United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2005
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ________________ to ________________
Commission file number 001-12000
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.)
Vaci ut 141, 1138 Budapest, Hungary
-----------------------------------
(Address of principal executive offices)
+36-1-8897000 +36-1-8897100
Issuer's telephone number Issuer's facsimile number
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirement for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of Exchange Act). Yes |_|No |X|
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock, $.001 par value 5,784,099
----------------------------- ---------------------------------
(Class) (Outstanding at November 14, 2005)
Transitional Small Business Disclosures Format (Check one): Yes |_| No |_|
EUROWEB INTERNATIONAL CORP.
INDEX
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet as of September 30, 2005 2
Condensed Consolidated Statements of Operations and Comprehensive
Income (Loss) for the three months ended September 30, 2005 and
2004 (restated) and the nine months ended September 30, 2005 and
2004 (restated) 3
Condensed Consolidated Statements of Stockholders' equity for the
nine months ended September 30, 2005 and twelve months ended
December 31, 2004 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2005 and 2004 (restated) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Item 3. Controls and Procedures 28
PART II. Other Information 29
Signature 30
2
EUROWEB INTERNATIONAL CORP.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30, 2005
------------
ASSETS
Current Assets
Cash and cash equivalents $ 4,863,296
Trade accounts receivable, net of allowance for doubtful accounts of 4,501,859
$796,189
Unbilled receivables 1,221,809
Deferred tax assets 31,678
Prepaid expenses and other current assets 924,572
------------
Total current assets 11,543,214
Property and equipment, net 6,642,425
Intangibles - customer contracts, net 1,283,455
Goodwill 5,806,181
Navigator - pre-acquisition cost 271,808
Other assets 383,074
------------
Total assets $ 25,930,157
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $ 3,326,004
Pantel loan payable - current portion 472,152
Current portion of bank loans 279,437
Notes payable 175,554
Other current liabilities 555,531
Accrued expenses 3,112,036
Deferred IRU revenue 46,000
Deferred other revenue 526,923
------------
Total current liabilities 8,493,637
Noncurrent Liabilities
Deferred tax liabilities 31,678
Deferred IRU revenue 871,035
Pantel loan payable 236,076
Bank loans 439,352
Lease obligations 123,319
Commitments and contingencies
Stockholders' Equity
Preferred stock, $.001 par value - Authorized 5,000,000 shares;
no shares issued or outstanding --
Common stock, $.001 par value - Authorized 35,000,000 shares;
5,590,655 shares issued of which 5,342,533 shares are outstanding
and 248,122 shares are held in escrow 5,342
Additional paid-in capital 49,810,246
Accumulated deficit (34,193,589)
Accumulated other comprehensive income 113,061
------------
Total stockholders' equity 15,735,060
------------
Total liabilities and stockholders' equity $ 25,930,157
============
See accompanying notes to condensed consolidated financial statements.
3
EUROWEB INTERNATIONAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Three months ended Nine months ended
September 30 September 30
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
(Restated) (Restated)
Revenues
Third party revenues $ 10,364,348 $ 7,502,144 $ 30,622,486 $ 15,993,379
Related party revenues -- 2,096,190 1,768,358 5,533,618
------------ ------------ ------------ ------------
Total revenues 10,364,348 9,598,334 32,390,844 21,526,997
Cost of revenues (Exclusive of depreciation and amortization
shown separately below)
Third party cost of revenues 6,651,513 4,474,572 20,677,378 10,103,607
Related party cost of revenues -- 1,785,613 1,164,692 4,454,898
------------ ------------ ------------ ------------
Total cost of revenues (Exclusive of depreciation and
amortization shown separately below) 6,651,513 6,260,185 21,842,070 14,558,505
Operating expenses
Compensation and related costs 924,457 913,939 2,514,864 2,137,468
Consulting, director and professional fees 912,873 1,140,152 2,670,795 2,012,980
Collection of written-off receivable -- -- (265,630) --
Other selling, general and administrative expenses 580,785 1,152,618 2,719,022 2,350,118
Depreciation and amortization 890,428 762,531 2,649,330 1,314,925
------------ ------------ ------------ ------------
Total operating expenses 3,308,543 3,969,240 10,288,381 7,815,491
Income (loss) from operations 404,292 (631,091) 260,393 (846,999)
Interest income (expense)
Interest income 8,413 24,326 23,871 141,695
Interest expense (67,277) (112,590) (261,581) (283,043)
------------ ------------ ------------ ------------
Net interest expense (58,864) (88,264) (237,710) (141,348)
Gain from sale of subsidiary -- -- -- 28,751
Other income -- -- 170,000 --
------------ ------------ ------------ ------------
Income (loss) before income taxes 345,428 (719,355) 192,683 (959,596)
Income tax expense (8,678) (4,436) (137,016) (50,455)
------------ ------------ ------------ ------------
Income (Loss) from continuing operations 336,750 (723,791) 55,667 (1,010,051)
Income from discontinued operations - Euroweb Slovakia -- 1,601 1,733,470 260,901
Income (loss) from discontinued operations - Euroweb Czech Republic 3,653 (66,192)
Net income (loss) 336,750 (718,537) 1,789,137 (815,342)
Other comprehensive income (loss) (38,909) 2,422 4,795 (20,109)
------------ ------------ ------------ ------------
Comprehensive income (loss) $ 297,841 $ (716,115) $ 1,793,932 $ (835,451)
============ ============ ============ ============
Income (loss) per share, before discontinued operations $ 0.06 $ (0.14) $ 0.01 $ (0.20)
Income per share from discontinued operations $ 0.00 $ 0.00 $ 0.32 $ 0.04
------------ ------------ ------------ ------------
Net income (loss) per share, basic $ 0.06 $ (0.13) $ 0.33 $ (0.16)
============ ============ ============ ============
Net income (loss) per share, diluted $ 0.06 $ (0.13) $ 0.33 $ (0.16)
============ ============ ============ ============
Weighted average number of shares outstanding, basic 5,342,533 5,342,533 5,342,533 4,948,753
Weighted average number of shares outstanding, diluted 5,542,533 5,342,533 5,342,533 4,948,753
See accompanying notes to condensed consolidated financial statements
4
EUROWEB INTERNATIONAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Common Stock Additional
---------------------------- Paid-in Accumulated
Shares Amount Capital Deficit
------------ ------------ ------------ ------------
Balance, January 1, 2004 (restated) 4,665,332 $ 4,665 $ 48,247,229 $(33,105,716)
============ ============ ============ ============
Foreign currency translation gain -- -- -- --
Reversal of unrealized gain on securities available for sale -- -- -- --
Deemed distribution -- (2,142,556)
Compensation charge on share
options issued to consultants -- -- 94,212 --
Issuance of shares (Elender Rt. acquisition) 677,201 677 2,458,108 --
Net loss -- -- -- (734,454)
------------ ------------ ------------ ------------
Balance, December 31, 2004 5,342,533 $ 5,342 $ 50,799,549 $(35,982,726)
============ ============ ============ ============
Foreign currency translation gain -- -- -- --
Compensation charge on share -- -- 126,109 --
options issued to consultants
Cancellation of treasury stock -- -- (1,115,412) --
Net income -- -- -- 1,789,137
------------ ------------ ------------ ------------
Balance, September 30, 2005 5,342,533 5,342 $ 49,810,246 $(34,193,589)
============ ============ ============ ============
Accumulated
Other Total
Comprehensive Treasury Stockholders'
Income (Loss) Stock Equity
------------ ------------ ------------
Balance, January 1, 2004 (restated) $ (25,502) $ (1,115,412) $ 14,005,264
============ ============ ============
Foreign currency translation gain 162,573 -- 162,573
Reversal of unrealized gain on securities available for sale (28,805) -- (28,805)
Deemed distribution -- -- (2,142,556)
Compensation charge on share
options issued to consultants -- -- 94,212
Issuance of shares (Elender Rt. acquisition) -- -- 2,458,785
Net loss -- -- (734,454)
------------ ------------ ------------
Balance, December 31, 2004 $ 108,266 $ (1,115,412) $ 13,815,019
============ ============ ============
Foreign currency translation gain 4,795 -- 4,795
Compensation charge on share 126,109
options issued to consultants
Cancellation of treasury stock -- $ 1,115,412 --
Net income -- -- 1,789,137
------------ ------------ ------------
Balance, September 30, 2005 $ 113,061 $ -- $ 15,735,060
============ ============ ============
See accompanying notes to condensed consolidated financial statements
5
EUROWEB INTERNATIONAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
--------------------------------------------------------------------------------
Nine Months Ended
September 30,
-------------
2005 2004 (restated)
------------ ------------
Net cash provided by (used in) operating activities $ 2,624,140 $ 644,436
------------ ------------
Cash flows from investing activities:
Maturity of securities -- 11,464,000
Collection of notes receivable -- 152,140
Acquisition of 51% of Euroweb Rt -- (2,142,000)
Acquisition of 100% of Elender Rt., including transaction costs and net of -- (6,459,219)
acquired
Navigator - pre-acquisition cost (271,808) --
Proceeds from sale of Euroweb Slovakia 2,700,000 --
Purchase of property and equipment (1,859,191) (1,570,738)
------------ ------------
Net cash provided by investing activities 569,001 1,444,183
------------ ------------
Cash flows from financing activities:
Repayment of bank loans and overdraft (217,500) (425,338)
Receipt of bank loans and overdraft -- 213,963
Repayment of notes payable (546,580) (180,161)
Repayment of Pantel note payable (245,000) --
Principal payments under capital lease obligations (228,411) (425,235)
------------ ------------
Net cash used in financing activities (1,237,491) (816,771)
------------ ------------
Effect of exchange rate changes on cash and cash equivalents (59,296) (76,598)
------------ ------------
Net increase in cash and cash equivalents 1,896,354 1,195,250
Cash and cash equivalents, beginning of period 3,231,669 2,233,231
------------ ------------
Cash and cash equivalents, end of period $ 5,128,023 $ 3,428,481
============ ============
See accompanying notes to condensed consolidated financial statements.
6
Euroweb International Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
1. Organization and Business
Euroweb International Corp. ("Euroweb" or the "Company") is a Delaware
corporation, which was organized on November 9, 1992. The Company was a
development stage company through December 31, 1993.
The Company operates in Hungary and Romania, through its subsidiaries Euroweb
Hungary Rt. ("Euroweb Hungary") and Euroweb Romania S.A. ("Euroweb Romania"). On
December 16, 2004, the Company disposed of Euroweb Czech Republic and no longer
has operations in the Czech Republic. On April 15, 2005, the Company sold
Euroweb Slovakia a.s. ("Euroweb Slovakia") for cash of $2,700,000 and, as a
result, has ceased operations in Slovakia.
The Company provides internet access, voice/ voice over internet protocol
("VOIP"), international/domestic leased line and additional value added services
primarily to business customers.
KPN Telecom owned approximately 43.54% of Euroweb's outstanding shares of common
stock as of December 31, 2004, and a majority interest in Pantel
Telecommunication Kft. ("Pantel"). On February 28, 2005, KPN NV sold its 75.1%
interest in the Pantel business to Hungarian Telephone and Cable Corp.
Therefore, Pantel is no longer considered a related party effective March 1,
2005.
In addition, on January 28, 2005, KPN Telecom entered into a Stock Purchase
Agreement whereby it sold to CORCYRA d.o.o. ("CORCYRA") 289,855 shares of common
stock of the Company for $1,000,000 on February 1, 2005 and KPN Telecom has also
agreed to sell its remaining 2,036,188 shares of the Company's common stock to
CORCYRA d.o.o. on or prior to April 30, 2006.
2. Basis of Presentation and Significant Accounting Policies
The interim unaudited condensed consolidated financial statements of Euroweb and
its consolidated subsidiaries included herein have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC")
regarding interim financial information and, accordingly, do not include all of
the information and note disclosures required by accounting principles generally
accepted in the United States of America ("U.S. GAAP") for complete financial
statements. These unaudited interim consolidated financial statements should be
read in conjunction with the audited consolidated financial statements and notes
thereto for the year ended December 31, 2004, appearing in the Annual Report on
Form 10-KSB of the Company for the year then-ended.
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with U.S. GAAP and reflect all adjustments which are, in
the opinion of management, necessary to a fair statement of the results for the
interim periods presented. All such adjustments are of a normal recurring
nature. The results of operations for the nine months ended September 30, 2005
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2005.
7
Euroweb International Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
In preparing the interim unaudited consolidated financial statements, management
is required to make estimates and assumptions that affect the amounts reported
in the financial statements. Actual results could differ from those estimates.
All intercompany balances and transactions have been eliminated in
consolidation.
Prior periods have been reclassified to conform with current period
presentation.
On December 16, 2004, the Company sold all of its shares in its wholly-owned
subsidiary, Euroweb Czech Republic, for cash of $500,000. As a part of the
transaction, the Company effectively forgave $400,000 of loans receivable from
Euroweb Czech Republic. On April 15, 2005, the Company sold Euroweb Slovakia for
cash of $2,700,000. The Company believes that the sales of Euroweb Czech
Republic and Euroweb Slovakia meet the criteria for presentation as a
discontinued operations under the provisions of Statement of Financial
Accounting Standard ("SFAS") No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets". The three- and nine-month periods ended September 30,
2004 have been restated to reflect Euroweb Czech Republic and Euroweb Slovakia
as discontinued operations.
Stock-based compensation
Under the accounting provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), the Company's net income (loss) and net income
(loss) per share for the three and nine months ended September 30, 2005 and 2004
would have been increased to the pro forma amounts indicated below:
Nine months ended September 30,2005 September 30, 2004
(restated)
Net income (loss):
Net income (loss), as reported $ 1,789,137 $ (815,342)
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of tax effects (687,144) (889,682)
------------- -------------
Pro forma net loss 1,101,993 (1,705,024)
============= =============
Basic and diluted income (loss) per share:
As reported, basic $ 0.33 $ (0.16)
Pro forma, basic 0.21 (0.34)
As reported, diluted $ 0.33 $ (0.16)
Pro forma, diluted 0.21 (0.34)
8
Euroweb International Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
Three months ended September 30,2005 September 30, 2004
(restated)
Net income (loss):
Net income (loss), as reported $ 336,750 $ (718,537)
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of tax effects (291,462) (298,526)
------------- -------------
Pro forma net loss 45,288 (1,017,063)
============= =============
Basic and diluted income (loss) per share:
As reported, basic $ 0.06 $ (0.13)
Pro forma, basic 0.01 (0.19)
As reported, diluted $ 0.06 $ (0.13)
Pro forma, diluted 0.01 (0.19)
The following is a reconciliation from basic earnings per share to diluted
earnings per share for the three and nine month periods ended September 30, 2005
and 2004:
3 months ended 9 months ended
------September 30,------ ------September 30,------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net income (loss) attributable to
Common stockholders (A) $ 336,750 $ (718,537) $ 1,789,137 $ (815,342)
----------- ----------- ----------- -----------
Determination of shares
Weighted average common shares
outstanding - basic (B) 5,342,533 5,342,533 5,342,533 4,948,753
Assumed conversion of dilutive stock
options and warrants 200,000 -- -- --
Weighted average common shares
Outstanding - diluted (C) 5,542,533 5,342,533 5,342,533 4,948,753
----------- ----------- ----------- -----------
Net income (loss) per common share
Basic (A/B) $ 0.06 $ (0.13) $ 0.33 $ (0.16)
Diluted (A/C) $ 0.06 $ (0.13) $ 0.33 $ (0.16)
For the three and nine month periods ended September 30, 2005, 615,000 and
941,879 stock options and warrants, respectively, were excluded from the
computation of diluted earnings per share since such options and warrants have
an exercise price in excess of the average market value of the Company's common
stock during the periods. For the three and nine month periods ended September
30, 2004, 657,333 and 516,069 stock options were excluded from the computation
of diluted net loss per common share since such options and warrants have an
exercise price in excess of the average market value of the Company's common
stock during the periods. 248,122 shares of common stock held in escrow as of
September 30, 2005, for issuance to a lender in the event of default on a loan,
were excluded from the computation of diluted earnings per share since the
Company was not in default as of September 30, 2005
9
Euroweb International Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
3. Bank Loans, Overdrafts, and Notes Payable
On June 1, 2004, Elender Rt. (which has since been merged with Euroweb Hungary
Rt.) entered into a bank loan agreement with Commerzbank (Budapest) Rt. The
agreement consists of a loan facility of HUF 300 million (approximately $1.45
million) of which $718,789 was outstanding at September 30, 2005. The loan is
being repaid in quarterly installments of HUF 14.5 million ($69,900), commencing
November 30, 2004. The interest rate is BUBOR (Budapest Interbank Offered Rate)
+ 1.35%.
In addition, the bank also provided an overdraft facility of HUF 150 million
(approximately $723,000) to Elender Rt. The Company did not need to utilize this
facility as at September 30, 2005. The interest rate is BUBOR (Budapest
Interbank Offered Rate) + 1%.
Notes payable of approximately $175,554 as of September 30, 2005 relate to
outstanding liabilities to three previous shareholders of Elender Rt.: Vitonas
Investments Limited, Certus Kft. and Rumed 2000 Kft. The outstanding amount is
payable in four equal quarterly installments of HUF 36.4 million ($175,554),
with the final payment due on December 31, 2005.
4. Pantel Loan Payable
During 2002 Pantel, a related party prior to March 1, 2005, provided a loan of
HUF 245 million (approximately $ 1.18 million using the September 30, 2005
exchange rate) to a subsidiary of the Company of which $708,228 was outstanding
at September 30, 2005. The loan bears interest at a rate of 13% and is repayable
in five equal installments from December 2004 semi-annually until the end of
2006.
5. Discontinued Operations and disposal of subsidiaries
Euroweb Slovakia (which was sold on April 15, 2005) and Euroweb Czech Republic
(which was sold on December 16, 2004) are considered discontinued operations for
financial reporting purposes and therefore all periods are restated to reflect
this. For the three and nine months ended September 30, 2005 and 2004, the
results of discontinued operations are as follows:
----------------------------------------- ------------------- ------------------ ------------------- -------------------
Country Three months Three months Nine months Nine months
ended September ended September ended September ended September
30, 2005 30, 2004 30, 2005 30, 2004
----------------------------------------- ------------------- ------------------ ------------------- -------------------
Slovakia operations -- $1,601 $32,270 $260,901
----------------------------------------- ------------------- ------------------ ------------------- -------------------
Slovakia --gain on disposal -- -- $1,701,200 --
----------------------------------------- ------------------- ------------------ ------------------- -------------------
Czech Republic operations -- $3,653 -- $(66,192)
----------------------------------------- ------------------- ------------------ ------------------- -------------------
Total $ -- $5,254 $1,733,470 $194,709
----------------------------------------- ------------------- ------------------ ------------------- -------------------
The Company did not realize any income tax benefit/losses in connection with the
disposal of the Slovakian and Czech operations.
10
Euroweb International Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
6. Stock-based Compensation
On April 26, 2004, the Company granted 125,000 options to its Chief Executive
Officer, an aggregate of 195,000 options to five employees and an aggregate of
45,000 options to two consultants of the Company. The stock options granted to
the Chief Executive Officer vest at the rate of 31,250 on November 1, 2004 and
each October 1 of 2005, 2006 and 2007. The stock options granted to the other
employees and consultants vest at the rate of 80,000 on November 1, 2004 and
each October 1 of 2005, 2006. The exercise price of the options ($4.78) is equal
to the market price on the date the grants were made.
In accordance with Accounting Principles Board No. 25, "Accounting for Stock
Issued to Employees," ("APB 25") no compensation expense was recorded for the
options granted to the Chief Executive Officer, and the five employees. In
accordance with SFAS 123, the Company will recognize total compensation charges
of approximately $162,000 for the grants made to the two consultants as such
consultants do not qualify as employees. Such compensation charges are
recognized over the vesting period of three years. Compensation expense for the
nine months ended September 30, 2005 was $45,303 (2004: $70,121), and $15,101
(2004: $42,073) for the three months ended September 30, 2005.
On March 22, 2005, the Company granted an aggregate of 200,000 options to two of
the directors. The stock options granted to the directors on March 22, 2005 vest
at the rate of 50,000 on each September 22 of 2005, 2006, 2007 and 2008. The
exercise price of the options ($3.40) is equal to the market price on the date
the grants were made. In accordance with APB 25, no compensation charges was
accounted in respect of these grants.
On June 2, 2005, the Company granted 100,000 options to a director of the
Company, which vest at the rate of 25,000 on each December 2 of 2005, 2006,
2007, and 2008. No compensation charge was accounted in respect of this grant.
The President and a Director of the Company is eligible to receive an annual
compensation of $250,000 starting from April 15, 2005, which is payable in
Euroweb shares of common stock. The number of shares to be paid is calculated
based on the average closing price 10 days prior to each employment year. The
number of shares for the year ended April 14, 2006 is 82,781. Compensation
expense for the nine months period ended September 30, 2005 was $114,582 (2004:
$0) and $83,333 (2004: $0) for the three months ended September 30, 2005.
On June 7, 2005, the Company granted 100,000 warrants to a consulting company as
compensation for investor relations services at exercise prices as follows:
40,000 warrants at $3.50 per share, 20,000 warrants at $4.25 per share, 20,000
warrants at $4.75 per share and 20,000 warrants at $5 per shares. The warrants
have a term of five years and tranches vest proportionately at a rate of a total
8,333 warrants per month over a one year period. The warrants are being expensed
over the performance period of one year. Compensation expense for the nine
months period ended September 30, 2005 was $80,806 and $60,600 for the three
months ended September 30, 2005.
11
Euroweb International Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
7. Related party transactions
The provision of international/domestic leased line, voice and VOIP services are
being provided in conjunction with Pantel, an entity which was majority owned
and controlled by KPN Telecom B.V. (which also owned a majority interest in the
Company until February 28, 2005). Intercompany sales were $1,768,358 for the two
months ended February 28, 2005 compared to $5,533,618 for the nine months ended
September 30, 2004. The two periods are not comparable due to the fact that from
March 1, 2005, Pantel is no longer related party with the Company, because KPN
Telecom B.V. disposed of its interest in Pantel. Therefore, transactions with
Pantel from March 1, 2005 are not classified as transactions with a related
party.
During the nine months ended September 30, 2005 and fiscal 2004, Pantel was the
most significant trading partner of the Company with approximately 50% of total
revenues of Euroweb Romania for the nine months ended September 30, 2005
(translating into 22% of the consolidated revenues of the Company) being derived
from providing services to Pantel.
8. Commitments and Contingencies
(a) Employment Agreements
A fixed-term employment agreement with the Chief Executive Officer, which
provided for aggregate annual compensation of $96,000 through December 31, 2005
was amended in 2004 and 2005. The amended agreement provides for an annual
salary of $200,000 and a bonus of up to $150,000 in each of 2005, 2006, 2007 and
2008, as well as an annual car allowance of $30,000.
The Company has entered into a two-year employment agreement with Moshe Schnapp
as President and Director of the Company starting from April 15, 2005, which
grants an annual compensation of $250,000 to be paid in the form of Euroweb
shares of common stock. The number of shares to be received by Mr. Schnapp is
calculated based on the average closing price 10 days prior to the commencement
of each employment year. For the year ended April 14, 2006, Mr. Schnapp will
receive 82,781 Euroweb shares of common stock.
(b) Lease agreements
The Company's subsidiaries have entered into various capital leases for vehicles
and internet equipment, as well as non-cancelable agreements for office
premises.
(c) Indefeasible Right of Use
In 2002, Euroweb Romania provided an Indefeasible Right of Use ("IRU") for
transmission capacity on 12 pairs of fiber over a period of 20 years, commencing
in 2003. For the duration of the agreement, Euroweb Romania is obliged to use
all reasonable endeavours to ensure the cable system is maintained in efficient
working order and in accordance with industry standards.
12
Euroweb International Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(d) Legal Proceedings
There are no known significant legal procedures that have been filed and are
outstanding against the Company.
(e) Elender Rt. acquisition
On June 9, 2004, the Company acquired all of the outstanding shares of Elender
Rt. ("Elender"), an internet service provider in Hungary, for $6,500,000 in cash
and 677,201 of the Company's shares of common stock. Under the terms of this
agreement, the Company has placed 248,122 unregistered shares of newly issued
common stock (in the name of the Company) with an escrow agent as security for
approximately $1.50 million loans payable to former shareholders of Elender. The
shares will be returned to the Company from escrow once the outstanding loans
have been fully repaid. However, if there is a default on the outstanding loan,
then the shares will be issued to the other party and the Company is then
obliged to register these shares.
Pursuant to section 1 of the Registration Rights Agreement signed on June 1,
2004 with the sellers of Elender, if the shares of the Company's common stock
were not registered within 120 days of closing (closing was on June 9, 2004) for
reasons attributable to the Company, a penalty of $2,000 per day is payable
until the shares are registered. The Company completed registration of the
shares of common stock issued in connection with the Elender acquisition in May
2005. In June 2005, the sellers renounced their claims in connection with the
late registration of shares, and therefore, the $170,000 penalty accrued during
the year ended December 31, 2004 was reversed and accounted for as other income
in the second quarter of 2005.
(f) Euroweb Hungary purchase guarantee
In February 2004, the Company purchased the remaining 51% of Euroweb Hungary
from Pantel. The consideration paid by the Company for the 51% interest
consisted of EUR 1,650,000 ($2.1 million) in cash, and a purchase commitment
that Euroweb Hungary will purchase at least HUF 600 million (approximately $3.0
million) worth of services from Pantel in each of 2004-2006. In the event that
Euroweb Hungary and its subsidiaries do not satisfy this commitment, Pantel may
charge a penalty equal to 25% of the commitment amount less any services
purchased. Purchases in 2004 and year to date 2005 have exceeded this amount.
(g) Indemnities provided upon sale of subsidiaries
On April 13, 2004, the Company sold its 100% shareholding in Neophone Rt. (a
non-operational subsidiary) for approximately $60,000. Under the terms of the
sale the Company has indemnified the buyer for any unaccrued costs, fines,
penalties and lawsuits, which relate to a period prior to the sale. No claims
have been made to date.
Under the terms of the sale agreement for Euroweb Czech, the buyer has a right
to make claims against the Company for up to $200,000 under representation and
warranties provisions of the sale agreement. This provision is applicable for
claims made within 12 months of closing. No claims have been made to date.
13
Euroweb International Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
On April 15, 2005, the Company sold Euroweb Slovakia. According to the
Securities Purchase Contract (the "Contract"), the Company will indemnify the
buyer for all damages incurred by the buyer as the result of seller's breach of
certain representations, warranties or obligations as set in the Contract up to
an aggregate amount of $540,000. The buyer shall not be entitled to make any
claim under this Article 9 of the Contract after the fourth anniversary of the
date of the Contract. No claims have been made to date. The Company has accrued
$35,000 as the estimated fair value of any such representation, warranty or
obligation in favor of the purchaser, issued pursuant to the share purchase
agreement.
9. Geographic information
The following table summarizes financial information from continuing operations
by geographic area for the three and nine months ended September 30, 2005 and
2004 after intercompany eliminations and allocation of certain salaries and
revenues/direct cost to the respective countries to more accurately reflect the
utilization of resources:
Geographic information for nine months ended 2005
Romania Hungary Corporate Total
Third party revenues $ 10,895,290 $ 19,727,196 -- $ 30,622,486
Pantel related revenues (January - February) 1,565,314 203,044 -- 1,768,358
Total revenues 12,460,604 19,930,240 -- 32,390,844
Depreciation 599,927 1,279,570 -- 1,879,497
Intangible amortization
(customer contract) -- 769,833 -- 769,833
Interest income 6,216 17,655 -- 23,871
Interest expense (34,786) (226,795) -- (261,581)
Net interest expense (28,570) (209,140) -- (237,710)
Income tax 137,016 -- -- 137,016
Income (loss) from continuing operations 1,070,351 131,430 (1,146,114) 55,667
Long-lived assets 3,237,148 3,405,277 -- 6,642,425
Intangible - customer contracts -- 1,283,455 -- 1,283,455
Other assets -- 383,074 -- 383,074
Capital expenditures 1,324,596 487,511 -- 1,812,107
Capital expenditures - discontinued operation -- -- -- 47,084
Goodwill 566,000 5,240,181 -- 5,806,181
Pantel related revenue for the nine months ended September 30, 2005 was
$6,269,550 in Romania and $949,620 in Hungary.
14
Euroweb International Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
Geographic information for nine months ended 2004
Romania Hungary Corporate Total
Third party revenues $ 3,679,568 $ 12,313,811 -- $ 15,993,379
Pantel related revenues 5,412,600 121,018 -- 5,533,618
Total revenues 9,092,168 12,434,829 -- 21,526,997
Depreciation 412,075 655,058 2,048 1,069,181
Intangible amortization
(customer contract) -- 245,744 -- 245,744
Interest income 21,063 71,639 48,993 141,695
Interest expense (22,101) (260,942) -- (283,043)
Net interest (expense)
income (1,038) (189,303) 48,993 (141,348)
Income tax 50,455 -- -- 50,455
Income (loss) from continuing operations 197,180 (102,805) (1,104,426) (1,010,051)
Long-lived assets 2,207,133 5,012,068 -- 7,219,201
Intangible - customer contracts -- 2,167,015 -- 2,167,015
Capital expenditures 1,064,986 451,237 -- 1,516,223
Capital expenditures - discontinued operation -- -- -- 54,515
Goodwill 566,000 5,377,821 -- 5,943,821
Geographic information for three months ended September 30, 2005
Romania Hungary Corporate Total
Third party revenues $ 3,833,021 $ 6,531,327 -- $ 10,364,348
Pantel related revenues -- -- -- --
Total revenues 3,833,021 6,531,327 -- 10,364,348
Depreciation 213,039 420,778 -- 633,817
Intangible amortization
(customer contract) -- 256,611 -- 256,611
Interest income 1,246 7,167 -- 8,413
Interest expense (11,192) (56,085) -- (67,277)
Net interest expense (9,946) (48,918) -- (58,864)
Income tax 8,678 -- -- 8,678
Income (loss) from continuing operations 417,975 360,083 (441,308) 336,750
Geographic information for three months ended September 30, 2004
Romania Hungary Corporate Total
Third party revenues $ 1,296,879 $ 6,205,265 -- $ 7,502,144
Pantel related revenues 1,996,600 99,590 -- 2,096,190
Total revenues 3,293,479 6,304,855 -- 9,598,334
Depreciation 197,030 364,401 -- 561,431
Intangible amortization
(customer contract) -- 201,100 -- 201,100
Interest income 2,665 20,632 1,029 24,326
Interest expense (7,116) (105,474) -- (112,590)
Net interest (expense)
income (4,451) (84,842) 1,029 (88,264)
Income tax 4,436 -- -- 4,436
Income (loss) from continuing operations 20,208 (340,791) (403,208) (723,791)
15
Euroweb International Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
10. Subsequent events
On July 21, 2005, Euroweb and its wholly-owned subsidiary Euroweb Hungary
entered into a Sale and Purchase Agreement (the "Agreement") with Marivaux
Investments Limited ("Marivaux") and Graeton Holdings Limited ("Graeton")
(collectively, Marivaux and Graeton are hereinafter referred to as the
"Sellers"), which are both registered under the laws of the Cyprus. Pursuant to
the Agreement, the Company has agreed to acquire and, the Sellers have agreed to
sell, 100% of the Seller's interest in Navigator Informatika Rt. ("Navigator"),
a Hungarian company. The closing of the transaction occurred on October 7, 2005.
In consideration for Marivaux's interest in Navigator, the Company paid Marivaux
$8,500,000 of which $150,000 was paid upon signing of the Agreement and
$8,350,000 was paid upon closing. In addition, at closing, Euroweb issued
Graeton 441,566 shares of common stock of Euroweb. Euroweb Hungary obtained a
$6,000,000 long term bank loan from Commerzbank Hungary ("Commerzbank") to
finance the cash part of purchase price, while $2,500,000 was financed from
existing cash on hand. The interest rate in connection with the loan is BUBOR
plus 2.5%. Euroweb Hungary is required to make quarterly scheduled payments in
connection with the loan commencing March 31, 2006 through June 30, 2010. The
first two payments will be approximately $166,000, while the remaining payments
will be approximately $354,000.
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.
Euroweb has entered into a registration rights agreement, relating to the
Navigator share issue, 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.
16
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Operations
Overview
Euroweb International Corporation owns and operates Internet Service Providers,
or ISPs, in Hungary and Romania through its subsidiaries, Euroweb Hungary Rt.
("Euroweb Hungary") and Euroweb Romania S.A. ("Euroweb Romania"). On December
16, 2004, the Company sold Euroweb Czech Republic and no longer has operations
in the Czech Republic. On April 15, 2005, the Company sold its interest in
Euroweb Slovakia a.s. ("Euroweb Slovakia"). Euroweb Czech Republic and Euroweb
Slovakia is considered a discontinued operation for financial reporting
purposes.
The Company operates in one industry segment, providing Internet access, voice,
international/domestic leased lines and additional value added services
primarily to business customers.
Our revenues come from the following sources:
o ISP (Internet access, content, web, hosting and related services );
o International / domestic leased line and Internet Protocol ("IP")
data services;
o Voice / Voice over IP ("VOIP") services; and
o Facilities (sale, rental and maintenance of optical fiber between
the Hungarian border and the Romanian City of Timisoara).
For international / domestic leased line and IP data services and voice / VOIP
services in Romania, our main customer in 2005 and 2004 was Pantel Rt.
("Pantel"). Pantel was a related party until February 28, 2005, when the
completion of the sale of KPN NV's 75.1% interest in the Pantel business to the
Hungarian Telephone and Cable Corp. was announced. As a result, as of March 1,
2005, Pantel is no longer a related party. Pantel still remains the most
significant customer and supplier of the Company.
We generally have not built out optical fibers for our ISP business, instead
entering into a number of agreements with infrastructure owners and telecom
companies to buy internet and telecom services and resell them to our customers.
Such a structure enables our company to avoid significant capital expenditures
on network development. However, without our own infrastructure, our ability to
compete with other ISPs and telecom companies is limited due to access costs
charged by third party telecommunication companies. In order to mitigate the
impact of newly introduced cheaper internet access technologies (e.g. ADSL) and
competition, we took several steps, including the following:
o Built strategic partnerships with telecom companies;
o Increased value added services and offered more comprehensive
customer solutions;
o Introduced voice and international / domestic leased lines services;
o Building of own optical fiber network in Romania; and o Making
acquisitions to ensure economies of scale and realization of
synergies.
This strategy has resulted in increased revenues, increased profitability and
increased cash generating ability of the Company since 2003.
17
Relationship with Pantel
Our largest customer and supplier since early 2001 has been Pantel, a
Hungary-based alternative telecommunications provider. Pantel operates within
the region and has become a significant trading partner for Euroweb Romania
through the provision of a direct fiber cable connection, which enables
companies to transmit data to a variety of destinations by utilizing the
international connections of Pantel. As a result, Euroweb Romania became the
preferred, but not exclusive, partner of Pantel for services in Romania. In
addition to this, Euroweb Hungary utilizes significant telecom services from
Pantel. Due to the fact that a significant portion of our revenue is generated
by international / domestic leased line and Voice / VOIP services, a number of
our representatives have moved to the premises of Pantel in order to improve
co-operation on international projects.
On February 28, 2005, KPN Telecom (the majority owner of Pantel and our largest
shareholder), completed the sale of its entire interest in Pantel. Therefore,
Euroweb is no longer related party with Pantel from March 1, 2005. Our
statements of operations present amounts relating to Pantel in related party
revenues and cost of revenues for the period January 1 to February 28, 2005 and
from January 1, 2004 to September 30, 2004.
Both Euroweb Hungary and Euroweb Romania engage in the following transactions
with Pantel:
(a) We purchase the following services from Pantel:
- Internet and related services;
- National and international leased and telephone lines;
- VOIP / Voice services; and
- Consulting services
The total amount of these services purchased from Pantel was $6,161,959 during
the nine months ended September 30, 2005 (nine months ended September 30, 2004:
$4,454,898).
In addition, Pantel charged interest of $89,510 in the nine months ended
September 30, 2005 (nine months ended September 30, 2004: $141,980) relating to
the loan provided to Euroweb Hungary by Pantel.
(b) We mainly sell services to Pantel in areas where we have operations and
Pantel does not, as follows:
- International leased lines and local telephone lines;
- International/national data and VOIP services for Pantel;
- Internet and related services; and
- Consulting services
The total value of these services sold was $7,219,170 in the nine months ended
September 30, 2005 (nine months ended September 30, 2004: $5,533,618).
Direct sales to Pantel were 22% of total consolidated revenue in the nine months
ended September 30, 2005 (nine months ended September 30, 2004: 26%). Euroweb
Romania is additionally dependent on Pantel for revenue because some third party
international/domestic line sales involve Pantel as the subcontractor/service
provider and some third party customers were introduced to the Company by Pantel
(i.e. their relationship with Pantel is stronger than their relationship with
Euroweb Romania).
18
Direct sales to Pantel and Pantel-related sales represent approximately 30% of
total consolidated revenues of the Company and approximately 78% of total sales
of Euroweb Romania. There is no such sales dependency in the case of Euroweb
Hungary.
With respect to pricing, agreements are made at market prices or a split of the
margin based on the financial investment into the specific services by the
Company and Pantel. The Company always considers alternative suppliers for each
individual project.
We cannot predict whether the disposal by KPN Telecom of its investment in
Pantel will have an influence on the business relationship between the Company
and Pantel. We have not experienced any deterioration in our relationship with
Pantel in the nine months ended 2005.
Disposals
On April 15, 2005, the Company completed the sale of 100% of the outstanding
stock of its subsidiary in Slovakia for $2,700,000. As a result of this
transaction, the Company recorded a gain of $1,701,200 in the second quarter of
2005.
In addition to the decreasing profitability of the Slovakian subsidiary, the
strategic role of the Slovakian operations in the Company's regional approach
became less significant over the last two years. This was primarily because of
the smaller market share presented by our Slovakian operations compared to the
other countries in which the Company operates. The Company continues the
realization of its strategy to focus its efforts in countries where the
Company's market presence is stronger. The sale of Euroweb Slovakia resulted in
a cash inflow of $2,700,000 in the nine months ended September 30, 2005.
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and
results of operations are based upon its consolidated financial statements that
have been prepared in accordance with generally accepted accounting principles
in the United States of America ("US GAAP"). This preparation requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, and the disclosure of contingent
assets and liabilities. US GAAP provides the framework from which to make these
estimates, assumption and disclosures. The Company chooses accounting policies
within US GAAP that management believes are appropriate to accurately and fairly
report the Company's operating results and financial position in a consistent
manner. Management regularly assesses these policies in light of current and
forecasted economic conditions. Accounting policies that management believes to
be critical to understanding the results of operations and the effect of the
more significant judgments and estimates used in the preparation of the
consolidated financial statements are the same as those described in the Annual
Report on Form 10-KSB of the Company for the year ended December 31, 2004.
Results of Operations
Nine Months Period Ended September 30, 2005 Compared to Nine Months Period
Ended September 30, 2004
Due to the acquisition of Elender Rt. on June 9, 2004, the profit and loss
statements for the nine months ended September 30, 2005 and 2004 are not
comparable from an organic growth point of view.
19
On December 16, 2004, the Company sold all of its shares in its wholly-owned
subsidiary, Euroweb Czech Republic, for cash of $500,000. As a part of the
transaction, the Company effectively forgave $400,000 of loans receivable from
Euroweb Czech Republic. On April 15, 2005, the Company sold Euroweb Slovakia for
$2,700,000. The Company believes that the sale of Euroweb Czech Republic and
Euroweb Slovakia meet the criteria for presentation as a discontinued operation
under the provisions of Statement of Financial Accounting Standard ("SFAS") No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets". The
nine-month period ended September 30, 2004 has been restated to reflect Euroweb
Czech Republic and Euroweb Slovakia as discontinued operations.
Nine months ended September 30, 2005 2004 (restated)
------------ ---------------
Total Revenues $ 32,390,844 $ 21,526,997
We experienced 50% revenue growth, or an increase of $10,863,847 for the nine
months ended September 30, 2005 compared to the nine months ended September 30,
2004. The increase was mainly due to the acquisition of Elender Rt., increases
in voice/VOIP and international leased line services and partly to the
depreciation of the US dollar against the Romanian lei and the Hungarian forint
in the nine months ended September 30, 2005 compared to the nine months ended
September 30, 2004. Depreciation of the US dollar increases our reported
revenues because our sales are non-US dollar denominated.
The following table summarizes the origin of changes in revenue compared to the
previous year:
------------------------------------ --------------------- --------------------- --------------
Revenue / services Q1-Q3 of 2005 Q1-Q3 of 2004 % change
(restated)
------------------------------------ --------------------- --------------------- --------------
ISP activity $19,371,610 $11,670,806 +66%
------------------------------------ --------------------- --------------------- --------------
International / domestic
leased line *(a) $ 5,963,186 $ 4,349,618 +37%
------------------------------------ --------------------- --------------------- --------------
Voice / VOIP $ 7,016,115 $ 5,413,537 +30%
------------------------------------ --------------------- --------------------- --------------
Facilities (a) $ 39,933 $ 93,036 -58%
------------------------------------ --------------------- --------------------- --------------
Total $32,390,844 $21,526,997 +51%
------------------------------------ --------------------- --------------------- --------------
* - primarily Pantel or Pantel-related sales,
(a) substantially all generated by our Romanian subsidiary
ISP revenue analysis
$6.60 million, or 86%, of the increase in ISP revenue relates to Hungary, mainly
due to the acquisition of Elender Rt. The remaining growth of ISP revenue ($1.14
million) can be attributed to organic growth in Romania compared to the previous
year. In Hungary, due to economic conditions and pricing issues, customers -
having access type (internet connection) services - generally transfer from
higher monthly fee subscriptions (such as leased line) to lower monthly fee
subscriptions (e.g. ADSL). Although the number of total customers has increased
compared to previous periods, mainly due to the new ADSL customers, organic
revenue growth possibilities in this segment are limited due to the change in
service types utilized by the customers. In Romania, organic growth is due to
the demand for broadband internet connections by corporate customers. The number
of corporate customers almost doubled (compared to the prior year) and now
exceeds 550.
20
International/national Leased Line revenue analysis
Revenue from international/national leased lines and IP data services generated
by Euroweb Romania has increased compared to last year. This service is
generally provided to a small number of ISPs, telecommunication firms (including
Pantel), and other international companies. Due to developments in the Romanian
market in the last few years, these wholesale prices have dropped. The Company
was able to approximately double the international leased line capacity sold
compared to 2004, in addition to winning a new government-related contract. This
increase in volume largely offset the negative price trends in the international
leased line segment.
Voice / VOIP Service revenue analysis
--------------------------------------------- -------------------- --------------------- ---------------
VOIP services revenue Q1-Q3 of 2005 Q1-Q3 of 2004 % change
(restated)
--------------------------------------------- -------------------- --------------------- ---------------
Retail voice origination (Ro+Hu) $ 372,039 $ 501,290 -26%
--------------------------------------------- -------------------- --------------------- ---------------
Wholesale voice termination (Ro) $4,000,000 $3,463,000 +16%
--------------------------------------------- -------------------- --------------------- ---------------
Neophone prepaid phonecard (Hu) $1,216,856 $1,449,247 -16%
--------------------------------------------- -------------------- --------------------- ---------------
Neophone Deal (Hu) $1,280,227 0 N/A
--------------------------------------------- -------------------- --------------------- ---------------
Neophone-X (Hu) $ 146,993 0 N/A
--------------------------------------------- -------------------- --------------------- ---------------
Total $7,016,115 $5,413,537 +30%
--------------------------------------------- -------------------- --------------------- ---------------
Hu- Hungarian related, Ro- Romanian related
Retail voice origination is provided to corporate customers over leased lines.
Such services enable customers to reduce their costs of international, long
distance and local calls that they initiate. 62% of revenue is generated in
Romania, while the remaining 38% is generated in Hungary. Revenue from retail
voice origination has decreased from $356,217 in the nine months ended 2004 to
$141,013 in the nine months ended September 30, 2005 in Hungary. From 2005, the
Hungarian subsidiary introduced a new voice product, Neophone Deal, which is a
more convenient and cheaper way for companies to reduce their voice costs.
Consequently, the Company anticipates decreases in retail voice origination
revenue in Hungary as customers migrate to this new product. In Romania, voice
revenue increased by $85,953 to $231,026 mainly due to increased volume in the
nine months ended September 30, 2005 compared to the corresponding nine months
in the previous year. Retail voice origination services are primarily
denominated in local currency. In US dollar terms, the overall decrease in
revenue is contributed to by the 14% depreciation of the US dollar against the
Romanian lei and the 5% depreciation of the US dollar against the Hungarian
forint in the nine months ended September 30, 2005 compared to the nine months
ended September 30, 2004.
Wholesale voice termination represents voice minutes received from Pantel and
forwarded to Romanian telecommunication companies. Revenue from such services
has increased by 16% mainly due to increased volume. The service bears a high
risk that the voice traffic may be completely eliminated if a strategic decision
is made by Pantel to use alternative providers or customers can obtain better
termination rates from competitors. Such volume reductions may occur at any
time, although the impact on the results of operations will be limited as
margins are low. Approximately 3% of the increase can be attributed to the
weakening of the US dollar from 2004 to 2005 against the euro, which is the
denominated currency of this service.
Neophone prepaid phonecards enable private individuals to make cheaper domestic
or international calls compared to the rates of the incumbent telecom operators.
The cards were first introduced in Hungary four years ago. During the first
three years, the number of users and voice traffic has continuously increased.
Since late 2003, competitors have introduced aggressively low prices;
consequently, the Company also had to reduce its prices, which has reduced the
revenue generated by this product. For the nine months ended September 30, 2005,
revenues from phone card traffic decreased by 16% compared to the previous
period, while the voice traffic minutes has increased over 6%.
21
Neophone Deal is offered to small- and medium-sized companies and is a carrier
pre-selection product. The subscriber keeps its existing phone number and
remains the client of the previous telecommunication company; however outgoing
calls initiated by the customer will go through the Euroweb voice network,
leaving out the previous telecommunication company. The outgoing traffic is
invoiced by Euroweb Hungary with discount prices compared to the rates of the
incumbent telecom operator.
Neophone-X, which was first introduced in February 2005, provides a voice
service by making use of users' personal computers and the Internet instead of
the traditional phone network. During computer based phone calls, voice is
transmitted in digital data packages and transformed into human voice again at
the receiving party. Revenue generated in the nine months ended September 30,
2005 was $146,993.
Facilities revenue analysis
Revenues from facilities are earned from the lease and sale of fiber optic
cables owned by Euroweb Romania and related maintenance fees. In 2004, a fiber
optic sale transaction resulted in revenues of approximately $34,000. Revenue
from an indefeasible right of use ("IRU") sold by the Company for transmission
capacity on 12 pairs of fiber over a period of 20 years, was approximately
$23,000 in 2004, and the balance of facilities revenue was maintenance revenue.
In 2005, facilities revenue included only revenue from the 20 year IRU contract.
Geographic revenue analysis
The following table summarizes the main changes in revenue compared to the
previous year with respect to the geographical source of revenue:
----------------------- --------------------- --------------------- ------------
Revenue/country Q1-Q3 of 2005 Q1-Q3 of 2004 Change in
(restated) %
----------------------- --------------------- --------------------- ------------
Hungary $19,930,240 $12,434,829 +60%
----------------------- --------------------- --------------------- ------------
Romania $12,460,604 $ 9,092,168 +37%
----------------------- --------------------- --------------------- ------------
Total $32,390,844 $21,526,997 +51%
----------------------- --------------------- --------------------- ------------
Elender Rt. was consolidated from June 9, 2004. Revenues for the Company's
Hungarian operations have increased by 60% or $7,495,411 mainly due to this
acquisition. Approximately 4% of the increase in Hungary is the result of the
strengthening of the Hungarian forint against the US dollar when comparing the
nine months ended September 30, 2005 and 2004.
The Romanian operations have experienced a 37%, or $3,368,436, revenue increase
compared to the prior period. Approximately 28% or $0.50 million of this
increase can be attributed to the increased wholesale voice termination,
approximately $1.60 million can be attributed to the increase of
domestic/international leased lines revenue, while the remaining increase is
mainly in connection with the organic growth from ISP activity and currency
appreciation of the Romanian lei against the US dollar.
22
Cost of revenues (excluding depreciation and amortization)
The following table summarizes the cost of revenues (excluding depreciation and
amortization) for the nine months ended September 30, 2005 and 2004:
Nine months ended September 30, 2005 2004 (restated)
------------ ---------------
Total cost of revenues $ 21,842,070 $ 14,558,505
Cost of revenues (excluding depreciation and amortization) comprise mostly
telecommunication expenses, which generally increase in line with the volume of
services sold to customers. The increase of 50% is fairly consistent with the
overall increase of revenues of 50%.
Compensation and related costs
The following table summarizes the compensation and related costs for the nine
months ended September 30, 2005 and 2004:
Nine months ended September 30, 2005 2004 (restated)
------------ ---------------
Compensation and related costs $ 2,514,864 $ 2,137,468
Overall compensation and related costs increased by 18%, or $377,396, mainly due
to the acquisition of Elender Rt. in June 2004 and the effect of the
appreciation of Hungarian and Romanian currencies against the US dollar during
the periods being compared.
Consulting, directors and professional fees
The following table summarizes the consulting, directors and professional fees
for the nine months ended September 30, 2005 and 2004:
Nine months ended September 30, 2005 2004 (restated)
------------ ---------------
Consulting, directors and
professional fees $ 2,670,795 $ 2,012,980
The consulting, directors and professional fees increased by 32% or $657,815,
which can mainly be attributed to the acquisition of Elender Rt. in June 2004
and to increased legal and consultancy costs associated with growth of the
business.
Collection of written-off receivable
The following table summarizes the collection of written-off receivables for the
nine months ended September 30, 2005 and 2004:
Nine months ended September 30, 2005 2004 (restated)
------------ ---------------
Collection of written-off receivable $ 265,630 $ 0
In March 2005, the Company received a check of $265,630 from Teleglobe Inc.
which went bankrupt in 2003. The Company had previously written off this
uncollected receivable.
Other selling, general and administrative expenses
23
The following table summarizes our other selling, general and administrative
expenses for the nine months ended September 30, 2005 and 2004:
Nine months ended September 30, 2005 2004 (restated)
------------ ---------------
Other selling, general and
administrative expenses $ 2,719,022 $ 2,350,118
Overall other selling, general and administrative expenses increased by 15%
($368,904), as a result of higher levels of business in general, mainly due to
the acquisition of Elender Rt. in June 2004. Increases were primarily in
telecommunication and local taxes in Hungary and Romania ($189,253) and bad debt
provisions ($107,307). The appreciation of the Hungarian and Romanian currencies
against the US dollar in the nine months ended September 30, 2005 compared to
the nine months ended September 30, 2004 also had an effect.
Depreciation and amortization
The following table summarizes our depreciation and amortization for the nine
months ended September 30, 2005 and 2004:
Nine months ended September 30, 2005 2004 (restated)
------------ ---------------
Depreciation $ 1,879,497 $ 1,069,181
Amortization of intangibles $ 769,833 $ 245,744
------------ ---------------
Total depreciation and
amortization $ 2,649,330 $ 1,314,925
============ ===============
Depreciation increased by $810,316 in the nine months ended September 30, 2005
compared to the same period in 2004, due to the Company's increased tangible
assets following the acquisition and consolidation of Elender Rt.
Amortization of intangibles of $769,833 in the nine months ended September 30,
2005 (2004: $245,744) relates to certain customer contracts of Elender Rt, which
were recognized as intangible assets upon acquisition.
Net interest expense
The following table summarizes our net interest expense for the nine months
ended September 30, 2005 and 2004:
Nine months ended September 30, 2005 2004 (restated)
------------ ---------------
Interest income $ 23,871 $ 141,695
Interest expense $ (261,581) $ (283,043)
------------ ---------------
Net interest expense $ (237,710) $ (141,348)
============ ===============
The increase in net interest expense is due to the fact that (i) fewer
interest-generating funds were available in this period than in the same period
of the previous year because funds were disbursed in connection with
acquisitions, (ii) interest rates on these investments have decreased over the
periods in question, (iii) securities matured on February 15, 2004, without new
investments being made due to cash being needed to fund acquisitions in 2004,
and (iv) consolidation of Elender Rt. has increased interest expense due to bank
loans and notes payable outstanding.
24
Other income
The following table summarizes our other income for the nine months ended
September 30, 2005 and 2004:
Nine months ended September 30, 2005 2004 (restated)
------------ ---------------
Other income $ 170,000 --
In June 2005, the sellers of Elender Rt. renounced their claims in connection
with the late registration of shares, and therefore, the $170,000 penalty
accrued during the year ended December 31, 2004 was reversed and accounted for
as other income in the second quarter of 2005.
Income tax expense
The following table summarizes our provision for income taxes for the nine
months ended September 30, 2005 and 2004:
Nine months ended September 30, 2005 2004 (restated)
------------ ---------------
Income tax expense $ (137,016) $ (50,455)
Income tax expense increased due to the profits generated in Romania, which are
not offset by losses carried forward from previous years.
Liquidity and Capital Resources
In recent years, we maintained approximately $11 million invested in US
government securities, which matured in February 2004. The main source of these
funds was capital injections by KPN in previous years.
As of September 30, 2005, our cash and cash equivalents were $4.9 million, an
increase of approximately $1.9 million from the end of fiscal year 2004. The
change is mainly due to the sale of Euroweb Slovakia.
Cash flow from operations in the nine months ended September 30, 2005 was
$2,624,140, an increase of $1,979,704 from the nine months ended September 30,
2004 (restated). The change is due to the increased cash generation of the
Romanian subsidiary and the acquisition of Elender Rt.
Investing activities increased the cash at hand of the Company by $569,001 in
the nine months ended September 30, 2005 due to sale of Euroweb Slovakia for
$2,700,000, which was partly offset by capital expenditures in Romania in
connection with certain fiber network expansion and backbone equipment.
Cash used for financing activities was $1,237,491 in the nine months ended
September 30, 2005. $1,009,080 was used to make payments on bank loans, a loan
due to Pantel and notes payable, while $228,411 was used to repay capital lease
obligations. At September 30, 2005, the Company had an unutilized overdraft
facility for $730,000.
Although we cannot provide guarantees, management believes that the synergy
effects and potential business opportunities of the merged Hungarian entities
can contribute to improving our cash generating ability during 2005 compared
with 2004, which can already be seen by the increase in cash flow from
operations. We intend to repay loans of our Company with cash from operations.
25
The Company may use its excess cash at hand, additional bank loans or capital
raisings to finance any future acquisitions its makes in Central and Eastern
Europe. The Company may also consider the sale of strategic assets or
subsidiaries. Due to our strategy of aggressive acquisition, we may seek to
incur additional material debts.
We signed a share purchase agreement on July 21, 2005 to acquire Navigator Rt.
Closing occurred on October 7, 2005. Based on the terms of that agreement, the
financial position of the Company will change significantly. The short and long
term liquidity position of the Company will be affected as follows: (1) cash at
hand will be reduced by $2,500,000 (2) long term bank loans will increase by
$6,000,000 (3) the estimated net working capital of Navigator group will
increase the liabilities of the Company by more than $1,500,000. In addition,
the Company expects transaction costs in excess of $250,000 in connection with
the acquisition related to advisory and consulting fees, financial reporting
requirements and registration costs.
Inflation and Foreign Currency
We maintain our books in local currencies: Hungarian forint for Euroweb Hungary
and the Romanian lei for Euroweb Romania.
Our operations are primarily outside of the United States through our wholly
owned subsidiaries. As a result, fluctuations in currency exchange rates may
significantly affect our revenues, net income and financial position when the
foreign currencies of our international operations are translated into US
dollars for financial reporting. In addition, we are also subject to currency
fluctuation risk with respect to certain foreign currency denominated
receivables and payables. Although we cannot predict the extent to which
currency fluctuations may affect our business and financial position, there is a
risk that such fluctuations will have an adverse impact on the Company's
revenues, net income and financial position. Because differing portions of our
revenues and costs are denominated in foreign currencies, movements could impact
our margins by, for example, decreasing our foreign revenues when the dollar
strengthens and not correspondingly decreasing our expenses. The Company does
not currently hedge its foreign currency exposure. In the future, we may engage
in hedging transactions to mitigate foreign exchange risk.
During the nine months ended 2005, the Romanian lei appreciated 14% against the
US dollar and the Hungarian forint appreciated 5% against the US dollar,
compared to the nine months ended 2004.
Effect of Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)"). SFAS 123(R)
requires an entity to recognize the grant-date fair value of stock options and
other equity-based compensation issued to employees in the income statement, but
expresses no preference for a type of valuation model. For small business
issuers, the SFAS 123(R) is effective as of the beginning of the first interim
or annual reporting period that begins after December 15, 2005. Early adoption
is encouraged for interim or annual periods for which financial statements or
interim reports have not been issued. The Company is currently assessing the
impact SFAS 123(R) will have on its financial statements.
26
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets: an amendment of APB Opinion No. 29" ("SFAS 153"). SFAS 153 eliminates a
company's ability to use the similar productive assets concept to account for
nonmonetary exchanges at book value without recognizing a gain. Nonmonetary
exchanges will have to be accounted for at fair value, with gain or loss
recognized, if the transactions meet a commercial-substance criterion and fair
value is determinable. SFAS 153 is effective for nonmonetary asset exchanges in
fiscal periods beginning after June 15, 2005, and early application is permitted
for nonmonetary asset exchanges occurring in fiscal periods beginning after
December 16, 2004. The Company is currently assessing the impact SFAS 153 may
have on its financial statements.
In December 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment
of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends Accounting Research
Bulletin No. 43, Chapter 4, "Inventory Pricing" ("ARB 43") to eliminate the "so
abnormal" criterion in ARB 43 and requires companies to recognize abnormal
freight, handling costs, and amounts of wasted material (spoilage) as
current-period charges. Additionally, SFAS 151 clarifies that fixed production
overhead cost should be allocated to inventory based on the normal capacity of
the production facility. SFAS 151 is effective for inventory costs incurred
during annual periods beginning after June 15, 2005. The Company is currently
assessing the impact SFAS 151 may have on its financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections" which replaces Accounting Principles Board Opinions No. 20
"Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim
Financial Statements." This statement applies to all voluntary changes in
accounting principle and changes resulting from adoption of a new accounting
pronouncement that does not specify transition requirements. SFAS 154 requires
retrospective application to prior periods' financial statements for changes in
accounting principle unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. SFAS 154 also
requires that retrospective application of a change in accounting principle be
limited to the direct effects of the change. Indirect effects of a change in
accounting principle should be recognized in the period of the accounting
change. SFAS 154 is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005 with early implementation
permitted for accounting changes and corrections of errors made in fiscal years
beginning after the date this statement was issued. SFAS 154 is effective for us
as of January 1, 2006 and is not expected to have a material impact on our
financial statements.
27
Forward-Looking Statements
When used in this Form 10-QSB, in other filings by the Company with the
Securities and Exchange Commission ("SEC"), in the Company's press releases or
other public or stockholder communications, or in oral statements made with the
approval of an authorized executive officer of the Company, the words or phrases
"would be," "will allow," "intends to," "will likely result," "are expected to,"
"will continue," "is anticipated," "estimate," "project," or similar expressions
are intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.
The Company cautions readers not to place undue reliance on any forward-looking
statements, which speak only as of the date made, are based on certain
assumptions and expectations which may or may not be valid or actually occur,
and which involve various risks and uncertainties. In addition, sales and other
revenues may not commence and/or continue as anticipated due to delays or
otherwise. As a result, the Company's actual results for future periods could
differ materially from those anticipated or projected.
Unless otherwise required by applicable law, the Company does not undertake, and
specifically disclaims any obligation, to update any forward-looking statements
to reflect occurrences, developments, unanticipated events or circumstances
after the date of such statement. The Company advises you to review any
additional disclosures made in its 10-QSB, 8-K, and 10-KSB reports filed with
the SEC.
Item 3. Controls and Procedures
As of the end of the period covered by this report, we conducted an evaluation,
under the supervision and with the participation of our chief executive officer
and chief accounting officer (principal financial officer) of our disclosure
controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the
Exchange Act). Based upon this evaluation, our chief executive officer and chief
accounting officer (principal financial officer) concluded that our disclosure
controls and procedures are effective to ensure that information required to be
disclosed by us in the reports that we file or submit under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. There was no change in our internal controls or in
other factors that could affect these controls during our last fiscal quarter
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
28
PART II
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company may become a party to litigation or
other legal proceedings that it considers to be a part of the
ordinary course of its business. The Company is not involved
currently in legal proceedings that could reasonably be expected to
have a material adverse effect on its business, prospects, financial
condition or results of operations. The Company may become involved
in material legal proceedings in the future.
ITEM 2. CHANGES IN SECURITIES
On October 7, 2005, the Company issued 441,566 shares of common
stock to Graeton Holdings Limited in exchange for the 15% ownership
in Navigator Rt, based on the share purchase agreement signed on
July 21, 2005.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibits (numbers below reference Regulation S-B, Item 601)
(3) (a) Certificate of Incorporation filed November 9, 1992(1)
(b) Amendment to Certificate of Incorporation filed July 9,
1997(2)
(c) Restated Certificate of Incorporation filed May 29, 2003
(d) Restated By-laws (filed as an exhibit to the Form 10-QSB for
the quarter ended September 30, 2004)
(31) (a) Certification of the Chief Executive Officer of Euroweb
International Corp. pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
(31) (b) Certification of the Chief Accounting Officer (principal
financial officer) of Euroweb International Corp. pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(32) (a) Certification of the Chief Executive Officer of Euroweb
International Corp. pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(32) (b) Certification of the Chief Accounting Officer (principal
financial officer) of Euroweb International Corp. pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
----------
(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)
29
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
Budapest, Hungary, on the 14th day of November 2005.
EUROWEB INTERNATIONAL CORP.
By /s/ Csaba Toro
------------------------
Csaba Toro
Chief Executive Officer
30