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, 1999
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 per share NASDAQ SMALL CAP
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 $1,233,567 for the year ended December 31, 1999.
As of March 14, 2000, 23,246,118 shares of Common Stock were outstanding of
which 11,432,564 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 14, 2000, was $102,893,076 (based upon the closing bid price on such date
on the Nasdaq of $9.00).
Documents incorporated by reference: Document Item(s) Into Which Incorporated
Annual Reports on Form 10-KSB for Part IV, Item 13
years ending December 31, 1996 and
December 31, 1997
Proxy Statement on Form DEF14A Part I, Item 4
filed December 14, 1999
Proxy Statement on Form DEF14A to Part III, Item 12
be filed no later than April 10, 2000
<PAGE>
TABLE OF CONTENTS
Page
PART I ...................................................................1
ITEM 1 DESCRIPTION OF BUSINESS........................................1
Background.....................................................1
EuroWeb Strategy...............................................1
Entry into ISP Market in Eastern
Europe and History of Acquisitions..........................1
Market Analysis Summary........................................2
Products and Services..........................................3
Customers......................................................4
Network Operations and Technical Support.......................5
Sales and Marketing............................................5
Competition....................................................5
Government Regulations.........................................5
Employees......................................................6
ITEM 2 DESCRIPTION OF PROPERTIES......................................6
ITEM 3 LEGAL PROCEEDINGS..............................................6
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............6
PART II ..................................................................7
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................7
Market Information.............................................7
Holders of Common Stock........................................8
Dividends......................................................8
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................8
Operations.....................................................8
Year Ended December 31, 1999 Compared to Year
Ended December 31, 1998......................................9
Liquidity and Capital Resources...............................10
The Year 2000.................................................11
Effect of Recent Accounting Pronouncements....................11
Forward-Looking Statements....................................11
Risk Factors..................................................12
ITEM 7 FINANCIAL STATEMENTS..........................................15
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...........................16
PART III ................................................................16
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT....16
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ITEM 10 EXECUTIVE COMPENSATION........................................17
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT................................................17
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................18
PART IV .................................................................18
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K..............................18
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<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Background
EuroWeb International Corp. (the "Company" or "EuroWeb") 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.
EuroWeb Strategy
Since exiting the construction business, the Company has been striving to
be the leading supplier in Central Europe to businesses of complete
communications solutions using Internet technologies. Rather than servicing
individual users, the Company focuses its efforts on business users and seeks
to satisfy all their needs with high quality and reliable service.
The Company's business has shown continued growth since it entered the
Internet field in January 1997, and the Company has made various acquisitions
in Hungary, the Czech Republic and Slovakia. The Company expects such growth
to continue throughout Central Europe, as it explores other expansion
opportunities throughout the region, and lays the groundwork to enter the
e-commerce market in the region.
Entry into ISP Market in Central Europe and History of Acquisitions
The Company entered the Internet Service Provider ("ISP") market in Central
Europe through various acquisitions of companies in that area over the past
three years. On January 2, 1997 the Company acquired all of the outstanding
stock of three Hungarian ISPs for a total purchase price of approximately
$1,785,000, consisting of 144,000 shares of common stock of the Company and
$1,425,000 in cash (collectively, the "1997 Acquisitions"). Thereafter in
1997, the three Hungarian companies were combined and merged into a new
Hungarian company known as EuroWeb Rt. On November 22, 1998, the Company
sold 51% of the
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1 1997 Acquisitions were as follows:
(a) Eunet (Hungary Ltd.) for a total cash cost of $1,000,000, and an assumption
of $128,000 in liabilities;
(b) E-Net Hungary Telecommunications and Multimedia for a total cash cost of
$200,000 and $150,000 in stock (60,000 share valued at $2.50 per share); and
(c) MS Telecom Rt. for a total cash cost of $225,000 and $210,000 in stock
(84,000 shares valued at $2.50 per share).
<PAGE>
outstanding shares of EuroWeb Rt. to Pantel Rt. for $2,200,000 in cash and an
agreement to increase the share capital of EuroWeb Rt. by $300,000 without
changing the ownership ratio (after the capital increase, the ownership ratio
would remain 49 - 51 percent). Because the Company currently owns a minority
interest in EuroWeb Rt., and EuroWeb Rt. is not a consolidated subsidiary of
the Company, neither the revenues derived from the Hungarian operation nor
information on employees of the Hungarian operation are included in the
Company's financial figures for the year ended December 31, 1999.
The Company continued with its acquisitions of ISPs in the Czech Republic
and Slovakia in 1999. On June 11, 1999, the Company acquired all of the
participating interests of Luko CzechNet, an ISP in the Czech Republic, for a
total cost of $1,862,154 consisting of 450,000 shares of the Company's common
stock valued at $2.00 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 Slovakia, an ISP in the Slovak Republic, for a total cost of $813,299
consisting of 237,040 shares of the Company's common stock valued at $1.6875
per share issued August 9, 1999 and the balance paid in cash. The Company then
made another acquisition of a Slovak ISP on July 15, 1999 with the purchase of
70% of the equity of Dodo s.r.o.'s subsidiary, R-Net, for a total cost of
$630,234 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. On
September 23, 1999 the Company acquired from Slavia Capital o.c.p., a.s. all
of the issued and outstanding stock of Global Network Services a.s.c., a
Slovakian corporation providing Internet service primarily to businesses
located in Bratislava and other major cities in Slovakia for a total purchase
price of $1,663,051, consisting of 355,568 shares of the Company's common
stock valued at $1.406 per share issued on September 23, 1999, and the balance
paid in cash. Eunet Slovakia was then merged into Global Network Services,
with the new name of EuroWeb Slovakia a.s.c.. Dodo s.r.o.'s subsidiary
continues to operate as a separate entity in Slovakia.
In October 1999, the Company entered signed letters of intent to purchase
all of the outstanding stock of Isternet Sr., s.r.o., a Slovak ISP, for
approximately $1.1 million in cash. This acquisition is subject to approval
of the Slovakian Antitrust Commission, and is being held in abeyance pending
such approval.
Negotiations are also in progress to acquire controlling interests in
additional ISPs in Slovakia, the Czech Republic as well as in Romania. The
Company also intends to extend into the e-commerce market in Central Europe.
Market Analysis Summary
The Internet is a collection of connected computer systems and networks
that link millions of public and private computers. The Internet and the web
have experienced rapid growth over recent years. This growth is projected to
continue. According to Nielson Net Ratings, as of July, 1999, there were
approximately 210 million users worldwide. Explosive growth of the Internet
is expected to significantly increase Internet purchases. International Data
Corporation ("IDC") reports that the amount of commerce conducted over the web
will top a staggering $1 trillion by 2003.
The Company believes that the countries that it is targeting in Central
Europe present a tremendous opportunity for long-term growth.
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<PAGE>
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 access to, Web sites; and (3) developing
content, including graphics and database functions, for Web sites on the
Internet (collectively referred to as "Value Added Services").
EuroWeb provides services in all three areas. In 1999, 85% of EuroWeb's
revenue was derived from providing access, 14% was derived from Web services,
and 1% was derived from providing value added services.
Access Options and Pricing
Access to the Internet can be either through a leased line, which
maintains an open connection to the Internet at all times, or through 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. The following tables describe some of EuroWeb's Internet
access options.
Low Speed Dial-up Access (56 Kbps)
Low speed dial-up access services are primarily marketed to individuals
and households.
Services Current List Price Summary Description
- -------- ------------------ -------------------
Individual Internet $323/Year Full Internet for single
No startup fee computer with mailbox
No traffic fee
Business Internet $27/Month Full Internet service for
Traffic fee small corporate networks
Startup fee: $38
High Speed Access (64Kbps-2Mbps)
High speed access services are primarily marketed to business accounts.
Services Current List Price Summary Description
- -------- ------------------ --------------------
Business Internet ISDN $38/Month Full Internet service for
64Kbps - 128Kbps) Traffic fee medium corporate network
Startup fee: $38 over Integrated Services
Digital Network ("ISDN")
Business Internet Managed $38/Month Full Internet service for
Leased Line Traffic fee big corporate networks
64Kbps - 2Mbps Startup fee: over dedicated line
$346-$5,076
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<PAGE>
Dedicated International $2,300-$14,000/Month Full Internet service
Line Traffic fee: Limitless for very big corporate
64K-512K Startup fee: $571-$1,286 networks or Internet
resellers over dedicated
international line
Web Services and Pricing
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 installs and maintains 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
(that "serve" information to Internet users). The business of "Web site
hosting" includes maintaining these computers as well as ensuring that the
computers are always connected to the Internet so that information may be
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, as well as other factors.
Services Current List Price Summary Description
- -------- ------------------ -------------------
Web Hosting $5-$48/Month Hosting companies' sites
Web Server Hosting From $120/Month Hosting companies, Web
No startup fee servers in EuroWeb's
machinery room
Autoweb From $24/Month Automatic creation of Web
Startup fee $476 sites
Design & Programming
Corporate web sites
Value-Added Services
EuroWeb has developed several databases for its customers, including
various on-line databases for Hungarian, Czech and Slovakian companies.
These databases enable subscribers to search for company data registered
with the respective country's registration agency. EuroWeb keeps such
databases current on a weekly basis and has translated the information into
English and German. EuroWeb intends to continue to develop databases for other
customers.
The Company also intends to enter the e-commerce market in Central Europe,
as it is currently laying the groundwork for provision of this service.
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<PAGE>
Customers
EuroWeb's customers are businesses and professionals in various sectors,
including government, multinational corporations, computer systems and service,
tourism and entertainment, banking and insurance, and media. EuroWeb's
customer base has grown to over 250 leased line business customers and over
7,500 dial up customers in Slovakia and in the Czech Republic as of
December 31, 1999. In 1999, no customer accounted for more than ten percent
of EuroWeb's total revenues.
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, 1999, EuroWeb had a network operations
group consisting of sixteen (16) people, including thirteen (13) providing
technical support and three (3) providing customer support. EuroWeb's network
operations personnel located at EuroWeb's network operations center in Slovakia
and the Czech Republic 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 technical support and customer support personnel are
currently available from 8 a.m. to 8 p.m., Monday through Friday. At other
times, these personnel respond to technical support requests via paging
services.
Sales and Marketing
EuroWeb employs twenty-one (21) 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 specialty periodicals, participation in industry shows, and press
relations. The sales persons work closely with the sixteen-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 in Hungary are Datanet, which has a customer base
similar to that of the Company's, and MATAV, the national Hungarian telephone
company. In Slovakia, the Company competes with Telenor Nextra, Ltd.,
Bratislava and Global TeleSystems Europe, B.V. ("GTS"), both of which have a
customer base similar to that of the Company's. There are also small niche
companies engaged in the Internet market, systems integration and software
development that compete with the Company for market share.
There are relatively low barriers to entry into EuroWeb's business.
Because other professional services firms similar to EuroWeb's 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 ISP market. EuroWeb expects that it will face additional competition from
new entrants into the market in the future.
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<PAGE>
Government Regulations
EuroWeb is not currently subject to direct government regulation other
than laws and regulations applicable to businesses generally. There are
currently few laws or regulations directly applicable to access to or commerce
on the Internet. However, with the increasing popularity and use of the
Internet, it is likely that new laws and regulations involving the Internet
will be adopted at the local, state, national or international levels, 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.
<PAGE>
Employees
The Company employs a total of fifty-six (56) persons in the Czech Republic
and in Slovakia: six (6) in management, twenty-one (21) in sales, three (3) in
graphics and Web development, three (3) in customer support, thirteen (13) in
networking operations and ten (10) administrative persons. None of the
Company's employees are represented by a labor organization. These figures do
not include employees at EuroWeb Rt. in Hungary.
The Company'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.
ITEM 2. DESCRIPTION OF PROPERTIES
The following table lists the office spaces that the Company and its
subsidiaries lease from unaffiliated persons:
<TABLE>
Rent
Sq. Amount Lease
Lessor Address of Property Primary Use feet /Month Terms
<S> <C> <C> <C> <C> <C>
The Company 445 Park Avenue stockholder relations and 800 $2,000 month to
New York, NY 10022 and general executive month
LUKO Czechnet Argentinslea 58 general operations 1400 $2,000 month to
CS-170 05 month
Prague, Czech Republic
EuroWeb Rocianska 36 general operations 4800 $1,250 month to
Slovakia a.s.c. SK-83102 month
Bratislava, Slovakia
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
In May 1999, a statement of claim was filed against Luko Czech, one of the
Company's wholly-owned subsidiaries in the Czech Republic. The claim involves
alleged damages in the amount of approximately $132,000 resulting from the
Company's cancellation of a contract with a data network provider. The Company
claims that the contract was terminated in accordance with its terms and
conditions, and has presented documentation in support of its position. The
Company is not a party to any other material legal proceedings as of the date
of this report.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
through the solicitation of proxies or otherwise, during the last quarter of
the fiscal year ended December 31, 1999.
<PAGE>
The Company did, however, send proxy solicitations to security holders of
the Company on December 14, 1999 to approve matters submitted to a vote at a
special meeting that was to be held on January 12, 2000 and was adjourned until
February 11, 2000. At that meeting security holders of the Company approved:
(1) a proposal to amend the Company's Certificate of Incorporation to increase
the number of shares of common stock authorized for issuance by the Company
from 20,000,000 shares to 60,000,000 shares of common stock; and (2) a proposal
for the issuance by the Company to KPN Telecom B.V., a Netherlands limited
liability Company ("KPN") of such number of shares of common stock that would
give KPN 51% of the Company's issued and outstanding shares of common stock;
and the issuance and sale of such number of additional shares of the Company's
common stock so as to preserve KPN's holding of 51% of the issued and
outstanding shares of the Company's common stock after giving effect to the
issuance of additional shares of common stock upon exercise by third parties
of outstanding warrants, options or other securities carrying rights to shares
of common stock (collectively, the "KPN transaction").
The Company filed the proxy soliciting material referred to above with the
Securities and Exchange Commission ("SEC") on December 14, 1999 on form DEF 14A.
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.
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<PAGE>
High Low
Quarter Ending:
1998
- ------------------
March 31, 1998 .500 .250
June 30, 1998 3.250 .375
September 30, 1998 2.750 .750
December 31, 1998 3.000 1.375
1999
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March 31, 1999 3.188 1.594
June 30, 1999 2.750 1.344
September 30, 1999 1.688 1.250
December 31, 1999 12.250 10.688
On March 14, 2000 the closing bid price on the Nasdaq for the Common Stock
was $9.00.
Holders of Common Stock
As of March 14, 2000 the Company had 23,246,118 shares of Common Stock
outstanding and 147 shareholders of record. The Company believes that it has
approximately 11,000 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
anticipated in these forward-looking statement as a result of certain factors
including but no limited to, those set forth under "Risk Factors" and elsewhere
here in.
<PAGE>
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.
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In January 1997, the Company acquired three ISP businesses in Hungary and
consolidated the three Hungarian ISPs under one roof under the name of
Euroweb Rt. On November 20, 1998 the Company sold a 51% interest in
EuroWeb Rt. On June 11, 1999, the Company acquired all of the participating
interests in Luko Czech, an ISP operating in the Czech Republic. The Company
also acquired in 1999 all or a majority of the respective interests in three
ISPs operating in Slovakia. The three acquisitions in Slovakia included:
(1) all of the outstanding shares of capital stock of EUnet Slovakia, (2) 70%
of the equity R-Net, a subsidiary of Dodo s.r.o. and (3) all of the outstanding
shares of Global Network Services a.s.c., which was owned by Slavia
Capital o.c.p., a.s.
Because the Company only had a minority interest in EuroWeb Rt. until
November 1998, 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.
The Company's consolidated statement of operations for the year ended
December 31, 1999 includes (1) the results of operations of Luko Czech from
the day of acquisition through December 31, 1999 and the results of operations
of the three Slovakian companies: EUnet Slovakia s.r.o., Global Network
Services, a.s.c., (which two companies were merged into Euroweb Slovakia s.r.o.)
and Dodo s.r.o. (all such companies acquired in 1999 herein referred to
collectively as the Acquired Companies, and individually as the Acquired
Company) beginning from the day each Acquired Company was acquired through
December 31, 1999 and (2) the Company's equity in net profit from EuroWeb Rt.
for the calendar year 1999.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Total revenues from Internet activities for the year ended December 31,
1999 were $1,233,567. This revenue figure does not reflect a full year's
revenue as each of the Company's four operating subsidiaries were acquired
during 1999 and the Acquired Companies operations were only included from the
dates of acquisition. No revenue is reported for the year ended December 31,
1999 from EuroWeb Rt., as the Company only reports EuroWeb Rt.'s results
of operations on the equity method. The inclusion of EuroWeb Rt. in the revenue
figures below are solely for purposes of comparison to 1998 figures.
Accordingly, the Company cannot report revenues, expenses and results of
operations of EuroWeb Rt., in the Company's financial statements. EuroWeb Rt.,
had revenues from Internet activities of $3,091,486 for the year ended
December 31, 1999. Had both the Acquired Companies and EuroWeb Rt. reported a
combined full year of Internet revenues, total Internet revenues for this
year would have been $6,096,206 as compared to Internet revenues of $1,958,062
for the year ended December 31, 1998.
Full Internet revenues by country, including Euroweb Rt., are the
following:
Hungary $3,091,486
Slovakia 2,023,586
Czech Republic 981,137
$6,096,206
For the year ended December 31, 1999, the Company realized a net loss
of $1,223,066 or $(.14) per share compared to a net profit of $427,524 or .08
per share in 1998. Included in the loss for 1999 is $402,397 of amortization
of goodwill relating to the acquisition of the subsidiaries acquired in 1999.
Also included in the loss was a realized loss of $136,792 on the sale of the
Company's investment in Hungarian Broadcasting Corporation, completely
liquidating the Company's position in this corporation. The total of these two
non-cash expenses is $539,189 or $(.06) per share. The profit in 1998 was due
to the gain of a 51% interest in the Hungarian subsidiary, EuroWeb Rt.
Equity in net income of EuroWeb Rt., of $83,595 reflects income for
during the period of January 1, 1999 to December 31, 1999, based upon 49%
ownership in EuroWeb Rt. The Company received cash of $2,200,000 from the
November 1998 sale of a 51% interest in EuroWeb Rt. The Company is seeking to
acquire other Internet service companies in Central and Eastern Europe.
Liquidity and Capital Resources
In the second quarter 1999, the Company sold 2,160,361 shares of its
common stock at an average price of $1.55 per share in four private placements.
The net proceeds from these placements amounted to $3,054,553 after deducting
placement agent fees and offering expenses of $297,545. In addition, the
placement agent for one of the offerings was granted 50,000 warrants to purchase
50,000 shares of common stock until April 1, 2002 at $2.00 per share. Another
placement agent from one of the offerings was granted 56,514 warrants to
purchase 56,514 shares at $2.10 per share until March 17, 2004 on the first
placement and 50,000 warrants to purchase 50,000 shares at $2.10 per share until
May 2, 2004 on the second placement. The 56,514 and the 50,000 warrants can
also be exercised in a cash-less exchange whereby the number of shares to be
issued in exchange for the warrants will be equal to the product of the number
of warrants and the exercise price divided by the current market price of a
share of common stock at the date of exercise. As a condition of placing
942,840 shares at $1.75 per share 942,840 A warrants exercisable at $2.00 per
share expiring April 1, 2002 and 942,840 B warrants exercisable at $2.25 per
share expiring April 1, 2001 were also issued.
-10-
During 1999, 704,341 warrants and options were exercised for 704,341
shares of common stock totaling $963,258 in contributed capital to the Company.
<PAGE>
In February, 2000, KPN purchased a 51% interest in the Company paying
$16,253,052 for 10,286,742 shares of common stock.
The Company has sufficient cash on hand to meet its anticipated working
capital requirements for at least twelve months. The Company plans to make
future acquisitions of Internet service providers in Central and Eastern
Europe. The excess cash on hand to be used to finance such future acquisitions
is currently invested in U.S. Government securities.
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.
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, 2000. 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.
-11-
<PAGE>
Forward-Looking Statements
When used in this Form 10-KSB, in other filings by the Company with the
SEC, in the Company's press releases or other public or stockholder
communications, or in oral statements made with the approval of an authorized
executive officer of the Company, the words or phrases "would be," "will allow,"
"intends to," "will likely result," "are expected to," "will continue,"
"is anticipated," "estimate," "project," or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995.
The Company cautions readers not to place undue reliance on any
forward-looking statements, which speak only as of the date made, are based on
certain assumptions and expectations which may or may not be valid or actually
occur, and which involve various risks and uncertainties, including but not
limited to the risks set forth below. See "Risk Factors." In addition, sales
and other revenues may not commence and/or continue as anticipated due to delays
or otherwise. As a result, the Company's actual results for future periods
could differ materially from those anticipated or projected.
Unless otherwise required by applicable law, the Company does not
undertake, and specifically disclaims any obligation, to update any
forward-looking statements to reflect occurrences, developments, unanticipated
events or circumstances after the date of such statement.
Risk Factors
The Company is subject to certain risk factors due to its development
stage status, the industry in which it competes and the nature of its
operations. Theses risks include the following.
Limited Operating History; Accumulated Deficit. Although the Company
was founded in November 1992, it only entered the Internet business in January
1997 by acquiring three operating Internet businesses. Accordingly, the Company
has only limited operating history on which to base an evaluation of its present
business and prospects. The Company and its prospects must be considered in
light of the risks, expenses and difficulties frequently encountered by
companies in an early stage of development, particularly companies in new and
rapidly evolving markets such as the Internet. Such risks for the Company
include, but are not limited to, an evolving business model and the management
of both internal and acquisition based growth. To address these risks, the
Company must, among other things, continue to expand its client base, continue
to develop the strength and quality of its operations, maximize the value
delivered to clients, respond to competitive developments and continue to
attract, retain and motivate qualified employees. There can be no assurance
that the Company will be successful in meeting these challenges and addressing
such risks and the failure to do so could have a material adverse affect on the
Company's business, results of operations and financial condition.
Regulations and Legal Uncertainties. In the United States, the business
proposed by the Company is not currently subject to direct regulation other than
federal and state regulation applicable to businesses generally and multi-level
marketing. However, changes in the regulatory environment relating to the
telecommunications, Internet and media industries could have an effect on its
business, which effect may be materially adverse to the interests of the
Company. Additionally, legislative proposals from international, federal, state
and foreign governmental bodies in the areas of content regulation, intellectual
property, privacy rights and tax issues, could impose additional regulations and
obligations upon all online service and content providers, which effect may be
materially adverse to the interests of the Company. The Company cannot predict
the likelihood that any such legislation will pass, nor the financial impact, if
any, the resulting regulation may have on it.
-12-
<PAGE>
Moreover, the applicability to persons engaged in Internet commerce of
existing laws governing issues such as intellectual property ownership, libel
and personal privacy is uncertain. Recent events relating to the use of online
services for certain activities has increased public focus and could lead to
increased pressure on foreign and national legislatures to impose regulations on
online service providers. The U.S. law relating to the liability of entities
conducting business over the Internet for information carried on, or
disseminated through, their systems is currently unsettled and has been the
subject of several recent private lawsuits. While the Company intends to
provide only content which meets the highest standards in quality, creativity
and ethical values, should similar actions be initiated against it, costs
incurred as a result of such actions could have a material adverse effect on
the business of the Company.
Dependence on Key Personnel; Limited Management; Need for Qualified
Management and Other Personnel. The success of the Company will be dependent
on the personal efforts of Csaba Toro, Vice President-International, Managing
Director (CEO) of all European Operations, Frank R. Cohen, Chairman of the
Board, Treasurer (CFO), and Robert Genova, President, CEO. The loss of the
services of any of such individuals could have a material adverse effect on the
Company's business and prospects. The Company does not have and does not intend
to obtain "key-man" insurance on the life of any of its officers. The success
of the Company is largely dependent upon its ability to hire and retain
additional qualified management, marketing, technical, financial and other
personnel. Competition for qualified personnel is intense, and there can be no
assurance that the Company will be able to hire or retain additional qualified
management. The inability to attract and retain qualified management and other
personnel will have a material adverse effect on the Company.
Developing Market; New Entrants; Unproven Acceptance of the Products;
Uncertain Adoption of Internet as a Medium of Commerce and Communications. The
market for Internet Programs and services has only recently begun to develop
and is rapidly evolving. The Internet is characterized by an increasing number
of market entrants who have introduced or developed products and services for
communication and commerce over the Internet and private networks. As is
typical in the case of a new and rapidly evolving industry, demand and market
acceptance for recently introduced products and services are subject to a high
level of uncertainty. Critical issues concerning the commercial use of the
Internet (including security, reliability, cost, ease of use and access, and
quality of service) remain unresolved and may impact the growth of Internet use.
While the Company believes that its products and services offer significant
advantages for Internet users, there can be no assurance that its products and
services will become widely chosen for access to the Internet or that, if
chosen, will hold the attention of users in order to allow it to continue to
attract users.
Because the market for the Company's proposed business, products and
services is new and evolving, it is difficult to predict the future growth rate,
if any, and size of this market. There can be no assurance that the market for
its products and services will develop, that the Company's products or services
will be adopted, or that individual personal computer users in business or at
home will use the Internet for commerce and communication. If the market fails
to develop, develops more slowly than expected, becomes saturated with
competitors, or if its products do not achieve market acceptance, its business,
operating results and financial condition will be materially adversely affected.
-13-
<PAGE>
Competition. The market for Internet-based products and services is
new, intensely competitive, rapidly evolving and subject to rapid technological
change. The Company expects competition to persist, intensify and increase in
the future. Such competition could materially adversely affect the Company's
business, operating results or financial condition. EuroWeb's principal
competitors in Hungary are Datanet, which has a customer base similar to that
of the Company's, and MATAV, the national Hungarian telephone company. In
Slovakia, the Company competes with Telenor Nextra, Ltd., Bratislava and Global
TeleSystems Europe, B.V. ("GTS"), both of which have a customer base similar to
that of the Companys. The Company may face intense competition from other
companies directly involved in the same business and also from many other
companies offering products which can be used in lieu of those offered by the
Company. Competition can take many forms, including convenience in obtaining
products, service, marketing and distribution channels. Although the Company
believes it can compete on the basis of the quality and reliability of its
services, there can be no assurance that the Company will be able to compete
successfully against current or future competitors or that competitive pressures
faced by the Company will not materially adversely affect the Company's
business, operating results or financial condition.
Possible Future Capital Needs. The Company currently anticipates that
its available cash resources will be sufficient to meet its presently
anticipated working capital and capital expenditure requirements for at least
the next 12 months. However, the Company may need to raise additional funds in
order to support more rapid expansion, acquire complementary businesses or
technologies or take advantage of unanticipated opportunities through public or
private financing, strategic relationships or other arrangements. There can be
no assurance that such additional funding, if needed, will be available on terms
acceptable to the Company, or at all. If adequate funds are not available on
acceptable terms, the Company may be unable to develop or enhance its services
and products or take advantage of future opportunities either of which could
have a material adverse effect on the Company's business, results of operations
and financial condition. The Company may determine, depending upon the
opportunities available to it, to seek additional debt or equity financing to
fund the cost of acquiring subscriber bases or service firms. To the extent
that the Company finances an acquisition with equity securities, any such
issuance of equity securities would result in dilution to the interests of the
Company's stockholders. Additionally, to the extent that the Company finances
an acquisition with equity securities, any such issuance of equity securities
would result in dilution to the interests of the Company's stockholders.
Additionally, to the extent that the Company incurs indebtedness or issues debt
securities in connection with any acquisition, the Company will be subject to
risks associated with incurring substantial indebtedness, including the risks
that interest rates may fluctuate and cash flow may be insufficient to pay
principal and interest on any such indebtedness.
No Dividends. The Company does not currently intend to pay cash
dividends on its common stock and does not anticipate paying such dividends at
any time in the foreseeable future. At present, the Company will follow a
policy of retaining all of its earnings, if any, to finance the development and
expansion of its business.
-14-
<PAGE>
Potential Issuance of Additional Common and Preferred Stock. The
Company is authorized to issue up to 60,000,000 shares of common stock as a
result of an amendment to the Certificate of Incorporation filed with the
Delaware Secretary of State on February 11, 2000. To the extent of such
authorization, the Board of the Company will have the ability, without seeking
stockholder approval, to issue additional shares of common stock in the future
for such consideration as the Board may consider sufficient. The issuance of
additional common stock in the future will reduce the proportionate ownership
and voting power of the common stock offered hereby. The Company is also
authorized to issue up to 5,000,000 shares of preferred stock, the rights and
preferences of which may be designated in series by the Board. To the extent
of such authorization, such designations may be made without stockholder
approval. The designation and issuance of series of preferred stock in the
future would create additional securities which may have voting, dividend,
liquidation preferences or other rights that are superior to those of the common
stock, which could effectively deter any takeover attempt of the Company.
Volatility of Stock Prices. Market prices for the Company's common
stock will be influenced by many factors and will be subject to significant
fluctuations in response to variations in operating results of the Company and
other factors such as investor perceptions of the Company, supply and demand,
interest rates, general economic conditions and those specific to the industry,
developments with regard to the Company's activities, future financial condition
and management. There can be no assurance regarding the future prices at which
the Companys common stock will trade, if any.
Foreign Currency and Exchange Risks and Rate Revaluation. The Company
will be subject to significant foreign exchange risk. There are currently no
meaningful ways to hedge currency risk in either Hungary, the Czech Republic or
Slovakia. Therefore, the Company's ability to limit its exposure to currency
fluctuations is significantly restricted. The Companys ability to obtain
dividends or other distributions is subject to, among other things,
restrictions on dividends under applicable local laws and foreign currency
exchange regulations of the jurisdiction in which its subsidiaries operate.
The laws under which the Companys operating subsidiaries are organized provide
generally that dividends may be declared by the partners or shareholders out
of yearly profits subject to the maintenance of registered capital and required
reserves and after the recovery of accumulated losses. There may be other
currency risks that the Company will face as it expands its operations into
other Central and Eastern European countries.
ITEM 7. FINANCIAL STATEMENTS
Reference is made to the Consolidated Financial Statements of the
Company, beginning with the index thereto on page F-2.
-15-
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
By letter dated December 15, 1999, EuroWeb International Corp.
("the Company") received notice from its independent accountant, BDO
Seidman, LLP ("Former Accountant") that the client-auditor relationship
between the Company and the Former Accountant has ceased. During the
Company's two most recent fiscal years and any subsequent interim
period preceding such resignation, the Company had no disagreement with
its Former Accountant on any matter of accounting principal or practice,
financial statement disclosure or auditing scope or procedure which
would have caused the accountant to make reference in its report upon
the subject matter of disagreement. Further, the Former Accountants
report on the financial statements of the Company as of and for the
year ended December 1998 did not contain an adverse opinion or
disclaimer of opinion or qualification as to audit scope or accounting
principle.
The decision to accept the resignation was approved by the full Board
of Directors. The resignation letter of the Former Accountant, a copy
of which was sent to the Securities and Exchange Commission, is on file
with the Company, and is incorporated by reference to Exhibit (16)(a)
on this Form 10-KSB.
On December 20, 1999 the Company engaged the firm of KPMG,
(the "New Accountant") as its independent accountant for the Companys
fiscal year ending December 31, 1999. The Company did not consult the
New Accountant with respect to either (i) the prior fiscal period, (ii)
the interim period as regards either the application of accounting
principles to a specified transaction, either completed or proposed, or
the type of audit opinion that might be rendered on the Companys
financial statements, or (iii) any matter that was either the subject
of a disagreement or reportable event.
The Company has authorized and requested the Former Auditor to respond
fully to the inquires of the New Auditor.
The Company has provided the Former Accountant with a copy of the
disclosures it is making herein in response to Item 304(a) of
Regulation S-K. The Company requested that the Former Auditor furnish
the Company with a letter addressed to the Commission stating whether
it agrees with the statements made by the Company. The Company has
annexed such letter as an exhibit to Form 8-K filed on December 21,
1999 and incorporated by reference to Exhibit (16)(d) on this Form 10-KSB.
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 caption "Election of Directors" in the Company's
definitive Proxy statement for the 2000 Annual Meeting of Stockholders,
a copy of which will be filed not later than 120 days after the close
of the fiscal year.
-16-
<PAGE>
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 2000
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
The following table sets forth information with respect to the
beneficial ownership of the Common Stock as of March 14, 2000 by (i)
each person known by the Company to own beneficially more than 5% of
the outstanding Common Stock; (ii) each director of the Company; and
(iii) all executive officers and directors as a group. Except as
otherwise indicated below, each of the entities or persons named in the
table has sole voting and investment powers with respect to all shares
of Common Stock beneficially owned by it or him as set forth opposite
its or his name.
Name and Address Shares Beneficially
Owned (1) Percent Owned (1)
- ------------------------------------------------------------------------------
Frank R. Cohen
445 Park Avenue
New York, NY 10022 525,000 (2) 4.41%
Robert Genova
227 Route 206, Unit 11
Flanders, NJ 07836 638,000 (3) 5.31%
Csaba Toro
1122 Budapest
Varosmajor utca 13
Hungary 465,000(4) 3.92%
All Officers and Directors as
a Group (3 Persons) 1,628,000 12.51%
KPN Telecom, B.V.
Mannplein 5
The Hague, Netherlands 11,803,554(5) 51%
____________________________
(1) Unless otherwise indicated, each person has sole investment and voting
power with respect to the shares indicated, subject to community
property laws, where applicable. For purposes of this table, a person
or group of persons is deemed to have "beneficial ownership" of any
shares which such person has the right to acquire within 60 days after
March 14, 2000. For purposes of computing the percentage of outstanding
shares held by each person or group of persons named above on March 14,
2000, any security which such person or group of persons has the right
to acquire within 60 days after such date is deemed to be outstanding
for the purpose of computing the percentage ownership for such person
or persons, but is not deemed to be outstanding for the purpose of
computing the percentage ownership of any other person.
(2) Includes 515,000 shares of Common Stock issuable upon exercise of
currently exercisable options: 100,000 shares at $1.00 per share
pursuant to Mr. Cohens September 1998 employment contract; 315,000
shares at $1.625 per share pursuant to an April 1999 modification to
his employment contract; and 70,000 shares at $1.25 per share and
30,000 shares at $1.625 per share pursuant to the Companys 1993 Stock
Option Plan.
(3) Includes 500,000 shares of Common Stock issuable upon exercise of
currently exercisable options: 100,000 shares at $1.00 per share
pursuant to Mr. Genovas September 1998 employment contract; 370,000
shares at $1.625 per share pursuant to an April 1999 modification to
his employment contract; and 30,000 shares at $1.625 pursuant to the
Companys 1993 Stock Option Plan.
(4) Includes 465,000 shares of Common Stock issuable upon exercise of
currently exercisable options: 100,000 shares at $1.00 per share
pursuant to Mr. Toro's September 1998 employment agreement; 315,000
shares at $1.625 per share pursuant to an April 1999 modification to
his employment agreement; and 50,000 shares at $2.00 per share granted
pursuant to a prior consulting agreement. In addition, Mr. Toro holds
60,000 shares of record for the beneficial ownership of five individuals
who received such shares as partial consideration paid by the Company
for the acquisition of Enet Hungary in 1996. Mr. Toro disclaims any
beneficial ownership of such 60,000 shares.
(5) Information included within a Schedule 13D dated February 24, 2000 and
filed with the Securities and Exchange Commission, in which Schedule
13D, KPN Telecom B.V. ("KPN"), the Reporting Person under the Schedule
13D, states that KPN, in addition to this number of shares of Common
Stock beneficially owned, also holds 3,275,594 shares of Common Stock
pursuant to an option, that is exercisable at a purchase price of $1.38
per share upon exercise by a third party of an option or warrant for an
identical number of shares of the Companys Common Stock so as to
preserve KPNs majority interest in the Company, as specified in the
Option Agreement, dated November 19, 1999 and amended by the Amended
and Restated Agreement of December 13, 1999.
<PAGE>
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 2000
Annual Meeting of Stockholders, a copy of which will be filed no later
than 120 days after the close of the fiscal year.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits (numbers below reference Regulation S-B, Item 601)
(2) Subscription Agreement and Option Agreement with KPN(23)
(3) (a) Certificate of Incorporation filed November 9, 1992(2)
(b) Amendment to Certificate of Incorporation filed July 9, 1997 3
(c) By-laws(2)
(4) (a) Form of Common Stock Certificate(2)
(b) Form of Underwriters' Warrants to be sold to Underwriters(2)
(c) Placement Agreement between Registrant and J.W. Barclay & Co.,
Inc. and form of Placement Agent Warrants issued in connection
with private placement financing(2)
(d) Form of 10% Convertible Debenture used in connection with
offshore private placement financing pursuant to Regulation S4
(e) Form of Common Stock Purchase Warrant in connection with private
placement financing under Section 506 of Regulation D(4)
(10)(a) Consulting agreement between Registrant and Klenner
Securities Ltd. (2)
(b) Consulting agreement between Registrant and Robert Genova(2)
(c) Consulting agreement between Registrant and Laszlo Modransky(2)
(d) 1993 Incentive Stock Option Plan(2)
(e) Sharing agreement for space and facilities between Registrant
and Hungarian Telephone and Cable Corp.(2)
(f) Articles of Association (in English) of Teleconstruct Building
Corp. (2)
(g) Articles of Association (in English) of Termolang Engineer and
Construction Ltd. (2)
(h) Letter of intent between Teleconstruct Building Corp. and
Pilistav(2)
- ----------------------------
2 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)
3 Filed with Form 10-QSB for quarter ended June 30, 1998.
4 Filed with Form 8-K as of February 17, 1994
<PAGE>
(i)Employment agreement between Registrant and Robert Genova and
termination agreement dated February 5, 1997 5
(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(4)
(k)Employment agreement between Registrant and Frank R. Cohen(2)
and modification of employment agreement(4)
(l)Letter of Intent agreement between Registrant and Raba-Com Rt.
(4)
(m)Letter of Intent agreement between Registrant and Kelet-Nograd
Rt. (4)
(n)Letter of Intent agreement between Registrant and 3 Pilistav
villages for installation of cable in those areas(4)
(o)Lease agreement between Registrant's subsidiary EUNET Kft. and
Varosmajor Passage, Kft. for office space(4)
(p)Acquisition agreement between Registrant and KFKI Computer
Systems Corp. dated December 13, 1996(4)
(q)Acquisition agreement between Registrant and E-Net Hungary(4)
(r)Acquisition agreement between Registrant and MS Telecom Rt. (4)
(s)Employment Agreement between Registrant and Imre Kovats(4)
(t)Employment Agreement between Registrant and Csaba Toro(4)
(u)Promissory Note from Registrant to HBC(4)
(v)Communication Services Agreement between Registrant and MCI
Global Resources, Inc.6
(w)Lease and Option Agreement for Building B as of April 1, 1998
with Hafisa Kft.7
(x)License Agreement between Gric Communications, Inc. and EuroWeb
International Corp.(5)
(y)Consulting Agreement between Registrant and Eurus Capital
Corporation and Rescission Agreement8
(y)(i) Agreement rescinding Option Agreement with Eurus Capital
Corporation9
(z)Financial Consulting Agreement between Registrant and J.W.
Barclay & Co., Inc.10
(aa) Mergers and Acquisitions Agreement between Registrant and J.W.
Barclay 11
(bb) Placement Agreement between Registrant and J.P. Carey, Inc.
and form of Placement Agent Warrants issued in connection with
private placement financing12
(cc) Private Placement Agreement between Registrant and Peter E.
Klenner13
- ---------------------------
5 Filed with Form 10-KSB for year ended December 31, 1996
6 Filed with Form 10-QSB for quarter ended September 30, 1997.
7 Filed with Form 10KSB for year ended December 31, 1997.
8 Filed with Amendment No. 1 to Registration Statement 333-52841
9 Filed with Amendment No. 2 to Registration Statement 333-52841
10 File with Amendment No. 1 to Registration Statement 333-52841
11 Filed with Amendment No. 1 to Registration Statement 333-52841
12 Filed with Form 8-K as of October 14, 1998
13 Filed with Form 8-K as of October 14, 1998
<PAGE>
(dd)Employment Agreement between Registrant and Csaba Toro14
(ee)Employment Agreement between Registrant and Robert Genova15
(ff)Employment Agreement between Registrant and Frank R. Cohen16
(gg)Placement Agreement between Registrant and JP Carey Securities
Inc. and Warrant Agreement in connection with private placement
financing17
(hh)Private Placement Agreement between Registrant and M&A
Management18
(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 19
(jj)Acquisition Agreement between Registrant and Luko Czech Net,
5.1.0. dated June 11, 1999 20
(kk)Acquisition Agreement between Registrant and Slavia Capital,
O.C.P.,a.s. dated July 2, 1999 21
(ll)Acquisition Agreement between Registrant and Eunet Slovakia
s.r.o. dated July 14, 1999 22
(mm)Acquisition Agreement between Registrant and shareholders of
Dodo, s.r.o. dated August 5, 1999 23
(16)(a)Letter on Change in Certifying Accountant24
(b)Letter by Former Accountant Agreeing with Companys
Statements.(24)
(22)(a)Proxy Statement for Special Meeting of Stockholders.25
(b)Press Release on Adjournment of Special Meeting.26
(c)Press Release on Results of Vote.27
- ------------------------------
14 Filed with Form 8-K as of October 14, 1998
15 Filed with Form 8-K as of October 14, 1998
16 Filed with Form 8-K as of October 14, 1998
17 Filed with Form 8-K as of April 21, 1999
18 Filed with Form 8-K as of April 21, 1999
19 Filed with Form 8-K as of April 21, 1999
20 Filed with Form 8-K as of June 11, 1999
21 Filed with Form 10-QSB for quarter ended June 30, 1999
22 Filed with Form 10-QSB for quarter ended June 30, 1999
23 Filed with Form 10-QSB for quarter ended June 30, 1999
24 Filed with Form 8-K on December 21, 1999.
25 Filed with Form DEF 14A on December 14, 1999.
26 Filed with Form 8-K on January 12, 2000.
27 Filed with Form 8-K on February 14, 2000.
<PAGE>
Euroweb International Corp.
Consolidated Financial Statements
Years Ended December 31, 1999 and 1998
<PAGE>
Euroweb International Corp.
Contents
Report of Independent Certified Public Accountants F-3
F-4
Consolidated Financial Statements:
Balance sheet F-5
Statements of operations and comprehensive loss F-6
Statements of stockholders' equity F-7
Statements of cash flows F-8
Notes to consolidated financial statements F-9 - F-20
<PAGE>
Independent Auditors Report
The Board of Directors
Euroweb International Corp.:
We have audited the accompanying consolidated balance sheet of Euroweb
International Corp. as of December 31, 1999, and the related consolidated
statements of operations and comprehensive loss, shareholders equity, and
cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit. The accompanying consolidated financial statements of Euroweb
International Corp. as of December 31, 1998, were audited by other auditors
whose report thereon dated March 13, 1999, expressed an unqualified
opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards
in the United States. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the 1999 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Euroweb International Corp. as of December 31, 1999, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles in the United States.
KPMG Hungaria
Budapest, Hungary
March 15, 2000
F-3
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Euroweb International Corp.
New York, New York
We have audited the 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 the year then
ended. 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 audit.
We conducted our audit 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 audit provides 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 the year then ended, in conformity with generally
accepted accounting principles.
BDO Seidman, LLP
New York, New York
March 13, 1999
F-4
<PAGE>
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEETS
December 31, 1999
ASSETS
Current Assets
Cash and cash equivalents (Note 3) $ 2,815,071
Certificate of deposit 1,052,779
Accounts receivable - less allowance
for doubtful accounts of $244,623 210,086
Current portion of note receivable (Note 13) 152,817
Current portion of loan receivable (Note 11d) 81,526
Receivable from Euroweb Rt. 35,388
Other receivables 56,600
Prepaid and other current assets 260,689
-----------
Total current assets 4,664,956
Property and equipment, less accumulated
depreciation of $90,325 411,768
Note receivable, less current portion (Note 13) 705,092
Loan receivable, less current portion (Note 11d) 86,682
Investment in Euroweb Rt., at equity 822,505
Goodwill, less accumulated amortization of $402,397 4,443,007
Other non-current assets 2,956
-----------
Total assets $11,136,966
===========
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 1,067,884
Current portion of loan payable (Note 6) 53,796
Deferred revenue 137,600
-----------
Total current liabilities 1,259,280
Loan payable, less current portion (Note 6) 31,298
Commitments & Contingencies (Note 10)
Minority interests 3,296
-----------
Total liabilities 1,293,874
Stockholders' Equity (Note 7)
Preferred stock, $.001 par value - shares
authorized 5,000,000; no shares issued
or outstanding -
Common stock, $.001 par value - shares
authorized 20,000,000; issued and outstanding
10,497,681 10,423
Additional paid-in capital 26,915,816
Accumulated deficit (16,983,745)
Accumulated other comprehensive losses:
Foreign currency translation adjustment (99,402)
-----------
Total stockholders' equity 9,843,092
-----------
Total liabilities and stockholders' equity $11,136,966
===========
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
Revenues $ 1,233,567 $1,685,245
----------- ----------
Expenses (Income)
Compensation and related costs (Note 10 & 11) 591,301 597,988
Network costs 628,880 670,611
Consulting and professional fees 481,604 240,750
Rent 70,580 122,098
Bad debts 17,782 -
Depreciation and amortization 489,434 435,340
Gain on sale of interest in Euroweb Rt. (Note 12b) (147,000) (1,516,548)
Interest income (228,099) (30,120)
Interest expense 5,945 24,091
Cost of cancelled public offering - 138,434
Equity in net (income) loss of Euroweb Rt. (83,595) 21,000
Other expense 451,526 434,399
Other income (17,396) -
Realized loss on sale of HBC securities 136,792 -
----------- ----------
Total 2,397,754 1,138,043
----------- ----------
Income (loss) from continuing operations
before income taxes and minority
interest (1,164,187) 547,202
Provision for income taxes 14,398 -
Minority interests in subsidiaries (income) loss (6,377) -
Income (loss) from continuing operations (1,172,208) 547,202
Loss from discontinued operations (Note 13) 50,858 119,678
----------- ---------
Net income (loss) (1,223,066) 427,524
Other comprehensive loss, net 52,427 11,075
----------- ----------
Comprehensive income (loss) $(1,275,493) $ 416,449
=========== ==========
Net income (loss) per share-basic
Continuing operations (.14) .10
Discontinued operations - (.02)
----------- ----------
(.14) .08
----------- ----------
Net income (loss) per share - diluted
Continuing operations (.14) .09
Discontinued operations - (.02)
----------- ----------
(.14) .07
----------- ----------
Weighted average number of shares
outstanding:
Basic 8,593,000 5,553,000
Diluted 8,593,000 5,906,000
See accompanying notes to consolidated financial statements
F-6
<PAGE>
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
Accumulated Other
Comprehensive Gains(Losses)
Unrealized
Gain(Loss) on
Foreign Investment in
Additional Currency Hungarian Total
Common Stock Paid-in Accumulated Translation Broadcasting Stockholders'
Shares Amount Capital Deficit Adjustment Corporation Equity
<S> <C> <C> <C> <C> <C> <C> <C>
TWELVE MONTHS ENDED DECEMBER 31, 1998:
Balances, January 1, 1998 4,949,936 $ 4,950 $19,770,725 $(16,188,203) $(35,900) $ - $3,551,572
Issuance of shares for cash (Note 7) 866,666 867 549,073 - - - 549,940
Exercise of common stock options 271,500 271 273,729 - - - 274,000
Issuance of shares for debentures 356,814 357 161,325 - - - 161,682
Issuance of options for
consulting services - - 132,000 - - - 132,000
Net income for the period - - - 427,524 - - 427,524
Foreign currency translation gain - - - - 9,900 - 9,900
Unrealized loss on investment in HBC - - - - - (20,975) (20,975)
---------- ------- ----------- ------------ -------- -------- ----------
Balances, December 31, 1998 6,444,916 $ 6,445 $20,886,852 $(15,760,679) $(26,000) $(20,975) $5,085,643
========== ======= =========== ============ ======== ======== ==========
TWELVE MONTHS ENDED DECEMBER 31, 1999:
Balances, January 1, 1999 6,444,916 $ 6,445 $20,886,852 $(15,760,679) $(26,000) $(20,975) $5,085,643
Issuance of shares for cash (Note 7) 2,160,361 2,160 3,042,023 - - - 3,044,183
Issuance of shares for acquisitions 1,188,063 1,188 1,998,812 - - - 2,000,000
Issuance of options for acquisitions - - 25,500 - - - 25,500
Exercise of common stock options 285,000 285 538,465 - - - 538,750
Exercise of common stock warrants 419,341 345 424,164 - - - 424,509
Foreign currency translation gain(loss) - - - - (73,402) - (73,402)
Unrealized loss on investment in HBC - - - - - (115,817) (115,817)
Realized loss on investment in HBC - - - - - 136,792 136,792
Net loss for the period - - - (1,223,066) - - (1,223,066)
---------- ------- ----------- ------------ -------- -------- ----------
Balances, December 31, 1999 10,497,681 $10,423 $26,915,816 $(16,983,745) $(99,402) $ -0- $9,843,092
========== ======= =========== ============ ======== ======== ==========
</TABLE>
See accompanying notes to consolidated financial
F-7
<PAGE>
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,223,066) $ 427,524
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 489,434 435,340
Gain on sale of interests in Euroweb Rt. (147,000) (1,396,870)
Stock issued for accrued interest - 11,682
Options granted as compensation and consulting - 44,000
Equity in net (income) loss of Euroweb Rt. (83,595) 21,000
Provision for doubtful accounts 17,782 -
Loss on sale of HBC securities 136,792 -
Foreign currency (gain)loss 6,470 -
Minority interests in subsidiaries (6,377) -
Non-cash compensation expense 96,000 -
(Increase) decrease in:
Accounts receivable 11,243 -
Receivable from Euroweb Rt. 65,715 (101,103)
Prepaid and other assets (17,734) (10,293)
Net assets, excluding cash, of subsidiaries
sold and deconsolidated - 71,904
Increase (decrease) in:
Accounts payable and accrued expenses (95,928) (339,225)
Current portion of loans payable (436) -
Deferred revenue (6,721) -
NET CASH USED IN OPERATING ACTIVITIES (757,421) (836,041)
CASH FLOWS FROM INVESTING ACTIVITIES:
Certificates of deposit 46,212 (1,006,567)
Payable to former owners of businesses acquired - (191,000)
Repayments of notes receivable 571,958 -
Issuance of loan receivable (250,000) -
Repayments loan receivable 81,792 -
Investment in Euroweb Rt. (59,100) -
Acquisition of Internet service companies,
net of cash acquired (2,639,485) -
Proceeds from sale of interests in HBC and
Euroweb Rt., respectively 43,733 2,200,000
Acquisition of property and equipment (160,341) -
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (2,365,231) 1,002,433
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 4,279,368 823,940
Repayment of debt (50,194) -
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,229,174 823,940
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH 20,269 -
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,126,791 990,332
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,688,280 697,948
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,815,071 $ 1,688,280
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 5,945 $ 24,091
Income tax paid $ 14,398 $ -
NON-CASH TRANSACTIONS:
Issuance of common stock upon conversion of debentures $ - $ 150,000
Issuance of common stock for acquisition of subsidiaries $ 2,000,000 $ -
Settlement of HBC receivable for HBC common stock $ - $ 177,418
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
Euroweb International Corp.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
1. Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of Euroweb
International Corp. (the "Company") and its subsidiaries. The
operations of Euroweb Rt., formerly a wholly-owned subsidiary, 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 at the equity method.
The operations of Luko Czech-Net, s.r.o. ("Luko Czech") were 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 effective from June 1, 1999.
The operations of EUnet Slovakia, s.r.o. ("EUnet") were 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
have been included effective from August 1, 1999.
The operations of DoDo s.r.o. ("R-Net") were 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 effective from
August 1, 1999.
The operations of Global Network Services, a.s., ("SKNET") were
acquired as a 100% owned subsidiary by the purchase of 70% of the
outstanding shares of stock on September 23, 1999 and the remaining
30% on November 16, 1999. The operations of SKNET have been included
effective from October 1, 1999.
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.
(d) Revenue Recognition
Revenues from monthly Internet services are recognized in the month in
which the services are provided.
F-9
<PAGE>
Euroweb International Corp.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(e) Foreign Currency Translation
The Company uses the local currencies, the Hungarian forint for
Euroweb Rt., Czech koruna for Luko Czech and the Slovak koruna for
EUnet, R-Net and SKNET as the functional currencies for measuring
their respective accounts. 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 for the period included in these
financial statements, 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, loans payable and
accrued expenses approximate fair values.
(h) Property and Equipment
Property and equipment are stated at cost. Maintenance and repairs
are expensed when incurred. Depreciation is computed over the
estimated useful lives of depreciable assets using the straight line
method.
(i) 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 of Euroweb Rt., 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.
(j) 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.
(k) Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." This statement requires a liability
approach for measuring deferred taxes based on temporary differences
between the financial statements 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.
F-10
<PAGE>
Euroweb International Corp.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(l) Net Income(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. The Company
had potentially dilutive common stock equivalents for the year ended
December 31, 1999, which were not included in the computation of
diluted net loss per share because they were antidilutive for that
year.
(m) Comprehensive Income
The Company adopted SFAS No. 130, "Reporting Comprehensive Income,"
("SFAS No. 130") which established standards for reporting and display
of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity
except those resulting from investments by, and distributions to,
owners. Among other disclosures, SFAS No.130 requires that all items
that are required to be recognized under current accounting standards
as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other
financial statements.
(n) Segment Information
The Company adopted Statement of Financial Accounting Standards
No. 131., "Disclosures about segments of an enterprise and related
information," ("SFAS No. 131"), effective for financial statements
issued for periods ending after December 15, 1997. This statement
establishes standards for the reporting of information about
operating segments in annual and interim financial statements,
operating segments are defined as components of an enterprise for
which separate financial information is available that is evaluated
regularly by the chief operating decision maker(s) in deciding how to
allocate resources and in assessing performance. SFAS No. 131
also requires disclosures about products and services, geographic
areas and major customers.
2. Organization and Business
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 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 12(b)).
During 1999 the Company acquired four Central European Internet service
companies. In the Czech Republic the Company acquired 100% of Luko Czech
on June 11, 1999. In the Slovak Republic the Company acquired 100% of
EUnet on July 15, 1999, 70% of R-Net on August 9, 1999 and 70% of SKnet
on September 23, 1999, and the remaining 30% on November 16, 1999
(See Note 12(a)). The Company is currently seeking to acquire other
Internet service providers companies in Central & Eastern Europe.
3. Cash Concentration
At December 31, 1999, cash and cash equivalents included $105,653 and
$1,359,838 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 $2,084,498.
F-11
<PAGE>
Euroweb International Corp.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
4. Investment in Hungarian Broadcasting Corporation
On June 30, 1998, the Company settled its receivable of $177,418 from
Hungarian Broadcasting Corporation ("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 represented 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 the date
received. The Company sold all of the HBC stock, 68,732 shares in the
current year resulting in a realized loss of $136,792.
5. Property and Equipment
Property and equipment at December 31, were as follows:
1999 1998 Estimated Useful Lives
Software $ 5,016 $ - 4
Internet equipment 412,671 - 4
Office equipment 4,589 3,288 4
Vehicles 79,817 - 4
-------- ------
Total 502,093 3,288
Less accumulated depreciation 90,325 3,288
-------- ------
$411,765 $ -0-
======== ======
6. Loan Payable
At the time of acquisition, on August 9, 1999, DoDo s.r.o., had an open
account loan from its parent company, INFIS s.r.o. At the time of
purchase the Company agreed to fix the term of repayment of this loan to
24 monthly payments of $3,500, without interest beginning one month after
an initial payment of $35,420 made in September 1999, which reduced the
original balance of $119,420, to $84,000. The loan is denominated in
U.S. Dollars.
The maturities of the loan payable for each of the subsequent years are
as follows: 2000 $42,000; 2001 $40,540; thereafter $-0-
7. Private Placements
(a) During 1999 the Company sold 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
=========
The net proceeds from these placements amounted to $3,044,184 after
deducting placement agent fees and offering expenses of $297,545.
The purchasers of the 942,840 share placement also received 942,840
A warrants exercisable at $2.00 per share, expiring April 1, 2002
and 942,840 B warrants exercisable at $2.25 per share, expiring
April 1, 2001. In conjunction with the placement, the agent for one
of the offerings was granted 50,000 warrants to purchase 50,000 shares
of common stock until April 1, 2002 at $2.00 per share. Another
placement agent from one of the offerings was granted 56,514 warrants
to purchase 56,514 shares at $2.10 per share until March 16, 2004 on
the first placement and 50,000 warrants to purchase 50,000 shares at
$2.10 per share until April 29, 2004 on the second placement. The
56,514 and the 50,000 warrants can also be exercised in a cash-less
exchange whereby the number of shares to be issued in exchange for
the warrants will be equal to the product of the number of warrants
and the exercise price divided by the current market price of a share
of common stock at the date of exercise. The Company has estimated
the fair value of the placement agents' fees based on the
Black-Scholes option pricing model as $1,928,600.
F-12
<PAGE>
Euroweb International Corp.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(b) 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. These
shares also may be exercised in a cash-less exchange described
in Note 7(a).
8. Stock Option Plan and Employment and Consulting Agreement Options
(a) Stock Options
The Company has a Stock Option Plan (the "Plan"). An aggregate of
670,000 shares of common stock are authorized for issuance under the
Plan. At December 31, 1999, 290,000 options were available under the
Plan. The number of shares available under the Plan was increased
from 350,000 to 670,000 by the shareholders at the annual meeting of
May 12, 1999. 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.
A total of 45,000 options were exercised and 45,000 options expired
in 1999.
(b) Employment Agreement Options
The Company has issued exercisable options pursuant to employment
agreements. The total number of options issued and outstanding on
December 31, 1999 pursuant to employment agreements is 1,300,000.
A total of 90,000 options were exercised and 1,000,000 were granted
in 1999.
(c) Consulting Agreement Options
The Company has issued exercisable options pursuant to consulting
agreements. A total of 150,000 options were exercised in 1999. There
are no outstanding consulting agreement options at December 31, 1999.
(d) Accounting for stock-based options
Stock options, employment agreement options and consulting agreement
options are all considered option which come under the guidelines of
stock based compensation.
F-13
<PAGE>
Euroweb International Corp.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
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 1999 and 1998, respectively: no dividends paid for all
years; expected volatility of 74% in 1999 and 117% in 1998; weighted
average risk-free interest rates of 5.5% and 5.46%, 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:
Year ended
December 31,
1999 1998
Net income(loss):
As reported $(1,223,066) $427,524
Pro forma (2,854,666) 101,424
Basic earnings(loss) per share:
As reported $ (.14) $ .08
Pro forma (.31) .02
Diluted earnings(loss) per share:
As reported (.14) .07
Proforma (.31) .02
Transactions involving options granted under the Plan, Employment
Agreements and Consulting Agreements are summarized below:
1999 1998
------------------- -------------------
Weighted Weighted
average average
exercise exercise
Shares Price Shares Price
Outstanding, January 1 880,000 $1.39 820,000 $1.39
Granted 1,130,000 1.68 390,000 1.14
Exercised (285,000) 1.89 (271,500) 1.0
Cancelled (45,000) 1.54 (58,500) 3.00
Outstanding, December 31 1,680,000 1.53 880,000 1.39
Excercisable, December 31, 1,680,000 1.53 810,000 1.32
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-14
<PAGE>
Euroweb International Corp.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
9. Other Stock Options and Stock Warrants
(a) Acquisition Options
On June 11, 1999 the Company issued exercisable options pursuant to
acquisition agreements. The total number of options issued and
outstanding on December 31, 1999 pursuant to acquisition agreements
is 50,000, at an exercise price of $2.00 per share, exercisable until
June 11, 2000. The Company has estimated the fair value of the
options using the Black-Scholes option-pricing model and has recorded
this amount as goodwill on the transaction.
(b) Stock Warrants
The following table summarizes information about stock warrants at
December 31, 1999:
Warrants outstanding and
exercisable
----------------------------
Weighted
Number average
outstanding at remaining
December 31, contractual
Range of exercise prices 1999 life
------------------------ -------------- -----------
$1.25 - 2.25 2,463,065 1.67
10. Commitments and Contingencies
(a) Employment Agreements
Employment agreements with the three officers of the Company provide
for aggregate annual compensation of $646,000 through December 31,
2005.
(b) Legal Proceedings
In May 1999 a statement of claim was filed against Luko Czech, a
wholly owned subsidiary, alleging damages in the amount of
approximately $132,000 resulting from the Company's cancellation of a
contract with a data network provider. The Company claims that the
contract was terminated in accordance with its terms and conditions.
The Company has presented documents in support of its position and
believes the Company's position will prevail.
11. Related Party Transactions
(a) The Company paid legal fees to the Secretary/Treasurer and current
Chairman of the Board of $30,000 for the year ended December 31, 1998.
There were no payments made in 1999.
(b) 1998 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. There were no employee leasing
arrangements in 1999.
(c) Receivable from Euroweb Rt., as at December 31, 1998, includes a
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. There was no
management fee activity in 1999.
F-15
<PAGE>
Euroweb International Corp.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(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 an apartment
in Budapest, Hungary. In September 1999, the Company loaned an
additional $100,000 to the same vice-president. Both loans were
rolled into one new loan repayable in monthly installments of $8,000,
including interest at 11% per annum, the new loan is collateralized
by two apartments in Budapest, Hungary.
12. Acquisitions/Disposition
(a) 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 $1,887,654, 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 $1,734,996, which is being amortized over its
estimated useful life of five years. The results of Luko Czech's
operations from June 1, 1999 to December 31, 1999 have been
included in the accompanying statements of operations and
comprehensive loss for the twelve months ended December 31, 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 $813,299 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 $726,213 which is being amortized over its estimated
useful life of five years. The results of EUnet's operations from
August 1, 1999 to December 31, 1999 have been included in the
accompanying statements of operations and comprehensive loss for the
twelve months ended December 31, 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 $630,234, 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 $607,663 which is being amortized over its estimated
useful life of five years. The results of R-Net's operations from
August 1, 1999 to December 31, 1999 have been included in the
accompanying statements of operations and comprehensive loss for the
twelve months ended December 31, 1999.
The Company acquired in two separate purchases, 70% on September 23,
1999 and 30% on November 16, 1999 all of the outstanding shares of
Global Network Services, a.s., an Internet service provider in the
Slovak Republic for a total cost of $1,633,051, consisting of 355,568
shares of the Company's stock valued at $1.406 per share, 250,000
issued October 1, 1999 and 105,568 shares issued October 18, 1999
and the balance paid in cash. The excess of the Company's cost over
fair value of the assets acquired (goodwill) amounted to
$1,776,532 which is being amortized over its estimated useful life
of five years. The results of SKNET's operations from October 1, 1999
to December 31, 1999 have been included in the accompanying statements
of operations and comprehensive loss for the twelve months ended
December 31, 1999.
F-16
<PAGE>
Euroweb International Corp.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
The following unaudited pro forma information presents the
consolidated results of the Company's operations as if the
acquisitions had occurred on January 1, 1998:
Twelve Months Ended
December 31,
------------------------------
1999 1998
---------- ----------
(unaudited) (unaudited)
Revenues $3,004,720 $2,640,797
Net loss 1,562,269 1,862,416
Net loss per share $ (.17) $ (.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.
(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 contributed $300,000 to Euroweb Rt.'s
capital in 1999, resulting in a gain of $147,000, which is reflected
in the December 31, 1999 financial statements. 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, data bank activity and information technology
activity, (ii) own or control any equity interest in any person or
entity that engages in any such business activity or (iii) permit
any of its employees to act as a director, officer, manager or
consultant to any person or entity that engages in any such business
activity. If the Company breaches its obligation set forth under this
provision, the Company will be required to sell to the other
shareholder all its shares at the time of such breach at a price
equal to nominal value of such shares.
The Company's consolidated statement of operations for the year ended
December 31, 1999 includes the Company's equity in net income of
Euroweb Rt. from January 1 to December 31, 1999.
Operating data for Euroweb Rt.:
Revenues $3,091,486
Expenses 2,533,902
----------
Net income $ 557,584
==========
Company's 49% equity in net income 273,216
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 (189,621)
----------
Equity in net income of Euroweb Rt. $ 83,595
==========
13. 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
F-17
<PAGE>
Euroweb International Corp.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
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 $-0- for the year ended December 31, 1999
and $1,724,000 for the year ended December 31, 1998. The loss from
discontinued operations of $50,858 ($.00 per share) and $119,678
($.02 per share) for the years ended December 31, 1999 and 1998,
respectively, represent losses on disposal.
14. Income Taxes
Components of income taxes are as follows:
1999 1998
------------------------- -------------------------
Current Deferred Total Current Deferred Total
Federal - - - - - -
State and local - - - - - -
Foreign 14,398 - 14,398 - - -
------- ------ ------- ------ ------ ----
Total $14,398 $ - $14,398 $ - $ - $ -
======= ====== ======= ====== ====== ====
The difference between the total expected tax expense (benefit)
(using the statutory rate of 34%) and tax expense for the years ended
December 31, 1999 is accounted for as follows:
1999 1998
----------------- ----------------
Amount % Amount %
--------- ------ -------- ------
Computed expected tax
expense (benefit) $(395,824) (34.00) $186,017 (34.00)
State Taxes Net of Federal Benefit (69,163) (5.94) 32,503 5.94
Amount Attributable to Foreign
Operations 193,945 16.66 88,777 16.22
Permanent Differences (58,712) (5.04) 1,410 0.26
Change in Valuation Allowance 344,141 29.56 (308,707)(56.42)
--------- ----- -------- -----
Total Expenses (benefit) $ 14,398 1.24 $ - -
========= ===== ======== =====
<PAGE>
Euroweb International Corp.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets at December 31, 1999 and 1998 are
as follows:
1999 1998
---------- ----------
Deferred Tax Assets:
Net Operating Loss Carryovers $2,065,480 $1,775,973
Capital Loss Carryovers 1,301,079 1,246,444
---------- ----------
Gross Tax Assets 3,366,559 3,022,417
Valuation Allowance (3,366,559) (3,022,417)
---------- ----------
Net Deferred Tax Asset $ - $ -
========== ==========
The Company has incurred net operating losses from inception. Net
operating loss carryovers will expire in varying amounts if unused as of
the years ended December 31, 2008 - 2019. Capital loss carryovers will
expire if unused as of the years ended December 31, 2002 - 2004. A
valuation allowance has been established due to uncertainty whether the
Company will generate sufficient taxable earnings and capital gains to
utilize the available carryovers. The Tax Reform Act of 1986 contains
provisions which may limit the net operating loss carryforwards available
to be used in any given year if certain events occur, including
significant changes in ownership interests. The Company has not assessed
the impact of these provisions on the availability of Company loss
carryovers.
15. Segment Disclosures
The Company operates in a single industry segment, Internet services.
The Company's operations involve providing access to the Internet, hosting
servers and developing content for web sites. The Company provides its
services in Hungary, the Czech Republic and the Slovak Republic. The
Company's chief operating decision maker monitors the revenue streams by
the various services provided, operations are managed and financial
performance is evaluated based on the delivery of Internet services over
leased telecommunications networks. Substantially all of the Company's
operating assets are located in Eastern Europe and all of its revenues
are generated in Eastern Europe.
Products and Services
The Company groups all of its revenue into one category "Internet and
Related Revenue." This is due to the fact that Access Service, access to
the Internet by either a leased line or through a dial up service,
accounts for 85% of the revenue stream. For the years ended December 31,
1999 and 1998, none of the Company's customers accounted for more than 10%
of the Company's total revenue.
16. Quarterly Financial Data (unaudited)
Basic
Net Income
Net Income (Loss) per
Revenue (Loss) Share
1999
First Quarter $ - $ (62,032) $ (.01)
Second Quarter 71,528 (137,790) (.02)
Third Quarter 418,254 (321,496) (.03)
Fourth Quarter 743,785 (701,748) (.08)
1998
First Quarter $384,900 $ (255,085) $ (.05)
Second Quarter 455,100 (122,019) (.02)
Third Quarter 505,953 (389,358) (.07)
Fourth Quarter 339,292 1,193,986 .22
F-17
<PAGE>
Euroweb International Corp.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
The fourth quarter 1998 revenues are for the period from October 1, to
November 20, 1998, at which time the Company sold a 51% of the operations
of Euroweb Rt. and realized a gain of $1,516,548.
17. Subsequent Events
(a) Change in control of company
On February 11, 2000, a special meeting of the shareholders was held
and two proposals were approved. Proposal number one approved the
amendment of the Company's certificate of incorporation increasing
the number of shares of common stock that is authorized for issuance
by the company from 20,000,000 shares of common stock to 60,000,000
shares of common stock. Proposal number two approved the issuance
and sale by the Company to KPN, Telecom B.V. ("KPN"), a Netherlands
Limited Liability Company, 9,883,340 shares at $1.58 per share and
rights to shares equal to all other outstanding warrants, options
and other securities at $1.38 per share. At closing KPN exercised
its option to purchase 1,516,812 shares at $1.38 per share in
addition to the 9,883,340 shares at $1.58 per share. These
approvals gave KPN control of 51% of the Company's common stock,
representing voting control of the Company.
(b) Acquisitions
On March 1, 2000 the Company purchased 100% of the Internet related
assets of Sumitcom Rokura, S.R.L. an Internet service provider in
Bucharest, Romania, for approximately $780,000, in cash.
On October 19, 1999, the Company entered signed letters of intent to
purchase all of the outstanding stock of Isternet SR s.r.o., an
Internet service provider located in the Slovak Republic for
$1,100,000 in cash. The Company is awaiting clearance from a
Slovakian Antitrust Commission to close on this purchase. All
satisfactory due diligence procedures were completed.
On March 20, 2000, the Company entered signed letters of intent to
purchase 100% of the shares of Mediator S.A., a leading Internet
service provider in Romania, for $3,000,000 in cash. This
acquisition is 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 useful lives.
The Company is currently seeking to acquire other Internet service
providers in Central and Eastern Europe.
F-18
<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 27th day of March 2000.
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, Secretary,
Frank R. Cohen Treasurer (CFO), Director March 27, 2000
/s/Robert Genova President, Chief Executive Officer
Robert Genova (CEO), Director March 27, 2000
/s/Csaba Toro Vice President, International
Csaba Toro Managing Director (COO) of all
European Operations, Director March 27, 2000
