SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: JULY 15, 1999
(Date of earliest event reported: JUNE 30, 1999)
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware _________ 51-0384117
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
Stefan-George-Ring 19-23
81929 Munich, Germany
(Address, including zip code,
of registrant's principal executive offices)
49-89-9931-5105
(Registrant's telephone number, including area code)
Not applicable.
(Former name or former address, if changed since last report)
2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On June 30, 1999, Registrant purchased from the existing stockholders all
of the issued and outstanding capital stock of Flashnet S.p.A. ("Flashnet"), a
leading Italian Internet Service Provider ("ISP"), for a purchase price
consisting of Lit. 41.0 billion ($22.1 million) in cash and 301,290 newly issued
shares of Registrant's common stock, a total purchase price valued at Lit. 54.2
billion ($29.2 million) as of May 14, 1999, the contract date. The purchase
price was determined through arms-length negotiations between Registrant and the
selling stockholders. The selling stockholders consisted of: (i) two affiliates
of 3i, an English investment group, which together owned 42.6% of Flashnet's
stock, on a fully diluted basis, and who received their portion of the purchase
price in cash; and (ii) members of Flashnet's management and their affiliates
who owned the remaining stock and received a combination of Registrant's stock
and cash. Among the selling stockholders were the President, Managing Director,
Sales Director and two technical directors, all of whom have agreed to continue
as employees under long-term contracts with customary covenants not to compete.
The Registrant financed the cash portion of the purchase price with an
interim loan (the "Interim Loan") of approximately $22 million made by Lehman
Commercial Paper, Inc. and Morgan Stanley Senior Funding, Inc. The Interim Loan
was repaid out of the proceeds of Registrant's private offering of Units to
Qualified Institutional Buyers pursuant to Rule 144A promulgated under the
Securities Act of 1933 as amended (the "Securities Act"). See Item 5.
Headquartered in Rome, Flashnet is the third largest ISP in Italy, offering
business and residential customers dedicated lines, dial-in and satellite access
to the Internet, web hosting, co-location services, electronic commerce, virtual
private networks and a variety of other services. It maintains a customer care
center which is available 24 hours per day to business customers and 18 hours
per day to residential customers.
Founded in 1994 as a division of a computer distribution group, Flashnet
originally focused on the residential market and built a clientele which totaled
approximately 38,000 residential customers as of March 31, 1999. Over the last
18 months, it has shifted its marketing focus to businesses and has already
developed a business customer base consisting of approximately 1,600 customers
as of March 31, 1999.
Flashnet owns 20 Points of Presence ("POPs") for dedicated lines and has
access to more than 300 dial-in access nodes which can also accommodate dial-in
traffic. The POPs interconnect with each other through leased lines. In Rome,
Flashnet has international access through primary links with MCI/WorldCom,
Global One and Ebone. Most of Flashnet's network equipment is manufactured by
Cisco.
ITEM 5. OTHER EVENTS
Pursuant to Rule 144A promulgated under the Securities Act, on July
8, 1999 Registrant sold to Qualified Institutional Buyers a total of 150,000
Units, each consisting of Registrant's 14% Senior Note due 2009 in the principal
amount of $1,000 and a Warrant to purchase 30.2310693 shares of Registrant's
common stock at a price of $22.278 per share. The Warrants entitle the holders
thereof to purchase in the aggregate 15% of Registrant's outstanding common
stock on a fully diluted basis.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
The following Financial Statements, Pro Forma Financial Information and
Exhibits are filed herewith:
(a) Financial Statements of Business Acquired
3
(1) Balance sheet of Flashnet S.p.A. as of December 31, 1998 and
related statements of loss, stockholders' deficit and cash flows
for the year then ended, expressed in Italian Lire, together with
the report thereon by Grant Thornton S.p.A., independent auditors.
(2) Unaudited balance sheet of Flashnet S.p.A. as of March 31, 1999
and 1998 and related statements of loss, stockholders'
deficit and cash flows for the periods then ended,
expressed in Italian Lire.
(b) Pro Forma Financial Statements
(1) Pro Forma Consolidated Financial Information
(c) Exhibits
2.1 Flashnet Stock Purchase Agreement
23.1 Consent of Grant Thornton S.p.A.
27.1 Financial Data Schedule
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 hereunto duly authorized.
Cybernet Internet Service
International, Inc.
_________________________________
(Registrant)
Date : July 15, 1999 By: /s/ Andreas Eder
_____________________________
(Signature)
Its Chairman
INDEPENDENT AUDITOR'S REPORT
The Chairman of the Board
Flashnet S.p.A
Via della Pisana 280/A
Rome, Italy
We have audited the accompanying balance sheet of Flashnet S.p.A (an Italian
Company) as of December 31, 1998, and the related statements of loss,
stockholders' deficit, and cash flows for the year then ended, expressed in
Italian Lire. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statements presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Flashnet S.p.A as of December
31, 1998, and the results of its operations and its cash flows for the year
then ended, in conformity with accounting principles generally accepted in the
United States of America.
May 14, 1999
Grant Thornton S.p.A.
Rome, Italy
F-1
FLASHNET S.p.A.
BALANCE SHEET
DECEMBER 31, 1998
(amounts in thousands of ITL)
ASSETS
Current assets
Cash............................................................. 32,034
Accounts receivable, net of allowance for doubtful accounts of
50,000 (Note 2.c)............................................... 4,499,540
Inventories (Notes 2.d and 3).................................... 174,770
Deferred income taxes (Notes 2.i and 14)......................... 964,301
Prepaid cable rentals............................................ 530,294
Other current assets............................................. 301,985
----------
Total current assets........................................... 6,502,924
Property, plant, and equipment (Notes 2.e and 4)................... 3,647,901
Other assets (Note 5).............................................. 1,288,611
----------
Total Assets................................................... 11,439,436
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Bank overdraft................................................... 716,437
Accounts payable................................................. 4,966,300
Current maturities of long-term debt............................. 365,995
Deferred income (Note 2.j)....................................... 2,774,708
Other current liabilities (Note 6)............................... 1,626,158
----------
Total current liabilities...................................... 10,449,598
Long-term liabilities
Obligations under capital leases (Note 7)........................ 628,885
Severance indemnities (Notes 2.g and 8).......................... 94,344
Bonds payable (Note 9)........................................... 800,000
----------
Total Liabilities.............................................. 11,972,827
----------
Stockholders' deficit..............................................
Common stock, par value ITL 1,000, authorized 2,297,142 shares,
issued, and outstanding 2,182,857 shares (Note 10).............. 2,182,857
Additional paid-in capital....................................... 983,891
Accumulated deficit (Notes 2.h and 11)........................... (3,700,139)
----------
Total Stockholders' Deficit.................................... (533,391)
----------
Total Liabilities and Stockholders' Deficit.................... 11,439,436
==========
See accompanying notes.
F-2
FLASHNET S.p.A.
STATEMENT OF LOSS
FOR THE YEAR ENDED DECEMBER 31, 1998
(amounts in thousands of ITL)
Net sales........................................................... 8,334,043
Cost of sales....................................................... (6,615,614)
----------
Gross profit........................................................ 1,718,429
Operating expenses.................................................. (4,562,098)
----------
Loss from operations................................................ (2,843,669)
Other income (expense)
Interest expense, net............................................. (369,914)
Penalties and interest on late payment of payroll taxes........... (358,780)
Rent income....................................................... 42,000
Others............................................................ 149,691
----------
Total other income (expense).................................... (537,003)
----------
Loss before income taxes............................................ (3,380,672)
Income taxes (Notes 2.i and 14)..................................... 1,015,169
----------
Net loss............................................................ (2,365,503)
==========
See accompanying notes.
F-3
FLASHNET S.p.A.
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1998
(amounts in thousands of ITL)
Additional
Common paid-in Accumulated
Total stock capital deficit
---------- --------- ---------- -----------
Beginning balance............... (434,636) 900,000 (1,334,636)
Sale of stock................... 2,200,000 282,857 1,917,143
Stock split..................... 1,000,000 (1,000,000)
Shareholders contribution of
additional paid-in capital..... 66,748 66,748
Net loss for the period......... (2,365,503) (2,365,503)
---------- --------- ---------- ----------
Ending balance.................. (533,391) 2,182,857 983,891 (3,700,139)
========== ========= ========== ==========
See accompanying notes.
F-4
FLASHNET S.p.A.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
(amounts in thousands of ITL)
Cash flows from operating activities
Net loss.................................................... (2,365,503)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.............................. 656,685
Change in assets and liabilities
Increase in accounts receivable........................... (2,320,596)
Decrease in inventories................................... 24,663
Increase in deferred tax asset--current................... (388,590)
Increase in deferred tax asset--noncurrent................ (728,197)
Increase in other current assets.......................... (201,760)
Increase in accounts payable.............................. 2,237,870
Increase in deferred income............................... 1,379,045
Increase in other current liabilities..................... 885,468
Increase in severance indemnities, net.................... 62,313
----------
Net cash used in operating activities.................... (758,602)
----------
Cash flows from investing activities
Purchase of property, plant, and equipment................. (1,487,740)
Payment to purchase the assets of Venezia Net Srl, net of
cash acquired............................................. (85,500)
Increase in other assets................................... (16,152)
----------
Net cash used in investing activities.................... (1,589,392)
----------
Cash flows from financing activities
Decrease in bank overdraft................................. (338,985)
Proceeds from sale of common stock......................... 2,200,000
Proceeds from issuance of bonds............................ 800,000
Proceeds from contribution of additional paid-in capital... 66,748
Principal payments under capital lease obligation.......... (366,041)
----------
Net cash provided by financing activities................ 2,361,722
Net change in cash and cash equivalents...................... 13,728
Cash and cash equivalents--beginning of period............... 18,306
----------
Cash and cash equivalents--end of period..................... 32,034
==========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest................................................... 118,727
Income taxes............................................... 87,045
Supplemental schedule of noncash investing and financing
activities:
1. Capital lease obligations of ITL 648,231 were incurred when the Company
entered into 10 leases for new telephone and computer equipment and
vehicles.
2. Additional capital stock was issued as a result of the stock splits
described in Note 11.
3. The Company purchased the assets of Venezia Net Srl for ITL 85,500. In
conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired ........................... 150,528
Cash paid to acquire the assets.......................... (85,500)
----------
Liabilities assumed.................................... 65,028
==========
See accompanying notes.
F-5
FLASHNET S.p.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. General
Flashnet S.p.A., the "Company", was established in Italy in 1995, and is
mainly involved in providing internet and long-distance telephone services.
2. Summary of Significant Accounting Policies
a. Basis of Financial Statements presentation
The company maintains its accounting records in Italian Liras ("ITL") and
prepares its statutory financial statements in confirmity with accounting
principles generally accepted in Italy.
The accompanying financial statements have been restated in order to comply
with accounting principles generally accepted in the United States of America,
for consolidation purposes. The main adjustments have been made to reflect the
provisions of FAS-13 (Accounting for Leases), and SOP 98-1 (Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use).
All information contained in the accompanying financial statements and
related notes are expressed in thousands of ITL ("ITL/000"), unless differently
indicated.
b. Statements of cash flows
For purposes of the statement of cash flows, cash equivalents include time
deposits, certificate of deposits, and all highly liquid debt instruments with
original maturities of three months or less.
c. Accounts receivable
Accounts receivable are reported at net realizable value. Net realizable
value is equal to the gross amount of receivable less an allowance for doubtful
accounts, based on an estimate of the collectibility of individual accounts and
prior years' bad debt experience.
d. Inventories
Inventories are stated at the lower of cost, determined by the FIFO method,
or market.
e. Property, plant, and equipment
The cost of property, plant, and equipment is depreciated over the estimated
useful lives of the related assets. Leasehold improvements are depreciated over
the lesser of the term of the related lease or the estimated useful lives of
the assets.
Depreciation is computed using the straight line method for both financial
reporting and income tax purposes.
Maintenance and repairs are charged to operations when incurred. Betterment
and renewals are capitalized. When property, plant, and equipment is sold or
otherwise disposed of, the asset account and related accumulated depreciation
account are relieved and any gain or loss is included in operations.
The useful lives of property, plant, and equipment for purposes of computing
depreciation are:
Computer and telephone equipment ............................... 8.5 years
Office furniture and equipment.................................. 3-8 years
Vehicles........................................................ 4 years
Property, plant, and equipment costing less than ITL 1,000,000 is entirely
expensed in the year of acquisition.
F-6
FLASHNET S.p.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
g. Severance indemnities
Under Italian Law, all employees are entitled to receive severance
indemnities upon termination of their employment, based on salary paid and
increase in cost of living. The severance indemnities accrue approximately at
the rate of 1/13.5 of the gross salaries paid during the year, and are
revaluated applying a cost of living factor established by the Italian
Government.
h. Retained Earnings
Italian corporations are required, under Italian Business Law, to appropriate
to a legal reserve not less than 1/20 of the net income for the period, until
the legal reserve reaches an amount equal to 1/5 of the capital stock. The
legal reserve is not available for distribution.
i. Income taxes
Income taxes are accounted for by the asset/liability approach in accordance
with FASB Statement 109. Deferred taxes arising from taxable temporary
differences and deductible temporary differences are included in the tax
expense in the income statement and in the deferred tax balances in the balance
sheet. Deferred tax assets are subject to reduction by a valuation account if
evidence indicates that it is more likely than not that some or all the
deferred tax assets will not be realized. Income taxes attributable to items
charged or credited directly to shareholders' equity, are charged or credited
to that component of shareholders' equity.
j. Deferred income
The Company collects in advance the subscriptions as provider of Internet
services from customers, and allocates the related revenues based on time
remaining to the end of the contract. Deferred income represents the unearned
portion at the balance sheet date.
k. Goodwill
Goodwill represents the excess of the cost of companies acquired over the
fair value of its net assets at dates of acquisition, and is being amortized on
the straight-line method over five years. The carrying amount of goodwill is
reviewed if the facts and circumstances suggest that it may be impaired.
Negative operating results, negative cash flows from operations, among other
factors, could be indicative of the impairment of goodwill. If this review
indicates that goodwill will not be recoverable, the Company's carrying value
of goodwill would be reduced.
l. Research and development costs and advertising costs
Research and development costs and advertising costs, are charged to
operations when incurred and are included in operating expenses.
3. Inventories
Inventories at December 31, 1998 consist of;
ITL/000
-------
Finished goods....................................................... 174,770
Less: allowance for obsolete inventory............................... 0
-------
174,770
=======
F-7
FLASHNET S.p.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
4. Property, Plant, and Equipment
Following is a summary of property, plant, and equipment at cost, less
accumulated depreciation at December 31, 1998:
ITL/000
---------
Telephone and computer equipment (owned).......................... 2,111,169
Telephone and computer equipment (leased)......................... 1,454,404
Office furniture and equipment.................................... 283,929
Leasehold improvements............................................ 445,339
Vehicles (leased)................................................. 184,870
---------
4,479,711
Less: accumulated depreciation (831,810)
---------
3,647,901
=========
Depreciation expense charged to operations for the year ended December 31,
1998 was ITL/000 525,270.
5. Other Assets
Other assets at December 31, 1998 consist of:
ITL/000
---------
Goodwill (net of accumulated amortization of ITL/000 456,416).... 278,527
Deferred income taxes............................................ 991,374
Others........................................................... 18,710
---------
1,288,611
=========
Amortization of goodwill charged to operations for the year ended December
31, 1998 was ITL/000 131,416.
6. Other Current Liabilities
Other current liabilities at December 31, 1998 consist of:
ITL/000
---------
Provision for penalties and interest on late payment of payroll
taxes.......................................................... 358,780
Income taxes payable............................................ 101,619
Payroll taxes payable........................................... 679,613
Salaries payable................................................ 116,076
VAT payable..................................................... 98,584
Others.......................................................... 271,486
---------
1,626,158
=========
7. Obligations under Capital Leases
The Company is the lessee of computer and telephone equipment and five
vehicles under capital leases expiring in various years through October 2003.
The assets and liabilities under capital leases are recorded at the fair value
of the leased property, which approximates the present value of the minimum
lease payments.
F-8
FLASHNET S.p.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
Depreciation of the assets under capital lease is included in depreciation
expense for the period and is based on the assets estimated useful life.
Accumulated depreciation of as of December 31, 1998 was ITL/000 241,657.
Minimum future lease payments as of December 31, 1998 for each of the next
five years and in the aggregate are:
ITL/000
---------
Year ending December 31:
1999............................................................ 555,536
2000............................................................ 483,909
2001............................................................ 204,843
2002............................................................ 20,438
2003............................................................ 16,174
Subsequent to December 31, 2003................................... 0
---------
Total minimum lease payments...................................... 1,280,900
Less: amount representing interest................................ (286,020)
---------
Present value of minimum lease payments........................... 994,880
=========
The above payments are computed using the interest rate in effect at December
31, 1998; actual payments may vary because of changes in applicable rates.
All leases provide for purchase options at the expiration of the lease; the
minimum future lease payments above, include the payments required to exercise
the purchase options.
8. Severance Indemnities
The amount shown in the financial statements represents the actual liability
at the balance sheet date. Following is detail of changes during the year ended
December 31, 1998:
ITL/000
-------
Balance--December 31, 1997.......................................... 32,030
Severance indemnities expense for the year.......................... 72,232
Indemnities paid during the year.................................... (9,918)
------
Balance--December 31, 1998.......................................... 94,344
======
Severance indemnities expense for the year ended December 31, 1998 includes
the following components:
ITL/000
-------
Indemnities accrued for the year..................................... 71,494
Revaluation of indemnities accrued at December 31, 1997.............. 738
------
72,232
======
F-9
FLASHNET S.p.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
9. Bonds Payable
Bonds payable consist of 800,000, 5% unsecured convertible bonds, face value
ITL 1,000 per bond, payable in quarterly installments from December 31, 2001 to
December 31, 2003. The bonds are convertible in 114,285 common shares (7-for-
1), par value ITL 1,000 per share.
Maturities as of December 31, 1998 for each of the next 5 years and in the
aggregate are:
ITL/000
-------
Year ending December 31:
1999............................................................... 0
2000............................................................... 0
2001............................................................... 120,000
2002............................................................... 400,000
2003............................................................... 400,000
-------
920,000
=======
Interest expense for the year ended December 31, 1998 was ITL/000 14,696.
10. Capital Stock
On August 5, 1998, the Stockholders approved:
a) A 1000-for-1 stock split, thereby increasing the number of issued and
outstanding shares from 900 to 900,000, and decreasing the par value of
each share from ITL 1,000,000 to ITL 1,000.
b) To increase the Company's capital stock from ITL 900,000,000 to ITL
1,182,857,000, issuing 282,857 additional shares of the Company's ITL
1,000 par value common stock, at a price of ITL 7,777.7817 per share.
c) A 1.84541073-for-1 stock split of the Company's ITL 1,000 par value
common stock. As a result of the split, 1,000,000 additional shares were
issued, additional paid-in capital was reduced from ITL 1,917,143,000 to
ITL 917,143,000, and common stock was increased from ITL 1,182,857,000
to ITL 2,182,857,000.
d) A capital contribution of ITL 66,748,000 as additional paid-in capital.
11. Accumulated Deficit
As described in Note 2.i, Italian corporations are required to maintain a
legal reserve that is not available for distribution, and only the
unappropriated retained earnings resulting from the statutory financial
statements prepared in accordance with Italian GAAP are available for
distribution.
Accumulated deficit as of December 31, 1998 consists of:
ITL/000
----------
Legal reserve (restricted)....................................... 175
Net loss for the period--Italian GAAP basis...................... (1,207,286)
Increase in accumulated deficit due to US GAAP adjustments....... (2,493,028)
----------
(3,700,139)
==========
F-10
FLASHNET S.p.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
12. Business combinations
On November 26, 1998, the Company acquired the assets of Venezia Net S.r.l.
in a business combination accounted for as a purchase. Venezia Net S.r.l. is
primarily engaged in providing internet services. The results of operations of
Venezia Net S.r.l. are included in the accompanying financial statements since
the date of acquisition. The total cost of the acquisition was ITL/000 94,477,
which exceeded the fair value of the net assets of Venezia Net S.r.l. by
ITL/000 84,943. As indicated in Note 2.k, the excess is being amortized on the
straight-line method over five years.
13. Related-Party Transactions
The Company sells Internet services, purchases part of its computer
equipment, and leases part of its office to a minority stockholder. The Company
is also indebted with two minority stockholders because of the bonds and
related interest, described in Note 9. Following is a summary of transactions
and balances at December 31, 1998:
ITL/000
-------
Purchases from stockholder........................................... 375,092
=======
Sales to stockholder................................................. 57,410
=======
Rent income.......................................................... 42,000
=======
Interest on bonds.................................................... 14,696
=======
Due from stockholder (included in accounts receivable)............... 351,641
=======
Bonds payable........................................................ 800,000
=======
14. Income Taxes
Income tax expense for the year ended December 31, 1998 consists of:
ITL/000
---------
Current........................................................... (101,618)
Deferred.......................................................... 1,116,787
---------
1,015,169
=========
The following temporary differences gave rise to the current and noncurrent
deferred tax asset at December 31, 1998:
ITL/000
-------
Service income deferred for financial accounting purposes......... 964,301
-------
Total Deferred Tax Asset--Current................................. 964,301
=======
Lease capitalized for financial accounting purposes but expensed
for tax purposes................................................. (83,007)
Intangible assets expensed for financial accounting purposes and
deferred for tax purposes........................................ 839,381
Net operating loss carryforward................................... 235,000
-------
Total Deferred Tax Asset--Noncurrent.............................. 991,374
=======
F-11
FLASHNET S.p.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
15. Research and Development Costs
Research and development costs charged to operations for the year ended
December 31, 1998 were ITL/000 834,041.
16. Commitments and Contingencies
a. At December 31, 1998, the Company is contingently liable for penalties
and interest relating to late payment of payroll taxes. Accordingly, a
provision of ITL/000 358,780 has been charged to operations in the
accompanying financial statements.
b. The Company leases office space under operating leases expiring in
various years through January 2004. Minimum future rental payments under
non-cancelable operating leases having remaining terms in excess of 1
year as of December 31, 1998 for each of the next 5 years and in the
aggregate are:
ITL/000
---------
Year ending December 31:
1999............................................................. 344,252
2000............................................................. 344,252
2001............................................................. 344,252
2002............................................................. 344,252
2003............................................................. 57,780
Subsequent to December 31, 2003.................................. 1,050
---------
Total minimum future rental payments............................. 1,435,838
=========
Rental expense under operating leases for the year ended December 31, 1998
was ITL/000 118,820.
17. Subsequent Events
On April 9, 1999, the Stockholders approved:
a. To increase the Company's capital stock from ITL 2,182,857,000 to ITL
2,690,937,000, issuing 427,080 additional shares of the Company's ITL
1,000 par value common stock, at a price of ITL 4,214.667 par share.
b. To issue at no cost 171,428 warrants to purchase 171,428 shares of the
Company's common stock, ITL 1,000 par value, at ITL 7,000.0233 per
share. On the same date the Stockholders authorized the issuance of
171,428 additional shares of the Company's ITL 1,000 par value common
stock, that were reserved for that purpose. The warrants are exercisable
through December 31, 2001.
F-12
FLASHNET S.p.A.
BALANCE SHEETS
MARCH 31, 1999 AND 1998
(amounts in thousands of ITL)
(unaudited)
1999 1998
---------- ----------
ASSETS
Current assets
Cash................................................. 45,333 21,563
Accounts receivable (Note 2.c and 3)................. 5,886,650 2,127,182
Inventories (Notes 2.d and 4)........................ 489,895 197,190
Deferred income taxes (Notes 2.i and 13)............. 993,775 517,243
Prepaid cable rentals................................ 200,808 53,096
Other current assets................................. 403,341 61,276
---------- ----------
Total current assets............................... 8,019,802 2,977,550
Property, plant, and equipment (Notes 2.e and 5)....... 3,962,956 2,304,606
Other assets (Note 6).................................. 1,611,896 856,432
---------- ----------
Total Assets....................................... 13,594,654 6,138,588
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Bank overdraft....................................... 534,966 1,089,447
Accounts payable..................................... 7,585,701 2,999,429
Current maturities of long-term debt................. 401,217 220,614
Deferred income (Note 2.j)........................... 2,886,431 1,267,735
Other current liabilities (Note 7)................... 1,995,149 1,209,351
---------- ----------
Total current liabilities.......................... 13,403,464 6,786,576
Long-term liabilities
Obligations under capital leases (Note 8)............ 623,106 516,395
Severance indemnities (Notes 2.g and 9).............. 134,638 38,867
Bonds payable (Note 10).............................. 800,000 0
---------- ----------
Total Liabilities.................................. 14,961,208 7,341,838
---------- ----------
Stockholders' deficit
Common stock, par value ITL 1,000 in 1999 and ITL
1,000,000 in 1998, authorized 2,297,142 shares in
1999 and 900 shares in 1998, issued and outstanding
2,182,857 shares in 1999 and 900 shares in 1998..... 2,182,857 900,000
Additional paid-in capital........................... 983,891 0
Accumulated deficit (Notes 2.h and 11)............... (4,533,302) (2,103,250)
---------- ----------
Total Stockholders' Deficit........................ (1,366,554) (1,203,250)
---------- ----------
Total Liabilities and Stockholders' Deficit........ 13,594,654 6,138,588
========== ==========
See accompanying notes.
F-13
FLASHNET S.p.A.
STATEMENTS OF LOSS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(amounts in thousands of ITL)
(unaudited)
Net sales............................................. 3,174,987 1,243,465
Cost of sales......................................... (2,735,912) (1,129,140)
----------- ----------
Gross profit.......................................... 439,075 114,325
Operating expenses.................................... (1,510,442) (815,964)
----------- ----------
Loss from operations.................................. (1,071,367) (701,639)
----------- ----------
Other income (expense)
Interest expense, net .............................. (113,646) (104,334)
Penalties and interest on late payment of payroll
taxes.............................................. (11,341) (222,547)
Rent income......................................... 10,500 10,500
Others.............................................. 13,185 9,119
----------- ----------
Total other income (expense)...................... (101,302) (307,262)
----------- ----------
Loss before income taxes.............................. (1,172,669) (1,008,901)
Income taxes (Notes 2.i and 13)....................... 339,506 240,287
----------- ----------
Net loss.............................................. (833,163) (768,614)
=========== ==========
See accompanying notes.
F-14
FLASHNET S.p.A.
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(amounts in thousands of ITL)
(unaudited)
Additional
Common paid-in Accumulated
Total stock capital deficit
---------- --------- ---------- -----------
Balance, Jan. 1, 1998 ITL/000.... (434,636) 900,000 (1,334,636)
Net loss for the period ......... (768,614) (768,614)
---------- --------- ------- ----------
Balance, Mar. 31, 1998 ITL/000... (1,203,250) 900,000 (2,103,250)
========== ========= ======= ==========
Balance, Jan. 1, 1999 ITL/000.... (533,391) 2,182,857 983,891 (3,700,139)
Net loss for the period ......... (833,163) (833,163)
---------- --------- ------- ----------
Balance, Mar. 31, 1999 ITL/000... (1,366,554) 2,182,857 983,891 (4,533,302)
========== ========= ======= ==========
See accompanying notes.
F-15
FLASHNET S.p.A.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(amounts in thousands of ITL)
(unaudited)
1999 1998
---------- --------
Cash flows from operating activities
Net loss................................................ (833,163) (768,614)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization.......................... 208,548 111,937
Change in assets and liabilities
(Increase) decrease in accounts receivable............ (1,387,110) 51,762
(Increase) decrease in inventories.................... (315,125) 2,243
(Increase) decrease in deferred tax asset-current..... (29,474) 58,468
(Increase) decrease in deferred tax asset-noncurrent.. (360,032) (298,755)
Decrease in other current assets...................... 228,130 516,147
Increase in accounts payable.......................... 2,619,401 270,999
Increase (decrease) in deferred income................ 111,723 (127,928)
Increase in other current liabilities................. 368,991 468,661
Increase in severance indemnities, net................ 40,294 6,836
---------- --------
Net cash provided by operating activities............ 652,183 291,756
---------- --------
Cash flows from investing activities.....................
Purchase of property, plant, and equipment.............. (343,545) (240,668)
---------- --------
Net cash used in investing activities................ (343,545) (240,668)
---------- --------
Cash flows from financing activities.....................
(Decrease) increase in bank overdraft................... (181,471) 34,025
Principal payments under capital lease obligations...... (113,868) (81,856)
---------- --------
Net cash used in financing activities................ (295,339) (47,831)
---------- --------
Net change in cash and cash equivalents.................. 13,299 3,257
Cash and cash equivalents--beginning of period........... 32,034 18,306
---------- --------
Cash and cash equivalents--end of period................. 45,333 21,563
========== ========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest.............................................. 28,643 9,174
Income taxes.......................................... 0 0
Supplemental schedule of noncash investing and financing
activities:
The following capital obligations were incurred when
the Company entered into new leases for new telephone
and computer equipment................................ 143,311 106,175
See accompanying notes.
F-16
FLASHNET S.p.A.
NOTES TO FINANCIAL STATEMENTS
March 31, 1999 and 1998
(unaudited)
1. General
Flashnet S.p.A., the "Company", was established in Italy in 1995, and is
mainly involved in providing internet and long-distance telephone services.
2. Summary of Significant Accounting Policies
a. Basis of Financial Statements presentation
The Company maintains its accounting records in Italian Liras ("ITL") and
prepares its statutory financial statements in conformity with accounting
principles generally accepted in Italy. The accompanying financial statements
have been restated in order to comply with accounting principles generally
accepted in the United States of America, for consolidation purposes. The main
adjustments have been made to reflect the provisions of FAS-13 (Accounting for
Leases), and SOP 98-1 (Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use).
All information contained in the accompanying financial statements and
related notes are expressed in thousands of ITL ("ITL/000"), unless otherwise
indicated.
b. Statement of cash flows
For purposes of the statement of cash flows, cash equivalents include time
deposits, certificate of deposits, and all highly liquid debt instruments with
original maturities of three months or less.
c. Accounts receivable
Accounts receivable are reported at net realizable value. Net realizable
value is equal to the gross amount of receivable less an allowance for doubtful
accounts, based on an estimate of the collectibility of individual accounts and
prior years' bad debt experience.
d. Inventories
Inventories are stated at the lower of cost, determined by the FIFO method,
or market.
e. Property, plant, and equipment
The cost of property, plant, and equipment is depreciated over the estimated
useful lives of the related assets. Leasehold improvements are depreciated over
the lesser of the term of the related lease or the estimated useful lives of
the assets. Depreciation is computed using the straight line method for both
financial reporting and income tax purposes.
Maintenance and repairs are charged to operations when incurred. Betterment
and renewals are capitalized. When property, plant, and equipment is sold or
otherwise disposed of, the asset account and related accumulated depreciation
account are relieved and any gain or loss is included in operations.
The useful lives of property, plant, and equipment for purposes of computing
depreciation are:
Computer and telephone equipment................................. 8.5 years
Office furniture and equipment................................... 3-8 years
Vehicles......................................................... 4 years
Property, plant, and equipment costing less than ITL 1,000,000 is entirely
expensed in the year of acquisition.
F-17
FLASHNET S.p.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 1999 and 1998
(unaudited)
g. Severance indemnities
Under Italian Law, all employees are entitled to receive severance
indemnities upon termination of their employment, based on salary paid and
increase in cost of living. The severance indemnities accrue approximately at
the rate of 1/13.5 of the gross salaries paid during the year, and are
revaluated applying a cost of living factor established by the Italian
Government.
h. Retained Earnings
Italian corporations are required, under Italian Business Law, to appropriate
to a legal reserve not less than 1/20 of the net income for the period, until
the legal reserve reaches an amount equal to 1/5 of the capital stock. The
legal reserve is not available for distribution.
i. Income taxes
Income taxes are accounted for by the asset/liability approach in accordance
with FASB Statement 109. Deferred taxes arising from taxable temporary
differences and deductible temporary differences are included in the tax
expense in the income statement and in the deferred tax balances in the balance
sheet. Deferred tax assets are subject to reduction by a valuation account if
evidence indicates that it is more likely than not that some or all the
deferred tax assets will not be realized. Income taxes attributable to items
charged or credited directly to shareholders' equity, are charged or credited
to that component of shareholders' equity.
j. Deferred income
The Company collects in advance the subscriptions as provider of internet
services from customers, and allocates the related revenues based on time
remaining to the end of the contract. Deferred income represents the unearned
portion at the balance sheet date.
k. Goodwill
Goodwill represents the excess of the cost of companies acquired over the
fair value of its net assets at dates of acquisition, and is being amortized on
the straight-line method over five years. The carrying amount of goodwill is
reviewed if the facts and circumstances suggest that it may be impaired.
Negative operating results, negative cash flows from operations, among other
factors, could be indicative of the impairment of goodwill. If this review
indicates that goodwill will not be recoverable, the Company's carrying value
of goodwill would be reduced.
I. Research and development costs and advertising costs
Research and development costs and advertising costs, are charged to
operations when incurred and are included in operating expenses.
3. Accounts Receivable
Following is a summary of accounts receivable at March 31, 1999 and 1998:
1999 1998
--------- ---------
Trade accounts............................... ITL/000 5,936,650 2,177,182
Less: allowance for doubtful accounts........ (50,000) (50,000)
--------- ---------
ITL/000 5,886,650 2,127,182
========= =========
F-18
FLASHNET S.p.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 1999 and 1998
(unaudited)
4. Inventories
Inventories at March 31, 1999 and 1998 consist of:
1999 1998
---------- ---------
Finished goods............................. ITL/000 489,895 197,190
Less: allowance for obsolete inventory..... 0 0
---------- ---------
ITL/000 489,895 197,190
========== =========
5. Property, Plant, and Equipment
Following is a summary of property, plant, and equipment at cost, less
accumulated depreciation at March 31, 1999 and 1998:
1999 1998
---------- ---------
Telephone and computer equipment (owned)... ITL/000 2,327,829 1,387,880
Telephone and computer equipment (leased).. 1,597,715 1,097,218
Office furniture and equipment............. 377,630 147,301
Leasehold improvements..................... 477,990 58,633
Vehicles (leased).......................... 185,403 0
---------- ---------
4,966,567 2,691,032
Less: accumulated depreciation............. (1,003,611) (386,426)
---------- ---------
ITL/000 3,962,956 2,304,606
========== =========
Depreciation expenses charged to operations for the three months ended March
31, 1999 and 1998, was ITL/000 171,801 and ITL/000 79,437, respectively.
6. Other Assets
Other assets at March 31, 1999 and 1998 consist of:
1999 1998
---------- ---------
Goodwill (net of accumulated amortization
of ITL/000 493,163 in 1999 and ITL/000
357,500 in 1998).......................... ITL/000 241,780 292,500
Deferred income taxes...................... 1,351,406 561,932
Others..................................... 18,710 2,000
---------- ---------
ITL/000 1,611,896 856,432
========== =========
Amortization of goodwill charged to operations for the three months ended
March 31, 1999 and 1998, was ITL/000 36,747 and ITL/000 32,500, respectively.
F-19
FLASHNET S.p.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 1999 and 1998
(unaudited)
7. Other Current Liabilities
Other current liabilities at March 31, 1999 and 1998 consist of:
1999 1998
--------- ---------
Provision for penalties and interest on late
payment of payroll taxes..................... ITL/000 370,121 222,547
Income taxes payable.......................... 71,031 22,967
Payroll taxes payable......................... 656,738 449,682
Salaries payable.............................. 147,419 42,146
VAT payable................................... 101,407 158,655
Others........................................ 648,433 313,354
--------- ---------
ITL/000 1,995,149 1,209,351
========= =========
8. Obligations Under Capital Leases
The Company is the lessee of computer and telephone equipment and five
vehicles under capital leases expiring in various years through December 2003.
The assets and liabilities under capital leases are recorded at the fair value
of the leased property, which approximates the present value of the minimum
lease payments.
Depreciation of the assets under capital lease is included in depreciation
expense for the period and is based on the assets estimated useful life.
Accumulated depreciation of as of March 31, 1999 and 1998 was ITL/000 298,994
and ITL/000 103,146, respectively.
Minimum future lease payments as of March 31, 1999 for each of the next five
years and in the aggregate are:
Year ending March 31:
1999...................................................... ITL/000 585,557
2000...................................................... 451,600
2001...................................................... 196,200
2002...................................................... 49,805
2003...................................................... 19,148
Subsequent to March 31, 2003.............................. 0
---------
Total minimum lease payments.............................. 1,302,310
Less: amount representing interest........................ (277,987)
---------
Present value of minimum lease payments................... ITL/000 1,024,323
=========
The above payments are computed using the interest rate in effect at December
31, 1998; actual payments may vary because of changes in applicable rates.
All leases provide for purchase options at the expiration of the lease; the
minimum future lease payments above, include the payments required to exercise
the purchase options.
F-20
FLASHNET S.p.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 1999 and 1998
(unaudited)
9. Severance Indemnities
The amount shown in the financial statements represents the actual liability
at the balance sheet date. Following is detail of changes during the three
months ended March 31, 1999 and 1998:
1999 1998
------- ------
Balance--beginning of period........................ ITL/000 94,344 32,030
Severance indemnities expense for the period........ 42,474 10,244
Indemnities paid during the period.................. (2,180) (3,407)
------- ------
Balance--end of period.............................. ITL/000 134,638 38,867
======= ======
Severance indemnities expense for the three months ended March 31, 1999 and
1998, includes the following components:
1999 1998
------ ------
Revaluation of indemnities accrued at the beginning
of the year ....................................... ITL/000 616 232
Indemnities accrued for the period.................. 41,858 10,012
------ ------
ITL/000 42,474 10,244
====== ======
10. Bonds Payable
Bonds payable consist of 800,000, 5% unsecured convertible bonds, face value
ITL 1,000 per bond, payable in quarterly installments from December 31, 2001 to
December 31, 2003. The bonds are convertible in 114,285 common shares (7-for-
1), par value ITL 1,000 per share.
Maturities as of March 31, 1999 for each of the next 5 years and in the
aggregate are:
Year ending March 31:
1999....................................................... ITL/000 0
2000....................................................... 0
2001....................................................... 220,000
2002....................................................... 400,000
2003....................................................... 300,000
-------
ITL/000 920,000
=======
Interest expense for the three months ended March 31, 1999 and 1998 was
ITL/000 9,864 and ITL/000 -0-, respectively.
11. Accumulated Deficit
As described in Note 2.i, Italian corporations are required to maintain a
legal reserve that is not available for distribution, and only the
unappropriated retained earnings resulting from the statutory financial
statements prepared in accordance with Italian GAAP are available for
distribution.
Accumulated deficit as of March 31, 1999 and 1998 consists of:
1999 1998
---------- ----------
Legal reserve (restricted)................. ITL/000 175 175
Net loss of prior periods-Italian GAAP
basis..................................... (1,207,286) (66,748)
Net loss for the period--Italian GAAP
basis..................................... (772,995) (987,066)
Increase in accumulated deficit due to US
GAAP adjustments.......................... (2,553,196) (1,049,611)
---------- ----------
ITL/000 (4,533,302) (2,103,250)
========== ==========
F-21
FLASHNET S.p.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 1999 and 1998
(unaudited)
12. Related Party Transactions
The Company sells internet services, purchases part of its computer
equipment, and leases part of its office to a minority stockholder.
The Company is also indebted with two minority stockholders because of the
bonds and related interest, described in Note 9.
Following is a summary of transactions and balances at March 31, 1999 and
1998:
1999 1998
------- -------
Purchases from stockholder......................... ITL/000 71,022 60,966
======= =======
Sales to stockholder............................... 82,193 14,085
======= =======
Rent income........................................ 10,500 10,500
======= =======
Interest on bonds.................................. 9,864 0
======= =======
Due from stockholder (included in accounts
receivable)....................................... 613,898 514,524
======= =======
Due to stockholder (included in accounts payable).. 144,734 173,419
======= =======
Bonds payable...................................... ITL/000 800,000 0
======= =======
13. Income Taxes
Income tax expense for the three months ended March 31, 1999 and 1998
consists of:
1999 1998
------- -------
Current............................................. ITL/000 (50,000) 0
Deferred............................................ 389,506 240,287
------- -------
ITL/000 339,506 240,287
======= =======
The following temporary differences gave rise to the current and noncurrent
deferred tax asset at March 31, 1999 and 1998:
1999 1998
--------- -------
Service income deferred for financial
accounting purposes........................... ITL/000 993,775 517,243
--------- -------
Total Deferred Tax Asset--Current.............. ITL/000 993,775 517,243
========= =======
1999 1998
--------- -------
Lease capitalized for financial accounting
purposes but expensed for tax purposes........ ITL/000 (94,152) (39,578)
Intangible assets expensed for financial
accounting purposes and deferred for tax
purposes...................................... 970,558 363,278
Net operating loss carryforward................ 475,000 238,232
--------- -------
Total Deferred Tax Asset--Noncurrent....... ITL/000 1,351,406 561,932
========= =======
F-22
FLASHNET S.p.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 1999 and 1998
(unaudited)
14. Research and Development Costs
Research and development costs charged to operations for the three months
ended March 31, 1999 and 1998 were ITL/000 113,504 and ITL/000 212,639.
15. Commitments and Contingencies
a) At March 31, 1999, the Company is contingently liable for penalties and
interest relating to late payment of payroll taxes. The accompanying
financial statements at March 31, 1999, include a provision of ITL/000
370,121 with regards to such contingency.
b) The Company leases office space under operating leases expiring in
various years through January 2004. Minimum future rental payments under
non-cancelable operating leases having remaining terms in excess of 1
year as of March 31, 1999 for each of the next 5 years and in the
aggregate are:
Year ending March 31:
1999................................................... ITL/000 344,252
2000................................................... 344,252
2001................................................... 344,252
2002................................................... 272,634
2003................................................... 43,598
Subsequent to March 31, 2003............................. 788
---------
Total minimum future rental payments..................... ITL/000 1,349,776
=========
Rental expense under operating leases for the three months ended March 31,
1999 and 1998 was ITL/000 102,155 and ITL/000 61,144, respectively.
16. Subsequent Events
On April 9, 1999, the Stockholders approved:
a) To increase the Company's capital stock from ITL 2,182,857,000 to ITL
2,609,937,000, issuing 427,080 additional shares of the Company's ITL
1,000 par value common stock, at a price of ITL 4,214.667 per share.
b) To issue, at no-cost, 171,428 warrants to purchase 171,428 shares of the
Company's common stock, ITL 1,000 par value, at ITL 7,000.0233 per
share. On the same date the Stockholders authorized the issuance of
171,428 additional shares of the Company's ITL 1,000 par value common
stock, that were reserved for that purpose. The warrants are exercisable
through December 31, 2001.
F-23
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited Pro Forma Consolidated Financial Statements are based on
our Consolidated Financial Statements. The accompanying unaudited Pro Forma
Consolidated Balance Sheet as of March 31, 1999 is based on the historical
financial position of the Company at March 31, 1999, adjusted as if the
acquisition of Flashnet and the Interim Loan incurred by the Company to fund
that acquisition had occurred on March 31, 1999. The accompanying unaudited Pro
Forma Consolidated Statements of Loss for the year ended December 31, 1998 and
the three months ended March 31, 1999, are based on the historical consolidated
financial statements of the Company, adjusted as if the acquisitions of
Open:Net, Vianet and Flashnet, collectively referred to as the "Acquisitions,"
and the Interim Loan had occurred on January 1, 1998. These unaudited Pro Forma
Consolidated Financial Statements do not include the results of operations of
Sunweb due to the relative insignificance of the amounts involved nor do they
reflect this Offering or application of the proceeds therefrom.
The unaudited Pro Forma Consolidated Financial Statements combine the
historical financial position and results of the Company with the historical
financial position and results of the Acquisitions, prior to the dates the
Company made such acquisitions, using the purchase method of accounting. The
Pro Forma Consolidated Statements of Loss presented are not necessarily
indicative of the operating results that would have been achieved had such
transactions occurred at the dates indicated above. These statements are based
on the assumptions set forth in the notes to such statements and should be read
in conjunction with the related financial statements and notes thereto of the
Company, Open:Net, Vianet, and Flashnet included elsewhere in this Offering
Memorandum.
The accounting adjustments reflected in the accompanying unaudited Pro Forma
Consolidated Financial Statements reflect estimates made by the Company and
assumptions which the Company believes to be reasonable. The Company believes
that no significant uncertainties should affect the pro forma adjustments and
considers the impact of any such uncertainties to be immaterial.
F-24
PRO FORMA CONSOLIDATED STATEMENTS OF LOSS
Year ended December 31, 1998
(unaudited)
Pro Forma
Historical as
Company Acquisitions Adjusted
------------- -------------- -------------
(in thousands, except per share data)
Revenue
Internet Projects........ $ 5,139 $ 1,067 (a) $ 6,206
Network Services......... 3,495 7,689 (a) 11,184
------------- ---------- -------------
Total revenues......... 8,634 8,756 17,390
Cost of revenues
Internet Projects........ 4,699 801 (b) 5,500
Network Services......... 4,067 4,882 (b) 8,949
Depreciation and
amortization............ 1,674 376 (b) 2,050
------------- ---------- -------------
Total cost of
revenues.............. 10,440 6,059 16,499
------------- ---------- -------------
Gross profit (loss)........ (1,806) 2,697 891
General and administrative
expenses.................. 1,576 1,936 (c) 3,512
Marketing expenses......... 3,844 1,692 (c) 5,536
Research and development... 2,941 917 (c) 3,858
Depreciation and
amortization.............. 880 4,131 (c)(d) 5,011
------------- ---------- -------------
Total operating
expenses.............. 9,241 8,676 17,917
------------- ---------- -------------
Operating loss............. (11,047) (5,979) (17,026)
Interest expense........... 197 234 (e) 431
Interest income............ 154 10 (e) 164
------------- ---------- -------------
Loss before taxes and
minority interest......... (11,090) (6,203) (17,293)
Income tax benefit......... 6,173 580 (f) 6,753
Minority interest.......... 145 -- 145
------------- ---------- -------------
Net loss................... $ (4,772) $ (5,623) $ (10,395)
============= ========== =============
Basic and diluted loss per
share..................... $ (0.30) $ (0.64)
============= =============
Number of shares used to
compute loss per share.... 16,012,653 339,887 (g) 16,352,540
============= ========== =============
F-25
PRO FORMA CONSOLIDATED STATEMENTS OF LOSS
Three months ended March 31, 1999
(unaudited)
Pro Forma
Historical as
Company Acquisitions Adjusted
------------- -------------- -------------
(in thousands, except per share data)
Revenue
Internet Projects........ $ 1,392 $ 159 (a) $ 1,551
Network Services......... 2,462 1,682 (a) 4,144
------------- ---------- -------------
Total revenues......... 3,854 1,841 5,695
Cost of revenues
Internet Projects........ 1,079 142 (b) 1,221
Network Services......... 2,970 1,418 (b) 4,388
Depreciation and
amortization............ 414 94 (b) 508
------------- ---------- -------------
Total cost of
revenues.............. 4,463 1,654 6,117
------------- ---------- -------------
Gross (loss)............... (609) 187 (422)
General and administrative
expenses.................. 1,456 509 (c) 1,965
Marketing expenses......... 1,807 230 (c) 2,037
Research and development... 1,263 66 (c) 1,329
Depreciation and
amortization.............. 841 774 (c)(d) 1,615
------------- ---------- -------------
Total operating
expenses.............. 5,367 1,579 6,946
------------- ---------- -------------
Operating loss............. (5,976) (1,392) (7,368)
Interest expense........... 11 35 (e) 46
Interest income............ 260 1 (e) 261
------------- ---------- -------------
Loss before taxes.......... (5,727) (1,426) (7,153)
Income tax benefit......... 2,159 197 (f) 2,356
------------- ---------- -------------
Net loss................... $ (3,568) $ (1,229) $ (4,797)
============= ========== =============
Basic and diluted loss per
share..................... $ (0.19) $ (0.25)
============= =============
Number of shares used to
compute loss per share.... 18,762,138 301,290 (g) 19,063,428
============= ========== =============
F-26
PRO FORMA CONSOLIDATED BALANCE SHEET
March 31, 1999
(unaudited)
Historical Pro Forma
Company Flashnet as Adjusted
---------- -------- -----------
(in thousands)
ASSETS
Cash and cash equivalents............ $ 29,107 $ 672(d)(h)(i) $ 29,779
Short-term investments............... 288 -- 288
Accounts receivable, net............. 4,049 3,266 (h) 7,315
Other receivables.................... 1,996 -- 1,996
Current deferred income taxes........ -- 551 (h) 551
Prepaid expenses and other assets ... 347 607 (h) 954
-------- ------- --------
Total current assets............... 35,787 5,096 40,883
Property and equipment, net.......... 11,121 2,199 (h) 13,320
Product development costs, net....... 5,626 -- 5,626
Goodwill, net........................ 5,809 29,958 (d)(h) 35,767
Deferred income taxes................ 9,565 750 (h) 10,315
Other assets......................... 3,918 10 (h) 3,928
-------- ------- --------
Total Assets........................... $ 71,826 $38,013 $109,839
======== ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Overdrafts and short-term
borrowings.......................... $ 1,506 $ 297 (h) $ 1,803
Trade accounts payable............... 7,555 4,209 (h) 11,764
Other accrued liabilities............ 2,148 2,261 (h) 4,409
Deferred purchase obligations........ 359 -- 359
Interim loan payable................. -- 22,783 (i) 22,783
Current portion of long-term debt and
capital lease obligations........... 1,157 223 (h) 1,380
Accrued personnel costs.............. 470 446 (h) 916
-------- ------- --------
Total current liabilities.......... 13,195 30,219 43,414
Long-term debt....................... -- 444 (h) 444
Capital lease obligations............ 1,272 345 (h) 1,617
Severance indemnities................ -- 75 (h) 75
Minority interest.................... 124 -- 124
SHAREHOLDERS' EQUITY
Common stock......................... 19 -- 19
Preferred stock...................... 6 -- 6
Additional paid in capital........... 72,359 6,930 (d) 79,289
Accumulated deficit.................. (10,003) -- (10,003)
Other comprehensive loss............. (5,146) -- (5,146)
-------- ------- --------
Total shareholders' equity......... 57,235 6,930 64,165
-------- ------- --------
Total Liabilities and Shareholders'
Equity................................ $ 71,826 $15,230 $109,839
======== ======= ========
F-27
NOTES TO THE PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, unless otherwise indicated)
(a) Includes the revenues of the Acquisitions for the periods prior to their
respective acquisition dates as follows.
Vianet Open:Net Flashnet Total
------ -------- -------- -----
1998 Pro Formas
Internet Projects........................... -- 461 606 1,067
Network Services............................ 3,123 372 4,194 7,689
1999 Pro Formas
Internet Projects........................... -- -- 159 159
Network Services............................ -- -- 1,682 1,682
(b) Includes the cost of revenues of the Acquisitions for the periods prior to
their respective acquisition dates as follows.
Vianet Open:Net Flashnet Total
------ -------- -------- -----
1998 Pro Formas
Internet Projects........................... -- 242 559 801
Network Services............................ 1,682 215 2,985 4,882
Depreciation and amortization............... 88 22 266 376
1999 Pro Formas
Internet Projects........................... -- -- 142 142
Network Services............................ -- -- 1,418 1,418
Depreciation and amortization............... -- -- 94 94
(c) Includes the operating expenses of the Acquisitions for the periods prior
to their respective acquisition dates as follows.
Vianet Open:Net Flashnet Total
------ -------- -------- -----
1998 Pro Formas
General and administrative expenses........ 420 26 1,490 1,936
Marketing expenses......................... 741 310 641 1,692
Research and development expenses.......... 259 178 480 917
Depreciation and amortization.............. 75 27 112 214
1999 Pro Formas
General and administrative expenses........ -- -- 509 509
Marketing expenses......................... -- -- 230 230
Research and development expenses.......... -- -- 66 66
Depreciation and amortization.............. -- -- 28 28
(d) Represents the amortization of goodwill and other intangible assets arising
from the Acquisitions.
Vianet Open:Net Flashnet Total
------ -------- -------- -----
1998 Pro Formas
Amortization................................ 766 168 2,983 3,917
1999 Pro Formas
Amortization................................ -- -- 746 746
Amortization is calculated on a straight line basis using the following
useful lives.
Goodwill.......................................................... 10 years
Customer base..................................................... 5 years
Management contracts.............................................. 3 years
F-28
The calculation and allocation of the purchase price was as follows:
Vianet Open:Net Flashnet Total
------ -------- -------- -------
Purchase price....................... $4,483 $2,541 $29,066 $36,090
Less: net assets acquired............ (37) 130 (758) (665)
------ ------ ------- -------
Excess of purchase price over net
assets acquired..................... $4,520 $2,411 $29,824 $36,755
Allocated to:
Goodwill........................... $2,063 $2,299 $29,824 $34,186
Customer base...................... 1,945 112 -- 2,057
Management contracts............... 512 -- -- 512
------ ------ ------- -------
$4,520 $2,411 $29,824 $36,755
====== ====== ======= =======
In addition to cash of $4,483 (of which $4,125 was paid in the first
quarter of 1999), the purchase price for Vianet includes 225,000 shares of
common stock of the Company which were placed with a trustee to be released
annually over a five year period. Of these shares, 150,000 are to be
released in 30,000 share increments as long as the owner of these shares
remains an employee of the Company. The remaining 75,000 shares are to be
released annually over a five year period in 15,000 share increments. The
150,000 shares as to which release will be made so long as the owner
thereof remains an employee of the Company are being treated as contingent
consideration and, accordingly, will be recorded as an additional cost of
the acquisition when the shares are released by the trustee.
The purchase price of Flashnet was paid in the form of cash of Lit. 41.0
billion ($22.1 million) and the issuance of 301,290 shares of Cybernet
common stock. The purchase price reflected in these Unaudited Pro Forma
Consolidated Financial Statements represents the cash portion of the
purchase price translated to U.S. dollars using the exchange rate in effect
on May 28, 1999 and the fair market value of the Cybernet common stock to
be issued based on the stock's closing price on May 14, 1999.
(e) Includes interest income and expense of the Acquisitions for the periods
prior to their respective acquisition dates as follows:
Vianet Open:Net Flashnet Total
------ -------- -------- -----
1998 Pro Formas
Interest expense............................ 3 8 223 234
Interest income............................. -- -- 10 10
1999 Pro Formas
Interest expense............................ -- -- 35 35
Interest income............................. -- -- 1 1
(f) The income tax adjustment represents Vianet income tax expense of $4 and
Flashnet income tax benefit of $584 for 1998 and a Flashnet income tax
benefit of $197 for 1999.
(g) Weighted average shares outstanding for the purposes of calculating pro
forma basic and diluted loss per share is as follows:
1998 1999
---------- ----------
Historical weighted average shares................. 16,012,653 18,762,138
Shares issued in connection with certain of the
Acquisitions and not reflected in historical
weighted average shares;
Open:Net acquisition............................. 38,597 --
Flashnet acquisition............................. 301,290 301,290
---------- ----------
16,352,540 19,063,428
========== ==========
(h) Represents pro forma adjustments to reflect the assets and liabilities of
Flashnet.
(i) Represents the issuance of the Interim loan payable of $22,783 obtained in
connection with the Flashnet acquisition.
F-29