SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________to_________________
COMMISSION FILE NUMBER 1-1200
EUROWEB INTERNATIONAL CORP.
(Exact Name of Registrant 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)
The Registrant's telephone number, including area code: (212) 758-9870
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, par value $.001 NASDAQ SMALL CAP
per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Registrant had revenues of $1,685,245 for the year ended December 31, 1998. As
of March 8, 1999, 6,487,916 shares of Common Stock were outstanding of which
6,422,916 were held by non-affiliates of the Company. The aggregate market value
of the Common Stock held by non-affiliates of the Company as of March 8, 1999,
was $11,240,103 (based upon the closing bid price on such date on NASDAQ of
March 7, 1999).
DOCUMENTS INCORPORATED BY REFERENCE
None.
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<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
The Company is a Delaware corporation which was organized on November 9,
1992. It was a development stage company through December 31, 1993. Its
wholly-owned Hungarian subsidiary, Teleconstruct Epitesi Kft ("Teleconstruct"),
a limited liability company, was organized on March 19, 1993 with the intention
to contract with community-sponsored telecom companies in Hungary to construct
and maintain local telephone exchanges in their areas. The subsidiary had two
operating business segments: (1) building of condominium apartments and building
renovation and (2) design and civil engineering, and laying of underground fiber
optic telephone and cable lines. The latter segment was discontinued in 1994.
The shares of the subsidiary, Teleconstruct, were sold in December 1998. With
the sale of Teleconstruct, the Company has exited the construction business and
accordingly, the construction operations have been classified as discontinued
operations for all periods presented.
On January 2, 1997, the Company entered the Internet Service Provider
business in Hungary by acquiring three Hungarian Internet service companies
("Internet providers") from unrelated parties, namely, EUNET, E-Net and MS
Telecom for a purchase price of approximately $1,913,000, consisting of 204,000
shares of common stock of the Company, $1,225,000 in cash, $356,000 of notes
payable, and assumption of approximately $128,000 of liabilities. The combined
companies were merged into a new Hungarian company known as EuroWeb RT
("EuroWeb"). On November 22, 1998, the Company sold 51% of the outstanding
shares of EuroWeb to Pantel RT for $2,200,000 in cash and an agreement to
increase the share capital of EuroWeb by $300,000 without changing the ownership
ratio (after the capital increase the ownership ratio would remain 49 - 51
percent). With the sale of the 51% interest, the Company does not currently have
a business but is seeking to acquire other Internet service companies in Eastern
Europe.
EUROWEB STRATEGY
EuroWeb's objective is to be the leading supplier to businesses of
complete communication solutions using Internet technologies. Instead of
concentrating on small users, EuroWeb concentrates on large business users and
seeks to satisfy all their needs with a high quality and reliable service.
EuroWeb's business has shown continued growth since it entered the
Internet field in January 1997, and EuroWeb expects such growth to continue in
Hungary. The Company is currently exploring the potential of expanding its
operations into other Central European countries.
PRODUCTS AND SERVICES
The Internet industry consists of three primary functions: 1) providing
access to the Internet; 2) maintaining ("hosting") the computers, known as
"servers," which store, and allow for access to, Web sites; and 3) developing
content, including graphics and database functions, for Web sites on the
Internet (known as "Value Added Services").
EuroWeb provides services in all three areas. In 1997 and 1998, 90% of its
revenues was derived from providing access, 5% was derived from Web services,
and 5% was derived from providing content and database functions.
Access to the Internet can be either through a leased line, which
maintains an open connection to the
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Internet at all times, or through a dial-up service, which requires subscribers
to dial a telephone number to connect to the Internet.
EuroWeb offers a variety of access options, including leased-line and
dial-up lines.
ACCESS OPTIONS
The following tables describe some of EuroWeb's Internet access options.
LOW SPEED DIAL-UP ACCESS
Low speed dial-up access services are primarily marketed to individuals
and households.
<TABLE>
<CAPTION>
<S> <C> <C>
Services Current List Price Summary Description
Individual Internet $380/Year Full Internet for single
No start up fee computer with mailbox
No traffic fee
Business Internet $27/Month Full Internet service for small
Traffic Fee corporate networks
Startup fee: $45
HIGH SPEED ACCESS
High speed access services are primarily marketed to business accounts.
Services Current List Price Summary Description
Business Internet ISDN $45/Month Full Internet service for
Traffic Fee medium corporate networks
Startup fee: $45 over Integrated Services Digital
Network ("ISDN")
Business Internet Managed $45-$902/Month Full Internet service for big
Leased Line Traffic fee corporate networks over
Startup fee: $503-$1,131 dedicated line
Dedicated International Line $2,300-$14,000/Month Full Internet service for very
64K-512K Traffic Fee: Limitless big corporate networks or
Startup fee: $571-$1,286 Internet resellers over dedicated
international line
</TABLE>
WEB SERVICES
EuroWeb markets various services for the design, development, hosting and
maintenance of home pages (entry points for a collection of information
presented through the World Wide Web). EuroWeb will install and maintain home
pages on EuroWeb servers for customers concerned with the cost, difficulty or
security of maintaining home pages on their own network.
Web site content on the Internet is stored on computers known as servers
(the "serve" information to Internet users). The business of "Web site hosting"
includes maintaining these computers as well as making certain that the
computers are always connected to the Internet (one of the benefits of the
Internet is that
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required information is available 24 hours a day, seven days a week). Web
hosting services are provided for a monthly fee which varies depending on the
bandwidth of the connection to the Internet and certain other factors.
<TABLE>
<CAPTION>
<S> <C> <C>
Services Current List Price Summary Description
Web Hosting $24-$476/Month Hosting companies' sites
Web Server Hosting From $143 Hosting companies' Web
Startup fee: $71 servers in EuroWeb's
machinery room
Autoweb From $24/Month Automatic creation of Web
Startup fee $476 sites
Design & Programming
corporate Web sites
</TABLE>
CONTENT SERVICES
EuroWeb provides various content services to customers including online
databases.
EuroWeb has developed several databases for its customers including a
"companies" database, a Hungarian bankruptcy database, and a composite Hungarian
library catalogue database.
The companies database enables subscribers to search for company data
registered in Hungarian Court of Registration. Every Hungarian company must file
with a Hungarian Court of Registration a statement setting forth the names and
addresses of its directors and managers, its accountants and attorneys and its
paid-in capital. In addition, regulations promulgated by the various government
ministries and statistical data releases by the government are also filed with
the Hungarian Court of Registration. EuroWeb keeps this database current on
a weekly basis and has had it translated into English and German.
The bankruptcy database enables subscribers to search for prior history of
companies. The library catalogue database consolidates the book catalogues of
all of the libraries in Hungary and identifies each book by name, author and a
brief identification of contents and in which libraries a copy of the book can
be found.
EuroWeb intends to continue to develop databases for other customers.
CUSTOMERS
EuroWeb's customers are businesses and professionals in varied lines
of business. EuroWeb's customer base has grown to over 250 business
customers as of December 31, 1998. In 1998, no customer accounted for more than
ten percent of EuroWeb's total revenues. The following is a list of certain
EuroWeb customers in each of 8 selected industry groups.
<TABLE>
<CAPTION>
Government Computer Systems & Service
- ---------- --------------------------
<S> <C>
State Privatization and Holding Corp. DYNAsoft Ltd. (SAP consultant)
Office of Economic Competition ICON Computing Ltd.
General Inspectorate of Communications IDOM Corp. (System Integrator)
Institute of Geodesy, Cartography and Remote Hungarian Railway Information Services Ltd.
Sensing
3
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Hungarian Banking and Capital Market Szuv Computing and Management Organization
Supervision Service Ltd.
KFKI Research Institute for Particle and Nuclear
Physics Corp.
Nuclear Physics Corp.
Scala ECE Hungary Ltd.
MULTINATIONAL COMPANIES TOURISM & ENTERTAINMENT
Bull-Zenith Hungary Ltd. Danubius Hotels Corp.
Digital Hungary Corp. Hungarian Tourism Service
ICL Hungary Ltd. Intercom Ltd.
HBO Hungary Ltd.
INDUSTRY BANKING
North-West Hungarian Electricity Supply EuroNet Corp.
Company Corp.
RABA Hungarian Railway Carriage and OTP Bank Corp.
Machine Works
Waterworks of Budapest Corp. Postabank Corp.
Malev Hungarian Airlines Corp. Credit Lyonnais Bank Corp.
Dunaferr Danube Ironworks Corp.
Heinz Canning Factory
North American Bus Industries Ltd.
NEWSPAPER RADIO
Budapest Sun Sunpress Ltd. Kossult Radio
Axel Springer Hungary Ltd. Petofi Radio
Magyar Hirlap (Daily) Slager Radio
Radio Hungary
</TABLE>
NETWORK OPERATIONS AND TECHNICAL SUPPORT
EuroWeb believes that effective network and technical support are
important criteria by which commercial users select Internet access providers
and has dedicated substantial resources to building a high quality support
infrastructure. As of December 31, 1998, EuroWeb had a network operations group
consisting of 11 people, including 6 providing technical support and 5 providing
customer support. EuroWeb's network operations personnel located at
EuroWeb's network operations center in Budapest are responsible for continuously
monitoring traffic across EuroWeb's network infrastructure. EuroWeb's
technical support personnel work to find solutions for customers experiencing
difficulties with Internet applications. Both the technical support and customer
support personnel currently are available from 8 a.m. to 8 p.m. Monday through
Friday. At other times, these personnel respond to technical support requests by
being paged.
SALES AND MARKETING
EuroWeb employs six persons in sales and marketing. To date, EuroWeb
has sold its Internet access and applications products and services
primarily through direct telephone contact. Call activity is generated in
response to a variety of promotional programs, including advertising in general
business and
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specialty periodicals, participation in industry shows, and press relations. The
sales persons work closely with the eleven person customer and technical support
group, which is responsible for installation at multiple sites and for support
and technical consulting services for the first thirty days after installation.
COMPETITION
The market for Internet services is relatively new, intensely competitive,
rapidly evolving and subject to rapid technological change. EuroWeb expects
competition to persist, intensify and increase in the future. EuroWeb's
principal competitors are Datanet, which has a customer base similar to that of
the Company's, and MATAV, the national Hungarian telephone company, and many
small niche companies engaged in WEB design, systems integration, and software
development. Furthermore, some of EuroWeb's current and potential competitors
have longer operating histories, larger installed customer bases, longer
relationships with clients and significantly greater financial, technical,
marketing and public relations resources than EuroWeb and the Company, and could
decide at any time to increase their resource commitments to EuroWeb's
market. EuroWeb strives to compete on the basis of the quality and
reliability of its services.
There are relatively low barriers to entry into EuroWeb's business.
Because professional services firms such as EuroWeb rely on the skill of
their personnel and the quality of their client service, EuroWeb has no
patented technology that would preclude or inhibit competitors from entering the
Internet services market. EuroWeb expects that it will face additional
competition from new entrants into the market in the future.
GOVERNMENT REGULATIONS
EuroWeb is not currently subject to direct government regulation other
than laws and regulations applicable to businesses generally, and there are
currently few laws or regulations directly applicable to access to or commerce
on the Internet. However, due to the increasing popularity and use of the
Internet, it is likely that a number of laws and regulations may be adopted at
the local, state, national or international levels with respect to the Internet
covering issues such as user privacy, freedom of expression, pricing of products
and services, taxation, information security or the convergence of traditional
communications services with Internet communications.
EMPLOYEES
The Company employs four persons, three in management and one in
administration. EuroWeb employs thirty persons; three in management, six in
sales, six in graphics and Web development, five in customer support, six in
networking operations and four administrative persons. None of the Company's
employees are represented by a labor organization. The Company and EuroWeb
believes that its relations with its employees are excellent.
EuroWeb's business of delivering Internet services is labor intensive.
Accordingly, EuroWeb's success depends in part on its ability to identify,
hire, train and retain employees who can provide the Internet strategy,
technology, marketing, audience development and creative skills required by
clients. There is currently a shortage of such personnel, and this shortage is
likely to continue for the foreseeable future.
5
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTIES
EuroWeb rents approximately 4,500 sq. feet of space at H-1122
Budapest, Varosmajor u. 13 from an unaffiliated person. It uses the premises for
executive offices and for operations and pays a rent in Hungarian forints of
approximately $114,000 per year under a five year lease expiring March 31, 2002.
The Company occupies space at 445 Park Avenue, New York, NY 10022 on a
month to month basis at a rental of $2,000 per month which it uses for
stockholder relations and general executive use.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings as of the
date of this report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the last quarter of the fiscal year ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is traded in the over-the-counter market on the
National Association of Securities Dealers' Automated Quotation System
("NASDAQ") under the symbol "EWEB".
The following table sets forth the high and low bid prices for the Common
Stock during the periods indicated as reported by NASDAQ. The prices reported
reflect inter-dealer quotations, and may not represent actual transactions and
do not include retail mark-ups, mark-downs or commissions.
HIGH LOW
---- ----
QUARTER ENDING:
1997
- ----
March 31, 1997 2 1/2 1 1/8
June 30, 1997 1 5/16 5/8
September 30, 1997 1 5/8
December 31, 1997 7/8 3/8
1998
- ----
March 31, 1998 1/2 1/4
June 30, 1998 3 1/4 3/8
September 30, 1998 2 3/4 3/4
December 31, 1998 3 1 3/8
On March 8, 1999 the closing bid price on the NASDAQ for the Common Stock was 1
3/4.
6
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HOLDERS OF COMMON STOCK
As of March 8, the Company had 6,487,916 shares of Common Stock
outstanding and 66 shareholders of record. The Company believes that it has
approximately 2,300 beneficial owners who hold their shares in street names.
DIVIDENDS
It is the present policy of the Company to retain earnings, if any, to
finance the development and growth of its business. Accordingly, the Board of
Directors does not anticipate that cash dividends will be paid until earnings of
the Company warrant such dividends, and there can be no assurance that the
Company can achieve such earnings or any earnings.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Information" and the Company's Consolidated Financial
Statements including the Notes thereto, included elsewhere in this report.
Except for the historical information contained herein, the discussion in the
report contains forward-looking statements that involve risks and uncertainties,
such as statements of the Company's plans, objectives, expectations and
intentions. The Company's actual results could differ materially from those
discussed below. Factors that could cause or contribute to such differences
include those discussed elsewhere herein.
Operations
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 sold 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"), the Company's
former president. The second building was completed in March 1998. The Company
received some rental income from unaffiliated persons from April to December
1998 when it sold the shares of Teleconstruct to M&A. With the sale of
Teleconstruct, the Company has exited the construction business and,
accordingly, the construction operations have been classified as discontinued
operations for all periods presented.
7
<PAGE>
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. EuroWeb offers a comprehensive range of services to deliver
Internet solutions designed to improve clients' business processes. EuroWeb's
services include providing access to an international backbone and design of
Web sites. EuroWeb markets its services principally to medium-sized and large
companies.
On November 20, 1998, the Company sold a 51% interest in EuroWeb. The
Company's consolidated statement of operations for the year ended December 31,
1998 includes (1) the results of operations of EuroWeb Rt. through November 20,
1998 and (2) the Company's equity in net loss of EuroWeb Rt. from November 21
to December 31, 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
For the year ended December 31, 1998, the Company realized a net profit
of $427,524 ($.08 per share) compared to a net loss of $(2,530,228) $(.68) per
share) in 1997. The profit was due to the gain of $1,516,548 on the sale of a
51% interest in its Hungarian Internet subsidiary.
Net revenues received from Internet activities for the year ended
December 31, 1998 were $1,958,062 of which $1,685,245 were received as of
November 22, 1998, the date of the sale of the 51% Interest. This compares with
revenue was of $1,270,135 in the year ended December 31, 1997. The increase in
revenues was due primarily to the sale of more leased lines to business
customers.
Compensation and related costs decreased to $597,988 in 1998 from
$790,543 in 1997 due to more efficient administration and reduced compensation
in its parent company.
Network costs increased from $525,530 in 1997 to $670,611 in 1998 due to
the increase in installing new lines.
Depreciation and amortization decreased in 1998 to $435,340 in 1998 from
$485,402 in 1997 because of less goodwill amortization.
Interest expenses (income) decreased in 1998 to $(6,029) from $868,925 in
1997 due to termination of the debt financing program. Incremental interest
relating to the convertible debt was $850,000 in 1997. Gains of $1,516,548
during 1998 and $24,000 during 1997 were recognized from the sale of a 51%
interest in a Company subsidiary and the sale of the Company's interest in
Hungarian Broadcasting Company, respectively.
Other expenses decreased from $557,386 in 1997 to $434,399 in 1998 due
primarily to more efficient administration.
Equity in net loss of EuroWeb Rt of $(21,000) reflects the loss during the
period from November 22, 1998 to December 31, 1998, based upon 49% ownership in
EuroWeb Rt.
The loss from discontinued operations of $119,678 ($.02 per share) and
$591,039 ($.16 per share) for the years ended December 31, 1998 and 1997,
respectively, represent loss on disposal for 1998 and loss from operations for
1997 from the construction business.
8
<PAGE>
The Company received cash of $2,200,000 from the November 1998 sale of
the a 51% interest in EuroWeb Rt., the Company's Hungarian Internet service
subsidiary. The Company is seeking to acquire other Internet service companies
in Eastern Europe.
LIQUIDITY AND CAPITAL RESOURCES
On September 1,1998, due to unfavorable conditions in the financial
markets, the Company withdrew a registration statement which it had previously
filed with the Securities and Exchange Commission for a public offering and
approximately $138,000 of costs incurred in connection with the public offering
were charged to expense during the third quarter of 1998.
In October 1998, the Company issued 866,666 shares of its common stock at
$.75 per share in two private placements (including 333,333 shares sold to two
companies controlled by, the Company's former President). The net proceeds from
these private placements amounted to $549,940 after deducting placement agent
fees and offering expenses of $100,061. In addition, the placement agent for one
of the offerings was granted 100,000 five-year warrants to purchase 100,000
shares of common stock on or after September 16, 1998 at an exercise price of
$1.10 per share.
In December 1998, the Company sold its holdings of shares in its
subsidiary Teleconstruct Epitesi Kft. for $1,500,000 consisting of $500,000 in
cash and a mortgage for $1,000,000 payable over six years with interest of 8
1/8% per year.
The Company currently anticipates that its current cash position and its
cash flows from current operations will be sufficient to meet its presently
anticipated working capital and capital expenditure requirements for at least
the next 12 months.
THE YEAR 2000
EuroWeb utilizes a significant number of computer software programs
and operating systems throughout its organization, including applications used
in operating the basic Internet service, network access, providing content and
fulfilling various administrative and billing functions. Since Internet
technology is constantly improving, both the hardware and software elements
which are provided by third parties must be upgraded at intervals ranging from
three to twelve months. A survey by EuroWeb has shown that approximately 90%
of these elements are standard software such as Unix and hardware such as Cisco
routers and Sun computers which have already been corrected. The remaining
hardware and software will be updated or replaced in the near future.
Furthermore, EuroWeb has developed some of its own special software
applications which have already incorporated the necessary modifications to
operate properly in the Year 2000. The Company is prepared to replace certain
computer elements wherever necessary during calendar year 1999, but management
does not believe that this would have any material adverse effect on the
Company's operations or its financial results.
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<PAGE>
EuroWeb does not separately identify costs incurred in connection with Year
2000 compliance activities. To date, however, the Company does not believe such
costs to be significant since most of the hardware must be replaced at intervals
ranging from three to twelve months. Future expenditures are not expected to be
significant.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." ("SFAS No. 133"), which requires companies
to recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. SFAS No. 133
is effective for fiscal years beginning after June 15, 1999. The Company does
not presently enter into any transactions involving derivative financial
instruments and, accordingly, does not anticipate the new standard will have
any effect on its financial statements.
ITEM 7. FINANCIAL STATEMENTS
Reference is made to the Consolidated Financial Statements of the Company,
beginning with the index thereto on page F-1.
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<PAGE>
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
F-1
<PAGE>
EUROWEB INTERNATIONAL CORP.
CONTENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ............ F-3
CONSOLIDATED FINANCIAL STATEMENTS:
Balance sheet .............................................. F-4
Statements of operations and comprehensive loss ............ F-5
Statements of stockholders' equity ......................... F-6
Statements of cash flows ................................... F-7
Notes to consolidated financial statements .......... F-8 - F-19
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Euroweb International Corp.
New York, New York
We have audited the accompanying consolidated balance sheet of Euroweb
International Corp. as of December 31, 1998, and the related consolidated
statements of operations and comprehensive loss, stockholders' equity, and cash
flows for each of the two years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Euroweb
International Corp. as of December 31, 1998, and the results of its operations
and its cash flows for each of the two years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
BDO Seidman, LLP
New York, New York
March 13, 1999
F-3
<PAGE>
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
CURRENT:
Cash and cash equivalents (Note 3) $ 1,688,280
Certificate of deposit 1,006,567
Current portion of note receivable (Note 10) 641,785
Receivable from Euroweb Rt (Note 8(c)) 101,103
Investment in Hungarian Broadcasting Corp. (Note 4(a)) 156,443
Prepaid and other 128,027
------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 3,722,205
NOTE RECEIVABLE, LESS CURRENT PORTION (NOTE 10) 858,215
INVESTMENT IN EUROWEB RT, AT EQUITY (NOTE 9) 730,813
======================================================================================================
$ 5,311,233
------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 225,590
------------------------------------------------------------------------------------------------------
COMMITMENTS (NOTE 7)
STOCKHOLDERS' EQUITY (NOTE 6):
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 6,444,916 6,445
Additional paid-in capital 20,886,852
Deficit (15,760,679)
Other comprehensive loss, net (46,975)
------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 5,085,643
------------------------------------------------------------------------------------------------------
$ 5,311,233
======================================================================================================
</TABLE>
See accompanying notes to consolidated
financial statements.
F-4
<PAGE>
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997
---------------------------------------------------------------------------------------------------------------------
REVENUES (NOTE 9) $ 1,685,245 $ 1,270,135
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
EXPENSES (INCOME):
Compensation and related costs (Notes 7 and 8(b)) 597,988 790,543
Network costs 670,611 525,530
Consulting and professional fees 240,750 234,042
Rent 122,098 117,531
Depreciation and amortization 435,340 485,402
Interest expense (income) - net (Note 5(b)) (6,029) 868,925
Financing costs (Note 5(b)) - 153,965
Cancelled public offering 138,434 -
Gain on sale of interests in Euroweb Rt and HBC (Notes 4(b) and
9(b)) (1,516,548) (524,000)
Equity in net loss of Euroweb Rt (Note 9(b)) 21,000 -
Other 434,399 557,386
---------------------------------------------------------------------------------------------------------------------
1,138,043 3,209,324
---------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 547,202 (1,939,189)
LOSS FROM DISCONTINUED OPERATIONS (NOTE 10) (119,678) (591,039)
---------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) 427,524 (2,530,228)
OTHER COMPREHENSIVE LOSS, NET (11,075) (35,900)
---------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $ 416,449 $(2,566,128)
=====================================================================================================================
NET INCOME (LOSS) PER SHARE - BASIC
Continuing operations $ .10 $ (.52)
Discontinued operations (.02) (.16)
---------------------------------------------------------------------------------------------------------------------
$ .08 $ (.68)
=====================================================================================================================
NET INCOME (LOSS) PER SHARE - DILUTED
Continuing operations $ .09 $ (.52)
Discontinued operations (.02) (.16)
---------------------------------------------------------------------------------------------------------------------
$ .07 $ (.68)
=====================================================================================================================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 5,553,000 3,728,000
Diluted 5,906,000 3,728,000
=====================================================================================================================
</TABLE>
See accompanying notes to consolidated
financial statements.
F-5
<PAGE>
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years ended December 31, 1998 and 1997
--------------------------------------------------------------------------------------------------------------------
Common stock Additional Other
-------------------------- paid-in comprehensive
Shares Amount capital loss Deficit
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 2,476,269 $2,476 $17,681,947 $ - $(13,657,975)
Compensation relating to the extension
of the period of exercisability of
former officer's options and
issuance of options to consultant
(Note 7) - - 170,000 - -
Issuance of shares on conversion of
debentures and accrued interest
(Note 5(b)) 2,413,667 2,414 1,224,838 - -
Exercise of put options on common stock
issued in connection with
acquisitions 60,000 60 (156,060) - -
Incremental interest from revaluation
of convertible debentures (Note 5(b)) - - 850,000 - -
Foreign currency translation adjustment - - - (35,900) -
Net loss for the year - - - - (2,530,228)
--------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 4,949,936 4,950 19,770,725 (35,900) (16,188,203)
Issuance of shares for cash (Note 5(a)) 866,666 867 549,073 - -
Exercise of common stock options 271,500 271 273,729 - -
Issuance of shares on conversion of
debentures and accrued interest
(Note 5(b)) 356,814 357 161,325 - -
Issuance of options for consulting
services - - 132,000 - -
Unrealized loss on investment in HBC - - - (20,975) -
Foreign currency translation adjustment - - - 9,900 -
Net income for the year - - - - 427,524
--------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 6,444,916 $6,445 $20,886,852 $(46,975) $(15,760,679)
====================================================================================================================
</TABLE>
See accompanying notes to consolidated
financial statements.
F-6
<PAGE>
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 427,524 $(2,530,228)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization 435,340 497,362
Gain on sale of interests - net (1,396,870) (524,000)
Options granted as compensation and consulting 44,000 170,000
Stock issued for accrued interest 11,682 42,252
Equity in net loss of Euroweb Rt 21,000 -
Incremental interest on revaluation of convertible debentures - 850,000
Provision for loss on construction-in-progress - 350,000
Provision for doubtful accounts - 39,216
Loss on sale of property - 75,000
(Increase) decrease in:
Accounts receivable - (70,849)
Vat refund receivable - 74,412
Receivables from related parties (101,103) (65,269)
Net assets, excluding cash, of subsidiaries sold and deconsolidated 71,904 -
Other assets (10,293) 82,329
Increase (decrease) in:
Accounts payable and accrued expenses (339,225) (59,449)
Deferred revenue - 99,614
---------------------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (836,041) (969,610)
---------------------------------------------------------------------------------- ---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Certificates of deposit (1,006,567) -
Payable to former owners of businesses acquired (191,000) -
Receivable from HBC - (65,269)
Acquisition of Internet service companies, net of cash acquired - (501,986)
Acquisition of property and equipment and construction-in-progress - (243,890)
Proceeds from sale of interests in Euroweb Rt and HBC, respectively 2,200,000 649,000
Proceeds from sale of property - 134,000
---------------------------------------------------------------------------------- ---------------- -----------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,002,433 (28,145)
---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible debt - 850,000
Proceeds from HBC loan - 350,000
Proceeds from issuance of common stock 823,940 -
---------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 823,940 1,200,000
---------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 990,332 202,245
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 697,948 495,703
---------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,688,280 $ 697,948
=====================================================================================================================
NONCASH TRANSACTIONS:
Issuance of common stock upon conversion of debentures $ 150,000 $ 1,185,000
Payable to stockholders of acquired companies - 191,000
Settlement of HBC receivable for HBC common stock 177,418 -
---------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated
financial statements.
F-7
<PAGE>
EUROWEB INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT (a) Principles of Consolidation
ACCOUNTING POLICIES
The consolidated financial statements
include the accounts of Euroweb
International Corp. (the "Company") and
its majority-owned subsidiaries. The
operations of Euroweb Rt, a
wholly-owned Hungarian subsidiary in
the Internet business, have been
included in the consolidated financial
statements through November 20, 1998,
at which date the Company sold 51% of
its interest in Euroweb Rt. The
remaining 49% interest is carried at
the equity method. 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 service
were recognized in the month in which
the services were provided.
(e) Foreign Currency Translation
The Company uses the local currency,
the Hungarian forint, as the functional
currency for measuring the accounts of
Euroweb Rt, in which it reduced its
interest from 100% to 49% on November
20, 1998. It translates all assets and
liabilities at year-end exchange rates
and all income and expense accounts at
average rates, and records adjustments
resulting from the translation in a
separate component of stockholders'
equity.
F-8
<PAGE>
(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, certificates of deposit
and accounts payable and accrued
expenses approximate fair value.
(h) Investment in Euroweb Rt
The Company's 49% equity interest in
Euroweb Rt is accounted for using the
equity method, under which the Company
records as income its share of the
earnings, net of the amortization of
goodwill, and dividends are credited
against the investment account when
declared. The excess of the carrying
value of the Company's investment over
its equity in the fair value of the
underlying net assets (goodwill) of
approximately $586,000 at the
acquisition date is amortized over an
estimated remaining useful life of 3
years.
(i) Stock-Based Compensation
In October 1995, the Financial
Accounting Standards Board ("FASB")
issued Statement of Financial
Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based
Compensation" ("SFAS No. 123") which
establishes a fair value method of
accounting for stock-based
compensation, through either
recognition or disclosure. The Company
adopted the disclosure option for
employee stock-based compensation
provisions of SFAS No. 123. Stock
arrangements with non-employees are
recorded at fair value.
F-9
<PAGE>
(j) Income Taxes
The Company accounts for income taxes
in accordance with SFAS No. 109,
"Accounting for Income Taxes" ("SFAS
No. 109"). 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.
(k) Net Income (Loss) Per Share
During 1997, the FASB issued SFAS No.
128 ("SFAS No. 128"), "Earnings per
Share," 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.
(l) Comprehensive Income
The Company adopted SFAS No. 130,
"Reporting Comprehensive Income", which
establishes 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 No. 130
requires that all items that are
required to be recognized under current
accounting standards as components of
comprehensive income be reported in a
financial statement that is displayed
with the same prominence as other
financial statements.
F-10
<PAGE>
2. ORGANIZATION AND BUSINESS On January 2, 1997, the Company
acquired three Hungarian Internet
Service companies and had operated them
through Euroweb Rt, a wholly-owned
subsidiary, through November 20, 1998,
on which date the Company sold a 51%
interest in Euroweb Rt (see Note 9).
The Company is currently seeking to
acquire other Internet service
companies in Eastern Europe.
3. CASH CONCENTRATION At December 31, 1998, cash and cash
equivalents included $300,663 and
$217,867 on deposit with a money market
fund and major money center bank,
respectively, and two certificates of
deposit of a major money center bank
aggregating $1,166,642.
4. INVESTMENT IN HUNGARIAN (a) On June 30, 1998, the Company settled
BROADCASTING CORP. its receivable of $177,418 from
Hungarian Broadcasting Corp. ("HBC"),
a public company, by receiving 68,732
restricted shares of HBC common stock
which are subject to a lock-up through
June 30, 1999. The 68,732 shares
represent less than 3% of HBC's total
outstanding shares of common stock. The
valuation of the stock represented a
discount of 30% from its market value
on that date. The investment is carried
at cost and the Company has classified
it as available for sale with the
unrealized loss of $20,975 recorded in
a separate component of stockholders'
equity. (b) The Company's prior 9.7%
interest in HBC, 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 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.
F-11
<PAGE>
5. PRIVATE PLACEMENTS (a) In September 1998, the Company sold
866,666 shares of its common stock at
$.75 per share in two private
placements. The net proceeds from these
private placements amounted to $549,940
after deducting placement agent fees
and offering expenses of $100,061. In
addition, the placement agent for one
of the offerings was granted 100,000
five year warrants to purchase 100,000
shares of common stock on or after
September 16, 1998 at a exercise price
of $1.10 per share.
The agreement with one of the private
placement investors requires the
Company to repurchase 166,666 shares of
common stock at $.75 per share upon
request by the investor during a six
month put period beginning September
12, 1998. The private placement
investor did not request the Company to
repurchase the 166,666 shares during
the six-month put period.
(b) In 1997, the Company sold $850,000 of
10% convertible debentures due 2 years
from the date of sale to foreign
investors outside the United States in
private placements receiving aggregate
net proceeds of approximately $696,000,
after deducting placement agent fees
and offering expenses of approximately
$154,000. 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. During 1998 and 1997,
debentures of $150,000 and $1,185,000
and accrued interest of $11,682 and
$42,252, respectively, have been
converted into 356,814 and 2,413,667
shares of common stock, respectively.
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 an interest charge of
$850,000 to the consolidated statement
of operations for the year ended
December 31, 1997. In addition,
financing costs of approximately
$154,000 incurred in connection with
the sale of the debentures have been
charged to operations during 1997,
since substantially all of the
debentures were converted to common
stock within a short period after
issuance.
F-12
<PAGE>
6. STOCK OPTION PLAN AND (a) Stock Options
WARRANTS
The Company has a Stock Option Plan
(the "Plan"). An aggregate of 350,000
shares of common stock is authorized
for issuance under the Plan. At
December 31, 1998, no stock options
were available under the Plan. The Plan
provides that incentive and
nonqualified options may be granted to
officers and directors and consultants
to the Company for the purpose of
providing an incentive to those persons
to work for 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. 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 the
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.
F-13
<PAGE>
SFAS No. 123, "Accounting for
Stock-Based Compensation", requires the
Company to provide pro forma
information regarding net income and
earnings per share as if compensation
cost for the Company's stock options
had been determined in accordance with
the fair value-based method prescribed
in SFAS No. 123. The Company estimates
the fair value of each stock option at
the grant date by using the
Black-Scholes option-pricing model with
the following weighted-average
assumptions used for grants in 1998 and
1997, respectively: no dividends paid
for all years; expected volatility of
117% in 1998 and 83% in 1997; weighted
average risk-free interest rates of
5.46% and 6.03%, respectively; and
expected lives of 5 years.
Under the accounting provisions of SFAS
No. 123, the Company's net income
(loss) and earnings (loss) per share
would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997
-------------------------------------------------------------------------
<S> <C> <C>
NET INCOME (LOSS):
As reported $427,524 $(2,530,228)
Pro forma 101,424 (2,636,578)
=========================================================================
BASIC EARNINGS (LOSS) PER SHARE:
As reported $ .08 $ (.68)
Pro forma .02 (.71)
=========================================================================
DILUTED EARNINGS (LOSS) PER SHARE:
As reported
$ .07 $ (.68)
Pro forma .02 (.71)
=========================================================================
</TABLE>
F-14
<PAGE>
Transactions involving options granted under the Plan are
summarized below:
<TABLE>
<CAPTION>
1998 1997
----------------------- ----------------------
Weighted Weighted
average average
exercise exercise
Shares price Shares price
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, January 1 820,000 $1.39 775,000 $1.71
Granted 390,000 1.14 240,000 1.77
Exercised (271,500) 1.00 - -
Cancelled (28,500) 3.00 (195,000) 2.33
--------------------------------------------------------------------------
Outstanding, December 31, 910,000 1.35 820,000 1.39
==========================================================================
Exercisable, December 31 810,000 1.27 720,000 $1.32
==========================================================================
</TABLE>
The following table summarizes information about stock options
outstanding under the Plan at December 31, 1998:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------ ------------------------
Number Weighted Number Weighted
outstanding average exercisable average
Range of at remaining Range of at remaining
exercisable December 31, contractual exercisable December 31, contractual
prices 1998 life prices 1998 life
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 - $3 3/8 910,000 3.2 $1.00-$3 3/8 810,000 3.2
======================================================================================
</TABLE>
F-15
<PAGE>
(b) Stock Warrants
The following table summarizes
information about stock warrants at
December 31, 1998:
<TABLE>
<CAPTION>
Warrants outstanding and exercisable
---------------------------------------
Number outstanding Weighted average
at December 31, remaining
Range of exercise prices 1998 contractual life
-------------------------------------------------------------------------
<S> <C> <C>
$ 1.10 - $ 1.25 840,000 3.0
$14.75 25,000 0.3
-------------------------------------------------------------------------
865,000 3.0
=========================================================================
</TABLE>
7. COMMITMENTS Employment Agreements
Employment agreements with the three
officers of the Company provide for
aggregate annual compensation of
$318,000 through September 30, 2004 and
$150,000 thereafter through 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.
8. RELATED PARTY TRANSACTIONS (a) The Company paid legal fees to the
Secretary/Treasurer and current
Chairman of the Board of $30,000 and
$24,000 for the years ended December
31, 1998 and 1997, respectively.
(b) Compensation and related costs includes
approximately $195,000 incurred under
an employee leasing arrangement with a
company owned by the vice-president of
the Company.
F-16
<PAGE>
(c) Receivable from Euroweb Rt includes
the management fee charge of $65,715
and advances. The management fee is
reflected in the statement of
operations for the year ended December
31, 1998 as a reduction of other
expenses.
(d) In January 1999, the Company loaned to
a vice-president of the Company
$150,000, repayable in monthly
installments of $8,000, including
interest at 11% per annum. The loan is
collateralized by the vice-president's
house in Budapest, Hungary.
9. ACQUISITIONS/DISPOSITION (a) 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, 204,000 shares
of common stock of the Company,
assumption of $128,000 of liabilities,
and issuance of note payable of
$356,000.
These acquisitions have been accounted
for using the purchase method of
accounting. The Company operated the
Internet Service companies through its
wholly-owned subsidiary, Euroweb Rt.
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 statement of
operations and comprehensive loss
includes the results of Internet
Service operations from the acquisition
date.
(b) On November 20, 1998, the Company
sold a 51% interest in Euroweb Rt for
$2,200,000, recognizing a gain of
$1,516,548 on the sale of the 51%
interest in Euroweb Rt. The buyer will
contribute $300,000 to Euroweb Rt's
capital. Pursuant to the non-compete
provision of the shareholders'
agreement, the Company cannot: (i)
engage in any business activity listed
in the scope of activities of Euroweb
Rt's charter, which, among others,
includes telecommunications, databank
activity and
F-17
<PAGE>
information technology activity, (ii)
own or control any equity interest in
any person or entity that engages in
any such business activity or (iii)
permit any of its employees to act as
a director, officer, manager or
consultant to any person or entity
that engages in any such business
activity. If the Company breaches its
obligation set forth under this
provision, the Company will be
required to sell to the other
shareholder all its shares at the time
of such breach at a price equal to the
nominal value of such shares.
The Company's consolidated statement of
operations for the year ended December
31, 1998 includes (1) the results of
operations of Euroweb Rt through
November 20, 1998 and (2) the Company's
equity in net loss of Euroweb Rt from
November 21 to December 31, 1998.
Operating data for Euroweb Rt:
<TABLE>
<CAPTION>
Period from
Year ended Period from November 21, to
December 31, January 1 to December 31,
1998 November 20, 1998 1998
-------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $1,958,062 $1,685,245 $272,817
Expenses 1,838,849 1,568,138 270,711(1)
-------------------------------------------------------------------------
Net income $ 119,213 $ 117,107 $ 2,106
=========================================================================
-------------------------------------------------------------------------
Company's 49% equity in net income $ 1,032
Amortization of the excess of the carrying value of
the Company's investment over its equity in the
fair value of the underlying net assets (22,032)
-------------------------------------------------------------------------
Equity in net loss of Euroweb Rt $(21,000)
=========================================================================
--------------
(1) Includes management fees of $65,715 and $63,930 charged
by the Company and the other shareholder, respectively.
</TABLE>
F-18
<PAGE>
10. DISCONTINUED OPERATIONS During 1998, the Company completed the
sale of all of the apartments in one of
two condominium buildings constructed
by the Company. The purchaser of all of
the apartments, except for one, was the
Company's former President. In December
1998, the former President also
purchased all of the outstanding shares
of stock of the Company's wholly-owned
construction subsidiary for $1,500,000,
which yielded a loss of $119,678. The
subsidiary's only significant asset was
the second condominium building. The
sales price has been satisfied by a
payment of $500,000 in January 1999 and
the issuance of a promissory note of
$1,000,000 payable in sixty equal
monthly installments including interest
at approximately 7.3% per annum. The
note is collateralized by the building.
With the sale of the construction
subsidiary, the Company has exited the
construction business and, accordingly,
the construction operations have been
classified as discontinued for all
periods presented. Revenues for
discontinued operations were $1,724,000
for the year ended December 31, 1998
and $-0- for the year ended December
31, 1997. The loss from discontinued
operations of $119,678 ($.02 per share)
and $591,039 ($.16 per share) for the
years ended December 31, 1998 and 1997,
respectively, represent loss on
disposal for 1998 and loss from
operations for 1997.
11. INCOME TAXES The reconciliation of the effective
income tax rate to the Federal
statutory rate is as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997
--------------------------------------------------------------------------------
<S> <C> <C>
Federal income tax note 34.0% (34.0%)
Effect of net operating loss and
capital loss carryforward and
valuation allowances (34.0) 34.0
--------------------------------------------------------------------------------
Effective income tax note 0.0% 0.0%
================================================================================
</TABLE>
Full valuation allowances have been
provided on the Company's net operating
and capital loss carryforwards which
are subject to annual restrictions
since their realization is not
considered to be more likely than not.
F-19
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
There is incorporated in this Item 9 by reference the information
appearing under the captious "Election of Directors" in the Company's definitive
Proxy statement for the 1998 Annual Meeting of Stockholders, a copy of which
will be filed not later than 120 days after the close of the fiscal year.
ITEM 10. EXECUTIVE COMPENSATION
There is incorporated in this Item 10 by reference the information
appearing under the caption "Election of Directors - Executive Compensation" in
the Company's definitive Proxy statement for the 1998 Annual Meeting of
Stockholders, a copy of which will be filed not later than 120 days after the
close of the fiscal year.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is incorporated in this item II by reference the information
appearing under the caption "Security Ownership of Certain Beneficial Owners and
Management" in the Company's definitive proxy statement for the 1998 Annual
Meeting of Stockholders, a copy of which will he filed not later than 120 days
after the close of the fiscal year.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is incorporated in this Item 12 by reference the information
appearing under the caption "Certain Relationships and Related Party
Transactions" in the Company's definitive proxy statement for the 1998 Annual
Meeting of Stockholders, a copy of which will be filed no later than 120 days
after the close of the fiscal year.
11
<PAGE>
PART IV
ITEM 13. 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***
(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***
(1) 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 Registrant'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) Lease and Option Agreement for Building B as of April 1, 1998
with Hafisa Kft.*****
(x) 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
12
<PAGE>
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 10KSB for year ended December 31, 1997.
B. A report on Form 8-K was filed on November 20, 1998 during the last quarter
covered by this report on Form 10-K. The report pertained to the sale of
51% of the shares of its Hungarian subsidiary EuroWeb Rt. to Pantel Rt.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of New York, State of New York, on the 31st day of March 1999.
EUROWEB INTERNATIONAL CORP.
By /s/Frank R. Cohen
------------------
Frank R. Cohen
Chairman of the Board
Pursuant to the requirements of the Securities Exchange of 1934, as
amended, this Report has been signed below by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/Frank R. Cohen Chairman of Board, Chief March 31, 1999
- --------------------- Executive Officer, Secretary
Frank R. Cohen
/s/Robert Genova Director, President, Chief March 31, 1999
- --------------------- Financial Officer, Treasurer
Robert Genova
/s/Csaba Toro Director and Vice President March 31, 1999
- ---------------------
Csaba Toro
/s/Richard G. Maresca Director March 31, 1999
- ---------------------
Richard G. Maresca
/s/Donald K. Roberton Director March 31, 1999
- ---------------------
Donald K. Roberton
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