Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________to_________________
Commission File Number 001-1200
EUROWEB INTERNATIONAL CORP.
(Name of small business issuer as specified in its charter)
Delaware 13-3696015
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1122 Budapest, Varosmajor utca 13. Hungary
(Address of principal executive offices)
Issuer's telephone number, including area code: (+36) 1-22-44-000
Facsimile: (+36) 1-88-83-783
------------------
Securities registered under Section 12(g) of the Exchange Act:
Title of Each Class Name of Each Exchange on which Registered
Common Stock, par value $.001 per share NASDAQ SMALL CAP
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirement for the past 90 days. Yes X No ___
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Issuer had revenues of $12,940,631 for the year ended December 31, 2002. As of
April 1, 2003, 4,840,822 shares of Common Stock were outstanding of which
2,204,318 were held by non-affiliates of the Company. The aggregate market value
of the Common Stock held by non-affiliates of the Company as of April 1, 2003
was $4,077,988 (based upon the closing bid price on such date on the Nasdaq of
$1.85).
Documents incorporated by reference:
Part III - Portions of the Registrant's Proxy statement for the Annual Meeting
of Stockholders for the fiscal year ended December 31, 2002.
Transitional Small Business Disclosure Format (check one):
Yes ___ No X
TABLE OF CONTENTS
Page
PART I .....................................................................................................2
Item 1. Description of Business.........................................................................2
EuroWeb Strategy................................................................................2
Entry into ISP Market in Central Europe and History of Acquisitions.............................3
Products and Services...........................................................................4
Customers.......................................................................................5
Network Operations and Technical Support........................................................6
Sales and Marketing.............................................................................6
Government Regulations..........................................................................6
Employees.......................................................................................6
Item 2. Description of Properties.......................................................................6
Item 3. Legal Proceedings...............................................................................7
Item 4. Submission of Matters to a Vote of Security Holders.............................................7
PART II .....................................................................................................7
Item 5. Market For Registrant's Common Equity And Related Stockholder Matters...........................7
Market Information..............................................................................7
Holders of Common Stock.........................................................................8
Dividends.......................................................................................8
Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations...........9
Operations......................................................................................9
Results of Operations..........................................................................12
Year Ended December 31, 2002 compared to Year Ended December 31, 2001..........................12
Liquidity and Capital Resources................................................................15
Inflation and Foreign Currency.................................................................15
Effect of Recent Accounting Pronouncements.....................................................16
Risk Factors...................................................................................18
Forward-Looking Statements.....................................................................21
Item 7. Financial Statements...........................................................................22
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........22
-i-
PART III ...................................................................................................22
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
16(A) OF THE EXCHANGE ACT 22
Item 10. EXECUTIVE COMPENSATION.........................................................................25
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................28
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................28
PART IV ....................................................................................................28
Item 13. EXHIBITS AND REPORTS ON FORM 8-K...............................................................28
Item 14. CONTROLS AND PROCEDURES........................................................................28
-ii-
PART I
ITEM 1. Description of Business
History of Business
EuroWeb International Corp. (the "Company" or "EuroWeb") is a Delaware
corporation which was organized on November 9, 1992. It was a development stage
company through December 31, 1993. The Company operates in the Czech Republic,
Romania and Slovakia, through its subsidiaries Euroweb Czech Republic spol.
s.r.o. ("Euroweb Czech"), Euroweb Slovakia a.s. ("Euroweb Slovakia") and Euroweb
Romania S.A. ("Euroweb Romania"). The Company provides Internet access and
additional value added services to business customers. The Company also owns 49%
ownership interest in Euroweb Hungary Rt. The remaining 51% of Euroweb Hungary
Rt. is held by Pantel Telecommunication Rt., Hungary ("Pantel Rt."), of which
KPN Telecom BV is also the controlling owner. KPN Telecom BV owns approximately
53% of EuroWeb's outstanding shares of common stock.
EuroWeb Strategy
Since exiting the construction business, the Company has been striving
to be the leading supplier in Central Europe to businesses of complete
communications solutions using Internet technologies. Rather than servicing
individual users, the Company focuses its efforts on business users and seeks to
satisfy all their needs with high quality and reliable service.
The Company's business has shown continued growth since it entered the
Internet field in January 1997, and the Company has made various acquisitions in
Hungary, the Czech Republic, Slovakia and Romania. As a continuing consolidation
is taking place in the industry, the Company is currently reviewing various
business opportunities, which may include either a merger with another company,
the disposition of one or more of its operating units, a sale of a significant
amount of assets or any combination of these items. No assurances can be given
that we will be successful in locating or negotiating with any of these
potential business opportunities.
Entry into ISP Market in Central Europe and History of Acquisitions/Dispositions
The Company entered the Internet Service Provider ("ISP") market in
Central Europe through various acquisitions of companies in that area over the
past five years. On January 2, 1997, the Company acquired all of the outstanding
stock of three Hungarian ISPs for a total purchase price of approximately
$1,785,000, consisting of 28,800 shares of common stock of the Company and
$1,425,000 in cash (collectively, the "1997 Acquisitions").1 Thereafter in 1997,
the three Hungarian companies were combined and merged into a new Hungarian
entity, EuroWeb Hungary Rt. On November 22, 1998, the Company sold 51% of the
outstanding shares of EuroWeb Hungary Rt. to Pantel Rt. for $2,200,000 in cash
and an agreement to increase the share capital of EuroWeb Hungary Rt. by
$300,000 without changing the ownership ratio (after the capital increase, the
ownership ratio would remain 49 - 51 percent). The Company currently uses the
equity method of accounting to record its interest in EuroWeb Hungary Rt.
The Company continued with its acquisitions of ISPs in the Czech
Republic, Slovakia and Romania in 1999 and 2000. On June 11, 1999, the Company
acquired all of the participating interests of Luko CzechNet, an ISP in the
Czech Republic, for a total cost of $1,862,154 consisting of 90,000 shares of
the Company's common stock and 50,000 options valued at $2.00 per share, and the
balance paid in cash. This acquisition was effective as of June 1, 1999.
--------
1 1997 Acquisitions were as follows:
(a) Eunet (Hungary Ltd.) for a total cash cost of $1,000,000, and an assumption
of $128,000 in liabilities;
(b) E-Net Hungary Telecommunications and Multimedia for a total cash cost of
$200,000 and $150,000 in stock (12,000 shares); and (c) MS Telecom Rt. for a
total cash cost of $225,000 and $210,000 in stock (16,800 shares).
2
On July 15, 1999, the Company acquired all of the outstanding shares of
capital stock of EUnet Slovakia, an ISP in the Slovak Republic, for a total cost
of $813,299 consisting of 47,408 shares of the Company's common stock valued at
$400,005 issued August 9, 1999 and the balance paid in cash. This acquisition
was effective as of August 1, 1999. The Company then made another acquisition of
a Slovak ISP on July 15, 1999 with the purchase of 70% of the outstanding shares
of Dodo s.r.o.'s subsidiary, R-Net, for a total cost of $630,234 consisting of
29,091 shares of the Company's common stock valued at $200,000 issued August 13,
1999 and the balance paid in cash. This acquisition was effective as of August
1, 1999.
On September 23, 1999 and November 16, 1999, the Company acquired from
Slavia Capital o.c.p., a.s. 70% and 30%, respectively, of the issued and
outstanding stock of Global Network Services a.s.c., a Slovakian corporation
providing Internet service primarily to businesses located in Bratislava and
other major cities in Slovakia for a total purchase price of $1,633,051,
consisting of 71,114 shares of the Company's common stock valued at $499,929
issued on September 23, 1999, and the balance paid in cash. This acquisition was
effective as of October 1, 1999. All Slovakian operations were then merged into
one company under the name of Euroweb Slovakia.
On April 21, 2000, the Company acquired all of the outstanding capital
stock of Isternet SR, s.r.o., an Internet service provider in the Slovak
Republic, for $1,029,299 in cash. Goodwill arising on this purchase was
$945,200. This acquisition was effective May 1, 2000.
On May 19, 2000, the Company purchased all of the Internet related
assets of Sumitkom Rokura, S.R.L. an Internet service provider in Romania, for
$1,561,125 in cash. The acquisition has been accounted for as an asset purchase
with a value of $1,150,000 being assigned to customer lists acquired.
On May 22, 2000, the Company acquired the remaining 30% of R-Net (the
initial 70% being acquired in 1999) for $355,810 in cash. Goodwill arising on
this purchase was $357,565.
On June 14, 2000, the Company acquired all of the outstanding shares of
capital stock of Mediator S.A., an Internet service provider in Romania for a
total cost of $2,835,569. This consisted of $2,040,000 in cash and the
assumption of a $540,000 liability to the former owner payable in annual
installments of $180,000 commencing on June 1, 2001. Goodwill arising on this
purchase was $2,455,223. Immediately after the purchase the name was changed to
Euroweb Romania, S.A. This acquisition was effective as of July 1, 2000.
On August 25, 2000, the Company, through its subsidiary, Luko Czech,
acquired all of the outstanding capital stock of Stand s.r.o., an Internet
service provider in the Czech Republic for $280,735 in cash, which was merged
into Luko Czech under the name of Euroweb Czech Republic. This acquisition was
effective as of September 1, 2000.
On February 11, 2000, a special meeting of the shareholders was held
and two proposals were approved. Proposal number one approved the amendment of
the Company's certificate of incorporation increasing the number of shares of
common stock that is authorized for issuance by the Company from 20,000,000
shares of common stock to 60,000,000 shares of common stock. Proposal number two
approved the issuance and sale by the Company to KPN Telecom B.V. ("KPN"), a
Netherlands Limited Liability Company, of 2,057,348 shares at $7.9 per share and
rights to shares equal to all other outstanding warrants, options and other
securities at $6.9 per share. At closing KPN exercised its option to purchase
303,362 shares at $6.9 per share in addition to the 2,057,348 shares at $7.9 per
share. These approvals gave KPN control of 51% of the Company's common stock,
representing voting control of the Company. This transaction provided the
Company with more than $18,000,000 in capital to fund future acquisitions.
On October 24, 2000, KPN Telecom B.V. exercised its option for 100,302
shares of the Company's common stock at $ 6.9 per share, in order to maintain
its 51% equity interest in the Company.
3
All share figures in the discussion above have been restated to reflect
the one for five reverse stock split effective August 21, 2001.
Products and Services
The activity of the company can be divided into the following categories:
o Traditional ISP services: (a) Internet access, (b) Content and Web services
(c) Other services;
o International/national leased line, IP data services (IP connections between
different countries); and
o Voice over IP services.
Traditional ISP services
Internet access
Access to the Internet can be either through a leased line, which enables a
constant connection to the Internet at all times, or through dial-up service,
which requires subscribers to dial a telephone number to connect to the
Internet.
EuroWeb offers a variety of access options and packages, including leased line
and dial-up Internet connections.
Content and Web services
EuroWeb provides various services for the design, development, hosting and
maintenance of home pages and web servers. EuroWeb installs and maintains home
pages on EuroWeb servers for customers concerned with the cost, difficulty or
security of maintaining home pages on their own network, and also provides
hosting possibility of customer's servers at EuroWeb's location.
International/domestic leased line, IP data services
In order to meet requests of International customers, EuroWeb offers
international/national data connection for companies across borders, or within
the countries to connect premises in different countries. This service includes
single (one to one point) and also Virtual Private Network (many to many point)
IP connections. In most cases, PanTel Rt. is acting as a partner in development
of the international network possibilities.
Voice over IP services
Capitalizing on its existing international presence and cross border
connections, EuroWeb offers voice services to major carriers and partners based
on Internet Protocol (IP) technology. Partners are sending Voice minutes to the
region in which EuroWeb operates, in order to terminate the calls in the
particular country locally. Euroweb's preferred VOIP partner is Pantel Rt.
Customers
EuroWeb's customers are mainly businesses and professionals. EuroWeb's
customer base is using more than 750 leased lines and over 8,400 dial up
accounts in Slovakia, the Czech Republic and in Romania as of December 31, 2002.
With the introduction of IP based Data and Voice services in 2001, new
types of customers have started to use EuroWeb's services such as
telecommunication carriers and multinational corporations who have high
cross-border bandwidth communication needs.
Network Operations and Technical Support
As of December 31, 2002, EuroWeb had a network operations group
consisting of 45 people, including technical and customer support employees.
EuroWeb's network operations personnel located at EuroWeb's network operations
center in Slovakia, the Czech Republic and Romania are responsible for
continuously monitoring traffic across EuroWeb's network infrastructure and also
to carry out implementation of new customer connections both for Internet and
other IP data connections. Both technical support and customer support personnel
are currently available from 8 a.m. to 8 p.m., Monday through Friday. At other
times, these personnel respond to technical support requests via telephone 24
hours a day. By the end of December 2002, EuroWeb had 98 Point of Presences
(POPs) covering the territory of the Czech Republic, Slovakia and Romania.
4
Sales and Marketing
EuroWeb employs 29 persons in sales and marketing. To date, EuroWeb has
sold its Internet access and applications products and services primarily
through direct personal and telephone contact. The sales persons work closely
with the customer and technical support group, which is responsible for
installation at multiple sites and for support and technical consulting
services, thereby demonstrating our commitment to account management to our
customers.
Government Regulations
EuroWeb is not currently subject to direct government regulation other
than laws and regulations applicable to businesses generally. There are specific
industry laws that may apply to the local subsidiaries in the field of Internet
and Telecommunications. However, with the increasing popularity and use of the
Internet, it is likely that new laws and regulations involving the Internet will
be adopted at the local, state, national or international levels, covering
issues such as user privacy, freedom of expression, pricing of products and
services, taxation, information security or the convergence of traditional
communications services with Internet communications.
Employees
The Company employs a total of 116 persons in the Czech Republic,
Slovakia and Romania all of which are full-time employees. None of the Company's
employees are represented by a labor organization.
ITEM 2. Description of Properties
The following table lists the office spaces that the Company and its
subsidiaries lease from unaffiliated persons:
Rent
Sq. Amount/
Lessor Address of Property Primary Use feet Month Lease Terms
--------------------- -------------------------- --------------------------- ----- ---------- -------------
The Company Varosmajor utca 13. stockholder relations and 250 - Month-to-month-
H-1122 general executive
Budapest, Hungary
Euroweb Czech Argentinska 38 general operations 3,617 $4,800 5 year
Republic CS-170 05 non-cancelable
Prague, Czech Republic
Euroweb Slovakia Priemyselna 1/A general operations 7,561 $8,500 5 year
SK - 821 09 non-cancelable
Bratislava, Slovakia
Euroweb Romania Bd. Unirii 33, Bl. A2, general operations 4,667 $3,655 3-month
Sc.3, 6th Floor, Sector notice
3 Bucharest, Romania
5
Until June 2002, the Company leased office space in New York for its
principal executives. With the closing of the New York office, the Company's
Chief Executive, Csaba Toro, has been using offices provided by Pantel Rt. No
consideration was charged as Csaba Toro was also the CEO of Pantel Rt. in 2002.
Item 3. Legal Proceedings
The Company is not a party to any material legal proceedings as of the
date of this report.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders
through the solicitation of proxies or otherwise, during the last quarter of the
fiscal year ended December 31, 2002.
PART II
ITEM 5. Market For Registrant's Common Equity And Related Stockholder Matters
Market Information
The Company's Common Stock is traded in the over-the-counter market on
the Nasdaq SmallCap Market ("Nasdaq") under the symbol "EWEB". On August 30,
2001, the shareholders approved a one-for-five reverse stock split of the
Company's Common Stock.
The following table sets forth the high and low bid prices for the
Common Stock during the periods indicated as reported by Nasdaq. Figures prior
to September 2001 have been restated to reflect the reverse stock split. The
prices reported reflect inter-dealer quotations, and may not represent actual
transactions and do not include retail mark-ups, mark-downs or commissions.
High Low
Quarter Ending:
2001
March 31, 2001 2.69 0.91
June 30, 2001 1.02 0.69
September 30, 2001 2.62 0.45
December 31, 2001 2.05 1.71
2002
March 31, 2002 2.95 1.47
June 30, 2002 2.85 1.84
September 30, 2002 2.50 1.88
December 31, 2002 2.14 1.72
On April 2, 2003 the closing bid price on the Nasdaq for the Common Stock was
$1.85.
Holders of Common Stock
As of April 1, 2003 the Company had 4,665,332 shares of Common Stock
outstanding and 165 shareholders of record. The Company was advised by its
transfer agent, the American Stock Transfer & Trust Company, that according to a
search made, the Company has approximately 10,000 beneficial owners who hold
their shares in street names.
Dividends
It has been the policy of the Company to retain earnings, if any, to
finance the development and growth of its business. However, the Company is
currently reviewing various business opportunities, which may include either a
merger with another company, the disposition of one or more of its operating
units, a sale of a significant amount of assets or any combination of these
items. No assurances can be given that we will be successful in locating or
negotiating with any of these potential business opportunities. If the Company
elects to pursue one of these business opportunities, then it may declare a
dividend depending on the situation. There can be no assurance that the Company
can achieve such earnings, if any, or that the outcome of the current
discussions will result in the Company's payment of a dividend.
6
Equity Compensation Plans
------------------------------- ---------------------------- ---------------------------- ----------------------------
Plan Category Number of shares to be Weighted-average exercise Number of shares remaining
issued upon exercise of price of outstanding available for future
outstanding options and options and warrants issuance under equity
warrants compensation plans
------------------------------- ---------------------------- ---------------------------- ----------------------------
Approved by security holders 61,500 $7.98 44,500
------------------------------- ---------------------------- ---------------------------- ----------------------------
Not approved by security 73,000 $10.14 --
holders
------------------------------- ---------------------------- ---------------------------- ----------------------------
Total 134,500 $9.15 44,500
------------------------------- ---------------------------- ---------------------------- ----------------------------
The equity compensation plans are discussed in Notes 16 and 17 to the
2002 Consolidated Financial Statements.
Sale of Securities that were not Registered Under the Securities Act of 1933
The Company did not sell any securities that were not registered under the
Securities Act of 1933 during the year ended December 31, 2002.
ITEM 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Operations
In 2001, the Company introduced two new service lines in addition to
its traditional Internet services: (1) International, domestic leased line and
IP Data services and (2) Voice over IP services. The Company operates through
three wholly-owned subsidiaries, one located in the Czech Republic, one located
in Slovakia, and one located in Romania, known as Euroweb Czech Republic,
Euroweb Slovakia, and Euroweb Romania, respectively. The Company made no new
acquisitions in 2001 and 2002.
The results of operations of each ISP have been included in the
Company's consolidated results of operations from the effective date of
acquisition.
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and
results of operations are based upon its consolidated financial statements that
have been prepared in accordance with generally accepted accounting principles
in the United States of America ("US GAAP"). This preparation requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, and the disclosure of contingent
assets and liabilities. US GAAP provides the framework from which to make these
estimates, assumptions and disclosures. The Company chooses accounting policies
within US GAAP that management believes are appropriate to accurately and fairly
report the Company's operating results and financial position in a consistent
manner. Management regularly assesses these policies in light of current and
forecasted economic conditions. The Company's accounting policies are stated in
Note 2 to the Consolidated Financial Statements. The Company believes the
following accounting policies are critical to understanding the results of
operations and the effect of the more significant judgments and estimates used
in the preparation of the consolidated financial statements:
Revenue Recognition Policies -- Revenues from services are recognized in
the month in which the services are provided. Invoices for traditional ISP,
International leased line and IP Data services are generally issued at the
beginning of the month except where local legislation prohibits such treatment.
VOIP traffic is measured during the month and invoiced at the end of the month.
Billed revenues for which the services are to be provided in the future, are not
disclosed as revenues in the reporting period, but are accrued and shown as
deferred revenue.
7
During the year, the Company entered into an agreement to provide transmission
capacity to a customer pursuant to an indefeasible rights-of-use agreement
("IRUs") that management believe qualifies as an operating lease under Financial
Accounting Standards Board Interpretation No. 13, "Accounting for Leases" ("FAS
13"), since the IRU agreement provides rights to use a specific subject asset
for a defined period. Revenue attributable to the lease will be recognized on a
straight-line basis over the term of the 20-year lease agreement, commencing
upon completion of the installation in March 2003.
Under Financial Accounting Standards Board Interpretation No. 43, "Real Estate
Sales, an interpretation of FASB Statement No. 66" ("FIN 43"), leases of fiber
and capacity that are deemed integral equipment are required to be accounted for
in the same manner as leases of real estate. If fiber and equipment are
considered integral to the related real estate, a lease must include a provision
transferring title of such integral equipment to the lessee, in order for that
lease to be accounted for as a sales-type lease. Failure to satisfy the title
transfer requirements results in operating lease treatment, and recognition of
the related lease income over the lease term. The Company's IRU does not involve
a transfer of title.
IRUs generally require the customer to make a down payment upon execution of the
agreement, with the balance due upon delivery and acceptance of the fiber. This
has resulted in a substantial amount of deferred revenue being recorded on the
balance sheet. The Company is obligated under the fiber IRU to maintain its
network in efficient working order and in accordance with industry standards.
Customers are obligated for the term of the agreement to pay for their allocable
share of the costs for operating and maintaining the network. The Company
recognizes this revenue monthly as services are provided.
Accounting practice and guidance with respect to the treatment of fiber sales
and IRU agreements continues to evolve. Any changes in the accounting treatment
could affect the way the Company accounts for revenue and expenses associated
with these transactions in the future.
Accounts Receivable - Allowance for Doubtful Accounts -- The Company
regularly reviews the valuation of accounts receivable. The allowance for
doubtful accounts is estimated based on historical experience and future
expectations of conditions that might impact the collectibility of accounts.
Property Plant & Equipment Recovery -- Changes in technology or changes in
the Company's intended use of these assets may cause the estimated period of use
or the value of these assets to change. These assets are reviewed for impairment
whenever events or changes in circumstances indicate that their carrying amounts
may not be recoverable. Estimates and assumptions used in both setting
depreciable lives and reviewing recoverability require both judgement and
estimation by management. Impairment is deemed to have occurred if projected
undiscounted cash flows related to the asset are less than its carrying value.
If impairment is deemed to have occurred, the carrying values of the assets are
written down, through a charge against earnings, to their fair value.
Goodwill - Goodwill results from business acquisitions and represents
the excess of purchase price over the fair value of net assets acquired.
Amortization was computed over the estimated future period of benefit (generally
five years) on a straight-line basis until December 31, 2001. On January 1, 2002
the Company adopted Statement of Financial Accounting Standard No. 142 ("SFAS
142"), "Goodwill and Other Intangible Assets," which establishes new accounting
and reporting standards for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17. Goodwill and intangible assets that have
indefinite useful lives are no longer amortized but rather are tested at least
annually for impairment. Intangible assets that have finite useful lives
(whether or not acquired in a business combination) will continue to be
amortized over their estimated useful lives, which are no longer limited to a
maximum of 40 years. The adoption of SFAS 142 has eliminated the goodwill charge
in 2002. During 2002, the Company performed the required SFAS No. 142 impairment
test, with respect to goodwill. The first step of this test requires the Company
to compare the carrying value of any reporting unit that has goodwill to the
estimated fair value of the reporting unit. As the current fair value was less
than the carrying value, the Company performed the second step of the impairment
test. This second step requires the Company to measure the excess of the
recorded goodwill over the current value of the goodwill by performing an
exercise similar to a purchase price allocation, and to record any excess as an
impairment. Based upon the results, the Company recorded an impairment of
$2,016,000 to the carrying value of its goodwill in its financial statements for
the year ended December 31, 2002.
8
Other Intangibles - Other Intangibles reflect customer list and the amount
represented on the balance sheet reflects the unamortized difference between the
purchase price and fair value of businesses acquired, less any impairment
recognized. Customer lists were acquired as a result of a purchase of assets and
are being amortized over the estimated future period of benefit of five years.
The assessment of recoverability and possible impairment was determined using
estimates of undiscounted future cash flows in a manner in accordance with the
provisions of Statement of Financial Accounting Standards No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," ("SFAS No. 144"), with a
write-down recorded in the third quarter of 2002. The carrying value of customer
lists is considered impaired when the projected undiscounted future cash flows
related to the asset are less than its carrying value. The Company measures
impairment based on the amount by which the carrying value of the customer lists
exceeds its fair market value. Fair market value is determined primarily using
the projected future cash flows discounted at a rate commensurate with the risk
involved. The assessment of the recoverability of the remaining balance will be
impacted if estimated future operating cash flows are not achieved
Commitments and contingencies
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 9 (Leases) of the Financial Statements for details.
The Company has entered into an employment agreement with the Chief Executive
Officer which provides for aggregate annual compensation of $96,000 through
December 31, 2005.
The following table summarizes the commitments described above:
----------------------------------- ------------- ------------ ------------- ------------- ------------ ------------
Contractual Cash Obligations Less than 1 1-2 Years 2-3 Years 3-4 Years 4-5 Years After 5
year Years
----------------------------------- ------------- ------------ ------------- ------------- ------------ ------------
Capital Lease Obligations 311,633 53,666 8,297 4,377 - -
----------------------------------- ------------- ------------ ------------- ------------- ------------ ------------
Operating Leases 168,264 168,264 168,264 168,264 96,964 -
----------------------------------- ------------- ------------ ------------- ------------- ------------ ------------
Employment agreements 96,000 96,000 96,000 - - -
----------------------------------- ------------- ------------ ------------- ------------- ------------ ------------
Total Contractual Cash Obligations 575,897 317,930 272,561 172,641 96,964 -
----------------------------------- ------------- ------------ ------------- ------------- ------------ ------------
In addition to the above contractual cash obligations, the Company's subsidiary
in Romania has entered into a 20 year Indefeasible Right of Use agreement
whereby 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. The total consideration
of $920,000 has already been received, and is being accounted for as an
operating lease. Refer to Note 9 (Leases) of the Financial Statements.
ii.
iii. Results of Operations
iv. Year Ended December 31, 2002 compared to Year Ended December 31, 2001
The Company has experienced a significant (61.47%) revenue growth
compared to 2001. The revenue increase of the Company can be attributed to the
International/Domestic leased line and VOIP services which were introduced
during 2001. A significant portion of these services is provided to Pantel Rt.,
a related party (see discussion under `revenues').
Revenues
Both the revenue structure and the geographical area of revenue source
has changed significantly in 2002. The ISP activity has experienced no growth,
while new services were the driving force of growth for the Company. The
following two tables summarize the main changes compared to the previous year:
9
------------------------------ ----------------- --------------------- -----------------
Revenue / services 2002 2001 %
------------------------------ ----------------- --------------------- -----------------
ISP activity $4,814,690 $4,786,107 100.59%
------------------------------ ----------------- --------------------- -----------------
Int./dom. leased line * $6,100,530 $1,917,399 318%
------------------------------ ----------------- --------------------- -----------------
VOIP ** $2,025,411 $1,310,622 154%
------------------------------ ----------------- --------------------- -----------------
Total $12,940,631 $8,014,128 161.47%
------------------------------ ----------------- --------------------- -----------------
* - mainly Pantel or Pantel related sales, ** - Direct sales to Pantel
--------------------------- ----------------- -------------------- ----------------- -------------- -----------------
Revenue/country Slovakia Czech Republic Romania U.S.A. Total
--------------------------- ----------------- -------------------- ----------------- -------------- -----------------
Revenues in 2002 $2,757,086 $1,415,541 $8,768,004 $- $12,940,631
--------------------------- ----------------- -------------------- ----------------- -------------- -----------------
Revenues in 2001 $2,483,464 $1,235,875 $4,294,789 $- $8,014,128
--------------------------- ----------------- -------------------- ----------------- -------------- -----------------
Total revenues from traditional Internet activities for the year ended December
31, 2002 were $4,814,690 in comparison with $4,786,107 for the year ended 2001.
ISP revenues have stagnated overall, with Slovakia and Czech Republic showing a
slight increase, while Romania has shown a decrease in ISP revenue.
International leased line revenue has increased more than three-fold compared to
last year. Most of the revenue is direct sales to Pantel Rt. or Pantel Rt.
related sales.
A large portion of the Company's VOIP services are provided to Pantel Rt. In the
event that Pantel Rt. should no longer use the Company's VOIP services, then the
Company's VOIP revenue would be significantly reduced.
In 2002, Pantel Rt. (a related party controlled by KPN Telecom B.V.) was the
most significant customer of the Company representing approximately 38% of the
total revenue of Euroweb International Corp. and 55% of total revenue of Euroweb
Romania.
Although the direct sales to Pantel Rt. were 38% of consolidated revenue,
Euroweb's dependency on Pantel Rt. is even greater than this figure suggests.
Some third party sales involve Pantel Rt. as the subcontractor/service provider
for the international/domestic lines (hence the revenues from Pantel Rt. are
lower than the amounts paid to Pantel Rt.), and some third party customers are
also clients of Pantel Rt. outside of Romania (i.e. their relationship with
Pantel Rt. is stronger than that with Euroweb Romania).
Effective dependency on Pantel Rt., taking into account the direct as well as
Pantel Rt.-related sales, represents approximately 53% of total consolidated
revenues of Euroweb International Corp. or approximately 80-90% of total sales
of Euroweb Romania. There is no such dependency in the case of Euroweb Czech or
Euroweb Slovakia
10
Cost of revenues
Cost of revenues comprise mostly telecommunication network telecom
expenses which are related to the provision of access facilities to customers.
This category also includes costs of phone calls in connection with VOIP
services.
Network costs were $8,613,196 in 2002 in comparison to $4,906,014 in
2001. The increase of 75% is larger than the increase of revenue comparing last
year, which is the result of increasing proportion of International/domestic
leased line and VOIP services having much less margin comparing higher margin on
ISP revenue. There were no significant pricing policy changes within the Company
during 2002. Pantel Rt. was the largest sub-provider representing approximately
41% of the total direct cost.
Operating expenses (excluding depreciation, amortization, and goodwill
impairment)
The increase in operating expenses from $4,771,898 to $6,424,543 is due
to severance payments to officers (former CFO and CEO) whose 5 year contracts
were terminated midway during 2002. Without this cost item, operating expenses
have decreased by $368,187 which, reflect cost cutting measures including the
closure of the US office in New York that resulted in a decrease to "other
selling, general and administrative" expenses.
The proportion of salaries versus consulting, professional and directors fees
has changed. Salaries have decreased due to the closure of US office, while the
company paid slightly higher professional fees and directors' fees compared to
the previous years.
Depreciation, amortization, goodwill impairment and writedown of intangibles
Amortization of goodwill and intangibles accounted for over 75% of
depreciation & amortization in 2001, while it was only 18% in 2002. The Company
charged $189,227 amortization on intangibles, while no amortization of goodwill
was recorded due to the adoption of Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets," ("SFAS No. 142"). Depreciation
of machinery and equipment has increased due to investments made in order to
provide the VOIP and International/domestic leased line services.
On May 19, 2000, the Company purchased all of the Internet related assets of
Sumitkom Rokura, S.R.L. an Internet service provider in Romania. The acquisition
was accounted for as an asset purchase with a value of $1,150,000 being assigned
to customer lists acquired which are being depreciated over an estimated period
of benefit of 5 years. However, an analysis of the customers and revenues as at
September 30, 2002 indicated that most of the expected revenues to be generated
by this customer list did not materialize. Therefore, the Company has written
down $448,500 of the customer list net book value. The remaining $184,000 will
continue to be amortized over the remaining period of benefit of 33 months.
However, the Company will continue to assess the recoverability of this amount
on a periodic basis and further writedowns will be made if required.
In 2001, the Company recognized an impairment loss of $1,507,759 relating
to the goodwill of Euroweb Slovakia as the future cash flows over the remaining
useful life were not expected to be sufficient to cover the net book value of
the goodwill in the Company's books. At the end of 2002 the Company performed an
annual impairment test relating to the goodwill recorded in its books. Euroweb
Romania, Euroweb Czech, and Euroweb Slovakia were identified as 'Reporting
Units' under SFAS 142, with pre-impairment Goodwill of $1,718,657, $838,581, and
$1,005,300 respectively. The Company compared the fair value of the reporting
units (determined using discounted cash flow projections) to their carrying
amounts, noting that the carrying amounts in each case were higher than their
fair values. The Company then compared the implied fair value of each reporting
unit's goodwill with their carrying amounts and recorded an impairment charge of
$2,016,000. The impairment relating to Euroweb Slovakia was $442,000, Euroweb
Czech was $746,000 and Euroweb Romania was $828,000. An average 3% growth rate
for revenues was used in the calculations.
11
Net interest income
Net interest income is significantly lower than the last year. The
decrease is due to the fact that less interest-generating funds were available
in this period than in the same period of the previous year, and also because
the effective interest rate on these investments has decreased over the periods
in question. The major revenue source is the approximately $12 million cash
which is invested into US Government Securities bearing interest at 3.1%. The
remaining amount was invested in other securities and /or was held in interest
bearing accounts.
Equity interest in affiliate
The Company's 49% interest in the net loss of Euroweb Hungary Rt. for the year
ended December 31, 2002 is $809,967. However, as the Company's 49% equity in the
net loss ($809,967) is greater than the carrying value before recording this
equity adjustment ($679,637), the investment has been written down to zero.
Since the Company has no legal or commercial commitments to provide continuing
financial support, the difference of $ 130,330 has not been recorded.
Sale or disposal transactions
During 2002, the Company focused purely on improving operation and
introduction of new services and thus did not divest any of its assets.
Consequently, no gain/loss on sale or disposals are recorded in 2002.
Liquidity and Capital Resources
The Company's cash, cash equivalents and marketable securities were
approximately $14,203,087 as of December 31, 2002, a decrease of $1,937,680 from
the end of fiscal year 2001. The decrease of cash was influenced by two major
reasons: (1) loss making activity and (2) severance to officers
The Company has $14,203,087 of cash, cash equivalents and marketable
securities compared to $2,816,831 total short and long term liabilities
(excluding deferred revenue), indicating that the Company is in a strong
financial position. Management believes that with its existing cash, cash
equivalents, marketable securities and internally generated funds, there will be
sufficient funds to meet the Company's currently projected working capital
requirements and other cash requirements until at least the next 12 months. In
the event the Company makes future acquisitions of Internet service providers in
Central and Eastern Europe, the excess cash on hand may be used to finance such
future acquisitions.
Inflation and Foreign Currency
The Company maintains its books in local currencies: Czech koruna for
Euroweb Czech Republic and the Slovak koruna for Euroweb Slovakia. However,
given the hyper-inflationary situation in Romania, the U.S. dollar is used as
the functional currency.
The Slovakian Koruna has strengthened by 6.5%, while the Czech Korona has
strengthened against the U.S. dollar by approximately 14% when compared with
2001.
Effect of Recent Accounting Pronouncements
The Financial Accounting Standards Board No. 143 "Accounting for Asset
Retirement Obligations" ("Statement 143") was issued in June 2001. Statement 143
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. The Company is required to
adopt the provisions of Statement 143 on January 1, 2003. The Company is
evaluating the impact, if any, Statement 143 may have on its future consolidated
financial statements.
12
In April 2002, the FASB issued SFAS No.145, Rescission of FASB
Statements No.4, 44 and 64, Amendment of FASB Statement No.13, and Technical
Corrections. SFAS No.145 amends existing guidance on reporting gains and losses
on the extinguishment of debt to prohibit the classification of the gain or loss
as extraordinary, as the use of such extinguishments have become part of the
risk management strategy of many companies. SFAS No.145 also amends SFAS No.13
to require sale-leaseback accounting for certain lease modifications that have
economic effects similar to sale-leaseback transactions. The provisions of the
Statement related to the rescission of Statement No.4 is applied in fiscal years
beginning after May 15, 2002. Earlier application of these provisions is
encouraged. The provisions of the Statement related to Statement No.13 were
effective for transactions occurring after May 15, 2002, with early application
encouraged. The adoption of SFAS No.145 is not expected to have a material
effect on the Company's financial statements.
The Financial Accounting Standards Board ("FASB") No. 146 "Accounting
for Costs Associated with Exit or Disposal Activities" ("Statement 146") was
issued in June 2002. Statement 146 nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". `Costs' include
(a) one-time termination benefits, (b) costs to terminate a contract that is not
a capital lease and (c) other associated costs including costs to consolidate
facilities or relocate employees. The Statement is based on the general
principle that a liability for a cost associated with an exit or disposal
activity should be (1) recorded when it is incurred and (2) initially measured
at fair value. Thus, a commitment to an exit or disposal plan no longer will be
a sufficient basis for recording a liability for those activities. The Company
is required to adopt the provisions of Statement 146 for exit or disposal
activities initiated after December 31, 2002. The Company is evaluating the
impact, if any, Statement 146 may have on its future consolidated financial
statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others", an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The disclosure requirements are effective for financial
statements of interim and annual periods ending after December 31, 2002. The
Company has adopted the disclosure requirements and will apply the recognition
and measurement provisions for all guarantees entered into or modified after
December 31, 2002. To date, the Company has not entered into or modified
guarantees.
In December 2002, the FASB issued SFAS No.148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No.123". This Statement amends FASB Statement No.123, "Accounting for
Stock-Based Compensation", to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No.123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to
these consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51". This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. For nonpublic enterprises, such as the Company,
with a variable interest in a variable interest entity created before February
1, 2003, the Interpretation is applied to the enterprise no later than the end
of the first annual reporting period beginning after June 15, 2003. The
application of this Interpretation is not expected to have a material effect on
the Company's financial statements.
13
In November 2002, the Emerging Task-Force issued its consensus on EITF
00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF 00-21") on an
approach to determine whether an entity should divide an arrangement with
multiple deliverables into separate units of accounting. According to EITF
00-21, in an arrangement with multiple deliverables, the delivered item(s)
should be considered a separate unit of accounting if all of the following
criteria are met: (1) the delivered item(s) has value to the customer on a
standalone basis, (2) there is objective and reliable evidence of the fair value
of the undelivered item(s), and (3) if the arrangement includes a general right
of return, delivery or performance of the undelivered item(s) is considered
probable and substantially in the control of the vendor. If all the conditions
above are met and there is objective and reliable evidence of fair value for all
units of accounting in an arrangement, the arrangement consideration should be
allocated to the separate units of accounting based on their relative fair
values. The guidance in this Issue is effective for revenue arrangements entered
into in fiscal beginning after June 15, 2003. The Company believes that the
adoption of EITF 00-21 will not have a material impact on it's financial
statements.
At the January 23, 2003 meeting, the Emerging Issues Task Force (EITF)
reached consensuses on EITF 02-18 "Accounting for Subsequent Investments in an
Investee after Suspension of Equity Method Loss Recognition". Issues 1 and 2 of
EITF 02-18 which considered whether, (i) an investor should recognize any
previously suspended losses when accounting for a subsequent investment in an
investee that does not result in the ownership interest increasing from one of
significant influence to one of control, and (ii), if the additional investment
represents the funding of prior losses, whether all previously suspended losses
should be recognized or whether only the previously suspended losses equal to
the portion of the investment determined to be funding prior losses should be
recognized. The EITF concluded that if the additional investment represents, in
substance, the funding of prior losses, the investor should recognize previously
suspended losses only up to the amount of the additional investment determined
to represent the funding of prior losses. At its February 5, 2003 meeting, the
FASB ratified the consensuses reached by the Task Force in this Issue. As
discussed in notes 1 (i) and 6, the Company has discontinued recording losses on
its equity method investment in Euroweb Hungary Rt, which is 51% owned by Pantel
Rt., also a subsidiary of KPN. If the Company makes additional investments in
Euroweb Hungary Rt., the Company would be required to recognize additional
losses to the extent these additional investments are considered funding of
unrecognized prior losses of Euroweb Hungary Rt.
Risk Factors
The Company is subject to certain risk factors due to the industry in
which it competes and the nature of its operations. Theses risks include the
following:
Limited Operating History; Accumulated Deficit. Although the Company
was founded in November 1992, it only entered the Internet business in January
1997 by acquiring three operating Internet businesses. Accordingly, the Company
has only limited operating history on which to base an evaluation of its present
business and prospects. The Company and its prospects must be considered in
light of the risks, expenses and difficulties frequently encountered by
companies in an early stage of development, particularly companies in new and
rapidly evolving markets such as the Internet. Such risks for the Company
include, but are not limited to, an evolving business model and the management
of both internal and acquisition based growth. To address these risks, the
Company must, among other things, continue to expand its client base, continue
to develop the strength and quality of its operations, maximize the value
delivered to clients, respond to competitive developments and continue to
attract, retain and motivate qualified employees. There can be no assurance that
the Company will be successful in meeting these challenges and addressing such
risks and the failure to do so could have a material adverse affect on the
Company's business, results of operations and financial condition.
14
Regulations and Legal Uncertainties. In the United States, the business
engaged in by the Company is not currently subject to direct regulation other
than federal and state regulation applicable to businesses generally and
multi-level marketing. However, changes in the regulatory environment relating
to the telecommunications, Internet and media industries could have an effect on
its business, which effect may be materially adverse to the interests of the
Company. Additionally, legislative proposals from international, federal, state
and foreign governmental bodies in the areas of content regulation, intellectual
property, privacy rights and tax issues, could impose additional regulations and
obligations upon all online service and content providers, which effect may be
materially adverse to the interests of the Company. The Company cannot predict
the likelihood that any such legislation will pass, nor the financial impact, if
any, the resulting regulation may have on it.
Moreover, the applicability to persons engaged in Internet commerce of
existing laws governing issues such as intellectual property ownership, libel
and personal privacy is uncertain. Recent events relating to the use of online
services for certain activities has increased public focus and could lead to
increased pressure on foreign and national legislatures to impose regulations on
online service providers. The U.S. law relating to the liability of entities
conducting business over the Internet for information carried on, or
disseminated through, their systems is currently unsettled and has been the
subject of several recent private lawsuits. While the Company intends to provide
only content which meets the highest standards in quality, creativity and
ethical values, should similar actions be initiated against it, costs incurred
as a result of such actions could have a material adverse effect on the business
of the Company.
Dependence on Key Personnel; Limited Management; Need for Qualified
Management and Other Personnel. The success of the Company will be dependent on
the personal efforts of Csaba Toro, Chief Executive Officer (CEO). The loss of
the services of Mr. Toro could have a material adverse effect on the Company's
business and prospects. The Company does not have and does not intend to obtain
"key-man" insurance on the life of any of its officers. The success of the
Company is largely dependent upon its ability to hire and retain additional
qualified management, marketing, technical, financial and other personnel.
Competition for qualified personnel is intense, and there can be no assurance
that the Company will be able to hire or retain additional qualified management.
The inability to attract and retain qualified management and other personnel
will have a material adverse effect on the Company.
Dependence on Pantel Rt. The majority owners of Pantel Rt. and Euroweb
International Corp. is KPN Telecom B.V. Such ownership improved the co-operation
of the two companies, which has resulted in a high level of dependency in the
case of Euroweb Romania. Actual dependency from Pantel Rt., taking into account
the direct and Pantel Rt. related sales, represents approximately 50-56% of
total consolidated revenue of Euroweb International Corp. or approximately
80-90% of total sales of Euroweb Romania. Despite the fact that co-operation is
based on arm's length agreements, disagreements between the management of Pantel
Rt. and EuroWeb, or an effective change of ownership in one or both companies,
may result in the loss of the Pantel Rt. related revenues and their significant
margin.
Developing Market; New Entrants; Unproven Acceptance of the Products;
Uncertain Adoption of Internet as a Medium of Commerce and Communications. The
market for Internet Programs and services has only recently begun to develop and
is rapidly evolving. The Internet is characterized by an increasing number of
market entrants who have introduced or developed products and services for
communication and commerce over the Internet and private networks. As is typical
in the case of a new and rapidly evolving industry, demand and market acceptance
for recently introduced products and services are subject to a high level of
uncertainty. Critical issues concerning the commercial use of the Internet
(including security, reliability, cost, ease of use and access, and quality of
service) remain unresolved and may impact the growth of Internet use. While the
Company believes that its products and services offer significant advantages for
Internet users, there can be no assurance that its products and services will
become widely chosen for access to the Internet or that, if chosen, will hold
the attention of users in order to allow it to continue to attract users.
15
Because the market for the Company's proposed business, products and
services is new and evolving, it is difficult to predict the future growth rate,
if any, and size of this market. There can be no assurance that the market for
its products and services will develop, that the Company's products or services
will be adopted, or that individual personal computer users in business or at
home will use the Internet for commerce and communication. If the market fails
to develop, develops more slowly than expected, becomes saturated with
competitors, or if its products do not achieve market acceptance, its business,
operating results and financial condition will be materially adversely affected.
Competition. The market for Internet-based products and services is new,
intensely competitive, rapidly evolving and subject to rapid technological
change. The Company expects competition to persist, intensify and increase in
the future. Such competition could materially adversely affect the Company's
business, operating results or financial condition.
We believe that the main competitors of Euroweb Slovakia are four of
the largest or most active providers in Slovakia:
o Nextra;
o GTS Inec;
o SLOVANET; and
o the incumbent telecom operator, Slovak Telecom.
The above are all also providing internet services. Both Nextra and GTS
Inec have a customer base similar to that of the Company's.
Romania's Internet market is in the initial phase of development. At
present, other then Euroweb Romania, there are two other data transmission
companies providing internet services, which also cover the entire territory of
Romania:
o Global One Romania; and
o Logic Telecom.
The Company may face intense competition from other companies directly
involved in the same business and also from many other companies offering
products which can be used in lieu of those offered by the Company. Competition
can take many forms, including convenience in obtaining products, service,
marketing and distribution channels. Although the Company believes it can
compete on the basis of the quality and reliability of its services, there can
be no assurance that the Company will be able to compete successfully against
current or future competitors or that competitive pressures faced by the Company
will not materially adversely affect the Company's business, operating results
or financial condition.
Volatility of Stock Prices. Market prices for the Company's common
stock will be influenced by many factors and will be subject to significant
fluctuations in response to variations in operating results of the Company and
other factors such as investor perceptions of the Company, supply and demand,
interest rates, general economic conditions and those specific to the industry,
developments with regard to the Company's activities, future financial condition
and management. There can be no assurance regarding the future prices at which
the Company's common stock will trade, if any.
Foreign Currency and Exchange Risks and Rate Revaluation. The Company
will be subject to significant foreign exchange risk. There are currently no
meaningful ways to hedge currency risk in either Hungary, the Czech Republic,
Romania or Slovakia. Therefore, the Company's ability to limit its exposure to
currency fluctuations is significantly restricted. The Company's ability to
obtain dividends or other distributions is subject to, among other things,
restrictions on dividends under applicable local laws and foreign currency
exchange regulations of the jurisdictions in which its subsidiaries operate. The
laws under which the Company's operating subsidiaries are organized provide
generally that dividends may be declared by the partners or shareholders out of
yearly profits subject to the maintenance of registered capital and required
reserves and after the recovery of accumulated losses.
16
Other factors affecting shareholders/investors
Possible Future Capital Needs. The Company currently anticipates that
its available cash resources will be sufficient to meet its presently
anticipated working capital and capital expenditure requirements for at least
the next 12 months and has currently no immediate plans for acquisitions that
would exceed the available funds. However, the Company may need to raise
additional funds in order to support more rapid expansion, acquire complementary
businesses or technologies or take advantage of unanticipated opportunities
through public or private financing, strategic relationships or other
arrangements. There can be no assurance that such additional funding, if needed,
will be available on terms acceptable to the Company, or at all. If adequate
funds are not available on acceptable terms, the Company may be unable to
develop or enhance its services and products or take advantage of future
opportunities either of which could have a material adverse effect on the
Company's business, results of operations and financial condition.
No Dividends. It has been the policy of the Company to not pay cash
dividends on its common stock. At present, the Company will follow a policy of
retaining all of its earnings, if any, to finance the development and expansion
of its business. However, the Company is currently reviewing various business
opportunities, which may include either a merger with another company, the
disposition of one or more of its operating units, a sale of a significant
amount of assets or any combination of these items. No assurances can be given
that we will be successful in locating or negotiating with any of these
potential business opportunities. If the Company elects to pursue one of these
business opportunities, then it may declare a dividend depending on the
situation. There can be no assurance that the Company can achieve such earnings,
if any, or that the outcome of the current discussions will result in the
Company's payment of a dividend.
Potential Issuance of Additional Common and Preferred Stock. The
Company is currently authorized to issue up to 60,000,000 shares of common stock
and intends on obtaining shareholder approval to amend its Certificate of
Incorporation so as to decrease the number of authorizes shares of common stock
from 60,000,000 to 12,500,000. To the extent of such authorization, the Board of
the Company will have the ability, without seeking stockholder approval, to
issue additional shares of common stock in the future for such consideration as
the Board may consider sufficient. The issuance of additional common stock in
the future will reduce the proportionate ownership and voting power of the
common stock offered hereby. The Company is also authorized to issue up to
5,000,000 shares of preferred stock, the rights and preferences of which may be
designated in series by the Board. To the extent of such authorization, such
designations may be made without stockholder approval. The designation and
issuance of series of preferred stock in the future would create additional
securities which may have voting, dividend, liquidation preferences or other
rights that are superior to those of the common stock, which could effectively
deter any takeover attempt of the Company.
Forward-Looking Statements
When used in this Form 10-KSB, in other filings by the Company with the
SEC, in the Company's press releases or other public or stockholder
communications, or in oral statements made with the approval of an authorized
executive officer of the Company, the words or phrases "would be," "will allow,"
"intends to," "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project," or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995.
The Company cautions readers not to place undue reliance on any
forward-looking statements, which speak only as of the date made, are based on
certain assumptions and expectations which may or may not be valid or actually
occur, and which involve various risks and uncertainties, including but not
limited to the risks set forth below. See "Risk Factors." In addition, sales and
other revenues may not commence and/or continue as anticipated due to delays or
otherwise. As a result, the Company's actual results for future periods could
differ materially from those anticipated or projected.
17
Unless otherwise required by applicable law, the Company does not
undertake, and specifically disclaims any obligation, to update any
forward-looking statements to reflect occurrences, developments, unanticipated
events or circumstances after the date of such statement.
ITEM 7. Financial Statements
Reference is made to the Consolidated Financial Statements of the
Company, beginning with the index thereto on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth certain information regarding the executive
officers and directors of the Company as of April 7, 2003.
Name Age Position with Company
---- --- ---------------------
Csaba Toro 37 Chief Executive Officer, Chairman of the Board
Rob Van Vliet 48 Director, Secretary to the Board and Treasurer
Gerald Yellin 68 Director
Stewart Reich 59 Director
Hans Lipman 43 Director
Csaba Toro, age 37, Chairman and CEO of the Company since June 2002, has been
with the Company since September 1998 in various other positions. During 2001
and 2002, Mr. Toro held the positions of COO and CEO in Pantel Rt. He resigned
as CEO of Pantel Rt. as of March 2003. From 1997 to 1999, Mr. Toro was managing
director of the Company's Hungarian subsidiary. Prior thereto, since 1994, he
was managing director of ENET Kft., which was acquired by the Company in 1997.
Rob van Vliet, age 48, has been a Director of the Company since May 2000. Mr.
van Vliet has been involved within KPN in the international IP/data activities
as developed in EuroWeb and Pantel Rt. since 1998. In 2002, Mr. van Vliet was a
member of the board of Pantel Rt. As of March 1, 2002, he became CEO of Vision
Networks Holdings with cable TV operations in Poland and the Czech Republic, the
operations of which were sold in early 2003. During the period from November
1998 until January 2000 he was also a member of the Supervisory Board of Planet
Internet, a consumer ISP in Belgium. From 1993 until 1998, Mr. van Vliet was
active as Project Director for KPN's international acquisitions in Central and
Eastern Europe.
Gerald Yellin, age 68, has been the Vice-President of the Investment Banking
House of Bear Stearns & Company, Inc. since 1975. Mr. Yellin worked for Bear
Stearns for 28 years, and is a graduate from Temple University, PA. Mr. Yellin
has been a Director of the Company since November 2001.
Stewart Reich, age 58, was Chief Executive Officer and President of Golden
Telecom Inc., Russia's largest alternative voice and data service provider as
well as its largest ISP, since 1997. In September 1992, Mr Reich was employed as
Chief Financial Officer at UTEL (Ukraine Telecommunications), of which he was
appointed President in November 1992. Prior to that Mr. Reich held various
positions at a number of subsidiaries of AT&T Corp. Mr. Reich has been a
director of the Company since 2002.
18
Hans Lipman, age 43, is a Dutch Registered Accountant and is financial manager
for Royal Dutch KPN's International Participations department since March 2001.
He is a member of the supervisory board of Pantel Rt, Hungary. From April 1994,
Mr. Lipman has been working as a financial manager and IT controller with KPN
Telecom. Prior to that he was auditor with PriceWaterhouseCoopers' predecessors,
since 1978. Mr. Lipman replaces Mr. Roelant Lyppens who resigned as director on
December 18, 2002.
Directors are elected annually and hold office until the next annual meeting of
the stockholders of the Company and until their successors are elected and
qualified. Officers are elected annually and serve at the discretion of the
Board of Directors.
ROLE OF THE BOARD
Pursuant to Delaware law, our business, property and affairs are
managed under the direction of our board of directors. The board has
responsibility for establishing broad corporate policies and for the overall
performance and direction of EuroWeb, but is not involved in day-to-day
operations. Members of the board keep informed of our business by participating
in board and committee meetings, by reviewing analyses and reports sent to them
regularly, and through discussions with our executive officers.
2002 BOARD MEETINGS
In 2002, the board met four times. No director attended less than
75% of all of the combined total meetings of the board and the committees on
which they served in 2002.
BOARD COMMITTEES
Audit Committee
The audit committee of the board of directors reviews the internal
accounting procedures of the company and consults with and reviews the services
provided by our independent accountants. During 2002, the audit committee
consisted of Messrs. Stewart Reich, Gerald Yellin and Rob van Vliet. The audit
committee held three meetings in 2002. Messrs. Yellin and Reich both serve as
audit committee financial expert for the Audit Committee. Both of the audit
committee financial experts are considered to be independent. Compensation
Committee
Compensation Committee
The compensation committee of the board of directors i) reviews and
recommends to the board the compensation and benefits of our executive officers;
ii) administers our stock option plans and employee stock purchase plan; and
iii) establishes and reviews general policies relating to compensation and
employee benefits. In 2002, the compensation committee consisted of Messrs. Rob
van Vliet, Roelant Lyppens and Csaba Toro. No interlocking relationships exist
between the board of directors or compensation committee and the board of
directors or compensation committee of any other company. During the past fiscal
year the compensation committee had two meetings.
SECTION 16(A) BENEFICIAL OWNERSHIP COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more then 10
percent of the Company's Common Stock, to file with the SEC the initial reports
of ownership and reports of changes in ownership of common stock. Officers,
directors and greater than 10 percent stockholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file.
19
Specific due dates for such reports have been established by the
Commission and the Company is required to disclose in this Proxy Statement any
failure to file reports by such dates during fiscal 2002. Based solely on its
review of the copies of such reports received by it, or written representations
from certain reporting persons that no Forms 5 were required for such persons,
the Company believes that during the fiscal year ended December 31, 2002, there
was no failure to comply with Section 16(a) filing requirements applicable to
its officers, directors and ten percent stockholders.
POLICY WITH RESPECT TO SECTION 162(m)
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), provides that, unless an appropriate exemption applies, a tax deduction
for the Company for compensation of certain executive officers named in the
Summary Compensation Table will not be allowed to the extent such compensation
in any taxable year exceeds $1 million. As no executive officer of the Company
received compensation during 2002 approaching $1 million, and the Company does
not believe that any executive officer's compensation is likely to exceed $1
million in 2003, the Company has not developed an executive compensation policy
with respect to qualifying compensation paid to its executive officers for
deductibility under Section 162(m) of the Code.
CODE OF ETHICS
The Company has adopted its Code of Ethics and Business Conduct for
Officers, Directors and Employees that applies to all of the officers, directors
and employees of the Company.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual and long term
compensation of the Company's Chief Executive Officer. The Company does not have
any officer whose annual salary and bonus exceeds $100,000 as of December 31,
2002:
ANNUAL COMPENSATION LONG-TERM COMPENSATION
Restricted Number of
Bonus and Stock Award(s) Securities
Name and Year Ended Other Annual Underlying All Other
Principal Position December 31, Salary ($) Compensation ($) ($) Options/SARs (#)
------------------ ------------ ---------- ---------------- -------------- ---------------- ---------
Compensation ($)
Csaba Toro 2002 $96,000 -- -- -- --
CEO and Chairman 2001 $96,000 -- -- -- --
2000 $96,000 -- -- 4,000 --
Employment agreements with Mr. Frank Cohen and Robert Genova, former
executive officer and directors of the Company, were terminated in the second
quarter of 2002 and their total compensation for the period from June 2002 to
December 31, 2005 was settled. At the same time, Mr. Robert Genova and Mr. Frank
Cohen forfeited all of their outstanding options in the Company. Mr. Toro was
appointed as the CEO and Chairman in May 2002. Prior to May 2002, Mr. Toro
served as the Chief Operating Officer of the Company.
There is no other officer, whose yearly compensation exceeded $100,000
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
There were no grants of Stock Options/SAR made to the named Executives during
the fiscal year ended December 31, 2002.
20
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION/SAR VALUES
------------------------ ---------------------- --------------------- ------------------------ -----------------------
Number of securities Value of the
underlying unexercised unexercised in the
options/SARs at FY-end money options/SARs at
(#) FY-end ($)*
Name Shares acquired on Value realized ($) Exercisbale/UnexercisableExercisbale/Unexercisable
exercise (#)
------------------------ ---------------------- --------------------- ------------------------ -----------------------
Csaba Toro, Chairman None None 87,000 $0.00
and CEO
------------------------ ---------------------- --------------------- ------------------------ -----------------------
* Fair market value of underlying securities (calculated by subtracting the
exercise price of the options from the closing price of the Company's Common
Stock quoted on the Nasdaq as of December 31, 2002), which was $1.73 per share.
None of Mr. Toro's options are presently in the money.
EMPLOYMENT AND MANAGEMENT AGREEMENTS
The Company entered into a six-year agreement with its Chief Executive
Officer and Chairman of the Board, Csaba Toro on October 18, 1999, which
commenced January 1, 2000. The agreement provides for an annual compensation of
$96,000 for Mr. Toro and terminates on December 31, 2005.
The agreement further provides that, if Mr. Toro's employment is
terminated other than for willful breach by the employee, for cause or in event
of a change in control of the Company, then the employee has the right to
terminate the agreement. In the event of any such termination, the employee will
be entitled to receive the payment due on the balance of his employment
agreement.
The Company has no pension or profit sharing plan or other contingent
forms of remuneration with any officer, director, employee or consultant,
although bonuses are paid to some individuals.
There were no changes in the Employment and Management Agreements in
the last fiscal year, other than the termination of the contract with the former
CFO and CEO.
DIRECTOR COMPENSATION
Directors who are also officers of the Company are not separately
compensated for their services as a director. Directors who are not officers
receive cash compensation for their services: $2,000 at the time of agreeing to
become a Director; $2,000 for each Board Meeting attended either in person or by
telephone; and $1,000 for each Audit Committee Meeting attended either in person
or by telephone. Non-employee directors are reimbursed for their expenses
incurred in connection with attending meetings of the Board or any committee on
which they serve and are eligible to receive awards under the Company's 1993
Stock Option Plan (described below). No stock option awards were made to
non-employee directors as of April 7, 2003.
STOCK OPTION PLAN
The Company's 1993 Stock Option Plan (the "Plan") permits the grant of
options to employees of the Company, including officers and directors, who are
serving in such capacities. An aggregate of 134,000 shares of Common Stock are
authorized for issuance under the Plan. At December 31, 2002, options for 61,500
Common Stock were outstanding and exercisable under the Plan. The Plan provides
that qualified and non-qualified options may be granted to officers, directors,
employees and consultants to the Company for the purpose of providing an
incentive to those persons to work for the Company. No options were granted to
any officers, directors, employees and consultants to the Company during the
year ended December 31, 2002.
21
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the
beneficial ownership of the Common Stock as of April 1, 2003 by (i) each person
known by the Company to own beneficially more than 5% of the outstanding Common
Stock; (ii) each director of the Company; (iii) each officer of the Company and
(iv) all executive officers and directors as a group. Except as otherwise
indicated below, each of the entities or persons named in the table has sole
voting and investment powers with respect to all shares of Common Stock
beneficially owned by it or him as set forth opposite its or his name.
Name and Address Shares Percent Owned (1)
Beneficially Owned (1)
--------------------------------------------------- ---------------------------- ---------------------------
KPN Telecom B.V. (4) 2,461,014 52.75%
Maanplein 5
The Hague, The Netherlands
Csaba Toro (3)(5)(6) 87,000(2) 1.86%
1122 Budapest
Varosmajor utca 13
Hungary
Hans Lipman (3)(6) 0 0
KPN Telecom B.V.
Maanplein 5
The Hague, The Netherlands
0 0
Rob van Vliet(3)(5)-(6)
KPN Telecom B.V.
Maanplein 5
The Hague, The Netherlands
Gerald Yellin (6) 0 0
500 E. 83rd Street
New York, NY 10028
Stewart Reich (6) 0 0
18 Dorset Lane,
Bedminister, NJ 07921
All Officers and Directors as a 87,000 1.86%
Group (7 Persons)
----------------------------
(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 April 1, 2003. For purposes of computing the percentage of
outstanding shares held by each person or group of persons named above
on April 1, 2003 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, 1.86% of the issued and
outstanding shares of the Company represented by options to
purchase 87,000 shares.
(3) Does not include shares reported to be beneficially owned by KPN
Telecom B.V. Messrs. van Vliet and Lipman are employees of KPN Telecom
B.V. Until March 1, 2003, Mr. Toro was an employee of Pantel Rt, an
indirect subsidiary of Royal KPN N.V.
(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.
22
The foregoing table is based upon 4,665,332 shares of common stock outstanding
as of April 1, 2003.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Significant related party transactions exist with Pantel Rt. Details of
these transactions can be found in the MD&A section of this form 10-KSB and in
Note 14 of the 2002 Consolidated Financial Statements.
In January 1999, the Company loaned Mr. Toro $150,000 for the purpose
of purchasing an apartment condominium in Budapest. The loan bears interest at
the rate of 11 1/2% per annum and is secured both by Mr. Toro's employment
contract and by a lien on the property. Mr. Toro repaid the loan in full in
2001.
Management believes that the transaction with Mr. Toro was made on
terms no less favorable to the Company than those available from unaffiliated
parties. It is intended that any future transactions with officers, directors
and affiliates of the Company will be made on terms no less favorable to the
Company than those available from unaffiliated parties.
There are no other significant related party transactions.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits (numbers below reference Regulation S-B, Item 601)
(2) Subscription Agreement and Option Agreement with KPN(1)(2)
(3) (a) Certificate of Incorporation filed November 9, 1992(1)
(b) Amendment to Certificate of Incorporation filed July 9,
1997(2)
(c) By-laws(2)
(4) (a) Form of Common Stock Certificate(1)
(b) Form of Underwriters' Warrants to be sold to
Underwriters(1)
(c) Placement Agreement between Registrant and J.W. Barclay &
Co., Inc. and form of Placement Agent Warrants issued in
connection with private placement financing(1)
(99) (a) Certification of the Chief Executive Officer of Euroweb
International Corp. Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(99) (b) Certification of the Chief Accounting Officer of
Euroweb International Corp. Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(99) (c) Code of Ethics and Business Conduct of Officers,
Directors and Euroweb International Corp.
----------------------------------
(1) Exhibits are incorporated by reference to Registrant's Registration
Statement on Form SB-2 dated May 12, 1993 (Registration No. 33-62672-NY, as
amended)
(2) Filed with Form 10-QSB for quarter ended June 30, 1998.
23
ITEM 14. CONTROLS AND PROCEDURES
As of December 31, 2002, an evaluation was performed under the
supervision and with the participation of the Company's management, including
the Cheif Executive Officer and the Chief Accounting Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on that evaluation, the Company's management, including
the Chief Executive Officer and the Chief Accounting Officer, concluded that the
Company's disclosure controls and procedures were effective as of December 31,
2002. There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect internal controls subsequent
to December 31, 2002.
24
EUROWEB INTERNATIONAL CORP.
Consolidated Balance Sheet as of December 31, 2002 and 2001, and
Consolidated Statements of Operations & Comprehensive Loss,
Stockholders' Equity, and Cash Flows for the
Years ended December 31, 2002 and 2001
EUROWEB INTERNATIONAL CORP.
Consolidated Financial Statements
December 31, 2002 and 2001
TABLE OF CONTENTS
page
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Balance Sheet F-3
Consolidated Statements of Operations and Comprehensive Loss F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
F-1
Independent Auditors' Report
The Board of Directors and Stockholders
Euroweb International Corp.
We have audited the accompanying consolidated balance sheet of Euroweb
International Corp. and subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of operations and comprehensive loss,
shareholders' equity and cash flows for each of the years in the two year period
ended December 31, 2002. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Euroweb
International Corp. and subsidiaries as of December 31, 2002 and 2001, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 2002 and 2001, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in note 1(k) to the consolidated financial statements, the Company
changed its method of accounting for goodwill and other intangibles in 2002.
KPMG Hungaria Kft.
Budapest, Hungary
April 9, 2003
F-2
Euroweb International Corp.
Consolidated Balance Sheet
December 31,
2002 2001
---- ----
ASSETS
Current assets:
Cash and cash equivalents (note 3) ......................................... $ 2,098,983 $ 1,512,303
Investment in securities (note 4) .......................................... 12,104,104 14,628,464
Trade accounts receivable, less allowance for doubtful accounts of ......... 348,488 686,935
$634,484 (2001: $457,721)
Related party receivables .................................................. 855,194 114,501
Current portion of note receivable (note 5) ................................ 190,105 194,296
Prepaid and other current assets ........................................... 851,100 598,484
------------ -----------
Total current assets .................................................. 16,447,974 17,734,983
Note receivable, less current portion (note 5) ............................... 173,871 363,976
Investment in affiliate (note 6) ............................................. -- 495,187
Property and equipment (note 7) .............................................. 1,269,923 1,426,604
Assets under construction (note 7) ........................................... 430,000 --
Goodwill (note 8) ............................................................ 1,546,538 3,562,538
Intangibles- customer lists (note 8) ......................................... 167,273 805,000
Other non-current assets ..................................................... -- 20,612
------------ -----------
Total assets ............................................................ $ 20,035,579 $ 24,408,900
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable ..................................................... $ 659,244 $ 638,729
Related party payables ..................................................... 345,110 --
Acquisition indebtedness (note 10) ......................................... 180,000 180,000
Loan payable (note 11) .................................................... 129,945 --
Other current liabilities .................................................. 469,547 704,483
Accrued expenses ........................................................... 965,885 468,921
Deferred IRU revenue (note 9) .............................................. 30,667 --
Deferred other revenues .................................................... 145,392 277,127
------------ -----------
Total current liabilities ............................................... 2,925,790 2,269,260
Loan payable (note 11) ..................................................... -- 94,904
Acquisition indebtedness, less current portion (note 10) ................... -- 180,000
Non-current portion of deferred IRU revenue (note 9) ....................... 889,333 --
Non-current portion of lease obligations (note 9) .......................... 67,100 196,600
------------ -----------
Total liabilities ....................................................... 3,882,223 2,740,775
Stockholders' equity (note 13)
Preferred stock, $.001 par value - Authorized 5,000,000 shares;
no shares issued or outstanding .......................................... --
Common stock, $.001 par value - Authorized 60,000,000 shares;
issued and outstanding 4,665,332 shares .................................. 24,129 24,129
Additional paid-in capital .................................................. 48,227,764 48,227,764
Accumulated deficit (31,219,267) (25,325,033)
Accumulated other comprehensive income/(loss) ............................... 236,142 (143,323)
Treasury stock - 175,490 common shares, at cost (1,115,412) (1,115,412)
------------ -----------
Total stockholders' equity ............................................... 16,153,356 21,668,125
------------ -----------
Commitments and contingencies (note 15)
Total liabilities and stockholders' equity ............................... $ 20,035,579 $ 24,408,900
============ ===========
See accompanying notes to consolidated financial statements.
F-3
Euroweb International Corp.
Consolidated Statements of Operations and Comprehensive Loss
Years Ended December 31, 2002 and 2001
2002 2001
---- ----
Revenues
Third party revenues ............................... $ 8,067,290 $ 5,524,442
Related party revenues .............................. 4,873,341 2,489,686
------------ ------------
Total Revenues ........................ 12,940,631 8,014,128
Cost of revenues
Third party cost of revenues ....................... 6,584,806 4,123,692
Related party cost of revenues ..................... 2,028,390 782,322
------------ ------------
Total Cost of revenues ................ 8,613,196 4,906,014
------------ ------------
Gross profit ..................................... 4,327,435 3,108,114
Operating expenses
Compensation and related costs ................... 1,884,891 2,001,191
Severance to officers ............................ 2,020,832 --
Consulting, professional and directors fees ...... 1,078,908 977,951
Other selling, general and administrative expenses 1,439,912 1,792,756
Goodwill impairment (Note 8) ..................... 2,016,000 1,507,759
Writedown of intangibles (Note 8) ................ 448,500 --
Depreciation and amortization .................... 1,038,166 2,905,012
------------ ------------
Total operating expenses ............. 9,927,209 9,184,669
------------ ------------
Loss from operations ................................ (5,599,774) (6,076,555)
Net interest income .............................. 385,177 948,803
Equity in net loss of affiliate (Note 6) ......... (679,637) (455,261)
Loss before income taxes ............................ (5,894,234) (5,583,013)
Provision for income taxes .......................... -- --
------------ ------------
Net loss ............................................ (5,894,234) (5,583,013)
Other comprehensive income (loss) ................... 379,465 (129,312)
------------ ------------
Comprehensive loss .................................. $ (5,514,769) $ (5,712,325)
============ ============
Net loss per share, basic ........................... (1.26) (1.17)
Weighted average number of shares outstanding ....... 4,665,332 4,771,804
See accompanying notes to consolidated financial statements
F-4
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002 and 2001
Accumulated
Additional Other TOTAL
Common Stock Paid-in Accumulated Comprehensive Treasury Stockholders
Shares* Amount Capital Deficit Gains(Losses) Stock Equity
------------ ------------ ------------ ------------- ------------ ------------ ------------
Balances, December 31, 2000 ..... 4,801,702 $ 24,129 $48,227,764 $(19,742,020) $ (14,011) (173,688) $28,322,174
============ ============ ============ ============= ============ ============ ============
Foreign currency translation gain -- -- -- -- 16,642 -- 16,642
Unrealized gain on securities ...
available for sale .............. -- -- -- -- 26,434 -- 26,434
Reclassification of realized gain -- -- -- -- (172,388) -- (172,388)
Net loss for the period ......... -- -- -- (5,583,013) -- -- (5,583,013)
Treasury stock .................. (136,370) -- -- -- -- (941,724) (941,724)
------------ ------------ ------------ ------------- ------------ ------------ ------------
Balances, December 31, 2001 ..... 4,665,332 $ 24,129 $48,227,764 $(25,325,033) $(143,323) $(1,115,412) $21,668,125
============ ============ ============ ============= ============ ============ ============
Foreign currency translation loss -- -- -- -- 160,687 -- 160,687
Unrealized gain on securities ... -- -- -- -- 245,212 -- 245,212
available for sale (Note 4)
Reclassification of realized gain -- -- -- -- (26,434) -- (26,434)
Net loss for the period ......... -- -- -- (5,894,234) -- -- (5,894,234)
------------ ------------ ------------ ------------- ------------ ------------ -----------
Balances, December 31, 2002 ..... 4,665,332 $ 24,129 $48,227,764 $(31,219,267) $ 236,142 $(1,115,412) $16,153,356
============ ============ ============ ============= ============ ============ ===========
* restated to reflect 1 for 5 reverse stock split
See accompanying notes to consolidated financial statements
F-5
Euroweb International Corp.
Consolidated Statements of Cash Flows
Year Ended December 31, 2002 and 2001
2002 2001
---- ----
Cash flows from operating activities
Net loss .................................................................. $ (5,894,234) $ (5,583,013)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ............................................. 1,038,166 2,905,012
Goodwill impairment ....................................................... 2,016,000 1,507,759
Intangibles impairment - customer lists ................................... 448,500 --
Amortization of discount on acquisition indebtedness (note 10) ............ 15,380 24,945
Equity in net loss of affiliate ........................................... 679,637 455,261
Provision on doubtful accounts ............................................ 176,763 81,893
Foreign currency loss (gain) .............................................. 35,041 (10,846)
Realized gain on sale of investment securities ............................ (47,970) (194,540)
Unrealized interest income on investment securities ....................... (357,046) (599,824)
Changes in operating assets and liabilities net of effects of acquisitions:
Accounts receivable ....................................................... (579,009) (468,346)
Prepaid and other assets .................................................. (247,384) 54,865
Accounts payable, other current liabilities and accrued expenses .......... 743,416 78,303
Deferred revenue .......................................................... 788,265 64,874
------------ ------------
Net cash used in operating activities ............................. (1,184,475) (1,683,657)
------------ ------------
Cash flows from investing activities:
Investment in securities .................................................. (13,506,666) (14,002,206)
Maturity of securities .................................................... 16,654,820 14,200,000
Payment of acquisition indebtedness ....................................... (180,000) (180,000)
Repayments of notes receivable ............................................ 194,296 146,820
Repayment of loan receivable .............................................. -- 86,682
Acquisition of property and equipment ..................................... (966,545) (445,207)
------------ ------------
Net cash provided by (used in) investing activities ............... 2,195,905 (193,911)
------------ ------------
Cash flows from financing activities:
Payments to acquire treasury stock ........................................ -- (941,724)
Principal payments under capital lease obligations ........................ (400,987) 49,000
------------ ------------
Net cash used in financing activities .............................. (400,987) (990,724)
------------ ------------
Effect of foreign exchange rate changes on cash .............................. (23,763) 7,812
------------ ------------
Net increase (decrease) in cash and cash equivalents ......................... 586,680 (2,860,480)
Cash and cash equivalents, beginning of year ................................. 1,512,303 4,372,783
------------ ------------
Cash and cash equivalents, end of year ....................................... $ 2,098,983 $ 1,512,303
============ ============
Supplemental disclosure:
Interest paid ................................................................ $ 77,247 $ 69,526
New capital leases ........................................................... $ 155,713 $ 525,577
See accompanying notes to consolidated financial statements.
F-6
Euroweb International Corp.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
1. Organization and Business
EuroWeb International Corp. (the "Company") is a Delaware corporation which
was organized on November 9, 1992, and was a development stage enterprise
through December 31, 1993. The controlling owner of Euroweb International Corp.
is KPN Telecom BV, a Netherlands corporation.
The Company operates in the Czech Republic, Romania and Slovakia, through
its subsidiaries Euroweb Czech Republic spol. s.r.o. ("Euroweb Czech"), Euroweb
Slovakia a.s. ("Euroweb Slovakia") and Euroweb Romania S.A. ("Euroweb Romania").
The Company operates in one industry segment, providing Internet access and
additional value added services to business customers.. The Company's
consolidated statements of operations also include the equity in the net income
or loss of Euroweb Hungary Rt., in which the Company has a 49% ownership
interest. The other 51% of Euroweb Hungary Rt. is held by Pantel
Telecommunication Rt., Hungary ("Pantel Rt."), of which KPN Telecom BV is also
the controlling owner.
The revenues come from the following three sources:
(1) Internet Service Provider (Internet access, Content and Web
services, Other services)
(2) International/domestic leased line, Internet Protocol data services
(3) Voice over Internet Protocol services
For the services in point (2) and (3), the main customer of the Company in 2002
and 2001 was Pantel Rt. (See Note 15).
2. Summary of Significant Accounting Policies
(a) Principles of consolidation and basis of presentation
The consolidated financial statements comprise the accounts of the
Company and its controlled subsidiaries. All material intercompany
balances and transactions have been eliminated upon consolidation.
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of
America.
(b) Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Significant estimates
made by the Company include the period of benefit and recoverability of
goodwill and other intangible assets.
(c) Fair value of financial instruments
F-7
Euroweb International Corp.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
The carrying values of cash equivalents, investment in debt securities,
notes and loans receivable, accounts payable, loans payable and accrued
expenses approximate fair values.
(d) Revenue recognition
Revenues from Internet services are recognized in the month in which
the services are provided, either based on monthly traffic or on fixed
monthly fees (leased lines). Revenue for other services, are recognized
as the service is performed.
During the year, the Company entered into an agreement to provide
transmission capacity to a customer pursuant to an indefeasible
rights-of-use agreement ("IRUs") that management believe qualifies as
an operating lease under Financial Accounting Standards Board
Interpretation No. 13, "Accounting for Leases" ("FAS 13"), since the
IRU agreement provides rights to use a specific subject asset for a
defined period. Revenue attributable to the lease will be recognized on
a straight-line basis over the term of the 20-year lease agreement,
commencing upon completion of the installation in March 2003.
Under Financial Accounting Standards Board Interpretation No. 43, "Real
Estate Sales, an interpretation of FASB Statement No. 66" ("FIN 43"),
leases of fiber and capacity that are deemed integral equipment are
required to be accounted for in the same manner as leases of real
estate. If fiber and equipment are considered integral to the related
real estate, a lease must include a provision transferring title of
such integral equipment to the lessee in order for that lease to be
accounted for as a sales-type lease. Failure to satisfy the title
transfer requirements results in operating lease treatment, and
recognition of the related lease income over the lease term. The
Company's IRU does not involve a transfer of title.
IRUs generally require the customer to make a down payment upon
execution of the agreement, with the balance due upon delivery and
acceptance of the fiber. This has resulted in a substantial amount of
deferred revenue being recorded on the balance sheet. The Company is
obligated under the fiber IRU to maintain its network in efficient
working order and in accordance with industry standards. Customers are
obligated for the term of the agreement to pay for their allocable
share of the costs for operating and maintaining the network. The
Company recognizes this revenue monthly as services are provided.
Accounting practice and guidance with respect to the treatment of fiber
sales and IRU agreements continues to evolve. Any changes in the
accounting treatment could affect the way the Company accounts for
revenue and expenses associated with these transactions in the future.
(e) Cost of revenues
Cost of revenues comprise principally of telecommunication network
expenses, costs of content services and cost of leased lines.
(f) Foreign currency translation
F-8
Euroweb International Corp.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
The Company considers the United States Dollar ("US$") to be the
functional currency of the Company and unless otherwise stated, the
respective local currency to be the functional currency of its
subsidiaries. The reporting currency of the Company is the US$ and
accordingly, all amounts included in the consolidated financial
statements have been translated into US$.
The balance sheets of subsidiaries are translated into US$ using the
year end exchange rates. Revenues and expenses are translated at
average rates in effect for the periods presented. The cumulative
translation adjustment is reflected as a separate component of
shareholders' equity on the consolidated balance sheet.
The Company conducts business and maintains its accounts for Euroweb
Romania in the Romanian Lei ("ROL"). Romania is considered a highly
inflationary economy and, therefore the U.S. dollar is used as the
functional currency. The Company's financial statements presented in
ROL are remeasured into U.S. dollars using the following policies:
o Monetary assets and liabilities are remeasured into the
functional currency using the exchange rate at the balance sheet
date.
o Non-monetary assets and liabilities are remeasured into the
functional currency using historical exchange rates.
o Revenues, expenses, gains and losses are remeasured into the
functional currency using the average exchange rate for the
period except for revenues and expenses related to non-monetary
items that are remeasured using historical exchange rates.
The net effect of re-measurement from the local currency into the
functional currency (US$) is included in the determination of net
profit and loss, under `Other selling, general and administration
expenses'.
Foreign currency transaction gains and losses are included in the
consolidated results of operations for the periods presented.
(g) Cash and cash equivalents
Cash and cash equivalents include cash at bank and short-term deposits
of less than three months duration.
(h) Investment in securities
Investments in marketable debt securities are classified as
available-for-sale and are recorded at fair value with any unrealized
holding gains or losses included as a component of other comprehensive
income until realized. Investments with remaining maturities of greater
than one year are classified as long-term, while those with remaining
maturities of less than one year are classified as short-term.
(i) Investment in affiliate
The Company holds a minority interest of 49% in Euroweb Hungary Rt.
which is controlled by its 51% shareholder, Pantel Rt. As the Company
exerts significant influence over Euroweb Hungary Rt., the investment
F-9
Euroweb International Corp.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
is carried under the equity method of accounting, with the Company
recording its share of the earnings or loss of Euroweb Hungary Rt.
Dividends are credited against the investment account when received.
As a result of continuing losses, the carrying value of the net
investment in affiliate was written down to zero during 2002. Since the
Company has no legal or commercial commitments to provide continuing
financial support, no further losses will be recognized unless the
Company makes additional qualifying investments in Euroweb Hungary Rt.,
and future profits will be recognized only once such profits exceed the
amount of unrecorded losses. If the Company makes additional qualifying
investments in Euroweb Hungary Rt., the Company would be required to
recognize additional losses to the extent these additional investments
are considered funding of unrecognized prior losses of Euroweb Hungary
Rt.
(j) Property and equipment
Property and equipment are stated at cost, less accumulated
depreciation. Equipment purchased under capital lease is stated at the
present value of minimum lease payments at the inception of the lease,
less accumulated depreciation. The Company provides for depreciation of
equipment using the straight-line method over the shorter of estimated
useful lives of up to four years or the lease term.
Recurring maintenance on property and equipment is expensed as
incurred.
Any gain or loss on retirements and disposals are included in the
results of operations.
(k) Goodwill and Intangibles
Goodwill results from business acquisitions and represents the
excess of purchase price over the fair value of net assets acquired.
Amortization was computed over the estimated future period of benefit
(generally five years) on a straight-line basis until December 31,
2001. On January 1, 2002 the Company adopted Statement of Financial
Accounting Standard No. 142 ("SFAS 142"), "Goodwill and Other
Intangible Assets," which establishes new accounting and reporting
standards for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17. Goodwill and intangible assets that
have indefinite useful lives are no longer amortized but rather are
tested at least annually for impairment. Intangible assets that have
finite useful lives (whether or not acquired in a business
combination) will continue to be amortized over their estimated useful
lives, which are no longer limited to a maximum of 40 years. The
adoption of SFAS 142 has eliminated the goodwill charge in 2002.
During 2002, the Company performed the required SFAS No. 142
impairment test, with respect to goodwill. The first step of this test
requires the Company to compare the carrying value of any reporting
unit that has goodwill to the estimated fair value of the reporting
unit. As the current fair value was less than the carrying value, the
Company performed the second step of the impairment test. This second
step requires the Company to measure the excess of the recorded
goodwill over the current value of the goodwill, and to record any
excess as an impairment. Based upon the results, the Company recorded
an impairment of $2,016,000 to the carrying value of its goodwill in
its financial statements for the year ended December 31, 2002.
Intangibles consist of customer lists which were acquired as a result
of a purchase of assets and are being amortized over the estimated
future period of benefit of five years. The assessment of
recoverability and possible impairment are determined using estimates
of undiscounted future cash flows in a manner in accordance with the
provisions of Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets,"
("SFAS No. 144"), with a write-down recorded in the third quarter of
2002. The carrying value of customer lists is considered impaired when
the projected undiscounted future cash flows related to the asset are
less than its carrying value. The Company measures impairment based on
the amount by which the carrying value of the customer lists exceeds
its fair market value. Fair market value is determined primarily using
the projected future cash flows discounted at a rate commensurate with
the risk involved. The assessment of the recoverability of the
remaining balance will be impacted if estimated future operating cash
flows are not achieved.
F-10
Euroweb International Corp.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(l) Net loss per share
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share," ("SFAS No. 128"), which provides for the
calculation of "basic" and "diluted" earnings per share. Basic
earnings(loss) per share include no dilution and is computed by
dividing income(loss) attributable to common stockholders by the
weighted average number of common shares outstanding for the period.
Diluted earnings(loss) per share reflects the potential effect of
common shares issuable upon exercise of stock options and warrants in
periods in which they have a dilutive effect. The Company had
potentially dilutive common stock equivalents for the years ended
December 31, 2002 and 2001, which were not included in the computation
of diluted net loss per share because they were antidilutive.
(m) Comprehensive loss
The Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," ("SFAS No. 130") which
established standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income
is defined to include all changes in equity except those resulting from
investments by, and distributions to, owners. Among other disclosures,
SFAS No.130 requires that all items that are required to be recognized
under current accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the
same prominence as other financial statements. The Company has chosen
to present a Combined Statement of Operations and Comprehensive Loss.
(n) Business segment reporting
The Company adopted Statement of Financial Accounting Standards No.
131, "Disclosures About Segments of an Enterprise and Related
Information," ("SFAS No. 131"). SFAS No. 131 superseded FASB Statement
No. 14, "Financial Reporting for Segments of a Business Enterprise."
SFAS No. 131 establishes standards for disclosures about operating
segments, products and services, geographic areas and major customers.
Management has determined that the Company operates in one industry
segment, providing Internet access and additional value added services
to business customers. Substantially all of the Company's revenues are
derived from the provision of such services.
(o) Income taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities, net of appropriate valuation
allowances, are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carry-forwards. Deferred tax assets and
liabilities, if any, are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(p) Stock-Based compensation
F-11
Euroweb International Corp.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations
including FASB Interpretation No. 44, "Accounting for Certain
Transactions involving Stock Compensation an interpretation of APB
Opinion No. 25" issued in March 2000, to account for its fixed plan
stock options. Under this method, compensation expense is recorded on
the date of grant only if the current market price of the underlying
stock exceeds the exercise price. SFAS No. 123, "Accounting for
Stock-Based Compensation," ("SFAS No. 123") established accounting and
disclosure requirements using a fair value-based method of accounting
for stock-based employee compensation plans. As allowed by SFAS No.
123, the Company has elected to continue to apply the intrinsic
value-based method of accounting described above, and has adopted the
disclosure requirements of SFAS No. 123.
(q) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
On January 1, 2002, the Company adopted SFAS No. 144 ("SFAS
144"), "Accounting for Impairment or Disposal of Long-Lived Assets,"
which establishes a single accounting method for long-lived assets to
be disposed of by sale and broadens the presentation of discontinued
operations. The adoption of this statement had no significant impact
on the Company's results of operations or financial position. The
Company evaluates the carrying value of long-lived assets to be held
and used, including goodwill, whenever events or changes in
circumstances indicate that the carrying amount may not be
recoverable. The carrying value of a long-lived asset is considered
impaired when the projected undiscounted future cash flows related to
the asset are less than its carrying value. The Company measures
impairment based on the amount by which the carrying value of the
respective asset exceeds its fair market value. Fair market value is
determined primarily using the projected future cash flows discounted
at a rate commensurate with the risk involved.
(r) Recent accounting pronouncements
The Financial Accounting Standards Board No. 143 "Accounting for Asset
Retirement Obligations" ("Statement 143") was issued in June 2001.
Statement 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. The Company is required to
adopt the provisions of Statement 143 on January 1, 2003. The Company
is evaluating the impact, if any, Statement 143 may have on its future
consolidated financial statements.
In April 2002, the FASB issued SFAS No.145, Rescission of FASB
Statements No.4, 44 and 64, Amendment of FASB Statement No.13, and
Technical Corrections. SFAS No.145 amends existing guidance on
reporting gains and losses on the extinguishment of debt to prohibit
the classification of the gain or loss as extraordinary, as the use of
such extinguishments have become part of the risk management strategy
of many companies. SFAS No.145 also amends SFAS No.13 to require
sale-leaseback accounting for certain lease modifications that have
economic effects similar to sale-leaseback transactions. The provisions
of the Statement related to the rescission of Statement No.4 is applied
in fiscal years beginning after May 15, 2002. Earlier application of
these provisions is encouraged. The provisions of the Statement related
to Statement No.13 were effective for transactions occurring after May
15, 2002, with early application encouraged. The adoption of SFAS
No.145 is not expected to have a material effect on the Company's
financial statements.
The Financial Accounting Standards Board ("FASB") No. 146 Accounting
for Costs Associated with Exit or Disposal Activities ("Statement 146")
was issued in June 2002. Statement 146 nullifies EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)". `Costs' include (a) one-time termination benefits, (b)
costs to terminate a contract that is not a capital lease and (c) other
associated costs including costs to consolidate facilities or relocate
employees. The Statement is based on the general principle that a
liability for a cost associated with an exit or disposal activity
should be (1) recorded when it is incurred and (2) initially measured
at fair value. Thus, a commitment to an exit or disposal plan no longer
will be a sufficient basis for recording a liability for those
activities. The Company is required to adopt the provisions of
Statement 146 for exit or disposal activities initiated after December
31, 2002. The Company is evaluating the impact, if any, Statement 146
may have on its future consolidated financial statements.
F-12
Euroweb International Corp.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others, an interpretation of
FASB Statements No. 5, 57 and 107 and a rescission of FASB
Interpretation No. 34. This Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under guarantees issued. The
Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value
of the obligation undertaken. The disclosure requirements are effective
for financial statements of interim and annual periods ending after
December 31, 2002. The Group has adopted the disclosure requirements
and will apply the recognition and measurement provisions for all
guarantees entered into or modified after December 31, 2002. To date
the company has not entered into or modified guarantees.
In December 2002, the FASB issued SFAS No.148, Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of
FASB Statement No.123. This Statement amends FASB Statement No.123,
Accounting for Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of Statement No.123 to
require prominent disclosures in both annual and interim financial
statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the
notes to these consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51. This
Interpretation addresses the consolidation by business enterprises of
variable interest entities as defined in the Interpretation. The
Interpretation applies immediately to variable interests in variable
interest entities created after January 31, 2003, and to variable
interests in variable interest entities obtained after January 31,
2003. For nonpublic enterprises, such as the Company, with a variable
interest in a variable interest entity created before February 1, 2003,
the Interpretation is applied to the enterprise no later than the end
of the first annual reporting period beginning after June 15, 2003. The
application of this Interpretation is not expected to have a material
effect on the Company's financial statements.
In November 2002, the Emerging Task-Force issued its consensus on EITF
00-21, Revenue Arrangements with Multiple Deliverables ("EITF 00-21")
on an approach to determine whether an entity should divide an
arrangement with multiple deliverables into separate units of
accounting. According to EITF 00-21, in an arrangement with multiple
deliverables, the delivered item(s) should be considered a separate
unit of accounting if all of the following criteria are met: (1) the
delivered item(s) has value to the customer on a standalone basis, (2)
there is objective and reliable evidence of the fair value of the
undelivered item(s), and (3) if the arrangement includes a general
right of return, delivery or performance of the undelivered item(s) is
considered probable and substantially in the control of the vendor. If
all the conditions above are met and there is objective and reliable
evidence of fair value for all units of accounting in an arrangement,
the arrangement consideration should be allocated to the separate units
of accounting based on their relative fair values. The guidance in this
Issue is effective for revenue arrangements entered into in fiscal
beginning after June 15, 2003. The Company believes that the adoption
of EITF 00-21 will not have a material impact on it's financial
statements.
F-13
Euroweb International Corp.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
At the January 23, 2003 meeting, the Emerging Issues Task Force (EITF)
reached consensuses on EITF 02-18 Accounting for Subsequent Investments
in an Investee after Suspension of Equity Method Loss Recognition.
Issues 1 and 2 of EITF 02-18 which considered whether, (i) an investor
should recognize any previously suspended losses when accounting for a
subsequent investment in an investee that does not result in the
ownership interest increasing from one of significant influence to one
of control, and (ii), if the additional investment represents the
funding of prior losses, whether all previously suspended losses should
be recognized or whether only the previously suspended losses equal to
the portion of the investment determined to be funding prior losses
should be recognized. The EITF concluded that if the additional
investment, represents, in substance, the funding of prior losses, the
investor should recognize previously suspended losses only up to the
amount of the additional investment determined to represent the funding
of prior losses. At its February 5, 2003 meeting, the FASB ratified the
consensuses reached by the Task Force in this Issue. As discussed in
notes 1 (i) and 6, the Company has discontinued recording losses on its
equity method investment in Euroweb Hungary Rt., which is 51% owned by
Pantel Rt., also a subsidiary of KPN. If the Company makes additional
investments in Euroweb Hungary Rt., the Company would be required to
recognize additional losses to the extent these additional investments
are considered funding of unrecognized prior losses of Euroweb Hungary
Rt.
3. Cash Concentration
At December 31, 2002 and 2001, cash and cash equivalents included $312,343 and
$778,015 on deposit with a U.S. money market fund.
4. Investment in Securities
The Company holds investments in United States Treasury Notes with a face value
of $12,269,000, which mature on February 15, 2004.
During 2002, the Company recorded net unrealized gains of $245,212 and the
accretion of interest and discount on the Notes of $357,046. In 2001, the
Company recorded a net unrealized gain of $26,434 and accreted interest of
$599,824.
5. Notes Receivable
In December 1998, the Company sold its entire shareholding in a wholly-owned
Hungarian subsidiary, Teleconstruct Epitesi, for $1,500,000. The sale was
satisfied by a payment of $500,000 in January 1999 and the issuance of a
promissory note for $1,000,000 payable in sixty equal monthly installments,
including interest at approximately 7.3% per annum. The note is collateralized
by a building.
F-14
Euroweb International Corp.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
6. Investment in affiliate
The Company's consolidated statement of operations for the years ended December
31, 2002 and 2001 include the Company's equity interest in the net income of
Euroweb Hungary Rt. for each period. Summarized financial information about
Euroweb Hungary Rt.is as follows:
2002 2001
---- ----
Revenues .......................... $ 6,536,790 $ 4,615,081
Gross profit ...................... 3,432,494 3,061,715
Net loss .......................... $(1,652,994) $ (542,122)
Company's 49% equity in net loss .. (809,967) (265,640)
Amortization of goodwill related to
the Company's investment 0 (189,621)
Equity in net loss of affiliate
recorded by the Company $ (495,187) $ (455,261)
============ ============
The carrying value of the net investment in affiliate was $ 495,187 at the
beginning of the year. Since the Hungarian forint has strengthened relative to
the U.S. dollar, the Company's 49% share of the foreign currency translation
gain ($ 184,450) was added to the carrying value of the net investment with the
corresponding entry recorded in other comprehensive income. However, as the
Company's share of the net loss ($809,967) is greater than the carrying value
before recording this equity adjustment ($679,637), the investment has been
written down to zero. Since the Company has no legal or commercial commitments
to provide continuing financial support, the difference of $ 130,330 has not
been recorded. If the Company makes additional investments in Euroweb Hungary
Rt., the Company would be required to recognize additional losses to the extent
these additional investments are considered funding of unrecognized prior losses
of Euroweb Hungary Rt.
The following information is a summary of selected items from Euroweb Hungary
Rt.'s consolidated balance sheet as at December 31, 2002 and 2001:
2002 2001
---- ----
Current Assets $ 2,254,179 $ 1,238,396
Total Assets 3,526,497 2,365,236
Current Liabilities 2,189,301 1,056,125
Total Liabilities 3,785,579 1,068,931
Pursuant to the non-compete provision in the shareholders' agreement, the
Company cannot: (i) engage in any business activity listed in the scope of
activities of Euroweb Hungary Rt.'s charter,which, among others, includes
telecommunications, data bank activity and information technology activity, (ii)
own or control any equity interest in any person or entity that engages in any
such business activity or (iii) permit any of its employees to act as a
director, officer, manager or consultant to any person or entity that engages in
any such business activity. If the Company breaches its obligation set forth
under this provision, the Company will be required to sell to PanTel Rt. all of
its shares at the time of such breach at a price equal to the nominal value of
such shares.
F-15
Euroweb International Corp.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
7. Property and equipment -
Property and equipment as at December 31, 2002 and 2001 were as follows:
2002 2001 Useful Life
---- ---- -----------
Software ...................... $ 60,424 $ 9,653 3 years
Internet equipment ............ 2,577,924 2,289,905 3 years
Vehicles ...................... 474,791 296,859 5 years
Other ......................... 248,930 73,395 3-5 years
----------- -----------
Total ....................... 3,362,069 2,669,811
Less accumulated depreciation (2,092,146) (1,243,207)
----------- -----------
$ 1,269,923 $ 1,426,604
=========== ===========
Depreciation charged during 2002 and 2001 was $ 848,939 and $694,269
respectively.
In October 2002, the Company started construction of a line consisting of 24
pairs of optical fibres between the Hungarian - Romanian border and Timisoara.
As at December, $430,000 of costs (separately disclosed as `Assets under
construction' on the balance sheet) were incurred. The total cost of the
investment is expected to be approximately $1,250,000 with expected completion
by the end of April 2003.
8. Goodwill and Other Intangible assets
Goodwill and other intangible assets as at December 31, 2002 and 2001
consist of the following:
2002 2001
Customer lists $1,150,000 $ 1,150,000
Goodwill 8,863,455 8,863,455
------------ ------------
Total 10,013,455 10,013,455
Less impairment writedown (3,972,259) (1,507,759)
Less accumulated amortization (4,327,385) (4,138,158)
------------ ------------
$1,713,811 $ 4,367,538
============ ============
Amortization charged during 2002 and 2001 was $189,227 and $2,210,743
respectively. The customer lists were obtained during the course of the purchase
of assets from a Romanian company. The net book value of customer lists as of 31
December 2002 was $167,273.
In 2001, the Company recognized an impairment loss of $1,507,759 relating to the
goodwill of Euroweb Slovakia as the future cash flows over the remaining useful
life were not expected to be sufficient to cover the net book value of the
F-16
Euroweb International Corp.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
goodwill in the Company's books. A transitional test in the beginning of
2002 indicated that no additional goodwill was impaired. At the end of 2002 the
Company performed an annual impairment test relating to the goodwill recorded in
its books. Euroweb Romania, Euroweb Czech, and Euroweb Slovakia were identified
as `Reporting Units' under SFAS 142. The Company compared the fair value of the
reporting units (determined using discounted cash flow projections) to their
carrying amounts, noting that the carrying amounts in each case were higher than
their fair values. The Company then compared the implied fair value of each
reporting unit's goodwill with their carrying amounts and recorded an impairment
charge of $2,016,000. The impairment relating to Euroweb Slovakia was $442,000,
Euroweb Czech was $746,000 and Euroweb Romania was $828,000.
In 2002, an analysis of Euroweb Romania's customers and revenues generated by
the purchased customer list indicated that most of the customers on this
customer list were lost during the year. Therefore, the Company has written down
$448,500 of the customer list in 2002. The remaining $184,000 will continue to
be amortized over the remaining period of benefit of 33 months.
The following table indicates a pro-forma presentation indicating the impact of
not amortizing goodwill relating to Euroweb Hungary Rt. (fully amortized by
December 21, 2001) in 2001:
2002 2001
---- ----
Reported net loss .............................. $(5,894,234) $(5,583,013)
Add back:
Goodwill amortization-Euroweb Romania and Czech 0 1,098,108
Goodwill amortization-Euroweb Hungary Rt ....... 0 189,621
----------- -----------
Adjusted net loss ........................ $(5,894,234) $(4,295,284)
=========== ===========
Reported net loss per share .................... $ (1.26) $ (1.17)
Add back:
Goodwill amortization- Euroweb Romania and Czech 0 0.23
Goodwill amortization-Euroweb Hungary Rt ....... 0 0.04
----------- -----------
Adjusted net loss per share .............. $ (1.26) $ (0.90)
=========== ===========
In order to improve the comparability of pre- and post-FAS 142 goodwill
impairment, goodwill relating to the Euroweb Slovakia subsidiary has not been
considered in the above presentation, because in December 2001, the Company
recorded an impairment to Goodwill of $1,507,759, based on a comparison of
carrying value with estimated fair value at that date. Accordingly, if the
Euroweb Slovakia goodwill had not been amortized, the impairment charge would
have been higher by the amount of the related amortization.
9. Leases
Capital leases
The Company is committed under various capital leases, which expire over the
next three years. The amount of assets held under capital leases included in
property and equipment is as follows:
2002 2001
---- ----
Internet equipment $ 706,227 $ 565,787
Vehicles 203,796 188,523
---------- ----------
Total 910,023 754,310
Less accumulated depreciation (499,594) (248,360)
---------- -----------
$ 410,429 505,950
========== ===========
F-17
Euroweb International Corp.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
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, 2002:
2003 $ 311,633
2004 53,666
2005 8,297
2006 4,377
---------
Total minimum lease payments 377,973
Less interest costs (25,649)
---------
Present value of future mimimum lease payments 352,324
Less: current installments (285,224)
---------
Non-current portion of lease obligations $67,100
=========
The current portion of lease obligations are included in `Other current
liabilities' on the Balance Sheet.
Operating leases
The Company's subsidiaries in Slovakia and the Czech Republic each have five
year non-cancelable lease agreements for office premises. The Slovakian contract
is denominated in local currency, while the Czech contract is denominated in
Euro's. Remaining minimal rental payments total approximately $769,980; $168,264
in each of the years 2003-2006, and $96,924 in 2007.
The Company has also entered into an Indefeasible Right of Use agreement for
transmission capacity (See note 2(d)), which is accounted for as an operating
lease. The entire amount of the consideration of $920,000 was prepaid by the
customer in 2002, and the Company recognizes this revenue on a straight line
basis over the term of the agreement (monthly $3,833.33), commencing once the
installation is completed in April 2003.
10. Acquisition Indebtedness
In connection with the acquisition of Euroweb Romania S.A., the company assumed
indebtedness of $ 540,000 from a selling shareholder. The indebtedness is
payable in three yearly installments of $180,000, commencing June 1, 2001. Due
to the long-term nature of this financial instrument, this liability has been
discounted using an appropriate rate, with the unamortized portion of $5,232 as
of December 31, 2002 being recorded under `prepaid and other current assets'.
11. Loan payable
At the date of acquisition in April 2000, Isternet SR, s.r.o. had a loan from
one of its former shareholders amounting to SKK 4,600,000.The loan is repayable
in January 2003 and bears interest at a rate of BRIBOR ("Bratislava Inter-Bank
Overnight Rate")+ 5%. The loan, including the 2002 interest, was settled in
January 2003.
F-18
Euroweb International Corp.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
12. Income taxes
No income taxes were payable in 2002 and 2001. The difference between the total
expected tax expense (benefit) and tax expense for the years ended December 31,
2002 and 2001 is accounted for as follows:
2002 2001
Amount % Amount %
------------ -------- ------------ -------
Computed expected tax
benefit ........................ $(1,715,040) (34.00) $(1,898,224) (34.00)
State Taxes Net of Federal Benefit (299,627) (5.94) (331,631) (5.94)
Amount Attributable to Foreign
Operations ..................... 1,220,982 24.21 1,881,245 33.7
Other ............................ (400) (0.01) 4,893 0.09
Change in Valuation Allowance .... 794,085 15.74 343,717 6.16
------------ -------- ------------ -------
Total benefit .................... $ -- 0.00% $ -- 0.00%
============= ======== ============ =======
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets at December 31, 2002 and 2001 are as follows:
2002 2001
---------- ----------
Deferred Tax Assets:
Net Operating Loss Carryovers $3,560,191 $2,766,106
Capital Loss Carryovers 1,278,955 1,321,392
----------- -----------
Gross Tax Assets 4,839,146 4,087,498
Valuation Allowance (4,839,146) (4,087,498)
----------- -----------
Net Deferred Tax Asset $ - $ -
=========== ===========
The Company has incurred net operating losses from inception. Net operating loss
carryovers will expire in varying amounts if unused as of the years ended
December 31, 2003 - 2022. The Company has unused capital loss carryovers at
December 31, 2002 of approximately $3,202,000. Capital loss carryovers will
expire in varying amounts if unused as of the years ended December 31, 2003 and
2004. A valuation allowance has been established due to uncertainty whether the
Company will generate sufficient taxable earnings and capital gains to utilize
the available carryovers. The Tax Acts of some jurisdictions contain provisions
which may limit the net operating loss carryforwards available to be used in any
given year if certain events occur, including significant changes in ownership
interests. The Company has not assessed the impact of these provisions on the
availability of Company loss carryovers.
F-19
Euroweb International Corp.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
13. Stockholders' equity
On August 30, 2001, the shareholders approved a one-for-five reverse stock split
of the Company's common stock. All amounts in the financial statements have been
restated to give retroactive effect to the reverse split.
14. Related party transactions
General: The largest customer of the Company since early 2001 has been Pantel
Rt., a Hungary-based alternative telecommunications provider. Pantel operates
within the region and has become a significant trading partner for Euroweb
Romania through the provision of a direct fiber cable connection, which enables
companies to transmit data to a variety of destinations by utilizing the
international connections of Pantel.
Due to the increase in revenues from International/domestic leased line and VOIP
services provided in conjunction with Pantel, some of the consultants of the
Company have moved to the premises of Pantel in order to improve the
effectiveness of the co-operation on international projects and daily
operational issues. Csaba Toro, Chief Executive Officer of Euroweb International
Corp., was also the Chief Executive Officer of Pantel until February 2003.
Transactions: Both Euroweb Slovakia and Euroweb Romania have engaged in
transactions with Pantel:
(a) Pantel provides the following services to the subsidiaries of the Company:
- Internet bandwidth
- International leased lines outside of Romania and Slovakia
The total amount of these services were $2,028,390 during 2002 (2001:
$782,322).
(b) Euroweb International and its subsidiaries provided the following services
to Pantel:
- Cost of international leased lines and local loops in Slovakia and Romania
- International IP and VOIP services
- Commissions
The total value of these services were approximately $4,873,371 in 2002
(2001: $2,489,686).
Direct sales to Pantel were 38% of total consolidated revenue, but Euroweb's
dependency on Pantel is even greater than this figure suggests. Some third party
sales involve Pantel as the subcontractor/service provider for the
international/domestic lines (hence the revenues from Pantel are lower 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).
F-20
Euroweb International Corp.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
Effective dependency on Pantel - taking into account direct and Pantel-related
sales - represents approximately 53% of total consolidated revenues of the
Company and approximately 80-90% of total sales of Euroweb Romania. There is no
such dependency in the case of Euroweb Czech or Euroweb Slovakia.
Pricing: Agreements are made at market prices or a split of the margin based on
the financial investment into the specific services by each of the parties. The
Company considers alternative suppliers for individual projects, when
appropriate.
Other: Some Pantel services are provided and invoiced by Euroweb Hungary Rt.
(49% owned by the Company and 51% owned by Pantel). These transactions are
considered as essentially Pantel services and disclosed as revenue of Pantel in
point (a) as set forth above. No other services are invoiced between Euroweb
Hungary Rt. and the Company.
There were no other significant related party transactions in 2002.
15. Commitments and Contingencies
(a) Employment Agreements
An employment agreement with the Chief Executive Officer provides for aggregate
annual compensation of $96,000 through December 31, 2005.
(b) Lease agreements
The Company's subsidiaries have entered into various capital leases for vehicles
and internet equipment, as well as non-cancelable agreements for office
premises. Refer to Note 9 (Leases).
(c) 20 years' usage rights
Euroweb Romania has provided an Indefeasible Right of Use for transmission
capacity on 12 pairs of fiber (see Note 9) over a period of 20 years. The
construction is expected to be finished by the end of April 2003. For the
duration of the agreement, Euroweb Romania is obliged to use all reasonable
endeavours to ensure the Cable System is maintained in efficient working order
and in accordance with industry standards.
(d) Legal Proceedings
There are no known significant legal procedures that have been filed and are
outstanding against the Company.
16. Stock Option Plan and Employee Options
The outstanding options have been adjusted to reflect the reverse stock split of
one for five that became effective on August 30, 2001, and prior period amounts
have been restated. During 2002, the Company did not grant any options nor were
any exercised.
F-21
Euroweb International Corp.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
a) Stock Options
Under the Company's Stock Option Plan (the "Plan"), an aggregate of 134,000
shares of common stock are authorized for issuance. The Plan provides that
incentive and nonqualified options may be granted to 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 three directors appointed by the Board (the "Committee"). The Board
or Committee determines, among other things, the persons to whom stock options
are granted, the number of shares subject to each option, the date or dates upon
which each option may be exercised and the exercise price per share.
Options granted under the Plan are generally exercisable for a period of up to
six years from the date of grant. Options terminate upon the option holder's
termination of employment or consulting arrangement with the Company, except
that, under certain circumstances, an option holder may exercise an option
within the three-month period after such termination of employment. An option
holder may not transfer any options although an option may be exercised by the
personal representative of a deceased option holder within the three-month
period following the option holder's death. Incentive options granted to any
employee who owns more than 10% of the Company's outstanding common stock
immediately before the grant 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.
Moreover, the exercise term may not exceed five years. The aggregate fair market
value of common stock (determined at the date of grant) for which any employee
may exercise incentive options in any calendar year may not exceed $100,000. In
addition, 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.
As of December 31, 2002, the total number of shares for which options have been
issued and are exercisable pursuant to the Plan is 61,500.
(b) Employment Agreement Options
The Company has issued exercisable options pursuant to employment agreements. As
of December 31, 2002 fully vested options are outstanding and exercisable for
63,000 shares pursuant to the employment agreement with Mr. Csaba Toro, CEO. The
options were granted on April 2, 1999 and expire on April 2, 2005. The options
are exercisable at $ 10.00 per share.
(c) Accounting for stock-based options
Stock options and employment agreement options are all considered options which
come under the guidelines of stock-based compensation. For options granted to
employees at exercise prices equal to the fair market value of the underlying
common stock at the date of grant, no compensation cost is recognized.
SFAS No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123"),
requires the Company to provide pro forma information regarding net income and
earnings per share as if compensation cost for the Company's stock options had
been determined in accordance with the fair value-based method prescribed in
SFAS No. 123. The Company estimates the fair value of each stock option at the
grant date by using the Black-Scholes option-pricing model. No grants were made
in 2002 and 2001. Consequently, in 2002 and 2001 the reported loss is the same
as the pro forma loss, as all previous grants vested in the year of the grant
and thus the full amount of the fair values were reflected in the pro forma loss
in the year of the grants.
F-22
Euroweb International Corp.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
The following table summarizes the total number of shares for which options
(granted under the Stock Option Plan and Employment Agreements) have been issued
and are exercisable:
2002 2001
------------------- -------------------
Weighted Weighted
average average
exercise exercise
Options* Price Options* Price
Outstanding, January 1, 319,500 $8.99 341,500 $8.82
Cancelled (185,000) 8.93 - -
Expired (10,000) 10.00 (22,000) 6.25
--------- ---------
Outstanding and exercisable, December 31, 124,500 9.00 319,500 8.99
========= =========
*Restated to reflect the reverse split of 1 for 5 effective August 30, 2001.
No options were granted or exercised in 2002 and 2001.
17. Stock Warrants
The number of warrants have been adjusted to reflect the reverse stock split of
one-for-five that became effective on August 30, 2001. As at December 31, 2002,
the total number of shares for which warrants have been issued and are
exercisable (at $ 11 per share) is 10,000. The warrants expire on May 2, 2004.
Warrants are generally granted in connection with private placement
transactions. In 2002, 1,076,731 warrants each which was the equivalent of
one-fifth of a share of common stock, expired. No warrants were granted or
exercised in 2002.
18. Segmental information
Although the Company introduced new services in 2001, the Company does not treat
these services as separate operating segments. Only revenue and gross margin by
service line information is received and evaluated by top management.
The table below summarizes financial information by geographic area for the year
ended December 31, 2002 after intercompany eliminations:
2002 Slovakia Czech Romania Corporate Total
3rd party revenues 2,651,744 1,415,541 4,000,005 - 8,067,290
Pantel related revenues 105,342 - 4,767,999 - 4,873,341
Total revenues 2,757,086 1,415,541 8,768,004 - 12,940,631
Gross profit 1,669,912 702,119 1,955,404 - 4,327,435
F-23
Euroweb International Corp.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
Depreciation 391,396 88,312 550,058 8,400 1,038,166
Intangible impairment - - 448,500 448,500
Goodwill impairment *** 442,000 746,000 828,000 2,016,000
Interest income 5,584 1,281 4,696 450,863 462,424
Interest expense 35,408 2,624 23,835 15,380 77,247
Net interest (expense) income (29,824) (1,343) (19,139) 435,483 385,177
Net profit/(loss)** 87,024 32,509 (137,069) (5,876,698) (5,894,234)
Segment fixed assets, net* 511,546 117,915 640,462 - 1,269,923
Fixed asset additions* 372,811 117,729 198,378 3,340 692,258
Goodwill *** 563,300 92,581 890,657 0 1,546,538
Customer lists 0 0 167,273 0 167,273
* excluding fiber project in Romania, representing unfinished construction
work totaling $430,000
** goodwill impairment is recorded in the corporate entity.
*** these amounts are recorded in the books of the corporate entity.
19. Subsequent events
There have been no material subsequent events since December 31, 2002.
F-24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on the 10th day of April 2003.
EUROWEB INTERNATIONAL CORP.
By /s/Csaba Toro
Csaba Toro
Chairman of the Board
Pursuant to the requirements of the Securities Exchange of 1934, as
amended, this Report has been signed below by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
/s/Csaba Toro Chairman of Board, April 10, 2003
Csaba Toro Chief Executive Officer (CEO)
Director
/s/ Rob van Vliet Treasurer April 10, 2003
Rob van Vliet Secretary to the Board
Director
/s/Hans Lipman Director April 10, 2003
Hans Lipman
/s/ Stewart Reich Director April 10, 2003
Stewart Reich
/s/Gerald Yellin Director April 10, 2003
Gerald Yellin
CERTIFICATIONS
I, Csaba Toro, certify that:
1. I have reviewed this annual report on Form 10-KSB of Euroweb
International Corp.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: April 10, 2003
/s/Csaba Toro
Csaba Toro
Chief Executive Officer
CERTIFICATIONS
I, Peter Szigeti, certify that:
1. I have reviewed this annual report on Form 10-KSB of Euroweb
International Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 10, 2003.
/s/Peter Szigeti
Peter Szigeti
Chief Accounting Officer