U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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.)
445 Park Avenue, 15th Floor, New York, NY 10022
(Address of principal executive offices)
(212) 758-9870
Issuer's telephone 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 5,306,750 Shares
(Class) (Outstanding at June 30, 1998)
Transitional Small Business Disclosures Format (Check one): Yes No X
<PAGE>
EUROWEB INTERNATIONAL CORP.
INDEX
PART I. Financial Information
Item 1. Financial Statements
Consolidated balance sheets as of December 31, 1997 (audited)
and June 30, 1998 (unaudited) 2
Consolidated statements of loss and comprehensive loss (unaudited)
for the three months ended June 30, 1997 and 1998 and the six
months ended June 30, 1997 and 1998 3
Consolidated statements of stockholders' equity (unaudited)
for the six months ended June 30, 1997 and 1998 4
Consolidated statements of cash flows (unaudited) for the
six months ended June 30, 1997 and 1998 5
Notes to consolidated financial statements (unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
PART II. Other Information 20
Signature 22
<PAGE>
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEETS
December 31, 1997 June 30, 1998
(Audited) (Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 697,948 $ 263,089
Accounts receivable, less
allowance for doubtful accounts
of $39,216 and $37,293 172,437 194,903
Receivable from Hungarian Broadcasting
Corporation 546,053 556,372
Prepaid and other current assets 103,073 79,165
Total current assets 1,519,511 1,093,529
Property and equipment, less accumulated
depreciation of $102,402 and $148,594 240,887 224,060
Condominium building held for sale, net
of $718,870 allowance for reduction
to market value, and accumulated depreciation
of $10,000 - 1,590,000
Construction in progress, net of $1,350,000
allowance for reduction to market value 3,279,900 -
Goodwill, less accumulated amortization of
$383,000 and $577,000 1,529,912 1,364,707
Other 70,094 205,018
$6,640,304 $4,477,314
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Note payable to Hungarian Broadcasting
Corporation $ 368,456 $ 378,954
Payable to former owners of acquired
businesses 191,000 76,000
Accounts payable and accrued expenses 789,623 632,618
Total current liabilities 1,349,079 1,087,572
10% Convertible Debentures 150,000 -
Deferred Revenue 1,589,653 46,000
Total liabilities 3,088,732 1,133,572
Commitments and Contingencies
Stockholders' Equity
Preferred stock, $.001 par value - shares
authorized 5,000,000; no shares outstanding - -
Common stock, $.001 par value - shares
authorized 15,000,000; issued and
outstanding 4,949,936 and 5,306,750 4,950 5,307
Additional paid-in capital 18,755,225 18,916,550
Accumulated deficit (15,172,703) (15,549,807)
Accumulated other comprehensive loss:
Foreign currency translation adjustment (35,900) (28,308)
Total stockholders' equity 3,551,572 3,343,742
$6,640,304 $4,477,314
See accompanying notes to consolidated financial statements.
<PAGE>
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1998 1997 1998
Revenues
Internet $ 321,828 $ 455,100 $ 608,080 $ 840,000
Construction income - - - 1,724,468
Rent income - 66,000 - 66,000
Total 321,828 521,100 608,080 2,630,468
Expenses(Income)
Cost of construction - - - 1,723,870
Compensation and related
costs 148,450 150,999 386,117 316,945
Network costs 119,332 282,029 194,493 453,269
Consulting and
professional fees 110,972 49,674 203,362 93,124
Rent 22,906 32,589 55,193 65,593
Depreciation and
amortization of
property and equipment 33,860 37,119 54,268 56,192
Amortization of goodwill 105,000 97,000 191,000 194,000
Interest and dividend income (21,211) (10,142) (40,211) (26,850)
Interest expense 195,320 13,322 378,517 15,117
Financing costs 73,779 - 133,703 -
Foreign currency (gain)loss 1,337 (35,428) 75,761 6,148
Loss on sale of office
condominium unit 75,000 - 75,000 -
Other 189,661 25,957 312,570 110,164
Total 1,054,406 643,119 2,019,773 3,007,572
Net loss (732,578) (122,019) (1,411,693) (377,104)
Other comprehensive gain:
Foreign currency
translation gain - 19,727 - 7,592
Comprehensive loss $ (732,578) $ (102,292) $(1,411,693$ (369,512)
Net loss per share - basic
and diluted $ (.23) $ (.02) $ (.47)$ (.07)
Weighted average number of
common shares outstanding 3,197,570 5,210,725 3,007,469 5,118,892
See accompanying notes to consolidated financial statements
<PAGE>
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Accumulated
Additional Other
Common Stock Paid-in Accumulated Comprehensive
Shares Amount Capital Deficit Loss
SIX MONTHS ENDED
JUNE 30, 1997:
Balance,
January 1, 1997 2,476,269 $2,476 $17,189,447 $(13,165,475) $ -
Issuance of put
options on
common stock
issued in
connection with
acquisitions (144,000) (144) (359,856) - -
Compensation
relating to the
extension of the
period of
exercisability of
former
officers' options - - 125,000 - -
Issuance of shares
on conversion of
debentures 845,484 846 604,589 - -
Incremental interest
from revaluation
of convertible
debentures - - 304,000 - -
Net loss for the
period - - - (1,411,693) -
Balance,
June 30, 1997 3,177,753 $3,178 $17,863,180$(14,577,168) $ -
SIX MONTHS ENDED JUNE 30, 1998:
Balance,
January 1, 1998 4,949,936 $4,950 $18,755,225$(15,172,703) $(35,900)
Issuance of shares
on conversion of
debentures 356,814 357 161,325 - -
Net loss for the
period - - - (377,104) -
Foreign currency
translation gain - - - - 7,592
Balance,
June 30, 1998 5,306,750 $5,307 $18,916,550$(15,549,807) $(28,308)
See accompanying notes to consolidated financial statements.
<PAGE>
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
1997 1998
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,411,693) $(377,104)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization of
property and equipment 54,268 56,192
Amortization of goodwill 191,000 194,000
Amortization of imputed interest income (26,000) -
Options granted/extended as compensation 125,000 -
Incremental interest on revaluation of
convertible debentures 304,000 -
Interest on debentures paid in shares of
capital stock 20,435 11,682
Loss on sale of property 75,000 247
Foreign currency loss 75,761 6,148
Changes in operating assets and liabilities:
(Increase)decrease in:
Accounts receivable (219,133) 67,534
VAT refund receivable 19,396 -
Receivables from related parties 616 -
Prepaid and other assets (65,030) (111,016)
Increase(decrease) in:
Accounts payable and accrued expenses 395,728 (157,005)
Compensation payable to officers (50,000) -
Payable to former owners of
acquired businesses - (115,000)
Deferred revenue - 46,000
Payable to former officer 125,059 -
Net cash used in operating activities (385,593) (378,322)
CASH FLOWS FROM INVESTING ACTIVITIES
Receivable from Hungarian Broadcasting
Corporation, net 16,084 179
Acquisition of Internet Service Companies,
net of cash acquired (458,629) -
Acquisition of property and equipment and
construction in progress (477,023) (29,365)
Proceeds from sale of office condominium unit 134,000 -
Acquisition of intangibles - (28,795)
Net cash used in investing activities (785,568) (57,981)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible debt 780,000 -
Proceeds from note payable to Hungarian
Broadcasting Corporation 350,000 -
Net cash provided by financing activities 1,130,000 -
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH (75,761) 1,444
DECREASE IN CASH AND CASH EQUIVALENTS (116,922) (434,859)
Cash and cash equivalents at beginning
of period 495,703 697,948
Cash and cash equivalents at end of period $ 378,781 $ 263,089
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ NONE $ 6,000
SUPPLEMENTAL NONCASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of common stock upon conversion
of debentures and accrued interest $ 605,435 $ 161,682
See accompanying notes to consolidated financial statements.
<PAGE>
EUROWEB INTERNATIONAL CORP.
Notes to Consolidated Financial Statements
(Unaudited)
1. Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of
EuroWeb International Corp., formerly Hungarian Teleconstruct
Corp., (the "Company") and its wholly-owned subsidiaries. All
material intercompany balances and transactions have been
eliminated.
Certain 1997 items have been reclassified to conform to the 1998
presentation.
(b) Use of Estimates and Assumptions
In preparing financial statements in conformity with generally
accepted accounting principles, management is required 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 revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
(c) Fiscal Year
The Company's reporting period is the fiscal year ending December 31
(d) Revenue Recognition
Revenues from monthly Internet services are recognized in the month
in which the services are provided.
Sales of constructed condominium apartments are recognized when
collection of the sales price is assured.
(e) Foreign Currency Translation
The Company's Hungarian subsidiary, EuroWeb Rt, uses the local
currency, the Hungarian forint, as the functional currency and
translates all assets and liabilities at exchange rates in effect at
the balance sheet date and all income and expense accounts at
average rates, and records adjustments resulting from the
translation in a separate component of stockholders' equity.
The Company uses the U.S. dollar as the functional currency for its
Hungarian subsidiary, Teleconstruct Epitesi Rt ("Teleconstruct").
Accordingly, monetary assets and liabilities of Teleconstruct were
remeasured by using the exchange rates in effect at the balance
sheet date, while nonmonetary assets and liabilities were remeasured
at historical rates. Income and expense accounts were remeasured at
the average rates in effect during the period. Remeasurement
adjustments and transaction gains or losses are reflected in
the consolidated statements of loss.
<PAGE>
EUROWEB INTERNATIONAL CORP.
Notes to Consolidated Financial Statements
(Unaudited)
(f) Cash Equivalents
For purposes of the consolidated statements of cash flows, the
Company considers all highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents.
(g) Fair Value of Financial Instruments
The carrying values of cash equivalents, accounts receivable,
receivables from and loan payable to Hungarian Broadcasting
Corporation ("HBC"), payable to former owners of acquired
businesses, accounts payable and accrued expenses and the 10%
convertible debentures approximate fair values.
(h) Equity in Net Loss of Unconsolidated Affiliate
The Company's 9.7% equity interest in HBC was accounted for using
the equity method through September 30, 1996 since the Company had
the ability to exercise significant influence over HBC. Beginning
October 1, 1996, the Company discontinued its use of the equity
method of accounting for its investment in HBC, since the Company no
longer had the ability to exercise significant influence over HBC.
On October 29, 1997, the Company sold its interest in HBC.
(i) Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of
the assets of 3 to 5 years.
(j) Goodwill
Goodwill is amortized on a straight-line basis over its estimated
useful life of five years. The Company periodically evaluates
goodwill based upon the expected undiscounted cash flow from the
acquired businesses.
(k) Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), which
established a fair value method of accounting for stock-based
compensation, through either recognition or disclosure. The Company
adopted the disclosure option for the employee stock-based
compensation provisions of SFAS No. 123. However, since the pro
forma net loss and net loss per share amounts assuming the fair
value method
was adopted January 1, 1995 did not differ materially from the
comparable amounts reported on the consolidated statements of loss,
no such pro forma amounts have been disclosed.
<PAGE>
EUROWEB INTERNATIONAL CORP.
Notes to Consolidated Financial Statements
(Unaudited)
(l) Income Taxes
The Company accounts for income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes." This statement requires a
liability approach for measuring deferred taxes based on temporary
differences between the financial statement and income tax bases of
assets and liabilities existing at the balance sheet date using
enacted rates for the years in which the taxes are expected to be
paid or recovered.
(m) Net Loss Per Share
During 1997, the FASB issued SFAS No. 128, "Earnings per Share,"
("SFAS No. 128"), which provides for the calculation of "basic" and
"diluted" earnings per share. This statement became effective for
financial statements issued for periods ending after December 15,
1997. Basic earnings per share include no dilution and are computed
by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted
earnings per share reflect, in periods in which they have a dilutive
effect, the effect of common shares issuable upon exercise of
stock options. Although SFAS No. 128 requires that all periods
presented be restated to comply with the provisions of this
statement, no restatement was required since the Company's basic net
loss per share and primary loss per share for the three months and
six months ended June 30, 1997 were the same.
(n) Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", 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 owners and distributions
to owners. Among other disclosures, SFAS 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. SFAS No. 130 became effective for
financial statements for periods beginning after December 15, 1997
and requires comparative information for earlier periods. The
Company adopted SFAS No. 130 as of January 1, 1998.
2. Organization and Business
The Company is a Delaware corporation which was organized on November 9,
1992. Its wholly-owned Hungarian subsidiary, Teleconstruct, was
organized on March 19, 1993 and is currently holding for sale a luxury
14-unit condominium building in Budapest. (See Note 7).
On January 2, 1997, the Company acquired three Hungarian Internet
service companies for a purchase price of approximately $1,913,000,
of which $76,000 is still owed at June 30, 1998 and is payable at
various dates through October 31, 1998.
<PAGE>
EUROWEB INTERNATIONAL CORP.
Notes to Consolidated Financial Statements
(Unaudited)
These acquisitions have been accounted for using the purchase method of
accounting. The Company is operating the Internet service companies
through its wholly-owned subsidiary, EuroWeb Rt.
3. Interim Periods
The accompanying consolidated financial statements for the three months
and six months ended June 30, 1998 and 1997 are unaudited but, in the
opinion of management, include all adjustments, consisting mainly of
normal recurring accruals necessary for fair presentation. Results for
the interim periods are not necessarily indicative of the results for a
full year.
4. Incorporation by Reference
Reference is made to the Company's annual report on Form 10-KSB for the
fiscal year ended December 31, 1997 and to the notes to the consolidated
financial statements included therein, which are incorporated herein by
reference.
5. Cash Concentration
At June 30, 1998, cash of $129,330, denominated in U.S. dollars, was on
deposit with two money market funds and a major money center bank in the
United States. In addition, $133,759 was on deposit in Hungarian banks.
6. Advances to, Payable from and Investment in HBC
(a) At June 30, 1998, the balance receivable from HBC represents loans,
advances and accrued interest receivable. The receivable was due
June 30, 1997. The Company expects repayment of this receivable
during 1998 from a convertible debt offering by HBC. Upon
repayment, the Company will pay the loan payable
to HBC.
(b) The Company's prior 9.7% interest in HBC (a public company),
represented by 250,000 shares of common stock, was subject to a
lock-up agreement through February 7, 1999. On October 29, 1997,
the Company sold the 250,000 shares for $649,000 to the then three
principals of HBC's underwriter on its previous two public
offerings. The sales price was approximately 55% of the
market price of HBC's common stock as of the date of the agreement
to sell, and approximately 40% at the time of the closing of the
sale. The Company recognized a gain of $524,000 based on a carrying
value of $125,000.
(c) In February 1997, the Company borrowed $350,000 from HBC. The loan,
which is evidenced by a promissory note with interest at 6% per
annum, is payable on the earlier to occur of (1) June 30, 1997, (2)
the closing of any offering by the Company of its securities, or (3)
sale of any assets by the Company. The loan is secured by the
balance of the loan owed by HBC to the Company.
<PAGE>
EUROWEB INTERNATIONAL CORP.
Notes to Consolidated Financial Statements
(Unaudited)
7. Construction-in-Progress and Condominium Building - Held for Sale
(a) Construction-in-progress of two luxury 14-unit condominium buildings
held for sale included the cost of land ($885,000) and construction
costs incurred through December 31, 1997, net of a provision of
$1,350,000 to write down to estimated net realizable value. The
provision was required based on the real estate market conditions in
Budapest.
(b) As of December 31, 1997, deposits of $1,589,653 out of a total sales
price of $1,679,653 were received for all of the apartments in one
of the condominium buildings, with the balance received in April
1998. All the deposits for the apartments with the exception of one
for $200,000 were received from the Company's former President.
Construction was completed in March 1998 and the sale of the
apartments was recognized during the three months ended March 31,
1998. The sales price of these apartments approximated the cost of
the apartments net of the allocated provision for write-down of
approximately $631,000.
(c) The second condominium building, for which move-in permits have been
obtained, has been leased under a net lease which provides for a
monthly rental of $22,000 for a period of five years. The lessee
has the right to purchase the leased building for $2,000,000 during
the lease period. The building is carried at cost, net of a
provision of approximately $719,000 to write down to net realizable
value.
8. Private Placements
(a) From November 1, 1996 to December 31, 1997, the Company sold
$1,642,500 of 10% convertible debentures due two years from the date
of sale to foreign investors outside the United States in private
placements, receiving aggregate net proceeds of approximately
$1,389,500 after deducting placement agent fees and offering
expenses of approximately $253,000. No sales of convertible
debentures were made during 1998.
Commencing 45 days after issuance, the original principal amount of
the debentures was convertible into the Company's shares of common
stock at a conversion price of 50% of the market price, as defined,
of the Company's common stock. From November 1, 1996 to December
31, 1997, debentures of $1,492,500 and accrued interest of $46,159
were converted into 2,677,646 shares of common stock. During the
six months ended June 30, 1998, an additional $150,000 of debentures
and $11,682 of accrued interest were converted into 356,814 shares
of common stock. There were no debentures outstanding at June 30,
1998.
The incremental yield on the debentures relating to the
convertibility of the debentures into common stock at a 50% discount
to the common stock's market price resulted in interest charges of
$304,000 to the consolidated statement of loss for the six months
ended June 30, 1997. In addition, financing costs of $133,703
incurred in connection with the sale of the debentures were
charged to operations in the first six months of 1997, since a
substantial portion of the debentures was expected to be converted
to common stock within a short period.
<PAGE>
EUROWEB INTERNATIONAL CORP.
Notes to Consolidated Financial Statements
(Unaudited)
(b) In October 1996, the Company sold a private placement consisting of
550,000 shares of common stock and 550,000 common stock purchase
warrants exercisable at $2 per share, reduced to $1.25 per share on
June 26, 1997, at any time from October 1, 1997 until September 30,
2001 for net proceeds of $972,450 after deducting placement agent
fees and offering expenses of $127,550. The warrants and the
underlying shares of common stock have been registered under
the Securities Act of 1933.
9. Stock Option Plan and Warrants
(a) Stock Options
On May 14, 1996, the stockholders approved an increase in the number
of stock options available under the Company's Stock Option Plan
(the "Plan") to 350,000. At December 31, 1997, 90,000 stock options
were available under the Plan and they were granted to the Company's
officers and directors in April 1998. These options are exercisable
at $1.625 per share for a period of five years.
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 requires the Company to provide, beginning with 1995
grants, pro forma information regarding net income and net income
per common share as if compensation costs for the Company's stock
option plans had been determined in accordance with the fair value
based method prescribed in SFAS No. 123. Such pro forma information
has not been presented because management has determined that the
compensation costs associated with options granted in 1997 and 1998
are not material to net loss or net loss per common share.
Transactions involving options granted under the Plan during the
year ended December 31, 1997 are summarized below:
Weighted
Number Average
of Exercise
Shares Price
Outstanding, January 1, 775,000 $1.71
Granted 240,000 $1.77
Cancelled (195,000) $2.33
Outstanding, December 31, 820,000 $1.39
Exercisable 720,000 $1.32
<PAGE>
EUROWEB INTERNATIONAL CORP.
Notes to Consolidated Financial Statements
(Unaudited)
The following table summarizes information about stock options outstanding
under the Plan at December 31, 1997:
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercisable Number Contractual Exercisable Number Exercisable
Prices Outstanding Life Price Exercisable Price
$1.00-3.38 820,000 2.6 $ 1.39 720,000 $ 1.32
(b) Stock Warrants
The following table summarizes information about stock warrants at
December 31, 1997:
Warrants Outstanding
and Exercisable
Number Weighted
Outstanding at Average
December 31, Remaining
Range of exercise prices 1997 Contractual Life
$ 1.25 - $ 4.00 555,700 4.8
$13.20 - 14.75 87,000 1.7
642,700 4.4
10. Commitments and Contingencies
(a) Employment Agreements
Effective May 1, 1994, the Company entered into three-year
employment agreements with three officers. The agreements were
subsequently extended by four additional years. The amended
agreements provided for aggregate annual compensation of $336,000
for the Chairman of the Board, President and Secretary/Treasurer of
the Company, and the granting of options to the three officers to
purchase 460,000 shares of common stock of the Company at the
exercise price of $1 per share with vesting over a five-year period
(20% per year).
On October 30, 1996, the Company entered into a termination
agreement with Peter Klenner, then President, which provided, among
other things, for (1) his resignation as an officer, director and
employee and (2) the cancellation of his employment agreement upon
payment of $372,000, which amount was to be deducted from the
amount owed by a company controlled by him in connection with the
purchase of one of the Company's condominium buildings.
Mr. Klenner retained his rights as a stock optionee with respect to
his 285,000 (subsequently reduced to 250,000) options granted under
his employment agreement and pursuant to the Company's Incentive
Stock Option Plan of 1993. Unless he exercises his options within
<PAGE>
EUROWEB INTERNATIONAL CORP
Notes to Consolidated Financial Statements
(Unaudited)
five years of the date the options were granted, the options
will expire. Compensation expense of $972,000 was charged to 1996
operations as a result of cancelling the President's employment
agreement and extending the termination date of his options.
On December 23, 1996, the Board of Directors extended the employment
contracts with Robert Genova, then Chairman of the Board and Frank
Cohen, then Secretary-Treasurer, to December 31, 2001 and increased
their annual compensation to $144,000 and $120,000, respectively.
In February 1997, Peter Klenner, the former President of the
Company, was retained as a consultant to the Company to oversee the
Company's real estate interests and Internet business. He agreed to
render consulting services for a two-year period for a fee of
100,000 five-year options exercisable at $2.00 per share.
Compensation of $50,000 relating to these options is being
charged to operations over a two-year period.
Also in February, 1997, Robert Genova, the Company's then Chairman
of the Board, resigned as an officer, director and employee, and
agreed to a cancellation of his employment agreement upon payment of
$50,000, which represented the approximate amount owed to him with
respect to 1996 salary. In addition, 125,000 stock options which
were granted to him under his employment agreement did not terminate
as a result of the resignation, but continue to be governed by the
original terms of the options. Compensation of $100,000 has been
charged to operations during the first quarter of 1997 relating to
the extension of the period of exercisability of the options.
Mr. Cohen, the Company's Treasurer, was appointed Chairman of the
Board with an increase in compensation to $150,000 effective July 1,
1997 and the term of his employment contract was extended to
December 31, 2005. The Company will also provide Mr. Cohen with a
split dollar life insurance policy in the face amount of $1,000,000
to be structured so that the premium and other costs paid by the
Company would be recovered by the Company out of the insurance
proceeds.
(b) Lease Commitment
The Company leases office space in Budapest, Hungary, under a lease
which provides for future minimum annual lease payments of
approximately $114,000 through March 31, 2002.
<PAGE>
EUROWEB INTERNATIONAL CORP.
Notes to Consolidated Financial Statements
(Unaudited)
(c) Service Agreements
The Company has entered into various communications service
agreements with terms in excess of one year in connection with the
Internet business which provide for aggregate minimum annual
payments by the Company as follows:
Year Ending
December 31,
1998 $ 424,000
1999 424,000
2000 424,000
2001 190,000
2002 190,000
$1,652,000
11. Subsequent Events
a) Underwriting Agreement
Pursuant to a letter of intent from an underwriter, the Company
intends to publicly offer, sell and distribute 1,000,000 units at $6
per unit consisting of one share of Cumulative Convertible Preferred
Stock and two Common Stock Purchase Warrants.
b) Resolutions Approved by the Board of Directors
On July 15, 1998, the Board of Directors approved the following
resolutions:
1. To increase the authorized number of shares of stock from
20,000,000 to 30,000,000 shares, consisting of 25,000,000 shares of
common stock and 5,000,000 shares of preferred stock. Such
resolution is subject to approval by the shareholders.
2. To increase the number of shares of common stock to be available
under the 1993 Stock Option Plan from 350,000 to 700,000. Such
resolution is subject to approval by the shareholders.
3. To appoint Robert Genova as Treasurer and Chief Financial Officer
until the pending public offering has been completed. At that
time, he will resign the latter position and will assume the
position of President at a salary of $72,000 per year for six
years.
4. To enter into an employment agreement (after the completion of the
pending public offering) with the Vice President and Managing
Director of Hungarian operations at a salary of $96,000 per year
for six years.
<PAGE>
EUROWEB INTERNATIONAL CORP.
Notes to Consolidated Financial Statements
(Unaudited)
5. To grant 100,000 six year common stock options each (after
completion of the proposed public offering) to the Chairman of the
Board, the President and the Vice President. The options will be
exercisable at the price established for the common stock in the
proposed public stock offering.<PAGE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Operations
The Company was organized on November 9, 1992. It was in the development
stage through December 31, 1993 and has been unprofitable to date. Through
its wholly-owned Hungarian subsidiary, Teleconstruct Epitesi Rt.
("Teleconstruct") the Company built for sale two luxury 14-unit condominium
buildings in Budapest. During 1996 and 1997, the Company sold one of the
apartments in the first building ("Building A") to a third party and agreed to
sell the remaining 13 apartments in Building A prior to its completion to M&A
Corp. ("M&A"), a corporation wholly owned by Peter Klenner ("Klenner"), its
former president. It was agreed that the closing of the sale would take place
on the completion of the second building ("Building B"). Klenner agreed to
lend the Company funds to complete Building B, which loans were to be applied
against his purchase price of Building A. The Company completed Building B in
March 1998. The Company leased Building B to an unaffiliated person for a
five year term commencing April 1, 1998 at a net rental of $22,000 per month
with an option to purchase the building for $2,000,000. The sale of Building
A was recognized for accounting purposes in the three months ended March 31,
1998. The Company has no intention at the present time to commence new
construction.
In January 1997, the Company acquired three operating Internet service
provider businesses and has consolidated the three businesses under one roof.
At present, EuroWeb is a leading Internet service provider operating in
Hungary that provides full Internet and Web Site solutions and services
primarily to businesses. The Company offers a comprehensive range of services
to deliver Internet solutions designed to improve clients' business processes.
The Company's services include providing access to an international backbone,
design of web sites, hosting of web sites, strategy consulting, analysis and
design, software development, electronic commerce and discount Fax. The
Company markets its services principally to medium-sized and large companies.
In February 1997, Robert Genova, the Company's then Chairman of the Board,
resigned as an officer, director and employee, and agreed to a cancellation of
his employment agreement upon payment of $50,000, which represented the
approximate amount owed to him with respect to 1996 salary. In addition,
125,000 stock options which were granted to him under his employment agreement
will not terminate as a result of the resignation, but will continue to be
governed by the original terms of the options. Compensation of $100,000 was
charged to operations for the year ended December 31, 1997, relating
to the period of exercisability of the options.
In February 1997, Peter Klenner, the former President of the Company, was
retained as a consultant to the Company to oversee the Company's real estate
interests and Internet business. He agreed to render consulting services for
a two-year period for a fee of 100,000 five-year options exercisable at $2.00
per share. Compensation of $50,000 relating to these options is being charged
to operations over a two-year period.
Effective July 9, 1997, the Company changed its name to EuroWeb International
Corp. and increased the authorized number of shares of capital stock from
10,000,000 shares of common stock to 15,000,000 shares of common stock and
5,000,000 shares of preferred stock. In addition, one of the three Internet
subsidiaries changed its name to EuroWeb Rt. and the accounts of the three
subsidiaries were consolidated into this company.
On August 26, 1997, the Board of Directors extended the term of the employment
agreement with Frank Cohen, its Chairman of the Board, to December 31, 2005
and included a provision in the contract to provide Mr. Cohen with a split
dollar life insurance policy with a face amount of $1,000,000. The policy is
to be structured so that the premiums and other costs paid by the Company in
connection with the policy would be recovered by the Company out of the
proceeds of the policy.
For the six months ended June 30, 1998, the Company incurred a net loss of
$377,104 ($.07 per share); the net loss for the six months ended June 30,
1997 amounted to $1,411,693 ($.47 per share).
For the three months ended June 30, 1998 and 1997, the net loss amounted to
$122,019 ($.02 per share) and $732,578 ($.23 per share), respectively. The
net loss, exclusive of amortization of goodwill for the three months, amounted
to $25,019 ($.005 per share) in 1998 compared with $627,578 ($.20 per share)
in 1997.
Total revenues for the six months ended June 30, 1998 amounted to $2,630,468,
compared with revenues of $608,080 for the six months ended June 30, 1997.
Revenues from the Internet business amounted to $840,000 and $608,080 for the
six months ended June 30, 1998 and 1997, respectively. The increase of
$231,920 in Internet revenues was due primarily to an increase in the number
of subscribers.
Cost of construction of $1,723,870 for the six months ended June 30, 1998
represents the costs associated with the construction revenue recognized
during the period.
Compensation and related costs decreased to $316,945 for the six months ended
June 30, 1998 from $386,117 in 1997. The 1997 amount includes approximately
$113,000 more of stock compensation to former officers of the Company than the
1998 amount.
Network costs of $453,269 were incurred for the six months ended June 30, 1998
in connection with the Internet business as compared with $194,493 in the
comparable period of 1997. Network costs represent connection fees charged to
the Company by the owner of the international and Hungarian telephone lines
leased to the Company and subleased by the Company to its subscribers. The
increase in network costs was due primarily to the increase in the number of
subscribers.
The acquisition of the Internet business in 1997 resulted in goodwill of
approximately $1,900,000, which is being amortized over five years;
amortization for the six months ended June 30, 1998 and 1997 amounted to
$194,000 and $191,000, respectively.
Financing costs of $133,703 incurred in connection with the sale of
convertible debentures were charged to operations during the six months ended
June 30, 1997, since a substantial portion of the debentures were expected to
be converted to common stock within a short period. There were no such costs
during 1998.
Interest expense for the six months ended June 30, 1997 includes $304,000 of
incremental interest on the convertible debentures relating to the
convertibility of the debentures at a 50% discount to the Common Stock's
market price.
Liquidity and Capital Resources
In October 1996, the Company sold a private placement consisting of 550,000
shares of common stock and 550,000 common stock purchase warrants exercisable
at $2 per share (subsequently reduced to $1.25 per share) at any time from
October 1, 1997 until September 30, 2001 for net proceeds of approximately
$973,000 after deducting placement agent fees and offering expenses of
approximately $127,000.
From November 1, 1996 to December 31, 1997, the Company sold $1,642,500 of 10%
convertible debentures due two years from the date of sale to foreign
investors outside the United States in private placements, receiving aggregate
net proceeds of approximately $1,389,500 after deducting placement agent fees
and offering expenses of approximately $253,000. No sales of convertible
debentures were made in 1998.
From November 1, 1996 to December 31, 1997, debentures of $1,492,500 and
accrued interest of $46,159 were converted into 2,677,646 shares of common
stock. During the six months ended June 30, 1998, an additional $150,000 of
debentures and $11,682 of accrued interest were converted into 356,814 shares
of common stock.
On July 15, 1998, the Board of Directors approved an increase in the
authorized number of shares of stock from 20,000,000 shares to 30,000,000
shares, consisting of 25,000,000 shares of common stock and 5,000,000 shares
of preferred stock.
The Directors also approved an increase in the number of shares of common
stock to be available under the Company's 1993 Incentive Stock Option Plan
from 350,000 to 700,000. Both of these actions are subject to future approval
by the Company's shareholders.
Pursuant to a letter of intent from an underwriter, the Company intends to
publicly offer, sell and distribute 1,000,000 units at $6 per unit consisting
of one share of Cumulative Convertible Preferred Stock and two Common Stock
Purchase Warrants.
The Company currently anticipates that its current cash position and its cash
flows from current operations, together with the proceeds of the proposed
public offering, will be sufficient to meet its presently anticipated working
capital and capital expenditure requirements for at least the next 12 months.
The net proceeds from the proposed offering will be used to support more rapid
expansion, develop new or enhanced services and products, acquire
complementary businesses or technologies or take advantage of unanticipated
opportunities. The Company's future liquidity and capital requirements will
depend upon numerous factors, including the success of the Company's
existing and new service offerings and competing technological and market
developments. The Company may be required to raise additional funds 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, take advantage of future opportunities or
respond to competitive pressures, any of which could have a material adverse
effect on the Company's business, results of operations and financial
condition.
The Year 2000
The Company is currently evaluating the impact of the Year 2000 on its
management and information systems. At this time, management believes that
the impact of the Year 2000 will have no material effect on its operations or
financial results.
Inflation and Seasonality
The rate of inflation in Hungary was 18% in 1997 as compared with 23% in 1996
and 28% in 1995. Prices have been rising rapidly in recent years.
Internet operations are not seasonal.
Foreign Currency
The Company is subject to significant foreign exchange risk. There are
currently no meaningful ways to hedge currency risk in Hungary. Therefore,
the Company's ability to limit its exposure to currency fluctuations is
significantly restricted. Although the forint has become exchangeable
outside Hungary, there is not yet a freely convertible exchange market in
place for the forint. In addition, Hungarian law permits the repatriation of
foreign currency only for dividends to the extent of capital investment and
earnings, as determined under applicable Hungarian law. There can be no
assurances as to the future exchangeability or convertibility of forints.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
Except for historical information provided in the Management's Discussion and
Analysis, statements made throughout this document are forward-looking and
contain information about financial results, economic conditions, trends and
known uncertainties. The Company cautions the reader that actual results could
differ materially from those expected by the Company, depending on the outcome
of certain factors (some of which are described with the forward-looking
statements) including: 1) heightened competition, particularly price
competition, reducing margins; and 2) slower growth than expected
in the market for Internet services in Hungary.
<PAGE>
PART II
Item 1. Legal Proceedings
None
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 Regulations S-B)
(3) (a) Certificate of Incorporation filed November 9, 1992*
(b) Amendment to Certificate of Incorporation filed July 9, 1997
(c) By-laws*
(4) (a) Form of Common Stock Certificate*
(b) Form of Underwriters' Warrants to be sold to Underwriters*
(c) Placement Agreement between Registrant and J.W. Barclay & Co.,
Inc. and form of Placement Agent Warrants issued in connection
with private placement financing*
(d) Form of 10% Convertible Debenture used in connection with
offshore private placement financing pursuant to Regulation S***
(e) Form of Common Stock Purchase Warrant in connection with private
placement financing under Section 506 of Regulation D***
(10)(a) Consulting agreement between Registrant and Klenner Securities
Ltd.*
(b) Consulting agreement between Registrant and Robert Genova*
(c) Consulting agreement between Registrant and Laszlo Modransky*
(d) 1993 Incentive Stock Option Plan*
(e) Sharing agreement for space and facilities between Registrant and
Hungarian Telephone and Cable Corp.*
(f) Articles of Association (in English) of Teleconstruct Building
Corp.*
(g) Articles of Association (in English) of Termolang Engineering and
Construction Ltd.*
(h) Letter of intent between Teleconstruct Building Corp. and
Pilistav*
(i) Employment agreement between Registrant and Robert Genova** and
termination agreement dated February 5, 1997***
<PAGE>
(j) Employment agreement between Registrant and Peter E. Klenner**
and termination agreement dated October 30, 1996, and agreement
for sale of condominium unit to M&A as amended***
(k) Employment agreement between Registrant and Frank R. Cohen** and
modification of employment agreement***
(l) Letter of Intent agreement between Registrant and Raba-Com Rt.***
(m) Letter of Intent agreement between Registrant and Kelet-Nograd
Rt.***
(n) Letter of Intent agreement between Registrant and 3 Pilistav
villages for installation of cable in those areas***
(o) Lease agreement between Registant's subsidiary EUnet Kft. and
Varosmajor Passage, Kft. for office space***
(p) Acquisition agreement between Registrant and KFKI Computer
Systems Corp. dated December 13,1996***
(q) Acquisition agreement between Registrant and E-Net Hungary***
(r) Acquisition agreement between Registrant and MS Telecom Rt.***
(s) Employment agreement between Registrant and Imre Kovats***
(t) Employment agreement between Registrant and Csaba Toro***
(u) Promissory Note from Registrant to HBC***
(v) Communication services agreement between Registrant and MCI
Global Resources, Inc.****
(w) 1998 Directors Stock Option Plan (subject to future approval by
the Company's shareholders)***
(x) Lease and option agreement for Building B as of April 1, 1998
with Hafisa Kft.*****
(y) License agreement between Gric Communications, Inc. and EuroWeb
International Corp.*****
* All 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)
** Filed with Form 8-K as of February 17, 1994
*** Filed with Form 10-KSB for year ended December 31, 1996
**** Filed with Form 10-QSB for quarter ended September 30, 1997
*****Filed with Form 10-KSB for year ended December 31, 1997
B. No reports on Form 8-K have been filed during the last quarter covered
by this report on Form 10-QSB
<PAGE>
SIGNATURE
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 13th day of August 1998.
EUROWEB INTERNATIONAL CORP.
By Frank R. Cohen
Chairman of the Board
[ARTICLE] 5
[CIK] 0000905428
[NAME] EUROWEB INTERNATIONAL
<TABLE>
<S> <C>
[PERIOD-TYPE] 6-MOS
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] JUN-30-1998
[CASH] 263,089
[SECURITIES] 0
[RECEIVABLES] 194,903
[ALLOWANCES] 37,293
[INVENTORY] 0
[CURRENT-ASSETS] 1,093,529
[PP&E] 1,972,654
[DEPRECIATION] 158,594
[TOTAL-ASSETS] 4,477,314
[CURRENT-LIABILITIES] 1,087,572
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 5,307
[OTHER-SE] 3,338,435
[TOTAL-LIABILITY-AND-EQUITY] 4,477,314
[SALES] 2,564,468
[TOTAL-REVENUES] 2,630,468
[CGS] 0
[TOTAL-COSTS] 2,992,455
[OTHER-EXPENSES] 0
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 15,117
[INCOME-PRETAX] (377,104)
[INCOME-TAX] 0
[INCOME-CONTINUING] (377,104)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (377,104)
[EPS-PRIMARY] (.07)
[EPS-DILUTED] (.07)
</TABLE>
