U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 1-1200
EUROWEB INTERNATIONAL CORP.
(Exact name of small business issuer as specified in its charter)
Delaware 13-3696015
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1122 Budapest, Varosmajor utca 13. Hungary
(Address of principal executive offices)
+36-1-2244000 +36-1-8883783
Issuer's telephone number Issuer's facsimile number
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirement for the past 90 days. Yes X No
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock, $.001 par value 4,665,332
-----------------------------
(Class) (Outstanding at March 31, 2003)
Transitional Small Business Disclosures Format (Check one): Yes No X_______
EUROWEB INTERNATIONAL CORP.
INDEX
PART I. Financial Information
Item 1. Financial Statements
Consolidated balance sheets as of March 31, 2003 (unaudited)
and December 31, 2002 (audited) 2
Consolidated statements of operations and comprehensive loss
(unaudited) for the three months ended March 31, 2003 and 2002 3
Consolidated statements of stockholders' equity for the three months ended
March 31, 2003 (unaudited) and twelve months ended December 31, 2002 4
Consolidated statements of cash flows (unaudited) for the three months
ended March 31, 2003 and 2002 5
Notes to interim (unaudited) Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 3. Controls and Procedures
PART II. Other Information 17
Signature 21
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, 2003 December 31, 2002
(Unaudited) (audited)
ASSETS
Current Assets
Cash and cash equivalents $ 998,438 $ 2,098,983
Investment in securities 12,146,309 12,104,104
Trade accounts receivable, net 414,153 348,488
Related party receivables 1,464,706 855,194
Current portion of note receivable 200,596 190,105
Prepaid and other current assets 1,215,466 851,100
--------- -------
Total current assets 16,439,668 16,447,974
Note receivable, less current portion 124,143 173,871
Investment in affiliate - -
Property and equipment, net 1,164,643 1,269,923
Construction in progress 1,186,000 430,000
Goodwill 1,546,538 1,546,538
Intangibles - customer lists 150,545 167,273
------- -------
Total assets $20,611,537 $20,035,579
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $1,279,500 $659,244
Related party payables 865,648 345,110
Acquisition indebtedness 180,000 180,000
Other current liabilities 276,108 469,547
Loan payable - 129,945
Accrued expenses 548,157 965,885
Deferred IRU revenue 30,667 30,667
Deferred other revenue 448,029 145,392
------- -------
Total current liabilities 3,628,109 2,925,790
Non-current portion of deferred IRU revenue 889,333 889,333
Non-current portion of lease obligations 54,650 67,100
------ ------
Total liabilities 4,572,092 3,882,223
Stockholders' Equity
Preferred stock, $.001 par value - Authorized 5,000,000 shares;
no shares issued or outstanding - -
Common stock, $.001 par value - Authorized 60,000,000 shares;
Issued and outstanding 4,665,332 shares 24,129 24,129
Additional paid-in capital 48,227,764 48,227,764
Accumulated deficit (31,281,577) (31,219,267)
Accumulated other comprehensive income 184,541 236,142
Treasury stock - 175,490 common shares, at cost (1,115,412) (1,115,412)
----------- -----------
Total stockholders' equity 16,039,445 16,153,356
---------- ----------
Commitments and contingencies (note 6)
Total liabilities and stockholders' equity $20,611,537 $20,035,579
=========== ===========
See accompanying notes to consolidated financial statements.
2
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
Three months ended
March 31,
2003 2002
Revenues
Third party revenues $ 2,142,862 $ 1,794,489
Related party revenues 1,199,034 1,356,091
----------- ---------
Total Revenues 3,341,896 3,150,580
Cost of revenues
Third party cost of revenues 1,803,912 1,437,866
Related party cost of revenues 514,896 518,972
------- -------
Total Cost of revenues 2,318,808 1,956,838
-------- --------
Gross profit 1,023,088 1,193,742
Operating expenses
Compensation and related costs 482,550 522,400
Consulting and professional fees 189,663 246,396
Other selling, general and administrative expenses 288,542 332,876
Depreciation and amortization 209,040 214,454
------- -------
Total operating expenses 1,169,795 1,316,126
Loss from operations (146,707) (122,384)
Net interest income 84,397 125,804
Equity in loss of affiliate - 188,050
Loss from operations before income taxes (62,310) (184,630)
Provision for income taxes - -
------- -------
Net Loss (62,310) (184,630)
Other comprehensive loss 51,601 161,197
------- -------
Comprehensive loss $(113,911) $ (345,827)
============= =========
Net Loss per share, basic (.01) (.04)
Weighted average number of shares outstanding 4,665,332 4,665,332
See accompanying notes to consolidated financial statements
3
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Accumulated
Additional Other Total
Common Stock Paid-in Accumulated Comprehensive Treasury Stockholders'
Shares Amount Capital Deficit Gains(Losses) Stock Equity
--------- ------- ----------- ------------- ---------- ------------ ------------
Balances, December 31, 2001 4,665,332 $24,129 $48,227,764 $(25,325,033) (143,323) $(1,115,412) $21,668,125
========= ======= =========== ============= ========== ============ ============
Foreign currency translation
loss - - - - 160,687 - 160,687
Unrealized gain on securities
available for sale - - - - 245,212 - 245,212
Reclassification of realized
gain included in net income - - - - (26,434) - (26,434)
Net loss for the period - - - (5,894,234) - - (5,894,234)
--------- ------- ----------- ------------- ---------- ------------ ------------
Balances, December 31, 2002 4,665,332 $24,129 $48,227,764 $(31,219,267) $236,142 $(1,115,412) $16,153,356
========= ======= =========== ============= ========== ============ ============
Foreign currency translation
gain (loss) - - - - (3,647) - (3,647)
Unrealized gain (loss) on - - - - (47,954) - (47,954)
securities available for sale
Net loss for the period - - - (62,310) - - (62,310)
--------- ------- ----------- ------------- ---------- ------------ ------------
Balances, March 31, 2003 4,665,332 $24,129 $48,227,764 $(31,281,577) $184,541 $(1,115,412) $16,039,445
========= ======= =========== ============= ========== ============ ============
See accompanying notes to consolidated financial statements
4
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
-------------------------------------------------------------------------------------- -------------------------------------------
Three Months Ended
March 31,
2003 2002
---- ----
Cash flows from operating activities:
Net loss $(62,310) $(184,630)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 209,040 214,454
Amortization of discount on acquisition indebtedness 5,232 5,076
Equity in loss of affiliate 0 188,050
Foreign currency (gain) loss (3,936) 3,217
Realized gain on sale of securities 0 (47,970)
Unrealized interest income on securities (90,159) (74,023)
Changes in operating assets and liabilities net of effects of acquisitions:
Accounts receivable (675,177) (42,893)
Prepaid and other assets (369,598) (133,980)
Accounts payable, other current liabilities and accrued expenses 568,265 101,084
Deferred revenue 302,637 (109,771)
-------------- --------------
Net cash used in operating activities (116,006) (81,386)
-------------- --------------
Cash flows from investing activities:
Investment in securities 0 (13,506,666)
Maturity of securities 0 14,650,000
Collections on notes receivable 39,237 60,506
Purchase of property and equipment (843,032) (158,213)
-------------- --------------
Net cash (used in) provided by investing activities (803,795) 1,045,627
-------------- --------------
Cash flows from financing activities:
Repayment of loan payable (129,945) 0
Principal payments under capital lease obligations (51,088) (47,393)
-------------- --------------
Net cash used in financing activities (181,033) (47,393)
-------------- --------------
Effect of foreign exchange rate changes on cash 289 (3,328)
-------------- --------------
Net increase (decrease) in cash and cash equivalents (1,100,545) 913,520
Cash and cash equivalents, beginning of period 2,098,983 1,512,303
-------------- --------------
Cash and cash equivalents, end of period $998,438 $2,425,823
============== ==============
See accompanying notes to consolidated financial statements.
5
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
1. Organization and Business
EuroWeb International Corp. (the "Company") is a Delaware
corporation which was organized on November 9, 1992, and was a development
stage enterprise through December 31, 1993. The controlling
owner of Euroweb International Corp. is KPN Telecom BV, a Netherlands
corporation.
The Company operates in the Czech Republic, Romania and Slovakia,
through its subsidiaries Euroweb Czech Republic spol. s.r.o.
("Euroweb Czech"), Euroweb Slovakia a.s. ("Euroweb Slovakia") and
Euroweb Romania S.A. ("Euroweb Romania"). The Company operates in
one industry segment, providing Internet access and additional
value added services to business customers. The Company's
consolidated statements of operations also include the equity in the
net income or loss of Euroweb Hungary Rt., in which the Company
has a 49% ownership interest. The other 51% of Euroweb Hungary Rt. is
held by Pantel Telecommunication Rt., Hungary ("Pantel Rt."),
of which KPN Telecom BV is also the controlling owner.
The revenues come from the following three sources:
(1) Internet Service Provider (Internet access, Content and Web
services, Other services)
(2) International/domestic leased line, Internet Protocol data services
(3) Voice over Internet Protocol services
For the services in points (2) and (3), the main customer of the Company in 2003
and 2002 was Pantel Rt.
2. Summary of Significant Accounting Policies
(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.
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of
America.
(b) Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Significant estimates
made by the Company include the period of benefit and recoverability of
goodwill and other intangible assets.
(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.
6
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
(d) Revenue recognition
Revenues from Internet services are recognized in the month in which
the services are provided, either based on monthly traffic or on fixed
monthly fees (leased lines). Revenue for other services, are recognized
as the service is performed.
During the year, the Company entered into an agreement to provide
transmission capacity to a customer pursuant to an indefeasible
rights-of-use agreement ("IRUs") that management believe qualifies as
an operating lease under Financial Accounting Standards Board
Interpretation No. 13, "Accounting for Leases" ("FAS 13"), since the
IRU agreement provides rights to use a specific subject asset for a
defined period. Revenue attributable to the lease will be recognized on
a straight-line basis over the term of the 20-year lease agreement,
commencing upon completion of the installation in April 2003.
Under Financial Accounting Standards Board Interpretation No. 43, "Real
Estate Sales, an interpretation of FASB Statement No. 66" ("FIN 43"),
leases of fiber and capacity that are deemed integral equipment are
required to be accounted for in the same manner as leases of real
estate. If fiber and equipment are considered integral to the related
real estate, a lease must include a provision transferring title of
such integral equipment to the lessee in order for that lease to be
accounted for as a sales-type lease. Failure to satisfy the title
transfer requirements results in operating lease treatment, and
recognition of the related lease income over the lease term. The
Company's IRU does not involve a transfer of title.
IRUs generally require the customer to make a down payment upon
execution of the agreement, with the balance due upon delivery and
acceptance of the fiber. This has resulted in a substantial amount of
deferred revenue being recorded on the balance sheet. The Company is
obligated under the fiber IRU to maintain its network in efficient
working order and in accordance with industry standards. Customers are
obligated for the term of the agreement to pay for their allocable
share of the costs for operating and maintaining the network. The
Company recognizes this revenue monthly as services are provided.
Accounting practice and guidance with respect to the treatment of fiber
sales and IRU agreements continues to evolve. Any changes in the
accounting treatment could affect the way the Company accounts for
revenue and expenses associated with these transactions in the future.
(e) Cost of revenues
Cost of revenues comprise principally of telecommunication network
expenses, costs of content services and cost of leased lines.
(f) Foreign currency translation
The Company considers the United States Dollar ("US$") to be the
functional currency of the Company and unless otherwise stated, the
respective local currency to be the functional currency of its
subsidiaries. The reporting currency of the Company is the US$ and
accordingly, all amounts included in the consolidated financial
statements have been translated into US$.
7
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
The balance sheets of subsidiaries are translated into US$ 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 reflected as a separate component of
shareholders' equity on the consolidated balance sheet.
The Company conducts business and maintains its accounts for Euroweb
Romania in the Romanian Lei ("ROL"). Romania is considered a highly
inflationary economy and, therefore the U.S. dollar is used as the
functional currency. The Company's financial statements presented in
ROL are remeasured into U.S. dollars using the following policies:
|X| Monetary assets and liabilities are remeasured into the
functional currency using the exchange rate at the balance sheet
date.
|X| Non-monetary assets and liabilities are remeasured into the
functional currency using historical exchange rates.
|X| Revenues, expenses, gains and losses are remeasured into the
functional currency using the average exchange rate for the
period except for revenues and expenses related to non-monetary
items that are remeasured using historical exchange rates.
The net effect of re-measurement from the local currency into the
functional currency (US$) is included in the determination of net
profit and loss, under `Other selling, general and administration
expenses'.
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 short-term deposits
of less than three months duration.
(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.
(i) Investment in affiliate
The Company holds a minority interest of 49% in Euroweb Hungary Rt.
which is controlled by its 51% shareholder, Pantel Rt. As the Company
exerts significant influence over Euroweb Hungary Rt., the investment
is carried under the equity method of accounting, with the Company
recording its share of the earnings or loss of Euroweb Hungary Rt.
Dividends are credited against the investment account when received.
8
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
As a result of continuing losses, the carrying value of the net
investment in affiliate was written down to zero during 2002. Since the
Company has no legal or commercial commitments to provide continuing
financial support, no further losses will be recognized unless the
Company makes additional qualifying investments in Euroweb Hungary Rt.,
and future profits will be recognized only once such profits exceed the
amount of unrecorded losses. If the Company makes additional qualifying
investments in Euroweb Hungary Rt., the Company would be required to
recognize additional losses to the extent these additional investments
are considered funding of unrecognized prior losses of Euroweb Hungary
Rt.
(j) Property and equipment
Property and equipment are stated at cost, less accumulated
depreciation. Equipment purchased under capital lease is stated at the
present value of minimum lease payments at the inception of the lease,
less accumulated depreciation. The Company provides for depreciation of
equipment using the straight-line method over the shorter of estimated
useful lives of up to four years or the lease term.
Recurring maintenance on property and equipment is expensed as
incurred.
Any gain or loss on retirements and disposals are included in the
results of operations.
(k) Goodwill and Intangibles
Goodwill results from business acquisitions and represents the excess
of purchase price over the fair value of net assets acquired.
Amortization was computed over the estimated future period of benefit
(generally five years) on a straight-line basis until December 31,
2001. On January 1, 2002 the Company adopted Statement of Financial
Accounting Standard No. 142 ("SFAS 142"), "Goodwill and Other
Intangible Assets," which establishes new accounting and reporting
standards for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17. Goodwill and intangible assets that have
indefinite useful lives are no longer amortized but rather are tested
at least annually for impairment. Intangible assets that have finite
useful lives (whether or not acquired in a business combination) will
continue to be amortized over their estimated useful lives, which are
no longer limited to a maximum of 40 years. The adoption of SFAS 142
has eliminated the goodwill charge in 2002 and 2003.
Intangibles consist of customer lists which were acquired as a result
of a purchase of assets and are being amortized over the estimated
future period of benefit of five years. The assessment of
recoverability and possible impairment are determined using estimates
of undiscounted future cash flows in a manner in accordance with the
provisions of Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets,"
("SFAS No. 144"), with a write-down recorded in the third quarter of
2002. The carrying value of customer lists is considered impaired when
the projected undiscounted future cash flows related to the asset are
less than its carrying value. The Company measures 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. The assessment of the recoverability of the
remaining balance will be impacted if estimated future operating cash
flows are not achieved.
9
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
(l) Net loss per share
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share," ("SFAS No. 128"), which provides for the
calculation of "basic" and "diluted" earnings per share. Basic
earnings(loss) per share include no dilution and 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 potential effect of
common shares issuable upon exercise of stock options and warrants in
periods in which they have a dilutive effect. The Company had
potentially dilutive common stock equivalents for the years ended
December 31, 2002 and the quarter ended March 31, 2003, which were not
included in the computation of diluted net loss per share because they
were antidilutive.
(m) Comprehensive loss
The Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," ("SFAS No. 130") which
established standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income
is defined to include all changes in equity except those resulting from
investments by, and distributions to, owners. Among other disclosures,
SFAS No.130 requires that all items that are required to be recognized
under current accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the
same prominence as other financial statements. The Company has chosen
to present a Combined Statement of Operations and Comprehensive Loss.
(n) Business segment reporting
The Company adopted Statement of Financial Accounting Standards No.
131, "Disclosures About Segments of an Enterprise and Related
Information," ("SFAS No. 131"). SFAS No. 131 superseded FASB Statement
No. 14, "Financial Reporting for Segments of a Business Enterprise."
SFAS No. 131 establishes standards for disclosures about operating
segments, products and services, geographic areas and major customers.
Management has determined that the Company operates in one industry
segment, providing Internet access and additional value added services
to business customers. Substantially all of the Company's revenues are
derived from the provision of such services.
(o) Income taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities, net of appropriate valuation
allowances, 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.
(p) Stock-Based compensation
10
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
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 FASB Interpretation No. 44, "Accounting for Certain
Transactions involving Stock Compensation an interpretation of APB
Opinion No. 25" issued in March 2000, to account for its fixed plan
stock options. Under this method, compensation expense 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 No. 123") established accounting and
disclosure requirements using a fair value-based method of accounting
for stock-based employee compensation plans. As allowed by SFAS No.
123, 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 No. 123.
(q) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
On January 1, 2002, the Company adopted SFAS No. 144 ("SFAS 144"),
"Accounting for Impairment or Disposal of Long-Lived Assets," which
establishes a single accounting method for long-lived assets to be
disposed of by sale and broadens the presentation of discontinued
operations. The adoption of this statement had no significant impact on
the Company's results of operations or financial position.
The Company evaluates the carrying value of long-lived assets to be held
and used, including goodwill, whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. The carrying
value of a long-lived asset is considered impaired when the projected
undiscounted future cash flows related to the asset are less than its
carrying value. The Company measures impairment based on the amount by
which the carrying value of the respective asset 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.
(r) Asset Retirement Obligations
On January 1, 2003, the Company adopted Financial Accounting Standards
Board No. 143 "Accounting for Asset Retirement Obligations" ("Statement
143") issued in June 2001. Statement 143 requires that the fair value of
a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can
be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset.
(s) Recent accounting pronouncements
The Financial Accounting Standards Board No. 143 "Accounting for Asset
Retirement Obligations" ("Statement 143") was issued in June 2001.
Statement 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. The Company is required to
adopt the provisions of Statement 143 on January 1, 2003. The Company
is evaluating the impact, if any, Statement 143 may have on its future
consolidated financial statements.
In April 2002, the FASB issued SFAS No.145, Rescission of FASB
Statements No.4, 44 and 64, Amendment of FASB Statement No.13, and
Technical Corrections. SFAS No.145 amends existing
11
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
guidance on reporting gains and losses on the extinguishment of debt to
prohibit the classification of the gain or loss as extraordinary, as
the use of such extinguishments have become part of the risk management
strategy of many companies. SFAS No.145 also amends SFAS No.13 to
require sale-leaseback accounting for certain lease modifications that
have economic effects similar to sale-leaseback transactions. The
provisions of the Statement related to the rescission of Statement No.4
is applied in fiscal years beginning after May 15, 2002. Earlier
application of these provisions is encouraged. The provisions of the
Statement related to Statement No.13 were effective for transactions
occurring after May 15, 2002, with early application encouraged. The
adoption of SFAS No.145 is not expected to have a material effect on
the Company's financial statements.
The Financial Accounting Standards Board ("FASB") No. 146 Accounting
for Costs Associated with Exit or Disposal Activities ("Statement 146")
was issued in June 2002. Statement 146 nullifies EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)". `Costs' include (a) one-time termination benefits, (b)
costs to terminate a contract that is not a capital lease and (c) other
associated costs including costs to consolidate facilities or relocate
employees. The Statement is based on the general principle that a
liability for a cost associated with an exit or disposal activity
should be (1) recorded when it is incurred and (2) initially measured
at fair value. Thus, a commitment to an exit or disposal plan no longer
will be a sufficient basis for recording a liability for those
activities. The Company is required to adopt the provisions of
Statement 146 for exit or disposal activities initiated after December
31, 2002. The Company is evaluating the impact, if any, Statement 146
may have on its future consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others, an interpretation of
FASB Statements No. 5, 57 and 107 and a rescission of FASB
Interpretation No. 34. This Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under guarantees issued. The
Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value
of the obligation undertaken. The disclosure requirements are effective
for financial statements of interim and annual periods ending after
December 31, 2002. The Group has adopted the disclosure requirements
and will apply the recognition and measurement provisions for all
guarantees entered into or modified after December 31, 2002. To date
the company has not entered into or modified guarantees.
In December 2002, the FASB issued SFAS No.148, Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of
FASB Statement No.123. This Statement amends FASB Statement No.123,
Accounting for Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of Statement No.123 to
require prominent disclosures in both annual and interim financial
statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the
notes to these consolidated financial statements.
12
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51. This
Interpretation addresses the consolidation by business enterprises of
variable interest entities as defined in the Interpretation. The
Interpretation applies immediately to variable interests in variable
interest entities created after January 31, 2003, and to variable
interests in variable interest entities obtained after January 31,
2003. For nonpublic enterprises, such as the Company, with a variable
interest in a variable interest entity created before February 1, 2003,
the Interpretation is applied to the enterprise no later than the end
of the first annual reporting period beginning after June 15, 2003. The
application of this Interpretation is not expected to have a material
effect on the Company's financial statements.
In November 2002, the Emerging Task-Force issued its consensus on EITF
00-21, Revenue Arrangements with Multiple Deliverables ("EITF 00-21")
on an approach to determine whether an entity should divide an
arrangement with multiple deliverables into separate units of
accounting. According to EITF 00-21, in an arrangement with multiple
deliverables, the delivered item(s) should be considered a separate
unit of accounting if all of the following criteria are met: (1) the
delivered item(s) has value to the customer on a standalone basis, (2)
there is objective and reliable evidence of the fair value of the
undelivered item(s), and (3) if the arrangement includes a general
right of return, delivery or performance of the undelivered item(s) is
considered probable and substantially in the control of the vendor. If
all the conditions above are met and there is objective and reliable
evidence of fair value for all units of accounting in an arrangement,
the arrangement consideration should be allocated to the separate units
of accounting based on their relative fair values. The guidance in this
Issue is effective for revenue arrangements entered into in fiscal
beginning after June 15, 2003. The Company believes that the adoption
of EITF 00-21 will not have a material impact on it's financial
statements.
At the January 23, 2003 meeting, the Emerging Issues Task Force (EITF)
reached consensuses on EITF 02-18 Accounting for Subsequent Investments
in an Investee after Suspension of Equity Method Loss Recognition.
Issues 1 and 2 of EITF 02-18 which considered whether, (i) an investor
should recognize any previously suspended losses when accounting for a
subsequent investment in an investee that does not result in the
ownership interest increasing from one of significant influence to one
of control, and (ii), if the additional investment represents the
funding of prior losses, whether all previously suspended losses should
be recognized or whether only the previously suspended losses equal to
the portion of the investment determined to be funding prior losses
should be recognized. The EITF concluded that if the additional
investment, represents, in substance, the funding of prior losses, the
investor should recognize previously suspended losses only up to the
amount of the additional investment determined to represent the funding
of prior losses. At its February 5, 2003 meeting, the FASB ratified the
consensuses reached by the Task Force in this Issue. As discussed in
notes 1 (i) and 6, the Company has discontinued recording losses on its
equity method investment in Euroweb Hungary Rt., which is 51% owned by
Pantel Rt., also a subsidiary of KPN. If the Company makes additional
investments in Euroweb Hungary Rt., the Company would be required to
recognize additional losses to the extent these additional investments
are considered funding of unrecognized prior losses of Euroweb Hungary
Rt.
On April 30, 2003, the FASB issued FASB Statement No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities, which
amends FASB Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities, to address (1) decisions reached by
13
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
the Derivatives Implementation Group, (2) developments in other Board
projects that address financial instruments, and (3) implementation
issues related to the definition of a derivative. Statement 149 has
multiple effective date provisions depending on the nature of the
amendment to Statement 133, and the Company is currently considering
its potential effect on the financial statements.
3. Investment in Securities
The Company holds investments in United States Treasury Notes with a face value
of $12,269,000, which mature on February 15, 2004.
As of March 31 2003, the Company has recorded net unrealized gains of $ 197,258
and the accretion of interest and discount on the Notes of $ 432,386 ($ 90,159
of which is recorded in the first quarter of 2003).
4. Affiliate, carried on an equity basis
The Company's consolidated statement of operations for the three months ended
March 31, 2003 and 2002 include the Company's equity interest in the net income
of Euroweb Hungary Rt. for each period, calculated as follows:
2003 (three months) 2002 (three months)
Revenues $ 2,036,296 $ 1,222,909
Gross profit 1,022,027 752,134
Net loss $ (132,470) $ (383,777)
============ ============
Company's 49% share of net loss (64,910) (188,050)
Equity in net loss recorded by the Company $ (-) $ (188,050)
============ ============
Unrecorded cumulative net loss $195,240 -
============ ============
The carrying value of the investment was written down to zero in 2002. Since the
Company has no legal or commercial commitments to provide continuing financial
support, the equity in the net loss of Euroweb Hungary Rt. of $64,910 has not
been recorded. If the Company makes additional investments in Euroweb Hungary
Rt., the Company would be required to recognize additional losses to the extent
these additional investments are considered funding of unrecognized prior losses
of Euroweb Hungary Rt. Moreover, only future profits in excess of the unrecorded
loss of $195,240 ($64,910 from 2003 and $130,330 unrecorded carry forward equity
in loss of affiliate from 2002) may be recorded.
14
Pursuant to the non-compete provision in the shareholders' agreement, the
Company cannot: (i) engage in any business activity listed in the scope of
activities of Euroweb Hungary Rt.'s charter,which, among others, includes
telecommunications, data bank activity and information technology activity, (ii)
own or control any equity interest in any person or entity that engages in any
such business activity or (iii) permit any of its employees to act as a
director, officer, manager or consultant to any person or entity that engages in
any such business activity. If the Company breaches its obligation set forth
under this provision, the Company will be required to sell to PanTel Rt. all of
its shares at the time of such breach at a price equal to the nominal value of
such shares.
5. Stockholders' Equity
During the three months of 2003, the Company did not grant any options or
warrants, nor were any exercised. Upon the exercise of an outstanding warrant or
option, each warrant/option holder will receive 1/5 of a share, due to the
reverse stock split effected on August 30, 2001.
6. Commitments and Contingencies
(a) Employment Agreements
An employment agreement with the Chief Executive Officer provides for aggregate
annual compensation of $96,000 through December 31, 2005.
(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.
(c) 20 years' usage rights
Euroweb Romania has provided an Indefeasible Right of Use for transmission
capacity on 12 pairs of fiber over a period of 20 years. The construction was
finished in April 2003. For the duration of the agreement, Euroweb Romania is
obliged to use all reasonable endeavours to ensure the Cable System is
maintained in efficient working order and in accordance with industry standards.
(d) VAT audit - Romania
Currently the Romanian Tax Authorities are conducting an audit relating to
the $867,000 VAT receivable in the books of Euroweb Romania. This VAT receivable
has been built up over the past 21 months as in Romania, it is normal practice
to wait until a Tax Authority audit before requesting a refund from the Tax
Authorities. As of the date hereof, the Tax Authority has not reached a decision
regarding this matter.
7. Related Party Transactions
The provision of international/domestic leased line and VOIP services are being
provided in conjunction with Pantel Telecommunication Rt., an entity which is
majority owned and controlled by the KPN Group (which also owns a majority
interest in the Company). In 2002 and 2003, Pantel Telecommunication Rt.
Hungary, a subsidiary of KPN and therefore a related party, is the most
significant trading partner of the Company. Approximately 66% of the 2003
revenues of Euroweb Romania (translating into 36% of the consolidated revenues
of the Company) were derived from the provision of services to Pantel.
15
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Forward-Looking Statements
When used in this Form 10-QSB, 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. 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.
Operations
Overview
The Company owns and operates Internet Service Providers in the
Czech Republic, Romania and Slovakia through its subsidiaries Euroweb
Czech Republic spol. s.r.o. ("Euroweb Czech"), Euroweb Slovakia a.s.
("Euroweb Slovakia") and Euroweb Romania S.A. ("Euroweb
Romania"). The Company operates in one industry segment, providing
Internet access and additional value added services to business
customers. The Company's consolidated statements of operations
also include the equity in the net income or loss of Euroweb Hungary
Rt., in which the Company has a 49% ownership interest. The other 51%
of Euroweb Hungary Rt. is held by Pantel Telecommunication
Rt., Hungary ("Pantel Rt."), of which KPN Telecom BV is also
the controlling owner.
The Company's revenues come from the following three sources:
(1) Internet Service Provider (Internet access, Content and Web
services, Other services)
(2) International/domestic leased line, Internet Protocol data services
(3) Voice over Internet Protocol services
For the services in points (2) and (3), the main customer of the Company in 2002
and 2003 was Pantel Rt, a related party. The majority owner of Euroweb
International Corporation and Pantel Rt is KPN Telecom BV, a Netherlands
corporation.
Related party transactions - Pantel Telecommunications Rt.
16
General: The largest customer of the Company since early 2001 has historically
been Pantel Telecommunication Rt, a Hungary-based alternative telecommunications
provider. Pantel operates within the region and has become a significant trading
partner for Euroweb Romania and Euroweb Slovakia through the provision of direct
fibre cable connection which enables companies to transmit data to a variety of
destinations by utilizing the international connections of Pantel.
Due to the fact that a significant level of revenue of the Company is generated
as a result of sales to Pantel, several of the Company's consultants of have
moved to the premises of Pantel in order to improve the effectiveness of the
co-operation on international projects. Csaba Toro, Chief Executive Officer of
Euroweb International Corporation was also the Chief Executive Officer of Pantel
in 2002. In February 2003, Csaba Toro resigned from the position of CEO of
Pantel.
Transactions: Both Euroweb Slovakia and Euroweb Romania have engaged in
transactions with Pantel:
(a) Pantel receives revenue from the provision of the following services to
subsidiaries of the Company:
- Internet bandwidth
- Costs of international leased lines outside Romania and Slovakia
The total amount of these services were USD $514,896 during the three month
period ended March 31, 2003.
(b) the Company and its subsidiaries received revenue from the provision of the
following services to Pantel:
- Cost of international leased lines and local loops in Slovakia and
Romania
- International IP and VOIP services for Pantel
- Commission
Total value of these services were approximately USD $1,199,034 in the
three month period ended March 31, 2003.
Direct sales to Pantel were 36% of total consolidated revenue, but Euroweb's
dependency on Pantel is even greater than this figure suggests. Some third party
sales involve Pantel as the subcontractor/service provider for the
international/domestic lines, and some third party customers are also clients of
Pantel outside of Romania (i.e. their relationship with Pantel is stronger than
their relationship with Euroweb Romania).
Effective dependency on Pantel, taking into account direct and Pantel-related
sales, represents approximately 57% of total consolidated revenues of the
Company and approximately 80-90% of total sales of Euroweb Romania. There is no
such dependency in the case of Euroweb Czech or Euroweb Slovakia.
Pricing: Agreements are made at market prices or a split of the margin based on
the financial investment into the specific services by each of the parties. The
Company always considers alternative suppliers for each individual project when
appropriate.
Other: Some services provided by Pantel are invoiced through Euroweb Hungary Rt,
which is 49% owned by the Company and 51% owned by Pantel. These transactions
are considered as essentially Pantel services and disclosed as revenue of Pantel
in point (a) as set forth above. No other service is invoiced to/from Euroweb
Hungary Rt.
17
Commitments and contingencies
The Company's subsidiaries have entered into various capital leases for vehicles
and internet equipment, as well as non-cancelable agreements for office
premises.
The Company has entered into an employment agreement with the Chief Executive
Officer which provides for aggregate annual compensation of $96,000 through
December 31, 2005.
In addition to the above contractual cash obligations, the Company's subsidiary
in Romania has entered into a 20 year Indefeasible Right of Use agreement
whereby for the duration of the agreement, Euroweb Romania is obliged to use all
reasonable endeavours to ensure the Cable System is maintained in efficient
working order and in accordance with industry standards. The total consideration
of $920,000 has already been received, and is being accounted for as an
operating lease.
Acquisitions
There were no new acquisition of subsidiaries or businesses in 2002 and the
first three months of 2003.
Results of Operations
Three-month Period Ended March 31, 2003 Compared to Three-month Period
Ended March 31, 2002
The Company has slightly increased its revenue (6%), although gross margin has
decreased in absolute terms (14%) as well as in percentage terms (gross margin
was 37.8% in the first quarter of 2002, and decreased to 30.6% in the first
quarter of 2003) compared to the same period in the previous year. A significant
part (67%) of the revenue can be attributed to activities in Romania. During the
same time period, the Company was able to reduce operating expenses, resulting
in a significant improvement of the operating results. In accordance with SFAS
142, the Company no longer amortizes goodwill.
Revenues
Total revenues for the three months ended March 31, 2003 were $3,341,896 in
comparison with $3,150,580 for the three months ended March 31, 2002, which is
an increase of 6%. There was a slight increase revenue in Romania and Slovakia,
with a decrease in Czech Republic as follows:
Revenue per countries/three months of 2003 2002
---------------------------------------------------------------------------------------------------------------
Czech Republic $ 322,323 $ 343,384
Romania 2,236,257 2,123,474
Slovakia 783,316 683,722
---------------------------------------------------------------------------------------------------------------
Total 3,341,896 3,150,580
18
The Company has increased ISP and VOIP revenue in 2003 compared with the same
period of 2002, however it has experienced reduction of revenue from
international/national leased line and IP data revenue due to the loss of some
key customers as well as market competition forcing the Company to reduce
prices. Moreover, a significant part of the increase in ISP activity can be
attributed to the weakened USD compared with the same period in 2002.
The proportion of revenue per service lines is as follows:
Revenue per services 2003 (margin) 2002 (margin)
----------------------------------------------------------------------------------------------------------------------
ISP $ 1,338,472 $ 1,199,224
Int./dom leased line and IP data 1,431,424 1,584,125
VOIP 572,000 367,231
----------------------------------------------------------------------------------------------------------------------
Total 3,341,896 (30.6%) 3,150,580 (37.9%)
Cost of revenues
Cost of revenues comprise mostly telecommunication network telecom expenses
which are related to the provision of access facilities to customers. This
category also includes costs of phone calls in connection with VOIP services
Network costs were $2,318,808 in the first quarter of 2003 in comparison to
$1,956,838 in the first quarter of 2002. Gross margin has decreased when
compared to the same period in the previous year. The margin has decreased due
to the following reasons: (1) the previously high internet margin in Slovakia
and Czech Republic has been reduced to a more sustainable level; and (2)
International/domestic leased line have also fallen significantly. The
International/domestic leased line has a very high gross margin in 2002 due to a
favourable one time agreement with one of the major suppliers of the Company.
Operating expenses (excluding depreciation and amortization)
Overall operating expenses (excluding depreciation and amortization) decreased
by 12% due to cost control measures and the positive impact of the closing of
the New York office in June 2002. The Company has implemented stringent cost
control measures and is managing the business with the existing operational
infrastructure and minimizing the need for additional resources.
Depreciation and amortization
As disclosed in Note 2(k) of the financial statements, no goodwill was amortized
in 2002 and 2003. Depreciation of tangible fixed assets has increased from
$156,954 in 2002 to $192,313 in 2003, reflecting the investment in equipment
used to provide the new services.
19
Net interest income
Net interest income of $84,397 in the three months of 2003 is lower than the net
interest income of $125,804 in the three months of 2002. The decrease is due to
the fact that less interest-generating funds were available in this period than
in the same period of the previous year, and also because the effective interest
rate on these investments has decreased over the periods in question.
Equity interest in affiliate
Although the Company's 49% share in the net loss of Euroweb Hungary Rt. for the
three months ended March 31, 2003 is $64,910, the opening net carrying value of
the investment in the Company's financial statements at the beginning of the
year was zero due to the goodwill write-offs in 2002. Therefore, the loss of
$64,910 is not required to be recorded in the books of the Company. However, if
in the future, Euroweb Hungary Rt. has net income, then the Company may only
recognize its 49% interest on Euroweb Hungary Rt. net income in excess of $
195,240 ($130,330 unrecorded from 2002 and $64,910 unrecorded for the first
quarter of 2003).
Liquidity and Capital Resources
The Company's cash, cash equivalents and marketable securities were
approximately $13,144,747 as of March 31, 2003, a decrease of $1,058,340 from
the end of 2002, mainly due to capital expenditures related to the installation
of the fibre optic cables in Romania.
The Company has $13,144,747 of cash, cash equivalents and marketable securities
compared to $ 4,572,092 total short and long term liabilities, indicating that
the Company is in a strong financial position. Management believes that with its
existing cash, cash equivalents, marketable securities and internally generated
funds, there will be sufficient funds to meet the Company's currently projected
working capital requirements and other cash requirements for at least the next
12 months.
KPN Telecom B.V. (NY Stock Exchange: KPN) owns 52% of the outstanding shares of
Common Stock of the Company. KPN has announced that it intends to sell all of
its non-core assets, including its ownership of 52% of the outstanding shares of
the Company.
Inflation and Foreign Currency
The Company maintains its books in local currencies, including the Czech koruna
for Euroweb Czech Republic and the Slovak koruna for Euroweb Slovakia. However,
given the hyper-inflationary situation in Romania, the U.S. dollar is used as
the functional currency.
The Slovakian Koruna has strengthened by 19%, while the Czech Korona has
strengthened against the U.S. dollar by approximately 19% between when comparing
the three months of 2003 and 2002. The impact of this is reflected in the
exchange rates used in the three months of 2003 and the three months of 2002.
20
Effect of Recent Accounting Pronouncements
In April 2002, the FASB issued SFAS No.145, Rescission of FASB
Statements No.4, 44 and 64, Amendment of FASB Statement No.13, and Technical
Corrections. SFAS No.145 amends existing guidance on reporting gains and losses
on the extinguishment of debt to prohibit the classification of the gain or loss
as extraordinary, as the use of such extinguishments have become part of the
risk management strategy of many companies. SFAS No.145 also amends SFAS No.13
to require sale-leaseback accounting for certain lease modifications that have
economic effects similar to sale-leaseback transactions. The provisions of the
Statement related to the rescission of Statement No.4 is applied in fiscal years
beginning after May 15, 2002. Earlier application of these provisions is
encouraged. The provisions of the Statement related to Statement No.13 were
effective for transactions occurring after May 15, 2002, with early application
encouraged. The adoption of SFAS No.145 is not expected to have a material
effect on the Company's financial statements.
The Financial Accounting Standards Board ("FASB") No. 146 "Accounting
for Costs Associated with Exit or Disposal Activities" ("Statement 146") was
issued in June 2002. Statement 146 nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". `Costs' include
(a) one-time termination benefits, (b) costs to terminate a contract that is not
a capital lease and (c) other associated costs including costs to consolidate
facilities or relocate employees. The Statement is based on the general
principle that a liability for a cost associated with an exit or disposal
activity should be (1) recorded when it is incurred and (2) initially measured
at fair value. Thus, a commitment to an exit or disposal plan no longer will be
a sufficient basis for recording a liability for those activities. The Company
is required to adopt the provisions of Statement 146 for exit or disposal
activities initiated after December 31, 2002. The Company is evaluating the
impact, if any, Statement 146 may have on its future consolidated financial
statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others", an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The disclosure requirements are effective for financial
statements of interim and annual periods ending after December 31, 2002. The
Company has adopted the disclosure requirements and will apply the recognition
and measurement provisions for all guarantees entered into or modified after
December 31, 2002. To date, the Company has not entered into or modified
guarantees.
In December 2002, the FASB issued SFAS No.148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No.123". This Statement amends FASB Statement No.123, "Accounting for
Stock-Based Compensation", to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No.123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to
these consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51". This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. For nonpublic enterprises, such as the Company,
with a variable interest in a variable interest entity created before February
1, 2003, the Interpretation is applied to the enterprise no later than the end
of the first annual reporting period beginning after June 15, 2003. The
application of this Interpretation is not expected to have a material effect on
the Company's financial statements.
21
In November 2002, the Emerging Task-Force issued its consensus on EITF
00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF 00-21") on an
approach to determine whether an entity should divide an arrangement with
multiple deliverables into separate units of accounting. According to EITF
00-21, in an arrangement with multiple deliverables, the delivered item(s)
should be considered a separate unit of accounting if all of the following
criteria are met: (1) the delivered item(s) has value to the customer on a
standalone basis, (2) there is objective and reliable evidence of the fair value
of the undelivered item(s), and (3) if the arrangement includes a general right
of return, delivery or performance of the undelivered item(s) is considered
probable and substantially in the control of the vendor. If all the conditions
above are met and there is objective and reliable evidence of fair value for all
units of accounting in an arrangement, the arrangement consideration should be
allocated to the separate units of accounting based on their relative fair
values. The guidance in this Issue is effective for revenue arrangements entered
into in fiscal beginning after June 15, 2003. The Company believes that the
adoption of EITF 00-21 will not have a material impact on it's financial
statements.
At the January 23, 2003 meeting, the Emerging Issues Task Force (EITF)
reached consensuses on EITF 02-18 "Accounting for Subsequent Investments in an
Investee after Suspension of Equity Method Loss Recognition". Issues 1 and 2 of
EITF 02-18 which considered whether, (i) an investor should recognize any
previously suspended losses when accounting for a subsequent investment in an
investee that does not result in the ownership interest increasing from one of
significant influence to one of control, and (ii), if the additional investment
represents the funding of prior losses, whether all previously suspended losses
should be recognized or whether only the previously suspended losses equal to
the portion of the investment determined to be funding prior losses should be
recognized. The EITF concluded that if the additional investment represents, in
substance, the funding of prior losses, the investor should recognize previously
suspended losses only up to the amount of the additional investment determined
to represent the funding of prior losses. At its February 5, 2003 meeting, the
FASB ratified the consensuses reached by the Task Force in this Issue. As
discussed in notes 1 (i) and 6, the Company has discontinued recording losses on
its equity method investment in Euroweb Hungary Rt, which is 51% owned by Pantel
Rt., also a subsidiary of KPN. If the Company makes additional investments in
Euroweb Hungary Rt., the Company would be required to recognize additional
losses to the extent these additional investments are considered funding of
unrecognized prior losses of Euroweb Hungary Rt.
On April 30, 2003, the FASB issued FASB Statement No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities, which amends
FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, to address (1) decisions reached by the Derivatives Implementation
Group, (2) developments in other Board projects that address financial
instruments, and (3) implementation issues related to the definition of a
derivative. Statement 149 has multiple effective date provisions depending on
the nature of the amendment to Statement 133, and the Company is currently
considering its potential effect on the financial statements.
22
Item 3. Controls and Procedures
As of March 31, 2003, 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 March 31, 2003. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to March 31, 2003.
PART II
Item 1. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings as of the date
of this report.
Item 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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 three
months of 2003.
ITEM 5. OTHER INFORMATION
None
23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits (numbers below reference Regulation S-B, Item 601)
(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)
(99) (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.
(99) (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.
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 13th day of May 2003.
EUROWEB INTERNATIONAL CORP.
By /s/Csaba Toro
Csaba Toro
Chairman of the Board
--------
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.
24
CERTIFICATIONS
I, Csaba Toro, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Euroweb
International Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003.
/s/Csaba Toro
Csaba Toro
Chief Executive Officer
CERTIFICATIONS
I, Peter Szigeti, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Euroweb
International Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003.
/s/Peter Szigeti
Peter Szigeti
Chief Accounting Officer