UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
OR
|_| TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________to_________________
COMMISSION FILE NUMBER 001-12000
EUROWEB INTERNATIONAL CORP.
(Name of small business issuer as specified in its charter)
DELAWARE 13-3696015
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1138 BUDAPEST, VACI UT 141. HUNGARY
(Address of principal executive offices)
Issuer's telephone number, including area code: (+36) 1-88-97-101,
Facsimile:(+36)-1-88-97-100
Securities registered under Section 12(g) of the Exchange Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------------- ---------------------
Common Stock, NASDAQ SMALL CAP
par value $.001 per share
Check whether the issuer is not required to file reports pursuant to Section 13
or 15 (d) of the Exchange Act. |_|
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirement for the past 90 days. Yes |X| No |_|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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. |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) Yes |_| No |X|
Issuer had revenues of $1,964,998 for the year ended December 31, 2005. As of
March 24, 2006, 5,843,067 shares of Common Stock were outstanding of which
3,245,556 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 1, 2005
was $11,524,969.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
TABLE OF CONTENTS
PAGE
PART I ........................................................................3
ITEM 1. DESCRIPTION OF BUSINESS...........................................3
Euroweb Strategy...................................................
Entry into ISP and IT Market in Central Europe and
History of Acquisitions...........................................
Products and Services..............................................
Customers..........................................................
Network Operations and Technical Support...........................
Sales and Marketing................................................
Government Regulations.............................................
Employees..........................................................
ITEM 2. DESCRIPTION OF PROPERTIES.........................................9
ITEM 3. LEGAL PROCEEDINGS.................................................9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............10
PART II ......................................................................10
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.............................................10
Market Information...............................................10
Holders of Common Stock..........................................10
Dividends........................................................11
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.......................................11
Operations.......................................................11
Results of Operations............................................16
Year Ended December 31, 2005 compared to Year Ended
December 31, 2004...............................................16
Liquidity and Capital Resources..................................18
Inflation and Foreign Currency...................................19
Effect of Recent Accounting Pronouncements.......................20
Risk Factors.....................................................21
Forward-Looking Statements.......................................24
ITEM 7. FINANCIAL STATEMENTS............................................F-1
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE........................................24
ITEM 8A CONTROLS AND PROCEDURES..........................................25
ITEM 8B OTHER INFORMATION................................................25
-i-
PART III .....................................................................26
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT...............26
ITEM 10. EXECUTIVE COMPENSATION...........................................29
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...34
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................35
PART IV ......................................................................36
ITEM 13. EXHIBITS.........................................................36
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES...........................37
-ii-
PART I
ITEM 1. DESCRIPTION OF BUSINESS
HISTORY OF BUSINESS
Euroweb International Corp. ("Euroweb") is a Delaware corporation and was
organized on November 9, 1992. It was a development stage company through
December 1993. In 1997, Euroweb entered the Internet field in Hungary and has
started to grow through various acquisitions not only in Hungary, but also in
the Czech Republic, Slovakia and Romania. Euroweb and its subsidiaries are
collectively referred to herein as the "Company".
In December 2004, Euroweb disposed its 100% interest in its subsidiary in
Czech Republic and in April 2005 also sold its 100% interest in its subsidiary
in Slovakia. At that time, the Company was focusing on maintaining and growing
its remaining operations in Hungary and Romania.
In October 2005, the Company stepped into the information technology
("IT") sector by acquiring 100% ownership of Navigator Informatika Rt.
(,,Navigator"), a Hungary-based provider of IT outsourcing, applications
development, and IT consulting services.
On December 19, 2005, the Company has entered into a definitive Share
Purchase agreement for the sale of its two Internet- and Telecom-related
operating subsidiaries, Euroweb Internet Szolgaltato Rt. ("Euroweb Hungary") and
Euroweb Romania S.A. ("Euroweb Romania"). These two Subsidiaries are classified
as discontinued operations in the financial statements of the Company.
KPN Telecom BV ("KPN") owned approximately 43.54% of the outstanding
shares of common stock of Euroweb as of December 31, 2004. On January 28, 2005,
KPN entered into a Stock Purchase Agreement whereby it sold to CORCYRA d.o.o., a
Croatian company ("CORCYRA"), 289,855 shares of Euroweb common stock for US
$1,000,000 on February 1, 2005 and has also agreed to sell its remaining
2,036,188 shares of Euroweb common stock on or prior to April 30, 2006. As of
December 31, 2005, KPN owned 35.20% of the outstanding shares of common stock of
Euroweb.
EUROWEB STRATEGY
The Company's business has shown continued revenue growth (taking into
account revenue from continuing and discontined operations) since it entered the
Internet field in January 1997. The Company commenced a consolidation strategy
in various Central and Eastern European countries as follows:
o In Hungary the Company acquired three Internet and telecommunications
companies in 1997 that were eventually consolidated and named Euroweb
Internet Szolgaltato Rt. The Company acquired Freestart Kft ("Freestart")
in 2003 and Elender Rt. "Elender") in 2004, which were subsequently merged
with Euroweb Hungary. The Company also acquired Navigator Informatika Rt.
in Hungary in 2005;
3
o In Romania, the Company acquired two Internet and telecommunications
companies in 2000 that were eventually consolidated and named Euroweb
Romania;
o In Slovakia the Company acquired four Internet and telecommunications
companies from 1999 to 2000, that were eventually consolidated and named
Euroweb Slovakia; and
o In the Czech Republic the Company acquired two Internet and
telecommunications companies during 1999 and 2000 that were eventually
consolidated and named Euroweb Czech Republic.
This active and successful merger and acquisition approach, which was
implemented over the last few years, is discussed in detail under the heading
History of Acquisitions and Dispositions, below.
In 2004, management recognized that the leased line market for an Internet
service provider ("ISP") has a limited ability to generate profit. The
expectation that the Company's core Internet business is likely to become more
and more difficult to grow without its own infrastructure led Euroweb to decide
to move into a new and fresh market.
In 2004, the Company commenced this strategy with the sale of its Internet
service assets located in the Czech Republic and Slovakia. The disposition of
Euroweb Hungary and Romania, which are engaged in the business of providing
Internet service in Hungary and Romania, respectively, will be the culmination
of the Company's decision to move out of its Internet service market. The
Company expects to close the sale of Euroweb Hungary and Romania during the
second quarter of 2006 however it cannot provide any guarantees that such sale
will close.
The acquisition of Navigator was a key element in redirecting Euroweb into
new markets. The closing of the sale of Euroweb Hungary and Euroweb Romania will
allow the Company to redeploy capital to acquire additional assets in IT space
and other unidentified industries that the Company deems profitable, as well as
focus its expertise in the area of IT outsourcing in Central and Eastern Europe.
If the opportunity presents itself, the Company will consider implementing its
consolidation strategy with its remaining subsidiary and any other business that
it enters. However, the Company does not presently have any plans, proposals or
arrangements to redeploy its capital or engage in any specific acquisitions. The
Company has not yet identified any additional specific industries in which to
invest.
Rather than servicing individual users, the Company focuses its efforts on
business users and seeks to satisfy their IT outsource service needs with high
quality and reliable service. In addition to Central Europe, the Company seeks
opportunities in the United States, provided that they consist of certain
parameters, which are deemed to be potentially lucrative for the Company.
HISTORY OF ACQUISITIONS AND DISPOSITIONS
Euroweb entered the ISP market in Central Europe through various
acquisitions of companies in that area over the past eight years. In 2005, the
scope of activity was changed by the acquisition of Navigator, which is active
in the IT services industry and the decision to sell the Company's operations in
the ISP market.
4
Hungary
On January 2, 1997, the Euroweb acquired all of the outstanding stock of
three Hungarian ISPs for a total purchase price of approximately $1,785,000,
consisting of 28,800 shares of common stock of the Company and $1,425,000 in
cash (collectively, the "1997 Acquisitions"). The 1997 Acquisitions included the
following:
o Eunet (Hungary Ltd.) for a total cash cost of $1,000,000, and an
assumption of $128,000 in liabilities;
o E-Net Hungary Telecommunications and Multimedia for a total cash cost of
$200,000 and $150,000 in stock (12,000 shares); and
o MS Telecom Rt. for a total cash cost of $225,000 and $210,000 in stock
(16,800 shares).
Thereafter in 1997, the three Hungarian companies were combined and merged
into a new Hungarian entity, Euroweb Hungary. On November 22, 1998, the Company
sold 51% of the outstanding shares of Euroweb Hungary to Pantel Rt. ("Pantel")
for $2,200,000 in cash and an agreement to increase the share capital of Euroweb
Hungary by $300,000 without changing the ownership ratio. In February 2004, the
Company acquired the 51% of Euroweb Hungary that it had sold to Pantel. Euroweb
Hungary is presented as a discontinued operation in the financial statements for
all periods presented due to the proposed sale of Euroweb Hungary to Invitel
Tavkozlesi Szolgaltato Rt. ("Invitel") . The consideration paid by the Company
for the 51% interest comprised EUR 1,650,000 ($2,105,000) in cash and a
guarantee that Euroweb Hungary will purchase at least HUF 600 million
(approximately $3,000,000) worth of services from Pantel Rt. in each of the
three years ending December 31, 2006. In each of 2003 and 2004, Euroweb Hungary
and subsidiaries purchased in excess of HUF 700 million (approximately
$3,500,000) in services from Pantel. In the event that Euroweb Hungary and its
subsidiaries do not satisfy this commitment, Pantel may charge a penalty equal
to 25% of the commitment amount less any services purchased.
On June 9, 2004, the Company acquired all of the outstanding shares of
Elender, an ISP located in Hungary that provides internet access to the
corporate and institutional (public) sector and, amongst others, 2,300 schools
in Hungary. Consideration paid of $9,350,005 consisted of $6,500,000 in cash and
677,201 of the Company's shares of common stock, valued at $2,508,353 excluding
registration cost, and $391,897 in transaction costs (consisting primarily of
professional fees incurred related to attorneys, accountants and valuation
advisors).
Under the terms of this agreement, the Company has placed 248,111
unregistered shares of newly issued (in the name of the Company) common stock
with an escrow agent as security for approximately $1.5 million loans payable to
former shareholders of Elender. The shares will be returned to the Company from
escrow once the outstanding loans have been fully repaid. However, if there is a
default on the outstanding loan, then the shares will be issued to the other
party and the Company is then obliged to register the shares. As of December 31,
2005, the Company had repaid all of the loans that were outstanding. In January
2006, the Company acquired and subsequently cancelled the shares that were put
into escrow.
On October 7, 2005, the Company acquired all of the outstanding shares of
Navigator, a Hungary-based provider of IT outsourcing, applications development
and IT consulting services. Consideration paid of $10,760,772 consisted of
$8,500,000 in cash and 441,566 shares of Euroweb common stock valued at
$1,752,134 excluding registration cost, and $508,638 in transaction costs
(consisting primarily of professional fees incurred related to attorneys,
accountants and valuation advisors).
5
On December 19, 2005, Euroweb entered into a share purchase agreement with
Invitel for the sale of Euroweb Hungary and Euroweb Romania. The purchase price
for the subsidiaries specified in the share purchase agreement is $30,000,000.
98% of the purchase price, or $29,400,000, is payable at closing and the
remaining 2% is payable upon delivery of a certificate prepared by an
independent auditor identifying the net indebtedness of the two subsidiaries,
which are required to be debt free. As part of the closing, $6,000,000 from the
cash proceeds will be paid by Euroweb International to Euroweb Hungary in
exchange for the 85% ownership of Navigator currently held by Euroweb Hungary.
This amount will be used by Euroweb Hungary for repayment of $6,000,000 bank
loan obtained for the acquisition of Navigator. The closing of the sale of
Euroweb Hungary and Euroweb Romania is subject to approval of the competition
office in Hungary, the buy-out of 85% ownership of Navigator from Euroweb
Hungary by Euroweb International Corporation and approval of the shareholders of
Euroweb. Euroweb Hungary and Euroweb Romania are classified as discontinued
operations for all periods presented in the financial statements of the Company.
Romania
On May 19, 2000, the Company purchased all of the Internet related assets
of Sumitkom Rokura, S.R.L. an ISP in Romania, for $1,561,125 in cash. The
acquisition has been accounted for as an asset purchase with a value of
$1,150,000 being assigned to customer lists acquired.
On June 14, 2000, the Company acquired all of the outstanding shares of
capital stock of Mediator S.A., an ISP in Romania for $2,040,000 in cash and the
assumption of a $540,000 liability to the former owner payable in annual
installments of $180,000 commencing on June 1, 2001. Goodwill arising on this
purchase was $2,455,223. Immediately after the purchase, the name of this
company was changed to Euroweb Romania. This acquisition was effective as of
July 1, 2000.
Czech Republic
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,
including 90,000 shares of the Company's common stock and 50,000 options valued
at $2.00 per share; the balance paid in cash. This acquisition was effective as
of June 1, 1999.
On August 25, 2000, the Company, through its subsidiary, Luko Czech,
acquired all of the outstanding capital stock of Stand s.r.o., an ISP in the
Czech Republic, for $280,735 in cash. Stand s.r.o. was merged into Luko Czech
under the name of Euroweb Czech Republic. This acquisition was effective as of
September 1, 2000.
On December 16, 2004, the Company sold all of its shares in its
wholly-owned subsidiary, Euroweb Czech for cash of $500,000. Additionally, as a
part of the transaction, the Company forgave $400,000 of loans receivable from
Euroweb Czech.
6
Slovakia
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 including 47,408 shares of the Company's common stock valued at
$400,005 issued August 9, 1999; the balance was paid in cash. This acquisition
was effective as of August 1, 1999.
The Company made another acquisition of a Slovak ISP on July 15, 1999 with
the purchase of 70% of the outstanding shares of Dodo s.r.o.'s subsidiary,
R-Net, for a total cost of $630,234, including 29,091 shares of the Company's
common stock valued at $200,000 issued August 13, 1999; the balance was paid in
cash. This acquisition was effective as of August 1, 1999.
On September 23, 1999 and November 16, 1999, the Company acquired from
Slavia Capital o.c.p., a.s. 70% and 30%, respectively, 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 $1,633,051,
including 71,114 shares of the Company's common stock valued at $499,929 issued
on September 23, 1999; the balance was paid in cash. The acquisition of 70% of
Global Network Services a.s.c. was effective as of October 1, 1999.
On April 21, 2000, the Company acquired all of the outstanding capital
stock of Isternet SR, s.r.o., an ISP in the Slovak Republic, for $1,029,299 in
cash. Goodwill arising on this purchase was $945,200. This acquisition was
effective May 1, 2000.
On May 22, 2000, the Company acquired the remaining 30% of R-Net (the
initial 70% being acquired in 1999) for $355,810 in cash. Goodwill arising on
this purchase was $357,565.
All of the Company's Slovakian operations were then merged into one
company under the name of Euroweb Slovakia. On April 15, 2005, Euroweb sold 100%
of its interest in its wholly-owned subsidiary Euroweb Slovakia to DanubiaTel
a.s. The purchase price was $2,700,000.
Euroweb Czech Republic, Euroweb Hungary, Euroweb Slovakia and Euroweb
Romania are classified as discontinued operations in the Company's financial
statements for all periods presented.
Stock issued to KPN Telecom B.V.
On February 11, 2000, a special meeting of the Company's shareholders
approved the issuance and sale by the Company to KPN, of 2,057,348 shares at
$7.90 per share and rights to shares equal to all other outstanding warrants,
options and other securities at $6.90 per share. At closing, KPN exercised its
option to purchase 303,362 shares at $6.90 per share in addition to the
2,057,348 shares at $7.90 per share. These transactions gave KPN control of 51%
of the Company's common stock and therefore, voting control, of the Company.
This transaction provided the Company with more than $18,000,000 in capital to
fund future acquisitions.
PRODUCTS AND SERVICES
Since Euroweb Hungary and Euroweb Romania are presented as discontinued
operations, these Internet- and telecom- related activities are not included in
the discussion below.
7
Navigator operates through its wholly owned subsidiaries, Navigator Info
Kft. and Navigator Engineering Kft. and is engaged in information technology
outsourcing, applications development and information technology consulting
services, primarily in the Hungarian market. Navigator's client base includes
primarily large organizations both in the corporate and institutional (public)
sector.
The revenues of Navigator are generated from recurring services, from
project-based one-time services and from the sale of IT devices. Navigator
provides IT services in the following fields, according to client demands:
o Full service IT System operation (alias: Complete IT outsourcing),
comprising full service support and maintenance with a cost-effective and
competitive service desk system, call center, hotline support and remote
troubleshooting
o IT system implementation and IT project management, including:
consultancy, system design, development and implementation and training;
and
o Sale of IT devices
CUSTOMERS
The Company, through its Navigator subsidiary, serves more than 3,500
users, close to 100 companies, government institutes, mid-sized and large
corporations. The customers are local and national businesses and professionals,
including telecommunication carriers and multinational corporations. However,
27% of the consolidated sales revenue of $1,964,998 in the period from October
7, 2005 to December 31, 2005 is derived from one customer, which was a former
owner of Navigator. 83% of the consolidated sales revenue for the period October
7, 2005 to December 31, 2005 was generated from the four most significant
customers of the Company.
ORGANIZATION
Project management
Navigator employs approximately five people in project management, who are
mainly responsible for bid-management and operations service management
activities. Their main task involves creating business offers and interaction
with IT System operation departments within the Company.
Operations and maintenance
Navigator employs approximately 50 people in operations and maintenance,
who are mainly responsible for client and servers support activities. Their main
task involves full service client support, server hosting and close interaction
with bid-management departments within the company.
Sales and Marketing
Navigator employs approximately three people in sales and one person in
marketing. To date, Navigator has sold its IT oursource products and services
primarily through direct personal and telephone contact. The sales force works
closely with the bid-management group, which is responsible for installations at
multiple sites, support and technical consulting services.
8
EMPLOYEES
The Company employs a total of 85 employees, who are full-time employees as of
December 31, 2005. The Company's employees are not represented by any labor
organization.
GOVERNMENT REGULATIONS
Euroweb is not currently subject to direct government regulation other than laws
and regulations applicable to businesses generally. There are specific industry
laws that may apply to the local subsidiaries in the field of IT services.
However, it is likely that new laws and regulations involving the provision of
IT outsourcing and consultancy services 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 and information
security.
ITEM 2. DESCRIPTION OF PROPERTIES
The following table lists the office space that the Company leases from
unaffiliated persons:
Rent
Amount/
Lessee Address of Property Primary Use Sq. feet Month Lease Terms
--------------- -------------------------- --------------------- -------- ---------- -------------
Navigator 1095 Budapest, Mariassy General operation 15,140 EUR 18,500 5 years
Informatika Rt. utca 5-7. Hungary from
December
15, 2005
non-
cancelable
Euroweb Hungary Vaci ut 141. stockholder relations, 18,000 EUR 27,000 December
H-1138 general executive, 31, 2008
Budapest, Hungary general operation non-
cancelable
Euroweb Romania Lipscani 102 Street, 3rd general operations 4,951 $9,300 April 15,
Floor, NOUVEAU CENTER, 2006
Sector 3 Bucharest,
Romania 4 months
notice
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are a party to litigation or other legal proceedings
that we consider to be a part of the ordinary course of our business. We are not
involved currently in legal proceedings that could reasonably be expected to
have a material adverse effect on our business, prospects, financial condition
or results of operations. We may become involved in material legal proceedings
in the future.
9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
through the solicitation of proxies or otherwise, during the last quarter of the
fiscal year ended December 31, 2005.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's common stock is traded on the Nasdaq SmallCap Market
("Nasdaq") under the symbol "EWEB".
The following table sets forth the high and low bid prices for the
Company's common stock during the periods indicated as reported by Nasdaq.
HIGH ($) LOW ($)
-------- -------
QUARTER ENDING:
2004
March 31, 2004 7.45 3.70
June 30, 2004 6.20 3.25
September 30, 2004 3.74 2.13
December 31, 2004 5.56 2.40
2005
March 31, 2005 4.03 2.93
June 30, 2005 4.89 2.81
September 30, 2005 4.73 2.97
December 31, 2005 4.52 3.10
On March 24, 2006 the closing bid price on the Nasdaq for the Company's
common stock was $3.36.
HOLDERS OF COMMON STOCK
As of March 24, 2006, the Company had 5,843,067 shares of common stock
outstanding and 104 shareholders of record. The Company was advised by its
transfer agent, the American Stock Transfer & Trust Company, that according to a
search made, the Company has approximately 6,153 beneficial owners who hold
their shares in street names.
10
DIVIDENDS
It has been the policy of the Company to retain earnings, if any, to
finance the development and growth of its business.
EQUITY COMPENSATION PLANS
Number of shares Weighted-average Number of shares
to be issued upon exercise price remaining available
exercise of of outstanding for future issuance
outstanding options options and under equity
Plan Category and warrants warrants compensation plans
------------------ ------------------- ---------------- --------------------
Approved by 605,000 $4.20 195,000
security holders
Not approved by
security holders 183,330 $4.13 -
------------------ ------------------- ---------------- --------------------
Total 788,330 $4.18 195,000
================== =================== ================ ====================
The equity compensation plans are discussed in Note 14 of the 2005
Consolidated Financial Statements.
SALE OF SECURITIES THAT WERE NOT REGISTERED UNDER THE SECURITIES ACT OF 1933
The Company did not sell any securities that were not registered under the
Securities Act of 1933 during the year ended December 31, 2005 that have not
been previously included in a Quarterly Report on Form 10-QSB or a Current
Report on Form 8-K.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company operates in Hungary and Romania, through its subsidiaries
Euroweb Hungary, Navigator and Euroweb Romania. Euroweb Hungary and Euroweb
Romania are currently held for sale and are classified as discontinued
operations for all periods presented in the Company's financial statements.
On December 16, 2004, the Company disposed of Euroweb Czech Republic for
$500,000 and no longer has operations in the Czech Republic. On April 15, 2005,
the Company disposed of Euroweb Slovakia for cash of $2,700,000 and, as a
result, has ceased operations in Slovakia.
On December 15, 2005, the Board of Directors of the Company decided to
sell 100% of its interest in Euroweb Hungary and Euroweb Romania. On December
19, 2005, the Company entered into a share purchase agreement with Invitel, a
Hungarian joint stock company, to sell 100% of the Company's interest in Euroweb
Hungary and Euroweb Romania, subject to various conditions including, but not
limited, to shareholders' approval.
11
The Company believes that the sale of Euroweb Czech and Euroweb Slovakia
and the proposed sale of Euroweb Hungary and Euroweb Romania meet the criteria
for presentation as discontinued operations under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets.", Therefore Euroweb Czech, Euroweb Slovakia,
Euroweb Hungary and Euroweb Romania are reclassified as discontinued operations
in the financial statements of the Company for all periods presented.
Through its subsidiary Navigator, the Company provides a full range of
information technology outsourcing services. The IT outsourcing services
provided by the Company primarily comprise IT maintenance, procurement,
consultancy and related services.
The Company's revenues come from the following three sources:
o Full service IT System operation (alias: Complete IT outsourcing),
comprising full service support and maintenance with a cost-effective and
competitive service desk system, call center, hotline support and remote
troubleshooting
o IT system implementation and IT project management, including:
consultancy, system design, development and implementation and training
o Sale of IT devices
ACQUISITIONS AND DISPOSALS
(a) Acquisition of Navigator
On October 7, 2005, the Company acquired all of the outstanding shares of
Navigator, an IT outsource service provider located in Hungary. Consideration
paid of $10,760,772 consisted of $8,500,000 in cash and 441,566 of the Company's
common shares valued at $1,752,134 excluding registration cost, and $508,638 in
transaction costs (consisting primarily of professional fees incurred related to
attorneys, accountants and valuation advisors). The results of Navigator have
been included in the Company's consolidated financial statements from the date
of acquisition.
In accordance with the purchase method of accounting prescribed by SFAS
No. 141 "Business Combinations", the Company allocated the consideration to the
tangible net assets and liabilities and intangible assets acquired, based on
their estimated fair values. The consideration has been allocated as follows:
Fair value of Navigator's recorded assets acquired and
liabilities assumed $ (325,055)
Identified intangibles - customer contracts 3,494,231
Deferred tax liabilities (559,076)
Excess purchase price over allocation to identifiable
assets and liabilities (Goodwill) 8,150,672
-------------
Total consideration $ 10,760,772
============
12
In performing this purchase price allocation of acquired intangible
assets, the Company considered its intention for future use of the assets,
analyses of historical financial performance and estimates of future performance
of Navigator's services, among other factors. Acquired identifiable intangible
assets obtained in the Company's acquisition of Navigator relate to customer
contracts which are being amortized over estimated useful lives of 1-4 years.
The excess of the purchase price over the fair value of the identifiable
tangible and intangible net assets acquired was assigned to goodwill. In
accordance with SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS
142"), goodwill will not be amortized but will be tested for impairment at least
annually.
Although the former owners of Navigator received shares of common stock of
the Company, each of the former owners of Navigator currently holds less than
10% of the outstanding shares of common stock in the Company. Therefore, they
are not considered related parties and those transactions are shown as third
party transactions in the accompanying consolidated financial statements of the
Company.
(b) Disposal of Euroweb Slovakia
On April 15, 2005, the Company disposed of Euroweb Slovakia a.s. ("Euroweb
Slovakia") for cash of $2,700,000 and, as a result, has ceased operations in
Slovakia.
CRITICAL ACCOUNTING ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements that have been
prepared in accordance with generally accepted accounting principles in the
United States of America ("US GAAP"). This preparation requires management to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and the disclosure of contingent assets and
liabilities. US GAAP provides the framework from which to make these estimates,
assumptions and disclosures. We choose accounting policies within US GAAP that
management believes are appropriate to accurately and fairly report our
operating results and financial position in a consistent manner. Management
regularly assesses these policies in light of current and forecasted economic
conditions. Although we believe that our estimates, assumptions and judgments
are reasonable, they are based upon information presently available. Actual
results may differ significantly from these estimates under different
assumptions, judgments or conditions for a number of reasons. Our accounting
policies are stated in Note 2 to the 2005 Consolidated Financial Statements. We
identified the following accounting policies as critical to understanding the
results of operations and representative of the more significant judgments and
estimates used in the preparation of the consolidated financial statements:
impairment of goodwill, allowance for doubtful accounts, acquisition related
assets and liabilities, accounting of income taxes.
Impairment of goodwill and other intangible assets: SFAS No. 142 requires
that goodwill and intangible assets with indefinite useful lives are not to be
amortized, but instead tested for impairment at least annually and at other
times when facts or circumstances indicate that the recorded amount of goodwill
may be impaired. If this review indicates that goodwill is not recoverable, the
Company's carrying value of the goodwill is reduced by the estimated shortfall.
The Company has compared the carrying value of Navigator with the estimated fair
value of the business operations and determined that goodwill recorded as of
October 7, 2005 was not impaired. We cannot assure that there will be no future
events or changes in cash flow estimates or other circumstance, which may
significantly change the carrying value of goodwill.
13
Allowance for Doubtful Accounts: We make judgments as to our ability to
collect outstanding accounts receivable and provide an allowance for a portion
of our accounts receivable when collection becomes doubtful. We also make
judgments about the creditworthiness of customers based on ongoing credit
evaluations and the aging profile of customer accounts receivable and assess
current economic trends that might impact the level of credit losses in the
future. Historically, our allowance for doubtful accounts has been sufficient to
cover our actual credit losses. However, since we cannot predict changes in the
financial stability of our customers, we cannot guarantee that our allowance
will continue to be sufficient. If actual credit losses are significantly
greater than the allowance that we have established, this would increase our
operating expenses and our reported net loss. To the extent the Company
establishes a valuation allowance or increases this allowance in a period, the
impact will be included in the tax provision in the statement of operations. So
far, we have not experienced material differences in credit losses comparing to
allowances. An increase of the valuation allowance by 1% of the outstanding
receivable as of December 31, 2005 would result in a $17,403 reduction of the
Company's net income for the year then ended.
Acquisition Related Assets and Liabilities: Accounting for the acquisition
of a business as a purchase transaction requires an allocation of the purchase
price to the assets acquired and the liabilities assumed in the transaction at
their respective estimated fair values. The most difficult estimations of
individual fair values are those involving intangible assets. We use all
available information to make these fair value determinations and, for major
business acquisitions, engage an independent valuation specialist to assist in
the fair value determination of the acquired long-lived assets. Due to inherent
subjectivity in determining the estimated fair value of long-lived assets in
business acquisitions that we have completed, we believe that the recording of
acquired assets and liabilities is a critical accounting policy. Any decrease in
useful life of the assets or necessary impairment may result reduction of
Company's result through higher amount of amortization, depreciation of assets
or impairment charge. The maximum exposure of such an effect is $3,132,300,
which is the net value of those assets as of December 31, 2005
Accounting for Income Taxes: We recognize deferred tax assets and
liabilities for the expected future tax consequences of transactions and events.
Under this method, deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. If necessary, deferred tax assets are
reduced by a valuation allowance to an amount that is determined to be more
likely than not recoverable. We must make significant estimates and assumptions
about future taxable income and future tax consequences when determining the
amount of the valuation allowance. In addition, tax reserves are based on
significant estimates and assumptions as to the relative filing positions and
potential audit and litigation exposures related thereto. To the extent the
Company establishes a valuation allowance or increases this allowance in a
period, the impact will be included in the tax provision in the statement of
operations.
14
COMMITMENTS AND CONTINGENCIES
The Company's subsidiaries have entered into various capital leases for
vehicles and internet equipment, as well as non-cancelable operational
agreements for office premises.
On April 6, 2005, Navigator entered into a long-term loan agreement with
Commerzbank Bank Rt (the "Bank") for HUF 201,250,000 (approximately $942,270
using December 31, 2005 exchange rate), with an interest rate of three month
BUBOR +2.5%. Approximately $740,354 was outstanding at December 31, 2005. The
loan is repayable in 14 quarterly instalments of HUF 14,375,000 (approximately
$67,300) plus quarterly interest starting on May 31, 2005. The shares of
Navigator were pledged as collateral for this loan, as well as a general lien
established on all of the assets of the Company.
In addition to the long-term loan agreement, Navigator also entered into
an overdraft facility for unlimited period of time with 30 days termination
period with the Bank for HUF 130,000,000 (approximately $608,671) on July 20,
2005. Approximately $325,409 was outstanding at December 31, 2005
Additionally, on September 1, 2005, Navigator entered into a two-month
loan facility agreement with the Bank for approximately $140,462 (HUF
30,000,000) to fund working capital. The Company did not utilize these funds
under this agreement as of December 31, 2005. The contract was extended to March
31, 2006.
The Company entered into a six-year agreement with its Chief Executive
Officer and Director, Csaba Toro on October 18, 1999, which commenced January 1,
2000, and provided for an annual compensation of $96,000. The agreement was
amended in 2004 and 2005. The amended agreement provides for an annual salary of
$200,000 and a bonus of up to $150,000 in 2005, and an annual salary of $200,000
and a bonus of up to $150,000 in 2006, 2007 and 2008, as well as an annual car
allowance of $30,000 for the same period.
The Company has entered into a two-year employment agreement with Moshe
Schnapp as President and Director of the Company starting from April 15, 2005,
which grants an annual compensation of $250,000 to be paid in the form of
Euroweb shares of common stock. The number of shares to be received by Mr.
Schnapp is calculated based on the average closing price 10 days prior to the
commencement of each employment year. For the year ended April 14, 2006, Mr.
Schnapp will receive 82,781 Euroweb shares of common stock.
In February 2004, the Company purchased the remaining 51% of Euroweb
Hungary from Pantel. The consideration paid by the Company for the 51% interest
consisted of EUR 1,650,000 ($2,105,000) in cash, and a purchase commitment that
Euroweb Hungary will purchase at least HUF 600 million (approximately $3
million) worth of services from Pantel in each year from 2004 to 2006. In the
event that Euroweb Hungary and its subsidiaries do not satisfy this commitment,
Pantel may charge a penalty equal to 25% of the commitment amount less any
services purchased. Purchases in 2004 and 2005 exceeded this amount. From the
date of acquisition of Euroweb Hungary by Invitel, any claim arising from this
commitment will be payable by Invitel.
15
The following table summarizes the commitments described above:
After
Contractual Cash Obligations 2006 2007 2008 2009 2009
----------------------------------- ---------- -------- -------- -------- --------
Capital leases $ 24,675 - - - -
----------------------------------- ---------- -------- -------- -------- --------
Operational leases $ 278,408 $278,408 $278,408 $278,408 $266,807
----------------------------------- ---------- -------- -------- -------- --------
Employment agreements (1) $ 200,000 $200,000 $200,000 - -
----------------------------------- ---------- -------- -------- -------- --------
Purchase commitment $3,000,000 - - - -
----------------------------------- ---------- -------- -------- -------- --------
Bank overdraft $ 325,409 - - - -
----------------------------------- ---------- -------- -------- -------- --------
Bank loan payable $ 269,220 $269,220 $201,914 - -
----------------------------------- ---------- -------- -------- -------- --------
Total Contractual Cash Obligations $4,097,712 $747,628 $680,322 $278,408 $266,807
----------------------------------- ---------- -------- -------- -------- --------
(1) Csaba Toro's (CEO) yearly base salary without bonus
On or before the date of closing of the sale of Euroweb Hungary and
Euroweb Romania to Invitel, Euroweb International will purchase 85% ownership of
Navigator representing a purchase obligation in a value of $6,000,000 in cash.
At the date of closing at the latest, Euroweb Hungary has to settle all of its
bank loans including the $6,000,000 Commerzbank loan obtained for the
acquisition of Navigator.
Due to the Company's strategy of aggressive acquisition, the Company may
seek to incur additional material debts, which are not reflected in the table
above.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004
Due to the acquisition of Navigator Informatika Rt. on October 7, 2005 and
the discontinued operation presentation of Euroweb Hungary, Euroweb Romania,
Euroweb Slovakia and Euroweb Czech, the profit and loss statements for the year
ended December 31, 2005 and 2004 are not comparable. The financial figures for
2004 only show the corporate expenses of the Company's legal entity registered
in the State of Delaware, while Navigator is only consolidated from October 7,
2005.
Year ended December 31, 2005 2004
----------- ---------
Total Revenues $ 1,964,998 $ 0
The revenue increase reflects the consolidation of Navigator from October
7, 2005.
Cost of revenues (excluding depreciation and amortization)
The following table summarizes our cost of revenues (excluding
depreciation and amortization) for the year ended December 31, 2005 and 2004:
Year ended December 31, 2005 2004
----------- ---------
Total cost of revenues $ 511,658 $ 0
16
Cost of revenues (excluding depreciation and amortization) principally
comprises cost of fixed assets sold during the course of IT outsourcing
projects, cost of materials required to perform IT outsourcing activities and
cost of project-dedicated sub-contractors consolidated from October 7, 2005.
Compensation and related costs
The following table summarizes our compensation and related costs for the
year ended December 31, 2005 and 2004:
Year ended December 31, 2005 2004
----------- ---------
Compensation and related costs $ 1,054,342 $ 361,809
Overall compensation and related costs increased by 291% (approximately
$693,000) due mainly to the following factors: increase due to acquisition of
Navigator in October 2005 (estimated at approximately $495,000) and compensation
for the new president.
Consulting, director and professional fees
The following table summarizes our consulting and professional fees for
the year ended December 31, 2005 and 2004:
Year ended December 31, 2005 2004
----------- ---------
Consulting, director and professional fees $ 1,396,096 $ 463,549
Overall consulting, director and professional fees increased by 301%
(approximately $933,000) due mainly to the following factors: increase due to
acquisition of Navigator in October 2005 (estimated at approximately $384,000)
and the remaining increase of $549,000 is due to increased cost of several
consultants, investment bankers, advisors, accounting and lawyers fee in
relation with the acquisition and disposal activity of the company during the
year as well as compensation charge of warrants issued during 2005.
Other selling, general and administrative expenses
The following table summarizes our other selling, general and
administrative expenses for the year ended December 31, 2005 and 2004:
Year ended December 31, 2005 2004
----------- ---------
Other selling, general and administrative expenses $ 703,770 $ 454,514
Overall other selling, general and administrative expenses increased by
155% (approximately $249,000) mainly due to the acquisition of Navigator in
October 2005.
Depreciation and amortization
The following table summarizes our depreciation and amortization for the
year ended December 31, 2005 and 2004:
Year ended December 31, 2005 2004
----------- ---------
Depreciation $ 147,547 $ 2,048
Amortization of intangibles $ 361,931 -
Total depreciation and amortization $ 509,478 $ 2,048
17
Depreciation has increased by $147,547 in the year ended December 31, 2005
compared to the same period in 2004. The increase can be attributed exclusively
to the acquisition of Navigator.
Amortization of intangibles of $361,931 in 2005 relates to certain
customer contracts of Navigator, which were recognized as intangible assets upon
acquisition.
Net interest income
The following table summarizes our net interest income for the year ended
December 31, 2005 and 2004:
Year ended December 31, 2005 2004
----------- ---------
Interest income $ 2,512 $ 49,154
Interest expense $ (38,240) -
Net interest (expense) income $ (35,728) $ 49,154
The decrease in net interest income is due to the fact that (i) less
interest-generating funds were available in this period than in the same period
of the previous year because funds were disbursed in connection with acquisition
of Navigator in 2005 (ii) the effective interest rate on these investments has
decreased over the periods in question (iii) securities expired on February 15,
2004, without new investments being made due to cash being needed to fund
acquisitions in 2004, and (iv) consolidation of Navigator and the loan liability
of Navigator has increased interest expense by more than $38,000 due to loans
outstanding, and consequently have reduced net interest income.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2005, our cash, cash equivalents and marketable
securities were approximately $1.6 million, a decrease of approximately $0.8
million from the end of fiscal year 2004. Despite of increased cash flow from
operations and sale of Euroweb Slovakia in 2005, the acquisition of Navigator,
increased capital expenditures of subsidiaries and the repayment of notes
payable and bank loans contributed mainly to the decrease of cash in 2005.
Cash flow from operations in fiscal 2005 was $4.2 million, an increase of
53% from fiscal 2004. The change is due to the increased profitability and cash
flow generation ability of Euroweb Hungary and Euroweb Romania.
Cash used in investing activities in 2005 was $8.9 million due to the
following three factors: (i) positive effect of sale of Euroweb Slovakia - $2.7
million (ii) acquisition of Navigator - $9, million and (iii) capital
expenditures - $2.6 million. In 2004, net cash provided by investing activities
was $1.4 million despite the acquisition of Elender and 51% of Euroweb Hungary
for altogether $9 million and capital expenditure of $1.7 million primary due to
the over $11 million in cash invested into US Government Securities, which
matured in February 2004 and originated from capital injections by KPN in
previous years.
18
Cash provided by financing activities in 2005 was approximately $4
million. From this amount is $4.2 million from discontinued operations
consisting of $6 million loan received from Commerzbank to acquire Navigator
offset by $1.8 million for repayment of bank and Pantel loans, notes and
principal payments under capital leases. The remaining $0.2 million cash used is
in connection with Navigator loan repayments and payments under capital lease
obligations of continued operation. In 2004, all of the Company's cash used in
financing activities related to discontinued operations, comprising $2.2 million
for repayment of bank and Pantel loans, notes and principal payments under
capital leases in connection with Euroweb Hungary and Euroweb Romania.
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 if the Company
completes the sale of Euroweb Hungary and Euroweb Romania. Unsuccessful
disposition of these or one of the subsidiries and an associated potential
penalty of EUR 400,000 may lead to liquidity difficulties without further
capital raising or additional indebtedness.
In the event the Company makes future acquisitions in Central and Eastern
Europe, the excess cash on hand, additional bank loans or fund raising may be
used to finance such future acquisitions. The Company may consider the sale of
non-strategic assets or subsidiaries.
INFLATION AND FOREIGN CURRENCY
The Company maintains its books in local currencies: Hungarian Forint for
Hungary and the Romanian Lei for Euroweb Romania.
The Company's operations are primary outside of the United States through
its wholly owned subsidiaries. As a result, fluctuations in currency exchange
rates may significantly affect the Company's sales, profitability and financial
position when the foreign currencies, primarily the Hungarian Forint, of its
international operations are translated into U.S. dollars for financial
reporting. In additional, we are also subject to currency fluctuation risk with
respect to certain foreign currency denominated receivables and payables.
Although the Company cannot predict the extent to which currency fluctuations
may or will affect the Company's business and financial position, there is a
risk that such fluctuations will have an adverse impact on the Company's sales,
profits and financial position. Because differing portions of our revenues and
costs are denominated in foreign currency, movements could impact our margins
by, for example, decreasing our foreign revenues when the dollar strengthens and
not correspondingly decreasing our expenses. The Company does not currently
hedge its currency exposure. In the future, we may engage in hedging
transactions to mitigate foreign exchange risk.
The translation of the Company's subsidiaries forint denominated balance
sheets into U.S. dollars, as of December 31, 2005, has been affected by the
weakening of the Hungarian forint against the U.S. dollar from 180.29 as of
December 31, 2004, to 213.58 as of December 31, 2005, an approximate 16%
depreciation in value. The average Hungarian forint/U.S. dollar exchange rates
used for the translation of the subsidiaries forint denominated statements of
operations into U.S. dollars, for the years ended December 31, 2005 and 2004
were 199.42, 202.74, respectively.
19
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123(R)"). SFAS 123(R) requires an entity to
recognize the grant-date fair value of stock options and other equity-based
compensation issued to employees in the income statement. SFAS 123(R) is
effective for the Company as of January 1, 2006. The Company is currently
assessing the impact SFAS 123(R) will have on its financial statements.
In December 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
amendment of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends Accounting
Research Bulletin No. 43, Chapter 4, "Inventory Pricing" ("ARB 43") to eliminate
the "so abnormal" criterion in ARB 43 and requires companies to recognize
abnormal freight, handling costs, and amounts of wasted material (spoilage) as
current-period charges. Additionally, SFAS 151 clarifies that fixed production
overhead cost should be allocated to inventory based on the normal capacity of
the production facility. SFAS 151 is effective for inventory costs incurred
during annual periods beginning after June 15, 2005. The Company is currently
assessing the impact SFAS 151 may have on its financial statements and is not
expected to have a material impact on our financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" which replaces Accounting Principles Board Opinions No. 20
"Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim
Financial Statements." This statement applies to all voluntary changes in
accounting principle and changes resulting from adoption of a new accounting
pronouncement that does not specify transition requirements. SFAS 154 requires
retrospective application to prior periods' financial statements for changes in
accounting principle unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. SFAS 154 also
requires that retrospective application of a change in accounting principle be
limited to the direct effects of the change. Indirect effects of a change in
accounting principle should be recognized in the period of the accounting
change. SFAS 154 is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005 with early implementation
permitted for accounting changes and corrections of errors made in fiscal years
beginning after the date this statement was issued. SFAS 154 is effective for
the Company as of January 1, 2006 and is not expected to have a material impact
on financial statements.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Financial Instruments-an amendment of FASB Statements No. 133 and 140"
("SFAS 155"). SFAS 155 amends SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") and SFAS No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". SFAS 155 resolves issues addressed in SFAS 133 Implementation
Issue No. D1, "Application of Statement 133 to Beneficial Interests in
Securitized Financial Assets." SFAS 155 is effective for the Company for all
financial instruments acquired or issued after January 1, 2007 and is not
expected to have a material impact on the Company's financial statements.
20
RISK FACTORS
The Company is subject to certain risk factors due to the industry in
which it competes and the nature of its operations. Theses risks include the
following:
WE HAVE INCURRED NET LOSSES FOR THE PRIOR PERIODS AND WE WILL AGAIN INCUR NET
LOSSES IF WE ARE UNABLE TO GENERATE SUFFICIENT REVENUE AND CONTROL COSTS.
We incurred net losses from continuing operations of $2,018,166 for the
year ended December 31, 2005 and $1,402,766 for the year ended December 31,
2004. We may not achieve profitability on a quarterly or annual basis in the
future. If revenues grow more slowly than we anticipate or if operating expenses
exceed our expectations or cannot be adjusted accordingly, we will continue to
incur losses. Our future performance is dependent upon the successful
development and marketing of our services and products and additional
acquisition about which there is no assurance. Any future success that we might
enjoy will depend upon many factors, including factors out of our control or
which cannot be predicted at this time. These factors may include changes in or
increased levels of competition, including the entry of additional competitors
and increased success by existing competitors, changes in general economic
conditions, increases in operating costs, including costs of supplies, personnel
and equipment, reduced margins caused by competitive pressures and other
factors. These conditions may have a materially adverse effect upon us or may
force us to reduce or curtail operations.
WE COULD INCUR MATERIAL ADDITIONAL EXPENSES, WHICH COULD REDUCE OUR GROSS
MARGINS OR INCREASE OPERATING LOSSES, IF THE IT SERVICE INDUSTRY BECOMES SUBJECT
TO ADDITIONAL REGULATIONS.
The IT service industry is not currently subject to direct regulation
other than regulation applicable to businesses generally. However, changes in
the regulatory environment relating to the IT industries could have an effect on
our business, which may be materially adverse to our interests. 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 may be
materially adverse to our interests. We cannot predict the likelihood that any
such legislation be introduced, nor the financial impact, if any, of the
resulting regulation.
As we may seek to acquire more companies, we may choose to finance these
acquisitions through proceeds generated from debt financing, which may lead to a
substantial increase in interest expenses.
21
OUR FUTURE SUCCESS IS DEPENDENT, IN PART, ON THE PERFORMANCE AND CONTINUED
SERVICE OF OUR CHIEF EXECUTIVE OFFICER AND OUR ABILITY TO ATTRACT ADDITIONAL
QUALIFIED PERSONNEL. IF WE ARE UNABLE TO DO SO OUR RESULTS FROM OPERATIONS MAY
BE NEGATIVELY IMPACTED.
Our success will be dependent on the personal efforts of Csaba Toro, Chief
Executive Officer. The loss of the services of Mr. Toro could have a material
adverse effect on our business and prospects. We do not have and do not intend
to obtain "key-man" insurance on the life of any of our officers. The success of
our company is largely dependent upon our 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 we 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 our company as our key personnel are critical
to our overall management as well as the development of our technology, our
culture and our strategic direction.
OUR WHOLLY OWNED SUBSIDIARY, NAVIGATOR, IS HIGHLY DEPENDENT ON FOUR CUSTOMERS.
IF THESE COMPANIES WERE TO TERMINATE OUR RELATIONSHIP, OUR RESULTS FROM
OPERATIONS WOULD BE MATERIALLY IMPACTED.
27% of the consolidated sales revenue in the year ended December 31, 2005
is derived from one customer, which was a former owner of Navigator Rt. 83% of
the consolidated sales revenue for the year ended December 31, 2005 was
generated from the four most significant customers of the Company.
INCREASED COMPETITION IN THE IT OUTSOURCE SERVICE INDUSTRY MAY MAKE IT DIFFICULT
FOR OUR COMPANY TO ATTRACT AND RETAIN CUSTOMERS AND TO MAINTAIN CURRENT PRICING
LEVELS.
The market for IT outsource products and services is intensely
competitive. 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.
The main competitors of Navigator are coming from different segments of
market, depending on the size of the targeted customers. Therefore, the
competitors of Navigator are the following:
o Large accounts, corporate enterprises segment:
o T-Systems Hungary, subsidiary of the incumbent telecom operator
o EDS Magyarorszag
o HP Hungary
o Medium size enterprises segment:
o IBM Hungary
o KFKI Group
o Synergon
o British Telecom Hungary
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.
22
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,
Romania or Slovakia. Therefore, the Company's ability to limit its exposure to
currency fluctuations is significantly restricted. The Company's 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 jurisdictions in which its subsidiaries operate. The
laws under which the Company's 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.
OTHER RISK FACTORS AFFECTING SHAREHOLDERS/INVESTORS
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 if the Company
completes the sale of Euroweb Hungary and Euroweb Romania. In case of
unsuccessful disposition of these subsidiries may lead to financial
difficulties, which will partly due to the potention penalty of EUR 400,000. If
the disposal is completed, the Company has no definitive plans for acquisitions
at this time, the Company may have future acquisitions that could potentially
exceed available funds. Therefore, 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.
No Dividends.
It has been the policy of the Company to not pay cash dividends on its
common stock. 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
Potential Issuance of Additional Common and Preferred Stock.
The Company is currently authorized to issue up to 35,000,000 shares. The
Board of Directors 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 of Directors 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 of Directors.
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.
23
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 above. 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.
ITEM 7. FINANCIAL STATEMENTS.
Reference is made to the Consolidated Financial Statements of the Company,
beginning with the index thereto on page F-1
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On April 15, 2005, the Company was notified by KPMG Hungaria Kft.
("KPMG"), its independent public accountants, that it was declining to stand for
re-election as the Company's auditor for the year ended December 31, 2005.
Further, on April 15, 2005, the Company engaged Deloitte Kft. ("Deloitte") as
its principal independent accountant. This decision to engage Deloitte was taken
upon the unanimous approval of the Board of Directors of the Company and was
approved by the shareholders meeting held on June 2, 2005.
During the fiscal year ended December 31, 2004 and through April 15, 2005,
(i) there were no disagreements between the Company and KPMG on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure which, if not resolved to the satisfaction of KPMG would have
caused KPMG to make reference to the matter in its reports on the Company's
financial statements, and (ii) KPMG's report on the Company's financial
statements did not contain any adverse opinion, disclaimer of opinion, or
modification or qualification of opinion. During the fiscal year ended December
31, 2004 and through April 15, 2005, there were no reportable events as the term
described in Item 304(a)(1)(iv) of Regulation S-B.
24
ITEM 8A. CONTROLS AND PROCEDURES
As of December 31, 2005, an evaluation was performed under the supervision
and with the participation of the Company's management, including the Chief
Executive Officer and the Chief Accounting Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on that evaluation, the Company's management, including the Chief Executive
Officer and the Chief Accounting Officer, concluded that the Company's
disclosure controls and procedures were effective as of December 31, 2005. There
have been no significant changes in the Company's internal controls or in other
factors that could significantly affect internal controls in the quarter ended
December 31, 2005 that materially affected or are reasonably likely to
materially affect the Company's internal controls.
ITEM 8B. OTHER INFORMATION
None.
25
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth certain information regarding the executive
officers and directors of the Company as of March 24, 2006
NAME AGE POSITION WITH COMPANY
------------- --- --------------------------------------------
Csaba Toro 40 Chief Executive Officer, Director, Treasurer
Moshe Schnapp 43 President and Director
Stewart Reich 61 Director, Board Chairman, Audit and
Compensation Committees Chairman
Gabor Ormosy 36 Director
Ilan Kenig 45 Director, Audit and Compensation
Committee's member
Yossi Attia 44 Director, Audit and Compensation
Committee's member
CSABA TORO, age 40, Chief Executive Officer of the Company since June
2002, has been with the Company since September 1998 in various other positions.
During 2001 and 2002, Mr. Toro held the positions of COO and CEO in Pantel Rt.
He resigned as CEO of Pantel Rt. as of March 2003. From 1997 to 1999, Mr. Toro
was managing director of the Companyi-s Hungarian subsidiary. Prior thereto,
since 1994, he was managing director of ENET Kft., which was acquired by the
Company in 1997.
MOSHE SCHNAPP, age 43, President and director of the Company since April
15, 2005 has worked in the construction and development industry for over
fifteen years. Mr. Schnapp background covers all aspect of financial planning
with project development, including, but not limited to, statistical research
and analysis as applied before and during the project. Mr. Schnapp has acted in
publicly traded companies both as director and as officer. Mr. Schnapp has
experience in project management, cost accounting and supervising marketing from
a financial point of view. Mr. Schnapp received a BA in economics and accounting
from Haifa University in 1987, an MBA from Tel Aviv University in 1994 and he
also holds doctorate degree in philosophy and a graduate degree in commercial
and industrial economy from Pacific Western University. Mr. Schnapp is a
licensed Certified Public Accountant in Israel. Mr. Schnapp served as director
and CFO of Engel General Contractors LTD (symbol ENGEF) and later was appointed
as CEO until January 1995. He served as CEO and Director of Genesis Construction
LTD (symbol GDCUF) from February 1995 until June 1999. Since October 2000 until
today he has been serving as director and president of American Realty Group,
Inc. a private company. Mr. Schnapp is also director and officer of: AS Holdings
LLC, Speedy the Plumber Inc, Bonanza Realty Inc, Bonanza Realty LLC, Glendon
Advisors Inc, Van Nuys Plaza LLC, and few other private companies.
26
STEWART REICH, age 61, was Chief Executive Officer and President of Golden
Telecom Inc., Russia's largest alternative voice and data service provider as
well as its largest ISP, since 1997. In September 1992, Mr Reich was employed as
Chief Financial Officer at UTEL (Ukraine Telecommunications), of which he was
appointed President in November 1992. Prior to that Mr. Reich held various
positions at a number of subsidiaries of AT&T Corp. Mr. Reich has been a
director of the Company since 2002.
GABOR ORMOSY, age 36, is CEO of Wallis Auto Holding, the largest Hungarian
car dealer network. Previously he served as the Chief Financial Officer of
Elender from 2002 to 2004 where he was responsible for strategic planning,
controlling, treasury, accounting, administration, business development and
investor relationships. From 2000 to 2002, Mr. Ormosy served as the Chief
Financial Officer for Webigen Rt., which was a web developer and marketing
company before merging into Elender. Prior to joining Webigen Rt., Mr. Ormosy
served in the corporate finance department of CA IB Securities Ltd., Budapest
where he was responsible as project manager for deal execution and valuations in
mergers & acquisitions and capital market deals. Since 2002, Mr. Ormosy has also
served as the President of the Board of Directors of Wallizing Rt. and as a
member of the Board of Directors of Index Rt.
YOSSI ATTIA, age 44, has been self employed as a real estate developer
since 2000. Mr. Attia was appointed to the Company's Board on February 1, 2005.
Prior to entering into the real estate development industry, Mr. Attia served as
the Senior Vice President of Investments of Interfirst Capital from 1996 to
2000. From 1994 though 1996, Mr. Attia was a Senior Vice President of
Investments with Sutro & Co. and from 1992 through 1994 Mr. Attia served as the
Vice President of investments of Prudential Securities. Mr. Attia obtained a BA
in economics and marketing from Haifa University in 1987 and MBA from Pepperdine
University in 1995. Mr. Attia held Series 7 and 63 securities licenses from 1991
until 2002. Since October 2000 until today Mr. Attia has been the majority
member of AS Holdings LLC, a holding LLC for private real estate group of
companies, serving as director/manger/president of all subsidiaries of AS
Holdings. Effective March 21, 2005, Mr. Attia was appointed as a member of the
Audit Committee and the Compensation committee.
ILAN KENIG, age 45, has over 20 years of management, legal, venture
capital and investment banking experience with specific emphasis in the
technology and telecommunications arena. Mr. Kenig was appointed to the
Company's Board on February 1, 2005. Mr. Kenig joined Unity Wireless Corporation
("Unity"), a designer, developer and manufacturer of wireless systems, as Vice
President of Business Development in December 2001 before assuming the position
of President and CEO in April 2002. From January 1999 until December 2001, Mr.
Kenig pursued international finance activities and mergers and acquisitions in
New York. Mr. Kenig was a founder of a law firm in Tel-Aviv representing
technology and telecommunications interests. Mr. Kenig holds a law degree from
Bar-Ilan University. Effective March 21, 2005, Mr. Kenig was appointed as a
member of the Audit Committee and the Compensation committee.
Directors are elected annually and hold office until the next annual
meeting of the stockholders of the Company and until their successors are
elected and qualified. Officers are elected annually and serve at the discretion
of the Board of Directors.
27
ROLE OF THE BOARD
Pursuant to Delaware law, our business, property and affairs are managed
under the direction of our board of directors. The board has responsibility for
establishing broad corporate policies and for the overall performance and
direction of Euroweb, but is not involved in day-to-day operations. Members of
the board keep informed of our business by participating in board and committee
meetings, by reviewing analyses and reports sent to them regularly, and through
discussions with our executive officers.
2005 BOARD MEETINGS
In 2005, the board met four times and made two additional resolutions. No
director attended less than 75% of all of the combined total meetings of the
board and the committees on which they served in 2005.
BOARD COMMITTEES
AUDIT COMMITTEE
The audit committee of the board of directors reviews the internal
accounting procedures of the Company and consults with and reviews the services
provided by our independent accountants. During 2005, the audit committee
consisted of Messrs. Stewart Reich and Howard Cooper, both of whom are
considered to be independent. The audit committee held two meetings in 2005. Mr.
Reich serves as the financial expert on the Audit Committee. On March 21, 2005,
Mr. Cooper resigned as a director of the Company and a member of the Audit
Committee. On March 21, 2005, the Board of Directors appointed Mr. Attia and Mr.
Kenig, both independent members of the board of directors, to serve as members
of the Audit Committee.
COMPENSATION COMMITTEE
The compensation committee of the board of directors i) reviews and
recommends to the board the compensation and benefits of our executive officers;
ii) administers our stock option plans and employee stock purchase plan; and
iii) establishes and reviews general policies relating to compensation and
employee benefits. In 2004, the compensation committee consisted of Messrs
Cooper, Reich and Lipman. No interlocking relationships exist between the board
of directors or compensation committee and the board of directors or
compensation committee of any other company. During the past fiscal year the
compensation committee had two meetings. On January 28, 2005, Mr. Lipman
resigned as a director of the Company and a member of the Compensation
Committee. On March 21, 2005, Mr. Cooper resigned as a director of the Company
and a member of the Compensation Committee. On March 22, 2005, the Board of
Directors appointed Mr. Attia and Mr. Kenig, both independent members of the
Board of Directors,, to serve as members of the Compensation Committee.
SECTION 16(A) BENEFICIAL OWNERSHIP COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more then 10
percent of the Company's Common Stock, to file with the SEC the initial reports
of ownership and reports of changes in ownership of common stock. Officers,
directors and greater than 10 percent stockholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file.
Specific due dates for such reports have been established by the
Commission and the Company is required to disclose in this Proxy Statement any
failure to file reports by such dates during fiscal 2005. Based solely on its
review of the copies of such reports received by it, or written representations
from certain reporting persons that no Forms 5 were required for such persons,
the Company believes that during the fiscal year ended December 31, 2005, there
was no failure to comply with Section 16(a) filing requirements applicable to
its officers, directors and ten percent stockholders.
28
POLICY WITH RESPECT TO SECTION 162(M)
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), provides that, unless an appropriate exemption applies, a tax deduction
for the Company for compensation of certain executive officers named in the
Summary Compensation Table will not be allowed to the extent such compensation
in any taxable year exceeds $1 million. As no executive officer of the Company
received compensation during 2005 approaching $1 million, and the Company does
not believe that any executive officer's compensation is likely to exceed $1
million in 2005, the Company has not developed an executive compensation policy
with respect to qualifying compensation paid to its executive officers for
deductibility under Section 162(m) of the Code.
CODE OF ETHICS
The Company has adopted its Code of Ethics and Business Conduct for
Officers, Directors and Employees that applies to all of the officers, directors
and employees of the Company.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual and long
term compensation of the Company's Chief Executive Officer and the President.
The Company does not have any officer whose annual salary and bonus exceeds
$100,000 as of December 31, 2005:
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------- --------------------------------------
Bonus and Number of
Other Restricted Securities
Annual Stock Underlying All Other
Name and Year Ended Compensation Award(s) Options/SARs Compensation
Principal Position December 31, Salary ($) ($) ($) (#) ($)
--------------------- ------------ ---------- ------------ ---------- ------------ ------------
Csaba Toro, Director, 2005 $ 224,000 $ 150,000 -- 125,000 --
CEO, and Treasurer 2004 $ 150,000 $ 100,000 -- 125,000 --
2003 $ 96,000 -- -- -- --
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------- --------------------------------------
Bonus and Number of
Other Restricted Securities
Annual Stock Underlying All Other
Name and Year Ended Compensation Award(s) Options/SARs Compensation
Principal Position December 31, Salary ($) ($) ($) (#) ($)
--------------------- ------------ ---------- ------------ ---------- ------------ ------------
Moshe Schnapp, Director, 2005 *$177,083 -- -- -- --
President 2004 -- -- -- -- --
2003 -- -- -- -- --
* the annual salary of $177,083 was paid in form of issuance of 58,968
shares of common stock in January 2006.
29
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
There were other grants of Stock Options/SAR made to the named Executive
and President during the fiscal year ended December 31, 2005.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION/SAR
VALUES
Number of
securities Value of the
underlying unexercised
unexercised in the
options money options
/SARs at /SARs at
FY-end (#) FY-end ($)*
Shares
acquired on Value Exercisable/ Exercisable/
Name exercise (#) realized ($) Unexercisable Unexercisable
------------------------ ------------- ------------ -------------- -------------
------------------------ ------------- ------------ -------------- -------------
Csaba Toro, CEO, None None 62,500 $0.00
Director and Treasurer
------------------------ ------------- ------------ -------------- -------------
* Fair market value of underlying securities (calculated by subtracting the
exercise price of the options from the closing price of the Company's
Common Stock quoted on the Nasdaq as of December 30, 2005), which was
$3.55 per share. None of Mr. Toro's options are presently in the money.
EMPLOYMENT AND MANAGEMENT AGREEMENTS
The Company entered into a six-year agreement with its Chief Executive
Officer and Director, Csaba Toro on October 18, 1999, which commenced January 1,
2000, and provided for an annual compensation of $96,000. The agreement was
amended in 2004 and 2005. The amended agreement provides for an annual salary of
$200,000 and a bonus of up to $150,000 in 2005, and an annual salary of $200,000
and a bonus of up to $150,000 in 2006, 2007 and 2008, as well as an annual car
allowance of $30,000 for the same period.
The Company has entered into a two-year employment agreement with Moshe
Schnapp as President and Director of the Company starting from April 15, 2005,
which grants an annual compensation of $250,000 to be paid in the form of
Euroweb shares of common stock. The number of shares to be received by Mr.
Schnapp is calculated based on the average closing price 10 days prior to the
commencement of each employment year. For the year ended April 14, 2006, Mr.
Schnapp will receive 82,781 Euroweb shares of common stock.
The two employment agreements mentioned above further provide that, if
employment is terminated other than for willful breach by the employee, for
cause or in event of a change in control of the Company, then the employee has
the right to terminate the agreement. In the event of any such termination, the
employee will be entitled to receive the payment due on the balance of his
employment agreement.
30
The Company has no pension or profit sharing plan or other contingent
forms of remuneration with any officer, director, employee or consultant,
although bonuses are paid to some individuals.
DIRECTOR COMPENSATION
Directors who are also officers of the Company are not separately
compensated for their services as a director. Directors who are not officers
receive cash compensation for their services: $2,000 at the time of agreeing to
become a Director; $2,000 for each Board Meeting attended either in person or by
telephone; and $1,000 for each Audit and Compensation Committee Meeting attended
either in person or by telephone. Non-employee directors are reimbursed for
their expenses incurred in connection with attending meetings of the Board or
any committee on which they serve and are eligible to receive awards under the
Company's 2004 Incentive Plan (described below).
STOCK OPTION PLAN
2004 INCENTIVE PLAN
GENERAL
The 2004 Incentive Plan was adopted by the Board of Directors. The Board
of Directors has initially reserved 800,000 shares of Common Stock for issuance
under the 2004 Incentive Plan. Under the Plan, options may be granted which are
intended to qualify as Incentive Stock Options ("ISOs") under Section 422 of the
Internal Revenue Code of 1986 (the "Code") or which are not ("Non-ISOs")
intended to qualify as Incentive Stock Options thereunder.
The 2004 Incentive Plan and the right of participants to make purchases
thereunder are intended to qualify as an "employee stock purchase plan" under
Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). The
2004 Incentive Plan is not a qualified deferred compensation plan under Section
401(a) of the Internal Revenue Code and is not subject to the provisions of the
Employee Retirement Income Security Act of 1974 ("ERISA").
On April 28, 2004, the Company granted 125,000 options to the Chief
Executive Officer and an additional 240,000 options to seven employees and
consultants of our company. The exercise price of the options ($4.78) is equal
to the market price on the date the grants were made. The options vest over a
period of between 3-4 years.
PURPOSE
The primary purpose of the 2004 Incentive Plan is to attract and retain
the best available personnel for the Company in order to promote the success of
the Company's business and to facilitate the ownership of the Company's stock by
employees.
ADMINISTRATION
The 2004 Incentive Plan is administered by the Company's Board of
Directors, as the Board of Directors may be composed from time to time. All
questions of interpretation of the 2004 Incentive Plan are determined by the
Board, and its decisions are final and binding upon all participants. Any
determination by a majority of the members of the Board of Directors at any
meeting, or by written consent in lieu of a meeting, shall be deemed to have
been made by the whole Board of Directors.
31
Notwithstanding the foregoing, the Board of Directors may at any time, or
from time to time, appoint a committee (the "Committee") of at least two members
of the Board of Directors, and delegate to the Committee the authority of the
Board of Directors to administer the Plan. Upon such appointment and delegation,
the Committee shall have all the powers, privileges and duties of the Board of
Directors, and shall be substituted for the Board of Directors, in the
administration of the Plan, subject to certain limitations.
Members of the Board of Directors who are eligible employees are permitted
to participate in the 2004 Incentive Plan, provided that any such eligible
member may not vote on any matter affecting the administration of the 2004
Incentive Plan or the grant of any option pursuant to it, or serve on a
committee appointed to administer the 2004 Incentive Plan. In the event that any
member of the Board of Directors is at any time not a "disinterested person", as
defined in Rule 16b-3(c)(3)(i) promulgated pursuant to the Securities Exchange
Act of 1934, the Plan shall not be administered by the Board of Directors, and
may only by administered by a Committee, all the members of which are
disinterested persons, as so defined.
ELIGIBILITY
Under the 2004 Incentive Plan, options may be granted to key employees,
officers, directors or consultants of the Company, as provided in the 2004
Incentive Plan.
TERMS OF OPTIONS
The term of each Option granted under the Plan shall be contained in a
stock option agreement between the Optionee and the Company and such terms shall
be determined by the Board of Directors consistent with the provisions of the
Plan, including the following:
(a) PURCHASE PRICE. The purchase price of the Common Shares subject to
each ISO shall not be less than the fair market value (as set forth in the 2004
Incentive Plan), or in the case of the grant of an ISO to a Principal
Stockholder, not less that 110% of fair market value of such Common Shares at
the time such Option is granted. The purchase price of the Common Shares subject
to each Non-ISO shall be determined at the time such Option is granted, but in
no case less than 85% of the fair market value of such Common Shares at the time
such Option is granted.
(b) VESTING. The dates on which each Option (or portion thereof) shall be
exercisable and the conditions precedent to such exercise, if any, shall be
fixed by the Board of Directors, in its discretion, at the time such Option is
granted.
(c) EXPIRATION. The expiration of each Option shall be fixed by the Board
of Directors, in its discretion, at the time such Option is granted; however,
unless otherwise determined by the Board of Directors at the time such Option is
granted, an Option shall be exercisable for ten(10) years after the date on
which it was granted (the "Grant Date"). Each Option shall be subject to earlier
termination as expressly provided in the 2004 Incentive Plan or as determined by
the Board of Directors, in its discretion, at the time such Option is granted.
32
(d) TRANSFERABILITY. No Option shall be transferable, except by will or
the laws of descent and distribution, and any Option may be exercised during the
lifetime of the Optionee only by him. No Option granted under the Plan shall be
subject to execution, attachment or other process.
(e) OPTION ADJUSTMENTS. The aggregate number and class of shares as to
which Options may be granted under the Plan, the number and class shares covered
by each outstanding Option and the exercise price per share thereof (but not the
total price), and all such Options, shall each be proportionately adjusted for
any increase decrease in the number of issued Common Shares resulting from
split-up spin-off or consolidation of shares or any like Capital adjustment or
the payment of any stock dividend.
Except as otherwise provided in the 2004 Incentive Plan, any Option
granted hereunder shall terminate in the event of a merger, consolidation,
acquisition of property or stock, separation, reorganization or liquidation of
the Company. However, the Optionee shall have the right immediately prior to any
such transaction to exercise his Option in whole or in part notwithstanding any
otherwise applicable vesting requirements.
(f) TERMINATION, MODIFICATION AND AMENDMENT. The 2004 Incentive Plan (but
not Options previously granted under the Plan) shall terminate ten (10) years
from the earlier of the date of its adoption by the Board of Directors or the
date on which the Plan is approved by the affirmative vote of the holders of a
majority of the outstanding shares of capital stock of the Company entitled to
vote thereon, and no Option shall be granted after termination of the Plan.
Subject to certain restrictions, the Plan may at any time be terminated and from
time to time be modified or amended by the affirmative vote of the holders of a
majority of the outstanding shares of the capital stock of the Company present,
or represented, and entitled to vote at a meeting duly held in accordance with
the applicable laws of the State of Delaware.
33
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership of our common stock as of March 24, 2006 by (i) each person known by
our company to own beneficially more than 5% of the outstanding Common Stock;
(ii) each director of our company; (iii) each officer of our company and (iv)
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.
Shares
Name and Address Beneficially Owned(1) Percent Owned (1)
--------------------------------- --------------------- -----------------
KPN Telecom B.V. (4) 2,036,188 34.85%
Maanplein 5
The Hague, The Netherlands
Fleminghouse Investments Limited 522,054 8.93%
Chrysanthou Mylona 3, P.C.
3030 Limassol
Cyprus
CORCYRA d.o.o.(3) 2,326,043 39.81%
Verudela 17
Pula Croatia 52100
Graeton Holdings Limited 441,566 7.60%
256 Makarios Avenue,Eftapaton
Court, CY3105 Limassol, Cyprus;
Csaba Toro (2)(5)(6) 62,500 1.07%
1138 Budapest
Vaci ut 141.
Hungary
Stewart Reich (6)(7) 75,000 1,28%
18 Dorset Lane,
Bedminister, NJ 07921
Gabor Ormosy
Fleminghouse Investments Limited 25,000 *
Chrysanthou Mylona 3, P.C. (6) (9)
3030 Limassol
Cyprus
Yossi Attia (6)(8) 25,000 *
1061 1/2 Spalding Ave.
West Hollywood, CA 90046
Ilan Kenig (6)(8) 25,000 *
7438 Fraser Park Drive
Burnaby, BC Canada V5J 5B9
Moshe Schnapp (5)(6) 58,968 1.01%
846 N Huntley
West Hollywood, CA 90069
All Officers and Directors as a 240,218 4.65%
Group (6 Persons)
* Less than one percent
(1) Unless otherwise indicated, each person has sole investment and voting
power with respect to the shares indicated. 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 24, 2006. For purposes of computing the percentage of outstanding
shares held by each person or group of persons named above on March 24,
2006, 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) Mr. Toro owns, directly or indirectly, 1.07% of the issued and outstanding
shares of the Company represented by options to purchase 62,500 shares.
34
(3) Pursuant to a Stock Purchase Agreement dated as of January 28, 2005, by
and between KPN Telecom B.V. ("KPN Telecom"), a company incorporated under
the laws of the Netherlands, and CORCYRA d.o.o., a Croatian company
("CORCYRA"), (the "Purchase Agreement"), KPN Telecom sold to CORCYRA
289,855 shares (the "Initial Shares") of our common stock for US
$1,000,000 (the "Initial Closing"). The Initial Closing occurred on
February 1, 2005. Pursuant to the Purchase Agreement, CORCYRA has also
agreed to purchase and, KPN has agreed to sell, KPN Telecom's remaining
2,036,188 shares of our common stock (the "Final Shares") on April 30,
2006 (the "Final Closing"); provided, however, that upon 14 days' prior
written notice to KPN Telecom, CORCYRA may accelerate the Final Closing to
an earlier month-end date as specified in such notice; provided, further,
that the Final Closing is subject to the satisfaction or waiver of all of
the conditions to closing set forth in the Purchase Agreement.
Accordingly, CORCYRA presently owns 289,855 shares of common stock and is
deemed to own, pursuant to Rule 13d-3(d), promulgated under the Securities
Exchange Act of 1934, as amended, the remaining 2,036,188 shares held by
KPN Telecom.
(4) KPN Telecom B.V. is a subsidiary of Royal KPN N.V.
(5) An officer of the Company.
(6) A director of the Company.
(7) Includes an option to purchase 75,000 shares of common stock at an
exercise price of $4.21 per share. 25,000 options vest on April 13, 2004,
25,000 options vest on April 13, 2005, while 25,000 options vest on April
13, 2006
(8) Effective March 22, 2005 the Board of Directors granted the two new
directors 100,000 options each at an exercise price of $3.40 per share
under the 2004 Incentive Plan. Each directors options vest in four equal
installments of 25,000 shares on September 22, 2005, September 22, 2006,
September 22, 2007 and September 22, 2008.
(9) Effective June 2, 2005, the Board of Directors granted 100,000 options at
an exercise price of $4.05 per share under the 2004 Incentive Plan. The
options vest in four equal installments of 25,000 shares on December 2,
2005, December 2, 2006, December 2, 2007 and December 2, 2008.
The foregoing table is based upon 5,843,067 shares of common stock
outstanding as of March 24, 2006.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In order to provide management of the Company with the appropriate
motivation to achieve the highest possible purchase price in connection with the
sale of its subsidiaries in Hungary and Romania, the Company's Compensation
Committee was granted the discretionary ability to pay a bonus to members of
management that were associated with the Company receiving a purchase price in
excess of US $28,000,000 for the subsidiaries. The bonus, which is at the
discretion of the Compensation Committee, will be up to 20% of the purchase
price received in excess of US $28,000,000. Upon the Company closing on the sale
of the subsidiaries for US $30,000,000 to Invitel, a bonus of up to US $400,000
(or 20% of US $2,000,000) may be paid by the Compensation Committee to select
members of management.
35
ITEM 13. EXHIBITS
A. Exhibits (numbers below reference Regulation S-B, Item 601)
(2) Subscription Agreement and Option Agreement with KPN(1)(2)
(3) (a) Certificate of Incorporation filed November 9, 1992(1)
(b) Amendment to Certificate of Incorporation filed July 9, 1997(2)
(c) By-laws(2)
(4) (a) Form of Common Stock Certificate(1)
(b) Form of Underwriters' Warrants to be sold to Underwriters(1)
(c) Placement Agreement between Registrant and J.W. Barclay & Co.,
Inc. and form of Placement Agent Warrants issued in connection
with private placement financing(1)
(10)(a) Shares Purchase Agreement between PanTel Tavkozlesi es
Kommunikacios rt., a Hungarian company, and Euroweb International
Corp., a Delaware corporation (3)
(10)(b) Guaranty by Euroweb International Corp., a Delaware corporation,
in favor of PanTel Tavkozlesi es Kommunikacios rt., a Hungarian
company (3)
(10)(c) Shares Purchase Agreement between Vitonas Investments Limited, a
Hungarian corporation, Certus Kft., a Hungarian corporation, Rumed
2000 Kft., a Hungarian corporation and Euroweb International Corp.,
a Delaware corporation, dated as of February 23, 2004. (4)
(10)(d) Share Purchase Agreement by and between Euroweb International
Corp. and Invitel Tavkozlesi Szolgaltato Rt. (5)
(31)(a) Certification of the Chief Executive Officer of Euroweb
International Corp. pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
(31)(b) Certification of the Chief Accounting Officer of Euroweb
International Corp. pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
(32)(a) Certification of the Chief Executive Officer of Euroweb
International Corp. Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(32)(b) Certification of the Chief Accounting Officer of Euroweb
International Corp., Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(99)(a) Code of Ethics and Business Conduct of Officers, Directors and
Euroweb International Corp.
----------------------------------
(1) Exhibits are incorporated by reference to Registrant's Registration
Statement on Form SB-2 dated May 12, 1993 (Registration No. 33-62672-NY,
as amended)
(2) Filed with Form 10-QSB for quarter ended June 30, 1998.
(3) Filed as an exhibit to Form 8-K on February 27, 2004.
(4) Filed as an exhibit to Form 8-K on March 9, 2004.
(5) Filed as an exhibit to Form 8-K on December 21, 2005.
36
ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES
Audit Fees. The aggregate fees billed by our auditors, for professional
services rendered for the audit of the Company's annual financial statements for
the years ended December 31, 2005 and 2004, and for the reviews of the financial
statements included in the Company's Quarterly Reports on Form 10-QSB during the
fiscal years were $192,000 and $217,000, respectively.
Audit related fees: Additionally, in 2005, fees for the audit of the 2004
US GAAP financials statements of Navigator (for 8-K filing purposes) was
$127,000. In 2004, fees for the audit of the 2003 US GAAP financial statements
of Euroweb Hungary (for 8-K filing purposes) was $18,750 and fees for the
restatement of the Company's 2003 financial statements to reflect the "as-if"
pooling of Euroweb Hungary Rt. for purposes of the SB-2 filing was $37,000.
All Other Fees. The aggregate fees billed by auditors for services
rendered to the Company, other than the services covered in "Audit Fees" and
"Audit related fees" and for the fiscal years ended December 31, 2005 and 2004
were $67,200 and $124,000. - The 2005 and 2004 fees relate to the SB-2
registration statement costs ($189,600), and miscellaneous tax advice ($1,600)
provided during the course of 2005 and 2004.
The Board of Directors has considered whether the provision of non-audit
services is compatible with maintaining the principal accountant's independence.
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 29th day of March 2005.
EUROWEB INTERNATIONAL CORP.
By: /s/Csaba Toro
-------------------------------------
Csaba Toro
Chief Executive Officer and Director
(Principal Executive Officer)
37
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
-------------------- ------------------------------------ --------------
By: /s/Csaba Toro Chief Executive Officer and Director March 29, 2006
------------- (Principal Executive Officer)
Csaba Toro
By: /s/Stewart Reich Chairman of the Board and Director March 29, 2006
----------------
Stewart Reich
By: /s/Moshe Schnapp President, Director March 29, 2006
----------------
Moshe Schnapp
By: /s/ Gabor Ormosy Director March 29, 2006
----------------
Gabor Ormosy
By: /s/ Yossi Attia Director March 29, 2006
---------------
Yossi Attia
By: /s/ Ilan Kenig Director March 29, 2006
--------------
Ilan Kenig
By: /s/ Peter Szigeti Chief Accounting Officer March 29, 2006
----------------- (Principal Financial Officer)
Peter Szigeti
38
EUROWEB INTERNATIONAL CORP.
Consolidated Balance Sheet as of December 31, 2005, and
Consolidated Statements of Operations & Comprehensive Income (Loss)
Stockholders' Equity, and Cash Flows for the
Years ended December 31, 2005 and 2004
39
EUROWEB INTERNATIONAL CORP.
Consolidated Financial Statements
As of December 31, 2005 and for the Years Ended December 31, 2005 and 2004
TABLE OF CONTENTS
PAGE
Report of the Independent Registered Public Accounting Firm F-2
Report of the Independent Registered Public Accounting Firm F-3
Consolidated Financial Statements:
Consolidated Balance Sheet F-4
Consolidated Statements of Operations and Comprehensive Income (Loss) F-5
Consolidated Statements of Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Euroweb International Corp.
We have audited the accompanying combined balance sheet of Euroweb
International Corp. and subsidiaries (the "Company") as of December 31, 2005,
and the related consolidated statements of income, 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 audits.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (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. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Euroweb International Corp. and
subsidiaries as of December 31, 2005, and the results of their operations and
their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
Deloitte Kft.
Budapest, Hungary
March 27, 2006
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Euroweb International Corp.
We have audited the accompanying consolidated statements of operations and
comprehensive loss, stockholders' equity, and cash flows of Euroweb
International Corp. and subsidiaries for the year ended December 31, 2004. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (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
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of the
operations and the cash flows of Euroweb International Corp. and subsidiaries
for the year ended December 31, 2004 in conformity with accounting principles
generally accepted in the United States of America.
KPMG Hungaria Kft.
Budapest, Hungary
March 24, 2006
F-3
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2005
AMOUNTS IN US DOLLARS
2005
-------------
ASSETS
Current assets:
Cash and cash equivalents (note 3) $ 1,568,690
Trade accounts receivable, less allowance for doubtful
accounts of $206,518 1,533,855
Prepaid and other current assets 321,315
------------
Total current assets of continuing operations 3,423,860
------------
Total assets of discontinued operations (note 9) 20,371,849
Total current assets 23,795,709
============
Property and equipment, net (note 4) 1,071,989
Goodwill (note 5) 8,150,672
Intangible assets - customer contracts, net (note 5) 3,132,300
------------
Total assets $ 36,150,670
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 2,065,333
Current portion of bank loans (note 7) 269,220
Bank overdrafts (note 7) 325,409
Other current liabilities 827,703
Accrued expenses 545,964
------------
Total current liabilities of continuing operations 4,033,629
Total liabilities of discontinued operations (note 9) 13,783,582
Total current liabilities 17,817,211
Deferred tax liability (note 10) 501,168
Non-current portion of bank loans (note 7) 471,134
------------
Total liabilities 18,789,513
Commitments and contingencies (note 12)
Stockholders' equity
Common stock, $.001 par value - Authorized
35,000,000 shares; 6,032,221 shares issued
of which 5,784,099 shares are outstanding and 25,248
248,122 shares are held in escrow
Additional paid-in capital 51,538,659
Accumulated deficit
(34,302,431)
Accumulated other comprehensive income 99,681
------------
Total stockholders' equity 17,361,157
------------
Total liabilities and stockholders' equity $ 36,150,670
============
See accompanying notes to consolidated financial statements.
F-4
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME / (LOSS)
YEARS ENDED DECEMBER 31, 2005 AND 2004
AMOUNTS IN US DOLLARS
2005 2004
----------- -----------
REVENUES $ 1,964,998 $ --
Cost of revenues (exclusive of depreciation and
amortization shown separately below) 511,658 --
OPERATING EXPENSES
Compensation and related costs 1,054,342 361,809
Consulting, professional and directors fees 1,396,096 463,549
Other selling, general and administrative expenses 703,770 454,514
Depreciation and amortization 509,478 2,048
----------- -----------
Total operating expenses 3,663,686 1,281,920
----------- -----------
Operating loss (2,210,346) (1,281,920)
Interest income 2,512 49,154
Interest expense (38,240) --
Other income (expenses) 170,000 (170,000)
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (2,076,074) (1,402,766)
Income tax benefit -deferred 57,908 --
----------- -----------
INCOME TAX BENEFIT 57,908 --
LOSS FROM CONTINUING OPERATIONS (2,018,166) (1,402,766)
Income from discontinued operations, net of tax 3,698,461 668,312
NET INCOME (LOSS) 1,680,295 (734,454)
Other comprehensive income (loss)
(8,585) 133,768
----------- -----------
COMPREHENSIVE INCOME (LOSS) $ 1,671,710 $ (600,686)
=========== ===========
LOSS PER SHARE FROM CONTINUING OPERATIONS, BASIC AND DILUTED (0.37) (0.28)
INCOME PER SHARE FROM DISCONTINUED OPERATIONS, BASIC AND
DILUTED 0.68 0.13
NET INCOME (LOSS) PER SHARE, BASIC AND DILUTED 0.31 (0.15)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC AND
DILUTED 5,445,363 5,043,822
See accompanying notes to consolidated financial statements
F-5
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2005 AND 2004
AMOUNTS IN US DOLLARS
Common Stock
---------------------------- Additional
Number Paid-in Accumulated
of shares Amount Capital Deficit
------------ ------------ ------------ ------------
BALANCES, JANUARY 1, 2004 4,665,332 $ 24,129 $ 48,227,764 $(33,105,716)
============ ============ ============ ============
Foreign currency translation gain -- -- -- --
Reversal of unrealized gain on -- -- -- --
securities available for sale
Deemed distribution (note 1) -- (2,142,556)
Compensation charge on -- -- 94,212
share options issued to
consultants
Issuance of shares (Elender Rt 677,201 678 2,458,108 --
acquisition)
Net loss for the period -- -- -- (734,454)
------------ ------------ ------------ ------------
BALANCES, DECEMBER 31, 2004 5,342,533 $ 24,807 $ 50,780,084 $(35,982,726)
============ ============ ============ ============
Foreign currency translation loss -- -- -- --
Compensation charge on -- -- 192,294
share options and warrants
issued to consultants
Issuance of shares 441,566 441 1,681,693 --
(Navigator Rt acquisition)
Cancellation of treasury stock -- -- ($ 1,115,412) --
Net income for the period 1,680,295
------------ ------------ ------------ ------------
BALANCES, DECEMBER 31, 2005 5,784,099 $ 25,248 $ 51,538,659 $(34,302,431)
------------ ------------ ------------ ------------
Accumulated
Other
Comprehensive TOTAL
Gains Treasury Stockholders'
(Losses) Stock Equity
------------ ------------ ------------
BALANCES, JANUARY 1, 2004 $ (25,502) $ (1,115,412) $ 14,005,263
============ ============ ============
Foreign currency translation gain 162,573 -- 162,573
Reversal of unrealized gain on (28,805) -- (28,805)
securities available for sale
Deemed distribution (note 1) (2,142,556)
Compensation charge on 94,212
share options issued to
consultants
Issuance of shares (Elender Rt -- -- 2,458,786
acquisition)
Net loss for the period -- -- (734,454)
------------ ------------ ------------
BALANCES, DECEMBER 31, 2004 $ 108,266 $ (1,115,412) $ 13,815,019
============ ============ ============
Foreign currency translation loss (8,585) -- (8,585)
Compensation charge on 192,294
share options and warrants
issued to consultants
Issuance of shares -- -- 1,682,134
(Navigator Rt acquisition)
Cancellation of treasury stock -- $ 1,115,412 --
Net income for the period 1,680,295
------------ ------------ ------------
BALANCES, DECEMBER 31, 2005 $ 99,681 -- $ 17,361,157
------------ ------------ ------------
See accompanying notes to consolidated financial statements
F-6
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2005 AND 2004
AMOUNTS IN US DOLLARS
2005 2004
------------ ------------
Net income (loss) $ 1,680,295 $ (734,454)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 509,478 2,048
Provision for bad and doubtful debts 11,026 --
Deferred tax charge (57,908)
Compensation expense due to options and warrants issued 192,294 94,212
Realized gain on sale of investment securities -- (26,383)
Changes in operating assets and liabilities net of effects of acquisitions:
Accounts receivable 215,455 (447,428)
Prepaid and other assets 539,094 (79,752)
Accounts payable, other current liabilities and accrued expenses 986,277 364,242
Cash provided by discontinued operations 114,062 3,568,571
------------ ------------
Net cash provided by operating activities 4,190,073 2,741,056
------------ ------------
Cash flows from investing activities:
Proceeds from maturity of securities -- 11,464,000
Proceeds on sale of subsidiaries 2,700,000 500,001
Acquisition of 51% of Euroweb Rt -- (2,142,000)
Acquisition of 100% of Elender Rt. (net of cash) -- (6,891,897)
Acquisition of 100% of Navigator Informatika Rt. (net of cash) (9,008,638) --
Collection on notes receivable -- 173,911
Acquisition of property and equipment (103,835) (2,048)
Capital expenditures in discontinued operations (2,477,999) (1,701,990)
------------ ------------
Net cash provided by (used in) investing activities (8,890,472) 1,399,977
------------ ------------
Cash flows from financing activities:
Principal payment under capital lease obligations (12,645) --
Repayments on overdraft and bank loan (233,379) --
Financing activities from discontinued operation 4,210,251 (2,280,826)
------------ ------------
Net cash provided by (used in) financing activities 3,964,227 (2,280,826)
------------ ------------
Effect of foreign exchange rate changes on cash (74,690) (37,952)
------------ ------------
Net (decrease) increase in cash and cash equivalents (810,862) 1,822,255
Cash and cash equivalents, beginning of year 2,379,552 557,297
------------ ------------
Cash and cash equivalents, end of year $ 1,568,690 $ 2,379,552
============ ============
Supplemental disclosure:
Cash paid for interest $ 39,456 --
Cash paid for Income taxes $ 101,573 --
Summary of non-cash transactions
Shares issued as consideration in acquisition of Elender Rt -- $ 2,508,353
Shares issued as consideration in acquisition of Navigator Rt $ 1,682,134 --
New capital leases -- --
See accompanying notes to consolidated financial statements.
F-7
EUROWEB INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION OF BUSINESS
Euroweb International Corp. ("Euroweb") is a Delaware corporation, which
was incorporated on November 9, 1992. Euroweb and its subsidiaries are
collectively referred to herein as the "Company". The Company was a development
stage company through December 31, 1993.
The Company operates in Hungary through its subsidiary Navigator
Informatika Rt. ("Navigator"), which is acquired on October 7, 2005.
The Company provides a full range of information technology ("IT")
outsourcing services through it subsidiary, Navigator. The IT outsourcing
services provided by the Company primarily comprise IT maintenance, procurement,
consultancy and related services.
On December 16, 2004, the Company disposed of Euroweb Czech Republic, spol
("Euroweb Czech Republic") and no longer has operations in the Czech Republic.
On April 15, 2005, the Company disposed of Euroweb Slovakia a.s. ("Euroweb
Slovakia") for cash of $2,700,000 and, as a result, has ceased operations in
Slovakia.
On December 15, 2005, the Board of Directors of the Company decided to
sell its entire interest in the wholly owned Euroweb Internet Szolgaltato Rt.
("Euroweb Hungary") and Euroweb Romania S.A. ("Euroweb Romania"). On December
19, 2005, the Company entered into a share purchase agreement with Invitel
Tavkozlesi Szolgaltato Rt., a Hungarian joint stock company, to sell the entire
interest in its two Internet- and telecom-related operating subsidiaries,
Euroweb Hungary and Euroweb Romania, subject to various conditions including,
but not limited to, shareholders' approval. Euroweb Hungary and Euroweb Romania
are classified in the Company's financial statements as discontinued operations
for all periods presented.
Approximately 83% of the consolidated revenue for the year ended December
31, 2005 was generated from the four most significant customers of the Company
as follows:
Revenue generated
--------------------------------------------------------------------------------
Company `A': $539,131
Company `B': 443,727
Company `C': 386,253
Company `D': 268,296
Other companies: 327,591
--------------------------------------------------------------------------------
Total revenue: $1,964,998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(a) Principles of consolidation and basis of presentation
The consolidated financial statements comprise the accounts of the Company
and its controlled subsidiaries. All material intercompany balances and
transactions have been eliminated upon consolidation and all adjustments,
consisting mainly of normal recurring accruals necessary for a fair
presentation, have been made.
F-8
EUROWEB INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On February 12, 2004, the Company entered into a share purchase agreement
with a related party, Pantel Rt. ("Pantel") to acquire the remaining 51% of
Euroweb Hungary shares that the Company did not already own. At the date of the
acquisition, KPN Telecom B.V. ("KPN") owned 50.17% of the voting common shares
of the Company and 75% of the voting common shares of Pantel. Accordingly, the
transaction was recorded in a manner similar to a pooling-of-interest and the
historical consolidated financial statements were restated to include the
financial position, results of operations and cash flows of Euroweb Hungary for
all periods presented. Since the purchase consideration was in excess of Euroweb
Hungary's book value (by $2,142,556), the excess is accounted for as a
distribution to KPN, which resulted in a deduction from retained earnings at the
closing of the transaction. There were no transactions with Euroweb Hungary in
any period prior to this transaction that required elimination.
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of America
("U.S. GAAP").
(b) Use of estimates
The preparation of consolidated financial statements requires management
to make a number of 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 consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(c) Fair value of financial instruments
The carrying values of cash equivalents, investment in debt securities,
notes and loans receivable, accounts payable, loans payable and accrued expenses
approximate fair values.
(d) Revenue recognition
Revenue Recognition--The Company applies the provisions of SEC Staff
Accounting Bulletin ("SAB") No. 104, Revenue Recognition in Financial
Statements, which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. SAB No. 104
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosure related to revenue recognition policies. The Company
recognizes revenue when persuasive evidence of an arrangement exists, the
product or service has been delivered, fees are fixed or determinable,
collection is probable and all other significant obligations have been
fulfilled. Revenues from maintenance services are recognized in the month in
which the services are provided, either based on performance or on fixed monthly
fees. The Company defers revenue recognition for payments on contracts for which
services have not been performed.
The Company also generates non-recurring revenue from consulting fees for
implementation, installation, configuration, testing and training related to the
use of third party licensed products. The Company recognizes revenue for these
services as they are performed, if contracted on a time and materials basis, or
using the percentage of completion method, if contracted on a fixed fee basis,
once the cost of the consulting project can be reliably estimated. Percentage of
completion is measured based on cost incurred to date compared to total
estimated cost at completion. When the cost to complete a project cannot be
reasonably estimated, the Company recognizes revenue using the completed
contract method until such time that the cost to complete the project can be
reasonably estimated.
F-9
EUROWEB INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(e) Cost of revenues (excluding depreciation and amortization)
Cost of revenues (excluding depreciation and amortization) principally
comprises cost of fixed assets sold during the course of IT outsourcing
projects, cost of materials required to perform IT outsourcing activities and
cost of project-dedicated sub-contractors.
(f) Foreign currency translation
The Company considers the United States Dollar ("US Dollar or "$") to be
the functional currency of the Euroweb and unless otherwise stated, the
respective local currency to be the functional currency each of its
subsidiaries. The reporting currency of the Company is the US Dollar and
accordingly, all amounts included in the consolidated financial statements have
been translated into US Dollar.
The balance sheets of subsidiaries are translated into US Dollar using the
year end exchange rates. Revenues and expenses are translated at average rates
in effect for the periods presented. The cumulative translation adjustment is
included in the accumulated other comprehensive gain (loss) within shareholders'
equity.
Foreign currency transaction gains and losses are included in the
consolidated results of operations for the periods presented.
(g) Cash and cash equivalents
Cash and cash equivalents include cash at bank and investments with
maturities of three months or less at the date of acquisition by the Company.
(h) Investment in securities
Investments in marketable debt securities are classified as
available-for-sale and are recorded at fair value with any unrealized holding
gains or losses included as a component of other comprehensive income until
realized. Investments with remaining maturities of greater than one year are
classified as long-term, while those with remaining maturities of less than one
year are classified as short-term. A decline in the market value of
available-for-sale securities below cost that is deemed to be
other-than-temporary temporary results in a reduction in the carrying value
amount to fair value. Such impairment is charged to earnings and a new cost
basis for the security is established. In assessing whether an impairment is
other-than-temporary, the Company considers several factors including, but not
limited to, the ability and intent to hold the investment, reason and duration
for the impairment and forecasted performance of the investee.
F-10
EUROWEB INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(i) Property and equipment
Property and equipment are stated at cost, less accumulated depreciation.
The Company provides for depreciation of property and equipment using the
straight-line method over the following estimated useful lives:
Software 3 years
Computer equipment 3-5 years
Other furniture equipment and fixtures 5-7 years
Equipment purchased under capital lease is stated at the lower of fair
value and the present value of minimum lease payments at the inception of the
lease, less accumulated depreciation. The Company provides for depreciation of
leased equipment using the straight-line method over the shorter of estimated
useful life and the lease term.
Total depreciation from continuing operations for the years ended December
31, 2005 and 2004 was $ 147,547 and $2,048 respectively.
Recurring maintenance on property and equipment is expensed as incurred.
Any gain or loss on retirements and disposals is included in the results
of operations in the period of the retirement or disposal.
(j) Goodwill and intangible assets
Goodwill results from business acquisitions and represents the excess of
purchase price over the fair value of net assets acquired. Goodwill is tested at
least annually for impairment. The first step of this test requires the Company
to compare the carrying value of any reporting unit that has goodwill to the
estimated fair value of the reporting unit. When the current fair value is less
than the carrying value, the Company performs the second step of the impairment
test. This second step requires the Company to measure the excess of the
recorded goodwill over the current value of the goodwill by performing an
exercise similar to a purchase price allocation, and to record any excess as an
impairment.
Intangible assets that have finite useful lives (whether or not acquired
in a business combination) are amortized over their estimated useful lives but
also reviewed for impairment in accordance with the Statement of Financial
Accounting Standard ("SFAS") No. 144 "Accounting for Impairment or Disposal of
Long Lived Assets" ("SFAS 144"). Intangible assets currently consist of customer
contracts, which were acquired as a result of a purchase of Navigator and are
being amortized over the estimated future period of benefit of one to four
years. The assessment of recoverability and possible impairment is performed
using estimates of undiscounted future cash flows. If impairment is indicated,
the Company then measures the impairment based on the amount by which the
carrying value of the customer lists exceeds its fair market value. Fair market
value is determined primarily using the projected future cash flows discounted
at a rate commensurate with the risk involved.
Total amortization of intangible assets for the years ended December 31,
2005 and 2004 was $ 361,931 and $0 respectively.
(k) Earnings (loss) per share
Basic earnings (loss) per share is computed by dividing income (loss)
attributable to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted earnings (loss) per share reflects
the effect of dilutive potential common shares issuable upon exercise of stock
options and warrants. There were no dilutive options and warrants for the year
ended 2005 and 2004. Stock options and warrants convertible into 779,067 and
550,378 shares of common stock, respectively, were excluded from the computation
of diluted earnings per share since such options and warrants have an exercise
price in excess of the average market value of the Company's common stock during
the periods.
F-11
EUROWEB INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(l) Comprehensive income
Comprehensive income includes all changes in equity except those resulting
from investments by, and distributions to, owners.
(m) Business segment reporting
The Company manages its operations, and accordingly determines its
operating segments, on a geographic basis. The Company currently has one
operating segment: Hungary.
(n) Income taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets, net of appropriate valuation allowances, and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carry-forwards. Deferred tax assets and liabilities, if any, are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(o) Stock-based compensation
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations including Financial
Accounting Standards Board ("FASB") Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25" to account for its stock options granted to employees. Under
this method, compensation expense for fixed plan stock options is recorded on
the date of grant only if the current market price of the underlying stock
exceeds the exercise price. SFAS No. 123, "Accounting for Stock-Based
Compensation," ("SFAS 123") and FASB Statement No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123" established accounting and disclosure requirements using a
fair value-based method of accounting for stock-based employee compensation
plans. As allowed by existing standards, the Company has elected to continue to
apply the intrinsic value-based method of accounting described above, and has
adopted the disclosure requirements of SFAS 123, as amended. The Company
accounted compensation expenses for the Company's stock options and warrants
granted other than employees or independent directors based on fair value method
prescibed in SFAS 123.
SFAS 123 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 123. The Company estimates the fair value of each stock
option at the grant date by using the Black-Scholes option-pricing model.
F-12
EUROWEB INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The pro forma amount calculated as total compensation expense under SFAS
123 is $632,766 for the 200,000 options granted to directors on October 13,
2003, $1.3 million for the 365,000 options granted on April 26, 2004 and
$775,260 for the 300,000 options issued in 2005. Under the accounting provisions
of SFAS No. 123, this compensation expense would be recorded over the vesting
period of the options (3-4 years).
For purposes of the pro forma calculation under SFAS 123, the fair value
of each option grant has been estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions for 2004 and
2005:
Dividend yield 0%
Risk free rate 4%
Expected option life (years) 6
Volatity 88%
Under the accounting provisions of SFAS 123, the Company's 2005 and 2004
net income (loss) and net income (loss) per share would have been affected as
indicated below:
2005 2004
----------- -----------
Net income (loss):
Net loss from continuing
operation as reported $(2,018,166) $(1,402,766)
Net income from discontinuing operation
as reported $ 3,698,461 $ 668,312
----------- -----------
Net income (loss) as reported $ 1,680,295 $ (734,454)
Compensation expense (842,572) (943,164)
----------- -----------
Pro forma net income (loss) $ 837,723 $(1,677,618)
=========== ===========
Basic and diluted income (loss) per share:
As reported $ 0.31 $ (0.15)
Pro forma $ 0.15 $ (0.33)
(p) Inventory
Inventory, comprised of IT hardware for resale, is carried at the lower of
cost or market. Deposits paid by the Company for inventory are recorded as
prepayments until the Company takes title to the inventory.
(q) Recently Issued Accounting Standards
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123(R)"). SFAS 123(R) requires an entity to
recognize the grant-date fair value of stock options and other equity-based
compensation issued to employees in the income statement. SFAS 123(R) is
effective for the Company as of January 1, 2006. The Company is currently
assessing the impact SFAS 123(R) will have on its financial statements.
F-13
EUROWEB INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
amendment of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends Accounting
Research Bulletin No. 43, Chapter 4, "Inventory Pricing" ("ARB 43") to eliminate
the "so abnormal" criterion in ARB 43 and requires companies to recognize
abnormal freight, handling costs, and amounts of wasted material (spoilage) as
current-period charges. Additionally, SFAS 151 clarifies that fixed production
overhead cost should be allocated to inventory based on the normal capacity of
the production facility. SFAS 151 is effective for inventory costs incurred
during annual periods beginning after June 15, 2005. The Company is currently
assessing the impact SFAS 151 may have on its financial statements and is not
expected to have a material impact on our financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" which replaces Accounting Principles Board Opinions No. 20
"Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim
Financial Statements." This statement applies to all voluntary changes in
accounting principle and changes resulting from adoption of a new accounting
pronouncement that does not specify transition requirements. SFAS 154 requires
retrospective application to prior periods' financial statements for changes in
accounting principle unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. SFAS 154 also
requires that retrospective application of a change in accounting principle be
limited to the direct effects of the change. Indirect effects of a change in
accounting principle should be recognized in the period of the accounting
change. SFAS 154 is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005 with early implementation
permitted for accounting changes and corrections of errors made in fiscal years
beginning after the date this statement was issued. SFAS 154 is effective for
the Company as of January 1, 2006 and is not expected to have a material impact
on financial statements.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Financial Instruments-an amendment of FASB Statements No. 133 and 140"
("SFAS 155"). SFAS 155 amends SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") and SFAS No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". SFAS 155 resolves issues addressed in SFAS 133 Implementation
Issue No. D1, "Application of Statement 133 to Beneficial Interests in
Securitized Financial Assets." SFAS 155 is effective for the Company for all
financial instruments acquired or issued after January 1, 2007 and is not
expected to have a material impact on the Company's financial statements.
3. CASH AND CASH EQUIVALENTS
At December 31, 2005, cash of $1.57 million are held in current accounts
in the United States.
F-14
EUROWEB INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. PROPERTY AND EQUIPMENT -
Property and equipment as at December 31, 2005 comprise the following:
2005
-----------
Software $ 570,318
Service equipment 1,454,019
Other 216,197
-----------
Total 2,240,534
Less accumulated depreciation (1,168,545)
-----------
$ 1,071,989
===========
5. GOODWILL AND ACQUIRED INTANGIBLE ASSETS
Goodwill and acquired intangible assets as at December 31, 2005 comprise
the following:
2005
-----------
Customer contracts $ 3,494,231
Less accumulated amortization (361,931)
-----------
$ 3,132,300
===========
Goodwill $ 8,150,672
Customer contracts
Capitalized customer contracts relate to fixed contracts of Navigator to
provide IT oursource services in Hungary. These contracts are being amortized
over their remaining life of one to four years from the date of acquisition
(October 2005).
Goodwill
Goodwill relates to the following reporting unit under SFAS 142: Navigator.
The Company performs its annual impairment test relating to the goodwill
as of December 31 of each year. In the test as of December 31, 2005, the Company
compared the fair value of its single reporting unit to their carrying amounts,
noted that the fair value was higher than the carrying amount, and therefore no
impairment charge was required.
F-15
EUROWEB INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. LEASES
Capital leases
The Company is committed under various capital leases, which expire over
the next one year. The amount of assets held under capital leases included in
property and equipment is as follows:
2005
---------
Leased service equipment, gross value $ 130,393
---------
Total gross book value leased assets 130,393
Less accumulated depreciation (105,718)
---------
Total net book value leased assets $ 24,675
=========
The following is a schedule of future minimum capital lease payments (with
initial or remaining lease terms in excess of one year) as of December 31, 2005:
2006
--------
$ 27,042
--------
Total minimum lease payments 27,042
Less interest costs (2,367)
--------
Present value of future minimum lease payments $ 24,675
Since all obligations under capital leases as of December 31, 2005 fall
due within 12 months, lease obligations are included in `Other current
liabilities' on the balance sheet.
Operating leases
The Company incurred operational lease expense of $47,700 for the year
ended 12/31/05, which related to office rent. The Company has a five-year
non-cancelable lease agreement for office premises, which was entered into on
December 15, 2005. Remaining minimum rental payments total $1,380,439; $278,408
in each of 2006 and 2007, 2008 and 2009 and $ 266,807 in 2010. The Company did
not incur any operating lease expenses in the year ended December 31, 2004.
7. BANK LOANS AND OVERDRAFT
On April 6, 2005, the Company entered into a long-term loan agreement with
Commerzbank Bank Rt (the "Bank") for HUF 201,250,000 (approximately $942,270 at
the December 31, 2005 exchange rate), with an interest rate of three month
Budapest Interbank Offered Rate ("BUBOR") +2.5%. Approximately $740,354 was
outstanding at December 31, 2005. The loan is repayable in 14 quarterly
instalments of HUF 14,375,000 (approximately $67,305) plus quarterly interest
starting on May 31, 2005. The shares of the Navigator and Euroweb Hungary were
pledged as collateral for this loan, as well as a general lien established on
all of the assets of these subsidiaries of Euroweb.
F-16
EUROWEB INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition to the long-term loan agreement, the Company also entered into
an overdraft facility for unlimited period of time with 30 days termination
period with the Bank for HUF 130,000,000 (approximately $608,671) on July 20,
2005. Approximately $325,409 was outstanding at December 31, 2005. The interest
rate is BUBOR + 1,5%.
Additionally, on September 1, 2005, the Company entered into a two-month
loan facility agreement with the Bank for approximately $140,462 (HUF
30,000,000) to fund working capital. The Company did not have outstanding
balances under this agreement as of December 31, 2005. The contract was extended
to March 31, 2006. The interest rate is BUBOR + 1,5%.
8. ACQUISITION
On October 7, 2005, the Company acquired all of the outstanding shares of
Navigator Informatika Rt., an IT outsourcing service provider located in
Hungary. Consideration paid of $10,760,772 consisted of $8,500,000 in cash and
441,566 shares of Euroweb common stock valued at $1,752,134 excluding
registration cost, and $508,638 in transaction costs (consisting primarily of
professional fees incurred related to attorneys, accountants and valuation
advisors). The results of Navigator have been included in the Company's
consolidated financial statements from the date of acquisition.
In accordance with the purchase method of accounting prescribed by SFAS
141, the Company allocated the consideration to the tangible net assets and
liabilities and intangible assets acquired, based on their estimated fair
values. The excess of the purchase price over the fair value of the identifiable
tangible and intangible net assets acquired was assigned to goodwill. In
accordance with SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS
142"), goodwill will not be amortized but will be tested for impairment at least
annually.
The following represents the final allocation of the purchase price paid
for the Navigator business based on the fair values of the acquired assets and
assumed liabilities as of October 7, 2005:
Trade account receivable, net $ 1,057,317
Prepaid and other current assets 664,109
Property and equipment, net 1,115,701
Trade account payable (1,142,626)
Other current liabilities and accrued expenses (720,414)
Short term and long term bank loans (1,299,142)
------------
Fair value of Navigator's recorded assets acquired and
liabilities assumed (325,055)
Identified intangible assets - customer contracts 3,494,231
Deferred tax liabilities (559,076)
Excess purchase price over allocation to identifiable
assets and liabilities (Goodwill) 8,150,672
------------
Total consideration $ 10,760,772
============
F-17
In determining the value to be ascribed to acquired intangible assets, the
Company considered its intention for future use of the assets, analyses of
historical financial performance and estimates of future performance of
Navigator's services, among other factors. Acquired identifiable intangible
assets obtained in the Company's acquisition of Navigator relate to customer
contracts, which are being amortized over the estimated useful life of one to
four years.
Although the former owners of Navigator received shares of common stock of
the Company, each of the former owners of Navigator currently holds less than
10% of the outstanding shares of common stock in the Company. Therefore, they
are not considered related parties and business transactions are shown as third
party transactions in the accompanying consolidated financial statements of the
Company.
The following unaudited pro-forma information presents a summary of
consolidated results of operations of the Company for the years ended December
31, 2005 and 2004 as if the acquisition of Navigator had occurred at January 1,
2005 and 2004, respectively.
DECEMBER 31, 2005 DECEMBER 31, 2004
----------------- -----------------
Revenues 7,638,924 4,094,158
Net loss 973,004 (1,992,225)
Net loss per share $(0.18) $(0.39)
The above unaudited pro forma summarized results of operations are
intended for informational purposes only and, in the opinion of management, are
neither indicative of the financial position or results of operations of the
Company had the acquisition actually taken place as of January 1, 2005 or 2004,
nor indicative of the Company's future results of operations. The above
unaudited pro forma summarized results of operations do not include potential
cost savings from operating efficiencies that may result from the Company's
acquisition of Navigator.
9. DISPOSITIONS
Completed sale of Euroweb Czech Republic and Euroweb Slovakia
On December 16, 2004, the Company sold all of its shares in its
wholly-owned subsidiary, Euroweb Czech Republic for cash of $500,000. As a part
of the transaction, the Company forgave $400,000 of loans receivable from
Euroweb Czech Republic. On April 15, 2005, the Company sold Euroweb Slovakia for
cash of $2,700,000.
Proposed sale of Euroweb Hungary and Euroweb Romania
On December 15, 2005, the Board of Directors of the Company decided to
sell its interest its wholly-owned subsidiaries in Euroweb Hungary and Euroweb
Romania. On December 19, 2005, the Company entered into a share purchase
agreement with Invitel Tavkozlesi Szolgaltato Rt., a Hungarian joint stock
company, to sell Euroweb Hungary and Euroweb Romania, subject to various
conditions including, but not limited to, shareholders' approval.
The Company believes that the sale of Euroweb Czech Republic and Euroweb
Slovakia and the proposed sale of Euroweb Hungary and Euroweb Romania meet the
criteria for presentation as a discontinued operation under the provisions of
"SFAS 144", therefore amounts relating to Euroweb Czech Republic, Euroweb
Slovakia, Euroweb Hungary and Euroweb Romania have been reclassified as
discontinued operations for all periods presented.
F-18
EUROWEB INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the details of result of discontinued operation
per reporting units as follows:
2005 2004
---------- ----------
Gain from discontinued Czech operations (including
2004 gain on disposal of $409,314), net of tax $ -- $ 364,722
Gain from discontinued Slovakian operations
(including the 2005 gain on disposal of
$1,701,200), net of tax 1,733,470 313,764
Income (loss) from discontinued Hungarian operations 637,256 (34,273)
Income from discontinued Romanian operations 1,327,735 24,099
---------- ----------
Income from dicountinued operations $3,698,461 $ 668,312
The following information is a summary of selected items from Euroweb
Hungary's consolidated balance sheet as at December 31, 2005:
Description 2005
------------
Cash and cash equivalents $ 1,578,129
Trade account receivable, net 2,529,553
Prepaid, unbilled receivable and other current assets 1,010,706
Assets of discontinued operation 11,413,521
Property and equipment, net 3,424,237
Trade account payable (2,213,058)
Other current liabilities, deferred revenue and accrued expenses (2,147,249)
Liabilities of discontinued operation (3,130,274)
Intercompany loans (3,541,750)
Short term and long term bank and Pantel related loans (6,882,160)
------------
Net assets $ 2,041,655
The following information is a summary of selected items from Euroweb
Romania's balance sheet as at December 31, 2005:
Description 2005
-----------
Cash and cash equivalents $ 168,096
Trade account receivable, net 963,855
Prepaid, unbilled receivable and other current assets 480,558
Property and equipment, net 3,445,460
Trade account payable (957,593)
Other current liabilities, deferred revenue and accrued expenses (1,493,474)
Intercompany loans (400,000)
Long term portion of (102,130)
-----------
Net assets $ 2,104,772
F-19
EUROWEB INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES
The loss from continuing operations before income taxes by tax
jurisdiction for the years ended December 31, 2005 and 2004 was as follows:
2005 2004
----------- -----------
Loss from continuing operations
before income taxes:
Domestic $(1,703,466) $(1,402,766)
Foreign (372,608) --
----------- -----------
Total $(2,076,074) $(1,402,766)
=========== ===========
There was no current income tax expense from continuing operations in 2005
and 2004. A deferred tax benefit of $57,908 was recognized in 2005. There was no
deferred tax expense or benefit recognized in 2004.
The provision (benefit) for income taxes allocated to continuing
operations is comprised of the following:
Year Ended December 31,
2005 2004
-------- ----
Current federal $ -- $ --
Current foreign -- --
Deferred federal -- --
Deferred foreign (57,908) --
-------- ----
Provision for income tax expense (benefit) $(57,908) $ --
The provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate to income tax before provision
for income taxes.
The difference between the total expected tax expense (benefit) and tax
expense allocated to continuing operations for the years ended December 31, 2005
and 2004 is accounted for as follows:
2005 2004
--------------------- --------------------
Amount % Amount %
----------- ------ ----------- -----
Computed expected tax
Expense/(Benefit) $ (705,865) (34.00) $ (476,940) (34.00)
Foreign Tax Rate Differential 67,069 3.23 -- --
Foreign Income not subject to tax (4,798) (0.23) 0 0
Equity adjustment on sale of subsidiary (1,688,478) (81.33) (747,202) (53.26)
Change in Valuation Allowance 2,274,164 109.54 1,224,142 87.26
----------- ------ ----------- -----
Total expense/(benefit) $ (57,908) (2.79%) $ -- --%
=========== ====== =========== =====
F-20
EUROWEB INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred Tax Assets and Liabilities
Upon the acquisition of Navigator, the Company recognized a net Deferred
Tax Liability of $559,076 related to the excess of fair value of net assets over
carrying values. As most of the excess relates to the recognition of customer
contracts (Note 5), which is being amortized over a period of 1-4 years from
acquisition, the Deferred Tax Liability is being reduced proportionately.
$57,908 was recognized as a benefit in 2005.
The statutory corporate tax rate in Hungary was 16% as of December 31,
2004. Navigator has no tax net operating loss carryforwards from prior years.
2005 2004
----------- -----------
Deferred Tax Assets:
Net Operating Loss Carryovers $ 4,331,534 $ 3,665,214
Capital Loss Carryovers 1,823,704 713,634
----------- -----------
Gross Deferred Tax Assets 6,155,238 4,378,848
Valuation Allowance (6,155,238) (4,378,848)
----------- -----------
Net Deferred Tax Assets $ -- $ --
=========== ===========
For U.S. Federal income tax purposes, the Company has unused net operating
loss carryforwards at December 31, 2005 of approximately $12.8 million available
to offset future taxable income. From the $12.8 million of losses, $1.2 million
expire in various years from 2008-2010, $1.6 million expires in 2011, and the
remaining $10 million expire in various years from 2016 through 2025. In
addition, the Company has a capital loss carryover for US income tax purposes of
approximately $5.4 million. $2.1 million of the loss is from 2004 and will
expire after 2009. The remainder of the capital loss, $3.3 million, will expire
after 2010. The Tax Acts of some jurisdictions contain provisions which may
limit the net operating loss and capital 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 since the deferred tax assets are
fully offset by the valuation allowance.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences and tax loss carryforwards become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and projections
for future taxable income over the periods in which the deferred tax assets are
deductible, management believes that it is more likely than the Company will not
realize the benefit of these deductible differences, net of existing valuation
allowances at December 31, 2005.
F-21
EUROWEB INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Undistributed earnings of the Company's foreign subsidiaries are currently
not material. Those earnings are considered to be indefinitely reinvested;
accordingly, no provision for US federal and state income tax has been provided
thereon. Upon repatriation of those earnings, in the form of dividends or
otherwise, the Company would be subject to both US income taxes (subject to an
adjustment for foreign tax credits) and withholding taxes payable to the various
foreign countries. Determination of the amount of unrecognized deferred U.S.
income tax liability is not practicable due to the complexities associated with
its hypothetical calculation.
11. STOCKHOLDERS' EQUITY
On March 22, 2005, the Company granted an aggregate of 200,000 options to
two of its directors. The stock options granted to the directors on March 22,
2005 vest at the rate of 25,000 on each September 22 of 2005, 2006, 2007 and
2008. The exercise price of the options was $3.40, which is equal to the market
price on the date the grants were made.
On June 2, 2005, the Company granted 100,000 options to a director of the
Company, which vest at the rate of 25,000 on each December 2 of 2005, 2006,
2007, and 2008. The exercise price of the options was $4.05, which was equal to
the market price on the date the grants were made.
The President of the Company is eligible to receive an annual compensation
of $250,000 starting from April 15, 2005 for a period of two years, which is
payable in Euroweb shares of common stock. The number of shares to be paid is
calculated based on the average closing price 10 days prior to April 15 of each
year starting from April 15, 2005. The number of shares for the year ended April
14, 2006 is 82,781. In January 2006, the Company issued 58,968 shares of common
stock out of the total 82,781 covering the service period from April 15, 2005 to
December 31, 2005.
On June 7, 2005, the Company granted 100,000 warrants to a consulting
company as compensation for investor relations services at exercise prices as
follows: 40,000 warrants at $3.50 per share, 20,000 warrants at $4.25 per share,
20,000 warrants at $4.75 per share and 20,000 warrants at $5 per shares. The
warrants have a term of five years and tranches vest at a rate of a total 8,333
warrants per month over a one year period from the lowest to the highest warrant
price. In February 2006, the Company has terminated the contract with the
consultant. The total number of warrants granted under this agreement is reduced
time-proportonially to 83,330 based on the time in service by the consultant.
The reduction related to the warrants at $5 per shares. The warrants are being
expensed over the performance period of one year. Compensation expense for the
year ended December 31, 2005 was $141,410.
There are no other warrants outstanding or expired in 2005.
In connection with the acquisition of Navigator Informatika Rt (Note 1),
the Company issued 441,566 shares of common stock.
F-22
EUROWEB INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. COMMITMENTS AND CONTINGENCIES
(a) Employment Agreements
The Company entered into a six-year agreement with its Chief Executive
Officer, Csaba Toro on October 18, 1999, which commenced January 1, 2000, and
provided for an annual compensation of $96,000. The agreement was amended in
2004 and 2005. The amended agreement provides for an annual salary of $200,000
and a bonus of up to $150,000 in 2006, 2007 and 2008, as well as an annual car
allowance of $30,000 for the same period.
The Company has entered into a two-year employment agreement with Moshe
Schnapp as President and Director of the Company starting from April 15, 2005,
which grants an annual compensation of $250,000 to be paid in the form of
Euroweb shares of common stock. The number of shares to be received by Mr.
Schnapp is calculated based on the average closing price 10 days prior to the
commencement of each employment year. For the year ended April 14, 2006, Mr.
Schnapp will receive 82,781 Euroweb shares of common stock.
(b) Lease agreements
The Company's subsidiaries have entered into various capital leases for
vehicles and internet equipment, as well as non-cancelable agreements for office
premises. Refer to Note 6 (Leases).
(c) Legal Proceedings
There are no known significant legal procedures that have been filed and
are outstanding against the Company.
(d) Elender Rt. acquisition
On June 9, 2004 the Company acquired all of the outstanding shares of
Elender Rt. ("Elender") for $6,500,000 in cash and 677,201 of the Company's
shares of common stock. Under the terms of agreement, the Company has placed
248,111 unregistered shares of common stock, newly issued and in the name of the
Company, with an escrow agent as security for approximately $1.5 million loans
payable to former shareholders of Elender. The shares will be returned to the
Company from escrow once the outstanding loans have been fully repaid. However,
if there is a default on the outstanding loan, then the shares will be issued to
the other party and the Company is then obliged to register the shares. As of
December 31, 2005, the Company had repaid all of the loans that were
outstanding. In January 2006, the Company acquired and subsequently cancelled
the shares that were put into escrow.
Pursuant to the registration rights agreement signed on June 1, 2004 with
the sellers of Elender, if the shares of the Company's common stock issued to
the sellers were not registered within 120 days of Closing (closing was on June
9, 2004) for reasons attributable to the Company, a penalty of $2,000 per day is
payable until the shares are registered. The Company made a provision of
$170,000 to accrue for potential penalties under this clause as of December 31,
2004. In 2005, the Company received a waiver from the sellers. Therefore the
penalty was reversed.
In case of disposal of Euroweb Hungary and Euroweb Romania, the Company
will have to reregister the shares issued in connection with the acquisition of
Elender. In case of late filing of this registration statement may result
penalty payment obligation.
F-23
EUROWEB INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(e) Navigator acquisition
The Company entered into a registration rights agreement dated July 21,
2005, whereby it has agreed to file a registration statement registering the
441,566 shares of Euroweb common stock issued in connection with the acquisition
within 75 days of the closing of the transaction and have such registration
statement declared effective within 150 days from the filing thereof. In the
event that Euroweb fails to meet its obligations to register the shares it may
be required to pay a penalty equal to 1% of the value of the Shares per month.
The Company has obtained a written waiver from the seller stating that the
seller will not raise any claims in connection with the filing of registration
statement until May 30, 2006.
(f) Euroweb Hungary Rt. purchase guarantee
In February 2004, the Company purchased the remaining 51% of Euroweb
Hungary from Pantel. The consideration paid by the Company for the 51% interest
consisted of EUR 1,650,000 ($2,105,000) in cash, and a purchase commitment that
Euroweb Hungary will purchase at least HUF 600 million (approximately $3
million) worth of services from Pantel in each year from 2004 to 2006. In the
event that Euroweb Hungary and its subsidiaries do not satisfy this commitment,
Pantel may charge a penalty equal to 25% of the commitment amount less any
services purchased. Purchases in 2004 and 2005 exceeded this amount. If Euroweb
Hungary is successfully sold to Invitel, any claim arising from this commitment
will from that date be payable by Invitel.
(g) Indemnities provided upon sale of subsidiaries
On April 15, 2005, the Company sold Euroweb Slovakia. According to the
securities purchase contract (the "Contract"), the Company will indemnify the
buyer for all damages incurred by the buyer as the result of seller's breach of
certain representations, warranties or obligations as set in the Contract up to
an aggregate amount of $540,000. The buyer shall not be entitled to make any
claim under the Contract after the fourth anniversary of the date of the
Contract. No claims have been made to date. The Company has accrued $35,000 as
the estimated fair value of this indemnity.
(h) Potentional penalty of EUR 400,000
If by the date which is 120 days after the signing of the share purchase
agreement on December 19, 2005 about the disposition of Euroweb Hungary and
Euroweb Romania to Invitel, the Company either fails to comply with the
provisions of the share purchase agreement, or the Stockholders Meeting of the
Company fails to approve the transaction as set forth in the agreement, then the
Company shall on demand reimburse to Invitel all costs, expenses and fees
(including without limit financial and technical advisors and attorneys fees) in
relation to the investigation, and negotiation of the Transaction, and all
associated and connected matters up to the maximum amount of EUR 400,000
(i) Purchase obligation of 85% ownership of Navigator
On or before the date of closing of the sale of Euroweb Hungary and
Euroweb Romania to Invitel, Euroweb International will purchase 85% ownership of
Navigator representing a purchase obligation in a value of $6,000,000 in cash.
At the date of closing at the latest, Euroweb Hungary has to settle all of its
bank loans including the $6,000,000 Commerzbank loan obtained for the
acquisition of Navigator.
F-24
EUROWEB INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCK OPTION PLAN AND EMPLOYEE OPTIONS
a) Stock option plans
The Company's Stock Option Plan expired in 2003, although unexpired
options issued under this plan were exercisable until expiry. At December 31,
2004, options for 63,000 common stock were outstanding and exercisable by the
Chief Executive Officer under the Stock Option Plan, which expired on April 2,
2005. No options remained outstanding as of December 31, 2005.
In 2004, the Board of Directors established the "2004 Incentive Plan" or
"the Plan", with an aggregate of 800,000 shares of common stock authorized for
issuance under the Plan. The Plan provides that incentive and nonqualified
options may be granted to key employees, officers, directors and consultants of
the Company for the purpose of providing an incentive to those persons. The Plan
may be administered by either the Board of Directors or a committee of two
directors appointed by the Board of Directors (the "Committee"). The Board of
Directors 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 generally exercisable for a period of
up to ten years from the date of grant. Incentive options granted to
stockholder's that hold in excess of 10% of the total combined voting power or
value of all classes of stock of the Company 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. 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.
On April 26, 2004 under the Plan, the Company granted 125,000 options to
the Chief Executive Officer and an additional 195,000 options to five employees
and 45,000 options to two consultants of the Company. All of these options have
an exercise price equal to the market price on day of grant ($4.78), vest over a
period of between three and four years and relate to future services to be
performed. As the Company follows APB 25 with respect to accounting for grants
made to employees, no compensation expense was recorded for these options. The
total compensation expense for their options granted to the two consultants is
$162,000, which is being expensed over the vesting period of three years.
In March 2005, one of the Directors has resigned and his 100,000 options
expired unexercised.
The President and a Director of the Company is eligible to receive an
annual compensation of $250,000 starting from April 15, 2005, which is payable
in shares of Euroweb common stock. The number of shares to be paid is calculated
based on the average closing price 10 days prior to each employment year. The
number of shares for the year ended April 14, 2006 is 82,781. Compensation
expense for the year ended December 31, 2005 was $177,083 (2004: $-). On January
5, 2006, 58,968 shares has been issued from the total of 82,781 shares covering
the period from April 15, 2005 to December 31, 2005.
F-25
EUROWEB INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(b) Other Options
The Company has issued options pursuant to employment agreements. As of
December 31, 2004 fully vested options are outstanding and exercisable for
63,000 shares pursuant to the employment agreement with the Chief Executive
Officer. The options were granted on April 2, 1999 (with exercise price equal to
stock price at date of grant) and expired unexercised on April 2, 2005. The
options were exercisable at $10.00 per share.
On October 13 2003, the Company granted two Directors 100,000 options
each, at an exercise price (equal to the fair value on that day) of $4.21 per
share, with 25,000 options vesting on each April 13, 2004, 2005, 2006 and 2007.
There were 100,000 options outstanding as of December 31, 2005.
The following table summarizes the total number of shares for which
options have been issued (Stock Option Plan, 2004 Incentive Plan, Employment
Agreements and grants to Directors) and are outstanding:
2005 2004
------------------- -------------------
Weighted Weighted
average average
exercise exercise
Options Price Options Price
-------- -------- ------- --------
Outstanding, January 1, 654,000 $ 5.33 309,000 $ 5.95
Granted 300,000 3.62 365,000 4.78
Cancelled -- -- -- --
Expired (249,000) 6.47 (20,000) 5.00
-------- -------- ------- --------
Outstanding, December 31, 705,000 4.20 654,000 5.33
======== ======== ======= ========
195,000 options under the 2004 Incentive Plan are outstanding and
exercisable as of December 31, 2005.
No options were exercised in 2005 and 2004.
The following table summarizes information about shares subject to
outstanding options as of December 31, 2005 which were issued to current or
former employees, consultants or directors pursuant to the 2004 Incentive Plan
and grants to Directors:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------- -------------------------------------
WEIGHTED-
WEIGHTED- AVERAGE WEIGHTED-
RANGE OF AVERAGE REMAINING AVERAGE
NUMBER EXERCISE EXERCISE LIFE NUMBER EXERCISE
OUTSTANDING PRICES PRICE IN YEARS EXERCISABLE PRICE
----------- ----------- --------- --------- ----------- ---------
100,000 $4.21 $4.21 3.76 50,000 $4.21
305,000 $4.78 $4.78 4.31 182,500 $4.78
200,000 $3.40 $3.40 5.22 50,000 $3.40
100,000 $4.05 $4.05 5.42 25,000 $4.05
----------- -----------
705,000 $3.40-$4.78 $4.20 4.46 307,500 $4.40
=========== ===========
F-26
EUROWEB INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SEGMENT INFORMATION
The Company's operations fall into one industry segment: providing IT
outsource services to business customers. The Company manages its operations,
and accordingly determines its operating segments, on a geographic basis.
Consequently, the Company has one operating segments: Hungary. The performance
of geographic operating segments is monitored based on net income or loss from
continuing operations (after income taxes, interest, and foreign exchange
gains/losses). The accounting policies of the segments are the same as those
described in the summary of accounting policies in Note 2. There are no
intersegment sales revenues.
The following tables summarize financial information by geographic segment
for the year ended December 31, 2005 and 2004:
Geographic information for 2005
Hungary Corporate Total
----------- ----------- -----------
Total revenues $ 1,964,998 -- $ 1,964,998
Depreciation 147,547 -- 147,547
Intangible amortization
(customer contract) 361,931 -- 361,931
Interest income 2,512 -- 2,512
Interest expense (38,240) -- (38,240)
Net interest (expense)
income (35,728) -- (35,728)
Income tax - current -- -- --
Income tax - deferred 57,908 -- 57 ,908
Net loss from continuing operations $ (314,700) $(1,703,466) $(2,018,166)
Fixed assets, net 1,071,989 -- 1,071,989
Fixed asset additions 103,835 -- 103,835
Goodwill 8,150,672 8,150,672
Geographic information for 2004
Corporate Total
---------- ----------
Total revenues -- --
Depreciation 2,048 2,048
Intangible impairment -- --
Goodwill impairment -- --
Interest income 49,154 49,154
Interest expense -- --
Net interest (expense)
income 49,154 49,154
Income tax -- --
Net loss from continuing operation (1,402,766) (1,402,766)
Fixed assets, net -- --
Fixed asset additions 2,048 2,048
Goodwill -- --
F-27
EUROWEB INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill and related impairment amounts are recorded in the books of the
Corporate entity and allocated to reporting units.
15. RELATED PARTY TRANSACTIONS
KPN owned approximately 43.54% (December 31, 2005: 35.20%) of the
outstanding shares of Euroweb common stock as of December 31, 2004, and a
majority interest in Pantel. On February 28, 2005, KPN sold its 75.1% interest
in Pantel to Hungarian Telephone and Cable Corp. Therefore, Pantel is no longer
considered a related party of the Company effective March 1, 2005. There were no
material related party transactions in continouing operation in 2005 and 2004.
16. SUBSEQUENT EVENTS
(a) Issuance of shares
In January 2006, the Company issued 58,968 shares of common stock out of
the total 82,781 covering the service period between April 15, 2005 to December
31, 2005.
(b) Termination of Consultant contract
In February 2006, the Company terminated its contract with a consultant
providing investor relation services. The warrants granted under the contract
are reduced time-proportionally to 83,330, based on the time in service by the
consultant.
(c) Cancellation of shares put into escrow
In January 2006, the Company acquired and cancelled the shares that were
put into escrow.
F-28