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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 JUNE 30, 1999
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 JUNE 30, 1999
Common stock - $0.001 par value 20,729,988
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TABLE OF CONTENTS
PAGE
----
PART I FINANCIAL INFORMATION................................................. 1
ITEM 1. FINANCIAL STATEMENTS................................................ 1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................... 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......... 16
PART II OTHER INFORMATION.................................................... 17
ITEM 1. LEGAL PROCEEDINGS................................................... 17
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS........................... 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES..................................... 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................. 17
ITEM 5. OTHER INFORMATION................................................... 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................... 17
SIGNATURES.................................................................... 18
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
1998 1999
------------ -----------
(unaudited)
-----------
(in thousands)
ASSETS
Cash and cash equivalents.......................... $42,876 $14,974
Short-term investments............................. 112 482
Accounts receivable, net of allowance for doubtful
accounts of $810 and $361 for June 30, 1999
and December 31, 1998 respectively................ 3,249 7,436
Other receivables.................................. 1,793 1,459
Prepaid expenses and other assets.................. 423 1,116
------- -------
Total current assets.......................... 48,453 25,467
Property and equipment, net........................ 7,970 14,429
Product development costs, net..................... 5,743 4,992
Goodwill, net...................................... 6,505 35,805
Deferred income taxes.............................. 8,166 12,251
Other assets....................................... 2,608 3,842
------- -------
TOTAL ASSETS.................................. $79,445 $96,786
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Overdrafts and short-term borrowings............... $ 287 $23,018
Trade accounts payable............................. 3,346 8,105
Other accrued liabilities.......................... 1,073 3,622
Deferred purchase obligations...................... 4,483 2
Current portion long term debt and capital lease
obligations....................................... 925 1,173
Accrued personnel costs............................ 589 1.109
------- -------
Total current liabilities.......................... 10,703 37,029
Long-term debt..................................... 67 104
Capital lease obligations.......................... 1,316 1,607
Minority interest.................................. -- --
SHAREHOLDERS' EQUITY
Common stock $.001 par value, 50,000,000 shares
authorized, 20,729,988 shares issued and
outstanding at June 30, 1999 and 18,762,138 issued
and outstanding at December 31, 1998.............. 19 21
Preferred stock $.001 par value, 50,000,000 shares
authorized, 4,793,440 shares issued and
outstanding at June 30, 1999 and 6,360,000 issued
and outstanding at December 31, 1998.............. 6 5
Subscription receivable............................ (19) --
Additional paid in capital......................... 72,795 79,335
Accumulated deficit................................ (6,436) (14,685)
Other Comprehensive income (loss).................. 994 (6,630)
------- -------
Total shareholders' equity.................... 67,359 58,046
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.... $79,445 $96,786
======= =======
See accompanying notes to consolidated financial statements
1
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
(unaudited)
Six months ended June 30,
--------------------------
1998 1999
------------ ------------
(in thousands,
except per share data)
--------------------------
Revenue
Internet Projects................................. $ 1,863 $ 2,459
Network Services.................................. 1,489 5,994
------------ ------------
Total revenues.................................. 3,352 8,453
Cost of revenues:
Internet Projects................................. 1,438 2,056
Network Services.................................. 1,747 6,534
Depreciation and amortization..................... 332 1,545
------------ ------------
Total cost of revenues.......................... 3,517 10,135
------------ ------------
Gross loss........................................ (165) (1,682)
General and administrative expenses............... 655 3,770
Marketing expenses................................ 1,608 5,147
Research and development.......................... 821 2,146
Depreciation and amortization..................... 272 1,228
------------ ------------
Total operating expenses........................ 3,356 12,291
Interest expense.................................. 106 64
Interest income................................... 12 383
------------ ------------
Loss before taxes and minority interest........... (3,615) (13,654)
Income tax benefit................................ 2,008 5,302
------------ ------------
Net loss before minority interest................. (1,607) (8,352)
Minority interest................................. -- 103
Net loss.......................................... (1,607) (8,249)
Other comprehensive loss:
Foreign currency translation adjustments.......... 12 (7,624)
------------ ------------
Comprehensive loss................................ (1,595) (15,873)
------------ ------------
Basic and diluted loss per share.................. $ (0.11) $ (0.44)
============ ============
Number of shares used to compute earnings per
share............................................ 14,765,777 18,917,582
============ ============
See accompanying notes to consolidated financial statements
2
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six months
ended June 30,
----------------
1998 1999
------ --------
(in thousands)
--------------------
Cash Flows from Operating Activities:
Net loss.................................................... $(1,607) $ (8,249)
Adjustments to reconcile net income to net cash provided by
operations:
Deferred tax credit........................................ (1,101) (5,309)
Depreciation and amortization.............................. 338 2,772
Provision for losses on accounts receivable................ 25 651
Changes in operating assets and liabilities:
Trade accounts receivable.................................. (462) (1,759)
Other receivables.......................................... (310) 139
Prepaid expenses and other assets.......................... (751) (1,943)
Trade accounts payable..................................... 1,134 1,757
Other accrued expenses and liabilities..................... (547) 517
Accrued personnel costs.................................... 148 80
------ --------
Total changes in operating assets and liabilities......... (888) (1,209)
------ --------
Net cash used in operating activities...................... (3,133) (11,344)
Cash Flows from Investing Activities:
Purchase of short term investments.......................... -- (403)
Proceeds from sale of short term investments................ 395 --
Purchase of property and equipment.......................... (1,221) (6,587)
Product development costs................................... (626) (686)
Acquisition of businesses, net of cash acquired............. -- (24,192)
Payment of deferred purchase obligations.................... -- (4,172)
------ --------
Net cash used in investing activities...................... (1,452) (36,040)
Cash Flows from Financing Activities:
Proceeds from issue of common stock, net.................... 724 --
Proceeds from borrowings.................................... 1,975 23,805
------ --------
Repayment of borrowings.....................................
Net cash provided by financing activities.................. 2,699 23,805
------ --------
Net (decrease) increase in cash and cash equivalents........ (1,886) (23,579)
Cash and cash equivalents at beginning of period............ 1,239 42,876
Translation adjustments..................................... 788 (4,323)
--------
Cash and cash equivalents at end of period.................. $ 141 $ 14,974
====== ========
Supplemental disclosure of non-cash investing and financing
activities:
Acquisitions (Note 5):
Fair value of assets acquired.............................. -- $ 34,344
Less:
Cash Acquired............................................. -- 73
Cash paid................................................. -- 22,850
Stock issued.............................................. -- 4,626
------ --------
Liabilities assumed......................................... -- 6,795
====== ========
See accompanying notes to consolidated financial statements
3
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 six
month period end June 30, 1999 are not necessarily indicative of results to be
expected for the year ended December 31, 1999. For further information, refer
to the Consolidated Financial Statements and Footnotes thereto included in the
Company's annual report of Form 10-K for the year ended December 31, 1998.
2.Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share:
June 30
----------------------
1998 1999
---------- ----------
Numerator:
Net loss-numerator for basic and diluted loss per
share (USD in thousands)............................. $ 1,607 $ 8,249
Denominator:
Denominator for basic and diluted loss per share --
weighted average shares outstanding.................. 14,765,777 18,917,582
Basic and diluted loss per share...................... $ (0.11) $ (0.44)
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
The Company evaluates performance and allocates resources based on the
operating profit of its subsidiaries. The Company operates in one line of
business, which is providing international Internet backbone and access
services and network business solutions for corporate customers. The Company's
reportable segments are divided by country since each country's operations are
managed and evaluated separately. The Company does not have any inter-company
sales between its subsidiaries. Information concerning the Company's geographic
locations is summarized as follows:
June 30
----------------
1998 1999
------- --------
(in thousands)
----------------
Revenues
Germany....................................................... $ 2,908 $ 5,455
US............................................................ -- --
Other......................................................... 444 2,998
------- --------
Total......................................................... $ 3,352 $ 8,453
Cost of Revenues
Germany....................................................... $ 3,168 $ 8,159
US............................................................ -- 9
Other......................................................... 348 1,967
------- --------
Total......................................................... $ 3,516 $ 10,135
4
June 30
------------------
1998 1999
-------- --------
(in thousands)
------------------
General and Admin Exp.
Germany................................................... $ 565 $ 2,605
US........................................................ 53 570
Other..................................................... 37 595
-------- --------
Total..................................................... $ 655 $ 3,770
Marketing Expenses
Germany................................................... 1,559 3,851
US........................................................ -- 243
Other..................................................... 49 1,053
-------- --------
Total..................................................... 1,608 5,147
Research & Development
Germany................................................... 788 1,622
US........................................................ -- --
Other..................................................... 33 524
-------- --------
Total..................................................... 821 2,146
Depreciation & Amortization
Germany................................................... 272 933
US........................................................ -- 138
Other..................................................... -- 157
-------- --------
Total..................................................... 272 1,228
Interest Expense
Germany................................................... 97 16
US........................................................ -- 9
Other..................................................... 9 39
-------- --------
Total..................................................... 106 64
Interest Income
Germany................................................... (12) (10)
US........................................................ -- (373)
Other..................................................... -- --
-------- --------
Total..................................................... (12) (383)
Loss before Taxes
Germany................................................... 3,532 11,723
US........................................................ 53 597
Other..................................................... 27 1,334
-------- --------
Total..................................................... 3,612 13,654
Income Tax Benefit
Germany................................................... (2,007) (5,305)
US........................................................ -- --
Other..................................................... -- 3
-------- --------
Total..................................................... $ (2,007) $ (5,302)
5
4.Income Taxes
In March 1999 the German government passed new tax legislation which reduced
the corporate income tax rate from 45% to 40%. Accordingly, the Company's
deferred tax assets and liabilities related to Germany were re-measured using
40% in the first quarter of 1999. The impact of re-measuring the deferred tax
assets and liabilities using the new rate was recorded as a reduction in the
income tax benefit of approximately $550,000 for the quarter ended March 31,
1999.
5.Business Acquisitions
Effective April 13, 1999, the Company acquired 51% of the outstanding shares
of Sunweb Internet Services SIS AG (Sunweb") for a total consideration of DM
2,865,550 ($1,513,201). DM 1,806,957 ($954,193) of the purchase price was paid
in cash with the remainder settled in exchange for the issuance of 25,000
shares of the common stock of the Company. 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 for the period April 13, 1999
through June 30, 1999. Goodwill recorded in connection with the acquisition of
Sunweb, amounting to DM 2,674,512 ($1,412,320), is being amortized over 10
years.
Effective June 25, 1999, the Company acquired 100% of the outstanding shares
of Flashnet S.p.A. (Flashnet") for a total consideration of DM 49,166,828
($25,963,367). DM 41,464,040 ($21,895,781) of the purchase price was paid in
cash with the remainder settled in exchange for the issuance of 301,290 shares
of the common stock of the Company. The acquisition has been accounted for
using the purchase method of accounting. Flashnet's results of operations
subsequent to June 25, 1999 are not included in the accompanying financial
statements due to immateriality. Goodwill recorded in connection with the
acquisition of Flashnet, amounting to DM 52,544,954 ($27,747,243), is being
amortized over 10 years.
The following unaudited pro forma consolidated results of operations for the
six months ended June 30, 1998 and 1999 assume the acquisitions of Open:Net,
Vianet and Flashnet had occurred as of January 1, 1998. The unaudited pro forma
consolidated results of operations do not include the results of operations of
Sunweb due to the relative insignificance of the amounts involved.
Six months ended June 30,
--------------------------
1998 1999
------------ ------------
Revenue............................................ $ 7,036,873 $ 12,760,400
Net loss........................................... 2,893,699 10,114,041
Basic and diluted loss per share................... $ (0.19) $ (0.49)
6.Shareholders Equity
In June 1999, holders of 276,560 shares of Series A Preferred Stock converted
their shares into 276,560 shares of the Company's Common Stock. Also in June
1999, holders of 1,290,000 shares of Series B Preferred Stock converted their
shares into 1,290,000 shares of the Company's Common Stock.
7.Subsequent events
On July 1, 1999, the Company sold 150,000 units consisting of 14.0% Senior
Notes due 2009 and warrants to purchase 4,534,604 shares of Common Stock. The
net proceeds of the unit offering were approximately $144 million.
6
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited Pro Forma Consolidated Financial Statements are based
on our Consolidated Financial Statements contained elsewhere in this Offering
Supplement. The accompanying unaudited Pro Forma Consolidated Statements of
Loss for the year ended December 31, 1998 and the six months ended June 30,
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", 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.
7
PRO FORMA CONSOLIDATED STATEMENTS OF LOSS
Year ended December 31, 1998
(unaudited)
Historical Pro Forma
Company Acquisitions as 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 amortiza-
tion..................... 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 ex-
penses..................... 2,941 917(c) 3,858
Depreciation and amortiza-
tion....................... 880 4,131(c)(d) 5,011
------------- ----------- -------------
Total Operating Ex-
penses................. 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 minor-
ity 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 earnings per
share...................... 16,012,653 339,887(g) 16,352,540
============= =========== =============
8
PRO FORMA CONSOLIDATED STATEMENTS OF LOSS
Six months ended June 30, 1999
(unaudited)
Historical Pro Forma
Company Acquisitions as Adjusted
------------- ------------- -------------
(in thousands, except per share data)
Revenue
Internet Projects......... $ 2,459 $ 432(a) $ 2,891
Network Services.......... 5,994 3,875(a) 9,869
------------- ---------- -------------
Total revenues.............. 8,453 4,307 12,760
Cost of revenues
Internet Projects......... 2,056 313(b) 2,369
Network Services.......... 6,534 2,665(b) 9,199
Depreciation and amortiza-
tion..................... 1,545 130(b) 1,675
------------- ---------- -------------
Total cost of revenues.. 10,135 3,108 13,243
------------- ---------- -------------
Gross (loss)................ (1,682) 1,199 (483)
General and administrative
expenses................... 3,770 225(c) 3,995
Marketing expenses.......... 5,147 1,125(c) 6,272
Research and development ex-
penses..................... 2,146 118(c) 2,264
Depreciation and amortiza-
tion....................... 1,228 1,505(c)(d) 2,733
------------- ---------- -------------
Total Operating Ex-
penses................. 12,291 2,973 15,264
------------- ---------- -------------
Operating loss.............. (13,973) (1,774) (15,747)
Interest expense............ 64 47(e) 111
Interest income............. 383 0 383
------------- ---------- -------------
Loss before taxes........... (13,654) (1,821) (15,475)
Minority interest income
(expense).................. 103 0 103
Income tax benefit.......... 5,302 (44)(f) 5,258
------------- ---------- -------------
Net loss.................... $ (8,249) $ (1,865) $ (10,114)
============= ========== =============
Basic and diluted loss per
share...................... $ 0.40 $ 0.49
============= =============
Number of shares used to
compute loss per share..... 20,428,698 301,290(g) 20,729,988
============= ========== =============
9
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.......................... -- -- 432 432
Network Services........................... -- -- 3,875 3,875
(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.......................... -- -- 313 313
Network Services........................... -- -- 2,665 2,665
Depreciation and amortization.............. -- -- 130 130
(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........ -- -- 225 225
Marketing expenses......................... -- -- 1,125 1,125
Research and development expenses.......... -- -- 118 118
Depreciation and amortization.............. -- -- 118 118
10
(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............................................ -- -- 1,387 1,387
Amortization is calculated on a straight line basis using the following
useful lives.
Goodwill.......................................................... 10 years
Customer base..................................................... 5 years
Management contracts.............................................. 3 years
The calculation and allocation of the purchase price was as follows:
Vianet Open:Net Flashnet Total
------ -------- -------- -------
Purchase price....................... $4,483 $2,541 $25,963 $32,987
Less: net assets acquired............ (37) 130 (1,784) (1,691)
------ ------ ------- -------
Excess of purchase price over net as-
sets acquired....................... $4,520 $2,411 $27,747 $34,678
Allocated to:
Goodwill..................................... $2,063 $2,299 $27,747 $32,109
Customer base................................ 1,945 112 -- 2,057
Management contracts......................... 512 -- -- 512
------ ------ ------- -------
$4,520 $2,411 $27,747 $34,678
====== ====== ======= =======
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.
(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............................ -- -- 47 47
Interest income............................. -- -- -- --
(f) The income tax adjustment represents Vianet income tax expense of $4 and
Flashnet income benefit of $584 for 1998 and a Flashnet income tax expense
of $44 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 20,428,698
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 20,729,988
========== ==========
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion is based on our Consolidated Financial Statements
included elsewhere in this Supplement. Such financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States. This section contains forward-looking statements that involve
inherent risks and uncertainties. Actual results may differ materially from
those contained in such forward-looking statements. See "Risk Factors" and
"Information Regarding Forward-Looking Statements" in the Offering Memorandum.
Overview
The following table sets forth, for the periods indicated, the items of
Consolidated Statements of Loss for the six month periods ended June 30, 1998
and 1999, respectively, expressed as a percentage of total revenues:
Percent of Total Revenues
-------------------------
Six Months Ended June 30,
-------------------------
1998 1999
------------ ------------
Revenue
Internet Projects........................ 55.6% 29.1%
Network Services......................... 44.4% 70.9%
Total Revenues......................... 100.0% 100.0%
Cost of Revenues
Internet Projects........................ 42.9% 24.3%
Network Services......................... 52.1% 77.3%
Depreciation and amortization............ 9.9% 18.3%
Total cost of revenues................. 104.9% 120.0%
Gross loss................................. -4.9% -20.0%
Operating Expenses
General and administrative expenses...... 19.5% 44.6%
Marketing expenses....................... 48.0% 60.9%
Research and development................. 24.5% 25.4%
Depreciation and amortization............ 8.1% 14.5%
Total operating expenses............... 100.1% 145.4%
Operating loss........................... -105.0% -165.3%
Interest expense......................... 3.2% -0.8%
Interest income.......................... 0.4% 4.5%
Loss before taxes and minority interest.. -107.8% -161.5%
Income tax benefit....................... 59.9% 62.7%
Net loss before minority interest........ -47.9% -98.8%
Minority interest........................ 0.0% 1.2%
Net loss................................. -47.9% -97.6%
Results of Operations--Six Months Ended June 30, 1998 Compared to the Six
Months Ended June 30, 1999
Revenues
Total revenues increased 152.1% from $3,352,487 in first half of 1998 to
$8,452,353 in first half of 1999. Internet Project revenues increased 32.0%
from $1,863,075 in the first half of 1998 to $2,458,547 for the same
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time period in 1999 while Network Services revenues increased 302.4% from
$1,489,412 to $5,993,805. First half Network Services revenues represented
70.9% of total revenues in 1999, as compared with 44.4% in 1998. The relative
higher increase in revenues from Network Services is partially a result of
expansion of our customer base, which provides us with a stream of recurring
revenues. Although the Company has focused on building these recurring revenues
from Network Services, building relations with Internet Project customers
remains a continuing strategy. In addition, we consolidated $1,901,219 of Vianet
revenues and (for the second quarter only) $120,256 of Sunweb revenues in the
first half of 1999. Vianet's revenues are derived principally from Network
Services. Excluding the impact of consolidating Vianet's, Open:Net's and
Sunweb's revenues, Network Services revenues in the first half of 1999 would
have increased 174.0% from the first half of 1998.
Cost of Revenues
Cost of revenues increased 188.3% from $3,515,654 in the first half of 1998
to $10,134,196 in the first half of 1999. Cost of revenues for Internet
Projects increased 42.9% from $1,438,477 to $2,055,656. Cost of revenues for
Network Services increased 274.3% from $1,745,699 to $6,533,928. A portion of
this increase in Network Services costs reflects the consolidation of Vianet
(even though Vianet's cost of revenues as a percentage of revenues was lower
than our own). Excluding Vianet, our cost of revenues increased approximately
164%, due to expenditures for personnel and expenses associated with the
expansion of our network, including leasing additional lines to provide the
increased capacity we will require as our business grows. The shift in
percentage cost of revenues from Internet Projects to Network Services in the
first half of 1999 is the result of our continued investment in Network
Services infrastructure. This investment included leased line costs, costs of
newly hired personnel for network deployment and management and network
facilities and equipment.
While total revenues increased, increases in cost of revenues caused gross
margins to decline from $(163,167) in the first half of 1998 to $(1,681,843) in
the first half of 1999. Cost of revenues as a percentage of total revenues
increased from 104.9% in the first six months of 1998 to 120.0% in the same
time period for 1999. This is principally due to our investment in Network
Services infrastructure, discussed above. We expect to see improvement in our
gross margin generally and Network Service in particular as we expand our
customer base and increase revenues per account and are thereby able to spread
the costs of product and network development over a larger revenue base. We
also expect our gross margin to improve over time as a result of our strategy to
construct our own infrastructure, including the replacement of leased
transmission facilities with owned facilities and the purchase of domestic and
international transmission capability as a telecommunications operator (rather
than as a purchaser at retail prices).
General and Administrative Expenses
General and administrative expenses increased 475.8% from $654,685 in the
first half of 1998 to $3,769,986 in the first half of 1999. These expenses
constituted 44.6% of revenues in the first half of 1999, compared to 19.5% for
the same period in 1998. Several factors contributed to this increase
including: the addition of personnel to develop and manage information systems
and internal services as well as the addition of senior management at the
Cybernet AG level to oversee our international operations; the centralizing of
our IT group; general office equipment purchases and relocation expenses at
Sunweb; and, to a lesser extent, certain accounting reallocations and the
impact of consolidating Open:Net, Vianet and Sunweb in the first half of 1999.
Open:Net, Vianet and Sunweb together incurred general and administrative
expenses of $469,363. We have recently undertaken certain measures, including a
hiring freeze in our German operations and at Sunweb on all non-sales force
employee additions until revenues improve, with the expectation that over the
next several fiscal quarters, such measures will help to decrease the
proportion of general and administrative expenses to our total revenues.
13
Marketing Expenses
Marketing expenses increased 220.1% from $1,607,852 in the first half of 1998
to $5,147,291 in first half of 1999, principally as a result of substantial
investments in marketing activities, including trade fairs, product literature
and related expenditures. These investments have also included consolidating
the various local brands that we have acquired. This increase also reflects the
impact of consolidating Open:Net, Vianet and Sunweb in the first half of 1999,
which together incurred marketing expenses of $633,622. Although we expect
marketing expenses to decrease as a percentage of revenues over time, we plan
to increase the amount we spend to establish our trade name locally and
internationally.
Research and Development
Research and development expenditures increased 161.4% from $820,921 in the
first half of 1998 to $2,146,090 in the first half of 1999. This reflects an
increase in personnel hired to develop new products and services, especially
our e-commerce solutions for which 19 people were hired in the first half of
1999.
Depreciation and Amortization
Depreciation and amortization increased 351.3% from $272,052 in the first six
months of 1998 to $1,227,757 in the first half of 1999. This increase is
attributable to the additional amortization of the goodwill arising from the
acquisition of Open:Net and Vianet in 1998 and to our investments in computer
hardware and software and facilities and depreciation of our billing system.
Interest Expense and Income
Interest expense decreased 39.3% from $105,584 in the first six months of
1998 to $64,066 in the same period of 1999. Our interest income increased from
$11,701 in the first six months of 1998 to $383,431 in the same period of 1999.
This increase is principally a result of interest earned on cash proceeds from
our December 1998 private equity offering. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources--Cash Flow" in the accompanying Offering Memorandum.
Other Comprehensive Loss: Foreign Currency Translation Adjustments
Foreign currency translation adjustments resulted in a gain of $12,619 in the
first half of 1998 and a loss of $7,624,064 in the first half of 1999. The
decrease in 1999 over 1998 is a result of the strengthening of the U.S. dollar
in the first six months of 1999 in relation to the Deutsche Mark.
Liquidity and Capital Resources
Cash Flow
Operating activities used cash of $11,334,499 for the six months ended June
30, 1999 compared to $3,133,178 for the comparable period in 1998. This is
principally the result of our first half net loss in 1999.
For the six months ended June 30, 1999, investing activities used cash of
$36,039,454, compared to $1,452,738 for the comparable period in 1998. This
increase in use of cash represents primarily our deferred cash payment for the
Vianet acquisition, the acquisition of Flashnet and purchases of property and
equipment. Expenditures for property and equipment consisted principally of
purchases of computer hardware and software and other expenditures related to
our Internet backbone and equipment necessary to support our anticipated
growth.
14
For the six months ended June 30, 1999, net cash provided by financing
activities was $23,805,141, compared to net cash provided of $2,698,286 for the
comparable period in 1998. This increase resulted from the Interim Loan incurred
to finance the Flashnet Acquisition. The Units Offering in July 1999 generated
$144,500,000 in net proceeds, $22,374,264 of which was used to repay in full the
Interim Loan and $57,466,076 of which was placed in an escrow account, in
accordance with the terms of the Senior Notes Indenture, to fund the first six
interest payments on the Senior Notes.
Working Capital
On June 30, 1999, our working capital, defined as the excess of our current
assets over our current liabilities, was $(11,562,266), as compared to
$(37,750,651) on December 31, 1998. The decrease in working capital resulted
from an increase in short-term borrowings (including the Interim Loan), an
increase in trade accounts payable and other accrued liabilities, as well as an
increase in accrued personnel costs and the current portion of long-term capital
lease obligations. This decrease was only partially offset by increases in cash
and accounts receivalbe. Our balance sheet as of June 30, 1999, reflects
$7,463,206 for net accounts receivable compared to $3,248,754 for the period
ended December 31, 1998 and $4,048,784 for the period ended March 31, 1999. This
increase is attributable to the large increase in sales (and therefore average
accounts receivable balances) but also collection difficulties at Cybernet AG
and at Flashnet, whose balance sheet was first consolidated on June 30, 1999. We
have instituted various measures which we expect will facilitate collection of
these receivables including realignment of sales force compensation schemes,
pre-contract credit evaluations for both business and residential customers and
assignment of direct responsibility to managers at the subsidiary-level for
reductions in receivables balances.
Credit Arrangements
As of June 30, 1999, the Company had short-term unsecured overdraft facilities
under which the Company and its subsidiaries could borrow up to DM 463,340
($253,023). These facilities are denominated in Deutsche Marks (in the amount of
DM 200,000 ($109,217)), Italian Lire (in the amount of DM 121,200 ($66,186)) and
Austrian Schilling (in the amount of DM 142,140 ($77,621)). The interest rates
fluctuate based upon current lending rates. The weighted average borrowing rate
on these facilities was 8.1% as of June 30, 1999. In addition, certain of the
Company's banks provide overdraft protection exceeding the limits specified in
these agreements. As of June 30, 1999, the Company and its subsidiaries had used
DM 835,768 ($456,400). In addition, as of June 30, 1999, the Company had long-
term capitalized lease obligations of DM 3,041,153 ($1,660,725). Amounts
expressed in Deutsche Marks in this paragraph have been translated for
convenience purposes into U.S. dollars at the rate of DM 1.83122 = $1.00 (the
rate implied by the August 3, 1999 Noon Buying Rate of the Euro to the
U.S. dollar).
Capital Expenditures
For the six months ended June 30, 1999, capital expenditures totaled
$6,586,968, compared to $1,221,112 for the comparable period in 1998. We funded
these capital expenditures primarily from net cash provided by financing
activities. The major investments by the Company in the first half of 1999
included investments in (i) a class 4 national telecommunications license for
the German market at a cost of DM 3,000,000 ($1,638,256), (ii) progress payments
on the installation of a new billing system totalling approximately DM 4,705,000
($ o ), (iii) the expansion of leased-line POP's at a cost of approximately DM
1,700,000 ($ o ) and (iv) various computer and technical equipment at a cost of
approximately DM 1,600,000 ($ o ). We have budgeted approximately $45.0 million
in capital expenditures for the remainder of 1999. We expect to use these
amounts to install carrier grade digital circuit switches and related equipment
in order to offer voice services to our customers, to build data centers and
office infrastructure and for transmission facilities (including alternative
long-haul transmission capabilities) and related equipment. We also expect to
use a portion of these budgeted amounts for the continued roll-out of our
billing system.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does 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, 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"), 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 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 by approximately $15,000,000.
All of the Company's revenues and a significant portion of our
expenses are denominated in currencies other than our reporting
currency, the U.S. dollar. Approximately 89% of our revenues in 1998
were denominated in Deutsche Mark and, as such, 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.
We prepared a sensitivity analysis to assess the impact of exchange
rate fluctuations on our 1998 operating results. Based on this
analysis, we estimated that a 10% adverse change in the exchange rates
between the Deutsche Mark and the U.S. dollar would have increased our
reported net loss for 1998 by approximately $530,300. Our analysis also
indicated that a 10% decrease in the exchange rate between the U.S.
dollar and the Deutsche Mark would result in a decrease of our March
31, 1999 net assets of approximately $1,997,900.
We have not entered into any derivative hedging instruments to reduce
the risk of exchange rate fluctuations.
16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 8,1999 we sold 150,000 Units (the "Units") to Qualified
Institutional Buyers pursuant to Rule 144A under the Securities Act of
1933 as amended (the "'33 Act"). Each Unit consisted of our 14.0%
Senior Note due 2009 in the principal amount of $1,000 (the "Senior
Notes") and a Warrant to purchase 30.2310693 shares of our common
stock par value $0.001 per share at a price of $22.278 per share (the
"Warrants"). Shares issuable upon exercise of the Warrants represented
15% of our issued and outstanding capital stock at that time. The Units
were sold through Lehman Brothers and Morgan Stanley Dean Witter for an
aggregate offering price of $150,000,000. The aggregate discounts and
commissions were $4,500,000 and the net proceeds were $144,500,000. Of
this amount, $57,466,076 was used to purchase U.S. government
securities pledged to an escrow account to secure payment of the first
six interest payments on the Senior Notes, and $22,374,264 was used to
repay an interim loan incurred to finance the cash portion of the
acquisition price of Flashnet S.p.A. ("Flashnet").
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
27.0 Financial Data Schedule for the period ended June 30, 1999.
(b) REPORTS ON FORM 8-K
We filed a report on Form 8-K on July 15, 1999 reporting on our
acquisition of Flashnet and our Units Offering.
17
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: August 13, 1999
18