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 12, 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 February 27, 2004 with regard
to the acquisition of the 51% of the issued and outstanding shares of Euroweb
Hungary 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 12, 2004, Euroweb International Corp., entered into a Share Purchase
Agreement with PanTel Tavkozlesi es Kommunikacios rt. ("Pantel"), a Hungarian
corporation, to acquire Pantel's 51% interest in Euroweb Hungary Rt., a
Hungarian corporation ("Euroweb Hungary") that provides Internet service and is
based in Budapest, Hungary. Euroweb International Corp. currently owns 49% of
Euroweb Hungary and, as a result of this acquisition, Euroweb Hungary will
become a wholly-owned subsidiary. The purchase price of EURO 1,650,000
(approximately USD 2,105,000) was funded from cash that Euroweb International
Corp. had previously raised.
As part of the acquisition, Euroweb International Corp. has guaranteed the
purchase of HUF 600 million (approximately USD 3 million) of services (annually
from 2004-2006) by Euroweb Hungary and its subsidiaries from Pantel. In 2003,
Euroweb Hungary Rt. and subsidiaries (Freestart Kft. and Neophone Rt.) purchased
in excess of HUF 700 million (approximately USD 3.5 million) in services from
Pantel. In the event that Euroweb Hungary and its subsidiaries do not satisfy
the Annual Commitment, then Euroweb Hungery is required to pay to Pantel a
penalty equal to 25% of the Annual Commitment less any services purchased.
Euroweb International Corp. has also guaranteed a loan of HUF 245,000,000 plus
interest payable provided by Pantel to a Euroweb Hungary Rt. subsidiary
(Freestart Kft.) as well as a guarantee of HUF 93,000,000 related to trade
payables.
ITEM 7. Financial Statements and Exhibits
(a) Financial Statements of businesses acquired.
Audited Financial Statements of Euroweb Hungary Rt. for the year
ended December 31, 2003 (attached hereto beginning on page F-1
following the signature page)
(b) Proforma Financial Information
Not Applicable
(c) Exhibits.
Exhibit No. Description
10.1 Shares Purchase Agreement between PanTel Tavkozlesi es Kommunikacios rt., a
Hungarian company, and Euroweb International Corp., a Delaware corporation
(filed as an exhibit to Form 8-K Current Report dated February 27, 2004)
10.2 Guaranty by Euroweb International Corp., a Delaware corporation, in favor
of PanTel Tavkozlesi es Kommunikacios rt., a Hungarian company (filed as an
exhibit to Form 8-K Current Report dated February 27, 2004)
2
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: May 17, 2004
Budapest, Hungary
3
EUROWEB HUNGARY RT.
Consolidated Financial Statements
December 31, 2003
TABLE OF CONTENTS
Page
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Balance Sheet F-3
Consolidated Statements of Operations and Comprehensive Loss F-4
Consolidated Statements of Stockholders' equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
F-1
Independent Auditors' Report
The Board of Directors and Stockholders
Euroweb Hungary Rt.
We have audited the accompanying consolidated balance sheet of Euroweb Hungary
Rt. and subsidiaries as of December 31, 2003, and the related consolidated
statements of operations and comprehensive loss and cash flows for the year
then ended. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Euroweb
Hungary Rt. and subsidiaries as of December 31, 2003, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.
KPMG Hungaria Kft.
Budapest, Hungary
May 7, 2004
F-2
Euroweb Hungary Rt. and its subsidiaries
Consolidated Balance Sheet
December 31, 2003
In HUF'000
2003
---------
ASSETS
Current assets:
Cash and cash equivalents 229,124
Trade accounts receivable, (net of allowance for doubtful 176,582
receivables of 67,269)
Related party receivables 14,597
Prepaid advertising 43,871
Accrued revenues 59,552
Other current assets 50,685
Total current assets 574,411
Property and equipment 182,833
---------
Total assets 757,244
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable 74,069
Related party payables 213,501
Related party loan payable 49,000
Other current liabilities and provisions 124,978
Accrued expenses 31,875
Deferred revenues 93,626
---------
Total current liabilities 587,049
---------
Non-current portion of related party loan 196,000
Non-current portion of lease obligations 38,728
---------
Total liabilities 821,777
Stockholders' equity
Common stock, HUF 100,000 par value - (760 authorized, issued and 76,000
paid ordinary shares, HUF 100,000 par value each)
Additional paid-in capital 93,547
Accumulated deficit (234,080)
---------
Total stockholders' equity (64,533)
---------
Commitments and contingencies
Total liabilities and stockholders' equity 757,244
=========
See accompanying notes to consolidated financial statements.
F-3
Euroweb Hungary Rt. and its subsidiaries
Consolidated Statements of Operations
Years Ended December 31, 2003
In HUF'000
2003
Revenues
Third party revenues 1,881,540
Related party revenues 23,897
----------
Total Revenues 1,905,437
Cost of revenues
Third party cost of revenues 302,711
Related party cost of revenues 698,001
----------
Total Cost of revenues 1,000,712
----------
Gross profit 904,725
Operating expenses
Compensation and related costs 287,471
Consulting, professional and directors fees 189,163
Other selling, general and administrative expenses 310,082
Depreciation and amortization 188,120
----------
Total operating expenses 974,836
----------
Loss from operations (70,111)
Net interest expense and foreign exchange differences (2,487)
Gains from sale of subsidiaries 24,518
Loss before income taxes (48,080)
Income taxes -
----------
Net loss (48,080)
==========
See accompanying notes to consolidated financial statements.
F-4
Euroweb Hungary Rt. and its subsidiaries
Consolidated Statements of stockholders' equity
Years Ended December 31, 2003
In HUF'000
Additional
Common Stock Paid-in Accumulated Stockholders'
Shares* Amount Capital Deficit Equity
---------- -------- --------- ------------ -------------
Balances, December 31, 2002 760 76,000 93,547 (186,000) (16,453)
========== ======== ========= ============ =============
Net loss for the period - - - (48,080) (48,080)
---------- -------- --------- ------------ -------------
Balances, December 31, 2003 760 76,000 93,547 (234,080) (64,533)
========== ======== ========= ============ =============
* number of shares
F-5
Euroweb Hungary Rt. and its subsidiaries
Consolidated Statements of Cash Flows
Year Ended December 31, 2003
In HUF'000
2003
---------
Cash flows from operating activities
Net loss (48,080)
Adjustments to reconcile net loss to net cash provided by
operating activities
Depreciation and amortization 188,120
Allowance of doubtful receivables 20,815
Changes in assets and liabilities
Accounts receivable (9,896)
Prepaid and other assets 66,039
Accounts payable, other current liabilities and accrued expenses 27,031
Deferred revenue 2,034
---------
Net cash provided by operating activities
246,063
---------
Cash flows from investing activities:
Acquisition of property and equipment (85,078)
---------
Net cash used in investing activities (85,078)
---------
Cash flows from financing activities:
Principal payment under capital lease obligations (59,649)
---------
Net cash used in financing activities (59,649)
---------
Net increase in cash and cash equivalents
101,336
Cash and cash equivalents, beginning of year
127,788
---------
Cash and cash equivalents, end of year 229,124
=========
Supplementary disclosure:
Interest paid 24,281
Income taxes paid 0
New capital leases 62,611
See accompanying notes to consolidated financial statements.
F-6
Euroweb Hungary Rt. and its subsidiaries
Notes to Consolidated Financial Statements
Year Ended December 31, 2003
1. Organization and Business
On January 2, 1997, Euroweb International Corporation acquired all of the
outstanding stock of three Hungarian Internet Service Providers and merged these
companies into a new Hungarian entity, Euroweb Hungary Rt. ("the Company"). On
November 22, 1998, Euroweb International Corp. sold 51% of the outstanding
shares of Euroweb Hungary Rt. to Pantel Rt.
On March 2002, Euroweb Hungary Rt. acquired 100% of Freestart Kft., a dial-up
focused Internet Service Provider for USD 9,000.
Euroweb Hungary Rt. has a 100% interest in Neophone Rt, which did not perform
business activity in 2003.
The Company operates in one industry and geographic segment, providing Internet
access and additional value added services to mainly business customers. Euroweb
Hungary Rt. used its infrastructure to introduce voice over internet protocol
services at the end of 2001 under the brand name of Neophone. The majority of
revenues from this service derive from phone cards sold to individuals, while
these services are also available over leased telephone lines to businesses.
Euroweb Hungary Rt. also provides free-of charge dial-up services through its
subsidiary Freestart Kft. Freestart Kft. is entitled to receive a certain
proportion of the telecom revenues on the internet related telephone calls from
the Hungarian telecommunication companies.
Details of subsidiaries of Euroweb Hungary Rt. as of the year-end date:
Subsidiaries 2003
--------------------------------------------------------- -
Prakticomp Kft. sold (a)
Inet Kft. sold (b)
Neophone Rt. 100%
Freestart Kft. 100%
(a) period 01/01-04/30 is included in the profit and loss statements in
2003
(b) period 01/01-05/31 is included in the profit and loss statements in
2003
The revenues come from the provision of Internet Services (Internet
access, Content and Web services, Revenue sharing from
Telecommunication Companies and Other services) and Voice over
Internet Protocol services through pre-paid phone cards and leased
lines. For these services, the primary and preferred supplier of the
Company in 2003 was Pantel Rt.
F-7
2. Summary of Significant Accounting Policies
(a) Principles of consolidation and basis of presentation
The consolidated financial statements comprise the accounts of the
Company and its controlled subsidiaries. All material inter-company
balances and transactions have been eliminated upon consolidation.
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of
America ("US GAAP").
(b) Use of estimates
The preparation of financial statements in conformity with US GAAP,
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.
(c) Fair value of financial instruments
The carrying values of cash equivalents, investment in debt
securities, notes and loans receivable, accounts payable, loans
payable and accrued expenses approximate fair values.
(d) Revenue recognition
Revenues from Internet services are recognized in the period in which
the services are provided, either based on monthly traffic or on fixed
monthly fees (leased lines). Revenue for other services, are
recognized for the period, when the service is performed.
(e) Cost of revenues
Cost of revenues comprise principally of telecommunication network
expenses, costs of content services and cost of leased lines.
(f) Foreign currency transactions
The Company considers the Hungarian Forint ("HUF") to be the
functional currency of the Company and of its subsidiaries. As at
December 31, 2003, 1 USD was HUF 207.91.
Foreign currency transactions are recorded at the exchange rate
prevailing at the date of the transactions. Assets and liabilities
denominated in foreign currencies are translated at the rates of
exchange at the balance sheet date. Gains and losses on foreign
currency transactions are included in the consolidated statement of
operations.
F-8
(g) Cash and cash equivalents
Cash and cash equivalents include cash, cash at bank and short-term
deposits of less than three months duration.
(h) Property and equipment
Property and equipment are stated at cost, less accumulated
depreciation. Equipment purchased under capital lease is stated at the
present value of minimum lease payments at the inception of the lease,
less accumulated depreciation. The Company provides for depreciation
of equipment using the straight-line method over the shorter of
estimated useful lives of up to four years or the lease term.
Recurring maintenance on property and equipment is expensed as
incurred.
Any gain or loss on retirements and disposals are included in the
results of operations.
(i) Impairment of long-lived assets
In accordance with SFAS No. 144, long-lived assets, such as property,
plant, and equipment, and purchased intangibles subject to
amortization, are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to
estimated undiscounted future cash flows expected to be generated by
the asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized by the amount by
which the carrying amount of the asset exceeds the fair value of the
asset. Assets to be disposed of would be separately presented in the
balance sheet and reported at the lower of the carrying amount or fair
value less costs to sell, and are no longer depreciated. The assets
and liabilities of a disposed group classified as held for sale would
be presented separately in the appropriate asset and liability
sections of the balance sheet.
(j) 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. Substantially all of the
Company's revenues are derived from the provision of such services.
(k) Income taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities, are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carry-forwards. Deferred tax assets and liabilities, if any, are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
F-9
(l) Recent accounting pronouncements
On April 30, 2003, the FASB issued FASB Statement No. 149,
Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, which amends FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, to address (1)
decisions reached by the Derivatives Implementation Group, (2)
developments in other Board projects that address financial
instruments, and (3) implementation issues related to the definition
of a derivative. The Company does not believe that FAS 149 will have
any impact on its financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities
and Equity". This statement establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. This statement is
effective for contracts entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatorily
redeemable financial instruments of non-public entities. The Company
has adopted SFAS 150 and has concluded that there is no current impact
on its consolidated financial statements.
In December 2003, the Securities and Exchanges Commission ("SEC")
issued Staff Accounting Bulletin ("SAB") 104, "Revenue Recognition".
SAB 104 revises or rescinds certain SAB guidance in order to make this
interpretive guidance consistent with current authoritative accounting
and auditing guidance and SEC rules and regulations relating to
revenue recognition. This bulletin is effective immediately. The
Company believes that its current revenue recognition policies comply
with SAB 104.
3. Property and equipment
Property and equipment as at December 31, 2003 in HUF '000 were as follows:
2003 Useful Life
Software and other intangible 134,583 3 years
Internet equipment 314,774 3 years
Vehicles 92,133 4-5 years
Other 200,531 3-5 years
---------
Total 742,021
Less accumulated depreciation (559,188)
---------
182,833
=========
F-10
Depreciation charged during 2003 was HUF 188,120,000.
2003 Useful Life
Leased assets gross value 105,679 3-5 years
Less accumulated depreciation (41,203)
---------
64,476
=========
4. Income taxes
The difference between the total expected tax expense (benefit) and tax expense
for the years ended December 31, 2003 is accounted for as follows:
2003
Amount in HUF `000 %
--------- --------
Computed expected tax
Benefit (8,654) (18.00)
Utilization of net operating loss not
previously recognized (10,718) (22.29)
Change in valuation allowance (21,061) (43.80)
Change in tax rates 40,433 84.10%
--------- --------
Total Expense (Benefit) - 0.00%
========= ========
All pretax income/loss and related income tax expense/benefit is attributable to
domestic operations.
Euroweb Hungary Rt. reported taxable income in 2003 and therefore utilized a
portion of its tax loss carryforwards. Its two subsidiaries, Neophone Rt. and
Freestart Kft. reported tax losses in 2003.
The change in the tax rates results from the fact that the corporate tax rate in
Hungary was 18% for 2003 and prior years, but in 2003, the Hungarian parliament
enacted a tax rate of 16% for 2004 and subsequent years. The net impact on the
change in tax rates has no material impact on the financial statements as the
Company has provided a full valuation allowance for deferred tax assets.
F-11
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets at December 31, 2003 are as follows:
2003
----------
HUF `000
Deferred Tax Assets:
Net Operating Loss Carryovers 300,205
Property and equipment, depreciation 687
Other current liabilities and provisions 15,194
----------
Gross Deferred Tax Assets 316,086
Valuation Allowance (316,086)
----------
Net Deferred Tax Assets -
==========
The Company has unused net operating loss carryforwards at December 31, 2003 of
approximately HUF 1.86 billion available to offset future taxable income. HUF
1.7 billion of this amount arose in the first three years of operations of the
Company's subsidiaries (Freestart Kft. and Neophone Rt.) and under current
Hungarian Tax Legislation, may be carried forward indefinitely. HUF 54 million
expires in 2007 and the remaining amounts expire in 2008.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers
projected future taxable income and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and projections
for future taxable income over the periods in which the deferred tax assets are
deductible, management believes it is more likely than not that the Company will
not realize the benefits of these deductible differences at December 31, 2003.
5. Leases
Capital leases
The Company is committed under various capital leases, which expire over the
next five years. The following is a schedule of future minimum capital lease
payments (with initial or remaining lease terms in excess of one year) as of
December 31, 2003 in HUF `000:
2004 86,408
2005 31,741
2006 5,031
2007 5,031
2008 1,258
--------
Total minimum lease payments 129,469
Less interest costs (16,336)
--------
Present value of future mimimum lease payments 113,133
Less: current installments (74,405)
--------
Non-current portion of lease obligations 38,728
========
F-12
The current portion of lease obligations are included in `Other current
liabilities' on the Balance Sheet.
6. Related Party Loan payable
During 2002 PanTel Rt., a related party provided a loan of HUF 245,000,000 to
Freestart Kft. The loan bears interest at a rate of 13%. The loan is repayable
in five equal instalments from December 2004 semi-annually until the end of
2006.
7. Related party transactions
General: The largest supplier of the Company has been Pantel Rt., a
Hungary-based alternative telecommunications provider, which was the majority
owner of Euroweb Hungary Rt. in 2003. KPN Telecom B.V. has controlling interest
over both Pantel Rt and Euroweb International Corporation.
Transactions:
(a) Pantel provides the following services and invoices to the Company in
connection with:
- Internet bandwidth
- National leased and telephone lines within Hungary
- VOIP services
- Consulting services
- Interest on loan
The total amount of these costs invoiced by Pantel was HUF 763,503,000
during 2003 of which direct telecommunication cost was HUF 698,001,000.
(b) Euroweb Hungary Rt. and its subsidiaries provided the following services to
Pantel:
- Internet and related services
- Consulting services
The total value of these services sold was approximately HUF 23,897,000 in 2003.
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.
In 2003, Euroweb Hungary Rt. has invoiced USD 19,303 (HUF 4,376,000) to Euroweb
International. This was the re-invoicing of costs incurred in connection with
Euroweb International and paid by Euroweb Hungary Rt.
There were no other significant related party transactions in 2003.
F-13
8. Commitments and Contingencies
(a) Lease agreements
The Company's subsidiaries have entered into various capital leases for vehicles
and internet equipment, Refer to Note 5 (Leases).
(b) Legal Proceedings
The Directors are not aware of any other commitments or contingencies at
December 31, 2003. The Company is not involved in any material litigation at
December 31, 2003.
(c) Other commitments
On February 12, 2004, Euroweb International Corp. entered into a Share Purchase
Agreement with a related party, PanTel Tavkozlesi es Kommunikacios Rt., Hungary
("Pantel"), to acquire Pantel's 51% interest in Euroweb Hungary Rt.
Consideration consists of EUR 1,650,000 in cash and a guarantee that Euroweb
Hungary Rt. will purchase at least HUF 600 million (approximately $3 million)
worth of services from Pantel in each of 2004-2006, with a penalty of 25% of the
amount by which purchases are less than the HUF 600 million in any year. Euroweb
International Corp has also provided a guarantee for a loan obtained from Pantel
by a subsidiary of Euroweb Hungary Rt. (HUF 245 million plus interest) as well
as a guarantee relating to a trade payable by Euroweb Hungary Rt. to Pantel of
HUF 93 million plus VAT.
9. Subsequent events
On April 13, 2004, the Company sold its 100% shareholding in Neophone Rt. (a
non-operational subsidiary) for HUF 13,000,000. The terms of the sale are that
the Company indemnifies the Buyer for any unaccrued costs, fines, penalties and
lawsuits which relate to a period prior to the sale.
F-14