U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended June 30, 2003
[ ] 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.)
1122 Budapest, Varosmajor utca 13. Hungary
(Address of principal executive offices)
+36-1-2244000 +36-1-8883783
Issuer's telephone number Issuer's facsimile number
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirement for the past 90 days. Yes X No
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock, $.001 par value 4,665,332
-----------------------------
(Class) (Outstanding at June 30, 2003)
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 June 30, 2003 (unaudited)
and December 31, 2002 (audited) 2
Consolidated statements of operations and comprehensive loss (unaudited) for
the three months ended June 30, 2003 and 2002 and six months
ended June 30, 2003 and 2002 3
Consolidated statements of stockholders' equity for the six months ended
June 30, 2003 (unaudited) and twelve months ended December 31, 2002 4
Consolidated statements of cash flows (unaudited) for the six months
ended June 30, 2003 and 2002 5
Notes to interim (unaudited) Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Item 3. Controls and Procedures
PART II. Other Information 23
Signature 24
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, 2003 December 31, 2002
----------------- -----------------
(Unaudited) (audited)
ASSETS
Current Assets
Cash and cash equivalents $ 1,773,397 $ 2,098,983
Investment in securities 11,690,474 12,104,104
Trade accounts receivable, net 427,958 348,488
Related party receivables 1,121,352 855,194
Current portion of note receivable 197,151 190,105
Prepaid and other current assets 1,247,550 851,100
----------------- -----------------
Total current assets 16,457,882 16,447,974
Note receivable, less current portion 73,502 173,871
Investment in affiliate - -
Property and equipment, net 2,171,760 1,269,923
Assets under construction - 430,000
Goodwill 1,546,538 1,546,538
Intangibles - customer lists 133,819 167,273
----------------- -----------------
Total assets $20,383,501 $20,035,579
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $ 1,213,702 $659,244
Related party payables 778,004 345,110
Acquisition indebtedness 180,000 180,000
Other current liabilities 550,576 469,547
Loan payable - 129,945
Accrued expenses 419,023 965,885
Deferred IRU revenue 46,000 30,667
Deferred other revenue 390,971 145,392
----------------- -----------------
Total current liabilities 3,578,276 2,925,790
Non-current portion of deferred IRU revenue 866,334 889,333
Non-current portion of lease obligations 53,604 67,100
----------------- -----------------
Total liabilities 4,498,214 3,882,223
Stockholders' Equity
Preferred stock, $.001 par value - Authorized 5,000,000 shares;
no shares issued or outstanding - -
Common stock, $.001 par value - Authorized 12,500,000 shares;
Issued and outstanding 4,665,332 shares 24,129 24,129
Additional paid-in capital 48,227,764 48,227,764
Accumulated deficit (31,371,245) (31,219,267)
Accumulated other comprehensive income: 120,051 236,142
Treasury stock - 175,490 common shares, at cost (1,115,412) (1,115,412)
----------------- ---------------
Total stockholders' equity 15,885,287 16,153,356
----------------- ---------------
Commitments and contingencies
Total liabilities and stockholders' equity $20,383,501 $20,035,579
================= ==============
See accompanying notes to consolidated financial statements.
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
Three months ended Six months ended
June 30 June 30,
------- --------
2003 2002 2003 2002
---- ---- ---- ----
Revenues
Third party revenues 2,406,065 1,910,141 4,548,927 $ 3,704,630
Related party revenues 1,506,656 1,059,041 2,705,690 2,415,132
------------ ------------ ------------ ------------
Total Revenues 3,912,721 2,969,182 7,254,617 6,119,762
Cost of revenues
Third party cost of revenues 2,043,605 1,355,397 3,847,517 2,793,263
Related party cost of revenues 613,701 541,199 1,128,597 1,060,171
------------ ------------ ------------ ------------
Total Cost of revenues 2,657,306 1,896,596 4,976,114 3,853,434
------------ ------------ ------------ ------------
Gross profit 1,255,415 1,072,586 2,278,503 2,266,328
Operating expenses
Compensation and related costs 507,019 453,966 989,569 976,366
Severance to officers - 2,020,832 - 2,020,832
Consulting and professional fees 329,629 293,102 519,292 539,498
Other selling, general and administrative expenses 313,854 569,766 602,396 902,642
Depreciation and amortization 230,605 237,093 439,645 451,547
------------ ------------ ------------ ------------
Total operating expenses 1,381,107 3,574,759 2,550,902 4,890,885
------------ ------------ ------------ ------------
Loss from operations (125,692) (2,502,173) (272,399) (2,624,557)
Net interest income 91,602 100,441 175,999 226,245
Equity in loss of affiliate - 307,137 - 495,187
Loss from operations before income taxes (34,090) (2,708,869) (96,400) (2,893,499)
------------ ------------ ------------ ------------
Provision for income taxes 55,578 - 55,578 -
------------ ------------ ------------ ------------
Net Loss (89,668) (2,708,869) (151,978) (2,893,499)
------------ ------------ ------------ ------------
Other comprehensive (loss) gain (64,490) 239,973 (116,091) 78,776
------------ ------------ ------------ ------------
Comprehensive loss (154,158) (2,468,896) $(268,069) $(2,814,723)
============ ============ ============ ============
Net Loss per share, basic and diluted (.02) (.57) (.03) (.61)
Weighted average number of shares outstanding, basic and diluted 4,665,332 4,771,804 4,665,332 4,771,804
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, 2001 4,665,332 $24,129 $48,227,764 $(25,325,033) (143,323) $(1,115,412) $21,668,125
============ ============= =========== ============= ============= ============= =============
Foreign currency translation gain - - - - 160,687 - 160,687
Unrealized gain on securities - - - - 245,212 - 245,212
available for sale
Reclassification of realized gain - - - - (26,434) - (26,434)
included in net income
Net loss for the period - - - (5,894,234) - - (5,894,234)
------------ ------------- ----------- ------------- ------------- ------------- -------------
Balances, December 31, 2002 4,665,332 $24,129 $48,227,764 $(31,219,267) $236,142 $(1,115,412) $16,153,356
============ ============= =========== ============= ============= ============= =============
Foreign currency translation loss - - - - (11,176) - (11,176)
Unrealized loss on securities - - - - (97,802) - (97,802)
available for sale
Reclassification of realized gain - - - - (7,113) - (7,113)
included in net income
Net loss for the period - - - (151,978) - - (151,978)
============ ============= =========== ============= ============= ============= =============
Balances, June 30, 2003 4,665,332 $24,129 $48,227,764 $(31,371,245) $120,051 $(1,115,412) $15,885,287
============ ============= =========== ============= ============= ============= =============
See accompanying notes to consolidated financial statements
4
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
-------------------------------------------------------------------------------------- -------------------------------------------
Six Months Ended
June 30,
2003 2002
---- ----
Cash flows from operating activities:
Net loss $ (151,978) $(2,893,499)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 439,645 451,547
Amortization of discount on acquisition indebtedness 5,232 10,155
Equity in loss of affiliate - 495,187
Foreign currency (gain) loss (37,946) 5,819
Realized gain on sale of securities (7,113) (62,786)
Unrealized interest income on securities (183,804) (157,903)
Changes in operating assets and liabilities net of effects of acquisitions:
Accounts receivable (345,628) 141,747
Prepaid and other assets (401,682) (132,195)
Accounts payable, other current liabilities and accrued expenses 674,795 (477,212)
Deferred revenue 237,913 (113,461)
Net cash provided by (used in) operating activities --------------- ---------------
229,434 (2,732,601)
--------------- ---------------
Cash flows from investing activities:
Investment in securities - (13,506,666)
Maturity of securities 499,632 16,654,820
Collection on notes receivable 93,323 104,307
Payment of acquisition indebtedness - (180,000)
Purchase of property and equipment (878,028) (315,307)
--------------- ---------------
Net cash (used in) provided by investing activities (285,073) 2,757,154
--------------- ---------------
Cash flows from financing activities:
Repayment of loan payable (129,945) -
Principal payments under capital lease obligations (166,772) (20,338)
--------------- ---------------
Net cash used in financing activities (296,717) (20,338)
--------------- ---------------
Effect of foreign exchange rate changes on cash 26,770 16,873
--------------- ---------------
Net (decrease) increase in cash and cash equivalents (325,586) 21,088
Cash and cash equivalents, beginning of period 2.098,983 1,512,303
--------------- ---------------
Cash and cash equivalents, end of period $1,773,397 $ 1,533,391
=============== ===============
See accompanying notes to consolidated financial statements.
5
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
1. Organization and Business
EuroWeb International Corp. (the "Company") is a Delaware corporation which was
organized on November 9, 1992, and was a development stage enterprise through
December 31, 1993. The controlling owner of Euroweb International Corp. is KPN
Telecom BV, a Netherlands corporation.
The Company operates in the Czech Republic, Romania and Slovakia, through its
subsidiaries Euroweb Czech Republic spol. s.r.o. ("Euroweb Czech"), Euroweb
Slovakia a.s. ("Euroweb Slovakia") and Euroweb Romania S.A. ("Euroweb Romania").
The Company operates in one industry segment, providing Internet access and
additional value added services to business customers. The Company's
consolidated statements of operations also include the equity in the net income
or loss of Euroweb Hungary Rt., in which the Company has a 49% ownership
interest. The other 51% of Euroweb Hungary Rt. is held by Pantel
Telecommunication Rt., Hungary ("Pantel Rt."), of which KPN Telecom BV is also
the controlling owner.
The revenues are derived from the following four activities:
(1) Internet Service Provider (Internet access, Content and Web services,
Other services)
(2) International/domestic leased line, Internet Protocol data services
(3) Voice over Internet Protocol services
(4) Facilities (sale, rent and maintenance of dark fiber between the
Hungarian border and the Romanian City of Timisoara)
For the services in points (2) and (3), the Company's main customer in 2003 and
2002 was Pantel Rt.
2. Summary of Significant Accounting Policies
(a) Principles of consolidation and basis of presentation
The consolidated financial statements comprise the accounts of the
Company and its controlled subsidiaries. All material intercompany
balances and transactions have been eliminated upon consolidation.
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of
America.
(b) Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America,
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates. Significant estimates made by the Company include the
period of benefit and recoverability of goodwill and other intangible
assets.
6
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
(c) Fair value of financial instruments
The carrying values of cash equivalents, investment in debt
securities, notes and loans receivable, accounts payable, loans
payable and accrued expenses approximate fair values.
(d) Revenue recognition
Revenues from Internet services are recognized in the month in which
the services are provided, either based on monthly traffic or on fixed
monthly fees (leased lines). Revenue for other services, are
recognized as the service is performed.
In 2002, the Company entered into an agreement to provide transmission
capacity to a customer pursuant to an indefeasible rights-of-use
("IRU") agreement that management believe qualifies as an operating
lease under Financial Accounting Standards Board Interpretation No.
13, "Accounting for Leases" ("FAS 13"), since the IRU agreement
provides rights to use a specific subject asset for a defined period.
Revenue attributable to the lease is recognized on a straight-line
basis over the term of the 20-year lease agreement, and commenced upon
installation in May 2003.
Under Financial Accounting Standards Board Interpretation No. 43,
"Real Estate Sales, an interpretation of FASB Statement No. 66" ("FIN
43"), leases of fiber and capacity that are deemed integral equipment
are required to be accounted for in the same manner as leases of real
estate. If fiber and equipment are considered integral to the related
real estate, a lease must include a provision transferring title of
such integral equipment to the lessee in order for that lease to be
accounted for as a sales-type lease. Failure to satisfy the title
transfer requirements results in operating lease treatment, and
recognition of the related lease income over the lease term. The
Company's IRU does not involve a transfer of title.
IRUs generally require the customer to make a down payment upon
execution of the agreement, with the balance due upon delivery and
acceptance of the fiber. This has resulted in a substantial amount of
deferred revenue being recorded on the balance sheet. The Company is
obligated under the fiber IRU to maintain its network in efficient
working order and in accordance with industry standards. Customers are
obligated for the term of the agreement to pay for their allocable
share of the costs for operating and maintaining the network. The
Company recognizes this revenue monthly as services are provided.
Accounting practice and guidance with respect to the treatment of
fiber sales and IRU agreements continues to evolve. Any changes in the
accounting treatment could affect the way the Company accounts for
revenue and expenses associated with these transactions in the future.
(e) Cost of revenues
Cost of revenues comprise principally of telecommunication network
expenses, costs of content services and cost of leased lines.
7
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
(f) Foreign currency translation
The Company considers the United States Dollar ("US$") to be the
functional currency of the Company and unless otherwise stated, the
respective local currency to be the functional currency of its
subsidiaries. The reporting currency of the Company is the US$ and
accordingly, all amounts included in the consolidated financial
statements have been translated into US$.
The balance sheets of subsidiaries are translated into US$ using the
year end exchange rates. Revenues and expenses are translated at
average rates in effect for the periods presented. The cumulative
translation adjustment is reflected as a separate component of
shareholders' equity on the consolidated balance sheet.
The Company conducts business and maintains its accounts for Euroweb
Romania in the Romanian Lei ("ROL"). Romania is considered a highly
inflationary economy and, therefore the U.S. dollar is used as the
functional currency. The Company's financial statements presented in
ROL are remeasured into U.S. dollars using the following policies:
o Monetary assets and liabilities are remeasured into the
functional currency using the exchange rate at the balance sheet
date.
o Non-monetary assets and liabilities are remeasured into the
functional currency using historical exchange rates.
o Revenues, expenses, gains and losses are remeasured into the
functional currency using the average exchange rate for the
period except for revenues and expenses related to non-monetary
items that are remeasured using historical exchange rates.
The net effect of re-measurement from the local currency into the
functional currency (US$) is included in the determination of net
profit and loss, under `Other selling, general and administration
expenses'. Foreign currency transaction gains and losses are included
in the consolidated results of operations for the periods presented.
(g) Cash and cash equivalents
Cash and cash equivalents include cash at bank and short-term deposits
of less than three months duration.
(h) 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. Investments with remaining maturities of
greater than one year are classified as long-term, while those with
remaining maturities of less than one year are classified as
short-term.
8
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
(i) Investment in affiliate
The Company holds a minority interest of 49% in Euroweb Hungary Rt.
which is controlled by its 51% shareholder, Pantel Rt. As the Company
exerts significant influence over Euroweb Hungary Rt., the investment
is carried under the equity method of accounting, with the Company
recording its share of the earnings or loss of Euroweb Hungary Rt.
Dividends are credited against the investment account when received.
As a result of continuing losses, the carrying value of the net
investment in affiliate was written down to zero during 2002. Since
the Company has no legal or commercial commitments to provide
continuing financial support, no further losses will be recognized
unless the Company makes additional qualifying investments in Euroweb
Hungary Rt., and future profits will be recognized only once such
profits exceed the amount of unrecorded losses. If the Company makes
additional qualifying investments in Euroweb Hungary Rt., the Company
would be required to recognize additional losses to the extent these
additional investments are considered funding of unrecognized prior
losses of Euroweb Hungary Rt.
(j) Property and equipment
Property and equipment are stated at cost, less accumulated
depreciation. Equipment purchased under capital lease is stated at the
present value of minimum lease payments at the inception of the lease,
less accumulated depreciation. The Company provides for depreciation
of equipment using the straight-line method over the shorter of
estimated useful lives of up to four years or the lease term.
Recurring maintenance on property and equipment is expensed as
incurred.
Any gain or loss on retirements and disposals are included in the
results of operations.
(k) Goodwill and Intangibles
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. On January 1, 2002 the Company adopted Statement of Financial
Accounting Standard No. 142 ("SFAS 142"), "Goodwill and Other
Intangible Assets," which establishes new accounting and reporting
standards for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17. Goodwill and intangible assets that
have indefinite useful lives are no longer amortized but rather are
tested at least annually for impairment. Intangible assets that have
finite useful lives (whether or not acquired in a business
combination) will continue to be amortized over their estimated useful
lives, which are no longer limited to a maximum of 40 years. The
adoption of SFAS 142 has eliminated the goodwill charge in 2002.
During 2002, the Company performed the required SFAS No. 142
impairment test, with respect to goodwill. The first step of this test
requires the Company to compare the carrying value of any reporting
unit that has goodwill to the estimated fair value of the reporting
unit. As the current fair value was less than the carrying value, the
Company performed the second step of the impairment test. This second
step requires the Company to measure the excess of the recorded
goodwill over the current value of the goodwill, and to record any
excess as an impairment.
10
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
Based upon the results, the Company recorded an impairment of
$2,016,000 to the carrying value of its goodwill in its financial
statements for the year ended December 31, 2002.
Intangibles consist of customer lists which 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 using estimates
of undiscounted future cash flows in a manner in accordance with the
provisions of Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets,"
("SFAS No. 144"), with a write-down recorded in the third quarter of
2002. The carrying value of customer lists is considered impaired when
the projected undiscounted future cash flows related to the asset are
less than its carrying value. The Company measures impairment based on
the amount by which the carrying value of the customer lists exceeds
its fair market value. Fair market value is determined primarily using
the projected future cash flows discounted at a rate commensurate with
the risk involved. The assessment of the recoverability of the
remaining balance will be impacted if estimated future operating cash
flows are not achieved.
(l) Net loss per share
The Company has adopted Statement of Financial Accounting Standards
No. 128, "Earnings per Share," ("SFAS No. 128"), which provides for
the calculation of "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 periods ended
June 30, 2003 and 2002, which were not included in the computation of
diluted net loss per share because they were antidilutive.
(m) Comprehensive loss
The Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," ("SFAS No. 130") which
established standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income
is defined to include all changes in equity except those resulting
from investments by, and distributions to, owners. Among other
disclosures, SFAS No.130 requires that all items that are required to
be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The
Company has chosen to present a Combined Statement of Operations and
Comprehensive Loss.
(n) Business segment reporting
The Company adopted Statement of Financial Accounting Standards No.
131, "Disclosures About Segments of an Enterprise and Related
Information," ("SFAS No. 131"). SFAS No. 131 superseded FASB Statement
No. 14, "Financial Reporting for Segments of a Business Enterprise."
SFAS No. 131 establishes standards for disclosures about operating
segments, products and services, geographic areas and major customers.
10
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
Management has determined that the Company operates in one industry
segment, providing Internet access and additional value added services
to business customers. Substantially all of the Company's revenues are
derived from the provision of such services.
(o) Income taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities, net of appropriate valuation
allowances, are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards. Deferred tax
assets and liabilities, if any, are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment
date.
(p) Stock-Based compensation
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related
interpretations including FASB Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation an interpretation of
APB Opinion No. 25" issued in March 2000, to account for its fixed
plan stock options. Under this method, compensation expense is
recorded at measurement date only if the current market price of the
underlying stock exceeds the exercise price. SFAS No. 123, "Accounting
for Stock-Based Compensation," ("SFAS No. 123") established accounting
and disclosure requirements using a fair value-based method of
accounting for stock-based employee compensation plans. As allowed by
SFAS No. 123, the Company has elected to continue to apply the
intrinsic value-based method of accounting described above, and has
adopted the disclosure requirements of SFAS No. 123. As no grants were
made since 2000, the reported loss is the same as the pro-forma loss
as all previous grants vested in the year of the grant and thus the
full amount of the fair values were reflected in the pro forma loss in
the year of the grants.
(q) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
of
On January 1, 2002, the Company adopted SFAS No. 144 ("SFAS 144"),
"Accounting for Impairment or Disposal of Long-Lived Assets," which
establishes a single accounting method for long-lived assets to be
disposed of by sale and broadens the presentation of discontinued
operations. The adoption of this statement had no significant impact
on the Company's results of operations or financial position. The
Company evaluates the carrying value of long-lived assets to be held
and used, including goodwill, whenever events or changes in
circumstances indicate that the carrying amount may not be
recoverable. The carrying value of a long-lived asset is considered
impaired when the projected undiscounted future cash flows related to
the asset are less than its carrying value. The Company measures
impairment based on the amount by which the carrying value of the
respective asset exceeds its fair market value. Fair market value is
determined primarily using the projected future cash flows discounted
at a rate commensurate with the risk involved.
11
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
(r) Asset Retirement Obligations
On January 1, 2003, the Company adopted Financial Accounting Standards
Board No. 143 "Accounting for Asset Retirement Obligations" ("Statement 143")
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. Significant asset retirement obligations do not exist and
therefore none have been recognized in the Company's books.
(s) Recent accounting pronouncements
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.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The disclosure requirements are effective for financial
statements of interim and annual periods ending after December 31, 2002. The
Group has adopted the disclosure requirements and will apply the recognition and
measurement provisions for all guarantees entered into or modified after
December 31, 2002. To date the company has not entered into or modified
guarantees.
12
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
In December 2002, the FASB issued SFAS No.148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.123.
This Statement amends FASB Statement No.123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No.123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to
these consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51. This Interpretation
addresses the consolidation by business enterprises of variable interest
entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31,2003. For nonpublic enterprises, such as the Company,
with a variable interest in a variable interest entity created before February
1, 2003, the Interpretation is applied to the enterprise no later than the end
of the first annual reporting period beginning after June 15, 2003. The
application of this Interpretation is not expected to have a material effect on
the Company's financial statements.
In November 2002, the Emerging Task-Force issued its consensus on EITF
00-21, Revenue Arrangements with Multiple Deliverables ("EITF 00-21") on an
approach to determine whether an entity should divide an arrangement with
multiple deliverables into separate units of accounting. According to EITF
00-21, in an arrangement with multiple deliverables, the delivered item(s)
should be considered a separate unit of accounting if all of the following
criteria are met: (1) the delivered item(s) has value to the customer on a
standalone basis, (2) there is objective and reliable evidence of the fair value
of the undelivered item(s), and (3) if the arrangement includes a general right
of return, delivery or performance of the undelivered item(s) is considered
probable and substantially in the control of the vendor. If all the conditions
above are met and there is objective and reliable evidence of fair value for all
units of accounting in an arrangement, the arrangement consideration should be
allocated to the separate units of accounting based on their relative fair
values. The guidance in this Issue is effective for revenue arrangements entered
into in fiscal beginning after June 15, 2003. The Company believes that the
adoption of EITF 00-21 will not have a material impact on it's financial
statements.
At the January 23, 2003 meeting, the Emerging Issues Task Force (EITF)
reached consensuses on EITF 02-18 Accounting for Subsequent Investments in an
Investee after Suspension of Equity Method Loss Recognition. Issues 1 and 2 of
EITF 02-18 which considered whether, (i) an investor should recognize any
previously suspended losses when accounting for a subsequent investment in an
investee that does not result in the ownership interest increasing from one of
significant influence to one of control, and (ii), if the additional investment
represents the funding of prior losses, whether all previously suspended losses
should be recognized or whether only the previously suspended losses equal to
the portion of the investment determined to be funding prior losses should be
recognized. The EITF concluded that if the additional investment, represents, in
substance, the funding of prior losses, the investor should recognize previously
suspended losses only up to the amount of the additional investment determined
to represent the funding of prior losses. At its February 5, 2003 meeting, the
FASB ratified the consensuses reached by the Task Force in this Issue. As
discussed in notes 1 (i) and 4, the Company has discontinued recording losses on
its equity method investment in Euroweb Hungary Rt., which is 51% owned by
Pantel Rt., also a subsidiary
13
of KPN Telecom BV. If the Company makes additional investments in Euroweb
Hungary Rt., the Company would be required to recognize additional losses to the
extent these additional investments are considered funding of unrecognized prior
losses of Euroweb Hungary Rt.
On April 30, 2003, the FASB issued FASB Statement No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities, which amends
FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, to address (1) decisions reached by the Derivatives Implementation
Group, (2) developments in other Board projects that address financial
instruments, and (3) implementation issues related to the definition of a
derivative. Statement 149 has multiple effective date provisions depending on
the nature of the amendment to Statement 133, and the Company is currently
considering its potential effect on the financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity". This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. This statement is
effective for contracts entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003, except for mandatorily redeemable financial instruments of
non-public entities. The Company is currently assessing the impact of this
pronouncement on its financial statements.
3. Investment in Securities
On April 24, 2003, the Company sold United States Treasury Notes for $499,632
representing a face value of $505,000. As at June 30, 2003, the Company holds
investments in United States Treasury Notes with a face value of $11,764,000,
which mature on February 15, 2004.
As of June 30 2003, the Company has recorded net unrealized gains of $147,410
and the accretion of interest and discount on the Notes of $526,031 ($93,645 of
which is recorded in the second quarter of 2003).
14
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
4. Affiliate, carried on an equity basis
The Company's consolidated statement of operations for the six months ended June
30, 2003 and 2002 includes the Company's equity interest in the net income of
Euroweb Rt. for each period, calculated as follows:
2003 (six months) 2002 (six months)
------------------ ------------------
Revenues $ 4,181,581 $ 2,638,978
Gross profit 2,005,404 1,566,933
Net loss $ (81,019) $ (1,215,902)
================== ==================
49% equity in net loss of affiliate $ (39,699) $ (595,792)
================== ==================
Equity in loss recorded by the company $ - $ (495,187)
================== ==================
Unrecorded cumulative net loss $ (170,029) $ (100,605)
================== ==================
The carrying value of the investment was written down to zero in 2002. Since the
Company has no legal or commercial commitments to provide continuing financial
support, the equity in the net loss of Euroweb Hungary Rt. of $39,699 has not
been recorded. If the Company makes additional investments in Euroweb Hungary
Rt., the Company would be required to recognize additional losses to the extent
these additional investments are considered funding of unrecognized prior losses
of Euroweb Hungary Rt. Moreover, only future profits in excess of the unrecorded
loss of $170,029 ($39,699 from 2003 and $130,330 unrecorded carry forward equity
in loss of affiliate from 2002) may be recorded.
Pursuant to the non-compete provision in the shareholders' agreement, the
Company cannot: (i) engage in any business activity listed in the scope of
activities of Euroweb Hungary Rt.'s charter,which, among others, includes
telecommunications, data bank activity and information technology activity, (ii)
own or control any equity interest in any person or entity that engages in any
such business activity or (iii) permit any of its employees to act as a
director, officer, manager or consultant to any person or entity that engages in
any such business activity. If the Company breaches its obligation set forth
under this provision, the Company will be required to sell to PanTel Rt. all of
its shares at the time of such breach at a price equal to the nominal value of
such shares.
15
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
5. Stockholders' Equity
During the six months of 2003, 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.
6. Commitments and Contingencies
(a) Employment Agreements
An employment agreement with the Chief Executive Officer provides for aggregate
annual compensation of $96,000 through December 31, 2005.
(b) Lease agreements
The Company's subsidiaries have entered into various capital leases for vehicles
and internet equipment, as well as non-cancelable agreements for office
premises.
(c) 20 years' usage rights
Euroweb Romania has provided an Indefeasible Right of Use for transmission
capacity on 12 pairs of fiber over a period of 20 years. The construction was
finished in April 2003 and the fibres were put into use from May 1, 2003. For
the duration of the agreement, Euroweb Romania is obliged to use all reasonable
endeavours to ensure the Cable System is maintained in efficient working order
and in accordance with industry standards.
(d) VAT Tax Authority audit - Romania
Currently the Romanian Tax Authorities are conducting an audit relating to how
the Company accounted for VAT with respect to foreign invoices. As at June 30,
2003, the Tax Authority has not reached a decision regarding this matter. Based
on discussions to date, the final outcome could range from a best case scenario
of no liability to a maximum exposure of principal, fines and penalties of up to
$1,768,000. Due to ongoing discussions, the Tax Authority has delayed the
publication of its findings until September 2003. Based on consultations with
its advisors, management is confident that the Company has appropriate legal
basis to defend its treatment of VAT (although the final outcome cannot be
assured), and therefore no provision has been made.
7. Related Party Transactions
The provision of international/domestic leased line and VOIP services are being
provided in conjunction with Pantel Telecommunication Rt., an entity which is
majority owned and controlled by KPN Telecom BV (which also owns a majority
interest in the Company). In 2002 and 2003, Pantel Rt., a subsidiary of KPN
Telecom BV and therefore a related party, is the most significant trading
partner of the Company. Approximately 54% of the 2003 revenues of Euroweb
Romania (translating into 37% of the consolidated revenues of the Company) were
derived from the provision of services to Pantel Rt.
16
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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.
Operations
Overview
The Company owns and operates Internet Service Providers in the Czech Republic,
Romania and Slovakia through its subsidiaries Euroweb Czech Republic spol.
s.r.o. ("Euroweb Czech"), Euroweb Slovakia a.s. ("Euroweb Slovakia") and Euroweb
Romania S.A. ("Euroweb Romania"). The Company operates in one industry segment,
providing Internet access and additional value added services to business
customers.. The Company's consolidated statements of operations also include the
equity in the net income or loss of Euroweb Hungary Rt., in which the Company
has a 49% ownership interest. The other 51% of Euroweb Hungary Rt. is held by
Pantel Telecommunication Rt., Hungary ("Pantel Rt."), of which KPN Telecom BV is
also the controlling owner.
The revenues come from the following four sources:
(1) Internet Service Provider (Internet access, Content and Web services,
Other services)
(2) International/domestic leased line, Internet Protocol data services
(3) Voice over Internet Protocol services
(4) Facilities (sale, rent and maintenance of dark fiber between the
Hungarian border and the Romanian City of Timisoara)
For the services in point (2) and (3), the main customer of the Company in 2002
and 2003 was Pantel Rt, a related party. The majority owner of Euroweb
International Corporation and Pantel Rt. is KPN Telecom BV, a Netherlands
corporation.
17
Related party transactions - Pantel Telecommunications Rt.
General: The largest customer of the Company since early 2001 is Pantel Rt, a
Hungary-based alternative telecommunications provider. Pantel Rt. 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 Rt.
Due to the fact that the significant revenue of the Company derives from the
iinternational/domestic leased line and Voice over Internet Protocol services, a
few of the Company's representatives have moved to the premises of Pantel Rt. in
order to improve co-operation on international projects.
Transactions: Both Euroweb Slovakia and Euroweb Romania have engaged in
transactions with Pantel Rt.:
(a) Pantel Rt. receives revenue from the provision of the following services to
subsidiaries of Euroweb International Corporation:
- Internet bandwidth
- International leased lines outside Romania and Slovakia
The total amount of these services was USD $1,128,597 during the six month
period ended June 30, 2003.
(b) Euroweb International and its subsidiaries received revenue from the
provision of the following services to Pantel Rt.:
- International leased lines and local loops in Slovakia and Romania
- International IP and VOIP services for Pantel Rt.
- Commission
- Facilities
Total value of these services were approximately USD $2,705,690 in the six
months period ended June 30, 2003.
Direct sales to Pantel Rt. were 37% of total consolidated revenue, but Euroweb's
dependency on Pantel Rt. is even greater than this figure suggests. Some third
party sales involve Pantel Rt. as the subcontractor/service provider for the
international/domestic lines, and some third party customers are also clients of
Pantel Rt. outside of Romania (i.e. their relationship with Pantel Rt. is
stronger than their relationship with Euroweb Romania).
Effective dependency on Pantel Rt. - taking into account direct and Pantel
Rt.-related sales - represents approximately 60% of total consolidated revenues
of the Company and approximately 90% of total sales of Euroweb Romania. There is
no such dependency in the case of Euroweb Czech or Euroweb Slovakia.
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 always considers alternative suppliers for
each individual project when appropriate.
18
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 accounting principles generally accepted 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.
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 2002 and the six months of 2003.
19
Results of Operations
Six-month Period Ended June 30, 2003 Compared to Six-month Period Ended
June 30, 2002
The Company has slightly increased its revenue, while gross margin has decreased
in absolute terms compared to the same period in the previous year. A
significant part (69%) of the revenue can be attributed to activities in
Romania. During the same time period, the Company was able to reduce operating
expenses compared to the previous year, resulting in a significant improvement
of the operating results. In accordance with SFAS 142, the Company no longer
amortizes goodwill.
Revenues
Total revenues for the six months ended June 30, 2003 were $7,254,617 in
comparison with $6,119,641 for the six months ended June 30, 2002. The Company
experienced increases in sales in Romania and Slovakia, and a decrease in sales
in the Czech Republic as follows:
Revenue per countries/six months of 2003 2002
---------------------------------------------------------------------------------------------------------------
Czech Republic $ 626,990 $ 738,244
Romania 5,011,413 4,003,826
Slovakia 1,616,214 1,377,571
---------------------------------------------------------------------------------------------------------------
Total 7,254,617 6,119,641
The Company has increased ISP and VOIP revenue in 2003 as compared to the same
period of 2002, however it has experienced reduction of revenue from
international/national leased line and IP data revenue due to the following:
o in the third quarter of 2002, a few of the most significant leased
line partners closed their contracts; and
o market competition has reduced the prices.
The proportion of revenue per product lines as of the six months ended June 30,
2003 has developed as follows:
Revenue per services 2003 (margin) 2002 (margin)
----------------------------------------------------------------------------------------------------------------------
ISP $ 2,722,641 $ 2,426,590
Int./dom leased line and IP data 3,057,443 3,240,020
VOIP 1,282,570 453,152
Facilities 191,963 -
----------------------------------------------------------------------------------------------------------------------
Total 7,254,617 (31.40%) 6,119,762 (37.03%)
20
Cost of revenues
Cost of revenues comprise mostly telecommunication expenses.
Network costs were $4,976,114 for the six months ended 2003 in comparison to
$3,853,434 for the six months ended 2002. Gross margin has decreased from 37.03%
to 31.4% when compared to the previous year. Although there were no significant
pricing policy changes within the Company during the six months of 2003, the
margin has decreased as follows:
o the previously high internet margin in SK and CZ reduced to a
reasonable level;
o Margin on International/domestic leased line has decreased in 2003 due
to a favourable one time agreement with one of the major suppliers of
the Company in 2002, which resulted in smaller costs last year
comparing this year.
This fall in margins was partly offset by the high margin on facilities revenue,
but the total margin was ultimately the same in absolute terms despite the
revenue increase on facilities revenue.
Operating expenses (excluding depreciation, amortization and severance)
Overall operating expenses (excluding depreciation, amortization and severance
to officers) decreased by 14% due to cost control measures and the positive
impact of closing of the New York office in 2002. The Company was able to reduce
costs in most categories and it is managing all of the product lines with the
existing operational infrastructure minimizing the need for additional
resources.
The severance payments to officers in 2002 related to the closure of the New
York office whereby the five year contracts of the former CFO and CEO were
terminated in June 2002.
VAT Tax Authority audit-Romania
Currently the Romanian Tax Authorities are conducting an audit relating to how
the Company accounted for VAT with respect to foreign invoices. As at June 30,
2003, the Tax Authority has not reached a decision regarding this matter. Based
on discussions to date, the final outcome could range from a best case scenario
of no liability to a maximum exposure of principal, fines and penalties of up to
$1,768,000. Due to ongoing discussions, the Tax Authority has delayed the
publication of its findings till September 2003. Based on consultations with its
advisors, management is confident that the company has appropriate legal basis
to defend its treatment of VAT (although the final outcome cannot be assured),
and therefore no provision has been made.
Depreciation and amortization
As disclosed above, no goodwill was amortized in 2002 and 2003. Other
intangibles, representing customer lists obtained in an acquisition in Romania
in 2000, are being amortized over a period of five years. In the first six
months of 2002, amortization was $ 115,000, while in the first six months of
2003, amortization was $33,454 due to the impairment of customer list in Q3 of
2002Which reduced the carrying value of the customer lists. Depreciation of
tangible fixed assets has increased from $336,547 in 2002 to $406,191 in 2003,
reflecting the investment in equipment used to provide the new services.
21
Net interest income
Net interest income in the six months of 2003 is lower than the comparable
amount in the six months of 2002 because their was a reduction in the
interest-generating funds that were available for the six month period ended
June 30, 2003 as compared to June 30, 2002, and also because the effective
interest rate on these investments has decreased over the periods in question.
Equity interest in affiliate
Although the Company's 49% share in the net loss of Euroweb Hungary Rt. for the
six months ended June 30, 2003 is $39,699, the opening net carrying value of the
investment in the Company's financial statements at the beginning of the year
was zero due to the goodwill write-offs in 2002. Therefore, the loss of $39,699
was not recorded in the books of the Company. However, if in the future, Euroweb
Hungary Rt. has net income, then the Company may only recognize its 49% interest
on Euroweb Hungary Rt. net income in excess of its cumulative share of
unrecorded losses of $ 170,029 ($130,330 unrecorded from 2002 and $39,699
unrecorded for the first half of 2003).
Liquidity and Capital Resources
The Company's cash, cash equivalents and marketable securities were
approximately $13,463,871 as of June 30, 2003, a decrease of $739,216 from the
end of 2002.
The Company achieved a positive cash flow from operations of $229,434 in the
first six months of 2003 (compared to cash used in operations of $2,732,601 in
the first six months of 2002). Approximately $2 million of the approximately $3
million difference is due to the severance paid to the former CEO and CFO in
June 2002 due to the closure of the New York office. The remaining amount is due
to various other cost control measures reducing expenses, and therefore cash
outlays.
The income tax expense relates to income tax payable of Euroweb Romania which is
expected to have taxable income in 2003, with no tax loss carryforwards to
offset this income.
For the six months ended June 30, 2003, the Company has $13,463,871 of cash,
cash equivalents and marketable securities compared to $4,498,214 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. KPN Telecom BV has announced that it intends to
sell all of its non-core assets, including its ownership of 52% of the
outstanding shares of the Company.
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 20%, while the Czech Korona has
strengthened against the U.S. dollar by approximately 17% between the six months
of 2003 and 2002. The impact of this is reflected in the exchange rates used in
the six months of 2003 and the six months of 2002.
22
Item 3. Controls and Procedures
As of June 30, 2003, 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 June 30, 2003. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to June 30, 2003.
23
PART II
Item 1. Legal Proceedings
The Company is not a party to any material legal proceedings as of the
date of this report.
Item 2. Changes in Securities
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
On May 27, 2003, the Company held its annual meeting of shareholders in
Budapest, Hungary. The Company's shareholders voted on, and approved, the
following three items:
1. The Company's shareholders elected the following five (5) director to
hold office until his successor is elected and qualified or until his earlier
resignation or removal. The result of the vote was as follows:
MEMBER FOR AGAINST WITHHELD AUTHORITY
------------------ ------------------ ------------------ ------------------
Csaba Toro 2,515,334 -0- 3,083
Daniel Kwantes 2,515,334 -0- 3,083
Stewart Reich 2,515,284 -0- 3,133
Gerald Yellin 2,515,334 -0- 3,083
Hans Lipman 2,515,334 -0- 3,083
2. The Company's shareholders approved an amendment and restatement to the
Company's Certificate of Incorporation decreasing the number of the Company's
authorized shares of common stock from 60,000,000 to 12,500,000. The result of
the vote was as follows:
For 2,516,333
Against 2,084
Abstentions -0-
3. The Company's shareholders approved the Board of Directors' selection of
KPMG Hungaria Kft. as the Company's independent auditors for the fiscal year
ending December 31, 2003. The result of the vote was as follows:
For 2,515,524
Against 2,893
Abstentions -0-
24
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)
(31) (a) Certification of the Chief Executive Officer of Euroweb
International Corp. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
(31) (b) Certification of the Chief Accounting Officer of Euroweb
International Corp. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
(32) (a) Certification of the Chief Executive Officer of Euroweb
International Corp. pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(32) (b) Certification of the Chief Accounting Officer of Euroweb
International Corp. pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on the 12th day of August 2003.
EUROWEB INTERNATIONAL CORP.
By _/s/Csaba Toro
Csaba Toro
Chairman of the Board and Chief Executive Officer
By /s/Peter Szigeti
Chief Accounting Officer
1 Exhibits are incorporated by reference to Registrant's Registration Statement
on Form SB-2 dated May 12, 1993 (Registration No. 33-62672-NY, as amended)
2 Filed with Form 10-QSB for quarter ended June 30, 1998.
25
Exhibit 31(a)
CERTIFICATION
I, Csaba Toro, certify that:
1. I have reviewed this Form 10-QSB of Euroweb International Corp.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the small business issuer as of, and for, the periods presented in
this report;
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and
have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the small business issuer, including its
consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this report is being prepared;
(b) Designed such internal control over financial reporting,
or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the small business
issuer's internal control over financial reporting that
occurred during the small business issuer's most recent fiscal
quarter (the small business issuer's fourth fiscal quarter in
the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the small business
issuer's internal control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control
over financial reporting, to the small business issuer's auditors and
the audit committee of the small business issuer's board of directors
(or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
small business issuer's ability to record, process, summarize
and report financial information; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in
the small business issuer's internal control over financial
reporting.
Date: August 12, 2003
/s/ Csaba Toro
Csaba Toro
Chief Executive Officer
26
Exhibit 31(b)
CERTIFICATION
I, Peter Szigeti, certify that:
1. I have reviewed this Form 10-QSB of Euroweb International Corp.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the small business issuer as of, and for, the periods presented in
this report;
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and
have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the small business issuer, including its
consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this report is being prepared;
(b) Designed such internal control over financial reporting,
or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the small business
issuer's internal control over financial reporting that
occurred during the small business issuer's most recent fiscal
quarter (the small business issuer's fourth fiscal quarter in
the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the small business
issuer's internal control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control
over financial reporting, to the small business issuer's auditors and
the audit committee of the small business issuer's board of directors
(or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
small business issuer's ability to record, process, summarize
and report financial information; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in
the small business issuer's internal control over financial
reporting.
Date: August 12, 2003
/s/ Peter Szigeti
Peter Szigeti
Chief Accounting Officer
27
EXHIBIT 32 (a)
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
I, Csaba Toro, the Chief Executive Officer of Euroweb International Corp. (the
"Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350, that to the best of my knowledge:
(1) the Quarterly Report on Form 10-QSB of the Company for the fiscal quarter
ended June 30, 2003 (the "Report") fully complies with the requirements of
Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934 (15 U.S.C.
78m or 78o(d)); and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: August 12, 2003
/s/Csaba Toro
------------------------------
Name: Csaba Toro
Title: Chief Executive Officer
28
EXHIBIT 32(b)
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
I, Peter Szigeti, the Chief Accouting Officer of Euroweb International Corp.
(the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350, that to the best of my knowledge:
(1) the Quarterly Report on Form 10-QSB of the Company for the fiscal quarter
ended June 30, 2003 (the "Report") fully complies with the requirements of
Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934 (15 U.S.C.
78m or 78o(d)); and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: August 12, 2003
/s/Peter Szigeti
------------------------------
Name: Peter Szigeti
Title: Chief Accounting Officer
29