U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to ________________
------------------------------- ----------------------------------------
Commission file number 1-1200
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EUROWEB INTERNATIONAL CORP.
(Exact name of small business issuer as specified in its charter)
Delaware 13-3696015
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
445 Park Avenue, 15th Floor, New York, NY 10022
(Address of principal executive offices)
(212) 758-9870
Issuer's telephone number
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirement for the past 90 days. Yes [X] No [_]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock, $.001 par value 4,665,326
-----------------------------
(Class) (Outstanding at March 31, 2002)
Transitional Small Business Disclosures Format (Check one): Yes[_] No [X]
------------------------
EUROWEB INTERNATIONAL CORP.
INDEX
PART I. Financial Information
Item 1. Financial Statements
Consolidated balance sheets as of March 31, 2002 (unaudited)
and December 31, 2001 (audited) 2
Consolidated statements of operations and comprehensive loss
(unaudited) for the three months ended March 31, 2002 and 2001 3
Consolidated statements of stockholders' equity for the three months ended
March 31, 2002 (unaudited) and twelve months ended December 31,
2001 4
Consolidated statements of cash flows (unaudited) for the three months
ended March 31, 2002 and 2001 5
Notes to interim (unaudited) Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II. Other Information 17
Signature 21
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEETS
March 31, 2002 December 31, 2001
------------------ -----------------
(Unaudited) (audited)
ASSETS
Current Assets
Cash and cash equivalents $ 2,425,823 $ 1,512,303
Investment in securities 13,449,254 14,628,464
Trade accounts receivable, net 844,329 801,436
Current portion of note receivable 180,027 194,296
Prepaid and other current assets 732,464 598,484
----------- -----------
Total current assets 17,631,897 17,734,983
Note receivable, less current portion 317,739 363,976
Investment in affiliate 305,492 495,187
Property and equipment, net 1,427,863 1,426,604
Intangibles, net 4,310,038 4,367,538
Other non-current assets 15,536 20,612
------------ -----------
Total assets $24,008,565 $24,408,900
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $869,516 $638,729
Current portion of acquisition indebtedness 180,000 180,000
Other current liabilities 629,705 704,483
Accrued expenses 413,996 468,921
Deferred revenue 167,356 277,127
---------- ---------
Total current liabilities 2,260,573 2,269,260
Loan payable 96,476 94,904
Acquisition indebtedness, less current portion 180,000 180,000
Non-current portion of lease obligations 149,218 196,611
Total liabilities 2,686,267 2,740,775
Stockholders' Equity
Preferred stock, $.001 par value - Authorized 5,000,000 shares;
no shares issued or outstanding - -
Common stock, $.001 par value - Authorized 60,000,000 shares;
Issued and outstanding 4,665,326 shares 24,129 24,129
Additional paid-in capital 48,227,764 48,227,764
Accumulated deficit (25,509,663) (25,325,033)
Accumulated other comprehensive losses: (304,520) (143,323)
Treasury stock - 175,490 common shares, at cost (1,115,412) (1,115,412)
------------ -----------
Total stockholders' equity 21,322,298 21,668,125
Commitments and contingencies
Total liabilities and stockholders' equity $24,008,565 $24,408,900
============ ===========
See accompanying notes to consolidated financial statements.
2
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
Three months ended March 31,
2002 2001
---- ----
Revenues $ 3,150,580 $ 1,258,860
Cost of revenues 1,956,838 638,818
---------- ---------
Gross profit 1,193,742 620,042
Operating expenses
Compensation and related costs 522,400 486,143
Consulting and professional fees 246,396 178,249
Other selling, general and administrative expenses 332,876 435,691
Depreciation and amortization 214,454 600,708
---------- ---------
Total operating expenses 1,316,126 1,700,791
Loss from operations (122,384) (1,080,749)
Net interest income 125,804 319,145
Equity in net income of affiliate (188,050) 21,252
Loss from operations before income taxes and minority interest (184,630) (740,352)
Provision for income taxes - -
---------- ---------
Net Loss (184,630) (740,352)
Other comprehensive (gain) loss 161,197 155,877
---------- ---------
Comprehensive loss $ (345,827) $(896,229)
=========== ==========
Net Loss per share, basic and diluted (.04) (.03)
Weighted average number of shares outstanding, basic and diluted 4,771,804 23,677,478
See accompanying notes to consolidated financial statements
3
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Accumulated
Additional Other Total
Common Stock Paid-in Accumulated Comprehensive Treasury Stockholders'
-----------------
Shares* Amount Capital Deficit Gains(Losses) Stock Equity
-------- ------ ----------- ----------- ------------- ------- -----------
Balances, December 31, 2000 4,801,696 $24,129 $48,227,764 $(19,742,020) $(14,011) $(173,688) $28,322,174
========= ======= =========== ============ ========= ========== ===========
Foreign currency translation gain - - - - 16,642 - 16,642
Unrealized gain on securities available - - - - 26,434 - 26,434
for sale
Reclassification adjustment for gain - - - - (172,388) - (172,388)
included currently in net income
Net loss for the period - - - (5,583,013) - - (5,583,013)
Treasury stock (136,370) - - - - (941,724) (941,724)
-------- ------- ----------- ------------ ---------- ------------ -----------
Balances, December 31, 2001 4,665,326 $24,129 $48,227,764 $(25,325,033) $(143,323) $(1,115,412) $21,668,125
======== ======= =========== ============ ========== ============ ===========
Foreign currency translation loss - - - - (3,328) - (3,328)
Unrealized loss on securities available - - - - (131,435) - (131,435)
for sale
Reclassification adjustment for gain - - - - (26,434) - (26,434)
included currently in net income
Net loss for the period - - - (184,630) - - (184,630)
Treasury stock - - - - - - -
--------- ------- ------------ ------------- ----------- ------------ -----------
Balances, March 31, 2002 4,665,326 $24,129 $48,227,764 $(25,509,663) $(304,520) $(1,115,412) $21,322,298
========= ======= =========== ============= ========== ============ ===========
* restated to reflect 5 for 1 reverse stock split
See accompanying notes to consolidated financial statements
4
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
----------------------------------------------------------------------------
Three Months Ended
March 31,
2002 2001
---- ----
Cash flows from operating activities:
Net loss $(184,630) $(740,352)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 214,454 600,708
Amortization of discount on acquisition indebtedness 5,076 7,395
Equity in loss (income) of affiliate 188,050 (21,252)
Foreign currency loss 3,217 56,615
Realized gain on sale of securities (47,970) (194,540)
Unrealized interest income on securities (74,023) -
Changes in operating assets and liabilities net of effects of acquisitions:
Accounts receivable (42,893) 81,531
Prepaid and other assets (133,980) 340,848
Accounts payable, other current liabilities and accrued expenses 101,084 (238,596)
Deferred revenue (109,771) (160)
---------- ---------
Net cash used in operating activities (81,386) (107,803)
Cash flows from investing activities:
Investment in securities (13,506,666) (14,002,206)
Maturity of securities 14,650,000 14,200,000
Repayments of notes receivable 60,506 39,974
Repayments of loan receivable - 21,815
Acquisition of property and equipment, intangibles (158,213) (26,474)
--------- ---------
Net cash provided by investing activities 1,045,627 233,109
Cash flows from financing activities:
Payments to acquire treasury stock - (677,797)
Principal payments under capital lease obligations (47,393) (11,810)
---------- ---------
Net cash used in financing activities (47,393) (689,607)
Effect of foreign exchange rate changes on cash (3,328) (53,048)
Net increase (decrease) in cash and cash equivalents 913,520 (617,349)
Cash and cash equivalents, beginning of period 1,512,303 4,372,783
---------- ---------
Cash and cash equivalents, end of period $2,425,823 $3,755,434
========== ==========
See accompanying notes to consolidated financial statements.
5
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
1. Organization and Business
EuroWeb International Corporation (the "Company") is a Delaware corporation
which was organized on November 9, 1992, and was a development stage enterprise
through December 31, 1993.
The Company owns and operates Internet service providers in the Czech
Republic, Romania and Slovakia. The Company's consolidated statements of
operations also include the equity in the net income of Euroweb Hungary Rt., in
which the Company has a 49% ownership interest. The Company operates in one
business segment.
2. Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared
in accordance with the instructions for Form 10-QSB and, therefore, do not
include all disclosures necessary for a complete presentation of financial
condition, results of operations, and cash flows in conformity with generally
accepted accounting principles. All adjustments which are, in the opinion of
management, of a normal recurring nature and are necessary for a fair
presentation of the interim financial statements, have been included. The
results of operations for the periods ended March 31, 2002 are not necessarily
indicative of the results that may be expected for the entire fiscal year or any
other interim period.
(b) Principles of consolidation
The consolidated financial statements comprise the accounts of the Company
and its controlled subsidiaries. All material intercompany balances and
transactions have been eliminated upon consolidation.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the Unites States of America.
(c) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates made by the Company include the period of benefit and recoverability
of goodwill and other intangible assets.
6
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
(d) Revenue recognition
Revenues from services are recognized in the month in which the services
are provided.
(e) Cost of revenues
Cost of revenues comprise principally of telecommunication expenses
(f) Cash and cash equivalents
Cash and cash equivalents include cash at bank and short-term deposits of
less than three months duration.
(g) Investment in securities
Investments in marketable debt securities are classified as
available-for-sale and are recorded at fair value with any unrealized holding
gains or losses included as a component of other comprehensive income until
realized.
(h) Investment in affiliate
The Company records as income its share of the earnings of Euroweb Hungary
Rt.(a 49% held associate) net of goodwill amortization. Dividends are credited
against the investment account when declared. The excess of the carrying value
of the Company's investment over its equity in the fair value of the underlying
net assets (goodwill) of approximately $586,000 at the acquisition date was
being amortized over three years until the end of December 2001. From 2002, no
amortization of goodwill is accounted.
(i) Property and equipment
Property and equipment are stated at cost, less accumulated depreciation.
Equipment purchased under capital lease is stated at the present value of
minimum lease payments at the inception of the lease, less accumulated
depreciation. The Company provides for depreciation of equipment using the
straight-line method over the shorter of estimated useful lives of four years or
the lease term.
Recurring maintenance on property and equipment is expensed as incurred.
When assets are retired or otherwise disposed of, the related costs and
accumulated depreciation from the respective accounts and any gain or loss on
disposals are included in the results of operations.
7
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
(j) Intangibles
Intangibles consist of goodwill and customer lists. Goodwill results from
business acquisitions and represents the excess of purchase price over the fair
value of net assets acquired. Amortization was computed over the estimated
future period of benefit (generally five years) on a straight-line basis until
December 2001; no amortization of goodwill is accounted from 2002. The Company
assesses recoverability by determining whether the goodwill can be recovered
through undiscounted future operating cash flows of the acquired operations. The
amount of goodwill impairment, if any, is measured based on projected discounted
future operating cash flows using appropriate discount rates. Conditions which
may indicate that an impairment issue exists include a negative economic
downturn or a change in the assessment of future operations. However, the
assessment of the recoverability of goodwill will be impacted if estimated
future operating cash flows are not achieved.
Customer lists were acquired as a result of a purchase of assets and are
being amortized over the estimated future period of benefit of five years. The
assessment of recoverability and possible impairment are determined in a manner
similar to the assessment of goodwill described above. No recoverability or
impairment issues have been identified, although the assessment of the
recoverability will be impacted if estimated future operating cash flows are not
achieved.
(k) Net loss per share
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share," ("SFAS No. 128"), which provides for the calculation
of "basic" and "diluted" earnings per share. Basic earnings(loss) per share
include no dilution and is computed by dividing income(loss) attributable to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings(loss) per share reflects the potential effect
of common shares issuable upon exercise of stock options and warrants in periods
in which they have a dilutive effect. The Company had potentially dilutive
common stock equivalents for the quarters ended March 31, 2002 and 2001, which
were not included in the computation of diluted net loss per share because they
were antidilutive.
3. Cash Concentration
At March 31, 2002, cash and cash equivalents included $1,382,527 on deposit
with a U.S. money market fund or major money center bank.
8
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
4. Investment in Securities
On January 25, 2002, the Company purchased an United States Treasury Note
with a face value of $14,389,000, which was purchased for $ 13,506,666. The note
matures on February 15, 2004. Of the $57,412 difference between the market value
as of March 31, 2002 and the purchase price, $74,023 is recorded as interest
income on securities calculated with an effective interest rate of 3%, while the
remaining $131,435 has been recorded as a comprehensive loss.
5. Affiliate, carried on an equity basis
The Company's consolidated statement of operations for the three months
ended March 31, 2002 and 2001 include the Company's equity interest in the net
income of Euroweb Rt. for each period, calculated as follows:
2002 (three months) 2001 (three months)
------------------ ------------------
Revenues $ 1,222,909 $ 1,215,180
Gross profit 752,134 806,579
Net (loss) income from operations (83,774) 140,117
Goodwill impairment (300,003) -
Net (loss) income $ (383,777) $ 140,117
=========== ===========
Company's 49% equity in net income (188,050) 68,657
Amortization of goodwill related to
the Company's investment - (47,405)
Equity in net (loss) income of affiliate $ (188,050) $ 21,252
========== ==========
The goodwill impairment resulted in the write-off of the remaining goodwill
balances in Euroweb Rt. relating to subsidiaries purchased in 2000 and 2001.
These subsidiaries did not generate the revenues or operating profit that was
initially thought possible and management assessed that goodwill was impaired.
After this writeoff, no goodwill exists in the records of Euroweb Rt.
Since the functional currency of the affiliate is the Hungarian forint, the
Company's net investment in the affiliate has been decreased by its share of the
translation gain ($1,645) arising upon conversion of the affiliate's financial
statements into US dollars. This amount has also been recorded in other
comprehensive gain (loss).
9
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
6. Stockholders' Equity
On August 30, 2001, the shareholders approved a one-for-five reverse stock
split of the Company's common stock. Prior period share and per share amounts
have been restated to give effect to the reverse stock split.
During the first three months of 2002, the Company did not grant any
options or warrants, nor were any exercised. Upon the exercise of an outstanding
warrant or option, each warrant/option holder will receive 1/5 of a share, due
to the reverse stock split effected on August 30, 2001.
7. Commitments and Contingencies
(a) Employment Agreements
Employment agreements with the three officers of the Company provide for
aggregate annual compensation of $646,000 through December 31, 2005.
8. Related Party Transactions
In 2001, the Company's subsidiary in Romania launched a service which
includes the provision of international IP and international leased line
services. This service is being provided in conjunction with Pantel
Telecommunication Rt., an entity which is majority owned and controlled by the
KPN Group (which also owns a majority interest in the Company). In 2001, Pantel
Telecommunication Rt. Hungary, a subsidiary of KPN and therefore a related
party, became the most significant trading partner of the Company. Approximately
55% of the 2001 annual revenues of Euroweb Romania (translating into 30% of the
consolidated revenues of the Company) were derived from the provision of
services to Pantel. In the first three months of 2002, sales to Pantel has
increased to 63% of revenues of Euroweb Romania (which represents 43% in the
consolidated revenues of the Company).
Pantel has also invoiced USD518,972 in the first three months of 2002 to
the subsidiaries of the Company in connection with the provision of internet
bandwidth and international leased lines.
10
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Operations
Overview
The Company owns and operates Internet Service Providers in the Czech
Republic, Romania and Slovakia. These subsidiaries are known as Euroweb Czech
Republic, Euroweb Slovakia, and Euroweb Romania and they are wholly owned. The
Company's consolidated statements of operations also include the equity in the
net income of Euroweb Hungary Rt., in which the Company has a 49% ownership
interest. The Company operates in one business segment, acting as an Internet
service provider to business customers through the provision of the following
services:
(1)Traditional ISP business (Internet access, Content and Web services,
Other services)
(2)International leased line, IP data services
(3)Voice over IP services
For the services in point (2) and (3), the main customer of the Company in
2002 was Pantel Telecommunication Rt, Hungary, a related party. The majority
owner of Euroweb International Corporation and Pantel Telecommunication Rt is
KPN Telecom BV, the Netherlands.
Related party transactions - Pantel Rt.
General: The largest customer of the Company since early 2001 is Pantel
Telecommunication Rt, which is the largest Alternative Telecom Provider in
Hungary offering state-of-the-art national and international communication
services, unlimited capacity and bandwidth through its countrywide network based
on New World technology. Pantel operates within the region and has become a
significant trading partner for Euroweb Romania and Euroweb Slovakia through the
provision of direct fibre cable connection which enables companies to transmit
data to a variety of destinations by utilizing the international connections of
Pantel.
Due to this fact, that the increase of revenue coming from the new
services, which is provided in conjunction with Pantel, some of the consultants
of the Company have moved to the premises of Pantel in order to improve the
effectiveness of the co-operation on international projects. Csaba Toro, Vice
President of Euroweb International Corporation is also the Chief Executive
Officer of Pantel.
Transactions: Both Euroweb Slovakia and Euroweb Romania have transactions
with Pantel:
(a) Pantel invoices to subsidiaries of Euroweb International Corporation in
connection with the following services:
- Internet bandwidth
- Costs of international leased lines outside Romania and Slovakia
The total amount of these services were USD 518,972 in the first three
months of 2002.
11
(b) Euroweb International and its subsidiaries invoice the following
services to Pantel:
- Cost of international leased lines and local loops in Slovakia and Romania
- International IP and VOIP services for Pantel
- Re-invoice of costs of Pantel related work of consultants of Euroweb
International Corporation
Total value of these services were approximately $1,356,091 in the first
three months of 2002.
Pricing: Agreements are made at market prices or a split of the margin
based on the financial investment into the specific services by each of the
parties. Euroweb International Corporation always considers alternative
suppliers for each individual project.
Other: Some services provided by Pantel are invoiced through Euroweb
Hungary Rt (49% owned by the Company and 51% owned by Pantel). These
transactions are considered as essentially Pantel services and disclosed as
revenue of Pantel in point (a). No other service is invoiced to/from Euroweb
Hungary Rt.
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and
results of operations are based upon its consolidated financial statements that
have been prepared in accordance with generally accepted accounting principles
in the United States of America ("US GAAP"). This preparation requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, and the disclosure of contingent
assets and liabilities. US GAAP provides the framework from which to make these
estimates, assumption and disclosures. The Company chooses accounting policies
within US GAAP that management believes are appropriate to accurately and fairly
report the Company's operating results and financial position in a consistent
manner. Management regularly assesses these policies in light of current and
forecasted economic conditions. The Company's accounting policies are stated in
Note 1 to the Consolidated Financial Statements. The Company believes the
following accounting policies are critical to understanding the results of
operations and the effect of the more significant judgments and estimates used
in the preparation of the consolidated financial statements:
Revenue Recognition Policies -- Revenues from services are recognized in
the month in which the services are provided. Invoices for traditional
ISP,International leased line and IP Data services are generally issued at the
beginning of the month except where local legislation prohibits such treatment.
VOIP traffic is measured during the month and invoiced at the end of the month.
Billed revenues for which the services are to be provided in the future, are not
disclosed as revenues in the reporting period, but are accrued and shown as
deferred revenue.
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.
12
Property Plant & Equipment Recovery -- Changes in technology or changes in
the Company's intended use of these assets may cause the estimated period of use
or the value of these assets to change. These assets are reviewed for impairment
whenever events or changes in circumstances indicate that their carrying amounts
may not be recoverable. Estimates and assumptions used in both setting
depreciable lives and reviewing recoverability require both judgement and
estimation by management. Impairment is deemed to have occurred if projected
undiscounted cash flows related to the asset are less than its carrying value.
If impairment is deemed to have occurred, the carrying values of the assets are
written down, through a charge against earnings, to their fair value.
Intangibles Recovery - Intangibles consist mostly of goodwill. Goodwill
represented on the balance sheet reflects the unamortized difference between the
purchase price and fair value of businesses acquired. As of January 1, 2002 the
Company adopted SFAS 142 which specifies that goodwill no longer be amortized on
a systematic basis, but should be subject to at least annual impairment tests.
SFAS also prescribes some transitional provisions which have to be completed by
June 30, 2002.
Acquisitions
There were no new acquisitions in 2001 and the first three months of 2002.
Results of Operations
Three-month Period Ended March 31, 2002 Compared to Three-month Period
Ended March 31, 2001
The Company has significantly increased its revenue and gross margin when
compared with the same period in the previous year; most of this increase can be
attributed to activities in Euroweb Romania. However, during the same time
period, the company was able to keep operating expenses at similar levels to the
previous year, resulting in a significant improvement of the operating results.
Moreover, the Company has adopted SFAS 142 as of January 1, 2002 and so no
amortization of goodwill is accounted in the first quarter of 2002, also
contributing to an improved operating result.
In contrary to the improvement in the operating results, income from
financial investments has reduced significantly due to falling yields in
investments and also due to the nature of the investments.
Revenues
Total revenues for the three months ended March 31, 2002 were $3,150,580 in
comparison with $1,258,860 for the three months ended March 31, 2001. The
increase in revenues of $1,891,720 was due to the introduction of new services,
while traditional ISP activity has not changed when compared with the previous
period. Most of the increase has been in Euroweb Romania as can be seen as
follows:
Revenue per countries Q1 2002 Q1 2001
------------------------------------------------------
Czech Republic $ 343,384 $ 292,673
Romania 2,123,474 337,161
Slovakia 683,722 629,026
------------------------------------------------------
Total 3,150,580 1,258,860
13
The new services were introduces in co-operation with Pantel
Telecommunication Rt. Hungary, a subsidiary of KPN and therefore a related
party. Sales to Pantel Rt. has increased compared with 2001. Approximately 55%
of the 2001 annual revenues of Euroweb Romania (representing 30% of the
consolidated revenues of the Company) were derived from the provision of
services to Pantel, while in the first three months of 2002 this percentage has
increased to 63% (representing 43% of the consolidated revenues of the Company).
The proportion of revenue per product lines has changed as follows:
Revenue per services 2002 2001
-----------------------------------------------------------
ISP $ 1,199,224 $ 1,193,652
Data 1,584,125 47,208
VOIP 367,231 18,000
-----------------------------------------------------------
Total 3,150,580 1,258,860
Cost of revenues
Cost of revenues comprise mostly telecommunication expenses.
Network costs were $1,956,838 in 2002 in comparison to $638,818 in 2001.
Gross margin has decreased from 49% to 37,88% when compared to previous years.
Although there were no significant pricing policy changes within the Company
during the first three months of 2002, the margin rate has decreased due to the
new services, which have significantly less margin than traditional ISP activity
resulting in a smaller gross profit ratio. Despite the decreasing ratio, the
company was able to almost double the amount of gross profit (92% increase) in
absolute terms.
Operating expenses (excluding depreciation and amortization)
There was no change in operating expenses (increased from $1,100,083 to
$1,101,672) which can be attributed to the cost control measures undertaken
within the Company and the increased effectiveness of internal resources as
newly acquired operations in 1999 and 2000 were operationally consolidated
enabling the Company to build new services on the existing infrastructure,
minimizing the need for additional labour and other non-equipment related
resources.
Depreciation and amortization
From 2002, no amortization of goodwill is accounted, so these amounts are
not comparable. If we ignore the amortization of goodwill and customer lists in
both years, normal depreciation of equipment have increased from $113,038 in
2001 to $156,954 in 2002, reflecting depreciation of necessary investment in
equipment used to provide the new services.
14
Net interest income
Net interest income of $125,804 in the first three months of 2002 is lower
than the net interest income of $319,145 in the first three months of 2001. The
decrease is due to the fact that less interest-generating funds were available
in this period than in the same period of the previous year, and also because
the effective interest rate on these investments has decreased over the periods
in question.
Equity interest in affiliate
The decrease in the equity in the net income of affiliate is the result of
loss making activities of the subsidiaries of Euroweb Rt., although, almost 80%
of the loss is in connection with a one-time goodwill impairment recognized in
the first Quarter of 2002 by Euroweb Rt.
Liquidity and Capital Resources
The Company's cash, cash equivalents and marketable securities were
approximately $15,875,077 as of March 31, 2002, a decrease of $265,690 from the
end of 2001. The Company has $15,875,077 of cash, cash equivalents and
marketable securities compared to $ 2,686,267 total short and long term
liabilities. Management believes that with its existing cash, cash equivalents,
marketable securities and internally generated funds, there will be sufficient
funds to meet the Company's currently projected working capital requirements and
other cash requirements until at least the next 12 months.
Royal Dutch Telecom (NY Stock Exchange: KPN) owns 52% of the outstanding
shares of Common Stock of the Company. KPN has announced that it intends to sell
all of its non-core assets, including its ownership of 52% of the outstanding
shares of the Company. KPN has distributed to interested buyers a Business Plan
on the Company, has made available all the documents relating to the Company,
and arranged for meetings of Management of the Company with prospective suitors.
So far, non of the offers were accepted by KPN.
On February 20, 2002, Everest Acquisition Corp., a wholly owned subsidiary
of Royal KPN, commenced a tender offer for all of the outstanding shares of
common stock of EuroWeb International Corp. at the purchase price of $2.25 in
cash per share. This offer was raised to $2.70 on March 20, 2002 and expired on
April 4, 2002.
The tender offer was conditional on at least 90% of the outstanding common
stock of EuroWeb calculated on a fully diluted basis being validly tendered and
not withdrawn prior to the expiration date (March 19, 2002). Everest Acquisition
Corp did not intend to waive this condition if the effect of the waiver would be
to permit Everest Acquisition to purchase less than a majority of the
outstanding EuroWeb shares that KPN does not already own.
Upon consummation of the Offer, Everest Acquisition and KPN intended to
effect a merger between EuroWeb and Everest Acquisition with the cash and
marketable securities of Euroweb International to be used to pay off financing
costs of the acquisition.
On April 8, 2002, the offer was cancelled after insufficient interest from
investors.
15
Inflation and Foreign Currency
The Company maintains its books in local currencies, the Czech koruna for
Euroweb Czech Republic and the Slovak koruna for Euroweb Slovakia. However,
given the hyper-inflationary situation in Romania, the U.S. dollar is used as
the functional currency.
The Slovakian Koruna has weakened by 0,075%, while the Czech Korona have
strengthen against the U.S. dollar by approximately 4,5% between the first three
months of 2002 and 2001. The impact of this is reflected in the exchange rates
used in the first three months of 2002 and the first three months of 2001.
Effect of Recent Accounting Pronouncements
In July 2001, Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("Statement 142") was issued. Statement
142 will require that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provision of Statement 142. Statement 142 will
also require that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." The Company is required to implement
Statement 142 on January 1, 2002.
Statement 142 established certain transition provisions which will require,
amongst other things, the Company perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To accomplish
this the Company must identify its reporting units and determine the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of the
date of adoption. The Company will then have up to six months from the date of
adoption to determine the fair value of each reporting unit and compare it to
the reporting unit's carrying amount. To the extent a reporting unit's carrying
amount exceeds its fair value, an indication exists that the reporting unit's
goodwill may be impaired and the Company must perform the second step of the
transitional impairment test. In the second step, the Company must compare the
implied fair value of the reporting unit's goodwill, determined by allocating
the reporting unit's fair value to all of it assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with Statement 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement of
earnings. The Company was required to, and has adopted, Statement 142 as of
January 1, 2002 and is now in the process of performing the required tasks under
the transition provisions described above.
16
The Financial Accounting Standards Board No. 143 "Accounting for Asset
Retirement Obligations" ("Statement 143") was issued in June 2001. Statement 143
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. The Company is required to
adopt the provisions of Statement 143 on January 1, 2003. The Company is
evaluating the impact, if any, Statement 143 may have on its future consolidated
financial statements.
The Financial Accounting Standards Board ("FASB") No. 144 "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("Statement 144") was issued in
August 2001. Statement 144 supersedes FASB Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of", and the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions", for the disposal of a segment of a business. Statement
144 addresses the financial accounting and reporting for (i) long-lived assets
to be held and used, (ii) long-lived assets to be disposed of other than by sale
and (iii) long-lived assets to be disposed of by sale. The Company is required
to, and has adopted, the provisions of Statement 144 as of January 1, 2002.
Forward-Looking Statements
When used in this Form 10-QSB, in other filings by the Company with the
SEC, in the Company's press releases or other public or stockholder
communications, or in oral statements made with the approval of an authorized
executive officer of the Company, the words or phrases 'would be," "will allow,"
"intends to," "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project," or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995.
The Company cautions readers not to place undue reliance on any
forward-looking statements, which speak only as of the date made, are based on
certain assumptions and expectations which may or may not be valid or actually
occur, and which involve various risks and uncertainties, including but not
limited to the risks set forth below. 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.
PART II
Item 1. Legal Proceedings
On March 8, 2002, the Company was served with a complaint filed in Delaware
Chancery Court by Suan Investments Inc. against, among others, the Company,
Purchaser, KPN and the individual directors of the Company, including the
members of the Special Committee.
The complaint alleges, among other things, that the consideration offered
by KPN is "unfair and inadequate" and that the "intrinsic value of [the
Company's] publicly owned shares is materially in excess of the amount offered".
The complaint also alleges that the documents disseminated to the Company's
unaffiliated stockholders by KPN and its affiliates in respect of the tender
offer are "materially false and misleading" and that KPN, "with the acquiescence
of the individual defendants, has breached and will continue to breach its
fiduciary duties ... by engaging in improper overreaching and self-dealing in
pursuing the proposed transaction."
17
According to the complaint, plaintiff is seeking, among other things, to
recover unspecified damages and costs and to enjoin or rescind the tender offer
and all related transactions contemplated in the Purchaser's tender offer
documents.
A complaint containing similar allegations and seeking similar relief was
filed in Delaware Chancery Court by Laurence Paskowitz on March 5, 2002 against
the Company and the other defendants in the Suan Investments action.
In light of the fact that the Special Committee recommended that the
Company's stockholders reject KPN's offer of $2.25 per Share, it is not clear
what relevance, if any, these actions have for the Company or for the individual
directors who serve on the Special Committee.
Item 2. Changes in Securities
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders
through the solicitation of proxies or otherwise, during the first quarter of
2002.
ITEM 5. OTHER INFORMATION
None
ITEM 6. 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(23)
(3) (a) Certificate of Incorporation filed November 9, 1992(1)
(b) Amendment to Certificate of Incorporation filed July 9, 19972
(c) By-laws(2)
(4) (a) Form of Common Stock Certificate(2)
(b) Form of Underwriters' Warrants to be sold to Underwriters(2)
(c) Placement Agreement between Registrant and J.W. Barclay & Co.,
Inc. and form of Placement Agent Warrants issued in
connection with private placement financing(2)
(d) Form of 10% Convertible Debenture used in connection with offshore
private placement financing pursuant to Regulation S3
18
(e) Form of Common Stock Purchase Warrant in connection with private
placement financing under Section 506 of Regulation D(4)
(10)(a) Consulting agreement between Registrant and Klenner Securities Ltd(2)
(b) Consulting agreement between Registrant and Robert Genova(2)
(c) Consulting agreement between Registrant and Laszlo Modransky(2)
(d) 1993 Incentive Stock Option Plan(2)
(e) Sharing agreement for space and facilities between
Registrant and Hungarian Telephone and Cable Corp.(2)
(f) Articles of Association (in English) of Teleconstruct
Building Corp. (2)
(g) Articles of Association (in English) of Termolang Engineer and
Construction Ltd. (2)
(h) Letter of intent between Teleconstruct Building Corp. and
Pilistav(2)
(i) Employment agreement between Registrant and Robert Genova and
termination agreement dated February 5, 19974
(j) Employment agreement between Registrant and Peter E. Klenner(2) and
termination agreement dated October 30, 1996, and agreement for sale
of condominium unit to M&A as amended(4)
(k) Employment agreement between Registrant and Frank R. Cohen(2) and
modification of employment agreement(4)
(l) Letter of Intent agreement between Registrant and Raba-Com Rt. (4)
(m) Letter of Intent agreement between Registrant and Kelet-Nograd Rt.(4)
(n) Letter of Intent agreement between Registrant and 3 Pilistav villages
for installation of cable in those areas(4)
(o) Lease agreement between Registrant's subsidiary EUNET Kft. and
Varosmajor Passage, Kft. for office space(4)
(p) Acquisition agreement between Registrant and KFKI Computer Systems
Corp. dated December 13, 1996(4)
(q) Acquisition agreement between Registrant and E-Net Hungary(4)
(r) Acquisition agreement between Registrant and MS Telecom Rt. (4)
(s) Employment Agreement between Registrant and Imre Kovats(4)
(t) Employment Agreement between Registrant and Csaba Toro(4)
(u) Promissory Note from Registrant to HBC(4)
(v) Communication Services Agreement between Registrant and MCI Global
Resources, Inc.5
(w) Lease and Option Agreement for Building B as of April 1, 1998 with
Hafisa Kft.6
(x) License Agreement between Gric Communications, Inc. and EuroWeb
International Corp.(5)
(y) Consulting Agreement between Registrant and Eurus Capital Corporation
and Rescission Agreement7
(y)(i) Agreement rescinding Option Agreement with Eurus Capital
Corporation8
(z)Financial Consulting Agreement between Registrant and J.W. Barclay &
Co., Inc.9
(aa)Mergers and Acquisitions Agreement between Registrant and J.W.
Barclay10
19
(bb)Placement Agreement between Registrant and J.P. Carey, Inc. and form
of Placement Agent Warrants issued in
connection with private placement financing11
(cc)Private Placement Agreement between Registrant and Peter E. Klenner12
(dd)Employment Agreement between Registrant and Csaba Toro13
(ee)Employment Agreement between Registrant and Robert Genova14
(ff)Employment Agreement between Registrant and Frank R. Cohen15
(gg)Placement Agreement between Registrant and JP Carey Securities
Inc. and Warrant Agreement in connection with private placement
financing16
(hh)Private Placement Agreement between Registrant and M&A Management17
(ii)Form of Subscription Agreement in connection with private offering of
common stock and Warrants pursuant to Rule 506 of Regulation D under
Section 4(2) of the Securities Act of 1933 18
(jj)Acquisition Agreement between Registrant and Luko Czech Net, 5.1.0.
dated June 11, 1999 19
(kk)Acquisition Agreement between Registrant and Slavia Capital, O.C.P.,
a.s. dated July 2, 199920
(ll)Acquisition Agreement between Registrant and Eunet Slovakia s.r.o.
dated July 14, 199921
(mm)Acquisition Agreement between Registrant and shareholders of Dodo,
s.r.o. dated August 5, 199922
(nn)Acquisition Agreement between Registrant and shareholders of Mediator
S.A. dated May 17, 2000 27 and Amendment thereto on August 28, 2000 28.
(16)(a)Letter on Change in Certifying Accountant23
(b)Letter by Former Accountant Agreeing with Company's Statements.(24)
(22)(a)Proxy Statement for Special Meeting of Stockholders.24
(b)Press Release on Adjournment of Special Meeting.25
(c)Press Release on Results of Vote.26
--------
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 with Form 8-K as of February 17, 1994
4 Filed with Form 10-KSB for year ended December 31, 1996
5 Filed with Form 10-QSB for quarter ended September 30, 1997.
6 Filed with Form 10KSB for year ended December 31, 1997.
7 Filed with Amendment No. 1 to Registration Statement 333-52841
8 Filed with Amendment No. 2 to Registration Statement 333-52841
9 File with Amendment No. 1 to Registration Statement 333-52841
10 Filed with Amendment No. 1 to Registration Statement 333-52841
11 Filed with Form 8-K as of October 14, 1998
12 Filed with Form 8-K as of October 14, 1998
13 Filed with Form 8-K as of October 14, 1998
14 Filed with Form 8-K as of October 14, 1998
15 Filed with Form 8-K as of October 14, 1998
16 Filed with Form 8-K as of April 21, 1999
17 Filed with Form 8-K as of April 21, 1999
18 Filed with Form 8-K as of April 21, 1999
19 Filed with Form 8-K as of June 11, 1999
20 Filed with Form 10-QSB for quarter ended June 30, 1999
21 Filed with Form 10-QSB for quarter ended June 30, 1999
22 Filed with Form 10-QSB for quarter ended June 30, 1999
23 Filed with Form 8-K on December 21, 1999.
24 Filed with Form DEF 14A on December 14, 1999.
25 Filed with Form 8-K on January 12, 2000.
26 Filed with Form 8-K on February 14, 2000.
27 Filed with Form 8-K on June 27, 2000.
28 Filed with Form 8-K/A on August 28, 2000.
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on the 9th day of May 2002.
EUROWEB INTERNATIONAL CORP.
By _/s/Frank R. Cohen
Frank R. Cohen
Chief Financial Officer
21