United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2006
TRANSITION 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.
(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.)
Vaci ut 141, 1138 Budapest, Hungary
(Address of principal executive offices)
+36-1-8897000 +36-1-8897100
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 [_]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of Exchange Act). Yes [_] No [X]
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 5,843,067
(Class) (Outstanding at May 10, 2006)
Transitional Small Business Disclosures Format (Check one): Yes [_] No [X]
EUROWEB INTERNATIONAL CORP.
INDEX
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet as of March 31,
2006 3
Condensed Consolidated Statements of Operations and
Comprehensive Loss for the three months ended March
31, 2006 and 2005 4
Condensed Consolidated Statements of Stockholders'
equity for the three months ended March 31, 2006 and
twelve months ended December 31, 2005 5
Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 2006 and 2005 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
Item 3. Controls and Procedures 25
PART II. Other Information 26
Signature 28
2
EUROWEB INTERNATIONAL CORP.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31, 2006
---------------
ASSETS
Current Assets
Cash and cash equivalents $ 691,021
Trade accounts receivable, net of allowance for
doubtful accounts of $201,223 1,430,263
Unbilled receivables 113,713
Prepaid expenses and other current assets 281,545
---------------
Total current assets of continuing operations 2,516,542
---------------
Total assets of discontinued operations 19,179,425
Total current assets 21,695,967
===============
Property and equipment, net 1,072,305
Intangibles - customer contracts, net 2,784,810
Goodwill 8,150,672
---------------
Total assets $ 33,703,754
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $ 1,278,462
Current portion of bank loan and overdraft 789,206
Other current liabilities 202,462
Accrued expenses 701,946
---------------
Total current liabilities of continuing
operations 2,972,076
Total liabilities of discontinued operations 12,905,537
---------------
Total current liabilities 15,877,613
---------------
Deferred tax liability 445,570
Bank loan 393,476
Commitments and contingencies
Stockholders' Equity
Common stock, $.001 par value - authorized
35,000,000 shares; 5,843,067 shares
issued and outstanding 25,307
Additional paid-in capital 51,900,890
Accumulated deficit (35,332,003)
Accumulated other comprehensive income 392,901
---------------
Total stockholders' equity 16,987,095
---------------
Total liabilities and stockholders' equity $ 33,703,754
===============
See accompanying notes to condensed consolidated financial statements.
3
EUROWEB INTERNATIONAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
Three months ended
March 31,
2006 2005
------------- -------------
Revenues $ 1,792,286 --
Cost of revenues (Exclusive of depreciation and
amortization shown separately below) 662,218 --
Operating expenses
Compensation and related costs 761,766 97,899
Consulting, director and professional fees 421,676 178,538
Other selling, general and administrative expenses 279,433 116,134
Depreciation and amortization 455,220 --
------------- -------------
Total operating expenses 1,918,095 392,571
Operating loss (788,027) (392,571)
Interest expense (31,182) --
------------- -------------
Loss from continuing operatings before income taxes (819,209) (392,571)
Income tax expense, current (21,075) --
Income tax benefit, deferred 55,598 --
------------- -------------
Income tax benefit 34,523 --
Loss from continuing operations (784,686) (392,571)
(Loss) income from discontinued operations, net of tax (244,886) 167,152
Net loss (1,029,572) (225,419)
Other comprehensive income 293,220 170,025
------------- -------------
Comprehensive loss $ (736,352) $ (55,394)
============= =============
Loss per share, from continuing operations, basic and diluted $ (0.14) $ (0.07)
Loss per share from discontinued operations, basic and diluted $ ( 0.04) $ 0.03
Net loss per share, basic and diluted $ ( 0.18) $ (0.04)
============= =============
Weighted average number of shares outstanding, basic and diluted 5,839,136 5,342,533
See accompanying notes to condensed consolidated financial statements.
4
EUROWEB INTERNATIONAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Common Stock
--------------------------- Paid-in Accumulated
Number of shares Amount Capital Deficit
---------------- ------------ ------------ ------------
Balances, January 1, 2005 24,807 $ 5,342,533 $ 50,780,084 $(35,982,726)
============ ============ ============ ============
Foreign currency translation loss -- -- -- --
Compensation charge on share
options and warrants issued to consultants
-- -- 192,294 --
Issuance of shares (Navigator Rt. acquisition)
441 441,566 1,681,693 --
Cancellation of treasury stock -- -- (1,115,412) --
Net income for the period -- -- -- 1,680,295
------------ ------------ ------------ ------------
Balances, December 31, 2005 25,248 5,784,099 51,538,659 (34,302,431)
------------ ------------ ------------ ------------
Foreign currency translation gain -- -- -- --
Compensation charge on share
options and warrants issued to employees,
directors and consultants -- -- 185,207
Issuance of shares to the President 59 58,968 177,024 --
Net loss for the period -- -- -- (1,029,572)
------------ ------------ ------------ ------------
Balances, March 31, 2006 25,307 $ 5,843,067 $ 51,900,890 $(35,332,003)
============ ============ ============ ============
Accumulated
Other
Comprehensive Treasury Stockholders'
Gains(Losses) Stock Equity
============ ============ ============
Balances, January 1, 2005 $ 108,266 $ (1,115,412) $ 13,815,019
Foreign currency translation loss (8,585) -- (8,585)
Compensation charge on share
options and warrants issued to consultants -- -- 192,294
Issuance of shares (Navigator Rt. acquisition) -- -- 1,682,134
-- -- 1,115,412 --
Cancellation of treasury stock -- -- 1,680,295
------------ ------------ ------------
Net income for the period 99,681 -- 17,361,157
Balances, December 31, 2005 ------------ ------------ ------------
Foreign currency translation gain 293,220 -- 293,220
Compensation charge on share
options and warrants issued to employees,
directors and consultants -- -- 185,207
Issuance of shares to the President -- -- 177,083
Net loss for the period -- -- (1,029,572)
------------ ------------ ------------
Balances, March 31, 2006 $ 392,901 -- $ 16,987,095
------------ ------------ ------------
See accompanying notes to condensed consolidated financial statements.
5
EUROWEB INTERNATIONAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
--------------------------------------------------------------------------------
Three Months Ended
March 31,
---------------------------
2006 2005
----------- -----------
Operating activities from continuing operations $(1,249,255) $ (295,833)
Operating activities from discontinued operations 1,104,849 563,597
----------- -----------
Net cash (used in) provided by operating
activities (144,406) 267,764
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (108,046) --
Investing activities from discontinued operations (502,865) (511,964)
----------- -----------
Net cash used in investing activities (610,911) (511,964)
----------- -----------
Cash flows from financing activities:
Repayment of bank loans (77,658) --
Utilization of bank overdraft 194,577 --
Principal payments under capital lease obligations (13,761) --
Financing activities from discontinued operation (226,626) (137,076)
----------- -----------
Net cash used in financing activities (123,468) (137,076)
----------- -----------
Effect of exchange rate changes on cash and cash
equivalents 1,116 (2,326)
----------- -----------
Net decrease in cash and cash equivalents (383,602) (877,669)
Cash and cash equivalents, beginning of period 1,568,690 2,379,552
----------- -----------
Cash and cash equivalents, end of period $ 691,021 $ 1,995,950
=========== ===========
Supplemental disclosure:
Cash paid for interest $ 30,114 --
Summary of non-cash transactions
Shares issued to the President $ 177,083 --
See accompanying notes to condensed consolidated financial statements.
6
Euroweb International Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
1. Organization and 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 was acquired on October 7, 2005.
The Company provides a full range of information technology ("IT") outsourcing
services through its subsidiary, Navigator. The IT outsourcing services provided
by the Company are primarily comprised of IT maintenance, procurement,
consultancy and related services.
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. ("Invitel"), 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,
in additional to Euroweb Slovakia, are classified in the Company's financial
statements as discontinued operations for all periods presented.
Approximately 89% of the consolidated revenue for the three months ended March
31, 2006 was generated from the four most significant customers of the Company
as follows:
Revenue
Generated As a %
------------------------------------------------------------------------
Company 'A': $473,276 26.41
Company 'B': 454,819 25.38
Company 'C': 374,695 20.91
Company 'D': 285,135 15.91
Other companies: 204,361 11.39
------------------------------------------------------------------------
Total revenue: $1,792,286 100.00
2. Basis of Presentation and Significant Accounting Policies
Basis of Presentation. The interim unaudited condensed consolidated financial
statements of Euroweb and its consolidated subsidiaries included herein have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC") regarding interim financial information and,
accordingly, do not include all of the information and note disclosures required
by accounting principles generally accepted in the United States of America
("U.S. GAAP") for complete financial statements. These unaudited interim
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended December
31, 2005, appearing in the Annual Report on Form 10-KSB of the Company for the
year then-ended.
7
Euroweb International Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
All intercompany balances and transactions have been eliminated in
consolidation.
Prior periods have been reclassified to conform with current period
presentation.
Use of Estimates. The accompanying unaudited interim consolidated financial
statements have been prepared in accordance with U.S. GAAP and reflect all
adjustments which are, in the opinion of management, necessary to a fair
statement of the results for the interim periods presented. All such adjustments
are of a normal recurring nature. The results of operations for the three months
ended March 31, 2006 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2006.
In preparing the interim unaudited consolidated financial statements, management
is required to make estimates and assumptions that affect the amounts reported
in the financial statements. Actual results could differ from those estimates.
Stock-based compensation. Prior to January 1, 2006, the Company accounted for
its stock-based employee compensation arrangements under the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB No. 25), as allowed by SFAS No. 123, Accounting
for Stock-based Compensation (SFAS No. 123), as amended by SFAS No. 148,
Accounting for Stock-Based Compensation -- Transition and Disclosure (SFAS No.
148). As a result, no expense was recognized for options to purchase its common
stock that were granted with an exercise price equal to fair market value at the
date of grant and no expense was recognized in connection with purchases under
our employee stock purchase plan for the years ended December 31, 2005 or 2004,
nor in the three-month ended March 31, 2005.
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123 (revised 2004) Share-Based Payment (SFAS No. 123R), which replaces SFAS
No. 123 and supersedes APB No. 25. SFAS No. 123R requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the financial statements based on their fair values beginning with
the first interim or annual period after December 15, 2005 for small business
issuers. Subsequent to the effective date, the pro forma disclosures previously
permitted under SFAS No. 123 are no longer an alternative to financial statement
recognition. Effective January 1, 2006, the Company have adopted SFAS No. 123R
using the modified prospective method. Under this method, compensation cost
recognized during the three-month periods ended March 31, 2006, includes: (a)
compensation cost for all share-based payments granted prior to, but not yet
vested as of March 31, 2006, based on the grant date fair value estimated in
accordance with the original provisions of SFAS No. 123 amortized on an
straight-line basis over the options' vesting period, and (b) compensation cost
for all share-based payments granted subsequent to January 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of SFAS No.
123R amortized on a straight-line basis over the options' vesting period. The
Company utilizes a Black-Scholes option-pricing model to measure the fair value
of stock options granted to employees. See Note 5 to the Company's Unaudited
Condensed Consolidated Financial Statements for a further discussion on
stock-based compensation. Pro forma results for prior periods have not been
restated. As a result of adopting SFAS No. 123R on January 1, 2006, the
Company's net loss is $119,037 lower for the three-month period ended March 31,
2006 than had we continued to account for stock-based employee compensation
under APB No. 25. Basic and diluted net loss per share for the three-month
periods ended March 31, 2006 would have been $ 0.16 had we not adopted SFAS No.
123R, compared to reported basic and diluted net loss per share of $0.18 for the
three-month period ended March 31, 2006. The adoption of SFAS No. 123R had no
impact on cash flows from operations, investing or financing.
8
Euroweb International Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
The Company estimates the fair value of each option award on the date of the
grant using the Black-Scholes option valuation model. Expected volatilities are
based on the historical volatility of the Company's common stock over a period
commensurate with the options' expected term. The expected term represents the
period of time that options granted are expected to be outstanding and is
calculated in accordance with the Securities and Exchange Commission ("SEC")
guidance provided in the SEC's Staff Accounting Bulletin 107, ("SAB 107"), using
a "simplified" method. The risk-free interest rate assumption is based upon
observed interest rates appropriate for the expected term of the Company's stock
options. The following table summarizes the weighted-average assumptions used in
the Black-Scholes model for options granted during the first three months of
2005.
Three Months
Ended March 31, 2005
--------------------------
Expected volatility 88%
Expected dividends -
Expected term (in years) 6
Risk-free rate 4%
No options have been granted or exercised in the three months ended March 31,
2006.
Prior to 2006, the Company accounted for stock-based compensation in accordance
with APB 25 using the intrinsic value method, which did not require that
compensation cost be recognized for the Company's stock options, provided the
option exercise price was not less than the common stock's fair market value on
the date of the grant. The Company provided pro-forma disclosure amounts in
accordance with SFAS No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure, as if the fair value method defined by SFAS No. 123
had been applied to its stock-based compensation. The net loss amount utilized
within the following table illustrates the effect on net loss and net loss per
share had the Company applied the fair value recognition provisions of SFAS No.
123 to account for its employee stock option and employee stock purchase plans
for the three-month period ended March 31, 2005 because stock-based employee
compensation was not accounted for using the fair value recognition method
during that period. For purposes of pro forma disclosure, the estimated fair
value of the stock awards, as prescribed by SFAS No. 123, is amortized to
expense over the vesting period of such awards:
Three months ended March 31, 2005
------------------ --------------
Net loss:
Net loss, as reported $(225,419)
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of tax effects (169,322)
---------
Pro forma net loss $(394,741)
=========
Basic and diluted loss per share:
As reported, basic and diluted $ (0.04)
Pro forma, basic and diluted $ (0.07)
9
Euroweb International Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
The historical pro forma impact of applying the fair value method prescribed by
SFAS No. 123 is not representative of the impact that may be expected in the
future due to changes in option grants in future years and changes in
assumptions such as volatility, interest rates and expected life used to
estimate fair value of future grants.
Note that the above pro forma disclosure was not presented for the three-month
periods ended March 31, 2006, because stock-based employee compensation has been
accounted for using the fair value recognition method under SFAS No. 123R for
these periods. As a result of adopting SFAS 123R, the impact to the Consolidated
Statement of Operations was to increase expenses and net loss by approximately
$0.1 million for the three months ended March 31, 2006. The following table
shows total stock-based employee compensation expense (see Note 5 for types of
stock-based employee arrangements) included in the condensed consolidated
statement of operations for the three-month periods ended March 31, 2006:
Categories of Three months ended
cost and expenses March 31, 2006
---------------------------------------------------------------------
Compensation and related costs $36,591
Consulting, directors and professional fees 82,446
---------------------------------------------------------------------
Total stock-based compensation expense $119,037
There was no capitalized stock-based employee compensation cost as of March 31,
2006. There were no material recognized tax benefits during the first
three-month period ended March 31, 2006.
Earnings per Share. The following is a reconciliation from basic earnings per
share to diluted earnings per share for the three month periods ended March 31,
2006 and 2005:
Three months ended
March 31,
2006 2005
----------- -----------
Net loss attributable to
common stockholders (A) $(1,029,572) $ (225,419)
----------- -----------
Determination of shares
Weighted average common shares
outstanding - basic (B) 5,839,136 5,342,533
Assumed conversion of dilutive stock
options and warrants -- --
Weighted average common shares
outstanding - diluted (C) 5,839,136 5,342,533
----------- -----------
Net income (loss) per common share
Basic (A/B) $ (0.18) $ (0.04)
Diluted (A/C) $ (0.18) $ (0.04)
10
Euroweb International Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
The Company had potentially dilutive common stock equivalents of 788,330 and
1,084,000 for the three months ended March 31, 2006 and 2005, which were not
included in the computation of diluted net loss per share, because they were
antidilutive.
3. Bank Loans and Overdrafts
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 $918,111 at
the March 31, 2006 exchange rate), with an interest rate of three month Budapest
Interbank Offered Rate ("BUBOR") +2.5%. Approximately $655,794 was outstanding
at March 31, 2006. The loan is repayable in 14 quarterly instalments of HUF
14,375,000 (approximately $65,579) 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.
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 $593,066 at the March 31, 2006
exchange rate ) on July 20, 2005. Approximately $526,888 was outstanding at
March 31, 2006. 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 March 31, 2006. The contract expired on March 31, 2006. The
interest rate was BUBOR + 1.5%.
4. Discontinued Operations and Disposal of Subsidiaries
Completed sale of Euroweb Slovakia 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 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 Slovakia, Euroweb Hungary and Euroweb Romania have been
reclassified as discontinued operations for all periods presented.
11
Euroweb International Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
The following table shows the details of result of discontinued operation per
reporting units for the three months ended March 31, 2006 and 2005 as follows:
Country / Three months ended March 31, 2006 2005
-------------------------------------------------------------------------------
Income from discontinued Slovakian operations $ -- 5,270
Loss from discontinued Hungarian operations (635,501) (219,518)
Income from discontinued Romanian operations 390,615 381,400
-------------------------------------------------------------------------------
Income (loss) from discontinued operations $(244,886) $ 167,152
========= =========
The following information is a summary of selected items from Euroweb Hungary's
consolidated balance sheet as at March 31, 2006:
Description March 31, 2006
------------------------------------------------------------------
Total assets $ 13,104,598
Total liabilities 10,299,461
------------------------------------------------------------------
Net assets $ 2,805,137
============
The following information is a summary of selected items from Euroweb Romania's
balance sheet as at March 31, 2006:
Description March 31, 2006
------------------------------------------------------------------
Total assets $ 6,074,827
Total liabilities 2,606,076
------------------------------------------------------------------
Net assets $ 3,468,751
============
5. Stock-based Compensation
Effective January 1, 2006, the Company adopted SFAS 123R, which requires the
Company to measure the cost of employee services received in exchange for all
equity awards granted based on the fair value of the award as of the grant date.
SFAS 123R supersedes Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"), and Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"). The
Company adopted SFAS 123R using the modified prospective transition method,
which requires the Company to record compensation cost related to unvested stock
awards as of December 31, 2005 by recognizing the unamortized grant date fair
value of these awards over the remaining requisite service periods of those
awards, with no change in historical reported earnings. Awards granted after
December 31, 2005 are valued at fair value in accordance with the provisions of
SFAS 123R and are recognized on a straight-line basis over the requisite service
periods of each award. The new standard also requires the Company to estimate
forfeiture rates for all unvested awards, which it has done for 2006 based on
its historical experience.
12
Euroweb International Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
As of March 31, 2006, the Company has one share-based compensation plans: the
2004 Stock Incentive Plan.
Pursuant to the Company's 2004 Stock Incentive Plan (the "Plan"), 800,000
shares have been provided for the grant of stock options to employees,
directors, consultants and advisors of the Company. The plan was approved by the
Company's Annual Meeting of Stockholders in May 2004. Option awards must be
granted with an exercise price at not less than the fair market price of the
Company's common stock on the date of the grant; those option awards generally
vest over a three or four-year period in equal increments of 33% or 25%,
beginning 6 months after the date of the grant. All options granted have
contractual terms of six years from the date of the grant and expires 3 months
after the holder leaves the Company. The grant date fair value is calculated
using the Black-Scholes option valuation model.
The Company has granted the following options under the Plan:
On April 26, 2004, the Company granted 125,000 options to its Chief Executive
Officer, an aggregate of 195,000 options to five employees and an aggregate of
45,000 options to two consultants of the Company. The stock options granted to
the Chief Executive Officer vest at the rate of 31,250 on November 1, 2004 and
each October 1 of 2005, 2006 and 2007. The stock options granted to the other
employees and consultants vest at the rate of 80,000 on November 1, 2004 and
each October 1 of 2005, 2006. The exercise price of the options ($4.78) is equal
to the market price on the date the grants were made. 60,000 options out of the
195,000 options granted to employees have been expired unexercised due to
termination of two employee contracts in 2005.
In accordance with APB No. 25, no compensation expense was recorded for the
options granted to the Chief Executive Officer, and the five employees until
December 31, 2005. Compensation charge according to SFAS 123R adopted from
January 1, 2006 was $36,591 in the three months period ended March 31, 2006.
In accordance with SFAS 123, the Company will recognize total compensation
charges of approximately $162,000 for the grants made to the two consultants as
such consultants do not qualify as employees. Such compensation charges are
recognized over the vesting period of three years. Compensation expense for the
three months ended March 31, 2006 was $5,580 (2005: $15,100).
On March 22, 2005, the Company granted an aggregate of 200,000 options to two of
the directors. The stock options granted to the directors on March 22, 2005 vest
at the rate of 50,000 on each September 22 of 2005, 2006, 2007 and 2008. The
exercise price of the options ($3.40) is equal to the market price on the date
the grants were made. In accordance with APB 25, no compensation charges were
accounted in respect of these grants until December 31, 2005. Compensation
charge according to SFAS 123R adopted from January 1, 2006 was $43,244 in the
three months period ended March 31, 2006.
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. No compensation charge was accounted in respect of this grant
until December 31, 2005. Compensation charge according to SFAS 123R adopted from
January 1, 2006 was $25,644 in the three months period ended March 31, 2006.
13
Euroweb International Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
The following table summarizes the option activity under the Plan as of
March 31, 2006 and changes during the quarter then ended:
Weighted Weighted Average
Average Remaining Aggregate
Number of Exercise Contractual Term Intrinsic
Stock Options Shares Price (in years) Value
------------------------------ ------------ -------------- ----------------
Outstanding at January 1, 2006 605,000 $ 4.20
Granted -- --
Exercised -- --
Forfeited or expired -- --
------------ --------------
Outstanding at March 31, 2006 605,000 $ 4.20 4.5 $ 0
Exercisable at March 31, 2006 257,500 $ 4.29 4.4 $ 0
The aggregate intrinsic value in the table above represents the total pretax
intrinsic value (the difference between the Company's closing stock price on the
last trading day of the first quarter of 2006 and the exercise price, multiplied
by the number of in-the money options) that would have been received by the
option holders had all option holders exercised their options on March 31, 2006.
The amount of aggregate intrinsic value will change based on the fair market
value of the Company's stock. The intrinsic value of stock options exercised
during the three months ended March 31, 2006 was $0.
As of March 31, 2006, there was approximately $0.4 million of total unrecognized
compensation cost related to non-vested share-based compensation granted under
the Plan, which is expected to be recognized over a weighted-average period of 2
years. No options were in money as of March 31, 2006.
Other option outside of the Plan
On October 13 2003, the Company granted one of the Directors 100,000 options 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 of 2004-2007. In accordance with APB No.
25, no compensation expense was recorded for the options granted to the Director
until December 31, 2005. Compensation charge according to SFAS 123R adopted from
January 1, 2006 was $13,558 in the three months period ended March 31, 2006. The
option was not exercised. The intrinsic value of this stock options exercised
during the three months ended March 31, 2006 was $0. As of March 31, 2006, there
was approximately $24,864 of total unrecognized compensation cost related to
non-vested share-based compensation granted under this grant, which is expected
to be recognized over a weighted-average period of 1 year. The option were not
in money as of March 31, 2006.
14
Euroweb International Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
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
Euroweb shares of 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 three months period ended March 31, 2006 was $62,499.
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 proportionately at a rate of a total
8,333 warrants per month over a one year period. The warrants are being expensed
over the performance period of one year. Compensation expense for the three
months period ended March 31, 2006 was $60,590. In February 2006, the Company
terminated its contract with the consultant company 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
company.
6. 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, 2007, Mr.
Schnapp will receive 76,103 Euroweb shares of common stock.
(b) Lease Agreements
The Company's subsidiary has entered into various capital leases for service
equipment, as well as non-cancelable agreement for office premises.
(c) Legal Proceedings
Except as set forth below, there are no known significant legal procedures that
have been filed and are outstanding against the Company:
15
Euroweb International Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
On April 26, 2006, a lawsuit was filed in Delaware Court of Chancery (the
"Court") by a stockholder of the Company against the Company, each of the
Company's directors and CORCYRA d.o.o., a stockholder of the Company that
beneficially owns 39.81% of the Company's outstanding common stock of the
Company. The Complaint is entitled Laurence Paskowitz v. Csaba Toro et al., C.A.
No. 2110-N and was brought individually and as a class action on behalf of
certain of the Company's common stockholders excluding defendants and their
affiliates. The plaintiff alleges the proposed sale of 100% of the Company's
interest in the Company's two Internet and telecom related operating
subsidiaries (the "Subsidiaries") constitutes a sale of substantially all of the
Company's assets and requires approval by a majority of the voting power of the
Company's outstanding common stock under Section 271 of the Delaware General
Corporation Law. The plaintiff also alleges the defendants breached their
fiduciary duties in connection with the sale of the subsidiaries and the
disclosures contained in the proxy statement filed on April 24, 2006. The
plaintiff applied for a temporary restraining order seeking to enjoin the
special meeting on May 15, 2006.
The Company denies any and all allegations of wrongdoing; however, in the
interests of conserving resources, on April 28, 2006, the parties to the
litigation entered into a Memorandum of Understanding providing for, subject to
confirmatory discovery by plaintiff, the negotiation of a formal stipulation of
a settlement of the litigation. Pursuant to the proposed settlement, the Board
of Directors of the Company has determined to: (i) increase the vote required to
approve the sale of 100% of the Company's interest in the Subsidiaries, (ii)
revise the disclosure within the proxy statement to eliminate the bonus of up to
US $400,000, which the Compensation Committee of the Company had the option to
pay to select members of management, as the Board of Directors had previously
elected to terminate the ability to pay such bonus and (iii) provide
supplemental disclosure as contained in the Supplemental Proxy Statement to be
mailed to stockholders and filed with the Securities and Exchange Commission on
May 3, 2006. The settlement will provide for dismissal of the litigation with
prejudice and is subject to Court approval. As part of the settlement, the
Company has agreed to pay an amount of attorneys' fees and expenses that is to
be negotiated between the two parties or, lieu of such agreement between the two
parties, will be determined by the Court.
(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. In case of disposal of Euroweb Hungary
and Euroweb Romania, the Company will have to re-register the shares issued in
connection with the acquisition of Elender. In case of late filing of this
registration statement may result penalty payment obligation.
16
Euroweb International Corp.
Notes to Unaudited Condensed 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) Potential Penalty of EUR 400,000
If by June 30, 2006, the Company either fails to comply with the provisions of
the share purchase agreement about the disposition of Euroweb Hungary and
Euroweb Romania to Invitel, 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.
17
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Operations
Overview
Euroweb International Corp. ("Euroweb" or the "Company") operates in Hungary and
Romania, through its subsidiaries Euroweb Internet Szolgaltato Rt. ("Euroweb
Hungary"), Navigator Informatika Rt. ("Navigator") and Euroweb Romania S.A.
("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 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 100%
of its interest in Euroweb Hungary and Euroweb Romania. On December 19, 2005,
the Company entered into a share purchase agreement with Invitel Tavkozlesi
Szolgaltato Rt. ("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.
The Company believes that the sale of 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." Accordingly, Euroweb Slovakia, Euroweb Hungary
and Euroweb Romania have been 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 ("IT") 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
18
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and
results of operations are based upon its 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, assumption and disclosures. The Company chooses accounting policies
within US GAAP that management believes are appropriate to accurately and fairly
report the Company's operating results and financial position in a consistent
manner. Management regularly assesses these policies in light of current and
forecasted economic conditions. Accounting policies that management believes to
be critical to understanding the results of operations and the effect of the
more significant judgments and estimates used in the preparation of the
consolidated financial statements are the same as those described in the Annual
Report on Form 10-KSB of the Company for the year ended December 31, 2005. (d)
Results of Operations
Three Months Period Ended March 31, 2006 Compared to Three Months Period
Ended March 31, 2005
Due to the acquisition of Navigator on October 7, 2005 and the discontinued
operation presentation of Euroweb Hungary, Euroweb Romania and Euroweb Slovakia,
the condensed consolidated statements of operations for the quarter ended March
31, 2006 and 2005 are not comparable. The financial figures for 2005 only
include the corporate expenses of the Company's legal entity registered in the
State of Delaware, while Navigator is only consolidated since October 7, 2005.
Three months ended March 31, 2006 2005
----------- -----------
Total revenues $ 1,792,286 $ 0
The revenue increase reflects the consolidation of Navigator from October 7,
2005.
Cost of revenues (excluding depreciation and amortization)
The following table summarizes cost of revenues (excluding depreciation and
amortization) for the three months ended March 31, 2006 and 2005:
Three months ended March 31, 2006 2005
----------- -----------
Total cost of revenues $ 662,218 $ 0
Cost of revenues (excluding depreciation and amortization) principally comprises
the cost of fixed assets sold during the course of IT outsourcing projects, the
cost of materials required to perform IT outsourcing activities and the cost of
project-dedicated sub-contractors consolidated from October 7, 2005.
19
Compensation and related costs
The following table summarizes compensation and related costs for the three
months ended March 31, 2006 and 2005:
Three months ended March 31, 2006 2005
----------- -----------
Compensation and related costs $ 761,766 $ 97,899
Overall, compensation and related costs increased by 678% (approximately
$664,000). The increase is primarily attributable to the acquisition of
Navigator in October 2005 (approximately $567,000) and the compensation for the
new president (approximately $62,000). The remaining increase is due to the
increase of compensation charge on options issued to employees in accordance
with SFAS 123R.
Consulting, director and professional fees
The following table summarizes consulting and professional fees for the three
months ended March 31, 2006 and 2005:
Three months ended March 31, 2006 2005
----------- -----------
Consulting, director and
professional fees $ 421,676 $ 178,538
Overall, consulting, director and professional fees increased by 136%
(approximately $243,000). The increase is primarily attributable to the
acquisition of Navigator in October 2005 (approximately $109,000) and a
compensation charge on stock option and warrants to directors and consultants in
accordance with SFAS 123R (approximately $134,000).
Other selling, general and administrative expenses
The following table summarizes other selling, general and administrative
expenses for the three months ended March 31, 2006 and 2005:
Three months ended March 31, 2006 2005
----------- -----------
Other selling, general and
administrative expenses $ 279,433 $ 116,134
Overall other selling, general and administrative expenses increased by 141%
(approximately $163,000) mainly due to the acquisition of Navigator in October
2005.
20
Depreciation and amortization
The following table summarizes depreciation and amortization for the three
months ended March 31, 2006 and 2005:
Three months ended March 31, 2006 2005
---------- ----------
Depreciation $ 107,730 $ -
Amortization of intangibles $ 347,490 -
-
---------- ----------
Total depreciation and amortization $ 455,220 $ -
========== =========
Depreciation has increased by $107,730 in the three months ended March 31, 2006.
The increase can be attributed exclusively to the acquisition of Navigator.
Amortization of intangibles of $347,490 in 2006 relates to certain customer
contracts of Navigator, which were recognized as intangible assets upon
acquisition.
Interest expense
The following table summarizes interest expense for the three months ended March
31, 2006 and 2005:
Three months ended March 31, 2006 2005
----------- -----------
Interest expense $(31,182) -
The increase in interest expense is due to the consolidation of Navigator. The
loan liability of Navigator has increased interest expense by more than $31,000
due to bank loan and overdraft facility outstanding.
Liquidity and Capital Resources
As of March 31, 2006, our cash, cash equivalents and marketable securities were
approximately $0.7 million, a decrease of approximately $0.9 million from the
end of fiscal year 2005. Due to cash consumption of losses in the three month
period ended March 31, 2006 and 2005, cash flow provided by (used in) operation
did not offset the cash used in financing and investing activities neither in
the three months ended March 31, 2006 nor in the three months ended March 31,
2005.
Cash flow used in operating activities for the three months ended March 31, 2006
was $0.1 million in opposite to $0.3 million cash provided by operating
activities in the months ended March 31, 2005. The $0.4 million change is due to
the decreased profitability of the subsidiaries of the Company.
Cash used in investing activities included Navigator related $0.1 million
capital expenditures in the three months ended March 31, 2006, while investing
activities from discontinued operations were $0.5 million both in the three
months ended 2006 and 2005.
Cash used in financing activities was $0.1 million in 2005 and 2006. Navigator
related cash provided by the financing activity was $0.1 million mainly due to
the utilization of bank overdraft, while Euroweb Hungary and Euroweb Romania
related cash used in financial activities as discontinued operation increased by
$0.1 million comparing 2005 is mainly due to partial loan repayment by Euroweb
Hungary in connection with $6 million Navigator related loan provided by
Commerzbank Hungary Rt in October 2005.
21
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 subsidiaries 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 currency: Hungarian Forint for
Navigator and US Dollars for the Parent Company registered in the State of
Delaware.
The Company's operations are primarily outside of the United States through its
wholly owned subsidiary. All the Company's customers are in Hungary. 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 March 31, 2006, has been affected by the weakening of
the Hungarian forint against the U.S. dollar from 213.58 as of December 31,
2005, to 219.20 as of March 31, 2006, an approximate 3% 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 three months ended March 31, 2006 and 2005 were 213.52 and
185.71, respectively.
Effect of Recent Accounting Pronouncements
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of SFAS 123R, Share-Based Payment, using the modified prospective
transition method and therefore did not restate results for prior periods. Prior
to January 1, 2006 the Company accounted for share-based compensation
arrangements in accordance with APB Opinion No. 25, Accounting for Stock Issued
to Employees and complied with the disclosure provisions of SFAS 123, Accounting
for Stock-Based Compensation. SFAS 123R requires all public entities that used
the fair-value method for either recognition or disclosure under SFAS 123 to
apply the modified prospective transition method as of the required effective
date. As a result, the Company adopted the provisions of SFAS 123R using this
method, effective January 1, 2006. Under the modified prospective method, new
awards are valued and accounted for prospectively upon adoption. Outstanding
prior awards that are unvested as of January 1, 2006 are recognized as
compensation cost over the remaining requisite service periods, as prior periods
may not be restated. The adoption of SFAS 123R increased our expenses and
reported net loss for the three months ended March 31, 2006 by $0.1 million.
22
Management forecasts that the impact of adopting SFAS 123R for the twelve months
ending December 31, 2006 will be approximately $0.4 million. This forecast is
based on the Black-Scholes option-pricing model, the price of our stock at the
time of grants, the volatility of our stock price and the expected forfeiture
rates. As such, our actual stock option expense may differ from this estimate.
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. Management adopted this Statement as of January 1, 2006
and will apply its standards after such date. The adoption of SFAS No. 151 did
not have a material impact on the Company's 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.
Forward-Looking Statements
When used in this Form 10-QSB, in other filings by the Company with the
Securities and Exchange Commission ("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.
23
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. The Company advises you to review any
additional disclosures made in its 10-QSB, 8-K, and 10-KSB reports filed with
the SEC.
24
Item 3. Controls and Procedures
As of the end of the period covered by this report, we conducted an evaluation,
under the supervision and with the participation of our Chief Executive Officer
and Chief Accounting Officer (principal financial officer) of our disclosure
controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the
Exchange Act). Based upon this evaluation, our Chief Executive Officer and Chief
Accounting Officer (principal financial officer) concluded that our disclosure
controls and procedures are effective to ensure that information required to be
disclosed by us in the reports that we file or submit under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. There was no change in our internal controls or in
other factors that could affect these controls during our last fiscal quarter
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
25
PART II
ITEM 1. LEGAL PROCEEDINGS
On April 26, 2006, a lawsuit was filed in Delaware Court of Chancery
(the "Court") by a stockholder of Euroweb International Corp. (the
"Company") against the Company, each of the Company's directors and
CORCYRA d.o.o., a stockholder of the Company that beneficially owns
39.81% of the Company's outstanding common stock of the Company. The
Complaint is entitled Laurence Paskowitz v. Csaba Toro et al., C.A. No.
2110-N and was brought individually and as a class action on behalf of
certain of the Company's common stockholders excluding defendants and
their affiliates. The plaintiff alleges the proposed sale of 100% of
the Company's interest in the Company's two Internet and telecom
related operating subsidiaries (the "Subsidiaries") constitutes a sale
of substantially all of the Company's assets and requires approval by a
majority of the voting power of the Company's outstanding common stock
under Section 271 of the Delaware General Corporation Law. The
plaintiff also alleges the defendants breached their fiduciary duties
in connection with the sale of the subsidiaries and the disclosures
contained in the proxy statement filed on April 24, 2006. The plaintiff
applied for a temporary restraining order seeking to enjoin the special
meeting on May 15, 2006.
The Company denies any and all allegations of wrongdoing; however, in
the interests of conserving resources, on April 28, 2006, the parties
to the litigation entered into a Memorandum of Understanding providing
for, subject to confirmatory discovery by plaintiff, the negotiation of
a formal stipulation of a settlement of the litigation. Pursuant to the
proposed settlement, the Board of Directors of the Company has
determined to: (i) increase the vote required to approve the sale of
100% of the Company's interest in the Subsidiaries, (ii) revise the
disclosure within the proxy statement to eliminate the bonus of up to
US $400,000, which the Compensation Committee of the Company had the
option to pay to select members of management, as the Board of
Directors had previously elected to terminate the ability to pay such
bonus and (iii) provide supplemental disclosure as contained in the
Supplemental Proxy Statement to be mailed to stockholders and filed
with the Securities and Exchange Commission on May 3, 2006. The
settlement will provide for dismissal of the litigation with prejudice
and is subject to Court approval. As part of the settlement, the
Company has agreed to pay an amount of attorneys' fees and expenses
that is to be negotiated between the two parties or, lieu of such
agreement between the two parties, will be determined by the Court.
The Company is not involved currently in other legal proceedings that
could reasonably be expected to have a material adverse effect on its
business, prospects, financial condition or results of operations. (q)
ITEM 2. CHANGES IN SECURITIES
None
26
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None. ITEM 6. EXHIBITS
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) Restated Certificate of Incorporation filed May 29, 2003
(d) Restated By-laws (filed as an exhibit to the Form 10-QSB for
the quarter ended September 30, 2004)
(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 (principal
financial 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 Section 906 of the
Sarbanes-Oxley Act of 2002.
(32) (b) Certification of the Chief Accounting Officer (principal
financial officer) of Euroweb International Corp. pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
-------------------------
(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.
27
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
Budapest, Hungary, on May 12, 2006.
EUROWEB INTERNATIONAL CORP.
By /s/Csaba Toro
-----------------------
Csaba Toro
Chief Executive Officer
28