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 September 30,
2002
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-1200
------
EUROWEB INTERNATIONAL CORP.
(Exact name of small business issuer as specified in its charter)
Delaware 13-3696015
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1113 Budapest, Bocskai ut 134-146. Hungary
------------------------------------------
(Address of principal executive offices)
+36-1-382-3771
Issuer's telephone number
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirement for the past 90 days. Yes X No
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock, $.001 par value 4,665,326
(Class) (Outstanding at
September 30, 2002)
Transitional Small Business Disclosures Format (Check one): Yes No X
EUROWEB INTERNATIONAL CORP.
INDEX
PART I. Financial Information
Item 1. Financial Statements
Consolidated balance sheets as of September 30, 2002 (unaudited)
and December 31, 2001 (audited) 2
Consolidated statements of operations and comprehensive loss (unaudited) for
the three months ended September 30, 2002 and 2001 and nine months
ended September 30, 2002 and 2001 3
Consolidated statements of stockholders' equity for the nine months ended
September 30, 2002 (unaudited) and twelve months ended December 31, 2001 4
Consolidated statements of cash flows (unaudited) for the nine months
ended September 30, 2002 and 2001 5
Notes to interim (unaudited) Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 3. Controls and Procedures 18
PART II. Other Information 17
Signature 21
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2002 2001
(Unaudited) (audited)
ASSETS
Current Assets
Cash and cash equivalents .................................... $ 1,501,254 $ 1,512,303
Investment in securities ..................................... 11,996,751 14,628,464
Trade accounts receivable, net ............................... 486,102 801,436
Current portion of note receivable ........................... 186,678 194,296
Prepaid and other current assets ............................. 609,417 598,484
------------ ------------
Total current assets .................................... 14,780,202 17,734,983
Note receivable, less current portion .......................... 222,702 363,976
Investment in affiliate ........................................ -- 495,187
Property and equipment, net .................................... 1,336,201 1,426,604
Goodwill, net .................................................. 3,562,538 3,562,538
Other intangibles, net ......................................... 184,000 805,000
Other non-current assets ....................................... 7,844 20,612
------------ ------------
Total assets .............................................. $ 20,093,487 $ 24,408,900
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable ....................................... $ 439,521 $ 638,729
Current portion of acquisition indebtedness .................. 180,000 180,000
Other current liabilities .................................... 579,395 704,483
Loan payable - short term portion ............................ 110,800 --
Accrued expenses ............................................. 265,035 468,921
Deferred revenue ............................................. 154,002 277,127
------------ ------------
Total current liabilities ................................. 1,728,753 2,269,260
Loan payable .................................................. -- 94,904
Acquisition indebtedness, less current portion ................ -- 180,000
Non-current portion of lease obligations ...................... 69,675 196,611
------------ ------------
Total liabilities ......................................... 1,798,428 2,740,775
Stockholders' Equity
Preferred stock, $.001 par value - Authorized 5,000,000 shares;
no shares issued or outstanding ............................ -- --
Common stock, $.001 par value - Authorized 60,000,000 shares;
Issued and outstanding 4,665,326 shares ....................... 24,129 24,129
Additional paid-in capital .................................... 48,227,764 48,227,764
Accumulated deficit
(28,904,221) (25,325,033)
Accumulated other comprehensive income/(loss): ................ 62,799 (143,323)
Treasury stock - 175,490 common shares, at cost .............. (1,115,412) (1,115,412)
------------ ------------
Total stockholders' equity ................................. 18,295,059 21,668,125
------------ ------------
Commitments and contingencies
Total liabilities and stockholders' equity ................. $ 20,093,487 $ 24,408,900
============ ============
See accompanying notes to consolidated financial statements.
2
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
Three months ended Nine months ended
------------------ -----------------
September 30 September 30
------------ ------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues ............................................ $ 3,195,364 $ 2,037,678 $ 9,315,126 $ 4,851,685
Cost of revenues .................................... 2,336,679 1,249,992 6,190,113 2,778,284
----------- ----------- ----------- -----------
Gross profit ..................................... 858,685 787,686 3,125,013 2,073,401
Operating expenses
Compensation and related costs ................... 413,346 499,296 1,389,712 1,466,284
Severance to officers ............................ -- -- 2,020,832 --
Consulting and professional fees ................. 153,269 203,198 692,767 592,483
Other selling, general and administrative expenses 284,556 522,047 1,187,198 1,347,530
Depreciation and amortization .................... 322,681 687,462 774,228 1,953,941
Writedown of intangible assets - customer lists .. 448,500 _ 448,500 --
----------- ----------- ----------- -----------
Total operating expenses ..................... 1,622,352 1,912,003 6,513,237 5,360,238
Loss from operations ................................ (763,667) (1,124,317) (3,388,224) (3,286,837)
Net interest income .............................. 77,978 185,691 304,223 778,352
Equity in loss of affiliate ...................... -- 269,504 495,187 320,261
Loss before income taxes ............................ (685,689) (1,208,130) (3,579,188) (2,828,746)
----------- ----------- ----------- -----------
Provision for income taxes .......................... -- -- -- --
----------- ----------- ----------- -----------
Net Loss ............................................ (685,689) (1,208,130) (3,579,188) (2,828,746)
Other comprehensive (gain) loss ..................... (127,346) (81,562) (206,122) 78,154
----------- ----------- ----------- -----------
Comprehensive loss .................................. $ (558,343) $(1,126,568) $(3,373,066) $(2,906,900)
=========== =========== =========== ===========
Net Loss per share, basic ........................... (.15) (.26) (.77) (.60)
Weighted average number of shares outstanding ....... 4,665,326 4,671,133 4,665,326 4,735,919
See accompanying notes to consolidated financial statements
3
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Accumulated
Additional Other Total
Common Stock Paid-in Accumulated Comprehensive Treasury Stockholders'
Shares* Amount Capital Deficit Gains(Losses) Stock Equity
--------- ------- ----------- ------------- --------- ---------- -----------
Balances, December 31, 2000 4,801,696 $24,129 $48,227,764 $(19,742,020) $(14,011) $(173,688) $28,322,174
========= ======= =========== ============= ========= ========== ===========
Foreign currency translation gain - - - - 16,642 - 16,642
Unrealized gain on securities - - - - 26,434 -
available for sale 26,434
Reclassification of realized gain - - - - (172,388) - (172,388)
to net income
Net loss for the period - - - (5,583,013) - - (5,583,013)
Treasury stock (136,370) - - - - (941,724) (941,724)
--------- ------- ----------- ------------- --------- ---------- -----------
Balances, December 31, 2001 4,665,326 $24,129 $48,227,764 $(25,325,033) $(143,323) $(1,115,412) $21,668,125
========= ======= =========== ============= ========= ========== ===========
Foreign currency translation gain - - - - 2,534 - 2,534
(loss)
Unrealized gain (loss) on - - - - 230,022 - 230,022
securities available for sale
Reclassification of realized gain - - - - (26,434) - (26,434)
to net income
Net loss for the period - - - (3,579,188) - - (3,579,188)
Treasury stock - - - - - - -
--------- ------- ----------- ------------- --------- ---------- -----------
Balances, September 30, 2002 4,665,326 $24,129 $48,227,764 $(28,904,221) $62,799 $(1,115,412) $18,295,059
========= ======= =========== ============= ========= ========== ===========
* restated to reflect 1 for 5 reverse stock split
See accompanying notes to consolidated financial statements
4
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
2002 2001
---- ----
Cash flows from operating activities:
Net loss .................................................................. $ (3,579,188) $ (2,828,746)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ............................................. 774,228 1,953,941
Amortization of discount on acquisition indebtedness ...................... 12,768 19,870
Writedown of intangibles - customer lists .................................. 448,500 --
Equity in loss of affiliate ............................................... 495,187 320,261
Foreign currency loss ..................................................... 15,896 --
Realized gain on sale of securities ....................................... (62,786) (194,540)
Unrealized interest income on securities .................................. (250,065) (424,245)
Changes in operating assets and liabilities net of effects of acquisitions:
Accounts receivable ....................................................... 315,334 (308,027)
Prepaid and other assets .................................................. (10,933) 25,130
Accounts payable, other current liabilities and accrued expenses .......... (612,988) 184,741
Deferred revenue .......................................................... (123,125) 81,661
------------ ------------
Net cash used in operating activities ............................. (2,577,174) (1,169,954)
------------ ------------
Cash flows from investing activities:
Investment in securities .................................................. (13,506,666) (14,002,206)
Maturity of securities .................................................... 16,654,820 14,200,000
Repayments of notes receivable ............................................ 148,892 122,137
Repayments of loan receivable ............................................. -- 67,278
Acquisition of property and equipment, intangibles ........................ (511,325) (492,633)
Net cash provided by (used in) investing activities ............... 2,785,721 (35,376)
------------ ------------
Cash flows from financing activities:
Payments to acquire treasury stock ........................................ -- (939,721)
Payment of acquisition indebtedness ....................................... (180,000) (180,000)
Principal payments under capital lease obligations ........................ (42,130) (8,963)
------------ ------------
Net cash used in financing activities .............................. (222,130) (818,088)
------------ ------------
Effect of foreign exchange rate changes on cash .............................. 2,534 960
------------ ------------
Net decrease in cash and cash equivalents .................................... (11,049) (2,403,102)
Cash and cash equivalents, beginning of period ............................... 1,512,303 4,372,783
------------ ------------
Cash and cash equivalents, end of period ..................................... $ 1,501,254 $ 1,969,681
============ ============
See accompanying notes to consolidated financial statements.
5
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
1. Organization and Business
EuroWeb International Corporation (the "Company") is a Delaware corporation
which was organized on November 9, 1992, and was a development stage enterprise
through December 31, 1993. The majority owner of Euroweb International
Corporation is KPN Telecom BV, a Netherlands corporation.
The Company owns and operates Internet service providers in the Czech
Republic, Romania and Slovakia. The Company operates in one business segment.
The Company's consolidated statements of operations also include the equity in
the net income of Euroweb Hungary Rt. (also referred to as "Euroweb Rt."), in
which the Company has a 49% ownership interest. The other 51% of Euroweb
Hungary Rt. is held by Pantel Rt., of which KPN Telecom BV is also the majority
owner.
2. Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying unaudited consolidated financial statements were
prepared in accordance with the instructions for Form 10-QSB and,
therefore, do not include all disclosures necessary for a complete
presentation of financial condition, results of operations, and cash
flows in conformity with generally accepted accounting principles. All
adjustments which are, in the opinion of management, of a normal
recurring nature and are necessary for a fair presentation of the
interim financial statements, have been included. The results of
operations for the periods ended September 30, 2002 are not necessarily
indicative of the results that may be expected for the entire fiscal
year or any other interim period.
(b) Principles of consolidation
The consolidated financial statements comprise the accounts of the
Company and its controlled subsidiaries. All material intercompany
balances and transactions have been eliminated upon consolidation.
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of
America.
(c) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles, requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates. Significant estimates made by the Company
include the recoverability and period of benefit of other intangible
assets and recoverability of goodwill.
6
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
(d) Revenue recognition
Revenues from monthly Internet services are recognized in the month in
which the services are provided. Revenue for other services, including
equipment sales are recognized as the service is performed or the
equipment is delivered.
(e) Cost of revenues
Cost of revenues comprise principally of telecommunication network
expenses, costs of content services and cost of internet equipment
sold.
(f) Cash and cash equivalents
Cash and cash equivalents include cash at bank and short-term deposits
of less than three months duration.
(g) Investment in securities
Investments in marketable debt securities are classified as
available-for-sale and are recorded at fair value with any unrealized
holding gains or losses included as a component of other comprehensive
income until realized.
(h) Investment in affiliate
The Company records as income its share of the earnings of
Euroweb Hungary Rt.(a 49% held associate) net of goodwill
amortization. The other 51% of Euroweb Hungary Rt. is held by Pantel
Rt., a related party and major trading partner.
(i) 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. The Company provides for depreciation of
equipment using the straight-line method over the shorter of estimated
useful lives of four years or the lease term.
Recurring maintenance on property and equipment is expensed as
incurred.
When assets are retired or otherwise disposed of, the related costs and
accumulated depreciation from the respective accounts and any gain or
loss on disposals are included in the results of operations.
7
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
(j) Intangibles
Intangibles consist of goodwill and customer lists. Goodwill results
from business acquisitions and represents the excess of purchase price
over the fair value of net assets acquired. Amortization was computed
over the estimated future period of benefit (generally five years) on a
straight-line basis until December 31 2001. In accordance with the
provisions of Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," ("SFAS No. 142"), no
amortization of goodwill has occurred since January 1, 2002. The
Company assesses whether the goodwill can be recovered through
undiscounted future operating cash flows of the acquired operations.
The amount of goodwill impairment, if any, is measured based on
projected discounted future operating cash flows using appropriate
discount rates. Conditions which may indicate that an impairment issue
exists include a negative economic downturn or a change in the
assessment of future operations. However, the assessment of the
recoverability of goodwill will be impacted if estimated future
operating cash flows are not achieved.
Customer lists were acquired as a result of a purchase of assets and
are being amortized over the estimated future period of benefit of five
years. The assessment of recoverability and possible impairment are
determined in a manner similar to the assessment of goodwill described
above. The assessment of the recoverability will be impacted if
estimated future operating cash flows are not achieved.
(k) Net loss per share
The Company calculates "basic" and "diluted" earnings per share. Basic
earnings(loss) per share includes no dilution and is computed by
dividing income(loss) attributable to common stockholders by the
weighted average number of common shares outstanding for the period.
Diluted earnings(loss) per share reflects the potential effect of
common shares issuable upon exercise of stock options and warrants in
periods in which they have a dilutive effect. The Company had
potentially dilutive common stock equivalents for the quarters ended
September 30, 2002 and 2001, which were not included in the computation
of diluted net loss per share because they were antidilutive.
3. Cash Concentration
At September 30, 2002, cash and cash equivalents included $625,727 on deposit
with a U.S. money market fund or major money center bank.
8
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
4. Investment in Securities
On January 25, 2002, the Company purchased a United States Treasury Note with a
face value of $14,389,000, which was purchased for $ 13,506,666. The note
matures on February 15, 2004.
On May 1, 2002, the Company sold US Treasury Notes with a face value of
$2,120,000 for $2,004,820 in order to cover the severances discussed in Note 7.
Of the $480,087 difference between the market value as of September 30, 2002 and
the purchase price of the remaining investment, $250,065 is recorded as interest
income on securities calculated with an effective interest rate of 3%, while the
remaining $230,022 has been recorded as a comprehensive gain.
5. Affiliate, carried on an equity basis
The Company's consolidated financial statements for the nine months ended
September 30, 2002 and 2001 include the Company's 49% interest in the loss of
Euroweb Hungary Rt. (also referred to as "Euroweb Rt.") Key information is
indicated below:
2002 (nine months) 2001 (nine months)
------------------ ------------------
Revenues ................................... $ 4,496,373 $ 3,407,551
Gross profit ............................... 2,535,879 2,285,029
Net loss ................................... $(1,321,600) $ (59,769)
=========== ===========
Company's 49% share of net loss ............ (647,584) (29,287)
Amortization of purchase goodwill related to
the Company's initial investment ........... -- (142,215)
-----------
Equity in net loss of affiliate ............ $ (647,584) $ (171,502)
=========== ===========
Loss recorded by the Company ............... $ (495,187) $ (171,502)
=========== ===========
More than half of the net loss of Euroweb Rt. was due to the write off of
goodwill of unprofitable subsidiaries. Particularly, a significant portion of
the goodwill impairment resulted from an April 2002 acquisition (purchase of
100% of the shares of Freestart Rt., a free Internet Service Provider, for a
purchase price of $10,000). This Company had a net liability position of
approximately USD 500,000 at the purchase date, due to a USD 1,000,000 liability
to Pantel Rt. (the majority owner of Euroweb Rt. and a KPN Group subsidiary). As
the main revenue stream of this entity is a revenue-sharing arrangement with the
dominant player in local fixed-line telephony, the terms of which may be subject
to legislation, management has decided to write-off the entire amount of the
excess of purchase price over net fair value of the assets.
9
The carrying value of the net investment in affiliate of $ 495,187 at the
beginning of the year has been written down to zero. Since the Company has no
legal or commercial commitments to provide continuing financial support, the
difference between the 49% equity interest in the net loss ($ 647,584) and the
opening net carrying value of the investment at the beginning of the year
($495,187) has not been recorded.
6. Stockholders' Equity
On August 30, 2001, the shareholders approved a one-for-five reverse stock split
of the Company's common stock. Prior period share and per share amounts have
been restated to give effect to the reverse stock split.
During the nine months of 2002, the Company did not grant any options or
warrants, nor were any exercised. Upon the exercise of an outstanding warrant or
option, each warrant/option holder will receive 1/5 of a share, due to the
reverse stock split effected on August 30, 2001.
7. Severance to officers
In May 2002, the employment contract of two officers were terminated. The
company has paid a total compensation of $1,254,166 to Mr. Robert Genova and
$766,666 to Mr. Frank Cohen covering the period until the end of the employment
contracts (December 2005).
The new management decided to close the New York offices and move the principal
office to Budapest, Hungary by June 30, 2002.
8. Commitments and Contingencies
Employment agreements with Mr. Frank Cohen and Robert Genova were terminated in
the second quarter of 2002 and their total compensation for the period from June
2002 to December 31, 2005 was settled. At the same time, Mr. Robert Genova and
Mr. Frank Cohen forfeited all of their outstanding options in the Company.
There is one employment agreement remaining as of June 30, 2002 with the Company
providing for aggregate annual compensation of $96,000 through December 31,
2005.
9. Related Party Transactions
In 2001, the Company's subsidiary in Romania launched a service which includes
the provision of international IP and international leased line services. This
service is being provided in conjunction with Pantel Telecommunication Rt., an
entity which is majority owned and controlled by the KPN Group (which also owns
a majority interest in the Company). In 2001, Pantel Telecommunication Rt.
Hungary, a subsidiary of KPN and therefore a related party, became the most
significant trading partner of the Company. Approximately 55% of the 2001 annual
revenues of Euroweb Romania (translating into 30% of the consolidated revenues
of the Company) were derived from the provision of services to Pantel. In the
nine months of 2002, sales to Pantel has increased to 52% of revenues of Euroweb
Romania (which represents 35% in the consolidated revenues of the Company).
10
Pantel has also invoiced USD 1,656,725 in the first nine months of 2002 to the
subsidiaries of the Company in connection with the provision of internet
bandwidth and international leased lines.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Operations
Overview
The Company owns and operates Internet service providers in the Czech Republic,
Romania and Slovakia. These subsidiaries (Euroweb Czech Republic, Euroweb
Slovakia, and Euroweb Romania) are wholly owned. The Company's consolidated
statements of operations also includes the equity in the net income of Euroweb
Hungary Rt., in which the Company has a 49% ownership interest. The Company
operates in one business segment, acting as an Internet service provider to
business customers through the provision of the following services:
(1) Traditional ISP business (Internet access, Content and Web services, Other
services)
(2) International leased line, IP data services
(3) Voice over IP services
For the services in points (2) and (3), the main customer of the Company in
2002 was Pantel Telecommunication Rt., which is a Hungarian related party. The
majority owner of Euroweb International Corporation and Pantel Telecommunication
Rt is KPN Telecom BV, a Netherlands corporation.
Related party transactions - Pantel Telecommunications Rt.
General: The largest customer of the Company since early 2001 has been Pantel
Telecommunication Rt, a Hungary-based alternative telecommunications provider.
Pantel operates within the region and has become a significant trading partner
for Euroweb Romania and Euroweb Slovakia through the provision of direct fiber
cable connection which enables companies to transmit data to a variety of
destinations by utilizing the international connections of Pantel.
Due to the fact that the increase of revenue comes from the new services
provided in conjunction with Pantel, some of the consultants of the Company have
moved to the premises of Pantel in order to improve the effectiveness of the
co-operation on international projects. Csaba Toro, Chief Executive Officer of
Euroweb International Corporation, is also the Chief Executive Officer of
Pantel.
Transactions: Both Euroweb Slovakia and Euroweb Romania have engaged in
transactions with Pantel:
(a) Pantel receives revenue from the provision of the following services to
subsidiaries of Euroweb International Corporation:
- Internet bandwidth
11
- Costs of international leased lines outside Romania and Slovakia
The total amount of these services were USD $1,656,725 during the nine
month period ended September 30, 2002.
(b) Euroweb International and its subsidiaries received revenue from the
provision of the following services to Pantel:
- Cost of international leased lines and local loops in Slovakia and
Romania
- International IP and VOIP services for Pantel
- Commission
Total value of these services were approximately USD $3,221,582 in the nine
months of 2002.
Pricing: Agreements are made at market prices or a split of the margin based on
the financial investment into the specific services by each of the parties.
Euroweb International Corporation considers alternative suppliers for individual
projects, when appropriate.
Other: Some services provided by Pantel are invoiced through Euroweb
Hungary Rt, of which 49% is owned by the Company and 51% is owned by Pantel.
These transactions are considered as essentially Pantel services and disclosed
as revenue of Pantel in point (a) as set forth above. No other service is
invoiced to/from Euroweb Hungary Rt.
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and
results of operations are based upon its consolidated financial statements that
have been prepared in accordance with generally accepted accounting principles
in the United States of America ("US GAAP"). This preparation requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, and the disclosure of contingent
assets and liabilities. US GAAP provides the framework from which to make these
estimates, assumption and disclosures. The Company chooses accounting policies
within US GAAP that management believes are appropriate to accurately and fairly
report the Company's operating results and financial position in a consistent
manner. Management regularly assesses these policies in light of current and
forecasted economic conditions. The Company's accounting policies are stated in
Note 1 to the Consolidated Financial Statements. The Company believes the
following accounting policies are critical to understanding the results of
operations and the effect of the more significant judgments and estimates used
in the preparation of the consolidated financial statements:
Revenue Recognition Policies -- Revenues from services are recognized in
the month in which the services are provided. Invoices for traditional
ISP,International leased line and IP Data services are generally issued at the
beginning of the month except where local legislation prohibits such treatment.
VOIP traffic is measured during the month and invoiced at the end of the month.
Billed revenues for which the services are to be provided in the future, are not
disclosed as revenues in the reporting period, but are accrued and shown as
deferred revenue.
Accounts Receivable - Allowance for Doubtful Accounts -- The Company
regularly reviews the valuation of accounts receivable. The allowance for
doubtful accounts is estimated based on historical experience and future
expectations of conditions that might impact the collectibility of accounts.
12
Property Plant & Equipment Recovery -- Changes in technology or changes in
the Company's intended use of these assets may cause the estimated period of use
or the value of these assets to change. These assets are reviewed for impairment
whenever events or changes in circumstances indicate that their carrying amounts
may not be recoverable. Estimates and assumptions used in both setting
depreciable lives and reviewing recoverability require both judgement and
estimation by management. Impairment is deemed to have occurred if projected
undiscounted cash flows related to the asset are less than its carrying value.
If impairment is deemed to have occurred, the carrying values of the assets are
written down, through a charge against earnings, to their fair value.
Intangibles Recovery - Intangibles consist mostly of goodwill. Goodwill
represented on the balance sheet reflects the unamortized difference between the
purchase price and fair value of businesses acquired. As of January 1, 2002 the
Company adopted SFAS 142 which specifies that goodwill no longer be amortized on
a systematic basis, but should be subject to at least annual impairment tests.
SFAS also prescribes some transitional provisions which have been completed by
June 30, 2002.
Acquisitions
There were no new acquisitions in 2001 and the first nine months of 2002.
Results of Operations
Nine-month Period Ended September 30, 2002 Compared to Nine-month
Period Ended September 30, 2001
The Company has significantly increased its revenue and gross margin (in
absolute terms) compared to the same period in the previous year; with most of
this increase being attributable to activities in Romania. However, during the
same time period, the company was able to keep operating expenses at similar
levels to the previous year, resulting in a significant improvement of the
operating results (excluding the one-time termination payment to officers). In
accordance with SFAS 142, the Company no longer amortizes goodwill. This has had
a positive impact on the operating results of the nine months of 2002.
Revenues
Total revenues for the nine months ended September 30, 2002 were $9,315,126
in comparison with $4,851,685 for the nine months ended September 30, 2001. The
increase in revenues of $4,463,441 was due to the introduction of new services,
while traditional ISP activity has not changed when compared with the previous
period. Most of the increase has been in Euroweb Romania as can be seen as
follows:
Revenue per countries/nine months of 2002 2001
---------------------------------------------------------------------------------------------------------------
Czech Republic $ 1,083,573 $ 892,749
Romania 6,182,922 2,128,240
Slovakia 2,048,631 1,830,696
---------------------------------------------------------------------------------------------------------------
Total 9,315,126 4,851,685
13
The new services were introduced in co-operation with Pantel
Telecommunication Rt., a subsidiary of KPN Telecom BV, which is also the
majority shareholder of the Company and therefore a related party. Sales to
Pantel have increased compared with 2001. Approximately 55% of the 2001 annual
revenues of Euroweb Romania (representing 30% of the consolidated revenues of
the Company) were derived from the provision of services to Pantel, while in the
nine months of 2002 this percentage has increased to 52% (representing 35% of
the consolidated revenues of the Company).
The proportion of revenue per product lines has developed as follows:
Revenue per services 2002 2001
---------------------------------------------------------------------------------------------------------------
ISP $ 3,563,873 $ 3,538,577
Int. leased line and IP data 4,786,462 506,748
VOIP 964,791 806,360
---------------------------------------------------------------------------------------------------------------
Total 9,315,126 4,851,685
Cost of revenues
Cost of revenues consist primarily of telecommunication expenses.
Network costs were $6,190,113 in 2002 in comparison to $2,778,284 in 2001. Gross
margin has decreased from 43% to 33% when compared to the previous year.
Although there were no significant pricing policy changes within the Company
during the first nine months of 2002, the margin rate has decreased due to the
new services, which have significantly less margin than traditional ISP
activity. Although the gross margin has fallen, the Company was able to increase
gross profit by 51% in absolute terms.
Severance to officers
In May 2002, the employment contracts for two executive officers, which had
fixed-terms until 2005, were terminated. A significant one-time cash outflow was
paid as severance, with Mr. Robert Genova receiving $1,254,166 and Mr. Frank
Cohen receiving $766,666.
The new management has closed the office in New York and moved the Company's
principal office to Budapest, Hungary. The Company expects to reduce its
compensation and related costs by $45,000 per month as a result of the Company's
relocation of its principal offices.
Operating expenses (excluding depreciation, amortization and severance)
Despite the 92% increase in revenues and 51% increase in gross profit, overall
operating expenses (excluding depreciation, amortization and severance)
decreased by 4% as cost control measures and the operational consolidation of
the subsidiaries acquired in 1999 and 2000 began to have a positive impact. This
enabled the Company to roll out new services using the existing operational
infrastructure minimizing the need for additional resources.
14
Depreciation and amortization
As disclosed above, no goodwill was amortized in 2002. Other intangibles,
representing customer lists obtained in an acquisition in Romania in 2000, are
being amortized ($57,500 quarterly) over a period of five years. Depreciation of
tangible fixed assets has increased from $490,931 in 2001 to $601,728 in 2002,
reflecting the investment in equipment used to provide the new services.
Writedown of intangibles - customer lists
On May 19, 2000, the Company purchased all of the Internet related assets of
Sumitkom Rokura, S.R.L. an Internet service provider in Romania. The acquisition
was accounted for as an asset purchase with a value of $1,150,000 being assigned
to customer lists acquired which are being depreciated over an estimated period
of benefit of 5 years. However, an analysis of the customers and revenues as at
September 30, 2002 indicated that most of the expected revenues to be generated
by this customer list did not materialize. Therefore, the Company has written
down $448,500 of the customer list net book value. The remaining $184,000 will
continue to be amortized over the remaining period of benefit of 33 months.
However, the Company will continue to assess the recoverability of this amount
on a periodic basis and further writedowns will be made if required.
Net interest income
Net interest income of $304,223 in the nine months of 2002 is lower than the net
interest income of $778,352 in the nine months of 2001. The decrease is due to
the fact that less interest-generating funds were available in this period than
in the same period of the previous year, and also because the effective interest
rate on these investments has decreased over the periods in question.
Equity interest in affiliate
Euroweb Rt. has made several acquisitions over the past two years where goodwill
has been initially recognized. However, management has considered such goodwill
to be impaired and has subsequently made write-offs which have had a significant
impact in the results for the first half of 2002. All goodwill previously
recognized by Euroweb Rt. have now been written off and as of June 30, 2002, no
goodwill exists on its books.
Although the Company's 49% interest in the net loss of Euroweb Rt. for the nine
months ended September 30, 2002 is $647,584, the opening net carrying value of
the investment in the Company's financial statements at the beginning of the
year was only $495,187. Therefore, the net investment has been written down to
zero. The difference of $152,397 is not required to be recorded in the books of
the Company as there is no legal or commercial commitment to provide continuing
financial support. However, if in the future, Euroweb Rt. has net income, then
the Company may only recognize its 49% interest on Euroweb Rt. net income in
excess of $152,397.
15
Liquidity and Capital Resources
The Company's cash, cash equivalents and marketable securities were
approximately $13,498,005 as of September 30, 2002, a decrease of $2,642,762
from the end of 2001.
The Company has $13,498,005 of cash, cash equivalents and marketable
securities compared to $ 1,798,428 total short and long term liabilities.
Management believes that with its existing cash, cash equivalents, marketable
securities and internally generated funds, there will be sufficient funds to
meet the Company's currently projected working capital requirements and other
cash requirements until at least the next 12 months.
KPN Telecom B.V. (NY Stock Exchange: KPN) owns 52% of the outstanding shares of
Common Stock of the Company. In November 2000, KPN announced that it intends to
sell all of its non-core assets, including its ownership of 52% of the
outstanding shares of the Company. KPN has distributed to interested buyers a
Business Plan on the Company, has made available all the documents relating to
the Company, and arranged for meetings of Management of the Company with
prospective suitors. So far, none of the offers to purchase were accepted by
KPN.
On February 20, 2002, Everest Acquisition Corp., a wholly owned subsidiary of
Royal KPN, commenced a tender offer for all of the outstanding shares of common
stock of EuroWeb International Corp. at the purchase price of $2.25 in cash per
share. This offer was raised to $2.70 on March 20, 2002 and expired on April 4,
2002.
Upon consummation of the Offer, Everest Acquisition and KPN intended to effect a
merger between EuroWeb and Everest Acquisition with the cash and marketable
securities of Euroweb International to be used to pay off financing costs of the
acquisition.
On April 8, 2002, the offer was cancelled after insufficient interest from
investors.
Inflation and Foreign Currency
The Company maintains its books in local currencies, including the Czech koruna
for Euroweb Czech Republic and the Slovak koruna for Euroweb Slovakia. However,
given the hyper-inflationary situation in Romania, the U.S. dollar is used as
the functional currency.
The Slovakian Koruna has strengthened by 4.13%, while the Czech Korona has
strengthened against the U.S. dollar by approximately 13% when comparing the
nine months of 2002 and 2001. The impact of this is reflected in the exchange
rates used in the nine months of 2002 and the nine months of 2001.
Effect of Recent Accounting Pronouncements
In July 2001, Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" ("Statement 142") was issued. Statement 142 requires
that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provision of Statement 142. Statement 142 will also require that
intangible assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." The Company is required to implement Statement 142 on
January 1, 2002.
16
Statement 142 established certain transition provisions which will require,
amongst other things, the Company perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To accomplish
this the Company must identify its reporting units and determine the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of the
date of adoption. The Company will then have up to six months from the date of
adoption to determine the fair value of each reporting unit and compare it to
the reporting unit's carrying amount. To the extent a reporting unit's carrying
amount exceeds its fair value, an indication exists that the reporting unit's
goodwill may be impaired and the Company must perform the second step of the
transitional impairment test. In the second step, the Company must compare the
implied fair value of the reporting unit's goodwill, determined by allocating
the reporting unit's fair value to all of it assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with Statement 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement of
earnings. The Company was required to, and has adopted, Statement 142 as of
January 1, 2002 and has completed the transition provisions described above .
The Financial Accounting Standards Board No. 143 "Accounting for Asset
Retirement Obligations" ("Statement 143") was issued in June 2001. Statement 143
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. The Company is required to
adopt the provisions of Statement 143 on January 1, 2003. The Company is
evaluating the impact, if any, Statement 143 may have on its future consolidated
financial statements.
The Financial Accounting Standards Board ("FASB") No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("Statement 144") was issued in
August 2001. Statement 144 supersedes FASB Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of", and the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions", for the disposal of a segment of a business. Statement
144 addresses the financial accounting and reporting for (i) long-lived assets
to be held and used, (ii) long-lived assets to be disposed of other than by sale
and (iii) long-lived assets to be disposed of by sale. The Company is required
to, and has adopted, the provisions of Statement 144 as of January 1, 2002.
The Financial Accounting Standards Board ("FASB") No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities" ("Statement 146") was issued in
June 2002. Statement 146 nullifies EITF Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". `Costs' include (a)
one-time termination benefits, (b) costs to terminate a contract that is not a
capital lease and (c) other associated costs including costs to consolidate
facilities or relocate employees. The Statement is based on the general
principle that a liability for a cost associated with an exit or disposal
activity should be (1) recorded when it is incurred and (2) initially measured
at fair value. Thus, a commitment to an exit or disposal plan no longer will be
a sufficient basis for recording a liability for those activities. The Company
is required to adopt the provisions of Statement 146 for exit or disposal
activities initiated after December 31, 2002. The Company is evaluating the
impact, if any, Statement 146 may have on its future consolidated financial
statements.
17
Forward-Looking Statements
When used in this Form 10-QSB, in other filings by the Company with the
SEC, in the Company's press releases or other public or stockholder
communications, or in oral statements made with the approval of an authorized
executive officer of the Company, the words or phrases "would be," "will allow,"
"intends to," "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project," or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995.
The Company cautions readers not to place undue reliance on any
forward-looking statements, which speak only as of the date made, are based on
certain assumptions and expectations which may or may not be valid or actually
occur, and which involve various risks and uncertainties. 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.
ITEM 3. CONTROLS AND PROCEDURES
As of September 30, 2002, an evaluation was performed under the supervision
and with the participation of the Company's management, including the Chief
Executive Officer and the Chief Accounting Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on that evaluation, the Company's management, including the Chief Executive
Officer and the Chief Accounting Officer,concluded that the Company's disclosure
controls and procedures were effective as of September 30, 2002. There have been
no significant changes in the Company's internal controls or in other factors
that significantly affect internal controls subsequent to September 30, 2002.
PART II
Item 1. Legal Proceedings
The Company is not a party to any material legal proceedings or aware of
any governmental proceeding being contemplated by a governmental authority that
has become reportable or had material developments during the quarter ended
September 30, 2002.
ITEM 2. Changes in Securities
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
18
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security
holders through the solicitation of proxies or otherwise,
during the nine months of 2002.
ITEM 5. OTHER INFORMATION
None.
item 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits (numbers below reference Regulation S-B, Item 601)
(3) (a) Certificate of Incorporation filed November 9, 1992(1)
(b) Amendment to Certificate of Incorporation filed July 9, 1997(2)
(c) By-laws(2)
(99) (a) Certification of the Chief Executive Officer of Euroweb International Corp. Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(99) (b) Certification of the Chief Accounting Officer of Euroweb International Corp. Pursuant to 18
U.S.C. Section 1350, As Adopted 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 9th day of November 2002.
EUROWEB INTERNATIONAL CORP.
By /s/Csaba Toro
Csaba Toro, Chairman of the Board
19
________________
(1) Exhibits are incorporated by reference to Registrant's Registration
Statement on Form SB-2 dated May 12, 1993 (Registration No. 33-62672-NY, as
amended)
(2) Filed with Form 10-QSB for quarter ended June 30, 1998.
CERTIFICATIONS
I, Csaba Toro, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Euroweb
International Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002.
/s/Csaba Toro
Csaba Toro
Chief Executive Officer
CERTIFICATIONS
I, Peter Szigeti, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Euroweb
International Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002.
/s/Peter Szigeti
Peter Szigeti
Chief Accounting Officer