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): October 7, 2005
EUROWEB INTERNATIONAL CORP.
(Exact name of registrant as specified in charter)
Delaware 001-12000 13-3696015
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
1138 Budapest, Vaci ut 141. Hungary
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: +36-1-8897000
Copies to:
Gregory Sichenzia, Esq.
Stephen M. Fleming, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas
New York, New York 10018
Phone: (212) 930-9700
Fax: (212) 930-9725
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instructions A.2. below):
|_| Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
INFORMATION INCLUDED IN REPORT
Euroweb International Corp. filed a Form 8-K dated October 13, 2005 with regard
to the acquisition of the 100% of the issued and outstanding shares of Navigator
Informatika Rt. without the required financial information. Accordingly, Euroweb
International Corp. is filing this Form 8-K/A to include that financial
information.
Item 1.01 Entry Into a Material Definitive Agreement
Item 2.01 Completion of Acquisition or Disposition of Assets
Item 3.02 Unregistered Sales of Equity Securities
Item 9.01 Financial Statements and Exhibits
On July 21, 2005, Euroweb International Corp. (the "Euroweb") and Euroweb
Hungary Rt. ("Euroweb Hungary"), a wholly-owned subsidiary of Euroweb
(collectively, Euroweb Hungary and Euroweb are hereinafter referred to as the
"Company"), 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 agreed to acquire, and the Sellers agreed to sell,
100% of the Sellers' interest in Navigator Informatika Rt. ("Navigator"), a
Hungarian company.
The Company's purchase of Navigator closed on October 7, 2005. In consideration
for Marivaux's interest in Navigator, the Company paid Marivaux US$8,500,000 of
which US$150,000 was paid upon signing of the Agreement and $8,350,000 was paid
on closing. In addition, at closing, Euroweb issued Graeton 441,566 shares of
common stock of Euroweb (the "Shares"). The offering and sale of the Shares was
deemed to be exempt under rule 506 of Regulation D and Section 4(2) of the
Securities Act of 1933, as amended. No advertising or general solicitation was
employed in offering the Shares. At the date on which the Agreement was entered
into, a material relationship existed between the ultimate parent of the Sellers
and the Company and its affiliates, to the extent that the ultimate parent of
the Sellers indirectly had a right to nominate a member of the Euroweb
International Corp. Board of Directors (and had nominated such a director) as
well as a right to nominate a member of the Euroweb Hungary Rt. Board of
Directors (and had nominated such a director).
Euroweb has entered into a Registration Rights Agreement dated July 21, 2005
whereby it agreed to file a registration statement registering the Shares within
75 days from the closing and have such registration statement declared effective
within 150 days from the filing thereof. In the event that Euroweb fails to meet
its obligations to register the Shares it may be required to pay a penalty equal
to 1% of the value of the Shares on a monthly basis. The Company is currently in
discussions with the Sellers to obtain a written waiver of the penalty as it has
been orally agreed that the registration statement will not be filed within 75
days from the closing. The waiver will provide for a postponement of the filing
until such time as is mutually agreed by both parties.
On September 27, 2005, Euroweb Hungary entered into an agreement with
Commerzbank Hungary ("Commerzbank") for a $6,000,000 long term loan facility to
finance the cash part of purchase price. The full amount of the facility was
drawn on October 4, 2005. The remainder of the cash purchase price, $2,500,000,
was financed from existing cash resources. The interest rate of the loan is
Budapest Interbank Offered Rate plus 2.5%. Euroweb Hungary is required to make
scheduled quarterly payments in connection with the loan in varying amounts from
$166,493 to $354,513 commencing March 31, 2006 through June 30, 2010.
1
As security for providing the funds, Euroweb Hungary granted a security interest
in all of its assets, the assignment of its revenue, the assignment of all
future dividends payable by Navigator and the pledge of all of the securities of
Euroweb Hungary and Navigator held by Euroweb. Further, in the event that
Euroweb Hungary fails to satisfy its obligations under the loan agreement with
Commerzbank, Commerzbank holds an option to acquire all of the securities of
Navigator.
2
ITEM 9.1. Financial Statements and Exhibits
(a) Financial statements of businesses acquired.
Audited combined and consolidated financial statements of Navigator
Informatika Rt. as of and for the year ended December 31, 2004
Report of Independent Registered Public Accounting Firm 4
Combined Balance Sheet 5
Combined and Consolidated Statement of Operations 6
Combined and Consolidated Statement of Changes in
Shareholders' Deficit 7
Combined and Consolidated Statement of Cash Flows 8
Notes to the Combined and Consolidated Financial Statements 9-20
Unaudited condensed combined and consolidated financial statements of
Navigator Informatika Rt. as of September 30, 2005 and for the nine months
ended September 30, 2005 and 2004
Unaudited Condensed Consolidated Balance Sheet 21
Unaudited Condensed Combined and Consolidated Statements
of Operations 22
Unaudited Condensed Combined and Consolidated Statements
of Cash Flow 23
Notes to the Unaudited Condensed Combined and Consolidated
Financial Statements 24-26
3
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Navigator Informatika Rt.
Budapest, Hungary
We have audited the accompanying combined balance sheet of Navigator Informatika
Rt. and subsidiaries (the "Company") as of December 31, 2004, and the related
combined and consolidated statements of income, stockholders' equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Navigator Informatika Rt. and
subsidiaries as of December 31, 2004, and the 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.
Deloitte Auditing and Consulting Kft.
Budapest, Hungary
December 2, 2005
4
Navigator Informatika Rt. and subsidiaries
Combined Balance Sheet
In thousands of Hungarian Forint, except share data
As of
December 31, 2004
-----------------
ASSETS
Current assets:
Cash and cash equivalents 12,870
Trade accounts receivable, net (note 3) 172,276
Related party trade receivables (note 7) 87,385
Related party loans receivable (note 7) 59,541
Prepayments and other current assets (note 4) 154,990
-----------------
Total current assets 487,062
Customer contracts, net (note 6) 271,391
Equipment and fixtures, net (note 5) 240,009
-----------------
Total assets 998,462
=================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable 95,208
Related party payables (note 7) 532,942
Short term related party loan (note 7) 56,410
Short term bank loan (note 8) 80,763
Other current liabilities (note 9) 62,976
Accrued expenses (note 10) 52,254
Deferred revenue 5,414
-----------------
Total current liabilities 885,967
Deferred taxes (note 12) 43,423
Long term capital lease obligation (note 11) 4,935
-----------------
Total long term liabilities 48,358
-----------------
Total liabilities 934,325
-----------------
Commitments and contingencies (note 11)
Shareholders' equity
Common stock, HUF 10,000 par value
(12,500 shares authorized, issued and
outstanding as of December 31, 2004) 125,000
Additional paid in capital 240,000
Accumulated deficit (300,863)
-----------------
Total shareholders' equity 64,137
-----------------
Total liabilities and shareholders' equity 998,462
=================
The accompanying notes form an integral part of these financial statements
5
Navigator Informatika Rt. and subsidiaries
Combined and Consolidated Statements of Operations
In thousands of Hungarian Forint
Year ended
December 31, 2004
-----------------
Third party revenue 768,239
Related party revenue 60,903
-----------------
Total revenue 829,142
Cost of revenue (exclusive of depreciation and
amortization shown separately below)
Third party 114,450
Related party 25,268
-----------------
Total cost of revenue (exclusive of depreciation and
amortization shown separately below) 139,718
Operating expenses
Personnel expenses 232,937
Consulting, advisory and professional fees 155,693
Other selling, general and administrative expenses
(including THUF 49,500 related party expenses) 222,823
Depreciation and amortization 95,772
-----------------
Total operating expenses 707,225
Loss from operations (17,801)
Other income/(expense)
Interest income 3,512
Interest expense (21,881)
-----------------
Total other expenses (18,369)
-----------------
Loss before income taxes (36,170)
Income taxes - deferred 4,027
Income taxes - current (4,805)
-----------------
Net income tax expense (778)
-----------------
Net loss (36,948)
=================
The accompanying notes form an integral part of these financial statements
6
Navigator Informatika Rt. and subsidiaries
Combined and Consolidated Statements of Changes in Shareholders' Equity
In thousands of Hungarian Forint, except share data
Common Stock
---------------------------- Additional
Number of paid in Accumulated Shareholders'
Shares Amount capital Deficit Equity
------------ ------------ ------------ ------------ ------------
January 1, 2004 12,500 125,000 -- (15,960) 109,040
============ ============ ============ ============ ============
Push down adjustments
on acquisition of
Navigator by
Wallis Rt. (note 2) 240,000 240,000
Deemed dividend related
to acquisition of
Navigator Info Kft. under
common control of Wallis
Rt. (note 2) (240,000) (240,000)
Net loss -- -- -- (36,948) (36,948)
Dividends -- -- -- (7,955) (7,955)
------------ ------------ ------------ ------------ ------------
December 31, 2004 12,500 125,000 240,000 (300,863) 64,137
============ ============ ============ ============ ============
The accompanying notes form an integral part of these financial statements
7
Navigator Informatika Rt. and subsidiaries
Combined and Consolidated Statement of Cash Flows
In thousands of Hungarian Forint
Year ended
December 31, 2004
-----------------
Net loss (36,948)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 95,772
Decrease in deferred taxation (4,027)
Loss on disposal of leasehold improvements 24,836
Loss on sale of property and equipment 12,327
Increase in allowance for doubtful receivables 16,099
Changes in assets and liabilities:
Increase in receivables (121,541)
Increase in prepayments and other assets (51,598)
Increase in related party payables 27,042
Increase in payables and other current liabilities 22,235
Increase in deferred revenue 4,592
-----------------
Net cash used in operating activities (11,211)
Cash flows from investing activities:
Purchase of property and equipment (42,695)
Proceeds from sale of property and equipment 31,662
-----------------
Net cash used in investing activities (11,033)
Cash flows from financing activities:
2003 dividends paid (22,559)
Proceeds from related party loans - cash pool, net (see note 7) 55,308
Proceeds from short term bank loan 80,763
Repayment of short term related party loan (38,474)
Early repayment of leasing obligations (21,403)
Repayment of related party loan (19,550)
Repayment of other loans (14,511)
-----------------
Net cash provided by financing activities 19,574
Decrease in cash and cash equivalents (2,670)
Cash and cash equivalents, beginning of year 15,540
-----------------
Cash and cash equivalents, end of year 12,870
=================
Supplemental Disclosures:
Non cash investing and financing activities
Purchase of shares of company under common control (note 7) 280,000
Payment made in 2005
Purchase of assets of company under common control (note 7) 180,700
Payment made in 2005
Other
Cash paid for income taxes 5,259
Cash paid for interest 19,331
The accompanying notes form an integral part of these financial statements
8
Navigator Informatika Rt. and subsidiaries
Notes to the Combined and Consolidated Financial Statements
In thousands of Hungarian Forint, except share data
1. Organization and Business
Navigator Informatika Rt. ("Navigator") was incorporated on July 17, 2001. On
December 1, 2004, Navigator purchased 100% of the shares of Navigator Info Kft.
and its wholly owned subsidiary Navigator Engineering Kft, for THUF 280,000 in a
transaction under the common control of Wallis Rt., the parent company of all
entities involved in this transaction. Navigator Informatika Rt. and its
subsidiaries are referred to as the "Company."
The Company provides a full range of information technology outsourcing
services. The information technology ("IT") outsourcing services provided by the
Company primarily comprise IT maintenance, procurement, consultancy and related
services.
On October 7, 2005, Euroweb International Corp. and one of its subsidiaries
purchased 100% of the outstanding shares of common stock of Navigator from
Marivaux Investments Limited and Graeton Holdings Limited for USD 8.5 million
(THUF 1,758,650 as of October 7, 2005) cash and 441,566 shares of common stock
of Euroweb International Corporation.
2. Summary of Significant Accounting Policies
Accounting Principles
The financial statements and accompanying notes have been prepared
in conformity with accounting principles generally accepted in the
United States of America.
Basis of Presentation
The financial statements comprise the accounts of Navigator,
Navigator Info Kft. (the wholly-owned subsidiary of Navigator) and
Navigator Engineering Kft. (the wholly-owned subsidiary of Navigator
Info Kft.) Navigator acquired Navigator Info Kft. in December 2004
for THUF 280,000 in a transaction under the common control of Wallis
Rt. Accordingly, the transaction was accounted in a manner similar
to a pooling-of-interests, with all prior periods being restated as
if the entities were combined for all periods presented. The
purchase consideration was in excess of the value of Navigator Info
Kft. net assets recorded by Navigator upon the transaction. The
excess consideration over recorded net assets, of THUF 240,000, was
accounted for as a distribution to Wallis Rt., which resulted in a
deduction from retained earnings.
On August 12, 2004, Wallis Rt. indirectly acquired 100% of the
shares of AM-IT Rt. (which was subsequently renamed to Navigator)
from an unrelated third party. Pursuant to Statement of Financial
Accounting Standards ("SFAS") No. 141, Business Combinations, at
this date, the assets and liabilities of Navigator were measured at
their fair values. The purchase price adjustments and goodwill were
pushed down to Navigator in accordance with Staff Accounting
Bulletin No. 54. "Push-down" is a basis of accounting that reflects
the parent company's cost in the separate financial statements of a
purchased subsidiary. Accordingly, as of August 12, 2004, the assets
and liabilities of Navigator were stepped up to reflect the
accounting basis of Wallis Rt. in Navigator's assets and
liabilities.
9
Navigator Informatika Rt. and subsidiaries
Notes to the Combined and Consolidated Financial Statements
In thousands of Hungarian Forint, except share data
The consideration paid by Wallitrade Kft. for Navigator was
allocated as follows:
THUF
Fair value of Navigator Informatika Rt.'s recorded
assets acquired and liabilities assumed:
Cash 28,327
Net receivables 86,067
Other current assets 19,747
Fixed assets 64,992
Payables and accruals (41,283)
Loans and leasing liability (32,850)
Total fair value of recorded assets acquired and
liabilities assumed: 125,000
Identified intangible - customer contract 356,000
Deferred tax related to indentified intangible (56,960)
----------
424,040
Excess of fair value of net assets over
consideration (59,040)
Total consideration 365,000
==========
In determining the fair value of the acquired customer contract, the
Company considered its intention for future use of the asset and
analyses of historical financial performance and estimates of future
performance of Navigator Rt.'s services. The Company used an
income-based valuation approach, using discount rates ranging from
16% to 18%. The contract is being amortized over the estimated
remaining useful life of 4.5 years. In allocating the purchase
price, the THUF 59,040 excess of fair value over purchase price
consideration was allocated as a pro-rata reduction of the values
assigned to non-current assets. The carrying value of the net assets
prior to the above-described step-up was THUF 125,000. The increase
in the recorded values of those assets upon the step-up was THUF
240,000, which amount was recorded as additional paid-in capital.
All material intercompany balances and transactions have been
eliminated.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
Fair Value of Financial Instruments
All financial instruments are carried at amounts that approximate
fair value.
Cash and Cash Equivalents
Cash and cash equivalents include cash at bank and short-term
deposits with maturities of three months or less at the date of
purchase.
10
Navigator Informatika Rt. and subsidiaries
Notes to the Combined and Consolidated Financial Statements
In thousands of Hungarian Forint, except share data
Inventory
Inventory, comprised of IT hardware for resale, is carried at the
lower of cost or market. Deposits paid by the Company for inventory
are recorded as prepayments until the Company takes title to the
inventory.
Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation. Equipment purchased under capital leases is stated at
the present value of minimum lease payments at the inception of the
lease less accumulated depreciation. Leased assets are depreciated
using a straight-line method over the estimated useful lives of the
leased asset.
The Company provides for depreciation of property and equipment
using the straight-line method over the following estimated useful
lives:
Software 3 years
Computer equipment 3-5 years
Other furniture equipment and fixtures 5-7 years
Server room removable fixtures 17 years
Recurring maintenance on property and equipment is expensed as
incurred.
Long-lived Assets
The Company periodically reviews long-lived assets for impairment
whenever events or changes in business circumstances indicate that
the carrying amount of the assets may not be fully recoverable or
that the useful lives of those assets are no longer appropriate.
Each impairment test is based on a comparison of the undiscounted
cash flows to the recorded value of the asset. If the undiscounted
cash flows exceeds the recorded value of the asset, the asset is
written down to its estimated fair value based on a discounted cash
flow analysis.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an
arrangement exists, the product or service has been delivered, fees
are fixed or determinable, collection is probable and all other
significant obligations have been fulfilled. Revenues from
maintenance services are recognized in the month in which the
services are provided, either based on performance or on fixed
monthly fees. The Company defers revenue recognition for payments on
contracts for which services have not been performed.
11
Navigator Informatika Rt. and subsidiaries
Notes to the Combined and Consolidated Financial Statements
In thousands of Hungarian Forint, except share data
The Company also generates non-recurring revenue from consulting
fees for implementation, installation, configuration, testing and
training related to the use of third party licensed products. The
Company recognizes revenue for these services as they are performed,
if contracted on a time and materials basis, or using the percentage
of completion method, if contracted on a fixed fee basis and when
the cost of the consulting project can be reliably estimated.
Percentage of completion is measured based on cost incurred to date
compared to total estimated cost at completion.
When the cost to complete a project cannot be reliably estimated,
the Company recognizes revenue using the completed contract method
until such time that the cost to complete the project can be
reliably estimated.
Cost of Revenues
Cost of revenues principally comprises cost of fixed assets sold
during the course of IT outsourcing projects, cost of materials
required to perform IT outsourcing activities and cost of
project-dedicated sub-contractors.
Foreign Currency Translation
The Company considers the Hungarian Forint ("HUF") to be its
functional currency.
Gains and losses from foreign currency transactions and the
translation of monetary assets or liabilities not denominated in
Hungarian forints are included in the income statements in the
period in which they occur.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities, net of appropriate valuation
allowances, are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards. Deferred tax
assets and liabilities, if any, are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the
enactment date.
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. The Company has
concluded that SFAS No.123 (revised 2004) currently has no impact on
its financial statements, as the Company does not provide
equity-based compensation to employees.
12
Navigator Informatika Rt. and subsidiaries
Notes to the Combined and Consolidated Financial Statements
In thousands of Hungarian Forint, except share data
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 does not believe that
SFAS 153 will have any impact 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 currently does not have any inventory that is within the
scope of SFAS 151.
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 the Company as of January 1,
2006 and is not expected to have a material impact on the Company's
financial statements.
13
Navigator Informatika Rt. and subsidiaries
Notes to the Combined and Consolidated Financial Statements
In thousands of Hungarian Forint, except share data
3. Trade Accounts Receivable
Trade accounts receivable as of December 31, 2004 in THUF were as follows:
December 31, 2004
---------------------------------------------------------------------
Receivable 205,400
Less allowance for doubtful debts (33,124)
---------------------------------------------------------------------
Total 172,276
===========
The Company establishes allowances for doubtful debts to reduce receivables to
their estimated recoverable value. The allowance is determined on an account by
account basis, with a 100% provision for those accounts overdue by more than 180
days.
4. Prepayments and Other Current Assets
Prepayments and other current assets as of December 31, 2004 in THUF were as
follows:
December 31, 2004
---------------------------------------------------------------------
Inventory 95,530
Corporate and value added taxes 18,156
Others 41,304
---------------------------------------------------------------------
Total 154,990
===========
Inventory prepayments include THUF 80,763 related to an advance payment for IT
equipment, which was received and sold to a customer at cost in February 2005.
5. Property and Equipment
Property and equipment as of December 31, 2004 in THUF were as follows:
December 31, 2004
---------------------------------------------------------------------
Software 98,294
Computer equipment 252,951
Server room moveable fixtures 10,584
Furniture, fixtures and other 36,482
---------------------------------------------------------------------
Total 398,311
Less accumulated depreciation (158,302)
---------------------------------------------------------------------
Total property and equipment 240,009
===========
The gross value of assets recorded under capital lease obligation was THUF
27,850, while accumulated depreciation was THUF 8,360 as of December 31, 2004.
14
Navigator Informatika Rt. and subsidiaries
Notes to the Combined and Consolidated Financial Statements
In thousands of Hungarian Forint, except share data
6. Customer Contract
Navigator has a fixed-term contract with Antenna Hungaria, its former parent, to
provide IT maintenance services until 2009. When Wallis Rt. indirectly acquired
Navigator from Antenna Hungaria on August 12, 2004, an amount of THUF 356,000
was assigned as the value of this customer contract (see note 2). Amortization
of THUF 30,220 was charged in the year ended December 31, 2004. Estimated
amortization in THUF until the end of the term of the contract, in February
2009, is as follows:
Year ended December 31,
---------------------------------------------------------------------
2005 78,230
2006 78,230
2007 78,230
2008 78,230
2009 12,860
7. Related Party Transactions
The Company has entered into transactions with related parties both during the
course of its normal operating activities and during the course of acquiring
certain assets and assuming certain liabilities of Wallitrade Kft., as well as
the purchase of the shares of Navigator Info Kft. These transactions are
summarized below:
Related Party Loans Receivable
As of December 31, 2004, THUF 38,474 of the balance of total related
party loans receivable relates to a short-term loan provided to
Wallitrade Kft., a party related by common ownership. The loan was
granted in November 2004 and bears interest at the base rate of the
Hungarian National Bank.
The remaining amount of THUF 21,067 relates to the cash pool
financing arrangement described below.
Cash Pool Financing
The Company has a cash pool agreement with Wallis Rt., the Company's
ultimate parent, whereby all surplus cash at bank of the Company and
other companies directly and indirectly owned by Wallis Rt.
(collectively, "Wallis Group") are sent to a head office account on
a daily basis. If there are funds drawn on an external overdraft
facility, then cash is sent by Wallis Rt. to the particular
subsidiary in order to minimize interest costs to Wallis Group. As
of January 1, 2004, the Company had transferred THUF 37,965 to
Wallis Rt. under this cash pool agreement. As of December 31, 2004,
THUF 38,410 was received from Wallis Rt. in order to maintain a zero
position in Navigator's external bank overdraft facility, while
Navigator's subsidiaries had transferred cash at bank of THUF 21,067
to Wallis Rt. - resulting in net borrowings of the Company from
Wallis Rt. of THUF 17,343 as of December 31, 2004. The charge for
the cash pool financing is one-month BUBOR.
15
Navigator Informatika Rt. and subsidiaries
Notes to the Combined and Consolidated Financial Statements
In thousands of Hungarian Forint, except share data
Cash in hand as of December 31, 2004 relates to petty cash at the
Company and its two subsidiaries.
Related Party Loan Payable
In September 2001, a related party provided a loan of THUF 30,000 to
the Company to finance working capital. The interest rate of the
loan was BUBOR (Budapest Interbank Offered Rate) +1%. The balance as
of December 31, 2004 was THUF 18,000. The balance was fully repaid
in March 2005.
Purchase of Wallitrade assets
In December 2004, the Company signed an agreement to purchase part
of the net assets of Wallitrade Kft. from Wallis Group in several
stages.
The first stages were completed in December 2004, and the following
assets were purchased:
THUF
Inventory 23,200
Fixed assets 157,500
----------
Total 180,700
==========
Note 14 (Subsequent events) details the completion of the purchase
of part of Wallitrade's net assets in 2005.
Acquisition of Shares in Navigator Info Kft.
The Company acquired all of the issued shares of Navigator Info Kft.
for consideration of THUF 280,000 in December 2004. As the
acquisition was made from an entity under common control (all of the
companies were owned directly or indirectly by Wallis Rt. at the
time of the acquisition in December 2004), the transactions were
accounted in a manner similar to a pooling of interests (see note
2).
Operating Transactions
The Company provides IT outsourcing services to related parties.
Total revenues generated from these services were THUF 60,900
(exclusive of VAT) during 2004.
Related parties also provided the following services (figures
exclusive of VAT) to the Company in 2004:
o Office rental of THUF 13,195 (see note 11)
o Car rental of THUF 13,210 (see note 11)
o Cash pool services (see note 7)
o Management fees of THUF 16,485
o Other miscellaneous services from related parties of THUF
10,675
16
Navigator Informatika Rt. and subsidiaries
Notes to the Combined and Consolidated Financial Statements
In thousands of Hungarian Forint, except share data
The total amount of such services purchased by the Company was THUF
62,700 (exclusive of VAT) during 2004.
The Company also invoiced a related party THUF 9,000 (exclusive of
VAT) during the year for services that it sub-contracted from
another related party. This is reflected on a net basis in the
financial statements.
8. Bank Loan
On November 30, 2004, the Company obtained a short-term loan of EUR 328,398
(THUF 80,763 as of December 31, 2004) in order to finance a deposit payable in
respect of a purchase of inventory to be sold to a customer under an outsourcing
agreement. The loan was repaid in February 2005.
9. Other Current Liabilities
Other current liabilities as of December 31, 2004 in THUF were as follows:
December 31, 2004
---------------------------------------------------------------------
Wage related taxes 21,795
Wages 11,335
Value added tax payable 9,643
Short-term portion of capital lease obligation 8,400
Dividend payable 7,955
Local tax payable 2,967
Other 881
---------------------------------------------------------------------
Total other current liabilities 62,976
===========
10. Accrued Expenses
Accrued expenses as of December 31, 2004 in THUF were as follows:
2004
---------------------------------------------------------------------
Accrued trade payables 36,218
Office rent 1,728
Audit 4,200
Other 10,108
---------------------------------------------------------------------
Total 52,254
===========
17
Navigator Informatika Rt. and subsidiaries
Notes to the Combined and Consolidated Financial Statements
In thousands of Hungarian Forint, except share data
11. Commitments and Contingencies
Lease Agreements
Capital lease - In 2003, the Company entered into three year capital
lease for computer equipment. The following is a schedule of future
capital lease payments (with initial or remaining lease terms in
excess of one year) as of December 31, 2004 in THUF:
Short term lease obligation 8,400
Long term lease obligation 4,935
-----------------------------------------------------
Total lease payments 13,335
===========
The current portion of the capital lease obligation is included in
'Other current liabilities' in the accompanying balance sheets.
Operating Leases
On September 1, 2004, the Company commenced a non-cancelable rental
contract for its office space for a period of 62 months with a
related party. The monthly rental fee is THUF 2,672.
The Company also has various car rental agreements under operating
leases with a related party. The rental amounts include maintenance
and servicing.
Following are the Company's commitments under its non-cancelable
lease obligations, as of December 31, 2004 in THUF:
Capital lease Operating lease
2005 10,071 50,782
2006 5,875 49,718
2007 -- 48,599
2008 -- 44,979
2009 -- 26,720
------------- -------------
Total 15,946 220,798
------------- =============
Less amount representing
interest (2,611)
-------------
Net minimum lease payments 13,335
=============
There are no restrictions on dividends imposed by lease contracts.
18
Navigator Informatika Rt. and subsidiaries
Notes to the Combined and Consolidated Financial Statements
In thousands of Hungarian Forint, except share data
Commitment Related to Advance Payment for Inventory
As part of its IT outsourcing relationship with a large customer,
the Company concluded an agreement in 2004 whereby it agreed to
procure IT assets for resale to the customer. A deposit with the
supplier for THUF 80,763 was made in December 2004. The assets were
delivered to the Company in February 2005 and installed by the
Company at the customer's site in the same month, when the remaining
payment of THUF 193,200 was paid by the Company to the supplier.
Subsidy
In 2003, the Company was granted a government subsidy of THUF 16,800
in connection with a government related project. The Company used
the funds to subsidize sub-contractor costs in connection with the
establishment of a government portal. The Company has a commitment
to maintain the portal until May 2007, and the government has the
right to demand the entire amount of the funds (with interest at
twice the Hungarian National Bank rate) if the Company does not
fulfill its obligations until May 2007.
12. Income Taxes
The statutory corporate tax rate in Hungary was 16% as of December 31, 2004.
Neither the Company nor its subsidiaries have any tax net operating loss
carryforwards from prior years.
The corporate income taxes of THUF 4,807 arise from the fact that the reported
loss before income taxes of THUF 30,795 includes THUF 22,704 of fixed asset
write-offs and THUF 19,800 of customer list amortization, which are not
deductible under Hungarian taxation rules, and THUF 16,100 of provision for
doubtful accounts which are deductible when the receivables are written off.
The Company recognized a deferred tax liability of THUF 47,451 in connection
with the recognition of the customer contract (note 6). The balance at December
31, 2004 represents the deferred tax liability of THUF 43,423 relating to the
excess of carrying values of customer contracts over their respective tax bases.
The deferred tax liability will be recognised in the statements of operations as
the customer contract is amortized over its remaining term until February 2009.
The Company has no other significant deferred tax assets or liabilities.
13. Dependency on Certain Customers
49% of the consolidated sales revenue in 2004 is derived from one customer,
which was a former owner of the Company. 78% of the 2004 annual sales revenue
was generated from the four most significant customers of the Company. As of
December 31, 2004, trade receivables of THUF 124,774 were due from Antenna
Hungaria, the former owner of the Company, while the other three largest
customers owed a total of THUF 62,093.
19
Navigator Informatika Rt. and subsidiaries
Notes to the Combined and Consolidated Financial Statements
In thousands of Hungarian Forint, except share data
14. Subsequent Events
During the first quarter of 2005, the Company completed the purchase of a part
of Wallitrade's net assets (See note 7) by acquiring receivables of THUF 33,122
and assuming liabilities of THUF 65,625 which related to the fixed assets
purchased in 2004.
On April 6, 2005, the Company entered into a long-term loan agreement with
Commerzbank Bank Rt (the "Bank") for THUF 201,250, with an interest rate of
three month BUBOR +2.5%, in order to finance the payment for the Wallitrade net
assets noted above. The loan is repayable in 14 quarterly instalments of THUF
14,380 plus quarterly interest starting on May 31, 2005. The shares of the
Company were pledged as collateral for this loan, as well as a general lien
established on all of the assets of the Company.
In addition to the long-term loan agreement, the Company also concluded an
overdraft facility with the Bank for THUF 130,000 on July 20, 2005.
Additionally, on September 1, 2005, the Company concluded a short-term loan
facility agreement with the Bank for THUF 30,000 to fund working capital. The
initial short-term loan facility expired on October 31, 2005 and was extended to
January 31, 2006 in October 2005.
In June 2005, Wallis Group sold its shares in Navigator to Marivaux Investments
Limited and Graeton Holdings Limited.
On October 7, 2005, Euroweb International Corp. and one of its subsidiaries
purchased 100% of the outstanding shares of common stock of Navigator
Informatika Rt. from Marivaux Investments Limited and Graeton Holdings Limited
for USD 8.5 million cash and 441,566 shares of common stock of Euroweb
International Corporation.
20
Navigator Informatika Rt. and subsidiaries
Unaudited Condensed Combined and Consolidated Balance Sheet
In thousands of Hungarian Forint
As of
September 30, 2005
------------------
ASSETS
Current assets:
Cash and cash equivalents --
Trade accounts receivable, net 132,215
Related party receivables 93,607
Accrued revenue 52,907
Prepaid and other current assets 87,972
------------------
Total current assets 366,701
Customer contract, net 231,396
Equipment and fixtures, net 229,178
------------------
Total assets 827,275
==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable 133,379
Related party payables 46,254
Short-term portion of related party loan 10,937
Short term bank loan and overdraft 161,510
Other current liabilities 71,473
Accrued expenses 76,710
Deferred revenue 8,396
------------------
Total current liabilities 508,659
Long term portion of bank loan 115,000
Long-term portion of related party loan 43,750
Deferred taxes 37,023
Long term portion of capital lease obligation 5,270
Other loan obligations 8,367
------------------
Total long term liabilities 209,410
------------------
Total liabilities 718,069
------------------
Commitments and contingencies
Shareholders' equity
Common stock, HUF 10,000 par value
(12,500 shares authorized, issued and outstanding
as of September 30, 2005) 125,000
Additional paid-in capital 240,000
Accumulated deficit (255,794)
------------------
Total shareholders' equity 109,206
------------------
Total liabilities and shareholders' equity 827,275
==================
The accompanying notes form an integral part of these
unaudited condensed financial statements
21
Navigator Informatika Rt. and subsidiaries
Unaudited Condensed Combined and Consolidated Statements of Operations
In thousands of Hungarian Forint
Nine months ended September 30,
--------------------------------
2005 2004
-------------- --------------
Third party revenue 841,872 498,622
Related party revenue 241,309 12,956
-------------- --------------
Total revenue 1,083,181 511,578
Cost of revenue (exclusive of depreciation and
amortization shown separately below) 268,494 56,973
Operating expenses
Personnel expenses 170,857 172,352
Consulting, advisory and professional fees 236,289 159,913
Other selling, general and administrative expenses
(including HUF 106 million and HUF 21 million
related party expenses in 2005 and 2004 respectively) 228,818 96,027
Depreciation and amortization 96,805 61,563
-------------- --------------
Total operating expenses 732,769 489,855
Income (loss) from operations 81,918 (35,250)
Other income / (expense)
Interest income 2,899 2,491
Interest expense (18,015) (9,278)
-------------- --------------
Total other expenses (15,116) (6,787)
-------------- --------------
Income (loss) before income taxes 66,802 (42,037)
Income tax, deferred 6,399 1,238
Income tax, current (28,132) (2,944)
-------------- --------------
Net income taxes expense (21,733) (1,706)
-------------- --------------
Net income (loss) 45,069 (43,743)
============== ==============
The accompanying notes form an integral part of these
unaudited condensed financial statements
22
Navigator Informatika Rt. and subsidiaries
Unaudited Condensed Combined and Consolidated Statement of Cash Flows
In thousands of Hungarian Forint
Nine months ended September 30,
--------------------------------
2005 2004
-------------- --------------
Net cash provided by operating activities 351,177 41,214
Cash flows from investing activities:
Payment for Wallitrade assets acquired (148,197) --
Proceeds on sale of fixed assets -- 8,400
Purchase of property and equipment (59,705) (15,977)
-------------- --------------
Net cash used in investing activities (207,902) (7,577)
Cash flows from financing activities:
Payment for Navigator Info Kft. shares - deemed dividend (280,000) --
Net borrowings under overdraft facility 104,010 --
Proceeds of long-term bank loan 201,250 --
Repayment of long-term bank loan (28,750) --
Repayment of short-term bank loan (80,763) --
Repayment of related party loans - cash pool, net (17,343) 47,207
Repayment of related party loan (40,787) (36,883)
2004 & 2003 dividends paid, respectively (7,955) (22,559)
Principal payments under capital lease obligations (5,807) (25,357)
-------------- --------------
Net cash used in financing activities (156,145) (37,592)
Decrease in cash and cash equivalents (12,870) (3,955)
Cash and cash equivalents, beginning of year 12,870 15,540
-------------- --------------
Cash and cash equivalents, end of period -- 11,585
============== ==============
The accompanying notes form an integral part of these
unaudited condensed financial statements
23
Navigator Informatika Rt. and subsidiaries
Notes to the Unaudited Combined and Consolidated Financial Statements
In thousands of Hungarian Forint, except share data
1. Basis of Presentation
Navigator Informatika Rt. ("Navigator") is a Hungarian Corporation, which was
owned until October 7, 2005 by Marivaux Investments Limited ("Marivaux") and
Graeton Holdings Limited ("Graeton"), which are both registered under the laws
of the Cyprus. Marivaux and Graeton were both indirectly owned by Wallis Rt.
Navigator Informatika Rt., and its wholly owned subsidiaries, Navigator Info
Kft. and Navigator Engineering Kft., are engaged in information technology
outsourcing, applications development and information technology consulting
services primarily in the Hungarian market.
The accompanying unaudited condensed financial statements of Navigator are
stated in Hungarian Forints ("HUF") (the currency in Hungary) and have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission regarding interim financial information. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of management, these financial statements include all
adjustments, consisting mainly of normal recurring accruals, necessary for a
fair presentation of the results for the interim periods presented. Results for
the interim periods are not necessarily indicative of the results for a full
fiscal year. These unaudited condensed financial statements should be read in
conjunction with Navigator's audited financial statements and notes thereto as
of and for the year ended December 31, 2004.
On August 12, 2004, Wallis Rt. indirectly acquired 100% of the shares of AM-IT
Rt. (which was subsequently renamed to Navigator) from an unrelated third party.
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 141,
Business Combinations, at this date, the assets and liabilities of Navigator
were recorded at their fair values and excess unallocated purchase consideration
recorded as goodwill. The purchase price adjustments and goodwill were pushed
down to Navigator in accordance with SAB 54. "Push-down" is a basis of
accounting that reflects the parent company's cost in the separate financial
statements of a purchased subsidiary. Accordingly, as of August 12, 2004,
Navigator stepped up the values of its consolidated assets and liabilities to
reflect the accounting basis of Wallis Rt. in Navigator's assets and liabilities
based on their estimated fair values. The consideration has been allocated as
follows:
THUF
Fair value of Navigator Informatika Rt.'s recorded
assets acquired and liabilities assumed:
Cash 28,327
Net receivables 86,067
Other current assets 19,747
Fixed assets 64,992
Payables and accruals (41,283)
Loans and leasing liability (32,850)
----------
Total fair value of recorded assets acquired and
liabilities assumed: 125,000
24
Navigator Informatika Rt. and subsidiaries
Notes to the Unaudited Combined and Consolidated Financial Statements
In thousands of Hungarian Forint, except share data
Total fair value of recorded assets acquired and
liabilities assumed: 125,000
Identified intangible - customer contract 356,000
Deferred tax related to indentified intangible (56,960)
----------
424,040
Excess of fair value of net assets over consideration (59,040)
Total consideration 365,000
==========
The excess of fair value of net assets over consideration was allocated on
a pro-rata basis to non-current assets. The carrying value of the net
assets prior to the above-described step-up was THUF 125,000. The increase
in the recorded values of those assets upon the step-up was THUF 240,000,
which amount was recorded as additional paid-in capital.
2. Bank Loan
On April 6, 2005, the Company entered into a long-term loan agreement with
Commerzbank Bank Rt (the "Bank") for THUF 201,250, with an interest rate of
three month BUBOR +2.5%. The loan is repayable in 14 quarterly instalments of
THUF 14,375 plus quarterly interest starting on May 31, 2005. The shares of the
Company were pledged as collateral for this loan, as well as a general lien
established on all of the assets of the Company.
In addition to the long-term loan agreement, the Company also entered into an
overdraft facility with the Bank for THUF 130,000 on July 20, 2005.
Additionally, on September 1, 2005, the Company entered into a two-month loan
facility agreement with the Bank for THUF 30,000 to fund working capital. The
Company did not draw down funds under this agreement until October 2005.
3. Dependency on Certain Customers
30% of the consolidated sales revenue in the nine months ended September 30,
2005 is derived from one customer, which was a former owner of the Company. 80%
of the consolidated sales revenue in the nine months ended September 30, 2005
was generated from the four most significant customers of the Company.
4. Commitments and Contingencies
Subsidy
In 2003, the Company was granted a government subsidy of THUF 16,800 in
connection with a government related project. The Company used the funds to
subsidize sub-contractor costs in connection with the establishment of a
government portal. The Company has a commitment to maintain the portal until May
2007, and the government has the right to demand the entire amount of the funds
(with interest at twice the Hungarian National Bank rate) if the Company does
not fulfill its obligations until May 2007.
25
Navigator Informatika Rt. and subsidiaries
Notes to the Unaudited Combined and Consolidated Financial Statements
In thousands of Hungarian Forint, except share data
5. Subsequent Events
In October 2005, the short term loan facility agreement of THUF 30,000 was
extended to January 31, 2006.
There were no other material events until the date of this report that are not
disclosed in the financial statements for the year ended December 31, 2004.
26
(b) Pro forma financial information:
UNAUDITED PRO FORMA CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited pro forma condensed combined and consolidated
financial statements (the "unaudited pro forma financial statements") give
effect to the acquisition by Euroweb International Corp. ("Euroweb") of 100% of
Navigator Informatika Rt. and its subsidiaries (collectively, "Navigator") for
approximately $8,700,000 in cash consideration (including estimated direct
transaction costs of $200,000) and 441,566 shares of Euroweb common stock with a
fair value of $1,752,134, less estimated registration costs of $70,000. The
acquisition will be accounted for using the purchase method of accounting. Under
this method, the purchase price has been allocated to the assets acquired and
liabilities assumed based on preliminary estimates of fair value. The final
purchase price allocation will be calculated based on the total consideration
and the fair values of the identifiable assets and liabilities of Navigator as
of October 7, 2005 (the date of closing of the purchase). Therefore, the actual
amount of goodwill, as well as other balance sheet items, could differ from the
amounts disclosed in these unaudited pro forma financial statements. In turn,
actual amounts disclosed in future statements of operations of the Euroweb, such
as intangible asset amortization and income taxes, may differ from the
corresponding amounts disclosed pro forma condensed combined and consolidated
statements of operations.
The unaudited pro forma condensed combined and consolidated statements of
operations give effect to the acquisition as if it occurred on January 1, 2004.
The unaudited pro forma condensed consolidated balance sheet gives effect to the
acquisition as if it occurred on September 30, 2005.
These unaudited pro forma financial statements are presented for illustrative
purposes only. The unaudited pro forma financial statements are not necessarily
indicative of the actual results of operations or financial position that would
have occurred had the acquisitions occurred on the dates indicated, nor are they
necessarily indicative of future operating results or financial position. No
account has been taken within the unaudited pro forma financial statements of
any synergies that may be realized following the acquisition. The unaudited pro
forma financial statements are only a summary and should be read in conjunction
with the historical consolidated financial statements and related notes of
Euroweb, included in its Form 10-KSB for the year ended December 31, 2004 and
its Form 10-QSB for the nine month period ended September 30, 2005 and the
historical combined and consolidated financial statements and related notes of
Navigator, included in this current report, and with the other information
included or incorporated by reference in this current report.
The pro forma adjustments described in the accompanying notes are based upon
available information and certain assumptions that management believes to be
reasonable.
Material business transactions between Euroweb and its subsidiaries and
Navigator during the periods presented have been eliminated.
27
EUROWEB
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2005
Euroweb Pro
Pro Forma Forma
Navigator Navigator Euroweb Adjustments Notes Consolidated
----------- ----------- ----------- ----------- ------- -----------
(A) (B) (E) (G)
THUF USD USD USD USD
ASSETS
Cash and cash equivalents -- -- 4,863,296 6,000,000 1 2,513,296
(8,350,000) 2
Trade accounts receivable, net 132,215 636,996 4,501,859 -- 5,138,855
Related party receivable 93,607 450,988 -- -- 450,988
Unbilled receivable 52,907 254,900 1,221,809 -- 1,476,709
Deferred tax assets -- -- 31,678 -- 31,678
Prepaid expenses and other
current assets 87,972 423,839 924,572 -- 1,348,411
----------- ----------- ----------- ----------- -----------
Total current assets 366,701 1,766,723 11,543,214 (2,350,000) 10,959,937
Property and equipment 231,396 1,114,839 6,642,425 -- 7,757,264
Intangibles - customer contracts 229,178 1,104,153 1,283,455 2,331,351 4,718,959
Goodwill -- -- 5,806,181 7,965,948 11 13,772,129
Navigator deposit -- -- 271,808 (150,000) 3 --
Navigator pre-acquisition costs -- -- -- (121,808) 4 --
Other assets -- -- 383,074 -- 383,074
----------- ----------- ----------- ----------- -----------
Total assets 827,725 3,985,715 25,930,157 7,675,491 37,591,363
=========== =========== =========== =========== ===========
LIABILITIES
Trade accounts payable 133,379 642,605 3,326,004 -- 3,968,609
Related party payable 46,254 222,847 -- -- 222,847
Short-term related party loan 10,937 52,693 -- -- 52,693
Pantel loan payables -- -- 472,152 -- 472,152
Current portion of bank loan 161,510 778,136 279,437 687,499 1 1,745,072
Notes payable -- -- 175,554 -- 175,554
Other current liabilities 71,473 344,348 555,531 -- 899,879
Accrued expenses 76,710 369,580 3,112,036 78,192 5 3,629,808
70,000 6
Deferred IRU revenue -- -- 46,000 -- 46,000
Deferred other revenues 8,396 40,451 526,923 -- 567,374
----------- ----------- ----------- ----------- -----------
Total current liabilities 508,659 2,450,660 8,493,637 835,691 11,779,988
Deferred tax liabilities 37,023 178,372 31,678 371,307 8 581,358
Deferred IRU revenue -- -- 871,035 -- 871,035
Pantel loan payable -- -- 236,076 -- 236,076
Related partly loan 43,750 210,782 -- -- 210,782
Bank loans 115,000 554,057 439,352 5,312,501 1 6,305,910
Other loans 8,367 40,312 -- -- 40,312
Lease obligations 5,270 25,390 123,319 -- 148,709
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value --
Common stock, $.001 par value 125,000 602,236 5,342 (602,236) 10 5,784
442 9
Additional paid-in capital 240,000 1,156,292 49,810,246 525,400 9 51,491,938
Accumulated deficit (255,794) (1,232,386) (34,193,589) 1,232,386 10 (34,193,589)
Accumulated other comprehensive
loss -- -- 113,061 -- 113,061
----------- ----------- ----------- ----------- -----------
Total stockholders' equity 109,206 526,142 15,735,060 1,155,992 17,417,194
----------- ----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity 827,275 3,985,715 25,930,157 7,675,491 37,591,363
=========== =========== =========== =========== ===========
See accompanying notes to the unaudited pro forma
condensed consolidated financial statements.
28
EUROWEB
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2004
Euroweb Pro
Pro Forma Forma
Navigator Navigator Euroweb Adjustments Notes Consolidated
----------- ----------- ----------- ----------- ------- -----------
(A) (C) (F) (G)
THUF USD USD USD USD
Third party revenues 768,239 3,796,210 24,284,048 (61,934) 13 28,018,324
Related party revenues 60,903 300,948 8,503,939 -- 8,804,887
----------- ----------- ----------- ----------- -----------
Total revenues 829,142 4,097,158 32,787,987 (61,934) 36,823,211
Cost of revenues (exclusive of
depreciation and
amortization)
Third party cost of revenues 114,450 565,548 15,860,057 -- 16,425,605
Related party cost of revenues 25,268 124,860 6,198,505 -- 6,323,365
----------- ----------- ----------- ----------- -----------
Total cost of revenues
(exclusive of depreciation
and amortization) 139,718 690,408 22,058,562 -- 22,748,970
Compensation and related costs 232,937 1,151,045 2,863,368 -- 4,014,413
Consulting, professional and
directors fees 155,693 769,348 2,688,229 -- 3,457,577
Other selling, general and
administrative expenses 222,823 1,101,067 3,714,865 (61,934) 13 4,753,998
Depreciation and amortization 95,772 473,252 2,453,209 1,233,016 12 4,159,477
----------- ----------- ----------- ----------- -----------
Loss from operations (17,801) (87,962) (990,246) (1,233,016) (2,311,224)
Interest income 3,512 17,354 243,130 -- 260,484
Interest expense (21,881) (108,124) (493,474) (495,391) 14 (1,096,989)
----------- ----------- ----------- ----------- -----------
Net interest expense (18,369) (90,770) (250,344) (495,391) (836,505)
Other expenses -- -- (170,000) -- (170,000)
Gain from sale of subsidiary -- -- 28,751 28,751
----------- ----------- ----------- ----------- -----------
Loss before income taxes (36,170) (178,732) (1,381,839) (1,728,407) (3,288,978)
Provision for income taxes -
deferred 4,027 19,899 -- 197,288 15 217,187
Provision for income taxes -
current (4,805) (23,754) (31,091) -- (54,845)
----------- ----------- ----------- ----------- -----------
Loss from continuing operations (36,948) (182,587) (1,412,930) (1,531,119) (3,126,636)
=========== =========== =========== =========== ===========
Income (loss) from continuing
operations per share, basic
and diluted (0.28) (0.57)
Weighted average number of
shares outstanding 5,043,822 5,485,388
See accompanying notes to the unaudited pro forma
consolidated financial statements.
29
EUROWEB
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
Euroweb Pro
Pro Forma Forma
Navigator Navigator Euroweb Adjustments Notes Consolidated
----------- ----------- ----------- ----------- ------- -----------
(A) (D) (E) (G)
THUF USD USD USD USD
Third party revenues 841,872 4,299,653 30,622,486 (36,800) 13 34,885,339
Related party revenues
241,309 1,232,425 1,768,358 -- 3,000,783
----------- ----------- ----------- ----------- -----------
Total revenues 1,083,181 5,532,078 32,390,844 (36,800) 37,886,122
Cost of revenues
(exclusive of
depreciation and
amortization)
Third party cost of
revenues 268,494 1,371,267 20,677,378 (36,800) 13 22,011,845
Related party cost of
revenues -- -- 1,164,692 -- 1,164,692
----------- ----------- ----------- ----------- -----------
Total cost of revenues
(exclusive of
depreciation and
amortization) 268,494 1,371,267 21,842,070 (36,800) 23,176,537
Compensation and related
costs 170,857 872,610 2,514,864 -- 3,387,474
Consulting, professional
and directors fees 236,289 1,206,788 2,670,795 -- 3,877,583
Collection of written-off
receivable -- -- (265,630) (265,630)
Other selling, general
and administrative
expenses 228,817 1,168,626 2,719,022 -- 3,887,648
Depreciation and
amortization 96,805 494,408 2,649,330 861,603 12 4,005,341
----------- ----------- ----------- ----------- -----------
Income from operations 81,918 418,379 260,393 (861,603) (182,831)
Interest income 2,899 14,806 23,871 -- 38,677
Interest expense (18,015) (92,007) (261,581) (304,141) 14 (657,729)
----------- ----------- ----------- ----------- -----------
Net interest expense (15,116) (77,201) (237,710) (304,141) (619,052)
Other revenue -- -- 170,000 -- 170,000
----------- ----------- ----------- ----------- -----------
Income before income taxes 66,802 341,178 192,683 (1,165,744) (631,883)
Provision for income
taxes - deferred 6,399 32,681 -- 137,856 15 170,537
Provision for income
taxes - current (28,132) (143,677) (137,016) -- (280,693)
----------- ----------- ----------- ----------- -----------
Income from continuing
operations 45,069 230,182 55,667 (1,027,888) (742,039)
=========== =========== =========== =========== ===========
Income from continuing
operations per share,
basic and diluted 0.01 (0.12)
Weighted average number
of shares outstanding 5,342,533 5,784,099
See accompanying notes to the unaudited pro forma
consolidated financial statements.
30
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(A) Reflects the balance sheet of Navigator as of September 30, 2005 and the
related statement of operations for the nine-month period then ended, and
the statement of operations of Navigator for the year ended December 31,
2004, all included in this Current Report.
(B) Translates the balance sheet of Navigator as of September 30, 2005 at a
rate of Hungarian Forint 207.56 = US Dollar 1.00, which was the closing
exchange rate for September 30, 2005 as reported by National Bank of
Hungary.
(C) Translates the statement of operations of Navigator for the year ended
December 31, 2004 at a rate of Hungarian Forint 202.37 = US Dollar 1.00,
which was the average monthly closing exchange rate for the year ended
December 31, 2004, as reported by National Bank of Hungary.
(D) Translates the statement of operations of Navigator for the nine-month
period ended September 30, 2005 at a rate of Hungarian Forint 195.80 = US
Dollar 1.00, which was the average monthly closing exchange rate for the
nine-month period ended September 30, 2005, as reported by National Bank
of Hungary.
(E) Reflects the balance sheet of Euroweb as of September 30, 2005 and the
related statement of operations for the nine-month period then ended,
included in the Form 10-QSB of Euroweb for the quarterly period ended
September 30, 2005.
(F) Reflects the balance sheet of Euroweb as of December 31, 2004, included in
the Form 10-KSB of Euroweb for the fiscal year ended December 31, 2004.
(G) Pro forma adjustments to record the purchase as if the purchase had
occurred on January 1, 2004 for purposes of presenting the pro forma
statements of operations for the year ended December 31, 2004 and for the
nine-month period ended September 30, 2005 and as if the purchase had
occurred on September 30, 2005 for purposes of presenting the pro forma
balance sheet as of September 30, 2005:
1. Represents the $6,000,000 loan obtained by Euroweb Hungary under an
agreement entered into with Commerzbank Hungary Rt. ("Commerzbank")
on September 27, 2005 to part-finance the cash element of the
purchase price. The loan bears interest at Budapest interbank
offered rate ("BUBOR") plus 2.5%. Euroweb Hungary is required to
make scheduled repayments in connection with the loan, beginning
with instalments of $166,493 on March 31, 2006 and June 30, 2006,
followed by quarterly repayments of $354,513 through June 30, 2010.
2. Represents the $8,350,000 cash element of the purchase price paid
upon closing of the purchase.
3. Represents the $150,000 cash element of the purchase price paid as a
deposit prior to closing of the purchase.
4. Represents direct costs of the purchase incurred prior to September
30, 2005.
5. Represents estimated additional direct costs of the purchase.
31
6. Represents the amount of the subsequent registration of the 441,566
shares of common stock of Euroweb issued as part-consideration for
Navigator. The present value of such costs is estimated to be not
materially different from the amount estimated to be paid.
7. Represents the increase in fair value of a customer contract
historically recognised by Navigator and the recognition of
additional customer contracts as intangible assets upon acquisition
of Navigator by Euroweb. The total amount assigned to customer
contracts in the preliminary purchase price allocation is
$3,435,504, which is being amortized over the remaining terms of the
contracts, ranging from one to four years.
8. Represents the deferred tax liability of $549,680 relating to the
excess of carrying values of customer contracts over their
respective tax bases. The deferred tax liability will be recognised
in the statements of operations as the customer contracts are
amortized over their remaining terms.
9. Represents the element of the purchase price payable in shares of
common stock of Euroweb, less estimated registration costs (note 6)
computed based on 441,566 shares and a share price of $3.968, being
the weighted average of opening and closing prices for a period from
two days before to two days after July 26, 2005, the announcement
date of the purchase of Navigator by Euroweb.
10. Represents the elimination of Navigator's shareholders' equity
accounts from the pro forma consolidated Euroweb shareholders equity
upon consummation of the purchase of all Navigator shares.
11. Represents the excess of estimated purchase price over the estimated
fair value of net assets acquired as goodwill, which was calculated
as set forth below:
The estimated purchase price has been calculated as follows:
USD
------------
Cash paid upon closing of the purchase (note 2) 8,350,000
Cash deposit paid prior to closing of the purchase
(note 3) 150,000
Share-based consideration, being 441,566 shares of
common stock of Euroweb at a share price of $3.968
(note 9) 1,752,134
Direct purchase costs accrued at September 30, 2005
(note 4) 121,808
Estimated additional direct purchase costs 78,192
------------
Estimated total purchase consideration (a) 10,452,134
============
32
Following closing of the purchase, Euroweb will determine the fair
value of the net tangible assets and the identifiable intangible
assets acquired and allocate the estimated purchase price based on
the purchase method of accounting. This unaudited pro forma
information is based upon management's estimates and is subject to
material changes upon completion of a final valuation. The estimated
purchase price is preliminarily allocated as follows:
USD USD
----------- -----------
Book value of net assets acquired 526,142
Fair value adjustments
Customer contracts (note 7) 2,331,351
Deferred tax liabilities (note 8) (371,307)
-----------
Total fair value adjustments 1,960,044
-----------
Fair value of net assets acquired (b) 2,486,186
===========
Estimated goodwill (a) - (b) 7,965,948
===========
12. Represents the increase to amortization charges as a result of the
increased estimated fair value of identified customer contracts
(note 7) over their estimated useful lives of one to four years.
13. Represents the elimination of intercompany transactions between
Euroweb and its subsidiaries and Navigator.
14. Represents interest expense relating to the Commerzbank loan
described in note 1 computed using interest rates in effect in the
periods presented.
15. Represents the amortization of the deferred tax liability relating
to the excess of carrying values of customer contracts over their
respective tax bases (note 8).
33
(c) Exhibits.
Exhibit No. Description
----------- --------------
10.1 Sale and Purchase Agreement by and between the
Company and the Sellers dated July 21, 2005 (1)
10.2 Registration Rights Agreement dated July 21, 2005
(1)
10.3 Loan Agreement dated September 27, 2005 by and
between Commerzbank Rt. and Euroweb International
Corp. (2)
10.4 Modification to the Sale and Purchase Agreement by
and between the Company and the Sellers (3)
99.1 Press Release dated October 7, 2005 (3)
(1) Incorporated by reference to the Form 8-K Current Report filed with the
Securities and Exchange Commission on July 26, 2005.
(2) Incorporated by reference to the Form 8-K Current Report filed with the
Securities and Exchange Commission on October 3, 2005.
(3) Incorporated by reference to the Form 8-K Current Report filed with the
Securities and Exchange Commission on October 13, 2005.
34
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: December 19, 2005
Budapest, Hungary
35