SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|X| Preliminary Proxy Statement
|_| Confidential, For Use of the Commission Only
(As Permitted by Rule 14a-6(e)(2))
|_| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
EUROWEB INTERNATIONAL CORP.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|X| No fee required
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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|_| Fee paid previously with preliminary materials.
|_| Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(4) Date Filed:
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EUROWEB INTERNATIONAL CORP.
1138 BUDAPEST, VACI UT 141. HUNGARY
(TEL) +36-1 889 7101
(FAX) +36-1 889 7128
TO THE STOCKHOLDERS OF EUROWEB INTERNATIONAL CORP.
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Meeting") of
EuroWeb International Corp., a Delaware corporation (the "Company" or
"Euroweb"), will be held at * (local time), on *, 2006 at * Budapest, Hungary
for the following purposes:
1. Consider and vote upon a proposal to sell 100% of the Company's
interest in the Company's two Internet and telecom related operating
subsidiaries, Euroweb Internet Szolgaltato Rt ("Euroweb Hungary ")
and Euroweb Romania S.A ("Euroweb Romania") together referred to
asthe "Subsidiaries" as contemplated in that certain Share Purchase
Agreement (the "Agreement") entered by and between Invitel
Tavkozlesi Szolgaltato Rt., a Hungarian joint stock company
("Invitel") and the Company on December 19, 2005, which is attached
hereto as Exhibit A; and
2. To transact such other business as may properly come before the
Meeting and any adjournment or postponement thereof.
Only stockholders who own shares of our common stock at the close of business on
*, 2006 are entitled to notice of and to vote at the special meeting. You may
vote your shares by:
o marking, signing and dating the enclosed proxy card as promptly as
possible and returning it in the enclosed postage-paid envelope;
o dialing the toll free number on the enclosed proxy card and casting
your vote in accordance with the instructions given to you on the
telephone; or
o casting your vote via the Internet at the website shown on the
enclosed proxy card.
You may also vote in person at the special meeting, even if you use one of the
three options listed above.
We have enclosed with this Notice of Special Meeting, a proxy statement and a
form of proxy.
By Order of the Board of Directors,
Stewart Reich, Chairman of the Board of Directors
Budapest, Hungary
*, 2006
1
EXHIBIT A TO THE NOTICE OF
SPECIAL MEETING OF STOCKHOLDERS
SPECIAL RESOLUTION TO BE SUBMITTED TO STOCKHOLDERS AT THE
SPECIAL MEETING OF STOCKHOLDERS RELATING TO PROPOSAL NO. 1
Be it resolved as a special resolution that:
1. The entering into of the Agreement between the Company and Invitel
relating to the sale by the Company to Invitel of the Subsidiaries
and all transactions, proceedings and actions to be completed
thereunder are hereby approved, ratified and adopted; and
2. Any director or officer of the Company be and s/he is hereby
authorized and directed to execute on behalf of the Company any
document required to be delivered pursuant to the Agreement.
2
EUROWEB INTERNATIONAL CORP.
1138 BUDAPEST, VACI UT 141. HUNGARY
(TEL) +36-1 889 7101
(FAX) +36-1 889 7128
PROXY STATEMENT FOR SPECIAL MEETING OF STOCKHOLDERS
The board of directors is soliciting proxies to be used at our *, 2006 special
meeting of stockholders. Please read and carefully consider the information
presented in this proxy statement and vote either by:
(i) completing, dating, signing and returning the enclosed proxy in the
enclosed postage-paid envelope;
(ii) by dialing the toll free number on the enclosed proxy card and
casting your vote; or
(iii) visiting the website shown on the enclosed proxy card and casting
your vote.
This proxy statement and the form of proxy will be mailed to all stockholders on
or about *, 2006.
INFORMATION ABOUT THE SPECIAL MEETING
WHEN IS THE SPECIAL MEETING?
*, 2006, * P.M. Budapest, Hungary time.
WHERE WILL THE SPECIAL MEETING BE HELD?
The meeting will be held at *, Budapest, Hungary.
WHAT ITEMS WILL BE VOTED UPON AT THE SPECIAL MEETING?
You will be voting on the following matters:
1. APPROVAL OF THE SALE OF THE SUBSIDIARIES. To vote on the sale of 100% of the
Company's interest in the Subsidiaries as contemplated in the Agreement entered
into by and between Invitel and the Company; and
2. OTHER BUSINESS. To transact such other business as may properly come before
the special meeting or any adjournment of the special meeting.
WHO CAN VOTE?
Only holders of record of our common stock at the close of business on *, 2006
will be entitled to notice of and to vote at the special meeting and any
adjournments of the special meeting. You are entitled to one vote for each share
of common stock held on that date. On *, 2006, there were * shares of our common
stock outstanding and entitled to vote.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE PROPOSAL SET FORTH HEREIN.
ACCORDINGLY, THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE APPROVAL
OF THE SALE OF THE SUBSIDIARIES AS SET FORTH IN THE
AGREEMENT ENTERED INTO BETWEEN INVITEL AND THE COMPANY.
HOW DO I VOTE BY PROXY?
3
You may vote your shares by:
o VOTING BY MAIL. You may vote by mail by marking, signing and dating
the enclosed proxy card as promptly as possible and returning it in
the enclosed postage-paid envelope. Proxies should not be sent by
the stockholder to the Company, but to American Stock Transfer and
Trust Company, the Company's Registrar and Transfer Agent, at 59
Maiden Lane, New York, New York 10038. A pre-addressed, postage-paid
envelope is provided for this purpose.
o VOTING BY TELEPHONE. You may vote by telephone by dialing the toll
free number on the enclosed proxy card and casting your vote in
accordance with the instructions given to you on the telephone.
Telephone voting is available 24 hours a day. If you vote by
telephone you should not return your proxy card.
o VOTING VIA THE INTERNET. You may vote via the Internet by visiting
the website shown on the enclosed proxy card. Internet voting is
also available 24 hours a day. If you vote via the Internet you
should not return your proxy card.
If you return your signed proxy card or vote by phone or the Internet before the
special meeting, we will vote your shares as you direct. For each other item of
business, you may vote "FOR" or "AGAINST" or you may "ABSTAIN" from voting.
If you return your signed proxy card but do not specify how you want to vote
your shares, we will vote them "FOR" the approval of the sale of 100% of the
Company's interest in the Subsidiaries as contemplated in the Agreement entered
into by and between Invitel and the Company.
If any matters other than those set forth above are properly brought before the
special meeting, the individuals named in your proxy card may vote your shares
in accordance with their best judgment.
HOW DO I CHANGE OR REVOKE MY PROXY?
You can change or revoke your proxy at any time before it is voted at the
special meeting by:
1. Submitting another proxy by mail, telephone or internet with a more
recent date than that of the proxy first given;
2. Sending written notice of revocation to American Stock Transfer and
Trust Company, the Company's Registrar and Transfer Agent, at 59
Maiden Lane, New York, New York 10038; or
3. Attending the special meeting and voting in person. If your shares
are held in the name of a bank, broker or other holder of record,
you must obtain a proxy, executed in your favor, from the holder of
record to be able to vote at the meeting.
WHAT CONSTITUTES A "QUORUM" FOR THE SPECIAL MEETING?
One-third of the outstanding shares of the Company common stock entitled to vote
at the special meeting, present or represented by proxy, constitutes a quorum. A
quorum is necessary to conduct business at the special meeting. You will be
considered part of the quorum if you have voted by proxy. Abstentions, broker
non-votes and votes withheld from director nominees count as "shares present" at
the special meeting for purposes of determining a quorum. However, abstentions
and broker non-votes do not count in the voting results. A broker non-vote
occurs when a broker or other nominee who holds shares for another does not vote
on a particular item because the broker or nominee does not have discretionary
authority for that item and has not received instructions from the owner of the
shares.
HOW MANY VOTES ARE REQUIRED?
The approval of the sale of 100% of the Company's interest in the Subsidiaries
as contemplated in the Agreement entered into by and between Invitel and the
Company will require an affirmative vote of the majority of the votes cast in
person or by proxy, provided that a quorum is present at the special meeting.
WHO PAYS FOR THE SOLICITATION OF PROXIES?
The Company will pay the cost of preparing, printing and mailing material in
connection with this solicitation of proxies. We will, upon request, reimburse
brokerage firms, banks and others for their reasonable out-of-pocket expenses in
forwarding proxy material to beneficial owners of stock or otherwise in
connection with this solicitation of proxies.
4
WHO CAN ANSWER FURTHER QUESTIONS?
If you have more questions about the proposed sale of the Subsidiaries, you
should contact the below party at the Company's principal executive offices:
EUROWEB INTERNATIONAL CORP.
1138 Budapest, Vaci ut 141. Hungary
(Tel) +36-1 889 7101
(Fax) +36-1 889 7128 Attention: Kriszta Hollo
5
SUMMARY TERM SHEET FOR PROPOSAL NO. 1
In Proposal No. 1, you are being asked to approve the sale of the
Subsidiaries to Invitel. The terms of the Agreement mandate that the total
purchase price to be paid is US $30,000,000 of which US $29,400,000 is payable
at closing and the remaining US $600,000 is payable upon delivery of a
certificate prepared by an independent auditor identifying the net indebtedness
of the Subsidiaries, which are required to be debt free. The purchase price is
to be reduced by the amount of any debt held in the Subsidiaries. The closing of
the sale of the Subsidiaries, of which we cannot provide any guarantee, is
expected to occur within seven business days of receipt of approval of the
proposed transaction by the Hungarian Economic Competition Office in Hungary,
the delivery of an audit report prepared by an independent auditor with respect
to the Subsidiaries and the approval of the Agreement by the shareholders of the
Company provided that such date is no later than June 30, 2006. If the Company
fails to have the Agreement approved at a shareholders meeting by June 30, 2006,
the Company will be obligated to reimburse Invitel for its expenses associated
with the acquisition of the Subsidiaries not to exceed EUR 400,000.
Reason for the Transaction
The Board of Directors believes the sale of the Subsidiaries, which are
engaged in the business of providing Internet Service in Hungary and Romania, is
the culmination of the Company's strategy of identifying and developing
companies within emerging industries for the purpose of consolidation and sale.
The Company commenced this strategy with the sale of its Internet Service assets
located in the Czech Republic and Slovakia. Further, the disposition of the
Subsidiaries for a purchase price of US $30,000,000 will allow the Company to
redeploy capital to acquire additional assets in IT space and other unidentified
industries that the Company deems profitable as well as focus its expertise in
the area of IT outsourcing in Central and Eastern Europe.
For a more detailed discussion please see "Proposal No. 1 - Approval of
the Sale of the Subsidiaries to Invitel" located on page 8.
Conditions to Closing of the Sale of the Subsidiaries
The completion of the proposed sale of the Subsidiaries depends upon the meeting
of a number of conditions including the following:
o The issuance by the Hungarian Economic Competition Office of its
unconditional approval of the sale of the Subsidiaries to Invitel;
o Approval of the Agreement by a majority of the stockholders of the
Company at a special meeting of stockholders in which a quorum was
present;
o Delivery of an audit report prepared by an independent auditor with
respect to the Subsidiaries and the absence of any event or
circumstance revealed in the audit that could reasonably be expected
to have a material adverse effect on the financial condition of the
Subsidaries, of which Invitel was not aware; and
o There shall be no material adverse change to the assets of the
Subsidiaries.
Risks
The sale of the Subsidiaries will reduce the lines of business which we
conduct. This decrease in diversification of our business could serve to magnify
any downturns in the remaining business lines. In particular:
o Our ability to adjust to changes in consumer demand or economic
shifts could be materially impacted.
o After classifying the Subsidiaries as discontinued operations (see
"Accounting Treatment"), our revenue for the year ended December 31,
2004 will decrease to $-0-_from $28,111,786..
6
o After classifying the Subsidiaries as discontinued operations, our
net loss from continuing operations for the year ended December 31,
2004 will increase to $1,261,909_from $1,099,176.
o Although we solicited a number of offers for the Subsidiaries, there
can be no assurance that the value may not be higher in a sale to
other purchasers.
o The loss of expected synergies and a common customer base between
Navigator Informatika Rt. and Euroweb Hungary, which may limit
Navigator Informatika Rt.'s ability to generate revenue and may also
have a goodwill impairment effect.
o As a result of the sale of the Subsidiaries, The Nasdaq Stock Market
may request that we reapply for listing and satisfy all initial
listing standards despite the fact that the Company will have
continuing operations in Central and Eastern Europe.
For a more detailed discussion please see "Proposal No. 1 - Approval of
the Sale of the Subsidiaries to Invitel" located on page 9.
Absence of Dissenters' Rights of Appraisals
Under the applicable provisions of General Corporation Law of the State of
Delaware ("GCL"), Euroweb's stockholders will have no rights in connection with
the proposed sale of the Subsidiaries to seek appraisal for the fair value of
their shares of common stock.
For a more detailed discussion please see "Proposal No. 1 - Approval of
the Sale of the Subsidiaries to Invitel" located on page 10.
7
PROPOSAL NO. 1
APPROVAL OF SALE OF THE SUBSIDIARIES TO INVITEL
PROPOSED TRANSACTION
On December 19, 2005, the Company entered into the Agreement with Invitel.
Pursuant to the Agreement, the Company has agreed to sell and, Invitel has
agreed to purchase, 100% of the Company's interest in the Subsidiaries. The
purchase price to be paid to the Company is US $30,000,000 in cash of which US
$29,400,000 is payable at closing and the remaining US $600,000 is payable upon
delivery of a certificate prepared by an independent auditor identifying the net
indebtedness of the Subsidiaries, which are required to be debt free. The
purchase price is to be reduced by the amount of any debt held in the
Subsidiaries. The closing of the sale of the Subsidiaries, of which we cannot
provide any guarantee, is expected to occur within seven business days of
receipt of approval of the proposed transaction by the Hungarian Economic
Competition Office in Hungary, the delivery of an audit report prepared by an
independent auditor with respect to the Subsidiaries and the approval of the
Agreement by the shareholders of the Company provided that such date is no later
than June 30, 2006. If the Company fails to have the Agreement approved at a
shareholders meeting by June 30, 2006, the Company will be obligated to
reimburse Invitel for its expenses associated with the acquisition of the
Subsidiaries not to exceed EUR 400,000.
BUSINESS OF THE COMPANY
We own and operate Internet Service Providers in Hungary and Romania
through the Subsidiaries, Euroweb Hungary and Euroweb Romania. We are also
engaged in the IT consulting business though our other subsidiary, Navigator
Informatika Rt., which we acquired on October 7, 2005. We previously had
operations in the Czech Republic and Slovakia through our subsidiaries Euroweb
Czech and Euroweb Slovakia. Those subsidiaries were sold on December 16, 2004
and April 15, 2005, respectively.
Our revenues generated by the Subsidiaries come from the following four
sources:
o Internet Service Provider (Internet access, content and web
services, other services);
o International/domestic leased line and Internet Protocol data
services;
o Voice over Internet Protocol services; and
o Facilities (sale, rental and maintenance of dark fiber between the
Hungarian border and the Romanian City of Timisoara).
Our other subsidiary, Navigator Informatika Rt., operates through its
wholly owned subsidiaries, Navigator Info Kft. and Navigator Engineering Kft.
and is is engaged in information technology outsourcing, applications
development and information technology consulting services primarily in the
Hungarian market. Navigator's client base includes primarily large organizations
both in the corporate and institutional (public) sector.
BUSINESS OF INVITEL
Founded in 1994, Invitel offers telephony, Internet, and data services to
residential and business customers in Hungary. Invitel is the incumbent operator
in 9 out of 54 primary service areas. In the rest of Hungary, Invitel is an
alternative telecom operator with a national fibre backbone, metropolitan area
networks and point-to-multi-point microwave access system.
Invitel's corporate headquarters is located at Invitel Tavkozlesi
Szolgaltato Rt. Puskas Tivadar u. 8-10 H-2040 Budaros, Hungary (Tel: 0036 1 801
1355).
REASONS FOR THE TRANSACTION
The Board of Directors believes the sale of the Subsidiaries, which are
engaged in the business of providing Internet Service in Hungary and Romania, is
the culmination of the Company's strategy of identifying and developing
companies within emerging industries for the purpose of consolidation and sale.
The Company commenced this strategy with the sale of its Internet Service assets
located in the Czech Republic and Slovakia. Further, the disposition of the
8
Subsidiaries for a purchase price of $30,000,000 will allow the Company to
redeploy capital to acquire additional assets in IT space and other unidentified
industries that the Company deems profitable as well as focus its expertise in
the area of IT outsourcing in Central and Eastern Europe.
Management considered the possibility of putting the Subsidiaries on the
public auction block. Management decided against this for a number of reasons
related to the specialized nature of the business and management's belief that
only companies already in the relevant business area (i.e. the Subsidiaries'
competitors) would be interested in purchasing the Subsidiaries. Specifically,
management decided against a public auction for the following reasons:
o The Internet Service industry is extremely competitive; accordingly
protecting the primary assets consisting largely of intellectual
properties is inherently a risk-filled proposition. The Company's
management was extremely concerned that a "public" sale of the
Subsidiaries would simply lead to competitors engaging in the due
diligence process for no purpose other than to glean confidential
information.
o The Company was also of the view that public disclosure of the
proposed sale would lead to key employees becoming unnecessarily
concerned and possibly leaving the Company's subsidiaries to find
increased security elsewhere and in particular, with competitors of
the Subsidiaries.
o Based on the Company's private negotiations for the sale of the
Subsidiaries with several parties, the Company believes that the
price being paid by Invitel is the best price the Company could
reasonably secure.
Prior to entering into the Agreement, during the past two years there has been
no other negotiations, transactions or contacts between the Company and Invitel
concerning any merger, consolidation, acquisition, tender offer, election of the
Company's directors or the sale of a material amount of assets of the Company.
There are no present or proposed material agreements, arrangements,
understandings or relationships between the Company or any of its executive
officers, directors, controlling persons or subsidiaries and Invitel or any of
its executive officers, directors, controlling persons or subsidiaries.
RISKS
The sale of the Subsidiaries will reduce the lines of business which we conduct.
This decrease in diversification of our business could serve to magnify any
downturns in the remaining business lines. In particular:
o Our ability to adjust to changes in consumer demand or economic
shifts could be materially impacted.
o After classifying the Subsidiaries as discontinued operations (see
"Accounting Treatment"), our revenue for the year ended December 31,
2004 will decrease to $-0-_from $28,111,786..
o After classifying the Subsidiaries as discontinued operations, our
net loss from continuing operations for the year ended December 31,
2004 will increase to $1,261,909_from $1,099,176.
o Although we solicited a number of offers for the Subsidiaries, there
can be no assurance that the value may not be higher in a sale to
other purchasers.
o The loss of expected synergies and a common customer base between
Navigator Informatika Rt. and Euroweb Hungary, which may limit
Navigator Informatika Rt.'s ability to generate revenue and may also
have a goodwill impairment effect.
o As a result of the sale of the Subsidiaries, The Nasdaq Stock Market
may request that we reapply for listing and satisfy all initial
listing standards despite the fact that the Company will have
continuing operations in Central and Eastern Europe.
9
ABSENCE OF DISSENTERS' RIGHTS OF APPRAISALS
Under the applicable provisions of GCL, Euroweb's stockholders will have
no rights in connection with the proposed sale of the Subsidiaries to seek
appraisal for the fair value of their shares of common stock.
VOTES REQUIRED
The approval of the sale of 100% of the Company's interest in the
Subsidiaries as contemplated in the Agreement entered into by and between
Invitel and the Company will require an affirmative vote of the majority of the
votes cast in person or by proxy, provided that a quorum is present at the
special meeting.
INTEREST OF RELATED PARTIES IN THE PROPOSED SALE OF THE SUBSIDIARIES TO INVITEL
During the initial stages of due diligence and negotiation, a third party
expressed interest to the Company to purchase the Subsidiaries for US
$26,000,000. In order to provide management of the Company with the appropriate
motivation to achieve the highest possible purchase price, the Company's
Compensation Committee was granted the discretionary ability to pay a bonus to
members of management that were associated with the Company receiving a purchase
price in excess of $28,000,000 for the Subsidiaries. The bonus, which is at the
discretion of the Compensation Committee, will be up to 20% of the purchase
price received in excess of US $28,000,000. Upon the Company closing on the sale
of the Subsidiaries for $30,000,000 to Invitel, then a bonus of up to US
$400,000 (or 20% of US $2,000,000) may be paid by the Compensation Committee to
select members of management. To the best of our knowledge, except for the
Bonus, none of the Company's officers or directors have a financial interest in
the proposed sale of the Subsidiaries to Invitel.
ACCOUNTING TREATMENT
Under accounting principles generally accepted in the United States of
America, upon stockholder approval of the proposed sale, we expect to reflect
the results of operations of the Subsidiaries as discontinued operations. The
expected gain on the sale of the Subsidiaries, net of any applicable taxes, will
be reflected in discontinued operations in the quarter during which the proposed
sale closes.
FEDERAL INCOME TAX CONSEQUENCE
The proposed sale of the Subsidiaries should have no direct income tax
consequences to the Company stockholders. The proposed sale of the Subsidiaries
will be reported by the Company as a sale of assets for federal income tax
purposes in the fiscal year ending December 31, 2006. The proposed sale of the
Subsidiaries will be a taxable transaction for United States federal income tax
purposes. Accordingly, the Company will recognize a gain or loss with respect to
the proposed sale of the Subsidiaries in an amount equal to the difference
between the amount of the consideration received for each asset over the
adjusted tax basis in the asset sold.
REGULATORY APPROVALS
No United States Federal or state regulatory requirements must be complied
with or approvals obtained as a condition of the proposed sale of the
Subsidiaries other than federal securities laws. However, the sale of the
Subsidiaries is contingent upon the issuance by the Hungarian Economic
Competition Office of its unconditional approval of the sale of the Subsidiaries
to Invitel. According to the deadlines defined in the Agreement, an application
for the approval of the proposed transaction is planned to be filed by January
16, 2006 with the Hungarian Economic Competition Office.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership of our common stock as of January 6, 2006 by (i) each person known by
our company to own beneficially more than 5% of the outstanding Common Stock;
(ii) each director of our company; (iii) each officer of our company and (iv)
all executive officers and directors as a group. Except as otherwise indicated
below, each of the entities or persons named in the table has sole voting and
investment powers with respect to all shares of common stock beneficially owned
by it or him as set forth opposite its or his name.
10
Shares
Name and Address Beneficially Owned(1) Percent Owned(1)
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KPN Telecom B.V. (4) 2,036,188 34.84%
Maanplein 5
The Hague, The Netherlands
Fleminghouse Investments Limited 522,054 8.93%
Chrysanthou Mylona 3, P.C.
3030 Limassol
Cyprus
CORCYRA d.o.o.(3) 2,326,043 39.80%
Verudela 17
Pula Croatia 52100
Graeton Holdings Limited 441,566 7.55%
256 Makarios Avenue
Eftapaton Court
Cy301 Limassol
Cyprus
Csaba Toro (2)(5)(6) 94,250 1.61%
1138 Budapest
Vaci ut 141.
Hungary
Stewart Reich (6)(7) 50,000 *
18 Dorset Lane,
Bedminister, NJ 07921
Gabor Ormosy
Fleminghouse Investments Limited 0 0%
Chrysanthou Mylona 3, P.C. (3)
3030 Limassol
Cyprus
Yossi Attia (6)(8) 0 0%
1061 1/2 Spalding Ave.
West Hollywood, CA 90046
Ilan Kenig (6)(8) 0 0%
7438 Fraser Park Drive
Burnaby, BC Canada V5J 5B9
Moshe Schnapp (5)(6) 58,968 *
846 N Huntley
West Hollywood, CA 90069
All Officers and Directors as a 203,218 3.47%
Group (6 Persons)
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* Less than one percent
(1) Unless otherwise indicated, each person has sole investment and voting power
with respect to the shares indicated. For purposes of this table, a person or
group of persons is deemed to have "beneficial ownership" of any shares which
such person has the right to acquire within 60 days after January 6, 2006. For
purposes of computing the percentage of outstanding shares held by each person
or group of persons named above on January 6, 2006, any security which such
person or group of persons has the right to acquire within 60 days after such
date is deemed to be outstanding for the purpose of computing the percentage
ownership for such person or persons, but is not deemed to be outstanding for
the purpose of computing the percentage ownership of any other person.
(2) Mr. Toro owns, directly or indirectly, 1.61% of the issued and outstanding
shares of the Company represented by options to purchase 94,250 shares.
(3) Pursuant to a Stock Purchase Agreement dated as of January 28, 2005, by and
between KPN Telecom B.V. ("KPN Telecom"), a company incorporated under the laws
of the Netherlands, and CORCYRA d.o.o., a Croatian company ("CORCYRA"), (the
"Purchase Agreement"), KPN Telecom sold to CORCYRA 289,855 shares (the "Initial
11
Shares") of our common stock for US $1,000,000 (the "Initial Closing"). The
Initial Closing occurred on February 1, 2005. Pursuant to the Purchase
Agreement, CORCYRA has also agreed to purchase and, KPN has agreed to sell, KPN
Telecom's remaining 2,036,188 shares of our common stock (the "Final Shares") on
April 30, 2006 (the "Final Closing"); provided, however, that upon 14 days'
prior written notice to KPN Telecom, CORCYRA may accelerate the Final Closing to
an earlier month-end date as specified in such notice; provided, further, that
the Final Closing is subject to the satisfaction or waiver of all of the
conditions to closing set forth in the Purchase Agreement. Accordingly, CORCYRA
presently owns 289,855 shares of common stock and is deemed to own, pursuant to
Rule 13d-3(d), promulgated under the Securities Exchange Act of 1934, as
amended, the remaining 2,036,188 shares held by KPN Telecom.
(4) KPN Telecom B.V. is a subsidiary of Royal KPN N.V.
(5) An officer of the Company.
(6) A director of our company.
(7) Includes an option to purchase 50,000 shares of common stock at an exercise
price of $4.21 per share. 25,000 options vest on April 13, 2004, while 25,000
options vest on April 13, 2005
(8) Effective March 22, 2005 the Board of Directors decided to grant the two new
directors 100,000 options each, under the 2004 Incentive Plan. No such option
were vested to date.
The foregoing table is based upon 5,843,067 shares of common stock
outstanding as of January 6, 2006.
SHAREHOLDER PROPOSALS
The Company intends to hold its 2006 annual meeting in May 2006 although
it has not set a definitive date for such meeting. Therefore, any proposal which
any shareholder may intend to present at the annual meeting to be held in 2006
must be received by us on or before April 3, 2006, if such proposal is to be
included in the proxy statement and form of proxy pertaining to the 2006 annual
meeting.
THE COMPANY'S BOARD OF DIRECTORS HAS CAREFULLY CONSIDERED THE FOREGOING
FACTORS AND UNANIMOUSLY BELIEVES THAT THE TRANSACTION IS IN THE BEST INTEREST OF
THE COMPANY'S STOCKHOLDERS. THE BOARD BELIEVES THAT THE PURCHASE PRICE IS FAIR
AND REASONABLE UNDER THE CIRCUMSTANCES AND IN THE CURRENT ECONOMIC CLIMATE.
For further information, see the Company's audited financial statements
for the year ended December 31, 2004 attached hereto as Exhibit B, the financial
statements for the year ended December 31, 2004 for Navigator Informatika Rt.
attached hereto as Exhibit C and the pro forma financial information attached
hereto as Exhibit D.
ADOPTION OF SPECIAL RESOLUTION
In addition to generally approving the sale of the Subsidiaries as set
forth above, the stockholders are being asked to approve the following
resolutions:
Be it resolved as a special resolution that:
1. The entering into of the Agreement between the Company and Invitel
relating to the sale by the Company to Invitel of the Subsidiaries,
a copy of which is appended to the Proxy as Exhibit A, and all
transactions, proceedings and actions to be completed thereunder are
hereby approved, ratified and adopted; and
2. Any director or officer of the Company be and s/he is hereby
authorized and directed to execute on behalf of the Company any
document required to be delivered pursuant to the Agreement.
12
RECOMMENDATION OF THE BOARD:
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF SALE OF THE
SUBSIDIARIES TO INVITEL.
OTHER BUSINESS
The Board of Directors is not aware of any matter other than the matters
described above to be presented for action at the Meeting. However, if any other
proper items of business should come before the Meeting, it is the intention of
the individuals named on your proxy card as the proxy holders to vote in
accordance with their best judgment on such matters.
BY ORDER OF THE BOARD OF DIRECTORS
BY: /S/CSABA TORO
------------------------------------------------
CSABA TORO, DIRECTOR AND CHIEF EXECUTIVE OFFICER
Dated: *, 2006
Budapest, Hungary
13
PROXY
EUROWEB INTERNATIONAL CORP.
SPECIAL MEETING OF STOCKHOLDERS - TO BE HELD
*, 2006
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned, revoking all prior proxies, hereby appoints CSABA TORO and
KRISZTA HOLLO and each of them, with full power of substitution in each, as
proxies for the undersigned, to represent the undersigned and to vote all the
shares of Common Stock of the Company which the undersigned would be entitled to
vote, as fully as the undersigned could vote and act if personally present, at
the Special Meeting of Stockholders (the "Meeting") to be held on *, 2006, at *,
local time, at *, or at any adjournments or postponements thereof.
Should the undersigned be present and elect to vote at the Meeting or at any
adjournments or postponements thereof, and after notification to the Secretary
of the Company at the Meeting of the stockholder's decision to terminate this
proxy, then such powers of attorney or proxies shall be deemed terminated and of
no further force and effect. This proxy may also be revoked by filing a written
notice of revocation with the Secretary of the Company or by duly executing a
proxy bearing a later date.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE LISTED PROPOSALS.
Proposal (1) to approve the sale of 100% of Euroweb International Corp.'s
interest in its two Internet and telecom related operating subsidiaries, Euroweb
Hungary Rt. and Euroweb Romania S.A as contemplated in that certain Share
Purchase Agreement entered into by and between Invitel Tavkozlesi Szolgaltato
Rt., a Hungarian joint stock company and Euroweb International Corp. on December
19, 2005.
FOR|_| AGAINST|_| ABSTAIN|_|
The shares represented by this proxy will be voted as directed by the
stockholder, but if no instructions are specified, this proxy will be voted for
proposal (1). If any other business is presented at the Meeting, this proxy will
be voted by those named in this proxy in their best judgment. At the present
time, the Board of Directors knows of no other business to be presented at the
Meeting.
The undersigned acknowledges receipt from the Company, prior to the execution of
this proxy, of the Notice of Special Meeting and accompanying Proxy Statement
relating to the Meeting.
NOTE: PLEASE MARK, DATE AND SIGN AS YOUR NAME(S) APPEAR(S) HEREON AND RETURN IN
THE ENCLOSED ENVELOPE. IF ACTING AS EXECUTORS, ADMINISTRATORS, TRUSTEES,
GUARDIANS, ETC., YOU SHOULD SO INDICATE WHEN SIGNING. IF THE SIGNER IS A
CORPORATION, PLEASE SIGN THE FULL CORPORATE NAME, BY DULY AUTHORIZED OFFICER. IF
SHARES ARE HELD JOINTLY, EACH SHAREHOLDER SHOULD SIGN.
Signature (Please sign within the box) [ ________ ] DATE: _______, 2006
Signature (Joint owners) [_________ ] DATE: _______, 2006
14
EXHIBIT A
================================================================================
DECEMBER 19, 2005
SHARE PURCHASE AGREEMENT
BETWEEN
EUROWEB INTERNATIONAL CORP.
(AS SELLER)
AND
INVITEL TAVKOZLESI SZOLGALTATO RT.
(AS PURCHASER)
================================================================================
THIS SHARE PURCHASE AGREEMENT IS MADE ON DECEMBER 19, 2005
BETWEEN
(1) EUROWEB INTERNATIONAL CORP., a Delaware, U.S. corporation, with its
principal place of business at 1138 Budapest, Vaci ut 141, Hungary,
represented by Csaba Toro, its Chief Executive Officer (the "Seller"); and
(2) INVITEL TAVKOZLESI SZOLGALTATO RT., a Hungarian joint stock company,
registration number Cg. 13-10-040575, with its registered office located
at 2040 Budaors, Puskas Tivadar utca 8-10, represented by Martin Lea, its
Chief Executive Officer (the "Purchaser").
R E C I T A L S:
(A) Seller is the registered and beneficial owner and holder of 19,996 series
A common shares, and 3 series B preference shares (the "EuroWeb Hungary
Shares"), all of which have a nominal value of 1000 HUF each and are
credited and fully paid, in EuroWeb Internet Szolgaltato Rt., a Hungarian
joint stock company whose details are set out in Schedule 1 ("EuroWeb
Hungary").
(B) The EuroWeb Hungary Shares represent 100% minus one share of the issued
share capital and voting rights in EuroWeb Hungary.
(C) Seller is also the registered and beneficial owner and holder of 6,411,968
common shares (the "EuroWeb Romania Shares" and, together with the EuroWeb
Hungary Shares, the "Purchased Shares"), all of which have a nominal value
of 5,000 ROL each and are credited and fully paid, in S.C. EuroWeb Romania
S.A., a Romanian joint stock company whose details are set out in Schedule
1 ("EuroWeb Romania" and together with EuroWeb Hungary, the "Group
Companies").
(D) The EuroWeb Romania Shares represent 99.9564% of the issued share capital
and voting rights in EuroWeb Romania.
(E) Seller has agreed to sell, and Purchaser has agreed to purchase the
Purchased Shares, on the terms and subject to the conditions set out in
this Agreement (the "Transaction").
A-1
A G R E E M E N T:
NOW, THEREFORE, IT IS AGREED:
1 DEFINITIONS AND INTERPRETATION
1.2 In this Agreement:
"AFFILIATE" of any person shall mean any person
directly or indirectly controlling,
controlled by, or under common control
with, such person;
"AGREEMENT" means this Share Purchase Agreement and
all Schedules hereto;
"AUDIT" has the meaning set out in Clause 4.2.1;
"BUSINESS" means the business of the Group
Companies as currently conducted by each
of them on the date of this Agreement
and from time to time thereafter,
including without limit the provision of
internet and IP voice and data services
(ISP);
"BUSINESS DAY(S)" means any day(s) (other than a Saturday
or Sunday) when commercial banks are
open for business in New York, Budapest,
Bucharest and London;
"CASH AND CASH EQUIVALENTS" means (i) money or the equivalent
thereof, including currency, coins,
negotiable cheques, balances in bank
accounts and interest-bearing financial
assets and (ii) deposits held at call
with banks (in the case of (i) and (ii),
free and clear of any Encumbrances)
minus (iii) any bank overdrafts;
"CLOSING DATE" means the date on which Closing occurs;
"CLOSING" has the meaning set out in Clause 6.1;
"COLLECTIVE AGREEMENT" means any agreement or arrangement made
by or on behalf of a Group Company and
by or on behalf of any one or more trade
unions, works councils, staff
associations or other body representing
employees and any agreement or
arrangement made by or on behalf of any
employers' or trade association and one
or more trade unions, works councils,
staff associations, association of trade
unions or other central body
representing employees which applies to
a Group Company or to which a Group
Company is subject;
"CONDITIONS" has the meaning set out in Clause 3.1;
A-2
"CONSOLIDATED NET DEBT" means the difference between (a) the
aggregate Indebtedness of the Group
Companies and (b) the aggregate Cash and
Cash Equivalents of the Group Companies;
"DELOITTE & TOUCHE" means, collectively, Deloitte Touche
Tohmatsu, a Swiss Verein, its member
firms, and their respective subsidiaries
and affiliates.
"ENCUMBRANCE(S)" means a mortgage, charge, pledge, lien,
right of usufruct, depository receipt,
option, restriction, right of first
refusal, right of pre-emption, easement,
lease, third-party right or interest,
other encumbrance or security interest
of any kind, or any other type of
preferential arrangement (including,
without limitation, any title transfer
and retention arrangement) having
similar effect;
"EUROWEB GUARANTEE AGREEMENT" means the guarantee agreement, dated
February 23, 2004, between Pantel as
obligee and Seller as guarantor;
"EUROWEB HUNGARY" has the meaning set out in Recital A;
"EUROWEB HUNGARY SHARES" has the meaning set out in Recital A;
"EUROWEB ROMANIA" has the meaning set out in Recital C;
"EUROWEB ROMANIA SHARES" has the meaning set out in Recital C;
"GROUP COMPANIES" has the meaning set out in Recital C;
"HUF" means Hungarian Forint, or any successor
currency thereto;
"IFRS" means International Financial Reporting
Standards promulgated from time to time
by the International Accounting
Standards Board (which include standards
and interpretations approved by said
Board and International Accounting
Standards issued under previous
constitutions);
A-3
"INDEBTEDNESS" means (i) indebtedness for borrowed
money, including without limit
indebtedness evidenced by any note,
bond, debenture, mortgage or other debt
instrument or debt security and
including without further limit
indebtedness owing from any of the Group
Companies to Seller or from Seller to
the Group Companies, (ii) obligations or
commitments to repay deposits or other
amounts advanced by and owing to third
parties, (iii) obligations under any
interest rate, currency or other hedging
agreement, (iv) obligations under leases
which, under IFRS, qualify as finance
leases (but not, for the avoidance of
doubt, obligations under leases which,
under IFRS, qualify as operating leases)
and (v) guarantees or other contingent
liabilities. Indebtedness shall not
include accounts payable to trade
creditors and accrued expenses arising
in the ordinary course of business
consistent with past practice;
"INDEMNIFYING PARTY" has the meaning set out in Clause 9.7;
"INDEMNITEE" has the meaning set out in Clause 9.7;
"INDEMNITIES" means the indemnities given by Seller in
Clause 9.2;
"INTELLECTUAL PROPERTY" means patents, trade marks, service
marks, trade and business names,
registered designs, design rights,
copyright, database rights, domain
names, rights in reports, procedures,
practices, forecasts, data, lists of
Subscribers and all other commercial
information in any form, inventions,
software (computer programs in both
source and object code form), trade
secrets, confidential information of all
kinds and other similar proprietary
rights which may subsist in any part of
the world and whether registered or not,
including, where such rights are
obtained or enhanced by registration,
any registration of such rights and
rights to apply for such registrations;
"INTERIM PERIOD" has the meaning set out in Clause 5.2;
"INTERNATIONAL ACCOUNTING
STANDARDS" means International Financial Reporting
Standards promulgated from time to time
by the International Accounting
Standards Board (which include standards
and interpretations approved by said
Board and International Accounting
Standards issued under previous
constitutions);
"KEY EMPLOYEES" means, collectively, with respect to
EuroWeb Hungary, Gerlei Gyongyver, Zsok
Gabor, Aranka Juhasz, Kun Istvan, Erdesz
Anita and Papp Zombor and, with respect
to EuroWeb Romania, Laurentiu Stan,
Grozea Octavian, Scarlat Catalin,
Amortoaie Claudiu and Moise Emilia;
"LIABILITY FOR TAX" means any liability to make an actual
payment or increased payment of Tax;
A-4
"LONG STOP DATE" has the meaning set out in Clause 6.1;
"LOSS" OR "LOSSES" has the meaning set out in Clause 9.2;
"MANAGEMENT ACCOUNTS" means the unaudited balance sheet of
each of the Group Companies as at
October 31, 2005 and the unaudited
profit and loss account of each of the
Group Companies as at October 31, 2005;
"MATERIAL ADVERSE CHANGE"
AND/OR "MATERIAL ADVERSE
EFFECT" means any material adverse change in or
material adverse effect on the business,
assets, liabilities, condition
(financial or otherwise), prospects
and/or results of operation of any of
the Group Companies, including adverse
currency movements and adverse financial
and operational movements;
"MATERIAL AGREEMENTS" has the meaning set out in Clause
8.1.5(a);
"MINORITY SHARE" means 1 series A common share, nominal
value HUF 1,000, representing 0.01% of
the issued share capital and voting
rights in EuroWeb Hungary;
"NAVIGATOR" means NAVIGATOR INFORMATIKA Uzleti
Szolgaltato es Kereskedelmi Rt., a
Hungarian joint-stock company with its
registered seat at Konyves Kalman krt.
5/B., 1097 Budapest, Hungary;
"NAVIGATOR INDEBTEDNESS" means a loan in the aggregate principal
amount of USD 6,000,000 (or HUF
1,237,200,000) by Commerzbank Hungary
Rt. to EuroWeb Hungary, pursuant to a
loan agreement dated September 27, 2005,
whose purpose was to finance 70.59% of
the purchase price payable by EuroWeb
Hungary for the Navigator Shares;
"NAVIGATOR SHARES" means the shares of stock in Navigator
contemplated to be acquired by EuroWeb
Hungary in the Navigator Transaction;
"NAVIGATOR SPA" means sale and purchase agreement, dated
July 21, 2005, among Marivaux
Investments Limited and Graeton Holding
Limited, as Vendors, and EuroWeb Hungary
and Seller, as Purchasers;
"NAVIGATOR TRANSACTION" means (1) the purchase by EuroWeb
Hungary and Seller of 85% and 15%,
respectively, of the outstanding shares
of stock in Navigator pursuant to the
Navigator SPA and (2) the incurrence of
the Navigator Indebtedness in order to
finance such purchase;
"NETWORK" means a fixed or mobile signal
distribution system to which Subscribers
have access or are connected;
"NHH" means the National Communications
Authority of Hungary;
A-5
"PANTEL" means Pantel Tavkozlesi es Kommunikacios
Rt., a Hungarian joint stock company;
"PANTEL CLAIM" has the meaning set out in Clause 5.10;
"PERMITS has the meaning set out in Clause
8.1.9(a);
"PRE-CLOSING PERIODS" has the meaning set out in Clause
8.1.6(a);
"PURCHASER" has the meaning set out in the
introduction;
"PURCHASE PRICE" has the meaning set out in Clause 4.1;
"PURCHASED SHARES" has the meaning set out in Recital C;
"RELATED PARTY" means any Affiliate of any of the Group
Companies;
"RETURNS" has the meaning set out in Clause
8.1.6(b);
"ROL" means Romanian Lei or any successor
currency thereto;
"SELLER" has the meaning set out in the
introduction;
"STOCKHOLDERS MEETING" has the meaning set out in Clause 3.2.1;
"SUBSCRIBER" has the meaning set out in Clause
8.1.16(a);
"SUBSCRIPTION AGREEMENT(S)" has the meaning in Clause 8.1.16(a);
"TAX" OR "TAXATION" means and includes all forms of taxation
and statutory and governmental, state,
provincial, local governmental or
municipal charges, duties, contributions
and levies, withholdings and deductions,
including, without limitation, any
social security or other similar
payments, value added tax, wherever and
whenever imposed and all related
penalties, charges, costs and interest;
"TAXATION AUTHORITY" means any governmental or other
authority competent to impose Taxation;
"THIRD PARTY CLAIM" has the meaning set forth in Clause 9.7;
"TRANSACTION" has the meaning set out in Recital E;
and
"USD" means United States Dollar or any
successor currency thereto;
"VERIFICATION" has the meaning in Clause 4.2.4;
1.2 References to a "person" include any company, partnership, joint
venture, firm, association, trust and any governmental or regulatory
authority.
A-6
1.3 The table of contents and headings are inserted for convenience only
and do not affect the construction of this Agreement.
1.4 Unless the context otherwise requires, words in the singular include
the plural and vice versa and a reference to any gender includes all
other genders.
1.5 References to Clauses, paragraphs and Schedules are to Clauses and
paragraphs of and Schedules to, this Agreement. The Schedules form
part of this Agreement.
1.6 References to "party" or "parties" are to a party to or the parties
to this Agreement.
1.7 References to any statute or statutory provision include a reference
to that statute or statutory provision as amended, consolidated or
replaced from time to time (whether before or after the date of this
Agreement) and include any subordinate legislation made under the
relevant statute or statutory provision.
1.8 The expressions "ordinary course of business" or "business in the
ordinary course" mean the ordinary and usual course of business of
any of the relevant Group Companies, consistent in all respects
(including nature and scope) with the prior practice of such
relevant Group Companies.
1.9 References to "contract" and "agreement" include any arrangement,
obligation, understanding or commitment.
1.10 References to "shares" in a person include a reference to the
shares, membership interests or other equity interests in such
person and references to "shareholders" shall be construed
accordingly.
1.11 References in Clause 5.3 and Clause 8 to USD shall include
references to the equivalent amounts in another currency by
reference to the spot rate of exchange of HVB Hungaria Rt. for the
purchase of the other currency with USD in the Budapest foreign
exchange market at or about 11 a.m. on the date of this Agreement.
2 SALE AND PURCHASE
3.1 On the terms, and subject to the Conditions:
3.1.1 Seller agrees to sell, assign, transfer and deliver to
Purchaser on the Closing Date, and Purchaser agrees to
purchase from Seller on the Closing Date, the Purchased
Shares, free and clear of all Encumbrances;
3.1.2 Seller agrees to procure the sale, assignment, transfer and
delivery to Purchaser and Purchaser agrees to purchase on the
Closing Date, the Minority Share, free and clear of all
Encumbrances; and
3.1.3 Seller shall sell and Purchaser shall purchase the Purchased
Shares, and Seller shall procure the sale of and Purchaser
shall purchase the Minority Share, in each case, with all
rights now or in the future attaching to them (including the
right to receive all dividends, distributions or any return of
capital declared).
3 CONDITIONS
3.1 The Closing will take place as set forth in Clause 6 below,
conditional on the following conditions (the "Conditions") being
satisfied, or waived in accordance with Clause 3.4, at or prior to
the Closing:
A-7
3.1.1 the issuance of a resolution by the Hungarian Economic
Competition Office unconditionally approving the Transaction
without imposing any other terms on Purchaser, Group Companies
or Affiliates, or stating that the Transaction is not subject
to its approval;
3.1.2 the approval by the shareholders of Seller of the transactions
contemplated by this Agreement;
3.1.3 the delivery of the Audit in accordance with Clause 4.2.1, and
the absence in the results of the Audit of any event or
circumstance that could reasonably be expected to have a
Material Adverse Effect of which Purchaser was not actually
aware on the date of this Agreement; and
3.1.4 since October 31, 2005, there shall not have occurred any
change or circumstance that has resulted or would be
reasonably likely to result in any Material Adverse Change.
3.2 Seller will use its best efforts to procure the fulfillment of the
Condition in Clause 3.1.2 as soon as possible and in any event prior
to the Long Stop Date. Without limiting the foregoing:
3.2.1 Seller shall take, in accordance with applicable laws and its
certificate of incorporation and by-laws, all action necessary
to convene a meeting of its shareholders (the "Stockholders
Meeting") as promptly as practicable after the execution of
this Agreement to consider and vote upon the adoption of this
Agreement.
3.2.2 The board of directors of Seller shall recommend such adoption
and shall take all lawful action to solicit such adoption of
this Agreement. In the event that subsequent to the date
hereof, the board of directors of Seller determines that this
Agreement is no longer advisable and makes any change in
recommendation contrary to the terms of this Agreement, Seller
shall nevertheless submit this Agreement to its shareholders
for adoption at the Stockholders Meeting unless this Agreement
shall have been terminated in accordance with its terms prior
to the Stockholders Meeting and, except as required by
applicable law or by its shareholders, Seller shall not
adjourn, postpone or cancel (or propose for adjournment,
postponement or cancellation) the Stockholders Meeting.
3.2.3 Purchaser and its counsel shall be given a reasonable
opportunity to review and comment upon the proxy statement
prepared by Seller in respect of the Stockholders Meeting
prior to its filing with the U.S. Securities and Exchange
Commission. Seller agrees to provide the Purchaser and its
counsel with information with respect to any oral comments and
with copies of any written comments Seller or its counsel may
receive from the SEC or its staff with respect to the proxy
statement promptly after receipt of such comments and shall
provide Purchaser and its counsel a reasonable opportunity to
comment on the response of Seller to such comments.
3.2.4 Based on its certificate of incorporation and by-laws and
applicable law, Seller represents and warrants that only a
simple majority vote of the Stockholders is necessary for
lawful approval of this Transaction.
3.3 If by the date which is 120 days after the date of this Agreement,
Seller either fails to comply with the provisions of Clause 3.2, or
the Stockholders Meeting fails to approve the Transaction as set
forth in this Agreement, then Seller shall on demand reimburse to
Purchaser all costs, expenses and fees (including without limit
financial and technical advisors and attorneys fees) in relation to
the investigation, and negotiation of the Transaction, and all
associated and connected matters up to the maximum amount of EUR
400,000. The payment of this amount is the sole remedy available for
Purchaser if the Stockholders Meeting fails to approve the
Transaction as set forth in this Agreement, except in the case of
the wilful breach by Seller of the provisions of Clause 3.2.
A-8
3.4 Purchaser may (but is not obliged to) waive the Conditions set out
in Clauses 3.1.3 and/or 3.1.4.
3.5 Purchaser shall diligently take all reasonable actions necessary to
obtain the approval of the Hungarian Economic Competition Office
(Clause 3.1.1) at its own cost and expense. Seller shall provide all
reasonable assistance to Purchaser in obtaining the approval. If the
Hungarian Economic Competition Office grants its approval subject to
conditions, the Parties shall conduct good faith negotiations on
whether such conditions are acceptable. If the conditions are
acceptable to Purchaser then the Condition in Clause 3.1.1 is deemed
to be fulfilled.
3.6 If any of the Conditions required to be fulfilled by Seller or
Purchaser, as the case may be, are not fulfilled by such Party or
are not waived by the other Party, on or before the Long Stop Date,
then the other Party shall be entitled to terminate this Agreement
by written notice.
3.7 If this Agreement is terminated in accordance with Clause 3.6, then
the following shall apply:
3.7.1 If this Agreement is terminated due to the failure of the
Condition set forth in Clause 3.1.1 to be fulfilled, then
Purchaser shall not be liable to Seller except to the extent
that it breached Clause 3.5;
3.7.2 If this Agreement is terminated due to the failure of the
Condition set forth in Clause 3.1.2 to be fulfilled, then
Seller shall not be liable to Purchaser except to reimburse
the costs, expenses and fees of Purchaser pursuant to Clause
3.3; and
3.7.3 If this Agreement is terminated due to the failure of the
Conditions set forth in Clauses 3.1.3 or 3.1.4 to be
fulfilled, then Seller shall not be liable to Purchaser except
to the extent that a breach by Seller of the provisions of
this Agreement shall have caused or contributed in any
material respect to such failure.
4 CONSIDERATION
4.1 The consideration for the sale and purchase of the Purchased Shares
and the Minority Share shall be the payment by Purchaser to Seller
of USD 30,000,000 (the "Purchase Price"), which Purchase Price shall
be payable as follows:
4.1.1 98% of the Purchase Price (or USD 29,400,000) shall be paid by
Purchaser on the Closing Date; and
4.1.2 2% of the Purchase Price (or USD 600,000), as adjusted
pursuant to Clause 4.2.5, shall be paid by Purchaser within
three (3) Business Days after the Independent Auditor shall
have delivered the Verification.
4.2 The Purchase Price shall be adjusted as follows:
4.2.1 From no later than February 1, 2006, Seller shall procure that
each Group Company provide Deloitte & Touche with access to
all documents and information required for Deloitte & Touch to
prepare an audit of the financial statements prepared by the
Company under IFRS (including, without limitation, the balance
sheet, profit and loss statement and statement of cash flows)
of each such Group Company for the twelve (12) month period
ended December 31, 2005 (the "Audit");
A-9
4.2.2 Seller and Purchaser shall use their respective best efforts
to procure that Deloitte & Touche prepare and deliver to the
parties the Audit, as soon as possible and in any event by the
40th day after the date on which Deloitte & Touche has been
provided with access to all documents and information required
for it to prepare the Audit;
4.2.3 at the Closing, Seller shall deliver to Deloitte & Touche and
Purchaser a certificate identifying the Indebtedness
outstanding and the Cash and Cash Equivalents of the Group
Companies on the Closing Date;
4.2.4 Seller and Purchaser shall use their respective best efforts
to procure that Deloitte & Touche verify and deliver to the
parties a statement as to the Consolidated Net Debt as at the
Closing Date (the "Verification") as soon as possible and in
any event within 10 Business Days after the Closing Date.
Purchaser shall procure that the Group Companies provide
Deloitte & Touch with access to all documents and information
required for Deloitte & Touche to conduct such audit and
deliver such Verification;
4.2.5 the Purchase Price shall be either:
(a) reduced by the amount by which the Verification
determines that the Consolidated Net Debt on the Closing
Date exceeded zero, and Purchaser shall be entitled to
deduct such excess from the instalment of the Purchase
Price paid pursuant to Clause 4.1.2; provided that
Seller shall pay to Purchaser within 30 days after
delivery of the Verification the amount (if any) by
which such excess exceeds the instalment of the Purchase
Price paid pursuant to Clause 4.1.2; or
(b) increased by the amount by which the Verification
determines that the Consolidated Net Debt on the Closing
Date was less than zero; and
4.2.6 the fees and costs of Deloitte & Touche in the preparation of
the Audit and the Verification shall be borne 50% by Seller
and 50% by Purchaser.
4.3 Seller shall be responsible for paying to the transferor of the
Minority Share such portion of the Purchase Price as Seller and such
transferor may agree and shall hold harmless Purchaser from and
against any Losses resulting from any claim by the transferor of the
Minority Share relating to his, her or its compensation for the
transfer of the Minority Share.
5 INTERIM PERIOD
5.2 On or prior to the Closing Date, Seller shall cause the Group
Companies to repay, with no additional or residual cost or liability
to Purchaser and all Navigator Indebtedness.
5.3 During the period from the date of this Agreement to the Closing
Date (the "Interim Period"), Seller shall cause the Group Companies
to operate and carry on their respective businesses in the ordinary
course of business in a manner consistent with past practices and
will not, without the prior written consent of Purchaser, cause or
permit any of the Group Companies to take any action or omit to take
any action which would cause any of the representations and
warranties set forth in Clause 8 to be untrue, inaccurate or
misleading in any material respect.
5.4 Without limiting the generality of Clause 5.2, Seller shall procure
that during the Interim Period neither Group Company shall take any
of the following actions without the prior written consent of
Purchaser:
5.4.1 the amendment of its by-laws or articles;
5.4.2 acquisition of, or agreement to acquire, by merger,
consolidation, purchase or otherwise any stock or all or
substantially all of the assets of any person (be it a
corporation, partnership, association or other business
organization in the ordinary course of business);
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5.4.3 the alteration or reorganization of its outstanding capital
stock or equity securities or declaration, set aside, making
or payment of any dividend in respect of its capital (in cash
or otherwise) or purchase or redemption of any shares of its
capital;
5.4.4 the issuance or sale, or redemption or acquisition of, or
agreement to issue or sell, or redeem or acquire, any of its
capital or other equity interest or any options, warrants or
other rights to purchase any such shares or other equity
interest or any securities convertible into or exchangeable
for such shares or equity interests or purchase, or agree to
purchase, any such securities of a third party;
5.4.5 the reorganization, dissolution or entering into any plan of
liquidation or dissolution or similar proceeding, or ceasing
to carry on its business operations;
5.4.6 except for the sale of the Navigator Shares, the sale,
transfer, lease or pledge, or agreement to sell, transfer,
lease or pledge (whether by a single transaction or a series
of related transactions), any asset, tangible or intangible
having a value of more than USD 50,000 or, over the course of
the Interim Period, assets with a value of more than USD
200,000 in the aggregate;
5.4.7 the cancellation or termination of any insurance policy (other
than any car insurance policy);
5.4.8 the provision of credits, lending of amounts and issuance of
credit notes or waiver or cancellation of any receivables or
debts owed to it having a value of more than USD 50,000 or,
over the course of the Interim Period, credits, loans, credit
notes and waivers and cancellation of receivables and debt
having a value of more than USD 200,000 in the aggregate;
5.4.9 except for the Navigator Indebtedness, incurrence of any new
Indebtedness over the course of the Interim Period in an
aggregate principal amount in excess of USD 200,000 in the
aggregate;
5.4.10 the amendment or voluntary termination of any Material
Agreement;
5.4.11 the entering into any new contract or agreement that would
qualify as a Material Agreement or any other contract,
agreement or commitment with a Related Party;
5.4.12 any departure or deviation from the ordinary course of
business consistent with past practice in the management of
the working capital of any of the Group Companies, including,
without limitation, through the delay in payment of payables
or acceleration of invoicing or collection of receivables;
5.4.13 the making by any of the Group Companies of any capital
expenditure in excess of USD 50,000 or, over the course of the
Interim Period, capital expenditures in excess of USD 200,000
in the aggregate;
5.4.14 the appointment and removal of the auditors of any of the
Group Companies;
5.4.15 the entering into of any swap, forward contract, futures
contract, option or any other derivative or financial
arrangement by any of the Group Companies other than in the
ordinary course of business;
5.4.16 the commencement or settlement of any material litigation
involving any of the Group Companies; or
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5.4.17 the employment of any management staff member, or termination
of any Key Employee.
For the purposes of requesting Purchaser's consent hereunder, Purchaser
designates Martin Lea and Rob Bowker acting separately and not jointly
with immediate effect and with full power to give consents; provided that
Purchaser shall have the right at any time upon written notice to Seller
to change the identity of the individuals designated to provide such
consents. Purchaser agrees not to unreasonably withhold any such consent
(considering the commercial sensitivities of the relevant decision and the
information provided by Seller in connection therewith) and not to
unreasonably delay any such consent (and any such consent shall be deemed
to be given if Purchaser has not consented or refused its consent within
five (5) Business Days).
5.5 During the Interim Period:
5.5.1 Seller shall: (a) provide to Purchaser copies of all financial
reports (including, without limitation, the monthly management
accounts with respect to each Group Company within 20 days
after the end of each calendar month) and other material
information regarding the Group Companies, including, without
limitation, all such information made available to members of
the boards of directors and supervisory boards of the Group
Companies (including any committees consisting of members of
such boards); (b) notify Purchaser of anything that
constitutes an unexpected emergency or other material change
in the normal course of the business or operations of the
properties or other assets of any of the Group Companies and
of any complaints, investigations, hearings, adjudicatory or
arbitral proceedings (including submissions thereto) of any
governmental authority or arbitral tribunal involving the
properties or other assets of the Group Companies, and keep
Purchaser fully informed of such events and permit Purchaser's
representatives prompt access to all materials prepared in
connection therewith.
5.5.2 Seller shall, and shall procure that (upon prior notice by
Purchaser to Seller) the management of each of the Group
Companies confer on a regular and frequent basis with one or
more designated representatives of Purchaser to report
operational matters and report the general status of ongoing
operations relating to the businesses of the Group Companies.
5.5.3 Seller shall, upon reasonable request, procure that
representatives of Purchaser have access, at all reasonable
times and in a manner so as not to interfere with the normal
business operations of the Group Companies, to the senior
management.
5.5.4 Seller shall procure that EuroWeb Romania use its best efforts
to apply for and obtain as many Permits as practicable that
were required for the construction of the existing Network of
EuroWeb Romania and that have not been applied for and
obtained.
5.6 Purchaser agrees to hold all information it receives from Seller
with respect to the Group Companies pursuant to Clause 5.4 as
confidential information until the Closing Date, will not use any of
such information at any time prior to the Closing Date except in
connection with this Agreement, and, if this Agreement is terminated
for any reason whatsoever, will (a) return to Seller all copies of
such information that are in its possession promptly upon the
written request of Seller and (b) destroy any internal analyses that
have incorporated any such information; provided that Purchaser
shall be entitled to retain for record keeping purposes one copy of
any material presented to its Board of Directors or shareholders.
5.7 During the Interim Period, Purchaser shall be entitled to speak with
management staff members of the Group Companies and offer to them,
on behalf of the relevant Group Company, a retention bonus payable
by such Group Company contingent upon the occurrence of the Closing
and their remaining with such Group Company for at least a specified
number of days after the Closing Date. Promptly upon the request of
Purchaser, Seller shall procure that the relevant Group Company
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authorize and execute any such offer. For the avoidance of doubt,
any such arrangements shall not include the payment of any part of
such a bonus by a Group Company prior to the Closing Date or by
Seller at any time.
5.8 During the Interim Period, Seller shall not take, and shall procure
that each of the Group Companies refrain from taking, any action to,
directly or indirectly, encourage, initiate or engage in any
discussions or negotiations with, or provide any information to, any
person (other than Purchaser and/or its Affiliates) concerning: (a)
any sale or other disposition of the Purchased Shares or all or any
material part of the assets or business of any Group Company; (b)
any issuance of any new shares by any of the Group Companies; or (c)
any merger, demerger or transformation of any of the Group
Companies.
5.9 During the Interim Period, Seller shall disclose to Purchaser in
writing any event or circumstance either (a) originating prior to
the date of this Agreement that constitutes a breach of Seller's
representations and warranties set out in Clause 8.1 or (b) that has
occurred since the date of this Agreement and that (i) would
constitute, if existing on the Closing Date, a breach of Seller's
representations and warranties set forth in Clause 8.1 and/or (ii)
constitutes or could reasonably be expected to result in a Material
Adverse Effect. Each such notice shall be delivered by Seller as
soon as reasonably practicable after Seller has become aware of such
event or circumstance and no later than 5 Business Days after Seller
having become so aware.
5.10 For avoidance of doubt, absent any agreement to the contrary by
Purchaser, no disclosure by Seller under Clause 5.8 shall serve to
excuse Seller from liability under this Agreement arising from a
representation, warranty and a breach of a covenant under Clause 5
or otherwise.
5.11 During the Interim Period, Seller and Purchaser shall use their
respective reasonable efforts to obtain jointly the consent of
Pantel to the assignment by Seller to Purchaser of all obligations
of Seller under the Euroweb Guaranty Agreement, such assignment to
take effect on the Closing Date. If such assignment proves to be
impossible or impractical due to the failure of Pantel to provide
its consent to such assignment, (a) Seller shall remain the
contracting party in respect of the Euroweb Guarantee Agreement, (b)
Seller shall notify Purchaser of any action, proceeding, claim,
liability demand or assessment asserted by Pantel against Seller
under the Euroweb Guarantee Agreement relating to an event or
circumstance occurring after the Closing Date (a "Pantel Claim"),
(c) Purchaser shall be solely responsible for satisfying any Pantel
Claim and shall indemnify and hold harmless Seller from and against
any and all Losses actually suffered or incurred by Seller arising
out of or resulting from any such Pantel Claim and (d) the
provisions of Clauses 9.7 through 9.9 shall apply as if the Pantel
Claim was a Third Party Claim thereunder, as if Seller was the
Indemnitee thereunder and Purchaser was the Indemnifying Party
thereunder.
5.12 During the Interim Period, Seller shall and shall cause the Group
Companies to cooperate fully with Purchaser and Purchaser's lenders
in finalizing for signature by the Group Companies at Closing all
documents requested by Purchaser's lenders in connection with
Purchaser's existing credit facilities (including without limitation
the supply of all necessary information); provided that any and all
such documents signed at Closing shall be conditional upon
successful Closing hereunder.
5.13 On or prior to the Closing Date, Seller shall procure the following:
5.13.1 The purchase by Seller from EuroWeb Hungary of all of the
Navigator Shares for a purchase price that shall not exceed
the purchase price paid by EuroWeb Hungary for the Navigator
Shares, and the repayment of any and all Navigator
Indebtedness from the proceeds of such purchase price, such
repayment to be (a) subject to no prepayment fees or penalties
(provided that if any such prepayment fees or penalties are
payable, then Seller shall pay them on behalf of EuroWeb
Hungary) and (b) simultaneous with the release of any
Encumbrances securing such Navigator Indebtedness; and
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5.13.2 The release by the vendors under the Navigator SPA of EuroWeb
Hungary from and against any and all actions, proceedings,
claims, liabilities, demands or assessments they may have
against EuroWeb Hungary under the Navigator SPA.
6 CLOSING
The sale and purchase of Purchased Shares in accordance with this Agreement (the
"Closing") will take place at the office of Reczicza White & Case LLP, Andrassy
ut 11, 1062 Budapest, Hungary on the date which is seven (7) Business Days after
the date on which the last of the Conditions is satisfied or waived, or at such
other time and place as is agreed in writing by Seller and Purchaser, provided
that such date is no later than June 30, 2006 (the "Long Stop Date").
At Closing the parties shall undertake those actions listed in Clause 6.5
applicable to it. If the provisions of Clause 6.5 are not complied with on the
Closing Date by either party, then the other party shall not be obliged to
proceed with the Closing and may:
6.2.1 defer Closing to a date no less than five (5) and no more than
fifteen (15) Business Days after the date set for Closing
(with the provisions of this Clause 6 applying to Closing as
so deferred);
6.2.2 proceed to Closing as far as practicable (without limiting
their rights under this Agreement); or
6.2.3 terminate this Agreement for breach of condition upon notice
to the party that has breached its obligations under Clause
6.5 (without limiting its rights and remedies under this
Agreement).
The payment of the Purchase Price by wire transfer of funds pursuant to Clause
6.5.2 and the crediting of the same on the bank account of Seller shall
discharge the payment obligation of Purchaser pursuant to Clause 6.5.2(a) of
this Agreement, and Purchaser shall not be concerned with the application of
such sums by Seller.
Closing Arrangements
Seller's Obligations
At Closing, Seller shall procure the delivery of the following for each of
Seller and Group Companies:
(a) evidence satisfactory to Purchaser that this Agreement has been duly
authorized and duly executed by Seller;
(b) a certificate signed by a duly authorized officer of Seller
certifying as to the authenticity of the attached resolution of the
shareholders of Seller approving the transactions contemplated by
this Agreement;
(c) valid and effective resolutions of the general meetings of the
shareholders of the Group Companies appointing, with effect from the
Closing Date, the persons set out in Schedule 6.5.1(c) or such other
persons as Purchaser shall nominate at least 45 days prior to the
Closing Date as members of board of directors, managing directors,
administrators and auditors of the Group Companies (as appropriate);
(d) the share certificates for the Purchased Shares, duly endorsed in
blank, or accompanied by transfers duly executed in favor of
Purchaser by Seller;
(e) authentic copies of the share registry of Euroweb Hungary and the
shareholders registry of EuroWeb Romania, in each case, reflecting
the registration of the transfers of the Purchased Shares to
Purchaser, signed by each of Seller and Purchaser;
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(f) written resignations in the agreed terms to take effect from Closing
of all members of the board of directors and supervisory board of
each Group Company, in each case relinquishing any right (past,
present or future) against any of the Group Companies for loss of
office (whether contractual, statutory or otherwise);
(g) a certificate of tax residency in the United States with respect to
Seller;
(h) evidence satisfactory to Purchaser of the fulfillment of the
Conditions;
(i) the books and records of the Group Companies as described in Clause
8.1.12;
(j) signed documents required by the banks of the Group Companies to
change the signatory rights over the accounts of the Group companies
to the designee of Purchaser;
(k) signed consents of counter-parties under those Material Agreements
requiring such consent in the event of a change of control in any of
the Group Companies;
(l) evidence satisfactory to Purchaser (acting reasonably) that all of
the actions required to be taken pursuant to Clause 5.1 have been
taken;
(m) all documents (duly signed by the Group Companies and notarized if
necessary) requested by Purchaser's lenders under its existing
credit facilities;
(n) certified declaration updating Seller's representations and
warranties in Clause 8 as at Closing in the agreed form of Schedule
6.5.1(o); and
(o) any and all other documents required to effect the Transaction and
divest in Purchaser the ownership and control of the Group Companies
and their Business.
Purchaser's Obligations
At Closing, Purchaser shall:
(a) procure that the Purchase Price shall be transferred by Swift
transfer in immediately available funds to the bank account notified
by Seller at least five Business Days prior to the Closing Date, and
provide copies of the relevant Swift instructions certified by
Purchaser's bank;
(b) deliver to Seller a certified copy of the minutes of the meeting of
the board of directors of Purchaser authorizing the execution of
this Agreement; and
(c) deliver to Seller a certified copy of the approval of the Hungarian
Economic Competition Office.
7 PURCHASER REPRESENTATIONS AND WARRANTIES
7.1 Purchaser represents and warrants to Seller that each of the
following is on the date hereof and will be on the Closing Date
true, accurate and not misleading:
7.1.1 Purchaser is a company duly incorporated and validly existing
under the laws of Hungary. It has the corporate power to enter
into this Agreement and to perform its obligations hereunder.
The execution of and entering into this Agreement and the
consummation of the transactions contemplated hereby, by
Purchaser have been duly authorized by all necessary corporate
and other action applicable to Purchaser. This Agreement
constitute legal, valid and binding obligations of Purchaser
enforceable against Purchaser in accordance with their terms.
7.1.2 The execution of and entering into this Agreement, and the
consummation of the transactions contemplated hereby, do not
and will not (with or without the passage of time or the
giving of notice) (i) violate or conflict with any provision
of the articles of Purchaser, (ii) violate or conflict with
any regulation binding upon Purchaser or any of its assets, or
(iii) except for Hungarian Competition Office approval,
require the consent of or notice to any person under any
agreement or obligation to which Purchaser is bound.
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7.1.3 Purchaser has conducted a comprehensive legal, tax, financial
and technical due diligence with respect to the Group
Companies and received detailed answers to questions regarding
the Group Companies and, without limiting the right of
Purchaser to recover under any Indemnity set out in Clauses
9.2.2, 9.2.3 or 9.2.4, on the date hereof is not aware of any
material breach of the representations and warranties given by
Seller pursuant to Clause 8. Seller shall not be liable under
the representations and warranties given by it in Clause 8 to
the extent that Purchaser was aware of the facts, events or
circumstances which cause any of such representations and
warranties to be breached or misleading; for purposes of the
foregoing, Purchaser shall be deemed to be aware of facts,
events or circumstances if and to the extent (and only if and
to the extent) that any of Martin Lea, Rob Bowker, Zsuzsanna
Czebe or Andrea Raba were actually aware of such facts, events
or circumstances on the date of this Agreement or that a
reasonable and prudent buyer, advised by competent and
experienced legal counsel and financial advisors, could
reasonably be expected to have discovered and understood such
facts, events or circumstances (including the extent of Losses
that could reasonably be expected to occur as a result of such
facts, events or circumstances) from an examination of the
documents set out in the data room made available by Seller to
Purchaser and its advisors.
7.1.4 Purchaser will on the Closing Date have sufficient funds at
its disposal to pay the Purchase Price hereunder. Attached as
Schedule 7.1.4 is a confirmation from HVB Hungaria Rt. that it
has agreed to underwrite a facility for the purpose of
financing the payment by Purchaser of a portion of the
Purchase Price.
8 SELLER REPRESENTATIONS AND WARRANTIES
8.1 Seller represents and warrants to Purchaser each of the following is
on the date hereof and will be on the Closing Date true, accurate
and not misleading:
8.1.1 Existence, Power and Authority
(a) Seller is a company duly incorporated and validly
existing under the laws of the State of Delaware, United
States of America. It has the corporate power to enter
into this Agreement and to perform its obligations
thereunder. The execution of and entering into this
Agreement and the consummation of the transactions
contemplated thereby, by Seller have been duly
authorized by the Board of Directors of Seller. On the
date of this Agreement the obligations of Seller
hereunder constitute legal, valid and binding
obligations of Seller enforceable against Seller in
accordance with their terms other than the obligation of
Seller to sell to Purchaser the Purchased Shares, which
shall be legal, valid and binding upon the approval of
the holders of a majority of the common stock of Seller
pursuant to Clause 3.2.1. No other corporate approvals
are necessary to authorize the execution or the
performance by Seller of this Agreement.
(b) The execution of and entering into this Agreement, and
the consummation of the transactions contemplated
thereby, do not and will not (with or without the
passage of time or the giving of notice) (i) violate or
conflict with any provision of the articles of Seller or
any of the Group Companies, (ii) violate or conflict
with any regulation binding upon Seller or any of the
Group Companies or any of their assets, (iii) require
the consent of or notice to any person under any
agreement or obligation to which any of the Group
Companies is bound or (iv) violate or conflict with,
result in a breach of, constitute a default under or
result in the termination, cancellation or modification
of any Material Agreement or other material obligation
by which any of the Group Companies is bound or result
in the creation or imposition of any Encumbrance upon
any asset of any of the Group Companies.
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(c) Set forth in Schedule 8.1.1(c) is a complete and
accurate list of each of the jurisdictions in which the
Group Companies operate, and/or are qualified and
licensed to do business. Each of the Group Companies is
duly organized and validly existing under the laws of
the country of its formation. Each of the Group
Companies has all requisite power to own its property
and other assets and to carry on its business as
currently being conducted. None of the Group Companies
is insolvent, has been declared insolvent, has been
dissolved, or, to the best knowledge, information and
belief of Seller, in the future could reasonably be
expected to be declared insolvent, and there has been no
petition filed proposing the opening of bankruptcy
proceedings in respect of any of the Group Companies.
(d) No consent or approval of, or registration,
notification, filing and/or declaration with, any
governmental authority or other person (other than the
approval by the U.S. Securities and Exchange Commission
of the proxy materials submitted in connection with the
Stockholders Meeting) is required to be given or made by
Seller or any of the Group Companies in connection with
the execution of this Agreement, and the consummation of
the Transaction; and to the best knowledge, information
and belief of Seller, the execution of this Agreement,
and the consummation of the Transaction, will not result
in the termination, cancellation or modification of any
permit.
8.1.2 Capitalization
(a) Schedule 8.1.2(a) sets forth a true, accurate and
complete description of the capitalization of each of
the Group Companies.
(b) Seller is the registered and beneficial owner of the
Purchased Shares, free of any and all Encumbrances
(other than Encumbrances securing the Navigator
Indebtedness, which Encumbrances shall be released in
full on or before the Closing Date). For the avoidance
of doubt, there are no options, warrants, rights
(including conversion or pre-emptive rights) or
agreements, orally or in writing, for the purchase or
acquisition of the Purchased Shares, other than as
detailed in this Agreement.
(c) Seller has a valid call option to purchase the Minority
Share.
8.1.3 Shares
(a) The Purchased Shares have been duly and validly issued,
fully paid and are non-assessable and free of
Encumbrances (other than Encumbrances securing the
Navigator Indebtedness, which Encumbrances shall be
released in full on or before the Closing Date).
(b) Neither Group Company owns, directly or indirectly, any
shares, membership interests or other equity or
proprietary interest in any other person (other than the
ownership by Euroweb Hungary of the Navigator Shares,
which shall cease on or before the Closing Date).
8.1.4 Management Accounts and no Changes
(a) The Management Accounts, except as indicated therein, to
the best knowledge, information and belief of Seller,
(i) have been prepared in accordance with local
accounting standards or accounting law consistently
applied throughout the ten (10) month period ended on
October 31, 2005 and (ii) present a true and fair view
of the financial position of the Group Companies taken
as a whole as at the date thereof and the results of
their operations and changes in the financial position
of the Group Companies taken as a whole for the such
period.
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(b) Since October 31, 2005, there has not been (i) any
Material Adverse Change, except such changes as have
generally effected the market within which either Group
Company operates, and to the best knowledge, information
and behalf of Seller, there is no fact or condition that
exists or is contemplated or threatened which could
reasonably be expected to result in a Material Adverse
Effect in the future save for general economic
conditions and matters generally affecting businesses
which compete with the business of any of the Group
Companies.
(c) To the best knowledge, information and belief of Seller,
none of the Group Companies has any material claims,
obligations, liabilities or Indebtedness, whether
absolute, accrued, contingent or otherwise, except for
(i) claims, obligations, liabilities or Indebtedness set
forth in the Management Accounts and (ii) accounts
payable to trade creditors and accrued expenses incurred
subsequent to October 31, 2005 in the ordinary course of
business consistent with past practice.
(d) To the best knowledge, information and belief of Seller,
the amount of all accounts receivable, unbilled invoices
and other debts due or recorded in the respective
records and books of account of the Group Companies as
being due as at the Closing Date (less the amount of any
provision or reserve therefor made in the respective
records and books of account of the Group Companies and
its Subsidiaries) will be good and collectible in full
in the ordinary course of business and in any event not
later than ninety (90) days after the Closing Date; and
none of such accounts receivable or other debts is, or
at the Closing Date will be, subject to any counterclaim
or set-off except to the extent of any such provision or
reserve. There has been no Material Adverse Change since
October 31, 2005 in the amount of accounts receivable or
other debts due to any the Group Companies or the
allowances with respect thereto, or accounts payable of
the Group Companies, from that reflected in the
Management Accounts.
(e) Schedule 8.1.4(e) set forth an accurate and complete
list of all Indebtedness and Cash and Cash Equivalents
of the Group Companies on October 31, 2005.
8.1.5 Material Agreements
(a) To the best knowledge, information and belief of Seller,
Schedule 8.1.5(a) sets forth an accurate and complete
list of (i) all agreements and other instruments which
contain restrictions on the payment of dividends or
other distributions in respect of the capital of any of
the Group Companies, (ii) all agreements relating to the
issuance or repurchase of shares or other equity
interests or in respect of registration rights,
pre-emptive rights, rights of first refusal, transfer
rights or restrictions, voting rights or other rights of
share or other equity holders of any of the Group
Companies, (iii) all agreements relating to a joint
venture, shareholders or other similar arrangement
involving any of the Group Companies, (iv) all
agreements of any of the Group Companies relating to a
loan or advance to, or investment in, any person in
excess of USD 50,000, (v) all guarantees and other
contingent liabilities of any of the Group Companies in
respect of any indebtedness or other contingent
obligation of any person (other than another Group
Company), (vi) all agreements pursuant to which any of
Seller or Group Companies has contracted with a third
party for all or a material part of the management of
any of the Group Companies, (vii) all contracts limiting
the ability of any of the Group Companies to engage in
any line of business or compete with any person, (viii)
all other agreements of any of the Group Companies
having a value or cost, or potential value or cost, in
excess of USD 100,000 or (ix) all material agreements of
any of the Group Companies which, or the termination of
which, could reasonably be expected to have a Material
Adverse Effect (all agreements, contracts, instruments
or commitments set forth or required to be set forth on
Schedule 8.1.5(a), the "Material Agreements").
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(b) To the best knowledge, information and belief of Seller,
none of the Group Companies is in breach with respect to
the performance of contractual obligations under any
Material Agreement, and there is no event that, with
notice or lapse of time or both, will constitute a
material default by any of the Group Companies
thereunder. To the best knowledge, information and
belief of Seller, no other party under any Material
Agreement is in default with respect to the performance
of contractual obligations thereunder, and there is no
event which, with notice or lapse of time or both, will
constitute a default by any such party thereunder. To
the best knowledge, information and belief of Seller,
each Material Agreement constitutes the legal, valid and
binding obligation of the Group Companies which are a
party thereto, enforceable against each of such parties
in accordance with its terms.
8.1.6 Taxes
To the best knowledge, information and belief of Seller:
(a) All Taxes and Tax liabilities of the Group Companies for
all taxable years or periods that end on or before the
Closing Date and, with respect to any taxable year or
period beginning before and ending after the Closing
Date, the portion of such taxable year or period ending
on and including the Closing Date ("Pre-Closing
Periods") have been timely paid or accrued and
adequately disclosed and fully provided for on the books
and records of the Group Companies in accordance with
International Accounting Standards or local accounting
standards.
(b) The Group Companies have duly and timely filed all Tax
returns and all other Tax documents, forms, statements
and reports that are required to have been filed by them
in accordance with applicable regulations ("Returns").
The Returns have accurately (i) reflected liability for
Taxes of the Group Companies, including any tax losses,
for the periods covered thereby, (ii) characterised and
reflected transactions between Group Companies,
including financing transactions between Group
Companies, and (iii) reflected the residual value for
Tax purposes of the assets of the Group Companies. There
are no requests for extensions of time for the filing of
any Returns.
(c) Other than disclosed in Schedule 8.1.6(c) none of the
Group Companies or Seller has been the subject of an
audit or other examination of Taxes by the tax
authorities of any nation, state or locality (and no
such audit is pending or contemplated) nor has any of
the Group Companies or Seller received any notices from
any taxing authority relating to any issue which could
or reasonably be expected to materially affect the Tax
liability of any of the Group Companies.
(d) Neither Seller nor any of the Group Companies has, as of
the Closing Date, (a) entered into an agreement or
waiver or requested to enter into an agreement or waiver
extending any statute of limitations relating to the
payment or collection of Taxes or (b) is presently
contesting any Tax liability before any court, tribunal
or agency.
(e) None of the Group Companies has been included in any
"consolidated", "unitary" or "combined" Return provided
for under the law of the United States, any non-U.S.
jurisdiction or any state, province, prefect or locality
with respect to Taxes for any taxable period for which
the statute of limitations has not expired.
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(f) All Taxes which the Group Companies, individually and
collectively, is (or was) required by law to withhold or
collect in connection with amounts paid or owing to any
employee, independent contractor, creditor, stockholder
or other third party have been duly withheld or
collected, and have been timely paid over to the proper
authorities to the extent due and payable.
(g) No written claim has ever been made by any Taxing
authority in a jurisdiction where any of the Group
Companies does not file Returns that such of the Group
Companies is or may by subject to Taxation by that
jurisdiction.
(h) There are no Tax sharing, allocation, indemnification or
similar agreements in effect as between any of the Group
Companies or any predecessor or Affiliate thereof and
any other party (including Seller and any predecessors
or Affiliates thereof) under which Purchaser or the
Group Companies could be liable for any Taxes or other
claims of any party.
(i) None of the Group Companies has applied for, been
granted, or agreed to any accounting method change for
which it will be required to take into account any
adjustment under the Tax laws of any nation, state,
province, prefect or locality.
8.1.7 Labor
(a) EuroWeb Hungary is not a party to a Collective Agreement
or required to comply with a Collective Agreement.
EuroWeb Romania is a party to a Collective Agreement for
the year 2005 - 2006 that is substantially the same as
its Collective Agreement for the year 2004 - 2005.
(b) No Group Company has a works or supervisory council or
other body representing employees which has a right to
be represented or attend at or participate in any board
or council meeting or a right to be informed, consulted
or make representations in relation to the business of a
Group Company, other than any right of consultation of
the employees to be informed or consulted with respect
to matters concerning them arising by operation of any
laws of general application.
(c) Except as disclosed in Schedule 8.1.8(a), no Group
Company is involved in a dispute regarding a claim of
material importance with its employees or any trade
union, association of trade unions, works council, staff
association or other body representing its employees and
there are no circumstances likely to give rise to any
such dispute.
(d) Within the period of two years ending on the date of
this Agreement no Group Company has:
(i) made or started implementation of any collective
dismissals that have required or will require
notification to any authority or notification to
or consultation with any trade union, works
council, staff association or other body
representing employees; or
(ii) been a party to any transfer of a business or
undertaking that has required or will require
notification to or consultation with any trade
union, works council, staff association or other
body representing employees.
(e) None of the Group Companies have, or are under any legal
obligation to establish, any pension schemes for their
employees except as disclosed in Schedule 8.1.7(e).
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(f) Seller and each of the Group Companies have provided
Purchaser and its advisors with a form of employment
agreement applicable to all employment and other
arrangements between a Group Company and each Key
Employee.
(g) Other than with respect to sales representatives
entitled to a bonus based upon their respective sales,
no Group Company has in existence nor is it proposing to
introduce, and none of its employees or contractors
directly or indirectly participates in (whether or not
established by a Group Company), any share trust, share
incentive scheme, share option scheme or profit sharing
scheme for the benefit of all or any of its present or
former employees or contractors or the dependants of any
of such persons or any scheme whereunder any present
employee or contractor is entitled to a commission,
bonus or remuneration of any other sort calculated by
reference to the whole or part of the turnover, profits
or sales of Seller, the Group, any Group Company or any
other person, firm or company or payable upon the
consummation of the Transaction.
8.1.8 Litigation; Compliance with Law
(a) Except as disclosed in Schedule 8.1.8(a) there is no
action, suit, arbitration or administrative or other
proceeding by or before (or, so far as Seller is aware,
any investigation by) any court, governmental authority
or arbitral tribunal pending or, to the best knowledge,
information and belief of Seller, threatened against or
affecting any of the Group Companies or any material
assets of any of the Group Companies, and, to the best
knowledge, information and belief of Seller, no valid
basis exists for any such action, proceeding or
investigation. None of the Group Companies is subject to
any judgments, orders or decrees.
(b) To the best knowledge, information and belief of Seller,
except as disclosed in Schedule 8.1.8(b), none of the
Group Companies is in violation or default of any
provisions of its articles or, is in violation of any
applicable laws or regulations. Each of the Group
Companies has operated in compliance with all applicable
laws and regulations.
(c) To the best knowledge, information and belief of Seller,
except as disclosed in Schedule 8.1.8(b), none of the
Group Companies has received notice of any alleged
violation of any applicable laws or regulations.
(d) To the best knowledge, information and belief of Seller,
none of the Group Companies has offered or given, or has
knowledge of any person that has offered or given on
their behalf, anything of value to: (i) any national or
local government official, any political party or
official thereof, or any candidate for political office;
(ii) customer or member of a governmental authority; or
(iii) any other person, in any such case while knowing
or having reason to know that all or a portion of such
money or thing of value may be offered, given or
promised, directly or indirectly, to any customer or
member of a governmental authority or candidate for
political office for the purpose of the following: (A)
influencing any action or decision of such person, in
his or its official capacity, including a decision to
fail to perform his or its official function; (B)
inducing such person to use his or its influence with
any governmental authority to effect or influence any
act or decision of such governmental authority, in each
of (A) and (B) in order to assist any Group Company in
obtaining or retaining business for, or with, or
directing business to, any person and where such payment
would constitute a bribe, kickback or illegal or
improper payment.
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8.1.9 Permits
To the best knowledge, information and belief of Seller:
(a) Seller has delivered or made available to Purchaser for
inspection a true and correct copy of each material
permit, certificate, license, consent or authorization
of all governmental or other authority or person
(collectively "Permits") obtained or possessed by the
Group Companies. The Group Companies have all Permits
necessary for their operations and the Business as
currently conducted including Permits for the design,
construction, operation and maintenance of all Networks,
as well as for the provision or any modification of the
services of any Networks.
(b) Except as disclosed in Schedule 8.1.9(d), each of the
Permits held by any of the Group Companies is in full
force and effect. The Group Companies have conducted
their business in accordance with their respective
Permits, and none of the Group Companies has received
any notice that indicates that it has not complied with
any of the terms of such Permits.
8.1.10 Intellectual Property
To the best knowledge, information and belief of Seller:
(a) Schedule 8.1.10(a) sets forth all material items of
Intellectual Property owned and/or licensed by the Group
Companies or under which they have rights. Each of the
Group Companies owns or possesses all requisite rights
to all Intellectual Property used or required to be used
by it without infringing the rights of third parties.
All material Intellectual Property has been duly
registered with, filed in or issued by the appropriate
governmental authority to the extent required to provide
the Group Companies with the rights used or contemplated
to be used by them, and each such registration, filing
and issuance remains in full force and effect.
(b) So far as Seller is aware, no claim adverse to the
interests of any of the Group Companies in any
Intellectual Property right has been threatened or
asserted, no basis exists for any such claim and no
person has infringed or otherwise violated any such
interest of any of the Group Companies. None of the
Group Companies has received any communications alleging
that it has violated any of the Intellectual Property
rights of any other person.
8.1.11 Insurance
(a) To the best knowledge, information and belief of Seller,
Schedule 8.1.11 is an accurate and complete list of each
insurance policy covering the Group Companies and their
businesses, employees and assets (other than any car
insurance policy). Each of the Group Companies has in
full force and effect insurance policies in such
amounts, and on such terms and covering such risks as
are customary in accordance with industry standards and
practices in Hungary or Romania, as the case may be, and
are required under any agreement or obligation to which
the relevant of the Group Companies is bound.
(b) With respect to each such insurance policy: (i) such
insurance policy is legal, valid, binding and
enforceable; (ii) no party thereto is in breach or
default, or has repudiated such insurance policy; and
(iii) since the end of their most recent financial year,
neither of the Group Companies has been notified by the
relevant insurer that it is no eligible to make any
claim under such insurance policy.
8.1.12 Books and Records
To the best knowledge, information and belief of Seller, the
minutes and related books of resolutions of each of the Group
Companies have been kept in accordance with the requirements
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of applicable regulation. All the accounts, books, ledgers,
financial and other records of each of the Group Companies are
in its possession or the possession of its advisors and, so
far as Seller is aware, have been properly and accurately
kept. The register of shareholders and other statutory books
(including the minutes and related books of resolutions) of
each of the Group Companies are in its possession and have
been properly maintained.
8.1.13 Properties
(a) Schedule 8.1.13(a) contains an accurate and complete
list of all real property owned in whole or in part by
the Group Companies. Each of the Group Companies has
good and marketable title to all the real property owned
by it, free and clear of all Encumbrances.
(b) To the best knowledge, information and belief of Seller,
Schedule 8.1.13(b) contains an accurate and complete
list and description of the material terms of all leases
or subleases of real property to which the Group
Companies is a party (as lessee or lessor). To the best
knowledge, information and belief of Seller, the Group
Companies have valid leasehold interests in all leased
real property described in each lease set forth in
Schedule 8.1.13(b), free and clear of any and all
Encumbrances. To the best knowledge, information and
belief of Seller, each lease set forth in Schedule
8.1.13(b) is in full force and effect; all rents and
additional rents due to date on each such lease have
been paid; in each case, the lessee has been in
peaceable possession since the commencement of the
original term of such lease and is not in default
thereunder and no waiver, indulgence or postponement of
the lessee's obligations thereunder has been granted by
the lessor; and there exists no default or event,
occurrence, condition or act (including the purchase of
the Purchased Shares hereunder) which, with the giving
of notice, the lapse of time or the happening of any
further event or condition, would become a default under
such lease.
8.1.14 Assets
Each of the Group Companies has good and valid title to, or a
valid leasehold interest in, all of the fixed assets reflected
in the Management Accounts and those fixed assets acquired,
leased or otherwise used by Group Companies since the end of
their most recent financial year, other than those disposed of
since that date in the ordinary course of business, free and
clear of all Encumbrances (other than Encumbrances securing
the Navigator Indebtedness, which Encumbrances shall be
released in full on or before the Closing Date).
8.1.15 Networks
To the best knowledge, information and belief of Seller:
(a) The Group Companies, individually or collectively, as
the case may be, have good and valid title to, and the
exclusive right to use, operate, alter or dispose of,
all Networks operated by them, free and clear of any
Encumbrances.
(b) All Networks operated by the Group Companies having
regard to their age and reasonable wear and tear are in
good operating condition and in a state of good
maintenance and repair and are adequate and suitable for
their present use. Each of the Group Companies has
adequate easements, rights of ingress and egress, pole
attachment rights, leasehold and other property
interests necessary for the operation and maintenance of
the Business and Network(s) and, to the best knowledge,
information and belief of Seller, none of such real
properties, nor the operation or maintenance thereof,
encroaches on the property of others. Neither Seller nor
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any of the Group Companies has received notice that any
Network has not been constructed and operated and
maintained at all times, in accordance with all
applicable laws and regulations.
8.1.16 Subscribers
(a) The Group Companies have at least 11,600 subscribers
("Subscribers") in the aggregate with whom the Group
Companies have written agreements to furnish internet
and IP voice and data services (ISP) (collectively,
"Subscription Agreements"). All persons receiving
services from the Group Companies are party to a
Subscription Agreement.
(b) To the best knowledge, information and belief of Seller,
the Subscription Agreements are legal, valid, binding
and enforceable obligations of the Subscribers. There
are no governmental, contractual or similar restrictions
on the amounts that the Group Companies are permitted to
charge for providing such services. None of the Group
Companies is in material breach with respect to the
performance of contractual obligations under any of the
Subscription Agreements, and, so far as Seller is aware,
there is no event that, with notice or lapse of time or
both, will constitute a material default by any of the
Group Companies thereunder.
8.1.17 Bank Accounts and Powers of Attorney
Set forth on Schedule 8.1.17 is an accurate and complete list
showing (a) the name and address of each bank in which the
Group Companies has an account or safe deposit box, the number
of any such account or any such box and the names of all
persons authorized to draw thereon or to have access thereto
and (b) the names of all persons, if any, holding powers of
attorney from the Group Companies.
8.1.18 Disclosure
To the best knowledge, information and belief of Seller, none
of this Agreement or Management Accounts (including the
footnotes thereto), any Schedule, Exhibit or certificate
delivered pursuant to this Agreement or any document or
statement in writing which has been supplied to Purchaser or
its representatives by or on behalf of Seller, the Group
Companies or any of its Subsidiaries or any of their
respective directors, officers or employees in connection with
the Transaction, contains any untrue statement of a material
fact, or omits any statement of a material fact necessary to
make the statements contained herein or therein not
misleading. There is no fact known to Seller that would have a
Material Adverse Effect with respect to any of the Group
Companies which has not been set forth in this Agreement or
Management Accounts (including the footnotes thereto) or any
Schedule, Exhibit or certificate delivered pursuant to this
Agreement.
8.2 Seller shall notify Purchaser in writing with full details of any
event or circumstance which is or may be expected to cause a breach
of, or be inconsistent with, any of the foregoing Seller's
representations and warranties promptly upon such event coming to
its notice whether before, at the time of, or after Closing.
8.3 Except if Purchaser is actually aware of the underlying breach on
the date of this Agreement, if a material breach of any of the
foregoing representations and warranties of Seller occurs prior to
Closing, Purchaser shall be entitled to terminate this Agreement
upon written notice to Seller provided that the accrued rights and
liabilities of the parties (including, for the avoidance of doubt,
Purchaser's right to claim damages for breach of Seller's
representations and warranties) shall subsist.
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8.4 Where any of Seller's representations and warranties are qualified
by knowledge, information, belief or awareness of Seller, Seller
confirms that (1) it has made reasonable inquiry within the ordinary
course of its business as to the subject-matter of such
representation and warranty, (2) in the ordinary course of its
business Seller should have been aware of any breach of each such
representation and warranty and (3) Seller is not aware of any such
breach.
9 SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION
9.1 The respective representations and warranties of Seller and
Purchaser contained in this Agreement shall survive the purchase and
sale of the Purchased Shares pursuant to this Agreement.
9.2 From and after the Closing Date, subject to the limitations set
forth in this Agreement, Seller shall indemnify and hold harmless
Purchaser and the Group Companies from and against any and all
losses, damages and expenses (including, without limitation,
reasonable attorneys' and consultants' fees and expenses)
(collectively, "Losses") actually suffered or incurred by Purchaser
or any of the Group Companies arising out of or resulting from any
of the following:
9.2.1 the failure of any representation and warranty of Seller to be
true, accurate and not misleading on the date of this
Agreement and on the Closing Date or the breach by Seller of
any of its covenants or agreements hereunder.
9.2.2 any claims relating to the legality of the provision by
EuroWeb Hungary of carrier pre-selection (CPS) service up to
and including the Closing Date; provided that, in the event
that, after the Closing Date, any authority shall fine Euroweb
Hungary with respect to the provision of such service but
shall not allocate such fine to a specific period, then
Seller's indemnity obligation hereunder shall extend to a
proportion of such fine in which the numerator is the number
of days between the date on which Euroweb Hungary commenced
providing such service and the Closing Date and the
denominator is the total number of days in which Euroweb
Hungary provided such service (including, for the avoidance of
doubt, the period after the Closing Date);
9.2.3 the revocation by the NHH on or prior to the Closing Date of
the right of the Group Companies to use the SHS
(51)310-000-310-999 numbering range;
9.2.4 any Liability for Tax of the Group Companies in respect of or
in consequence of any event, act, omission or transaction
which occurred on or before the Closing Date;
9.2.5 any event or circumstance that occurs on or prior to the
Closing Date relating to the absence of any Permit for the
construction of the existing Network of EuroWeb Romania (for
the avoidance of doubt, Purchaser shall be responsible for any
Losses arising out of or resulting from any such event or
circumstance that occurs after the Closing Date);
9.2.6 the Navigator Transaction.
9.3 For the purposes of indemnification under Clause 9.2:
9.3.1 Seller shall not be liable in respect of any claim for breach
of representation and warranty under Clause 9.2.1 where the
liability agreed or determined in respect of any such claim
for breach of representation and warranty does not exceed
one-percent (1%) of the Purchase Price (provided that any
event or circumstance which results in Losses of Purchaser or
any Group Company in excess of 1% of the Purchase Price shall
be deemed to be "material" for purposes of determining whether
or not a breach has occurred of any representation and
warranty qualified by materiality in Clause 8 and such
qualification shall be disregarded in the quantification of
Losses arising from such a breach), unless and until the
aggregate amount of all such claims for breach of
representation and warranty for which Seller would otherwise
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be liable in the absence of this provision exceeds one-percent
(1%) of the Purchase Price. Where the amount agreed or
determined in respect of all claims referred to in Clause 9.2
for breach of representation and warranty or Indemnity exceeds
one-percent (1%) of the Purchase Price, Seller shall be liable
for the entire amount thereof;
9.3.2 the aggregate liability of Seller in respect of breaches of
the representations and warranties set forth in Clauses 8.1.5
and 8.1.7 through 8.1.17 and the Indemnities set forth in
Clauses 9.2.2 and 9.2.3 shall not exceed 15% of the Purchase
Price;
9.3.3 the aggregate liability of Seller for the representations and
warranties and Indemnities specified in Clause 9.3.2 and set
forth in Clauses 8.1.4, 8.1.6, 9.2.4, 9.2.5 and 9.2.6 shall
not exceed 30% of the Purchase Price (for the avoidance of
doubt, the parties acknowledge that in any aggregation of
liability under this Clause 9.3.3, the liability under Clause
9.3.2 shall not exceed 15% of the Purchase Price in any
circumstances);
9.3.4 the aggregate liability of Seller in respect of breaches of
the representations and warranties set forth in Clause 8.1.1,
8.1.2 and 8.1.3 shall not exceed 100% of the Purchase Price;
9.3.5 Seller shall not incur any liability in respect of any claim
for breach of representation and warranty or indemnity and any
such claim shall be wholly barred and unenforceable unless
notice of such claim shall have been served upon Seller by
Purchaser no later than 60 days after the approval by
Purchaser of the statutory financial reports of the Group
Companies for the financial year 2006 (but in any event no
later than June 1, 2007), or in the case of Clause 8.1.6
(Taxes) or Clause 9.2.4, five (5) years from the last day of
the calendar year in which the Closing Date occurs.
Notwithstanding anything to the contrary herein, the time
limitations contained in this Clause shall not apply to any
claim for breach of any representation and warranty set forth
in Clauses 8.1.1 through 8.1.3; and
9.3.6 Seller shall not incur any liability in respect of any claim
for breach of representations and warranty or indemnity under
Clause 8.1.6 (Taxes) or Clause 9.2.4 in respect of an event or
circumstance in any financial year unless the liability agreed
or determined in respect of all claims for events or
circumstances in such financial year exceed USD 50,000.
9.4 Purchaser shall indemnify and hold harmless Seller from and against
any and all Losses actually suffered or incurred by Seller arising
out of or resulting from the failure of any representation or
warranty of Purchaser to be true, accurate and not misleading on the
date of this Agreement and the Closing Date or the breach by
Purchaser of any of its covenants or agreements hereunder; provided
that Purchaser shall not incur any liability in respect of any claim
for breach of representation and warranty or indemnity and any such
claim shall be wholly barred and unenforceable unless notice of such
claim shall have been served upon Purchaser by Seller no later than
twenty-four (24) months from the Closing Date.
9.5 In no event shall either Purchaser or Seller be liable to the other
under Clauses 9.2 or 9.4 for any consequential, indirect, special or
punitive losses, damages or liabilities.
9.6 Any payment under Clauses 9.2 or 9.4 shall be made to Purchaser or
Seller, as the case may be, or at the respective party's direction
within 30 Business Days after a demand by Purchaser or Seller, as
the case may be. If either party disputes a demand made by the other
party, then it shall be entitled to withhold payment of the disputed
amount; provided that if the dispute shall be resolved in the favor
of the other party, the disputed amount shall be deemed to bear
interest in accordance with Clause 23 from the 30th day after the
demand.
9.7 Subject to the limitations set by this Agreement, if any action,
proceeding, claim, liability, demand or assessment shall be asserted
by a third party against Purchaser or any of the Group Companies
(the "Indemnitee") with respect to any matter set forth in Clause
9.2 (a "Third Party Claim") in respect of which such Indemnitee
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proposes to demand indemnification, such Indemnitee shall notify
Seller (the "Indemnifying Party") thereof within a reasonable period
of time after assertion thereof; provided, however, that the failure
to so notify the Indemnifying Party shall not affect the
Indemnitee's right to indemnification hereunder unless (and solely
to the extent) the Indemnifying Party's interests are actually and
materially prejudiced thereby. Subject to rights of or duties to any
insurer or other third Person having liability therefor, the
Indemnifying Party shall have the right, within ten (10) days after
receipt of such notice, to defend the Indemnitee against the Third
Party Claim with counsel of its choice reasonably satisfactory to
the Indemnitee; provided, however, that the Indemnifying Party
notifies the Indemnitee in writing within fifteen (15) days after
the Indemnitee has given notice of the Third Party Claim that the
Indemnifying Party will indemnify the Indemnitee from and against
the entirety of any damage the Indemnitee may suffer resulting from,
arising out of, relating to, in the nature of, or caused by the
Third Party Claim, and provided further that the Indemnifying Party
may not assume such control without Indemnitee's express written
consent if: (i) the Third Party Claim does not involve only money
damages but also seeks an injunction or other equitable relief; or
(ii) settlement of, or an adverse judgment with respect to, the
Third Party Claim is, in the good faith judgment of the Indemnitee,
likely to establish a precedential custom or practice materially
adverse to the continuing business interests or the reputation of
the Indemnitee. The Indemnifying Party shall conduct the defense of
the Third Party Claim actively and diligently.
9.8 So long as the Indemnifying Party is conducting the defense of the
Third Party Claim in accordance with the foregoing Clause above, (i)
the Indemnitee may retain separate counsel at its sole cost and
expense and participate in the defense of the Third Party Claim,
provided that Indemnitee's counsel may not oppose the professional
decisions of the lead counsel engaged by the Indemnifying Party
except on reasonable grounds; (ii) the Indemnitee will not consent
to the entry of any judgment or enter into any settlement with
respect to the Third Party Claim without the prior written consent
of the Indemnifying Party (not to be withheld unreasonably); and
(iii) the Indemnifying Party will not consent to the entry of any
judgment or enter into any settlement with respect to the Third
Party Claim without the prior written consent of the Indemnitee
(which may only be withheld in the event that such settlement would
serve to create a precedential custom or practice materially adverse
to the continuing business interests or the reputation of the
Indemnitee).
9.9 In the event that Indemnifying Party declines or fails to assume
control of the defense of any Third Party Claim as specified above,
then and in such event the Indemnitee may defend against, and
consent to the entry of any judgment or enter into any settlement
with respect to, the Third Party Claim in any manner it reasonably
may deem appropriate, subject to the consent of the Indemnifying
Party which may not be unreasonably withheld or delayed. The
Indemnifying Party shall reimburse the Indemnitee promptly and
periodically for the costs of defending against the Third Party
Claim (including reasonable attorneys' fees and expenses incurred in
defending the Third Party Claim pursuant to this Clause 9.9), and
will remain responsible for any Losses the Indemnitee may suffer
resulting from, arising out of, relating to, in the nature of, or
caused by any Third Party Claim in accordance with the provisions of
this Agreement.
10 POST-CLOSING INTEGRATION ASSISTANCE
Seller shall, and shall procure that its Chief Executive Officer, Csaba
Toro and his successors, assist Purchaser in the transition and
integration of the Group Companies during the first year after Closing, at
no cost to Purchaser or the Group Companies. Without limiting the
foregoing, Seller undertakes to provide at no cost to Purchaser, during
the first year after the Closing, 25 days (total 8 hours a day) of
consulting services by Csaba Toro and his successors to assist Purchaser
in the integration of the Group Companies, on dates and at times
reasonably requested by Purchaser.
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11 NO-RECRUITMENT; NON-COMPETE
11.1 Seller shall not and shall procure that each of its Affiliates and
its Chief Executive Officer, Csaba Toro and his Affiliate shall not,
directly or indirectly, either alone or jointly with any other
person or in any capacity whatsoever:
11.1.1 neither pending nor within 2 years after the Closing Date
carry on or be engaged or otherwise interested in any business
in Hungary or Romania which competes with the Business or any
part of the Business;
11.1.2 neither pending nor within 2 years after the Closing Date not
employ any employee of, or consultant to, either Company
(provided that the foregoing shall not restrict Seller or its
Affiliates from employing any of Csaba Toro, Kriszta Hollo,
Balazs Nyiri, Wilson Balanchandra, Zoltan Toth; provided
further that Zoltan Toth shall be available to Euroweb Hungary
for a period of 2 months after the Closing Date to continue
his duties as and to the extent such duties exist on the date
hereof); or
11.1.3 at any time within 2 years after the Closing Date in the
course of any business use the words EuroWeb, Freestart, or
use any trade, business or domain name or distinctive mark,
design or logo used or previously used in the Business by any
of the Group Companies or anything which is capable of so
being confused with the exception that Seller shall be
entitled to use the names "Euroweb International", "EWI" and
"EWEB" and related domain names in such a manner as does not
cause any confusion in the respective markets in which the
Group Companies operate.
11.2 Notwithstanding Clause 11.1, it is understood that Navigator
provides a full scope of IT services and additional trade capacity.
Its full service IT system implementation and IT project management
includes consultancy, system design, development and implementation,
and training. Its full service IT system operation includes full
support and maintenance of the provided services: application
development; telecommunications; Internet access; virus protection
services; LAN support; and other related services. Nothing in this
Agreement shall prevent Seller, in its sole discretion, from
continuing to own or subsequently transferring Navigator or
Navigator from continuing to provide the services its currently
provides on the date of this Agreement.
11.3 Each of the restrictions contained in this Clause 11 shall be
construed as a separate provision of this Agreement. If any
restriction is unenforceable but would be valid if reduced in scope
or duration the restriction shall apply with the minimum
modifications as may be necessary to make it valid and enforceable.
12 PREFERRED VENDOR STATUS
Seller undertakes that it shall, and shall procure that each of its
Affiliates shall provide preferred vendor status to Purchaser and each of
the Group Companies in any business they conduct subsequent to the
Closing; in return for a reciprocal commitment by Purchaser and the Group
Companies in favor of Seller.
13 CONFIDENTIALITY
13.1 Seller shall treat as confidential the provisions of this Agreement
and all information it has received or obtained about Purchaser as a
result of entering into this Agreement. The provisions of this
Clause 13 shall survive Closing and the eventual termination of this
Agreement.
13.2 Purchaser shall treat as confidential the provisions of this
Agreement and all information it has received or obtained about
Seller and/or the Group Companies as a result of entering into this
Agreement.
13.3 Either party may disclose information which would otherwise be
confidential if and to the extent:
A-28
13.3.1 required by law or any securities exchange, regulatory or
governmental body or Tax authority;
13.3.2 disclosed to its professional advisers (provided that such
persons are required to treat such information as
confidential); or
13.3.3 it comes into the public domain other than as a result of a
breach by a party of this Clause 13,
provided that prior written notice of any confidential information
to be disclosed pursuant to this Clause 13 shall be given to the
other party.
14 ANNOUNCEMENTS
14.1 No announcement shall be made by either party relating to this
Agreement without the prior written approval of the other party,
such approval not to be unreasonably withheld or delayed.
14.2 Either party may make an announcement relating to this Agreement if
(and only to the extent) required by the law of any relevant
jurisdiction or any securities exchange, regulatory or governmental
body provided that prior written notice of any announcement required
to be made is given to the other party in which case such party
shall take all steps as may be reasonable in the circumstances to
agree the contents of such announcement with the other party prior
to making such announcement.
15 ASSIGNMENT
The rights and benefits of this Agreement (together with any cause of
action arising in connection with any of them) may be assigned and the
obligations under this Agreement transferred by Purchaser to any Affiliate
or to its successor in title; provided that in the event of any transfer
of obligations Purchaser shall remain jointly and severally liable to
Seller for the fulfillment of such obligations.
16 FURTHER ASSURANCE
Each Party shall from time to time and at its own cost do, execute and
deliver or procure to be done, executed and delivered all such further
acts, documents and things required by, and in a form satisfactory to, the
other Party to give full effect to this Agreement and its rights, powers
and remedies under this Agreement.
17 ENTIRE AGREEMENT
This Agreement, together with any other documents referred to in the
Agreement constitutes the whole agreement between the parties and
supersedes any previous arrangements or agreements between them relating
to the Transaction.
18 SEVERANCE AND VALIDITY
If any provision of this Agreement is or becomes illegal, invalid or
unenforceable in any respect under the law of any jurisdiction, such
provision shall be deemed to be severed from this Agreement and the
parties shall replace such provision with one having an effect as close as
possible to the deficient provision. The remaining provisions will remain
in full force in that jurisdiction and all provisions will continue in
full force in any other jurisdiction.
19 AMENDMENTS
No amendment of this Agreement shall be effective unless in writing and
signed by or on behalf of the parties.
20 REMEDIES AND WAIVERS
20.1 No waiver of any right under this Agreement shall be effective
unless in writing. Unless expressly stated otherwise a waiver shall
be effective only in the circumstances for which it is given.
A-29
20.2 No delay or omission by any party in exercising any right or remedy
provided by law or under this Agreement shall constitute a waiver of
such right or remedy.
20.3 The single or partial exercise of a right or remedy under this
Agreement shall not preclude any other nor restrict any further
exercise of any such right or remedy.
20.4 The rights and remedies provided in this Agreement are cumulative
and do not exclude any rights or remedies provided by law.
21 EFFECT OF CLOSING
The provisions of this Agreement which remain to be performed following
Closing shall continue in full force and effect notwithstanding Closing.
22 COSTS AND EXPENSES
Except as provided otherwise, each party shall pay its own costs and
expenses in connection with the negotiations, preparation and performance
of this Agreement.
23 DEFAULT INTEREST
Any and all amounts which are due and payable under this Agreement shall
be paid in USD and shall carry interest at a rate of 3-month LIBOR plus
4%.
24 NOTICES
24.1 Any notice or other communication to be given under or in connection
with this Agreement ("Notice") shall be in the English language in
writing and signed by or on behalf of the party giving it and marked
for the attention of the relevant party. A Notice may be delivered
personally or sent by fax, pre-paid recorded delivery or pre-paid
registered airmail to the address or fax number provided in Clause
24.3.
24.2 A Notice shall be deemed to have been received:
24.2.1 at the time of delivery if delivered personally;
24.2.2 at the time of transmission if sent by fax;
24.2.3 2 (two) Business Days after the time and date of posting if
sent by pre-paid recorded delivery; or
24.2.4 5 (five) Business Days after the time and date of posting if
sent by pre-paid registered airmail,
provided that if deemed receipt of any Notice occurs after 6.00 p.m.
or is not on a Business Day, deemed receipt of the Notice shall be
9.00 a.m. on the next Business Day. References to time in this
Clause 24 are to local time in the country of the addressee.
24.3 The addresses and fax numbers for service of Notice are:
SELLER:
Name: Euroweb International Corp.
Address: 1138 Budapest, Vaci ut 141, Hungary
For the attention of: Csaba Toro, Chief Executive Officer
Fax number: +36 1 889-7128
PURCHASER:
Name: Invitel Tavkozlesi Szolgaltato Rt.
Address: 2040 Budaors, Puskas Tivadar utca 8-10
For the attention of: Martin Lea, Chief Executive Officer
Fax number: +36 1 801-1675
A-30
24.4 A party shall notify the other parties of any change to its address
in accordance with the provisions of this Clause 24 provided that
such notification shall only be effective on the later of the date
specified in the notification and 5 (five) Business Days after
deemed receipt.
25 COUNTERPARTS
This Agreement may be executed in counterparts and shall be effective when
each party has executed a counterpart. Each counterpart shall constitute
an original of this Agreement.
26 GOVERNING LAW
26.1 The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the Republic of Hungary,
excluding any conflict of laws rule or principle that might refer
the governance of the construction of this Agreement to the law of
another jurisdiction. Notwithstanding the foregoing, the conditions
and binding effect of the transfer of the EuroWeb Romania Shares
shall be governed by the laws of Romania.
27 SETTLEMENT OF DISPUTES
27.1 Any dispute, controversy or claim arising out of, relating to or in
connection with this Agreement shall be referred to, and finally
settled by, international arbitration under the Rules of Arbitration
of the International Chamber of Commerce (the "ICC") in effect on
the date of this Agreement, which Rules are deemed to be
incorporated by reference into this Clause. The place of the
arbitration shall be Budapest, Hungary and the award shall be deemed
to have been rendered there. The language of the arbitration shall
be English. The arbitral tribunal shall consist of three
arbitrators. Seller shall nominate one arbitrator; Purchaser shall
nominate one arbitrator; and a third arbitrator, who shall serve as
chairman, shall be appointed by the Secretary General of the ICC
International Court of Arbitration if the two arbitrators cannot
agree upon a chairman within 30 days of the confirmation of the
second of the first two arbitrators. The award shall be final and
binding upon the parties, who undertake to carry it out without
delay and without recourse to judicial proceedings in any
jurisdiction whatsoever seeking annulment, setting aside,
modification or any diminution or impairment of its terms or effect.
IN WITNESS WHEREOF each party has executed this Agreement, or caused this
Agreement to be executed by its duly authorized representatives.
EUROWEB INTERNATIONAL CORP., a Delaware, U.S. corporation
By:_______________________________________
Csaba Toro, its Chief Executive Officer
INVITEL TAVKOZLESI SZOLGALTATO RT., a Hungarian joint stock company
By:_______________________________________
Martin Lea, its Chief Executive Officer
By:_______________________________________
Rob Bowker, its Chief Financial Officer
A-31
EXHIBIT B
EUROWEB INTERNATIONAL CORP.
Consolidated Balance Sheet as of December 31, 2004, and
Consolidated Statements of Operations & Comprehensive Loss,
Stockholders' Equity, and Cash Flows for the
Years ended December 31, 2004 and 2003
EUROWEB INTERNATIONAL CORP.
Consolidated Financial Statements
December 31, 2004 and 2003
TABLE OF CONTENTS
PAGE
Report of the Independent Registered Public Accounting Firm B-2
Consolidated Financial Statements:
Consolidated Balance Sheet B-3
Consolidated Statements of Operations and Comprehensive Loss B-4
Consolidated Statements of Stockholders' Equity B-5
Consolidated Statements of Cash Flows B-6
Notes to Consolidated Financial Statements B-7
B-1
REPORT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Euroweb International Corp.
We have audited the accompanying consolidated balance sheet of Euroweb
International Corp. and subsidiaries as of December 31, 2004, and the related
consolidated statements of operations and comprehensive loss, stockholders'
equity, and cash flows for the years ended December 31, 2004 and 2003. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Euroweb
International Corp. and subsidiaries as of December 31, 2004, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 2004 and 2003 in conformity with accounting principles
generally accepted in the United States of America.
The consolidated financial statements give retroactive effect to the purchase of
Euroweb Rt. by the Company on February 29, 2004 which has been accounted for as
a combination of entities under common control in a manner similar to a pooling
of interests as described in Note 2(q) to the consolidated financial statements.
KPMG Hungaria Kft.
Budapest, Hungary
March 23, 2005
B-2
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2004
2004
------------
ASSETS
Current assets:
Cash and cash equivalents (note 3) $ 4,537,633
Trade accounts receivable, less allowance
for doubtful accounts of $1,384,415 3,695,990
Related party receivables 1,869,667
Unbilled receivables 1,107,501
Prepaid and other current assets 858,694
Deferred tax asset (note 10) 253,425
------------
Total current assets 12,322,910
Property and equipment (note 4) 7,253,113
Goodwill (note 5) 5,806,181
Intangibles- customer contracts (note 5) 2,053,288
Other assets 568,356
------------
Total assets $ 28,003,848
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 4,254,759
Related party payables 564,818
Related party loan payable - short term portion (note 8) 543,568
Overdrafts and current portion of bank loans (note 7) 321,704
Notes payable (note 7) 808,441
Other current liabilities 1,091,470
Accrued expenses 2,808,073
Deferred IRU revenue (note 6) 46,000
Deferred other revenues 1,260,225
------------
Total current liabilities 11,699,058
Deferred tax liability (note 10) 253,425
Non-current portion of related party loan payable (note 8) 543,568
Non-current portion of bank loans (note 7) 747,085
Non-current portion of deferred IRU revenue (note 6) 797,334
Non-current portion of lease obligations (note 6) 148,359
------------
Total liabilities 14,188,829
Commitments and contingencies (note 13)
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;
issued and outstanding 5,342,533 shares 24,807
Additional paid-in capital 50,780,084
Accumulated deficit
(35,982,726)
Accumulated other comprehensive (loss)/income 108,266
Treasury stock - 175,490 common shares, at cost
(1,115,412)
Total stockholders' equity 13,815,019
------------
Total liabilities and stockholders' equity $ 28,003,848
============
See accompanying notes to consolidated financial statements.
B-3
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
------------ ------------
(restated)
REVENUES
Third party $ 28,111,786 $ 16,376,349
Related party 8,503,939 5,740,709
------------ ------------
Total Revenues 36,615,725 22,117,058
COST OF REVENUES (exclusive of depreciation and amortization
shown separately below)
Third party 17,233,994 8,155,836
Related party 6,198,505 5,796,350
------------ ------------
Total Cost of revenues (exclusive of 23,432,499 13,952,186
depreciation and amortization shown separately below)
OPERATING EXPENSES
Compensation and related costs 4,182,977 2,814,868
Consulting, professional and directors fees 2,829,525 2,074,565
Other selling, general and administrative expenses 4,237,848 2,458,429
Goodwill impairment -- 887,957
Impairment of intangibles -- 100,364
Depreciation and amortization 2,610,764 1,636,133
------------ ------------
Total operating expenses 13,861,114 9,972,316
------------ ------------
Operating loss (677,888) (1,807,444)
Net interest (expense) income (217,672) 344,320
Other expenses (170,000) --
Gain from sale of subsidiaries 28,751 109,621
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (1,036,809) (1,353,503)
Income tax expense-current 62,367 61,590
Income tax expense-deferred -- --
------------ ------------
INCOME TAX EXPENSE 62,367 61,590
LOSS FROM CONTINUING OPERATIONS (1,099,176) (1,415,093)
Gain (Loss) from discontinued Czech Republic operations 364,722 (375,934)
(including 2004 gain on disposal of $409,314)
NET LOSS (734,454) (1,791,027)
Other comprehensive income (loss) 133,768 (261,644)
------------ ------------
COMPREHENSIVE LOSS $ (600,686) $ (2,052,671)
============ ============
LOSS PER SHARE, BEFORE DISCONTINUED OPERATIONS (0.22) (0.30)
DISCONTINUED OPERATIONS 0.07 (0.08)
NET LOSS PER SHARE, BASIC (0.15) (0.38)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 5,043,822 4,665,332
See accompanying notes to consolidated financial statements
B-4
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2004 AND 2003
Accumulated
Common Stock Additional Other TOTAL
---------------------------- Paid-in Accumulated Comprehensive Treasury Stockholders'
Shares Amount Capital Deficit Gains(Losses) Stock Equity
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCES,
DECEMBER 31, 2002 4,665,332 $ 24,129 $ 48,227,764 $(31,314,689) $ 236,142 (1,115,412) $ 16,057,934
(RESTATED) ============ ============ ============ ============ ============ ============ ============
Foreign currency
translation gain -- -- -- -- (45,237) -- (45,237)
Reversal of
unrealized gain on -- -- -- -- -- -- (216,407)
securities available
for sale (216,407)
Net loss for the
period (restated) -- -- -- (1,791,027) -- -- (1,791,027)
Treasury stock -- -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCES,
DECEMBER 31, 2003 4,665,332 $ 24,129 $ 48,227,764 $(33,105,716) $ (25,502) $ (1,115,412) $ 14,005,263
(RESTATED) ============ ============ ============ ============ ============ ============ ============
Foreign currency
translation gain -- -- -- -- 162,573 -- 162,573
Reversal of
unrealized gain on -- -- -- -- (28,805) -- (28,805)
securities available
for sale
Deemed distribution
(Note 2q) -- -- -- (2,142,556) -- -- (2,142,556)
Compensation charge
on share -- -- 94,212 -- -- -- 94,212
options issued to
consultants
Issuance of shares
(Elender Rt acquisition) 677,201 678 2,458,108 -- -- -- 2,458,786
Net loss for the period -- -- -- (734,454) -- -- (734,454)
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCES,
DECEMBER 31, 2004 5,342,533 $ 24,807 $ 50,780,084 $(35,982,726) $ 108,266 $ (1,115,412) $ 13,815,019
============ ============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements
B-5
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2004 AND 2003
2004 2003
------------ ------------
(restated)
Net loss (734,454) (1,791,027)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 2,610,764 1,636,133
Goodwill impairment -- 887,957
Intangibles impairment - customer lists -- 100,364
Amortization of discount on acquisition indebtedness -- 5,232
Foreign exchange gain 11,430 101,134
Bad debts provision 238,807 120,859
Compensation expense charged to equity 94,212 --
Gain on sale of subsidiaries -- (109,621)
Realized gain on sale of investment securities (26,383) (7,113)
Unrealized interest income on investment securities -- (360,539)
Changes in operating assets and liabilities net of effects of acquisitions:
Accounts receivable (704,871) (708,675)
Prepaid and other assets 585,974 328,199
Accounts payable, other current liabilities and accrued expenses 339,036 825,499
Deferred revenue 128,311 320,268
Adjustments relating to discontinued operations (364,722) 128,621
------------ ------------
Net cash provided by operating activities 2,178,104 1,477,291
------------ ------------
Cash flows from investing activities:
Maturity of securities 11,464,000 798,567
Proceed on sale of subsidiaries 500,001 4,933
Acquisition of 51% of Euroweb Rt (2,142,000) --
Acquisition of 100% of Elender Rt. (net of cash) (6,891,897) --
Payment of acquisition indebtedness -- (180,000)
Collection on notes receivable 173,911 190,065
Repayment of loan payable -- (129,945)
Capital expenditures in discontinued operations -- (21,816)
------------
Acquisition of property and equipment (1,701,990) (1,150,167)
------------ ------------
Net cash provided by (used in) investing activities 1,402,025 (488,363)
------------ ------------
Cash flows from financing activities:
Principal payment under capital lease obligations (544,876) (616,611)
------------ ------------
Repayments on notes payable (807,447) --
------------ ------------
Repayments on related party loan payable (249,597) --
------------ ------------
Repayments on overdraft and bank loan (678,906) --
------------ ------------
Net cash used in financing activities (2,280,826) (616,611)
------------ ------------
Effect of foreign exchange rate changes on cash 233,652 72,238
------------ ------------
Net (decrease) increase in cash and cash equivalents 1,532,955 444,555
Cash and cash equivalents, beginning of year 3,004,678 2,560,123
------------ ------------
Cash and cash equivalents, end of year 4,537,633 3,004,678
============ ============
Supplemental disclosure:
Shares issued as consideration in acquisition of Elender Rt $ 2,508,353 --
Interest paid $ 389,809 $ 158,306
Income taxes paid $ 62,367 $ 61,590
New capital leases $ 81,664 $ 378,855
See accompanying notes to consolidated financial statements.
B-6
1. ORGANIZATION OF BUSINESS
Euroweb International Corp. is a Delaware corporation which was organized on
November 9, 1992. The largest shareholder of Euroweb International Corp. was KPN
Telecom B.V. ("KPN"), a Netherlands corporation, with a 43.6% shareholding at
December 31, 2004.
Euroweb International Corp. owns and operates Internet service providers in
Hungary, Slovakia and Romania (collectively referred to as the "Company"). The
Company operates in one business segment. In January 2005 the Company decided to
sell its operations in Slovakia (see Note 17, Subsequent Events).
Acquisition of remaining 51% of Euroweb Internet Szolgaltato Rt ("Euroweb Rt.").
The Hungarian operations are conducted through Euroweb Rt. In February 2004, the
Company acquired the remaining 51% of Euroweb Rt. that it did not already own
from Pantel Telecommunication Rt. ("Pantel Rt.") and Euroweb Rt. is fully
consolidated in the financial statements for all periods presented (see Note 2
(q) below).
The consideration paid by the Company for the 51% interest comprised EUR
1,650,000 (USD $2,105,000) in cash, and a guarantee that Euroweb Hungary Rt.
will purchase at least HUF 600 million (approximately $3 million) worth of
services from Pantel Rt. in each of the three years ending December 31, 2006.
Acquisition of Elender Business Communications Rt. ("Elender Rt.") On June 9,
2004, the Company acquired all of the outstanding shares of Elender Rt., an
Internet Service Provider ("ISP") located in Hungary. Consideration paid of USD
$9,350,005 consisted of USD $6,500,000 in cash and 677,201 of the Company's
common shares valued at USD $2,508,353 excluding registration cost, and USD
$341,652 in transaction costs (consisting primarily of professional fees
incurred related to attorneys, accountants and valuation advisors). The results
of Elender Rt. have been included in the Company's consolidated financial
statements from the date of acquisition.
In accordance with the purchase method of accounting prescribed by SFAS No. 141
"Business Combinations" ("SFAS 141"), the Company allocated the consideration to
the tangible net assets and liabilities and intangible assets acquired, based on
their estimated fair values. The consideration has been allocated as follows:
Fair value of Elender Rt.'s recorded assets acquired and
liabilities assumed 1,379,404
Identified intangibles - customer contracts 2,730,420
Excess purchase price over allocation to identifiable
assets and liabilities (Goodwill) 5,240,181
---------------
Total Consideration $ 9,350,005
===============
In performing this purchase price allocation of acquired intangible assets based
in part on the valuation performed by an independent appraiser, the Company
considered its intention for future use of the assets, analyses of historical
financial performance and estimates of future performance of Elender Rt.'s
services, among other factors. Acquired identifiable intangible assets obtained
in the Company's acquisition of Elender Rt. relate to customer contracts which
are being amortized over the estimated useful life of 2.5 years.
The Company estimated the fair values of the identified intangibles - customer
contracts using the "income" valuation approach and discount rates ranging from
14% to 18%. The discount rates selected were based in part on the Company's
weighted average cost of capital and determined after consideration of the
Company's rate of return on debt and equity, and the risk associated with
achieving forecasted cash flows.
The excess of the purchase price over the fair value of the identifiable
tangible and intangible net assets acquired was assigned to goodwill. In
accordance with SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS
142"), goodwill will not be amortized but will be tested for impairment at least
annually.
B-7
Although the former owners of Elender Rt. received shares of common stock of the
Company, each of the former owners of Elender Rt. currently holds less than 10%
of the outstanding shares of common stock in the Company. Therefore, they are
not considered related parties and those transactions are shown as third party
transactions in the accompanying consolidated financial statements of the
Company.
Sale of Euroweb Czech
On December 16, 2004, the Company sold all of its shares in its wholly-owned
subsidiary, Euroweb Czech for cash of $500,000. However, as a part of the
transaction, the Company effectively forgave $400,000 of loans receivable from
Euroweb Czech. The Company believes that the sale of Euroweb Czech meets the
criteria for presentation as a discontinued operation under the provisions of
Statements of Financial Accounting Standard ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets, therefore all periods are
restated to reflect Euroweb Czech Republic as discontinued operations.
The following unaudited pro-forma information presents a summary of consolidated
results of operations of the Company, as if the acquisition of Elender Rt., the
disposal of Euroweb Czech, and the planned disposal of Euroweb Slovakia (see
Note 17 Subsequent Events), had occurred at January 1, 2003.
------------------------------------------------------------------------------
DECEMBER 31, 2004 DECEMBER 31, 2003
------------------------------------------------------------------------------
Revenues 43,341,912 39,686,447
------------------------------------------------------------------------------
Net loss (2,408,146) (2,741,788)
------------------------------------------------------------------------------
Net loss per share $(0.45) $(0.51)
------------------------------------------------------------------------------
The above unaudited pro forma summarized results of operations are intended for
informational purposes only and, in the opinion of management, are neither
indicative of the financial position or results of operations of the Company had
the acquisition and disposals actually taken place as of January 1, 2004 or
2003, nor indicative of the Company's future results of operations. The above
unaudited pro forma summarized results of operations do not include potential
cost savings from operating efficiencies or synergies that may result from the
Company's acquisition of Elender Rt.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(a) Principles of consolidation and basis of presentation
The consolidated financial statements comprise the accounts of the Company and
its controlled subsidiaries. All material inter-company balances and
transactions have been eliminated upon consolidation and all adjustments,
consisting mainly of normal recurring accruals necessary for a fair
presentation, have been made. The purchase of the remaining 51% of Euroweb
Hungary has been accounted in a manner similar to a pooling-of-interest with
prior periods being restated.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America ("U.S.
GAAP").
(b) Use of estimates
The preparation of consolidated financial statements requires management to make
a number of 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 consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Significant items subject to
such estimates and assumptions made by the Company include the period of benefit
and recoverability of goodwill and other intangible assets. Actual results could
differ from those estimates.
B-8
(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
Revenue Recognition--The Company applies the provisions of SEC Staff Accounting
Bulletin ("SAB") No. 104, Revenue Recognition in Financial Statements, which
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. SAB No. 104 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosure
related to revenue recognition policies. In general, the Company recognizes
revenue related to its billable services when (i) persuasive evidence of an
arrangement exists, (ii) services have been rendered, (iii) the fee is fixed or
determinable and (iv) collectibility is reasonably assured. Generally, these
criteria are met monthly as the Company's service is provided on a
month-to-month basis and collection for the service is generally made within 30
days of the service being provided.
Billable services revenues are recognized in the period in which fees are fixed
or determinable and the related services are provided to the user. When the
Company's subscribers pay in advance for services, revenue is recognized ratably
over the period in which the related services are provided. Advance payments
from users are recorded on the balance sheet as deferred revenue. In
circumstances where payment is not received in advance, revenue is only
recognized if collectibility is reasonably assured.
Access revenues consist of monthly fees charged to customers for dial-up
Internet access services. Access revenues also consist of fees charged for
high-speed, high-capacity access services including digital subscriber lines
("ADSL") and leased lines. Voice revenue relates to the transmission of voice
information in digital form in discrete packets. Revenues are recognized on a
monthly basis based on usage.
Data revenue refers to the provision of leased lines to business customers.
Revenues are derived from monthly fixed fees and are recognized in the month
earned.
Domain registration revenue is usually billed in advance for a period of between
0-2 years. It is recorded as deferred revenue on the balance sheet and is taken
into income monthly on a straight-line basis.
Web design relates to services performed for customers who require assistance
with setting up a web page. Revenue is recognized once the final product has
been accepted by the customer. Any work-in-progress is classified as ,,other
assets" on the balance sheet.
Hosting revenues consist of fees earned by leasing server space and providing
web services to companies and individuals wishing to present a web or e-commerce
presence. Revenues are derived from monthly fixed fees and are recognized in the
month earned.
Revenues from prepaid calling card sales are recognized when the customer uses
the cards and are based on the ratio of actual minutes used to minutes
purchased. Once the prepaid calling cards expire, any remaining prepaid amounts
are recognized as revenues.
In 2002, the Company entered into an agreement to provide transmission capacity
to a customer pursuant to an indefeasible rights-of-use agreement ("IRU"). Since
the Company's IRU does not involve a transfer of title and other factors,
management believes the agreement does not qualify for up-front sales treatment
despite collection in full of the $920,000 arrangement fee. The Company has
B-9
accounted for this transaction as an operating lease under Financial Accounting
Standards Board Interpretation No. 13, "Accounting for Leases" ("FAS 13"). This
accounting has resulted in a substantial amount of deferred revenue being
recorded on the balance sheet. Revenue attributable to the transaction is being
recognized on a straight-line basis over the term of the 20-year lease agreement
(monthly $3,833).
The Company is also obligated to maintain its network in efficient working order
and in accordance with industry standards. The customer is obligated for the
term of the agreement to pay for their allocable share of the costs for
operating and maintaining the network.
(e) Cost of revenues (excluding depreciation and amortization)
Cost of revenues (excluding depreciation and amortization) comprise principally
of telecommunication network expenses, costs of content services and cost of
leased lines and are recognized as incurred.
(f) Foreign currency translation
The Company considers the United States Dollar ("US$") to be the functional
currency of the U.S. entity 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, "other comprehensive income
(loss)", on the consolidated balance sheet for Euroweb Hungary, Euroweb Romania
and Euroweb Slovakia. Until December 31, 2003 the Company considered Romania a
highly inflationary economy (under SFAS 52) and, therefore the U.S. dollar was
used as the functional currency, with resulting gains/losses on translation
being charged directly to the Statement of Operations.
Foreign currency transaction gains and losses are also included in the
consolidated results of operations for the periods presented.
(g) Cash and cash equivalents
Cash and cash equivalents at December 31, 2004 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. A decline in the market value of available-for-sale
securities below cost that is deemed to be other-than-temporary temporary
results in a reduction in the carrying value amount to fair value. Such
impairment is charged to earnings and a new cost basis for the security is
established. In assessing whether an impairment is other-than-temporary, the
Company considers several factors including, but not limited to, the ability and
intent to hold the investment, reason and duration for the impairment and
forecasted performance of the investee.
(i) 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. Total depreciation from continuing operations for the
years ended December 31, 2004 and 2003 was $ 1,933,632 and $1,569,224
respectively.
B-10
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.
(j) 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 that goodwill and
intangible assets acquired in a business combination and that have indefinite
useful lives are no longer amortized but rather are tested at least annually for
impairment. 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. When the current fair value is less than the
carrying value, the Company performs 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 by performing an exercise
similar to a purchase price allocation, and to record any excess as an
impairment.
Intangible assets that have finite useful lives (whether or not acquired in a
business combination) are amortized over their estimated useful lives but also
reviewed for impairment in accordance with FASB No. 144 "Accounting for
Impairment or Disposal of Long Lived Assets". Intangibles currently consist of
customer contracts which were acquired as a result of a purchase of assets and
are being amortized over the estimated future period of benefit of 2.5 years.
The assessment of recoverability and possible impairment are determined using
estimates of undiscounted future cash flows, if an impairment has occurred. The
Company then 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.
(k) 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
include 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 years ended December 31, 2004 and 2003, which
were not included in the computation of diluted net loss per share because they
were antidilutive.
(l) Comprehensive income
Comprehensive income includes all changes in equity except those resulting from
investments by, and distributions to, owners. All items that are required to be
recognized under current accounting standards as components of comprehensive
income are required to 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.
(m) Business segment reporting
The Company's operations fall into 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.
The Company manages its operations, and accordingly determines its operating
segments, on a geographic basis. Consequently, the Company has three operating
segments: Euroweb Hungary, Euroweb Romania, and Euroweb Slovakia.
B-11
(n) Income taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets, net of appropriate valuation allowances, and liabilities 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.
(o) 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" to account for its fixed plan stock
options. Under this method, compensation expense is recorded on the date of
grant 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") and FASB Statement No. 148, ,,Accounting for Stock-Based Compensation
- Transition and Disclosure, an amendment of FASB Statement No. 123"established
accounting and disclosure requirements using a fair value-based method of
accounting for stock-based employee compensation plans. As allowed by existing
standards, 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 amended.
Under the accounting provisions of SFAS No. 123, the Company's 2004 and 2003 net
loss and net loss per share would have been increased to the pro forma amounts
indicated below:
2004 2003
(restated)
Net loss:
Net loss as reported $ (734,454) $(1,791,027)
Compensation expense (943,164) (110,482)
Pro forma net loss (1,677,618) (1,901,509)
Basic and diluted loss per share:
As reported $ (0.15) $ (0.38)
Pro forma (0.33) (0.41)
(p) Recently Issued Accounting Standards
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment. SFAS No. 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 Statement 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) may have on its financial
statements.
B-12
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets:
an amendment of APB Opinion No. 29, which is part of the short-term
international convergence project between the FASB and IASB. 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 Financial Accounting Standards Board ("FASB") issued SFAS
No. 151, Inventory Costs, which amends Chapter 4, Inventory Pricing, of
Accounting Research Bulletin No. 43, Restatement and Revision of Accounting
Research Bulletins. The Statement was issued as a result of the FASB's and
International Accounting Standards Board's ("IASB") joint project to improve the
comparability between U.S. and international accounting standards. SFAS 151
eliminates 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, the Statement 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.
FASB Statement No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, was issued in May 2003. This
Statement establishes standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. The Statement also includes required disclosures for financial
instruments within its scope. For the Company, the Statement was effective as of
January 1, 2004, except for mandatory redeemable financial instruments. For
certain mandatorily redeemable financial instruments, the Statement will be
effective on January 1, 2005. The effective date has been deferred indefinitely
for certain other types of mandatorily redeemable financial instruments. The
Company currently does not have any financial instruments that are within the
scope of this Statement.
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. The Company does not believe that FAS 149 will have any impact on
its financial statements.
(q) Business Combination following the "as-if" pooling-of-interest method of
accounting
On February 12, 2004, the Company entered into a Share Purchase Agreement with a
related party, Pantel Rt. ("Pantel") to acquire the remaining 51% of Euroweb
Hungary shares that the Company did not already own. Pantel's majority
shareholder is also KPN. As this was a transaction between entities under common
control (at the date of the acquisition, KPN owned 50.17% of the voting common
shares of the Company and 75% of the voting common shares of Pantel Rt.), the
transaction was recorded in a manner similar to a pooling-of-interest, and
accordingly the historical consolidated financial statements have been restated
to include the financial position, results of operations and cash flows of
Euroweb Hungary for all periods presented. Since the purchase consideration was
in excess of Euroweb Hungary's book value by $2,142,556 it is accounted for as a
distribution to KPN which resulted in a deduction from retained earnings at the
closing of the transaction. There were no intercompany transactions requiring
elimination in any period.
B-13
3. CASH CONCENTRATION
All cash and cash equivalents are held in current accounts as of December 31,
2004. Approximately $2.4 million is held in the United States, and approximately
$228,000 is held in United States dollars in Romania, Slovakia and Hungary.
Approximately $39,000 is held in Romania in Euro. The remaining amounts are held
in local currency in Romania, Slovakia, and Hungary.
4. PROPERTY AND EQUIPMENT -
Property and equipment as at December 31, 2004 comprise the following:
2004 Useful Life
------------ -----------
Software $ 1,406,167 3 years
Internet equipment 8,168,003 3 years
Fibre optic cables-Romania 1,280,484 20 years
Vehicles 528,344 4-5 years
Other 1,209,190 3-5 years
------------
Total 12,592,188
Less accumulated depreciation (5,339,075)
------------
$ 7,253,113
============
5. GOODWILL AND ACQUIRED INTANGIBLE ASSETS
Goodwill and acquired intangible assets as at December 31, 2004 comprise the
following:
2004
-----------
Customer contracts (Elender Rt.) 2,730,420
Less accumulated amortization-Customer contracts (677,132)
-----------
$ 2,053,288
===========
Goodwill 13,447,287
Less impairment -Goodwill (5,004,426)
Less accumulated amortization-Goodwill (2,636,680)
-----------
$ 5,806,181
===========
Customer contracts
Most (approximately 87%) of the Customer contracts relate to an Elender Rt.
contract to provide internet access to schools in Hungary. The remaining items
are leased line contracts of Elender Rt. These contracts are being amortized
over a period of 2.5 years from the date of acquisition (June 2004).
B-14
Goodwill and Impairment Charges
The Gross book value of Goodwill relates to the following reporting units under
SFAS 142: Euroweb Romania ($2,455,223), Euroweb Slovakia ($4,413,173), and
Euroweb Hungary ($6,578,891). The Goodwill of Euroweb Slovakia was fully
impaired by December 31, 2003, and the Goodwill of Euroweb Romania had been
impaired down to $566,000. The Goodwill relating to Euroweb Hungary arose on the
acquisition of Elender Rt. ($5,240,181) which has now been merged into Euroweb
Hungary and is considered as one reporting unit for purposes of SFAS 142. The
other Goodwill of $1,338,710 relating to Euroweb Hungary arose from several
acquisitions and had been fully impaired by December 31, 2003.
At the beginning of 2005 the Company performed its annual impairment test
relating to the goodwill as of December 31, 2004. The Company compared the fair
value of the reporting units (Euroweb Romania and Euroweb Hungary) to their
carrying amounts, noting that in each case the fair value was higher than the
carrying amount, and that no impairment charge was required.
In 2003 impairments of $563,000 for Euroweb Slovakia, $324,957 for Euroweb
Romania, and $92,581 for Euroweb Czech were recorded. The 2003 Euroweb Czech
impairment is included in the `loss from discontinued operations' line item in
the accompanying Consolidated Statement of Operations.
The net book value of goodwill of $5,806,181 as of December 31, 2004 relates to
Euroweb Romania ($566,000) and Euroweb Hungary ($5,240,181).
6. LEASES
Capital leases
The Company is committed under various capital leases, which expire over the
next three years. The amount of assets held under capital leases included in
property and equipment is as follows:
2004
-----------
Leased Internet equipment gross value 128,560
Leased vehicles gross value 355,791
-----------
Total gross book value leased assets 484,351
Less accumulated depreciation (90,570)
-----------
Total net book value leased assets $ 393,781
===========
The following is a schedule of future minimum capital lease payments (with
initial or remaining lease terms in excess of one year) as of December 31, 2004:
2005 284,463
2006 94,201
2007 54,159
-----------
Total minimum lease payments 432,823
Less interest costs (37,086)
-----------
Present value of future minimum lease payments 395,737
Less: current installments (247,378)
-----------
Non-current portion of lease obligations $ 148,359
===========
B-15
The current portion of lease obligations are included in `Other current
liabilities' on the Balance Sheet.
Operating leases
The Company's subsidiary in Slovakia (as Lessee) has a five year non-cancelable
lease agreement for office premises. Remaining minimal rental payments total
approximately $380,000; $138,000 in each of 2005 and 2006, and $104,000 in 2007.
The Company's subsidiary in Hungary (as Lessee) has a seven year non-cancelable
lease agreement for office premises. Remaining minimal rental payments total
approximately EUR 1,282,176; EUR 320,544 in each of 2005, 2006, 2007 and 2008.
In 2002, the Company (as Lessor) entered into a twenty year Indefeasible Right
of Use agreement to provide transmission capacity and collected the $920,000
lease payment in full in the same year (Note 2(d)).
7. BANK LOANS, OVERDRAFT, AND NOTES PAYABLE
On June 1, 2004, Elender Rt. (which has now been merged with Euroweb Hungary)
entered into a bank loan agreement with Commerzbank (Budapest) Rt. The agreement
consists of a loan facility of HUF 300 million (approximately $1.67 million) of
which approximately $1,070,000 was outstanding at December 31, 2004. The loan is
being repaid in quarterly installments of HUF 14.5 million (approximately
$80,000), commencing November 30, 2004. The interest rate is BUBOR (Budapest
Interbank Offered Rate) + 1.35%.
In addition, the bank also provided an overdraft facility of HUF 150 million
(approximately $830,000) to Elender Rt. The Company did not need to utilize this
facility as at December 31, 2004. The interest rate is BUBOR (Budapest Interbank
Offered Rate) + 1%.
Notes payable of approximately $808,000 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 36.438 million (approximately $202,000), with the
final payment on December 31, 2005.
8. RELATED PARTY LOAN PAYABLE
During 2002 Pantel Rt., a related party, provided a loan of HUF 245,000,000
(approximately $ 1.36 million using 2004 exchange rate) to a subsidiary of the
Company. 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. The
year-end balance reflects the payment made in December 2004.
9. DISCONTINUED OPERATIONS AND DISPOSAL OF SUBSIDIARIES
On December 16, 2004, the Company sold all of its shares in its wholly-owned
subsidiary, Euroweb Czech for cash of $500,000. However, as a part of the
transaction, the Company effectively forgave $400,000 of loans receivable from
Euroweb Czech. The Company believes that the sale of Euroweb Czech meets the
criteria for presentation as a discontinued operation under the provisions of
Statements of Financial Accounting Standard ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets, therefore all periods are
restated to reflect Euroweb Czech Republic as discontinued operations. The
Company recognized a gain of approximately US $409,000 on the sale of Euroweb
Czech.
B-16
On April 13, 2004, the Company sold its 100% shareholding in Neophone Rt. (a
non-operational subsidiary) for approximately $60,000, realizing a gain of
$28,751. In 2003, Euroweb Hungary sold two subsidiaries for approximately $
5,000. A gain of $ 109,621 was recorded on the sales due to the fact that both
subsidiaries had net liabilities at the time of sale.
10. INCOME TAXES
Deferred Tax Assets and Liabilities
Upon the acquisition of Elender Rt., the Company recognized a net Deferred Tax
Liability of $294,005 related to the excess of fair value of net assets over
carrying values. As most of the excess relates to the recognition of customer
contracts (Note 5) which is being amortized over a period of 2.5 years from
acquisition, the Deferred Tax Liability is being reduced proportionately.
$83,576 was expensed in 2004. Elender Rt. had tax loss carryforwards of
approximately $1.9 million (resulting in a potential Deferred Tax Asset of
$312,005) which could be carried forward post acquisition. An amount up to the
value of the Deferred Tax Liability ($294,005) was recognized as a Deferred Tax
Asset at acquisition and the remaining deferred tax asset of $18,000 is covered
by a valuation allowance (subsequent recognition of the benefits of this
valuation allowance will be credited against Goodwill from the Elender
acquisition). This amount has been reduced at year-end to $253,425.
The deferred income tax expense of zero in 2004 is a result of a $83,576
deferred income tax benefit due to the excess of acquisition of Elender Rt., and
is offset by a deferred income tax expense of $83,576 to reduce Deferred Tax
Assets.
The loss from continuing operations before income taxes by tax jurisdiction for
the years ended December 31 2004 and 2003 was as follows:
2004 2003
------------ -----------
Loss from continuing operations before income taxes:
Domestic $ (1,670,486) (1,370,658)
Foreign 633,677 17,155
------------ -----------
Total $ (1,036,809) $(1,353,503)
============ ===========
The current income tax expense of $62,367 (2003: 61,590) is attributable to
income/loss from continuing operations and relates entirely to current foreign
tax.
B-17
The difference between the total expected tax expense (benefit) and tax expense
for the years ended December 31, 2004 and 2003 is accounted for as follows:
2004 2003
------------------- -------------------
Amount % Amount %
--------- ------- --------- --------
Computed expected tax
Benefit $(352,515) (34.00) $(460,191) (34.00)
Foreign Tax Rate Differential 696,053 67.13 50,922 3.76
Utilization of net operating
losses not previously recognized (55,732) (5.38) (51,529) (3.81)
Change in tax rates -- -- 194,390 14.36
Non-deductible expenses 17,178 1.66 333,383 24.63
Change in Valuation Allowance (242,617) (23.40) (5,385) (0.40)
--------- ------- --------- --------
Total Expense $ 62,367 6.02% $ 61,590 4.55%
========= ======= ========= ========
The change in the tax rates in 2003 results from the fact that the corporate tax
rate in Hungary was 18% for 2003 and prior years, but in 2003, the Hungarian
parliament enacted a tax rate of 16% for 2004 and subsequent years. The net
impact of the change in tax rates has no material impact on the financial
statements as the Company has provided a full valuation allowance for deferred
tax assets (see below).
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets at December 31, 2004 and 2003 are as follows:
2004 2003
------------ -------------
Deferred Tax Assets:
Net Operating Loss Carryovers $ 5,328,292 $ 5,241,133
Other -- 76,351
Capital Loss Carryovers -- 63,801
------------ -------------
Gross Deferred Tax Assets 5,328,292 5,381,385
Valuation Allowance (5,074,867) (5,381,385)
------------ -------------
Net Deferred Tax Assets 253,425 --
Deferred Tax Liabilities (Intangibles) (253,425) --
------------ -------------
Net Deferred Tax Assets $ -- $ --
============ =============
The valuation allowance was $6,384,117 at January 1, 2003. During 2004, the
valuation allowance decreased by $306,518, while during 2003 it decreased by
$1,002,732.
B-18
The Company has unused net operating loss carryforwards at December 31, 2004 of
approximately $20 million available to offset future taxable income. Of this
amount, approximately $10 million of losses that arose in the first three years
of operation in Hungary can be carried forward indefinitely based on current
Hungarian Tax Legislation. Of the remaining $10 million of losses, $1.9 million
expire in various years from 2005-2010, $1.6 million expires in 2011, and the
remaining $6.5 million expire in various years from 2016 through 2024. The Tax
Acts of some jurisdictions contain provisions which may limit the net operating
loss carryforwards available to be used in any given year if certain events
occur, including significant changes in ownership interests. The Company has not
assessed the impact of these provisions on the availability of Company loss
carryovers since the deferred tax assets are fully offset by the valuation
allowance.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences and tax loss carryforwards become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and projections
for future taxable income over the periods in which the deferred tax assets are
deductible, management believes that it is more likely than not that the Company
will realize the benefit of these deductible differences, net of existing
valuation allowances at December 31, 2004.
11. STOCKHOLDERS' EQUITY
On April 28, 2004, the Company granted 125,000 options to the Chief Executive
Officer and an additional 195,000 options to five employees and 45,000 options
to two consultants of the Company (see Note 14(a)). As the Company follows APB
25 with respect to accounting for grants made to employees, no compensation
expense was recorded for the options granted to the Chief Executive Officer and
the five employees. However, the Company will recognize total compensation
charges of approximately $162,000 for the grants made to the two consultants,
which will be expensed over the vesting period of three years (compensation
expense for the year ended December 31, 2004 was $94,212).
In connection with the acquisition of Elender Rt. (Note 1), the Company issued
677,201 of common shares. The Company is in the process of registering these
common shares.
12. RELATED PARTY TRANSACTIONS
General: The largest customer of the Company since early 2001 has been Pantel
Rt. ("Pantel"), a Hungary-based alternative telecommunications provider. As at
December 31, 2004, KPN was the majority owner of Pantel and the largest
shareholder of the Company. 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.
Due to the increase in revenues from International/domestic leased line and VOIP
services provided in conjunction with Pantel, some of the representatives of the
Company work at the premises of Pantel in order to improve the effectiveness of
the co-operation on international projects and daily operational issues. Csaba
Toro, Chief Executive Officer of Euroweb International Corp., was also the Chief
Executive Officer of Pantel until February 2003.
Transactions: Euroweb Hungary and Euroweb Romania have engaged in transactions
with Pantel:
(a) Pantel provides the following services to the subsidiaries of the Company:
- Internet bandwidth
- National leased and telephone lines within Hungary
- VOIP services
- Consulting services
The total amount of these services purchased from Pantel was $6,198,505 during
2004 (2003: $5,796,350). Additionally, consulting services amounted to $292,864
in 2003, there was no such services in 2004. In 2004, Pantel Rt. charged
interest of $154,761 (2003: zero).
B-19
(b) The Company and its subsidiaries provided the following services to
Pantel:
- International leased lines and local loops in Hungary and Romania
- International IP and VOIP services
- Certain consultants are hired by the Company, but also work on
projects for Pantel. In these cases, Pantel is recharged a portion
of the consulting fees
The total value of these services sold was approximately $8,503,939 in 2004
(2003: $5,740,709).
Direct sales to Pantel were 23% of total consolidated revenue in 2004 (2003:
26%). However, the dependency on Euroweb Romania on Pantel is even more
significant. Some third party sales involve Pantel as the subcontractor/service
provider for the international/domestic lines, and some third party customers
were introduced to the Company by Pantel (i.e. their relationship with Pantel is
stronger than their relationship with Euroweb Romania).
Effective dependency on Pantel: Direct sales to Pantel and Pantel-related sales
represent approximately 30% of total consolidated revenues of the Company and
approximately 80% of total sales of Euroweb Romania. There is no such sales
dependency in the case of Euroweb Hungary and Euroweb Slovakia.
Pricing: Agreements are made at market prices or a portion of the margin based
on the financial investment into the specific services by each of the parties.
The Company considers alternative suppliers for individual projects, when
appropriate.
There were no other significant related party transactions in 2004 or 2003.
13. 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. The amended agreement provides for an annual salary of
$200,000 and a bonus of up to $150,000 in each of 2005 and 2006, as well as an
annual car allowance of $30,000.
Two fixed-term employment agreements for Officers of the Company provide for an
aggregate monthly compensation of $ 18,750 until December 31, 2005.
(b) Lease agreements
The Company's subsidiaries have entered into various capital leases for vehicles
and internet equipment, as well as non-cancelable agreements for office
premises. Refer to Note 6 (Leases).
(c) 20 years' usage rights
In 2002, Euroweb Romania provided an Indefeasible Right of Use for transmission
capacity on 12 pairs of fiber (see Note 6) 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.
B-20
(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
Business Communications Rt., a leading ISP in Hungary, for USD 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 248,111 unregistered shares of newly issued
(in the name of the Company) common stock with an escrow agent as security for
approximately $1.5 million loans payable to former shareholders of Elender. The
shares will be returned to the Company from escrow once the outstanding loans
have been fully repaid. However, if there is a default on the outstanding loan,
then the shares will be issued to the other party and the Company is then
obliged to register these shares.
Pursuant to section 1 of the Registration Rights Agreement signed on June 1,
2004 with the Sellers of Elender Rt., 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 is in the process of
registering the shares of common stock issued in connection with the Elender Rt.
acquisition. The Company has made a provision of $170,000 to accrue for
potential penalties under this Clause until December 31, 2004.
(f) Euroweb Hungary purchase guarantee
In February 2004, the remaining 51% of Euroweb Hungary was purchased from Pantel
Rt. The Consideration paid by the Company for the 51% interest consisted of EUR
1,650,000 (USD $2,105,000) in cash, and a purchase commitment that Euroweb
Hungary Rt. will purchase at least HUF 600 million (approximately $3 million)
worth of services from Pantel Rt. in each of 2004-2006. In the event that
Euroweb Hungary and its subsidiaries do not satisfy this commitment, Pantel Rt.
may charge a penalty equal to 25% of the commitment amount less any services
purchased. Purchases in 2004 exceeded this amount.
(g) Indemnities provided upon sale of subsidiaries
On April 13, 2004, the Company sold its 100% shareholding in Neophone Rt. (a
non-operational subsidiary) for approximately $60,000. Under the terms of the
sale the Company has indemnified the Buyer for any unaccrued costs, fines,
penalties and lawsuits which relate to a period prior to the sale. No claims
have been made to date.
Under the terms of the sale agreement for Euroweb Czech (see Note 9), 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.
14. STOCK OPTION PLAN AND EMPLOYEE OPTIONS
a) Stock Option Plan
The Company's Stock Option Plan expired in 2003, although unexpired options
issued under this Plan are exercisable until expiry. At December 31, 2004,
options for 26,000 (December 31, 2003: 46,000) Common Stock were outstanding and
exercisable (by the Chief Executive Officer) under this Stock Option Plan.
In 2004, the Board of Directors established the "2004 Incentive Plan" or "the
Plan", with an aggregate of 800,000 shares of common stock authorized for
issuance under the Plan. The Plan provides that incentive and nonqualified
options may be granted to key employees, officers, directors and consultants of
the Company for the purpose of providing an incentive to those persons. The Plan
may be administered by either the Board of Directors or a committee of two
directors appointed by the Board (the "Committee"). The Board or Committee
determines, among other things, the persons to whom stock options are granted,
the number of shares subject to each option, the date or dates upon which each
option may be exercised and the exercise price per share.
B-21
Options granted under the Plan are generally exercisable for a period of up to
ten years from the date of grant. No Option shall be transferable, except by
will or the laws of descent and distribution. Incentive options granted to a
Principal Stockholder must have an exercise price of not less than 110% of the
fair market value of the underlying stock on the date of the grant. The Company
will not grant a nonqualified option with an exercise price less than 85% of the
fair market value of the underlying common stock on the date of the grant.
Under the Plan, the Company on April 26, 2004 granted 125,000 options to the
Chief Executive Officer and an additional 195,000 options to five employees and
45,000 options to two consultants of the Company. All of these options have an
exercise price equal to the market price on day of grant ($4.78), vest over a
period of between 3-4 years and relate to future services to be performed. As
the Company follows APB 25 with respect to accounting for grants made to
employees, no compensation expense will be recorded for the options granted to
the Chief Executive Officer and the five employees. However, the Company will
recognize total compensation charges of approximately $162,000 for the grants
made to the two consultants, which is being expensed over the vesting period of
three years.
(b) Other Options
The Company has issued exercisable options pursuant to employment agreements. As
of December 31, 2004 (and 2003) fully vested options are outstanding and
exercisable for 63,000 shares pursuant to the employment agreement with the
Chief Executive Officer. The options were granted on April 2, 1999 (with
exercise price equal to stock price at date of grant) and expire on April 2,
2005. The options are exercisable at $ 10.00 per share.
On October 13 2003, the Company granted two Directors 100,000 options each, at
an exercise price (equal to the fair value on that day) of $4.21 per share, with
25,000 options vesting on each April 13 of 2004-2007.
(c) Accounting for stock-based options
SFAS No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123"),
requires the Company to provide pro forma information regarding net income and
earnings per share as if compensation cost for the Company's stock options had
been determined in accordance with the fair value-based method prescribed in
SFAS No. 123. The Company estimates the fair value of each stock option at the
grant date by using the Black-Scholes option-pricing model.
The amount calculated as total compensation expense under SFAS No. 123 is
$632,766 for the 200,000 options granted to directors on October 13, 2003, and
$1.3 million for the 365,000 options granted on April 26, 2004 (calculated at
grant date using Black-Scholes valuation model with volatility of 88%, interest
rate of 4%, expected life of 6 years and a no-dividend assumption). Under the
accounting provisions of SFAS No. 123, this compensation expense is recorded
over the vesting period of the options (3-4 years) and the Company's 2004 and
2003 net loss and net loss per share would have increased to the pro forma
amounts indicated below:
2004 2003
(restated)
Net loss:
Net loss as reported $ (734,454) $ (1,791,027)
Compensation expense (943,164) (110,482)
Pro forma net loss (1,677,618) (1,901,509)
Basic and diluted loss per share:
As reported $ (0.15) $ (0.38)
Pro forma (0.33) (0.41)
B-22
The following table summarizes the total number of shares for which options have
been issued (Stock Option Plan, 2004 Incentive Plan, Employment Agreements and
grants to Directors) and are outstanding:
2004 2003
---------------------- --------------------
Weighted Weighted
average average
exercise exercise
Options Price Options Price
--------- --------- --------- --------
Outstanding, January 1, 309,000 $5.95 124,500 $9.00
Granted 365,000 4.78 200,000 4.21
Cancelled - - - -
Expired (20,000) 5.00 (15,500) 7.65
--------- --------- --------- --------
Outstanding, December 31, 654,000 5.33 309,000 5.95
========= ========= ========= ========
250,250 options are outstanding and exercisable at December 31, 2004 (2003:
109,000)
The 200,000 options granted to Directors in 2003 are exercisable as follows:
50,000 exercisable on each April 14 of 2004, 2005, 2006, and 2007. The 365,000
options granted on April 26, 2004 are exercisable as follows: 111,250 options on
November 1, 2004, 111,250 options on each of October 1, 2005, and October 1,
2006, and 31,250 options on October 1, 2007. The remaining 89,000 options
outstanding as at December 31, 2004 are all exercisable as at December 31, 2004.
No options were exercised in 2004 and 2003.
At December 31, 2004 the range of exercise prices and weighted average remaining
contractual life of outstanding options was $4.21 - $10.47 and 5.93 years,
respectively.
15. STOCK WARRANTS
As at December 31, 2003 the total number of shares for which warrants have been
issued and are exercisable (at $ 11 per share) was 10,000. These warrants
expired unexercised on May 2, 2004. No warrants were issued in 2004.
16. GEOGRAPHIC INFORMATION
The Company's operations fall into one industry segment: providing Internet
access and additional value added services to business customers. The Company
manages its operations, and accordingly determines its operating segments, on a
geographic basis. Consequently, the Company has three operating segments:
Euroweb Hungary, Euroweb Romania, and Euroweb Slovakia. The performance of
geographic operating segments is monitored based on net income or loss from
operations (before income taxes, interest, and foreign exchange gains/losses).
The accounting policies of the segments are the same as those described in the
summary of accounting policies in Note 2. There are no inter-segment sales
revenues.
B-23
The following tables summarize financial information by geographic segment for
the year ended December 31, 2004 and 2003:
Geographic information for 2004
Slovakia Romania Hungary Corporate Total
--------- ---------- ---------- ---------- ------------
3rd party revenues 3,827,738 5,637,991 18,646,057 -- $ 28,111,786
Pantel related revenues -- 7,999,011 504,928 -- 8,503,939
Total revenues 3,827,738 13,637,002 19,150,985 -- 36,615,725
Depreciation 185,758 626,564 1,119,262 2,048 1,933,632
Intangible amortization
(customer contract) -- -- 677,132 -- 677,132
Interest income 32,857 24,437 95,539 49,154 201,987
Interest expense 8,718 30,571 380,370 -- 419,659
Net interest (expense)
income 24,139 (6,134) (284,831) 49,154 (217,672)
Income tax 31,275 31,092 -- -- 61,590
Net loss 313,754 (53,704) (97,317) (897,187) (734,454)
Fixed assets, net 234,557 2,195,881 5,274,303 -- 7,704,741
Fixed asset additions 76,807 985,492 639,691 -- 1,701,990
Goodwill -- 566,000 5,240,181 5,806,181
Geographic information for 2003
Slovakia Romania Hungary Corporate Total
--------- ---------- ---------- ---------- ------------
3rd party revenues 3,424,633 4,539,215 8,412,501 -- $ 16,376,349
Pantel related revenues -- 5,633,864 106,845 -- 5,740,709
Total revenues 3,424,633 10,173,079 8,519,346 -- 22,117,058
Depreciation 328,182 466,853 841,098 -- 1,636,133
Intangible impairment -- 100,364 -- -- 100,364
Goodwill impairment 563,000 324,957 -- -- 887,957
Interest income 18,990 3,934 82,012 390,349 495,285
Interest expense 28,269 24,333 93,132 5,231 150,965
Net interest (expense)
income (9,279) (20,399) (11,120) 385,118 344,320
Income tax -- 61,590 -- -- 61,590
Net loss (457,092) (399,232) (214,967) (719,736) (1,791,027)
Fixed assets, net 326,788 1,575,851 879,385 -- 2,782,024
Fixed asset additions 94,954 752,848 310,270 -- 1,158,072
Goodwill -- 566,000 -- -- 566,000
Goodwill and related impairment amounts are recorded in the books of the
Corporate entity and allocated to reporting units. The Gain/Loss on discontinued
operations is included in the Corporate Net Loss.
B-24
17. SUBSEQUENT EVENTS
(a) Status of Pantel Rt. as a related party
On February 28, 2005, it was announced that the sale of KPN NV's 75.1% interest
in the Pantel business to the Hungarian Telephone and Cable Corp. had been
completed. Therefore, Pantel is no longer considered a related party effective
March 1, 2005.
(b) Euroweb Slovakia
In January 2005, the Company decided that the operations of Euroweb Slovakia
were no longer considered part of the core assets of the Company. In light of
this decision, the Company, in January 2005, approached a potential buyer
interested in acquiring internet service providers in Slovakia. The Company is
currently negotiating the sale of Euroweb Slovakia with this potential buyer.
The Company intends to treat Euroweb Slovakia as a discontinued operation for
purposes of US GAAP reporting in future periods, with appropriate restatement of
comparative prior period amounts. The following table presents the carrying
amounts of the major classes of assets and liabilities of Euroweb Slovakia as at
December 31, 2004:
2004
----------
Current assets 1,480,522
Long-term assets 234,557
Total assets $1,715,079
Current liabilities 1,244,310
Long-term liabilities 6,701
Total liabilities $1,251,011
Net equity $ 464,068
(c) Announced sale of the Company's shares by KPN
Pursuant to a Stock Purchase Agreement dated as of January 28, 2005, between KPN
Telecom B.V. (the largest shareholder of the Company), and CORCYRA
d.o.o.("CORCYRA"), CORCYRA purchased 289,855 shares of the Company's common
stock from KPN Telecom B.V. and has also agreed to purchase KPN Telecom B.V.'s
remaining shares of the Company's common stock by April 30, 2006.
(d) Potential acquisition
In March 2005, the Company signed a Letter of Intent relating to a potential
acquisition. The finalisation of the transaction terms is subject to the
completion of due diligence procedures (currently underway) and agreement on
terms which will be detailed in a formal purchase agreement. The purchase
consideration, if the transaction goes ahead, is expected to comprise a
combination of cash and Company stock.
(e) New Stock options
On March 22nd, 2005 the Board of Directors decided to grant two new directors
100,000 stock options each under the 2004 Incentive Plan. These stock options
are exercisable as follows: 50,000 exercisable on each September 22 of 2005,
2006, 2007, and 2008.
B-25
EXHIBIT C
FINANCIAL STATEMENTS OF NAVIGATOR INFORMATIKA RT.
TABLE OF CONTENTS
Audited combined and consolidated financial statements of Navigator Informatika
Rt. as of and for the year ended December 31, 2004
Report of Independent Registered Public Accounting Firm C-2
Combined Balance Sheet C-3
Combined and Consolidated Statement of Operations C-4
Combined and Consolidated Statement of Changes in Shareholders' Deficit C-5
Combined and Consolidated Statement of Cash Flows C-6
Notes to the Combined and Consolidated Financial Statements C-14-C-18
Unaudited condensed combined and consolidated financial statements of
Navigator Informatika Rt. as of September 30, 2005 and for the nine
months ended September 30, 2005 and 2004
Unaudited Condensed Consolidated Balance Sheet C-19
Unaudited Condensed Combined and Consolidated Statements of Operations C-20
Unaudited Condensed Combined and Consolidated Statements of Cash Flow C-21
Notes to the Unaudited Condensed Combined and
Consolidated Financial Statements C-22
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Navigator Informatika Rt.
Budapest, Hungary
We have audited the accompanying combined balance sheet of Navigator Informatika
Rt. and subsidiaries (the "Company") as of December 31, 2004, and the related
combined and consolidated statements of income, stockholders' equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Navigator Informatika Rt. and
subsidiaries as of December 31, 2004, and the results of their operations and
their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
Deloitte Auditing and Consulting Kft.
Budapest, Hungary
December 2, 2005
C-2
NAVIGATOR INFORMATIKA RT. AND SUBSIDIARIES
COMBINED BALANCE SHEET
IN THOUSANDS OF HUNGARIAN FORINT, EXCEPT SHARE DATA
As of December
31, 2004
--------------
ASSETS
Current assets:
Cash and cash equivalents 12,870
Trade accounts receivable, net (note 3) 172,276
Related party trade receivables (note 7) 87,385
Related party loans receivable (note 7) 59,541
Prepayments and other current assets (note 4) 154,990
--------------
Total current assets 487,062
Customer contracts, net (note 6) 271,391
Equipment and fixtures, net (note 5) 240,009
--------------
Total assets 998,462
==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable 95,208
Related party payables (note 7) 532,942
Short term related party loan (note 7) 56,410
Short term bank loan (note 8) 80,763
Other current liabilities (note 9) 62,976
Accrued expenses (note 10) 52,254
Deferred revenue 5,414
--------------
Total current liabilities 885,967
Deferred taxes (note 12) 43,423
Long term capital lease obligation (note 11) 4,935
--------------
Total long term liabilities 48,358
--------------
Total liabilities 934,325
--------------
Commitments and contingencies (note 11)
Shareholders' equity
Common stock, HUF 10,000 par value (12,500 shares 125,000
authorized, issued and outstanding as of December 31, 2004)
Additional paid in capital 240,000
Accumulated deficit (300,863)
--------------
Total shareholders' equity 64,137
--------------
Total liabilities and shareholders' equity 998,462
==============
The accompanying notes form an integral part of these financial statements
C-3
NAVIGATOR INFORMATIKA RT. AND SUBSIDIARIES
COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS
IN THOUSANDS OF HUNGARIAN FORINT
Year ended
December 31,
2004
--------------
Third party revenue 768,239
Related party revenue 60,903
--------------
TOTAL REVENUE 829,142
COST OF REVENUE (exclusive of depreciation and
amortization shown separately below)
Third party 114,450
Related party 25,268
--------------
TOTAL COST OF REVENUE (exclusive of depreciation and 139,718
amortization shown separately below)
OPERATING EXPENSES
Personnel expenses 232,937
Consulting, advisory and professional fees 155,693
Other selling, general and administrative expenses
(including THUF 49,500 related party expenses) 222,823
Depreciation and amortization 95,772
--------------
Total operating expenses 707,225
Loss from operations (17,801)
OTHER INCOME/(EXPENSE)
Interest income 3,512
Interest expense (21,881)
--------------
Total other expenses (18,369)
--------------
Loss before income taxes (36,170)
Income taxes -deferred 4,027
Income taxes -current (4,805)
--------------
Net income tax expense (778)
--------------
NET LOSS (36,948)
==============
The accompanying notes form an integral part of these financial statements
C-4
NAVIGATOR INFORMATIKA RT. AND SUBSIDIARIES
COMBINED AND CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
IN THOUSANDS OF HUNGARIAN FORINT, EXCEPT SHARE DATA
COMMON STOCK
-------------------------
NUMBER OF ADDITIONAL ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT PAID IN CAPITAL DEFICIT EQUITY
----------- --------- --------------- ------------ -------------
JANUARY 1, 2004 12,500 125,000 -- (15,960) 109,040
=========== ========= =============== ============ =============
Push down adjustments on 240,000 240,000
acquisition of Navigator
by Wallis Rt. (note 2)
Deemed dividend related
to acquisition of
Navigator Info Kft.
under common control of
Wallis Rt. (note 2) (240,000) (240,000)
Net loss
-- -- -- (36,948) (36,948)
Dividends -- -- -- (7,955) (7,955)
----------- --------- --------------- ------------ -------------
DECEMBER 31, 2004 12,500 125,000 240,000 (300,863) 64,137
=========== ========= =============== ============ =============
The accompanying notes form an integral part of these financial statements
C-5
NAVIGATOR INFORMATIKA RT. AND SUBSIDIARIES
COMBINED AND CONSOLIDATED STATEMENT OF CASH FLOWS
IN THOUSANDS OF HUNGARIAN FORINT
Year ended
December 31,
2004
------------
Net loss (36,948)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 95,772
Decrease in deferred taxation (4,027)
Loss on disposal of leasehold improvements 24,836
Loss on sale of property and equipment 12,327
Increase in allowance for doubtful receivables 16,099
Changes in assets and liabilities:
Increase in receivables (121,541)
Increase in prepayments and other assets (51,598)
Increase in related party payables 27,042
Increase in payables and other current liabilities 22,235
Increase in deferred revenue 4,592
------------
Net cash used in operating activities (11,211)
Cash flows from investing activities:
Purchase of property and equipment (42,695)
Proceeds from sale of property and equipment 31,662
------------
Net cash used in investing activities (11,033)
Cash flows from financing activities:
2003 dividends paid (22,559)
Proceeds from related party loans - cash pool, net (see note 7) 55,308
Proceeds from short term bank loan 80,763
Repayment of short term related party loan (38,474)
Early repayment of leasing obligations (21,403)
Repayment of related party loan (19,550)
Repayment of other loans (14,511)
------------
Net cash provided by financing activities 19,574
Decrease in cash and cash equivalents (2,670)
Cash and cash equivalents, beginning of year 15,540
------------
Cash and cash equivalents, end of year 12,870
============
Supplemental Disclosures:
Non cash investing and financing activities
Purchase of shares of company under common control (note 7) Payment 280,000
made in 2005
Purchase of assets of company under common control (note 7) Payment 180,700
made in 2005
Other
Cash paid for income taxes 5,259
Cash paid for interest 19,331
The accompanying notes form an integral part of these financial statements
C-6
NAVIGATOR INFORMATIKA RT. AND SUBSIDIARIES
NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS OF HUNGARIAN FORINT, EXCEPT SHARE DATA
1. ORGANIZATION AND BUSINESS
Navigator Informatika Rt. ("Navigator") was incorporated on July 17, 2001. On
December 1, 2004, Navigator purchased 100% of the shares of Navigator Info Kft.
and its wholly owned subsidiary Navigator Engineering Kft, for THUF 280,000 in a
transaction under the common control of Wallis Rt., the parent company of all
entities involved in this transaction. Navigator Informatika Rt. and its
subsidiaries are referred to as the "Company."
The Company provides a full range of information technology outsourcing
services. The information technology ("IT") outsourcing services provided by the
Company primarily comprise IT maintenance, procurement, consultancy and related
services.
On October 7, 2005, Euroweb International Corp. and one of its subsidiaries
purchased 100% of the outstanding shares of common stock of Navigator from
Marivaux Investments Limited and Graeton Holdings Limited for USD 8.5 million
(THUF 1,758,650 as of October 7, 2005) cash and 441,566 shares of common stock
of Euroweb International Corporation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Principles
The financial statements and accompanying notes have been prepared in
conformity with accounting principles generally accepted in the United
States of America.
Basis of Presentation
The financial statements comprise the accounts of Navigator, Navigator
Info Kft. (the wholly-owned subsidiary of Navigator) and Navigator Engineering
Kft. (the wholly-owned subsidiary of Navigator Info Kft.) Navigator acquired
Navigator Info Kft. in December 2004 for THUF 280,000 in a transaction under the
common control of Wallis Rt. Accordingly, the transaction was accounted in a
manner similar to a pooling-of-interests, with all prior periods being restated
as if the entities were combined for all periods presented. The purchase
consideration was in excess of the value of Navigator Info Kft. net assets
recorded by Navigator upon the transaction. The excess consideration over
recorded net assets, of THUF 240,000, was accounted for as a distribution to
Wallis Rt., which resulted in a deduction from retained earnings.
On August 12, 2004, Wallis Rt. indirectly acquired 100% of the shares of
AM-IT Rt. (which was subsequently renamed to Navigator) from an unrelated third
party. Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 141,
Business Combinations, at this date, the assets and liabilities of Navigator
were measured at their fair values. The purchase price adjustments and goodwill
were pushed down to Navigator in accordance with Staff Accounting Bulletin No.
54. "Push-down" is a basis of accounting that reflects the parent company's cost
in the separate financial statements of a purchased subsidiary. Accordingly, as
of August 12, 2004, the assets and liabilities of Navigator were stepped up to
reflect the accounting basis of Wallis Rt. in Navigator's assets and
liabilities.
C-7
NAVIGATOR INFORMATIKA RT. AND SUBSIDIARIES
NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS OF HUNGARIAN FORINT, EXCEPT SHARE DATA
The consideration paid by Wallis Rt. for Navigator was allocated as
follows:
THUF
------------
Fair value of Navigator Informatika Rt.'s
recorded assets acquired and liabilities assumed:
Cash 28,327
Net receivables 86,067
Other current assets 19,747
Fixed assets 64,992
Payables and accruals (41,283)
Loans and leasing liability
(32,850)
Total fair value of recorded assets acquired
and liabilities assumed:
125,000
Identified intangible - customer contract 356,000
Deferred tax related to identified intangible (56,960)
------------
424,040
Excess of fair value of net assets over consideration (59,040)
Total consideration 365,000
============
In determining the fair value of the acquired customer contract, the
Company considered its intention for future use of the asset and analyses of
historical financial performance and estimates of future performance of
Navigator Rt.'s services. The Company used an income-based valuation approach,
using discount rates ranging from 16% to 18%. The contract is being amortized
over the estimated remaining useful life of 4.5 years. In allocating the
purchase price, the THUF 59,040 excess of fair value over purchase price
consideration was allocated as a pro-rata reduction of the values assigned to
non-current assets. The carrying value of the net assets prior to the
above-described step-up was THUF 125,000. The increase in the recorded values of
those assets upon the step-up was THUF 240,000, which amount was recorded as
additional paid-in capital.
All material intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Fair Value of Financial Instruments
All financial instruments are carried at amounts that approximate fair
value.
Cash and Cash Equivalents
Cash and cash equivalents include cash at bank and short-term deposits
with maturities of three months or less at the date of purchase.
C-8
NAVIGATOR INFORMATIKA RT. AND SUBSIDIARIES
NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS OF HUNGARIAN FORINT, EXCEPT SHARE DATA
Inventory
Inventory, comprised of IT hardware for resale, is carried at the lower of
cost or market. Deposits paid by the Company for inventory are recorded as
prepayments until the Company takes title to the inventory.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Equipment purchased under capital leases is stated at the present value of
minimum lease payments at the inception of the lease less accumulated
depreciation. Leased assets are depreciated using a straight-line method
over the estimated useful lives of the leased asset.
The Company provides for depreciation of property and equipment using the
straight-line method over the following estimated useful lives:
Software 3 years
Computer equipment 3-5 years
Other furniture equipment and fixtures 5-7 years
Server room removable fixtures 17 years
Recurring maintenance on property and equipment is expensed as incurred.
Long-lived Assets
The Company periodically reviews long-lived assets for impairment whenever
events or changes in business circumstances indicate that the carrying amount of
the assets may not be fully recoverable or that the useful lives of those assets
are no longer appropriate. Each impairment test is based on a comparison of the
undiscounted cash flows to the recorded value of the asset. If the undiscounted
cash flows exceeds the recorded value of the asset, the asset is written down to
its estimated fair value based on a discounted cash flow analysis.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement
exists, the product or service has been delivered, fees are fixed or
determinable, collection is probable and all other significant obligations have
been fulfilled. Revenues from maintenance services are recognized in the month
in which the services are provided, either based on performance or on fixed
monthly fees. The Company defers revenue recognition for payments on contracts
for which services have not been performed.
C-9
NAVIGATOR INFORMATIKA RT. AND SUBSIDIARIES
NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS OF HUNGARIAN FORINT, EXCEPT SHARE DATA
The Company also generates non-recurring revenue from consulting fees for
implementation, installation, configuration, testing and training related to the
use of third party licensed products. The Company recognizes revenue for these
services as they are performed, if contracted on a time and materials basis, or
using the percentage of completion method, if contracted on a fixed fee basis
and when the cost of the consulting project can be reliably estimated.
Percentage of completion is measured based on cost incurred to date compared to
total estimated cost at completion.
When the cost to complete a project cannot be reliably estimated, the
Company recognizes revenue using the completed contract method until such time
that the cost to complete the project can be reliably estimated.
Cost of Revenues
Cost of revenues principally comprises cost of fixed assets sold during
the course of IT outsourcing projects, cost of materials required to perform IT
outsourcing activities and cost of project-dedicated sub-contractors.
Foreign Currency Translation
The Company considers the Hungarian Forint ("HUF") to be its functional
currency.
Gains and losses from foreign currency transactions and the translation of
monetary assets or liabilities not denominated in Hungarian forints are
included in the income statements in the period in which they occur.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities, net of appropriate valuation
allowances, are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss
and tax credit carry-forwards. Deferred tax assets and liabilities, if
any, are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that
includes the enactment date.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)"). SFAS
123(R) requires an entity to recognize the grant-date fair value of stock
options and other equity-based compensation issued to employees in the
income statement. The Company has concluded that SFAS No.123 (revised
2004) currently has no impact on its financial statements, as the Company
does not provide equity-based compensation to employees.
C-10
NAVIGATOR INFORMATIKA RT. AND SUBSIDIARIES
NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS OF HUNGARIAN FORINT, EXCEPT SHARE DATA
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets: an amendment of APB Opinion No. 29" ("SFAS 153"). SFAS 153
eliminates a company's ability to use the similar productive assets
concept to account for nonmonetary exchanges at book value without
recognizing a gain.
Nonmonetary exchanges will have to be accounted for at fair value, with
gain or loss recognized, if the transactions meet a commercial-substance
criterion and fair value is determinable. SFAS 153 is effective for
nonmonetary asset exchanges in fiscal periods beginning after June 15,
2005, and early application is permitted for nonmonetary asset exchanges
occurring in fiscal periods beginning after December 16, 2004. The Company
does not believe that SFAS 153 will have any impact on its financial
statements.
In December 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
amendment of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends
Accounting Research Bulletin No. 43, Chapter 4, "Inventory Pricing" ("ARB
43") to eliminate the "so abnormal" criterion in ARB 43 and requires
companies to recognize abnormal freight, handling costs, and amounts of
wasted material (spoilage) as current-period charges.
Additionally, SFAS 151 clarifies that fixed production overhead cost
should be allocated to inventory based on the normal capacity of the
production facility. SFAS 151 is effective for inventory costs incurred
during annual periods beginning after June 15, 2005. The Company currently
does not have any inventory that is within the scope of SFAS 151.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" which replaces Accounting Principles Board Opinions No. 20
"Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in
Interim Financial Statements." This statement applies to all voluntary
changes in accounting principle and changes resulting from adoption of a
new accounting pronouncement that does not specify transition
requirements. SFAS 154 requires retrospective application to prior
periods' financial statements for changes in accounting principle unless
it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. SFAS 154 also requires that retrospective
application of a change in accounting principle be limited to the direct
effects of the change. Indirect effects of a change in accounting
principle should be recognized in the period of the accounting change.
SFAS 154 is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005 with early
implementation permitted for accounting changes and corrections of errors
made in fiscal years beginning after the date this statement was issued.
SFAS 154 is effective for the Company as of January 1, 2006 and is not
expected to have a material impact on the Company's financial statements.
C-11
NAVIGATOR INFORMATIKA RT. AND SUBSIDIARIES
NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS OF HUNGARIAN FORINT, EXCEPT SHARE DATA
3. TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable as of December 31, 2004 in THUF were as follows:
December 31, 2004
------------------------------------------------------------------
Receivable 205,400
Less allowance for doubtful debts (33,124)
------------------------------------------------------------------
TOTAL 172,276
=======
The Company establishes allowances for doubtful debts to reduce receivables to
their estimated recoverable value. The allowance is determined on an account by
account basis, with a 100% provision for those accounts overdue by more than 180
days.
4. PREPAYMENTS AND OTHER CURRENT ASSETS
Prepayments and other current assets as of December 31, 2004 in THUF were as
follows:
December 31, 2004
------------------------------------------------------------------
Inventory 95,530
Corporate and value added taxes 18,156
Others 41,304
------------------------------------------------------------------
TOTAL 154,990
=======
Inventory prepayments include THUF 80,763 related to an advance payment for IT
equipment, which was received and sold to a customer at cost in February 2005.
5. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 2004 in THUF were as follows:
December 31, 2004
------------------------------------------------------------------
Software 98,294
Computer equipment 252,951
Server room moveable fixtures 10,584
Furniture, fixtures and other 36,482
------------------------------------------------------------------
Total 398,311
Less accumulated depreciation (158,302)
TOTAL PROPERTY AND EQUIPMENT 240,009
========
The gross value of assets recorded under capital lease obligation was THUF
27,850, while accumulated depreciation was THUF 8,360 as of December 31, 2004.
C-12
NAVIGATOR INFORMATIKA RT. AND SUBSIDIARIES
NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS OF HUNGARIAN FORINT, EXCEPT SHARE DATA
6. CUSTOMER CONTRACT
Navigator has a fixed-term contract with Antenna Hungaria, its former parent, to
provide IT maintenance services until 2009. When Wallis Rt. indirectly acquired
Navigator from Antenna Hungaria on August 12, 2004, an amount of THUF 356,000
was assigned as the value of this customer contract (see note 2). Amortization
of THUF 30,220 was charged in the year ended December 31, 2004. Estimated
amortization in THUF until the end of the term of the contract, in February
2009, is as follows:
Year ended December 31,
------------------------------------------------------------
2005 78,230
2006 78,230
2007 78,230
2008 78,230
2009 12,860
7. RELATED PARTY TRANSACTIONS
The Company has entered into transactions with related parties both during the
course of its normal operating activities and during the course of acquiring
certain assets and assuming certain liabilities of Wallitrade Kft., as well as
the purchase of the shares of Navigator Info Kft. These transactions are
summarized below:
Related Party Loans Receivable
As of December 31, 2004, THUF 38,474 of the balance of total related party
loans receivable relates to a short-term loan provided to Wallitrade Kft., a
party related by common ownership. The loan was granted in November 2004 and
bears interest at the base rate of the Hungarian National Bank.
The remaining amount of THUF 21,067 relates to the cash pool financing
arrangement described below.
Cash Pool Financing
The Company has a cash pool agreement with Wallis Rt., the Company's
ultimate parent, whereby all surplus cash at bank of the Company and other
companies directly and indirectly owned by Wallis Rt. (collectively, "Wallis
Group") are sent to a head office account on a daily basis. If there are funds
drawn on an external overdraft facility, then cash is sent by Wallis Rt. to the
particular subsidiary in order to minimize interest costs to Wallis Group. As of
January 1, 2004, the Company had transferred THUF 37,965 to Wallis Rt. under
this cash pool agreement. As of December 31, 2004, THUF 38,410 was received from
Wallis Rt. in order to maintain a zero position in Navigator's external bank
overdraft facility, while Navigator's subsidiaries had transferred cash at bank
of THUF 21,067 to Wallis Rt. - resulting in net borrowings of the Company from
Wallis Rt. of THUF 17,343 as of December 31, 2004. The charge for the cash pool
financing is one-month BUBOR.
C-13
NAVIGATOR INFORMATIKA RT. AND SUBSIDIARIES
NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS OF HUNGARIAN FORINT, EXCEPT SHARE DATA
Cash in hand as of December 31, 2004 relates to petty cash at the Company
and its two subsidiaries.
Related Party Loan Payable
In September 2001, a related party provided a loan of THUF 30,000 to the
Company to finance working capital. The interest rate of the loan was BUBOR
(Budapest Interbank Offered Rate) +1%. The balance as of December 31, 2004 was
THUF 18,000. The balance was fully repaid in March 2005.
Purchase of Wallitrade assets
In December 2004, the Company signed an agreement to purchase part of the
net assets of Wallitrade Kft. from Wallis Group in several stages.
The first stages were completed in December 2004, and the following assets
were purchased:
THUF
-------
Inventory 23,200
Fixed assets 157,500
-------
TOTAL 180,700
Note 14 (Subsequent events) details the completion of the purchase of part
of Wallitrade's net assets in 2005.
Acquisition of Shares in Navigator Info Kft.
The Company acquired all of the issued shares of Navigator Info Kft. for
consideration of THUF 280,000 in December 2004. As the acquisition was made from
an entity under common control (all of the companies were owned directly or
indirectly by Wallis Rt. at the time of the acquisition in December 2004), the
transactions were accounted in a manner similar to a pooling of interests (see
note 2).
Operating Transactions
The Company provides IT outsourcing services to related parties. Total
revenues generated from these services were THUF 60,900 (exclusive of VAT)
during 2004.
Related parties also provided the following services (figures exclusive of
VAT) to the Company in 2004:
o Office rental of THUF 13,195 (see note 11)
o Car rental of THUF 13,210 (see note 11)
o Cash pool services (see note 7)
o Management fees of THUF 16,485
o Other miscellaneous services from related parties of THUF 10,675
C-14
NAVIGATOR INFORMATIKA RT. AND SUBSIDIARIES
NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS OF HUNGARIAN FORINT, EXCEPT SHARE DATA
The total amount of such services purchased by the Company was THUF 62,700
(exclusive of VAT) during 2004.
The Company also invoiced a related party THUF 9,000 (exclusive of VAT)
during the year for services that it sub-contracted from another related party.
This is reflected on a net basis in the financial statements.
8. BANK LOAN
On November 30, 2004, the Company obtained a short-term loan of EUR 328,398
(THUF 80,763 as of December 31, 2004) in order to finance a deposit payable in
respect of a purchase of inventory to be sold to a customer under an outsourcing
agreement. The loan was repaid in February 2005.
9. OTHER CURRENT LIABILITIES
Other current liabilities as of December 31, 2004 in THUF were as follows:
December 31, 2004
------------------------------------------------------------------
Wage related taxes 21,795
Wages 11,335
Value added tax payable 9,643
Short-term portion of capital lease obligation 8,400
Dividend payable 7,955
Local tax payable 2,967
Other 881
------------------------------------------------------------------
TOTAL OTHER CURRENT LIABILITIES 62,976
======
10. ACCRUED EXPENSES
Accrued expenses as of December 31, 2004 in THUF were as follows:
2004
------------------------------------------------------------------
Accrued trade payables 36,218
Office rent 1,728
Audit 4,200
Other 10,108
------------------------------------------------------------------
TOTAL 52,254
======
C-15
NAVIGATOR INFORMATIKA RT. AND SUBSIDIARIES
NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS OF HUNGARIAN FORINT, EXCEPT SHARE DATA
11. COMMITMENTS AND CONTINGENCIES
Lease Agreements
Capital lease - In 2003, the Company entered into three year capital lease
for computer equipment. The following is a schedule of future capital lease
payments (with initial or remaining lease terms in excess of one year) as of
December 31, 2004 in THUF:
Short term lease obligation 8,400
Long term lease obligation 4,935
------------------------------------------------------------
TOTAL LEASE PAYMENTS 13,335
======
The current portion of the capital lease obligation is included in `Other
current liabilities' in the accompanying balance sheets.
Operating Leases
On September 1, 2004, the Company commenced a non-cancelable rental
contract for its office space for a period of 62 months with a related party.
The monthly rental fee is THUF 2,672.
The Company also has various car rental agreements under operating leases
with a related party. The rental amounts include maintenance and servicing.
Following are the Company's commitments under its non-cancelable lease
obligations, as of December 31, 2004 in THUF:
Capital lease Operating lease
2005 10,071 50,782
2006 5,875 49,718
2007 -- 48,599
2008 -- 44,979
2009 -- 26,720
------------ --------------
TOTAL 15,946 220,798
------------ ==============
Less amount representing interest (2,611)
------------
NET MINIMUM LEASE PAYMENTS 13,335
============
There are no restrictions on dividends imposed by lease contracts.
C-16
NAVIGATOR INFORMATIKA RT. AND SUBSIDIARIES
NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS OF HUNGARIAN FORINT, EXCEPT SHARE DATA
Commitment Related to Advance Payment for Inventory
As part of its IT outsourcing relationship with a large customer, the
Company concluded an agreement in 2004 whereby it agreed to procure IT assets
for resale to the customer. A deposit with the supplier for THUF 80,763 was made
in December 2004. The assets were delivered to the Company in February 2005 and
installed by the Company at the customer's site in the same month, when the
remaining payment of THUF 193,200 was paid by the Company to the supplier.
Subsidy
In 2003, the Company was granted a government subsidy of THUF 16,800 in
connection with a government related project. The Company used the funds to
subsidize sub-contractor costs in connection with the establishment of a
government portal. The Company has a commitment to maintain the portal until May
2007, and the government has the right to demand the entire amount of the funds
(with interest at twice the Hungarian National Bank rate) if the Company does
not fulfill its obligations until May 2007.
12. INCOME TAXES
The statutory corporate tax rate in Hungary was 16% as of December 31, 2004.
Neither the Company nor its subsidiaries have any tax net operating loss
carryforwards from prior years.
The corporate income taxes of THUF 4,807 arise from the fact that the reported
loss before income taxes of THUF 30,795 includes THUF 22,704 of fixed asset
write-offs and THUF 19,800 of customer list amortization, which are not
deductible under Hungarian taxation rules, and THUF 16,100 of provision for
doubtful accounts which are deductible when the receivables are written off.
The Company recognized a deferred tax liability of THUF 47,451 in connection
with the recognition of the customer contract (note 6). The balance at December
31, 2004 represents the deferred tax liability of THUF 43,423 relating to the
excess of carrying values of customer contracts over their respective tax bases.
The deferred tax liability will be recognised in the statements of operations as
the customer contract is amortized over its remaining term until February 2009.
The Company has no other significant deferred tax assets or liabilities.
13. DEPENDENCY ON CERTAIN CUSTOMERS
49% of the consolidated sales revenue in 2004 is derived from one customer,
which was a former owner of the Company. 78% of the 2004 annual sales revenue
was generated from the four most significant customers of the Company. As of
December 31, 2004, trade receivables of THUF 124,774 were due from Antenna
Hungaria, the former owner of the Company, while the other three largest
customers owed a total of THUF 62,093.
C-17
NAVIGATOR INFORMATIKA RT. AND SUBSIDIARIES
NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS OF HUNGARIAN FORINT, EXCEPT SHARE DATA
14. SUBSEQUENT EVENTS
During the first quarter of 2005, the Company completed the purchase of a part
of Wallitrade's net assets (See note 7) by acquiring receivables of THUF 33,122
and assuming liabilities of THUF 65,625 which related to the fixed assets
purchased in 2004.
On April 6, 2005, the Company entered into a long-term loan agreement with
Commerzbank Bank Rt (the "Bank") for THUF 201,250, with an interest rate of
three month BUBOR +2.5%, in order to finance the payment for the Wallitrade net
assets noted above. The loan is repayable in 14 quarterly instalments of THUF
14,380 plus quarterly interest starting on May 31, 2005. The shares of the
Company were pledged as collateral for this loan, as well as a general lien
established on all of the assets of the Company.
In addition to the long-term loan agreement, the Company also concluded an
overdraft facility with the Bank for THUF 130,000 on July 20, 2005.
Additionally, on September 1, 2005, the Company concluded a short-term loan
facility agreement with the Bank for THUF 30,000 to fund working capital. The
initial short-term loan facility expired on October 31, 2005 and was extended to
January 31, 2006 in October 2005.
In June 2005, Wallis Group sold its shares in Navigator to Marivaux Investments
Limited and Graeton Holdings Limited.
On October 7, 2005, Euroweb International Corp. and one of its subsidiaries
purchased 100% of the outstanding shares of common stock of Navigator
Informatika Rt. from Marivaux Investments Limited and Graeton Holdings Limited
for USD 8.5 million cash and 441,566 shares of common stock of Euroweb
International Corporation.
C-18
NAVIGATOR INFORMATIKA RT. AND SUBSIDIARIES
UNAUDITED CONDENSED COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS
IN THOUSANDS OF HUNGARIAN FORINT
As of
September 30,
2005
------------
ASSETS
Current assets:
Cash and cash equivalents --
Trade accounts receivable, net 132,215
Related party receivables 93,607
Accrued revenue 52,907
Prepaid and other current assets 87,972
------------
Total current assets 366,701
Customer contract, net 231,396
Equipment and fixtures, net 229,178
------------
Total assets 827,275
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable 133,379
Related party payables 46,254
Short-term portion of related party loan 10,937
Short term bank loan and overdraft 161,510
Other current liabilities 71,473
Accrued expenses 76,710
Deferred revenue 8,396
------------
Total current liabilities 508,659
Long term portion of bank loan 115,000
Long-term portion of related party loan 43,750
Deferred taxes 37,023
Long term portion of capital lease obligation 5,270
Other loan obligations 8,367
------------
Total long term liabilities 209,410
------------
Total liabilities 718,069
------------
Commitments and contingencies
Shareholders' equity
Common stock, HUF 10,000 par value (12,500 shares 125,000
authorized, issued and outstanding as of September 30, 2005)
Additional paid-in capital 240,000
Accumulated deficit (255,794)
------------
Total shareholders' equity 109,206
------------
Total liabilities and shareholders' equity 827,275
============
The accompanying notes form an integral part of these
unaudited condensed financial statements
C-19
NAVIGATOR INFORMATIKA RT. AND SUBSIDIARIES
UNAUDITED CONDENSED COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS
IN THOUSANDS OF HUNGARIAN FORINT
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2005 2004
---------- ----------
Third party revenue 841,872 498,622
Related party revenue 241,309 12,956
---------- ----------
TOTAL REVENUE 1,083,181 511,578
COST OF REVENUE (exclusive of depreciation and 268,494 56,973
amortization shown separately below)
OPERATING EXPENSES
Personnel expenses 170,857 172,352
Consulting, advisory and professional fees 236,289 159,913
Other selling, general and administrative expenses
(including HUF 106 million and HUF 21 million
related party expenses in 2005 and 2004 respectively)
228,818 96,027
Depreciation and amortization 96,805 61,563
---------- ----------
Total operating expenses 732,769 489,855
Income (loss) from operations 81,918 (35,250)
OTHER INCOME / (EXPENSE)
Interest income 2,899 2,491
Interest expense (18,015) (9,278)
---------- ----------
Total other expenses (15,116) (6,787)
---------- ----------
Income (loss) before income taxes 66,802 (42,037)
Income tax, deferred 6,399 1,238
Income tax, current (28,132) (2,944)
---------- ----------
Net income taxes expense (21,733) (1,706)
---------- ----------
NET INCOME (LOSS) 45,069 (43,743)
========== ==========
The accompanying notes form an integral part of these
unaudited condensed financial statements
C-20
NAVIGATOR INFORMATIKA RT. AND SUBSIDIARIES
UNAUDITED CONDENSED COMBINED AND CONSOLIDATED STATEMENT OF CASH FLOWS
IN THOUSANDS OF HUNGARIAN FORINT
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2005 2004
-------- --------
Net cash provided by operating activities 351,177 41,214
Cash flows from investing activities:
Payment for Wallitrade assets acquired (148,197) --
Proceeds on sale of fixed assets -- 8,400
Purchase of property and equipment (59,705) (15,977)
-------- --------
Net cash used in investing activities (207,902) (7,577)
Cash flows from financing activities:
Payment for Navigator Info Kft. shares - deemed dividend (280,000) --
Net borrowings under overdraft facility 104,010 --
Proceeds of long-term bank loan 201,250 --
Repayment of long-term bank loan (28,750) --
Repayment of short-term bank loan (80,763) --
Repayment of related party loans - cash pool, net (17,343) 47,207
Repayment of related party loan (40,787) (36,883)
2004 & 2003 dividends paid, respectively (7,955) (22,559)
Principal payments under capital lease obligations (5,807) (25,357)
-------- --------
Net cash used in financing activities (156,145) (37,592)
Decrease in cash and cash equivalents (12,870) (3,955)
Cash and cash equivalents, beginning of year 12,870 15,540
-------- --------
Cash and cash equivalents, end of period -- 11,585
======== ========
The accompanying notes form an integral part of these
unaudited condensed financial statements
C-21
1. BASIS OF PRESENTATION
Navigator Informatika Rt. ("Navigator") is a Hungarian Corporation, which was
owned until October 7, 2005 by Marivaux Investments Limited ("Marivaux") and
Graeton Holdings Limited ("Graeton"), which are both registered under the laws
of the Cyprus. Marivaux and Graeton [were][are] both [indirectly] owned by
Wallis Rt. Navigator Informatika Rt., and its wholly owned subsidiaries,
Navigator Info Kft. and Navigator Engineering Kft., are engaged in information
technology outsourcing, applications development and information technology
consulting services primarily in the Hungarian market.
The accompanying unaudited condensed financial statements of Navigator are
stated in Hungarian Forints ("HUF") (the currency in Hungary) and have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission regarding interim financial information. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of management, these financial statements include all
adjustments, consisting mainly of normal recurring accruals, necessary for a
fair presentation of the results for the interim periods presented. Results for
the interim periods are not necessarily indicative of the results for a full
fiscal year. These unaudited condensed financial statements should be read in
conjunction with Navigator's audited financial statements and notes thereto as
of and for the year ended December 31, 2004.
On August 12, 2004, Wallis Rt. indirectly acquired 100% of the shares of
AM-IT Rt. (which was subsequently renamed to Navigator) from an unrelated third
party. Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 141,
Business Combinations, at this date, the assets and liabilities of Navigator
were recorded at their fair values and excess unallocated purchase consideration
recorded as goodwill. The purchase price adjustments and goodwill were pushed
down to Navigator in accordance with SAB 54. "Push-down" is a basis of
accounting that reflects the parent company's cost in the separate financial
statements of a purchased subsidiary. Accordingly, as of August 12, 2004,
Navigator stepped up the values of its consolidated assets and liabilities to
reflect the accounting basis of Wallis Rt. in Navigator's assets and liabilities
based on their estimated fair values. The consideration has been allocated as
follows:
THUF
---------
Fair value of Navigator Informatika Rt.'s recorded assets
acquired and liabilities assumed:
Cash 28,327
Net receivables 86,067
Other current assets 19,747
Fixed assets 64,992
Payables and accruals (41,283)
Loans and leasing liability (32,850)
---------
Total fair value of recorded assets acquired and
liabilities assumed: 125,000
Total fair value of recorded assets acquired and
liabilities assumed: 125,000
Identified intangible - customer contract 356,000
Deferred tax related to indentified intangible (56,960)
---------
424,040
Excess of fair value of net assets over consideration (59,040)
Total consideration 365,000
=========
The excess of fair value of net assets over consideration was allocated on
a pro-rata basis to non-current assets. . The carrying value of the net assets
prior to the above-described step-up was THUF 125,000. The increase in the
recorded values of those assets upon the step-up was THUF 240,000, which amount
was recorded as additional paid-in capital.
C-22
2. BANK LOAN
On April 6, 2005, the Company entered into a long-term loan agreement with
Commerzbank Bank Rt (the "Bank") for THUF 201,250, with an interest rate of
three month BUBOR +2.5%. The loan is repayable in 14 quarterly instalments of
THUF 14,375 plus quarterly interest starting on May 31, 2005. The shares of the
Company were pledged as collateral for this loan, as well as a general lien
established on all of the assets of the Company.
In addition to the long-term loan agreement, the Company also entered into an
overdraft facility with the Bank for THUF 130,000 on July 20, 2005.
Additionally, on September 1, 2005, the Company entered into a two-month loan
facility agreement with the Bank for THUF 30,000 to fund working capital. The
Company did not draw down funds under this agreement until October 2005.
3. DEPENDENCY ON CERTAIN CUSTOMERS
30% of the consolidated sales revenue in the nine months ended September 30,
2005 is derived from one customer, which was a former owner of the Company. 80%
of the consolidated sales revenue in the nine months ended September 30, 2005
was generated from the four most significant customers of the Company.
4. COMMITMENTS AND CONTINGENCIES
Subsidy
In 2003, the Company was granted a government subsidy of THUF 16,800 in
connection with a government related project. The Company used the funds to
subsidize sub-contractor costs in connection with the establishment of a
government portal. The Company has a commitment to maintain the portal until May
2007, and the government has the right to demand the entire amount of the funds
(with interest at twice the Hungarian National Bank rate) if the Company does
not fulfill its obligations until May 2007.
5. SUBSEQUENT EVENTS
In October 2005, the short term loan facility agreement of THUF 30,000 was
extended to January 31, 2006.
There were no other material events until the date of this report that are not
disclosed in the financial statements for the year ended December 31, 2004.
C-23
EXHIBIT D
EUROWEB INTERNATIONAL CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited pro forma condensed consolidated financial statements
(the "unaudited pro forma financial statements") give effect to:
o the sale of 100% of the interest of Euroweb International
Corporation ("Euroweb") in each of Euroweb Internet Szolgaltato Rt.
("Euroweb Hungary") and Euroweb Romania S.A. ("Euroweb Romania")
o the sale of 100% of Euroweb Slovakia a.s. ("Euroweb Slovakia"); and
o the acquisition of 100% of Navigator Informatika Rt. ("Navigator")
Sale of 100% of the interest of Euroweb in Euroweb Hungary and Euroweb Romania
The unaudited pro forma financial statements give effect to the sale of 100% of
the Company's interest in Euroweb Hungary and Euroweb Romania. The sale is
expected to be completed prior to June 30, 2006. Euroweb Hungary and Euroweb
Romania are together expected to be sold for approximately $30,000,000 cash,
less estimated transaction costs, severances, success fees and estimated
guarantee provisions of approximately $1,700,000.
Euroweb International Corporation ("Euroweb") believes that the sale of Euroweb
Hungary and Euroweb Romania meets the criteria for presentation as a
discontinued operation under the provisions of Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." The unaudited pro forma financial statements reflect the pro forma
impact of the sale of Euroweb Hungary and Euroweb Romania on the financial
position and results of operations of Euroweb for all of the historical periods
presented. The estimated gain of $16,251,443 on the sale of Euroweb Hungary and
Euroweb Romania is not reflected in the unaudited pro forma condensed
consolidated statements of operations due to the non-recurring nature of the
gain.
Sale of 100% of Euroweb Slovakia
The unaudited pro forma financial statements give effect to the sale of 100% of
Euroweb Slovakia. The sale was completed on April 15, 2005 and Euroweb Slovakia
has already been reported in discontinued operations in the historic financial
statements of Euroweb for the nine months ended September 30, 2005 and 2004
included in Euroweb's Form 10-QSB for the quarter ended September 30, 2005.
Euroweb is not yet required to prepare financial statements for any historic
complete fiscal year that includes Euroweb Slovakia in discontinued operations.
Therefore, the unaudited pro forma financial statements reflect the pro forma
impact of the sale of Euroweb Slovakia on the results of operations of Euroweb
for the years ended December 31, 2004 and 2003.
D-1
Acquisition of 100% of Navigator Informatika Rt. ("Navigator")
The unaudited pro forma condensed consolidated statements of operations for the
year ended December 31, 2004 and the nine months ended September 30, 2005 and
the unaudited pro forma condensed consolidated balance sheet as of September 30,
2005 also give effect to the acquisition by Euroweb of 100% of Navigator. Pro
forma effect is given to this acquisition only for the most recent fiscal year
presented in the unaudited pro forma financial statements and the subsequent
interim period.
Euroweb acquired Navigator for approximately $8,700,000 in cash consideration
(including estimated direct transaction costs of $200,000) and 441,566 shares of
Euroweb common stock with a fair value of $1,752,134, less estimated
registration costs of $70,000. The acquisition, which was closed on October 7,
2005, will be accounted for using the purchase method of accounting. Under this
method, the purchase price has been allocated to the assets acquired and
liabilities assumed based on preliminary estimates. The final purchase price
allocation will be calculated based on the transaction value and the fair values
of the identifiable assets and liabilities of Navigator as of October 7, 2005
(the date of closing of the purchase). Euroweb expects to finalize these matters
in early 2006. Therefore, the actual amount of goodwill, as well as other
balance sheet items, could differ from the amounts disclosed in the unaudited
pro forma financial statements and actual amounts disclosed in future statements
of operations of the Euroweb, such as intangible asset amortization and income
taxes, may differ from the corresponding amounts disclosed in the unaudited pro
forma condensed consolidated statements of operations.
The unaudited pro forma condensed consolidated balance sheet gives effect to the
disposition of Euroweb Hungary and Euroweb Romania and the acquisition of
Navigator Rt. as if it occurred on September 30, 2005. The unaudited pro forma
condensed consolidated statements of operations give effect to the dispositions
of Euroweb Hungary, Euroweb Romania and Euroweb Slovakia as though the
dispositions had been in effect for all periods presented. The unaudited pro
forma condensed consolidated statements of operations for the year ended
December 31, 2004 and the nine months ended September 30, 2005 give effect to
the acquisition of Navigator as if it occurred on January 1, 2004. The unaudited
pro forma condensed consolidated statements of operations for the year ended
December 31, 2003 and the nine months ended September 30, 2004 do not give
effect to the acquisition of Navigator.
The pro forma adjustments described in the accompanying notes are based upon
available information and certain assumptions that management believes are
reasonable. The unaudited pro forma condensed consolidated statements of
operations are for illustrative purposes only and are not necessarily indicative
of the actual results of operations that would have occurred had the
transactions described above occurred on the dates indicated, nor are they
necessarily indicative of future operating results. The unaudited pro forma
financial statements are only a summary and should be read in conjunction with
the historical consolidated financial statements and related notes of the
Euroweb, in its Form 10-KSB for the year ended December 31, 2004 and its Form
10-QSB for the nine month period ended September 30, 2005, and of Navigator in
the Current Report on Form 8-K/A of Euroweb filed with the SEC on December 20,
2005.
All pro forma amounts are presented in U.S. dollars, the reporting currency of
Euroweb.
There were no material business transactions between Euroweb and Navigator
during the periods presented.
D-2
EUROWEB
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2005
ADJUSTMENTS TO ELIMINATE
ENTITIES DISPOSED OF
------------------------------ ADJUSTMENTS EUROWEB PRO
EUROWEB EUROWEB TO INCLUDE PRO FORMA FORMA
EUROWEB HUNGARY ROMANIA NAVIGATOR ADJUSTMENTS NOTES CONSOLIDATED
---------- ----------- ------------ ---------- ------------- ----- -----------
(A) (B) (C) (D) (J) (K)
ASSETS
Cash and cash
equivalents 4,863,296 (3,192,859) (390,525) -- 30,000,000 1 25,429,912
(8,350,000) 2
6,000,000 3
(6,000,000) 4
2,500,000 5
Trade accounts
receivable, net 4,501,859 (3,170,590) (1,252,019) 636,996 -- 716,246
Related party
receivable -- -- -- 450,988 -- 450,988
Unbilled receivable 1,221,809 (1,088,952) (132,857) 254,900 -- 254,900
Deferred tax assets 31,678 -- -- -- -- 31,678
Prepaid expenses and
other current
assets 924,572 (386,459) (477,915) 423,839 -- 484,037
---------- ----------- ------------ ---------- ------------- -----------
TOTAL CURRENT
ASSETS 11,543,214 (7,838,860) (2,253,316) 1,766,723 24,150,000 27,367,761
Property and equipment 6,642,425 (3,405,277) (3,237,148) 1,114,839 -- 1,114,839
Intangibles- customer
lists 1,283,455 (1,283,455) -- 1,104,153 2,331,351 6 3,435,504
Goodwill 5,806,181 (5,240,181) (566,000) -- 7,965,948 7 7,965,948
Navigator -
pre-acquisition
cost 271,808 -- -- -- (150,000) 8 --
(121,808) 9
Other assets 383,074 (383,074) -- -- -- --
---------- ----------- ------------ ---------- ------------- -----------
TOTAL ASSETS 25,930,157 (18,150,847) (6,056,464) 3,985,715 34,175,491 39,884,052
========== =========== ============ ========== ============= ===========
See accompanying notes to the unaudited pro forma condensed consolidated financial statements.
D-3
EUROWEB
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2005
ADJUSTMENTS TO ELIMINATE
ENTITIES DISPOSED OF
------------------------------ ADJUSTMENTS EUROWEB PRO
EUROWEB EUROWEB TO INCLUDE PRO FORMA FORMA
EUROWEB HUNGARY ROMANIA NAVIGATOR ADJUSTMENTS NOTES CONSOLIDATED
---------- ----------- ------------ ---------- ------------- ----- -----------
(A) (B) (C) (D) (J) (K)
LIABILITIES
Trade accounts payable 3,326,004 (1,688,345) (1,596,219) 642,605 -- 684,045
Related party payable -- -- -- 222,847 -- 222,847
Related party loan -- -- -- 52,693 52,693
Pantel loan payables 472,152 (472,152) -- -- -- --
Current portion of bank loan 279,437 (279,437) -- 778,136 687,499 3 778,136
(687,499) 4
Notes payable 175,554 (175,554) -- -- -- --
Other current liabilities 555,531 (365,132) (139,567) 344,348 -- 395,180
Accrued expenses 3,112,036 (2,305,893) (249,011) 369,580 78,192 10 2,774,904
70,000 11
1,700,000 12
Deferred IRU revenue 46,000 -- (46,000) -- -- --
Deferred other revenues 526,923 (375,144) (151,779) 40,451 -- 40,451
---------- ----------- ------------ ---------- ------------- -----------
TOTAL CURRENT LIABILITIES 8,493,637 (5,661,657) (2,182,576) 2,450,660 1,848,192 4,948,256
Deferred tax liabilities 31,678 (31,678) -- 178,372 371,307 12 549,679
Deferred IRU revenue 871,035 -- (871,035) -- -- --
Related party loan -- -- -- 210,782 -- 210,782
Pantel loan payable 236,076 (236,076) -- -- -- --
Bank and loans 439,352 (439,352) -- 554,057 5,312,501 3 554,057
(5,312,501) 4
Other loans -- -- -- 40,312 -- 40,312
Lease obligations 123,319 (8,498) (114,821) 25,390 -- 25,390
STOCKHOLDERS' EQUITY
Common stock, $.001 par value 5,342 -- -- 602,236 (602,236) 13 5,784
442 14
Additional paid-in capital 49,810,246 -- -- 1,156,292 525,400 14 51,491,938
Accumulated deficit (34,193,589) (11,858,985) (2,689,572) (1,232,386) 1,232,386 13 (17,942,146)
30,800,000 15
Accumulated other
comprehensive income 113,061 85,399 (198,460) -- -- --
---------- ----------- ------------ ---------- ------------- -----------
TOTAL STOCKHOLDERS' EQUITY 15,735,060 (11,773,586) (2,888,032) 526,142 31,955,992 33,555,576
---------- ----------- ------------ ---------- ------------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY 25,930,157 (18,150,847) (6,056,464) 3,985,715 34,175,491 39,884,052
========== =========== ============ ========== ============= ===========
See accompanying notes to the unaudited pro forma condensed consolidated financial statements.
D-4
EUROWEB
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2004
ADJUSTMENTS TO ELIMINATE ENTITIES
DISPOSED OF PRO FORMA ADJUSTMENTS
------------------------------------- RESULTS TO EUROWEB
EUROWEB EUROWEB EUROWEB AFTER INCLUDE PRO FORMA PRO FORMA
EUROWEB HUNGARY ROMANIA SLOVAKIA DISPOSITIONS NAVIGATOR ADJUSTMENTS NOTES CONSOLIDATED
---------- ----------- ----------- ----------- ----------- ----------- ----------- ----- -----------
(E) (F) (G) (H) (I) (J)
Third
party
revenues
28,111,786 (18,646,057) (5,637,991) (3,827,738) -- 3,796,210 -- 3,796,210
Related
party
revenues 8,503,939 (504,928) (7,999,011) -- -- 300,948 -- 300,948
---------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
TOTAL
REVENUES 36,615,725 (19,150,985) (13,637,002) (3,827,738) -- 4,097,158 -- 4,097,158
COST OF
REVENUES
(EXCLUSIVE
OF
DEPRECIATION
AND
AMORTIZATION)
Third party
cost of
revenues 17,233,994 (7,131,537) (8,728,520) (1,373,937) -- 565,548 -- 565,548
Related
party cost
of revenues 6,198,505 (3,841,719) (2,356,786) -- -- 124,860 -- 124,860
---------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
TOTAL COST
OF REVENUES
(EXCLUSIVE OF
DEPRECIATION
AND
AMORTIZATION) 23,432,499 (10,973,256) (11,085,306) (1,373,937) -- 690,408 -- 690,408
Compensation
and related
costs 4,182,977 (1,792,637) (681,419) (1,319,609) 389,312 1,151,045 -- 1,540,357
Consulting,
professional
and directors
fees 2,829,525 (1,926,142) (352,825) (141,296) 409,262 769,348 -- 1,178,610
Other selling,
general and
administrative
expenses 4,237,848 (2,475,042) (907,366) (486,248) 369,192 1,101,067 -- 1,470,259
Depreciation
and
amortization 2,610,764 (1,796,394) (626,564) (185,758) 2,048 473,252 1,233,016 15 1,708,316
---------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
LOSS FROM
OPERATIONS (677,888) (187,514) 16,478 (320,890) (1,169,814) (87,962) (1,233,016) (2,490,792)
Interest
income 275,987 (95,539) (24,437) (32,857) 123,154 17,354 -- 140,508
Interest
expense (493,659) 380,370 30,571 8,718 (74,000) (108,124) -- (182,124)
---------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
NET INTEREST
EXPENSE (217,672) 284,831 6,134 (24,139) 49,154 (90,770) -- (41,616)
Other
expenses (170,000) -- -- -- (170,000) -- -- (170,000)
Gain from
sale of
subsidiaries 28,751 -- -- -- 28,751 -- -- 28,751
---------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
LOSS BEFORE
INCOME TAXES (1,036,809) 97,317 22,612 (345,029) (1,261,909) (178,732) (1,233,016) (2,673,657)
Provision
for income
taxes -
deferred -- -- -- -- -- 19,899 197,288 16 217,187
Provision
for income
taxes
- current (62,367) -- 31,092 31,275 -- (23,754) -- (23,754)
---------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
LOSS FROM
CONTINUING
OPERATIONS (1,099,176) 97,317 53,704 (313,754) (1,261,909) (182,587) (1,035,728) (2,480,224)
========== =========== =========== =========== =========== =========== =========== ===========
INCOME
(LOSS) FROM
CONTINUING
OPERATIONS
PER SHARE,
BASIC AND
DILUTED (0.22) (0.23) (0.45)
WEIGHTED
AVERAGE
NUMBER OF
SHARES
OUTSTANDING 5,043,822 5,485,388 5,485,388
See accompanying notes to the unaudited pro forma consolidated financial statements.
D-5
EUROWEB
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2005
ADJUSTMENTS TO ELIMINATE
ENTITIES DISPOSED OF PRO FORMA
-------------------------- RESULTS ADJUSTMENTS EUROWEB PRO
EUROWEB EUROWEB AFTER TO INCLUDE PRO FORMA FORMA
EUROWEB HUNGARY ROMANIA DISPOSITION NAVIGATOR ADJUSTMENTS NOTES CONSOLIDATED
---------- ----------- ------------ ----------- ------------- ----------- ----- ------------
(E) (F) (G) (I) (J)
Third party
revenues 30,622,486 (19,727,196) (10,895,290) -- 4,299,653 -- 4,299,653
Related party
revenues 1,768,358 (203,044) (1,565,314) -- 1,232,425 -- 1,232,425
---------- ----------- ------------ ----------- ------------- ----------- ------------
TOTAL REVENUES 32,390,844 (19,930,240) (12,460,604) -- 5,532,078 -- 5,532,078
COST OF REVENUES
(EXCLUSIVE OF
DEPRECIATION AND
AMORTIZATION)
Third party cost
of revenues 20,677,378 (11,771,101) (8,906,277) -- 1,371,267 -- 1,371,267
Related party
cost of revenues 1,164,692 (788,822) (375,870) -- -- -- --
---------- ----------- ------------ ----------- ------------- ----------- ------------
TOTAL COST OF
REVENUES
(EXCLUSIVE OF
DEPRECIATION
AND AMORTIZATION) 21,842,070 (12,559,923) (9,282,147) -- 1,371,267 -- 1,371,267
Compensation and
related costs 2,514,864 (891,922) (806,067) 816,875 872,610 -- 1,689,485
Consulting,
professional and
directors fees 2,670,795 (2,194,657) (230,228) 245,910 1,206,788 -- 1,452,698
Collection of
written-off
receivable (265,630) -- 265,630 -- -- --
Other selling,
general and
administrative
expenses 2,719,022 (1,893,765) (571,928) 253,329 1,168,626 -- 1,421,955
Depreciation and
amortization 2,649,330 (2,049,403) (599,927) -- 494,408 861,603 15 1,356,011
---------- ----------- ------------ ----------- ------------- ----------- ------------
LOSS FROM
OPERATIONS 260,393 (340,570) (1,235,937) (1,316,114) 418,379 (861,603) (1,759,338)
Interest income 23,871 (17,655) (6,216) -- 14,806 -- 14,806
Interest expense (261,581) (226,795) (34,786) -- (92,007) -- (92,007)
---------- ----------- ------------ ----------- ------------- ----------- ------------
NET INTEREST
EXPENSE (237,710) 209,140 28,570 -- (77,201) -- (77,201)
Other revenue 170,000 -- -- 170,000 -- -- 170,000
---------- ----------- ------------ ----------- ------------- ----------- ------------
LOSS BEFORE
INCOME TAXES 192,683 (131,430) (1,207,367) (1,146,114) 341,178 (861,603) (1,666,539)
Provision for
income taxes -
deferred -- -- -- -- 32,681 137,856 16 170,537
Provision for
income taxes -
current (137,016) -- (137,016) -- (143,677) -- (143,677)
---------- ----------- ------------ ----------- ------------- ----------- ------------
LOSS FROM
CONTINUING
OPERATIONS 55,667 (131,430) (1,070,351) (1,146,114) 230,182 (723,747) (1,639,679)
========== =========== ============ =========== ============= =========== ============
INCOME (LOSS)
FROM CONTINUING
OPERATIONS PER
SHARE, BASIC
AND DILUTED 0.01 (0.20) (0.30)
WEIGHTED AVERAGE
NUMBER OF SHARES
OUTSTANDING,
BASIC AND DILUTED 5,342,533 5,342,533 5,342,533
See accompanying notes to the unaudited pro forma consolidated financial statements.
D-6
EUROWEB
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2003
ADJUSTMENTS TO ELIMINATE
ENTITIES DISPOSED OF
--------------------------------------- EUROWEB
EUROWEB EUROWEB EUROWEB PRO FORM
EUROWEB HUNGARY ROMANIA SLOVAKIA CONSOLIDATED
----------- ----------- ----------- ----------- -----------
(E) (F) (G) (H)
Third party revenues 16,376,349 (8,412,501) (4,539,215) (3,424,633) --
Related party revenues 5,740,709 (106,845) (5,633,864) -- --
----------- ----------- ----------- ----------- -----------
TOTAL REVENUES 22,117,058 (8,519,346) (10,173,079) (3,424,633) --
COST OF REVENUES (EXCLUSIVE OF
DEPRECIATION AND AMORTIZATION)
Third party cost of revenues 8,155,836 (1,313,443) (5,417,488) (1,424,905) --
Related party cost of revenues 5,796,350 (3,160,812) (2,635,538) -- --
----------- ----------- ----------- ----------- -----------
TOTAL COST OF REVENUES (EXCLUSIVE
OF DEPRECIATION AND AMORTIZATION) 13,952,186 (4,474,255) (8,053,026) (1,424,905) --
Compensation and related costs 2,814,868 (1,110,410) (601,785) (1,006,673) 96,000
Consulting, professional and
directors fees 2,074,565 (1,230,002) (262,987) (153,325) 428,251
Other selling, general and
administrative expenses 2,458,429 (1,177,049) (680,350) (396,361) 204,669
Goodwill impairment 887,957 -- (324,957) (563,000) --
Impairment of intangibles 100,364 -- (100,364) -- --
Depreciation and amortization 1,636,133 (841,098) (466,853) (328,182) --
----------- ----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (1,807,444) 313,468 317,243 447,813 (728,920)
Interest income 495,285 (82,012) (3,934) (18,990) 390,349
Interest expense (150,965) 93,132 24,333 28,269 (5,231)
----------- ----------- ----------- ----------- -----------
NET INTEREST EXPENSE 344,320 11,120 20,399 9,279 385,118
Gain from sale of subsidiaries 109,621 (109,621) -- -- --
----------- ----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES (1,353,503) 214,967 337,642 457,092 (343,802)
Provision for income taxes - deferred -- -- -- -- --
Provision for income taxes - current (61,590) -- 61,590 -- --
----------- ----------- ----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS (1,415,093) 214,967 399,232 457,092 (343,802)
=========== =========== =========== =========== ===========
INCOME (LOSS) FROM CONTINUING OPERATIONS
PER SHARE, BASIC AND DILUTED (0.30) (0.07)
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 4,665,332 4,665,332
See accompanying notes to the unaudited pro forma consolidated financial statements.
D-7
EUROWEB
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
ADJUSTMENTS TO ELIMINATE
ENTITIES DISPOSED OF
------------------------- EUROWEB
EUROWEB EUROWEB PRO FORM
EUROWEB HUNGARY ROMANIA CONSOLIDATED
----------- ----------- ----------- ------------
(E) (F) (G)
Third party revenues 15,993,379 (12,313,811) (3,679,568) --
Related party revenues 5,533,618 (121,018) (5,412,600) --
----------- ----------- ----------- ------------
TOTAL REVENUES 21,526,997 (12,434,829) (9,092,168) --
COST OF REVENUES
(EXCLUSIVE OF
DEPRECIATION AND
AMORTIZATION)
Third party cost of revenues 10,103,607 (4,404,957) (5,698,650) --
Related party cost of revenues 4,454,898 (2,724,505) (1,730,393) --
----------- ----------- ----------- ------------
TOTAL COST OF REVENUES
(EXCLUSIVE OF DEPRECIATION AND
AMORTIZATION) 14,558,505 (7,129,462) (7,429,043) --
Compensation and related costs 2,137,468 (1,293,974) (581,273) 262,221
Consulting, professional and
directors fees 2,012,980 (1,413,765) (83,256) 515,959
Other selling, general and
administrative expenses 2,350,118 (1,639,079) (337,848) 373,191
Depreciation and amortization 1,314,925 (900,802) (412,075) 2,048
----------- ----------- ----------- ------------
LOSS FROM OPERATIONS (846,999) (57,747) (248,673) (1,153,419)
Interest income 141,695 (71,639) (21,063) 48,993
Interest expense (283,043) 260,942 22,101 --
----------- ----------- ----------- ------------
NET INTEREST EXPENSE (141,348) 189,303 1,038 48,993
Gain from sale of subsidiaries 28,751 (28,751) -- --
----------- ----------- ----------- ------------
LOSS BEFORE INCOME TAXES (959,596) 102,805 (247,635) (1,104,426)
Provision for income taxes - deferred -- -- -- --
Provision for income taxes - current (50,455) -- 50,455 --
----------- ----------- ----------- ------------
LOSS FROM CONTINUING OPERATIONS (1,010,051) 102,805 (197,180) (1,104,426)
=========== =========== =========== ============
INCOME (LOSS) FROM CONTINUING OPERATIONS
PER SHARE, BASIC AND DILUTED (0.20) (0.22)
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 4,948,753 4,948,753
See accompanying notes to the unaudited pro forma consolidated financial statements.
D-8
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(A) Reflects the historical consolidated balance sheet of Euroweb as of
September 30, 2005, included in the Form 10-QSB of Euroweb for the quarter
ended September 30, 2005.
(B) Eliminates the historical assets and liabilities of Euroweb Hungary from
the consolidated balance sheet of Euroweb as of September 30, 2005.
(C) Eliminates the historical assets and liabilities of Euroweb Romania from
the consolidated balance sheet of Euroweb as of September 30, 2005.
(D) Reflects the historical assets and liabilities included in the balance
sheet of Navigator as of September 30, 2005, which is included in the
Current Report on Form 8-K/A of Euroweb, filed with SEC on December 20,
2005.
(E) Reflects the consolidated statements of operations of Euroweb for the nine
month periods ended September 30, 2005 and 2004 included in the Form
10-QSB of Euroweb for the quarter ended September 30, 2005 and for the
years ended December 31, 2004 and 2003 included in the Annual Report on
Form 10-KSB of Euroweb for the year ended December 31, 2004.
(F) Eliminates the historical operations of Euroweb Hungary for the period
presented.
(G) Eliminates the historical operations of Euroweb Romania for the period
presented.
(H) Eliminates the historical operations of Euroweb Slovakia for the period
presented.
(I) Reflects the statements of operations of Navigator for the nine months
ended September 30, 2005 and for the year ended December 31, 2004 included
in the Current Report on Form 8-K/A of Euroweb, filed with SEC on December
20, 2005.
(J) Pro forma adjustments to record the acquisition of Navigator as if it had
occurred on January 1, 2004 for purposes of presenting the pro forma
statements of operations:
(K) Pro forma adjustments related to the sales of Euroweb Hungary, Euroweb
Romania and Euroweb Slovakia and the purchase of Navigator, on the basis
described in the introduction to these unaudited pro forma financial
statements:
1) Represents the cash proceeds of $30,000,000 received upon the sale
of Euroweb Hungary and Euroweb Romania.
2) Represents the $8,350,000 cash element of the purchase price paid
upon closing of the purchase of Navigator Rt.
3) Represents the $6,000,000 loan obtained by Euroweb Hungary under an
agreement entered into with Commerzbank Hungary Rt. ("Commerzbank")
on September 27, 2005 to part-finance the cash element of the
purchase price of Navigator. The loan bears interest at Budapest
interbank offered rate ("BUBOR") plus 2.5% and is repayable
beginning with instalments of $166,493 on March 31, 2006 and June
30, 2006, followed by quarterly repayments of $354,513 through June
30, 2010.
4) Reflects the early repayment of the $6,000,000 Commerzbank loan
described in 3), above, at the date of closing of the sale of
Euroweb Hungary and Euroweb Romania as those entities are required
under the terms of the sale to be free of debt.
5) Reflects the repayment of $2,500,000 intercompany loan from Euroweb
Hungary to Euroweb International at the date of closing originated
from the Navigator acquisition
6) Represents the increase in fair value of a customer contract
historically recognised by Navigator and the recognition of
additional customer contracts as intangible assets upon acquisition
of Navigator by Euroweb. The total amount assigned to customer
contracts in the preliminary purchase price allocation is
$3,435,504, which is being amortized over the remaining terms of the
contracts, ranging from one to four years.
7) Reflects the excess of estimated purchase price over the estimated
fair value of net assets acquired as goodwill, which was calculated
as set forth below:
D-9
The estimated purchase price has been calculated as follows:
USD
-----------
Cash paid upon closing of the purchase 8,350,000
Cash deposit paid prior to closing of the purchase 150,000
Share-based consideration (441,566 shares of common stock
of Euroweb at a share price of $ 3.968) 1,752,134
Direct purchase costs accrued at September 30, 2005 121,808
Estimated additional direct purchase costs 78,192
-----------
Estimated total purchase consideration (a) 10,452,134
===========
Following closing of the purchase of Navigator Rt., Euroweb will determine
the fair value of the net tangible assets and the identifiable intangible
assets acquired and allocate the estimated purchase price based on the
purchase method of accounting. This unaudited pro forma information is
based upon management's estimates, which are based, in part, on the
preliminary results of an independent valuation, and is subject to
material changes upon receipt of a final valuation. The preliminary
estimated purchase price is allocated as follows:
USD USD
----------- -----------
Book value of net assets assumed 526,142
Fair value adjustments
Customer contracts (note 13) 2,331,351
Deferred tax (note 14) (371,307)
-----------
Total fair value adjustments 1,960,044
-----------
Fair value of net assets acquired (b) 2,486,186
===========
Estimated goodwill (a) - (b) 7,965,948
===========
8) Represents the $150,000 cash element of the purchase price paid as a
deposit prior to closing of the purchase of Navigator Rt.
9) Represents direct costs of the purchase of Navigator Rt. incurred
prior to September 30, 2005.
10) Represents estimated additional direct costs of the purchase of
Navigator Rt.
11) Represents the amount of the subsequent registration of the 441,566
shares of common stock of Euroweb issued as part-consideration for
Navigator. The present value of such costs is estimated to be not
materially different from the amount estimated to be paid.
12) Represents the deferred tax liability of $549,679 relating to the
excess of carrying values of customer contracts over their
respective tax bases. The deferred tax liability will be recognised
in the statements of operations as the customer contracts are
amortized over their remaining terms.
13) Reflects the elimination of Navigator's shareholders' equity
accounts from the pro forma consolidated Euroweb shareholders equity
upon consummation of the purchase of all Navigator shares.
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14) Represents the element of the purchase price payable in shares of
common stock of Euroweb, less estimated registration costs computed
based on 441,566 shares and a share price of $3.968, being the
weighted average of opening and closing prices for a period from two
days before to two days after July 26, 2005, the announcement date
of the purchase of Navigator by Euroweb.
15) Adjustment to reflect the estimated pro forma gain on the sale of
Euroweb Hungary and Euroweb Romania, after estimated direct
transaction costs, success fees, severances and provision on
estimated warranty claims of $1,700,000 to be paid or payable in
connection with the sale and net of the estimated tax liability
(expected to be zero). Because the estimated pro forma gain assumes
the sale was consummated on September 30, 2005, the estimated pro
forma gain will ultimately differ from the actual gain that will
occur at the closing date of sale.
16) Represents the increase to amortization charges as a result of the
increased estimated fair value of identified customer contracts over
their estimated useful lives of one to four years.
17) Represents the amortization of the deferred tax liability relating
to the excess of carrying values of customer contracts over their
respective tax bases
No adjustments have been made to reflect any income tax effect of
the pro forma adjustments since Euroweb has significant net
operating loss carryforwards and, therefore, does not expect to have
taxable income in the foreseeable future.
D-11