U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-1200
EUROWEB INTERNATIONAL CORP.
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(Exact name of small business issuer as specified in its charter)
Delaware 13-3696015
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Vaci ut 141, 1138 Budapest, Hungary
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(Address of principal executive offices)
+36-1-8897000 +36-1-8897100
-------------------------- --------------------------
Issuer's telephone number Issuer's facsimile 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 5,342,533
----------------------------- --------------------------------
(Class) (Outstanding at August 18, 2005)
Transitional Small Business Disclosures Format (Check one): Yes [ ] No [X]
EUROWEB INTERNATIONAL CORP.
INDEX
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet as of June 30, 2005 2
Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss) for the three months ended
June 30, 2005 and 2004 (restated) and the six months
ended June 30, 2005 and 2004 (restated) 3
Condensed Consolidated Statements of Stockholders' equity
for the six months ended June 30, 2005 and twelve months
ended December 31, 2004 4
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2005 and 2004 (restated) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 3. Controls and Procedures 28
PART II. Other Information 29
Signature 30
2
EUROWEB INTERNATIONAL CORP.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, 2005
-------------
ASSETS
Current Assets
Cash and cash equivalents $ 5,128,023
Trade accounts receivable, net of allowance 3,725,940
for doubtful accounts of $797,656
Unbilled receivables 1,185,799
Deferred tax assets 126,712
Prepaid expenses and other current assets 762,411
------------
Total current assets 10,928,885
Property and equipment, net 6,765,133
Intangibles - customer contracts, net 1,540,066
Goodwill 5,806,181
Other assets 407,739
------------
Total assets $ 25,448,004
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $ 3,301,398
Pantel loan payable - current portion 478,538
Current portion of bank loans 283,216
Notes payable 355,862
Other current liabilities 532,311
Accrued expenses 2,597,594
Deferred IRU revenue 46,000
Deferred other revenue 589,490
------------
Total current liabilities 8,184,409
Noncurrent Liabilities
Deferred tax liabilities 126,712
Deferred IRU revenue 874,490
Pantel loan payable 239,269
Bank loans 516,099
Lease obligations 145,505
Commitments and contingencies
Stockholders' Equity
Preferred stock, $.001 par value - Authorized
5,000,000 shares;
no shares issued or outstanding --
Common stock, $.001 par value - Authorized
35,000,000 shares;
5,766,145 shares issued, 5,342,533 shares 5,342
outstanding and 248,122 shares in escrow
Additional paid-in capital 50,849,959
Accumulated deficit (34,530,339)
Accumulated other comprehensive income 151,970
Treasury stock - 175,490 common shares, at cost (1,115,412)
------------
Total stockholders' equity 15,361,520
------------
Total liabilities and stockholders' equity $ 25,448,004
============
See accompanying notes to condensed consolidated financial statements.
3
EUROWEB INTERNATIONAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Three months ended Six months ended
June 30 June 30
------------------------------ ------------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
(Restated) (Restated)
Revenues
Third party revenues $ 11,092,984 $ 4,838,975 $ 20,258,138 $ 8,491,235
Related party revenues -- 1,946,661 1,768,358 3,437,428
------------ ------------ ------------ ------------
Total revenues 11,092,984 6,785,636 22,026,496 11,928,663
Cost of revenues (Exclusive of
depreciation and amortization shown
separately below)
Third party cost of revenues 7,627,427 3,354,016 14,025,865 5,629,035
Related party cost of revenues -- 1,417,931 1,164,692 2,669,285
------------ ------------ ------------ ------------
Total cost of revenues
(Exclusive of depreciation
and amortization
shown separately below) 7,627,427 4,771,947 15,190,557 8,298,320
Operating expenses
Compensation and related costs 851,291 698,722 1,590,407 1,223,529
Consulting, director and professional fees 766,707 522,233 1,757,922 872,828
Collection of written-off receivable -- -- (265,630) --
Other selling, general and administrative expenses 1,081,581 696,103 2,138,237 1,197,500
Depreciation and amortization 869,989 313,705 1,758,902 552,394
------------ ------------ ------------ ------------
Total operating expenses 3,569,568 2,230,763 6,979,838 3,846,251
Loss from operations (104,011) (217,074) (143,899) (215,908)
Interest income (expense)
Interest income 7,875 46,120 15,458 117,369
Interest expense (82,907) (100,642) (194,304) (170,453)
------------ ------------ ------------ ------------
Net interest expense (75,032) (54,522) (178,846) (53,084)
Gain from sale of subsidiary -- 28,751 -- 28,751
Other income 170,000 -- 170,000 --
------------ ------------ ------------ ------------
Income (loss) before income taxes (9,043) (242,845) (152,745) (240,241)
Income tax expense (41,351) (14,436) (128,338) (46,019)
------------ ------------ ------------ ------------
Loss from continuing operations (50,394) (257,281) (281,083) (286,260)
Income from discontinued operations -
Euroweb Slovakia in 2005 and Euroweb
Czech Republic & Slovakia in 2004 1,728,200 119,616 1,733,470 189,455
Net income (loss) 1,677,806 (137,665) 1,452,387 (96,805)
Other comprehensive income (loss) (126,321) (1,116) 43,704 (22,531)
------------ ------------ ------------ ------------
Comprehensive income (loss) $ 1,551,485 $ (138,781) $ 1,496,091 $ (119,336)
============ ============ ============ ============
Loss per share, before discontinued operations $ (0.01) $ (0.05) $ (0.05) $ (0.06)
Discontinued operations $ 0.32 $ 0.02 $ 0.32 $ 0.04
------------ ------------ ------------ ------------
Net income (loss) per share, basic $ 0.31 $ (0.03) $ 0.27 $ (0.02)
============ ============ ============ ============
Net income (loss) per share, diluted $ 0.30 $ (0.03) $ 0.27 $ (0.02)
============ ============ ============ ============
Weighted average number of shares outstanding, basic 5,342,533 4,815,821 5,342,533 4,740,576
Weighted average number of shares outstanding, diluted 5,575,866 4,815,821 5,459,199 4,740,576
See accompanying notes to condensed consolidated financial statements
4
EUROWEB INTERNATIONAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Accumulated
Other
Common Stock Additional Comprehensive Total
------------------------- Paid-in Accumulated Income Treasury Stockholders'
Shares Amount Capital Deficit (Loss) Stock Equity
--------- ----------- ------------ ------------ --------- ----------- ------------
Balance, January 1, 2004 (restated) 4,665,332 $ 4,664 $ 48,247,229 $(33,105,716) $ (25,502) $(1,115,412) $ 14,005,263
========= =========== ============ ============ ========= =========== ============
Foreign currency translation gain -- -- -- -- 162,573 -- 162,573
Reversal of unrealized gain on
securities available for sale -- -- -- -- (28,805) -- (28,805)
Deemed distribution (2,142,556) (2,142,556)
Compensation charge on -- -- 94,212 94,212
share
options issued to consultants
Issuance of shares (Elender Rt.
acquisition) 677,201 678 2,458,108 -- -- -- 2,458,786
Net loss -- -- -- (734,454) -- -- (734,454)
--------- ----------- ------------ ------------ --------- ----------- ------------
Balance, December 31, 2004 5,342,533 $ 5,342 $ 50,799,549 $(35,982,726) $ 108,266 $(1,115,412) $ 13,815,019
========= =========== ============ ============ ========= =========== ============
Foreign currency translation gain -- -- -- -- 43,704 -- 43,704
Compensation charge on -- -- 50,410 50,410
share
options issued to consultants
Net income -- -- -- 1,452,387 -- -- 1,452,387
--------- ----------- ------------ ------------ --------- ----------- ------------
Balance, June 30, 2005 5,342,533 5,342 $ 50,849,959 $(34,530,339) $ 151,970 $(1,115,412) $ 15,361,520
========= =========== ============ ============ ========= =========== ============
See accompanying notes to condensed consolidated financial statements
5
EUROWEB INTERNATIONAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
----------------------------------
2005 2004 (restated)
----------- ---------------
Net cash provided by (used in) operating
activities $ 1,377,893 $ (35,857)
----------- ------------
Cash flows from investing activities:
Maturity of securities -- 11,464,000
Collection of notes receivable -- 100,409
Acquisition of 51% of Euroweb Rt -- (2,142,000)
Acquisition of 100% of Elender Rt., including -- (6,629,100)
transaction costs and net of cash acquired
Proceeds from sale of Euroweb Slovakia 2,700,000 --
Purchase of property and equipment (1,189,206) (485,100)
----------- ------------
Net cash provided by investing activities 1,510,794 2,308,209
----------- ------------
Cash flows from financing activities:
Receipt (repayment) of bank loans and overdraft, gross (150,657) 141,463
Repayment of notes payable (378,602) --
Repayment of Pantel note payable (239,270) --
Principal payments under capital lease obligations (184,668) (22,577)
----------- ------------
Net cash provided by (used in) financing
activities (953,197) 118,886
----------- ------------
Effect of exchange rate changes on cash and cash
equivalents (39,136) (43,552)
----------- ------------
Net increase in cash and cash equivalents 1,896,354 2,347,686
Cash and cash equivalents, beginning of period 3,231,669 2,233,231
----------- ------------
Cash and cash equivalents, end of period $ 5,128,023 $ 4,580,917
=========== ============
See accompanying notes to condensed consolidated financial statements.
6
Euroweb International Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
1. Organization and Business
Euroweb International Corp. ("Euroweb" or the "Company") is a Delaware
corporation, which was organized on November 9, 1992. The Company was a
development stage company through December 31, 1993.
The Company operates in Hungary and Romania, through its subsidiaries Euroweb
Hungary Rt. ("Euroweb Hungary") and Euroweb Romania S.A. ("Euroweb Romania"). On
December 16, 2004, the Company disposed of Euroweb Czech Republic and no longer
has operations in the Czech Republic. On April 15, 2005, the Company sold
Euroweb Slovakia a.s. ("Euroweb Slovakia") for cash of $2,700,000 and, as a
result, has ceased operations in Slovakia.
The Company provides internet access, voice/ voice over internet protocol
("VOIP"), international/domestic leased line and additional value added services
primarily to business customers.
KPN Telecom owned approximately 43.54% of Euroweb's outstanding shares of common
stock as of December 31, 2004. In 2004, KPN Telecom announced its intention to
divest its interest in Pantel Telecommunication Kft. ("Pantel"), with certain
sale agreements being signed with a view to final consummation in 2005. On
February 28, 2005, the sale of KPN NV's 75.1% interest in the Pantel business to
Hungarian Telephone and Cable Corp. was completed. Therefore, Pantel is no
longer considered a related party effective March 1, 2005.
In addition, on January 28, 2005, KPN Telecom entered into a Stock Purchase
Agreement whereby it sold to CORCYRA d.o.o. ("CORCYRA") 289,855 shares of common
stock of the Company for $1,000,000 on February 1, 2005 and has also agreed to
sell its remaining 2,036,188 shares of the Company's common stock on or prior to
April 30, 2006.
2. Basis of Presentation and Significant Accounting Policies
The interim unaudited consolidated financial statements of Euroweb and its
consolidated subsidiaries included herein have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC")
regarding interim financial information and, accordingly, do not include all of
the information and note disclosures required by accounting principles generally
accepted in the United States of America ("U.S. GAAP") for complete financial
statements. These unaudited interim consolidated financial statements should be
read in conjunction with the audited consolidated financial statements and notes
thereto for the year ended December 31, 2004, appearing in the Annual Report on
Form 10-KSB of the Company for the year then-ended.
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with U.S. GAAP and reflect all adjustments which are, in
the opinion of management, necessary to a fair statement of the results for the
interim periods presented. All such adjustments are of a normal recurring
nature. The results of operations for the six months ended June 30, 2005 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2005.
7
Euroweb International Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
In preparing the interim unaudited consolidated financial statements, management
is required to make estimates and assumptions that affect the amounts reported
in the financial statements. Actual results could differ from those estimates.
All intercompany balances and transactions have been eliminated in
consolidation.
Prior periods have been reclassified to conform with current period
presentation.
On December 16, 2004, the Company sold all of its shares in its wholly-owned
subsidiary, Euroweb Czech Republic, for cash of $500,000. As a part of the
transaction, the Company effectively forgave $400,000 of loans receivable from
Euroweb Czech Republic. On April 15, 2005, the Company sold Euroweb Slovakia for
cash of $2,700,000. The Company believes that the sale of Euroweb Czech Republic
and Euroweb Slovakia meet the criteria for presentation as a discontinued
operation under the provisions of Statements of Financial Accounting Standard
("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets". The three- and six-month periods ended June 30, 2004 have been restated
to reflect Euroweb Czech Republic and Euroweb Slovakia as discontinued
operations.
The following table presents unaudited summarized results of operations of the
Company without Euroweb Slovakia, on a pro forma basis, for the three- and
six-month periods ended June 30, 2005, as though the company had been disposed
as of January 1, 2005 and for the corresponding periods in 2004:
Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
------------ ------------ ---------- ----------
Revenues $ 11,092,984 $ 6,785,636 $ 22,026,496 $ 11,928,663
Net loss from continuing operations $ (50,394) $ (257,281) $ (281,083) $ (286,260)
Net income (loss) $ (50,394) $ (257,281) $ 1,420,117 $ (286,260)
Net loss per share, basic $ (0.01) $ (0.05) $ 0.27 $ (0.06)
Net income (loss) per share, diluted $ (0.01) $ (0.05) $ 0.26 $ (0.06)
The above unaudited pro forma summarized results of operations are intended for
informational purposes only and, in the opinion of management, are neither
indicative of the financial position or results of operations of the Company had
the disposal actually taken place as of January 1, 2005, nor indicative of the
Company's future results of operations.
Stock-based compensation
Under the accounting provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), the Company's net income (loss) and net income
(loss) per share for the three and six months ended June 30, 2005 and 2004 would
have been increased to the pro forma amounts indicated below:
8
Euroweb International Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
Six months ended June 30,2005 June 30, 2004
(restated)
------------- -------------
Net income (loss):
Net income (loss), as reported $ 1,452,387 $ (96,805)
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of tax effects (395,682) (591,156)
------------- -------------
Pro forma net loss 1,056,705 (687,961)
============= =============
Basic and diluted income (loss) per share:
As reported, basic $ 0.27 $ (0.02)
Pro forma, basic 0.20 (0.14)
As reported, diluted $ 0.27 $ (0.02)
Pro forma, diluted 0.19 (0.14)
Three months ended June 30,2005 June 30, 2004
(restated)
------------- -------------
Net income (loss):
Net income (loss), as reported $ 1,677,806 ($ 137,665)
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of tax effects (326,360) (262,622)
------------- -------------
Pro forma net loss 1,351,446 (124,957)
============= =============
Basic and diluted income (loss) per share:
As reported, basic $ 0.31 $ (0.03)
Pro forma, basic 0.25 (0.03)
As reported, diluted $ 0.30 $ (0.03)
Pro forma, diluted 0.24 (0.03)
9
Euroweb International Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
The following is a reconciliation from basic earnings per share to diluted
earnings per share for the three and six month periods ended June 30, 2005 and
2004:
3 months ended 6 months ended
June 30, June 30,
------------------------------- -------------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net income (loss) attributable to
Common stockholders (A) $ 1,677,806 ($ 137,665) $ 1,452,387 ($ 96,805)
----------- ----------- ----------- -----------
Determination of shares
Weighted average common shares
outstanding - basic (B) 5,342,533 4,815,821 5,342,533 4,740,576
Assumed conversion of dilutive stock
options and warrants 233,333 -- 116,666 --
Weighted average common shares
Outstanding - diluted (C) 5,575,866 4,815,821 5,459,199 4,740,576
----------- ----------- ----------- -----------
Net income (loss) per common share
Basic (A/B) $ 0.31 ($ 0.03) $ 0.27 ($ 0.02)
Diluted (A/C) $ 0.30 ($ 0.03) $ 0.27 ($ 0.02)
For the three and six month periods ended June 30, 2005, 531,667 and 648,334
stock options and warrants, respectively, were excluded from the computation of
diluted earnings per share since such options and warrants have an exercise
price in excess of the average market value of the Company's common stock during
the periods. For the three and six month periods ended June 30, 2004, 565,000
stock options were excluded from the computation of diluted net loss per common
share because the effect of their inclusion would be anti-dilutive. 248,122
shares of common stock held in escrow as of June 30, 2005, for issuance to a
lender in the event of default on a loan, were excluded from the computation of
diluted earnings per share since the Company was not in default as of June 30,
2005
3. Bank Loans, Overdrafts, and Notes Payable
On June 1, 2004, Elender Rt. (which has been merged with Euroweb Hungary Rt.)
entered into a bank loan agreement with Commerzbank (Budapest) Rt. The agreement
consists of a loan facility of HUF 300 million (approximately $1.67 million) of
which approximately $799,315 was outstanding at June 30, 2005. The loan is being
repaid in quarterly installments of HUF 14.5 million (approximately $80,000),
commencing November 30, 2004. The interest rate is BUBOR (Budapest Interbank
Offered Rate) + 1.35%.
In addition, the bank also provided an overdraft facility of HUF 150 million
(approximately $800,000) to Elender Rt. The Company did not need to utilize this
facility as at June 30, 2005. The interest rate is BUBOR (Budapest Interbank
Offered Rate) + 1%.
Notes payable of approximately $355,862 as of June 30, 2005 relate to
outstanding liabilities to three previous shareholders of Elender Rt.: Vitonas
Investments Limited, Certus Kft. and Rumed 2000 Kft. The outstanding amount is
payable in four equal quarterly installments of HUF 36.4 million (approximately
$190,967), with the final payment due on December 31, 2005.
10
Euroweb International Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
4. Pantel Loan Payable
During 2002 Pantel, a related party prior to March 1, 2005, provided a loan of
HUF 245 million (approximately $ 1.2 million using June 30, 2005 exchange rate)
to a subsidiary of the Company of which $717,807 was outstanding at June 30,
2005. The loan bears interest at a rate of 13% and is repayable in five equal
installments from December 2004 semi-annually until the end of 2006.
5. Discontinued Operations and disposal of subsidiaries
Euroweb Slovakia sold on April 15, 2005 and Euroweb Czech Republic sold on
December 16, 2004 are considered discontinued operations for U.S. financial
reporting purposes and therefore, all periods are restated. For the three and
six months ended June 30, 2005 and 2004, the results of discontinued operations
are as follows:
Country Three
Three months Six months
months ended June Six months ended June
ended June 30, 2004 ended June 30, 2004
30, 2005 (restated) 30, 2005 (restated)
---------- ---------- ---------- ----------
Slovakia operations $ 27,000 $ 132,964 $ 32,270 $ 259,300
Slovakia - gain on disposal $1,701,200 -- $1,701,200 --
Czech Republic operations -- ($ 13,338) -- $ (69,845)
---------- ---------- ---------- ----------
Total $1,728,200 $ 119,616 $1,733,470 $ 189,455
The Company did not realize any income tax benefit/losses in connection with the
disposal of the Slovakian operation.
6. Stock-based Compensation
On March 22, 2004, the Company granted 125,000 options to its Chief Executive
Officer, 195,000 options to five employees and 45,000 options to two consultants
of the Company. On March 22, 2005, the Company granted 200,000 options to two of
the directors. The stock options granted to the Chief Executive Officer on April
26, 2004 vest at the rate of 31,250 on each October 1 of 2004, 2005, 2006 and
2007. The stock options granted to the other employees and consultants on April
26, 2004 vest at the rate of 80,000 on each October 1 of 2004, 2005, 2006. The
exercise price of the options ($3.40) is equal to the market price on the date
the grants were made.
In accordance with Accounting Principles Board No. 25, "Accounting for Stock
Issued to Employees," no compensation expense was recorded for the options
granted to the Chief Executive Officer, directors and the five employees.
However, in accordance with SFAS 123, the Company will recognize total
compensation charges of approximately $162,000 for the grants made to the two
consultants as such consultants do not qualify as employees. Such compensation
charges are recognized over the vesting period of three years. Compensation
expense for the six months ended June 30, 2005 was $30,200 (2004: $28,048), and
$15,100 (2004: $28,048) for the three months ended June 30, 2005.
11
Euroweb International Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
The stock options granted to the directors on March 22, 2005 vest at the rate of
50,000 on each September 22 of 2005, 2006, 2007, and 2008. The exercise price of
the options ($3.40) is equal to the market price on the date the grants were
made. No compensation charges was accounted in respect of these grants.
On June 2, 2005, the Company granted 100,000 options to a director of the
Company, which vest at the rate of 25,000 on each December 2 of 2005, 2006,
2007, and 2008. No compensation charge was accounted in respect of this grant.
The President and Director of the Company is eligible to receive an annual
compensation of $250,000 starting from April 15, 2005, which is payable in
Euroweb shares of common stock. The number of shares to be paid is calculated
based on the average closing price 10 days prior to each employment year. The
number of shares for the year ended April 14, 2006 is 82,781,
On June 7, 2005, the Company granted 100,000 warrants to a consulting company at
exercise prices as follows: 40,000 warrants at $3.50 per share, 20,000 warrants
at $4.25 per share, 20,000 warrants at $4.75 per share and 20,000 warrants at $5
per shares. The warrants have a term of five years and vest at a rate of 8,333
shares per month over a one year period. The warrants are being expensed over
the performance period.
7. Related party transactions
The provision of international/domestic leased line, voice and VOIP services are
being provided in conjunction with Pantel, an entity which was majority owned
and controlled by KPN Telecom B.V. (which also owned a majority interest in the
Company as at December 31, 2004). Intercompany sales were $1,768,358 for the two
months ended February 28, 2005 compared to $3,437,428 for the six months ended
June 30, 2005. The two periods are not comparable due to the fact that from
March 1, 2005, Pantel is no longer related party with the Company, because KPN
Telecom B.V. disposed of its interest in Pantel. Therefore, transactions with
Pantel from March 1, 2005 are not classified as transactions with a related
party.
In the first half of 2005 and fiscal 2004, Pantel was the most significant
trading partner of the Company with approximately 52% of total revenues of
Euroweb Romania for the six months ended June 30, 2005 (translating into 21% of
the consolidated revenues of the Company) being derived from providing services
to Pantel.
8. Commitments and Contingencies
(a) Employment Agreements
A fixed-term employment agreement with the Chief Executive Officer, which
provided for aggregate annual compensation of $96,000 through December 31, 2005
was amended in 2004 and 2005. The amended agreement provides for an annual
salary of $200,000 and a bonus of up to $150,000 in each of 2005, 2006, 2007 and
2008, as well as an annual car allowance of $30,000.
12
Euroweb International Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
The Company has entered into a two year employment agreement with Moshe Schnapp
as President and Director of the Company starting from April 15, 2005, which
grants an annual compensation of $250,000 to be paid in form of Euroweb shares
of common stock. The number of shares to be received by Mr. Schnapp is
calculated based on the average closing price 10 days prior to the commencement
of each employment year. For the year ended April 14, 2006, Mr. Schnapp will
receive 82,781 Euroweb shares of common stock.
A fixed-term employment agreement for a Country Manager of the Company provides
for an aggregate monthly compensation of $ 10,000 until December 31, 2005.
(b) Lease agreements
The Company's subsidiaries have entered into various capital leases for vehicles
and internet equipment, as well as non-cancelable agreements for office
premises.
(c) 20 years' usage rights
In 2002, Euroweb Romania provided an Indefeasible Right of Use ("IRU") for
transmission capacity on 12 pairs of fiber over a period of 20 years, commencing
in 2003. For the duration of the agreement, Euroweb Romania is obliged to use
all reasonable endeavours to ensure the cable system is maintained in efficient
working order and in accordance with industry standards.
(d) Legal Proceedings
There are no known significant legal procedures that have been filed and are
outstanding against the Company.
(e) Elender Rt. acquisition
On June 9, 2004 the Company acquired all of the outstanding shares of Elender
Rt. ("Elender"), a leading internet service provider in Hungary, for $6,500,000
in cash and 677,201 of the Company's shares of common stock. Under the terms of
this agreement, the Company has placed 248,122 unregistered shares of newly
issued common stock (in the name of the Company) with an escrow agent as
security for approximately $1.5 million loans payable to former shareholders of
Elender. The shares will be returned to the Company from escrow once the
outstanding loans have been fully repaid. However, if there is a default on the
outstanding loan, then the shares will be issued to the other party and the
Company is then obliged to register these shares.
Pursuant to section 1 of the Registration Rights Agreement signed on June 1,
2004 with the sellers of Elender, if the shares of the Company's common stock
were not registered within 120 days of closing (closing was on June 9, 2004) for
reasons attributable to the Company, a penalty of $2,000 per day is payable
until the shares are registered. The Company completed registration of the
shares of common stock issued in connection with the Elender acquisition in May
2005. In June 2005, the sellers renounced their claims in connection with the
late registration of shares, and therefore, the $170,000 penalty accrued during
the year ended December 31, 2004 was reversed and accounted for as other income
in the second quarter of 2005.
13
Euroweb International Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(f) Euroweb Hungary purchase guarantee
In February 2004, the Company purchased the remaining 51% of Euroweb Hungary
from Pantel. The consideration paid by the Company for the 51% interest
consisted of EUR 1,650,000 ($2,105,000) in cash, and a purchase commitment that
Euroweb Hungary will purchase at least HUF 600 million (approximately $3
million) worth of services from Pantel in each of 2004-2006. In the event that
Euroweb Hungary and its subsidiaries do not satisfy this commitment, Pantel may
charge a penalty equal to 25% of the commitment amount less any services
purchased. Purchases in 2004 exceeded this amount.
(g) Indemnities provided upon sale of subsidiaries
On April 13, 2004, the Company sold its 100% shareholding in Neophone Rt. (a
non-operational subsidiary) for approximately $60,000. Under the terms of the
sale the Company has indemnified the buyer for any unaccrued costs, fines,
penalties and lawsuits, which relate to a period prior to the sale. No claims
have been made to date.
Under the terms of the sale agreement for Euroweb Czech, the buyer has a right
to make claims against the Company for up to $200,000 under representation and
warranties provisions of the sale agreement. This provision is applicable for
claims made within 12 months of closing. No claims have been made to date.
On April 15, 2005, the Company sold Euroweb Slovakia. According to the
Securities Purchase Contract (the "Contract"), the Company will indemnify the
buyer for all damages incurred by the buyer as the result of seller's breach of
any representation, warranty and obligation as set forth in point 9.1.1 through
9.1.16 of the Contract or as the result of breach of any representation,
warranty and obligation set forth in other respective provisions of this
Contract, only up to the aggregate amount of $540,000. The buyer shall not be
entitled to make any claim under this Article 9 of the Contract after the fourth
anniversary of the date of the Contract. No claims have been made to date. The
Company has accrued $35,000 as the estimated fair value of any representation,
warranty and obligation in favor of the purchaser, issued pursuant to the share
purchase agreement.
9. Geographic information
The following table summarizes financial information from continuing operations
by geographic area for the three and six months ended June 30, 2005 and 2004
after intercompany eliminations and allocation of certain salaries and
revenues/direct cost to the respective countries to more accurately reflect the
utilization of resources:
14
Euroweb International Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
Geographic information for Q1-Q2 2005
Romania Hungary Corporate Total
----------- ------------- ----------- -------------
Third party revenues $ 7,062,269 $ 13,195,869 -- $ 20,258,138
Pantel related revenues (January - February) 1,565,314 203,044 -- 1,768,358
Total revenues 8,627,583 13,398,913 -- 22,026,496
Depreciation 386,888 858,792 -- 1,245,680
Intangible amortization
(customer contract) -- 513,222 -- 513,222
Interest income 4,970 10,488 -- 15,458
Interest expense (23,594) (170,710) -- (194,304)
Net interest expense (18,624) (160,222) -- (178,846)
Income tax 128,338 -- -- 128,338
Income (loss) from continuing operations 652,376 (228,653) (704,806) (281,083)
Long-lived assets 2,913,665 3,851,468 -- 6,765,133
Capital expenditures 826,694 362,512 -- 1,189,206
Goodwill 566,000 5,240,181 5,806,181
Pantel related revenue for the six months ended June 30, 2005 was $4,513,559 in
Romania and $657,672 in Hungary
Geographic information for Q1-Q2 2004
Romania Hungary Corporate Total
----------- ------------- ----------- -------------
Third party revenues $ 2,382,689 $ 6,108,546 -- $ 8,491,235
Pantel related revenues 3,416,000 21,428 -- 3,437,428
Total revenues 5,798,689 6,129,974 -- 11,928,663
Depreciation 215,045 290,657 2,048 507,750
Intangible amortization
(customer contract) -- 44,644 -- 44,644
Interest income 18,398 51,007 47,964 117,369
Interest expense (14,985) (155,468) -- (170,453)
Net interest (expense)
income 3,413 (104,461) 47,964 (53,084)
Income tax 22,531 -- -- 22,531
Income (loss) from continuing operations 176,972 237,986 (651,631) (236,673)
Long-lived assets 1,806,102 4,693,453 -- 6,499,555
Capital expenditures 425,331 59,769 -- 485,100
Goodwill 566,000 -- -- 566,000
15
Euroweb International Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
Geographic information for three months ended June 30, 2005
Romania Hungary Corporate Total
----------- ------------- ----------- -------------
Third party revenues $ 2,185,068 $ 6,375,318 -- $ 11,092,984
Pantel related revenues -- -- -- --
Total revenues 4,358,634 6,734,350 -- 11,092,984
Depreciation 192,279 421,099 -- 613,378
Intangible amortization
(customer contract) -- 256,611 -- 256,611
Interest income 2,087 5,788 -- 7,875
Interest expense (13,135) (69,772) -- (82,907)
Net interest expense (11,048) (63,984) -- (75,032)
Income tax 41,351 -- -- 41,351
Income (loss) from continuing operations 270,976 (9,135) (312,235) (50,394)
Geographic information for three months ended June 30, 2004
Romania Hungary Corporate Total
----------- ------------- ----------- -------------
Third party revenues $ 1,192,585 $ 3,646,390 -- $ 4,838,975
Pantel related revenues 1,952,270 (5,609) -- 1,946,661
Total revenues 3,144,855 3,640,781 -- 6,785,636
Depreciation 112,656 156,195 210 269,061
Intangible amortization
(customer contract) -- 44,644 -- 44,644
Interest income 16,720 27,462 1,938 46,120
Interest expense (6,649) (93,993) -- (100,642)
Net interest (expense)
income 10,071 (66,531) 1,938 (54,522)
Income tax 9,052 -- -- 9,052
Income (loss) from continuing operations 20,576 162,646 (390,916) (207,694)
10. Subsequent events
On July 21, 2005, Euroweb and its wholly-owned subsidiary Euroweb Hungary
entered into a Sale and Purchase Agreement (the "Agreement") with Marivaux
Investments Limited ("Marivaux") and Graeton Holdings Limited ("Graeton")
(collectively, Marivaux and Graeton are hereinafter referred to as the
"Sellers"), which are both registered under the laws of the Cyprus. Pursuant to
the Agreement, the Company has agreed to acquire and, the Sellers have agreed to
sell, 100% of the Seller's interest in Navigator Informatika Rt. ("Navigator"),
a Hungarian company. In consideration for Marivaux's interest in Navigator, the
Company will pay Marivaux $8,500,000 of which $150,000 was paid upon signing of
the Agreement and $8,350,000 shall be paid upon closing. In addition, at
closing, Euroweb shall issue Graeton 441,566 shares of common stock of Euroweb.
The Company will utilize a $6,000,000 long term bank loan from Commerzbank
Hungary ("Commerzbank") to finance the cash part of purchase price, while
$2,500,000 will be financed from existing cash on hand.
The closing of the sale of Navigator is expected to occur within five days after
the complete satisfaction of all closing conditions including, but not limited
to, the approval of the Hungarian Competition Office and obtaining the
acquisition loan from Commerzbank
16
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (a)
Operations
Overview
Euroweb International Corporation owns and operates Internet Service Providers,
or ISPs, in Hungary and Romania through its subsidiaries, Euroweb Hungary Rt.
("Euroweb Hungary") and Euroweb Romania S.A. ("Euroweb Romania"). On December
16, 2004, the Company sold Euroweb Czech and no longer has operations in the
Czech Republic. On April 15, 2005, the Company sold its interest in Euroweb
Slovakia a.s. ("Euroweb Slovakia") and, therefore, in 2005, Euroweb Slovakia is
considered a discontinued operation for U.S. reporting purposes.
The Company operates in one industry segment, providing Internet access, voice,
international/domestic leased lines and additional value added services to
mainly business customers.
Our revenues come from the following four sources:
o Internet Service Provider (Internet access, content and web services,
other services);
o International/domestic leased line and Internet Protocol data services;
o Voice / Voice over Internet Protocol services; and
o Facilities (sale, rental and maintenance of optical fiber between the
Hungarian border and the Romanian City of Timisoara).
For the services in the second and third points in Romania, our main customer in
2005 and 2004 was Pantel Rt. ("Pantel"), which was a related party. On February
28, 2005, the completion of the sale of KPN NV's 75.1% interest in the Pantel
business to the Hungarian Telephone and Cable Corp. was announced. As a result,
we are no longer a related party with Pantel as of March 1, 2005; however, it
still remains the most significant customer and supplier of the Company.
As an Internet Service Provider, we generally have not built out optical fibers,
instead entering into a number of agreements with infrastructure owners and
telecom companies to buy internet and telecom services and resell them to our
customers. Such a structure enables our company to avoid significant capital
expenditures on network development. However, without our own infrastructure,
our ability to compete with other Internet Service Providers and telecom
companies is limited due to existing access costs charged by third party
telecommunication companies. In order to mitigate the impact of newly introduced
cheaper technology and competition, we took several steps, including the
following:
o Built strategic partnership with telecom companies;
o Increased the value added services and offered more comprehensive
solutions;
o Introduced voice and international/domestic leased lines services;
o Building of own optical fiber network in Romania; and
o Made acquisitions to ensure economies of scale and utilization of
synergies.
This strategy has resulted in increased revenues, reduction of losses and
increased the cash generating ability of the Company since 2003.
17
Related party transactions and major customers/supplier - Pantel
General: Our largest customer and supplier since early 2001 has been Pantel, a
Hungary-based alternative telecommunications provider. Pantel operates within
the region and has become a significant trading partner for Euroweb Romania
through the provision of a direct fiber cable connection, which enables
companies to transmit data to a variety of destinations by utilizing the
international connections of Pantel. As a result, Euroweb Romania became the
preferred, but not exclusive partner of Pantel for services in Romania. In
addition to this, Euroweb Hungary utilizes significant telecom services from
Pantel. Due to the fact that a significant portion of our revenue is generated
by international/domestic leased line and Voice / Voice over Internet Protocol
services, a number of our representatives have moved to the premises of Pantel
in order to improve co-operation on international projects.
On February 28, 2005, KPN Telecom (the majority owner of Pantel and our largest
shareholder), completed the sale of its entire interest in Pantel. Therefore,
Euroweb is no longer related party with Pantel from March 1, 2005. Profit and
loss statements include amounts relating to Pantel in related party revenues and
costs for the period January 1 to February 28 in 2005 and from January 1, 2004
to June 30 in 2004.
Transactions: Both Euroweb Hungary and Euroweb Romania engage in the following
transactions with Pantel:
(a) Pantel receives revenue from the provision of the following services to
our Company and our subsidiaries:
- Internet and related services;
- National and international leased and telephone lines;
- VOIP / Voice services; and
- Consulting services
The total amount of these services purchased from Pantel was $4,156,292 during
the six months ended June 30, 2005 (six months ended June 30, 2004: $2,768,689).
In addition, Pantel charged interest of $66,180 in the six months ended June 30,
2005 (six months ended June 30, 2004: $99,404) relating to the loan payable
given to Euroweb Hungary by Pantel.
(b) Our Company and our subsidiaries received revenue from the provision of
the following services to Pantel.:
- Cost of international leased lines and local telephone lines in Hungary
and Romania;
- International/national data and voice over internet protocol services for
Pantel;
- Internet and related services; and
- Consulting services
The total value of these services sold was $5,171,231 in the six months ended
June 30, 2005 (six months ended June 30, 2004: $3,437,428).
Direct sales to Pantel were 21% of total consolidated revenue in the six month
ended June 30, 2005 (six months ended June 30, 2004: 29%). However, the
dependency on Euroweb Romania on Pantel is even more significant. Some third
party sales involve Pantel as the subcontractor/service provider for the
international/domestic lines, and some third party customers were introduced to
the Company by Pantel (i.e. their relationship with Pantel is stronger than
their relationship with Euroweb Romania).
18
Effective dependency on Pantel: Direct sales to Pantel and Pantel-related sales
represent approximately 31% of total consolidated revenues of the Company and
approximately 79% of total sales of Euroweb Romania. There is no such sales
dependency in the case of Euroweb Hungary.
With respect to 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. We always consider alternative suppliers for each individual
project.
It cannot be predicted in advance whether the changes in ownerships will have an
influence on the business relationship between the Company and Pantel. We have
not experienced any deterioration in our mutual relationship in the first half
of 2005.
Disposals
On April 15, 2005, the Company completed the sale of 100% of the outstanding
stock of its subsidiary in Slovakia for $2,700,000. As a result of these
transactions, the Company recorded approximately $1,736,200 profit in the second
quarter of 2005.
In addition to the decreasing profitability of the Slovakian subsidiary, the
strategic role of the Slovakian operations in the Company's regional approach
became less significant over the last two years. This was primarily because of
the smaller market scale represented by our Slovakian operations compared to the
other countries in which the Company operates. The Company continues the
realization of its strategy to focus its efforts in countries where the
Company's market presence is stronger. The sale of Euroweb Slovakia resulted in
a cash inflow of $2,700,000 in the six months ended June 30, 2005.
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. Accounting policies the Company believes to be
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 are the same as those described in its Annual Report on
Form 10-KSB for the year ended December 31, 2004. (d)
Results of Operations
19
Six months Period Ended June 30, 2005 Compared to Six Months Period Ended
June 30, 2004
Due to the acquisition of Elender Rt. on June 9, 2004, the profit and loss
statements for the six months ended June 30, 2005 and 2004 are not comparable
from an organic growth point of view.
On December 16, 2004, the Company sold all of its shares in its wholly-owned
subsidiary, Euroweb Czech, for cash of $500,000. As a part of the transaction,
the Company effectively forgave $400,000 of loans receivable from Euroweb Czech
Republic. On April 15, 2005, the Company sold Euroweb Slovakia for cash of
$2,700,000. The Company believes that the sale of Euroweb Czech Republic and
Euroweb Slovakia meet the criteria for presentation as a discontinued operation
under the provisions of Statements of Financial Accounting Standard ("SFAS") No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets". The
six-month period ended June 30, 2004 has been restated to reflect Euroweb Czech
Republic and Euroweb Slovakia as discontinued operations.
Six months ended June 30, 2005 2004
(restated)
------------ -----------
Total Revenues $ 22,026,496 $11,928,663
We experienced a +84% revenue growth, or an increase of $10,097,833 for the six
months ended June 30, 2005 compared to the six months ended June 30, 2004. The
increase was mainly due to the acquisition of Elender Rt., increases in
voice/VOIP and international leased line services and partly to the depreciation
of the US Dollar against the Romanian Lei and the Hungarian Forint in the six
months ended June 30, 2005 compared to the six months ended June 30, 2004,
because Company's sales are non-dollar denominated results in higher reported
dollar revenues.
The following table summarizes the main changes in revenue compared to the
previous year with respect to the revenue structure:
Revenue / services
Q1-Q2 of 2004
Q1-Q2 of 2005 (restated) % change
------------- ---------- --------
ISP activity $13,285,654 $ 5,641,203 +235%
Int./nat. leased line *(a) $ 3,832,885 $ 2,601,432 +47%
Voice / VOIP (Hungary and Romania) $ 4,881,206 $ 3,611,195 +35%
Facilities (a) $ 26,751 $ 74,833 -65%
Total $22,026,496 $11,928,663 +85%
* - primarily Pantel or Pantel related sales,
(a) substantially all generated by the Romanian subsidiary
ISP revenue analysis
Approximately $6.6 million of the increase in ISP revenue or 86% of the increase
in ISP revenue relates to Hungary, mainly due to the acquisition of Elender Rt.
The remaining growth of ISP revenue can be attributed to the weakness of the US
Dollar and organic growth in Romania in a value of approximately $450,000
compared to the previous year. In Hungary, due to economic conditions and
pricing issues, customers - having access type (internet connection) services -
generally transfer from higher monthly fee subscriptions (such as leased line)
to lower monthly fee subscriptions (e.g. ADSL). Although the number of total
customers has increased compared to previous periods mainly due to the new ADSL
customers, organic revenue growth possibilities in this segment are limited due
to the structural change in service types utilized by the customers. In Romania,
organic growth is due to the demand for broadband internet connections by
corporate customers. Their numbers are almost doubled and now exceed 500.
20
International/national Leased Line revenue analysis
Revenue from international/national leased lines and internet protocol data
services produced by Euroweb Romania has increased compared to last year. This
service is generally provided to a small number of Internet Service Providers,
telecommunication firms including Pantel, and other international companies. Due
to developments in the Romanian market in the last few years, these individually
agreed wholesale prices have dropped. Despite price erosion, the Company was
able to approximately double the sold international leased line capacity
compared to 2004, in addition to new government-related contract in order to
offset the negative price trends in the international leased line segment.
VOIP services revenue Q1-Q2 of 2004
Q1-Q2 of 2005 (restated) % change
------------- ------------------ --------
Retail voice origination (Ro+Hu) $ 250,956 $ 342,332 -27%
Wholesale voice termination (Ro) $ 3,048,000 $ 2,287,000 +33%
Neophone prepaid phonecard (Hu) $ 852,192 $ 981,863 -13%
Neophone Deal (Hu) $ 650,768 0 N/A
Neophone-X (Hu) $ 79,290 0 N/A
------------- ------------------ --------
Total $ 4,881,206 $ 3,611,195 +35%
Hu- Hungarian related, Ro- Romanian related
Retail voice origination is provided to corporate customers over leased lines.
Such services enable the customers to reduce their costs of the international,
long distance and local calls, which they initiate. 60% of revenue is generated
in Romania, while the remaining 40% is generated in Hungary. Revenue from retail
voice origination has decreased from $245,331 in the six months ended 2004 to
$101,291 in the six months ended June 30, 2005 in Hungary. In Romania, voice
revenue increased by $52,664 to $149,665 in the six months ended June 30, 2005
compared to the corresponding six months in the previous year. From 2005, the
Hungarian subsidiary introduced a new voice product, Neophone Deal, which is a
more convenient and cheaper way for companies to reduce their voice costs.
Consequently, the Company anticipates decreases in the future in Hungary. The
services are mostly denominated in local currency; therefore in US Dollar terms,
the overall decrease is higher due to the 13% depreciation of the US Dollar
against the Romanian Lei and the 8% depreciation of the US Dollar against the
Hungarian Forint in the six months ended June 30, 2005 compared to the six
months ended June 30, 2004.
Wholesale voice termination represents voice minutes received from Pantel and
forwarded to Romanian telecommunication companies. Such services have increased
by 33%. The service bears a high risk that the voice traffic may be completely
eliminated if a strategic decision is made by Pantel to use alternative
providers or customers can obtain better termination rates from competitors.
Such volume reductions may occur at any time, although the impact on the result
of operation will be limited as margins are low. Approximately 5% of the
increase can be attributed to the weakening of the US Dollar from 2004 to 2005
against the Euro, which is the denominated currency of this service.
Neophone prepaid phonecards enable users (private individuals) to make cheaper
domestic or international calls compared to the rates of the incumbent telecom
operators, and were first introduced four years ago in Hungary. During the first
three years, the number of users and voice traffic has continuously increased.
From late 2003, the competition has introduced aggressively low prices;
consequently, the Company also had to reduce its prices, so this development
reduced the revenue generated by this product. For the six months ended June 30,
2005, revenues from phone card traffic decreased by 12% compared to the previous
period, while the voice traffic minutes has increased by approximately 5%.
21
Neophone Deal is offered to small- and medium-sized companies in the form of
carrier pre-selection. The subscriber keeps its existing phone number and
remains the client of the previous telecommunication company; however outgoing
calls initiated by the customer will go through Euroweb voice network leaving
out the previous telecommunication company. The outgoing traffic is invoiced by
Euroweb Hungary with discount prices comparing to the rates of the incumbent
telecom operator.
Neophone-X, which was first introduced in February 2005, provides a voice
service by building on the system that comprises of users' personal computers
and the Internet. In this case the phone call is implemented with the
intermediation of computers and the Internet instead of the classical phone
network. During computer based phone calls voice is transmitted in digital data
packages, then it is transformed into human voice again at the receiving party.
Revenue generated in the six months ended June 30, 2005 was $79,290.
Facilities revenue analysis
Revenues from facilities consist of lease and sale of fiber optic cables owned
by Euroweb Romania and related maintenance fee. In 2004, a fiber optic sale
transaction resulted in revenues of approximately $34,000. IRU revenue in 2004
was approximately $23,000, and the balance of facilities revenue was maintenance
revenue. In 2005, facilities revenue included only the revenue from the 20 year
IRU contract.
Geographic revenue analysis
The following table summarizes the main changes in revenue compared to the
previous year with respect to the geographical source of revenue:
Q1-Q2 of 2004 Change
Revenue/country Q1-Q2 of 2005 (restated) in %
--------------- ------------- ------------- -------
Hungary $13,398,913 $ 6,104,716 +119%
Romania $ 8,627,583 $ 5,823,947 +48%
--------------- ------------- ------------- -------
Total $22,026,496 $11,928,663 +86%
Elender Rt. has been consolidated from June 9, 2004, and consequently the
Hungarian operations have increased by 119% or $7,294,197 mainly due to this
acquisition. Approximately 8% of the increase in Hungary is the result of the
strengthening of the Hungarian Forint against the US Dollar when comparing the
six months ended June 30, 2005 and 2004.
The Romanian operations have experienced a 48% or $2,803,636 revenue increase
compared to the prior period. Approximately 28% or $0.8 million of this increase
can be attributed to the increased wholesale voice termination, approximately
$1.2 million can be attributed to the increase of domestic/international leased
lines revenue, while the remaining is mainly in connection with the organic
growth from ISP activity and currency appreciation of the Romanian Lei against
the US Dollar in the six months ended June 30, 2005 compared to the six months
ended June 30, 2004.
22
Cost of revenues (excluding depreciation and amortization)
The following table summarizes the cost of revenues (excluding depreciation and
amortization) for the six months ended June 30, 2005 and 2004:
Six months ended June 30, 2004
2005 (restated)
----------- -----------
Total cost of revenues $15,190,557 $ 8,298,320
Cost of revenues (excluding depreciation and amortization) comprise mostly
telecommunication expenses. The increase of 183% is fairly consistent with the
overall increase of revenues of 185%.
Compensation and related costs
The following table summarizes the compensation and related costs for the six
months ended June 30, 2005 and 2004:
Six months ended June 30, 2004
2005 (restated)
----------- -----------
Compensation and related
costs $ 1,590,407 $1,223,529
Overall compensation and related costs increased by 30%, or $366,878, mainly due
to the acquisition of Elender Rt. in June 2004 and the effect of the
appreciation of Hungarian and Romanian currencies against the US Dollar in the
six months ended June 30, 2005 compared to the six months ended June 30, 2004.
Consulting, directors and professional fees
The following table summarizes the consulting, directors and professional fees
for the six months ended June 30, 2005 and 2004:
Six months ended June 30, 2004
2005 (restated)
----------- -----------
Consulting, directors
and professional fees $ 1,757,922 $ 872,828
The consulting, directors and professional fees increased by $885,094, which can
mainly be attributed to the acquisition of Elender Rt. in June 2004, the
outsourcing of certain technical, sales and other services due to restructured
Hungarian operation and to increased legal and consultancy costs associated with
growth of the business.
23
Collection of written-off receivable
The following table summarizes the collection of written-off receivables for the
six months ended June 30, 2005 and 2004:
Six months ended June 30, 2004
2005 (restated)
----------- -----------
Collection of
written-off receivable $ 265,630 $ 0
In March 2005, the Company received a check of $265,630 from Teleglobe Inc.
which went bankrupt in 2003. The Company had previously written off this
uncollected receivable.
Other selling, general and administrative expenses
The following table summarizes our other selling, general and administrative
expenses for the six months ended June 30, 2005 and 2004:
Six months ended June 30, 2004
2005 (restated)
----------- -----------
Other selling, general and
administrative expenses $ 2,138,237 $1,197,500
Overall other selling, general and administrative expenses increased by 79%
($940,737) mainly due to the acquisition of Elender Rt. in June 2004. The main
categories are as follows: increase in marketing cost mainly due to the
introduction of new Neophone products ($358,255), increase in rental fee of
offices ($178,615), an increase in telecommunication and local taxes in Hungary
and Romania ($131,104) and increase of bad debt provision ($49,094). The
remainder of the increase can be attributed to other cost categories and the
appreciation of the Hungarian and Romanian currencies against the US Dollar in
the six months ended June 30, 2005 compared to the six months ended June 30,
2004.
Depreciation and amortization
The following table summarizes our depreciation and amortization for the six
months ended June 30, 2005 and 2004:
Six months ended June 30, 2004
2005 (restated)
----------- -----------
Depreciation $ 1,245,680 $ 507,750
Amortization of intangibles $ 513,222 $ 44,644
----------- -----------
Total depreciation and
amortization $ 1,758,902 $ 552,394
Depreciation increased by $737,930 in the six months ended June 30, 2005
compared to the same period in 2004, which can be attributed mainly to the
acquisition and consolidation of Elender Rt.
Amortization of intangibles of $513,222 in the six months ended June 30, 2005
(2004: $44,644) relates to certain customer contracts of Elender Rt, which were
recognized as intangible assets upon acquisition.
Net interest expense
The following table summarizes our net interest expense for the six months ended
June 30, 2005 and 2004:
Six months ended June 30, 2004
2005 (restated)
----------- -----------
Interest income $ 15,458 $ 117,369
Interest expense $ (194,304) $ (170,453)
----------- -----------
Net interest expense $ (103,814) $ (53,084)
=========== ==========
24
The increase in net interest expense is due to the fact that (i) fewer
interest-generating funds were available in this period than in the same period
of the previous year because funds were disbursed in connection with the
acquisitions, (ii) interest rates on these investments have decreased over the
periods in question, (iii) securities expired on February 15, 2004, without new
investments being made due to cash being needed to fund acquisitions in 2004,
and (iv) consolidation of Elender Rt. has increased interest expense due to bank
loans and notes payable outstanding, and consequently have increased interest
expense.
Other income
The following table summarizes our other income for the six months ended June
30, 2005 and 2004:
Six months ended June 30, 2004
2005 (restated)
----------- -----------
Other income $ 170,000 --
In June 2005, the sellers of Elender Rt. renounced their claims in connection
with the late registration of shares, and therefore, the $170,000 penalty
accrued during the year ended December 31, 2004 was reversed and accounted for
as other income in the second quarter of 2005.
Income tax expense
The following table summarizes our provision for income taxes for the six months
ended June 30, 2005 and 2004:
Six months ended June 30, 2004
2005 (restated)
----------- -----------
Income tax expense $ (128,338) $ (46,019)
The income tax expense increased due to the profit before tax in Romania, which
are not offset by losses carried forward from previous years.
Liquidity and Capital Resources
In recent years, we maintained approximately $11 million invested in US
Government Securities, which matured in February 2004. The main source of these
funds were capital injections by KPN in previous years.
As of June 30, 2005, our cash and cash equivalents were $5.1 million, an
increase of approximately $1.9 million from the end of fiscal year 2004
(restated). The change is mainly due to the sale of Euroweb Slovakia.
Cash flow from operations in the six months ended June 30, 2005 was $1,377,893
an increase of $1,412,750 from the six months ended June 30, 2004 (restated).
The change is due to the increased cash generation of the Romanian subsidiary
and the acquisition of Elender.
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Investing activities increased the cash at hand of the Company by $1,510,794 in
the six months ended June 30, 2005 due to sale of Euroweb Slovakia for
$2,700,000, which was partly offset by the increased capital expenditures in
Romania compared to 2004, in connection with certain fiber network expansion and
backbone equipment.
Cash flow from financing activities was $(953,197) in the six months ended June
30, 2005. $768,529 was used to make payments on bank loans, the Pantel loan and
notes payable, while $184,668 was used to repay capital leased obligations. At
June 30, 2005, the overdraft facility was available but not utilized, with the
unutilized portion of the loan facility being $750,000.
Although we cannot provide guarantees, management believes that the synergy
effects and potential business opportunities of the merged Hungarian entities
can contribute to improving our cash generating ability during 2005 comparing
2004, which can already be seen by the change in cash flow from operations. We
intend to reduce the loans and trade liabilities of our Company from any such
cash generated.
(e) In the event we make future acquisitions in Central and Eastern Europe, the
excess cash on hand, additional bank loans or fund raising may be used to
finance such future acquisitions. The Company may also consider the sale of
strategic assets or subsidiaries. Due to our strategy of aggressive acquisition,
we may seek to incur additional material debts.
(f) We signed a share purchase agreement on July 21, 2005 to acquire Navigator
Rt. Based on the terms of that agreement, the financial position of the Company
will change significantly. The short and long term liquidity position of the
Company will be affected as follows: (1) Cash at hand will be reduced by
$2,500,000 (2) Long term bank loans will increase by $6,000,000 (3) an estimated
net working capital of Navigator group will increase the liability position of
the Company by more than $1,000,000. In addition, the Company expects
transaction costs in excess of $200,000 in connection with the acquisition
related to advisory and consulting fees, financial reporting requirements and
registration costs.
Inflation and Foreign Currency
We maintain our books in local currencies: Hungarian Forint for Euroweb Hungary
and the Romanian Lei for Euroweb Romania.
Our operations are primarily outside of the United States through our wholly
owned subsidiaries. As a result, fluctuations in currency exchange rates may
significantly affect our revenues, net income and financial position when the
foreign currencies, primarily the Hungarian Forint, of our international
operations are translated into U.S. dollars for financial reporting. In
addition, we are also subject to currency fluctuation risk with respect to
certain foreign currency denominated receivables and payables. Although we
cannot predict the extent to which currency fluctuations may or will affect, our
business and financial position, there is a risk that such fluctuations will
have an adverse impact on the Company's revenues, net income and financial
position. Because differing portions of our revenues and costs are denominated
in foreign currencies, movements could impact our margins by, for example,
decreasing our foreign revenues when the dollar strengthens and not
correspondingly decreasing our expenses. The Company does not currently hedge
its currency exposure. In the future, we may engage in hedging transactions to
mitigate foreign exchange risk.
During the first half of 2005, the Romanian Lei appreciated 13% against the US
dollar and the Hungarian Forint appreciated 8% against the US dollar, compared
to the first half of 2004.
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Effect of Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)"). SFAS 123(R)
requires an entity to recognize the grant-date fair value of stock options and
other equity-based compensation issued to employees in the income statement, but
expresses no preference for a type of valuation model. For small business
issuers, the SFAS 123(R) is effective as of the beginning of the first interim
or annual reporting period that begins after December 15, 2005. Early adoption
is encouraged for interim or annual periods for which financial statements or
interim reports have not been issued. The Company is currently assessing the
impact SFAS 123(R) will have on its financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets: an amendment of APB Opinion No. 29" ("SFAS 153"). SFAS 153 eliminates a
company's ability to use the similar productive assets concept to account for
nonmonetary exchanges at book value without recognizing a gain. Nonmonetary
exchanges will have to be accounted for at fair value, with gain or loss
recognized, if the transactions meet a commercial-substance criterion and fair
value is determinable. SFAS 153 is effective for nonmonetary asset exchanges in
fiscal periods beginning after June 15, 2005, and early application is permitted
for nonmonetary asset exchanges occurring in fiscal periods beginning after
December 16, 2004. The Company is currently assessing the impact SFAS 153 may
have on its financial statements.
In December 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment
of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends Accounting Research
Bulletin No. 43, Chapter 4, "Inventory Pricing" ("ARB 43") to eliminate the "so
abnormal" criterion in ARB 43 and requires companies to recognize abnormal
freight, handling costs, and amounts of wasted material (spoilage) as
current-period charges. Additionally, SFAS 151 clarifies that fixed production
overhead cost should be allocated to inventory based on the normal capacity of
the production facility. SFAS 151 is effective for inventory costs incurred
during annual periods beginning after June 15, 2005. The Company is currently
assessing the impact SFAS 151 may have on its financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" which replaces Accounting Principles Board Opinions No. 20
"Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim
Financial Statements." This statement applies to all voluntary changes in
accounting principle and changes resulting from adoption of a new accounting
pronouncement that does not specify transition requirements. SFAS 154 requires
retrospective application to prior periods' financial statements for changes in
accounting principle unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. SFAS 154 also
requires that retrospective application of a change in accounting principle be
limited to the direct effects of the change. Indirect effects of a change in
accounting principle should be recognized in the period of the accounting
change. SFAS 154 is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005 with early implementation
permitted for accounting changes and corrections of errors made in fiscal years
beginning after the date this statement was issued. SFAS 154 is effective for us
as of January 1, 2006 and is not expected to have a material impact on our
financial statements.
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Forward-Looking Statements
When used in this Form 10-QSB, in other filings by the Company with the
Securities and Exchange Commission ("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. 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. The Company advises you to review any
additional disclosures made in its 10-QSB, 8-K, and 10-KSB reports filed with
the SEC.
Item 3. Controls and Procedures
As of the end of the period covered by this report, we conducted an evaluation,
under the supervision and with the participation of our chief executive officer
and chief accounting officer of our disclosure controls and procedures (as
defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon
this evaluation, our chief executive officer and chief accounting officer
concluded that our disclosure controls and procedures are effective to ensure
that information required to be disclosed by us in the reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the Commission's rules and forms. There was
no change in our internal controls or in other factors that could affect these
controls during our last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
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PART II
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings as of the date of
this report. (o)
ITEM 2. CHANGES IN SECURITIES
On April 15, 2005, Moshe Schnapp, the President and Director of the
Company became eligible to receive 82,781 shares of Euroweb common stock
representing a value of $250,000, which is his annual compensation for the year
ended April 14, 2006. The number of shares is calculated based on the average
closing price 10 days prior to each employment year. The shares have not been
issued as of the date of this report.
On June 2, 2005, the Company granted 100,000 share options to Gabor
Ormossy, director of the Company. The exercise price of the options ($4.05) is
equal to the market price on the date the grants were made. The options vest
over a period of four years.
On June 7, 2005, the Company granted 100,000 warrants to a consulting
company at exercise prices as follows: 40,000 warrants at $3.50 per share,
20,000 warrants at $4.25 per share, 20,000 warrants at $4.75 per share and
20,000 warrants at $5.00 per shares. The warrants have a term of five years and
vest at a rate of 8,333 shares per month over a one year period.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 2, 2005, the Company held its annual meeting of shareholders in
Budapest, Hungary. The Company's shareholders voted on, and approved, the
following three items:
o The Company's shareholders elected Csaba Toro, Moshe Schnapp, Ilan
Kenig, Yossi Attia, Stewart Reich and Gabor Ormossy as directors to hold office
until their successors are elected and qualified
o The amendment of the Company's 2004 Stock Incentive Plan.
o The Company's shareholders approved the Board of Directors'
selection of Deloitte Kft. as the Company's independent auditors for the fiscal
year ending December 31, 2005.
ITEM 5. OTHER INFORMATION
On April 15, 2005, Moshe Schnapp was appointed as the president and a
director of the Company with a two years employment agreement granting an annual
salary of $250,000 payable in Euroweb shares.
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On July 21, 2005, Euroweb and its wholly-owned subsidiary Euroweb Hungary
entered into a Sale and Purchase Agreement (the "Agreement") with Marivaux
Investments Limited ("Marivaux") and Graeton Holdings Limited ("Graeton")
(collectively, Marivaux and Graeton are hereinafter referred to as the
"Sellers"), which are both registered under the laws of the Cyprus. Pursuant to
the Agreement, the Company has agreed to acquire and, the Sellers have agreed to
sell, 100% of the Seller's interest in Navigator Informatika Rt. ("Navigator"),
a Hungarian company. In consideration for Marivaux's interest in Navigator, the
Company will pay Marivaux $8,500,000 of which $150,000 was paid upon signing of
the Agreement and $8,350,000 shall be paid upon closing. In addition, at
closing, Euroweb shall issue Graeton 441,566 shares of common stock of Euroweb.
The Company will utilize a $6,000,000 long term bank loan from Commerzbank
Hungary ("Commerzbank") to finance the cash part of purchase price, while
$2,500,000 will be financed from existing cash on hand.
The closing of the sale of Navigator is expected to occur within five days
after the complete satisfaction of all closing conditions including, but not
limited to, the approval of the Hungarian Competition Office and obtaining the
acquisition loan from Commerzbank.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits (numbers below reference Regulation S-B, Item 601)
(3) (a) Certificate of Incorporation filed November 9, 1992((1))
(b) Amendment to Certificate of Incorporation filed July 9,
1997(2)
(c) Restated Certificate of Incorporation filed May 29, 2003
(d) Restated By-laws (filed as an exhibit to the Form 10-QSB for
the quarter ended September 30, 2004)
(31) (a) Certification of the Chief Executive Officer of Euroweb
International Corp. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
(31) (b) Certification of the Chief Accounting Officer of Euroweb
International Corp. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
(32) (a) Certification of the Chief Executive Officer of Euroweb
International Corp. pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(32) (b) Certification of the Chief Accounting Officer of Euroweb
International Corp. pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on the 22nd day of August 2005.
EUROWEB INTERNATIONAL CORP.
By /s/ Csaba Toro
---------------------------
Csaba Toro
Chief Executive Officer
------------
(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)
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