U.S. Securities and Exchange
Commission Washington,
D.C. 20549
Form 10-QSB
(Mark One)
|x| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended September 30, 2003
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_____________ to ________________
Commission file number 1-1200
EUROWEB INTERNATIONAL CORP.
(Exact name of small business issuer as specified in its charter)
Delaware 13-3696015
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1122 Budapest, Varosmajor utca 13. Hungary
------------------------------------------
(Address of principal executive offices)
+36-1-8897101 +36-1-8883783
Issuer's telephone number Issuer's facsimile number
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirement for the past 90 days. Yes X No
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock, $.001 par value 4,665,332
----------------------------- --------------------------------
(Class) (Outstanding at September 30, 2003)
Transitional Small Business Disclosures Format (Check one): Yes____ No X______
EUROWEB INTERNATIONAL CORP.
INDEX
PART I. Financial Information
Item 1. Financial Statements
Consolidated balance sheets as of September 30, 2003 (unaudited)
and December 31, 2002 (audited) 3
Consolidated statements of operations and comprehensive loss (unaudited) for
the three months ended September 30, 2003 and 2002 and nine months
ended September 30, 2003 and 2002 4
Consolidated statements of stockholders' equity for the nine months ended
September 30, 2003 (unaudited) and twelve months ended December 31, 2002 5
Consolidated statements of cash flows (unaudited) for the nine months
ended September 30, 2003 and 2002 6
Notes to interim (unaudited) Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
Item 3. Controls and Procedures
PART II. Other Information 24
Signature 25
2
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2003 2002
---- ----
(Unaudited) (audited)
ASSETS
Current Assets
Cash and cash equivalents ............................................. $ 1,295,038 $ 2,098,983
Investment in securities .............................................. 11,719,885 12,104,104
Trade accounts receivable, net ........................................ 376,361 348,488
Related party receivables ............................................. 1,354,777 855,194
Current portion of note receivable .................................... 200,771 190,105
Prepaid and other current assets ...................................... 1,068,986 851,100
------------ ------------
Total current assets ............................................. 16,015,818 16,447,974
Note receivable, less current portion ................................... 21,931 173,871
Property and equipment, net ............................................. 1,995,050 1,269,923
Assets under construction ............................................... -- 430,000
Goodwill ................................................................ 1,546,538 1,546,538
Intangibles - customer lists ............................................ 117,091 167,273
------------ ------------
Total assets ....................................................... $19,696,428 $ 20,035,579
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable ................................................ $ 727,300 $ 659,244
Related party payables ................................................ 685,121 345,110
Acquisition indebtedness .............................................. -- 180,000
Other current liabilities ............................................. 551,039 469,547
Loan payable .......................................................... -- 129,945
Accrued expenses ...................................................... 573,453 965,885
Deferred IRU revenue .................................................. 46,000 30,667
Deferred other revenue ................................................ 469,854 145,392
------------ ------------
Total current liabilities .......................................... 3,052,767 2,925,790
Non-current portion of deferred IRU revenue ............................ 854,834 889,333
Non-current portion of lease obligations ............................... 42,598 67,100
------------ ------------
Total liabilities .................................................. 3,950,199 3,882,223
Stockholders' Equity
Preferred stock, $.001 par value - Authorized 5,000,000 shares;
no shares issued or outstanding ..................................... -- --
Common stock, $.001 par value - Authorized 12,500,000 shares;
Issued and outstanding 4,665,332 shares ................................ 24,129 24,129
Additional paid-in capital ............................................. 48,227,764 48,227,764
Accumulated deficit..................................................... (31,455,951) (31,219,267)
Accumulated other comprehensive income: ................................ 65,699 236,142
Treasury stock - 175,490 common shares, at cost ....................... (1,115,412) (1,115,412)
------------ ------------
Total stockholders' equity .......................................... 15,746,229 16,153,356
------------ ------------
Commitments and contingencies
Total liabilities and stockholders' equity .......................... $19,696,428 $20,035,579
============ ============
See accompanying notes to consolidated financial statements.
3
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
Three months ended Nine months ended
------------------ ------------------
September 30 September 30,
------------------ ------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues
Third party revenues ............................................... 2,384,035 2,388,914 6,932,962 $ 6,093,544
Related party revenues ............................................. 1,262,187 806,450 3,967,877 3,221,582
------------ ------------ ------------ ------------
Total Revenues ....................................... 3,646,222 3,195,364 10,900,839 9,315,126
Cost of revenues
Third party cost of revenues ...................................... 1,732,564 1,740,125 5,580,081 4,533,388
Related party cost of revenues .................................... 755,545 596,554 1,884,142 1,656,725
------------ ------------ ------------ ------------
Total cost of revenues ............................... 2,488,109 2,336,679 7,464,223 6,190,113
------------ ------------ ------------ ------------
Gross profit .................................................... 1,158,113 858,685 3,436,616 3,125,013
Operating expenses
Compensation and related costs .................................. 457,803 413,346 1,447,372 1,389,712
Severance to officers ........................................... -- -- -- 2,020,832
Consulting and professional fees ................................ 259,619 153,269 778,911 692,767
Other selling, general and administrative expenses .............. 362,850 284,556 965,246 1,187,198
Depreciation and amortization ................................... 215,218 322,681 654,863 774,228
Writedown of intangible assets - customer lists ................. - 448,500 - 448,500
------------ ------------ ------------ ------------
Total operating expenses .................................... 1,295,490 1,622,352 3,846,392 6,513,237
------------ ------------ ------------ ------------
Loss from operations ............................................... (137,377) (763,667) (409,776) (3,388,224)
Net interest income ............................................. 74,150 77,978 250,149 304,223
Equity in loss of affiliate ..................................... -- -- -- 495,187
Loss from operations before income taxes ........................... (63,227) (685,689) (159,627) (3,579,188)
------------ ------------ ------------ ------------
Provision for income taxes ......................................... 21,479 -- 77,057 --
------------ ------------ ------------ ------------
Net Loss ........................................................... (84,706) (685,689) (236,684) (3,579,188)
------------ ------------ ------------ ------------
Other comprehensive (loss) gain .................................... (54,352) 127,346 (170,443) 206,122
------------ ------------ ------------ ------------
Comprehensive loss ................................................. (139,058) (558,343) $ (407,127) $ (3,373,066)
============ ============ ============ ============
Net Loss per share, basic and diluted .............................. (.02) (.15) (.05) (.77)
Weighted average number of shares outstanding, basic and diluted ... 4,665,332 4,665,332 4,665,332 4,665,332
See accompanying notes to consolidated financial statements
4
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Accumulated
Common Stock Additional Other Total
------------------ Paid-in Accumulated Comprehensive Treasury Stockholders'
Shares Amount Capital Deficit Gains(Losses) Stock Equity
----------- ---------- ------------ ------------- ------------- ------------ ------------
Balances, December 31, 2001 4,665,332 $24,129 $48,227,764 $(25,325,033) (143,323) $(1,115,412) $21,668,125
----------- ---------- ------------ ------------- ------------- ------------ ------------
Foreign currency translation gain - - - - 160,687 - 160,687
Unrealized gain on securities
available for sale - - - - 245,212 - 245,212
Reclassification of realized gain
included in net income - - - - (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
----------- ---------- ------------ ------------- ------------- ------------ ------------
Foreign currency translation loss - - - - (13,683) - (13,683)
Unrealized loss on securities - - - - (156,760) - (156,760)
available for sale
Net loss for the period - - - (236,684) - - (236,684)
----------- ---------- ------------ ------------- ------------- ------------ ------------
Balances, September 30, 2003 4,665,332 $24,129 $48,227,764 $(31,455,951) $65,699 $(1,115,412) $15,746,229
=========== ========== ============ ============= ============= ============ ============
See accompanying notes to consolidated financial statements
5
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
-------------------
2003 2002
------------ ------------
Cash flows from operating activities:
Net loss .................................................................. $ (236,684) $(3,579,188)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ............................................. 654,863 774,228
Amortization of discount on acquisition indebtedness ...................... -- 12,768
Writedown of intangibles - customer list .................................. -- 448,500
Equity in loss of affiliate ............................................... -- 495,187
Foreign currency (gain) loss .............................................. (32,110) 15,896
Realized gain on sale of securities ....................................... -- (62,786)
Unrealized interest income on securities .................................. (272,173) (250,065)
Changes in operating assets and liabilities net of effects of acquisitions:
Accounts receivable ....................................................... (527,456) 315,334
Prepaid and other assets .................................................. (217,886) (10,933)
Accounts payable, other current liabilities and accrued expenses .......... 239,477 (612,988)
Deferred revenue 305,296 (123,127)
------------ ------------
Net cash used in operating activities (86,673) (2,577,174)
------------ ------------
Cash flows from investing activities:
Investment in securities .................................................. -- (13,506,666)
Maturity of securities .................................................... 499,632 16,654,820
Collection on notes receivable ............................................ 141,274 148,892
Payment of acquisition indebtedness ....................................... (180,000) (180,000)
Purchase of property and equipment ........................................ (899,808) (511,325)
------------ ------------
Net cash (used in) provided by investing activities ............... (438,902) 2,605,721
Cash flows from financing activities:
Repayment of loan payable ................................................. (129,945) --
Principal payments under capital lease obligations ........................ (166,852) (42,130)
------------ ------------
Net cash used in financing activities .............................. (296,797) (42,130)
------------ ------------
Effect of foreign exchange rate changes on cash .............................. 18,427 2,534
------------ ------------
Net decrease in cash and cash equivalents..................................... (803,945) (11,049)
Cash and cash equivalents, beginning of period ............................... 2,098,983 1,512,303
============ ============
Cash and cash equivalents, end of period ..................................... $ 1,295,038 $ 1,501,254
============ ============
See accompanying notes to consolidated financial statements.
6
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
1. Organization and Business
EuroWeb International Corp. (the "Company") is a Delaware corporation which was
organized on November 9, 1992, and was a development stage enterprise through
December 31, 1993. The controlling owner of Euroweb International Corp. is KPN
Telecom BV, a Netherlands corporation.
The Company operates in the Czech Republic, Romania and Slovakia, through its
subsidiaries Euroweb Czech Republic spol. s.r.o. ("Euroweb Czech"), Euroweb
Slovakia a.s. ("Euroweb Slovakia") and Euroweb Romania S.A. ("Euroweb Romania").
The Company operates in one industry segment, providing Internet access and
additional value added services to business customers. The Company's
consolidated statements of operations also include the equity in the net income
or loss of Euroweb Hungary Rt., in which the Company has a 49% ownership
interest. The other 51% of Euroweb Hungary Rt. is held by Pantel
Telecommunication Rt., Hungary ("Pantel Rt."), of which KPN Telecom BV is also
the controlling owner.
The revenues are derived from the following four activities:
(1) Internet Service Provider (Internet access, Content and Web services,
Other services);
(2) International/domestic leased line, Internet Protocol data services;
(3) Voice over Internet Protocol services; and
(4) Facilities (sale, rent and maintenance of dark fiber between the
Hungarian border and the Romanian City of Timisoara)
For the services in points (2) and (3), the Company's main customer in 2003 and
2002 was Pantel Rt.
2. Summary of Significant Accounting Policies
(a) Principles of consolidation and basis of presentation
The consolidated financial statements comprise the accounts of the
Company and its controlled subsidiaries. All material intercompany
balances and transactions have been eliminated upon consolidation.
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of
America.
(b) Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Significant estimates
made by the Company include the period of benefit and recoverability of
goodwill and other intangible assets.
7
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
(c) Fair value of financial instruments
The carrying values of cash equivalents, investment in debt
securities, notes and loans receivable, accounts payable, loans
payable and accrued expenses approximate fair values.
(d) Revenue recognition
Revenues from Internet services are recognized in the month in which
the services are provided, either based on monthly traffic or on fixed
monthly fees (leased lines). Revenue for other services, are
recognized as the service is performed.
In 2002, the Company entered into an agreement to provide transmission
capacity to a customer pursuant to an indefeasible rights-of-use
("IRU") agreement that management believe qualifies as an operating
lease under Financial Accounting Standards Board Interpretation No.
13, "Accounting for Leases" ("FAS 13"), since the IRU agreement
provides rights to use a specific subject asset for a defined period.
Revenue attributable to the lease is recognized on a straight-line
basis over the term of the 20-year lease agreement, and commenced upon
installation in May 2003.
Under Financial Accounting Standards Board Interpretation No. 43,
"Real Estate Sales, an interpretation of FASB Statement No. 66" ("FIN
43"), leases of fiber and capacity that are deemed integral equipment
are required to be accounted for in the same manner as leases of real
estate. If fiber and equipment are considered integral to the related
real estate, a lease must include a provision transferring title of
such integral equipment to the lessee in order for that lease to be
accounted for as a sales-type lease. Failure to satisfy the title
transfer requirements results in operating lease treatment, and
recognition of the related lease income over the lease term. The
Company's IRU does not involve a transfer of title.
IRUs generally require the customer to make a down payment upon
execution of the agreement, with the balance due upon delivery and
acceptance of the fiber. This has resulted in a substantial amount of
deferred revenue being recorded on the balance sheet. The Company is
obligated under the fiber IRU to maintain its network in efficient
working order and in accordance with industry standards. Customers are
obligated for the term of the agreement to pay for their allocable
share of the costs for operating and maintaining the network. The
Company recognizes this revenue monthly as services are provided.
Accounting practice and guidance with respect to the treatment of
fiber sales and IRU agreements continues to evolve. Any changes in the
accounting treatment could affect the way the Company accounts for
revenue and expenses associated with these transactions in the future.
(e) Cost of revenues
Cost of revenues comprise principally of telecommunication network
expenses, costs of content services and cost of leased lines.
8
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
(f) Foreign currency translation
The Company considers the United States Dollar ("US$") to be the
functional currency of the Company and unless otherwise stated, the
respective local currency to be the functional currency of its
subsidiaries. The reporting currency of the Company is the US$ and
accordingly, all amounts included in the consolidated financial
statements have been translated into US$.
The balance sheets of subsidiaries are translated into US$ using the
year end exchange rates. Revenues and expenses are translated at
average rates in effect for the periods presented. The cumulative
translation adjustment is reflected as a separate component of
shareholders' equity on the consolidated balance sheet.
The Company conducts business and maintains its accounts for Euroweb
Romania in the Romanian Lei ("ROL"). Romania is considered a
hyper-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$) of $ 17,305 (gain) 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.
9
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
(i) Investment in affiliate
The Company holds a minority interest of 49% in Euroweb Hungary Rt.
which is controlled by its 51% shareholder, Pantel Rt. As the Company
exerts significant influence over Euroweb Hungary Rt., the investment
is carried under the equity method of accounting, with the Company
recording its share of the earnings or loss of Euroweb Hungary Rt.
Dividends are credited against the investment account when received.
As a result of continuing losses, the carrying value of the net
investment in affiliate was written down to zero during 2002. Since
the Company has no legal or commercial commitments to provide
continuing financial support, no further losses will be recognized
unless the Company makes additional qualifying investments in Euroweb
Hungary Rt., and future profits will be recognized only once such
profits exceed the amount of unrecorded losses. If the Company makes
additional qualifying investments in Euroweb Hungary Rt., the Company
would be required to recognize additional losses to the extent these
additional investments are considered funding of unrecognized prior
losses of Euroweb Hungary Rt.
(j) Property and equipment
Property and equipment are stated at cost, less accumulated
depreciation. Equipment purchased under capital lease is stated at the
present value of minimum lease payments at the inception of the lease,
less accumulated depreciation. The Company provides for depreciation
of equipment using the straight-line method over the shorter of
estimated useful lives of up to four years or the lease term.
Recurring maintenance on property and equipment is expensed as
incurred.
Any gain or loss on retirements and disposals are included in the
results of operations.
(k) Goodwill and Intangibles
Goodwill results from business acquisitions and represents the excess
of purchase price over the fair value of net assets acquired.
Amortization was computed over the estimated future period of benefit
(generally five years) on a straight-line basis until December 31,
2001. On January 1, 2002 the Company adopted Statement of Financial
Accounting Standard No. 142 ("SFAS 142"), "Goodwill and Other
Intangible Assets," which establishes new accounting and reporting
standards for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17. Goodwill and intangible assets that
have indefinite useful lives are no longer amortized but rather are
tested at least annually for impairment. Intangible assets that have
finite useful lives (whether or not acquired in a business
combination) will continue to be amortized over their estimated useful
lives, which are no longer limited to a maximum of 40 years. The
adoption of SFAS 142 has eliminated the goodwill charge in 2002.
During 2002, the Company performed the required SFAS No. 142
impairment test, with respect to goodwill. The first step of this test
requires the Company to compare the carrying value of any reporting
unit that has goodwill to the estimated fair value of the reporting
unit. As the current fair value was less than the carrying value, the
Company performed the second step of the impairment test. This second
step requires the Company to measure the excess of the recorded
goodwill over the current value of the goodwill, and to record any
excess as an impairment.
10
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
Based upon the results, the Company recorded an impairment of
$2,016,000 to the carrying value of its goodwill in its financial
statements for the year ended December 31, 2002.
Intangibles consist of customer lists which were acquired as a result
of a purchase of assets and are being amortized over the estimated
future period of benefit of five years. The assessment of
recoverability and possible impairment are determined using estimates
of undiscounted future cash flows in a manner in accordance with the
provisions of Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets,"
("SFAS No. 144"), with a write-down recorded in the third quarter of
2002. The carrying value of customer lists is considered impaired when
the projected undiscounted future cash flows related to the asset are
less than its carrying value. The Company measures impairment based on
the amount by which the carrying value of the customer lists exceeds
its fair market value. Fair market value is determined primarily using
the projected future cash flows discounted at a rate commensurate with
the risk involved. The assessment of the recoverability of the
remaining balance will be impacted if estimated future operating cash
flows are not achieved.
(l) Net loss per share
The Company has adopted Statement of Financial Accounting Standards
No. 128, "Earnings per Share," ("SFAS No. 128"), which provides for
the calculation of "basic" and "diluted" earnings per share. Basic
earnings(loss) per share includes no dilution and is computed by
dividing income(loss) attributable to common stockholders by the
weighted average number of common shares outstanding for the period.
Diluted earnings(loss) per share reflects the potential effect of
common shares issuable upon exercise of stock options and warrants in
periods in which they have a dilutive effect. The Company had
potentially dilutive common stock equivalents for the periods ended
September 30, 2003 and 2002, which were not included in the
computation of diluted net loss per share because they were
antidilutive.
(m) Comprehensive loss
The Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," ("SFAS No. 130") which
established standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income
is defined to include all changes in equity except those resulting
from investments by, and distributions to, owners. Among other
disclosures, SFAS No.130 requires that all items that are required to
be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The
Company has chosen to present a Combined Statement of Operations and
Comprehensive Loss.
(n) Business segment reporting
The Company adopted Statement of Financial Accounting Standards No.
131, "Disclosures About Segments of an Enterprise and Related
Information," ("SFAS No. 131"). SFAS No. 131 superseded FASB Statement
No. 14, "Financial Reporting for Segments of a Business Enterprise."
SFAS No. 131 establishes standards for disclosures about operating
segments, products and services, geographic areas and major customers.
11
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
Management has determined that the Company operates in one industry
segment, providing Internet access and additional value added services
to business customers. Substantially all of the Company's revenues are
derived from the provision of such services.
(o) Income taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities, net of appropriate valuation
allowances, are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards. Deferred tax
assets and liabilities, if any, are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment
date.
(p) Stock-Based compensation
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related
interpretations including FASB Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation an interpretation of
APB Opinion No. 25" issued in March 2000, to account for its fixed
plan stock options. Under this method, compensation expense is
recorded at measurement date only if the current market price of the
underlying stock exceeds the exercise price. SFAS No. 123, "Accounting
for Stock-Based Compensation," ("SFAS No. 123") established accounting
and disclosure requirements using a fair value-based method of
accounting for stock-based employee compensation plans. As allowed by
SFAS No. 123, the Company has elected to continue to apply the
intrinsic value-based method of accounting described above, and has
adopted the disclosure requirements of SFAS No. 123. As no grants were
made since 2000, the reported loss is the same as the pro-forma loss
as all previous grants vested in the year of the grant and thus the
full amount of the fair values were reflected in the pro forma loss in
the year of the grants.
(q) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
of
On January 1, 2002, the Company adopted SFAS No. 144 ("SFAS 144"),
"Accounting for Impairment or Disposal of Long-Lived Assets," which
establishes a single accounting method for long-lived assets to be
disposed of by sale and broadens the presentation of discontinued
operations. The adoption of this statement had no significant impact
on the Company's results of operations or financial position. The
Company evaluates the carrying value of long-lived assets to be held
and used, including goodwill, whenever events or changes in
circumstances indicate that the carrying amount may not be
recoverable. The carrying value of a long-lived asset is considered
impaired when the projected undiscounted future cash flows related to
the asset are less than its carrying value. The Company measures
impairment based on the amount by which the carrying value of the
respective asset exceeds its fair market value. Fair market value is
determined primarily using the projected future cash flows discounted
at a rate commensurate with the risk involved.
12
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
(r) Asset Retirement Obligations
On January 1, 2003, the Company adopted Financial Accounting Standards
Board No. 143 "Accounting for Asset Retirement Obligations" ("Statement 143")
issued in June 2001. Statement 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying
amount of the long-lived asset. Significant asset retirement obligations do
not exist and therefore none have been recognized in the Company's books.
(s) Recent accounting pronouncements
The Financial Accounting Standards Board ("FASB") No. 146 Accounting for
Costs Associated with Exit or Disposal Activities ("Statement 146") was
issued in June 2002. Statement 146 nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)". `Costs'
include (a) one-time termination benefits, (b) costs to terminate a contract
that is not a capital lease and (c) other associated costs including costs to
consolidate facilities or relocate employees. The Statement is based on the
general principle that a liability for a cost associated with an exit or
disposal activity should be (1) recorded when it is incurred and (2)
initially measured at fair value. Thus, a commitment to an exit or disposal
plan no longer will be a sufficient basis for recording a liability for those
activities. The Company is required to adopt the provisions of Statement 146
for exit or disposal activities initiated after December 31, 2002. The
Company has adapted Statement 146 and has concluded that there is no current
impact on its consolidation financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements
No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under
guarantees issued. The Interpretation also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken. The disclosure requirements are effective
for financial statements of interim and annual periods ending after December
31, 2002. The Group has adopted the disclosure requirements and will apply
the recognition and measurement provisions for all guarantees entered into or
modified after December 31, 2002. To date the company has not entered into or
modified guarantees.
13
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
In December 2002, the FASB issued SFAS No.148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement
No.123. This Statement amends FASB Statement No.123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of Statement No.123 to require prominent disclosures in both
annual and interim financial statements. Certain of the disclosure
modifications are required for fiscal years ending after December 15, 2002
and are included in the notes to these consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51. This
Interpretation addresses the consolidation by business enterprises of
variable interest entities as defined in the Interpretation. The
Interpretation applies immediately to variable interests in variable interest
entities created after January 31, 2003, and to variable interests in
variable interest entities obtained after January 31,2003. For nonpublic
enterprises, such as the Company, with a variable interest in a variable
interest entity created before February 1, 2003, the Interpretation is
applied to the enterprise no later than the end of the first annual reporting
period beginning after June 15, 2003. The application of this Interpretation
is not expected to have a material effect on the Company's financial
statements.
In November 2002, the Emerging Task-Force issued its consensus on EITF
00-21, Revenue Arrangements with Multiple Deliverables ("EITF 00-21") on an
approach to determine whether an entity should divide an arrangement with
multiple deliverables into separate units of accounting. According to EITF
00-21, in an arrangement with multiple deliverables, the delivered item(s)
should be considered a separate unit of accounting if all of the following
criteria are met: (1) the delivered item(s) has value to the customer on a
standalone basis, (2) there is objective and reliable evidence of the fair
value of the undelivered item(s), and (3) if the arrangement includes a
general right of return, delivery or performance of the undelivered item(s)
is considered probable and substantially in the control of the vendor. If all
the conditions above are met and there is objective and reliable evidence of
fair value for all units of accounting in an arrangement, the arrangement
consideration should be allocated to the separate units of accounting based
on their relative fair values. The guidance in this Issue is effective for
revenue arrangements entered into in fiscal beginning after June 15, 2003.
The Company believes that the adoption of EITF 00-21 will not have a material
impact on it's financial statements.
At the January 23, 2003 meeting, the Emerging Issues Task Force (EITF)
reached consensuses on EITF 02-18 Accounting for Subsequent Investments in an
Investee after Suspension of Equity Method Loss Recognition. Issues 1 and 2
of EITF 02-18 which considered whether, (i) an investor should recognize any
previously suspended losses when accounting for a subsequent investment in an
investee that does not result in the ownership interest increasing from one
of significant influence to one of control, and (ii), if the additional
investment represents the funding of prior losses, whether all previously
suspended losses should be recognized or whether only the previously
suspended losses equal to the portion of the investment determined to be
funding prior losses should be recognized. The EITF concluded that if the
additional investment, represents, in substance, the funding of prior losses,
the investor should recognize previously suspended losses only up to the
amount of the additional investment determined to represent the funding of
prior losses. At its February 5, 2003 meeting, the FASB ratified the
consensuses reached by the Task Force in this Issue. As discussed in notes 1
(i) and 4, the Company has discontinued recording losses on its equity method
investment in Euroweb Hungary Rt., which is 51% owned by Pantel Rt., also a
subsidiary of
14
KPN Telecom BV. If the Company makes additional investments in Euroweb
Hungary Rt., the Company would be required to recognize additional losses to
the extent these additional investments are considered funding of
unrecognized prior losses of Euroweb Hungary Rt.
On April 30, 2003, the FASB issued FASB Statement No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities, which amends
FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, to address (1) decisions reached by the Derivatives
Implementation Group, (2) developments in other Board projects that address
financial instruments, and (3) implementation issues related to the
definition of a derivative. Statement 149 has multiple effective date
provisions depending on the nature of the amendment to Statement 133, and the
Company is currently considering its potential effect on the financial
statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity".
This statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as
equity. This statement is effective for contracts entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003, except for mandatorily
redeemable financial instruments of non-public entities. The Company is
currently assessing the impact of this pronouncement on its financial
statements.
3. Investment in Securities
On April 24, 2003, the Company sold United States Treasury Notes for $499,632
with a face value of $505,000. As at September 30, 2003, the Company holds
investments in United States Treasury Notes with a face value of $11,764,000,
which mature on February 15, 2004.
As of September 30 2003, the Company has recorded net unrealized gains of
$88,452 and the accretion of interest and discount on the Notes of $614,399
($88,368 of which is recorded in the third quarter of 2003).
15
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
4. Affiliate, carried on an equity basis
The Company's consolidated statement of operations for the nine months ended
September 30, 2003 and 2002 includes the Company's equity interest in the net
income of Euroweb Hungary Rt. for each period, calculated as follows:
2003 (nine months) 2002 (nine months)
------------------ ------------------
Revenues $ 6,280,734 $ 4,496,373
Gross profit 2,853,845 2,535,879
Net loss $ (195,069) $ (1,321,600)
================== =================
Company's 49% equity in net loss $ (95,583) $ (647,584)
================== =================
Equity in loss recorded by the company $ - $ (495,187)
================== =================
Unrecorded cumulative net loss $ (225,913) $ (152,397)
================== =================
The carrying value of the investment was written down to zero in 2002. Since
the Company has no legal or commercial commitments to provide continuing
financial support, the equity in the net loss of Euroweb Hungary Rt. of
$39,699 has not been recorded. If the Company makes additional investments in
Euroweb Hungary Rt., the Company would be required to recognize additional
losses to the extent these additional investments are considered funding of
unrecognized prior losses of Euroweb Hungary Rt. Moreover, only future
profits in excess of the unrecorded loss of $225,913 ($95,583 from 2003 and
$130,330 unrecorded carry forward equity in loss of affiliate from 2002) may
be recorded.
Pursuant to the non-compete provision in the shareholders' agreement, the
Company cannot: (i) engage in any business activity listed in the scope of
activities of Euroweb Hungary Rt.'s charter,which, among others, includes
telecommunications, data bank activity and information technology activity,
(ii) own or control any equity interest in any person or entity that engages
in any such business activity or (iii) permit any of its employees to act as
a director, officer, manager or consultant to any person or entity that
engages in any such business activity. If the Company breaches its obligation
set forth under this provision, the Company will be required to sell to
PanTel Rt. all of its shares at the time of such breach at a price equal to
the nominal value of such shares.
16
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
5. Stockholders' Equity
During the nine months of 2003, the Company did not grant any options or
warrants, nor were any exercised. Upon the exercise of an outstanding warrant
or option, each warrant/option holder will receive 1/5 of a share, due to the
reverse stock split effected on August 30, 2001.
6. Commitments and Contingencies
(a) Employment Agreements
An employment agreement with the Chief Executive Officer provides for
aggregate annual compensation of $96,000 through December 31, 2005.
(b) Lease agreements
The Company's subsidiaries have entered into various capital leases for
vehicles and internet equipment, as well as non-cancelable agreements for
office premises.
(c) 20 years' usage rights
Euroweb Romania has provided an Indefeasible Right of Use for transmission
capacity on 12 pairs of fiber over a period of 20 years. The construction was
finished in April 2003 and the fibres were put into use from May 1, 2003. For
the duration of the agreement, Euroweb Romania is obliged to use all
reasonable endeavours to ensure the Cable System is maintained in efficient
working order and in accordance with industry standards.
(d) VAT Tax Authority audit - Romania
Currently the Romanian Tax Authorities are conducting an audit relating to
the Company's accounting for VAT with respect to foreign invoices. As at
September 30, 2003, the Tax Authority has not reached a decision regarding
this matter. Based on discussions to date, the final outcome could range from
a best case scenario of no liability to a maximum exposure of principal,
fines and penalties of up to $1,768,000. Due to ongoing discussions, the Tax
Authority has delayed the publication of its findings until the end of 2003.
Based on consultations with its advisors, management is confident that the
Company has appropriate legal basis to defend its treatment of VAT (although
the final outcome cannot be assured), and therefore no provision has been
made.
7. Related Party Transactions
The provision of international/domestic leased line and VOIP services are
being provided in conjunction with Pantel Telecommunication Rt., an entity
which is majority owned and controlled by KPN Telecom BV (which also owns a
majority interest in the Company). In 2002 and 2003, Pantel Rt., a subsidiary
of KPN Telecom BV and therefore a related party, is the most significant
trading partner of the Company. Approximately 53% of the 2003 revenues of
Euroweb Romania (representing 37% of the consolidated revenues of the
Company) were derived from the provision of services to Pantel Rt.
17
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
When used in this Form 10-QSB, in other filings by the Company with the SEC,
in the Company's press releases or other public or stockholder
communications, or in oral statements made with the approval of an authorized
executive officer of the Company, the words or phrases "would be," "will
allow," "intends to," "will likely result," "are expected to," "will
continue," "is anticipated," "estimate," "project," or similar expressions
are intended to identify "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995.
The Company cautions readers not to place undue reliance on any
forward-looking statements, which speak only as of the date made, are based
on certain assumptions and expectations which may or may not be valid or
actually occur, and which involve various risks and uncertainties. In
addition, sales and other revenues may not commence and/or continue as
anticipated due to delays or otherwise. As a result, the Company's actual
results for future periods could differ materially from those anticipated or
projected.
Unless otherwise required by applicable law, the Company does not undertake,
and specifically disclaims any obligation, to update any forward-looking
statements to reflect occurrences, developments, unanticipated events or
circumstances after the date of such statement. The Company advises you to
review any additional disclosures made in its 10-QSB, 8-K, and 10-KSB reports
filed with the Commission.
Operations
Overview
The Company owns and operates Internet Service Providers in the Czech
Republic, Romania and Slovakia through its subsidiaries Euroweb Czech
Republic spol. s.r.o. ("Euroweb Czech"), Euroweb Slovakia a.s. ("Euroweb
Slovakia") and Euroweb Romania S.A. ("Euroweb Romania"). The Company operates
in one industry segment, providing Internet access and additional value added
services to business customers.. The Company's consolidated statements of
operations also include the equity in the net income or loss of Euroweb
Hungary Rt., in which the Company has a 49% ownership interest. The other 51%
of Euroweb Hungary Rt. is held by Pantel Telecommunication Rt., Hungary
("Pantel Rt."), of which KPN Telecom BV is also the controlling owner.
The revenues come from the following four sources:
(1)Internet Service Provider (Internet access, Content and Web services,
Other services);
(2) International/domestic leased line, Internet Protocol data services;
(3) Voice over Internet Protocol services; and
(4)Facilities (sale, rent and maintenance of dark fiber between the
Hungarian border and the Romanian City of Timisoara).
For the services in point (2) and (3), the main customer of the Company in
2002 and 2003 was Pantel Rt, a related party. The majority owner of Euroweb
International Corporation and Pantel Rt. is KPN Telecom BV, a Netherlands
corporation.
18
Related party transactions - Pantel Telecommunications Rt.
General: The largest customer of the Company since early 2001 is Pantel Rt, a
Hungary-based alternative telecommunications provider. Pantel Rt. operates
within the region and has become a significant trading partner for Euroweb
Romania and Euroweb Slovakia through the provision of direct fiber cable
connection, which enables companies to transmit data to a variety of
destinations by utilizing the international connections of Pantel Rt.
Due to the fact that the significant revenue of the Company derives from the
international/domestic leased line and Voice over Internet Protocol services,
a few of the Company's representatives have moved to the premises of Pantel
Rt. in order to improve co-operation on international projects.
Transactions: Both Euroweb Slovakia and Euroweb Romania have engaged in
transactions with Pantel Rt. including the following:
(a)Pantel Rt. receives revenue from the provision of the following services
to subsidiaries of Euroweb International Corporation:
- Internet bandwidth; and
- International leased lines outside Romania and Slovakia.
The total amount of these services was $1,884,142 during the nine month
period ended September 30, 2003 as compared to $ 1,656,725 for the nine month
period ended September 30, 2002.
(b)Euroweb International and its subsidiaries received revenue from the
provision of the following services to Pantel Rt.:
- International leased lines and local loops in Slovakia and Romania;
- International IP and VOIP services for Pantel Rt.;
- Commission; and
- Facilities.
Total value of these services were approximately $3,967,877 in the nine
months period ended September 30, 2003 as compared to $3,221,582 in the nine
months period ended September 30, 2002.
Direct sales to Pantel Rt. were 37% of total consolidated revenue, but
Euroweb's dependency on Pantel Rt. is even greater than this figure suggests.
Some third party sales involve Pantel Rt. as the subcontractor/service
provider for the international/domestic lines, and some third party customers
are also clients of Pantel Rt. outside of Romania (i.e. their relationship
with Pantel Rt. is stronger than their relationship with Euroweb Romania).
Effective dependency on Pantel Rt., taking into account direct and Pantel
Rt.-related sales, represents approximately 60% of total consolidated
revenues of the Company and approximately 89% 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.
19
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and results
of operations are based upon its consolidated financial statements that have
been prepared in accordance with accounting principles generally accepted in
the United States of America ("US GAAP"). This preparation requires
management to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses, and the disclosure of
contingent assets and liabilities. US GAAP provides the framework from which
to make these estimates, assumption and disclosures. The Company chooses
accounting policies within US GAAP that management believes are appropriate
to accurately and fairly report the Company's operating results and financial
position in a consistent manner. Management regularly assesses these policies
in light of current and forecasted economic conditions. The Company's
accounting policies are stated in Note 1 to the Consolidated Financial
Statements. The Company believes the following accounting policies are
critical to understanding the results of operations and the effect of the
more significant judgments and estimates used in the preparation of the
consolidated financial statements:
Revenue Recognition Policies -- Revenues from services are recognized in the
month in which the services are provided. Invoices for traditional
ISP,International leased line and IP Data services are generally issued at
the beginning of the month except where local legislation prohibits such
treatment. VOIP traffic is measured during the month and invoiced at the end
of the month. Billed revenues for which the services are to be provided in
the future, are not disclosed as revenues in the reporting period, but are
accrued and shown as deferred revenue.
Accounts Receivable - Allowance for Doubtful Accounts -- The Company
regularly reviews the valuation of accounts receivable. The allowance for
doubtful accounts is estimated based on historical experience and future
expectations of conditions that might impact the collectibility of accounts.
Property Plant & Equipment Recovery -- Changes in technology or changes in
the Company's intended use of these assets may cause the estimated period of
use or the value of these assets to change. These assets are reviewed for
impairment whenever events or changes in circumstances indicate that their
carrying amounts may not be recoverable. Estimates and assumptions used in
both setting depreciable lives and reviewing recoverability require both
judgement and estimation by management. Impairment is deemed to have occurred
if projected undiscounted cash flows related to the asset are less than its
carrying value. If impairment is deemed to have occurred, the carrying values
of the assets are written down, through a charge against earnings, to their
fair value.
Intangibles Recovery - Intangibles consist mostly of goodwill. Goodwill
represented on the balance sheet reflects the unamortized difference between
the purchase price and fair value of businesses acquired. As of January 1,
2002 the Company adopted SFAS 142 which specifies that goodwill no longer be
amortized on a systematic basis, but should be subject to at least annual
impairment tests. SFAS also prescribes some transitional provisions which
have been completed by September 30, 2002.
Acquisitions
There were no new acquisitions in 2002 and the nine months ended September
30, 2003.
20
Results of Operations
Nine-month Period Ended September 30, 2003 Compared to Nine-month
Period Ended September 30, 2002
Due to further improvement in the third quarter of 2003, the Company was able
to increase its revenue and gross margin in absolute terms compared to the
same period in the previous year. In the same period, overall operating
expenses, excluding severance and write-off of intangibles, has also
decreased resulting improvement of the profitability and effectiveness of the
Company. In the first nine months, the Company showed positive EBITDA of
$245,087.
Revenues
Total revenues for the nine months ended September 30, 2003 were $10,900,839
in comparison with $9,315,126 for the nine months ended September 30, 2002.
The Company experienced increases in sales in Romania and Slovakia, and a
decrease in sales in the Czech Republic as follows:
Revenue per countries/nine months of 2003 2002
---------------------------------------------------------------------------------------------------------------
Czech Republic $ 894,315 $ 1,083,573
Romania 7,537,308 6,182,922
Slovakia 2,469,216 2,048,631
---------------------------------------------------------------------------------------------------------------
Total 10,900,839 9,315,126
The Company has increased ISP and VOIP revenue for the nine months ended
September 30, 2003 as compared to the same period of 2002, however it has
experienced reduction of revenue from international/national leased line and
IP data revenue due to the following:
o in the third quarter of 2002, a few of the most significant leased line
partners closed their contracts; and
o market competition has reduced the prices.
The proportion of revenue per product lines as of the nine months ended
September 30, 2003 has developed as follows:
Revenue per services 2003 (margin) 2002 (margin)
----------------------------------------------------------------------------------------------------------------------
ISP $ 4,062,348 $ 3,563,873
Int./dom leased line and IP data 4,772,953 4,786,462
VOIP 1,820,747 964,791
Facilities 244,791 -
----------------------------------------------------------------------------------------------------------------------
Total 10,900,839 (31.5%) 9,315,126 (33.5%)
21
Cost of revenues
Cost of revenues comprise mostly of telecommunication expenses.
Direct costs were $7,464,223 for the nine months ended September 30, 2003 in
comparison to $6,190,113 for the nine months ended September 30, 2002. Gross
margin has decreased from 33.5% to 31.5% when compared to the previous year.
Although there were no significant pricing policy changes within the Company
during the nine months of 2003, the margin was decreased for the following
reasons:
o previously high internet margins generated from Euroweb Czech in the
Czech Republic was reduced due to loss of revenue;
o Margin on International/domestic leased line has decreased in 2003 due
to a favourable one time agreement with one of the major suppliers of
the Company in 2002, which resulted in smaller costs last year in
comparison with this year.
Despite the fall in margin, which was partly offset by higher margin on
facilities revenue, the total margin was ultimately larger in absolute terms
due to the increase of revenue for the nine months ended September 30, 2003
compared to the same period of 2002.
Operating expenses (excluding depreciation, amortization and severance)
Overall operating expenses (excluding depreciation, amortization, writedown
of customer list and severance to officers) decreased by 2% for the nine
months ended September 30, 2003 as compared to the same period in 2002 due to
cost control measures and the positive impact of the closing of the New York
office in 2002. The Company was able to reduce costs in most categories and
it is managing all of the product lines with the existing operational
infrastructure minimizing the need for additional resources.
The severance payments to officers in 2002 related to the closure of the New
York office whereby the five year contracts of the former CFO and CEO were
terminated in June 2002.
VAT Tax Authority audit-Romania
Currently the Romanian Tax Authorities are conducting an audit relating to
how the Company accounted for Value Added Tax with respect to foreign
invoices. As at September 30, 2003, the Tax Authority has not reached a
decision regarding this matter. Based on discussions to date, the final
outcome, although the Company cannot provide any guarantees, could range from
a best case scenario of no liability to a maximum exposure of principal,
fines and penalties of up to $1,768,000. Due to ongoing discussions, the Tax
Authority has delayed the publication of its findings until the end of 2003.
Based on consultations with its advisors, management is confident that the
Company has appropriate legal basis to defend its treatment of VAT (although
the final outcome cannot be assured), and therefore no provision has been
made.
Depreciation and amortization
As disclosed above, no goodwill was amortized in 2002 and 2003. Other
intangibles, representing customer lists obtained in an acquisition in
Romania in 2000, are being amortized over a period of five years. In the nine
months of 2002, amortization was $ 172,500, while in the nine months of 2003,
amortization was $50,181 due to the impairment of customer list in Q3 of
2002, which reduced the carrying value of the customer lists. Depreciation of
tangible fixed assets has increased from $601,728 in 2002 to $604,682 in
2003.
22
Net interest income
Net interest income in the nine months ended September 30, 2003 is lower than
the comparable amount in the nine months of 2002 because there was a
reduction in the interest-generating funds that were available for the nine
month period ended September 30, 2003 as compared to September 30, 2002, and
also because the effective interest rate on these investments has decreased
over the periods in question.
Equity interest in affiliate
Although the Company's 49% share in the net loss of Euroweb Hungary Rt. for
the nine months ended September 30, 2003 is $95,583, the opening net carrying
value of the investment in the Company's financial statements at the
beginning of the year was zero due to the goodwill write-offs in 2002.
Therefore, the loss of $95,583 was not recorded in the books of the Company.
However, if in the future, Euroweb Hungary Rt. has net income, then the
Company may only recognize its 49% interest on Euroweb Hungary Rt. net income
in excess of its cumulative share of unrecorded losses of $ 225,913 ($130,330
unrecorded from 2002 and $95,583 unrecorded for the nine months of 2003).
Liquidity and Capital Resources
The Company's cash, cash equivalents and marketable securities were
approximately $13,014,923 as of September 30, 2003, a decrease of $1,188,164
from the end of 2002.
The decrease is mainly related to capital expenditures of $899,808 (mostly in
connection with the building of dark fiber in Romania). The Company used
$86,673 of cash in operations in the first nine months of 2003 (compared to
cash used in operations of $2,732,601 in the first nine months of 2002).
The income tax expense relates to income tax payable of Euroweb Romania,
which is expected to have taxable income in 2003, with no tax loss
carryforwards to offset this income.
For the nine months ended September 30, 2003, the Company has $13,014,923 of
cash, cash equivalents and marketable securities compared to $3,950,199 total
short and long term liabilities. Management believes that with its existing
cash, cash equivalents, marketable securities and internally generated funds,
there will be sufficient funds to meet the Company's currently projected
working capital requirements and other cash requirements until at least the
next 12 months.
KPN Telecom B.V. (NY Stock Exchange: KPN) owns approximately 50.1% of the
outstanding shares of Common Stock of the Company. KPN Telecom BV has
announced that it intends to sell all of its non-core assets, including its
ownership of 50.1% of the outstanding shares of the Company.
Inflation and Foreign Currency
The Company maintains its books in local currencies, including the Czech
koruna for Euroweb Czech Republic and the Slovak koruna for Euroweb Slovakia.
However, given the hyper-inflationary situation in Romania, the U.S. dollar
is used as the functional currency.
23
The Slovakian Koruna has strengthened by 19%, while the Czech Korona has
strengthened against the U.S. dollar by approximately 15% between the nine
months of 2003 and 2002. The impact of this is reflected in the exchange
rates used in the nine months of 2003 and the nine months of 2002.
Item 3. Controls and Procedures
As of September 30, 2003, an evaluation was performed under the supervision
and with the participation of the Company's management, including the Chief
Executive Officer and the Chief Accounting Officer, of the effectiveness of
the design and operation of the Company's disclosure controls and procedures.
Based on that evaluation, the Company's management, including the Chief
Executive Officer and the Chief Accounting Officer, concluded that the
Company's disclosure controls and procedures were effective as of September
30, 2003. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal
controls subsequent to September 30, 2003.
24
PART II
Item 1. Legal Proceedings
The Company is not a party to any material legal proceedings as of the
date of this report.
Item 2. Changes in Securities
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits (numbers below reference Regulation S-B, Item 601)
(3) (a)Certificate of Incorporation filed November 9, 1992(1)
(b)Amendment to Certificate of Incorporation filed July
9,1997(2)
(c) By-laws(2)
(31) (a) Certification of the Chief Executive Officer of Euroweb
International Corp. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
(31) (b) Certification of the Chief Accounting Officer of Euroweb
International Corp. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
(32) (a) Certification of the Chief Executive Officer of Euroweb
International Corp. pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(32) (b) Certification of the Chief Accounting Officer of Euroweb
International Corp. pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York, on the 12th day of
November 2003.
EUROWEB INTERNATIONAL CORP.
By /s/Csaba Toro
-------------
Csaba Toro
Chairman of the Board and Chief Executive Officer
By /s/Peter Szigeti
-------------
Chief Accounting Officer
25
--------
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.