U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1998
[X] 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 5,178,246 SHARES
- ----------------------------- ------------------------------
(Class) (Outstanding at March 31, 1998)
Transitional Small Business Disclosures Format (Check one): Yes [ ] No [X]
<PAGE>
EUROWEB INTERNATIONAL CORP.
INDEX
<TABLE>
<CAPTION>
PART I. Financial Information
Item 1. Financial Statements
<S> <C>
Consolidated balance sheets as of March 31, 1998
(unaudited) and December 31, 1997 (audited) .................................. 2
Consolidated statements of loss and comprehensive loss (unaudited)
for the three months ended March 31, 1998 and 1997 ........................... 3
Consolidated statements of stockholders' equity (unaudited)
for the three months ended March 31, 1998 and 1997 ........................... 4
Consolidated statements of cash flows (unaudited) for the
three months ended March 31, 1998 and 1997 ................................... 5
Notes to consolidated financial statements (unaudited) .......................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ...................... 17
PART II. Other Information .................................................... 21
Signature .......................................................................... 23
</TABLE>
- 1 -
<PAGE>
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
(Unaudited) (Audited)
-------------- -----------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 543,314 $ 697,948
Accounts receivable, less allowance for doubtful
accounts of $39,216 486,870 172,437
Receivable from Hungarian Broadcasting Corporation 552,460 546,053
Prepaid and other current assets 81,319 103,073
---------- ----------
Total current assets 1,663,963 1,519,511
Property and equipment, less accumulated
depreciation of $121,311 and $102,402 204,430 240,887
Condominium building, net of $718,870 allowance
for reduction to market value, held for sale 1,600,000 --
Construction in progress, net of $1,350,000
allowance for reduction to market value -- 3,279,900
Goodwill, less accumulated amortization of
$480,000 and $383,000 1,454,968 1,529,912
Other 101,290 70,094
---------- ----------
$5,024,651 $6,640,304
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable to Hungarian Broadcasting Corporation $ 373,704 $ 368,456
Payable to former owners of acquired businesses 176,000 191,000
Accounts payable and accrued expenses 990,595 789,623
---------- ----------
Total current liabilities 1,540,299 1,349,079
10% CONVERTIBLE DEBENTURES 100,000 150,000
DEFERRED REVENUE 50,000 1,589,653
---------- ----------
Total liabilities 1,690,299 3,088,732
---------- ----------
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 5,178,246 and 4,949,936 5,178 4,950
Additional paid-in capital 18,804,997 18,755,225
Accumulated deficit (15,427,788) (15,172,703)
Accumulated other comprehensive loss: -- --
Foreign currency translation adjustment (48,035) (35,900)
---------- ----------
Total stockholders' equity 3,334,352 3,551,572
---------- ----------
$5,024,651 $6,640,304
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
- 2 -
<PAGE>
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1998 1997
------ -----
REVENUES
<S> <C> <C>
Internet $ 384,900 $ 286,252
Construction income 1,724,468 --
--------- ---------
Total 2,109,368 286,252
--------- ---------
EXPENSES(INCOME)
Cost of construction 1,723,870 --
Compensation and related costs 165,946 237,667
Network costs 171,240 75,161
Consulting and professional fees 43,450 92,390
Rent 33,004 32,287
Depreciation and amortization
of property and equipment 19,073 20,408
Amortization of goodwill 97,000 86,000
Interest and dividend income (16,708) (19,000)
Interest expense 33,612 183,197
Financing costs -- 59,924
Foreign currency loss 41,576 74,424
Other 52,390 122,909
--------- ---------
Total 2,364,453 965,367
--------- ---------
Net loss (255,085) (679,115)
Other comprehensive loss
Foreign currency translation loss (12,135) --
--------- ---------
Comprehensive loss $ (267,220) $ (679,115)
========== =========
Net loss per share - basic and diluted $ (.05) $ (.24)
========== =========
Weighted average number of common
shares outstanding 5,026,039 2,815,255
========== =========
</TABLE>
See accompanying notes to consolidated financial statements
- 3 -
<PAGE>
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
------------ Paid-in Accumulated Comprehensive
Shares Amount Capital Deficit Loss
-------- ------- ------- ----------- ------------
THREE MONTHS ENDED MARCH 31, 1998:
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1998 4,949,936 $4,950 $18,755,225 $(15,172,703) $ (35,900)
Issuance of shares on conversion
of debentures 228,310 228 49,772 - -
Net loss for the period - - - (255,085) -
Foreign currency translation loss - - - - (12,135)
-------- --------- ----------- ------------ ---------
Balance, March 31, 1998 5,178,246 $5,178 $18,804,997 $15,427,788 $(48,035)
========= ====== =========== =========== =========
THREE MONTHS ENDED MARCH 31, 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) (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 648,905 649 505,668 - -
Incremental interest from
revaluation of convertible
debentures - - 150,000 - -
Net loss for the period - - - (679,115) -
-------- --------- ----------- ------------ ---------
Balance, March 31, 1997 3,125,174 $2,981 $17,610,259 $(13,844,590) $ -0-
========= ====== =========== =========== =========
</TABLE>
See accompanying notes to consolidated financial statements
- 4 -
<PAGE>
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
--------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss $(255,085) $(679,115)
Adjustments to reconcile net loss to
net cash provided by(used in) operating activities:
Depreciation and amortization of property and equipment 19,073 20,408
Amortization of goodwill 97,000 86,000
Amortization of imputed interest income -- (13,000)
Options granted/extended as compensation -- 125,000
Incremental interest on revaluation of
convertible debentures -- 150,000
Interest on debentures paid in shares of
capital stock -- 11,317
Foreign currency loss 41,576 74,424
Changes in operating assets and liabilities:
(Increase)decrease in:
Accounts receivable (224,433) (165,290)
VAT refund receivable -- 30,929
Receivables from related parties -- 616
Prepaid and other assets 8,189 (29,388)
Increase(decrease) in:
Accounts payable and accrued expenses 200,972 440,088
Compensation payable to officers -- (50,000)
Payable to former owners acquired businesses (15,000) 87,648
Deferred revenue 50,000 --
--------- ---------
Net cash provided by(used in) operating activities (77,708) 89,637
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Receivable from Hungarian Broadcasting Corporation (1,159) 8,655
Acquisition of Internet Service Companies, net of cash acquired -- (481,801)
Acquisition of property and equipment -- (321,348)
Acquisition of intangibles (22,056) --
--------- ---------
Net cash used in investing activities (23,215) (794,494)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible debt -- 395,000
---------
Proceeds from note payable to Hungarian Broadcasting Corporation -- 350,000
--------- ---------
Net cash provided by financing activities -- 745,000
--------- ---------
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH (53,711) (74,424)
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (154,634) (34,281)
Cash and cash equivalents at beginning of period 697,948 495,703
--------- ---------
Cash and cash equivalents at end of period $ 543,314 $ 461,422
========= =========
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock upon conversion of debentures and accrued interest $ 50,000 $ 506,317
See accompanying notes to consolidated financial statements ========= =========
</TABLE>
- 5 -
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 majority-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 and occupancy permits
have been obtained.
(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.
- 6 -
<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) 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.
- 7 -
<PAGE>
EUROWEB INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(k) 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.
(l) 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 ended March 31, 1997 were the same.
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 and is operating them through its wholly-owned subsidiary,
Euroweb Rt.
These acquisitions have been accounted for using the purchase method of
accounting. The cost in excess of net assets acquired (goodwill) of
approximately $1,900,000 resulting from these acquisitions is being
amortized over 5 years using the straight-line method.
The accompanying statement of loss for 1997 includes the results of the
acquired companies' operations since January 2, 1997. The Company is
operating the Internet service companies through its wholly-owned
subsidiary, Euroweb Rt.
- 8 -
<PAGE>
EUROWEB INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. INTERIM PERIODS
The accompanying consolidated financial statements for the three months
ended March 31, 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 March 31, 1998, cash of $389,212, 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, $154,102 was on deposit in Hungarian banks.
6. ADVANCES TO, PAYABLE FROM AND INVESTMENT IN HBC
(a) At March 31, 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 planned 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 in favor of the HBC
underwriters. On October 29, 1997, the Company sold the 250,000
shares to the HBC underwriters for $649,000, approximately 40% of
the then market price. 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 and the proceeds of
a debt owed by a company controlled by the Company's former
President (see Note 10(a)).
- 9 -
<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 includes the cost of land ($885,000) and
construction costs incurred through December 31, 1997, net of a
provision of $1,350,000 ($350,000 and $1,000,000 provided in 1997
and 1996, respectively), 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. All the deposits for the
apartments with the exception of one for $200,000 were received
from the Company's former President. Move-in permits were obtained
and the sale of the apartments was recognized in the three months
ended March 31, 1998. The sales price of these apartments
approximates the cost of the apartments net of the allocated
provision for write-down.
(c) The second condominium building for which move-in permits have also
been obtained has been leased under a net lease which provides for
monthly rentals 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.
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 $279,000. No sales of 10%
convertible debentures were made during the first quarter of 1998.
Commencing 45 days after issuance, the original principal amount of
the debentures is 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. In the case of the occurrence of one
or more "events of default" as described in the debenture, the
debentures may be immediately due and payable. 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 three months ended March 31, 1998, an additional
$50,000 of debentures were converted into 228,310 shares of common
stock.
- 10 -
<PAGE>
EUROWEB INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 $150,000 to the consolidated statement of loss for the
three months ended March 31, 1997. In addition, financing costs of
$59,924 incurred in connection with the sale of the debentures were
charged to operations in the first quarter of 1997, since a
substantial portion of the debentures was expected to be converted
to common stock within a short period.
The unconverted debentures of $150,000 at December 31, 1997 and
$100,000 at March 31, 1998 are due as follows:
December 31, March 31,
1997 1998
----------- -----------
(unaudited)
January 1999 $ 50,000 $ --
April 1999 100,000 100,000
-------- --------
$150,000 $100,000
(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 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. The exercise price was
reduced to $1.25 per share on June 26, 1997.
9. STOCK OPTION PLAN AND WARRANTS
(a) Stock Options
The Company has a Stock Option Plan (the "Plan"). An aggregate of
100,000 shares of Common Stock are authorized for issuance under
the Plan. On May 14, 1996, the stockholders approved an increase in
the number of stock options available under the Plan to 350,000. At
December 31, 1997, 90,000 stock options which were available under
the Plan were granted to the Company's officers and directors in
April 1998. Plan provides that incentive and nonqualified options
may be granted to officers and directors and consultants to the
Company. The Plan may be administered by either the Board of
Directors or a committee of three directors appointed by the Board
(the "Committee"). The Board or Committee determines, among other
things, the persons to whom stock options are granted, the number
of shares subject to each option, the date or dates upon which each
option may be exercised and the exercise price per share.
Options granted under the Plan are exercisable for a period of up
to ten years from the date of grant. Options terminate upon the
optionee's termination of employment or consulting arrangement with
the Company, except that, under certain circumstances, an optionee
may exercise an option within the three-month period after such
termination of employment.
- 11 -
<PAGE>
EUROWEB INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
An optionee may not transfer any options except that an option may
be exercised by the personal representative of a deceased optionee
within the three-month period following the optionee's death.
Incentive options granted to any employee who owns more than 10% of
the Company's outstanding common stock immediately before the grant
must have an exercise price of not less than 110% of the fair
market value of all underlying stock on the date of the grant and
the exercise term may not exceed five years. The aggregate fair
market value of common stock (determined at the date of grant) for
which any employee may exercise incentive options in any calendar
year may not exceed $100,000. In addition, the Company will not
grant a nonqualified option with an exercise price less than 85% of
the fair market value of the underlying common stock on the date of
the grant.
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 1998 and 1997
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
======== =====
The following table summarizes information about stock
options outstanding under the Plan at December 31, 1997:
<TABLE>
<CAPTION>
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
----------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
$1.00-3.38 820,000 2.6 $ 1.39 720,000 $ 1.32
========== ============ ============ =========== =========== ======
</TABLE>
- 12 -
<PAGE>
EUROWEB INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On August 26, 1997, the Board of Directors 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. This action is subject to
approval of the Company's shareholders at the next annual
shareholder meeting to be held in July 1998.
As part of its expansion plans into other countries of
Central Europe, the Company retained Eurus Capital
Corporation as its consultant in Poland to provide various
services for a period of two years, including market
surveys, advise regarding the political, economic and
regulatory conditions in Poland, considerations of possible
funding sources, seeking potential joint venture parties
and identifying possible acquisitions. For its services,
the Company granted an option to Eurus in April 1998 to
acquire 300,000 shares of the Company's common stock at a
price of $1.125 per share for a period expiring on April
20, 2001.
(b) Stock Warrants
The following table summarizes information about stock
warrants at December 31, 1997:
<TABLE>
<CAPTION>
Warrants Outstanding
and Exercisable
------------------------------------------
Number Weighted
Outstanding at Average
December 31, Remaining
Range of exercise prices 1997 Contractual Life
------------------------ -------------- -----------------
<S> <C> <C> <C>
$ 1.25 - $ 4.00 555,700 4.8
$13.20 - 14.75 87,000 1.7
--------
642,700 4.4
========
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
(a) Employment Agreements
Effective May 1, 1994, the Company entered into three-year
employment agreements with three officers and terminated the
existing consulting and retainer agreement with them. The
agreements were extended by two additional years on October 23,
1995 and another two years on December 23, 1996. 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 its 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 is 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. The
- 13 -
<PAGE>
EUROWEB INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
President 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 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 (See Note 11(a)).
On December 23, 1996, the Board of Directors extended the
employment contracts of the Chairman of the Board and Treasurer to
December 31, 2001 and increased their annual compensation to
$144,000 and $120,000, respectively.
In February 1997, 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, the Company's 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. 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 the Chairman of the Board with
a split dollar life insurance policy in the face amount of
$2,000,000 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.
(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:
- 14 -
<PAGE>
EUROWEB INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Year Ending
DECEMBER 31,
------------
1998 $ 424,000
1999 424,000
2000 424,000
2001 190,000
2002 190,000
----------
$1,652,000
11. RELATED PARTY TRANSACTIONS
(a) Transactions with Former President
On October 30, 1996, the Board of Directors approved the sale of one
of the condominium buildings under construction to a company
controlled by the Company's President and Chief Executive Officer.
The building contains fourteen units for which deposits for the full
sales price have been received by the Company. The purchaser agreed
to purchase all of the apartments in the building, except for one,
for $1,479,653. Move-in permits were received and the sale was
recognized in the three months ended March 31, 1998.
On October 30, 1996, the Company's President also resigned as an
officer, director and employee and agreed to a cancellation of his
employment agreement (which provided for $168,000 salary per annum
until February 1999), upon payment of $372,000. The $372,000,
together with an additional amount of approximately $1,017,000 owed
to the former President, was used as a deposit with $90,000 being
owed by him on the above purchase at December 31, 1997.
It was further agreed that 250,000 stock options which were granted
to the President under his employment agreement and pursuant to the
Company's Incentive Stock Option Plan of 1993 will not terminate but
will continue to be governed by the original terms of the options.
The aforementioned $372,000 relating to the cancellation of the
President's employment agreement and $600,000 relating to the
extension of the period of exercisability of the President's options
were charged to operations during the fourth quarter of 1996.
12. ACQUISITIONS
On January 2, 1997, the Company acquired three Hungarian Internet
service companies for a purchase price of approximately $1,913,000,
consisting of $1,225,000 in cash ($825,000 paid in 1996), 204,000
shares of common stock of the Company (144,000 issued in 1996),
assumption of $128,000 of liabilities, and $356,000 in notes, of
which $176,000 is still owed at March 31, 1998 and is payable at
various dates through October 31, 1998.
- 15 -
<PAGE>
EUROWEB INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The acquisitions have been accounted for using the purchase method
of accounting. The cost in excess of net assets acquired (goodwill)
of approximately $1,900,000 resulting from these acquisitions is
being amortized over 5 years using the straight-line method.
The Company's consolidated statements of loss for the three months
ended March 31, 1998 and March 31, 1997 includes the results of
operations of the Internet service companies from the acquisition
date.
13. SUBSEQUENT EVENT
Pursuant to a letter of intent from an underwriter, the Company
intends to enter into an Underwriting Agreement to publicly offer,
sell and distribute 800,000 units at $6 per unit consisting of one
share of Convertible Preferred Stock and one Common Stock Purchase
Warrant.
- 16 -
<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 condominiums in Budapest. During
1996 and 1997, the Company's former President agreed to purchase 13 of the 14
apartments in one of the buildings and to finance the completion of the other
building. The Company completed the construction and recorded the sale during
the three months ended March 31, 1998. Construction of the second building also
was completed and in April 1998 the Company net-leased the building to an
unaffiliated person for a net monthly rental of $22,000 for a five year term.
The net lease also contained an option to purchase the building for a sum of
$2,000,000 during the lease period.
In January 1997, the Company acquired three operating Internet service provider
businesses and has consolidated the three businesses under one roof. Revenues
from the Internet business amounted to $384,900 and $286,252 for the three
months ended March 31, 1998 and 1997, respectively.
In February 1997, the Company's 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, 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. The
compensation 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 its Chairman of the Board to December 31, 2005 and included a
provision in the contract to provide the Chairman with a split dollar life
insurance policy with a face amount of $2,000,000. 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.
- 17 -
<PAGE>
In 1998, the Company started a division to develop Internet software to provide
electronic commercial-based solutions to perform many business processes. This
division was retained by Fornex, an agent of the Budapest Stock Exchange
("BSE"), to develop software to record all transactions on the BSE in real time,
which information can be obtained by subscribers of the Fornex service through
the Internet. The division has also been retained by Postal Bank, Hungary's
second largest bank, to help develop software for home banking use by customers
of the bank to enable the customers to transfer funds on deposits at the bank
electronically to third parties. The Company is also working on developing
software for credit card processing and transaction validation and is
negotiating to acquire software companies engaged in phases of Electronic
Banking and Electronic Transaction Processing, but it has not yet identified any
particular acquisition as of this date.
As part of its expansion plans into the countries of Central Europe, the Company
retained Eurus Capital Corporation as its consultant in Poland to provide
various services for a period of two years, including market surveys, advise
regarding the political, economic and regulatory conditions in Poland,
considerations of possible funding sources, seeking potential joint venture
parties and identifying possible acquisitions. For its services, the Company
granted an option to Eurus in April 1998, to acquire 300,000 shares of the
Company's common stock at a price of $1.125 per share for a period expiring on
April 20, 2001.
For the three months ended March 31, 1998, the Company incurred a net loss of
$255,085 ($.05 per share); the net loss for the three months ended March 31,
1997 amounted to $679,115 ($ .24 per share).
Revenues for the three months ended March 31, 1998 amounted to $2,109,368,
compared with revenues of $286,252 for the three months ended March 31, 1997.
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 three months ended March 31, 1998 and 1997 amounted to $97,000 and
$86,000, respectively.
Financing costs of $59,924 incurred in connection with the sale of convertible
debentures were charged to operations for the first quarter of 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 the first quarter
of 1998.
Interest expense for the three months ended March 31, 1997 includes $150,000, 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
- 18 -
<PAGE>
expenses of approximately $279,000. No sales of 10% convertible debentures were
made during the first quarter of 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 three months ended March 31, 1998, an additional $50,000 of debentures were
converted into 228,310 shares of common stock.
On August 26, 1997 the Board of Directors 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. This action is subject to approval of the
Company's shareholders at the next annual shareholder meeting to be held in
1998.
The Company is planning to raise additional funds by issuing shares of its
preferred stock in a public offering during 1998. The offering would cover
920,000 units (each unit consisting of one share of preferred stock and one
common stock purchase warrant).
The Company currently anticipates that its available cash resources, combined
with the net proceeds from the public offering, will be sufficient to meet its
presently anticipated working capital and capital expenditure requirements for
at least the next 12 months. However, the Company may need to raise additional
funds in order to support more rapid expansion, develop new or enhanced services
and products, respond to competitive pressures, acquire complimentary 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% for 1996
and 28% for 1995. Prices have been rising rapidly in recent years.
Internet operations are not seasonal or dependent on weather conditions.
FOREIGN CURRENCY
The Company will be 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
- 19 -
<PAGE>
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.
- 20 -
<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***
- 21 -
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 approval of
the Company's shareholders at the next annual
shareholder meeting to be held in 1998)***
(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
- 22 -
<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 8th day of June 1998.
EUROWEB INTERNATIONAL CORP.
By /s/Frank R. Cohen
--------------------------
Frank R. Cohen
Chairman of the Board
- 23 -
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 543,314
<SECURITIES> 0
<RECEIVABLES> 486,870
<ALLOWANCES> 39,216
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<PP&E> 1,804,430
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<COMMON> 5,178
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<TOTAL-LIABILITY-AND-EQUITY> 5,024,651
<SALES> 2,109,368
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