U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
|_| 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 9,883,340 Shares
(Class) (Outstanding at September 30, 1999)
Transitional Small Business Disclosures Format (Check one): Yes No X
<PAGE>
EUROWEB INTERNATIONAL CORP.
INDEX
PART I. Financial Information
Item 1. Financial Statements
Consolidated balance sheets as of September 30, 1999 (unaudited)
and December 31, 1998 (audited) 2
Consolidated statements of operations and comprehensive loss
(unaudited) for the three months ended September 30, 1999 and 1998
and the nine months ended September 30, 1999 and 1998 3
Consolidated statements of stockholders' equity (unaudited) for the
nine months ended September 30, 1999 and 1998 4
Consolidated statements of cash flows (unaudited) for the nine
months ended September 30, 1999 and 1998 5
Notes to consolidated financial statements (unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
PART II. Other Information 17
Signature 20
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EUROWEB INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
September 30, 1999 December 31, 1998
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 2,693,524 $1,688,280
Certificate of deposit 1,039,989 1,006,567
Accounts receivable - less allowance
for doubtful accounts of $148,009 362,376 -
Current portion of note receivable 150,082 641,785
Current portion of loan receivable 88,141 -
Receivable from Euroweb Rt. 35,388 101,103
Other receivables 50,678 -
Prepaid and other current assets 158,955 128,027
Investment in Hungarian Broadcasting Corp. 2,180 156,443
Total current assets 4,581,313 3,722,205
Property and equipment, less accumulated
depreciation of $30,684 440,573 -
Note receivable, less current portion 744,525 858,215
Loan receivable, less current portion 100,000 -
Investment in Euroweb Rt., at equity 975,952 730,813
Goodwill, less accumulated amortization
of $129,161 4,134,660 -
Other non-current assets 2,800 -
$10,979,823 $5,311,233
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 1,013,390 $ 225,590
Current portion of loan payable 66,056 -
Deferred revenue 156,665 -
Total current liabilities 1,236,111 225,590
Long Term Liabilities
Loan payable, less current portion 45,012 -
Commitments
Minority interests 10,013 -
Stockholders' Equity
Preferred stock, $.001 par value - shares
authorized 5,000,000; no shares outstanding
Common stock, $.001 par value - shares
authorized 20,000,000 (1999) and 15,000,000
(1998); issued and outstanding 9,883,340 (1999)
and 6,444,916 (1998) 9,884 6,445
Additional paid-in capital 26,017,597 20,886,852
Accumulated deficit (16,281,997) (15,760,679)
Accumulated other comprehensive losses:
Foreign currency translation adjustment (46,846) (26,000)
Unrealized loss on investment in Hungarian
Broadcasting Corporation (9,951) (20,975)
Total stockholders' equity 9,688,687 5,085,643
$10,979,823 $5,311,233
</TABLE>
See accompanying notes to consolidated financial statements.
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EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues
Internet $ 418,254 $ 505,953 $ 489,782 $1,345,953
Expenses(Income)
Compensation and related costs 143,234 140,262 300,609 457,207
Network costs 194,256 109,572 236,256 562,841
Consulting and professional fees 136,770 70,475 285,248 163,599
Rent 6,055 34,179 18,111 99,772
Bad debts 5,929 - 5,929 -
Depreciation and amortization 23,507 19,471 27,396 75,663
Amortization of goodwill 102,023 97,000 129,161 291,000
Gain on capital contribution by
parent company of Euroweb Rt. (147,000) - (147,000) -
Interest and dividend income (51,859) (2,505) (175,993) (29,355)
Interest expense 878 30,255 878 45,372
Foreign currency loss 1,903 16,245 931 16,245
Cost of cancelled public offering - 137,055 - 137,055
Equity in net income of Euroweb Rt. (6,945) - (66,989) -
Other expense 140,029 147,529 203,454 202,048
Other income (2,791) - (2,791) -
Realized loss on sale of securities 126,841 - 126,841 -
Total 672,830 799,538 942,041 2,021,447
Loss from continuing operations
before income taxes and minority
interests (254,576) (293,585) (452,259) (675,494)
Provision for income taxes 16,690 - 18,829 -
Minority interests in subsidiaries (628) - (628) -
Loss from continuing operations (270,638) (293,585) (470,460) (675,494)
Income(loss) from discontinued
operations (50,858) (95,773) (50,858) (90,968)
Net loss (321,496) (389,358) (521,318) (766,462)
Other comprehensive gains(losses):
Foreign currency translation gain(loss) 5,984 948 (20,846) 8,540
Unrealized gain(loss) on investment in
Hungarian Broadcasting Corporation (9,951) 69,280 116,890 69,280
Comprehensive loss $(325,463) $(319,130) $(425,274) $(688,642)
Net income(loss) per share-basic
and diluted
Continuing operations $ (.03) $ (.05) $ (.06) $ (.13)
Discontinued operations - (.02) - (.02)
$ (.03) $ (.07) $ (.06) $ (.15)
Weighted average number of shares
outstanding 9,460,959 5,499,811 8,103,113 5,247,261
</TABLE>
See accompanying notes to consolidated financial statements
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EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
Accumulated Other
Comprehensive Gains(Losses)
Unrealized
Gain(Loss) on
Foreign Investment in
Additional Currency Hungarian
Common Stock Paid-in Accumulated Translation Broadcasting
Shares Amount Capital Deficit Adjustment Corporation
<S> <C> <C> <C> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 1999:
Balance, January 1, 1999 6,444,916 $6,445 $20,886,852 $(15,760,679) $(26,000) $(20,975)
Issuance of shares in private
placements 2,160,361 2,160 3,042,023 - - -
Issuance of shares for acquisition
of business 1,188,063 1,189 1,998,812 - - -
Exercise of common stock options 90,000 90 9,910 - - -
Foreign currency translation
gain(loss) - - - - (20,846) -
Unrealized loss on investment in
Hungarian Broadcasting
Corporation - - - - - 11,024
Net loss for the period - - - (521,318) - -
Balance, September 30, 1999 9,883,340 $9,884 $26,017,597 $(16,281,997) $(46,846) $ (9,951)
NINE MONTHS ENDED SEPTEMBER 30, 1998:
Balance, January 1, 1998 4,949,936 $4,950 $19,770,725 $(16,188,203) $(35,900) $ -
Issuance of shares in private
placements 700,000 700 424,240 - - -
Exercise of common stock options 135,000 135 134,865 - - -
Issuance of shares on
conversion of debentures 356,814 357 161,325 - - -
Net loss for the period - - - (766,462) - -
Foreign currency
translation gain - - - - 8,540 -
Unrealized gain - - - - - 69,280
Balance, September 30, 1998 6,141,750 $6,142 $20,491,155 $(16,954,665) $(27,360) $ 69,280
</TABLE>
See accompanying notes to consolidated financial statements.
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EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
Nine Months Ended
September 30,
1999 1998
<S> <C> <C>
Cash flows from operating activities
Net loss $ (521,318) $(766,462)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization of property and equipment 27,396 100,663
Amortization of goodwill 129,161 291,000
Gain on capital contribution by parent company of minority
interests (147,000) -
Bad debts 5,929 -
Interest on debentures paid in shares of capital stock - 11,682
Write down of condominium building held for sale - 75,000
Loss on sale of property - 247
Loss on sale of securities 126,841 -
Equity in net income of Euroweb Rt. (66,989) -
Foreign currency loss 931 19,094
Changes in operating assets and liabilities:
(Increase)decrease in:
Accounts receivable (18,018) 12,229
VAT refund receivable - (37,776)
Receivable from Euroweb Rt. 65,715 -
Prepaid and other current assets 50,403 19,467
Increase(decrease) in:
Accounts payable and accrued expenses (16,171) (167,643)
Deferred revenue (5,524) 58,041
Net cash used in operating activities (396,272) (384,458)
Cash flows from investing activities
Receivable from Hungarian Broadcasting Corporation - 179
Certificates of deposit (33,422) -
Repayment of note receivable 605,393 -
Proceeds of loan receivable (250,000) -
Repayment of loan receivable 61,859 -
Investment in EuroWeb Rt. (59,100) -
Acquisition of property and equipment and construction
in progress (23,935) (40,342)
Acquisition of intangibles - (28,795)
Payable to former owners of business acquired (115,000)
Acquisition of four subsidiaries, net of cash acquired (2,092,868) -
Proceeds of sale of securities 38,446 - -
Net cash used in investing activities (1,753,627) (183,958)
Cash flows from financing activities
Payments of loan payable (14,613) -
Exercise of common stock options 90,000 135,000
Proceeds from issuance of common stock 3,053,687 549,940
Net cash provided by financing activities 3,129,074 684,940
Effect of foreign exchange rate changes on cash (931) (10,554)
Increase(decrease) in cash and cash equivalents 1,005,244 105,970
Cash and cash equivalents at beginning of period 1,688,280 697,948
Cash and cash equivalents at end of period $2,693,524 $ 803,918
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 878 $ 6,000
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock upon conversion of debentures and accrued interest $ - $ 161,682
Shares of stock received in settlement of net balance due from
Hungarian Broadcasting Corp. - 177,418
Issuance of common stock for acquisition of four subsidiaries 2,000,000 -
</TABLE>
See accompanying notes to consolidated financial statements.
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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. (the "Company"), its wholly-owned subsidiaries and
its majority-owned subsidiaries. The operations of Euroweb Rt., a
wholly-owned subsidiary in the Internet business, were 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 on the equity method.
The operations of Luko Czech-Net, s.r.o. ("Luko Czech"), a limited
liability company, was acquired as a wholly-owned subsidiary by the
purchase of 100% of its registered capital stock on June 11, 1999.
The operations of Luko Czech have been included since June 1, 1999.
The operations of EUnet Slovakia, s.r.o. ("EUnet") was acquired as a
wholly-owned subsidiary by the purchase of 100% of its outstanding
shares of capital stock on July 15, 1999. The operations of EUnet
has been included since August 1, 1999.
The operations of DoDo s.r.o. ("R-Net"), a trade company, was
acquired as a 70% owned subsidiary by the purchase of 70% of equity
of the Company on August 9, 1999. The operations of R-Net have been
included since August 1, 1999.
The operations of Global Network Services, a.s., ("SKNET") was
acquired as a 70% owned subsidiary by the purchase of 70% of the
outstanding shares of stock on September 23, 1999. The operations
of SKNET has not been included.
Minority interests are recorded using the parent company theory
method.
All of the acquired companies are Internet service providers.
All material intercompany balances and transactions have been
eliminated.
Certain 1998 items have been reclassified to conform to the 1999
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 calendar year.
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EUROWEB INTERNATIONAL CORP.
Notes to Consolidated Financial Statements
(Unaudited)
(d) Revenue Recognition
Revenues from monthly Internet services are recognized in the month
in which the services are provided.
(e) Foreign Currency Translation
The Company uses the local currencies, the Hungarian forint, Czech
koruna and the Slovak koruna as the functional currencies for
measuring the accounts of Euroweb Rt. and Luko Czech, EUnet, R-Net
and SKNET. It 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.
(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,
notes and loans receivable, accounts payable and accrued expenses
approximate fair values.
(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.
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 three years.
(i) 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.
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EUROWEB INTERNATIONAL CORP.
Notes to Consolidated Financial Statements
(Unaudited)
(j) Net Loss Per Share
The Company has adopted Statement of Financial Accounting Standards
No. 128, "Earnings per Share," ("SFAS No. 128"), which provides for
the calculation of "basic" and "diluted" earnings per share. 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
the effect of common shares issuable upon exercise of stock options
and warrants in periods in which they have a dilutive effect.
(k) Comprehensive Income
The Company adopted SFAS No. 130, "Reporting Comprehensive Income,"
which established standards for reporting and display of
comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity
except those resulting from investments by, and distributions to,
owners. Among other disclosures, SFAS 130 requires that all items
that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as
other financial statements.
2. Organization, Business, Acquisitions and Discontinued Operations
The Company is a Delaware corporation which was organized on November 9,
1992. On January 2, 1997, the Company acquired three Hungarian Internet
service companies for a purchase price of approximately $1,913,000. These
acquisitions were accounted for using the purchase method of accounting.
The Company consolidated the Internet service companies into its
wholly-owned subsidiary, Euroweb Rt.
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. Pursuant to the
non-compete provision of the shareholders' agreement, the Company cannot:
(i) engage in any business activity in Hungary listed in the scope of
activities of Euroweb Rt.'s charter, (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.
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EUROWEB INTERNATIONAL CORP.
Notes to Consolidated Financial Statements
(Unaudited)
The Company's consolidated statements of operations include the equity in
net income of Euroweb Rt. for the three months and nine months ended
September 30, 1999 and the results of operations of Euroweb Rt. for the
three months and nine months ended September 30, 1998. Operating data
for Euroweb Rt. for the three months and nine months ended September 30,
1999 include the following:
Three Months Nine Months
Revenues $808,560 $2,161,560
Net Income $ 87,680 $ 393,410
Company's 49% equity in net income $ 51,827 $ 201,635
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 (44,882) (134,646)
Equity in net income of Euroweb Rt. $ 6,945 $ 66,989
On June 11, 1999, the Company acquired all of the participation interests
of Luko Czech, an Internet service provider in the Czech Republic for a
total cost of $1,848,433, consisting of 450,000 shares of the Company's
common stock valued at $2 per share, issued June 11, 1999, and the balance
paid in cash. This acquisition was accounted for using the purchase
method of accounting. The excess of the Company's cost over the fair
value of the net assets acquired (goodwill) amounted to $1,700,215, which
is being amortized over its estimated useful life of five years. The
results of Luko Czech's operations from June 1, 1999 to September 30, 1999
have been included in the accompanying statements of operations and
comprehensive loss for the three months and nine months ended
September 30, 1999.
On July 15, 1999, the Company acquired all of the outstanding shares of
capital stock of EUnet, an Internet service provider in the Slovak
Republic, for a total cost of $804,020 consisting of 237,040 shares of
the Company's common stock valued at $1.6875 per share issued July 19,
1999 and the balance paid in cash. This acquisition was accounted for
using the purchase method of accounting. The excess of the Company's
cost over the fair value of the net assets acquired (goodwill) amounted
to $717,460 which is being amortized over its estimated useful life of
five years. The results of EUnet's operations from August 1, 1999 to
September 30, 1999 have been included in the accompanying statements of
operations and comprehensive loss for the three months and nine months
ended September 30, 1999.
On August 9, 1999, the Company acquired 70% of the equity of R-Net, an
Internet service provider in the Slovak Republic for a total cost of
$626,840, consisting of 145,455 shares of the Company's common stock
valued at $1.375 per share issued August 13, 1999 and the balance paid in
cash. This acquisition was accounted for using the purchase method of
accounting. The excess of the Company's cost over the fair value of the
net assets acquired (goodwill) amounted to $605,237 which is being
amortized over its estimated useful life of five years. The results of
R-Net's operations from August 1, 1999 to September 30, 1999 have been
included in The accompanying statements of operations and comprehensive
loss for the three months and nine months ended September 30, 1999.
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EUROWEB INTERNATIONAL CORP.
Notes to Consolidated Financial Statements
(Unaudited)
On September 23, 1999, the Company acquired 70% of the outstanding shares
of SKNET, an Internet service provider in the Slovak Republic for a total
cost of $1,221,248, consisting of 355,568 shares of the Company's common
stock valued at $1.406 per share, 250,000 shares issued October 1, 1999
and 105,568 shares issued October 18, 1999 and the balance paid in cash.
This acquisition was accounted for using the purchase method of accounting.
The excess of the Company's cost over the fair value of the net assets ZZ
acquired (goodwill) amounted to $1,240,909 which is being amortized over
its estimated useful life of five years. The results of SKNET's
operations have not been included in the accompanying statements of
operations and comprehensive loss for the three months and nine months
ended September 30, 1999
The following pro forma information presents the consolidated results of
the Company's operations as if the acquisitions had occurred on January 1,
1998:
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Revenues $805,222 $1,122,297 $2,386,035 $3,026,425
Net loss 474,165 617,180 1,339,662 1,469,858
Net loss per share $ (.05) $ (.11) $ (.16) $ (.27)
These unaudited pro forma results have been prepared for comparative
purposes only. They do not purport to be indicative of the results of
operations that actually would have resulted had the combination occurred
on January 1, 1998, or of future results of operations of the consolidated
entities.
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, ecept 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 resulted in a loss of
of $119,678. The subsidiary's only significant asset was the second
condominium building. The sales price was 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 the
three months and nine months ended September 30, 1998. Revenues for the
nine months ended September 30, 1998 were $1,724,468 and the loss from
discontinued operations was $15,968 ($.00 per share).
3. Interim Periods
The accompanying consolidated financial statements for the three months
and nine months ended September 30, 1999 and 1998 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.
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EUROWEB INTERNATIONAL CORP.
Notes to Consolidated Financial Statements
(Unaudited)
4. Incorporation by Reference
Reference is made to the Company's annual report on Form 10-KSB for the
year ended December 31, 1998 and to the notes to the consolidated
financial statements included therein, which are incorporated herein by
reference.
5. Cash Concentration
At September 30, 1999, cash and cash equivalents included $104,367 and
$2,203,599 on deposit in the United States with a money market fund and
major money center bank, respectively, and one certificate of deposit of
a major U.S. money center bank aggregating $1,018,564. In addition,
$298,699, $86,860 and $6,607 were on deposit in Czech, Slovak and
Hungarian banks respectively.
6. Investment in Hungarian Broadcasting Corp.
On June 30, 1998, the Company settled its receivable of $177,418 from
Hungarian Broadcasting Corp. ("HBC"), a public company, by receiving
68,732 restricted shares of HBC common stock which were 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 Company sold all of the HBC stock, 63,732 shares and 5,000
shares in the third and fourth quarters of 1999 respectively. The sale
resulted in a realized loss of $126,841 in the third quarter of 1999.
The remaining investment in HBC is carried at its selling price. The
remaining unrealized loss of $9,951, recorded in a separate component
of stockholders' equity will be realized in the fourth quarter 1999.
7. Loan Receivable
In January 1999, the Company loaned $150,000 to its Vice-President for
the purpose of buying an apartment in Budapest. On September 27, 1999,
the Company loaned an additional $100,000 to its vice president for the
purpose of buying a second apartment in Budapest, bringing the total
outstanding principal on that date to $188,141. The old and new loan
have been consolidated and are repayable in 26 monthly installments of
$8,000, including interest at 11% per annum. The loan is collateralized
by the Vice-President's two apartments.
8. Capital Stock, Stock Options and Warrants
During the first quarter of 1999, options which were previously granted to
two officers for the purchase of shares of the Company's common stock were
exercised. One officer exercised options for 35,000 shares at $1.00 per
share; the second officer exercised options for 55,000 shares at $1.31 per
share.
During April and May 1999, the Company sold the following shares of its
common stock in four private placements:
152,380 shares at $1.31 per share to a company owned
by the Company's former President. Mandatory
redemption by the Company of 50% of these shares
expired on 9/30/99
565,141 shares at $1.31 per share
942,840 shares at $1.75 per share
500,000 shares at $1.50 per share
Total 2,160,361 shares
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EUROWEB INTERNATIONAL CORP.
Notes to Consolidated Financial Statements
(Unaudited)
The purchasers of the 942,840 shares also received three-year warrants to
purchase 942,840 shares at $2.00 per share and 942,840 shares at $2.25 per
share.
A private placement agent received 106,520 warrants to purchase shares of
common stock 50,000 at $2.00 and 56,520 at $2.20 per share.
During April 1999, the Company also granted a total of 1,000,000 common
stock options to its Chairman of the Board, President and Vice President.
The options are exercisable over seven years at a price of $1.625 per
share.
As discussed in Note 2, the Company issued 450,000 shares of its common
stock during June 1999 in connection with the acquisition of Luko Czech,
237,040 shares of its common stock in July 1999 in connection with the
acquisition of EUnet, 145,455 shares of its common stock in August 1999
in connection with the acquisition of R-Net and 355,568 shares in
September in connection with the acquisition of CKNet.
On May 21, 1999, the Company's stockholders approved the following:
a) An increase in the authorized number of shares of capital stock to
30,000,000 shares, consisting of 25,000,000 shares of common stock
and 5,000,000 shares of preferred stock; the increase has not yet
become effective.
b) An increase in the number of shares of common stock available under
the Company's 1993 Incentive Stock Option Plan from 350,000 to
670,000.
On May 21, 1999, the Board of Directors granted a total of 130,000
five-year options exercisable at 2 3/32 (equal to the market price on
that date) to two directors.
9. Commitments
Employment agreements with the three officers of the Company provide for
aggregate annual compensation of $368,000 through September 30, 2004 and
$150,000 thereafter through December 31, 2005.
10. Subsequent Events
On October 27, 1999 the Company signed a letter of intent to sell new
shares to a West European based international telephone company, whereby
the buyer will own 51% of the Company. This sale is subject to the
completion of satisfactory due diligence to be completed by November 17,
1999.
The buyer will pay $1.58 per share to purchase about 10.3 million newly
issued common shares for a total consideration of approximately $16.2
million. The sale is subject to a 30 day due diligence period for the
buyer, approval by both boards of directors and approval by Euroweb's
shareholders. The parties agreed to keep the buyer's name confidential
until the conclusion of due diligence.
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<PAGE>
EUROWEB INTERNATIONAL CORP.
Notes to Consolidated Financial Statements
(Unaudited)
On November 1, 1999 the board of directors approved the modification to
Mr. Frank Cohen's employment contract dated October 15, 1999. Mr. Cohen
is Chairman, Secretary and Chief Executive Officer. The modification
cancels and deletes the obligation of the company to pay the premiums on
a split dollar life insurance policy in the face amount of up to
$2,000,000 on the life of Mr. Cohen. In consideration of Mr. Cohen's
agreement to said cancellation, the company increased his basic salary
from $150,000 per year to $200,000 per year commencing January 1, 2000.
In October 1999, the Company entered signed letters of intent to purchase
the following interests in Internet Service Providers:
a) All of the outstanding stock of Isternet Sr, s.r.o., located in the
Slovak Republic, for $190,000 in cash.
b) All of the outstanding stock of Inicia s.r.o., located in the Czech
Republic, through its subsidiary Czech Net for $1,060,000 in cash.
As of November 15, 1999, all of the acquisitions described above are
subject to completion of satisfactory due diligence procedures.
The acquisitions discussed above will be accounted for as purchase
transactions and the acquired companies' results of operations for
future periods commencing with the acquisition dates will be included in
the Company's consolidated financial statements. Any excess of the costs
of these acquisitions over the underlying net assets will be recorded
as goodwill and amortized over the estimated useful lives.
On November 5, 1999, Deutsche Bank AG filed Schedule 13G, dated
October 28, 1999 with the Securities and Exchange Commission, indicating
that they beneficially owned 880,000 shares which comprised 9.7% of the
Company's common shares outstanding.
The Company is currently seeking to acquire other Internet service
providers in central and eastern Europe.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Operations
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. 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 effective January 1, 1998.
In January 1997, the Company acquired three operating Internet service
provider businesses and consolidated the three businesses under one roof.
At present, Euroweb Rt. ("Euroweb") is a leading Internet service provider
operating in Hungary that provides full Internet and Web Site solutions and
services primarily to businesses. 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 Rt. The
Company's consolidated statements of operations include the equity in net
income of Euroweb Rt. for the three months and nine months ended September 30,
1999 and the results of its operations for the three months and nine months
ended September 30, 1998.
Revenues of Euroweb Rt. for the first nine months of 1999 amounted to
$2,161,560. This represented a substantial increase from the revenues of
$1,345,953 or the first nine months of 1998 and was primarily due to the
sale of more leased lines to business customers. Net income of Euroweb Rt.
before amortization of goodwill for the 1999 period was $393,410 compared to
net income of $135,232 in 1998.
Equity in net loss of Euroweb Rt. of $1,919 represents 49% of the subsidiary's
net income less amortization of goodwill.
On June 11, 1999 the Company acquired all of the outstanding stock of Luko
Czech-Net, s.r.o. ("Luko Czech"), an Internet service provider in the Czech
republic. This acquisition was accounted for using the purchase method of
accounting and the results of its operations from June 1, 1999 to September 30,
1999 have been included in the accompanying statements of operations and
comprehensive loss for the three months and nine months ended September 30,
1999.
The consolidated net loss for the nine months ended September 30, 1999
amounted to ($521,318) compared to a net loss of ($766,462) in 1998. The
loss from discontinued opertation for the nine months ended September 30,
1999 amounted to ($50,858) compared to a net loss of ($90,968) in 1998.
These represent the losses from operations incurred by the construction
business which was sold in December 1998. The 1999 losses represent
settlements of claims between the buy of the construction business and the
Company.
The pro forma consolidated net loss for the nine months ended September 30,
1999 (assuming that all subsidiaries had been acquired on January 1, 1998)
amounted to a net loss of $1,339,662 for the nine months ended September 30,
1999 compared to a net loss of $1,469,858 in 1998.
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<PAGE>
On July 15, 1999, the Company acquired all of the outstanding shares of
capital stock of EUnet, an Internet service provider in the Slovak Republic.
This acquisition was accounted for using the purchase method of accounting
and the results of EUnet's operations from August 1, 1999 to September 30,
1999 have been included in the accompanying statements of operations and
comprehensive loss for the three and nine months ended September 30, 1999.
On August 9, 1999, the Company acquired 70% of the equity of R-Net, an
Internet service provider in the Slovak Republic. This acquisition was
accounted for using the purchase method of accounting and the results of
R-Net's operations from August 1, 1999 to September 30, 1999 have been
included in the accompanying statements of operations and comprehensive
loss for the three and nine months ended September 30, 1999.
On September 23, 1999, the Company acquired 70% of the outstanding shares
of SKNET, an Internet service provider in the Slovak Republic. This
acquisition was accounted for using the purchase method of accounting and
the results of SKNET's operations have not been included in the accompanying
statements of operations and comprehensive loss for the three months and nine
months ended September 30, 1999
Liquidity and Capital Resources
During November 1998, the Company sold 51% of its interest in Euroweb Rt. for
$2,200,000.
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.
During the first quarter of 1999, options which were previously granted to
two officers for the purchase of shares of the Company's common stock were
exercised. One officer exercised options for 35,000 shares at $1.00 per
share; the second officer exercised options for 55,000 shares at $1.31 per
share.
During April and May 1999, the Company sold the following shares of its
common stock in four private placements:
152,380 shares at $1.31 per share to a company owned
by the Company's former President. Mandatory
redemption of 50% of these shares by the
Company expired on 9/30/99
565,141 shares at $1.31 per share
942,840 shares at $1.75 per share
500,000 shares at $1.50 per share
Total 2,160,361 shares
The purchasers of the 942,840 shares also received three-year warrants to
purchase 942,840 shares at $2.00 per share and 942,840 shares at $2.25 per
share.
A private placement agent received 106,520 warrants to purchase shares of
common stock 50,000 at $2.00 and 56,520 at $2.20 per share.
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<PAGE>
During April 1999, the Company also granted a total of 1,000,000 common
stock options to its Chairman of the Board, President and Vice President.
The options are exercisable over seven years at a price of $1.625 per share.
On May 21, 1999, the Company's stockholders approved the following:
a) An increase in the authorized number of shares of capital stock to
30,000,000 shares, consisting of 25,000,000 shares of common stock and
5,000,000 shares of preferred stock; the increase has not yet become
effective.
b) An increase in the number of shares of common stock available under the
Company's 1993 Incentive Stock Option Plan from 350,000 to 670,000.
On May 21, 1999, the Board of Directors granted a total of 130,000 five-year
options exercisable at 2 3/32 (equal to the market price on that date) to two
directors.
At September 30, 1999, the Company's cash and cash equivalents aggregated
$2,693,524 and it owned a one-year certificate of deposit for $1,039,989.
The Company anticipates that its current cash position and its cash flows
from current operations as well as the issuances of additional shares of
capital stock discussed above will be sufficient to meet its anticipated
working capital and capital expenditure requirements for at least the next
12 months.
On June 11, 1999, the Company acquired all of the outstanding stock of Luko
Czech for a total cost of $1,841,758, consisting of 450,000 shares of the
Company's common stock valued at $2 per share and the balance paid in cash.
On July 15, 1999, the Company acquired all of the outstanding shares of
capital stock of EUnet, an Internet service provider in the Slovak Republic.
This acquisition was accounted for using the purchase method of accounting and
the results of EUnet's operations from August 1, 1999 to September 30, 1999
have been included in the accompanying statements of operations and
comprehensive loss for the three and nine months ended September 30, 1999.
On August 9, 1999, the Company acquired 70% of the equity of R-Net, an
Internet service provider in the Slovak Republic. This acquisition was
accounted for using the purchase method of accounting and the results of
R-Net's operations from August 1, 1999 to September 30, 1999 have been
included in the accompanying statements of operations and comprehensive loss
for the three months and nine months ended September 30, 1999.
On September 23, 1999, the Company acquired 70% of the outstanding shares of
SKNET, an Internet service provider in the Slovak Republic. This acquisition
was accounted for using the purchase method of accounting and the results of
SKNET's operations have not been included in the accompanying statements of
operations and comprehensive loss for the three months and nine months ended
September 30, 1999
In October 1999, the Company entered signed letters of intent to purchase
the following interests in Internet Service Providers:
a) All of the outstanding stock of Isternet Sr, s.r.o., located in the
Slovak Republic, for $1,060,000 in cash.
b) All of the outstanding stock of Inicia s.r.o., located in the Czech
Republic, through its subsidiary Czech Net for $190,000 consisting.
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<PAGE>
On October 27, 1999 the Company signed a letter of intent to sell new shares
of common stock to a West European based international telephone company,
whereby the buyer will own 51% of the Company. This sale is subject to the
completion of satisfactory due diligence to be completed by November 17, 1999.
The buyer will pay $1.58 per share to purchase about 10.3 million newly
issued common shares for a total consideration of approximately $16.2 million.
The sale is subject to a 30 day due diligence period for the buyer, approval
by both boards of directors and approval by Euroweb's shareholders. The
parties agreed to keep the buyer's name confidential until the conclusion
of due diligence.
As of November 15, 1999 all of the acquisitions described above are subject to
satisfactory due diligence procedures.
The Company is currently seeking to acquire other Internet service companies
in central and eastern Europe.
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.
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.
Inflation and Seasonality
Internet operations are not seasonal.
Cautionary Statement for Purpose 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: 2) heightened competition,
particularly price competition, reducing margins; and 2) slower growth
than expected in the market for Internet services in Hungary or the Czech
and Slovak Republics.
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<PAGE>
PART II
Item 1. Legal Proceedings
None that would materially affect the Company
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(1)
(b) Amendments to Certificate of Incorporation filed July 9,
1997 and on May 11, 1999(12)
(c) By-laws(1)
(4)(a) Form of Common Stock Certificate(1)
(b) Form of Underwriters' Warrants to be sold to
Underwriters(1)
(c) Placement Agreement between Registrant and J.W. Barclay &
Co., Inc. and form of Placement Agent Warrants issued in
connection with private placement financing(1)
(d) Form of 10% Convertible Debenture used in connection with
offshore private placement financing pursuant to
Regulation S(3)
(e) Form of Common Stock Purchase Warrant in connection with
private placement financing under Section 506 of
Regulation D(3)
(10)(a) Consulting agreement between Registrant and Klenner
Securities Ltd.(1)
(b) Consulting agreement between Registrant and Robert
Genova(1)
(c) Consulting agreement between Registrant and Laszlo
Modransky(1)
(d) 1993 Incentive Stock Option Plan(1)
(e) Sharing agreement for space and facilities between
Registrant and Hungarian Telephone and Cable Corp.(1)
(f) Articles of Association (in English) of Teleconstruct
Building Corp.(1)
(g) Articles of Association (in English) of Termolang
Engineering and Construction Ltd.(1)
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<PAGE>
(h) Letter of intent between Teleconstruct Building Corp. and
Pilistav(1)
(i) Employment agreement between Registrant and Robert
Genova(2) and termination agreement dated February 5,
1997(3)
(j) Employment agreement between Registrant and Peter E.
Klenner(2) and termination agreement dated October 30,
1996, and agreement for sale of condominium unit to M&A
as amended(3)
(k) Employment agreement between Registrant and Frank R.
Cohen(2) and modifications of employment agreement(3)
(l) Letter of Intent agreement between Registrant and
Rsba-Com Rt.(3)
(m) Letter of Intent agreement between Registrant and
Kelet-Nograd Rt.(3)
(n) Letter of Intent agreement between Registrant and 3
Pilistav villages for installation of cable in those
areas(3)
(o) Lease agreement between Registant's subsidiary EUnet Kft
and Varosmajor Passage, Kft. for office space(3)
(p) Acquisition agreement between Registrant and KFKI Computer
Systems Corp. dated December 13, 1996(3)
(q) Acquisition agreement between Registrant and E-Net
Hungary(3)
(r) Acquisition agreement between Registrant and MS
Telecom Rt.(3)
(s) Employment agreement between Registrant and Imre Kovats(3)
(t) Employment agreement between Registrant and Csaba Toro(3)
(u) Promissory Note from Registrant to HBC(3)
(v) Communication Services Agreement between Registrant and
MCI Global Resources, Inc.(4)
(w) Lease and Option Agreement for Building B as of April 1,
1998 with Hafisa Kft.(5)
(x) License Agreement between GRIC Communications, Inc. and
Euroweb International Corp.(5)
(y) Consulting Agreement between Registrant and Eurus Capital
Corporation and Rescission Agreement(7)
(y)(i) Agreement rescinding Option Agreement with Eurus Capital
Corporation(8)
(z) Financial Consulting Agreement between Registrant and J.W.
Barclay & Co., Inc.(7)
(aa) Mergers and Acquisitions Agreement between Registrant and
J.W. Barclay(7)
(bb) Placement Agreement between Registrant and J.P. Carey,
Inc. and form of Placement Agent Warrants issued in
connection with private placement financing(9)
(cc) Private Placement Agreement between Registrant and Peter E.
Klenner(9)
(dd) Employment Agreement between Registrant and Csaba Toro(9)
(ee) Employment Agreement between Registrant and Robert
Genova(9)
(ff) Employment Agreement between Registrant and Frank R.
Cohen(9)
(gg) Placement Agreement between Registrant and JP Carey
Securities Inc. and Warrant Agreement in connection with
private placement financing(10)
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<PAGE>
(hh) Private placement agreement between Registrant and M&A
Management(10)
(ii) Form of Subscription agreement in connection with private
offering of Common Stock and Warrants pursuant to
Rule 506 of Regulation D under Section 4(2) of the
Securities Act of 1933(10)
(jj) Acquisition Agreement between Registrant and Luko
Czech-Net, s.r.o. dated June 11, 1999(11)
(kk) Acquisition Agreement between Registrant and Slavia
Capital, O.C.P., A.S. dated July 2, 1999 (12)
(ll) Acquisition Agreement between Registrant and shareholders
of EUnet Slovakia s.r.o. dated July 14, 1999 (12)
(mm) Acquisition Agreement between Registrant and shareholders
of DoDo, s.r.o. dated August 5, 1999(12)
B. A report on Form 8-K was filed as of April 21, 1999 during the quarter
covered by this report. The report pertained primarily to certain
private placements completed by the Company. Another report on
Form 8-K was filed as of June 11, 1999 during the quarter covered by
this report. The report pertained primarily to the acquisition by the
Company of a Czech Internet Service Provider, Luko Czech-Net s.r.o.
(1) 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)
(2) Filed with Form 8-K as of February 17, 1994
(3) Filed with Form 10-KSB for year ended December 31, 1996
(4) Filed with Form 10-QSB for quarter ended September 30, 1997
(5) Filed with Form 10-KSB for year ended December 31, 1997
(6) Filed with Registration Statement 333-52841
(7) Filed with Amendment No. 1 to Registration Statement 333-52841
(8) Filed with Amendment No. 2 to Registration Statement 333-52841
(9) Filed with Form 8-K as of October 14, 1998
(10) Filed with Form 8-K as of April 21, 1999
(11) Filed with Form 8-K as of June 11, 1999
(12) Filed with Form 10-QSB for quarter ended June 30, 1999
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<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 12th day of November 1999.
EUROWEB INTERNATIONAL CORP.
By /s/ Frank R. Cohen
Frank R. Cohen
Chairman of the Board
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