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
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EUROWEB INTERNATIONAL CORP.
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(Name of Registrant as Specified In Its Charter)
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pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
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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 10:00 am (local time), on May 15, 2006 at the law
offices of Sichenzia Ross Friedman Ference LLP, 1065 Avenue of the Americas,
21st Floor, New York, New York 10018 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 as the "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
March 17, 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,
Csaba Toro, Director and Chief Executive Officer
Budapest, Hungary
April 24, 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 May 15, 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 April 24, 2006.
INFORMATION ABOUT THE SPECIAL MEETING
WHEN IS THE SPECIAL MEETING?
May 15, 2006, 10:00 A.M. New York, New York time.
WHERE WILL THE SPECIAL MEETING BE HELD?
The meeting will be held at the law offices of Sichenzia Ross Friedman Ference
LLP, 1065 Avenue of the Americas, 21st Floor, New York, New York 10018.
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 resulting in the Company's
classification of the Subsidiaries as discontinued operations and the reflection
of the Company's revenues for the year ended December 31, 2004 of zero; 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 March 17,
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 March 17, 2006, there were 5,843,067
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?
You may vote your shares by:
3
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?
4
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.
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 including the full
payment by Euroweb Hungary on or prior to the Closing Date of the US $6,000,000
loan it received from Commerzbank Hungary ("Commerzbank") in connection with the
Company's acquisition of Navigator Informatika Rt. ("Navigator"). 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 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 and receipt of approval of the
proposed transaction by the Hungarian Economic Competition Office in Hungary,
which the Company has received. If the Company fails to have the Agreement
approved at a shareholders meeting, the Company will be obligated to reimburse
Invitel for its expenses associated with the acquisition of the Subsidiaries not
to exceed EUR 400,000. The Company has classified the Subsidiaries as
discontinued operations reflecting revenue for the year ended December 31, 2004
of zero.
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 that was first implemented in 1997 of
identifying and developing companies within emerging industries for the purpose
of consolidation and sale if favorable market conditions exist. Although the
Company primarily focuses on the operation and development of its core
businesses, the Company pursues consolidations and sale opportunities as
presented in order to develop its core businesses.
The Company commenced the consolidation strategy in various Central and
Eastern European countries as follows:
o in Hungary, with the acquisition of various Internet and
telecommunications companies in 1997 that were eventually
consolidated and named Euroweb Hungary, the acquisition of Elender
Rt. in 2004 and the acquisition of Navigator in 2005;
o in Romania, with the acquisition of several Internet and
telecommunications companies in 2000 that were eventually
consolidated and named Euroweb Romania;
o in Slovakia, with the acquisition of several Internet and
telecommunications companies from 1999 to 2000 that were eventually
consolidated and named Euroweb Slovakia; and
o in Czech Republic, with the acquisition of two Internet and
telecommunications companies during 1999 and 2000 that were
eventually consolidated and named Euroweb Czech Republic.
In 2004, the Company elected to sell its Internet Service assets located
in the Czech Republic and Slovakia as the Company received offers it believed
were above the market value of such assets. Further, the disposition of the two
Subsidiaries, Euroweb Hungary and Euroweb Romania, for a purchase price of
$30,000,000 will allow the Company to redeploy capital to acquire additional
assets in IT space and other as-yet unidentified industries that the Company
deems profitable, as well as focus its expertise in the area of IT outsourcing
in Central and Eastern Europe. If the opportunity presents itself, the Company
will consider implementing its consolidation strategy with its remaining
subsidiary and any other business that it enters. However, the Company does not
presently have any plans, proposals or arrangements to redeploy its capital or
engage in any acquisitions. The Company has not yet identified any specific new
industries in which to invest.
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
6
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, which
has been issued;
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 with respect to 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 Upon classifying the Subsidiaries as discontinued operations (see
"Accounting Treatment"), our revenue for the year ended December 31, 2004
decreased to $-0- from $28,111,786.
o Upon classifying the Subsidiaries as discontinued operations, our net loss
from continuing operations for the year ended December 31, 2004 increased
to $1,402,766 from a net loss of $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 and the acquisition of
Navigator, the Company may be deemed to have entered a new line of
business and, as a result of the change of such business line, 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.
o If the Company fails to have the Agreement approved at a shareholders
meeting , the Company will be obligated to reimburse Invitel for its
expenses associated with the acquisition of the Subsidiaries not to exceed
EUR 400,000 and this payment, combined with loss of proceeds from the
failed sale of the Subsidiaries, may result in the Company experiencing
financial difficulty with respect to its cash position.
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, The Subsidiaries are required to be debt free,
which includes the full payment on or prior to the Closing Date of the US
$6,000,000 loan obtained by Euroweb Hungary from Commerzbank in connection with
the Company's acquisition of Navigator Informatika Rt. 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 an audit report
prepared by an independent auditor with respect to the Subsidiaries, the
approval of the Agreement by the shareholders of the Company provided that such
date is no later than June 30, 2006 and receipt of approval of the proposed
transaction by the Hungarian Economic Competition Office in Hungary, which the
Company has received. If the Company fails to have the Agreement approved at a
shareholders meeting, the Company will be obligated to reimburse Invitel for its
expenses associated with the acquisition of the Subsidiaries not to exceed EUR
400,000. After the sale of the Subsidiaries would be classified as discontinued
operations, the Company's revenue for the year ended December 31, 2004 will be
zero.
Background of the Transaction
In April 2005, the Company's Board of Directors was notified that Invitel
was looking for acquisition and consolidation opportunities in Hungary. On April
27, 2005, Invitel made a non-binding offer to purchase the Subsidiaries. From
April 2005 through September 2005, Invitel made three non-binding offers. On
December 15, 2005, Invitel submitted a binding offer that the Board of Directors
of the Company accepted on December 17, 2005 and which culminated in the
entering of the Agreement on December 19, 2005. In addition, the Company
received several non-binding and binding offers from various parties. The
Company eventually received and entered a binding offer from an international
telecommunication company for the sale of the Subsidiaries on December 8, 2005.
In connection with the receipt of the binding offer, the Company signed an
exclusivity agreement with the international telecommunication company, which
expired on December 16, 2005. After the expiration of the exclusivity agreement
with the international telecommunications company on December 16, 2005, the
Company entered into the Agreement with Invitel.
Business of the Company
We own and operate Internet Service Providers in Hungary and Romania
through the Subsidiaries, Euroweb Hungary and Euroweb Romania. Euroweb Hungary
and Euroweb Romania are classified as discontinued operations for all periods
presented in the financial statements of the Company. We are also engaged in the
IT consulting business though our other subsidiary, Navigator Informatika Rt.,
which we acquired on October 7, 2005. Navigator Informatika Rt. operates through
its wholly owned subsidiaries, Navigator Info Kft. and Navigator Engineering
Kft. and 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. We previously had
operations in the Czech Republic and Slovakia through our subsidiaries Euroweb
Czech and Euroweb Slovakia, which were sold on December 16, 2004 and April 15,
2005, respectively.
Our revenues generated by Navigator Informatika Rt. come from the
following three sources:
o Full service IT System operation or complete IT outsourcing, comprising
full service support and maintenance with a cost-effective and competitive
service desk system, call center, hotline support and remote
troubleshooting
o IT system implementation and IT project management, including:
consultancy, system design, development and implementation and training;
and
8
o Sale of IT devices
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 Budaors, 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 that was first implemented in 1997 of
identifying and developing companies within emerging industries for the purpose
of consolidation and sale if favorable market conditions exist. Although the
Company primarily focuses on the operation and development of its core
businesses, the Company pursues consolidations and sale opportunities as
presented.
The Company commenced the consolidation strategy in various Central and
Eastern European countries as follows:
o in Hungary, with the acquisition of various Internet and
telecommunications companies in 1997 that were eventually consolidated and
named Euroweb Hungary, the acquisition of Elender Rt. in 2004 and the
acquisition of Navigator in 2005;
o in Romania, with the acquisition of several Internet and
telecommunications companies in 2000 that were eventually consolidated and
named Euroweb Romania;
o in Slovakia, with the acquisition of several Internet and
telecommunications companies from 1999 to 2000, that were eventually
consolidated and named Euroweb Slovakia; and
o in Czech Republic, with the acquisition of two Internet and
telecommunications companies during 1999 and 2000 that were eventually
consolidated and named Euroweb Czech Republic.
In 2004, the Company elected to sell its Internet Service assets located in the
Czech Republic and Slovakia as the Company received offers it believed were
above the market value of such assets. Further, the disposition of the
Subsidiaries, Euroweb Hungary and Euroweb Romania, for a purchase price of
$30,000,000 will allow the Company to redeploy capital to acquire additional
assets in IT space and other as-yet unidentified industries that the Company
deems profitable, as well as focus its expertise in the area of IT outsourcing
in Central and Eastern Europe. If the opportunity presents itself, the Company
will consider implementing its consolidation strategy with its remaining
subsidiary and any other business that it enters. However, the Company does not
presently have any plans, proposals or arrangements to redeploy its capital or
engage in any acquisitions. The Company has not yet identified any specific new
industries in which to invest.
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.
9
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 Upon classifying the Subsidiaries as discontinued operations (see
"Accounting Treatment"), our revenue for the year ended December 31, 2004
decreased to $-0- from $28,111,786.
o Upon classifying the Subsidiaries as discontinued operations, our net loss
from continuing operations for the year ended December 31, 2004 increased
to $1,402,766 from a net loss of $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 and the acquisition of
Navigator, the Company may be deemed to have entered a new line of
business and, as a result of the change of such business line, 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.
o If the Company fails to have the Agreement approved at a shareholders
meeting, the Company will be obligated to reimburse Invitel for its
expenses associated with the acquisition of the Subsidiaries not to exceed
EUR 400,000 and this payment, combined with loss of proceeds from the
failed sale of the Subsidiaries, may result in the Company experiencing
financial difficulty with respect to its cash position.
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.
10
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 US $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 US $30,000,000 to Invitel, 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, we reflected 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 was filed on January 17, 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 March 24, 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 power with respect to all shares of Common Stock beneficially owned
by it or him as set forth opposite its or his name.
Shares
Name and Address Beneficially Owned(1) Percent Owned (1)
--------------------------------------------------- ----------------------------
KPN Telecom B.V. (4) 2,036,188 34.85%
Maanplein 5
The Hague, The Netherlands
Fleminghouse Investments Limited 522,054 8.93%
Chrysanthou Mylona 3, P.C.
3030 Limassol
Cyprus
11
CORCYRA d.o.o.(3) 2,326,043 39.81%
Verudela 17
Pula Croatia 52100
Graeton Holdings Limited 441,566 7.60%
256 Makarios Avenue,Eftapaton
Court, CY3105 Limassol, Cyprus;
Csaba Toro (2)(5)(6) 62,500 1.07%
1138 Budapest
Vaci ut 141.
Hungary
Stewart Reich (6)(7) 75,000 1,28%
18 Dorset Lane,
Bedminister, NJ 07921
Gabor Ormosy
Fleminghouse Investments Limited 25,000 *
Chrysanthou Mylona 3, P.C. (6) (9)
3030 Limassol
Cyprus
Yossi Attia (6)(8) 25,000 *
1061 1/2 Spalding Ave.
West Hollywood, CA 90046
Ilan Kenig (6)(8) 25,000 *
7438 Fraser Park Drive
Burnaby, BC Canada V5J 5B9
Moshe Schnapp (5)(6) 58,968 1.01%
846 N Huntley
West Hollywood, CA 90069
All Officers and Directors as a 240,218 4.65%
Group (6 Persons)
* 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 March 24, 2006. For
purposes of computing the percentage of outstanding shares held by each person
or group of persons named above on March 24, 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, 1.07% of the issued and outstanding
shares of the Company represented by options to purchase 62,500 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
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.
12
(4) KPN Telecom B.V. is a subsidiary of Royal KPN N.V.
(5) An officer of the Company.
(6) A director of the Company.
(7) Includes an option to purchase 75,000 shares of common stock at an exercise
price of $4.21 per share. 25,000 options vest on April 13, 2004, 25,000 options
vest on April 13, 2005, while 25,000 options vest on April 13, 2006
(8) Effective March 22, 2005, the Board of Directors granted the two new
directors 100,000 options each at an exercise price of $3.40 per share under the
2004 Incentive Plan. Each director's options vest in four equal installments of
25,000 shares each on September 22, 2005, September 22, 2006, September 22, 2007
and September 22, 2008.
(9) Effective June 2, 2005, the Board of Directors granted 100,000 options at an
exercise price of $4.05 per share under the 2004 Incentive Plan. The options
vest in four equal installments of 25,000 shares each on December 2, 2005,
December 2, 2006, December 2, 2007 and December 2, 2008.
The foregoing table is based upon 5,843,067 shares of common stock outstanding
as of March 24, 2006.
Shareholder Proposals
The Company intends to hold its 2006 annual meeting in June 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 May 12, 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, 2005 attached hereto as Exhibit B, unaudited
individual financial statements of Euroweb Hungary as of December 31, 2005
attached hereto as Exhibit C, unaudited individual financial statements of
Euroweb Romania as of December 31, 2005 attached hereto as Exhibit D and the pro
forma financial information attached hereto as Exhibit E.
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.
13
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: April 24, 2006
Budapest, Hungary
14
PROXY
EUROWEB INTERNATIONAL CORP.
SPECIAL MEETING OF STOCKHOLDERS - TO BE HELD
May 15, 2006
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned, revoking all prior proxies, hereby appoints CSABA TORO and
MOSHE SCHNAPP 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 May 15, 2006,
at 10:00 A.M, local time, at the law offices of Sichenzia Ross Friedman Ference
LLP, 1065 Avenue of the Americas, 21st Floor, New York, New York 10018, 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 A 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
15
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").
18
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;
"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;
19
"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);
20
"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;
21
"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 means any material adverse change in or material
"Material Adverse Effect" 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;
22
"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.
23
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:
24
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.
25
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");
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;
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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 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.
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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;
31
(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.
34
(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").
35
(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.
36
(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).
37
(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.
38
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 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.
39
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 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.
40
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.
41
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 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;
42
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 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.
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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.
44
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:
45
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.
46
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
47
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
48
EXHIBIT B
EUROWEB INTERNATIONAL CORP.
Consolidated Balance Sheet as of December 31, 2005, and
Consolidated Statements of Operations & Comprehensive Income (Loss)
Stockholders' Equity, and Cash Flows for the
Years ended December 31, 2005 and 2004
49
EUROWEB INTERNATIONAL CORP.
Consolidated Financial Statements
As of December 31, 2005 and for the Years Ended December 31, 2005 and 2004
TABLE OF CONTENTS
Page
Report of the Independent Registered Public Accounting Firm F-2
Report of the Independent Registered Public Accounting Firm F-3
Consolidated Financial Statements:
Consolidated Balance Sheet F-4
Consolidated Statements of Operations and Comprehensive Income (Loss) F-5
Consolidated Statements of Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Euroweb International Corp.
We have audited the accompanying combined balance sheet of Euroweb International
Corp. and subsidiaries (the "Company") as of December 31, 2005, and the related
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 Euroweb International Corp. and
subsidiaries as of December 31, 2005, 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 Kft.
Budapest, Hungary
March 27, 2006
F-2
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Euroweb International Corp.
We have audited the accompanying consolidated statements of operations and
comprehensive loss, stockholders' equity, and cash flows of Euroweb
International Corp. and subsidiaries for the year ended December 31, 2004. 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 results of the operations and
the cash flows of Euroweb International Corp. and subsidiaries for the year
ended December 31, 2004 in conformity with accounting principles generally
accepted in the United States of America.
KPMG Hungaria Kft.
Budapest, Hungary
March 24, 2006
F-3
Euroweb International Corp.
Consolidated Balance Sheet
As of December 31, 2005
Amounts in US dollars
2005
------------
ASSETS
Current assets:
Cash and cash equivalents (note 3) $ 1,568,690
Trade accounts receivable, less allowance for doubtful accounts of $206,518 1 533,855
Prepaid and other current assets 321,315
------------
Total current assets of continuing operations 3,423,860
------------
Total assets of discontinued operations (note 9) 20,371,849
Total current assets 23,795,709
============
Property and equipment, net (note 4) 1,071,989
Goodwill (note 5) 8,150,672
Intangible assets - customer contracts, net (note 5) 3,132,300
------------
Total assets $ 36,150,670
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 2,065,333
Current portion of bank loans (note 7) 269,220
Bank overdrafts (note 7) 325,409
Other current liabilities 827,703
Accrued expenses 545,964
------------
Total current liabilities of continuing operations 4,033,629
Total liabilities of discontinued operations (note 9) 13,783,582
Total current liabilities 17,817,211
Deferred tax liability (note 10) 501,168
Non-current portion of bank loans (note 7) 471,134
------------
Total liabilities 18,789,513
Commitments and contingencies (note 12)
Stockholders' equity
Common stock, $.001 par value - Authorized 35,000,000 shares;
6,032,221 shares issued of which 5,784,099 shares are outstanding and 25,248
248,122 shares are held in escrow
Additional paid-in capital 51,538,659
Accumulated deficit (34,302,431)
Accumulated other comprehensive income 99,681
------------
Total stockholders' equity 17,361,157
------------
Total liabilities and stockholders' equity $ 36,150,670
============
See accompanying notes to consolidated financial statements.
F-4
Euroweb International Corp.
Consolidated Statements of Operations and Comprehensive Income / (Loss)
Years Ended December 31, 2005 and 2004
Amounts in US dollars
2005 2004
----------- -----------
Revenues $ 1,964,998 $ --
Cost of revenues (exclusive of depreciation and
amortization shown separately below) 511,658 --
Operating expenses
Compensation and related costs 1,054,342 361,809
Consulting, professional and directors fees 1,396,096 463,549
Other selling, general and administrative expenses 703,770 454,514
Depreciation and amortization 509,478 2,048
----------- -----------
Total operating expenses 3,663,686 1,281,920
----------- -----------
Operating loss (2,210,346) (1,281,920)
Interest income 2,512 49,154
Interest expense (38,240) --
Other income (expenses) 170,000 (170,000)
Loss from continuing operations before income taxes (2,076,074) (1,402,766)
Income tax benefit -deferred 57,908 --
----------- -----------
Income tax benefit 57,908 --
Loss from continuing operations (2,018,166) (1,402,766)
Income from discontinued operations, net of tax 3,698,461 668,312
Net income (loss) 1,680,295 (734,454)
Other comprehensive income (loss) (8,585) 133,768
----------- -----------
Comprehensive income (loss) $ 1,671,710 $ (600,686)
=========== ===========
Loss per share from continuing operations, basic and diluted (0.37) (0.28)
Income per share from discontinued operations, basic and diluted 0.68 0.13
Net income (loss) per share, basic and diluted 0.31 (0.15)
Weighted average number of shares outstanding, basic and diluted 5,445,363 5,043,822
See accompanying notes to consolidated financial statements
F-5
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2005 and 2004
Amounts in US dollars
Common Stock Additional
------------------------------- Paid-in Accumulated
Number of shares Amount Capital Deficit
---------------- ------------ ------------ ------------
Balances, January 1, 2004 4,665,332 $ 24,129 $ 48,227,764 $(33,105,716)
============ ============ ============ ============
Foreign currency translation gain -- -- -- --
Reversal of unrealized gain on -- -- -- --
securities available for sale
Deemed distribution (note 1) -- (2,142,556)
Compensation charge on share -- -- 94,212
options issued to consultants
Issuance of shares (Elender Rt 677,201 678 2,458,108 --
acquisition)
Net loss for the period -- -- -- (734,454)
------------ ------------ ------------ ------------
Balances, December 31, 2004 5,342,533 $ 24,807 $ 50,780,084 $(35,982,726)
============ ============ ============ ============
Foreign currency translation loss -- -- -- --
Compensation charge on share -- -- 192,294
options and warrants issued to
consultants
Issuance of shares (Navigator Rt 441,566 441 1,681,693 --
acquisition)
Cancellation of treasury stock -- -- $ (1,115,412) --
Net income for the period -- -- -- 1,680,295
------------ ------------ ------------ ------------
Balances, December 31, 2005 5,784,099 $ 25,248 $ 51,538,659 $(34,302,431)
============ ============ ============ ============
Accumulated
Other TOTAL
Comprehensive Treasury Stockholders'
Gains(Losses) Stock Equity
------------- ------------ -------------
Balances, January 1, 2004 $ (25,502) $ (1,115,412) $ 14,005,263
============ ============ ============
Foreign currency translation gain 162,573 -- 162,573
Reversal of unrealized gain on (28,805) -- (28,805)
securities available for sale
Deemed distribution (note 1) (2,142,556)
Compensation charge on share 94,212
options issued to consultants
Issuance of shares (Elender Rt -- -- 2,458,786
acquisition)
Net loss for the period -- -- (734,454)
------------ ------------ ------------
Balances, December 31, 2004 $ 108,266 $ (1,115,412) $ 13,815,019
============ ============ ============
Foreign currency translation loss (8,585) -- (8,585)
Compensation charge on share 192,294
options and warrants issued to
consultants
Issuance of shares (Navigator Rt -- -- 1,682,134
acquisition)
Cancellation of treasury stock -- $ 1,115,412 --
Net income for the period -- -- 1,680,295
------------ ------------ ------------
Balances, December 31, 2005 $ 99,681 -- $ 17,361,157
============ ============ ============
See accompanying notes to consolidated financial statements
F-6
Euroweb International Corp.
Consolidated Statements of Cash Flows
Year Ended December 31, 2005 and 2004
Amounts in US dollars
--------------------------------------------------------------------------------
2005 2004
------------ ------------
Net income (loss) $ 1,680,295 $ (734,454)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 509,478 2,048
Provision for bad and doubtful debts 11,026 --
Deferred tax charge (57,908)
Compensation expense due to options and warrants issued 192,294 94,212
Realized gain on sale of investment securities -- (26,383)
Changes in operating assets and liabilities net of effects of acquisitions:
Accounts receivable 215,455 (447,428)
Prepaid and other assets 539,094 (79,752)
Accounts payable, other current liabilities and accrued expenses 986,277 364,242
Cash provided by discontinued operations 114,062 3,568,571
------------ ------------
Net cash provided by operating activities 4,190,073 2,741,056
------------ ------------
Cash flows from investing activities:
Proceeds from maturity of securities -- 11,464,000
Proceeds on sale of subsidiaries 2,700,000 500,001
Acquisition of 51% of Euroweb Rt -- (2,142,000)
Acquisition of 100% of Elender Rt. (net of cash) -- (6,891,897)
Acquisition of 100% of Navigator Informatika Rt. (net of cash) (9,008,638) --
Collection on notes receivable -- 173,911
Acquisition of property and equipment (103,835) (2,048)
Capital expenditures in discontinued operations (2,477,999) (1,701,990)
------------ ------------
Net cash provided by (used in) investing activities (8,890,472) 1,399,977
------------ ------------
Cash flows from financing activities:
Principal payment under capital lease obligations (12,645) --
Repayments on overdraft and bank loan (233,379) --
Financing activities from discontinued operation 4,210,251 (2,280,826)
------------ ------------
Net cash provided by (used in) financing activities 3,964,227 (2,280,826)
------------ ------------
Effect of foreign exchange rate changes on cash (74,690) (37,952)
------------ ------------
Net (decrease) increase in cash and cash equivalents (810,862) 1,822,255
Cash and cash equivalents, beginning of year 2,379,552 557,297
------------ ------------
Cash and cash equivalents, end of year $ 1,568,690 $ 2,379,552
============ ============
Supplemental disclosure:
Cash paid for interest $ 39,456 --
Cash paid for Income taxes $ 101,573 --
Summary of non-cash transactions
Shares issued as consideration in acquisition of Elender Rt -- $ 2,508,353
Shares issued as consideration in acquisition of Navigator Rt $ 1,682,134 --
New capital leases -- --
See accompanying notes to consolidated financial statements.
F-7
1. Organization of Business
Euroweb International Corp. ("Euroweb") is a Delaware corporation, which was
incorporated on November 9, 1992. Euroweb and its subsidiaries are collectively
referred to herein as the "Company". The Company was a development stage company
through December 31, 1993.
The Company operates in Hungary through its subsidiary Navigator Informatika Rt.
("Navigator"), which is acquired on October 7, 2005.
The Company provides a full range of information technology ("IT") outsourcing
services through it subsidiary, Navigator. The IT outsourcing services provided
by the Company primarily comprise IT maintenance, procurement, consultancy and
related services.
On December 16, 2004, the Company disposed of Euroweb Czech Republic, spol
("Euroweb Czech Republic") and no longer has operations in the Czech Republic.
On April 15, 2005, the Company disposed of Euroweb Slovakia a.s. ("Euroweb
Slovakia") for cash of $2,700,000 and, as a result, has ceased operations in
Slovakia.
On December 15, 2005, the Board of Directors of the Company decided to sell its
entire interest in the wholly owned Euroweb Internet Szolgaltato Rt. ("Euroweb
Hungary") and Euroweb Romania S.A. ("Euroweb Romania"). On December 19, 2005,
the Company entered into a share purchase agreement with Invitel Tavkozlesi
Szolgaltato Rt., a Hungarian joint stock company, to sell the entire interest in
its two Internet- and telecom-related operating subsidiaries, Euroweb Hungary
and Euroweb Romania, subject to various conditions including, but not limited
to, shareholders' approval. Euroweb Hungary and Euroweb Romania are classified
in the Company's financial statements as discontinued operations for all periods
presented.
Approximately 83% of the consolidated revenue for the year ended December 31,
2005 was generated from the four most significant customers of the Company as
follows:
Revenue generated
--------------------------------------------------------------------------------
Company `A': $ 539,131
Company `B': 443,727
Company `C': 386,253
Company `D': 268,296
Other companies: 327,591
--------------------------------------------------------------------------------
Total revenue: $1,964,998
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 intercompany 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.
F-8
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. At the date of the
acquisition, KPN Telecom B.V. ("KPN") owned 50.17% of the voting common shares
of the Company and 75% of the voting common shares of Pantel. Accordingly, the
transaction was recorded in a manner similar to a pooling-of-interest and the
historical consolidated financial statements were 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), the excess 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 transactions with Euroweb Hungary in
any period prior to this transaction that required elimination.
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. Actual results could differ
from those estimates.
(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. 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.
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,
once 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
reasonably estimated, the Company recognizes revenue using the completed
contract method until such time that the cost to complete the project can be
reasonably estimated.
F-9
(e) Cost of revenues (excluding depreciation and amortization)
Cost of revenues (excluding depreciation and amortization) 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.
(f) Foreign currency translation
The Company considers the United States Dollar ("US Dollar or "$") to be the
functional currency of the Euroweb and unless otherwise stated, the respective
local currency to be the functional currency each of its subsidiaries. The
reporting currency of the Company is the US Dollar and accordingly, all amounts
included in the consolidated financial statements have been translated into US
Dollar.
The balance sheets of subsidiaries are translated into US Dollar 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
included in the accumulated other comprehensive gain (loss) within shareholders'
equity.
Foreign currency transaction gains and losses are included in the consolidated
results of operations for the periods presented.
(g) Cash and cash equivalents
Cash and cash equivalents include cash at bank and investments with maturities
of three months or less at the date of acquisition by the Company.
(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. The
Company provides for depreciation of property and equipment using the
straight-line method over the following estimated useful lives:
F-10
Software 3 years
Computer equipment 3-5 years
Other furniture equipment and fixtures 5-7 years
Equipment purchased under capital lease is stated at the lower of fair value and
the present value of minimum lease payments at the inception of the lease, less
accumulated depreciation. The Company provides for depreciation of leased
equipment using the straight-line method over the shorter of estimated useful
life and the lease term.
Total depreciation from continuing operations for the years ended December 31,
2005 and 2004 was $ 147,547 and $2,048 respectively.
Recurring maintenance on property and equipment is expensed as incurred.
Any gain or loss on retirements and disposals is included in the results of
operations in the period of the retirement or disposal.
(j) Goodwill and intangible assets
Goodwill results from business acquisitions and represents the excess of
purchase price over the fair value of net assets acquired. Goodwill is 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 the Statement of Financial Accounting
Standard ("SFAS") No. 144 "Accounting for Impairment or Disposal of Long Lived
Assets" ("SFAS 144"). Intangible assets currently consist of customer contracts,
which were acquired as a result of a purchase of Navigator and are being
amortized over the estimated future period of benefit of one to four years. The
assessment of recoverability and possible impairment is performed using
estimates of undiscounted future cash flows. If impairment is indicated, the
Company then measures the 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.
Total amortization of intangible assets for the years ended December 31, 2005
and 2004 was $ 361,931 and $0 respectively.
(k) Earnings (loss) per share
Basic earnings (loss) per share 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 effect of dilutive potential common shares issuable upon exercise of stock
options and warrants. There were no dilutive options and warrants for the year
ended 2005 and 2004. Stock options and warrants convertible into 779,067 and
550,378 shares of common stock, respectively, were excluded from the computation
of diluted earnings per share since such options and warrants have an exercise
price in excess of the average market value of the Company's common stock during
the periods.
F-11
(l) Comprehensive income
Comprehensive income includes all changes in equity except those resulting from
investments by, and distributions to, owners.
(m) Business segment reporting
The Company manages its operations, and accordingly determines its operating
segments, on a geographic basis. The Company currently has one operating
segment: Hungary.
(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 Financial Accounting
Standards Board ("FASB") Interpretation No. 44, "Accounting for Certain
Transactions involving Stock Compensation, an interpretation of APB Opinion No.
25" to account for its stock options granted to employees. Under this method,
compensation expense for fixed plan stock options 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
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 123, as amended. The Company accounted compensation
expenses for the Company's stock options and warrants granted other than
employees or independent directors based on fair value method prescibed in SFAS
123.
SFAS 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 123. The Company estimates the fair value of each stock
option at the grant date by using the Black-Scholes option-pricing model.
F-12
The pro forma amount calculated as total compensation expense under SFAS 123 is
$632,766 for the 200,000 options granted to directors on October 13, 2003, $1.3
million for the 365,000 options granted on April 26, 2004 and $775,260 for the
300,000 options issued in 2005. Under the accounting provisions of SFAS No. 123,
this compensation expense would be recorded over the vesting period of the
options (3-4 years).
For purposes of the pro forma calculation under SFAS 123, the fair value of each
option grant has been estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions for 2004 and 2005:
Dividend yield 0%
Risk free rate 4%
Expected option life (years) 6
Volatity 88%
Under the accounting provisions of SFAS 123, the Company's 2005 and 2004 net
income (loss) and net income (loss) per share would have been affected as
indicated below:
2005 2004
Net income (loss):
Net loss from continuing
operation as reported $(2,018,166) $(1,402,766)
Net income from discontinuing operation
as reported $ 3,698,461 $ 668,312
----------- -----------
Net income (loss) as reported $ 1,680,295 $ (734,454)
Compensation expense (842,572) (943,164)
----------- -----------
Pro forma net income (loss) $ 837,723 $(1,677,618)
=========== ===========
Basic and diluted income (loss) per share:
As reported $ 0.31 $ (0.15)
Pro forma $ 0.15 $ (0.33)
(p) 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.
(q) Recently Issued Accounting Standards
In December 2004, the 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. SFAS 123(R) is effective for the
Company as of January 1, 2006. The Company is currently assessing the impact
SFAS 123(R) will have on its financial statements.
In December 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment
of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends Accounting Research
Bulletin No. 43, Chapter 4, "Inventory Pricing" ("ARB 43") to eliminate the "so
abnormal" criterion in ARB 43 and requires companies to recognize abnormal
freight, handling costs, and amounts of wasted material (spoilage) as
current-period charges. Additionally, SFAS 151 clarifies that fixed production
overhead cost should be allocated to inventory based on the normal capacity of
the production facility. SFAS 151 is effective for inventory costs incurred
during annual periods beginning after June 15, 2005. The Company is currently
assessing the impact SFAS 151 may have on its financial statements and is not
expected to have a material impact on our financial statements.
F-13
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 financial statements.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments-an amendment of FASB Statements No. 133 and 140" ("SFAS
155"). SFAS 155 amends SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133") and SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". SFAS 155
resolves issues addressed in SFAS 133 Implementation Issue No. D1, "Application
of Statement 133 to Beneficial Interests in Securitized Financial Assets." SFAS
155 is effective for the Company for all financial instruments acquired or
issued after January 1, 2007 and is not expected to have a material impact on
the Company's financial statements.
3. Cash and cash equivalents
At December 31, 2005, cash of $1.57 million are held in current accounts in the
United States.
4. Property and equipment -
Property and equipment as at December 31, 2005 comprise the following:
2005
-----------
Software $ 570,318
Service equipment 1,454,019
Other 216,197
-----------
Total 2,240,534
Less accumulated depreciation (1,168,545)
-----------
$ 1,071,989
===========
F-14
5. Goodwill and Acquired Intangible Assets
Goodwill and acquired intangible assets as at December 31, 2005 comprise the
following:
2005
-----------
Customer contracts $ 3,494,231
Less accumulated amortization (361,931)
-----------
$ 3,132,300
===========
Goodwill $ 8,150,672
Customer contracts
Capitalized customer contracts relate to fixed contracts of Navigator to provide
IT oursource services in Hungary. These contracts are being amortized over their
remaining life of one to four years from the date of acquisition (October 2005).
Goodwill
Goodwill relates to the following reporting unit under SFAS 142: Navigator.
The Company performs its annual impairment test relating to the goodwill as of
December 31 of each year. In the test as of December 31, 2005, the Company
compared the fair value of its single reporting unit to their carrying amounts,
noted that the fair value was higher than the carrying amount, and therefore no
impairment charge was required.
6. Leases
Capital leases
The Company is committed under various capital leases, which expire over the
next one year. The amount of assets held under capital leases included in
property and equipment is as follows:
2005
---------
Leased service equipment, gross value $ 130,393
---------
Total gross book value leased assets 130,393
Less accumulated depreciation (105,718)
---------
Total net book value leased assets $ 24,675
=========
F-15
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, 2005:
2006 $ 27,042
--------
Total minimum lease payments 27,042
Less interest costs (2,367)
--------
Present value of future minimum lease payments $ 24,675
Since all obligations under capital leases as of December 31, 2005 fall due
within 12 months, lease obligations are included in `Other current liabilities'
on the balance sheet.
Operating leases
The Company incurred operational lease expense of $47,700 for the year ended
12/31/05, which related to office rent. The Company has a five-year
non-cancelable lease agreement for office premises, which was entered into on
December 15, 2005. Remaining minimum rental payments total $1,380,439; $278,408
in each of 2006 and 2007, 2008 and 2009 and $266,807 in 2010. The Company did
not incur any operating lease expenses in the year ended December 31, 2004.
7. Bank loans and overdraft
On April 6, 2005, the Company entered into a long-term loan agreement with
Commerzbank Bank Rt (the "Bank") for HUF 201,250,000 (approximately $942,270 at
the December 31, 2005 exchange rate), with an interest rate of three month
Budapest Interbank Offered Rate ("BUBOR") +2.5%. Approximately $740,354 was
outstanding at December 31, 2005. The loan is repayable in 14 quarterly
instalments of HUF 14,375,000 (approximately $67,305) plus quarterly interest
starting on May 31, 2005. The shares of the Navigator and Euroweb Hungary were
pledged as collateral for this loan, as well as a general lien established on
all of the assets of these subsidiaries of Euroweb.
In addition to the long-term loan agreement, the Company also entered into an
overdraft facility for unlimited period of time with 30 days termination period
with the Bank for HUF 130,000,000 (approximately $608,671) on July 20, 2005.
Approximately $325,409 was outstanding at December 31, 2005. The interest rate
is BUBOR + 1,5%.
Additionally, on September 1, 2005, the Company entered into a two-month loan
facility agreement with the Bank for approximately $140,462 (HUF 30,000,000) to
fund working capital. The Company did not have outstanding balances under this
agreement as of December 31, 2005. The contract was extended to March 31, 2006.
The interest rate is BUBOR + 1,5%.
8. Acquisition
On October 7, 2005, the Company acquired all of the outstanding shares of
Navigator Informatika Rt., an IT outsourcing service provider located in
Hungary. Consideration paid of $10,760,772 consisted of $8,500,000 in cash and
441,566 shares of Euroweb common stock valued at $1,752,134 excluding
registration cost, and $508,638 in transaction costs (consisting primarily of
professional fees incurred related to attorneys, accountants and valuation
advisors). The results of Navigator have been included in the Company's
consolidated financial statements from the date of acquisition.
F-16
In accordance with the purchase method of accounting prescribed by 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 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.
The following represents the final allocation of the purchase price paid for the
Navigator business based on the fair values of the acquired assets and assumed
liabilities as of October 7, 2005:
Trade account receivable, net $ 1,057,317
Prepaid and other current assets 664,109
Property and equipment, net 1,115,701
Trade account payable (1,142,626)
Other current liabilities and accrued expenses (720,414)
Short term and long term bank loans (1,299,142)
----------------------------------------------------------------------
Fair value of Navigator's recorded assets acquired and
liabilities assumed (325,055)
Identified intangible assets - customer contracts 3,494,231
Deferred tax liabilities (559,076)
Excess purchase price over allocation to identifiable
assets and liabilities (Goodwill) 8,150,672
------------
Total consideration $ 10,760,772
============
In determining the value to be ascribed to acquired intangible assets, the
Company considered its intention for future use of the assets, analyses of
historical financial performance and estimates of future performance of
Navigator's services, among other factors. Acquired identifiable intangible
assets obtained in the Company's acquisition of Navigator relate to customer
contracts, which are being amortized over the estimated useful life of one to
four years.
Although the former owners of Navigator received shares of common stock of the
Company, each of the former owners of Navigator currently holds less than 10% of
the outstanding shares of common stock in the Company. Therefore, they are not
considered related parties and business transactions are shown as third party
transactions in the accompanying consolidated financial statements of the
Company.
F-17
The following unaudited pro-forma information presents a summary of consolidated
results of operations of the Company for the years ended December 31, 2005 and
2004 as if the acquisition of Navigator had occurred at January 1, 2005 and
2004, respectively.
--------------------------------------------------------------------------------
December 31, 2005 December 31, 2004
--------------------------------------------------------------------------------
Revenues 7,638,924 4,094,158
--------------------------------------------------------------------------------
Net loss 973,004 (1,992,225)
--------------------------------------------------------------------------------
Net loss per share $ (0.18) $ (0.39)
--------------------------------------------------------------------------------
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 actually taken place as of January 1, 2005 or 2004, 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 that may result from the Company's acquisition of
Navigator.
9. Dispositions
Completed sale of Euroweb Czech Republic and Euroweb Slovakia On December 16,
2004, the Company sold all of its shares in its wholly-owned subsidiary, Euroweb
Czech Republic for cash of $500,000. As a part of the transaction, the Company
forgave $400,000 of loans receivable from Euroweb Czech Republic. On April 15,
2005, the Company sold Euroweb Slovakia for cash of $2,700,000.
Proposed sale of Euroweb Hungary and Euroweb Romania On December 15, 2005, the
Board of Directors of the Company decided to sell its interest its wholly-owned
subsidiaries in Euroweb Hungary and Euroweb Romania. On December 19, 2005, the
Company entered into a share purchase agreement with Invitel Tavkozlesi
Szolgaltato Rt., a Hungarian joint stock company, to sell Euroweb Hungary and
Euroweb Romania, subject to various conditions including, but not limited to,
shareholders' approval.
The Company believes that the sale of Euroweb Czech Republic and Euroweb
Slovakia and the proposed sale of Euroweb Hungary and Euroweb Romania meet the
criteria for presentation as a discontinued operation under the provisions of
"SFAS 144", therefore amounts relating to Euroweb Czech Republic, Euroweb
Slovakia, Euroweb Hungary and Euroweb Romania have been reclassified as
discontinued operations for all periods presented.
The following table shows the details of result of discontinued operation per
reporting units as follows:
2005 2004
---------------------------------------------------------------------------------------------------------
Gain from discontinued Czech operations (including 2004 gain on disposal
of $409,314), net of tax $ -- $ 364,722
Gain from discontinued Slovakian operations (including the 2005 gain on
disposal of $1,701,200), net of tax 1,733,470 313,764
Income (loss) from discontinued Hungarian operations 637,256 (34,273)
Income from discontinued Romanian operations 1,327,735 24,099
---------------------------------------------------------------------------------------------------------
Income from dicountinued operations $3,698,461 $ 668,312
F-18
The following information is a summary of selected items from Euroweb Hungary's
consolidated balance sheet as at December 31, 2005:
Description 2005
--------------------------------------------------------------------------------
Cash and cash equivalents $ 1,578,129
Trade account receivable, net 2,529,553
Prepaid, unbilled receivable and other current assets 1,010,706
Assets of discontinued operation 11,413,521
Property and equipment, net 3,424,237
Trade account payable (2,213,058)
Other current liabilities, deferred revenue and accrued expenses (2,147,249)
Liabilities of discontinued operation (3,130,274)
Intercompany loans (3,541,750)
Short term and long term bank and Pantel related loans (6,882,160)
--------------------------------------------------------------------------------
Net assets $ 2,041,655
The following information is a summary of selected items from Euroweb Romania's
balance sheet as at December 31, 2005:
Description 2005
--------------------------------------------------------------------------------
Cash and cash equivalents $ 168,096
Trade account receivable, net 963,855
Prepaid, unbilled receivable and other current assets 480,558
Property and equipment, net 3,445,460
Trade account payable (957,593)
Other current liabilities, deferred revenue and accrued expenses (1,493,474)
Intercompany loans (400,000)
Long term portion of capital lease obligation (102,130)
--------------------------------------------------------------------------------
Net assets $ 2,104,772
10. Income taxes
The loss from continuing operations before income taxes by tax jurisdiction for
the years ended December 31, 2005 and 2004 was as follows:
2005 2004
----------- -----------
Loss from continuing operations
before income taxes:
Domestic $(1,703,466) $(1,402,766)
Foreign (372,608) --
----------- -----------
Total $(2,076,074) $(1,402,766)
=========== ===========
There was no current income tax expense from continuing operations in 2005 and
2004. A deferred tax benefit of $57,908 was recognized in 2005. There was no
deferred tax expense or benefit recognized in 2004.
F-19
The provision (benefit) for income taxes allocated to continuing operations is
comprised of the following:
Year Ended December 31,
2005 2004
--------------------------------------------------------------------------------
Current federal $ -- $ --
Current foreign -- --
Deferred federal -- --
Deferred foreign (57,908) --
--------------------------------------------------------------------------------
Provision for income tax expense (benefit) $(57,908) $ --
The provision for income taxes differs from the amount computed by applying the
statutory federal income tax rate to income tax before provision for income
taxes.
The difference between the total expected tax expense (benefit) and tax expense
allocated to continuing operations for the years ended December 31, 2005 and
2004 is accounted for as follows:
2005 2004
Amount % Amount %
----------- ----------- ----------- -----------
Computed expected tax
Expense/(Benefit) $ (705,865) (34.00) $ (476,940) (34.00)
Foreign Tax Rate Differential 67,069 3.23 -- --
Foreign Income not subject to tax (4,798) (0.23) 0 0
Equity adjustment on sale of subsidiary (1,688,478) (81.33) (747,202) (53.26)
Change in Valuation Allowance 2,274,164 109.54 1,224,142 87.26
----------- ----------- ----------- -----------
Total expense/(benefit) $ (57,908) (2.79%) $ -- --%
=========== =========== =========== ===========
Deferred Tax Assets and Liabilities
Upon the acquisition of Navigator, the Company recognized a net Deferred Tax
Liability of $559,076 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 1-4 years from
acquisition, the Deferred Tax Liability is being reduced proportionately.
$57,908 was recognized as a benefit in 2005.
The statutory corporate tax rate in Hungary was 16% as of December 31, 2004.
Navigator has no tax net operating loss carryforwards from prior years.
2005 2004
----------- -----------
Deferred Tax Assets:
Net Operating Loss Carryovers $ 4,331,534 $ 3,665,214
Capital Loss Carryovers 1,823,704 713,634
----------- -----------
Gross Deferred Tax Assets 6,155,238 4,378,848
Valuation Allowance (6,155,238) (4,378,848)
----------- -----------
Net Deferred Tax Assets $ -- $ --
=========== ===========
F-20
For U.S. Federal income tax purposes, the Company has unused net operating loss
carryforwards at December 31, 2005 of approximately $12.8 million available to
offset future taxable income. From the $12.8 million of losses, $1.2 million
expire in various years from 2008-2010, $1.6 million expires in 2011, and the
remaining $10 million expire in various years from 2016 through 2025. In
addition, the Company has a capital loss carryover for US income tax purposes of
approximately $5.4 million. $2.1 million of the loss is from 2004 and will
expire after 2009. The remainder of the capital loss, $3.3 million, will expire
after 2010. The Tax Acts of some jurisdictions contain provisions which may
limit the net operating loss and capital 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 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 the Company will not
realize the benefit of these deductible differences, net of existing valuation
allowances at December 31, 2005.
Undistributed earnings of the Company's foreign subsidiaries are currently not
material. Those earnings are considered to be indefinitely reinvested;
accordingly, no provision for US federal and state income tax has been provided
thereon. Upon repatriation of those earnings, in the form of dividends or
otherwise, the Company would be subject to both US income taxes (subject to an
adjustment for foreign tax credits) and withholding taxes payable to the various
foreign countries. Determination of the amount of unrecognized deferred U.S.
income tax liability is not practicable due to the complexities associated with
its hypothetical calculation.
11. Stockholders' Equity
On March 22, 2005, the Company granted an aggregate of 200,000 options to two of
its directors. The stock options granted to the directors on March 22, 2005 vest
at the rate of 25,000 on each September 22 of 2005, 2006, 2007 and 2008. The
exercise price of the options was $3.40, which is equal to the market price on
the date the grants were made.
On June 2, 2005, the Company granted 100,000 options to a director of the
Company, which vest at the rate of 25,000 on each December 2 of 2005, 2006,
2007, and 2008. The exercise price of the options was $4.05, which was equal to
the market price on the date the grants were made.
The President of the Company is eligible to receive an annual compensation of
$250,000 starting from April 15, 2005 for a period of two years, which is
payable in Euroweb shares of common stock. The number of shares to be paid is
calculated based on the average closing price 10 days prior to April 15 of each
year starting from April 15, 2005. The number of shares for the year ended April
14, 2006 is 82,781. In January 2006, the Company issued 58,968 shares of common
stock out of the total 82,781 covering the service period from April 15, 2005 to
December 31, 2005.
F-21
On June 7, 2005, the Company granted 100,000 warrants to a consulting company as
compensation for investor relations services at exercise prices as follows:
40,000 warrants at $3.50 per share, 20,000 warrants at $4.25 per share, 20,000
warrants at $4.75 per share and 20,000 warrants at $5 per shares. The warrants
have a term of five years and tranches vest at a rate of a total 8,333 warrants
per month over a one year period from the lowest to the highest warrant price.
In February 2006, the Company has terminated the contract with the consultant.
The total number of warrants granted under this agreement is reduced
time-proportonially to 83,330 based on the time in service by the consultant.
The reduction related to the warrants at $5 per shares. The warrants are being
expensed over the performance period of one year. Compensation expense for the
year ended December 31, 2005 was $141,410.
There are no other warrants outstanding or expired in 2005.
In connection with the acquisition of Navigator Informatika Rt (Note 1), the
Company issued 441,566 shares of common stock.
12. Commitments and Contingencies
(a) Employment Agreements
The Company entered into a six-year agreement with its Chief Executive Officer,
Csaba Toro on October 18, 1999, which commenced January 1, 2000, and provided
for an annual compensation of $96,000. The agreement was amended in 2004 and
2005. The amended agreement provides for an annual salary of $200,000 and a
bonus of up to $150,000 in 2006, 2007 and 2008, as well as an annual car
allowance of $30,000 for the same period.
The Company has entered into a two-year employment agreement with Moshe
Schnapp as President and Director of the Company starting from April 15, 2005,
which grants an annual compensation of $250,000 to be paid in the form of
Euroweb shares of common stock. The number of shares to be received by Mr.
Schnapp is calculated based on the average closing price 10 days prior to the
commencement of each employment year. For the year ended April 14, 2006, Mr.
Schnapp will receive 82,781 Euroweb shares of common stock.
(b) Lease agreements
The Company's subsidiaries have entered into various capital leases for vehicles
and internet equipment, as well as non-cancelable agreements for office
premises. Refer to Note 6 (Leases).
(c) Legal Proceedings
There are no known significant legal procedures that have been filed and are
outstanding against the Company.
F-22
(d) Elender Rt. acquisition
On June 9, 2004 the Company acquired all of the outstanding shares of Elender
Rt. ("Elender") for $6,500,000 in cash and 677,201 of the Company's shares of
common stock. Under the terms of agreement, the Company has placed 248,111
unregistered shares of common stock, newly issued and in the name of the
Company, 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 the shares. As of
December 31, 2005, the Company had repaid all of the loans that were
outstanding. In January 2006, the Company acquired and subsequently cancelled
the shares that were put into escrow.
Pursuant to the registration rights agreement signed on June 1, 2004 with the
sellers of Elender, if the shares of the Company's common stock issued to the
sellers 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 made a provision of
$170,000 to accrue for potential penalties under this clause as of December 31,
2004. In 2005, the Company received a waiver from the sellers. Therefore the
penalty was reversed.
In case of disposal of Euroweb Hungary and Euroweb Romania, the Company will
have to reregister the shares issued in connection with the acquisition of
Elender. In case of late filing of this registration statement may result
penalty payment obligation.
(e) Navigator acquisition
The Company entered into a registration rights agreement dated July 21, 2005,
whereby it has agreed to file a registration statement registering the 441,566
shares of Euroweb common stock issued in connection with the acquisition within
75 days of the closing of the transaction and have such registration statement
declared effective within 150 days from the filing thereof. In the event that
Euroweb fails to meet its obligations to register the shares it may be required
to pay a penalty equal to 1% of the value of the Shares per month. The Company
has obtained a written waiver from the seller stating that the seller will not
raise any claims in connection with the filing of registration statement until
May 30, 2006.
(f) Euroweb Hungary Rt. purchase guarantee
In February 2004, the Company purchased the remaining 51% of Euroweb Hungary
from Pantel. The consideration paid by the Company for the 51% interest
consisted of EUR 1,650,000 ($2,105,000) in cash, and a purchase commitment that
Euroweb Hungary will purchase at least HUF 600 million (approximately $3
million) worth of services from Pantel in each year from 2004 to 2006. In the
event that Euroweb Hungary and its subsidiaries do not satisfy this commitment,
Pantel may charge a penalty equal to 25% of the commitment amount less any
services purchased. Purchases in 2004 and 2005 exceeded this amount. If Euroweb
Hungary is successfully sold to Invitel, any claim arising from this commitment
will from that date be payable by Invitel.
F-23
(g) Indemnities provided upon sale of subsidiaries
On April 15, 2005, the Company sold Euroweb Slovakia. According to the
securities purchase contract (the "Contract"), the Company will indemnify the
buyer for all damages incurred by the buyer as the result of seller's breach of
certain representations, warranties or obligations as set in the Contract up to
an aggregate amount of $540,000. The buyer shall not be entitled to make any
claim under the Contract after the fourth anniversary of the date of the
Contract. No claims have been made to date. The Company has accrued $35,000 as
the estimated fair value of this indemnity.
(h) Potentional penalty of EUR 400,000
If by the date which is 120 days after the signing of the share purchase
agreement on December 19, 2005 about the disposition of Euroweb Hungary and
Euroweb Romania to Invitel, the Company either fails to comply with the
provisions of the share purchase agreement, or the Stockholders Meeting of the
Company fails to approve the transaction as set forth in the agreement, then the
Company shall on demand reimburse to Invitel 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
(i) Purchase obligation of 85% ownership of Navigator
On or before the date of closing of the sale of Euroweb Hungary and Euroweb
Romania to Invitel, Euroweb International will purchase 85% ownership of
Navigator representing a purchase obligation in a value of $6,000,000 in cash.
At the date of closing at the latest, Euroweb Hungary has to settle all of its
bank loans including the $6,000,000 Commerzbank loan obtained for the
acquisition of Navigator.
13. Stock Option Plan and Employee Options
a) Stock option plans
The Company's Stock Option Plan expired in 2003, although unexpired options
issued under this plan were exercisable until expiry. At December 31, 2004,
options for 63,000 common stock were outstanding and exercisable by the Chief
Executive Officer under the Stock Option Plan, which expired on April 2, 2005.
No options remained outstanding as of December 31, 2005.
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 of Directors (the "Committee"). The Board of
Directors 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.
Options granted under the Plan are generally exercisable for a period of up to
ten years from the date of grant. Incentive options granted to stockholder's
that hold in excess of 10% of the total combined voting power or value of all
classes of stock of the Company 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.
F-24
On April 26, 2004 under the Plan, 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. 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 three and four 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 was recorded for these options. The
total compensation expense for their options granted to the two consultants is
$162,000, which is being expensed over the vesting period of three years.
In March 2005, one of the Directors has resigned and his 100,000 options expired
unexercised.
The President and a Director of the Company is eligible to receive an annual
compensation of $250,000 starting from April 15, 2005, which is payable in
shares of Euroweb common stock. The number of shares to be paid is calculated
based on the average closing price 10 days prior to each employment year. The
number of shares for the year ended April 14, 2006 is 82,781. Compensation
expense for the year ended December 31, 2005 was $177,083 (2004: $ -). On
January 5, 2006, 58,968 shares has been issued from the total of 82,781 shares
covering the period from April 15, 2005 to December 31, 2005.
(b) Other Options
The Company has issued options pursuant to employment agreements. As of December
31, 2004 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 expired unexercised on April 2, 2005. The options were
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, 2004, 2005, 2006 and 2007. There were
100,000 options outstanding as of December 31, 2005.
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:
F-25
2005 2004
------------------ -----------------
Weighted Weighted
average average
exercise exercise
Options Price Options Price
-------- -------- -------- --------
Outstanding, January 1, 654,000 $5.33 309,000 $5.95
Granted 300,000 3.62 365,000 4.78
Cancelled -- -- -- --
Expired (249,000) 6.47 (20,000) 5.00
-------- -------
Outstanding, December 31, 705,000 4.20 654,000 5.33
======== =======
195,000 options under the 2004 Incentive Plan are outstanding and exercisable as
of December 31, 2005.
No options were exercised in 2005 and 2004.
The following table summarizes information about shares subject to
outstanding options as of December 31, 2005 which were issued to current
or former employees, consultants or directors pursuant to the 2004
Incentive Plan and grants to Directors:
Options Outstanding Options Exercisable
------------------------------------- --------------------------------------------------------
Weighted- Weighted- Weighted-
Number Range of Average Average Remaining Number Average
Outstanding Exercise Prices Exercise Price Life in Years Exercisable Exercise Price
----------- --------------- -------------- ----------------- ----------- --------------
100,000 $4.21 $4.21 3.76 50,000 $4.21
305,000 $4.78 $4.78 4.31 182,500 $4.78
200,000 $3.40 $3.40 5.22 50,000 $3.40
100,000 $4.05 $4.05 5.42 25,000 $4.05
---------- ---------
705,000 $3.40-$4.78 $4.20 4.46 307,500 $4.40
========== =========
14. Segment information
The Company's operations fall into one industry segment: providing IT outsource
services to business customers. The Company manages its operations, and
accordingly determines its operating segments, on a geographic basis.
Consequently, the Company has one operating segments: Hungary. The performance
of geographic operating segments is monitored based on net income or loss from
continuing operations (after 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
intersegment sales revenues.
F-26
The following tables summarize financial information by geographic segment for
the year ended December 31, 2005 and 2004:
Geographic information for 2005
Hungary Corporate Total
Total revenues $ 1,964,998 -- $ 1,964,998
Depreciation 147,547 -- 147,547
Intangible amortization
(customer contract) 361,931 -- 361,931
Interest income 2,512 -- 2,512
Interest expense (38,240) -- (38,240)
Net interest (expense)
income (35,728) -- (35,728)
Income tax - current -- -- --
Income tax - deferred 57,908 -- 57,908
Net loss from continuing operations $ (314,700) $(1,703,466) (2,018,166)
Fixed assets, net 1,071,989 -- 1,071,989
Fixed asset additions 103,835 -- 103,835
Goodwill 8,150,672 8,150,672
Geographic information for 2004
Corporate Total
Total revenues -- --
Depreciation 2,048 2,048
Intangible impairment -- --
Goodwill impairment -- --
Interest income 49,154 49,154
Interest expense -- --
Net interest (expense)
income 49,154 49,154
Income tax -- --
Net loss from continuing operation (1,402,766) (1,402,766)
Fixed assets, net -- --
Fixed asset additions 2,048 2,048
Goodwill -- --
Goodwill and related impairment amounts are recorded in the books of the
Corporate entity and allocated to reporting units.
15. Related party transactions
KPN owned approximately 43.54% (December 31, 2005: 35.20%) of the outstanding
shares of Euroweb common stock as of December 31, 2004, and a majority interest
in Pantel. On February 28, 2005, KPN sold its 75.1% interest in Pantel to
Hungarian Telephone and Cable Corp. Therefore, Pantel is no longer considered a
related party of the Company effective March 1, 2005. There were no material
related party transactions in continouing operation in 2005 and 2004.
F-27
16. Subsequent events
(a) Issuance of shares
In January 2006, the Company issued 58,968 shares of common stock out of the
total 82,781 covering the service period between April 15, 2005 to December 31,
2005.
(b) Termination of Consultant contract
In February 2006, the Company terminated its contract with a consultant
providing investor relation services. The warrants granted under the contract
are reduced time-proportionally to 83,330, based on the time in service by the
consultant.
(c) Cancellation of shares put into escrow
In January 2006, the Company acquired and cancelled the shares that were put
into escrow.
F-28
EXHIBIT C
Euroweb Internet Szolgaltato Rt.
Unaudited Financial Statements
As of December 31, 2005 and the years ended
TABLE OF CONTENTS
Page
Financial Statements:
Unaudited Consolidated Balance Sheet as at December 31, 2005 2
Unaudited Consolidated Statements of Operations for the years ended
December 31, 2005 and 2004 3
Unaudited Consolidated Statements of Changes in Shareholders'
Equity/(Deficit) for the years ended December 31, 2005 and
2004 4
Unaudited Consolidated Statements of Cash Flows for the years ended
December 31, 2005 and 2004 5
Notes to the Unaudited Consolidated Financial Statements 6-20
Euroweb Internet Szolgaltato Rt.
Unaudited Consolidated Balance Sheet
as of December 31, 2005
In USD
2005
----
ASSETS
Current assets:
Cash and cash equivalents $ 1,578,129
Trade accounts receivable, less allowance for doubtful accounts
of $566,776 (note 3) 2,529,553
Unbilled receivable 738,182
Prepaid and other current assets (note 4) 210,524
------------
Total current assets of continuing operations 5,056,388
Total assets of discontinued operations (note 16) 11,413,521
Total current asset 16,469,909
Property and equipment, net (note 5) 3,424,237
Goodwill (note 6) 5,240,181
Intangible assets - customer contracts (note 6) 1,026,644
------------
Total assets $ 26,160,971
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 2,213,058
Short term portion of long term bank loan payable (note 8) 1,277,236
Short term portion of Pantel loan payable (note 9) 458,844
Other current liabilities (note 11) 293,268
Accrued expenses 1,476,683
Deferred revenue 366,298
------------
Total current liabilities of continuing operations 6,085,387
Total liabilities of discontinued operations (note 16) 3,130,274
------------
Total current liabilities 9,215,661
Long term related party loan (note 10) 3,541,750
Long term bank loan payable (note 8) 5,146,080
------------
Total liabilities 17,903,491
------------
Commitments and contingencies (note 13)
Shareholders' equity
Common stock, USD 4.85695 par value 20,000 shares authorized, 97,139
issued and outstanding as of December 31, 2005)
Additional paid in capital 9,247,534
Accumulated deficit (630,763)
Accumulated other comprehensive loss (456,430)
------------
Total shareholders' equity 8,257,480
------------
Total liabilities and shareholders' equity $ 26,160,971
============
See accompanying notes to unaudited consolidated financial statements.
2
Euroweb Internet Szolgaltato Rt.
Unaudited Consolidated Statements of Operations
for the Years Ended December 31, 2005 and 2004
In USD
2005 2004
---- ----
Total revenue $ 26,193,195 $ 19,150,985
Cost of revenue (exclusive of depreciation and
amortization shown separately below 16,328,703 10,973,256
Operating expenses
Personnel expenses 1,926,180 1,792,637
Consulting, professional and directors fees 1,928,366 1,854,142
Other selling, general and administrative expenses 2,283,291 2,521,468
Depreciation and amortization 2,715,015 1,784,410
------------ ------------
Total operating expenses 8,852,852 7,952,657
Income (loss) from operations 1,011,640 225,072
Other income/(expense)
Gain from sale of subsidiary -- 28,751
Foreign exchange gain (loss), net (6,775) 11,546
Interest income 38,090 81,272
Interest expense (474,941) (454,370)
------------ ------------
Total other income/(expense) (443,626) (332,801)
------------ ------------
Income (loss) before income taxes 568,014 (107,729)
Income taxes -- --
------------ ------------
Net income (loss) from continuing operations 568,014 (107,729)
============ ============
Income from discontinued operations
29,977 --
Net income (loss) $ 597,991 $ (107,729)
============ ============
Other comprehensive income (loss) (294,038) 69,239
Comprehesive income (loss) $ 303,953 $ (38,490)
------------ ------------
Net income per share, basic and diluted $ 29.90 $ (5.39)
Weighted number of shares outstanding 20,000 20,000
See accompanying notes to the unaudited consolidated financial statements.
3
Euroweb Internet Szolgaltato Rt.
Unaudited Consolidated Statements of Changes in Shareholders' Equity/Deficit
Years Ended December 31, 2005 and 2004
In USD (except number of shares)
Common Stock Additional Accumulated Other Shareholders'
Shares* Amount paid in capital Deficit Comprehensive (Deficit)
Income (loss) /Equity
------------- ------------- --------------- ------------- ------------- -------------
January 1, 2004 760 $ 406,110 $ 387,202 $ (1,121,025) $ (231,631) $ (559,344)
============= ============= =============== ============= ============= =============
Cancellation of common (760) (406,110) 406,110 -- -- --
stock
Issuance of common stock 20,000 97,139 (97,139) -- -- --
Additional paid in -- -- 8,551,361 -- -- 8,551,361
capital due to merge with
Elender
Foreign currency -- -- -- -- 69,239 69,239
translation gain
Net income -- -- -- (107,729) -- (107,729)
------------- ------------- --------------- ------------- ------------- -------------
December 31, 2004
20,000 $ 97,139 $ 9,247,534 $ (1,228,754) $ (162,392) $ 7,953,527
============= ============= =============== ============= ============= =============
Foreign currency -- -- -- -- (294,038) (294,038)
translation loss
Net income -- -- -- 597,991 -- 597,991
------------- ------------- --------------- ------------- ------------- -------------
December 31, 2005
20,000 $ 97,139 $ 9,247,534 $ (630,763) $ (456,430) $ 8,257,480
============= ============= =============== ============= ============= =============
* number of shares
See accompanying notes to unaudited consolidated financial statements.
4
Euroweb Internet Szolgaltato Rt.
Statements of Cash Flows
Year Ended December 31, 2005 and 2004
In USD
2005 2004
Net income (loss) $ 597,991 $ (107,729)
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 2,715,015 1,784,410
Increase in allowance for doubtful receivables 35,040 308,675
Changes in assets and liabilities:
(Increase) decrease in trade accounts receivable 967,334 (91,616)
(Increase) decrease in unbilled receivable, prepaid and other
current assets 632,329 316,514
Decrease in trade accounts payable, accrued expenses and other
current liabilities (1,512,374) (129,961)
Adjustment relating to discontinued operation 340,406 --
Decrease (increase ) in deferred revenue (166,793) 20,655
----------- -----------
Net cash provided by operating activities 3,608,948 2,100,948
Cash flows from investing activities:
Acquisition of Navigator Informatika Rt (8,500,000) --
Capital expenditure on discontinued operation (103,835) --
Purchase of property and equipment (594,880) (639,691)
----------- -----------
Net cash used in investing activities (9,198,715) (639,691)
Cash flows from financing activities:
Repayments on notes payable (728,770) (807,447)
Repayments on Pantel loan payable (491,428) (249,597)
Repayments on bank loan (289,990)
(678,906)
Receipt of bank loan 6,000,000 --
Receipt of intercompany loan 2,500,000 --
Adjustment relating to discontinued operation (233,379)
Principal payment under capital lease obligations (167,130) (385,445)
----------- -----------
Net cash provided by (used in) financing activities 6,589,303 (2,121,395)
Effect of exchange rate changes on cash and cash equivalents 47,544 89,206
Increase (decrease) in cash and cash equivalents 1,047,080 (570,932)
Cash and cash equivalents, beginning of year 531,049 1,101,981
----------- -----------
Cash and cash equivalents, end of year $ 1,578,129 $ 531,049
=========== ===========
Supplemental disclosures and non-cash financing transactions:
Cash paid for income taxes $ -- $ --
Cash paid for interest $ 461,124 $ 247,617
See accompanying notes to unaudited consolidated financial statements.
5
Notes to the unaudited consolidated financial statements
1. Organization and Business
On January 2, 1997, Euroweb International Corporation acquired all of the
outstanding stock of three Hungarian Internet Service Providers and merged these
companies into a new Hungarian entity, Euroweb Internet Szolgaltato Rt. ("the
Company" or "Euroweb Hungary").
On November 22, 1998, Euroweb International Corporation sold 51% of the
outstanding shares of the Company to Pantel Rt. (,,Pantel").
In March 2002, Euroweb Hungary acquired 100% of Freestart Kft. ("Freestart"), a
dial-up focused Internet Service Provider.
On February 12, 2004, Euroweb International Corporation entered into a Share
Purchase Agreement to re-acquire Pantel's 51% interest in Euroweb Hungary. Since
the acquisition was made from an entity under common control (both Pantel and
Euroweb International Corporation were majority owned by KPN Telecom B.V.
(,,KPN") at the time of acquisition in February 2004), the transaction was
accounted for by Euroweb International Corporation in a manner similar to a
pooling-of-interests in accordance with generally accepted accounting principles
in the United States of America, with all prior periods being restated as if the
entities were combined for all periods.
On June 9, 2004, the Euroweb International Corporation acquired all of the
outstanding shares of Elender Rt. ("Elender"), an Internet Service Provider
located in Hungary. In November 2004, Euroweb Hungary merged with Elender in a
transaction under the common control of Euroweb International Corporation. The
results of Elender have been included in the Company's financial statements from
the date of acquisition by Euroweb International Corporation.
In August 2005, Freestart merged with the Company in a transaction under the
common control of Euroweb International Corporation. The results of Freestart
have been included in the Company's financial statements from the date of
acquisition by Euroweb International Corporation.
On October 7, 2005, the Company purchased 85% of the outstanding shares of
common stock of Navigator Informatika Rt. (,,Navigator") from Marivaux
Investments Limited for $8.5 million cash. The transaction was financed with a
$6,000,000 loan from Commerzbank Hungary Rt. and a $2,500,000 loan from Euroweb
International Corporation.
On December 19, 2005, Euroweb International Corporation entered into a Share
Purchase Agreement (the "Agreement") with Invitel Tavkozlesi Szolgaltato Rt., a
Hungarian joint stock company ("Invitel"). Pursuant to the Agreement, Euroweb
International Corporation has agreed to sell and, Invitel has agreed to
purchase, 100% of the interest of Euroweb International Corporation in the its
two internet- and telecom-related operating subsidiaries, the Company and
Euroweb Romania S.A (collectively, the "Subsidiaries").
6
Notes to the unaudited consolidated financial statements
The purchase price to be paid to Euroweb International Corporation is
$30,000,000 in cash, of which $29,400,000 is payable at closing and the
remaining $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 Euroweb International Corporation and the Company cannot
provide any guarantee, is expected to occur within seven business days of
receipt of approval of the competition office in Hungary and approval of the
shareholders of Euroweb International Corporation, provided that such date is no
later than June 30, 2006. Euroweb International Corporation is required to take
all required action to convene a meeting to vote on and approve the Agreement.
The Company operates in one industry and geographic segment, providing Internet
access and additional value added services primarily to business customers.
Euroweb Hungary also provides free-of charge dial-up services through its
subsidiary Freestart. Freestart is entitled to receive a certain proportion of
the telecom revenues on the internet related telephone calls from the Hungarian
telecommunication companies.
Euroweb Hungary used its infrastructure to introduce voice over internet
protocol services at the end of 2001 under the brand name of Neophone. The
majority of revenues from this service derive from phone cards sold to
individuals, while these services are also available over leased telephone lines
to businesses.
From 2005, two new voice products were introduced:
Neophone Deal is offered to small- and medium-sized companies and is a carrier
pre-selection product. The subscriber keeps its existing phone number and
remains the client of the previous telecommunication company; however outgoing
calls initiated by the customer will go through the Company's voice network,
leaving out the previous telecommunication company. The outgoing traffic is
invoiced by Euroweb Hungary with discounted prices compared to the rates of the
incumbent telecom operator.
Neophone-X provides a voice service by making use of users' personal computers
and the Internet instead of the traditional phone network. During computer-based
phone calls, voice is transmitted in digital data packages and transformed into
human voice again at the receiving party.
2. Summary of Significant Accounting Policies
Accounting Principles
The unaudited financial statements and accompanying notes have been
prepared in conformity with accounting principles generally accepted in
the United States of America ("U.S. GAAP").
7
Notes to the unaudited consolidated financial statements
Basis of presentation
The financial statements comprise the consolidated accounts of Euroweb
Hungary, Freestart, Elender and Navigator. The results of Elender, Freestart and
Navigator have been included in the Company's financial statements from the date
of acquisition by Euroweb International Corporation.
On June 9, 2004, Euroweb International acquired 100% of the shares of
Elender (which was subsequently renamed to Euroweb Hungary) 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
Elender were measured at their fair values. The purchase price adjustments and
goodwill were pushed down to Euroweb Hungary 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 June 9, 2004, the assets and liabilities of Euroweb Hungary
were stepped up to reflect the accounting basis of Euroweb International in
Euroweb Hungary's assets and liabilities.
The Consideration paid for Elender was $9,350,005 consisted of
$6,500,000 in cash and 677,201 of the Company's shares of common stock, valued
at $2,508,353 excluding registration cost, and $341,652 in transaction costs
(consisting primarily of professional fees incurred related to attorneys,
accountants and valuation advisors).
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, the Company
considered its intention for future use of the assets, analyses of historical
financial performance and estimates of future performance of Elender'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
16% 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.
8
Notes to the unaudited consolidated financial statements
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.
All material intercompany balances and transactions have been
eliminated.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, 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.
Business segment reporting
Management has determined that the Company operates in one industry
segment, providing Internet access and additional value added services to
business customers and individuals. All of the Company's revenues are derived
from the provision of such services.
Fair value of financial instruments
The carrying values of cash equivalents, notes and loans receivable,
accounts payable, loans payable and accrued expenses approximate their fair
values.
The estimated fair value of the Company's debt at December 31, 2005 was
$3,573,000, which differs from the carrying amount of $3,541,750 included in the
balance sheet as long-term intercompany loan. The difference is calculated on
the $2,500,000 interest free loan with a 6% annual interest rate as market
price.
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.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation.
Equipment purchased under capital leases is stated at the lower of fair
value and the present value of minimum lease payments at the inception of
the lease or fair value, whichever is lower, less accumulated
depreciation.
9
Notes to the unaudited consolidated financial statements
The Company provides for depreciation of property and equipment using the
straight-line method over the following estimated useful lives:
Software and other intangibles 3-5 years
Computer equipment 3 years
Other furniture equipment and fixtures 3-5 years
Vehicles 5 years
Leased assets are depreciated using a straight-line method over the lesser
of the estimated useful life of the leased asset and the lease term.
Recurring maintenance on property and equipment is expensed as incurred.
Long-lived assets
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the
Company periodically reviews long-lived assets for impairment whenever events or
changes in 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 impairment is indicated, the
asset is written down to its estimated fair value based on a discounted cash
flow analysis.
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.
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.
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.
10
Notes to the unaudited consolidated financial statements
The Company earns revenue from the following activities:
Access services
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 services
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 services
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
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 and hosting
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.
Prepaid calling cards
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 revenue.
Cost of revenues
Cost of revenues (excluding depreciation and amortization) principally
comprises telecommunication network expenses, costs of content services and cost
of leased lines.
11
Notes to the unaudited consolidated financial statements
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.
Foreign currency translation
The Company conducts business and maintains its accounts in Hungarian
Forint ("HUF"). The Company considers the Hungarian Forint to be its
functional currency. 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 component of accumulated other comprehensive income in
shareholders' equity.
Advertising costs
Advertising costs are expensed as incurred and amounted $888,330 and
$900,904 for the years ended December 31, 2005 and 2004, respectively.
Business Combination following the "as-if" pooling-of-interes method of
accounting
On February 12, 2004, the Euroweb International Corporation entered into a
Share Purchase Agreement with a related party, Pantel Telecommunication
Rt. (,,Pantel") acquire the remaining 51% of Euroweb Hungary shares that
the Company did not already own. As this was a transaction between
entities under common control (at the date of the acquisition, KPN Telecom
B.V. (,,KPN") owned 50.17% of the voting common shares of the Company and
75% of the voting common shares of Pantel), the transaction was recorded
in a manner similar to a pooling-of-interests, and accordingly the
historical consolidated financial statements of Euroweb International
Corporation were been restated to include the financial position, results
of operations and cash flows of Euroweb Hungary for all periods.
12
Notes to the unaudited consolidated financial statements
Net earnings (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 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. There were
no potentional dilutive options and warrants for the year ended 2005 and
2004.
Recent accounting pronouncements
In December 2004, the 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. SFAS 123(R) is effective for the
Company as of January 1, 2006. The Company is currently assessing the impact
SFAS 123(R) will have on its financial statements.
In December 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment
of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends Accounting Research
Bulletin No. 43, Chapter 4, "Inventory Pricing" ("ARB 43") to eliminate the "so
abnormal" criterion in ARB 43 and requires companies to recognize abnormal
freight, handling costs, and amounts of wasted material (spoilage) as
current-period charges. Additionally, SFAS 151 clarifies that fixed production
overhead cost should be allocated to inventory based on the normal capacity of
the production facility. SFAS 151 is effective for inventory costs incurred
during annual periods beginning after June 15, 2005. The Company is currently
assessing the impact SFAS 151 may have on its financial statements and is not
expected to have a material impact on our financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" which replaces Accounting Principles Board Opinions No. 20
"Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim
Financial Statements." This statement applies to all voluntary changes in
accounting principle and changes resulting from adoption of a new accounting
pronouncement that does not specify transition requirements. SFAS 154 requires
retrospective application to prior periods' financial statements for changes in
accounting principle unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. SFAS 154 also
requires that retrospective application of a change in accounting principle be
limited to the direct effects of the change. Indirect effects of a change in
accounting principle should be recognized in the period of the accounting
change. SFAS 154 is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005 with early implementation
permitted for accounting changes and corrections of errors made in fiscal years
beginning after the date this statement was issued. SFAS 154 is effective for
the Company as of January 1, 2006 and is not expected to have a material impact
on financial statements.
13
Notes to the unaudited consolidated financial statements
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments-an amendment of FASB Statements No. 133 and 140" ("SFAS
155"). SFAS 155 amends SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133") and SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". SFAS 155
resolves issues addressed in SFAS 133 Implementation Issue No. D1, "Application
of Statement 133 to Beneficial Interests in Securitized Financial Assets." SFAS
155 is effective for the Company for all financial instruments acquired or
issued after January 1, 2007 and is not expected to have a material impact on
the Company's financial statements.
3. Trade accounts receivable
2005
----------------------------------------------------------------------
Receivable $ 3,096,329
Less: allowance for doubtful debts (566,776)
----------------------------------------------------------------------
Total $ 2,529,553
===========
The Company establishes an allowance for doubtful debts to reduce receivables to
their estimated net realizable value. The allowance is determined on an account
by account basis.
Receivable due from Pantel was $23,527 as of December 31, 2005.
4. Prepaid and other current assets
2005
----------------------------------------------------------------------
Prepaid costs $ 19,322
Inventory 92,668
Deposit 98,534
----------------------------------------------------------------------
Total $210,524
========
5. Property and equipment
Property and equipment as at December 31, 2005 were as follows:
2005
--------------------------------------------------------------------------
Software and other intanglible assets $ 1,953,282
Computer equipment 3,796,895
Vehicles, furniture, fixtures and other 772,310
Total 6,522,487
--------------------------------------------------------------------------
Less accumulated depreciation (3,098,250)
--------------------------------------------------------------------------
Net book value $ 3,424,237
===========
The gross value of assets recorded under capital lease obligation was $39,255,
while accumulated depreciation was $18,430 as of December 31, 2005. Lease
payments under operating leases was approximately $388,000 in 2005.
14
Notes to the unaudited consolidated financial statements
6. Goodwill and acquired intangible assets
Goodwill and acquired intangible assets as at December 31, 2005 comprise the
following:
2005
----
Customer contracts (Elender) 2,730,420
Less accumulated amortization-Customer contracts (1,703,776)
-----------
$ 1,026,644
===========
Goodwill
$ 5,240,181
===========
Customer contracts
Most (approximately 87%) of the Customer contracts relate to an Elender contract
to provide internet access to schools in Hungary. The remaining items are leased
line contracts of Elender. These contracts are being amortized over a period of
2.5 years from the date of acquisition (June 2004).
Goodwill and Impairment Charges
The Goodwill relating to Euroweb Hungary arose on the acquisition of Elender is
considered as one reporting unit for purposes of SFAS 142.
At the beginning of 2006, the Euroweb Hungary performed its annual impairment
test relating to the goodwill as of December 31, 2005. Euroweb Hungary compared
the fair value of the reporting units 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.
7. Note payable
Notes payable relate to outstanding liabilities to three previous shareholders
of Elender: Vitonas Investments Limited, Certus Kft. and Rumed 2000 Kft. The
outstanding amount was payable in four equal quarterly installments of HUF
36.438 million (approximately $170,600). The note payable was settled until
December 31, 2005.
8. Bank loans
On June 1, 2004, Elender (which has now been merged with Euroweb Hungary)
entered into a bank loan agreement with Commerzbank (Budapest) Rt.
("Commerzbank"). The agreement consists of a loan facility of HUF 300 million
(approximately $1.67 million) of which approximately $630,639 was outstanding at
December 31, 2005. The loan is being repaid in quarterly installments of HUF
14.5 million (approximately $68,000), commencing November 30, 2004. The interest
rate is BUBOR (Budapest Interbank Offered Rate) + 1.35%.
15
Notes to the unaudited consolidated financial statements
In addition, Commerzbank also provided an overdraft facility of HUF 150 million
(approximately $702,000) to Elender. No amount was outstanding under this
facility as at December 31, 2005. The interest rate is BUBOR (Budapest Interbank
Offered Rate) + 1%.
In October 2005, Euroweb Hungary obtained the HUF equivalent of $6,000,000 long
term bank loan from Commerzbank Hungary ("Commerzbank") to finance the
acquisition of Navagator. The interest rate in connection with the loan is BUBOR
plus 2.5%. Euroweb Hungary is required to make quarterly scheduled payments in
connection with the loan commencing March 31, 2006 through June 30, 2010. The
first two payments will be approximately HUF 34 million ($160,914), while the
remaining sixteen payments will be approximately HUF 73 million ($341,928). The
outstanding balance was $5,792,677 as of December 31, 2005.
9. Pantel loan
During 2002 Pantel Rt. ("Pantel") provided a loan of HUF 245,000,000
(approximately $ 1.15 million) to Freestart Kft. 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.
10. Related party transactions
The largest supplier of the Company since early 2001 has been Pantel, a
Hungary-based alternative telecommunications provider. As at December 31, 2004,
KPN was the majority owner of Pantel and the largest shareholder of Euroweb
International Corporation. Csaba Toro, Chief Executive Officer of Euroweb
International Corporation, was also the Chief Executive Officer of Pantel until
February 2003. In 2004, KPN announced its intention to divest its interest in
Pantel with certain sale agreements being signed with a view to final
consummation in 2005. On February 28, 2005, the sale of KPN's 75.1% interest in
the Pantel business to Hungarian Telephone and Cable Corp. was completed.
Therefore, Pantel will no longer be considered a related party effective March
1, 2005.
Euroweb Hungary has engaged in the following transactions with Pantel:
(a) Pantel provides the following services to the Company:
- Internet bandwidth
- National leased and telephone lines within Hungary
- Voice services
The total amount of these services purchased from Pantel was $5,419,840 during
2005 (2004: $3,841,719). Additionally, in 2004, Pantel charged interest of
$111,475 (2004: $154,761)
16
Notes to the unaudited consolidated financial statements
(b) The Company and its subsidiaries provided the following services to Pantel:
- Internet and related services
The total value of these services sold was approximately $1,220,664 in 2005
(2004: $504,928).
At the time of acquisition of Elender, Euroweb International Corporation assumed
a loan liability from the previous shareholders of Elender. The outstanding
balance of this loan liability is $1,041,750 as of December 31, 2005 with a
repayment date of December 31, 2007, payable in one installment. The interest
rate is BUBOR (Budapest Interbank Offered Rate) + 0.5%. Interest expense was
$69,033 (2004: $74,000) in 2005.
In September 2005, Euroweb International Corporation provided a $2,500,000
interest free loan to the Company for the acquisition of Navigator. The
repayment is due in one instalment in 2010. The loan is interest free.
During 2005, Interweb International Corporation has invoiced management fee of
$407,637. There was no management fee in 2004.
The trade accounts receivable due from Pantel was $23,527 as of December 31,
2005. Trade accounts payable to Pantel were $1,037,845 as of December 31, 2005.
There was no outstanding trade creditor and trade debtors balances with Euroweb
International Corporation as of December 31, 2005 in additional to the loan
balances described above.
Discontinued liabilities of Euroweb Hungary and Euroweb Romania in the audited
consolidated financials statements of Euroweb International as of December 31,
2005 does not include the $3,541,750 intercompany loan liabilities of Euroweb
Hungary to the Parent Company as stated in the unaudited financial statements of
Euroweb Hungary, as it is eliminated in Euroweb International's financial
statements. In additional, income from discontinued operation in the Statements
of Operation in the audited consolidated financials statements of Euroweb
International as of December 31, 2005 eliminates the interest income received
from Euroweb Hungary. Eliminated interest expense was $69,033 (2004: $74,000) in
2005.
There were no other material transactions with related parties.
11. Other current liabilities
2005
---------------------------------------------------------------------
Taxes $ 245,411
Other 47,857
---------------------------------------------------------------------
Total other current liabilities $ 293,268
=======
17
Notes to the unaudited consolidated financial statements
12. Accrued expenses
2005
---------------------------------------------------------------------
Telecommunication expenses $ 1,147,153
Interest 27,095
Other 302,435
---------------------------------------------------------------------
Total $ 1,476,683
=========
13. Commitments and contingencies
Lease agreements
Capital lease - before 2004, the Company entered into capital leases, which
expire over the next two years. 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, 2005:
Short term lease obligation $ 28,944
------------------------------------------------------------------------------
Total lease payments $ 28,944
======
The current portion of the capital lease obligation is included in `Other
current liabilities' in the accompanying balance sheets.
The Company has a seven-year non-cancelable lease agreement for office premises.
Remaining minimal rental payments total approximately $ 1,153,959; $ 384,653 in
each of 2006, 2007 and 2008.
Following are the Company's commitments under its non-cancelable lease
obligations:
Capital lease Operating lease
2006 32,417 384,653
2007 -- 384,653
2008 -- 384,653
--------------- ---------------
Total $ 32,417 $ 1,153,959
--------------- ===============
Less amount representing interest (3,473)
---------------
Net minimum lease payments $ 28,944
===============
There are no restrictions on dividends imposed by lease contracts.
In February 2004, Euroweb International Corporation purchased 51% of Euroweb
Hungary from Pantel. The consideration paid for the 51% interest consisted of
EUR 1,650,000 ($2,105,000) in cash and a purchase commitment that Euroweb
Hungary will purchase at least HUF 600 million (approximately $3 million) worth
of services from Pantel in each year from 2004 to 2006. In the event that
Euroweb Hungary and its subsidiaries do not satisfy this commitment, Pantel may
charge a penalty equal to 25% of the commitment amount less any services
purchased to Euroweb Hungary. Purchases in 2004 and 2005 exceeded this amount.
18
Notes to the unaudited consolidated financial statements
14. Income taxes
The statutory rate will be 16 % effective from January 1, 2004. Owing to the
taxable losses, the Company did not have any corporate income taxes payable for
the years of 2005 and 2004.
The losses incurred in the previous years can be carried forward for offset
against future taxable profit. The carried forward taxable losses as of December
31, 2005 and 2004 were $9,371,931 and $11,522,347 respectively. Of this amount,
approximately $8 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. The remaining losses expire in various years from
2006-2010. 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 deferred tax assets are fully offset by a valuation allowance.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than 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 the Company will not
realize the benefit of these deductible differences, net of existing valuation
allowances at December 31, 2005.
15. Stockholders' equity
In November 2004, Elender merged with the Company in a transaction under common
control. As of the merger date, Euroweb International Corporation reduced the
common stock of the Company by cancelling all common stock and issued 20,000
shares of new common stock.
16. Discontinued operations and disposal of subsidiaries
On October 7, 2005, the Company acquired 85% of the outstanding shares of
Navigator Informatika Rt., an IT outsourcing service provider located in
Hungary. Consideration paid in cash was $8,500,000. The results of Navigator
have been included in the Company's consolidated financial statements from the
date of acquisition.
19
Notes to the unaudited consolidated financial statements
Proposed sale of Navigator
On December 15, 2005, the Board of Directors of Euroweb International has
decided to sell its interest in Euroweb Hungary and Euroweb Romania. On December
19, 2005, the Company entered into a Share Purchase Agreement with Invitel
Tavkozlesi Szolgaltato Rt, a Hungarian joint stock company to sell the Company's
interest in the Company's two Internet- and telecom-related operating
subsidiaries, Euroweb Hungary and Euroweb Romania subject to various conditions
including, but not limited to shareholders' approval. One of the conditions were
that Euroweb International will acquire the 85% of outstanding shares of
Navigator until the closing of the deal.
The Company believes that the proposed sale of Navigator 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 amounts relating to Navigator were
presented as discontinued operations for all periods.
The following information is a summary of selected items from Navigator's
consolidated balance sheet as at December 31, 2005:
Description 2005
-----------------------------------------------------------------------------
Cash and cash equivalents $ 7,828
Trade account receivable, net 1,488,906
Prepaid, unbilled receivable and other current assets 233,980
Property and equipment, net 1,112,652
Trade account payable (1,714,153)
Short and long term bank loans and overdraft (1,065,763)
Other current liabilities, deferred revenue and accrued expenses (350,350)
-----------------------------------------------------------------------------
Net liabilities ($ 286,900)
Discontinued assets and liabilities of Euroweb Hungary and Euroweb Romania in
the audited consolidated financials statements of Euroweb International as of
December 31, 2005 does not include the discontinued assets and liabilities of
Navigator as stated in the unaudited financial statements of Euroweb Hungary, as
Navigator is presented as continuing operation in Euroweb International's
financial statements.
20
EUROWEB INTERNET SZOLGALTATO RT.
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 the sale of 85%
of the interest of Euroweb Internet Szolgaltato Rt. ("Euroweb" or "Euroweb
Hungary") in Navigator Informatika Rt. ("Navigator").
Sale of 85% of the interest of Euroweb in Navigator
On December 19, 2005, Euroweb International Corporation entered into a share
purchase agreement with to Invitel Tavkozlesi Szolgaltato Rt. ("Invitel") for
the sale to Invitel of Euroweb Hungary and Euroweb Romania S.A. ("Euroweb
Romania"). The purchase price for the subsidiaries specified in the share
purchase agreement is $30,000,000. 98% of the purchase price, or $29,400,000, is
payable at closing and the remaining 2% is payable upon delivery of a
certificate prepared by an independent auditor identifying the net indebtedness
of the two subsidiaries, which are required to be debt free. As part of the
closing, $8,500,000 from the cash proceeds will be paid by Euroweb International
to Euroweb Hungary in exchange for the 85% ownership of Navigator currently held
by Euroweb Hungary. This amount will be used by Euroweb Hungary for repayment of
a $6,000,000 bank loan obtained for the acquisition of Navigator and for the
repayment of a $2,500,000 intercompany loan to Euroweb International
Corporation. The closing of the sale of Euroweb Hungary and Euroweb Romania is
subject to approval of the competition office in Hungary, the buy-out of 85%
ownership of Navigator from Euroweb by Euroweb International Corporation and
approval of the shareholders of Euroweb International Corporation.
The unaudited pro forma financial statements give effect to the sale of 85% of
Euroweb's interest in Navigator. The sale is expected to be completed on the
closing of sale of Euroweb Hungary and Euroweb Romania. Navigator is expected to
be sold for $8,500,000 cash with no transaction costs.
Euroweb believes that the sale of Navigator 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." Accordingly, Navigator is presented as discontinued
operations in the historical unaudited consolidated financial statements of
Euroweb. The estimated gain is $224,923 on the sale of Navigator.
The unaudited pro forma condensed consolidated balance sheet gives effect to the
disposition of Navigator as if it occurred on December 31, 2005.
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 financial statements
are for illustrative purposes only and are not necessarily indicative of the
actual results of operations or financial position 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 unaudited consolidated financial statements and related notes of
Euroweb, attached in this proxy for the year ended December 31, 2005.
All pro forma amounts are presented in U.S. dollars, the reporting currency of
Euroweb.
Euroweb Internet Szolgaltato Rt.
Unaudited Pro Forma Condensed Consolidated Balance Sheet
December 31, 2005
Euroweb Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
ASSETS (A) (B)
Current Assets
Cash and cash equivalents $ 1,578,129 $ 8,500,000 (1) $ 1,785,453
(5,792,676) (2)
(2,500,000) (3)
Trade accounts receivable, net 2,529,553 -- 2,529,553
Unbilled receivable 738,182 -- 738,182
Prepaid and other current assets 210,524 -- 210,524
------------ ------------ ------------
Total current assets of continuing operations 5,056,388 207,324 5,263,712
Total assets of discontinued operations 11,413,521 (11,413,521) (4) --
------------ ------------ ------------
Total current assets 16,469,909 (11,206,197) 5,263,712
Property and equipment, net 3,424,237 -- 3,424,237
Goodwill 5,240,181 -- 5,240,181
Intangible assets - customer contracts 1,026,644 -- 1,026,644
Total assets $ 26,160,971 $(11,206,197) $ 14,954,774
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $ 2,213,058 -- $ 2,213,058
Current portion of bank loans 1,277,236 (1,005,674) (2) 271,562
Short term portion of Pantel loan 458,844 -- 458,844
Other current liabilities 293,268 -- 293,268
Deferred revenue 366,298 -- 366,298
Accrued expenses 1,476,683 -- 1,476,683
------------ ------------ ------------
Total current liabilities of continuing operations 6,085,387 (1,005,674) 5,079,713
Total liabilities of discontinued operations 3,130,274 (3,130,274) (4) --
------------ ------------ ------------
Total current liabilities 9,215,661 (4,135,948) 5,079,713
Non-current liabilities
Long term related party loan 3,541,750 (2,500,000) (3) 1,041,750
Long term bank loan payable 5,146,080 (4,787,002) (2) 359,078
------------ ------------ --- ------------
Total liabilities 17,903,491 (11,422,950) 6,480,541
Stockholders' Equity
Common stock, USD 4,85695 per value, 20,000 shares
authorized, issued and outstanding as of December 31, 2005 97,139 -- 97,139
Additional paid-in capital 9,247,534 -- 9,247,534
Accumulated deficit (630,763) 224,923 (5) (405,840)
Accumulated other comprehensive losses (456,430) (8,170) (6) (464,600)
------------ ------------ ------------
Total stockholders' equity 8,257,480 216,753 8,474,233
------------ ------------ ------------
Total liabilities and stockholders' equity $ 26,160,971 $(11,206,197) $ 14,954,774
============ ============ ============
See notes to unaudited pro forma condensed consolidated balance sheet
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(A) Reflects the historical unaudited consolidated balance sheet of
Euroweb as of December 31, 2005, included in this proxy statement of
Euroweb International Corporation for the year ended December 31,
2005.
(B) Pro forma adjustments related to the sale of Navigator on the basis
described in the introduction to these unaudited pro forma financial
statements:
1) Represents the cash proceeds of $8,500,000 received upon the sale of
Navigator
2) Reflects the repayment of $5,792,676 Commerzbank loan on current exchange
rate at the date of closing originated from the Navigator acquisition in a
value of $6,000,000 at the historical exchange rate as the loan was
provided in Hungarian forint by the bank
3) Reflects the repayment of $2,500,000 intercompany loan from Euroweb to
Euroweb International Corporation at the date of closing originated from
the Navigator acquisition
4) Adjustment to eliminate assets sold and liabilities transferred upon the
sale of Navigator
5) Adjustment to reflect the pro forma gain on the sale of Navigator. No tax
liability and transaction costs are expected to arise as a result of the
sale. Because the estimated pro forma gain assumes the sale was
consummated on December 31, 2005, the pro forma gain will ultimately
differ from the actual gain that will occur at the closing date of sale.
6) Adjustment to eliminate cumulative other comprehensive gain/losses of
Navigator
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.
EXHIBIT D
Euroweb Romania S.A.
Unaudited Financial Statements
As of December 31, 2005 and for the years ended
TABLE OF CONTENTS
Page
Unaudited Financial Statements:
Balance Sheet 2
Statements of Operations 3
Statements of Changes in Shareholders' Deficit 4
Statements of Cash Flows 5
Notes to the Financial Statements 6-16
Euroweb Romania S.A.
Unaudited Balance Sheet
As of December 31, 2005
in USD
2005
----
ASSETS
Current assets:
Cash and cash equivalents $ 168,096
Trade accounts receivable, less allowance for
doubtful accounts of $206,518 (note 3) 963,855
Unbilled receivable 108,918
Prepaid and other current assets (note 4) 371,640
-----------
Total current assets 1,612,509
Property and equipment, net (note 5) 3,445,460
Goodwill (note 6) 566,000
-----------
Total assets $ 5,623,969
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 957,593
Short term portion of related party loan (note 7) 400,000
Other current liabilities 148,505
Accrued expenses 437,399
Deferred IRU revenue (note 8) 46,000
Deferred other revenue 46,946
-----------
Total current liabilities 2,036,443
Long term portion of deferred IRU revenue (note 8) 814,624
Long term capital lease obligation (note 8) 102,130
-----------
Total long term liabilities 916,754
-----------
Total liabilities 2,953,197
-----------
Commitments and contingencies (note 8)
Shareholders' equity
Common stock, USD 0.2538 par value (6,414,767 shares 1,628,181
authorized, issued and outstanding as of December 31, 2005)
Additional paid in capital 2,455,223
Accumulated deficit (1,519,624)
Accumulated other comprehensive income 106,992
-----------
Total shareholders' deficit 2,670,772
-----------
Total liabilities and shareholders' equity $ 5,623,969
===========
See accompanying notes to unaudited financial statements.
2
Euroweb Romania S.A.
Unaudited Statements of Operations
Years Ended December 31, 2005 and 2004
in USD
2005 2004
---- ----
Total revenue $ 16,799,292 $ 13,637,002
Cost of revenue (exclusive of depreciation
and amortization shown separately 12,543,151 11,085,306
below)
Operating expenses
Personnel expenses 995,163 707,419
Consulting, professional and directors fees 398,181 388,957
Collection of written-off receivable (265,630) --
Other selling, general and administrative expenses 663,438 869,434
Depreciation and amortization 780,697 626,564
------------ ------------
Total operating expenses 2,571,849 2,592,374
Income (loss) from operations 1,684,292 (40,678)
Other income (expense)
Foreign exchange gain (loss), net (156,041) 89,803
Interest income 7,135 24,437
Interest expense (18,979) (18,571)
------------ ------------
Total other income (expense) (167,885) 95,669
------------ ------------
Income before income taxes 1,516,407 54,991
Income taxes (188,412) (31,092)
------------ ------------
Net income $ 1,327,995 $ 23,899
============ ============
Other comprehensive income (loss) (94,990) 201,982
Comprehesive income $ 1,233,005 $ 225,881
============ ============
Net income per share, basic and diluted $ 0.21 $ 0.00
Weighted number of shares outstanding 6,414,767 6,414,767
See accompanying notes to the unaudited financial statements.
3
Euroweb Romania S.A.
Unaudited Statements of Changes in Shareholders' Equity
Years Ended December 31, 2005 and 2004
in USD (Except Number of Shares)
Additional Other
Common Stock paid in Accumulated Comprehensive Shareholders'
Shares* Amount capital Deficit Income Equity
-------------- -------------- -------------- -------------- -------------- -------------
January 1, 2004 6,414,767 1,628,181 2,455,223 (2,871,518) 0 1,211,886
============== ============== ============== ============== =============
Foreign currency
translation gain -- -- -- 201,982 201,982
Net profit -- -- 23,899 -- 23,899
-------------- -------------- -------------- -------------- -------------
December 31, 2004 6,414,767 $ 1,628,181 2,455,223 $ (2,847,619) $ 201,982 $ 1,437,767
============== ============== ============== ============== =============
Foreign currency
translation loss -- -- -- (94,990) (94,990)
Net profit -- -- 1,327,995 -- 1,327,995
-------------- -------------- -------------- -------------- -------------
December 31, 2005 6,414,767 $ 1,628,181 2,455,223 $ (1,519,624) $ 106,992 $ 2,670,772
============== ============== ============== ============== =============
* number of shares
See accompanying notes to unaudited financial statements.
4
Euroweb Romania S.A.
Statements of Cash Flows
Year Ended December 31, 2005 and 2004
In USD
2005 2004
Net income $ 1,327,995 $ 23,899
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 780,697 626,564
(Decrease) increase in allowance for doubtful receivables (254,782) 161,009
Changes in assets and liabilities:
(Increase) decrease in trade accounts receivable (516,284) 334,232
(Increase) decrease in unbilled receivables, prepaid and other current
assets (118, 218) 323,320
Increase (decrease) in trade accounts payable, accrued expenses and other
current liabilities 888,712 (497,768)
Increase (decrease) in deferred revenue (29,873) 75,601
----------- -----------
Net cash provided by operating activities 2,078,247 1,046,857
Cash flows from investing activities:
Purchase of property and equipment (1,836,819) (985,492)
----------- -----------
Net cash used in investing activities (1,836,819) (985,492)
Cash flows from financing activities:
Repayment of intercompany loans (250,000) (150,000)
Principal payment under capital lease obligations (112,431) (159,431)
----------- -----------
Net cash used in financing activities (362,431) (309,431)
Effect of exchange rate changes on cash and cash equivalents (31,969) 34,206
Decrease in cash and cash equivalents $ (152,972) $ (213,860)
Cash and cash equivalents, beginning of year $ 321,068 $ 534,928
----------- -----------
Cash and cash equivalents, end of year $ 168,096 $ 321,068
=========== ===========
Supplemental disclosures and non-cash financing transactions:
Cash paid for income taxes $ 184,634 $ 31,646
Cash paid for interest $ 18,979 $ 17,565
New capital lease $ 106,949 $ 133,378
See accompanying notes to unaudited financial statements.
5
Notes to unaudited financial statements
1. Organization and Business
Euroweb Romania S.A. ("the Company" or "Euroweb Romania") was registered with
the Romanian Trade Register as a joint-stock company previously named as
Mediator S.A (,,Mediator") in March 1998, and commenced activities in November
1998. Euroweb International Corporation ("Euroweb International") acquired 100%
of the shares of the Company in June 2000.
On May 19, 2000, Euroweb Romania purchased 100% of the Internet-related assets
of Sumitkom Rokura, S.R.L. an Internet service provider in Romania. This
transaction was accounted for as an asset purchase. The acquisition was
operationally effective as of July 1, 2000.
On December 19, 2005, Euroweb International entered into a Share Purchase
Agreement (the "Agreement") with Invitel Tavkozlesi Szolgaltato Rt., a Hungarian
joint stock company ("Invitel"). Pursuant to the Agreement, Euroweb
International has agreed to sell and, Invitel has agreed to purchase, 100% of
the Euroweb International's interest in its two Internet and telecom related
operating subsidiaries, Euroweb Internet Szolgaltato Rt. and the Company
(together, the "Subsidiaries"). The purchase price to be paid to Euroweb
International is USD $30,000,000 in cash of which USD $29,400,000 is payable at
closing and the remaining $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 Euroweb International and the Company cannot
provide any guarantee, is expected to occur within seven business days of
receipt of approval of the competition office in Hungary and approval of the
shareholders of Euroweb International provided that such date is no later than
June 30, 2006. Euroweb International is required by the Agreement to take all
required action to convene a meeting to vote on and approve the Agreement.
The Company is an Internet Service Provider offering a wide range of services
such as internet subscriptions, hosting services and sales of modems, routers
and related devices to customers. In addition to traditional Intenet services,
the Company also provides the following services, utilizing its existing
infrastucture: (1) International/national leased line and internet protocol
("IP") data services (IP connections between different countries or connections
between two or more sites within the same country) (2) Voice and Voice over IP
("VOIP") services; and (3) Facilities (sale, rent and maintenance of dark fiber
between the Hungarian border and the Romanian City of Timisoara.
For the international/national leased line and VOIP services, the main customer
and supplier in 2005 and 2004 was Pantel Rt. (,,Pantel"), a related party for
those periods. Pantel ceased to be a related party of the Company effective
March 1, 2005 (see note 9).
6
Notes to unaudited financial statements
2. Summary of Significant Accounting Policies
Basis of presentation
The financial statements comprise the accounts of the stand alone legal
entity of Euroweb Romania S.A.
The unaudited financial statements have been prepared in accordance with
generally accepted accounting principles in theUnited States of America
("U.S. GAAP").
In June 2000, Euroweb International acquired 100% of the shares of
Mediator (which was subsequently renamed to Euroweb Romania) 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 Mediator were measured at their fair values. The
purchase price adjustments and goodwill were pushed down to Euroweb
Romania 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, in
June 2000, the assets and liabilities of Euroweb Romania were stepped up
to reflect the accounting basis of Euroweb International in Euroweb
Romania's assets and liabilities.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP
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.
Business segment reporting
Management has determined that the Company operates in one industry
segment, providing Internet access and additional value-added services to
business customers and individuals. All of the Company's revenues are derived
from the provision of such services.
Fair value of financial instruments
The carrying values of cash equivalents, notes and loans receivable,
accounts payable, loans payable and accrued expenses approximate their fair
values.
The estimated fair value of the Company's debt at December 31, 2005 was
$471,000, which differs from the carrying amount of $400,000 included in the
balance sheet as short term and long-term part of intercompany loans, based on
an annual 6% calculated interest as market price.
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.
7
Notes to unaudited financial statements
Property and equipment
Property and equipment are stated at cost less accumulated depreciation.
Equipment purchased under capital leases is stated at the lower of fair
value and the present value of minimum lease payments at the inception of
the lease, less accumulated depreciation. The Company provides for
depreciation of property and equipment using the straight-line method over
the following estimated useful lives:
Software 3 years
Fiber network 12-20 years
Computer and network equipment 3-10 years
Other furniture equipment and fixtures 3-5 years
Vehicles 5 years
Leased assets are depreciated using a straight-line method over the lesser
of the estimated useful life of the leased assets and the lease term.
Recurring maintenance on property and equipment is expensed as incurred.
Long-lived assets
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the
Company periodically reviews long-lived assets for impairment whenever events or
changes in 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 impairment is indicated, the
asset is written down to its estimated fair value based on a discounted cash
flow analysis.
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.
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.
8
Notes to unaudited financial statements
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.
The Company earns revenue from the following activities:
Access services
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 services
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 services
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
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 and hosting
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.
9
Notes to unaudited financial statements
Indefeasible Right of Use
In 2002, the Company entered into an agreement to provide transmission
capacity to a customer pursuant to an indefeasible right of use agreement
("IRU"). Since the Company's IRU does not involve a transfer of title,
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 accounted for this transaction as an operating lease under
SFAS No. 13, "Accounting for Leases" ("SFAS 13"). This accounting has
resulted in 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 $3,833).
The Company is also obligated to maintain its network in efficient working
order and in accordance with industry standards. The customer is obligated
for the term of the agreement to pay for its allocable share of the costs
for operating and maintaining the network.
Cost of revenues
Cost of revenues (excluding depreciation and amortization) comprises
principally telecommunication network expenses, costs of content services
and cost of leased lines and are recognized as incurred.
Income taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets, net of appropriate valuation allowances, and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss
and tax credit carry-forwards. Deferred tax assets and liabilities, if
any, are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that
includes the enactment date.
Foreign currency translation
The Company conducts business and maintains its accounts in the Romanian
Lei ("ROL"). The Company considers the Romanian Lei to be its functional
currency. The reporting currency of the Company is the US$ and
accordingly, all amounts included in the consolidated financial statements
have been translated into US$.
The balance sheet translated into US$ 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
component of accumulated other comprehensive income in shareholders'
equity.
10
Notes to unaudited financial statements
Foreign currency transaction gains and losses are included in the
consolidated results of operations for the periods presented.
Advertising costs
Advertising costs are expensed as incurred and amounted $142,255 and
$215,037 for the years ended December 31, 2005 and 2004, respectively.
Comparatives
Prior period amounts have been reclassified to conform with current period
presentation.
Net earnings (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 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. There were
no potentional dilutive options and warrants for the year ended 2005 and
2004.
Recent accounting pronouncements
In December 2004, the 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. SFAS 123(R) is effective for the
Company as of January 1, 2006. The Company is currently assessing the impact
SFAS 123(R) will have on its financial statements.
In December 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment
of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends Accounting Research
Bulletin No. 43, Chapter 4, "Inventory Pricing" ("ARB 43") to eliminate the "so
abnormal" criterion in ARB 43 and requires companies to recognize abnormal
freight, handling costs, and amounts of wasted material (spoilage) as
current-period charges. Additionally, SFAS 151 clarifies that fixed production
overhead cost should be allocated to inventory based on the normal capacity of
the production facility. SFAS 151 is effective for inventory costs incurred
during annual periods beginning after June 15, 2005. The Company is currently
assessing the impact SFAS 151 may have on its financial statements and is not
expected to have a material impact on our financial statements.
11
Notes to unaudited financial statements
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" which replaces Accounting Principles Board Opinions No. 20
"Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim
Financial Statements." This statement applies to all voluntary changes in
accounting principle and changes resulting from adoption of a new accounting
pronouncement that does not specify transition requirements. SFAS 154 requires
retrospective application to prior periods' financial statements for changes in
accounting principle unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. SFAS 154 also
requires that retrospective application of a change in accounting principle be
limited to the direct effects of the change. Indirect effects of a change in
accounting principle should be recognized in the period of the accounting
change. SFAS 154 is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005 with early implementation
permitted for accounting changes and corrections of errors made in fiscal years
beginning after the date this statement was issued. SFAS 154 is effective for
the Company as of January 1, 2006 and is not expected to have a material impact
on financial statements.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments-an amendment of FASB Statements No. 133 and 140" ("SFAS
155"). SFAS 155 amends SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133") and SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". SFAS 155
resolves issues addressed in SFAS 133 Implementation Issue No. D1, "Application
of Statement 133 to Beneficial Interests in Securitized Financial Assets." SFAS
155 is effective for the Company for all financial instruments acquired or
issued after January 1, 2007 and is not expected to have a material impact on
the Company's financial statements.
3. Trade accounts receivable
2005
--------------------------------------------------------------------------------
Receivable $ 1,087,322
Less: allowance for doubtful debts (123,467)
--------------------------------------------------------------------------------
Total $ 963,855
===========
The Company establishes an allowance for doubtful debts to reduce receivables to
their estimated net realizable value. The allowance is determined on an account
by account basis.
4. Prepaid and other current assets
2005
--------------------------------------------------------------------------------
Inventory $173,357
Prepaid expenses 95,195
Others 103,088
--------------------------------------------------------------------------------
Total $371,640
========
12
Notes to unaudited financial statements
5. Property and equipment
Property and equipment as at December 31, 2005 were as follows:
2005
--------------------------------------------------------------------------------
Software and intellectual property $ 62,248
Fiber network 2,351,496
Computer and network equipment 1,730,679
Vehicles 371,821
Furniture, fixtures and other 182,836
--------------------------------------------------------------------------------
Total 4,699,080
Less accumulated depreciation (1,253,620)
--------------------------------------------------------------------------------
Net book value $ 3,445,460
===========
The gross value of assets recorded under capital lease obligations was $344,776,
and related accumulated depreciation was $186,846 as of December 31, 2005. Lease
payments under operating leases was $111,600 in 2005.
6. Goodwill
Goodwill as at December 31, 2005 comprise the following:
2005
-----------
Goodwill (Mediator) 2,455,223
Less accumulated amortization (736,566)
Less accumulated impairment (1,152,657)
-----------
$ 566,000
===========
Goodwill and Impairment Charges
The Goodwill relating to Euroweb Romania on the acquisition of Mediator is
considered as one reporting unit for purposes of SFAS 142.
At the beginning of 2006, the Euroweb Romania performed its annual impairment
test relating to the goodwill as of December 31, 2005. Euroweb Romania compared
the fair value of the reporting units 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.
13
Notes to unaudited financial statements
7. Intercompany loans
Euroweb International has provided $800,000 interest free loans to Euroweb
Romania for financing the operation due to the Company's high VAT receivable
position and investments into fixed assets. The loans were tranferred as
follows: $50,000 in 2000, $450,000 in 2001 and $300,000 in 2003. The outstanding
portion of these intercompany loans is repayable in two instalments: $150,000 in
the first quarter of 2006 and $250,000 in December 2006.
Discontinued liabilities of Euroweb Hungary and Euroweb Romania in the audited
consolidated financials statements of Euroweb International as of December 31,
2005 does not include the $400,000 intercompany loan liabilities of Euroweb
Romania to the Parent Company as stated in the unaudited financial statements of
Euroweb Romania, as it is eliminated in Euroweb International's financial
statements.
8. Commitments and Contingencies
(a) Lease agreements
Capital lease - the Company entered into capital leases that expire over the
next three years. 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,
2005:
Short term lease obligation $ 74,274
Long term lease obligation 102,130
--------------------------------------------------------------------------------
Total lease payments $176,404
========
The current portion of the capital lease obligation is included in `Other
current liabilities' in the accompanying balance sheets.
The Company's operating lease is an office rental agreement valid until April
15, 2006. The contract is cancellable subject to a four-month notice period.
Following are the Company's commitments under its non-cancelable capital lease
and cancelable operating lease obligations:
Capital lease Operating lease
2006 $ 88,126 $ 37,200
2007 80,301 --
2008 35,911 --
--------- ---------
Total 204,338 $ 37,200
---------
Less amount representing interest (27,934) ~
---------
Net minimum lease payments $ 176,404 ~
=========
There are no restrictions on dividends imposed by lease contracts.
14
Notes to unaudited financial statements
(b) Indefeasible Right of Use
In 2002, Euroweb Romania provided an IRU for transmission capacity on 12 pairs
of fiber over a period of 20 years, commencing in 2003. For the duration of the
agreement, Euroweb Romania is obliged to use all reasonable endeavours to ensure
the cable system is maintained in efficient working order and in accordance with
industry standards.
(c) Legal Proceedings
There are no known significant legal procedures that have been filed and are
outstanding against the Company.
9. Related party transactions and major customer
The largest supplier 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 Euroweb International Corporation. Csaba Toro, Chief Executive
Officer of Euroweb International Corporation, was also the Chief Executive
Officer of Pantel until February 2003. In 2004, KPN announced its intention to
divest its interest in Pantel with certain sale agreements being signed with a
view to final consummation in 2005. On February 28, 2005, the sale of KPN's
75.1% interest in the Pantel business to Hungarian Telephone and Cable Corp. was
completed. Therefore, Pantel will no longer be considered a related party
effective March 1, 2005.
Euroweb Romania has engaged in the following transactions with Pantel:
(a) Pantel provides the following services to the Company:
- Internet and related services;
- National and international leased and telephone lines;
- Voice services;
The total amount of these services purchased from Pantel was $2,853,363 during
2005 (2004: $2,356,786).
(b) The Company provided the following services to Pantel:
- International leased lines and local telephone lines in Romania;
- International/national data and voice over internet protocol services;
- Internet and related services;
The total value of these services sold was approximately $8,478,212 in 2005
(2004: $7,999,011).
However, the dependency on Pantel is even more significant. Some third party
sales of Euroweb Romania involve Pantel as the subcontractor/service provider
for the international/domestic lines (hence the revenues related to Pantel are
greater than the amounts paid to Pantel), and some third party customers are
also clients of Pantel outside of Romania (i.e. their relationship with Pantel
is stronger than their relationship with Euroweb Romania). Effective dependency
on Pantel - taking into account direct and Pantel -related sales - represents
approximately up to 66% of total revenue of Euroweb Romania in the year ended
December 31, 2005.
15
Notes to unaudited financial statements
The trade accounts receivable due from Pantel was $507,761 as of December 31,
2005. There were no trade accounts payable to Pantel as of December 31, 2005.
There were no other material transactions with related parties.
10. Income taxes
The statutory corporate tax rate in Romania was 16% for the years ended December
31, 2005 and 2004.
The current income tax expense of $188,412 (2004: $31,092) is attributable to
income/loss from continuing operations and tax base adjustments based on the
Romanian corporate tax laws.
The Company has no deferred tax assets resulting from any losses carried
forward. In addition, the Company has no deferred tax liabilities.
16
EXHIBIT E
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 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") to Invitel Tavkozlesi Szolgaltato Rt. and the acquisition of
100% of Navigator Informatika Rt. ("Navigator").
Acquisition of 100% of Navigator
The unaudited pro forma condensed consolidated statements of operations for the
year ended December 31, 2005 also give effect to the acquisition by Euroweb of
100% of Navigator as if the acquisition occurred on January 1, 2005.
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 provision accrual of approximately $1,900,000.
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." Accordingly, Euroweb Hungary and Euroweb Romania are presented as
discontinued operations in the historical consolidated financial statements of
Euroweb. The estimated gain is $15,603,244 on the sale of Euroweb Hungary and
Euroweb Romania, which is not reflected in the unaudited pro forma condensed
consolidated statements of operations due to the non-recurring nature of the
gain.
The unaudited pro forma condensed consolidated balance sheet gives effect to the
disposition of Euroweb Hungary and Euroweb Romania as if it occurred on December
31, 2005.
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 financial statements
are for illustrative purposes only and are not necessarily indicative of the
actual results of operations or financial position 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, 2005.
All pro forma amounts are presented in U.S. dollars, the reporting currency of
Euroweb.
Euroweb International Corporation
Unaudited Pro Forma Condensed Consolidated Balance Sheet
December 31, 2005
Euroweb Pro Forma
Historical Adjustments Pro Forma
------------ ------------ ------------
ASSETS (A) (B)
Current Assets
Cash and cash equivalents $ 1,568,690 $ 30,000,000 (1) $ 25,568,690
(8,500,000) (2)
2,500,000 (3)
Trade accounts receivable, net 1,533,855 -- 1,533,855
Prepaid and other current assets 321,315 -- 321,315
------------ ------------ ------------
Total current assets of continuing operations 3,423,860 24,000,000 27,423,860
Total assets of discontinued operations 20,371,849 (20,371,849) (4) --
------------ ------------ ------------
Total current assets 23,795,709 3,628,151 27,423,860
Property and equipment, net 1,071,989 -- 1,071,989
Goodwill 8,150,672 -- 8,150,672
Intangibles - customer contracts 3,132,300 -- 3,132,300
------------ ------------ ------------
Total assets $ 36,150,670 $ 3,628,151 $ 39,778,821
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $ 2,065,333 -- $ 2,065,333
Current portion of bank loans 269,220 -- 269,220
Bank overdrafts 325,409 -- 325,409
Other current liabilities 827,703 $ 1,900,000 (5) 2,727,703
Accrued expenses 545,964 -- 545,964
------------ ------------ ------------
Total current liabilities of continuing operations 4,033,629 1,900,000 5,933,629
Total liabilities of discontinued operations 13,783,582 (13,783,582) (4) --
------------ ------------ ------------
Total current liabilities 17,817,211 (11,883,582) 5,933,629
Non-current liabilities
Deferred tax liability 501,168 -- 501,168
Non-current portion of bank loans 471,134 -- 471,134
------------ ------------ ------------
Total liabilities 18,789,513 (11,883,582) 6,905,931
Stockholders' Equity
Common stock, $.001 par value - Authorized 35,000,000 shares;
Issued and outstanding 5,784,099 shares 25,248 -- 25,248
Additional paid-in capital 51,538,659 -- 51,538,659
Accumulated deficit (34,302,431) 15,603,244 (6) (18,699,187)
Accumulated other comprehensive losses 99,681 (91,511) (7) 8,170
------------ ------------ ------------
Total stockholders' equity 17,361,157 15,511,733 32,872,890
------------ ------------ ------------
Total liabilities and stockholders' equity $ 36,150,670 $ 3,628,151 $ 39,778,821
============ ============ ============
See notes to unaudited pro forma condensed consolidated balance sheet
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(A) Reflects the historical consolidated balance sheet of Euroweb as of
December 31, 2005, included in the Form 10-KSB of Euroweb for the
year ended December 31, 2005.
(B) Pro forma adjustments related to the sale of Euroweb Hungary and
Euroweb Romania 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 acquisition of 85% ownership of Navigator Informatika Rt.
from Euroweb Hungary by Euroweb International Corporation for $8,500,000
at the date of closing.
(3) Reflects the repayment of $2,500,000 intercompany loan from Euroweb
Hungary to Euroweb at the date of closing originated from the Navigator
acquisition
(4) Adjustment to eliminate assets sold and liabilities transferred upon the
sale of Euroweb Hungary and Euroweb Romania
(5) Adjustment to reflect the estimated direct transaction costs, bonuses,
success fees, severances and accrued provision on estimated warranty
claims totalling $1,900,000, to be paid, payable in connection with the
sale
(6) Adjustment to reflect the pro forma gain on the sale of Euroweb Hungary
and Euroweb Romania, after estimated direct transaction costs, bonuses,
success fees, severances and accrued provision on estimated warranty
claims of $1,900,000 to be paid or payable in connection with the sale. No
tax liability is expected to arise as a result of the sale. Because the
estimated pro forma gain assumes the sale was consummated on December 31,
2005, the pro forma gain will ultimately differ from the actual gain that
will occur at the closing date of sale.
(7) Adjustment to eliminate cumulative other comprehensive gain/losses of
Euroweb Hungary and Euroweb Romania
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.
Euroweb International Corporation
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the Year Ended December 31, 2005
Euroweb Pro Forma
Historical Adjustments Notes Pro Forma
----------- ----------- ----- -----------
Revenues $ 1,964,998 $ 5,673,926 (1) $ 7,638,924
Cost of revenues (exclusive of depreciation and
amortization shown separately below) 511,658 1,406,427 (1) 1,918,085
Operating expenses
Compensation and related costs 1,054,342 894,984 (2) 1,949,326
Consulting, professional and directors fees 1,396,096 1,237,731 (3) 2,633,827
Other selling, general and administrative expenses 703,770 1,198,590 (4) 1,902,360
Depreciation and amortization 509,478 1,378,784 (5) 1,888,262
----------- ----------- -----------
Total operating expenses 3,663,686 4,710,089 8,373,775
Operating loss (2,210,346) (442,590) (2,652,936)
Interest income 2,512 15,185 (6) 17,697
Interest expense (38,240) (94,367) (6) (132,607)
Other income (expenses) 170,000 -- 170,000
Loss from continuing operations before income taxes (2,076,074) (521,772) (2,597,846)
----------- ----------- -----------
Income tax expense - current -- (143,677) (7) (143,677)
Income tax expense-deferred 57,908 166,796 (7) 224,704
----------- ----------- -----------
Income tax expense 57,908 23,119 81,027
Loss from continuing operations $(2,018,166) $ (498,653) $(2,516,819)
=========== =========== ===========
Loss per share from continuing operations,
basic and diluted (0.37) (0.44)
Weighted average number of shares
outstanding, basic and diluted 5,445,363 5,784,099
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(A) Reflects the statements of operations of the Company for the years ended
December 31, 2005 included in the Company's Annual Report on Form 10-KSB
for the year ended December 31, 2005.
(B) Pro forma adjustments to record the acquisition of Navigator Informatika
Rt. (,,Navigator") as if it had occurred on January 1, 2005 for purposes
of presenting the pro forma statements of operations:
1) Adjustment to reflect the revenues and costs of goods sold of
Navigator for the period from January 1, 2005 to October 7, 2005.
2) Adjustment to reflect the salary and related costs of Navigator for
the period from January 1, 2005 to October 7, 2005..
3) Adjustment to reflect the consulting, professional and directors'
fees of Navigator for the period from January 1, 2005 to October 7,
2005.
4) Adjustment to reflect the selling, general and administrative costs
of Navigator for the period from January 1, 2005 to October 7, 2005.
5) Adjustment to reflect the amortization and depreciation charge of
Navigator for the period from January 1, 2005 to October 7, 2005.
6) Adjustment to reflect the interest income and expenses of Navigator
for the period from January 1, 2005 to October 7, 2005.
7) Adjustment to reflect the income tax of Navigator for the period
from January 1, 2005 to October 7, 2005.