UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ________ to _________
COMMISSION FILE NO. 0-25677
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 51-0384117
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
STEFAN - GEORGE - RING 19-23
81929 MUNICH, GERMANY
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
49-89-993-150
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL
YEAR IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Class OUTSTANDING AT MAY 8, 2000
Common stock - $0.001 par value 23,361,147
TABLE OF CONTENTS
PAGE
----
PART I FINANCIAL INFORMATION............................................ 3
ITEM 1. FINANCIAL STATEMENTS.......................................... 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................... 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.... 19
PART II OTHER INFORMATION............................................... 19
ITEM 1. LEGAL PROCEEDINGS............................................ 19
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.................... 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.............................. 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 19
ITEM 5. OTHER INFORMATION............................................ 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................. 19
SIGNATURES............................................................... 24
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
------------ -----------
1999 2000
(unaudited)
(in thousands)
ASSETS
Cash and cash equivalents......................................... $ 73,213 $ 63,173
Short-term investments............................................ 41,237 29,531
Accounts receivable -- trade, net of allowance for doubtful
accounts of $ 1,192,000 and $1,424,000 at December 31, 1999 and
March 31, 2000 respectively....................................... 9,162 8,570
Other receivables................................................. 5,052 5,129
Restricted investments............................................ 10,091 20,182
Prepaid expenses and other assets................................. 2,201 1,382
----------- -----------
Total current assets.............................................. 140,956 127,967
Property and equipment, net....................................... 28,479 31,238
Product development costs, net.................................... 3,096 2,615
Goodwill, net..................................................... 26,240 26,268
Deferred income taxes............................................. 20,771 22,724
Restricted investments............................................ 48,158 27,638
Other assets...................................................... 20,100 22,712
----------- -----------
TOTAL ASSETS......................................................... $287,800 $261,162
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Overdrafts and short-term borrowings............................ $ 437 521
Trade accounts payable.......................................... 18,229 12,653
Other accrued liabilities....................................... 15,144 11,142
Current portion long term debt and capital lease obligations.... 1,728 1,587
Accrued personnel costs......................................... 2,694 1,985
----------- -----------
Total current liabilities.................................. 38,232 27,888
Long-term debt.................................................. 178,372 180,960
Capital lease obligations....................................... 2,437 2,751
SHAREHOLDERS' EQUITY
Common stock $.001 par value, 50,000,000 shares authorized,
20,970,000 and 23,104,000 shares issued and outstanding at
December 31, 1999 and March 31, 2000 respectively................. 21 23
Preferred stock $.001 par value, 50,000,000 shares authorized,
4,793,000 and , 3,203,000 issued and outstanding December 31,
1999 and March 31, 2000 respectively.............................. 4 3
Additional paid in capital...................................... 134,951 139,504
Accumulated deficit............................................. (57,971) (81,527)
Other comprehensive income (loss)............................... (8,246) (8,440)
----------- -----------
Total shareholders' equity...................................... 68,759 49,563
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................... $ 287,800 $ 261,162
=========== ===========
See accompanying notes to consolidated financial statements
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
(Unaudited)
Three months ended March 31
--------------------------------------
1999 2000
--------------- ----------------
( in thousands, except per share
data )
Revenue
Internet Projects................................................................ $ 1,392 $ 636
Network Services................................................................. 2,462 6,422
------- --------
Total revenues........................................................................ 3,854 7,058
Cost of revenues:
Internet Projects................................................................ 1,079 694
Network Services................................................................. 2,970 6,375
Depreciation and amortization.................................................... 414 1,067
------- --------
Total cost of revenues................................................................ 4,463 8,136
Gross margin (loss)................................................................... (609) (1,078)
General and administrative expenses............................................... 1,456 6,716
Sales and marketing expenses...................................................... 1,807 2,906
Research and development.......................................................... 1,263 177
Depreciation and amortization..................................................... 841 3,162
------- --------
Total operating expenses 5,367 12,961
Operating loss........................................................................ (5,976) (14,039)
Interest expense...................................................................... 11 8,859
Interest income....................................................................... 260 1,324
Foreign currency gains(losses)........................................................ - (4,910)
------- --------
Loss before taxes and minority interest............................................... (5,727) (26,484)
Income tax benefit.................................................................... 2,159 2,928
------- --------
Net loss.............................................................................. $(3,568) $(23,556)
======= ========
Basic and diluted loss per share...................................................... $(0.19) $(1.02)
======= --------
Number of shares used to compute earnings per share................................... 18,762 23,103
======= ========
See accompanying notes to consolidated financial statements
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For three months ended March 31,
------------------------------------------
(in thousands) 1999 2000
------------------- ----------------
Cash Flows from Operating Activities:
Net loss...................................................................... $ (3,568) $(23,556)
Adjustments to reconcile net loss to net cash used by operations:
Deferred tax credit....................................................... (2,159) (2,930)
Depreciation and amortization............................................. 1,255 4,229
Provision for losses on accounts receivable............................... 77 232
Amortization of Bond discount............................................. - 1,327
FX loss................................................................... - 4,910
Changes in operating assets and liabilities:
Trade accounts receivable................................................. (1,305) (89)
Other receivables......................................................... (385) (296)
Other assets.............................................................. (1,443) (1,431)
Prepaid expenses and other current assets................................. (238) 724
Trade accounts payable.................................................... 4,686 (4,785)
Other accrued expenses and liabilities.................................... 1,215 (3,346)
Accrued personnel costs................................................... (74) (592)
-------- --------
Total changes in operating assets and liabilities 2,456 (9,815)
-------- --------
Net cash used in operating activities.................................... (1,939) (25,603)
Cash Flows from Investing Activities:
Purchase of short term investments............................................ (193) (21,256)
Proceeds from sale of short term investments.................................. - 39,257
Purchase of property and equipment............................................ (4,534) (6,348)
Product development costs..................................................... (773) -
Acquisition of businesses, net of cash acquired............................... - (833)
Payment of deferred purchase obligations...................................... (3,930) -
-------- --------
Net cash (used) provided by investing activities......................... (9,430) 10,820
Cash Flows from Financing Activities:
Proceeds from issuance of bonds and other borrowings.......................... 1,913 2,823
Repayment of borrowings....................................................... (64) -
-------- --------
Net cash provided by financing activities................................ 1,849 2,823
-------- --------
Translation adjustments....................................................... (4,249) 1,920
-------- --------
Net (decrease) increase in cash and cash equivalents.......................... (13,769) (10,040)
Cash and cash equivalents at beginning of period.............................. 42,876 73,213
-------- --------
Cash and cash equivalents at end of period.................................... $ 29,107 $ 63,173
======== ========
Supplemental disclosure of non-cash investing and financing activities:
Acquisitions (Note 4):
Fair value of assets acquired............................................. $ - $ 6,449
Less:
Cash acquired........................................................ - 195
Cash paid............................................................ - 1,028
Stock issued......................................................... - 4,555
-------- --------
Liabilities assumed....................................................... $ - $ 671
======== ========
Stock dividend................................................................
Other supplemental cash flow disclosures:
Cash paid for interest................................................... - 10,091
Cash paid for taxes...................................................... - -
Depreciation............................................................. 826 1,574
Amortization............................................................. 429 2,655
See accompanying notes to consolidated financial statements
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles ("GAAP") for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation of financial position and results of
operations have been included. Operating results for the three months ending
March 31, 2000 are not necessarily indicative of results to be expected for the
year ended December 31, 2000. For further information, refer to the Consolidated
Financial Statements and Footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1999. Certain prior year
amounts in the consolidated financial statements have been reclassified to
conform to the current year presentation.
2. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
March 31,
---------
1999 2000
------- --------
(in thousands, except per share data)
Numerator:
Net loss-numerator for basic and diluted loss per share.... $(3,568) $(23,556)
Denominator:
Denominator for basic and diluted loss per share --
weighted average shares outstanding....................... 18,762 23,103
Basic and diluted loss per share................................ $ (.19) $ (1.02)
The denominator for diluted earnings per share excludes the convertible
preferred stock and stock options because the inclusion of these items would
have an anti-dilutive effect.
3. Segment information
We evaluate performance and allocate resources based on the operating profit of
our subsidiaries. We operate in one line of business, which is providing
international Internet backbone and access services and network business
solutions for corporate customers. Our reportable segments are divided by
country since each country's operations are managed and evaluated separately.
Information concerning our geographic locations is summarized as follows:
Three months ended March 31
------------------------------
1999 2000
------------ -----------
(in thousands)
Revenues:
Germany................................................ $ 2,529 $ 4,464
US..................................................... - -
Italy.................................................. 516 1,553
Other.................................................. 809 1,041
------- --------
Total.................................................. $ 3,854 $ 7,058
Depreciation and Amortization:
Germany.............................................. $ 1,168 $ 1,511
US................................................... 30 2,107
Italy................................................ 11 279
Other................................................ 46 332
------- --------
Total................................................ $ 1,255 $ 4,229
Interest Expense:
Germany.............................................. $ 5 $ 19
US................................................... - 8,785
Italy................................................ 4 53
Other................................................ 2 2
------- --------
Total................................................ $ 11 $ 8,859
Interest Income:
Germany.............................................. $ 3 $ 16
US................................................... 257 1,297
Italy................................................ - 7
Other................................................ - 5
------- --------
Total................................................ $ 260 $ 1,325
Loss before Taxes:
Germany.............................................. $(5,275) $ (3,364)
US................................................... (112) (19,285)
Italy............................................... (205) (2,285)
Other................................................ (135) (1,550)
------- --------
Total................................................ $(5,727) $(26,484)
Income tax benefit:
Germany.............................................. $ 2,159 $ 2,928
US................................................... - -
Italy............................................... - -
Other................................................ - -
------- --------
Total................................................ $ 2,159 $ 2,928
Total Assets:
Germany.............................................. $35,995 $ 65,312
US................................................... 33,877 173,148
Italy............................................... 953 15,775
Other................................................ 1,001 6,927
------- --------
Total................................................ $71,826 $261,162
======= ========
4. Business Acquisitions
Effective April 13, 1999, we acquired 51% of the outstanding shares of Sunweb
Internet Services SIS AG ("Sunweb") for a total consideration of DM 3,103,000
($1,639,000). DM 1,807,000 ($954,000) of the purchase price was paid in cash (in
Swiss Francs) with the remainder settled in exchange for the issuance of 25,680
shares of our common stock. The Stock Purchase Agreement also contains
provisions for put and call options for the sellers and buyers, respectively,
for the remaining 49% of the outstanding stock of Sunweb. The purchase price per
the agreement for the remaining 49% of the shares is based on a multiple of
Sunweb's net profit or loss before taxes. The put and call options expire on
December 31, 2001. The acquisition has been accounted for using the purchase
method of accounting and as such the accompanying financial statements reflect
Sunweb's results of operations from April 13, 1999. Goodwill recorded in
connection with the acquisition of Sunweb, amounting to DM 2,678,000
($1,414,000), is being amortized over 10 years.
Effective June 30, 1999, we acquired 100% of the outstanding shares of Cybernet
Italia S.p.A. (formerly Flashnet S.p.A.) for a total consideration of DM
52,816,000 ($27,890,000). DM 41,464,000 ($21,896,000) of the purchase price was
paid in cash (in Italian Lire) with the remainder settled in exchange for the
issuance of 301,290 shares of our common stock. The acquisition has been
accounted for using the purchase method of accounting and as such the
accompanying financial statements reflect Cybernet Italia's results from June
30, 1999. Goodwill recorded in connection with the acquisition of Cybernet
Italia, amounting to DM 32,004,000 ($16,970,000), is being amortized over 10
years.
Effective October 28 1999, we acquired 51% of the outstanding shares of Novento
Telecom AG ("Novento") and 51% of Multicall Telefonmarketing AG ("Multicall")
for a consideration of DM 3,178,000 ($ 2,373,000). DM 2,002,000 ($1,092,000) of
the purchase price was paid in cash with the remainder settled in exchange for
the issuance of 39,412 shares of our common stock. The acquisition has been
accounted for using the purchase method of accounting and as such the
accompanying financial statements reflect Novento and Multicall's results from
October 28, 1999. Goodwill recorded in connection with the acquisition of
Novento, amounting to DM 1,913,000 ($1,043,000) is being amortized over 10
years.
Effective October 29, 1999, we acquired the remaining 34% of the outstanding
shares of Eclipse, in which we already owned 66% of the outstanding shares, for
a total consideration of DM 4,320,000 ($2,356,000). DM 707,000 ($386,000) of the
purchase price was paid in cash with the remainder settled by way of the
depositing of 136,402 shares of our common stock in a pooling trust from which
the shares will be released to the sellers. Goodwill recorded in connection with
the acquisition of the remaining shares in Eclipse, amounting to DM 3,718,000
($2,359,000), is being amortized over the remaining life of the goodwill
associated with the acquisition of the majority shareholding at the end of 1997.
Effective January 1, 2000, we acquired the remaining 49% of the outstanding
shares of Novento Telecom AG ("Novento") and the remaining 49% of Multicall
Telefonmarketing AG ("Multicall"), businesses in which we already owned 51% of
the outstanding shares, for a consideration of DM 10,860,000 ($ 5,582,000). DM
2,000,000 ($ 1,028,000) of the purchase price was paid in cash with the
remainder settled in exchange for the issuance of 543,812 shares of our common
stock. Goodwill recorded in connection with the acquisition of Novento,
amounting to DM 5,741,000 ($ 2,951,000), is being amortized over 5 years.
The following unaudited pro forma consolidated results of operations for the
three months ended March 31, 1999 and 2000 assume that acquisitions of Sunweb,
Cybernet Italia, Novento and Multicall occurred as of January 1, 1999.
Three months ended March 31,
----------------------------------------------------
1999 2000
-------------- ----------------------
(in thousand except per share data)
Revenue $ 6,606 $ 7,058
Net loss (5,577) (23,556)
Basic and diluted loss per share $(0.267) $ (1.02)
5. Subsequent Events
Effective April 17, 2000, we acquired Cybernet S.a.g.l., an internet service
provider located in Lugano Switzerland, for a maximum purchase price of SFr
500,000 ($304,000) and 12,000 shares of our common stock. Of the SFr 500,000,
SFr 100,000 will only be paid upon the achievement of certain revenue targets
during the period from March 1, 2000 to August 31, 2000. The 12,000 shares of
common stock will be released to the former owners only upon the acheivement of
certain revenue targets during the fiscal year 2000.
6. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The following table sets forth, for the periods indicated, the items of
Consolidated Statements of Loss for the three months ended March 31, 1999 and
2000, respectively, expressed as a percentage of total revenues:
For three months ended March 31,
------------------------------------------
1999 2000
--------------------- -------------------
Revenue 36.1% 9.0%
Internet Projects..............................................................
Network Services............................................................... 63.9% 91.0%
Total revenues...................................................................... 100.0% 100.0%
Cost of revenues:
Internet Projects.............................................................. 28.0% 9.8%
Network Services............................................................... 77.1% 90.3%
Depreciation and amortization.................................................. 10.7% 15.1%
Total cost of revenues.............................................................. 115.8% 115.3%
Gross margin (loss)................................................................. -15.8% -15.3%
General and administrative expenses............................................. 37.8% 95.2%
Sales and Marketing expenses.................................................... 46.9% 41.2%
Research and development........................................................ 32.8% 2.5%
Depreciation and amortization................................................... 21.8% 44.8%
Total operating expenses............................................................ 139.3% 183.6%
Operating loss...................................................................... -155.1% -198.9%
Interest expense.................................................................... -0.3% 125.5%
Interest income..................................................................... 6.7% 18.8%
Realized foreign currency translation losses........................................ 0.0% -69.6%
Loss before taxes and minority interest............................................. -148.1% -375.2%
Income tax benefit.................................................................. 56.0% 41.5%
Net loss............................................................................ -92.0% -333.7%
Revenues
Total revenues increased 83.1% from $3,855,000 in the first three months of 1999
to $7,058,000 in the first three months 2000, primarily as a result of increased
Network Services revenues. Internet Project revenues decreased 54.3% from
$1,392,000 in the first three months of 1999 to $636,000 for the same period in
2000, while Network Services revenues increased 160.9% from $2,462,000 to
$6,422,000. The first three months Network Services revenues represented 91.0%
of total revenues in 2000, as compared with 63.9% in 2000
The increase in revenues from Network Services is mainly a result of expansion
of our customer base, which provides us with a stream of recurring revenues.
Although we have focused on building recurring revenues from Network Services,
building relations with Internet Project customers remains a continuing
strategy. In addition, we consolidated $875,000 of Vianet revenues, $166,000 of
Sunweb revenues, $1,134,000 of Cybernet Italia revenues, and $1,268,000 of
Novento's revenues in the first three months of 2000, all of these companies
were acquired after March 1999. The revenues of all these companies are derived
primarily from Network Services. Excluding the revenues of these acquisitions,
Network Services revenues increased 56.9% in the first three months of 2000
compared with revenues of the corresponding period in 1999, and Internet
Projects revenues decreased by 54.9%.
From the first three months of 1999 to the first three months of March 2000, the
Euro depreciated approximately 14% versus the US dollar. As our principal
operating currency is the Euro, the depreciation of the Euro had an unfavorable
impact on our revenues which are reported in US dollars. Reported US dollar
revenues increased approximately 83% in the first three months of 2000 over the
same period in 1999. Had the exchange rate of the Euro remained stable against
the US dollar during this period, our US dollar revenues would have increased
approximately 109%.
Costs of Revenues
Total costs of revenues increased 82.3% from $4,463,000 in the first three
months of 1999 to $8,136,000 in the first three months of 2000. Cost of
revenues as a percentage of revenues remained relatively stable, being 115.8% in
the first three months of 1999 and 115.3% in the first three months of 2000.
Cost of revenues mainly consists of (i) telecommunications expenses, (ii)
technical and operations personnel and related overhead costs, (iii) the cost of
hardware and software sold, (iv) amortization of product development costs, (v)
depreciation of network facilities and equipment, and (vi) consulting expenses
in the area of network and software development. Telecommunications expenses
mainly represent the cost of transporting Internet traffic from our customer's
location through a local telecommunications carrier to one of our access nodes
and the cost of leasing lines to interconnect our backbone nodes. Technical and
operational personnel included in cost of revenues are those individuals
involved in the planning, building and managing of our network and the providing
services over this network. We had 180 technical and operations personnel on
March 31, 2000 and approximately 88 such personnel at March 31, 1999.
The cost of revenues from Internet Projects decreased by 35.7% from $1,079,000
in the first three months of 1999 to $694,000 in the first three months of 2000.
Cost of Internet Projects as a percentage of related revenues increased from
77.5% in the first three months of 1999 to 109.1% in the first three months of
2000, as we won and completed fewer Internet Projects than expected.
The cost of revenues from Network Services increased 114.6% from $2,970,000 in
the first three months of 1999 to $6,375,000 in the first three months of 2000.
This increase primarily resulted from the additional leased line expenses
related to the expansion of our network backbone, additional leased lines to our
customer's premises, a large increase in network personnel and consolidation of
expenses of companies acquired in 1999. Cost of Network Services as a percentage
of related revenues decreased from 120.7% in the first three months of 1999 to
99.3% in the first three months of 2000. This decrease is primarily attributable
to improved network utilization and heightened productivity of personnel in our
network operations.
Depreciation and amortization included in the cost of revenues, increased from
$413,000 in the first three months of 1999 to $1,067,000 in the first three
months of 2000 as a result of investments in our own network infrastructure and
supporting systems. Additionally, we have capitalized certain costs associated
with designing and building the network and related software.
General and Administrative Expenses
General and administrative expenses increased 361% from $1,456,000 in the first
three months of 1999 to $6,716,000 in the first three months of 2000. General
and administrative expenses consist principally of salaries and other personnel
costs for our administrative staff, office rent, and external legal and
accounting advisory costs. The increase in our general and administrative
expenses reflects the costs of building a corporate infrastructure to support
our anticipated growth and the addition of the general and administrative
expenses of the companies acquired in the last six months of 1999. We incurred
significant legal, accounting and other external advisory costs associated with
its financing activities, acquisitions and alliances in the second half of 1999.
As a percentage of revenues, general and administrative expenses increased from
37.8% in the first three months of 1999 to 95.2% in the first three months of
2000.
General and Administrative personnel increased from approximately 33 at the end
of March 1999 to 79 at the end of March 2000. Most of these additions were made
to the financial, human resources, and IT management of the operating companies
and to the executive management in the corporate headquarters. While we
currently have more general and administrative staff than at the end of March
1999, our general and administrative staff has been reduced from 84 at the end
of December 1999. We made reductions in non-essential support functions and
related overhead in the fourth quarter of 1999. Through these actions we reduced
general and administrative expenses by 29% in the three months ended March 31,
2000 as compared to the three months ended December 31, 1999.
Excluding the general and administrative expenses in the companies acquired
since the end of the first quarter of 1999, general and administrative expenses
increased 279% from $1,456,000 in the first three months of 1999 to $5,517,000
in the first three months of 2000.
Sales and Marketing Expenses
Sales and marketing expenses increased by 61% from $1,806,000 in the first three
months of 1999 to $2,906,000 in the first three months of 2000. Sales and
marketing expenses consist principally of salaries of our sales force and
marketing personnel and advertising and communication expenditures. The growth
in these expenses was partially due to additions to the sales and marketing
staff which increased from approximately 96 on March 31, 1999 to 102 on March
31, 2000. The increase was also due to increased marketing activities in the
corporate headquarters. As a percentage of revenues, our sales and marketing
expenses decreased from 46.9% in the first three months of 1999 to 41.2% in the
first three months of 2000.
In the fourth quarter of 1999 we reduced our sales and marketing staff and
related overhead. This resulted in a 42% reduction of sales and marketing
expenses by in the first three months of 2000 as compared to the last three
months of 1999.
Excluding the sales and marketing expenses in the companies acquired since the
end of the first quarter of 1999, sales and marketing expenses increased 11%
from $1,806,000 in the first three months of 1999 to $2,012,000 in the first
three months of 2000.
Research and Development
Research and development expenses decreased 86% from $1,263,000 in the first
three months of 1999 to $177,000 in the first three months of 2000. Research and
development expenses consist principally of personnel costs of employees working
on product development, consulting costs and certain overhead items. As a
percentage of revenues, research and development decreased from 32.8% in the
first three months of 1999 to 2.5% in the first three months of 2000.
Depreciation and Amortization
Depreciation and amortization expenses increased from $842,000 in the first
three months of 1999 to $3,162,000 in the first three months of 2000. This
increase reflects increased depreciation of property and equipment purchased to
build the corporate infrastructure necessary to support our anticipated growth,
and increased amortization of goodwill related to our acquisitions. Goodwill
represents the excess of the purchase price of companies we purchased over the
fair value of the tangible assets of those companies. Goodwill is amortized over
5 - 10 years.
Interest Income and Expense
Interest expense increased from $11,000 in the first three months of 1999 to
$8,859,000 in the first three months of 2000 as a result of our issuance of debt
securities in the second half of 1999. Interest income increased from $259,000
in the first three months of 1999 to $1,324,000 in the first three months of
2000 as a result of interest earned on the unutilized proceeds of these
offerings.
In the first three months of 2000 we incurred net foreign exchange losses of
$4,910,000 because our borrowings are denominated in US dollars but our
principal operating currency is the Euro. We will continue to record such losses
if the US dollar strengthens against the Euro.
Income Taxes
We recorded income tax benefits of $2,159,000 in the first three months of 1999
and $2,928,000 in the first three months of 2000, arising principally from
operating losses. Although we have additional operating losses, a valuation
allowance has been established to reflect the estimated amount of the tax
benefit that may not be realized. The majority of the operating losses and the
associated valuation allowance are associated with operations subject to
taxation under the German tax code. Under the current German tax code, these
net operating losses may be carried forward indefinitely and used to offset our
future taxable earnings.
Liquidity and Capital Resources
Cash Flow
Operating activities used cash of $25,603,000 in the first three months of 2000
compared to $1,939,000 for the comparable period in 1999. This is principally
the result of higher net losses as explained above.
For the first three months of 2000 investing activities provided cash of
$10,364,000 compared to cash used of $9,430,000 for the comparable period in
1999. This increase in cash generated from investing activities represents the
net proceeds from the purchase and sale of short-term investments, partially
offset by the cash outflows for the purchases of property and equipment
($6,348,000). Expenditures for property and equipment consisted principally of
the fit-out of POP's and data facilities, the purchases of computer hardware and
software and other expenditures related to our Internet backbone and equipment.
For the first three months of 2000, net cash provided by financing activities
was $2,823,000 compared to $1,849,000 in the same period in 1999.
Working Capital
On March 31, 2000, our working capital, defined as the excess of our current
assets over our current liabilities, was $100,079,000 as compared $102,724,000
at December 31, 1999.
Our accounts receivable as of March 31, 2000, reflects $8,570,000 for net
accounts receivable compared to $9,162,000 as at December 31, 1999. We have
taken steps to improve the timely collection of receivables, some of which have
started to show an impact.
Cash and cash equivalents amounted to $63,173,000 at March 31, 2000 compared
$73,213,000 at December 31, 1999. Of this, approximately $61,000,000 is held in
US dollars. We also had various short-term investments denominated in Euro's
totaling $29,531,000 at March 31, 2000. In addition, at March 31, 2000 we had
approximately $47,820,000 of Restricted cash held in escrow, to meet the next
five semi-annual interest payments on our 14% Senior Notes. This amount is
invested in US treasury bonds.
Credit Arrangements
As of March 31, 2000, we had short-term unsecured overdraft facilities under
which we and our subsidiaries could borrow up to DM 2,162,000 ($1,062,000).
These facilities are denominated in Italian Lire (in the amount of DM 2,020,000
($993,000)) and Austrian Schilling (in the amount of DM142,000 ($69,000)). The
interest rates fluctuate based upon current lending rates. The weighted average
borrowing rate on these facilities was 6.43% as March 31, 2000. In addition,
certain of our banks provide overdraft protection exceeding the limits specified
in these agreements. As of March 31, 2000, we and our subsidiaries had used DM
1,061,000 ($521,000) of these facilities. In addition, as March 31, 2000, we had
long-term capitalized lease obligations of DM 8,829,000 ($4,337,000).
Capital Expenditures
For the three months ended March 31, 2000, capital expenditures totaled
approximately $6,348,000. We funded these capital expenditures primarily from
net cash provided by financing activities. Our investments in the first three
months of 2000 included: (i) investments in various computer and technical
equipment totalling approximately DM 4,328,000 ($2,127,000), (ii) investments in
data facilities and data center premises totaling approximately DM 6,301,000
($3,096,000), and (iii) investments in other equipment totaling approximately DM
2,301,000 ($1,130,000).
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not utilize market-risk-sensitive instruments, such as derivative
financial instruments. Our primary market risk is in the area of interest rate
and foreign currency exchange rate fluctuations.
We maintain our cash balances in deposits at banks and in highly liquid short-
term investments, such as money market funds and US Treasury Bonds, therefore
lowering our exposure to interest income risks. As a result of our sale of Units
consisting of 14.0% Senior Notes due 2009 and warrants in July 1999 (the "Unit
Offering"), as well as our sale of Convertible Notes in August 1999 we have a
substantial amount of debt in U.S. dollars.
While our reporting currency is U.S. dollars, our functional currency is the
Deutsche Mark and as such significant fluctuations in the U.S. dollar to
Deutsche Mark exchange rate could have an adverse impact on the amount of
Deutsche Marks required to satisfy this debt. We estimate that a 10% increase in
the exchange rate between the Deutsche Mark and the U.S. dollar would increase
the Deutsche Mark amount required to settle the debt outstanding from the Unit
offering and our sale of Convertible Notes by approximately $20,000,000.
All of our revenues and a significant portion of our expenses are denominated in
currencies other than our reporting currency, the U.S. dollar. Approximately 63%
of our revenues in the first three months of 2000 were denominated in Deutsche
Marks and another 35% of revenues were denominated in other European Monetary
Union member currencies. The majority of our foreign exchange rate exposure
relates to the translation of our Deutsche Mark financial statements into U.S.
dollars which is impacted by changes in the exchange rates between the Euro and
the U.S. dollar.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
NOT APPLICABLE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NOT APPLICABLE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NOT APPLICABLE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
3.1 Certificate of Incorporation. (Incorporated by reference as Exhibit
3.1 to the Form S-1 Registration Statement filed with the Commission
on September 18, 1998).
3.2 Bylaws (Incorporated by reference as Exhibit 3.2 to the Form S-1
Registration Statement filed with the Commission on September 18,
1998).
4.1 Unit Agreement dated as of July 8, 1999 by and among the Company,
Lehman Brothers International (Europe) and Morgan Stanley & Co.
International Limited (Incorporated by reference to the Form S-4
Registration Statement No. 333-86853 filed September 10, 1999).
4.2 Indenture dated as of July 8, 1999 by and between the Company and The
Bank of New York, relating to the Company's notes contained in the
Units (Incorporated by reference to the Form S-4 Registration Statement
No. 333-86853 filed September 10, 1999).
4.3 Collateral Agreement dated as of July 8, 1999 by and among the
Company, Lehman Brothers International (Europe) and Morgan Stanley &
Co. International Limited, relating to the Unit Agreement (Incorporated
by reference to the Form S-4 Registration Statement No. 333-86853 filed
September 10, 1999).
4.4 Registration Rights Agreement dated as of July 8, 1999 by and among
the Company, Lehman Brothers International (Europe) and Morgan Stanley
& Co. International Limited, relating to the Company's notes contained
in the Units (Incorporated by reference to the Form S-4 Registration
Statement No. 333-86853 filed September 10, 1999).
4.5 Warrant Agreement, dated as of July 8, 1999 by and among Cybernet
Internet Services International, Inc., Lehman Brothers International
(Europe) and Morgan Stanley & Co. International Limited, relating to
the Company's warrants contained in the Units (Incorporated by
reference to the Form S-4 Registration Statement No. 333-86853 filed
September 10, 1999).
10.1 Sale and Assignment of Business Shares of the Artwise GmbH Software
Losugen dated September 18, 1997 by and among Mr. Stefan
Heiligensetzer, Mr. Frank Marchewicz, Mr. Rolf Strehle, Mr. Gerhard
Schonenberger, Mr. Lothar Bernecker, Artwise GmbH Software Solutions,
Cybernet Internet--Dienstleistungen AG and Cybernet Internet--
Beteiligungs GmbH (Incorporated by reference as Exhibit 10.1 to the
Form S-1 Registration Statement filed with the Commission on September
18, 1998).
10.1.1 Amending Agreement Concerning the Sale and Assignment of Interest in
Artwise GmbH Software LoSungen of September 18, 1997 by and among Rolf
Strehle, Gerhard Schonenberger, Cybernet Internet-Dienstleistungen AG
and Cybernet Internet - Beteiligungs GmbH. (Incorporated by reference
as Exhibit 10.1.1 to the Form 10-K Annual Report filed with the
Commission on March 30, 2000).
10.2 Sale and Assignment of Shares in OpenNet Internet Solutions GmbH dated
August 12, 1998 by and among Mr. Thomas Egner, Mr. Uwe Hagenmeier, Mr.
Markus Kress, Mr. Oliver Schaffer, Cybernet Internet Dienstleistungen
AG, and Cybernet Internet--Beteiligungs GmbH (Incorporated by
reference as Exhibit 10.2 to the Form S-1 Registration Statement filed
with the Commission on September 18, 1998).
Exhibit
Number Description
------- -----------
10.15 Agreement on the use of Data Communication Installations of Info AG
dated July 29, 1996 between Info AG and CyberNet Internet--
Dienstleistungen Ag (Incorporated by reference as Exhibit 10.15 to
the Form S-1 Registration Statement filed with the Commission on
September 18, 1998).
10.16 Ebone Internet Access Contract dated February 26, 1997 between Ebone
Inc. and Cybernet AG (Incorporated by reference as Exhibit 10.16 to
the Form S-1 Registration Statement filed with the Commission on
September 18, 1998).
10.17 Agreement, undated, between feratel International GmbH and Cybernet
Internet--Dienstleistungen AG (Incorporated by reference as Exhibit
10.17 to the Form S-1 Registration Statement filed with the
Commission on September 18, 1998).
10.18 Cybernet Internet Services International, Inc. 1998 Stock Incentive
Plan (Incorporated by reference as Exhibit 10.18 to the Form S-1/A
Registration Statement filed with the Commission on November 5,
1998).
10.19 Cybernet Internet Services International, Inc. 1998 Outside
Directors' Stock Option Plan (Incorporated by reference as Exhibit
10.19 to the Form S-1/A Registration Statement filed with the
Commission on November 5, 1998).
10.20 Agreement and Plan of Merger, dated October 9, 1998, between the
Company, a Utah corporation, and Cybernet Internet Services
International, Inc., a Delaware corporation (Incorporated by
reference as Exhibit 2.1 to the Form S-1/A Registration Statement
filed on November 5, 1998).
10.23 Registration Rights Agreement dated August 26, 1999 by and between
the Company and Morgan Stanley & Co. International Limited relating
to the Company's (Euro)25,000,000 Convertible Senior Subordinated
Pay-In-Kind Notes due 2009 (Incorporated by reference to the
Form S-4 Registration Statement No. 333-86853 filed September 10,
1999).
10.24 Indenture dated August 26, 1999 by and between the Company and The
Bank of New York relating to the Company's (Euro)25,000,000
Convertible Senior Subordinated Pay-In-Kind Notes due 2009
(Incorporated by reference to the Form S-4 Registration Statement
No. 333-86853 filed September 10, 1999).
10.26 Registration Rights Agreement dated August 26, 1999 by and between
the Company and Morgan Stanley & Co. International Limited relating
to the company's $35,000,000 13.0% Convertible Senior Subordinated
Discount Notes due 2009 (Incorporated by reference to the Form S-4
Registration Statement No. 333-86853 filed September 10, 1999).
10.27 Registration Rights Agreement dated August 26, 1999 by and between
the Company and Morgan Stanley & Co. International Ltd. relating to
the company's $15,002,183 13.0% Convertible Senior Subordinated
Discount Notes due 2009 (Incorporated by reference to the Form S-4
Registration Statement No. 333-86853 filed September 10, 1999).
10.28 Indenture dated August 26, 1999 by and between the Company and The
Bank of New York relating to the company's $35,000,000 and
$15,002,183 13.0% Convertible Senior Subordinated Discount Notes due
2009 (Incorporated by reference to the Form S-4 Registration
Statement No. 333-86853 filed September 10, 1999).
10.29 Condition Precedent Sale and Transfer of Novento Telecom AG and
Multicall Telefonmarketing AG Stock and Sale and Assignment of
Claims dated December 2, 1999. (Incorporated by reference as Exhibit
10.29 to the Form 10-K Annual Report filed with the Commission on
March 30, 2000.)
10.29.1 Sale and Transfer of Stock of Novento Telecom AG and Multicall
Telefonmarketing AG and Purchase and Assignment of Claims, dated
October 1, 1999. (Incorporated by reference as Exhibit 10.29.1 to
the Form 10-K Annual Report filed with the Commission on March 30,
2000.)
10.30 Framework Contract for the Performance of Project and Consulting
Services, dated November 19, 1999, by and between Beam GmbH and
Cybernet AG. (Incorporated by reference as Exhibit 10.30 to the Form
10-K Annual Report filed with the Commission on March 30, 2000.)
10.30.1 Loan and Security Agreement, dated November 10, 1999, by and between
Rolf Strehle, Gerhard Schonenberger and Cybernet Internet -
Dienstleistungen AG. (Incorporated by reference as Exhibit 10.30.1
to the Form 10-K Annual Report filed with the Commission on March
30, 2000.)
10.31 Stock Purchase Agreement, dated February 19, 1999, by and between
Jurg Heim, Marco Samek and Cybernet Internet Services International,
Inc. (Incorporated by reference as Exhibit 10.31 to the Form 10-K
Annual Report filed with the Commission on March 30, 2000.)
10.32 Cooperation Software Licensing Agreement, dated December 28, 1999,
by and between Berningshausen & Neben OHG and Cybernet Internet
Services International, Inc. (Incorporated by reference as Exhibit
10.32 to the Form 10-K Annual Report filed with the Commission on
March 30, 2000.)
10.33 Employment Agreement, dated as of November 1, 1999, by and between
Bernd Buchholz and Cybernet Internet Services International, Inc.
(Incorporated by reference as Exhibit 10.33 to the Form 10-K Annual
Report filed with the Commission on March 30, 2000.)
21 Subsidiaries. (Incorporated by reference as Exhibit 21 to the Form
10-K Annual Report filed with the Commission on March 30, 2000.)
27.1 Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
BY: /s/ Andreas Eder
-------------------------------------
Andreas Eder
Chairman of the Board, President, and
Chief Executive Officer
BY: /s/ Robert Eckert
-------------------------------------
Robert Eckert
Chief Financial Officer and Treasurer
Dated: May 12, 2000