As filed with the Securities and Exchange Commission on January 11, 2000
Registration No. 333-91595
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
CYBERNET INTERNET SERVICES
INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 7375 51-0384117
(State or other
jurisdiction of
(Primary Standard Industrial Classification Code Number)
(I.R.S. Employer
Identification No.)
incorporation or
organization)
Stefan-George-Ring 19-23
D-81929 Munich
Germany
+49-89-993-150
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Andreas Eder
Chairman of the Board of Directors,
President and Chief Executive Officer
Cybernet Internet Services International, Inc.
Stefan-George-Ring 19-23
81929 Munich, Germany
+49-89-993-150
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------
Copies To:
Joseph M. Berl, Esq.
Powell, Goldstein, Frazer & Murphy LLP
1001 Pennsylvania Ave., NW
Washington, DC 20004-2505
(202) 347-0066
Approximate date of commencement of proposed sale to the public: From time to
time after this Registration Statement is declared effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
--------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
Proposed
Maximum
Title of Each Class of Aggregate Proposed Maximum
Securities to be Amount to be Price Per Aggregate Offering Amount of
Registered Registered Unit(1) Price Registration Fee
- -------------------------------------------------------------------------------------------
13% Convertible Senior
Subordinated Discount
Notes Due 2009......... $51,506,345(2) 100% $ 51,506,345(2) $ 14,318.76(7)
13% Convertible Senior
Subordinated Pay-In-
Kind Notes due 2009.... (Euro)46,928,436(3) 100% (Euro)46,928,436(3) $13,571.86(4)(7)
Common Stock, par value
$.001 per share........ 5,617,138 shares(5) (5) (5) (6)
- -------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o).
(2) Represents the accreted value of the Discount Notes as of the initial
filing date.
(3) Represents the principal amount of the Pay-in-Kind Notes originally issued
and the principal amount of such notes which is issuable under the pay-in-
kind feature of such notes.
(4) Based upon the conversion rate of $1.0403 = (Euro)1.00 which is the Federal
Reserve Bank of New York noon buying rate as of November 17, 1999.
(5) Represents 5,617,138 shares issuable upon conversion of the Discount Notes
and the Pay-in-Kind Notes registered hereunder. Pursuant to Rule 416, such
number of shares registered hereby shall include an indeterminate number of
shares that may be issued in connection with a stock split, stock dividend,
recapitalization or similar event.
(continued on next page)
(continued from previous page)
(6) Pursuant to Rule 457(i), there is no additional filing fee with respect to
the shares of common stock issuable upon conversion of the Discount Notes
and Pay-in-Kind Notes because no additional consideration will be received
in connection with the exercise of the conversion privilege.
(7) Previously paid.
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
SUBJECT TO COMPLETION, DATED JANUARY 11, 2000
PROSPECTUS
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
[LOGO]
$50,002,183 13.0% CONVERTIBLE SENIOR SUBORDINATED DISCOUNT NOTES DUE 2009
(Euro)25,000,000 13.0% CONVERTIBLE SENIOR SUBORDINATED PAY-IN-KIND NOTES DUE
2009
5,617,138 SHARES OF COMMON STOCK
This prospectus relates to the resale from time to time of the securities set
forth above by selling securityholders named herein.
The Discount Notes and the Pay-In-Kind Notes are convertible by holders into
shares of our common stock. The number of shares of our common stock issuable
upon conversion of the Discount Notes is equal to the accreted value of the
Discount Notes being converted on the date of conversion divided by $25.00,
subject to adjustment under certain circumstances. The number of shares of our
common stock issuable upon conversion of the Pay-In-Kind Notes is equal to the
principal amount of the notes being converted divided by (Euro)25.00, subject
to adjustment under certain circumstances. If the market price of our common
stock exceeds certain prices during certain specified periods, the Discount
Notes and the Pay-In-Kind Notes will automatically convert into shares of our
common stock on or after August 26, 2000. You can find a more extensive
description of the Pay-In-Kind Notes beginning on page 85 and the Discount
Notes beginning on page 116.
We may redeem all or part of the Discount Notes and the Pay-In-Kind Notes on
or after August 15, 2004. We may also redeem all but not part of the Discount
Notes and the Pay-In-Kind Notes at any time if changes in tax laws impose
certain withholding taxes on amounts payable on such Notes.
The Discount Notes and the Pay-in-kind Notes are not secured and are
subordinated to all of our present and future senior indebtedness.
Our common stock is quoted on the OTC Bulletin Board operated by The Nasdaq
Stock Market under the symbol "ZNET" and trades on the Neuer Market of the
Frankfurt Stock Exchange under the symbol "CYN." On January 4, 2000, the last
reported sale price for our common stock on the OTC Bulletin Board and the
Neuer Market was $8.750 per share and (Euro)9.100 share, respectively.
------------
AN INVESTMENT IN THE NOTES AND OUR COMMON STOCK INVOLVES A HIGH DEGREE OF
RISK. PLEASE SEE "RISK FACTORS" BEGINNING ON PAGE 11.
------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THE DISCLOSURES IN THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------
THE DATE OF THIS PROSPECTUS IS JANUARY , 2000.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY +
+NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN +
+OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE +
+SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
TABLE OF CONTENTS
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
DIFFERENT INFORMATION. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN ANY
STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE
INFORMATION CONTAINED IN OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON
THE FRONT OF THIS PROSPECTUS.
Page
----
Currency and Financial Statement Presentation............................ ii
Information Regarding Forward-Looking Statements......................... ii
Summary.................................................................. 1
Ratio of Earnings to Fixed Costs......................................... 10
Risk Factors............................................................. 11
Use of Proceeds.......................................................... 28
Exchange Rate Information................................................ 29
Price Range of Common Stock and Dividend Policy.......................... 30
Capitalization........................................................... 31
Selected Consolidated Financial and Operating Data....................... 32
Unaudited Pro Forma Consolidated Financial Statements.................... 34
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 39
Quantitative and Qualitative Disclosures About Market Risk............... 56
Business................................................................. 57
Information Regarding Significant Subsidiaries........................... 74
Page
----
Management............................................................... 75
Related Party Transactions............................................... 82
Stock Ownership of Principal Beneficial Owners and Management............ 83
Description of the PIK Notes............................................. 85
Description of the Discount Notes........................................ 116
Certain Definitions...................................................... 145
Registration Rights...................................................... 162
Description of Senior Notes.............................................. 163
Description of Capital Stock............................................. 164
Anti-Takeover Provisions................................................. 168
Certain United States Federal Income Tax Consequences to Holders of PIK
Notes................................................................... 171
Certain United States Federal Income Tax Consequences to Holders of
Discount Notes.......................................................... 175
Selling Securityholders.................................................. 178
Plan of Distribution..................................................... 178
Legal Matters............................................................ 180
Independent Accountants.................................................. 180
Available Information.................................................... 180
Listing and General Information.......................................... 181
Glossary of Terms........................................................ 183
Index to Financial Statements............................................ F-1
The securities may not be offered or sold in or into the United Kingdom
except in circumstances that do not constitute an offer to the public within
the meaning of the Public Offers of Securities Regulations 1995. All applicable
provisions of the Financial Services Act 1986 must be complied with in respect
of anything done in relation to securities in, from or otherwise involving the
United Kingdom.
We confirm, having made all reasonable inquiries, that this prospectus
contains all information which is material in the context of the sale of the
securities, that the information contained herein is true and accurate in all
material respects and is not misleading in any material respect, that the
opinions and intentions expressed herein are honestly held and that there are
no other facts the omission of which would make any of such information or the
expression of any such opinions or intentions misleading in any material
respect. The Company accepts responsibility accordingly.
i
CURRENCY AND FINANCIAL STATEMENT PRESENTATION
In this prospectus, unless otherwise specified or unless the context
otherwise requires, all references to "Deutsche Marks," "DM" and "Pfennigs" are
to the lawful currency of the Federal Republic of Germany, all references to
"Lire," "Lira" and "Lit." are to the lawful currency of Italy, all references
to "Austrian Schillings" and "ATS" are to the lawful currency of Austria, all
references to "Euro" and "(Euro)" are to the lawful currency of the countries
of the European Monetary Union, and all references to "U.S. dollars," "dollars"
and "$" are to the lawful currency of the United States. Non-U.S. currency
amounts stated in dollars, unless otherwise indicated, have been translated
from Deutsche Marks, Lire, Austrian Schillings or Euro at assumed rates solely
for convenience and should not be construed as representations that the
Deutsche Mark, Lira, Austrian Schilling or Euro amounts actually represent such
dollar amounts or could be converted into dollars at the rate indicated or any
other rate. Except as otherwise indicated in this prospectus, such dollar
amounts have been translated from Euro to Deutsche Marks at the rate of
(Euro)1.00 = DM 1.9558, from Euro to Lire at the rate of (Euro)1.00 = Lit.
1,936.27, from Euro to Austrian Schillings at the rate of (Euro)1.00 = ATS
13.7603 and from dollars to Euro at the rate of $1.00 = (Euro)0.9613, the noon
buying rate in The City of New York for cable transfers in foreign currencies
as certified by the Federal Reserve Bank of New York for customs purposes (the
"Noon Buying Rate") on November 17, 1999. You should read "Exchange Rate
Information" for information regarding recent rates of exchange between the
U.S. dollar and the Deutsche Mark, between the U.S. dollar and the Austrian
Schilling, between the U.S. dollar and the Lira and between the U.S. dollar and
the Euro.
Unless otherwise indicated, financial information in this prospectus has been
prepared in accordance with generally accepted accounting principles in the
United States.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains or incorporates by reference "forward-looking
statements within the meaning of section 27A of the Securities Act and section
21E of the Exchange Act". These statements can often be identified by the use
of forward-looking terminology such as "estimate," "project," "believe,"
"expect," or "anticipate" or the negative of such terms or other variations on
such or comparable terms, or by discussions of strategy that involve risks and
uncertainties. These forward-looking statements include statements concerning:
(1) the strategies for our business;
(2) our anticipated growth of the communications and information services
industry;
(3) our plans to devote significant management time and capital resources
to our business;
(4) our expectations as to funding capital requirements;
(5) our anticipated dates on which we will begin to provide certain
services or reach specific milestones in our business strategies; and
(6) other expectations, beliefs, future plans, anticipated development and
other matters that are not historical facts.
You should be aware that these forward-looking statements are not historical
facts and are subject to risks and uncertainties, including financial,
regulatory environment, changes and growth in the Internet and
telecommunications industry and the general economy, changes in product and
services offerings, risks associated with our limited operating history,
managing rapid growth, acquisitions and strategic investments, dependence on
effective information and billing systems and trend projections. Any of these
factors could cause actual events or results to differ materially from those
expressed or implied by the statements. We cannot assure that such results
expressed or implied by the statements will be achieved, or that, if achieved,
such results will be indicative of the results in subsequent periods. The most
important factors that could prevent us from achieving our stated goals include
the risks that we will not:
(1) achieve and sustain profitability from the creation and implementation
of our Internet Protocol based communications network;
ii
(2) overcome significant early operating losses;
(3) produce sufficient capital to fund our business strategies;
(4) enhance financial and management controls;
(5) attract and retain additional qualified management and other personnel;
(6) negotiate peering agreements; and
(7) make acquisitions necessary to expand our network, products and
services and to implement our strategies.
For a discussion of certain of these factors, see Risk Factors beginning on
page 11.
GLOSSARY
This prospectus contains a number of technical and industry-related terms
that may not be easily understandable by all readers. We have attempted to
define these terms as they arise in the text. We have also provided definitions
for certain of these terms in a glossary which begins on page 183 of this
prospectus.
iii
SUMMARY
Because this is a summary, it may not contain all information that may be
important to you. You should read the entire prospectus, including the
information incorporated by reference and the financial data and related notes,
before making an investment decision.
The terms "Company," "Cybernet," "we," "us" and "our," as used in this
prospectus, refer to Cybernet Internet Services International, Inc. Delaware
and its subsidiaries as a combined entity, except where its use is such that it
is clear that such term means only Cybernet Internet Services International,
Inc., and the terms do not in any case refer to the selling securityholders.
The Company
We are a leading provider of Internet communications services and solution in
Germany, Austria, Italy and Switzerland. Our Internet protocol solutions are
based on a core product offering consisting of Internet connectivity and value-
added services. These services include virtual private networks, web-hosting,
co-location, security solutions, electronic commerce, Intranet/Extranet and
work flow solutions. We also offer consulting, design and installation,
training, technical support and operation and monitoring of Internet protocol-
based systems.
We market our products and services primarily to small- and medium-sized
enterprises in Europe. We believe these enterprises represent an underserved
and sizeable market. Companies in this market are characterized by a lack of
internal technical resources, rapidly expanding communications needs and a high
propensity to utilize third-party outsourcing.
We are recognized as a provider of high quality Internet connectivity
services and solutions to enterprises and as one of Germany's leading Internet
access providers. IT Services, a leading German computer magazine, has ranked
us number one among German Internet service providers in terms of
infrastructure, international outlook and customer service. Our objective is to
become a leading provider of communications services and network-based business
solutions to small- to medium-sized enterprises in Europe.
We operate a geographically distributed Internet protocol network based upon
leased lines. Our network is spread over six countries and consists of network
nodes equipped primarily with Cisco and Ascend routers connected to a redundant
high-performance backbone infrastructure. We help corporate customers reduce
telecommunications costs by offering Internet connectivity through dedicated
lines at more than 56 directly owned points of presence or POPs. We also offer
a system of dial-in nodes with ISDN (high speed digital network) or analog
modem ports to smaller enterprises and employees and affiliates of corporate
customers. These nodes permit local dial-in access throughout Germany, Italy
and Switzerland and most of Austria. Recently, we reorganized our dial-in
network in Germany by concentrating multiple dial-in access notes into larger
access points called virtual POPs. We are expanding our network across Germany,
Austria, Italy and Switzerland by installing additional POPs and replacing
dial-in access nodes with virtual POPs.
General Information
Our principal executive offices are located at Stefan-George-Ring 19-23,
81929 Munich, Germany, telephone number: +49-89-993-150, and our registered
address in the United States is Corporation Services Company, 1013 Centre Road,
Wilmington, Delaware 19805.
1
Securities Offered Hereby
This prospectus relates to the following:
. (Euro)25,000,000 aggregate principal amount of 13.0% Convertible Senior
Subordinated Pay-In-Kind Notes due 2009, which we refer to as the PIK
Notes
. $93,500,000 principal amount when fully accreted ($50,002,183 aggregate
initial accreted value) of 13.0% Convertible Senior Subordinated
Discount Notes due 2009, which we refer to as the Discount Notes and
which, together with the PIK Notes, we refer to as the Notes
. 5,617,138 shares of our common stock issuable upon conversion of the
Notes
2
PIK Notes
Issuer.................. Cybernet Internet Services International, Inc.
PIK Notes............... (Euro)25,000,000 aggregate principal amount of 13.0%
Convertible Senior Subordinated Pay-In-Kind Notes due
2009. The PIK Notes are convertible into our common
stock. See "--Conversion" below and see "Description
of the PIK Notes" and "Description of Capital Stock."
Maturity Date........... August 15, 2009.
Interest................
We will pay interest on the PIK Notes semi-annually
at a rate of 13.0% per annum on each February 15 and
August 15 (1) in the form of additional notes, which
we call Secondary PIK Notes, issued under the pay-in-
kind feature of the PIK Notes, starting on
February 15, 2000 and continuing through August 15,
2004, and (2) in cash, starting on February 15, 2005,
and continuing to maturity on August 15, 2009. There
will not be any accrual of cash interest on the PIK
Notes prior to August 15, 2004, or payment of cash
interest on the PIK Notes prior to February 15, 2005.
References to the PIK Notes in this prospectus
includes the Secondary PIK Notes.
Ranking.................
The PIK Notes are senior subordinated unsecured debt.
They rank equally in right of payment to all our
existing and future senior subordinated debt
(including the Discount Notes) and junior in right of
payment to all our existing and future unsubordinated
indebtedness (including our senior notes issued in
July 1999, in the aggregate principal amount of
$150,000,000). We conduct our business principally
through subsidiaries, existing and future debt and
other liabilities and commitments of our
subsidiaries, including trade payables, will be
effectively senior to the PIK Notes.
Optional Redemption..... We may redeem the PIK Notes, in whole or in part, at
any time on or after August 15, 2004, at the
redemption prices set forth in this prospectus, plus
accrued and unpaid interest and additional amounts
due under tax gross-up provisions of the PIK Notes,
if any, to the redemption date. See "Description of
the PIK Notes--Optional Redemption."
We may also redeem all but not just a portion of the
PIK Notes at any time, if changes in certain tax laws
impose certain withholding taxes on amounts payable
on the PIK Notes. If we decide to do this, we must
pay holders a price equal to the principal amount
plus accrued interest and the other amounts described
in the section "Description of the PIK Notes--
Redemption for Taxation Reasons."
Conversion..............
Unless previously redeemed, the PIK Notes are
convertible, at the option of the holders, into
shares of our common stock at any time on or after
August 25, 2000, and prior to the maturity date. The
number of shares of our common stock issuable upon
conversion of the PIK Notes is equal to the principal
amount of the PIK Notes being converted divided by
(Euro)25.00, subject to adjustment in certain events.
3
In addition, if the closing sale price of our common
stock on the Neuer Market of the Frankfurt Stock
Exchange during any period described below has
exceeded the price for such period referred to below
for at least 30 consecutive trading days and the
registration statement of which this prospectus is a
part is then effective and available, all of the PIK
Notes will be automatically converted on the next
trading day into shares of our common stock. However,
the conversion will not occur prior to August 26,
2000, and will occur then only if the closing sale
price of our common stock is at least (Euro)32.00:
12 Months
Beginning Closing Sale Price
--------------- ------------------
August 15, 1999 (Euro)32.00
August 15, 2000 (Euro)38.46
August 15, 2001 (Euro)44.92
August 15, 2002 (Euro)51.37
August 15, 2003 (Euro)57.83
Change of Control....... Upon a change of control, each holder of the PIK
Notes may require us to repurchase all or a portion
of such holder's PIK Notes at a purchase price equal
to 101% of the principal amount thereof, plus accrued
and unpaid interest thereon and additional amounts
due under tax gross-up provisions of the PIK Notes,
if any, to the date of repurchase.
Withholding Taxes;
Additional Amounts.....
Unless required by law, all our payments in respect
of the PIK Notes will be made without withholding or
deduction for or on account of any taxes imposed by
or within any relevant taxing jurisdiction. We will
generally be required to pay as additional amounts
any amounts withheld or deducted for such taxes.
Certain Covenants.......
The PIK Notes are issued under an indenture which
contains covenants that limit our ability to:
. incur additional indebtedness;
. pay dividends on, redeem or repurchase our capital
stock or make investments;
. issue or sell capital stock of our subsidiaries;
. incur indebtedness junior in right of payment to
our senior indebtedness but senior in right of
payment to the PIK Notes;
. engage in transactions with affiliates;
. create so liens;
. sell assets;
. guarantee indebtedness;
. restrict dividend or other payments to us; and
. consolidate, merge or transfer all or
substantially all our assets and the assets of our
subsidiaries on a consolidated basis.
4
These covenants are subject to important exceptions
and qualifications, which are described under
"Description of the PIK Notes" in this prospectus.
Registration Rights..... We are required to use our best efforts to maintain
the effectiveness of the registration statement of
which this prospectus is a part until certain dates
specified therein. See "Registration Rights."
Trustee, Paying Agent
and Registrar..........
The Bank of New York.
Listing, Admission or
Eligibility for
Trading................ We expect to list the PIK Notes or to have them
admitted for trading on an internationally recognized
stock exchange or make them eligible for trading in
an over-the-counter trading market.
You should read "Description of the PIK Notes" for additional information
concerning these notes.
5
Discount Notes
Issuer.................. Cybernet Internet Services International, Inc.
Discount Notes
Offered................ $93,500,000 principal amount when fully accreted,
$50,002,183 aggregate initial accreted value, of
13.0% Convertible Senior Subordinated Discount Notes
due 2009. The Discount Notes are convertible into our
common stock. See "--Conversion" below and see
"Description of the Discount Notes" and "Description
of Capital Stock."
Maturity Date........... August 15, 2009.
Yield and Interest......
The Discount Notes were initially sold at a
substantial discount from their principal amount at
maturity, and there will not be any accrual of cash
interest on the Discount Notes prior to August 15,
2004, or payment of cash interest on the Discount
Notes prior to February 15, 2005. For a discussion of
the United States federal income tax treatment of the
Discount Notes and the original issue discount rules,
see "Certain United States Federal Income Tax
Consequences to Holders of Discount Notes." From and
after August 15, 2004, the Discount Notes will bear
interest at a rate of 13.0% per annum payable semi-
annually in cash on each February 15 and August 15,
commencing February 15, 2005.
Ranking.................
The Discount Notes are senior subordinated unsecured
debt. They rank equally in right of payment to all
our existing and future senior subordinated debt
(including the PIK Notes) and junior in right of
payment to all our existing and future unsubordinated
indebtedness (including our senior notes issued in
July 1999, in the aggregate principal amount of
$150,000,000). Because we conduct our business
principally through subsidiaries, existing and future
debt and other liabilities and commitments of our
subsidiaries, including trade payables, will be
effectively senior to the Discount Notes.
Optional Redemption..... We may redeem the Discount Notes, in whole or in
part, at any time on or after August 15, 2004, at the
redemption prices set forth in this prospectus, plus
accrued and unpaid interest and additional amounts
due under tax gross-up provisions of the Discount
Notes, if any, to the redemption date. See
"Description of the Discount Notes--Optional
Redemption."
We may also redeem all but not just a portion of the
Discount Notes at any time, if changes in certain tax
laws impose certain withholding taxes on amounts
payable on the Discount Notes. If we decide to do
this, we must pay holders a price equal to the
principal amount plus accrued interest and the other
amounts described in the section "Description of the
Discount Notes--Redemption for Taxation Reasons."
Conversion..............
Unless previously redeemed, the Discount Notes are
convertible, at the option of the holders, into
shares of our common stock at any time on or after
August 25, 2000, and prior to the maturity date. The
number of shares of our common stock issuable upon
conversion of the Discount Notes is equal to the
accreted value of the Discount Notes being converted
(on the date of conversion) divided by $25.00,
subject to adjustment in certain events.
6
Accordingly, the number of shares of our common stock
issuable upon conversion of the Discount Notes will
increase as the accreted value of the Discount Notes
increases. In addition, if the closing sale price of
our common stock on the Neuer Markt of the Frankfurt
Stock Exchange during any period described below has
exceeded the price for such period referred to below
for at least 30 consecutive trading days, and the
registration statement of which this prospectus is a
part is then effective and available, all of the
Discount Notes will be automatically converted on the
next trading day into shares of our common stock.
However, the conversion will not occur prior to
August 26, 2000, and will occur then only if the
closing sale price of our common stock is at least
(Euro)32.00.
12 Months
Beginning Closing Sale Price
--------------- ------------------
August 15, 1999 (Euro)32.00
August 15, 2000 (Euro)38.46
August 15, 2001 (Euro)44.92
August 15, 2002 (Euro)51.37
August 15, 2003 (Euro)57.83
Change of Control.......
Upon a change of control, each holder of the Discount
Notes may require us to repurchase all or a portion
of such holder's Discount Notes at a purchase price
equal to 101% of the accreted value thereof, plus
accrued and unpaid interest thereon and additional
amounts due under tax gross-up provisions of the
Discount Notes, if any, to the date of repurchase.
Withholding Taxes;
Additional Amounts.....
Unless required by law, all our payments in respect
of the Discount Notes will be made without
withholding or deduction for or on account of any
taxes imposed by or within any relevant taxing
jurisdiction. We will generally be required to pay as
additional amounts any amounts withheld or deducted
for such taxes.
Certain Covenants.......
The Discount Notes are issued under an indenture
which contains covenants that limit our ability to:
. incur additional indebtedness;
. pay dividends on, redeem or repurchase our capital
stock or make investments;
. issue or sell capital stock of certain of our
subsidiaries;
. incur indebtedness junior in right of payment to
our senior indebtedness but senior in right of
payment to the Discount Notes;
. engage in transactions with affiliates;
. create liens;
. sell assets;
. guarantee indebtedness;
. restrict dividend or other payments to us; and
. consolidate, merge or transfer all or
substantially all our assets and the assets of our
subsidiaries on a consolidated basis.
7
These covenants are subject to important exceptions
and qualifications, which are described under
"Description of the Discount Notes" in this
prospectus.
Registration Rights,
Liquidated Damages and
Conversion Ratio
Adjustment.............
We are required to use our best efforts to maintain
the effectiveness of the registration statement of
which this prospectus is a part until certain dates
specified therein. See "Registration Rights."
Trustee, Paying Agent
and Registrar..........
The Bank of New York.
Listing................. We expect to list the Discount Notes or to have them
admitted for trading on an internationally recognized
stock exchange or make them eligible for trading in
an over-the-counter trading market.
You should read "Description of the Discount Notes" for additional
information concerning these notes.
Risk Factors
See "Risk Factors" for a discussion of factors you should carefully consider
before deciding to invest in the Notes or our common stock. Risk Factors begin
on page 11.
8
Summary Consolidated Financial and Operating Information
The summary historical consolidated financial and operating data as of and
for the years ended December 31, 1996, 1997 and 1998 and the nine months ended
September 30, 1998 and 1999 have been derived from our audited Consolidated
Financial Statements included elsewhere in this prospectus. The pro forma
consolidated financial data have been derived from our unaudited Pro Forma
Consolidated Financial Statements included elsewhere in this prospectus. The
financial data set forth below have been prepared in accordance with generally
accepted accounting principles in the United States. The unaudited interim
financial statements contained in this prospectus include all adjustments,
consisting of normal recurring adjustments, that management considers necessary
for a fair presentation of the financial position and results of operations for
the interim periods.
The historical consolidated financial data set forth below should be read in
conjunction with our Consolidated Financial Statements and the notes thereto
included elsewhere in this prospectus. The pro forma consolidated financial
data set forth below should be read in conjunction with our unaudited Pro Forma
Consolidated Financial Statements and the notes thereto included elsewhere in
this prospectus.
Pro forma statement of operations is based on the unaudited Pro Forma
Consolidated Financial Statements included elsewhere in this prospectus. The
pro forma statement of loss for the year ended December 31, 1998 is based on
the historical statement of loss adjusted as if the acquisitions of Open:Net
Internet Solutions GmbH, Vianet Telekommunications A.G. and Flashnet S.p.A.
were completed on January 1, 1998, and the pro forma statement of loss for the
nine months ended September 30, 1999 is based on the historical statements of
loss adjusted as if the Flashnet acquisition had been completed on January 1,
1999. The pro forma data does not purport to represent what our results of
operations would have been had these acquisitions been made on such dates.
Results of operations for the periods presented are not necessarily
indicative of results of operations for future periods. Our development and
expansion activities, including acquisitions, during the periods shown below,
may significantly affect the comparability of these data from one period to
another. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Nine months ended
Years ended December 31, September 30,
--------------------------------- ----------------------------
Pro forma Pro forma
1996 1997 1998 1998 1998 1999 1999
----- ------ ------- --------- ------- -------- ---------
(in thousands, except per share data)
Statement of Operations
Data:
Revenue
Internet Projects...... $ 217 $1,598 $ 5,139 $ 6,206 $ 3,118 $ 3,452 $ 3,884
Network Services....... 91 716 3,495 11,184 2,261 11,292 15,167
----- ------ ------- ------- ------- -------- --------
Total revenue.......... 308 2,314 8,634 17,390 5,379 14,744 19,051
Cost of revenues
Internet Projects...... 237 1,495 4,699 5,500 1,887 3,238 3,551
Network Services....... 119 866 4,067 8,949 2,619 10,702 13,367
Depreciation and
amortization (/1/).... 7 171 1,674 2,050 680 2,374 2,504
----- ------ ------- ------- ------- -------- --------
Total cost of
revenues.............. 363 2,532 10,440 16,499 5,186 16,314 19,422
Gross profit (loss)..... (55) (218) (1,806) 891 193 (1,570) (371)
Operating expenses:
General and
administrative
expenses.............. 263 482 1,576 3,512 1,241 9,377 10,502
Marketing expenses..... 165 1,188 3,844 5,536 3,268 7,244 7,469
Research and
development........... 179 280 2,941 3,858 1,166 3,796 3,914
Depreciation and
amortization (/2/).... 22 116 880 5,011 475 2,922 4,409
----- ------ ------- ------- ------- -------- --------
Total operating
expenses.............. 629 2,066 9,241 17,917 6,150 23,339 26,294
----- ------ ------- ------- ------- -------- --------
Operating loss.......... (684) (2,284) (11,047) (17,026) (5,957) (24,909) (26,665)
Interest income
(expense), net......... (2) (39) (43) (267) (47) (6,111) (6,158)
Foreign currency
translation gain
(loss)................. -- -- -- -- -- (651) (651)
----- ------ ------- ------- ------- -------- --------
Loss before taxes and
minority interest..... (686) (2,323) (11,090) (17,293) (6,004) (31,671) (33,474)
Income tax benefit..... 402 1,339 6,173 6,753 3,226 13,668 13,624
Minority interest...... -- -- 145 145 -- 101 101
----- ------ ------- ------- ------- -------- --------
Net loss................ $(284) $ (984) $(4,772) (10,395) $(2,778) $(17,902) $(19,749)
===== ====== ======= ======= ======= ======== ========
Basic and diluted loss
per share............. $(.12) $ (.12) $ (.30) $ (.64) $ (0.18) $ (0.92) $ (1.00)
===== ====== ======= ======= ======= ======== ========
9
Nine months ended
Years ended December 31, September 30,
---------------------------------- --------------------
Pro forma Pro forma
1996 1997 1998 1998 1999 1999
----- ------- ------- --------- -------- ----------
(in thousands)
Other Financial and
Operating Data:
Number of Network
Services
customers(/3/)......... 166 4,061 6,923 42,391 (/4/) 10,830 50,724 (/4/)
EBITDA(/5/)............. $(655) $(1,997) $(8,493) $(9,965) $(20,264) $(20,403)
Capital
expenditures(/6/)...... 552 1,708 6,034 8,713 10,724 --
Ratio of earnings to
fixed charges(/7/)..... -- -- -- -- -- --
December 31, September 30,
---------------------- ----------------
1996 1997 1998 1998 1999
------ ------- ------- ------- --------
(in thousands)
Balance Sheet Data:
Working capital (deficiency)(/8/)...... $ 339 $ 891 $37,751 $ 2,567 $130,999
Total assets.......................... 2,211 12,617 79,445 33,247 302,177
Long-term debt(/9/)................... -- 42 1,383 1,133 177,503
Total stockholders' equity............ 1,790 8,908 67,359 21,057 103,025
- --------
(1) Represents depreciation and amortization of capitalized costs related to
investments in product development, designing our network (including
related software) and building network capacity (including related
personnel and consulting costs).
(2) Represents depreciation of property and equipment and amortization of
acquired goodwill.
(3) Number of customers as of December 31, 1996, 1997 and 1998; and March 31,
1999.
(4) Includes 32,652 and 39,894 Flashnet customers (of which 1,096 and 1,625
were business customers and 31,556 and 38,269 were residential customers)
as at December 31, 1998 and March 31, 1999, respectively.
(5) We define EBITDA as loss before interest, income taxes, minority interest,
depreciation and amortization. EBITDA is included because management
believes it is a useful indicator of a company's ability to incur and
service debt. EBITDA should not be considered as a substitute for operating
earnings, net income, cash flow or other statements of operations or cash
flow data computed in accordance with United States generally accepted
accounting principles or as a measure of our results of operations or
liquidity. Funds depicted by this measure may not be available for
management's discretionary use (due to covenant restrictions, debt service
payments and other commitments). Because all companies do not calculate
EBITDA identically, our presentation of EBITDA may not be comparable to
other similarly entitled measures of other companies.
(6) Pro forma capital expenditures for the nine months ended September 30, 1999
were not available.
(7) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of losses before income taxes and minority interest, plus fixed
charges. Fixed charges consist of interest expense. Earnings were
insufficient to cover fixed charges by $(684), $(2,284), $(10,893),
$(5,890), $(16,616) and $(25,133) for the years ended December 31, 1996,
1997 and 1998, for the nine months ended September 30, 1999, the year ended
December 31, 1998 pro forma and the nine months ended September 30, 1999
pro forma, respectively.
(8) We define working capital as total current assets less total current
liabilities.
(9) Long-term debt includes obligations under capital lease agreements.
RATIO OF EARNINGS TO FIXED CHARGES
We have had a deficiency in our earnings to cover fixed charges for the
periods set forth below. In computing the ratio of earnings to fixed charges,
earnings consist of losses before income taxes and minority interest, plus
fixed charges. Fixed charges consist of interest expense.
Nine Months
ended September
Years ended December 31, 30,
---------------------------------- -----------------
Proforma Proforma
1996 1997 1998 1998 1999 1999
----- ------- -------- -------- ------- --------
(in thousands)
Deficiency in earnings
to cover fixed
charges............... $(684) $(2,284) $(10,893) $(16,616) $(5,890) $(25,133)
10
RISK FACTORS
You should consider carefully the risks described below and other information
in this prospectus before making an investment decision. The risks and
uncertainties described below are not the only ones facing us. Additional risks
and uncertainties not presently known to us or that we may currently deem
immaterial may also impair our business operations.
If any of the following events identified in the following risk factors
actually occurs, it could materially adversely affect our business, financial
condition and results of operations.
This prospectus also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of a variety of
factors, including the risks identified below and elsewhere in this prospectus.
See "Information Regarding Forward-Looking Statements."
We Have a History of Losses and Cannot Be Certain We Will Achieve Positive
Cash Flow
For the years ended December 31, 1996, 1997 and 1998, we had net losses
before taxes of $685,627, $2,323,247 and $11,090,260, respectively. For the
nine months ended September 30, 1999, we had a net loss before taxes of
approximately $13,654,000. In addition, we had an accumulated deficit of
approximately $14,685,000 as of September 30, 1999.
We anticipate that we will continue to incur significant additional losses in
the intermediate term while we expend substantial amounts on network
infrastructure, sales and marketing and business development. Even thereafter,
we cannot be certain that we will achieve or sustain positive cash flow or
profitability from our operations. Our net losses and negative cash flow from
operating activities are likely to continue even longer than we currently
anticipate if:
. we do not establish and maintain a customer base that generates
sufficient revenue;
. prices for our products or services decline faster than we have
anticipated;
. we do not remain competitive in the innovation and quality of our
products;
. we do not attract and retain qualified personnel;
. we do not reduce our termination costs as we expand our network by
negotiating competitive interconnection rates and peering arrangements;
or
. we do not obtain necessary governmental approvals, rights-of-way and
operator licenses.
Our Limited Operating History Makes it Difficult to Assess Our Past
Performance and Future Prospects
We commenced our first significant operations in 1996. Accordingly, you have
limited historical operating and financial information on which to base your
evaluation of our performance and our prospects. Moreover, we have acquired
seven companies since we first commenced significant operations, which limits
the comparability of our operating and financial information from period to
period.
We Are Substantially Leveraged--Our substantial indebtedness could adversely
affect our financial health and prevent us from fulfilling our obligations
under the Notes.
We have a substantial amount of debt. We may borrow even more money for
working capital, capital expenditures, research and development, acquisitions
or other general corporate purposes. We are considering offering additional
debt securities in the future.
The following table shows certain important credit statistics.
At September 30, 1999
---------------------
(in thousands
except ratio)
Total debt................................................ $177,503
Stockholders equity....................................... $103,025
Total debt to equity ratio................................ 1.7x
11
The following table shows interest expense and the excess of fixed charges
over earnings for the nine month period ended September 30, 1999 as if the
acquisition of Flashnet and the offerings of units and the Notes had occurred
on January 1, 1999.
For the Nine
Months Ended
September 30, 1999
------------------
(in thousands)
Interest expense............................................. $23,465
Earnings deficiency to cover fixed charges................... $20,767
Our high level of debt could have important consequences for you. In
particular, some or all of the following factors may reduce the amount of money
available to us to finance our operations and other business activities, or may
place us at a competitive disadvantage:
. a significant portion of the net proceeds of the unit offering we made
in July 1999, has been set aside for the payment of interest on the
senior notes in the aggregate principal amount of $150 million which
were included in the units (the "Senior Notes");
. beginning in the fourth year following issuance of the units, we will
need to use a large portion of the money earned by our subsidiaries to
pay interest on the Senior Notes and, beginning in the sixth year
following issuance of the Senior Notes, we will need to use a large
portion of the money earned by our subsidiaries to pay interest on the
Senior Notes;
. we may have difficulty borrowing money in the future for working
capital, capital expenditures, research and development, acquisitions,
implementation of our business strategies or other purposes;
. the covenants included in the indentures governing the Senior Notes and
the Notes may restrict our ability to expand or pursue certain business
opportunities;
. we may have more indebtedness than certain of our competitors;
. our debt level may reduce our flexibility to adjust rapidly to changing
market conditions, including increased competition in the Internet
services and telecommunications industries;
. our debt level may reduce our ability to invest in new and developing
technologies; and
. our debt level may make us more vulnerable to downturns in general
economic conditions or in our industries and to changing market
conditions and regulations.
Ability to Service Debt--To service our indebtedness, we will require a
significant amount of cash. Our ability to generate cash depends on many
factors beyond our control.
We expect to obtain all or most of the money to pay our expenses and to pay
the principal and interest on the Senior Notes and the Notes, except as
described in the paragraph below, from the operations of our subsidiaries. Our
ability to meet our obligations thus depends on the future performance of our
subsidiaries. This in turn depends on successful implementation of our strategy
and on financial, business, economic, competitive, regulatory, technical and
other factors. We cannot control many of these factors, such as economic
conditions in the markets where our subsidiaries operate, pressure from
competitors, regulatory developments and changes in technology.
We Are Dependent Upon Our Subsidiaries' Ability to Earn and Make Available
Enough Money to Pay the Senior Notes, the Notes and Our Other Obligations.
We cannot be certain that our subsidiaries will earn enough money to allow us
to pay the principal and interest on the Senior Notes, and the Notes, and to
meet our other obligations. If we do not have enough money to do so, we may be
required to obtain additional equity capital, to refinance all or part of our
existing debt or to borrow more money. Our ability to refinance our debt or to
borrow more money will depend on our financial condition at the time, the
restrictions in the agreements governing our debt and other factors, including
general market and economic conditions. If such additional equity or debt
financing or refinancing is not possible, we could be forced to dispose of
assets at unfavorable prices. In addition, we could default on our obligation
to make payments on the Senior Notes, or the Notes.
12
We have loaned or intend to loan or contribute a portion of the proceeds from
the units and the Notes to our subsidiaries. Our cash flow and consequent
ability to service our debt obligations, are dependent upon our ability to
receive cash from our subsidiaries. Our subsidiaries are separate legal
entities and have no obligation to pay amounts due under the Senior Notes, the
Notes or to make funds available for such payments. In addition, applicable law
of the jurisdictions in which these subsidiaries are organized or contractual
or other obligations to which they are subject may limit their ability to pay
dividends or make payments on intercompany loans, including those made with the
proceeds of the units and the Notes. All of our subsidiaries are restricted
from paying dividends unless they meet the statutory financial requirements in
their respective jurisdictions of organization. Vianet does not currently meet
the statutory requirements for payment of dividends and our other subsidiaries
may be similarly restricted. Although the indentures currently limit the
ability of subsidiaries to enter into consensual restrictions on their ability
to pay dividends and make other payments, such limitations are subject to
significant qualifications. Furthermore, the payment of interest and principal
on inter-company loans and advances as well as the payment of dividends by
these subsidiaries may be subject to taxes.
Ranking of the Senior Notes, Discount Notes and PIK Notes--Because of our
structure, these obligations may be subordinated to other obligations.
The Notes are subordinated to all senior indebtedness of Cybernet, including
indebtedness under the Senior Notes. Therefore, in the event of bankruptcy,
liquidation or reorganization of Cybernet, the assets of Cybernet, will be
available to pay obligations on the Notes only after all senior indebtedness
has been paid in full. The Notes are not guaranteed by our subsidiaries thus,
creditors of our subsidiaries will have a prior claim to the assets of the
subsidiaries before claims of holders of Cybernet's indebtedness, including
Notes. Accordingly, the Notes, will effectively be subordinated in right of
payment to all existing and future indebtedness and other liabilities,
including trade payables, of the subsidiaries, except to the extent that
Cybernet is recognized as a creditor as a result of any parent-subsidiary
loans. Cybernet may, however, contribute, rather than loan, all of the proceeds
of the units and the Notes to the subsidiaries. If Cybernet is recognized as a
creditor because it has made one or more parent-subsidiary loans, its claims
would still be subordinated with respect to any assets of the subsidiary
pledged to secure other indebtedness and any indebtedness of such subsidiary
senior to that held by Cybernet. Moreover, Cybernet may decide to contractually
subordinate some or all of any of the proceeds that it loans to its
subsidiaries. The subordinated nature of such loans may have an adverse effect
on the ability of our subsidiaries to pay amounts owed and, therefore, on
Cybernet's ability to make payment on the Notes. In addition, in the event of a
bankruptcy of one or more of our subsidiaries, we cannot assure you that any of
these inter-company loans will be respected under applicable bankruptcy law.
The bankruptcy laws of the jurisdictions in which our subsidiaries are
organized differ significantly from those applicable in the United States.
Although the indentures currently limit the ability of our subsidiaries to
incur indebtedness and to issue preferred stock in the future, there are
certain significant qualifications and exceptions to this limitation.
Accordingly, our subsidiaries may continue to incur a substantial amount of
indebtedness and issue preferred stock under certain circumstances.
The Indentures Contain Restrictive Covenants--The restrictive covenants in the
indentures may restrict our ability to operate our business.
Each of the indentures contains a number of covenants that will impose
significant operating and financial restrictions on us and limit the discretion
of our management with respect to certain business matters. These covenants,
among other things, will limit or prohibit us from incurring additional debt,
making investments, paying dividends to our stockholders, creating liens,
selling assets, engaging in mergers or consolidations, prepaying subordinated
indebtedness, repurchasing or redeeming capital stock, entering into certain
transactions with affiliates and capitalizing on business opportunities. See
"Description of the PIK Notes--Certain Covenants" and "Description of the
Discount Notes--Certain Covenants."
Failure to comply with the covenants and restrictions in the indentures or in
any other financing agreements we may enter into could trigger defaults under
such agreements even if we are able to pay our debt.
13
Such defaults could result in a default on our senior debt or the Notes and
could delay or preclude payment of principal or interest on the Notes.
We Will Need Additional Capital in the Future--If we fail to raise sufficient
capital, we may not be able to expand our business
As we continue to develop and expand our business and deploy our network, we
will require significant capital to fund our capital expenditures and working
capital needs, as well as our debt service requirements and cash flow deficits.
In particular, we expect to incur significant capital expenditures to make
acquisitions and to lease transmission capacity on a long-term basis, acquire
backbone capacity or construct our own infrastructure in selected locations in
order to transport high bandwidth data and voice services over all available
transmission protocols.
The actual amounts and timing of our future capital requirements may vary
significantly from our estimates. In addition, we continually reevaluate our
business plan in our rapidly changing industry. Accordingly, it is likely that
our plan will change in material respects in the intermediate term. Any such
change could result in a need for additional financing. Our revenues and costs
are dependent on factors that are not within our control, such as advances in
technology, increased competition, regulatory development, fluctuation in
interest or currency exchange rates, the demand for our services and various
factors such as the ability to obtain necessary rights-of-way in constructing
the network. Due to the uncertainty of these factors, our actual revenues and
costs may vary from expected amounts, possibly to a material degree, and such
variations are likely to affect our future capital requirements.
We are considering offering additional debt or equity securities in the
future. We may need to seek even more capital sooner than we expect if:
. our development plans or projections change or prove to be inaccurate;
. we cannot achieve a sufficient customer base and level of traffic;
. cost overruns occur in connection with the development of the network;
. we cannot obtain interconnection agreements as we expand our network;
. technological advances render significant portions of our network
investments obsolete or unprofitable; or
. competition causes us to reduce prices of our products or services
faster than we expect.
We intend to evaluate acquisition opportunities and strategic alliances on an
ongoing basis as they arise and we may require additional financing if we elect
to pursue any such opportunities. Such additional financing may not be
available on acceptable terms or at all. Moreover, our substantial indebtedness
as a result of the unit offering and the Notes offerings and other possible
future debt financings may adversely affect our ability to raise additional
funds. An inability to obtain financing could require us to delay or abandon
plans for parts of our network, acquisition opportunities, or strategic
alliances.
We May Have Difficulty Establishing and Maintaining Interconnection Agreements
and Peering Relationships
If the incumbent operators deny us interconnection or fail to grant us
interconnection for sufficient capacity on acceptable terms, we will have to
use refile or resale agreements to terminate such traffic through other
carriers that have interconnection arrangements with those incumbent operators.
Termination through refile or resale agreements is significantly more expensive
than termination through our own interconnection and could render our services
noncompetitive.
If we are unable to preserve our existing peering arrangements or to obtain
additional ones, this could increase our costs, and limit our ability to
compete effectively with other European Internet protocol ("IP")
14
backbone providers that have better peering arrangements. The dominance of
national Internet service providers or ("ISP's") is driving industry peering
practice. The basis on which large national ISPs make peering available is
becoming more limited as the provision of Internet access and related services
expands. Recently, companies that previously offered peering have cut back by
establishing new, more restrictive criteria for peering or have eliminated
peering relationships entirely.
We have negotiated peering arrangements with several IP backbone providers
and several European ISPs. If increasing requirements associated with
maintaining peering with these ISPs develop, we may have to comply with those
additional requirements in order to continue these peering relationships.
Our ability to obtain and maintain peering arrangements with other European
ISPs and with United States ISPs is critical to our ability to exchange traffic
with those ISPs without having to pay transit costs. However, we cannot be
certain that we will be able to negotiate additional peer status with United
States ISPs or with European IP backbone providers or that we will be able to
terminate traffic on their networks at favorable prices. In particular, major
United States ISPs require almost all European ISPs and IP backbone providers
to pay a transit fee to exchange traffic.
We Are Dependent on Our Key Personnel--The continued success of our operations
is dependent on our key personnel who may voluntarily terminate their
employment with us at any time.
Our success depends upon the continued efforts of our senior management team
and our technical, marketing and sales personnel. These employees may
voluntarily terminate their employment with us at any time. We maintain no key
man life insurance policies. Our success also depends on our ability to
attract, train, retain and motivate additional highly skilled and qualified
managerial, technical, marketing and sales personnel. Competition for qualified
employees and personnel in the Internet and telecommunications industries in
Europe is intense. Only a limited number of persons have the required knowledge
and experience in the particular sectors and countries in which we operate. The
process of hiring employees with the combination of skills and attributes
required to carry out our strategy can be extremely challenging and time-
consuming. We cannot assure you that we will be able to retain existing
personnel or to identify and hire new qualified personnel. If we were to lose
the services of our key personnel or were unable to attract additional
qualified personnel, this could materially adversely affect our business,
financial condition and results of operations.
We Are Dependent on Our Suppliers
We are dependent on third-party suppliers for our leased-line connections and
bandwidth. Info AG, a potential competitor, and Deutsche Telekom, a competitor,
are our primary providers of network and switching capacity. We also depend
upon telecommunications carriers, which are often our competitors, to provide
telecommunications services and lease physical space to us for routers, modems
and other equipment. We have few long-term contracts with these suppliers. Most
of these suppliers are not subject to any contractual restrictions that
prohibit them from competing with us. Moreover, any failure or delay of any
network provider to deliver bandwidth to us or to provide operations,
maintenance and other services with respect to such bandwidth on a timely or
adequate basis could adversely affect our business. If these suppliers change
their pricing structures, we may be adversely affected.
We are also dependent on certain third-party suppliers of hardware
components. Although we attempt to maintain a number of vendors for each
product, certain components which we use in providing our network services are
currently available from only one source. For example, routers are currently
available only from Cisco. A failure by a supplier to deliver quality products
to us on a timely basis or our inability to develop alternate sources if and as
required could result in delays which could have a material adverse effect on
our business. Moreover, we cannot be sure that we will be able to obtain such
supplies on the scale we require at an affordable cost or at all. Neither can
we be certain that our suppliers will not enter
15
into exclusive arrangements with our competitors or stop selling their products
or components to us at commercially reasonable prices or at all.
We Are Subject to Risks as We Make Acquisitions and Engage in Strategic
Alliances--We may make inappropriate acquisitions and alliances and fail to
properly integrate them.
As part of our business strategy, we may acquire, make investments in, or
enter into strategic alliances with companies in complementary businesses, so
as to optimize our market presence in the regions we presently serve and expand
into other European countries. Acquisitions, investments and strategic alliance
involve risks, such as
. incorrect assessment of the value, strengths and weaknesses of an
acquisition, investment or strategic alliance;
. underestimating the difficulty of integrating the operations and
personnel of newly acquired companies;
. the potential disruption of our ongoing business, including possible
diversions of resources and management time;
. the potential inability to maintain uniform standards, controls,
procedures and policies; and
. the threat of impairing relationships with employees and customers as a
result of changes in management or ownership.
We cannot assure you that we will be successful in overcoming these risks.
Moreover, we cannot be certain that any desired acquisition, investment or
strategic alliance could be made in a timely manner or on terms and conditions
acceptable to us. Neither can we assure that we will be successful in
identifying attractive acquisition candidates. We expect that competition for
such acquisitions may be significant.
We May Have Difficulty Managing Our Rapid Growth--Our systems and personnel
may have difficulty in supporting our growth.
Our growth strategy has placed and will continue to place a significant
strain on our customer support, sales and marketing, administrative resources,
network and operations and management and billing systems. Such a strain on our
administrative and operational capabilities could adversely affect the quality
of our services and our ability to collect revenues. To manage our growth
effectively, we will have to enhance further the efficiency of our operational
support, other back office systems and financial systems and controls and
expenditures on administrative expenses. In addition we will need to maintain
and enhance our brand identity.
We Have Experienced Difficulties in Collecting Certain Accounts Receivable--
Failure to collect such accounts may materially adversely impact our financial
condition.
We have recently experienced difficulties in collecting some of our accounts
receivable, primarily at Cybernet AG and at Flashnet. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources--Working Capital." Our inability successfully
to collect on such accounts may have a material adverse impact on our business,
results of operations and financial condition.
We Are Subject to Risks as a Result of the International Scope of Our
Operations
We may face certain risks because we conduct an international business,
including:
. regulatory restrictions or prohibitions on the provision of our
services;
. tariffs and other trade barriers;
. difficulties in staffing and managing foreign operations;
16
. longer payment cycles;
. problems in collecting accounts receivable;
. political risks; and
. potentially adverse tax consequences of operating in multiple
jurisdictions, including the imposition or increase in withholding taxes
on remittances and other payments by subsidiaries.
We cannot assure you that such factors will not have an adverse effect on our
future operations and, consequently, on our business, financial condition and
results of operations. In addition, an adverse change in laws or administrative
practices in countries within which we operate could have a material adverse
effect on us.
We Are Subject to Foreign Exchange Rate Risks--Unfavorable exchange rate
fluctuations could affect us financially.
The proceeds from units and the Notes were in United States dollars, but many
of the costs and expenses of implementing our business strategies will be in
Euros and, to a lesser extent, in Swiss Francs. Therefore, the extent to which
we can apply such proceeds to these costs and expenses will be subject to
currency exchange rate fluctuations.
The principal and interest due on the Senior Notes and the Discount Notes are
payable in United States dollars. However, our revenues will largely be in
Euros and, to a lesser extent, in Swiss Francs. Accordingly, our ability to pay
the interest and principal when due on the Senior Notes and the Discount Notes
will be dependent to a significant extent on the future exchange rate of the
Euro against the United States dollar.
We May Not Have the Financial Resources to Repurchase the Senior Notes, the
Discount Notes or the PIK Notes as Required on a Change of Control--Failure to
make such repurchases may result in a default.
Upon the occurrence of a change of control (as defined in the indentures), we
will be required to make an offer to purchase all of the outstanding Senior
Notes, Discount Notes and PIK Notes at a price equal to 101% of their accreted
value or principal amount, as applicable, plus accrued and unpaid interest, if
any, to the date of repurchase. In such an event, we cannot be certain that we
would have sufficient assets to satisfy our obligations under the Senior Notes,
Discount Notes and PIK Notes and any other indebtedness then outstanding. Our
failure to repurchase the Senior Notes, Discount Notes and PIK Notes upon a
change of control due to inadequate financial resources in such instance would
result in a default under the indentures.
Because Most of Our Assets and Our Officers and Directors Are Outside the
United States, Service of Process and Enforcement of Judgments May Be Difficult
We are a Delaware corporation maintaining a registered agent in Delaware, and
process may be served at the address of the registered agent. However, most of
our assets are located outside the United States. Most of our officers and
directors are not residents of the United States, and a substantial portion of
their assets is located outside the United States. As a result, it may not be
possible for investors to effect service of process in the United States upon
such non-resident officers and directors or to enforce in jurisdictions outside
the United States judgments obtained against us or our directors and officers.
This applies to any action, including civil actions based on the United States
federal securities laws. In addition, awards for punitive damages in actions
brought in the United States or elsewhere may be unenforceable in Germany.
There May be Questions About Our Status Under German Law
The possibility exists that a German court might view precedents so as to
refuse to recognize our existence as a United States corporation in the period
between our November 1998 incorporation and the establishment of our United
States office in May 1999 on the grounds that we were required to maintain more
contact with the United States during that period. If such a challenge to our
status as a United States corporation were
17
successfully brought under German law, contracts into which we entered during
that period might be void and Cybernet might be treated as if it were a general
partnership under German law. Acting for and on behalf of Cybernet, our
management could be held personally liable for our actions and liabilities and
may, as a consequence, be entitled to be indemnified by Cybernet.
Sales of New or Existing Securities Could Depress Our Stock Price--We may
issue additional securities and principal shareholders may sell shares of
common stock.
The market price of our common stock could drop as a result of sales of a
large number of our shares or warrants or a substantial amount of our
convertible debt securities in the public market. The perception that such
sales may occur could have the same effect. The price of the Notes would also
likely be adversely affected by decreases in the price of our common stock.
As of November 10, 1999, our executive officers and directors owned, directly
or indirectly, approximately 10.5% of our common stock and approximately 17.8%
of our Series A Non-Voting Preferred Stock. Our Series A Non-Voting Preferred
Stock is convertible in various amounts over time into common stock and all of
it is convertible by January 1, 2001. In addition, executive officers and
directors hold options to purchase an aggregate of 500,000 shares of common
stock exercisable starting on December 28, 1999. Assuming conversion of all
these shares and exercise of all these warrants, these officers and directors
would hold approximately 12.6% of our common stock. See "Stock Ownership of
Principal Beneficial Owners and Management."
In addition, Holger Timm owns, a former director of Cybernet who resigned on
December 2, 1998, either directly or indirectly through a company controlled by
him, shares of common stock, Series A Non-Voting Preferred Stock and Series B
Voting Preferred Stock which in the aggregate and assuming conversion of all
the Series A Non-Voting Preferred Stock into Voting Stock, would constitute
approximately 26.3% of our voting shares.
One Shareholder Controls a Large Block of Cybernet Stock and His Interests May
Conflict with Yours
Holger Timm, a former director of Cybernet who resigned on December 2, 1998,
directly or indirectly, holds approximately 10.9% of the common stock of
Cybernet, 100% of the Series B Voting Preferred Stock and 58.1% of the Series A
Non-Voting Preferred Stock, which is convertible, over time, into our common
stock. As a result, assuming conversion of all the Series A Non-Voting
Preferred Stock into Voting Stock, Mr. Timm would hold approximately 26.3% of
our voting shares. Mr. Timm is the controlling shareholder and an executive
officer of the company which owns 40% of the investment bank which served as
the underwriter in our December 1998 public offering of common stock, for which
services such investment bank received approximately $3 million in fees. Mr.
Timm is also a principal stockholder and executive officer of one of our
customers, Cybermind, which is itself a principal stockholder of the Company.
Mr. Timm has the power to influence actions requiring stockholder approval
(including amendments to our Certificate of Incorporation and By-laws and
approving mergers and sales of all or substantially all of our assets). We can
offer no assurance that the interests of Mr. Timm will not conflict with your
interests. See "Stock Ownership of Principal Beneficial Owners and Management."
We Are Subject to Anti-Takeover Provisions In Our Charter and Bylaws Which May
Delay or Prevent a Change of Control
Provisions of the Delaware General Corporation Law and our Certificate of
Incorporation and By-Laws may delay, discourage or prevent a future takeover or
change in control of Cybernet unless such takeover or change in control is
approved by our Board of Directors. These provisions may also make the removal
of directors and management more difficult, may discourage bids for our common
stock at a premium over the market price and may adversely affect the market
price, the voting and other rights of the holders of our common stock.
18
We are subject to the anti-takeover provisions of Section 203 of the Delaware
General Corporation Law, which prohibits us from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which such person became an interested
stockholder, unless the business combination is approved in a prescribed
manner. In addition, our Certificate of Incorporation provides that the Board
of Directors must be divided into three classes of directors serving staggered
terms and that all stockholder actions must be effected at a duly called
meeting and not by written consent. Either of these provisions could have the
effect of discouraging a third party from making a tender offer or otherwise
attempting to gain control of Cybernet. Our Certificate of Incorporation also
places certain restrictions on who may call a special meeting of stockholders.
Our Board of Directors also has the authority to issue up to 50,000,000 shares
of undesignated preferred stock and to determine the price, rights,
preferences, and privileges of those shares without any further vote or actions
by the stockholders. The rights of the holders of our common stock are subject
to, and may be adversely affected by, the rights of all present and any future
holders of preferred stock.
The Internet Services Market Is New and Uncertain and It May Be Difficult to
Retain Customers
The market for Internet connectivity services and related software products
and services is in an early stage of growth, particularly in the European
markets in which we operate. As a consequence, current and future competitors
are likely to introduce competing Internet connectivity services, online
services and products, and it is difficult to predict the rate at which the
market will grow or at which new or increased competition will result in market
saturation. For example, certain companies have recently introduced free
Internet access services in support of their other product and service
offerings. If demand for Internet services fails to grow, or grows more slowly
than anticipated, our business, results of operations and financial condition
could be materially adversely affected.
The immature nature of the market for Internet access services may also
adversely affect our ability to retain new customers, as customers may
discontinue our services after an initial trial period. During each fiscal
period we typically acquire new customers for our products and services, while
seeking to renew service agreements with existing customers. The sales and
marketing expenses associated with attracting new customers are substantial.
Our ability to improve operating margins will depend, in significant part, on
our ability to retain customers.
We Are Dependent on the Internet Which Some Potential Customers May Decline to
Adopt.
Our products and services are targeted toward users of the Internet, which
has experienced rapid growth. Evolving industry standards, frequent new product
and service introductions and demand and market acceptance for recently
introduced products and services are subject to a high level of uncertainty, as
is typical in the case of a new and rapidly evolving industry characterized by
quickly changing technology. While we believe that Europeans will adopt this
new technology with the same enthusiasm that residents of the United States
have, we cannot be certain that the European market will develop to the same
extent.
In addition, critical issues concerning the commercial use of the Internet
remain unresolved and may impact the growth of Internet use, especially in the
business and geographic markets we target. Despite growing interest in the many
commercial uses of the Internet, many businesses have been deterred from
purchasing Internet access services for a number of reasons, including, among
others:
. lack of availability of cost-effective, high-speed options;
. inconsistent quality of service;
. a limited number of local access points for corporate users;
. inability to integrate business applications on the Internet;
. the need to deal with multiple and frequently incompatible vendors;
19
. inadequate protection of the confidentiality of stored data and
information moving across the Internet; and
. a lack of tools to simplify Internet access and use.
In particular, a perceived lack of security of commercial data, such as
credit card numbers, has significantly impeded commercial exploitation of the
Internet to date, and we cannot be certain that encryption or other
technologies will be developed to satisfactorily address these security
concerns. Capacity constraints caused by growth in the use of the Internet may
also, unless resolved, impede further expansion in the use of the Internet to
the extent that users experience delays, transmission errors and other
difficulties. Further, the adoption of the Internet for commerce and
communications replaces more established means of communication and requires
the understanding and acceptance of a new way of conducting business and
exchanging information. Some businesses may be unwilling to commit themselves
to learning this new way of conducting business until it is proved.
We May Be Hurt by System Failures
Our success is largely dependent upon our ability to deliver high speed,
uninterrupted access to the Internet. Any system failure that causes
interruptions in our operations could have a material adverse effect on us. Our
telecommunications network is carried primarily on lines leased from Deutsche
Telekom. Failures in this or any other telecommunications network on which we
rely would result in customers' receiving no or diminished access to the
Internet. We also currently lease the properties where our POPs are located.
Any relocation that may be required as a result of expired or changing lease
terms may result in increased costs or temporary disruption of service.
We Could Be Held Liable for Information Disseminated Over Our Network
The law relating to liability of ISPs for information and materials carried
on or disseminated through their networks is not completely settled. A number
of lawsuits have sought to impose such liability for material deemed to be
socially harmful. In particular, one lower court in Germany, where we presently
have the majority of our operations, recently found the manager of an ISP
liable for the contents of materials transmitted after the ISP failed to remove
the offending material from its news-server, despite requests from government
authorities. The law relating to the regulation and liability of information
carried or disseminated by ISPs is also undergoing a process of development in
other European countries.
The possibility that courts could impose liability for information or
material carried on or disseminated through our network could require us to
take measures to reduce our exposure to such liability. Such measures may
require us to spend substantial resources or to discontinue certain product or
service offerings. Any of these actions could have a material adverse effect on
our business, operating results and financial condition.
We Are Subject to Various Forms of Regulation:
Regulation of the Internet May Increase
Currently, few laws or regulations are directly applicable to activities or
commerce on the Internet. However, a number of legislative and regulatory
proposals are under consideration and may be adopted in various jurisdictions
with respect to issues such as Internet user privacy, infringement, pricing,
taxes, quality of products and services and intellectual property rights. It is
uncertain how existing laws will be applied to the Internet in areas such as
intellectual property (including copyrights, trademarks and trade secrets),
obscenity and defamation. The adoption of new laws or the adaptation of
existing laws to the Internet may decrease the growth in the use of the
Internet, which could in turn decrease the demand for our products and
services, increase our cost of doing business or otherwise have a material
adverse effect on our business, result of operations and financial condition.
20
Regulation of the European Telecommunications Market is Intense
The European telecommunications industry, which we plan to enter, is subject
to a significant degree of regulation. Our ability to operate networks and
provide services in Germany, Austria, Italy and Switzerland is dependent upon
our ability to obtain appropriate licenses, registrations and other
authorizations or permissions from governmental authorities in each
jurisdiction in which we operate and on those licenses and other authorizations
remaining in force. Such licenses generally contain clauses pursuant to which
we may be fined or our license may be revoked in certain circumstances. Such
revocation may be on very short notice. The revocation of any of our licenses
would force us to stop operating in the relevant country. In some cases, the
licenses we receive may be of fixed duration and we must comply with
regulations and technical requirements prescribed by the jurisdiction in which
we obtained such licenses in order to maintain them. We have no guarantees that
we will be able to obtain, maintain or renew the licenses, authorizations and
registrations we need to provide telecommunications services or that such
licenses and other authorizations will be issued or renewed on terms or with
fees that are commercially viable. The loss, or substantial limitations of, or
the failure to obtain, licenses, authorizations or registrations could have a
material adverse effect on our business.
Regulation in the European Union is Developing
The recent liberalization of the European telecommunications market, induced
by legislation of the European Union ("EU") and the introduction of the World
Trade Organization Basic Telecom Agreement, has significantly reduced the
regulatory barriers to entry in the markets in which we operate or intend to
operate. However, national regulatory frameworks which are fully consistent
with the policies and requirements of the EU and the World Trade Organization
have only recently been, or are still being, implemented in certain EU member
states and Switzerland, respectively. These nations are in the early stages of
providing for and adapting to a liberalized telecommunications market. As a
result, in these markets, we and other new entrants may encounter more
protracted and difficult procedures to obtain licenses and negotiate
interconnection agreements. We cannot assure you that further alterations to
the regulatory frameworks, which may place our operations and competitive
position at a disadvantage, will not be made in the future. In particular,
German regulatory authorities have indicated to Deutsche Telekom, the dominant
telecommunications provider in Germany, that it will be allowed to take
additional costs into account when determining fees, subject to regulatory
approval. Although the regulatory authority denied Deutsche Telekom's first
application for higher prices on the basis that Deutsche Telekom had not
demonstrated higher costs, we cannot assure you that the regulatory authorities
will continue to reach such conclusions in the future. We also cannot assure
you that such fees, which tend to be favorable for new entrants providing long
distance and international voice telephony services, will remain at their
current levels. See also "Business--Regulation."
Many of the countries in which we intend to establish facilities and provide
services lack the level of experience the United States has with regulation of
a competitive telecommunications market. In Germany and many of the other
Western European countries in which we operate or intend to operate the markets
for public switched services were virtually closed to competition until January
1, 1998. Prior to that time, few entities other than the incumbent operators
had the right to provide public voice telephony services or installed public
networks. As a result, few pro-competitive regulations and regulators existed
to enforce laws and regulations against the incumbent operators. The limited
experience of legislators, regulators and courts with the implementing of a
competitive regulatory regime, combined with continued full or partial
government ownership of the incumbent operators, as discussed below, could slow
or even undermine the movement to competitive telecommunications markets in
these countries.
As a result, we may be incorrect in our assumptions that:
. each European country where we intend to establish networks and provide
services will enact and enforce, on a timely basis, the measures
necessary to ensure that new entrants such as Cybernet can compete
fairly with the incumbent operators; and
. we will be allowed to provide and expand our services in these European
countries as set forth in our business plans.
21
We cannot assure you, with respect to any country in which we operate or plan
to operate, that future changes in the law, regulation, or government will not
have a material adverse effect on Cybernet. See "Business--Regulation."
We Are Subject to Intellectual Property Risks
Legal standards relating to the validity, enforceability and scope of
protection of intellectual property rights in Internet-related industries are
uncertain and still evolving, and we cannot be certain as to the future
viability or value of any of our intellectual property rights or those of other
companies within the IT industry. We cannot assure you that the steps we have
taken to protect our intellectual property rights will be adequate or that
third parties will not infringe or misappropriate our proprietary rights. Any
such infringement or misappropriation, should it occur, could have a material
adverse effect on our business, results of operations and financial condition.
Furthermore, we cannot be certain that our business activities will not
infringe the proprietary rights of others or that such other parties will not
assert infringement claims against us. We anticipate that we may be subject to
claims in the ordinary course of our business, including claims of alleged
infringement of the trademarks and other intellectual property rights of third
parties due to the dissemination of our content or the provision of access by
our online services to content made available by third parties. Such claims and
any resultant litigation, should it occur, could subject us to significant
liability for damages and could result in invalidation of our proprietary
rights and, even if not meritorious, could be time-consuming and expensive to
defend, and could result in the diversion of management time and attention, any
of which could have a material adverse effect on our business, results of
operations and financial condition.
We regard substantial elements of our products and services as proprietary
and we attempt to protect them by relying on trademark, service mark, trade
dress, copyright and trade secret laws and restrictions on disclosure and
transfer of title. We also enter into confidentiality agreements with our
employees, suppliers, distributors, consultants, vendors and customers and
license agreements with third parties and generally seek to control access to
and distribution of our technology, documentation and other proprietary
information. We are pursuing the registration of our service marks in the EU
but we currently have no patents or applications for patents pending for our
products or services. Effective service mark, copyright and trade secret
protection may not be available in every country in which our products and
services are distributed or made available. We cannot assure you that the steps
we have taken to protect our proprietary rights will be adequate or that third
parties will not infringe or misappropriate our copyrights, service marks,
trade dress and similar proprietary rights.
We Are Dependent on Our Billing and Information Systems--We may not be able to
successfully implement new systems
As we add additional services, sophisticated back office information and
processing systems become more and more vital to our growth and our ability to:
. manage and monitor traffic along our network;
. track service provisioning, traffic faults and repairs;
. effect least cost routing;
. achieve operating efficiencies;
. monitor costs;
. bill and receive payments from customers; and
. reduce credit exposure.
We have purchased from Kenan Systems a new billing system which we have
installed and are integrating into our German operations and which we are
beginning to implement in Italy. We cannot assure you that this system will be
successfully implemented on a timely basis or at all, or that it will perform
as expected. We also
22
cannot assure you that this transition will not cause delays or interruptions
in our monitoring and billing activities.
The billing system we are acquiring will require enhancements and ongoing
investments, particularly as traffic volume increases. We may encounter
difficulties in enhancing our systems or integrating new technology into our
systems in a timely and cost-effective manner. Implementation of that system in
Germany did cause some delay in our processing of customer invoices and we
cannot assure that its implementation in other countries will not cause similar
delays. Such difficulties could have a material adverse effect on our ability
to operate efficiently and provide adequate customer service.
We Are Subject to Risks Associated with Converting to the Euro
On January 1, 1999, 11 of the 15 EU member countries adopted the Euro as
their common legal currency, at which time their respective individual
currencies became irrevocably fixed at a rate of exchange to the Euro, and the
Euro became a currency in its own right. Presently, the following 11 currencies
are subject to the Euro conversion: the Austrian Shilling, the Belgian Franc,
the Dutch Guilder, the Finnish Markka, the French Franc, the Deutsche Mark, the
Irish Punt, the Italian Lira, the Luxembourg Franc, the Portuguese Escudo and
the Spanish Peseta.
From January 1, 1999, until January 1, 2002, the Euro will exist in
electronic form only and the participating countries' individual currencies
will persist in tangible form as legal tender in fixed denominations of the
Euro. During this transition period, we must manage transactions with our
customers and our third party vendors in both the Euro and the participating
countries' respective individual currencies. This may cause significant
logistical problems. We may incur increased operational costs and may have to
modify or upgrade our information systems in order to:
. convert individual currencies to Euro;
. convert individual currencies of participating countries into each
other;
. execute conversion calculations utilizing six-digit exchange rates and
other prescribed requirements;
. accommodate the new Euro currency symbol; and
. permit pricing, advertising, billing, accounting, internal financial
calculations, sales and other transactions or practices to be effected
simultaneously in Euro and the participating countries' respective
individual currencies.
Changes in pricing denominations for products once sold and advertised in an
individual currency and now sold and advertised in the Euro could cause
material billing errors and complications. Fluctuations in the business cycles
of a participating country or a failure on any participating country's part to
comply with EC directives could have negative economic effects on other
participating countries, including countries in which we operate. Any of the
above could have a material adverse effect on us and our ability to make
payments under the Senior Notes, the Discount Notes and the PIK Notes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Conversion to the Euro."
We Are Subject to the Risks Associated with Rapid Industry Changes
Changes in the Internet Services Industry
The Internet services industry in which we operate is characterized by
rapidly changing technology, evolving industry standards, emerging competition
and frequent new service, software and other product innovations. We cannot
guarantee that we will be able to identify new service opportunities
successfully and develop and bring new products and services to market in a
timely and cost-effective manner, or that products, software and services or
technologies developed by others will not render our products and services non-
competitive or obsolete. In addition, we cannot provide any assurance that our
product or service developments
23
or enhancements will achieve or sustain market acceptance or be able to address
effectively the compatibility and interoperability issues raised by
technological changes or new industry standards.
As Internet-related industries evolve, we may be required to develop or
acquire additional technological capabilities. In particular, there is
substantial uncertainty as to the transmission media for future ISPs.
Currently, we provide access to Internet services primarily through analog
telephone lines and ISDN lines. Several companies have recently introduced, on
an experimental basis, delivery of Internet access services through cable
television lines. If the Internet becomes accessible by cable modem, or if
screen based telephones, television or other consumer electronic devices or
customer requirements change the way Internet access is provided, we will need
to develop new services or modify our existing services to accommodate these
developments. This pursuit of technological advances may require substantial
time and expense and we cannot be certain that we will succeed in adapting our
business to handle such requirements. Failure to do so could have a material
adverse effect on our business, results of operations and financial condition.
Changes in the Telecommunications Industry
The European telecommunications industry which we are entering is also
changing rapidly due to, among other factors:
. market liberalization;
. continuing privatization of incumbent operators;
. significant technological advancements;
. introductions of new products and services utilizing new technologies;
. increased availability of transmission capacity;
. expansion of telecommunications infrastructure;
. increased use of the Internet for voice and data transmission; and
. the globalization of economies and trade.
These factors are likely to continue to affect our markets and may have
unforeseen effects which could have a material adverse effect on us. In
particular, if the continued growth we anticipate in the demand for voice and
IP services were not to occur or we were precluded from servicing this
anticipated demand, we might not be able to generate sufficient revenues in the
next few years to fund our working capital requirements. Even if these factors
turn out as anticipated, we cannot be sure that our strategy will be successful
in this rapidly evolving market. In addition, further changes may happen at any
time that could significantly affect our operations.
Our success will depend substantially on our ability to predict which of the
many possible current and future networks, products and services will be
important to finance, establish and maintain. In particular, as we further
expand and develop our network, we will become increasingly exposed to the
risks associated with the relative effectiveness of our technology and
equipment. The cost of implementation of emerging and future technologies could
be significant, and we cannot be certain that we will select appropriate
technology and equipment or that we will obtain such new technology on a timely
basis or on satisfactory terms. We may choose new technologies that prove to be
inadequate or incompatible with technologies of our customers, providers of
transmission capacity or other carriers. As new technologies develop, we may be
forced to implement such new technologies at substantial cost to remain
competitive. In addition, competitors may implement new technologies before we
do, allowing such competitors to provide lower priced or enhanced services and
superior quality compared to those we provide. The failure to obtain effective
technology and equipment may hinder our ability to provide competitive products
and services, and may adversely affect the viability of our operations and
could have a material adverse impact on our business.
24
The Markets in Which We Operate Are Highly Competitive
Competition in the Internet Services Market
The Internet services market is extremely competitive and we expect
competition in this market to intensify in the future. We believe that our
ability to compete successfully depends on a number of factors including:
. our market presence;
. our image and reputation;
. our technical expertise;
. the capacity, reliability, latency and security of our network
infrastructure;
. the functionality, performance and quality of our services;
. our ability to provide customization and customer support;
. the variety of services we offer;
. the pricing and quality of products and services offered by competitors
and suppliers;
. the timing of our introductions of new products and services and of
those of our competitors;
. our ability to support industry standards; and
. industry and general economic trends.
Many new start-up businesses as well as existing businesses in different
industries have been drawn by the tremendous growth and potential market size
of the Internet services market. Our current and prospective competitors
include:
. ISPs such as European Computer Industry Research Centre, Xlink, PSInet,
UUNet Technologies, EUnet and Nacamar in Germany; EUnet Multimedia
Network Services, Netway Austria and Cybertron in Austria; and I-Net in
Italy; as well as numerous smaller, regional ISPs in each country;
. established online services such as America Online and CompuServe;
. major systems integrators and computer manufacturers such as Andersen
Consulting and IBM;
. telecommunications companies such as Mannesmann Arcor, Deutsche Telekom
and Viag Interkom in Germany; Telekom Austria and United Telecom Austria
in Austria; and Infostrada, Telecom Italia and Wind in Italy;
. cable operators such as Deutsche Telekom and Primacom; and
. value-added resellers of computer, network and peripheral equipment.
Many of these current and prospective competitors have greater market
presence, engineering and marketing capabilities, brand recognition and
financial, technological, personnel and other resources than we do. As a
result, such competitors may be able to develop and expand their communications
and network infrastructures more quickly, to adapt more swiftly to new or
emerging technologies and changes in customer requirements, to take advantage
of acquisition and other opportunities more readily, and to devote greater
resources to the marketing and sale of their products and services than we can.
Prices for IP services are currently relatively high in Europe. However, the
U.S. market for IP services has been experiencing downward pressure on prices
and certain companies have recently introduced free Internet access services in
Europe in support of their other product and service offerings. As competition
increases, we anticipate comparable price decreases in the European IP market
over the next few years. As a result of an increase in the number of
competitors, and vertical and horizontal integration in the industry, we
currently encounter and expect to continue to encounter significant pricing
pressure. We cannot be certain that we will be able to offset the adverse
effect on revenues of any necessary price reductions by increasing the number
of our customers, generating higher revenue from enhanced services, reducing
costs or otherwise. We cannot assure
25
you that IP service prices will not decline more quickly than our IP
transmission or termination costs. If this were to occur, it could have a
material adverse effect on our gross profit margins.
Competition affects not only the price of our products and services but also
our ability to attract and retain effective, knowledgeable salespeople.
Furthermore, advances in technology as well as changes in the marketplace and
the regulatory environment occur constantly and we cannot predict the effect
that ongoing or future developments may have on us or on the pricing of our
products and services. In addition, we believe that Internet access services
businesses are likely to encounter consolidation in the near future, which
could result in increased price and other competition. This could result in an
erosion of our market share and could prevent us from becoming profitable. In
summary, we cannot be certain that we will have the financial resources,
technical expertise or marketing and support capabilities to compete
successfully in the Internet services market.
Competition in the European Telecommunications Market
Competition in the European telecommunications market, which we are entering,
is intense and is based primarily on price. The opening of the market to
alternative operators, combined with technological advances, has resulted in
significant reductions in retail and wholesale prices for voice services.
Prices declined significantly during 1998 and 1999 and we expect prices to
continue to decline. While decreasing prices fuel growing demand for bandwidth,
they also narrow gross profit margins on long distance voice traffic. Our
ability to compete successfully in this environment will significantly depend
on our ability to generate high traffic volumes from our customers while
keeping our cost of services low. We cannot assure you that we will be able to
do this.
In all of the countries in which Cybernet currently offers its services we
compete with the incumbent operators (Deutsche Telekom in Germany, Austria
Telecom in Austria, Telecom Italia in Italy and Swisscom in Switzerland ). In
all of these countries, the incumbent operators virtually control all access to
local networks and have significant operational economies, including a large
national network and existing operating agreements with other incumbent
operators.
Many of our competitors have greater financial resources and would be in a
better position than we would be to withstand the adverse effect on gross
profit margins caused by price decreases, particularly those competitors that
already own infrastructure and have interconnection or peering arrangements and
thus enjoy a lower cost base than we do. Unless and until we are able to reduce
our cost base, we may not be able to compete on the basis of price if market
prices are reduced below a certain level. Inability to price our services
competitively may in turn cause us to lose customers.
Tax-related Risks
The Discount Notes were issued at a substantial discount from their principal
amount at maturity. If a debt instrument is originally issued at a discount
that is equal to or greater than a de minimis amount, the debt instrument will
be treated as having "original issue discount" ("OID") for U.S. federal income
tax purposes. Although cash interest will not accrue on the Discount Notes
prior to August 15, 2004, and there will be no periodic payments of cash
interest on the Discount Notes prior to February 15, 2005, OID will accrue from
the issue date of the Discount Notes. Consequently, purchasers of the Discount
Notes generally will be required to include amounts in gross income for U.S.
federal income tax purposes in advance of their receipt of the cash payments to
which the income is attributable. Such amounts may be significant as a result
of the substantial OID on the Discount Notes. See "Certain United States
Federal Income Tax Consequences to Holders of Discount Notes--Original Issue
Discount" for a more detailed discussion of the U.S. federal income tax
consequences for the beneficial owners resulting from the purchase, ownership
and disposition of the Discount Notes.
The Discount Notes and the PIK Notes will be "applicable high yield discount
obligations" ("AHYDOs"), as defined in the Internal Revenue Code of 1986,
because (i) the yield to maturity on the Notes exceeds the "applicable federal
rate" in effect at the time of their issuance (the "AFR") plus five percentage
26
points and (ii) the Notes have "significant OID" as that term is defined in the
Internal Revenue Code. As a result, we will not be allowed to take a deduction
for OID accrued on the Notes for U.S. federal income tax purposes until such
time as we actually pay such OID. Moreover, since the yield to maturity on the
Notes for U.S. federal tax purposes until such time as we actually pay such
OID. Moreover, since the yield to maturity on the Notes exceeds the AFR plus 6%
(such excess is called the "Disqualified Yield"), the deduction for OID accrued
on the Notes will be permanently disallowed for U.S. federal income tax
purposes to the extent such interest or OID is attributable to the Disqualified
Yield on the Notes ("Dividend-Equivalent Interest"). For purposes of the
dividends received deduction, the Dividend-Equivalent Interest will be treated
as a dividend to the extent it is deemed to have been paid out of our current
or accumulated earnings and profits. Accordingly, a U.S. Holder of the Notes
that is a corporation may, subject to applicable limitations, be entitled to
take a dividends received deduction with respect to any Dividend-Equivalent
Interest received by such corporate holder on the Notes.
Under Section 163(1) of the Internal Revenue Code, no deduction is permitted
for interest paid or accrued on any indebtedness of a corporation that is
"payable in equity" of the issuer. Debt is treated as payable in equity of the
issuer if a substantial amount of the principal or interest is required to be
paid in, or converted into, equity of the issuer or if the debt is part of an
arrangement which is reasonably expected to result in a substantial amount of
the principal or interest being paid in, or converted into, equity of the
issuer. The legislative history to Section 163(1) indicates that it is not
expected that the provision will affect debt convertible at the holder's option
if the conversion price is significantly higher than the market price of the
stock on the date of the debt issuance. However, the legislative history does
not address debt instruments, such as the Notes, that mandatorily convert if
the market price of the stock reaches certain thresholds. Thus, it is unclear
whether Section 163(1) will disallow our interest deduction with respect to the
Notes.
There Is No Established Market for the PIK Notes or the Discount Notes
The PIK Notes and the Discount Notes are new issues of securities for which
there is currently no trading market. We cannot assure you as to:
. the liquidity of any market for either the PIK Notes or the Discount
Notes that may develop;
. your ability as a holder of either the PIK Notes or the Discount Notes
to sell such Notes; or
. the price at which you would be able to sell any of your PIK Notes or
Discount Notes.
If a market for any of such securities were to develop, they could trade at
prices that may be higher or lower than those reflected by their offering price
depending on many factors, including prevailing interest rates, our operating
results and the market for similar securities. Historically, the market for
such securities has been subject to disruptions that have caused substantial
volatility in the prices of similar securities.
The Market for the Common Stock is Very Limited
The common stock of the Company is currently only traded on certain over-the-
counter markets, including the OTC Bulletin Board operated by The Nasdaq Stock
Market, Inc. and the Freiverkehr of the Berlin and Munich Stock Exchanges, and
on the Neuer Markt of the Frankfurt Stock Exchange. Furthermore, shares of
common stock have only traded on the Neuer Markt since December 9, 1998. The
common stock is not presently listed on any national securities exchange in the
United States and there is currently no established trading market for the
common stock in the United States.
We cannot assure you as to:
. the liquidity of any U.S. market for the common stock of the Company
that may develop;
. your ability as a holder of common stock to sell any shares of common
stock in such United States market; or
. the price at which you would be able to sell any of your shares of
common stock in such United States market.
27
We Do Not Expect to Pay Dividends
The Company does not anticipate paying cash dividends in the foreseeable
future. See "Price Range of Common Stock and Dividend Policy."
USE OF PROCEEDS
We will not receive any proceeds from sales by any selling securityholders of
the Discount Notes or the PIK Notes or shares of common stock.
28
EXCHANGE RATE INFORMATION
The following tables set forth, for the periods indicated, certain
information concerning the Noon Buying Rate for Deutsche Marks, Italian Lire,
Austrian Schillings and Euro, expressed in Deutsche Marks, Italian Lire,
Austrian Schillings and Euro, respectively, per dollar. Such rates are provided
solely for the convenience of the reader and should not be construed as a
representation that Deutsche Marks, Italian Lire, Austrian Schillings or Euro
amounts actually represent such dollar amounts or that such Deutsche Marks,
Italian Lire, Austrian Schillings or Euro amounts could have been, or could be,
converted into dollars at that rate or at any other rate. We did not use such
rates in the preparation of the combined financial statements of the Company
included elsewhere in this prospectus. On the tables for the Deutsche Mark,
Italian Lira and Austrian Schilling, the columns entitled "Average Rate"
represent the average Noon Buying Rates on the last business day of each month
during the relevant period. As of January 1, 1999, the Deutsche Mark, the
Italian Lira and the Austrian Schilling began trading at fixed rates against
the Euro.
Deutsche Mark Exchange Rate Average Period-
Year Ended December 31, Rate High Low End Rate
- --------------------------- -------- -------- -------- --------
1995........................................ 1.4261 1.5612 1.3565 1.4345
1996........................................ 1.5070 1.5655 1.4354 1.5387
1997........................................ 1.7394 1.8810 1.5413 1.7991
1998........................................ 1.7588 1.8542 1.6060 1.6670
Italian Lira Exchange Rate Average Period-
Year Ended December 31, Rate High Low End Rate
- -------------------------- -------- -------- -------- --------
1995........................................ 1,628.95 1,736.25 1,569.00 1,584.00
1996........................................ 1,538.37 1,602.00 1,496.00 1,519.00
1997........................................ 1,712.15 1,840.75 1,515.70 1,769.00
1998........................................ 1,737.19 1,827.60 1,592.00 1,654.00
Austrian Schilling Exchange Rate Average Period-
Year Ended December 31, Rate High Low End Rate
- -------------------------------- -------- -------- -------- --------
1995........................................ 9.8733 10.9845 9.5903 10.0810
1996........................................ 10.6002 11.0070 10.1000 10.8340
1997........................................ 12.2386 13.2330 10.8400 12.6340
1998........................................ 12.1940 13.0160 11.3230 11.6040
Euro Exchange Rate Period-
Month End 1999(a) High Low End Rate
- ------------------ -------- -------- --------
January 31........................................... 0.8794 0.8466 0.8794
February 28.......................................... 0.9114 0.8819 0.9095
March 31............................................. 0.9332 0.9079 0.9252
April 30............................................. 0.9466 0.9223 0.9466
May 28............................................... 0.9595 0.9270 0.9595
June 30.............................................. 0.9713 0.9509 0.9699
July 31.............................................. 0.9863 0.9329 0.9351
August 31............................................ 0.9607 0.9239 0.9486
September 30......................................... 0.9684 0.9361 0.9389
October 30........................................... 0.9508 0.9185 0.9508
November 30.......................................... 0.9924 0.9518 0.9924
December 31.......................................... 0.9984 0.9744 0.9930
- --------
(a) On January 4, 2000, the Noon Buying Rate was $1.00 = (Euro)0.9700 and the
Euro was fixed to the Deutsche Mark at (Euro)1.00 = DM 1.9558, to the
Italian Lira at (Euro)1.00 = Lit. 1,936.27 and to the Austrian Schilling at
(Euro)1.00 = ATS 13.7603, as reported by the United States Federal Reserve
Bank of New York.
29
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Price Range Of Common Stock
Our common stock is traded on the OTC Bulletin Board under the symbol "ZNET"
and on the Neuer Markt of the Frankfurt Stock Exchange under the Symbol "CYN."
Our common stock also trades on the Freiverkehr of the Berlin and Munich Stock
Exchanges under the securities identification number WP-Kenn-Nr. 906 623. Our
principal foreign trading market is the Neuer Markt. As of August 2, 1999, the
Company had 169 registered stockholders of record. The closing price of the
common stock on the OTC Bulletin Board and the Neuer Markt on January 4, 2000
was $8.750 per share and (Euro)9.100 per share, respectively.
The following tables set forth for the periods indicated the high and low bid
prices for the common stock as reported each quarterly period in 1997 and 1998
and each monthly period in 1999 on the OTC Bulletin Board and the Neuer Markt.
Prices on the OTC Bulletin are reported in The NASDAQ Trading and Marketing
Services' Trading Activity Reports, Trade and Quote Summary. Prices on the
Neuer Markt are reported for trades on the electronic trading system of
Deutsche Borse A.G. The prices are inter-dealer prices, do not include retail
mark up, mark down or commission and may not necessarily represent actual
transactions.
otc bulletin board
High Low
1997 ------------ ------------
Third Quarter(/1/)............................ $ 11.250 $9.310
Fourth Quarter................................ $ 16.250 $7.750
High Low
1998 ------------ ------------
First Quarter................................. $ 34.500 $11.500
Second Quarter................................ $ 28.750 $20.000
Third Quarter................................. $ 29.875 $18.000
Fourth Quarter................................ $ 37.250 $13.000
High Low
1999 ------------ ------------
January....................................... $ 47.000 $29.625
February...................................... $ 43.875 $33.500
March......................................... $ 36.000 $26.500
April......................................... $ 27.750 $23.000
May........................................... $ 24.000 $20.000
June.......................................... $ 20.000 $16.000
July.......................................... $ 21.750 $14.500
August........................................ $ 18.000 $14.000
September..................................... $ 20.875 $ 14.250
October....................................... $ 16.000 $ 13.750
November...................................... $15,500 $8.1250
December...................................... $12.000 $8.5075
- --------
(1) On September 17, 1997, Cybernet Utah, the Company's predecessor, acquired
Cybernet AG. Prior to that date, Cybernet Utah had no material business
activities, assets or liabilities. Accordingly, stock prices for the period
prior to September 17, 1997, do not relate to the business in which the
Company is presently engaged.
neuer markt of the frankfurt stock exchange
High Low
1998 ------------ ------------
Fourth Quarter (beginning December 9, 1998)... (Euro)33.029 (Euro)24.900
High Low
1999 ------------ ------------
January....................................... (Euro)41.200 (Euro)26.600
February...................................... (Euro)39.900 (Euro)31.400
March......................................... (Euro)32.500 (Euro)24.500
April......................................... (Euro)24.700 (Euro)21.650
May........................................... (Euro)23.400 (Euro)20.300
June.......................................... (Euro)19.500 (Euro)16.400
July.......................................... (Euro)19.800 (Euro)14.200
August........................................ (Euro)17.450 (Euro)13.300
September..................................... (Euro)19.400 (Euro)14.800
October....................................... (Euro)15.850 (Euro)13.300
November...................................... (Euro)15.200 (Euro)7.400
December...................................... (Euro)11.400 (Euro)8.900
Dividend Policy
The Company has never paid dividends on its common stock.
30
CAPITALIZATION
The following table sets forth our cash and capitalization as of September
30, 1999. This table should be read in conjunction with the Consolidated
Financial Statements, the notes thereto, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," included elsewhere
in this prospectus.
At
September 30,
1999
-------------
Cash:
Cash and restricted cash......................................... $198,456
========
Debt:
Overdrafts and short-term borrowings............................. $ 88
Current Portion long-term debt and capital lease obligations..... 1,552
Capital lease obligations........................................ 1,175
Senior Notes..................................................... 98,289
PIK Notes........................................................ 27,095
Discount Notes................................................... 50,815
--------
Total debt................................................... $179,014
--------
Shareholders Equity:
Common Stock $.001 par value, 50,000,000 shares authorized,
20,729,988 issued and
outstanding................................................... $ 21
Preferred stock $.001 par value, 50,000,000 shares authorized,
6,360,000 shares issued and outstanding....................... 5
Additional paid in capital..................................... 131,230
Accumulated deficit............................................ (24,338)
Cumulative translation adjustment.............................. (3,893)
--------
Total shareholders equity.................................... $103,025
--------
Total Capitalization....................................... $282,039
========
31
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The selected consolidated financial data as of and for the years ended
December 31, 1996, 1997, and 1998, set forth below, are derived from our
audited Consolidated Financial Statements included elsewhere in this
prospectus. The selected consolidated financial data as of and for the nine
months ended September 30, 1998 and 1999 set forth below, are derived from our
unaudited Interim Financial Statements included elsewhere in this prospectus.
The pro forma consolidated financial data for the year ended December 31, 1998
and as of and for the nine months ended September 30, 1999, set forth below,
are derived from our unaudited Pro Forma Consolidated Financial Statements
included elsewhere in this prospectus. The financial data set forth below have
been prepared in accordance with United States generally accepted accounting
principles. The unaudited Interim Financial Statements included in this
prospectus include all adjustments, consisting of normal recurring adjustments,
that management considers necessary for a fair presentation of the financial
position and results of operations for the interim periods.
The information set forth below should be read in conjunction with our
audited Consolidated Financial Statements, our unaudited Interim Financial
Statements and our unaudited Pro Forma Consolidated Financial Statements, and
the related notes thereto included elsewhere in this prospectus. Historical and
pro forma results of operations presented herein are not necessarily indicative
of results of operations for future periods. Our development and expansion
activities, including acquisitions, during the periods set forth below
significantly affect the comparability of this information from one period to
another. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Nine months ended
Years ended December 31, September 30,
------------------------------------ -----------------------------
Pro forma Pro forma
1996 1997 1998 1998 (/1/) 1998 1999 1999 (/1/)
----- ------- -------- ---------- ------- -------- ----------
(in thousands, except per share data)
Statement of Operations
Data:
Revenue
Internet Projects...... $ 217 $ 1,598 $ 5,139 $ 6,206 $ 3,118 $ 3,452 $ 3,884
Network Services....... 91 716 3,495 11,184 2,261 11,292 15,167
----- ------- -------- -------- ------- -------- --------
Total revenue.......... 308 2,314 8,634 17,390 5,379 14,744 19,051
Cost of revenues
Internet Projects...... 237 1,495 4,699 5,500 1,887 3,238 3,551
Network Services....... 119 866 4,067 8,949 2,619 10,702 13,367
Depreciation and
amortization (/2/).... 7 171 1,674 2,050 680 2,374 2,504
----- ------- -------- -------- ------- -------- --------
Total cost of
revenues.............. 363 2,532 10,440 16,499 5,186 16,314 19,422
Gross profit (loss)..... (55) (218) (1,806) 891 193 (1,570) (371)
Operating expenses:
General and
administrative
expenses.............. 263 482 1,576 3,512 1,241 9,377 10,502
Marketing expenses..... 165 1,188 3,844 5,536 3,268 7,244 7,469
Research and
development........... 179 280 2,941 3,858 1,166 3,796 3,914
Depreciation and
amortization (/3/).... 22 116 880 5,011 475 2,922 4,409
----- ------- -------- -------- ------- -------- --------
Total operating
expenses.............. 629 2,066 9,241 17,917 6,150 23,339 26,294
----- ------- -------- -------- ------- -------- --------
Operating loss.......... (684) (2,284) (11,047) (17,026) (5,957) (24,909) (26,665)
Interest income
(expense), net......... (2) (39) (43) (267) (47) (6,111) (6,158)
Foreign currency
translation gain
(loss)................. -- -- -- -- -- (651) (651)
----- ------- -------- -------- ------- -------- --------
Loss before taxes and
minority interest..... (686) (2,323) (11,090) (17,293) (6,004) (31,671) (33,474)
Income tax benefit..... 402 1,339 6,173 6,753 3,226 13,668 13,624
Minority interest...... -- -- 145 145 -- 101 101
----- ------- -------- -------- ------- -------- --------
Net loss................ $(284) $ (984) $ (4,772) (10,395) $(2,778) $(17,902) $(19,749)
===== ======= ======== ======== ======= ======== ========
Basic and diluted loss
per share............. $(.12) $ (.12) $ (.30) $ (.64) $ (0.18) $ (0.92) $ (1.00)
===== ======= ======== ======== ======= ======== ========
32
Nine months ended
Years ended December 31, September 30,
----------------------------------- --------------------
Pro forma Pro forma
1996 1997 1998 1998 (/1/) 1999 1999 (/1/)
----- ------- ------- ---------- -------- ----------
(in thousands, except number of customers data and
ratios)
Other Financial and
Operating Data:
Number of Network
Services customers
(/4/).................. 166 4,061 6,923 42,391 (/5/) 10,830 50,724(/5/)
EBITDA (/6/)............ $(655) $(1,997) $(8,493) $(9,965) $(20,264) $(20,403)
Capital expenditures
(/7/).................. 552 1,708 6,034 8,713 10,724
Ratio of earnings to
fixed charges (/8/).... -- -- -- --
December 31, September 30,
---------------------- ----------------
1996 1997 1998 1998 1999
------- ------ ------- ------- --------
(in thousands)
Balance Sheet Data:
Working capital (deficiency) (/9/)..... $ 339 $ 891 $37,751 $ 2,567 $130,899
Total assets........................... 2,211 12,617 79,445 33,247 302,177
Long-term debt (/10/).................. -- 42 1,383 1,133 177,503
Total stockholders' equity............. 1,790 8,908 67,359 21,057 103,025
- --------
(1) Pro forma statement of operations is based on the unaudited Pro Forma
Consolidated Financial Statements included elsewhere in this prospectus.
The pro forma statement of loss for the year ended December 31, 1998 is
based on the historical statement of loss adjusted as if the Open:Net,
Vianet and Flashnet acquisitions were completed on January 1, 1998 and the
pro forma statement of loss for the nine months ended September 30, 1999 is
based on the historical statements of loss adjusted as if the Flashnet
acquisition had been completed on January 1, 1999. The pro forma data does
not purport to represent what our results of operations would have been had
these acquisitions been made on such dates.
(2) Represents depreciation and amortization of capitalized costs related to
investments in product development, designing our network (including
related software) and building network capacity (including related
personnel and consulting costs).
(3) Represents depreciation of property and equipment and amortization of
acquired goodwill.
(4) Number of customers as of December 31, 1996, 1997, and 1998, and March 31,
1999.
(5) Includes 32,652 and 39,894 Flashnet customers (of which 1,096 and 1,625
were business customers and 31,556 and 38,269 were residential customers)
at December 31, 1998 and March 31, 1999, respectively.
(6) We define EBITDA as loss before interest, income taxes, minority interest,
depreciation and amortization. EBITDA is included because management
believes it is a useful indicator of a company's ability to incur and
service debt. EBITDA should not be considered as a substitute for operating
earnings, net income, cash flow or other statements of operations or cash
flow data computed in accordance with US GAAP or as a measure of our
results of operations or liquidity. Funds depicted by this measure may not
be available for management's discretionary use (due to covenant
restrictions, debt service payments and other commitments). Because all
companies do not calculate EBITDA identically, the presentation of EBITDA
contained herein may not be comparable to other similarly entitled measures
of other companies.
(7) Pro forma capital expenditures for the nine months ended September 30, 1999
were not available.
(8) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of losses before income taxes and minority interest, plus fixed
charges. Fixed charges consist of interest expense. Earnings were
insufficient to cover fixed charges by $(684), $(2,284), $(10,893),
$(5,890), $(16,616) and $(25,133) for the years ended December 31, 1996,
1997 and 1998, for the nine months ended September 30, 1999, the year ended
December 31, 1998 pro forma and the nine months ended September 30, 1999
pro forma, respectively.
(9) We define working capital as total current assets less total current
liabilities.
(10) Long-term debt includes obligations under capital lease agreements.
33
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
prospectus. The accompanying unaudited Pro Forma Consolidated Statements of
Loss for the year ended December 31, 1998 and the nine months ended
September 30, 1999, are based on the historical consolidated financial
statements of the Company contained elsewhere in this prospectus, adjusted as
if the acquisitions of Open:Net, Vianet and Flashnet, 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.
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 of Open:Net, Vianet and
Flashnet, 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 prospectus.
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.
34
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 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 expenses.... 2,941 917(c) 3,858
Depreciation and amortization........ 880 3,885(c)(d) 4,765
---------- -------- ----------
Total operating expenses......... 9,241 8,430 17,671
---------- -------- ----------
Operating loss....................... (11,047) (5,733) (16,780)
Interest expense..................... 197 234(e) 431
Interest income...................... 154 10(e) 164
---------- -------- ----------
Loss before taxes and minority inter-
est................................. (11,090) (5,957) (17,047)
Income tax benefit................... 6,173 580(f) 6,753
Minority interest.................... 145 -- 145
---------- -------- ----------
Net loss............................. $ (4,772) $ (5,377) $ (10,149)
========== ======== ==========
Basic and diluted loss per share..... $ (0.30) $ (0.62)
========== ==========
Number of shares used to compute
earnings per share.................. 16,012,653 370,926(g) 16,383,579
========== ======== ==========
35
Pro Forma Consolidated Statements Of Loss
Nine months ended September 30, 1999
(unaudited)
Historical Pro Forma
Company Acquisitions as Adjusted
------------- ------------- -------------
(in thousands, except per share data)
Revenue
Internet Projects......... $ 3,452 $ 432 (a) $ 3,884
Network Services.......... 11,292 3,875 (a) 15,167
------------- ---------- -------------
Total revenues.............. 14,744 4,307 19,051
Cost of revenues
Internet Projects......... 3,238 313 (b) 3,551
Network Services.......... 10,702 2,665 (b) 13,367
Depreciation and amortiza-
tion..................... 2,374 130 (b) 2,504
------------- ---------- -------------
Total cost of revenues.. 16,314 3,108 19,422
------------- ---------- -------------
Gross (loss)................ (1,570) 1,199 (371)
General and administrative
expenses................... 9,377 1,125 (c) 10,502
Marketing expenses.......... 7,244 225 (c) 7,469
Research and development ex-
penses..................... 3,796 118 (c) 3,914
Depreciation and amortiza-
tion....................... 2,922 1,487 (c)(d) 4,409
------------- ---------- -------------
Total operating ex-
penses................. 23,339 2,955 26,294
------------- ---------- -------------
Operating loss.............. (24,909) (1,756) (26,665)
Interest expense............ 8,294 47 (e) 8,341
Interest income............. 2,183 -- 2,183
Foreign currency translation
gain (loss)................ (651) -- (651)
------------- ---------- -------------
Loss before taxes........... (31,671) (1,803) (33,474)
Minority interest income
(expense).................. 101 -- 101
Income tax benefit.......... 13,668 (44)(f) 13,624
------------- ---------- -------------
Net loss.................... $ (17,902) $ (1,847) $ (19,749)
============= ========== =============
Basic and diluted loss per
share...................... $ (0.92) $ (1.00)
============= =============
Number of shares used to
compute loss per share..... 19,417,249 332,329 (g) 19,749,578
============= ========== =============
36
Notes To The Pro Forma Consolidated Financial Statements
(All dollar amounts in thousands, unless otherwise indicated)
(a) Includes the revenues of the acquisitions of Open:Net, Vianet and Flashnet
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 of Open:Net, Vianet and
Flashnet 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 of Open:Net, Vianet and
Flashnet 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........ -- -- 1,125 1,125
Marketing expenses......................... -- -- 225 225
Research and development expenses.......... -- -- 118 118
Depreciation and amortization.............. -- -- 118 118
(d) Represents the amortization of goodwill and other intangible assets arising
from the acquisitions of Open:Net, Vianet and Flashnet.
Vianet Open:Net Flashnet Total
------ -------- -------- -----
1998 Pro Formas
Amortization................................. 766 168 2,737 3,671
1999 Pro Formas
Amortization................................. -- -- 1,369 1,369
37
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 $26,584 $33,608
Less: net assets acquired............ (37) 130 (790) (697)
------ ------ ------- -------
Excess of purchase price over net as-
sets acquired....................... $4,520 $2,411 $27,374 $34,305
Allocated to:
Goodwill............................. $2,063 $2,299 $27,374 $31,736
Customer base........................ 1,945 112 -- 2,057
Management contracts................. 512 -- -- 512
------ ------ ------- -------
$4,520 $2,411 $27,374 $34,305
====== ====== ======= =======
In addition to the 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 of Open:Net,
Vianet and Flashnet, 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 19,417,249
Shares issued in connection with certain of the
Acquisitions and not reflected in historical
weighted average shares;
Open:Net acquisition............................. 38,597 --
Flashnet acquisition............................. 332,329 332,329
---------- ----------
16,383,579 19,749,578
========== ==========
38
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 prospectus. The discussion of the results of
operations of Vianet, with respect to the fiscal years ended 1998 and 1997, is
based on financial statements included elsewhere in this prospectus. Such
financial statements have been prepared in accordance with United States
generally accepted accounting principles. 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."
Overview
General
We have experienced substantial rates of revenue growth since commencing
significant operations in 1996. Our revenues have grown from $307,673 in 1996
to $2,314,021 in 1997 and to $8,633,528 in 1998 (approximately $17,390,000 in
1998 on a pro forma basis). This revenue growth has been generated both
internally, as we have significantly expanded our customer base, and through
acquisitions.
Since 1996, we have acquired seven companies:
. Cybernet E-Commerce. In September 1997, we acquired 100% of Artwise,
which was later renamed Cybernet E-Commerce, the financial results of
which are included in our Consolidated Financial Statements from the
date of that acquisition.
. Eclipse. In December 1997, we acquired 66% of Eclipse, but did not
include the financial results of that company's operations in our
Consolidated Financial Statements until 1998 because its 1997 financial
results from the date of that acquisition were immaterial to our
consolidated results. In June 1999, we acquired the remaining 34%.
. Open:Net. In August 1998, we acquired 100% of Open:Net, the financial
results of which are included in our Consolidated Financial Statements
from the date of that acquisition.
. Vianet. In December 1998, we acquired 100% of Vianet but did not include
the financial results of that company's operations in our Consolidated
Financial Statements until the first quarter of 1999 because the 1998
financial results from the date of that acquisition were immaterial to
our consolidated results. We have, however, included below a discussion
of Vianet's results of operations for its fiscal years 1998 and 1997.
. Sunweb. In May 1999, we acquired 51% of Sunweb. Because that acquisition
occurred in May 1999, the financial results of that company's operations
are not included in our Consolidated Financial Statements for 1998 nor
in our results of operations for the three months ended on March 31,
1999.
. Flashnet. In June 1999, we acquired 100% of Flashnet, a leading Italian
ISP through which we gained access to all major business centers in
Italy.
. Novento. In October 1999, we acquired a majority interest in Novento
Telecom A.G. and its sister organization, Multicall Telefonmarketing
A.G., which are German direct marketing organizations for communications
services.
Our recent acquisition history limits the comparability of the historical
financial information discussed herein.
39
The following table sets forth, for the periods indicated, the items of our
Consolidated Statements of Loss expressed as a percentage of total revenues:
Percent of Total Revenues
----------------------------------------------
Nine months
Years ended December 31, ended September 30,
-------------------------- -------------------
1996 1997 1998 1998 1999
-------- -------- -------- --------- ---------
Revenue
Internet Projects.............. 70.6% 69.1% 59.5% 58.0% 23.4%
Network Services............... 29.4% 30.9% 40.5% 42.0% 76.6%
Total Revenues............... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Revenues
Internet Projects.............. 77.0% 64.6% 54.4% 35.1% 22.0%
Network Services............... 38.8% 37.4% 47.1% 48.7% 72.6%
Depreciation and amortization.. 2.2% 7.4% 19.4% 12.6% 16.0%
Total cost of revenues....... 118.0% 109.4% 120.9% 96.4% 110.6%
Gross loss..................... -18.0% -9.4% -20.9% -3.6% 10.6%
Operating Expenses
General and administrative
expenses...................... 85.5% 20.8% 18.3% 23.1% 63.6%
Marketing expenses............. 53.5% 51.4% 44.5% 60.8% 49.1%
Research and development....... 58.2% 12.1% 34.1% 21.7% 25.7%
Depreciation and amortization.. 6.9% 5.0% 10.2% 8.8% 19.8%
Total operating expenses..... 204.1% 89.3% 107.1% 114.4% 158.3%
Operating loss................. -222.1% -98.7% -128.0% 110.8% 169.0%
Interest expense............... -0.7% -1.7% -2.3% 2.1% 56.3%
Interest income................ -- -- 1.8% 1.2% 14.8%
Realized foreign currency
translation losses............ -- -- -- -- 4.4%
Loss before taxes and minority
interest...................... -222.8% -100.4% -128.5% 111.7% 214.8%
Income tax benefit............. 130.6% 57.9% 71.5% 60% 92.7%
Net loss before minority
interest...................... -92.2% -42.5% -57.0% 51.7% 122.1%
Minority interest.............. -- -- 1.7% 0.0% 0.7%
Net loss....................... -92.2% -42.5% -55.3% 51.7% 121.4%
Revenues
We classify our revenues into two categories: revenues from Internet Projects
and revenues from Network Services. Internet Project revenues result from
consulting, installation fees, training of our customers' employees and
hardware and software sales resulting from, for example, the installation of
VPNs, websites, e-commerce solutions and customer servers in our data centers.
Internet Project revenues for any particular project depend upon its size and
complexity. An Internet Project is typically completed within three months and
the related revenues are recognized upon completion and customer acceptance of
the related project.
In most cases, after completion of an Internet Project, we derive recurring
revenues from the ongoing management and monitoring of the services and
solutions we have set up. We record these recurring revenues under Network
Services revenues. Network Services revenues are primarily derived from
recurring connectivity charges and include maintenance and usage charges
related to VPNs, co-location and hosting services. Network Services revenues
also result from eight affinity groups with which we have specific contractual
arrangements. These affinity groups act as resellers of our connectivity
services and their members become our customers. The customers who came to us
through affinity groups tend to be smaller customers. The majority of our
40
Network Services revenues are from connectivity charges. We recognize these
revenues when the services are provided to our customers. Revenues from Network
Services in 1998 constituted 40.5% of our total revenues compared with 30.9%
for 1997. We expect Network Services revenues to continue to increase as a
percentage of total revenues as we grow our customer base and thereby create a
larger portion of recurring revenues. In 1998, Flashnet had total revenues of
Lit. 8,334,043 thousand ($4,597,003). We also expect that our acquisition of
Flashnet, which has relatively less Internet Project revenues, will contribute
to this shift.
We currently encounter and expect to continue to encounter significant
downward pressure on the prices of our products and services. We expect that
these price declines will dampen revenues for the second quarter.
The table below summarizes the revenues and customer evolution for Internet
Projects and Network Services for the years ended December 31, 1996, 1997 and
1998, respectively and the three months ended March 31, 1999:
As at and
As at and for the for the
years ended December three
31, months ended
--------------------- March 31,
1996 1997 1998 1999
------ ------ ------ ------------
Internet Projects
Internet Project Customers(a)............. 12 49 122 O19
Internet Project Revenues ($'000)......... 217 1,598 5,139 1,392
Average Internet Project Revenue per
Customer ($)............................. 18,108 32,610 42,124 73,274
Network Services
Network Services Business Customers
Number of Customers(b)................... 166 2,120 3,077 6,095
Average Number of Customers(c)........... 83 1,143 2,599 5,994
Churn Percentage(d)...................... N/A 4.8% 0.8% 0.4%
Revenues ($'000)......................... 91 659 2,680 2,279
Average Revenues per Customer(e)($)...... 1,093 577 1,031 380
Network Services Affinity Group Customers
Number of Customers(b)................... -- 1,941 3,846 4,735
Average Number of Customers(c)........... -- 971 2,894 4,291
Revenues ($'000)......................... -- 57 814 183
Average Revenues per Customer(e)($)...... -- 58 281 43
Total Network Services Customers
Number of Customers(b)................... 166 4,061 6,923 10,830
Average Number of Customers(c)........... 83 2,114 5,492 10,285
Revenues ($'000)......................... 91 716 3,494 2,462
Average Revenues per Customer(e)($)...... 1,093 339 636 239
- --------
(a) Represents aggregate customers during the relevant period.
(b) Number of customers at end of relevant period.
(c) Calculated as the arithmetic average of beginning-of-period and end-of-
period customers. The beginning of period customers for the three months
ended March 31, 1999 include 2,816 Network Services Business Customers of
Vianet (not included in number of customers as of December 31, 1998).
(d) Calculated as the number of customers lost during the period as a
percentage of the average number of customers for the period.
(e) Calculated as revenues for the period divided by average number of
customers for the period.
Cost of Revenues
Cost of revenues consists principally of (i) telecommunications expenses,
(ii) personnel costs, (iii) cost of hardware and software sold, (iv)
amortization of product development costs, (v) depreciation of network
infrastructure, and (vi) service and consulting expenses. Telecommunications
expenses mainly represent the cost of transporting Internet traffic from our
customers' locations through a local telecommunications carrier to
41
one of our access nodes and the cost of leasing lines to interconnect our
backbone nodes. Like our revenues, we classify our cost of revenues (other than
depreciation and amortization costs) according to whether they are incurred in
connection with Internet Projects or with Network Services. Additionally, we
include in our cost of revenues certain depreciation and amortization of
capitalized costs related to investments in product development, designing our
network (including related software), and building network capacity (including
related personnel and consulting costs). These costs are amortized over a
period not exceeding four years. As we develop our network capacity, we expect
to record increased costs for depreciation and amortization of network
infrastructure.
In 1998, Flashnet's cost of revenues was Lit. 6,615,614 thousand ($3,649,129)
representing 79.4% of its revenues, a lower percentage than our own. We
therefore expect that in 1999 our acquisition of Flashnet will have a positive
effect on our gross margin.
General and Administrative Expenses
General and administrative expenses consist principally of salaries and other
personnel costs for our administrative staff, office rent and utilities. In
1998, Flashnet's general and administrative expenses were Lit. 2,586,000
thousand ($1,426,421), representing approximately 31.0% of revenues. This is
approximately equal to the relationship between our general and administrative
expenses and revenues.
Marketing Expenses
Marketing expenses consist principally of salaries of our sales force and
advertising and communication expenditures. As we continue to grow our sales
force and to increase brand awareness, we anticipate that marketing expenses
will continue to increase. In 1998, Flashnet had marketing expenses of Lit.
1,114,000 thousand ($614,475) representing 13.4% of revenues.
Research and Development
Research and development expenses consist principally of personnel costs of
employees working on the development of new products and services, consulting
costs and certain overhead items associated with these activities. In 1998,
Flashnet had research and development expenses of Lit. 834,000 thousand
($460,029) representing 10.0% of revenues compared to 34.1% for Cybernet.
Depreciation and Amortization
Depreciation and amortization expense consists of depreciation of capital
expenditures for property and equipment purchased to build the corporate
infrastructure necessary to support our anticipated growth as well as
amortization of goodwill related to our acquisitions. Goodwill represents the
excess of the purchase price of companies we purchased over the fair value of
the tangible assets and identifiable intangible assets of those companies and
is amortized over 10 years. This expense in our income statement does not
include the depreciation and amortization described under "--Cost of Revenues"
above.
Interest Expense and Income
Interest expense consists principally of interest associated with capital
lease obligations which we undertook in 1998 to finance the purchase of
computer equipment. Interest income consists of interest earned on excess cash
balances, including those resulting from the proceeds of our 1998 equity
offerings. Our interest expense and income will increase significantly in
future periods as a result of interest accruing on the Senior Notes, the
Discount Notes and the PIK Notes and interest generated by the collateral
account created in connection with the issuance of the Senior Notes.
42
Income Taxes
Our income tax benefits result largely from the operating losses of our
German subsidiaries. Under current German law, the tax benefit resulting from
these losses can be carried forward indefinitely.
Other Comprehensive Loss: Foreign Currency Translation Adjustments
Foreign currency translation adjustments result from the translation of the
assets and liabilities of our international subsidiaries from their local
reporting currency into United States dollars using current exchange rates at
the balance sheet dates. Statement of operations items are translated at
average exchange rates prevailing during the period. The resulting translation
adjustments are recorded in the foreign currency translation adjustment account
in equity. Accordingly, we recognize unrealized foreign exchange gains with
respect to non-United States dollar-denominated assets when the value of the
United States dollar decreases with respect to these other currencies and
unrealized foreign exchange losses when the relative value of the United States
dollar increases.
Results of Operations--Nine Months Ended September 30, 1998 Compared to the
Nine Months Ended September 30, 1999
Revenues
Total revenues increased 174.1% from $5,378,365 in the first nine months of
1998 to $14,743,590 in the first nine months of 1999, primarily as a result of
increased Network Services revenues. Internet Project revenues increased 10.7%
from $3,117,810 in the first nine months of 1998 to $3,451,588 for the same
time period in 1999 while Network Services revenues increased 399.5% from
$2,260,555 to $11,292,001. The first nine months Network Services revenues
represented 76.6% of total revenues in 1999, as compared with 42.0% in 1998.
The increase in revenues from Network Services is mainly a result of
expansion of our customer base, which provides us with a stream of recurring
revenues. Although 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 $2,808,707 of
Vianet revenues, $258,305 of Sunweb revenues (second and third quarters of
1999), and $2,825,593 of Flashnet revenues (third quarter of 1999 only) in the
first nine months of 1999. Vianet's revenues are derived primarily from Network
Services, Sunweb's revenues are more heavily weighted toward projects, and
Flashnet's revenues are principally derived from Network Services. Excluding
the impact of consolidating Vianet's, Open:Net's, Sunweb's and Flashnet's
revenues, Network Services revenues in the first nine months of 1999 would have
increased 64.6% from the first nine months of 1998.
Cost of Revenues
Cost of revenues increased 214.5% from $5,186,602 in the first nine months of
1998 to $16,313,600 in the first nine months of 1999. Cost of revenues for
Internet Projects increased 71.6% from $1,887,073 to $3,237,129. Cost of
revenues for Network Services increased 308.6% from $2,619,227 to $10,701,583.
A portion of the increase in Network Services costs reflects the consolidation
of Vianet, Sunweb and Flashnet. Excluding these acquisitions, our cost of
revenues increased approximately 137.3%. This increase was due to expenditures
for personnel and expenses associated with the expansion of our network (newly
hired personnel for network deployment and management and network facilities)
and the cost of leasing additional lines to provide the increased capacity we
will require as our business grows. In the first nine months of 1999, the
Company's technical and operational staff increased from 61 to 151 (excluding
the acquisition of Vianet, Sunweb and Flashnet) and 99 to 214 on a pro forma
basis (i.e. including these acquisitions).
43
Gross Margin (Loss)
While total revenues increased significantly in the first nine months of
1999, larger increases in the cost of revenues led to a decline in gross margin
from $191,763 in the first nine months of 1998 to $(1,570,010) in the first
nine months of 1999. Cost of revenues as a percentage of total revenues
increased from 96.4% in the first nine months of 1998 to 110.6% 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 in 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 655.5% from $1,241,134 in the
first nine months of 1998 to $9,376,941 in the first nine months of 1999. These
expenses constituted 63.6% of revenues in the first nine months of 1999,
compared to 23.1% for the same period in 1998. During the first nine months of
1999, the Company added more than 50 employees in general and administrative
functions. Personnel additions were made to develop and manage information
systems, strengthen finance and accounting functions and better manage customer
care and billing. In addition, the Company added senior management to oversee
corporate development and international operations.
The impact of consolidating Vianet, Sunweb and Flashnet in the first nine
months of 1999 has also had an unfavorable impact on these expenses. Vianet,
Sunweb and Flashnet together incurred general and administrative expenses of
$1,088,522 in the first nine months of 1999.
Marketing Expenses
Marketing expenses increased 121.6% from $3,268,811 in the first nine months
of 1998 to $7,244,310 in the first nine months 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 Vianet, Sunweb and Flashnet
in 1999, which together incurred marketing expenses of $1,062,833. Although we
expect marketing expenses to decrease as a percentage of revenues over time, we
expect marketing expenses to increase as we increase spending to further
establish our trade name locally and internationally. We are beginning both
national and international advertising campaigns, the first step of which is
the launch of the new Cybernet-Italy organization scheduled for November 1999.
Research and Development
Research and development expenditures increased 225.6% from $1,166,003 in the
first nine months of 1998 to $3,796,087 in the first nine months of 1999, as
the Company continues to invest in the development of new products and
services. We are currently performing a detailed assessment of our current
products and services in an attempt to better focus our products and services
to be offered to customers in the future. As part of this process we are
evaluating the strategic significance of certain products in the Company's
portfolio.
Depreciation and Amortization
Depreciation and amortization increased 514.3% from $475,718 in the first
nine months of 1998 to $2,922,163 in the first nine months 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 the acquisition of
Sunweb and
44
Flashnet in 1999. In addition, depreciation expense increased due to increased
investments in computer hardware and software and office facilities.
Interest Expense and Income
Interest expense increased from $114,179 in the first nine months of 1998 to
$8,294,452 in the same period of 1999. This was primarily a result of the
interest expense incurred during the third quarter of 1999 on units sold in
July which consisted of the Senior Notes and warrants to purchase an aggregate
of 4,534,661 shares of our common stock (the "Warrants"). Our interest income
increased from $66,712 in the first nine months of 1998 to $2,182,718 in the
same period of 1999. This increase is a result of interest earned on cash
proceeds from our December 1998 equity offering and the interest earned on the
proceeds from the private offering of units in July 1999 (the "Private Unit
Offering"), and the private offerings of the PIK Notes (the "Private PIK Notes
Offering") and the Discount Notes (the "Private Discount Notes Offering") in
August 1999.
Realized Foreign Currency Translation Gains or Losses
The Company incurred $650,644 of foreign exchange losses in the first nine
months of 1999.
Other Comprehensive Loss: Foreign Currency Translation Adjustments
Foreign currency translation adjustments resulted in a loss of $172,686 in
the first nine months of 1998 and a loss of $3,891,924 in the first nine months
of 1999. The increase in 1999 over 1998 is a result of the strengthening of the
U.S. dollar in the first nine months of 1999 in relation to the Deutsche Mark.
Results of Operations--Year Ended December 31, 1998 As Compared To The Year
Ended December 31, 1997
Revenues
Total revenues increased by 273.1% from $2,314,021 in 1997 to $8,633,528 in
1998. In 1998, Network Services represented 40.5% of total revenues as compared
to 30.9% in 1997. The relative shift from Internet Project revenues to Network
Services revenues is primarily a result of the fact that we have expanded our
customer base and have thereby created a larger recurring revenue base. It also
results from the fact that a larger proportion of the revenues from the
companies we have acquired are Network Services revenues.
Our revenue growth has been generated through our acquisitions as well as
internal growth of our existing business. The chart below sets forth our
revenues from existing operations compared to our revenues from acquired
companies for both Internet Projects and Network Services in 1998, pro forma as
if the acquisitions of Open:Net, Vianet and Flashnet had occurred on January 1,
1998.
Pro Forma for Year Ended December 31, 1998
Revenues from Revenues from
Existing Operations Acquired Companies
------------------- ------------------
Internet Projects Revenues............ 59.3% 20.9%
Network Services Revenues............. 40.7% 79.1%
Internet Project revenues increased by 221.6% from $1,597,869 in 1997 to
$5,139,110 in 1998 and represented 69.1% and 59.5% of our total revenues in
1997 and 1998, respectively. Average Internet Project revenues per customer
increased from $32,610 in 1997 to $42,124 in 1998 reflecting our transition
from smaller to medium-sized customers as our reputation and brand awareness
have improved. This has resulted in an increase in average revenues per
customer.
Network Services revenues increased by 387.9% from $716,152 in 1997 to
$3,494,418 in 1998 and represented 30.9% and 40.5% of total revenues in 1997
and 1998, respectively. Our total number of customers
45
increased by 70.5% in 1998 to 6,923 customers from 4,061 in 1997. No single
customer accounted for more than 6% of our revenues in 1998. A substantial
number of our smaller Network Services customers belongs to affinity groups
with which we began forming relationships in our prior years. Excluding
affinity group members, we provided Network Services to 3,077 customers as of
December 31, 1998, compared to 2,120 customers as of December 31, 1997. The
addition of 977 new customers (which includes affinity group customers)
produced 55.9% of Network Services revenues. We derived the remaining 44.1%
from existing customers. Average revenues per Network Services customer
increased from $339 in 1997 to $636 in 1998 (from $577 to $1,031, excluding
affinity group customers) reflecting the transition of our customer base to
larger enterprises and the provision of services in addition to connectivity.
We derived $7,692,555 or 89.1% of total revenues in 1998 from our operations
in Germany and $940,973 or 10.9% of total revenues from our operations in
Italy. Vianet, our Austrian subsidiary, which we acquired on December 28, 1998,
and whose results are not included in the Company's results of operations for
the year ended December 31, 1998, had revenues of approximately $3.2 million in
1998.
Cost of Revenues
Total cost of revenues increased by 312.4% from $2,531,787 in 1997 to
$10,440,008 in 1998. Cost of revenues as a percentage of revenues increased
from 109.4% in 1997 to 120.9% in 1998.
The costs of our Internet Project revenues increased by 214.2% from
$1,495,234 in 1997 to $4,698,557 in 1998. This increase primarily resulted from
increased purchases of hardware and software and the costs of additional
personnel. Costs of Internet Projects as a percentage of Internet Project
revenues decreased from 93.6% in 1997 to 91.4% in 1998. This decrease is
primarily attributable to a reduction in training and seminar expenditures,
partially offset by the increase in purchases of hardware and software.
The costs of our Network Services revenues increased by 370.0% from $865,357
in 1997 to $4,067,513 in 1998. This increase primarily consisted of additional
leased line expenses to provide the increased capacity we will require as our
business grows. Costs of Network Services revenues as a percentage of related
revenues decreased from 120.8% in 1997 to 116.4% in 1998. This decrease is
primarily attributable to a decline in personnel costs associated with these
revenues and a reduction in purchased Internet services due to the development
of our own network.
Depreciation and amortization included in cost of revenues increased by
877.8% from $171,196 in 1997 to $1,673,938 in 1998 as a result of new
investments in project development from year to year. We have capitalized
certain investments associated with designing the network (including related
software) and with building network capacity (including related personnel and
consulting costs) and 1998 was the first year to include a full year of
depreciation for these investments.
General and Administrative Expenses
General and administrative expenses increased by 227.1% from $481,700 in 1997
to $1,575,758 in 1998. The increase in our general and administrative expenses
reflects not only the costs of building a corporate infrastructure to support
our anticipated growth but also the impact of the addition of general and
administrative expenses of companies acquired in 1997 and 1998. As a percentage
of total revenues, general and administrative expenses decreased from 20.8% in
1997 to 18.3% in 1998.
Marketing Expenses
Marketing expenses increased by 223.4% from $1,188,634 in 1997 to $3,844,232
in 1998. These higher marketing expenses reflect an increase in salary expense
resulting from our larger sales force and an increase in advertising and
communication expenses reflecting our drive to improve local and international
awareness of our brand. As a percentage of total revenues, our marketing
expenses decreased from 51.4% in 1997 to 44.5% in 1998.
46
Research and Development
Research and development expenses increased by 951.4% from $279,698 in 1997
to $2,940,865 in 1998. The development of our modular products and the related
pricing research which we conducted in 1998 is reflected in the higher
personnel costs included in research and development. The personnel utilized
for this purpose include not only members of our research and development
staff, but also members of our marketing force, and we include in research and
development expenses the portion of our marketing force personnel's time
devoted to product development. We also incurred consulting expenses in 1998
not incurred in 1997 while researching the viability of certain
telecommunications services that we plan to offer in the future. These
consulting expenses amounted to $554,005. As a percentage of revenues, research
and development expenses increased from 12.1% in 1997 to 34.1% in 1998.
Depreciation and Amortization
Depreciation and amortization expense increased by 659.3% from $115,899 in
1997 to $879,978 in 1998. This increase reflects increased depreciation of
capital expenditures on property and equipment purchased in order to build the
corporate infrastructure necessary to support our anticipated growth. This
expense also reflects increased amortization of goodwill related to our 1997
and 1998 acquisitions. Most of these investments were not capitalized until
1997, and because we had a full year of depreciation for 1998, depreciation and
amortization expenses for 1998 are significantly greater than they were in
1997.
Net goodwill in connection with the 1997 acquisitions of Cybernet E-Commerce
and Eclipse amounted to $1,322,566 at December 31, 1997 and net goodwill
including the 1998 acquisitions of Open:Net and Vianet amounted to $6,504,576
at December 31, 1998. We amortize goodwill over 10 years. In 1999, we will
begin depreciating additional goodwill of approximately $30 million which will
be added to our balance sheet as a result of the Flashnet acquisition.
Interest Expense and Income
Interest expense increased by 398.7% from $39,550 in 1997 to $197,243 in 1998
as a result of new capital lease obligations, which we undertook in 1998 to
finance acquisitions of computer equipment. We earned interest income in 1998
of $154,296 on excess cash balances resulting from the proceeds of our 1998
equity offering. We had no interest income in 1997.
Income Taxes
We recorded income tax benefits of $1,339,407 in 1997 and $6,172,645 in 1998,
arising principally from incurred operating losses from our operating
subsidiaries in Germany. Under the current German tax code, these net operating
losses may be carried forward indefinitely and used to offset our future
taxable earnings.
Other Comprehensive Loss: Foreign Currency Translation Adjustments
Foreign currency translation adjustments resulted in a gain in 1998 of
$1,204,589 and a loss in 1997 of $210,211 in 1997. The 1998 gain is a result of
the weakening of the U.S. dollar in 1998 in relation to the Deutsche Mark.
Results of Operations--Year Ended December 31, 1997 As Compared To The Year
Ended December 31, 1996
Revenues
Total revenues increased by 652.1% from $307,673 in 1996 to $2,314,021 in
1997. This revenue growth is primarily a result of the fact that 1997 was a
full year of operations while 1996 was primarily devoted to start-up and
initial marketing activities.
47
Revenues from Internet Projects increased by 635.3% from $217,296 in 1996 to
$1,597,869 in 1997 and represented 70.6% and 69.1% of total revenues in 1996
and 1997, respectively. Average revenues per customer increased from $18,108 in
1996 to $32,610 in 1997. The increase in average revenues per customer reflects
our transition from small- to medium-sized customers.
Revenues from Network Services increased by 692.4% from $90,377 in 1996 to
$716,152 in 1997 and represented 29.4% and 30.9% of total revenues in 1996 and
1997, respectively. Our total number of customers increased by 2,346.4% in 1997
to 4,061 customers from 166 in 1996. No single customer accounted for more than
10% of our revenues in 1997. In 1997 we added 1,941 new customers by
establishing relationships with affinity groups. This addition of new customers
allowed us to obtain additional revenues with relatively low incremental cost.
Excluding affinity group members, we provided Network Services to 2,120
customers as of December 31, 1997, compared to 166 customers as of December 31,
1996. The addition of 2,009 new customers (which includes affinity group
customers) represented 97.0% of Network Services revenues. The remaining 3.0%
was derived from existing customers. Average revenues per customer decreased
from $1,093 in 1996, our first year of operation, to $339 in 1997. This
decrease occurred in part because 1997 was the first year in which we
contracted with affinity group customers. These customers typically produce
lower average Network Services revenues than our business customers.
Costs of Revenues
Total costs of revenues increased by 597.2% from $363,120 in 1996 to
$2,531,787 in 1997. Costs of revenues as a percentage of revenues decreased
from 118.0% in 1996 to 109.4% in 1997.
The costs of our Internet Projects revenues increased by 530.8% from $237,037
in 1996 to $1,495,234 in 1997. This increase primarily resulted from increased
personnel costs, training and seminars, and purchases of software. Costs of
Internet Projects as a percentage of related revenues decreased from 109.1% in
1996 to 93.6% in 1997. This decrease is primarily attributable to a reduction
of freelance staff costs utilized to design websites during our first year of
operations.
The costs of our Network Services revenues increased by 625.4% from $119,297
in 1996 to $865,357 in 1997. This increase primarily resulted from increased
personnel costs and the cost of additional leased lines. Costs of Network
Services as a percentage of related revenues decreased from 132.0% in 1996 to
120.8% in 1997. This decrease is primarily due to a decline in purchased
Internet services and leased line expenses as a percentage of revenues and was
partially offset by additional personnel costs.
Depreciation and amortization, included in costs of revenues, increased by
2,422.8% from $6,786 in 1996 to $171,196 in 1997 as a result of new investments
in product development and establishing our network from year to year.
General and Administrative Expenses
General and administrative expenses increased by 83.0% from $263,175 in 1996
to $481,700 in 1997. Increases in our general and administrative expenses
reflect the costs of building a corporate infrastructure which will support our
future growth. It also reflects the impact of the addition of general and
administrative expenses of companies acquired in 1997. As a percentage of
revenues, general and administrative expenses decreased from 85.5% in 1996 to
20.8% in 1997.
Marketing Expenses
Marketing expenses increased by 621.8% from $164,669 in 1996 to $1,188,634 in
1997. Increases in our marketing expenses are attributable primarily to
increased salaries reflecting our efforts to build a larger sales force and
larger advertising and communication expenses in our drive to improve public
awareness of our brand name. As a percentage of revenues, our marketing
expenses decreased from 53.5% in 1996 to 51.4% in
48
1997 due to a reduction of freelance staff costs. These reductions were
partially offset by higher personnel costs and advertising and
telecommunications expenses.
Research and Development
Research and development expenses increased by 56.3% from $178,994 in 1996 to
$279,698 in 1997 primarily as a result of increased personnel costs. As a
percentage of revenues, our research and development decreased from 58.2% in
1996 to 12.1% in 1997 due to the growth of our revenues as significant
operations commenced.
Depreciation and Amortization
Depreciation and amortization increased by 445.1% from $21,263 in 1996 to
$115,899 in 1997, reflecting increased capital expenditures in property, plant
and equipment. The increase in goodwill amortization from 1996 to 1997 is due
to goodwill arising from the 1997 acquisitions.
We had no net goodwill at December 31, 1996. At December 31, 1997, net
goodwill in connection with the acquisitions of Artwise and Eclipse amounted to
$1,322,566.
Interest Expense and Income
Interest expense increased by 1,802.4% from $2,079 in 1996 to $39,550 in
1997, principally due to the higher level of overdrafts and short-term
borrowings in 1997 compared to 1996. We incurred these overdrafts to fund our
working capital requirements.
Income Taxes
We recorded income tax benefits of $401,849 in 1996 and $1,339,407 in 1997,
arising principally from operating losses incurred from our operating
subsidiaries in Germany. Under the current German tax code, these net operating
losses may be carried forward indefinitely and used to offset our future
taxable earnings.
Other Comprehensive Loss: Foreign Currency Translation Adjustments
Foreign currency translation adjustments resulted in a loss of $210,211 in
1997 and a loss of $5,089 in 1996.
Vianet--Results of Operations--Year Ended December 31, 1998 As Compared To The
Year Ended December 31, 1997
Vianet is an Austrian ISP acquired by our Company on December 28, 1998. We
accounted for the acquisition using the purchase method of accounting. Because
Vianet's results of operations subsequent to the acquisition date were
immaterial to our consolidated financial results, we did not include them in
our 1998 Consolidated Financial Statements.
We provide below a discussion of Vianet's results of operations for the year
ended December 31, 1998 as compared to the year ended December 31, 1997. The
financial statements on which this discussion is based have been prepared in
accordance with United States generally accepted accounting principles.
Total Revenues
Total revenues include payment for systems integration and consulting
projects, the basic connectivity fee that is paid at the beginning of each
three month period and current usage fees which are invoiced monthly after the
relevant month. The prepaid connectivity fee is recorded under deferred income
and recognized as
49
revenue after the service is provided. System integration and consulting
projects are billed and paid upon completion. Total revenues increased by 37.3%
from ATS 27,390,233 ($2,125,949) in 1997 to ATS 37,617,683 ($2,919,773) in
1998. The revenue growth was generated by Vianet's increased customer base.
Costs of Products Sold
Costs of products sold consist primarily of telecommunications fees, licenses
and marketing. Costs of products sold increased by 37.5% from ATS 12,403,754
($962,743) in 1997 to ATS 17,051,503 ($1,323,487) in 1998. These costs
increased because increased usage by the growing customer base required
upgrades to the network infrastructure for current and future needs.
Research and Development
Research and development costs consist principally of personnel costs,
consulting costs and allocated overhead costs. Vianet had no research and
development costs in 1997 and ATS 1,282,625 ($99,554) of such costs in 1998.
This increase in costs of research and development resulted from activities
related to the enhancement of existing services, the addition of value-added
products and billing flexibility.
General and Administrative
General and administrative costs increased by 39.0% from ATS 14,787,656
($1,147,774) in 1997 to ATS 20,558,892 ($1,595,720) in 1998. This increase in
general and administrative costs resulted from growth in the size of Vianet.
General and administrative costs include primarily salaries and other personnel
costs of Vianet's administrative staff, office rent and other overhead
expenses.
Interest Income and Expense
Interest income decreased by 57.2% from ATS 20,972 ($1,628) in 1997 to ATS
8,966 ($696) in 1998. This decrease resulted from lower bank balances. Interest
income is primarily attributable to short term interest earned on bank
balances. Interest expense increased by 3.0% from ATS 86,212 ($6,692) in 1997
to ATS 88,803 ($6,893) in 1998. This increase resulted from increased short-
term borrowing. Interest expense is primarily attributable to Vianet's
overdraft facility.
Income Taxes
Vianet received a tax benefit of ATS 4,940 ($383) in 1998 and had income tax
expenses of ATS 193,116 ($14,989) in 1997.
Liquidity and Capital Resources
Overview
Since our inception, we have financed our operations and growth primarily
from the proceeds of private and public sales of equity and debt securities.
Total net proceeds of equity offerings in the three years ended December 31,
1998 amounted to approximately $67,660,706. Additionally, in 1998, our
subsidiaries financed the acquisition of certain equipment with capital lease
obligations. Total net proceeds from the Private Unit Offering in July 1999,
and from the Private Discount Notes Offering and the Private PIK Notes Offering
in August 1999, were approximately $216,861,000.
Cash Flow
Operating activities used cash of $569,685, $1,432,432 and $10,335,128 in
each of the three years ended December 31, 1996, 1997 and 1998, respectively.
The large increase in cash used in 1998 resulted from increased expenditures
for marketing and research and development. For the nine months ended September
30,
50
1999, operating activities used $26,646,458, compared to $2,232,661 for the
comparable period in 1998. This is principally the result of higher net losses,
increases in deferred tax assets, increases in accounts receivable and other
assets.
Investing activities used cash of $1,532,912, $4,790,473 and $9,928,634 in
each of the three years ended December 31, 1996, 1997 and 1998, respectively.
The large increase in 1998 resulted from the business acquisitions and the
increase in expenditures for property and equipment in that year. Expenditures
for property and equipment consisted principally of purchases of computer
hardware and other expenditures related to our Internet backbone and equipment
necessary to support our anticipated growth. For the nine months ended
September 30, 1999, investing activities used cash of $38,298,792, compared to
$12,630,021 for the comparable period in 1998. This increase in use of cash
reflects the acquisition of Flashnet and Sunweb ($22,749,328), the payment of
our deferred purchase obligation for the Vianet acquisition ($4,119,266), and
purchases of property and equipment ($10,724,156). 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.
Net cash provided by financing activities was $2,084,784, $8,644,161 and
$60,010,168 in each of the three years ended December 31, 1996, 1997 and 1998,
respectively. The large increase in 1998 results principally from our December
1998 public equity offering which generated $44,977,376 in net proceeds and the
May 1998 private equity offering which generated $12,600,000 in proceeds. In
June 1997, we completed a private placement which generated $8,070,427 in net
proceeds. In addition, in 1996, we received $2,012,903 in equity investments
from our founders. For the nine months ended September 30, 1999, net cash
provided by financing activities was $166,040,789 compared to $16,110,411 for
the comparable period in 1998. This increase resulted from the issuance of the
Units and the Notes in July and August of 1999, respectively. The Private Unit
Offering in July 1999 generated $144,500,000 in net proceeds, $22,374,264 of
which was used to repay in full an interim loan which financed the cash portion
of the acquisition of Flashnet, 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. In addition, the
Private Discount Notes Offering and the Private PIK Notes Offering in August
1999 generated $69,899,282 in aggregate net proceeds.
Working Capital
Our working capital, defined as the excess of our current assets over our
current liabilities, was $37,750,651 at December 31, 1998, compared to $891,027
at December 31, 1997 and $339,353 at December 31, 1996. Cash and cash
equivalents amounted to $42,875,877 at December 31, 1998, compared with
$2,238,909 at December 31, 1997 and $27,889 at December 31, 1996. The increase
in working capital, cash and cash equivalents resulted primarily from the
proceeds of our first public equity offering in December 1998 and our private
placements in May 1998 and June 1997.
On September 30, 1999, our working capital, defined as the excess of our
current assets over our current liabilities, was $130,999,452, as compared to
$37,750,651 on December 31, 1998. The increase in working capital resulted from
cash proceeds from the Units and the Notes issued in July and August of 1999,
from an increase in accounts receivable partially offset by increases in
accounts payable, and from a decrease in deferred purchase obligations related
to the Vianet acquisition at the end of 1998.
Our balance sheet as of September 30, 1999, reflects $8,853,665 for net
accounts receivable compared to $3,248,754 for the period ended December 31,
1998 and $7,036,206 for the period ended 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.
51
Credit Arrangements
As of September 30, 1999, the Company had short-term unsecured overdraft
facilities under which the Company and its subsidiaries could borrow up to DM
1,133,647 ($613,162 ). These facilities are denominated in Italian Lire (in the
amount of DM 930,302 ($507,281)), Australian Schilling (in the amount of DM
142,100 ($77,485)) and Swiss Franc (in the amount of DM 61,2435 ($33,396)). The
interest rates fluctuate based upon current lending rates. The weighted average
borrowing rate on these facilities was 7.5% as of September 30, 1999. In
addition, certain of our banks provide overdraft protection exceeding the
limits specified in these agreements. As of September 30, 1999, the Company and
its subsidiaries had used DM 162,161 ($88,424) of these facilities. In
addition, as of September 30, 1999, we had long-term capitalized lease
obligations of DM 2,155,995 ($1,175,634).
Amounts expressed in Deutsche Marks in this paragraph have been translated
for convenience purposes into U.S. dollars at the rate of DM 1.8339 equals
$1.00 (the balance sheet conversion rate on September 30, 1999).
Capital Expenditures
For the nine months ended September 30, 1999, capital expenditures totaled
$12,787,342. We funded these capital expenditures primarily from net cash
provided by financing activities. Our major investments in the first nine
months of 1999 included: (i) progress payments on a new billing system totaling
approximately DM 5,379,472 ($2,933,350), (ii) investments in POP equipment of
approximately DM 3,986,943 ($2,174,024), (iii) investments in various computer
and technical equipment totaling approximately DM 4,486,454 ($1,185,465), and
(iv) investments in facilities and officer infrastructure totaling
approximately DM 5,358,725 ($2,922,037). We have planned approximately $30.0
million in capital expenditures for the remainder of 1999. We expect to make
these expenditures to install carrier grade digital circuit switches and
related equipment for voice services, to build data centers and office
infrastructure and to purchase transmission facilities (including alternative
long-haul transmission capabilities) and related equipment. We also expect to
use a portion of the budgeted amount for the continued implementation of our
billing system.
Valuation Allowance
At December 31, 1998, we had available combined net operating losses carried
forward of approximately $20,230,048, most of which relate to our German
operations. Under the current German tax code, these net operating losses may
be carried forward indefinitely and used to offset our future taxable earnings.
We have not provided any valuation allowance against the deferred tax asset
related to these losses carried forward. However, if we were unable to generate
sufficient taxable income in the future or if the tax law were changed, we
would have to establish a valuation allowance through a charge to income. In
March 1999, the German government passed new tax legislation which reduced the
corporate income tax rate from 45% to 40%. The impact of recalculating the
deferred tax assets and liabilities using the new rate recorded in the first
quarter of 1999 was approximately $550,000.
Seasonality
Our quarterly results are subject to seasonality. We typically experience an
increased level of Internet Project sales in the last fiscal quarter. We also
typically experience a slowdown in the first fiscal quarter in Internet Project
sales because customers refrain from making IT investment decisions until the
completion of CeBit, a major European trade show, which takes place in the
Spring. Network Services results do not typically exhibit the same level of
seasonal variation.
Foreign Currency
Most of our revenues and a significant portion of our expenses are
denominated in Deutsche Marks instead of the dollar, our reporting currency. As
we expand our operations into other European countries (particularly Italy
following the acquisition of Flashnet), we expect that we will continue to
generate revenues in currencies
52
other than the dollar. All of our revenues and an increasing portion of our
expenses continue to be denominated in currencies other than the currency in
which we report our results. Therefore, our reported results will continue to
be impacted by exchange rate movements of these currencies against the dollar.
The funds available from the Private Unit Offering and the Private Discount
Notes Offering were denominated in United States dollars and interest payments
on the Senior Notes and the Discount Notes will be made in United States
dollars. As a result, we will be exposed to foreign exchange risks, and our
results of operations likely will be affected by fluctuations in the value of
the local currencies in which we transact business. We do not currently engage
in hedging transactions, however, we may consider entering into such
transactions to reduce the risk of our exposure to currency fluctuations,
including any such fluctuations which may result from having significant
dollar-denominated liabilities after the offering of the Senior Notes and the
Discount Notes.
Year 2000
The Year 2000 problem results from the fact that many existing computer
programs and systems have used only two digits to identify the year in the date
field. These programs were designed and developed without considering the
impact of a change in the century designation. If not corrected, computer
applications that use a two-digit format could fail or create erroneous results
in any computer calculation or other process involving the Year 2000 or a later
date.
We have identified two main areas of risk related to the Year 2000 problem
for our IT systems:
. Our internal computer systems or embedded chips could be disrupted or
fail, causing an interruption or decrease in productivity in our
operations; and
. Computer systems or embedded chips of third parties including (without
limitation) financial institutions, suppliers, vendors, landlords,
customers, suppliers of communications services and others could be
disrupted or fail, causing an interruption or decrease in our ability to
continue our operations.
We have evaluated our state of readiness for the Year 2000 issue. With regard
to our internal IT systems, we have concluded that substantially all of those
systems are Year 2000 compliant. Our personnel have tested and analyzed our
systems in the course of regular quality control and research development. We
did not spend significant capital on this evaluation. To date, the only costs
in connection with our Year 2000 evaluation have been limited to internal staff
costs, which have been expensed as incurred. The financial information
contained in this prospectus includes such costs, which are not material. Based
on our experience to date, we do not anticipate that we will be required to
incur significant additional operating expenses or to invest material amounts
to obtain Year 2000 compliance. To respond to our customers' inquiries, we are
in the process of developing a report to inform our customers about the effect
of the Year 2000 problem on our products and services. We anticipate utilizing
an outside consultant to prepare this report at a cost estimated to be DM
50,000 ($26,748).
We have been assured by all major suppliers, vendors and customers that the
following existing IT and other systems, upon which we rely for products and
services and for internal operations, are Year 2000 compliant:
. the Cisco routers we use in connection with leased telephone line
communications;
. the Ascend routers we use in connection with telephone dial-up
communications;
. Sun Workstations, our main Internet servers;
. the Microsoft Corporation software we use in our internal office
operations;
. our network facilities supplied by Info AG;
. our global transit facilities supplied by AT&T/Unisource;
. our leased telephone lines supplied by Deutsche Telekom; and
. the electric power to our main offices and several of its nodes,
supplied by Stadtwerke Munich.
53
Based on those assurances, we believe that the IT systems utilized in our
principal network, backbone and internal operations will meet Year 2000
requirements. We do not anticipate significant interruptions of billings or
service to customers or disruptions of internal operations attributable to the
Year 2000 problem.
We have plans to complete the integration of compliant operations and have
instituted procedures to assure that IT systems installed in 1999 will be Year
2000 compliant. We do not expect compliance with the Year 2000 problem on a
Company-wide basis to require acceleration of planned expenditures for the
purpose of remediation. Because we believe that substantially all our material
systems are Year 2000 compliant, we have not developed a theoretical worst case
analysis or a contingency plan to deal with such a contingency.
We are now determining whether suppliers of secondary significance to our
business, such as local suppliers of telephone service and electric power, are
Year 2000 compliant. Some of these secondary systems are non-essential, as they
duplicate systems that we have determined will operate in the Year 2000
environment. We anticipate completing our inquiries regarding secondary systems
during the third quarter of 1999.
With respect to non-IT systems, our operations do not depend in a significant
manner on embedded technology. All of our desk-top computers and telephones are
Year 2000 compliant. Our offices' climate control systems, elevators and
monitor alarms do have embedded systems. However, our operations do not depend
upon elevators for access to the principal offices. We are in the process of
evaluating whether the embedded systems at our other facilities are Year 2000
compliant. Accordingly, we have not developed formal contingency plans in this
regard.
Conversion to the Euro
On January 1, 1999, 11 of the 15 EU member countries (the "participating
countries") adopted the Euro as their common legal currency, at which time
their respective individual currencies became irrevocably fixed at a rate of
exchange to the Euro, and the Euro became a currency in its own right.
Presently, the following 11 currencies are subject to the Euro conversion: the
Austrian Schilling, the Belgian Franc, the Dutch Guilder, the Finnish Markka,
the French Franc, the Deutsche Mark, The Irish Punt, the Italian Lira, the
Luxembourg Franc, the Portuguese Escudo and the Spanish Peseta.
From January 1, 1999 until January 1, 2002 (the "transition period"), the
Euro will exist in electronic form only and the participating countries'
individual currencies will continue in tangible form as legal tender in fixed
denominations of the Euro. During the transition period, we must manage
transactions with our customers and our third party vendors in both the Euro
and the participating countries' respective individual currencies. This may
cause significant logistical problems. We may incur increased operational costs
and may have to modify or upgrade our information systems in order to:
. convert individual currencies to Euro;
. convert individual currencies of participating countries into each
other;
. execute conversion calculations utilizing six-digit exchange rates and
other prescribed requirements;
. accommodate the new Euro currency symbol; and
. permit pricing, advertising, billing, accounting, internal financial
calculations, sales and other transactions or practices to be effected
simultaneously in Euro and the participating countries' respective
individual currencies.
Changes in pricing denominations for products once sold and advertised in an
individual currency and now sold and advertised in the Euro could cause
material billing errors and complications. Fluctuations in the business cycles
of participating countries or a failure on any participating country's part to
comply with EU
54
directives could have negative economic effects on other participating
countries, including countries in which we operate. Additionally, the
participating countries' pursuit of a single monetary policy may adversely
affect the particular economies of markets in which we conduct business. Any of
the above could have a material adverse effect on us and our ability to make
payments under the Senior Notes, the Discount Notes and the PIK Notes.
While we believe that our systems have not been adversely impacted by the
Euro conversion and we believe that we are substantially Euro-compliant, we
cannot guarantee that we will be able to avoid the accounting, billing and
logistical difficulties that might result from the introduction of the Euro. In
addition, we cannot be sure that we, our third party suppliers or our customers
will be able to implement the necessary protocols successfully. If we, our
third party vendors, customers or any others with whom we must interact or
interconnect, fail to adapt and modify our procedures and systems to
accommodate the Euro conversion, this could materially adversely affect our
results of operations and our ability to meet our obligations under the Senior
Notes, the Discount Notes and the PIK Notes.
55
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
We do not utilize market-risk-sensitive instruments, such as derivative
financial instruments. Our primary market risk is in the area of interest rate
and foreign currency exchange rate fluctuations.
We maintain our cash balances in deposits at banks and in highly liquid
short-term investments, such as money market mutual funds, therefore lowering
our exposure to interest income risks.
As a result of our Private Unit Offering in July 1999 and Private Discount
Notes Offering in August 1999, we have a substantial amount of debt in United
States dollars. While our reporting currency is United States dollars, our
functional currency is the Deutsche Mark and significant fluctuations in the
United States 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 rates between the Deutsche Mark
and the United States dollar would increase the Deutsche Mark amount required
to settle the debt outstanding from the Private Unit Offering and the Private
Discount Notes Offering by approximately $20,000,000.
All of our revenues and a significant portion of our expenses are denominated
in currencies other than our reporting currency, the United States dollar.
Approximately 89% of our revenues in 1998 and 52% of our revenues in the first
nine months of 1999 were denominated in Deutsche Mark. Another 45% of our
revenues in the first nine months of 1999 were denominated in other European
Monetary Union member currencies. The majority of our foreign exchange rate
exposure relates to the translation of our Deutsche Mark financial statements
into United States dollars which is impacted by changes in the exchange rates
between the Euro and the United States 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 United States 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 United States 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.
56
BUSINESS
We began our operations with the formation of Cybernet AG, a privately held
German stock company. Cybernet AG was organized in December 1995, and commenced
significant operations in 1996. On September 17, 1997, Cybernet AG was acquired
by Cybernet Utah. At the time that it acquired Cybernet AG, Cybernet Utah had
no material business activities, assets or liabilities. Effective November 18,
1998, Cybernet Utah was merged into Cybernet Delaware, and the Delaware
corporation is the surviving entity of the merger. On June 30, 1999, we
consummated our acquisition of all of the issued and outstanding capital stock
of Flashnet, a leading ISP based in Rome, Italy. The terms "Company,"
"Cybernet," "we," "us" and "our" refer to Cybernet Delaware and its
subsidiaries as a combined entity, except where its use is such that it is
clear that such term means only Cybernet Delaware. Such terms do not in any
case refer to selling securityholders.
Overview
Through our subsidiaries, we are a leading provider of Internet
communications services and solutions in Germany, Austria, Italy and
Switzerland, targeting small- to medium-sized enterprises. Our IP solutions are
based on a core product offering consisting of Internet connectivity and value-
added services. Such value-added services include VPNs, web-hosting, co-
location, security solutions, electronic commerce, Intranet/Extranet and
workflow solutions. We offer consulting, design and installation, training,
technical support, and operation and monitoring of IP-based systems. We market
our products and services primarily to small- and medium-sized enterprises in
Europe because we believe that they represent an underserved and sizeable
market. Companies in this market are characterized by a lack of internal
technical resources, rapidly expanding communications needs and a high
propensity to utilize third-party outsourcing. We are recognized as a provider
of high quality Internet connectivity services and solutions to enterprises and
as one of Germany's leading Internet access providers. IT Services, a leading
German computer magazine has ranked us number one among German ISPs in terms of
infrastructure, international outlook and customer service.
Our mission is to become a leading European provider of IP-based
communications services and network-based business solutions. We intend to
continue to focus on small- and medium-sized enterprises in Europe, offering a
full portfolio of advanced communications products, including Internet access
and value added services, as well as data and switched voice services.
We believe that our capabilities in Internet, telecommunications and systems
integration services differentiate us from many of our competitors who offer
some, but not all, of the products and services that we offer. We approach and
win business customers by offering and designing a full range of services and
solutions for mission critical communications needs, such as electronic
commerce solutions, Intranets and VPNs. This enables us to work directly with
different levels of our customers' organizations, to participate in the design
of customers' systems and to offer additional network and communications
services as our customers' businesses grow and their needs change. By basing
our solutions upon product modules, we are able to meet our customers'
individual needs at competitive prices, while realizing higher margins by
reducing costs through standardization. Also, as a result of the high quality
of our services and the value-added nature of our solutions, we believe that we
experience higher customer retention rates and that we are less vulnerable to
pricing pressures than many of our competitors in the telecommunications and
Internet industries.
We sell our services and solutions primarily through our direct sales force.
Most of our sales people are based in regional offices and are supported by
specialized technical and commercial assistance from our customer care centers
in Munich, Vienna, Zurich, Rome and Trento. We complement our direct sales
effort with an extensive reseller and referral network of over 100 companies
and by forming marketing alliances with technology leaders such as Hewlett-
Packard, Microsoft, Network Associates, Sun Microsystems and Nokia Italia.
While our reseller arrangements begin with sales of our basic product
offerings, such as connectivity, they can lead to direct sales by us of more
complex solutions, such as security solutions or VPNs.
57
We operate a geographically distributed IP network based upon leased lines.
Our network is spread over six countries and consists of network nodes equipped
primarily with Cisco and Ascend routers connected to a redundant high-
performance backbone infrastructure. We help corporate customers reduce
telecommunications costs by offering Internet connectivity through dedicated
lines at 56 directly owned points of presence or "POPs". We also offer a system
of dial-in nodes with ISDN or analog modem ports to smaller enterprises,
employees and affiliates of corporate customers. These nodes permit local dial-
in access throughout Germany, Italy and Switzerland and most of Austria.
Flashnet owns 20 of these POPs for dedicated lines (which can also accommodate
dial-in traffic) and has access to more than 300 dial-in access nodes.
Recently, we reorganized our dial-in network in Germany by concentrating
multiple dial-in access nodes into larger access points called "Virtual POPs,"
which use a Public Switched Telephone Network ("PSTN") to aggregate traffic. We
expect this will generate operating efficiencies, in that there will be fewer
overall nodes to service. We are expanding our network across Germany, Austria,
Italy and Switzerland by installing additional POPs and replacing dial-in
access nodes with Virtual POPs.
We also plan to add digital circuit switching capabilities to our network to
offer switched voice telecommunications services to our customers, capture more
revenues from dial-in traffic and provide termination services to other
carriers by layering switched voice capability onto our expanded leased line
network. For these purposes, we require:
. licenses to offer voice telephone services in Germany, Austria, Italy
and Switzerland;
. up to nine carrier grade digital circuit switches;
. a billing system capable of capturing the necessary data and generating
invoices to our customers; and
. interconnection agreements with incumbent operators and other
telecommunications carriers. In Germany, we have:
. obtained a license to offer voice telephone services in the entire
country;
. ordered six Nortel DMS-100 switches;
. installed the Kenan billing system; and
. begun negotiations for an interconnection agreement with both
Deutsche Telekom and Telecom Italia. In order to enable us to begin
offering voice telephone service before our own switched voice
network begins operating, we have entered into an interim agreement
with a third-party carrier. In Austria and Switzerland, we have
begun the process of obtaining telecommunications licenses. In
Italy, our subsidiary Flashnet has a license to provide voice
services throughout the entire country.
We have increased our revenues from $0.3 million in 1996 to $8.6 million in
1998 ($17.4 million pro forma for acquisitions, including Flashnet). As of
September 30, 1999, we provided services to approximately 13,400 business
customers, an increase from approximately 200 customers at December 31, 1996.
The majority of these customers are small- to medium-sized enterprises. We also
provide services to larger companies and organizations such as BASF
Corporation, German Parcel, Commerzbank, Hewlett-Packard, Start Media Plus,
DaimlerChrysler Aerospace Dornier, BMW Financial Services, Raiffeisenbank,
Zuegg, Honeywell, Lauda Air, Modern Times, Amadeus, Lufthansa, News, Nokia
Italia, ERG, Avis, Ferrovie dello Stato (Italian Railways) and the Italian
Parliament.
Our management team consists of individuals with extensive Internet, IT and
telecommunications expertise. Andreas Eder, co-founder and Chief Executive
Officer, previously held various positions at Siemens-Nixdorf Information
Systems and The Boston Consulting Group. Robert Eckert, our Chief Financial
Officer, was previously with Netsource A/S, Swisscom International, and General
Electric (USA). In addition, we have recruited individuals at various
managerial levels from leading industry participants such as AT&T/Unisource,
British Telecommunications and Deutsche Telekom. Our policy is to retain the
key executives of the companies we acquire. To this end, we typically structure
our acquisitions to give such executives an equity participation in the future
success of our Company. We have retained most of the key managers in our
acquisitions.
58
Industry Background
The Internet is a global network of multiple private and public networks that
use standardized communication protocols to communicate with each other. Use of
the Internet has grown rapidly since its initial commercialization in the early
1990s. International Data Corporation ("IDC"), a market research organization,
has estimated that the number of Internet users worldwide will grow from
approximately 68.7 million in 1997 to approximately 319.8 million by the end of
2002, a compound annual rate of 36.0%. Consumers and companies in the United
States have spearheaded the adoption of the Internet. While other regions of
the world have been slower to accept the Internet, its use is becoming a
standard communications tool worldwide.
The Internet has become an important commercial medium and represents a
significant opportunity for businesses to interact in new and different ways
with a large number of customers, employees, suppliers and partners. As use of
the Internet grows, businesses are increasing the breadth and depth of their
Internet product and service offerings. Pioneering Internet-based businesses
have developed Internet products and services in areas such as finance,
insurance, media, tourism, retail and advertising. Other businesses have begun
to use the Internet for an expanding variety of applications, ranging from
corporate publicity and advertising, to sales, distribution, customer service,
employee training and communication with business partners. Increasingly,
Internet operations are becoming mission-critical for many of these
enterprises. To ensure the reliability of their Internet operations,
enterprises are requiring that these operations have performance, scalability
and expert management 24 hours a day, 7 days a week.
Companies generally utilize two types of Internet services: connectivity and
value-added services. Connectivity services provide access to the Internet,
while value-added services consist of products such as web-hosting, VPNs,
security solutions and systems integration that improve the internal and
external operations of a company.
The Internet is also experiencing rapid growth rates in Europe. According to
IDC, the number of Internet users in Europe reached 16.8 million in 1997 and is
expected to reach 82.0 million in 2002. Datamonitor, another market research
organization, estimates that the number of externally hosted commercial
websites in Europe will increase from 221,700 in 1997 to 981,900 in 2000, while
the number of VPNs will expand from 100 in 1997 to 27,900 in 2000. We believe
that the growing numbers of externally hosted websites and VPNs reliably
predict a corresponding growth in Internet traffic. We expect this projected
growth to be fueled by a number of factors, including the large and growing
installed base of advanced personal computers and increased availability of
bandwidth, resulting in faster and cheaper access to the Internet, improvements
in network architectures, increasing numbers of network-enabled applications,
and the emergence of compelling content and commerce-enabling technologies.
Europe lags the United States in terms of total Internet users, Internet
users as a percentage of population, and personal computers ("PCs") with
Internet access. An historical comparison reveals that Europe is between one
and two years behind the United States when the selected indicators are
considered. We expect European Internet usage to follow historical United
States growth rates and achieve current United States levels within one to two
years. The following table provides information about current and projected
Internet usage in Europe and the United States.
Europe United States
------------ --------------------------
1997 2002E 1995 1996 1997 2002E
----- ----- ----- ----- ----- -----
Internet users (millions)........... 16.8 82.0 9.7 23.2 38.7 135.9
Population (millions)............... 386.0 388.4 263.0 265.4 267.9 279.5
Internet users as a percent of
population......................... 4.4% 21.1% 3.7% 8.7% 14.4% 48.6%
PCs with internet access............ 19.7% 57.1% 11.5% 23.8% 36.3% 84.3%
- --------
Sources: IDC Corporation; population and Internet users as a percent of
population are based upon population figures provided by the United
States Bureau of the Census.
59
Internet usage varies significantly between European regions. Northern
European countries generally have a higher level of market penetration and
service usage than countries in Southern Europe, which we believe currently
presents a growth opportunity. The following table summarizes certain
information and estimates about revenues from Internet connectivity and from
Internet hosting and VPNs in European countries.
Connectivity Hosting and VPN
--------------------------------------------- ---------------------------------------------
Anticipated Anticipated
1997 2000E Change 1997 2000E Change
($ in millions) ($ in millions) (%) per annum ($ in millions) ($ in millions) (%) per annum
--------------- --------------- ------------- --------------- --------------- -------------
Finland................. 17 42 35.2% 1 20 171.4%
France.................. 94 383 59.7% 3 92 213.0%
Germany................. 447 1,084 34.4% 16 184 125.7%
Italy................... 30 169 77.9% 5 50 115.4%
Netherlands............. 28 85 44.8% 6 42 91.3%
Spain................... 35 136 57.2% 2 31 49.3%
Sweden.................. 31 67 29.3% 4 34 104.1%
United Kingdom.......... 154 381 35.2% 16 146 109.0%
Other (*)............... 83 272 48.5% 23 123 74.9%
--- ----- ---- --- --- -----
Total................. 919 2,619 41.8% 76 722 111.8%
=== ===== ==== === === =====
- --------
(*) Other includes Austria, Belgium, Ireland, Norway, Portugal and Switzerland.
Source: Datamonitor.
Datamonitor reports that the European corporate Internet connectivity market
consisted of 1.2 million accounts and generated total revenues of $919 million
in 1997. It estimates that corporate connectivity revenues will grow to $2.6
billion in 2000, a compound annual growth rate of 41.8%.
Datamonitor also reports that in 1997, European Internet value-added services
generated revenues of $287 million. It estimates that revenues from value-added
services will increase to $1.7 billion in 2000, a compound annual growth rate
of 80.7%. In 1997, revenues from hosting services and VPNs were $76 million,
26.5% of total European revenues from value-added services. In 2000, they are
expected to be $722 million, 43.2% of such revenues, a compound annual growth
rate of 111.8%.
We consider Germany to be the most important connectivity market in Europe in
terms of revenues, with a highly developed consumer and business on-line
customer base. As the chart above shows, in 1997, the German connectivity
market had revenues of $447 million, 48.6% of total European connectivity
revenues. It is estimated that, in 2000, Germany will generate connectivity
revenues of $1.1 billion, 41.4% of total European connectivity revenues.
Italy currently has a relatively low Internet penetration level. The Internet
connectivity market in Italy is very fragmented, with many small providers. We
expect that connectivity revenues in Italy will grow at one of the fastest
rates in Europe, particularly northern and central Italy, because much of
Italian business is concentrated in that area. We believe our acquisition of
Flashnet will permit us to take advantage of this growth opportunity.
Business Strategy
Our objective is to become a leading provider of communications services and
network-based business solutions to small- to medium-sized enterprises in
Europe. We currently offer a full-service portfolio of advanced communications
products including Internet access and value-added services, as well as
switched voice services. The principal elements of our business strategy are as
follows:
60
Target Small- to Medium-Sized Business Enterprises. We focus on small- to
medium-sized enterprises. In Germany, we focus on companies that typically have
revenues between (Euro)25 million and (Euro)500 million. According to
Statistisches Bundesamt, a German government agency, such companies generate
45% of Germany's total corporate revenues. In other countries, the revenues of
small- to medium-sized enterprises as a portion of total corporate revenues
vary. We believe that this customer segment is underserved and has substantial
and increasing communications needs. Small- to medium-sized enterprises
typically lack the technical resources to build and maintain extensive
communications systems and, as a consequence, they outsource many services and
solutions to third parties. We focus in particular on network intensive
industries, such as IT, tourism, retail, finance, government, media and
advertising. For many of these industries, utilization of the Internet has
become essential. In certain markets, we also serve high-end residential
customers.
Initiate Long-Term Relationships with Customers Through Local Coverage and at
an Early Stage. Unlike some of our competitors, we use strong local management
teams to address the needs of our customers. Most of our sales people are based
in regional offices and are supported by specialized technical and commercial
assistance from our offices in Munich, Vienna, Zurich, Rome and Trento. This
strategy allows us to initiate close relationships with our customers at an
early stage of their Internet services requirements, engage in strategic
discussions with senior management about their communications requirements,
participate in the design of their systems, services and solutions, and
establish the basis for long-term relationships at different levels of our
customers' organizations. We are then in a position to provide our customers
with additional services as their requirements increase or change over time.
This also enables us to offer additional solutions to our customers without
having to compete primarily on price.
Develop a Total Communications Offering. We currently offer both Internet
connectivity services and modular Internet business solutions to our customers.
Our modular solutions include web-hosting and -housing, VPNs, security
solutions, electronic commerce solutions and Intranet and workflow solutions.
As technology evolves, we intend to broaden our product offering to include
additional services, solutions and innovations that have proven reliable and
effective. In June 1999, we started offering voice services. Our ability to
offer voice services will allow us to provide one-stop shopping for integrated
voice and data solutions. We believe IP technology and IP applications will be
the primary platform and interface for business data and voice communications
in the future.
Expand Our Sales Channels. We are currently pursuing growth opportunities
through various sales channels. These include trained direct sales
representatives with strong technical backgrounds, an extensive reseller
program and marketing alliances with technology leaders like Hewlett-Packard,
Microsoft, Network Associates, and Sun Microsystems. We are expanding our
direct sales force and regional offices to increase our local coverage. We
intend to expand our reseller and referral arrangements to increase sales of
our basic connectivity services, and enhance our marketing alliances to obtain
more potential customer contacts.
Control Our Network. We consider it strategically important to control and
operate our own network infrastructure. This will enable us to: (i) maximize
revenues by offering total communications services, including broad band and
voice services; (ii) achieve the highest levels of service quality and
reliability; and (iii) reduce transmission costs. This involves:
. optimizing the configuration of our IP network, by concentrating
international access at a few select locations where the cost of global
access can be minimized; concentrating network planning and management
in one central location; and planning the network's redundancy on a pan-
European basis rather than on a local basis;
. establishing up to nine large-scale data centers to enhance our co-
location and housing service offering;
. acquiring up to nine carrier grade digital circuit switches to be
installed in key cities; and
. leasing transmission capacity on a long-term basis, acquiring backbone
capacity, or constructing our own infrastructure in selected locations,
to transport high bandwidth data and voice services over all available
transmission protocols (including alternative long-haul transmission
media such as microwave).
61
Accelerate Growth in Europe Through Targeted Acquisitions. To date, we have
successfully integrated three acquisitions. We have recently acquired three
additional companies which we are in the process of integrating. We will seek
to acquire additional Internet-related companies to strengthen our presence in
other European countries, while continuing to grow internally. We look for
strategically and culturally compatible companies to add to our strong
management, enhance our technical expertise, and enhance our customer base in
our current coverage area and bordering countries.
Products and Services
We currently offer a comprehensive range of Internet connectivity services,
network solutions and business solutions to enterprises in Germany, Austria,
Italy, and Switzerland and have started to offer voice services.
Connectivity Services
We offer a variety of connectivity solutions, including Internet access,
third party software and hardware implementation and configuration services, in
bundled and unbundled packages. We offer dedicated line connectivity at speeds
ranging from 64 Kbps to multiples of 2 Mbps. We offer Internet connectivity to
our corporate customers through dedicated lines at our 56 directly owned POPs.
We also provide both analog and ISDN dial-in Internet access throughout
Germany, Italy and Switzerland as well as throughout most of Austria. In
Germany, Italy and Switzerland dial-in service allows our customers to dial
into one nation-wide number to access the Internet at local telephone rates.
Our dial-in services in Austria utilize dial-in access nodes, each of which has
its own dial-in number. We have seven such dial-in access nodes in Austria. At
present, we offer our dial-in service through third party telephone networks.
As we introduce our interconnection and switching capabilities, we plan to
offer dial-in access at a cost approximating that of a local call and also to
charge the customer for telephone minutes. Outside the countries in which we
operate, we offer roaming at local call rates in cooperation with more than 350
international ISPs and telecommunications companies which have joined the
Global Reach Internet Connection.
We offer third-party software products such as electronic mail, news and
other solutions that permit customers to navigate and utilize the Internet and
give remote access to mobile personnel operating outside traditional office
settings. We also provide router services such as router renting,
configuration, supervision and maintenance. Overall, we are able to offer
customers a full portfolio of services with managed connectivity. Our principal
connectivity services include:
Product Name Characteristics
------------ ---------------
Personal Connect, Office Single user dial-up services, with dynamic IP address and
Connect, Call & Surf, access speeds of up to 64 Kbps. Selection of usage-based
Call-to-Intranet or flat rate tariffs, including dial-in telephony costs
(except Personal Connect and Office Connect).
Business Connect, Call & Multi user dial-up service for workgroups, with multiple
Surf for Workgroups, IP addresses and access speeds of up to 128 Kbps.
Call-to-Intranet for Services provided via Local Area Networks ("LANs") with
Workgroups Ascend Pipeline 50/75 routers. Selection of usage-based
or flat rate tariffs, including dial-in telephony costs
(except Business Connect).
Business Line, Campus Leased line service for workgroups, with multiple IP
Line addresses and access speeds of up to 2 Mbps. Service
provided via LANs and Cisco 16xx routers. Selection of
usage-based and flat rate tariffs.
62
Network Solutions
Virtual Private Networks. Many companies today have private data
communication networks, which are often referred to as corporate networks.
These networks are used to transfer proprietary data between offices and use
relatively expensive leased lines to connect various locations. Our VPNs
utilize the Internet as a cost effective alternative to corporate networks to
provide secure transmission of data and voice with the added benefit of secure
remote access. In addition, our VPN products are often the basis for Intranet
services (connectivity of branch offices, teleworkers and mobile workforce) and
Extranet services (connectivity of business partners, suppliers and customers)
services. We offer these products in conjunction with additional hardware and
software solutions, as well as continuous operation and maintenance, customer
care and billing services. Flashnet offers a product called ALL IN ONE, an all
inclusive solution including combinations of data transmission, Internet access
and voice-over IP, representing the ideal platform to build VPNs for customers.
Security Solutions. Corporate networks and systems need to be protected
against unauthorized access and use. We currently offer a comprehensive set of
third-party supplied security products, including encryption, firewall and
authentication packages. We add value to this software by providing services
such as security consulting, installation support, on-the-job training of
customers' system administrators, hotline support (24 hours a day, 7 days a
week) and security audits. To assure the security of communication and business
transactions between users of networks, we integrate state-of-the-art software,
technologies and standards. We offer these security solutions as stand-alone
products or as part of broader solutions, such as VPNs or Intranets. Our
principal security solutions include:
Product Name Characteristics
------------ ---------------
Firewall 1, Gauntlet Third-party firewall software tailored to customer
requirements.
ACE / Server, SecurID Third-party authentication hardware and software.
Token
Idea@Exchange--Secure Third-party software for encryption of electronic mail
Messaging traffic tailored to customer requirements.
Business Solutions
Co-Location. We offer co-location solutions to customers who have the
resources to manage their own servers and websites and who prefer not to share
a server with others. Customers receive the benefits of having their servers
housed in one of our data centers, with full-time connection to the Internet,
direct access to our high-speed network, uninterrupted power supply, regular
back-up and monitoring and technical support 24 hours a day, seven days a week.
Our principal co-location services include:
Product Name Characteristics
------------ ---------------
Server Housing Flexible service offering ranging from simple co-location
to dedicated ports and back-up facilities.
Rent-a-Server Rental of various high-end server types.
Application and Website Hosting. We offer shared server application and
website hosting services, which permit corporations to market themselves and
their products on the Internet without having to invest in independent
technology infrastructure and operations staff. Such customers receive
sufficient bandwidth to meet their needs and the benefits of having their
systems housed in one of our continuously maintained data centers. Applications
on our servers, which our customers can access, include shop and mall systems,
payment systems, publishing systems and video conferencing.
Electronic Commerce. Electronic commerce is the execution of commercial
transactions on the Internet. We design and implement dedicated electronic
commerce systems or any component part which a customer may require, such as
shop or mall, credit verification and payment handling verification. These
systems are
63
based on our electronic commerce platform which integrates systems and
technologies of third-party vendors, such as Brokat, Hewlett-Packard,
Intershop, Microsoft, SAP, Sun Microsystems, VeriFone and others. For customers
reluctant to undertake an investment in a proprietary electronic commerce
solution, we maintain our own electronic commerce system, which we provide on a
lease basis. Through working arrangements with content providers and media
companies, we also assist customers utilizing electronic commerce for retail
and wholesale sales to targeted groups on the Internet. This enables a customer
to establish a distribution channel for products or a channel for purchasing,
and to determine whether to invest in a dedicated system. Our principal
electronic commerce services include:
Product Name Characteristics
------------ ---------------
Online Shopping-- Online shopping site hosted by Cybernet on a low cost
Cybernet Shop Hosting monthly rental basis, which is based on shop software
from Intershop and Beans, among others. Administration is
conducted via Internet.
Online Shopping-- Full license online shopping customized by Cybernet,
Cybernet Shop License based on Intershop, Microsoft Site Server and Openshop,
Model among others. Integration of an inventory control system
is possible.
Online Shopping-- Complex shop or mall applications, tailored to customer
Cybernet Shop and Mall requirements. Integration of an inventory control system
and/or special modules (e.g., customer retention) is
possible.
Imperia Website management system which facilitates the
administration and creation of new websites.
Digital Order Business-to-business system for the digital integration
of procurement processes, hosted on a Cybernet platform.
Auction Server Hosted module for on-line live auctions, providing
different auction rules and methods.
PictureBase Hosted on-line database to present, sell and archive
digital pictures through the Internet. Integration of
electronic payment is possible.
Intranet and Workflow Solutions. Internet technologies can be utilized in a
customers' internal information technology system. We offer Intranet and
workflow solutions that enhance the capabilities, efficiencies and
functionality of our customers' systems, speed the development of new
applications, reduce the cost of developing and maintaining applications and
allow the integration of existing systems and databases. Thus, instead of
replacing their systems, customers can preserve their investment and upgrade
their systems with our enhanced solutions. Our Intranet platform integrates
basic dial-in and leased line connectivity with IP-based VPNs and a
communications infrastructure that includes facsimile, voice mail, electronic
mail and enhanced security solutions. Our principal Intranet and workflow
solutions include:
Product Name Characteristics
------------ ---------------
Faxination--Unified Third-party hardware and software which transforms
Messaging Server messages and documents from one medium into another
(e.g., fax to electronic mail, electronic mail to voice).
Service accessible via PSTN line.
Teleworkx Bundle of Cybernet and third-party hardware and software
targeted at teleworkers.
Intranet Access Control Third-party software which grants secure and controlled
access for teleworkers to the Intranet.
64
Voice Services
Since June 1999, we have been offering switched voice services to our IP-
based customers, as well as value-added and integrated solutions combining
switched voice solutions and IP solutions. We also envision offering wholesale
services to other carriers on a case-by-case basis.
Initially, pending completion of our own interconnect arrangements, these
services are offered in co-operation with a third-party telecommunications
operator. As we complete the implementation of our own voice switching
capabilities and leased line network, we anticipate capturing more dial-up
revenues and reducing our transmission costs.
Sales and Marketing
We believe that our sales and marketing program enables us to effectively
market our comprehensive range of products and services to corporate customers.
We tailor our marketing approach as follows:
. to our principal target market of medium-sized corporations, we offer
customized solutions at competitive prices by designing systems that
integrate modular elements of proven functionality, effectiveness and
reliability;
. to some larger customers with more specialized needs, we offer more
sophisticated technical services and individualized solutions; and
. to customers with basic service needs, we provide services which require
minimal customization and installation, such as Internet connectivity.
Flashnet provides consumer customers in Italy with dial-in access services
that are delivered through an easy to implement Internet kit. Flashnet also
simplifies customer payment by issuing rechargeable cards. We believe that
Flashnet is the first ISP in Italy to implement use of this payment method.
Direct Sales. At September 30, 1999, our direct sales force consisted of 81
sales representatives located in 19 offices in Cologne, Frankfurt, Dusseldorf,
Berlin, Munich, Stuttgart, Hamburg, Vienna, Trento, Rome, Milan, Bologna,
Venice, Florence, Padua, Verona, Zurich and Lausanne. We are in the process of
expanding that direct sales force and opening additional sales offices. We are
also increasing our local presence and enhancing client coverage by shifting
more of our direct sales representatives from our headquarters to our regional
offices, where they will be closer to customers.
Our sales force has a strong technical background and a detailed
understanding of the differing needs of the customers in the regions it serves.
It is knowledgeable about our main targeted industry segments, particularly IT,
tourism, retail, finance, government, media and advertising.
Channel Sales and Partnerships. Our channel sales group develops
relationships with resellers of our products and services and maintains
marketing alliances. In Germany, our three-person channel sales group works
with a network of more than 100 resellers, primarily software suppliers,
systems integrators and ISPs, through whom we offer basic services such as
Internet connectivity that can be delivered with a minimum of customization and
installation. Direct sales people in Austria and Italy also develop reseller
relationships. In addition, we utilize our reseller relationships to gain
direct access to customers for the sale of additional products and services.
Our marketing alliances with a select group of companies provide a strong
mutual referral program, which we believe will enable us to acquire new
customers cost effectively, benefit from association with well-known partners
and increase our brand awareness. We currently have marketing alliances with
Hewlett-Packard, Microsoft, Network Associates, Sun Microsystems and others. In
Italy, Flashnet uses a network of approximately 240 computer stores (Flashnet
Points) as its primary means of marketing to consumer customers.
We intend to conduct our operations and marketing under the Cybernet brand
name, although we use subsidiary brand names for transition periods after
acquisitions. We have undertaken public relations efforts to
65
raise the awareness and visibility of the Cybernet name in our target markets.
We present ourselves as "The Communication People," providing connectivity,
value-added solutions and superior customer service.
Technology and Network Operations
Overview
The IP network of an ISP consists of a number of access nodes linked by owned
or leased lines. Access nodes are used to provide our customers with access to
our network either through dedicated lines or regular telephone lines (dial-in
access). The IP traffic generated at each access node is carried through our
backbone network to points of traffic exchange, where traffic is exchanged with
other providers' networks. These points of traffic exchange can be of two
types: peering points or transit points. Peering points provide for the free
exchange of traffic pursuant to agreements between ISPs. Transit points provide
global connectivity which we purchase from international carriers.
IP Network
We currently operate a geographically distributed IP based network in six
countries (Germany, Switzerland, Austria, Italy, Hungary and Luxembourg)
consisting of network nodes equipped primarily with Cisco and Ascend routers
connected to a redundant high-performance backbone infrastructure. The network
nodes are connected primarily by leased lines and include fourteen POPs in
Germany, 26 POPs in Italy, seven POPs in Austria and three POPs in Switzerland,
and a single POP in Luxembourg and Budapest. We lease our lines from major
telecommunications carriers and backbone operators, such as Deutsche Telekom,
Telecom Italia, Swisscom, Telekom Austria and Hermes Europe Rail Tel. We also
operate two microwave links that connect Munich with Innsbruck and the Italian
border at speeds of 34 Mbps. Our network nodes are interconnected at E-1 to DS3
speeds. We offer our dedicated line customers direct access to our POPs at
bandwidths ranging from 64 kbps to DS3. We have at present approximately 475
customers using dedicated line access. We believe our network is recognized as
one of Germany's most extensive and highest quality Internet networks. In 1999,
we expect to expand our network to include POPs in eleven additional cities in
Germany, and seven cities in Switzerland. We intend to acquire or enter into
long-term leases for backbone capacity or construct our own infrastructure in
selected locations in order to transport high bandwidth data and voice services
over all available transmission protocols, at lower costs than using leased
lines.
Our IP network is designed to offer reliability, scalability and high
transmission speed to our customers. We achieve reliability by operating a
fault tolerant network through our redundant backbone in Germany, Austria,
Switzerland and Northern Italy, which is based on a hierarchical multiple ring
design. We include back-up routers in our access nodes to attain further
redundancy, and thereby minimize the risk of single points of failure. To
ensure constant worldwide connectivity, we use multiple global access
providers. In Italy, Flashnet's extensive network is based on a star design and
achieves redundancy through back-up leased lines. We derive scalability from a
hierarchical multi-layer architecture that offers the opportunity to add
network locations without major infrastructure changes. We offer transmission
capacities ranging from 64 kbps to DS3 and intend to upgrade parts of our
network to STM-1 capacity in the near future. In addition, our network includes
cache servers in the major POPs to reduce the delivery time of regularly
requested information and reduce bandwidth needs for international traffic.
We offer dial-in Internet access through dial-in nodes with analog and ISDN
ports that provide coverage throughout Germany, Italy and Switzerland and
throughout most of Austria. In Germany, we have completed our BELT project,
which enables us to offer local dial-in connections to our customers throughout
the country with a single dial-in number. We have achieved this by
concentrating multiple dial-in access nodes into four larger access points
called virtual POPs, using the PSTN to aggregate traffic. We expect that these
virtual POPs will generate operating efficiencies, because there will be fewer
locations we will be required to service. We already offer local dial-in access
through a single dial-in number in Switzerland and Italy. In Austria, our
dial-in customers can access our network through seven telephone numbers.
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Peering and Transit Relationships. We have entered into peering agreements
with major ISPs in each of the countries in which we operate. We have peering
agreements with more than 25 ISPs in Germany and with the principal ISPs in
Austria, Italy and Switzerland. Our main peering points are in Frankfurt,
Munich, Milan, Rome, Trento, Vienna and Zurich. We also peer directly through
leased lines connected to some of our peering partners, such as Deutsche
Telekom. We plan to enter into additional peering agreements in order to
establish a direct presence in most European peering centers and to reduce
transit costs. By the end of 1999, we expect to connect to peering points in
France, Belgium, The Netherlands and the United Kingdom. Recently, some ISPs
have restricted peering agreements by implementing restrictive criteria for
small ISPs. We believe that our size and growth prospects will allow us to
maintain and extend our existing agreements.
We have entered into global transit agreements pursuant to which we have
purchased the right to route traffic across the networks maintained by Ebone,
Global One, Swisscom, AT&T Corporation/Unisource and MCI Worldcom. This
provides our customers with the ability to communicate with those European
countries in which we are not present, and with the rest of the world.
Frankfurt, Munich, Vienna and Zurich currently serve as our global access
points.
Network Management
The effective functioning of our network is one of the key elements of our
operations. We have developed network management capabilities to offer reliable
and cost efficient communications services and to deliver high quality services
to our customers. Our Network Operations Centers ("NOCs") in Munich, Vienna,
Zurich and Trento, monitor the performance of our network and our international
links 24 hours a day and seven days a week. Our NOCs have the capability to
identify network problems on a real-time basis. Our technical support groups
are equipped to take the necessary corrective measures quickly. By the second
quarter of 2001, we intend to centralize our NOCs in a single facility in
Munich.
Data Centers
We house servers in our data centers that are linked to our network. We
currently operate data centers in Munich, Frankfurt, Vienna and Rome. Our main
data center in Munich has a capacity of 300 square meters. We intend to
establish additional data centers in Dusseldorf, Frankfurt, Hamburg, Munich,
Vienna, Trento, Rome, Milan and Zurich. These data centers will be co-located
with certain of our IP nodes (POPs) and switching facilities. We have already
signed leases for the facilities in Hamburg, Frankfurt, Trento, Milan, Rome and
Munich. Each of these facilities will be approximately 2,000 square meters in
size. We are designing these facilities to house transmission, IP routing and
switching equipment, and to offer hosting, co-location, facilities management
and interconnection services to our corporate customers, ISPs and
telecommunications carriers. Each facility will offer uninterruptible power
supply and back-up generators, air-conditioning, constant monitoring and
physical security to ensure a high quality of service with minimal
interruptions.
Switched Voice
We have added digital circuit switching capabilities to our network. Until we
finalize the installation of our switches and negotiate interconnection
agreements, we will be able to offer switched voice services using a third-
party provider. We are installing carrier grade Nortel DMS-100 voice switches
in Germany, Italy, Austria and Switzerland. In Germany, we have obtained a
class 4 license, which is necessary to offer telephony services. We expect to
interconnect with Deutsche Telekom at multiple points of interconnection,
thereby minimizing our interconnection costs in the German market. Our
subsidiary Flashnet has a telephony license to offer voice services throughout
Italy and we are currently in negotiations with Telecom Italia for an
interconnection agreement. We have applied for national licenses to offer
switched services and started the process of entering into interconnection
agreements in Switzerland and Austria. We expect our switched network to start
operating in the first quarter of 2000 and be fully operational by the end of
that year. We have recently completed the installation of our integrated
billing system through which we expect to be able to
67
provide a single bill to our German customers for voice and IP services. Over
time, we plan to centralize our billing and provide integrated bills to the
customers in all of the countries we service.
CUSTOMERS
As of September 30, 1999, we provided network services to 13,400 business
customers (including customers served through affinity groups), as compared to
6,923 as of December 31, 1998, 4,061 as of December 31, 1997 and 166 as of
December 31, 1996. As of March 31, 1999, we had 4,735 affinity group customers,
as compared to 3,846 as of December 31, 1998, and 1,941 as of December 31,
1997. At year-end 1996, we had no affinity group customers. During the nine
months ended September 30, 1999, we completed Internet Projects for 150
customers, as compared to 122 customers in 1998, 49 customers in 1997 and 12
customers in 1996.
While our target market is the small- and medium-sized corporations, we also
provide services and solutions to prominent larger businesses. Through our
subsidiary Flashnet, we also serve consumer customers in Italy.
Our customers include businesses in IT, tourism, service, retail, finance,
government, media and advertising and manufacturing. Following is a list of
certain business groups in each of seven selected industry groups to which we
provided services and solutions as of December 31, 1998.
* Information Technology * Finance
CompuNet AXA Nordstern Colonia
Cyberlab Interactive HypoVereinsbank
Hogatex BMW Leasing
Info AG Commerzbank
InstallShield Software GE Capital Finance
Prism Software Engineering VR--Leasing
CompuServe Interactive Service
Internet Consulting * Government
Swissdata
Federal YZK Office
* Travel and Tourism Regulierungsbehoerde fur
Telekommunikation und Post
Frosch Touristik Bundesdruckerei
START AMADEUS Ministerium fur Wissenschaft
START Media Plus Stadtwerke Karlsruhe
Lauda Air
* Media and Advertising
* Retail
Finanzen-Verlag
Eddie Bauer Media Consulting
F.W. Woolworth Co. ORF Modern Times
Suzuki Auto
Tengelmann * Manufacturing
Wrigley
Zuegg Bayer
Daimler Chrysler Aerospace
Hugo Matthaes Druckerei
Nokia Italia
CUSTOMER SERVICE
We provide high quality customer service and support in order to enhance the
strength of our brand name, increase customer retention rates and generate new
customer referrals. Our customer services are organized into technical support
and call center groups.
Our technical support group consists of technicians in our Munich NOC and
field engineers. The NOC-based technicians respond to customer requests 24
hours a day, seven days a week, diagnosing customers'
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problems and providing immediate assistance. We believe that our centralized
technical support operations improve the quality and consistency of our
support, achieve scalability in our resources and benefit from economies of
scale. Our field engineers are available to visit our customers' premises, as
necessary.
Our call center provides complete information and specifications about each
of our products and advises our customers on service and solutions related
questions.
We have purchased and installed and are in the process of implementing an
integrated billing system for Internet and switched voice services and are in
the process of introducing this new system to our customers. We have licensed
the Kenan billing platform and have adapted it to our requirements.
Implementation of this system caused some delay in our processing of customer
invoices in the first quarter of 1999. We do not expect those problems to
recur. Kenan, a subsidiary of Lucent Technologies, is a leading provider of
billing solutions to the telecommunications industry. Initially, this system
will allow us to provide a single bill to our German customers for all the
different services they are purchasing from us, thereby simplifying their
internal operations and reducing our costs. In the year 2000, we intend to
adopt the use of this integrated billing system on a Company-wide basis and to
manage it from our central offices in Munich.
Acquisitions
Since we began business in 1996, we have acquired seven companies through
which we have expanded our technical capabilities, attracted additional talent,
entered new markets and increased our customer base:
. Cybernet E-Commerce. In September 1997, we acquired 100% of Artwise
which was later renamed Cybernet E-Commerce, a German company which
provided us with expertise in Intranet messaging and workflow solutions
and established our presence in the Ulm region of Germany;
. Eclipse. In December 1997, we acquired 66% of Eclipse, an ISP based in
Trento, Italy, through which we established our presence in Northern
Italy;
. Open:Net. In August 1998, we acquired 100% of Open:Net, an ISP through
which we increased our penetration of the southwest German market
serviced by Artwise;
. Vianet. In December 1998, we acquired 100% of Vianet, a leading Austrian
ISP through which we entered the Austrian market and significantly
increased our customer base;
. Sunweb. In May 1999, we acquired 51% and an option to purchase the
remaining 49% of Sunweb, through which we established a presence in
Switzerland and acquired substantial additional expertise in switched
voice services; and
. Flashnet. In June 1999, we acquired 100% of Flashnet, a leading Italian
ISP through which we gained access to all major business centers in
Italy.
. Novento. In October 1999, we acquired 51% of Novento Telecom AG and its
sister organization, Multicall Telefonmarketing AG, which are German
direct marketing organizations for communications services through which
we expanded our sales capabilities and acquired additional sales and
marketing expertise.
Competition
The business of providing Internet connectivity, services and solutions is
highly competitive and there are no substantial barriers to entry. We believe
that competition will intensify in the future and our ability to successfully
compete depends on a number of factors including: market presence; the
capacity, reliability and security of our network; the pricing structure of our
services; our ability to adapt our products and services to new technological
developments; and principal market and economic trends. Our competitors consist
of ISPs, telecommunications carrier, and system integrators/computer
manufacturers. Because few of our competitors in any of these groups provide
all of the products, services and solutions that we provide, we believe that we
are well positioned to compete in our market.
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ISPs
We strive to differentiate ourselves from other ISPs by offering a full range
of services and solutions which business customers are likely to require in
connection with their use of the Internet. Most of our ISP competitors offer
fewer services and focus on connectivity. However, some competitor ISPs have
greater resources and larger communications and network infrastructures than we
do. In Germany, these competitors include: European Computer-Industry Research
Centre; Nacamar; PSINet; UUNet Technologies; and Xlink. In Austria, they
include Cybertron, EUnet Multimedia Network Services and Netway Austria; and in
Italy, they include I-Net.
Telecommunications carriers
Many telecommunications carriers are large organizations and do not provide
Internet services as their main product. We compete with these organizations by
focusing on the Internet and offering flexible decision making and execution,
responsive customer service, recognized technical expertise, and high quality
products. Our main carrier competitors in Germany are: Mannesmann Arcor,
Deutsche Telekom and Viag Interkom. In Austria, our principal carrier
competitors are Telekom Austria, United Telecom and Tele.ring. And in Italy,
they are Infostrada, Telecom Italia and Wind.
When we begin to offer voice services, we will compete directly with
carriers, including large carriers such as Mannesman Arcor, Deutsche Telekom
and Viag Interkom in that market segment. Most of these competitors are
significantly larger and have substantially greater market presence, financial,
technical, operational, marketing and other resources and experience than we
do. In addition, carriers have greater resources to engage in various forms of
price competition, such as bundling Internet services with other
telecommunications services, thereby offering lower prices for either
telecommunications or Internet services. Increased price competition could
force us to reduce our prices, resulting in lower profit margins. In addition,
increased competition for new customers could result in increased sales and
marketing expenses and related customer acquisition costs and could materially
adversely affect our profitability.
Major System Integrators and Computer Manufacturers
Major systems integrators and computer manufacturers, such as Andersen
Consulting and IBM, provide IT solutions to their clients and have expanded
their offerings to include Internet-related products and solutions. Many of
these companies have established customer relationships and recognized
technical expertise, and some have significantly greater resources than we
have. However, most do not offer connectivity services and solutions. We
compete with these companies by offering a more complete Internet-related
service and product line than they offer. In fact, some system integrators and
computer manufacturers utilize our connectivity services and solutions to
complement their own lines of products and services.
Research and Development
Our future success will depend, in part, on our ability to offer services
that incorporate leading technology, address the increasingly sophisticated and
varied needs of current and prospective customers and respond to technological
advances and emerging industry standards and practices on a timely and cost
effective basis. The market for our services is characterized by rapidly
changing and unproven technology, evolving industry standards, changes in
customer needs, emerging competition and frequent introductions of new
services. We cannot assure you that future advances in technology will be
beneficial to, or compatible with, our business or that we will be able to
incorporate into our business such advances on a cost effective and timely
basis. Moreover, technological advances may have the effect of encouraging
certain of our current or future customers to rely on in-house personnel and
equipment to furnish the services we currently provide. In addition, keeping
pace with technological advances may require substantial expenditures and lead
time.
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Intellectual Property Rights
We rely on a combination of copyright, service mark and trade secret laws and
contractual restrictions to establish and protect certain proprietary rights in
our products and services. In this regard, we have applied to the EU for a
trademark registration for the name "Cybernet." We have no patented technology
that would preclude or inhibit competitors from entering our market. We have
entered into confidentiality and invention assignment agreements with our
employees, and non-disclosure agreements with our consultants, vendors,
suppliers, distributors and appropriate customers in order to limit access to
and disclosure of our technology, documentation and other proprietary
information. We cannot assure you that these contractual arrangements or the
other steps we have taken to protect our intellectual property will prove
sufficient to prevent misappropriation of our technology or to deter
independent third-party development of similar technologies. The laws of the
countries in which we operate may not protect our products, services or
intellectual property rights to the same extent as do the laws of the United
States. To date, we have not been notified that our products are claimed to
infringe the proprietary rights of third parties, but we cannot assure you that
third parties will not claim infringement by us with respect to current or
future products. We expect that participants in our markets will be
increasingly subject to infringement claims as the number of products and
competitors in our industry segment grows. Any such claim, whether meritorious
or not, could be time consuming, result in costly litigation, cause product
installation delays or require us to enter into royalty or licensing
agreements. Such royalty or licensing agreements might not be available on
terms acceptable to us, or at all. As a result, any such claim could materially
adversely affect our business, results of operations and financial condition.
Regulation
Regulatory Environment in the Internet-Related Markets of the Company
Our Internet operations are not currently subject to direct regulation by
governmental agencies in the countries in which we operate (other than
regulations applicable to businesses generally). In 1997, Germany enacted the
Information and Communication Services Act which releases Internet access
providers from liability for third-party content in certain circumstances and
establishes a legal framework for Internet commerce with respect to the
identification of service providers, data privacy and price indications on the
Internet. A number of other legislative and regulatory proposals are under
consideration with respect to Internet user privacy, infringement, pricing,
quality of products and services and intellectual property ownership. There is
also controversy regarding the application of value-added taxes in the Internet
environment. The adoption of new laws could materially adversely affect our
business, result of operations and financial condition.
Regulation and Regulatory Authorities in the Telecommunications Market
Effective January 1, 1998, all of the countries in which we operate abolished
the monopoly rights of incumbent operators to provide fixed-line voice
telephone services to the public. As a result, competitive telecommunications
markets are now developing for long distance and international telephone
services. Competition for local telephone service has been much slower to
develop.
All of the countries in which we operate have enacted legislation and
regulations and have established regulatory authorities for the
telecommunications industry. The purpose of this regulation is to ensure: (i) a
wide range of high-quality, telecommunications services to private individuals
and businesses; (ii) reliable services to the entire population at affordable
prices; (iii) the absence of interference with personal and intellectual
property rights in telecommunications traffic; and (iv) effective competition
in the provision of telecommunications services.
In each of the countries in which we operate, providing telecommunications
services and related facilities requires a license. The regulatory authorities
have various powers, including the authority to grant and revoke licenses,
assign and supervise frequencies, impose universal services obligations,
control network access and
71
interconnection, and approve or review the tariffs and tariff-related general
business terms and conditions of market-dominant providers.
In the countries in which we operate, different classes of licenses are
required for different services offered and facilities operated. We have
obtained a "class 4 license" (voice telephone services based upon self-operated
telecommunications networks) in Germany. Geographically this license covers the
entire Federal Republic of Germany and is valid indefinitely. We have not yet
obtained similar licenses for Switzerland or Austria, which we will require to
expand our business as we currently plan. In Italy, our subsidiary Flashnet has
a license which permits us to offer voice telephone services in the entire
country. We have also obtained a "class 3 license" in Germany which permits us
to operate cables, radio links and other telecommunications-related
infrastructure throughout Germany.
When we enter the switched voice telephony market, our ability to provide
viable services will depend in significant part upon our ability to secure and
maintain interconnection agreements with the incumbent operators and other
facilities-based providers in our target markets. We will need interconnection
to complete calls that originate on our network but terminate outside our
network or originate elsewhere and terminate on our network. The cost of
interconnecting will be a critical factor in determining whether services on
our network can be offered on a competitive basis.
Each of the countries in which we have operations has market-dominant
providers which are legally required to offer essential services such as
transmission, switching and operational interface to networks such as the one
we plan. Market-dominant operators of telecommunications facilities are
obligated to provide interconnection on a non-discriminatory basis and at cost-
related prices. If the terms and conditions of obligatory interconnection
cannot be agreed upon, the regulatory regimes of the countries in which we
operate provide for administrative proceedings which permit regulatory
authorities to set the conditions for interconnection.
In two decisions dated September 12 and October 2, 1997, the German Post
Ministry set the average interconnection price in Germany (the average fees
Deutsche Telekom may charge for origination and termination of voice services
from or into the network of other network operators) at 2.7 Pfennigs per minute
(for each delivery and receipt) until January 1, 2000. Deutsche Telekom has
filed suit seeking a higher average fee. Moreover, the German regulatory
authority (the "Regulatory Authority") has indicated to Deutsche Telekom that
it will be allowed to take additional costs into account when determining fees
subject to approval, if "atypical traffic" (still to be defined) occurs and
Deutsche Telekom provides evidence of the corresponding additional costs in
individual cases. However, Deutsche Telekom's first application for higher
prices because of such a typical traffic was denied by the Regulatory Authority
on the basis that Deutsche Telekom had not demonstrated the higher costs
resulting from such traffic. In order to assert these additional costs, we
understand that Deutsche Telekom has submitted an application to the Regulatory
Authority to supplement the interconnection fees currently in effect. We cannot
assure you that these additional costs will not be implemented until after the
Regulatory Authority has responded to this application.
Another potential consequence of the implementation of the concept of
"atypical traffic" is that Deutsche Telekom may offer interconnection on
modified conditions. We understand that Deutsche Telekom intends to force
competitors to install additional points of interconnection where traffic
originating from or terminating in an area defined by Deutsche Telekom exceeds
a specified volume. In addition, we understand that Deutsche Telekom intends to
seek certain other surcharges to interconnection rates. If approved by the
Regulatory Authority, these provisions would likely result in additional
infrastructure costs and higher interconnection rates for us.
Subscriber Line Charges
We rely upon Deutsche Telekom for leased lines so as to obtain direct access
to customers. Although the rates which Deutsche Telekom may charge for such
lines have been established by the Regulatory Authority
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and the ruling of the Regulatory Authority purports to establish rates which
will be in effect until March 31, 2001, the ruling has been appealed to a
court. Any possible increase in these rates of the rental charge could impede
our business development.
Internet Access Charges
T-Online, an ISP owned by Deutsche Telekom, has announced its intention to
charge Internet subscribers a flat rate that is significantly lower than the
rate charged by competitor ISPs. The District Court (Landgericht) Hamburg
enjoined T-Online from offering this rate because the telecommunications law
forbids market dominant providers from bundling services. However, this court
decision is not final and we cannot anticipate the final outcome of this issue.
If T-Online is permitted to charge the proposed rate, our ability to market
Internet access services might be adversely affected.
Employees
At the end of September 1999, we had a total of approximately 450 employees
organized as follows: 143 in sales and marketing, 214 in technical and
operational personnel and 93 in administration. There are no collective
bargaining agreements in effect. We believe that relations with our employees
are good.
Properties
We lease the real estate where our business offices and certain nodes
containing servers, routers and other equipment are located. Our largest
leasehold property is our main office in Munich with approximately 2,000 square
meters. Other leasehold properties for our regional offices are located in Ulm,
Neu-Ulm, Frankfurt, Dusseldorf, Berlin, Munich, Stuttgart, Hamburg, Vienna,
Trento, Rome, Milan, Florence, Padua, Verona, Zurich, Lausanne and an
administrative office is located in Washington, D.C. In addition, we lease
approximately 3,500 square meters for our planned facility in Frankfurt, 2,500
square meters for our planned facility in Hamburg and 600 square meters for our
new Trento Data Center, and are planning to lease additional space in
Dusseldorf, Munich, Vienna and Zurich.
We believe that none of these leases is critical to operations and that
relocation of any of the leased premises would be feasible on acceptable terms,
if necessary.
We lease dedicated telephone lines from telecommunications carriers and
resellers. Assets relating to our operations, including servers and routers,
are leased or owned.
Legal Proceedings
In December 1998, we applied for and received a class 4 telecommunications
license from Germany's Regulierungsbehoerde fur Telekommunikation und Post. The
fee for this license was DM 3,000,000. The EU regulations set the maximum fee
that can be charged at the actual cost incurred by a government agency to
administer its regulations. We filed an action in a German court to recover a
portion of the fee paid for our license because we believe the fee charged
exceeded the amount chargeable under EC regulations in effect in 1998 and
prevailed in that action in the court of first instance. The decision is
subject to appeal and it is not possible to predict the ultimate outcome of our
action.
We are not involved in any other legal proceedings which we believe would, if
adversely determined, have a material adverse effect upon our business,
financial condition or results of operations.
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INFORMATION REGARDING SIGNIFICANT SUBSIDIARIES
The following table sets forth certain information pertaining to Cybernet's
significant subsidiaries.
Country of %
Company Name in Full Registration Activity Ownership
- -------------------- ------------ -------- ---------
Cybernet AG(/1/) Germany Internet services 100
Flashnet S.p.A.(/2/) Italy Internet services 100
- --------
(1) Net loss arising out of ordinary activities, after tax and for the
financial year ended December 31, 1998 amounted to DM 8,514,505
($4,649,647) and the net loss arising out of ordinary activities, after
tax, for the first quarter of 1999 amounted to DM 5,283,378 ($2,885,175).
No dividends have been received from Cybernet AG in the course of 1998 or
1999. Cybernet AG has no reserves as of December 31, 1998 as they are not
required for German corporations or under US GAAP. It has an issued share
capital of DM 3,200,000, all of which shares are credited as fully paid.
(2) Net loss after tax for the year ended December 31, 1998 amounted to Lit.
2,365,503 thousand ($1,304,796) and net loss after tax for the first
quarter of 1999 amounted to Lit. 833,163 thousand ($459,567). Flashnet had
an issued share capital of 2,182,857 shares as of March 31, 1999.
74
MANAGEMENT
Executive Officers and Directors
The following table sets forth the names, ages and positions of our executive
officers and directors:
Name Age Position
---- --- --------
Andreas Eder................. 39 Co-founder, Chairman of the Board of
Directors, President, Chief Executive
Officer, and Head of the Management Board of
Cybernet AG
Dr. Alessandro Giacalone..... 48 Director
Robert Eckert................ 38 Chief Financial Officer and Treasurer
Bernd Buchholz............... Executive Vice President for Sales and
Marketing
Dr. Hubert Besner............ 36 Director and Member of the Management Board
of Cybernet AG
Robert Fratarcangelo......... 61 Director and Secretary
G.W. Norman Wareham.......... 46 Director
Tristan Libischer............ 30 Director, Co-Founder of Vianet and Member of
the Management Board of Vianet
Jurg Heim.................... 35 Co-Founder of Sunweb, Chief Executive Officer
of Subweb and Member of the Management Board
of Sunweb
Marco Samek.................. 27 Co-Founder of Sunweb, Chief Operational
Officer of Sunweb and Member of the
Management Board of Sunweb
Roberto Loro................. 33 Co-Founder of Eclipse, Director of Marketing
Division of Eclipse and Member of the
Management Board of Eclipse
Stefano Longano.............. 37 Co-Founder of Eclipse and Member of the
Management Board of Eclipse
Patrizia Loro................ 31 Manager of Eclipse and Member of the
Management Board of Eclipse
Andreas Eder
Mr. Eder, a co-founder of Cybernet AG, has been Chairman, President, Chief
Executive Officer and Head of the Management Board of Cybernet AG since its
formation in December 1995 and has been Chairman of our Board of Directors,
President and Chief Executive Officer since we acquired Cybernet AG in 1997.
Before founding Cybernet AG, Mr. Eder held management positions with The Boston
Consulting Group from April 1991 to October 1995 and Siemens-Nixdorf
Information Systems from April 1986 to March 1991. Mr. Eder holds a Master
Degree in Business Administration from the University of Munich.
Dr. Alessandro Giacalone
Dr. Giacalone has been a Director since February 1999. Between October 1997
and November 30, 1999, he was our Chief Operating Officer and member of the
Management Board of Cybernet AG. From September 1994 to May 1997, Dr. Giacalone
was Managing Director of the European Computer-Industry Research Centre
("ECRC") in Munich and, from 1990 to September 1994, he was Research Group
Leader at the ECRC. At the ECRC, he built a commercial Internet service
enterprise which was the second such enterprise in Germany. This project was
completed by the end of 1996. Between 1984 and 1990, he was an Assistant
Professor of Computer Science at the State University of New York. Dr.
Giacalone graduated in Computer Science from the University of Pisa and holds
Masters and Doctorate degrees in Computer Science from Brown University.
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Robert Eckert
Mr. Eckert joined the Company as Chief Financial Officer and Treasurer in May
1999. From September 1998 to May 1999, Mr. Eckert was the Chief Financial
Officer of NetSource ASA, a pan-European reseller of telecommunications
services. From July 1997 to August 1998, Mr. Eckert was the Director of
International Business Development and from 1995 to July 1997, he was the
Finance Director at Swisscom International. From 1987 to 1994, Mr. Eckert was
with the General Electric Company (USA) where he held several finance positions
in various countries and business groups. He holds a BA in International
Business and Marketing from Northeastern University in the USA and an MBA from
INSEAD in France.
Dr. Hubert Besner
Dr. Besner is one of our Directors and a member of the Management Board of
Cybernet AG and has served in these capacities since February 1996. From April
1994 to the present, he has been a partner in the law firm of Besner Kreifels
Weber in Munich. From January 1992 to March 1994, he was the head of the legal
department of Schneider, a German real estate development company. He is
currently a Director of Marine Shuttle Operations, a member of the Supervisory
Board of Schuller Industsrieentsorgung, Typhoon Networks and IPO Beteiligungen,
and is the head of the Supervisory Board of PIPECAD Integrierte Softwaresyteme.
Dr. Besner received his First State Exam in law from Ludwig-Maximilians-
Universitat in 1986 and his Doctorate Degree magna cum laude from Ludwig-
Maximilians-Universitat in 1988.
Bernd Buchholz
Mr. Buchholz joined the Company as Executive Vice President Sales and
Marketing in November 1999. From July 1998 to October 1999, Mr. Buchholz was
Chief Executive Officer and a major stockholder of Novento Telecom AG. From
June 1997 to June 1998, Mr. Buchholz was Managing Director Germany for Esprit
Telecom GmbH (GTS Global Telesystems Group). From October 1996 to May 1997, Mr.
Buchholz was Vice President Europe for Novadigm Inc. From April 1995 to
September 1996, Mr. Buchholz was Chief Executive Officer and owner of Beki
GmbH. From June 1993 to March 1995, Mr. Buchholz was Managing Director for
Symantec Europe and from February 1989 to May 1993 Mr. Buchholz was Vice
President Europe and Managing Director for Novell Europe.
Robert Fratarcangelo
Since May 1999, Mr. Fratarcangelo has been our Secretary, and he has been one
of our Directors since September 1997. Since September 1996, he has been the
President and Chief Executive Officer of Criminal Investigative Technologies,
Inc. From 1993 to 1996, Mr. Fratarcangelo was a District Manager at EMC/2/ in
Massachusetts. From 1988 to 1993, Mr. Fratarcangelo was Vice President, Federal
Sales at Teradata and Digital Communications Associates. Previously, Mr.
Fratarcangelo held various positions at IBM. Mr. Fratarcangelo has a Bachelors
Degree in Political Science from the State University of New York.
G.W. Norman Wareham
Mr. Wareham has been one of our Directors since May 1997. Mr. Wareham is a
director of ZMAX Corporation and has served in this capacity since September
1996. He has been the President of Wareham Management Ltd. since May 1996. Mr.
Wareham is currently a director and officer of Aquaplan, British Brasses, Solar
Energy, Viper Resources and WattMonitor and has served in these capacities
since May 1997, December 1998, December, 1997, November 1998 and December 1998,
respectively. Since June 1998 and February 1997, respectively, Mr. Wareham has
been a director of two Canadian public companies, Anthian Resources and Orko
Gold. From June 1995 to January 1996, Mr. Wareham was an accountant with the
certified general accounting firm of Wanzel, Sigmund, & Overes. From April 1993
to February 1995, Mr. Wareham served as President and Chief Executive Officer
of Transatlantic Financial, a private investment banking company. From August
1986 to March 1993, Mr. Wareham was the proprietor of Wareham & Company,
providing accounting and management consulting services.
76
Tristan Libischer
Mr. Libischer has been one of our Directors since February 1999. He is co-
founder of Vianet and has been a Managing Director of Vianet since September
1994. From February 1992 to August 1994, Mr. Libischer held various positions
with BARK. From November 1990 to January 1992, Mr. Libischer was a senior
consultant and sales engineer with 3C Group.
Jurg Heim
Mr. Heim, a co-founder and member of the Management Board of Sunweb, has
served as Chief Executive Officer of Sunweb since its formation in March 1998.
From October 1997 to March 1998, Mr. Heim was a Systems Engineer of data and
intellectual property services at Netcom Services. Mr. Heim was head of Systems
Administration at Telepax Communications from February 1988 to March 1994. Mr.
Heim holds an Electronic Installation degree in Informatik Telephonie.
Marco Samek
Mr. Samek, a co-founder of Sunweb, has served as Chief Operational Officer
and as a member of the Management Board of Sunweb since its formation in March
1998. Since December 1997, Mr. Samek has also been a principal of Framenet EDP.
He was a Systems Engineer of Internet Services at Newtelco from August 1997 to
April 1998. From January 1996 to April 1997, Mr. Samek was Chief Systems
Engineer in the multimedia company Decatron. Mr. Samek has a technical degree
in Communications from Technikum Winterhur College.
Roberto Loro
Mr. Loro, a co-founder of Eclipse, has served as Director of the Marketing
Division of Eclipse and member of the Management Board of Eclipse since April
1998 and before that, he was Director of Project Development there since
January 1992. Previously, he performed various software, IT and mathematics
consulting assignments for a variety of public and private organizations. Mr.
Loro holds a Mathematics degree from the University of Trento.
Stefano Longano
Mr. Longano is a co-founder of Eclipse and has been a member of the
Management Board of Eclipse since April 1998. From January 1996 to March 1998,
Mr. Longano was technical director of Eclipse. From January 1991 to December
1995, he was a senior scientist and project manager for European projects at
the Laboratory of Information and Communication Technologies of the University
of Trento. He holds a Masters Degree in Physics from the University of Trento.
Patrizia Loro
Ms. Loro has been a member of the Management Board of Eclipse since April
1998 and a manager of Eclipse since January 1995. From March 1993 to December
1997, Ms. Loro was Managing Director and a major shareholder of Centro Servizi
Agiendali Sas. Since 1990, Ms. Loro has held various positions in accounting in
several companies. She attended economics courses at the University of Trento
and Italian Tax Code classes in Milan.
Except for a sibling relationship between Roberto and Patrizia Loro, no
family relationship exists between any director or executive officer and any
other director or executive officer.
77
Board Composition
We currently have six directors. In accordance with the terms of our
Certificate of Incorporation, the Board of Directors is divided into three
classes: Class A, whose term will expire at the annual meeting of stockholders
to be held in 2002; Class B, whose term will expire at the annual meeting of
stockholders to be held in 2000; and Class C, whose term will expire at the
annual meeting of stockholders to be held in 2001. The Class A directors are
Dr. Besner and Mr. Fratarcangelo, the Class B directors are Dr. Giacalone and
Mr. Wareham, and the Class C directors are Messrs. Eder and Libischer. At each
annual meeting of stockholders after the initial classification, the successors
to directors whose terms will then expire will be elected to serve from the
time of election and qualification until the third annual meeting following
election. Any additional directorships resulting from an increase in the number
of directors will be distributed among the three classes so that, as nearly as
possible, each class will consist of one-third of the directors. Directors may
be removed for cause by the affirmative vote of the holders of a majority of
all outstanding voting shares of Cybernet entitled to vote generally, voting
together as a single class.
Board Committees
The Board of Directors has three committees: an Executive Committee, an Audit
Committee and a Compensation Committee. The Executive Committee consists of Mr.
Eder, Dr. Besner and Dr. Giacalone. The Audit Committee consists of Messrs.
Fratarcangelo and Wareham. The Audit Committee reviews our accounting
processes, financial controls and reporting systems, as well as our selection
of independent auditors and the scope of the audits to be conducted.
The Compensation Committee consists of Dr. Besner, Mr. Fratarcangelo, and Mr.
Wareham. It reviews executive compensation and organization structure. The
Compensation Committee also administers our Stock Option Plan. Prior to the
creation of the Compensation Committee in November 1998, all decisions
concerning salaries, incentives and other forms of compensation of our
directors, officers and other employees were made by the whole Board of
Directors.
Director Compensation
Directors, who are not also employees, receive $15,000 annually and are
reimbursed for out-of-pocket expenses incurred in connection with their service
on the Board. Each outside director may elect to receive his annual director
fee in cash, stock options or a combination thereof. The value of the stock
options is determined pursuant to the Black-Scholes method and the options are
fully vested at the date of grant.
Employment Contracts
Our executive officers are appointed by the Board of Directors and serve
until their successors are elected or appointed.
We have entered into employment agreements with each of the following
officers and directors on the following material terms.
Andreas Eder. On March 1, 1999, we entered into an employment agreement with
Mr. Eder to serve as President and Chief Executive Officer. The agreement
provides for a three-year term and an annual base salary of approximately
$125,716 per year. It also permits Mr. Eder to earn an annual bonus of up to
approximately $41,906 if certain performance standards established by the
Compensation Committee are achieved. We may terminate the agreement if Mr. Eder
should suffer a "disability" or for "cause."
Upon Mr. Eder's death, we are obligated to pay to his estate an amount equal
to his base salary for the period ended 12 months after his death. If Mr. Eder
resigns or we terminate his employment as a result of a "disability" or for
"cause," we are obligated to pay his base salary through the date of
termination.
78
Under the agreement, "disability" is defined as: (a) any mental or physical
disability which the Board of Directors deems in good faith would preclude Mr.
Eder from performing his duties; or (b) a mental or physical disability which
lasts for a period of 60 consecutive days or for 90 days in any six-month
period and which the Board of Directors elects to treat as permanent in nature.
The agreement defines "cause" as any material breach of its terms by Mr. Eder
or the commission of a felony or a crime involving moral turpitude.
Alessandro Giacalone. On March 1, 1999, we entered into an employment
agreement with Dr. Giacalone to serve as Chief Operating Officer on the same
terms as described above with respect to Mr. Eder.
Tristan Libischer. On December 28, 1998, Vianet entered into an employment
agreement with Mr. Libischer to serve as a member of the Management Board of
Vianet. The agreement is for a five-year term beginning January 1, 1999,
provides for an annual base salary of approximately $100,573 and permits
Mr. Libischer to earn an annual bonus of approximately $33,524 if certain
performance standards established by the Management Board of Vianet are
achieved.
Vianet may terminate the agreement for "good cause." "Good cause" is defined
as a gross breach of duty, the inability to properly conduct the affairs of
Vianet or a vote of no confidence at an annual meeting of Vianet.
Mr. Libischer is not entitled to severance pay if his employment is
terminated for good cause or if he resigns prematurely without the permission
of the Management Board of Vianet. If Mr. Libischer is unable to perform his
duties due to illness or accident, Vianet is required to pay his full base
salary for a maximum of six months and 49% of his base salary for another three
months. If Mr. Libischer leaves Vianet in the middle of a fiscal year, any
bonus earned will be paid on a pro-rata basis.
Robert Eckert. Mr. Eckert entered into an employment agreement with the
Company to serve as Chief Financial Officer which will become effective when
Mr. Eckert receives his working permit from the German governmental
authorities. The agreement is for a three-year term and provides for a base
salary of approximately $114,000. The agreement also provides for a bonus of up
to approximately $46,000 if certain performance standards established by the
Compensation Committee are achieved. Mr. Eckert will also receive an option to
purchase 100,000 shares of Cybernet's common stock pursuant to Cybernet's
Incentive Plan (as defined). In the event Mr. Eckert is unable to work due to
illness or other reasons, the Company is obligated to pay Mr. Eckert his base
salary for six months. In the event of Mr. Eckert's death, the Company is
obligated to pay Mr. Eckert's heirs his base salary for six months.
Jurg Heim. Sunweb has entered into an employment agreement with Mr. Heim for
a term expiring on March 31, 2001. The agreement provides for a base
compensation of approximately $98,115, in addition to certain management
bonuses and an option to purchase 15,000 shares of Cybernet's common stock if
Sunweb meets specified performance goals for 1999.
Marco Samek. Sunweb has entered into an employment agreement with Mr. Samek
on the same terms as described above for Mr. Heim.
79
Summary Compensation Table
Our compensation program for executive management includes base salaries,
annual performance-based incentive bonus plans and stock option plans. The
compensation of each executive officer was established by the Board of
Directors acting upon the recommendations of the Compensation Committee.
The following table sets forth the annual long-term and other compensation
for our Chief Executive Officer and our other two most highly compensated
executive officers during the last fiscal year, as well as the total annual
compensation paid to each individual for the three previous fiscal years.
Summary Compensation Table
Annual Long-Term
Compensation Compensation
--------------- ------------
Securities
Underlying All Other
Fiscal Options Compensation
Name and Principal Position Year Salary ($)(/1/) SARs (#) ($)
- --------------------------- ------ --------------- ------------ ------------
Andreas Eder............................................. 1998 $96,135 100,000(/3/) N/A
Chairman of the Board, President, Chief Executive 1997 65,066(/2/) 0 N/A
Officer, and Head of the Management Board of Cybernet AG 1996 N/A(/2/) N/A(/2/) N/A
Alessandro Giacalone..................................... 1998 125,716 100,000(/3/) N/A
Director, Former Chief Operating Officer, and Member of 1997 31,429(/2/) 0 N/A
Management Board of Cybernet AG 1996 N/A(/2/) N/A(/2/) N/A
Rudolf Strobl............................................ 1998 96,163 0 $251,433(/4/)
Former Member of Management 1997 70,616(/2/) 0 N/A
Board of Cybernet AG 1996 N/A(/2/) N/A(/2/) N/A
- --------
(1) Each of the persons listed has or had an employment contract with us
calling for the payment of an annual bonus if certain performance standards
are achieved. No bonus was paid in the years listed.
(2) Messrs. Eder and Strobl became executive officers of Cybernet in connection
with our acquisition of Cybernet AG in September 1997. As a result, the
information presented for fiscal 1997 represents payments made from the
time of such acquisition through December 31, 1997 and no information is
presented for fiscal 1996. Dr. Giacalone joined the Company in October
1997.
(3) Represents shares of Cybernet's common stock subject to an option granted
to the named executive on December 27, 1998.
(4) The amount indicated was paid to Mr. Strobl in December 1998 as severance
pay in connection with the termination of his employment agreement. Mr.
Strobl's employment terminated on December 31, 1998.
80
Option/SAR Grants in Last Fiscal Year
The following table provides information on options to purchase Cybernet's
common stock that were granted to two of the above named executives during
fiscal 1998. Mr. Strobl received no option grants in fiscal 1998.
Individual Grants
-------------------------
Percent of Potential Realizable
Number of Total Value at Assumed
Securities Options/SARs Annual Rates of Stock
Underlying Granted to Exercise Price Appreciation
Options/SARs Employees or Base for Option Term
Granted in Fiscal Price Expiration ---------------------
Name (#) Year ($/Sh) Date 5% ($) 10% ($)
- ---- ------------ ------------ -------- ---------- ---------- ----------
Andreas Eder........... 100,000 14.6% $32.04 12/27/08 $2,015,000 $5,016,000
Chairman of the Board,
President, Chief
Executive Officer, and
Head of the Management
Board of Cybernet AG
Alessandro Giacalone... 100,000 14.6% 32.04 12/27/08 2,015,000 5,106,000
Director, Former Chief
Operating Officer, and
Member of the
Management Board of
Cybernet AG
Indemnification of Directors and Officers
Our Certificate of Incorporation limits the liability of our directors and
executive officers to the maximum extent permitted by Delaware law. Delaware
law provides that directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, except
liability for (i) breach of their duty of loyalty to the corporation or its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) unlawful payments
of dividends or unlawful stock repurchases or redemptions, or (iv) any
transaction from which the director derived an improper personal benefit. Such
limitation of liability does not apply to liability arising under the federal
or state securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
We have also secured insurance on behalf of each officer, director, employee
or other agent for any liability arising out of claims under applicable
securities laws against such persons and us, and on behalf of directors and
officers with respect to other claims.
At present, there is no pending litigation or proceeding involving any of our
directors or officers in which indemnification is required or permitted, and we
are not aware of any threatened litigation or proceeding that may result in a
claim for such indemnification.
Stock Incentive Plan
We maintain the Cybernet Internet Services International, Inc. 1998 Stock
Incentive Plan (the "Incentive Plan"). The Board of Directors has reserved
2,000,000 shares of Cybernet's common stock for issuance pursuant to awards
that may be made under the Incentive Plan, subject to adjustment as provided
therein. The number of shares of common stock associated with any forfeited
stock incentive are added back to the number of shares that can be issued under
the Incentive Plan. No participant may be granted during any one year period
rights to shares of common stock under options and stock appreciation rights
which, in the aggregate, exceed 100,000 shares of common stock. The
Compensation Committee has granted options to purchase a total of 1,409,325
shares of common stock in varying amounts.
81
The Incentive Plan allows for the grant of incentive stock options, non-
qualified stock options, stock appreciation rights, stock awards, dividend
equivalent rights, performance units and phantom shares. The exercise
price of an incentive stock option may not be less than the fair market value
of the common stock on the date of the grant (or less than 110% of the fair
market value if the participant controls more than 10% of the voting power of
Cybernet or a subsidiary thereof). Non-qualified stock options may be made
exercisable at a price equal to, less than or more than the fair market value
of the common stock on the date that the option is awarded. The term of an
incentive stock option may not exceed ten years from the date of grant.
However, any incentive stock option granted to a participant who controls more
than 10% of the voting power of Cybernet or a subsidiary thereof will not be
exercisable after the expiration of five years following the date the option is
granted.
RELATED PARTY TRANSACTIONS
Dr. Besner, one of our Directors, is a partner with the law firm of Besner
Kreifels Weber, which represents us and to which we paid fees of approximately
$98,303 during fiscal 1998.
In November 1998, Mr. Timm, one of our principal stockholders and a former
Director who resigned on December 2, 1998, advanced an interest free loan to us
for approximately $1,396,849. We repaid the loan in December 1998.
In December 1998, we paid $2,916,000 in underwriting fees to an investment
bank that is 40% owned by a company of which Mr. Timm is Head of the Managing
Board, President, Chief Executive Officer and a principal stockholder. These
underwriting fees were paid in connection with a best efforts all or nothing
public offering of our common stock.
We provide Internet connectivity services to Cybermind Interactive Europe
("Cybermind"), a principal stockholder of Cybernet, pursuant to a standard
service contract. In 1998, Cybermind paid us approximately $68,200 for such
services. Mr. Timm is Chief Executive Officer and Head of the Managing Board,
as well as the principal stockholder, of Cybermind.
82
STOCK OWNERSHIP OF PRINCIPAL
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of November 10, 1999, regarding
beneficial ownership of Cybernet's common stock, Series A Preferred Stock and
Series B Voting Preferred Stock by (i) each stockholder known by us to be the
beneficial owner of more than five percent of the outstanding shares of common
stock or Series B Voting Preferred Stock, as the case may be; (ii) each of our
directors with respect to the equity securities held by such director; (iii)
each of our executive officers named in the Summary Compensation Table with
respect to the equity securities held by such executive officer; and (iv) all
of our current executive officers and directors as a group with respect to the
equity securities held by such executive officers and directors. Stock
ownership information has been furnished to us by such beneficial owners or is
based upon filings made by such owners with the Securities and Exchange
Commission. As of November 10, 1999, there were 21,164,681 shares of Cybernet
common stock, 923,440 shares of Series A Preferred Stock and 3,870,000 shares
of Series B Voting Preferred Stock issued and outstanding. The following table
assumes that all shares of Series A Preferred Stock and Series B Preferred
Stock which are convertible into common stock within 60 days have been
converted.
Name Shares Beneficially Owned
- ---- ---------------------------------------
Series A Series B
Non-Voting Voting
Common Preferred Preferred
Executive Officers and Directors Stock Stock Stock
- --------------------------------- --------- ---------- ---------
Andreas 1,645,850(/1/) 88,877(/1/) 0
Eder....
Stefan-
George-
Ring 19
81929
Munich,
Germany
Approximate
Name Percentage of Class
- ---- -----------------------------------------------------------
Percentage of Percentage of
Series A Series B
Percentage of Non-Voting Voting
Common Preferred Preferred Voting
Executive Officers and Directors Stock Stock Stock Distribution(/7/)
- --------------------------------- ------------- ------------- ------------- -----------------
Andreas 7.6% 14.8% * 6.4%
Eder....
Stefan-
George-
Ring 19
81929
Munich,
Germany
Alessandro 360,933(/2/) 18,000 0
Giacalone..
Stefan-
George-
Ring 19
81929
Munich,
Germany
Alessandro 1.5% 3.0% * 1.3%
Giacalone..
Stefan-
George-
Ring 19
81929
Munich,
Germany
Tristan 183,333(/2/) 0 0
Libischer..
Mariannengasse
14
1090
Vienna,
Austria
Tristan * * * *
Libischer..
Mariannengasse
14
1090
Vienna,
Austria
Bernd 39,412
Buchholz..
Hm
Muehlenbach
19
40670
Meerbusch,
Germany
Bernd
Buchholz..
Hm
Muehlenbach
19
40670
Meerbusch,
Germany
Hubert 1,261(/3/) 0 0
Besner..
Widenmayerstrasse
41
80538
Munich,
Germany
Hubert * * * *
Besner..
Widenmayerstrasse
41
80538
Munich,
Germany
G.W. 0 0 0
Norman
Wareham..
1177 West
Hastings
Street
Suite
1818
Vancouver,
B.C.,
Canada
V6E 2K3
G.W. * * * *
Norman
Wareham..
1177 West
Hastings
Street
Suite
1818
Vancouver,
B.C.,
Canada
V6E 2K3
Robert 0 0 0
Fratarcangelo..
10842 Oak
Crest
Fairfax,
Virginia
22030
Robert * * * *
Fratarcangelo..
10842 Oak
Crest
Fairfax,
Virginia
22030
All
executive
officers
and
directors
as a
group
(10
persons).. 2,229,428 106,877 0
All
executive
officers
and
directors
as a
group
(10
persons).. 10.5% 17.8% * 8.9%
Principal Stockholders Other
Than Executive Officers
and Directors
Rudolf 487,510 26,786 0
Strobl..
Gleiwitzerstrasse
15
81929
Munich,
Germany
Principal Stockholders Other
Than Executive Officers
and Directors
Rudolf 2.3% 4.4% * 1.9%
Strobl..
Gleiwitzerstrasse
15
81929
Munich,
Germany
Holger 3,766,446(/4/) 393,750(/5/) 2,580,000(/6/)
Timm....
Trabner
Strasse
12
14193
Berlin,
Germany
Holger 17.8% 65.6% 100.0% 25.4%(/8/)
Timm....
Trabner
Strasse
12
14193
Berlin,
Germany
Cybermind 2,697,396 300,000 2,580,000
Interactive
Europe..
Am
Borsigturm
48
13507
Berlin,
Germany
Cybermind 12.7% 50.0% 100.0% 21.0%
Interactive
Europe..
Am
Borsigturm
48
13507
Berlin,
Germany
83
- --------
*Indicates less than 1% beneficial ownership
(1) Includes 337,434 shares of common stock and 18,816 shares of Series A Non-
voting Preferred Stock held by Mr. Eder's spouse. She has sole investment
and sole voting power over all shares held by her, and Mr. Eder disclaims
beneficial ownership of any of the shares held by her. Includes 172,800
shares of common stock and 7,200 shares of Series A Preferred Stock subject
to an agreement between Andreas Eder and Dave Morton, an employee of the
Company, by which Mr. Morton has the option to acquire, (a) 25% of the
total number of shares starting on January 1, 1999, (b) 25% of the total
number of shares starting on January 1, 2000 and ending June 30, 2000, and
(c) 50% of the total number of shares starting on January 1, 2001, and
ending June 30, 2001 and (B) 100,800 shares of common stock and 4,200
shares of Series A Preferred Stock subject to an agreement between Andreas
Eder and Todd Ferguson, an employee of the Company or its subsidiary, by
which Mr. Ferguson has the option to acquire such shares at the same price
and under terms as for Mr. Morton. Includes options to purchase 33,333
shares of common stock under the Company's Incentive Plan which become
exercisable on December 28, 1999. Does not include options to purchase
67,667 shares of common stock under the Company's Incentive Plan, which
become exercisable on December 28, 2000 and 2001.
(2) Includes options to purchase 33,333 shares of common stock under the
Company's Incentive Plan which become exercisable on December 28, 1999.
Does not include options to purchase 66,337 shares of common stock under
the Company's Incentive Plan which become exercisable on December 28, 2000
and 2001.
(3) Includes 1,261 shares of common stock held by Dr. Besner's spouse who has
sole voting and investment power with respect to such shares. Dr. Besner
disclaims beneficial ownership of any of the shares held by her.
(4) Mr. Timm can be deemed to control Cybermind as a result of his position as
Chief Executive Officer and Head of the Managing Board and principal
shareholder. Includes 2,697,396 shares of common stock held by Cybermind
after the conversion of the Series B Preferred. Does not include an
aggregate of 673,200 shares of common stock sold by Mr. Timm to Alessandro
Giacalone, Christian Moosmann, Frank Lutze and Hans Bergbreiter pursuant to
stock purchase agreements dated April 8, 1997 (the "April 8 Stock Purchase
Agreements"). Also, does not include an aggregate of 36,000 shares of
Series A Preferred Stock sold by Mr. Timm to the same individuals pursuant
to the April 8 Stock Purchase Agreements. Each of the April 8 Stock
Purchase Agreements involved an employee purchaser and provides that,
subject to certain conditions, the securities sold shall revert to Mr. Timm
if the purchaser's employment terminates for any reason except termination
without cause by us or one of our subsidiaries, or if we or one of our
subsidiaries breaches our employment agreement with such buyer. If such
shares were included as beneficially owned by Mr. Timm for purposes of this
chart, he would be deemed to hold 21% of the common stock of Cybernet (28%
of Voting Distribution).
(5) Includes 300,000 shares of Series A Non-Voting Preferred Stock held by Mr.
Timm indirectly through Cybermind. For an explanation of Mr. Timm's
relationship to Cybermind, see Footnote 4 above.
(6) Reflects shares of Series B Voting Preferred Stock held by Mr. Timm
indirectly through Cybermind. For an explanation of Mr. Timm's relationship
to Cybermind, see Footnote 4 above.
(7) For purposes of this column, the percentages were calculated by adding the
number of shares of common stock outstanding to 100% of the Series B Voting
Preferred. It does not take into account the Series A Non-Voting Preferred
Stock that is not presently convertible or options granted to directors,
employees or management that have not been exercised.
(8) Assuming conversion of the remaining Series A Non-Voting Preferred Stock,
Mr. Timm would control approximately 26.3% of the voting securities of
Cybernet.
84
DESCRIPTION OF THE PIK NOTES
The PIK Notes were issued by the Company under an Indenture (the "PIK Notes
Indenture") between the Company and The Bank of New York, as Trustee, (the "PIK
Notes Trustee"). The terms of the PIK Notes include those stated in the PIK
Notes Indenture and those made part of the PIK Notes Indenture by reference to
the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act").
The following description is a summary of the material provisions of the PIK
Notes Indenture. It does not restate this agreement in its entirety. We urge
you to read the PIK Notes Indenture because that agreement, and not this
description, defines your rights as a holder of the PIK Notes. We have filed
copies of the PIK Notes Indenture as exhibits to the registration statement
which includes this prospectus.
The definitions of certain capitalized terms used in the following summary
are set forth below in "Certain Definitions," beginning on page 145. For
purposes of this "Description of the PIK Notes," the term "Company" is used to
refer specifically to Cybernet Internet Services International, Inc.
The Company may issue additional pay-in-kind notes ("Additional PIK Notes")
from time to time, under the PIK Notes Indenture. The PIK Notes and any
Additional PIK Notes are limited in aggregate principal amount to
(Euro)100,000,000 (excluding the pay-in-kind notes issued to pay interest on
PIK Notes and Additional PIK Notes). The PIK Notes and any Additional PIK Notes
will be treated as a single class for all purposes under the PIK Notes
Indenture.
We expect to list the PIK Notes or admit them for trading on an
internationally recognized stock exchange or make them eligible for trading in
an over-the-counter trading market. If and so long as the PIK Notes are so
listed, admitted or made eligible, the Company will maintain such special
agents including paying agents in such jurisdictions as are required by
applicable rules and regulations of such stock exchange or trading market.
There can be no assurance that the Company will be successful in securing any
such listing, admission or eligibility.
Subordination
The PIK Notes are senior subordinated unsecured obligations of the Company.
The payment of the PIK Notes is subordinated to the prior payment in full of
all Senior Indebtedness of the Company, which includes the Senior Notes. The
PIK Notes rank equally with all other Senior Subordinated Indebtedness of the
Company, including the Discount Notes which are currently outstanding and any
additional notes that may be issued under the Discount Notes Indenture or the
PIK Notes Indenture. Unsecured Indebtedness is not deemed to be subordinate or
junior to secured Indebtedness merely because it is unsecured. As described in
"--Certain Covenants--Limitation on Subordinate Indebtedness," the Company may
not incur any Indebtedness that is senior in right of payment to the PIK Notes,
but junior in right of payment to Senior Indebtedness.
To the extent that any payment of Senior Indebtedness is determined to be
fraudulent or preferential or otherwise and is thereafter set aside or required
to be paid to any receiver, trustee in bankruptcy, liquidating trustee or
similar Person under any bankruptcy, insolvency, receivership, fraudulent
conveyance or similar law, then if such payment is recovered by a receiver,
trustee in bankruptcy or other similar Person, the Senior Indebtedness
originally intended to be satisfied will be deemed to be reinstated and
outstanding as if such payment had not occurred. Similarly, any obligation to
repay Senior Indebtedness which is determined to be fraudulent, invalid or
otherwise set aside will be deemed to be reinstated and outstanding as Senior
Indebtedness for all purposes of the PIK Notes Indenture.
The Company may not pay principal of, premium, if any, or interest on, or
other payment obligations in respect of, the PIK Notes or make any deposit
pursuant to the provisions described under "--Legal Defeasance and Covenant
Defeasance" below and may not otherwise purchase, redeem or retire any PIK
Notes (collectively, "pay the PIK Notes") if: (1) any Senior Indebtedness is
not paid when due; or (2) any other default on Senior Indebtedness occurs and
the maturity of such Senior Indebtedness is accelerated in
85
accordance with its terms unless, in either case, the default has been cured or
waived and any such acceleration has been rescinded or such Senior Indebtedness
has been paid in full.
The Company also will not be permitted to pay the PIK Notes (other than
interest payable in kind) for a Payment Blockage Period (as defined below)
during the continuance of any default, other than a default described in clause
(1) or (2) of the immediately preceding paragraph, on any Designated Senior
Indebtedness that permits the holders of the Designated Senior Indebtedness to
accelerate its maturity immediately without either further notice (except such
notice as may be required to effect such acceleration) or the expiration of any
applicable grace periods.
A "Payment Blockage Period" is a 179 day period which commences on the
receipt by the PIK Notes Trustee of written notice (a "Blockage Notice") of a
default of the kind described in the immediately preceding paragraph from the
representative of the holders of such Designated Senior Indebtedness specifying
an election to effect a Payment Blockage Period. The Payment Blockage Period
may be less than 179 days if the Payment Blockage Period is terminated by the
Person or Persons who gave the Blockage Notice or if the default giving rise to
the Blockage Notice is no longer continuing or the Designated Senior
Indebtedness has been repaid in full. The Company will be permitted to make
payments in kind of interest during a Payment Blockage Period, unless payments
in cash are then required to be made under the PIK Notes Indenture.
The Company may resume payments on the PIK Notes after the end of the Payment
Blockage Period, unless the maturity of such Designated Senior Indebtedness has
been accelerated. Not more than one Blockage Notice may be given in any
consecutive 360-day period, irrespective of the number of defaults with respect
to Designated Senior Indebtedness during such period.
In the event of a payment or distribution of the assets or securities of the
Company as a result of:
(1) a total or partial liquidation or a dissolution of the Company;
(2) a reorganization, bankruptcy, insolvency, receivership of or similar
proceeding relating to the Company or its property; or
(3) an assignment for the benefit of creditors or marshaling of the
Company's assets and liabilities,
then the holders of Senior Indebtedness will be entitled to receive payment in
full of Senior Indebtedness (including interest accruing after, or which would
accrue but for, the commencement of the proceeding at the rate specified in the
applicable Senior Indebtedness, whether or not a claim for such interest would
be allowed) before the holders of the PIK Notes will be entitled to receive any
payment or distribution.
In addition, until the Senior Indebtedness is paid in full, any payment or
distribution to which holders of the PIK Notes would be entitled but for the
subordination provisions of the PIK Notes Indenture will be made to holders of
the Senior Indebtedness as their interests may appear. If a payment or
distribution is made to holders of the PIK Notes that, due to the subordination
provisions, should not have been made to them, such holders are required to
hold it in trust for the holders of Senior Indebtedness and pay it over to them
as their interests may appear.
If payment of the PIK Notes is accelerated because of an Event of Default,
the Company or the PIK Notes Trustee must notify the holders of the Designated
Senior Indebtedness or the representative of such holders of the acceleration.
The Company may not pay the PIK Notes until five business days after such
holders or the representative of the Designated Senior Indebtedness receives
notice of such acceleration and, thereafter, may pay the PIK Notes only if the
subordination provisions of the PIK Notes Indenture otherwise permit payment at
that time.
By reason of the subordination provisions described above, in the event of
liquidation or insolvency, creditors of the Company who are not holders of
Senior Indebtedness may recover less, ratably, than holders of Senior
Indebtedness and may recover more, ratably, than holders of the PIK Notes.
86
The Company is a holding company with limited assets and operates its
business through Subsidiaries. Any right of the Company and its creditors,
including holders of the PIK Notes, to participate in the assets of any of the
Company's Subsidiaries upon any liquidation or administration of any such
Subsidiary will be subject to the prior claims of the creditors of such
Subsidiary. The claims of creditors of the Company, including holders of the
PIK Notes, will be effectively subordinated to all existing and future third
party indebtedness and liabilities, including trade payables, of the Company's
Subsidiaries. At June 30, 1999, the Company's Subsidiaries had total
liabilities of $16,200,635 million reflected on the Company's balance sheet.
The Company and its Subsidiaries may incur other debt in the future, including
secured debt.
The PIK Notes will not be entitled to any security and will not be entitled
to the benefit of any guarantees, except under the circumstances described
under "--Certain Covenants--Limitation on Issuances of Guarantees of
Indebtedness by Restricted Subsidiaries."
Principal, Maturity and Interest
The PIK Notes mature on August 15, 2009. Interest on the PIK Notes accrues at
the rate of 13.0% per annum semi-annually in arrears on each February 15 and
August 15 (each, an "Interest Payment Date"), commencing on February 15, 2000
to the Person in whose name each PIK Note (or any predecessor PIK Note) is
registered at the close of business on the preceding February 1 or August 1, as
the case may be (each, a "Record Date"). Interest is payable through and
including the interest payment due on August 15, 2004, in additional PIK Notes
which we refer to as Secondary PIK Notes. Secondary PIK Notes will, upon
issuance, become PIK Notes for all purposes governed by the PIK Notes
Indenture. After August 15, 2004, interest will be payable only in cash.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months.
Methods of Receiving Payments on PIK Notes
If a holder of PIK Notes has given wire transfer instructions to the Company,
the Company will make all payments of principal, premium, interest and
Additional Amounts on the PIK Notes in accordance with those instructions. All
other payments on the PIK Notes will be made at the office or agency of the
Company maintained for that purpose within the City and State of New York
unless the Company elects to make payments of interest and Additional Amounts
by check mailed to the holders at the addresses set forth in the register of
holders of PIK Notes. Until otherwise designated by the Company, the Company's
office or agency in New York will be the office of the PIK Notes Trustee
maintained for such purpose.
Denominations
The PIK Notes and Secondary PIK Notes (or PIK Notes issued on the transfer
thereof) will be issued in minimum denominations of (Euro)1.00 principal amount
and integral multiples thereof. PIK Notes in denominations of less than
(Euro)1.00 will not be issued and no payments, in cash or otherwise, will be
made in respect of any fractional denomination amounts to which holders would
otherwise be entitled; provided that a holder's entitlement to Secondary PIK
Notes in denominations of (Euro)1.00 or integral multiples thereof will be
calculated on the basis of the aggregate principal amount of PIK Notes held by
such holder on the relevant Record Date.
Conversion
Unless previously redeemed, the PIK Notes are convertible (in denominations
of (Euro)1.00 principal amount or integral multiples thereof) at the option of
the holder thereof, into common stock of the Company at any time on or after
August 25, 2000, and prior to the maturity date. The number of shares of common
stock ("PIK Conversion Shares") issuable upon conversion of the PIK Notes is
equal to the principal amount of the PIK Notes being converted divided by
(Euro)25.00, subject to adjustment in certain events as described below (the
"PIK Conversion Ratio"). Except as described below, no adjustment will be made
on conversion of any PIK Notes for interest accrued thereon or for dividends
paid on outstanding common stock of the Company.
87
If PIK Notes not called for redemption are converted (including pursuant to
the mandatory conversion feature described below) after a Record Date for the
payment of interest and prior to the next succeeding Interest Payment Date,
such PIK Notes must be accompanied by funds equal to the interest payable on
such succeeding Interest Payment Date on the principal amount so converted.
The Company is not required to issue fractional shares upon conversion of PIK
Notes (including pursuant to the mandatory conversion feature described below)
and, in lieu thereof, will pay a cash adjustment based upon the closing price
on the Neuer Markt of the common stock on the last Trading Day prior to the day
of conversion. In the case of PIK Notes called for redemption, conversion
rights will expire at the close of business on the Trading Day next preceding
the date fixed for redemption, unless the Company defaults in payment of the
redemption price.
If the closing price on the Neuer Markt of the common stock during any period
described below has exceeded the price for such period referred to below for at
least 30 consecutive Trading Days ("Market Criteria," with the 30-day period
being referred to as the "Market Criteria Period"), and the registration
statement of which this prospectus is a part is effective and available, all of
the PIK Notes will be automatically converted on the next Trading Day after the
Market Criteria Period into that number of shares of common stock derived by
application of the PIK Conversion Ratio; provided, however, that the conversion
will not occur until August 26, 1999, and will occur then only if the closing
price on the Neuer Markt of the common stock is at least (Euro)32.00 on such
date:
12 Months Beginning Closing Sale Price
- ------------------- ------------------
August 15, 1999.............................................. (Euro)32.00
August 15, 2000.............................................. (Euro)38.46
August 15, 2001.............................................. (Euro)44.92
August 15, 2002.............................................. (Euro)51.37
August 15, 2003.............................................. (Euro)57.83
The denominator of the PIK Conversion Ratio is subject to adjustment (under
formulae set forth in the PIK Notes Indenture) in certain events, including:
(1) the issuance of common stock as a dividend or distribution;
(2) the common stock is subdivided or combined;
(3) the issuance to all holders of common stock of rights or warrants to
purchase additional shares of common stock at a price per share that is
less than the Current Market Price per share;
(4) the distribution to all holders of common stock of shares of Capital
Stock of the Company (other than common stock) or evidences of
indebtedness of the Company or assets (including securities, but
excluding those rights, warrants, dividends and distributions referred
to in (1), (2) and (3) above and dividends and distributions in
connection with the liquidation, dissolution or winding up of the
Company or paid in cash);
(5) the distribution of cash to all holders of common stock, excluding:
(A) any quarterly cash dividend paid on the common stock to the extent
that the aggregate cash dividend per share of common stock in any
quarter does not exceed the greater of (x) the amount per share of
common stock of the next preceding quarterly cash dividend on the
common stock to the extent that such preceding quarterly dividend
did not require an adjustment of the denominator of the PIK
Conversion Ratio (as adjusted to reflect subdivisions or
combinations of the common stock), and (y) 3.75% of the average of
the daily closing prices on the Neuer Markt of the common stock,
for the ten consecutive Trading Days immediately prior to the date
of declaration of such dividend, and
88
(B) any dividend or distribution in connection with the liquidation,
dissolution or winding up of the Company; and
(6) the payment of consideration in respect of a tender or exchange offer
by the Company or any Subsidiary of the Company for the common stock to
the extent that the value of the consideration per share of common
stock exceeds the Current Market Price per share of common stock on the
Trading Day next succeeding the last date on which tenders or exchanges
may be made pursuant to such tender or exchange.
If any adjustment is required to be made as set forth in clause (5) above as
a result of a distribution that is a quarterly dividend, such adjustment would
be based upon the amount by which such distribution exceeds the amount of the
quarterly cash dividend permitted to be excluded pursuant to such clause (5).
If an adjustment is required to be made as set forth in clause (5) above as a
result of a distribution that is not a quarterly dividend, such adjustment
would be based upon the full amount of the distribution.
No adjustment to the denominator of the PIK Conversion Ratio will be required
unless such adjustment would require a change of at least 1.0% in the
denominator of the PIK Conversion Ratio then in effect; provided that any
adjustment that would otherwise be required to be made will be carried forward
and taken into account in any subsequent adjustment. Except as stated above,
the denominator of the PIK Conversion Ratio will not be adjusted for the
issuance of common stock or any securities convertible into or exchangeable for
common stock or carrying the right to purchase any of the foregoing.
If holders of common stock are entitled to receive securities, other property
or assets (including cash) as a result of:
(1) any reclassification or change of the common stock;
(2) a consolidation, merger or combination involving the Company; or
(3) a sale or conveyance to another corporation of the property and assets
of the Company as an entirety or substantially as an entirety,
the holders of the PIK Notes then outstanding will be entitled thereafter to
convert such PIK Notes into the kind and amount of securities or other property
or assets which they would have been entitled to receive had such PIK Notes
been converted into common stock immediately prior to such reclassification,
change, consolidation, merger, combination, sale or conveyance, assuming that
the holders would not have exercised any rights of election as to the
securities or other property or assets receivable in connection therewith.
The Company from time to time may, to the extent permitted by law, reduce the
denominator of the PIK Conversion Ratio by any amount for any period of at
least 20 days, if the Board of Directors has made a determination that such
reduction would be in the best interests of the Company. The Board's
determination will be conclusive. The Company may, at its option, make other
reductions in the denominator of the PIK Conversion Ratio as the Board of
Directors deems advisable to avoid or diminish any income tax to holders of
common stock resulting from any dividend or distribution of stock (or rights to
acquire stock) or from any event treated as such for income tax purposes. See
"Certain United States Federal Income Tax Consequences to Holders of PIK
Notes."
In order to effect an optional conversion of any of the PIK Notes, the holder
is required to surrender to the PIK Notes Trustee, the PIK Notes to be
converted and a duly executed copy of the conversion form set forth in the PIK
Notes Indenture. Upon the conversion of any PIK Notes into shares of common
stock (including any mandatory conversion), the Company will transfer to or
upon the written order of the holder of the PIK Notes to be converted
appropriate evidence of ownership of any shares of common stock or other
security or property to which it is entitled, registered or otherwise placed in
such name or names as it may direct in writing, and will deliver such evidence
of ownership to the person or persons entitled to receive the same and an
amount in cash in lieu of any fractional shares, if any. All shares of common
stock or other securities issuable by the Company upon the conversion of the
PIK Notes are required to be validly issued, fully paid and nonassessable.
89
The holders of PIK Notes are not entitled, as such, to receive dividends or
other distributions, receive notice of any meeting of the stockholders, consent
to any action of the stockholders, receive notice of any other stockholder
proceedings, or to any other rights as stockholders of the Company.
At the date of conversion (including mandatory conversion), the rights of the
holders of PIK Notes being converted (as such holders) will terminate (except
the right to receive accrued and unpaid interest, if any) and the PIK Notes to
be converted will no longer be deemed outstanding and will represent only the
right to receive shares of common stock and a right to receive cash for
fractional shares, as described above.
Optional Redemption
Except as described below and in the following paragraph or under "--
Redemption for Taxation Reasons," the PIK Notes will not be redeemable at the
Company's option prior to August 15, 2004. From and after August 15, 2004, the
PIK Notes will be subject to redemption at the option of the Company, in whole
or in part, upon not less than 30 nor more than 60 days' prior notice at the
redemption prices (expressed as a percentage of principal amount) set forth
below, plus accrued and unpaid interest and Additional Amounts, if any, to the
applicable redemption date, if redeemed during the twelve-month period
beginning on August 15 of each of the years indicated below:
Redemption
Year Price
---- ----------
2004........................................................... 106.500%
2005........................................................... 104.333%
2006........................................................... 102.167%
2007 and thereafter............................................ 100.000%
Notice of redemption is required be published in a leading newspaper having a
general circulation in New York (which is expected to be The Wall Street
Journal) and in Frankfurt (which is expected to be the Frankfurter Allgemeine
Zeitung) or, with respect to PIK Notes issued in definitive registered form,
mailed by first-class mail to the registered address of each holder of such PIK
Notes.
In the case of any partial redemption, selection of the PIK Notes for
redemption will be made by the PIK Notes Trustee in compliance with the
requirements of the principal securities exchange, if any, on which the PIK
Notes are listed. If the PIK Notes are not listed or the exchange prescribes no
method of selection, the selection of PIK Notes for redemption will be made on
a pro rata basis, by lot or by such other method as the PIK Notes Trustee in
its sole discretion deems to be fair and appropriate although no PIK Note of
(Euro)1.00 in original principal amount or less may be redeemed in part. On and
after the redemption date, interest will cease to accrue on the PIK Notes or
portions thereof called for redemption.
Redemption for Taxation Reasons
The Company may redeem the PIK Notes, in whole but not in part, if the
Company determines that it is or will be required to pay Additional Amounts
(and the Company determines that such requirement cannot be avoided by taking
reasonable measures), as a result of:
(1) any change in, or amendment to, the laws or treaties (or any
regulations or rulings promulgated thereunder) of the Federal Republic
of Germany (or any political subdivision or taxing authority thereof)
affecting taxation which becomes effective on or after August 26, 1999,
or
(2) any change in or new or different position regarding the application,
administration or interpretation of such laws, treaties, regulations or
rulings (including a holding, judgment or order by a court of competent
jurisdiction), which change, amendment, application or interpretation
becomes effective on or after August 26, 1999.
90
The redemption price payable in such event is the principal amount of the PIK
Notes being redeemed plus all accrued and unpaid interest to the date fixed by
the Company for redemption (a "Tax Redemption Date") and all Additional Amounts
(see "--Withholding Taxes and Additional Amounts"), if any, then due and which
will become due on the Tax Redemption Date as a result of the redemption or
otherwise.
No notice of a redemption for taxation reasons may be given earlier than 90
days prior to the earliest date on which the Company would be obligated to make
a payment of Additional Amounts or withholding if a payment in respect of the
PIK Notes were then due. Prior to giving any notice of redemption of the PIK
Notes pursuant to the foregoing, the Company is required to deliver to the PIK
Notes Trustee an opinion of an independent tax counsel of recognized
international standing to the effect that the circumstances referred to above
exist.
Prescription
Claims against the Company for the payment of principal of, or interest, or
Additional Amounts, if any, on, the PIK Notes will become void unless
presentation for payment is made (where so required in the PIK Notes Indenture)
within a period of 10 years, in the case of principal, or Additional Amounts,
if any, or five years, in the case of interest, from the applicable original
payment date therefor.
Certain Covenants
Limitation on Indebtedness
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness; provided, however, that if no Default
or Event of Default shall have occurred and be continuing at the time, or would
occur as a consequence of the Incurrence of any such Indebtedness, the Company
may Incur Indebtedness if immediately thereafter the ratio of (1) the aggregate
principal amount of Indebtedness of the Company and its Restricted Subsidiaries
on a consolidated basis outstanding as of the Transaction Date to (2) the pro
forma Consolidated Cash Flow for the preceding two full fiscal quarters
multiplied by two, determined on a pro forma basis as if any such Indebtedness
had been Incurred and the proceeds thereof had been applied at the beginning of
such two fiscal quarters, would be greater than zero and less than or equal to
6.0 to 1.
(b) Paragraph (a) of this covenant will not prohibit (except for Indebtedness
under subsection (7) below) the Company and (except for Indebtedness under
clauses (5), (6), (10) and (12) below) any Restricted Subsidiary from Incurring
any or all of the following:
(1) Indebtedness (other than Acquired Indebtedness) in an aggregate
principal amount at any one time outstanding not to exceed (Euro)100.0
million Incurred to finance the cost (provided that such Indebtedness
is Incurred at any time on or before, or within 90 days following, the
incurrence of such cost) (including the cost of design, development,
construction, acquisition, transportation, installation or integration)
of equipment, inventory or network assets used in the Permitted
Business or Equity Interests of:
(A) a Restricted Subsidiary that owns principally such assets from a
Person other than the Company or a Restricted Subsidiary of the
Company; or
(B) any Person that is principally engaged in the Permitted Business,
that would become a Restricted Subsidiary and owns principally
such assets.
Any such Indebtedness of a Restricted Subsidiary must be Incurred under
one or more Credit Facilities, under one or more Capitalized Leases or
from the vendor of the equipment, inventory or network assets acquired
with the proceeds of such Indebtedness. The amount of such Indebtedness
of the Company or any Restricted Subsidiary may not exceed the Fair
Market Value of the assets so acquired. The amount of any such
Indebtedness permitted to be Incurred to acquire Equity Interests
91
pursuant to clause (A) or (B) above must be reduced by the amount of
any Acquired Indebtedness Incurred in such acquisition.
(2) Indebtedness of any Restricted Subsidiary owing to and held by the
Company, Indebtedness of the Company owing to and held by any
Restricted Subsidiary or Indebtedness of any Restricted Subsidiary
owing to and held by any other Restricted Subsidiary; provided that:
(A) any subsequent issuance or transfer of any Capital Stock or any
other event which results in any such Restricted Subsidiary
ceasing to be a Restricted Subsidiary or any subsequent transfer
of such Indebtedness (other than to the Company or another
Restricted Subsidiary) will be deemed, in each case, to constitute
the Incurrence of such Indebtedness not permitted by this clause
(2); and
(B) Indebtedness of the Company owing to and held by a Restricted
Subsidiary must be unsecured and subordinated in right of payment
to the PIK Notes.
(3) Indebtedness issued in exchange for, or the net proceeds of which are
used to refinance or refund, then outstanding Indebtedness of the
Company or a Restricted Subsidiary, other than Indebtedness Incurred
under clauses (2), (4), (7), (8), (10) and (12) of this paragraph (b)
and any refinancings thereof in an amount not to exceed the amount so
refinanced or refunded (plus premiums, accrued interest, and reasonable
fees and expenses); provided that such new Indebtedness shall only be
permitted under this clause (3) if:
(A) in case the PIK Notes are refinanced in part or the Indebtedness
to be refinanced or refunded is pari passu with the PIK Notes,
such new Indebtedness is expressly made pari passu with, or
subordinate in right of payment to, the remaining PIK Notes;
(B) in case the Indebtedness to be refinanced is subordinated in right
of payment to the PIK Notes, such new Indebtedness is expressly
made subordinate in right of payment to the PIK Notes at least to
the extent that the Indebtedness to be refinanced or refunded is
subordinated to the PIK Notes;
(C) the Stated Maturity of such new Indebtedness, determined as of the
date of Incurrence of such new Indebtedness, is no earlier than
the Stated Maturity of the Indebtedness being refinanced or
refunded; and
(D) such new Indebtedness, determined as of the date of its
Incurrence, has a Weighted Average Life to Maturity which is not
less than the remaining Weighted Average Life to Maturity of the
Indebtedness to be refinanced or refunded.
In no event may Indebtedness of the Company be refinanced or refunded by
means of any Indebtedness of any Restricted Subsidiary pursuant to this
clause (3).
(4) Indebtedness:
(A) in respect of performance, surety or appeal bonds or letters of
credit supporting Trade Payables, in each case provided in the
ordinary course of business;
(B) under Currency Agreements and Interest Rate Agreements; provided
that such agreements (x) are designed solely to protect against
fluctuations in foreign currency exchange rates or interest rates
and (y) do not increase the Indebtedness of the obligor
outstanding at any time other than as a result of fluctuations in
foreign currency exchange rates or interest rates or by reason of
fees, indemnities and compensation payable thereunder; and
(C) arising from agreements providing for indemnification, adjustment
of purchase price or similar obligations, or from Guarantees or
letters of credit, bankers' acceptances, surety bonds or
performance bonds securing any obligations of the Company or any
of its Restricted Subsidiaries pursuant to such agreements, in any
case Incurred in connection with the disposition of any
92
business, assets or Restricted Subsidiary of the Company (other than
Guarantees of Indebtedness Incurred for the purpose of financing such
acquisition by the Person acquiring all or any portion of such
business, assets or Restricted Subsidiary), in a principal amount not
to exceed the gross proceeds actually received by the Company or any
Restricted Subsidiary in connection with such disposition.
(5) Indebtedness, to the extent that the net proceeds thereof are promptly
(A) used to repurchase PIK Notes tendered in a Change of Control Offer
as described under "--Repurchase of PIK Notes upon a Change of Control"
or (B) deposited to defease all of the PIK Notes as described under "--
Legal Defeasance and Covenant Defeasance."
(6) Indebtedness of the Company represented by the PIK Notes.
(7) Indebtedness represented by a Guarantee of the PIK Notes and Guarantees
of other Indebtedness of the Company by a Restricted Subsidiary in each
case permitted by and made in accordance with the "Limitation on
Issuances of Guarantees of Indebtedness by Restricted Subsidiaries"
covenant described below.
(8) Indebtedness under one or more Credit Facilities (which shall be in
addition to any such Indebtedness incurred under one or more Credit
Facilities under clause (1) of this paragraph (b)) in an aggregate
principal amount at any one time outstanding not to exceed the greater
of (A) (Euro)50.0 million and (B) 80% of Eligible Accounts Receivable
at such time.
(9) Acquired Indebtedness; provided that the aggregate amount of such
Acquired Indebtedness of the Person that is to become a Restricted
Subsidiary, or to be merged or consolidated with or into the Company or
any Restricted Subsidiary in the contemplated transaction, or to be
assumed by the Company or a Restricted Subsidiary in connection with an
Asset Acquisition, outstanding at the time of such transaction does not
exceed the Fair Market Value of the equipment, inventory, network
assets and Cash Equivalents of any Restricted Subsidiary so acquired or
that are acquired in such Asset Acquisition, as the case may be.
(10) Indebtedness of the Company not to exceed, at any one time
outstanding, the sum of:
(A) 2.00 times the Net Cash Proceeds received from the issuance and
sale, other than to a Subsidiary of Equity Interests (other than
Redeemable Stock and excluding any Equity Interests issued in
connection with the Offering) of the Company, less
(1) the amount of such proceeds used to make Restricted Payments as
provided in clause (C)(2) of paragraph (a) or clauses (3) or
(4) of paragraph (b) of the "Limitation on Restricted Payments"
covenant described below, and
(2) if such proceeds are used to consummate a transaction pursuant
to which the Company Incurs Acquired Indebtedness, one-half of
the amount of such Acquired Indebtedness so Incurred, and
(B) The Fair Market Value of any Permitted Assets acquired by the
Company in exchange for Equity Interests of the Company issued
after August 26, 1999.
In determining the Fair Market Value of any such Permitted Assets so
acquired, if the estimated Fair Market Value of such Permitted Assets
exceeds (Euro)2.0 million then the Fair Market Value of such Permitted
Assets will be determined by a majority of the Board of Directors. if
the Estimate Fair Market Value exceeds (Euro)10.0 million, then the
Company will deliver to the PIK Notes Trustee a written appraisal as to
the fair market value of such Permitted Assets prepared by an
internationally recognized investment banking or public accounting firm
(or, if no such investment banking or public accounting firm is
qualified to prepare such an appraisal, by an internationally
recognized appraisal firm). Indebtedness permitted under this clause
(10) (other than the Indebtedness Incurred under one or more Credit
Facilities, under one or more Capitalized Leases or from the vendor of
assets, property or services acquired with the proceeds of such
Indebtedness) may not mature prior to the
93
Stated Maturity of the PIK Notes and the Weighted Average Life to
Maturity of such Indebtedness must be longer than that of the PIK
Notes.
(11) Indebtedness outstanding as of August 26, 1999.
(12) Unsecured Indebtedness of the Company (in addition to Indebtedness
permitted under clauses (1) through (11) above) in an aggregate
principal amount outstanding at any one time not to exceed (Euro)200.0
million.
(c) For purposes of determining any particular amount of Indebtedness under
the "Limitation on Indebtedness" covenant, Guarantees, Liens or obligations
with respect to letters of credit supporting Indebtedness otherwise included in
the determination of such particular amount will not be included. The
foregoing, however, will not in any way limit the provisions of the "Limitation
on Issuances of Guarantees of Indebtedness by Restricted Subsidiaries" covenant
described below.
For purposes of determining compliance with the "Limitation on Indebtedness"
covenant:
(A) in the event that an item of Indebtedness meets the criteria of more
than one of the types of Indebtedness described in clauses (1) through
(12) of paragraph (b) above, the Company will classify the item of
Indebtedness in its sole discretion and will only be required to
include the amount and type of such Indebtedness in one of such
clauses; and
(B) the principal amount of Indebtedness issued at a price that is less
than the principal amount thereof will be equal to the amount of the
liability in respect thereof determined in conformity with US GAAP.
(d) For purposes of determining compliance with any Euro-denominated
restriction on the Incurrence of Indebtedness, the Euro-equivalent principal
amount of Indebtedness denominated in a non-Euro currency will be calculated
based on the relevant currency exchange rate in effect on the date such
Indebtedness was Incurred, in the case of term Indebtedness, or first
committed, in the case of revolving credit Indebtedness. However, if such
Indebtedness is Incurred to refinance other Indebtedness denominated in a non-
Euro currency, and such refinancing would cause the applicable Euro-denominated
restriction to be exceeded if calculated at the relevant currency exchange rate
in effect on the date of such refinancing, such Euro-denominated restriction
will be deemed not to have been exceeded so long as the principal amount of
such refinancing Indebtedness does not exceed the principal amount of such
Indebtedness being refinanced. The principal amount of any Indebtedness
incurred to refinance other Indebtedness, if Incurred in a different currency
from the Indebtedness being refinanced, will be calculated based on the
currency exchange rate applicable to the currencies in which such refinancing
Indebtedness is denominated that is in effect on the date of such refinancing.
Limitation on Restricted Payments
(a) The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly:
(1) declare or pay any dividend or make any distribution on account of
any Equity Interest in the Company or any Restricted Subsidiary to
the holders thereof, including any dividend or distribution payable
in connection with any merger or consolidation, other than:
(A) dividends or distributions payable solely in Equity Interests
(other than Redeemable Stock) of the Company,
(B) dividends or distributions made only to the Company or a
Restricted Subsidiary, and
(C) pro rata dividends or distributions of Capital Stock of a
Restricted Subsidiary held by Persons other than the Company or
a Restricted Subsidiary;
(2) purchase, redeem, retire or otherwise acquire for value any Equity
Interests of the Company, an Unrestricted Subsidiary or a
Restricted Subsidiary (other than any such Equity Interests owned
by the Company or any Restricted Subsidiary);
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(3) make any principal payment or redeem, purchase, repurchase,
defease, or otherwise acquire or retire for value, in each case,
prior to any scheduled repayment, or maturity, any Indebtedness of
the Company that is subordinated in right of payment to the PIK
Notes; or
(4) make any Investment, other than a Permitted Investment, in any
Person
(all such payments or any other actions described in clauses (1) through (4)
above being collectively referred to as "Restricted Payments"), unless, at
the time of, and after giving effect to, the proposed Restricted Payment:
(A) no Default or Event of Default has occurred and is continuing;
(B) the Company could Incur at least (Euro)1.00 of additional
Indebtedness under paragraph (a) of the "Limitation on
Indebtedness" covenant described above; and
(C) the aggregate amount expended for all Restricted Payments (the
amount so expended, if other than in cash, to be determined in good
faith by the Board of Directors) after August 26, 1999, is less
than the sum of:
(1) 50% of the aggregate amount of the Consolidated Net Income (or,
if the Consolidated Net Income is a loss, 100% of the amount of
such loss) accrued on a cumulative basis during the period
(taken as one accounting period) beginning on the first day of
the fiscal quarter beginning immediately following August 26,
1999, and ending on the last day of the last fiscal quarter
preceding the Transaction Date for which reports have been filed
with the Commission or provided to the PIK Notes Trustee
pursuant to the "Provision of Financial Statements and Reports"
covenant described below, plus
(2) 100% of the aggregate Net Cash Proceeds received by the Company
after August 26, 1999, from the issuance and sale of its Equity
Interests (other than Redeemable Stock and excluding any Equity
Interests issued in connection with the Offering) to a Person
(other than a Subsidiary of the Company), except to the extent
that such Net Cash Proceeds are used
(a) to purchase, redeem or otherwise retire Equity Interests or
Indebtedness as set forth below in clause (3) or (4) of the
immediately succeeding paragraph, or
(b) to Incur Indebtedness pursuant to clause (10) of paragraph
(b) of the "Limitation on Indebtedness" covenant described
above, plus
(3) the aggregate amount by which Indebtedness (other than any
Indebtedness subordinated in right of payment to the PIK Notes)
of the Company or any Restricted Subsidiary is reduced on the
Company's balance sheet upon the conversion or exchange (other
than by a Subsidiary of the Company) subsequent to August 26,
1999, into Equity Interests (other than Redeemable Stock and
less the amount of any cash, or the fair value of property,
distributed by the Company or any Restricted Subsidiary upon
such conversion or exchange), plus
(4) without duplication of any amount included in the calculation of
Consolidated Net Income, in the case of repayment of, or return
of capital with respect to, any Investment constituting a
Restricted Payment (including the redesignation of Unrestricted
Subsidiaries as Restricted Subsidiaries) made after August 26,
1999, an amount equal to the lesser of (x) the repayment of, or
the return of capital with respect to, such Investment and (y)
the cost of such Investment, in either case less the cost of the
disposition of such Investment and net of taxes.
(b)The foregoing provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration thereof if, at the date of declaration, such payment
would comply with the provisions of the PIK Notes Indenture;
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(2) the redemption, repurchase, defeasance or other acquisition or
retirement for value of Indebtedness that is subordinated in right
of payment to the PIK Notes including premium, if any, and accrued
and unpaid interest, with the proceeds of, or in exchange for,
Indebtedness Incurred under clause (3) of paragraph (b) of the
"Limitation on Indebtedness" covenant described above;
(3) the repurchase, redemption or other acquisition of Equity Interests
in the Company in exchange for, or out of the Net Cash Proceeds of,
a substantially concurrent offering of Equity Interests (other than
Redeemable Stock and excluding any Equity Interests issued in
connection with the Offering) in the Company to any Person (other
than a Subsidiary);
(4) the repurchase, redemption or other acquisition of Indebtedness of
the Company which is subordinated in right of payment to the PIK
Notes in exchange for, or out of the Net Cash Proceeds of, a
substantially concurrent offering of Equity Interests (other than
Redeemable Stock and excluding any Equity Interests issued in
connection with the Offering), in the Company to any Person (other
than a Subsidiary);
(5) repurchases of Equity Interests of the Company from employees of
the Company or any of its Restricted Subsidiaries deemed to occur
upon exercise of stock options if such Equity Interests represent a
portion of the exercise price of such options, provided that any
payments made pursuant to this clause (5) may not exceed in the
aggregate (Euro)5.0 million in any fiscal year of the Company;
(6) Investments in any Person (the primary business of which is
related, ancillary or complementary to the business of the Company
and its Restricted Subsidiaries on the date of such Investment);
provided that the aggregate amount of Investments made pursuant to
this clause (6) does not exceed the sum of:
(A) (Euro)25.0 million, plus
(B) the amount of Net Cash Proceeds received by the Company after
August 26, 1999, from the issuance and sale of its Equity
Interests (other than Redeemable Stock and excluding any Equity
Interests issued in connection with the Offering), to a Person
(other than a Subsidiary of the Company), except to the extent
that such Net Cash Proceeds are used
(i) to make Restricted Payments pursuant to clause (C)(2) of
paragraph (a) of this "Limitation on Restricted Payments
Covenant" or clause (3) or (4) of this paragraph (b) or
(ii) to Incur Indebtedness pursuant to clause (10) of paragraph
(b) of the "Limitation on Indebtedness" covenant described
above, plus
(C) the aggregate amount by which Indebtedness (other than any
Indebtedness subordinated in right of payment to the PIK Notes)
of the Company or any Restricted Subsidiary is reduced on the
Company's balance sheet upon the conversion or exchange (other
than by a Subsidiary of the Company) subsequent to August 26,
1999, into Equity Interests (other than Redeemable Stock and
less the amount of any cash, or the fair value of property,
distributed by the Company or any Restricted Subsidiary upon
such conversion or exchange); and
(7) Investments acquired in exchange for Capital Stock (other than
Redeemable Stock) of the Company;
provided that, in the case of clauses (2) through (7) above, no Default or
Event of Default shall have occurred and be continuing or occur as a
consequence of the actions or payments set forth therein.
(c)Each Restricted Payment permitted pursuant to the immediately preceding
paragraph (b) (other than the Restricted Payments referred to in clauses (2)
and (7) thereof and the Net Cash Proceeds from any issuance of Equity Interests
referred to in clauses (3) and (4) thereof) will be included in calculating
whether the conditions of clause (C) of paragraph (a) of this "Limitation on
Restricted Payments" covenant have been met
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with respect to any subsequent Restricted Payments. In the event the proceeds
of an issuance of Equity Interests (other than Redeemable Stock and excluding
any Equity Interests issued in connection with the Offering), of the Company
are used for the redemption, repurchase or other acquisition of the PIK Notes,
then the Net Cash Proceeds of such issuance will be included in clause (C) of
paragraph (a) of this "Limitation on Restricted Payments" covenant only to the
extent such proceeds are not used for such redemption, repurchase or other
acquisition of the PIK Notes.
Limitation on Subordinate Indebtedness
The Company will not Incur any Indebtedness if such Indebtedness is
subordinate or junior in ranking in any respect to any Senior Indebtedness
unless such Indebtedness is Senior Subordinated Indebtedness or is
contractually subordinated in right of payment to Senior Subordinated
Indebtedness.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
(a)The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, create or otherwise cause or suffer to exist or become
effective any consensual encumbrance or restriction of any kind on the ability
of any Restricted Subsidiary to:
(1) pay dividends or make any other distributions permitted by
applicable law on any Equity Interests of such Restricted
Subsidiary owned by the Company or any other Restricted Subsidiary;
(2) pay any Indebtedness owed to the Company or any other Restricted
Subsidiary;
(3) make loans or advances to the Company or any other Restricted
Subsidiary; or
(4) transfer any of its property or assets to the Company or any other
Restricted Subsidiary.
(b)The provisions described in the immediately preceding paragraph will not
prohibit any encumbrances or restrictions:
(1) existing by reason of any agreement in effect on August 26, 1999,
and any amendments, supplements, extensions, refinancings, renewals
or replacements of such agreements; provided that the encumbrances
and restrictions in any such amendments, supplements, extensions,
refinancings, renewals or replacements are no more restrictive than
those that are then in effect and are being amended, supplemented,
extended, refinanced, renewed or replaced;
(2) existing by reason of applicable law;
(3) existing with respect to any Restricted Subsidiary acquired by the
Company or any Restricted Subsidiary after August 26, 1999, or the
property or assets of such Restricted Subsidiary, and existing at
the time of such acquisition and not incurred in contemplation
thereof, which encumbrances or restrictions are not applicable to
any Person or the property or assets of any Person other than such
Person or the property or assets of such Person so acquired;
(4) in the case of clause (4) of the immediately preceding paragraph
(a),
(A) that restrict in a customary manner the subletting, assignment
or transfer of any property or asset that is, or is subject to,
a lease, purchase mortgage obligation, license, conveyance or
contract or similar property or asset,
(B) existing by virtue of any transfer of, agreement to transfer,
option or right with respect to, or Lien on, any property or
assets of the Company or any Restricted Subsidiary not otherwise
prohibited by the PIK Notes Indenture, or
(C) arising or agreed to in the ordinary course of business, not
relating to any Indebtedness, and that do not, individually or
in the aggregate, materially detract from the value of property
or assets of the Company or any Restricted Subsidiary to the
Company or any Restricted Subsidiary;
97
(5) with respect to a Restricted Subsidiary and imposed pursuant to an
agreement that has been entered into for the sale or disposition of
all or substantially all of the Capital Stock in, or property and
assets of, such Restricted Subsidiary; provided that such
restriction shall terminate if such transaction is abandoned or if
such transaction is not consummated within six months of the date
such agreement was entered into; or
(6) contained in the terms of any Indebtedness or any agreement
pursuant to which such Indebtedness was issued if:
(A) the encumbrance or restriction applies only in the event of a
payment default or a default with respect to a financial
covenant contained in such Indebtedness or agreement,
(B) the encumbrance or restriction is not materially more
disadvantageous to the holders of the PIK Notes than is
customary in comparable financings (as determined by the Board
of Directors), and
(C) the Board of Directors determines that any such encumbrance or
restriction will not materially affect the Company's ability to
make payments of principal or interest on the PIK Notes.
(c)The "Limitation on Dividend and Other Payment Restrictions Affecting
Restricted Subsidiaries" covenant will not prevent the Company or any
Restricted Subsidiary from creating, incurring, assuming or suffering to exist
any Liens otherwise permitted in the "Limitation on Liens" covenant described
below that limit the right of the debtor to dispose of the assets securing such
Indebtedness.
Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary, directly
or indirectly, to issue, transfer, convey, sell, lease or otherwise dispose of
any shares of Capital Stock (including options, warrants or other rights to
purchase shares of such Capital Stock) of such Restricted Subsidiary or any
other Restricted Subsidiary to any Person (other than to the Company or a
Wholly Owned Restricted Subsidiary and issuances of director's qualifying
shares of Capital Stock of foreign Restricted Subsidiaries, in each case, to
the extent required by applicable law), unless:
(1) the Net Cash Proceeds from such issuance, transfer, conveyance, sale,
lease or other disposition are applied in accordance with the
provisions of the "Limitation on Asset Sales" covenant described below;
(2) immediately after giving effect to such issuance, transfer, conveyance,
sale, lease or other disposition, such Restricted Subsidiary would no
longer constitute a Restricted Subsidiary; and
(3) any Investment in such Person remaining after giving effect to such
issuance, transfer, conveyance, sale, lease or other disposition would
have been permitted to be made under the "Limitation on Restricted
Payments" covenant if made on the date of such issuance, transfer,
conveyance, sale, lease or other disposition (valued as provided in the
definition of "Investment").
Limitation on Transactions with Shareholders and Affiliates
(a)The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction or series
of transactions (including, without limitation, the purchase, sale, lease or
exchange of property or assets, or the rendering of any service) with any
direct or indirect holder (or any Affiliate of such holder) of 5% or more of
any class of Capital Stock of the Company or with any Affiliate of the Company
or any Restricted Subsidiary, unless:
(1) such transaction or series of transactions is on terms that are no
less favorable to the Company or such Restricted Subsidiary than
could reasonably be obtained in a comparable arm's-length
transaction with a Person that is not such a holder or Affiliate;
98
(2) if such transaction or series of transactions involves aggregate
consideration in excess of (Euro)2.5 million, the Company shall
have delivered to the PIK Notes Trustee, a resolution set forth in
an Officers' Certificate adopted by a majority of the Board of
Directors, including a majority of the independent, disinterested
directors, approving such transaction or series of transactions,
and certifying that such transaction or series of transactions
comply with clause (1) above; and
(3) if such transaction or series of transactions involves aggregate
consideration in excess of (Euro)7.5 million, the Company shall
have delivered to the PIK Notes Trustee, a written opinion as to
the fairness to the Company or such Restricted Subsidiary of such
transaction or series of transactions from a financial point of
view from an internationally recognized investment banking firm
(or, if an investment banking firm is generally not qualified to
give such an opinion, by an internationally recognized appraisal
firm or accounting firm).
(b)The foregoing limitation will not limit and will not apply to:
(1) any transaction between the Company and any of its Restricted
Subsidiaries or between Restricted Subsidiaries;
(2) the payment of reasonable and customary regular fees to directors
of the Company who are not employees of the Company;
(3) the payment of dividends, distributions or other amounts by the
Company or any Restricted Subsidiary permitted by the "Limitation
on Restricted Payments" covenant described above;
(4) issuances of Equity Interests (other than Redeemable Stock) on
terms consistent with the requirements of clause (1) of the
immediately preceding paragraph; and
(5) any payments or other transactions pursuant to tax-sharing
agreements between the Company and any other Person with which the
Company files a consolidated tax return or with which the Company
is part of a consolidated group for tax purposes.
Limitation on Liens
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, create, incur, assume or suffer to exist any Lien
(other than Permitted Liens) securing Senior Subordinated Indebtedness or
Subordinated Obligations on any asset or property of the Company or any
Restricted Subsidiary without making effective provisions for all of the PIK
Notes and all other amounts due under the PIK Notes Indenture to be directly
secured equally and ratably with (or, if the obligation or liability to be
secured by such Lien is subordinated in right of payment to the PIK Notes,
prior to) the obligation or liability secured by such Lien. Any Lien which is
granted to secure the PIK Notes under this covenant may be discharged at the
same time as the discharge of the Lien that gave rise to the obligation to so
secure the PIK Notes.
Limitation on Asset Sales
The Company will not, and will not permit any Restricted Subsidiary to, make
any Asset Sale unless:
(1) the Company or the Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the Fair
Market Value of the assets sold or disposed of; and
(2) at least 75% of the consideration received for such Asset Sale consists
of cash or Cash Equivalents or Replacement Assets or the assumption of
Indebtedness which ranks equal in right of payment with the PIK Notes.
Within 360 days after receipt of any Net Cash Proceeds from an Asset Sale,
the Company must apply such Net Cash Proceeds at its option:
(1) to permanently prepay, repay or purchase Senior Indebtedness of the
Company or Senior Subordinated Indebtedness of the Company or
Indebtedness of any Restricted Subsidiary providing a
99
Guarantee pursuant to the "Limitation on Issuances of Guarantees by
Restricted Subsidiaries" covenant or Indebtedness of any other
Restricted Subsidiary, in each case owing to a Person other than the
Company or any of its Restricted Subsidiaries;
(2) to invest in Replacement Assets; or
(3) in any combination of prepayment, repayment, purchase and reinvestment
permitted by the foregoing clauses (1) and (2).
Any Net Cash Proceeds from the Asset Sale that are not applied or invested as
provided and within the time period set forth in the immediately preceding
paragraph will constitute "Excess Proceeds." If at any time the aggregate
amount of Excess Proceeds exceeds (Euro)5.0 million, the Company is required to
make an offer (an "Asset Sale Offer") to all holders of PIK Notes and to the
extent required by the terms thereof, to all holders of other Senior
Subordinated Indebtedness outstanding with similar provisions requiring the
Company to make an offer to purchase such Senior Subordinated Indebtedness with
the proceeds from any Asset Sale ("Pari Passu Notes").
An Asset Sale Offer is an offer by the Company to purchase on a pro rata
basis the maximum principal amount (or accreted value, as the case may be) of
PIK Notes and such Pari Passu Notes to which the Asset Sale Offer applies, in
an integral multiple of (Euro)1,000 (or $1,000 as the case may be), that may be
purchased out of the Excess Proceeds at the offer price in cash. The offer
price in an Asset Sale Offer is in an amount equal to 100% of the outstanding
principal amount or accreted value, as the case may be, of the PIK Notes and
Pari Passu Notes, plus accrued and unpaid interest thereon plus Additional
Amounts, if any, to the date fixed for the closing of such offer (and, in the
case of definitive, registered PIK Notes, subject to the right of a holder of
record on the relevant record date to receive interest due on the relevant
Interest Payment Date and Additional Amounts, if any, in respect thereof).
To the extent that the aggregate amount of PIK Notes and Pari Passu Notes
tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the
Company may use any remaining Excess Proceeds for general corporate purposes.
If the aggregate amount of PIK Notes and Pari Passu Notes tendered pursuant to
an Asset Sale Offer exceeds the amount of Excess Proceeds, the selection of PIK
Notes for purchase will be made by the PIK Notes Trustee in the same manner as
the PIK Notes are selected for partial redemption, as described under "--
Optional Redemption." Upon completion of any such Asset Sale Offer, the amount
of Excess Proceeds will be reset at zero.
The Company is required to comply with the requirements of Rule 14e-1 under
the Exchange Act and any other securities laws and regulations thereunder and
with the applicable laws of any non-U.S. jurisdiction in which an Asset Sale
Offer is made, in each case, to the extent such laws or regulations are
applicable in connection with the repurchase of the PIK Notes pursuant to an
Asset Sale Offer. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the PIK Notes Indenture, the
Company will comply with the applicable securities laws and regulations and
will not be deemed to have breached its obligations described in the PIK Notes
Indenture by virtue thereof.
Limitation on Issuances of Guarantees of Indebtedness by Restricted
Subsidiaries
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to guarantee, assume or in any other manner become liable with
respect to any Indebtedness of the Company unless:
(1) such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture to the PIK Notes Indenture providing for a
Guarantee of all of the Company's obligations under the PIK Notes and
the PIK Notes Indenture on terms substantially similar to the guarantee
of such Indebtedness, except that if the Indebtedness is by its express
terms subordinated in right of payment to the PIK Notes, any such
assumption, Guarantee or other liability of such Restricted Subsidiary
with respect to such Indebtedness will be subordinated in right of
payment to such Restricted Subsidiary's
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assumption, Guarantee or other liability with respect to the PIK Notes
substantially to the same extent as such Indebtedness is subordinated to
the PIK Notes, and
(2) such Restricted Subsidiary waives, and will not in any manner
whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against the
Company or any other Restricted Subsidiary as a result of any payment
by such Restricted Subsidiary under its Guarantee.
Any Restricted Subsidiary may, however, guarantee Senior Indebtedness of the
Company, including Indebtedness under a Credit Facility if such Indebtedness
is Incurred in accordance with the "Limitation on Indebtedness" covenant
discussed above. In addition, the immediately preceding paragraph will not
apply to any Guarantee of any Restricted Subsidiary that existed at the time
such Person became a Restricted Subsidiary and was not incurred in connection
with, or in contemplation of, such Person becoming a Restricted Subsidiary.
Any Guarantee of all of the Company's obligations under the PIK Notes and
the PIK Notes Indenture by a Restricted Subsidiary may, in any case, provide
by its terms that it will be automatically and unconditionally released and
discharged upon
(1) any sale, exchange or transfer, to any Person not an Affiliate of the
Company, of all of the Company's and each Restricted Subsidiary's
Equity Interests in, or all or substantially all of the assets of, such
Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the PIK Notes Indenture), or
(2) the release or discharge of the guarantee which resulted in the
creation of such Guarantee, except a discharge or release by or as a
result of payment under such guarantee.
Business of the Company; Restriction on Transfers of Existing Business
The Company will not, and will not permit any Restricted Subsidiary to, be
principally engaged in any business or activity other than a Permitted
Business. In addition, the Company and any Restricted Subsidiary will not be
permitted, directly or indirectly, to transfer to any Unrestricted Subsidiary
(1) any of the licenses, permits or authorizations used in the Permitted
Business of the Company or any Restricted Subsidiary, or
(2) any material portion of the "property and equipment" (as such term is
used in the Company's consolidated financial statements) of the Company
or any Restricted Subsidiary used in the licensed service areas of the
Company or any Restricted Subsidiary.
Provision of Financial Statements and Reports
The Company is required to file on a timely basis with the Commission, to
the extent such filings are accepted by the Commission and whether or not the
Company has a class of securities registered under the Exchange Act,
(1) all annual and quarterly financial statements and other financial
information that would be required to be contained in a filing with the
Commission on Forms 10-K and 10-Q (which financial statements shall be
prepared in accordance with US GAAP), including a "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual financial information, a
report thereon by the Company's certified independent accountants, and
(2) all current reports that would be required to be filed with the
Commission on Form 8-K, in each case, if the Company had a class of
securities registered under the Exchange Act, whether or not the
Company has such a class of securities registered under the Exchange
Act.
Such quarterly financial information must be filed with the Commission
within 45 days following the end of each fiscal quarter of the Company, and
such annual financial information must be furnished within 90 days following
the end of each fiscal year of the Company. Such annual financial information
must include the
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geographic segment financial information required to be disclosed by the
Company under Item 101(d) of Regulation S-K under the Securities Act.
The Company is also required (1) to file with the PIK Notes Trustee, and
provide to each holder of PIK Notes, without cost to such holder, copies of
such reports and documents within 15 days after the date on which the Company
files such reports and documents with the Commission or the date on which the
Company would be required to file such reports and documents if the Company
were so required, and (2) if filing such reports and documents with the
Commission is not accepted by the Commission or is prohibited under the
Exchange Act, to supply, at the Company's cost, copies of such reports and
documents to any prospective holder of PIK Notes promptly upon request.
In addition, if and so long as the PIK Notes are listed or admitted for
trading on a stock exchange and the rules or regulations of such stock exchange
shall require, copies of all reports and information described above will be
available in such places and during such times as such rules or regulations may
require.
Limitation on Investment Company Activities
The Company will not, and will not permit any of its Restricted Subsidiaries
or controlled Affiliates to, conduct its business in a fashion that would cause
the Company to be required to register as an "investment company" (as that term
is defined in the Investment Company Act of 1940, as amended (the "Investment
Company Act")), or otherwise to become subject to regulation under the
Investment Company Act. For purposes of establishing the Company's compliance
with this provision, any exemption which is or would become available under
Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act will be
disregarded.
Repurchase of PIK Notes upon a Change of Control
If a Change of Control occurs, the Company is required to make an offer (the
"Change of Control Offer") to purchase the PIK Notes at a price in cash (the
"Change of Control Payment") equal to 101% of the aggregate principal amount of
the PIK Notes, plus accrued and unpaid interest thereon to the date of
repurchase, plus Additional Amounts, if any, to the date of repurchase (subject
to the right of holders of record of definitive, registered PIK Notes on the
relevant Record Date to receive interest due on the relevant Interest Payment
Date and Additional Amounts, if any, in respect thereof). Within 30 days
following any Change of Control, the Company will give notice to the holders of
the PIK Notes describing the transaction or transactions that constitute the
Change of Control and offering to repurchase the PIK Notes on the Change of
Control Payment date specified in the notice, pursuant to the procedures
required by the PIK Notes Indenture and described in the notice.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder and will
comply with the applicable laws of any non-U.S. jurisdiction in which a Change
of Control Offer is made, in each case, to the extent such laws or regulations
are applicable in connection with the repurchase of the PIK Notes pursuant to a
Change of Control Offer. To the extent that the provisions of any securities
laws or regulations conflict with the provisions of the PIK Notes Indenture,
the Company will comply with the applicable securities laws and regulations and
will not be deemed to have breached its obligations contained in the PIK Notes
Indenture by virtue thereof. The provisions relating to the Company's
obligation to make an offer to repurchase the PIK Notes as a result of a Change
of Control may be waived or modified with the written consent of the holders of
a majority in principal amount of the PIK Notes.
If the Company is unable to repay all of its Indebtedness that contains
restrictions prohibiting the repurchase of the PIK Notes or is unable to obtain
the consents of the holders of Indebtedness, if any, of the Company outstanding
at the time of a Change of Control whose consent would be so required to permit
the repurchase of PIK Notes, then the Company will be unable to fulfil its
repurchase obligations to holders of the PIK Notes, thereby resulting in a
breach of the "Repurchase of Notes upon a Change of Control" covenant. Such
breach will constitute an Event of Default under the PIK Notes Indenture if it
continues for a period of 30
102
consecutive days after written notice is given to the Company by the Trustee or
the holders of at least 25% in aggregate principal amount of the PIK Notes
outstanding. In addition, the failure by the Company to repurchase PIK Notes at
the conclusion of the Change of Control Offer will constitute an Event of
Default without any waiting period or notice requirements.
There can be no assurances that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of PIK Notes) required by the foregoing covenant (as
well as may be contained in other securities of the Company which might be
outstanding at the time, including the senior notes and the Discount Notes).
The above covenant requiring the Company to repurchase the PIK Notes will,
unless the consents referred to above are obtained, require the Company to
repay all Indebtedness then outstanding which by its terms would prohibit such
PIK Notes repurchase.
The existence of a holder's right to require the Company to repurchase such
holder's PIK Notes upon the occurrence of a Change of Control may deter a third
party from seeking to acquire the Company in a transaction that would
constitute a Change of Control.
Consolidation, Merger and Sale of Assets
The Company may not consolidate with, merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of its
property and assets (as an entirety or substantially an entirety in one
transaction or in a series of related transactions) to, any Person or permit
any Person to merge with or into the Company and the Company will not permit
any of its Restricted Subsidiaries to enter into any such transaction or series
of transactions if such transaction or series of transactions, in the
aggregate, would result in the sale, assignment, conveyance, transfer, lease or
other disposition of all or substantially all of the properties and assets of
the Company or the Company and its Restricted Subsidiaries, taken as a whole,
to any other Person or Persons, unless:
(1) the Company is the continuing Person, or the Person (if other than the
Company) formed by such consolidation or into which the Company is
merged or that acquired or leased such property and assets of the
Company is a corporation organized and existing under the laws of the
United States of America, any state thereof or the District of Columbia
and expressly assumes, by a supplemental indenture, all of the
obligations of the Company with respect to the PIK Notes and under the
PIK Notes Indenture;
(2) immediately after giving effect to such transaction, no Default or
Event of Default exists;
(3) immediately after giving effect to such transaction on a pro forma
basis, the Company, or any Person becoming the successor obligor of the
PIK Notes:
(A) has a Consolidated Net Worth equal to or greater than the
Consolidated Net Worth of the Company immediately prior to such
transaction; and
(B) could Incur at least (Euro)1.00 of Indebtedness under paragraph (a)
of the "Limitation on Indebtedness" covenant described above;
(4) the Company delivers to the PIK Notes Trustee an Officers' Certificate
and an opinion of counsel, in each case stating that such
consolidation, merger or transfer and such supplemental indenture
complies with the PIK Notes Indenture; and
(5) the Company delivers to the PIK Notes Trustee an opinion of tax counsel
stating that:
(A) holders of PIK Notes will not recognize income, gain or loss for
U.S. federal or German income tax purposes as a result of such
transaction;
(B) any payment of principal, redemption price or purchase price of,
premium (if any) and interest on the PIK Notes by the Company to a
holder after the consolidation, merger, conveyance, transfer or
lease of assets will be exempt from the Taxes described under "--
Withholding Taxes and Additional Amounts" and
103
(C) no other taxes on income (including taxable capital gains) will be
payable under the tax laws of the Relevant Taxing Jurisdiction (as
defined in "--Withholding Taxes and Additional Amounts") by a
holder who is or who is deemed to be a non-resident of the Relevant
Taxing Jurisdiction in respect of the acquisition, ownership or
disposition of the PIK Notes, including the receipt of principal
of, premium and interest paid pursuant to such PIK Notes.
Events of Default
The following constitute "Events of Default" under the PIK Notes Indenture:
(1) default for 30 days or more in the payment when due of interest or
Additional Amounts on the PIK Notes;
(2) default in the payment of principal of (or premium, if any, on) any PIK
Notes when the same becomes due and payable at maturity, upon
acceleration, redemption or otherwise;
(3) default in the payment of principal or interest on PIK Notes required
to be purchased pursuant to an Asset Sale Offer as described under "--
Certain Covenants--Limitation on Asset Sales" or pursuant to a Change
of Control Offer as described under "--Repurchase of PIK Notes upon a
Change of Control;"
(4) failure to perform or comply with the provisions described under "--
Consolidation, Merger and Sale of Assets;"
(5) failure to comply with any other covenant or agreement of the Company
in the PIK Notes Indenture or under the PIK Notes for 30 days after
written notice by the PIK Notes Trustee or the holders of 25% or more
in aggregate principal amount of the PIK Notes;
(6) a default on any other Indebtedness of the Company or any Restricted
Subsidiary if:
(A) either (i) such default is a failure to pay principal of such
Indebtedness when due after any applicable grace period or (ii) as
a result of such default, the maturity of such Indebtedness has
been accelerated prior to its scheduled maturity and such default
has not been cured within the shorter of 30 days and the applicable
grace period, and such acceleration has not been rescinded; and
(B) the principal amount of such Indebtedness, together with the
principal amount of any other Indebtedness of the Company and its
Restricted Subsidiaries that is also in default as to principal, or
the maturity of which has also been accelerated, aggregates
(Euro)5.0 million or more;
(7) failure to pay final judgments and orders against the Company or any
Restricted Subsidiary (not covered by insurance) aggregating in excess
of (Euro)5.0 million (treating any deductibles, self-insurance or
retention as not so covered), which final judgments remain unpaid,
undischarged and unstayed for a period in excess of 30 consecutive days
following entry of the final judgment or order that causes the
aggregate amount for all such final judgments or orders outstanding and
not paid, discharged or stayed to exceed (Euro)5.0 million; and
(8) certain events of bankruptcy or insolvency with respect to the Company
or any of its Significant Subsidiaries.
If an Event of Default (other than an Event of Default described in clause
(8) above) occurs and is continuing under the PIK Notes Indenture, the PIK
Notes Trustee or the holders of at least 25% in aggregate principal amount of
the PIK Notes then outstanding, by written notice to the Company, may declare
the principal of, premium, if any, interest and other monetary obligations
(including Additional Amounts, if any) on all the then outstanding PIK Notes,
to be immediately due and payable. Upon such a declaration, such principal of,
premium, if any, interest and other monetary obligations on the PIK Notes,
shall be immediately due and payable.
In the event of an acceleration because of the occurrence of an Event of
Default described in clause (6) above, such acceleration will be automatically
rescinded and annulled if the default triggering such Event of
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Default is remedied or cured by the Company and/or the relevant Restricted
Subsidiaries or waived by the holders of the relevant Indebtedness within 60
days after the declaration of acceleration with respect thereto.
If an Event of Default described in clause (8) above occurs, the principal
of, premium, if any, accrued interest and other monetary obligations on the PIK
Notes then outstanding shall ipso facto become and be immediately due and
payable without any declaration or other act on the part of the PIK Notes
Trustee or any holder.
Holders of at least a majority in principal amount of the outstanding PIK
Notes, by written notice to the Company and to the PIK Notes Trustee, may waive
all past defaults and rescind and annul a declaration of acceleration and its
consequences, if:
(1) all existing Events of Default, other than the nonpayment of the
principal of, premium, if any, interest and other monetary obligations
on the PIK Notes that have become due solely by such declaration of
acceleration, have been cured or waived; and
(2) the rescission would not conflict with any judgment or decree of a
court of competent jurisdiction.
For additional information as to the waiver of defaults, see "--Amendment,
Supplement and Waiver."
Holders of the PIK Notes may not enforce the PIK Notes Indenture or the PIK
Notes except as provided in the PIK Notes Indenture. Subject to certain
limitations, holders of a majority in principal amount of the then outstanding
PIK Notes may direct the PIK Notes Trustee in its exercise of any trust or
power. The PIK Notes Trustee may withhold from holders of the PIK Notes notice
of any continuing Default (except a Default relating to the payment of
principal, premium, if any, interest and Additional Amounts, if any) if it
determines that withholding notice is in their interest. The PIK Notes Trustee
has no obligation to accelerate the PIK Notes if in its best judgment
acceleration is not in the best interest of the holders of the PIK Notes.
The Company is required to deliver annually an Officers' Certificate to the
PIK Notes Trustee certifying that a review has been conducted of the activities
of the Company and the Company's performance under the PIK Notes Indenture and
that the Company has fulfilled all obligations thereunder or, if there has been
a default in the fulfillment of any such obligation, specifying each such
default and the nature and status thereof. The Company is also obligated to
notify the PIK Notes Trustee of any default or defaults in the performance of
any covenants or agreements under the PIK Notes Indenture within five business
days of becoming aware of any such default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of the Company
will have any liability for any obligations of the Company under the PIK Notes
or the PIK Notes Indenture or for any claim based on, in respect of, or by
reason of such obligations or their creation. Each holder of the PIK Notes by
accepting a PIK Note waives and releases all such liability. The waiver and
release are part of the consideration for issuance of the PIK Notes. Such
waiver and release may not be effective to waive liabilities under the U.S.
federal securities laws, and it is the view of the Commission that such a
waiver is against public policy.
Legal Defeasance and Covenant Defeasance
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding PIK Notes ("Legal
Defeasance") and cure all then existing Events of Default except for:
(1) the rights of holders of outstanding PIK Notes to receive payments in
respect of the principal of, premium, if any, interest and Additional
Amounts, if any, on the PIK Notes when such payments are due from the
trust referred to below;
105
(2) the Company's obligations with respect to registration of PIK Notes;
mutilated, destroyed, lost or stolen PIK Notes; and the maintenance of
an office or agency for payment and money for security payments held in
trust;
(3) the rights, powers, trusts, duties and immunities of the PIK Notes
Trustee, and the Company's obligations in connection therewith; and
(4) the Legal Defeasance provisions of the PIK Notes Indenture.
In addition, the Company may, at its option and at any time, elect to have
the obligations of the Company released with respect to certain covenants that
are described in the PIK Notes Indenture ("Covenant Defeasance"), and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the PIK Notes. In the event
Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events) described under
"Events of Default" will no longer constitute an Event of Default with respect
to the PIK Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance with
respect to the PIK Notes:
(1) the Company must irrevocably deposit with the PIK Notes Trustee, in
trust, for the benefit of the holders of the PIK Notes cash in Euro,
Euro Government Securities or a combination thereof, in such amounts as
will be sufficient, in the opinion of an internationally recognized
firm of independent public accountants, to pay the principal of,
premium, if any, interest and Additional Amounts, if any, due on the
outstanding PIK Notes, on the stated maturity date or on the applicable
redemption date, as the case may be;
(2) in the case of Legal Defeasance, the Company must have delivered to the
PIK Notes Trustee:
(A) an opinion of counsel in the United States reasonably acceptable to
the Trustee confirming that, subject to customary assumptions and
exclusions, (1) the Company has received from, or there has been
published by, the U.S. Internal Revenue Service a ruling or (2)
since August 26, 1999, there has been a change in the applicable
U.S. federal income tax law, in either case to the effect that, and
based thereon such opinion of counsel shall confirm that, subject
to customary assumptions and exclusions, the holders of the
outstanding PIK Notes will not recognize income, gain or loss for
U.S. federal income tax purposes as a result of such Legal
Defeasance and will be subject to U.S. federal income tax on the
same amounts, in the same manner and at the same times as would
have been the case if such Legal Defeasance had not occurred, and
(B) an opinion of counsel in the Federal Republic of Germany reasonably
acceptable to the PIK Notes Trustee to the effect that (1) holders
will not recognize income, gain or loss for German income tax
purposes as a result of such Legal Defeasance and will be subject
to German income tax on the same amounts, in the same manner and at
the same times as would have been the case if such Legal Defeasance
had not occurred and (2) payments from the defeasance trust will be
free and exempt from any and all withholding and other income taxes
of whatever nature imposed or levied by or on behalf of the German
government or any political subdivision thereof or therein having
the power to tax;
(3) in the case of Covenant Defeasance, the Company must have delivered to
the PIK Notes Trustee:
(A) an opinion of counsel in the United States reasonably acceptable to
the Trustee confirming that, subject to customary assumptions and
exclusions, the holders of the outstanding PIK Notes will not
recognize income, gain or loss for U.S. federal income tax purposes
as a result of such Covenant Defeasance and will be subject to such
tax on the same amounts, in the same manner and at the same times
as would have been the case if such Covenant Defeasance had not
occurred, and
(B) an opinion of counsel in the Federal Republic of Germany reasonably
acceptable to the PIK Notes Trustee to the effect that (1) holders
will not recognize income, gain or loss for German
106
income tax purposes as a result of such Covenant Defeasance and will
be subject to German income tax on the same amounts, in the same
manner and at the same times as would have been the case if such
Covenant Defeasance had not occurred and (2) payments from the
defeasance trust will be free and exempt from any and all
withholding and other income taxes of whatever nature imposed or
levied by or on behalf of the German government or any political
subdivision thereof or therein having the power to tax; and
(4) no Default or Event of Default shall have occurred and be continuing
with respect to certain Events of Default on the date of such deposit;
(5) such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under any material
agreement or instrument to which the Company is a party or by which the
Company is bound;
(6) the Company shall have delivered to the Pik Notes Trustee an opinion of
counsel to the effect that, as of the date of such opinion and subject
to customary assumptions and exclusions, following the deposit, the
trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally under any applicable German law or U.S.
federal or state law, and that the trustee has a perfected security
interest in such trust funds for the ratable benefit of the holders;
(7) the Company shall have delivered to the PIK Notes Trustee an Officers'
Certificate stating that the deposit was not made by the Company with
the intent of defeating, hindering, delaying or defrauding any
creditors of the Company or others; and
(8) the Company shall have delivered to the PIK Notes Trustee an Officers'
Certificate and an opinion of counsel in the United States (which
opinion of counsel may be subject to customary assumptions and
exclusions) each stating that all conditions precedent provided for or
relating to the Legal Defeasance or the Covenant Defeasance, as the
case may be, have been complied with.
Satisfaction and Discharge
The PIK Notes Indenture will be discharged and will cease to be of further
effect as to all PIK Notes issued thereunder when either:
(1) all such PIK Notes theretofore authenticated and delivered (except
lost, stolen or destroyed notes which have been replaced or paid and
notes for whose payment money has theretofore been deposited in trust
and thereafter repaid to the Company) have been delivered to the PIK
Notes Trustee for cancellation; or
(2)(A) all such PIK Notes not theretofore delivered to the PIK Notes
Trustee for cancellation have become due and payable by reason of
the making of a notice of redemption or otherwise or will become due
and payable within one year, and the Company has irrevocably
deposited with the PIK Notes Trustee as trust funds in trust an
amount of money sufficient to pay and discharge the entire
indebtedness on the PIK Notes not theretofore delivered to the PIK
Notes Trustee for cancellation to the date of maturity or
redemption;
(B) no Default with respect to the PIK Notes or the PIK Notes Indenture
shall have occurred and be continuing on the date of such deposit or
shall occur as a result of such deposit and such deposit will not
result in a breach or violation of, or constitute a default under,
any other instrument to which the Company is a party or by which it
is bound;
(C) the Company has paid all sums payable by it under the PIK Notes
Indenture; and
(D) the Company has delivered irrevocable instructions to the PIK Notes
Trustee to apply the deposited money toward the payment of such
Notes at maturity or the redemption date, as the case may be.
107
In addition, the Company must deliver an Officers' Certificate and an opinion
of counsel to the PIK Notes Trustee stating that all conditions precedent to
satisfaction and discharge have been satisfied.
Withholding Taxes and Additional Amounts
All payments made by the Company on the PIK Notes will be made without
withholding or deduction for, or on account of, any present or future taxes,
duties, assessments or governmental charges of whatever nature (collectively,
"Taxes") imposed or levied by or on behalf of Germany, or any jurisdiction in
which the Company or any successor Company is organized or is otherwise
resident for tax purposes or any political subdivision thereof or any authority
having power to tax therein or any jurisdiction from or through which payment
is made (each, a "Relevant Taxing Jurisdiction"), unless the withholding or
deduction of such Taxes is then required by law.
If any deduction or withholding for, or on account of, any Taxes of any
Relevant Taxing Jurisdiction, is at any time required on any payments made by
the Company with respect to the PIK Notes, including payments of principal,
redemption price, interest or premium, the Company will pay such additional
amounts (the "Additional Amounts") as may be necessary in order that the net
amounts received in respect of such payments by the holders of the PIK Notes or
the PIK Notes Trustee, as the case may be, after such withholding or deduction,
equal the respective amounts which would have been received in respect of such
payments in the absence of such withholding or deduction; except that no such
Additional Amounts will be payable with respect to:
(1) any payments on a Pik Note held by or on behalf of a holder or
beneficial owner who is liable for such Taxes in respect of such note
by reason of the holder or beneficial owner having some connection with
the Relevant Taxing Jurisdiction (including being a citizen or resident
or national of, or carrying on a business or maintaining a permanent
establishment in, or being physically present in, the Relevant Taxing
Jurisdiction) other than by the mere holding of such Note or
enforcement of rights thereunder or the receipt of payments in respect
thereof;
(2) any Taxes that are imposed or withheld as a result of a change in law
after August 26, 1999 where such withholding or imposition is by reason
of the failure of the holder or beneficial owner of the PIK Note to
comply with any request by the Company to provide information
concerning the nationality, residence or identity of such holder or
beneficial owner or to make any declaration or similar claim or satisfy
any information or reporting requirement, which is required or imposed
by a statute, treaty, regulation or administrative practice of the
Relevant Taxing Jurisdiction as a precondition to exemption from all or
part of such Taxes;
(3) except in the case of the winding up of the Company, any PIK Note
presented for payment (where presentation is required) in the Relevant
Taxing Jurisdiction; or
(4) any PIK Note presented for payment (where presentation is required)
more than 30 days after the relevant payment is first made available
for payment to the holder.
Such Additional Amounts will also not be payable where, had the beneficial
owner of the PIK Note been the holder of the PIK Note, he would not have been
entitled to payment of Additional Amounts by reason of clauses (1) to (4)
inclusive above.
Upon request, the Company will provide the PIK Notes Trustee with
documentation satisfactory to the trustee evidencing the payment of Additional
Amounts. Copies of such documentation will be made available to the holders
upon request.
The Company will pay any present or future stamp, court or documentary taxes,
or any other excise or property taxes, charges or similar levies which arise in
any jurisdiction from the execution, delivery or registration of the PIK Notes
or any other document or instrument referred to therein, or the receipt of any
payments with respect to the PIK Notes, excluding any such taxes, charges or
similar levies imposed by any jurisdiction outside of the Federal
108
Republic of Germany, the United States of America or any jurisdiction in which
a Paying Agent is located, other than those resulting from, or required to be
paid in connection with, the enforcement of the PIK Notes or any other such
document or instrument following the occurrence of any Event of Default with
respect to the PIK Notes.
Amendment, Supplement and Waiver
Except as provided in the next two succeeding paragraphs, the PIK Notes
Indenture and the PIK Notes may be amended or supplemented with the consent of
the holders of at least a majority in principal amount of the PIK Notes then
outstanding (including consents obtained in connection with a tender offer or
exchange offer for the PIK Notes), and any existing Default or Event of Default
and its consequences or compliance with any provision of the PIK Notes
Indenture or the PIK Notes may be waived with the consent of the holders of a
majority in principal amount of the outstanding PIK Notes (including consents
obtained in connection with a tender offer or exchange offer for such PIK
Notes).
The PIK Notes Indenture provides that without the consent of each holder
affected, an amendment or waiver may not (with respect to any PIK Notes held by
a non-consenting holder of the PIK Notes):
(1) reduce the principal amount of the PIK Notes whose holders must consent
to an amendment, supplement or waiver,
(2) reduce the principal of or change the fixed maturity of any such PIK
Note or alter or waive the provisions with respect to the redemption of
such PIK Notes,
(3) reduce the rate of or change the time for payment of interest on any
PIK Note,
(4) waive a Default in the payment of principal of, or premium, if any,
interest or Additional Amounts, if any, on the PIK Notes (except a
rescission of acceleration of such PIK Notes by the holders of at least
a majority in aggregate principal amount of such Notes and a waiver of
the payment default that resulted from such acceleration with respect
to such Notes), or in respect of a covenant or provision contained in
the PIK Notes Indenture which cannot be amended or modified without the
consent of all holders,
(5) make any PIK Note payable in money other than that stated in the PIK
Notes,
(6) make any change in the provisions of the PIK Notes Indenture relating
to waivers of past Defaults or the rights of holders of such PIK Notes
to receive payments of principal of, or premium, if any, interest or
Additional Amounts, if any, on such Notes,
(7) make any change in the amendment and waiver provisions in the PIK Notes
Indenture,
(8) make any change in the provisions of the PIK Notes Indenture described
under "--Withholding Taxes and Additional Amounts" that adversely
affects the rights of any holder of the PIK Notes,
(9) amend the terms of the PIK Notes or the PIK Notes Indentures in a way
that would result in the loss of an exemption from any of the Taxes
described thereunder or an exemption from any obligation to withhold or
deduct Taxes as described thereunder unless the Company agrees to pay
Additional Amounts, if any, in respect thereof, or
(10) impair the right of any holder of the PIK Notes to receive payment of
principal of, and interest on, such holder's PIK Notes on or after the
due dates therefor or to institute suit for the enforcement of any
payment on or with respect to such holder's PIK Notes.
Notwithstanding the foregoing, without the consent of any holder of PIK
Notes, the Company and the PIK Notes Trustee together may amend or supplement
the PIK Notes Indenture or the PIK Notes:
(1) to cure any ambiguity, omission, defect or inconsistency;
109
(2) to provide for uncertificated PIK Notes in addition to or in place of
certificated PIK Notes, or to provide for additional forms of global
PIK Notes containing transfer and other restrictions and which comply
with applicable U.S. securities and other laws;
(3) to comply with the covenant relating to mergers, consolidations and
sales of assets;
(4) to provide for the assumption of the Company's obligations to holders
of such PIK Notes;
(5) to make any change that would provide any additional rights or benefits
to the holders of the PIK Notes or that does not adversely affect the
legal rights under the PIK Notes Indenture of any such holder;
(6) to add covenants for the benefit of the holders of PIK Notes or to
surrender any right or power conferred upon the Company; or
(7) to comply with requirements of the Commission in order to effect or
maintain the qualification of the PIK Notes Indenture under the Trust
Indenture Act.
No amendment may be made to the subordination provisions of the PIK Notes
Indenture that adversely affects the rights of any holder of Senior
Indebtedness then outstanding unless the holders of such Senior Indebtedness
(or any group or representative thereof authorized to give a consent) consent
to such change.
The consent of the holders of PIK Notes is not necessary under the PIK Notes
Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
Notices
Notices regarding the PIK Notes which have been issued in global form will be
published in a leading newspaper having a general circulation in New York
(which is expected to be The Wall Street Journal) and in Frankfurt (which is
expected to be the Frankfurter Allgemeine Zeitung). If and so long as the PIK
Notes are listed, admitted or eligible for trading on a stock exchange or
trading market and the rules or regulations of such stock exchange or trading
market so require, notice will also be published in a newspaper having a
general circulation in the additional jurisdictions as such rules or
regulations may require.
Notices regarding the PIK Notes issued in definitive, registered form will be
mailed to holders by first-class mail at their respective addresses as they
appear on the registration books of the Registrar.
Notices given by publication will be deemed given on the first date on which
publication is made and notices given by first-class mail, postage prepaid,
will be deemed given five calendar days after mailing.
Concerning the Trustee
The PIK Notes Indenture contains certain limitations on the rights of the PIK
Notes Trustee, should the PIK Notes Trustee become a creditor of the Company,
to obtain payment of claims in certain cases, or to realize on certain property
received in respect of any such claim as security or otherwise. The PIK Notes
Trustee will be permitted to engage in other transactions; provided, however,
if the PIK Notes Trustee acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to
continue, or resign.
The PIK Notes Indenture provides that in case an Event of Default shall occur
(which shall not be cured), the PIK Notes Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent person in the
conduct of his own affairs. Subject to such provisions, the trustee will be
under no obligation to exercise any of its rights or powers under the PIK Notes
Indenture at the request of any holder of such PIK Notes, unless such holder
shall have offered to the PIK Notes Trustee security and indemnity satisfactory
to it against any loss, liability or expense.
110
Governing Law
The PIK Notes Indenture and the PIK Notes and the rights and duties of the
parties thereunder shall be governed by, and construed in accordance with, the
laws of the State of New York.
Enforceability of Judgments
Since most of the operating assets of the Company and its Subsidiaries are
outside the United States, any judgment obtained in the United States against
the Company or a Subsidiary, including judgments with respect to the payment of
principal, premium, if any, interest, Additional Amounts, if any, redemption
price and any purchase price with respect to the PIK Notes, may not be
collectible within the United States.
The Company has been informed by its German counsel, Besner Kreifels Weber,
that, subject to certain exceptions, the laws of the Federal Republic of
Germany permit an action to be brought in a court of competent jurisdiction in
the Federal Republic of Germany permitting the enforcement of a judgment of a
United States federal court or a court of the State of New York sitting in the
Borough of Manhattan in the City of New York awarding claims under the terms
and conditions of the PIK Notes and the PIK Notes Indenture. In granting
permission to enforce the United States or New York State court ruling, the
respective German court would not substantively re-examine or re-litigate the
case on the merits of the subject matter thereof.
The exceptions to permission of enforcement of United States and New York
State court judgments provide, among other things, that a judgment may not be
enforced in Germany, if:
. such judgment is not final and remains subject to appeal or any other
form of contestation in the United States;
. the court having rendered such judgment is not the court of competent
jurisdiction pursuant to German international law;
. the judgment contradicts an earlier final and enforceable judgment
rendered in Germany or abroad on the same subject matter; or
. the enforcement of such judgment would contradict essential principles
of German law and German ordre public (which especially excludes the
enforcement of judgments with a penal or revenue character).
Form of PIK Notes
The PIK Notes were initially issued in the form of one or more fully
registered notes in global form (the "Global Notes") in denominations of
(Euro)1.00 principal amount and integral multiples thereof.
The Global Notes have been deposited with a common depositary for Euroclear
and Cedelbank (together, the "Depositaries" and, individually, a "Depositary"),
or its nominee. Ownership of interests in the Global Notes is limited to
persons that have accounts with Euroclear or Cedelbank or persons that may hold
interests through such participants. Thereafter, ownership interests in the
Global Notes ("Book-Entry Interests") will be shown on, and transfers thereof
will be effected only through, records maintained in book-entry form by
Euroclear and Cedelbank and their participants.
The Book-Entry Interests will not be held in definitive form. Instead,
Euroclear and/or Cedelbank will credit on their respective book-entry
registration and transfer systems a participant's account with the interest
beneficially owned by such participant. The laws of some jurisdictions,
including certain states of the United States, may require that certain
purchasers of securities take physical delivery of such securities in
definitive form. The foregoing limitations may impair the ability to own,
transfer or pledge Book-Entry Interests. In addition, while the Notes are in
global form, holders of Book-Entry Interests will not be considered the owners
or "holders" of Notes for any purpose.
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To the extent permitted by law, the Company, the PIK Note Trustee and the
Registrar shall be entitled to treat the holder of any PIK Note as the absolute
owner thereof.
The Company will not impose any fees or other charges in respect of the PIK
Notes; however, holders of the Book-Entry Interests may incur fees normally
payable in respect of the maintenance and operation of accounts in Euroclear
and/or Cedelbank.
None of Cybernet, the PIK Notes Trustee or the Registrar will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of Book-Entry Interests.
Transfer and Exchange
The Global Notes may be transferred only to a successor to the relevant
Depositary.
All transfers of Book-Entry Interests between participants in Euroclear or
participants in Cedelbank will be effected by Euroclear or Cedelbank pursuant
to customary procedures and subject to the applicable rules and procedures
established by Euroclear or Cedelbank and their respective participants. See
"Description of Book-Entry System."
Subject to the foregoing, a Book-Entry Interest in one of the Global Notes
may be transferred to a person who takes delivery thereof in the form of a
Book-Entry Interest in another of the Global Notes by means of an instruction
originated through Euroclear or Cedelbank, as applicable. Any Book-Entry
Interest that is so transferred will, upon transfer, cease to be a Book-Entry
Interest in the first-mentioned Global Note and become a Book-Entry Interest in
the other Global Note and will thereafter be subject to all transfer
restrictions, if any, and other procedures applicable to Book-Entry Interests
in such other Global Note for as long as it remains such a Book-Entry Interest.
In connection with such transfer, appropriate adjustments will be made to
reflect a decrease in the principal amount at maturity of the first-mentioned
Global Note and a corresponding increase in the principal amount at maturity of
the other Global Note, as applicable.
In accordance with the terms of the PIK Notes Indenture, Book-Entry Interests
in a Global Note may be exchanged by the holder thereof for Definitive Notes in
denominations of (Euro)1.00 principal amount and integral multiples thereof
upon receipt by the Registrar of instructions relating thereto and any
certificates and other documentation required by the Indenture. It is expected
that such instructions will be based upon directions received by Euroclear or
Cedelbank, as applicable, from the participant that owns the relevant Book-
Entry Interests. Definitive Notes issued in exchange for a Book-Entry Interest
will, except as set forth in the PIK Notes Indenture or as otherwise determined
by the Issuer in compliance with applicable law, be subject to the restrictions
described under "Notice to Investors" and will have the legend referred to
under "Notice to Investors."
Subject to such restrictions, PIK Notes issued as Definitive Notes may be
transferred in whole or in part, in denominations of (Euro)1.00 in principal
amount or integral multiples thereof to persons who take delivery thereof in
the form of Definitive Notes or in the form of Book-Entry Interests in a Global
Note. In connection with any such transfer, the PIK Indenture will require the
transferor to, among other things, furnish appropriate endorsements and
transfer documents and to pay any taxes, duties and governmental charges in
connection with such transfer.
Notwithstanding the foregoing, Cybernet is not required to register the
transfer of any Definitive Notes:
(1) for a period of 15 calendar days prior to any date fixed for the
redemption of the PIK Notes;
(2) for a period of 15 calendar days immediately prior to the date fixed
for the selection of PIK Notes to be redeemed in part;
(3) for a period of 15 calendar days prior to the record date with respect
to any interest payment date;
(4) which the holder has tendered (and not withdrawn) for repurchase in
connection with a Change of Control Offer.
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Any such transfer will be made without charge to the holder, other than any
taxes, duties and governmental charges payable in connection with such
transfer.
Description of Book-Entry System
General
One or more Global Notes representing the PIK Notes was deposited with a
common depositary for Euroclear and Cedelbank, or its nominee, when the PIK
Notes were initially issued. Book-Entry Interests therein are shown on, and
transfers thereof are effected only through, records maintained in book-entry
form by Euroclear and Cedelbank and their participants.
Book-Entry Interests will not be held in definitive form. Instead, Euroclear
and/or Cedelbank will credit on their respective book-entry registration and
transfer systems a participant's account with the interest beneficially owned
by such participant. The laws of some jurisdictions, including certain states
of the United States, may require that certain purchasers of securities take
physical delivery of such securities in definitive form. The foregoing
limitations may impair the ability to own, transfer of pledge Book-Entry
Interests. In addition, while the PIK Notes are in global form, holders of
Book-Entry Interests will not be considered the owners or "holders" of PIK
Notes for any purpose.
So long as the PIK Notes are held in global form, the common depositary (or
its nominee) will be considered the sole holder of Global Notes for all
purposes under the PIK Notes Indenture. In addition, participants must rely on
the procedures of Euroclear and Cedelbank and indirect participants must rely
on the procedures of the participants through which they own Book-Entry
Interests to exercise any rights of holders under the PIK Notes Indenture.
None of Cybernet, the PIK Notes Trustee or the Registrar will have any
responsibility or be liable for any aspect of the records relating to the Book-
Entry Interests.
Definitive Notes
Under the terms of the PIK Notes Indenture, owners of Book-Entry Interests
will receive definitive, registered PIK Notes:
(1) if either Euroclear or Cedelbank notifies Cybernet that it is unwilling
or unable to continue to act as depositary and a successor depositary
is not appointed by Cybernet within 90 days;
(2) if Euroclear or Cedelbank so request following an Event of Default
under the PIK Notes Indenture;
(3) in whole (but not in part) at any time if Cybernet in its sole
discretion determines that the Global Notes should be exchanged for
Definitive Registered Notes; or
(4) the owner of a Book-Entry Interest requests such exchange in writing
delivered through either Euroclear or Cedelbank following an Event of
Default under the PIK Notes Indenture.
Euroclear has advised the Company, with regard to the Book-Entry Interests,
that its current practice, upon receipt of any request by an owner of a Book-
Entry Interest for Definitive Notes, is to make a request to the Company that
all owners of Book-Entry Interests receive Definitive Notes.
In such an event, the Registrar will issue definitive PIK Notes registered in
the name or names and issued in any approved denominations, requested by or on
behalf of Euroclear and/or Cedelbank, as applicable (in accordance with their
respective customary procedures and based upon directions received from
participants reflecting the beneficial ownership of Book-Entry Interests), and
such definitive PIK Notes will bear the
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restrictive legend referred to in "Notice to Investors," unless that legend is
not required by the PIK Notes Indenture or applicable law.
Redemption of Global Notes
In the event any Global Note (or any portion thereof) is redeemed, the
relevant Depositary will redeem an equal amount of the Book-Entry Interests in
such Global Note from the amount received by it in respect of the redemption of
such Global Note. The redemption price payable in connection with the
redemption of such Book-Entry Interests will be equal to the amount received by
the relevant Depositary in connection with the redemption of such Global Note
(or any portion thereof).
Cybernet understands that under existing practices of Euroclear and
Cedelbank, if fewer than all of the PIK Notes are to be redeemed at any time,
Euroclear and Cedelbank will credit their respective participants' accounts on
a proportionate basis (with adjustments to prevent fractions) or by lot or on
such other basis as they deem fair and appropriate; provided, however, that no
Book-Entry Interest of less than (Euro)1.00 principal amount may be redeemed in
part.
Payments on Global Notes
Payments of any amounts owing in respect of the Global Notes (including
principal, premium, if any, interest Additional Amounts, if any, and Liquidated
Damages, if any) will be made by Cybernet in Euros, to the relevant Paying
Agent. The relevant Paying Agent will, in turn, make such payments to the
common depositary for Euroclear and Cedelbank which will distribute such
payments to participants in accordance with its procedures.
Under the terms of the Indenture, Cybernet and the PIK Notes Trustee will
treat the registered holder of the Global Notes (e.g., the common depositary
(or its nominee)) as the owners thereof for the purpose of receiving payments
and for all other purposes. Consequently, none of Cybernet, the PIK Notes
Trustee or any agent of Cybernet or the Trustee has or will have any
responsibility or liability for:
(1) any aspect of the records of Euroclear, Cedelbank or any participant or
indirect participant relating to or payments made on account of a Book-
Entry Interest or for maintaining, supervising or reviewing any of the
records of Euroclear, Cedelbank or any participant or indirect
participant relating to or payments made on account of a Book-Entry
Interest; or
(2) Euroclear, Cedelbank or any participant or indirect participant.
Payments by participants to owners of Book-Entry Interests held through
participants are the responsibility of such participants, as is now the case
with securities held for the accounts of customers registered in "street name."
Action by Owners of Book-Entry Interests
Euroclear and Cedelbank have advised Cybernet that they will take any action
permitted to be taken by a holder of PIK Notes (including the presentation of
PIK Notes for exchange as described above) only at the direction of one or more
participants to whose account the Book-Entry Interests in the Global Notes are
credited and only in respect of such portion of the aggregate principal amount
of PIK Notes as to which such participant or participants has or have given
such direction. The relevant Depositary will not exercise any discretion in the
granting of consents, waivers or the taking of any other action in respect of
the Global Notes. However, if there is an Event of Default under the PIK Notes,
each of Euroclear and Cedelbank reserve the right to exchange the Global Notes
for Definitive Notes in certificated form, and to distribute such PIK Notes to
its participants.
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Information Concerning Euroclear and Cedelbank
Cybernet understands as follows with respect to Euroclear and Cedelbank:
Euroclear and Cedelbank hold securities for participating organizations and
facilitate the clearance and settlement of securities transactions between
their respective participants through electronic book-entry changes in accounts
of such participants. Euroclear and Cedelbank provide to their participants,
among other things, services for safekeeping, administration, clearance and
settlement of internationally traded securities and securities lending and
borrowing. Euroclear and Cedelbank interface with domestic securities markets.
Euroclear and Cedelbank participants are financial institutions such as
underwriters, securities brokers and dealers, banks, trust companies and
certain other organizations. Indirect access of Euroclear or Cedelbank is also
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodian relationship with a Euroclear or
Cedelbank participant, either directly or indirectly.
Global Clearance and Settlement Under the Book-Entry System
The Book-Entry Interests will trade through participants of Euroclear or
Cedelbank, and will settle in same-day funds. Since the purchase determines the
place of delivery, it is important to establish at the time of trading of any
Book-Entry Interests where both the purchaser's and seller's accounts are
located to ensure that settlement can be made on the desired value date.
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DESCRIPTION OF THE DISCOUNT NOTES
The Discount Notes were issued by the Company under an Indenture (the
"Discount Notes Indenture") between the Company and The Bank of New York, as
Trustee, (the "Discount Notes Trustee"). The terms of the Discount Notes
include those stated in the Discount Notes Indenture and those made part of the
Discount Notes Indenture by reference to the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act").
The following description is a summary of the material provisions of the
Discount Notes Indenture. It does not restate this agreement in its entirety.
We urge you to read the Discount Notes Indenture because that agreement, and
not this description, defines your rights as a holder of the Discount Notes. We
have filed copies of the Discount Notes Indenture as exhibits to the
registration statement which includes this prospectus.
The definitions of certain capitalized terms used in the following summary
are set forth below in "Certain Definitions," beginning on page 145. For
purposes of this "Description of the Discount Notes," the term "Company" is
used to refer specifically to Cybernet Internet Services International, Inc.
The Company may issue additional discount notes ("Additional Discount Notes")
from time to time, under the Discount Notes Indenture. The Discount Notes and
any Additional Discount Notes are limited in aggregate principal amount to
$100,000,000. The Discount Notes and any Additional Discount Notes will be
treated as a single class for all purposes under the Discount Notes Indenture.
We expect to list the Discount Notes or admit them for trading on an
internationally recognized stock exchange or make them eligible for trading in
an over-the-counter trading market. If and so long as the Discount Notes are so
listed, admitted or made eligible, the Company will maintain such special
agents including paying agents in such jurisdictions as are required by
applicable rules and regulations of such stock exchange or trading market.
There can be no assurance that the Company will be successful in securing any
such listing, admission or eligibility.
Subordination
The Discount Notes are senior subordinated unsecured obligations of the
Company. The payment of the Discount Notes is subordinated to the prior payment
in full of all Senior Indebtedness of the Company, which includes the Senior
Notes. The Discount Notes rank equally with all other Senior Subordinated
Indebtedness of the Company, including the PIK Notes which are currently
outstanding and any additional notes that may be issued under the Discount
Notes Indenture or the PIK Notes Indenture. Unsecured Indebtedness is not
deemed to be subordinate or junior to secured Indebtedness merely because it is
unsecured. As described in "--Certain Covenants--Limitation on Subordinate
Indebtedness," the Company may not incur any Indebtedness that is senior in
right of payment to the Discount Notes, but junior in right of payment to
Senior Indebtedness.
To the extent that any payment of Senior Indebtedness is determined to be
fraudulent or preferential or otherwise and is thereafter set aside or required
to be paid to any receiver, trustee in bankruptcy, liquidating trustee or
similar Person under any bankruptcy, insolvency, receivership, fraudulent
conveyance or similar law, then if such payment is recovered by a receiver,
trustee in bankruptcy or other similar Person, the Senior Indebtedness
originally intended to be satisfied will be deemed to be reinstated and
outstanding as if such payment had not occurred. Similarly, any obligation to
repay Senior Indebtedness which is determined to be fraudulent, invalid or
otherwise set aside will be deemed to be reinstated and outstanding as Senior
Indebtedness for all purposes of the Discount Notes Indenture.
The Company may not pay principal of, premium, if any, or interest on, or
other payment obligations in respect of, the Discount Notes or make any deposit
pursuant to the provisions described under "--Legal Defeasance and Covenant
Defeasance" below and may not otherwise purchase, redeem or retire any Discount
Notes (collectively, "pay the Discount Notes") if: (1) any Senior Indebtedness
is not paid when due; or (2) any other default on Senior Indebtedness occurs
and the maturity of such Senior Indebtedness is
116
accelerated in accordance with its terms unless, in either case, the default
has been cured or waived and any such acceleration has been rescinded or such
Senior Indebtedness has been paid in full.
The Company also will not be permitted to pay the Discount Notes for a
Payment Blockage Period (as defined below) during the continuance of any
default, other than a default described in clause (1) or (2) of the immediately
preceding paragraph, on any Designated Senior Indebtedness that permits the
holders of the Designated Senior Indebtedness to accelerate its maturity
immediately without either further notice (except such notice as may be
required to effect such acceleration) or the expiration of any applicable grace
periods.
A "Payment Blockage Period" is a 179 day period which commences on the
receipt by the Discount Notes Trustee of written notice (a "Blockage Notice")
of a default of the kind described in the immediately preceding paragraph from
the representative of the holders of such Designated Senior Indebtedness
specifying an election to effect a Payment Blockage Period. The Payment
Blockage Period may be less than 179 days if the Payment Blockage Period is
terminated by the Person or Persons who gave the Blockage Notice or if the
default giving rise to the Blockage Notice is no longer continuing or the
Designated Senior Indebtedness has been repaid in full.
The Company may resume payments on the Discount Notes after the end of the
Payment Blockage Period, unless the maturity of such Designated Senior
Indebtedness has been accelerated. Not more than one Blockage Notice may be
given in any consecutive 360-day period, irrespective of the number of defaults
with respect to Designated Senior Indebtedness during such period.
In the event of a payment or distribution of the assets or securities of the
Company as a result of:
(1) a total or partial liquidation or a dissolution of the Company;
(2) a reorganization, bankruptcy, insolvency, receivership of or similar
proceeding relating to the Company or its property; or
(3) an assignment for the benefit of creditors or marshaling of the
Company's assets and liabilities,
then the holders of Senior Indebtedness will be entitled to receive payment in
full of Senior Indebtedness (including interest accruing after, or which would
accrue but for, the commencement of the proceeding at the rate specified in the
applicable Senior Indebtedness, whether or not a claim for such interest would
be allowed) before the holders of the Discount Notes will be entitled to
receive any payment or distribution.
In addition, until the Senior Indebtedness is paid in full, any payment or
distribution to which holders of the Discount Notes would be entitled but for
the subordination provisions of the Discount Notes Indenture will be made to
holders of the Senior Indebtedness as their interests may appear. If a payment
or distribution is made to holders of the Discount Notes that, due to the
subordination provisions, should not have been made to them, such holders are
required to hold it in trust for the holders of Senior Indebtedness and pay it
over to them as their interests may appear.
If payment of the Discount Notes is accelerated because of an Event of
Default, the Company or the Discount Notes Trustee must notify the holders of
the Designated Senior Indebtedness or the representative of such holders of the
acceleration. The Company may not pay the Discount Notes until five business
days after such holders or the representative of the Designated Senior
Indebtedness receives notice of such acceleration and, thereafter, may pay the
Discount Notes only if the subordination provisions of the Discount Notes
Indenture otherwise permit payment at that time.
By reason of the subordination provisions described above, in the event of
liquidation or insolvency, creditors of the Company who are not holders of
Senior Indebtedness may recover less, ratably, than holders of Senior
Indebtedness and may recover more, ratably, than holders of the Discount Notes.
The Company is a holding company with limited assets and operates its
business through Subsidiaries. Any right of the Company and its creditors,
including holders of the Discount Notes, to participate in the assets
117
of any of the Company's Subsidiaries upon any liquidation or administration of
any such Subsidiary will be subject to the prior claims of the creditors of
such Subsidiary. The claims of creditors of the Company, including holders of
the Discount Notes, will be effectively subordinated to all existing and future
third party indebtedness and liabilities, including trade payables, of the
Company's Subsidiaries. At June 30, 1999, the Company's Subsidiaries had total
liabilities of $16,200,635 million reflected on the Company's balance sheet.
The Company and its Subsidiaries may incur other debt in the future, including
secured debt.
The Discount Notes will not be entitled to any security and will not be
entitled to the benefit of any guarantees, except under the circumstances
described under "--Certain Covenants--Limitation on Issuances of Guarantees of
Indebtedness by Restricted Subsidiaries."
Principal, Maturity and Interest
The Discount Notes mature on August 15, 2009. The Discount Notes will accrete
at the rate of 13.0% per annum semi-annually commencing on August 26, 1999
until August 15, 2004. There will be no accrual of cash interest on the
Discount Notes prior to August 15, 2004. From and after August 15, 2004, the
Discount Notes will bear interest at the rate of 13.0% per annum, payable semi-
annually in arrears on each February 15 and August 15 (each, an "Interest
Payment Date"), commencing on February 15, 2005 to the Person in whose name
each Discount Note (or any predecessor Discount Note) is registered at the
close of business on the preceding February 1 or August 1, as the case may be
(each, a "Record Date"). Interest will be computed on the basis of a 360-day
year of twelve 30-day months.
Methods of Receiving Payments on Discount Notes
If a holder of Discount Notes has given wire transfer instructions to the
Company, the Company will make all payments of principal, Accreted Value,
premium, interest and Additional Amounts on the Discount Notes in accordance
with those instructions. All other payments on the Discount Notes will be made
at the office or agency of the Company maintained for that purpose within the
City and State of New York unless the Company elects to make payments of
interest and Additional Amounts by check mailed to the holders at the addresses
set forth in the register of holders of Discount Notes. Until otherwise
designated by the Company, the Company's office or agency in New York will be
the office of the Discount Notes Trustee maintained for such purpose.
Denominations
The Discount Notes (or Discount Notes issued on the transfer thereof) will be
issued in minimum denominations of $1,000 principal amount and integral
multiples thereof.
Conversion
Unless previously redeemed, the Discount Notes are convertible (in
denominations of $1,000 principal amount at maturity or integral multiples
thereof) at the option of the holder thereof, into common stock of the Company
at any time on or after August 25, 2000, and prior to the maturity date. The
number of shares of common stock ("Discount Conversion Shares") issuable upon
conversion of the Discount Notes is equal to the Accreted Value of the Discount
Notes being converted (on the date of conversion) divided by $25.00, subject to
adjustment in certain events as described below (the "Discount Conversion
Ratio"). Except as described below, no adjustment will be made on conversion of
any Discount Notes for interest accrued thereon or for dividends paid on
outstanding common stock of the Company.
If Discount Notes not called for redemption are converted (including pursuant
to the mandatory conversion feature described below) after a Record Date for
the payment of interest and prior to the next succeeding Interest Payment Date,
such Discount Notes must be accompanied by funds equal to the interest payable
on such succeeding Interest Payment Date on the principal amount so converted.
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The Company is not required to issue fractional shares upon conversion of
Discount Notes (including pursuant to the mandatory conversion feature
described below) and, in lieu thereof, will pay a cash adjustment based upon
the closing price on the Neuer Markt of the common stock on the last Trading
Day prior to the day of conversion. In the case of Discount Notes called for
redemption, conversion rights will expire at the close of business on the
Trading Day next preceding the date fixed for redemption, unless the Company
defaults in payment of the redemption price.
If the closing price on the Neuer Markt of the common stock during any period
described below has exceeded the price for such period referred to below for at
least 30 consecutive Trading Days ("Market Criteria," with the 30-day period
being referred to as the "Market Criteria Period"), and the registration
statement of which this prospectus is a part is effective and available, all of
the Discount Notes will be automatically converted on the next Trading Day
after the Market Criteria Period into that number of shares of common stock
derived by application of the Discount Conversion Ratio; provided, however,
that the conversion will not occur until August 26, 1999, and will occur then
only if the closing price on the Neuer Markt of the common stock is at least
(Euro)32.00 on such date:
12 Months Beginning Closing Sale Price
- ------------------- ------------------
August 15, 1999.............................................. (Euro)32.00
August 15, 2000.............................................. (Euro)38.46
August 15, 2001.............................................. (Euro)44.92
August 15, 2002.............................................. (Euro)51.37
August 15, 2003.............................................. (Euro)57.83
The denominator of the Discount Conversion Ratio is subject to adjustment
(under formulae set forth in the Discount Notes Indenture) in certain events,
including:
(1) the issuance of common stock as a dividend or distribution;
(2) the common stock is subdivided or combined;
(3) the issuance to all holders of common stock of rights or warrants to
purchase additional shares of common stock at a price per share that is
less than the Current Market Price per share;
(4) the distribution to all holders of common stock of shares of Capital
Stock of the Company (other than common stock) or evidences of
indebtedness of the Company or assets (including securities, but
excluding those rights, warrants, dividends and distributions referred
to in (1), (2) and (3) above and dividends and distributions in
connection with the liquidation, dissolution or winding up of the
Company or paid in cash);
(5) the distribution of cash to all holders of common stock, excluding:
(A) any quarterly cash dividend paid on the common stock to the extent
that the aggregate cash dividend per share of common stock in any
quarter does not exceed the greater of (x) the amount per share of
common stock of the next preceding quarterly cash dividend on the
common stock to the extent that such preceding quarterly dividend
did not require an adjustment of the denominator of the Discount
Conversion Ratio (as adjusted to reflect subdivisions or
combinations of the common stock), and (y) 3.75% of the average of
the daily closing prices on the Neuer Markt of the common stock,
for the ten consecutive Trading Days immediately prior to the date
of declaration of such dividend, and
(B) any dividend or distribution in connection with the liquidation,
dissolution or winding up of the Company; and
(6) the payment of consideration in respect of a tender or exchange offer
by the Company or any Subsidiary of the Company for the common stock to
the extent that the value of the consideration per share of common
stock exceeds the Current Market Price per share of common stock on the
Trading
119
Day next succeeding the last date on which tenders or exchanges may be
made pursuant to such tender or exchange.
If any adjustment is required to be made as set forth in clause (5) above as
a result of a distribution that is a quarterly dividend, such adjustment would
be based upon the amount by which such distribution exceeds the amount of the
quarterly cash dividend permitted to be excluded pursuant to such clause (5).
If an adjustment is required to be made as set forth in clause (5) above as a
result of a distribution that is not a quarterly dividend, such adjustment
would be based upon the full amount of the distribution.
No adjustment to the denominator of the Discount Conversion Ratio will be
required unless such adjustment would require a change of at least 1.0% in the
denominator of the Discount Conversion Ratio then in effect; provided that any
adjustment that would otherwise be required to be made will be carried forward
and taken into account in any subsequent adjustment. Except as stated above,
the denominator of the Discount Conversion Ratio will not be adjusted for the
issuance of common stock or any securities convertible into or exchangeable for
common stock or carrying the right to purchase any of the foregoing.
If holders of common stock are entitled to receive securities, other property
or assets (including cash) as a result of:
(1) any reclassification or change of the common stock;
(2) a consolidation, merger or combination involving the Company; or
(3) a sale or conveyance to another corporation of the property and assets
of the Company as an entirety or substantially as an entirety,
the holders of the Discount Notes then outstanding will be entitled thereafter
to convert such Discount Notes into the kind and amount of securities or other
property or assets which they would have been entitled to receive had such
Discount Notes been converted into common stock immediately prior to such
reclassification, change, consolidation, merger, combination, sale or
conveyance, assuming that the holders would not have exercised any rights of
election as to the securities or other property or assets receivable in
connection therewith.
The Company from time to time may, to the extent permitted by law, reduce the
denominator of the Discount Conversion Ratio by any amount for any period of at
least 20 days, if the Board of Directors has made a determination that such
reduction would be in the best interests of the Company. The Board's
determination will be conclusive. The Company may, at its option, make other
reductions in the denominator of the Discount Conversion Ratio as the Board of
Directors deems advisable to avoid or diminish any income tax to holders of
common stock resulting from any dividend or distribution of stock (or rights to
acquire stock) or from any event treated as such for income tax purposes. See
"Certain United States Federal Income Tax Consequences to Holders of Discount
Notes."
In order to effect an optional conversion of any of the Discount Notes, the
holder is required to surrender to the Discount Notes Trustee, the Discount
Notes to be converted and a duly executed copy of the conversion form set forth
in the Discount Notes Indenture. Upon the conversion of any Discount Notes into
shares of common stock (including any mandatory conversion), the Company will
transfer to or upon the written order of the holder of the Discount Notes to be
converted appropriate evidence of ownership of any shares of common stock or
other security or property to which it is entitled, registered or otherwise
placed in such name or names as it may direct in writing, and will deliver such
evidence of ownership to the person or persons entitled to receive the same and
an amount in cash in lieu of any fractional shares, if any. All shares of
common stock or other securities issuable by the Company upon the conversion of
the Discount Notes are required to be validly issued, fully paid and
nonassessable.
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The holders of Discount Notes are not entitled, as such, to receive dividends
or other distributions, receive notice of any meeting of the stockholders,
consent to any action of the stockholders, receive notice of any other
stockholder proceedings, or to any other rights as stockholders of the Company.
At the date of conversion (including mandatory conversion), the rights of the
holders of Discount Notes being converted (as such holders) will terminate
(except the right to receive accrued and unpaid interest, if any) and the
Discount Notes to be converted will no longer be deemed outstanding and will
represent only the right to receive shares of common stock and a right to
receive cash for fractional shares, as described above.
Optional Redemption
Except as described below and in the following paragraph or under "--
Redemption for Taxation Reasons," the Discount Notes will not be redeemable at
the Company's option prior to August 15, 2004. From and after August 15, 2004,
the Discount Notes will be subject to redemption at the option of the Company,
in whole or in part, upon not less than 30 nor more than 60 days' prior notice
at the redemption prices (expressed as a percentage of principal amount) set
forth below, plus accrued and unpaid interest and Additional Amounts, if any,
to the applicable redemption date, if redeemed during the twelve-month period
beginning on August 15 of each of the years indicated below:
Redemption
Year Price
---- ----------
2004........................................................... 106.500%
2005........................................................... 104.333%
2006........................................................... 102.167%
2007 and thereafter............................................ 100.000%
Notice of redemption is required be published in a leading newspaper having a
general circulation in New York (which is expected to be The Wall Street
Journal) and in Frankfurt (which is expected to be the Frankfurter Allgemeine
Zeitung) or, with respect to Discount Notes issued in definitive registered
form, mailed by first-class mail to the registered address of each holder of
such Discount Notes.
In the case of any partial redemption, selection of the Discount Notes for
redemption will be made by the Discount Notes Trustee in compliance with the
requirements of the principal securities exchange, if any, on which the
Discount Notes are listed. If the Discount Notes are not listed or the exchange
prescribes no method of selection, the selection of Discount Notes for
redemption will be made on a pro rata basis, by lot or by such other method as
the Discount Notes Trustee in its sole discretion deems to be fair and
appropriate although no Discount Note of $1,000 in original principal amount or
less may be redeemed in part. On and after the redemption date, interest will
cease to accrue on the Discount Notes or portions thereof called for
redemption.
Redemption for Taxation Reasons
The Company may redeem the Discount Notes, in whole but not in part, if the
Company determines that it is or will be required to pay Additional Amounts
(and the Company determines that such requirement cannot be avoided by taking
reasonable measures), as a result of:
(1) any change in, or amendment to, the laws or treaties (or any
regulations or rulings promulgated thereunder) of the Federal Republic
of Germany (or any political subdivision or taxing authority thereof)
affecting taxation which becomes effective on or after August 26, 1999,
or
(2) any change in or new or different position regarding the application,
administration or interpretation of such laws, treaties, regulations or
rulings (including a holding, judgment or order by a court of competent
jurisdiction), which change, amendment, application or interpretation
becomes effective on or after August 26, 1999.
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The redemption price payable in such event is the Accreted Value of the
Discount Notes being redeemed (if the redemption is prior to August 15, 2004)
and the principal amount thereof (if the redemption is on or after August 15,
2004) in each case together with all accrued and unpaid interest to the date
fixed by the Company for redemption (a "Tax Redemption Date") and all
Additional Amounts (see "--Withholding Taxes and Additional Amounts"), if any,
then due and which will become due on the Tax Redemption Date as a result of
the redemption or otherwise.
No notice of a redemption for taxation reasons may be given earlier than 90
days prior to the earliest date on which the Company would be obligated to make
a payment of Additional Amounts or withholding if a payment in respect of the
Discount Notes were then due. Prior to giving any notice of redemption of the
Discount Notes pursuant to the foregoing, the Company is required to deliver to
the Discount Notes Trustee an opinion of an independent tax counsel of
recognized international standing to the effect that the circumstances referred
to above exist.
Prescription
Claims against the Company for the payment of principal or Accreted Value of,
or interest, or Additional Amounts, if any, on, the Discount Notes will become
void unless presentation for payment is made (where so required in the Discount
Notes Indenture) within a period of 10 years, in the case of principal,
Accreted Value, or Additional Amounts, if any, or five years, in the case of
interest, from the applicable original payment date therefor.
Certain Covenants
Limitation on Indebtedness
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness; provided, however, that if no Default
or Event of Default shall have occurred and be continuing at the time, or would
occur as a consequence of the Incurrence of any such Indebtedness, the Company
may Incur Indebtedness if immediately thereafter the ratio of (1) the aggregate
principal amount of Indebtedness of the Company and its Restricted Subsidiaries
on a consolidated basis outstanding as of the Transaction Date to (2) the pro
forma Consolidated Cash Flow for the preceding two full fiscal quarters
multiplied by two, determined on a pro forma basis as if any such Indebtedness
had been Incurred and the proceeds thereof had been applied at the beginning of
such two fiscal quarters, would be greater than zero and less than or equal to
6.0 to 1.
(b) Paragraph (a) of this covenant will not prohibit (except for Indebtedness
under subsection (7) below) the Company and (except for Indebtedness under
clauses (5), (6), (10) and (12) below) any Restricted Subsidiary from Incurring
any or all of the following:
(1) Indebtedness (other than Acquired Indebtedness) in an aggregate
principal amount at any one time outstanding not to exceed (Euro)100.0
million Incurred to finance the cost (provided that such Indebtedness
is Incurred at any time on or before, or within 90 days following, the
incurrence of such cost) (including the cost of design, development,
construction, acquisition, transportation, installation or integration)
of equipment, inventory or network assets used in the Permitted
Business or Equity Interests of:
(A) a Restricted Subsidiary that owns principally such assets from a
Person other than the Company or a Restricted Subsidiary of the
Company; or
(B) any Person that is principally engaged in the Permitted Business,
that would become a Restricted Subsidiary and owns principally
such assets.
Any such Indebtedness of a Restricted Subsidiary must be Incurred under
one or more Credit Facilities, under one or more Capitalized Leases or
from the vendor of the equipment, inventory or network assets acquired
with the proceeds of such Indebtedness. The amount of such Indebtedness
of
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the Company or any Restricted Subsidiary may not exceed the Fair Market
Value of the assets so acquired. The amount of any such Indebtedness
permitted to be Incurred to acquire Equity Interests pursuant to clause
(A) or (B) above must be reduced by the amount of any Acquired
Indebtedness Incurred in such acquisition.
(2) Indebtedness of any Restricted Subsidiary owing to and held by the
Company, Indebtedness of the Company owing to and held by any
Restricted Subsidiary or Indebtedness of any Restricted Subsidiary
owing to and held by any other Restricted Subsidiary; provided that:
(A) any subsequent issuance or transfer of any Capital Stock or any
other event which results in any such Restricted Subsidiary
ceasing to be a Restricted Subsidiary or any subsequent transfer
of such Indebtedness (other than to the Company or another
Restricted Subsidiary) will be deemed, in each case, to constitute
the Incurrence of such Indebtedness not permitted by this clause
(2); and
(B) Indebtedness of the Company owing to and held by a Restricted
Subsidiary must be unsecured and subordinated in right of payment
to the Discount Notes.
(3) Indebtedness issued in exchange for, or the net proceeds of which are
used to refinance or refund, then outstanding Indebtedness of the
Company or a Restricted Subsidiary, other than Indebtedness Incurred
under clauses (2), (4), (7), (8), (10) and (12) of this paragraph (b)
and any refinancings thereof in an amount not to exceed the amount so
refinanced or refunded (plus premiums, accrued interest, and reasonable
fees and expenses); provided that such new Indebtedness shall only be
permitted under this clause (3) if:
(A) in case the Discount Notes are refinanced in part or the
Indebtedness to be refinanced or refunded is pari passu with the
Discount Notes, such new Indebtedness is expressly made pari passu
with, or subordinate in right of payment to, the remaining
Discount Notes;
(B) in case the Indebtedness to be refinanced is subordinated in right
of payment to the Discount Notes, such new Indebtedness is
expressly made subordinate in right of payment to the Discount
Notes at least to the extent that the Indebtedness to be
refinanced or refunded is subordinated to the Discount Notes;
(C) the Stated Maturity of such new Indebtedness, determined as of the
date of Incurrence of such new Indebtedness, is no earlier than
the Stated Maturity of the Indebtedness being refinanced or
refunded; and
(D) such new Indebtedness, determined as of the date of its
Incurrence, has a Weighted Average Life to Maturity which is not
less than the remaining Weighted Average Life to Maturity of the
Indebtedness to be refinanced or refunded.
In no event may Indebtedness of the Company be refinanced or refunded by
means of any Indebtedness of any Restricted Subsidiary pursuant to this
clause (3).
(4) Indebtedness:
(A) in respect of performance, surety or appeal bonds or letters of
credit supporting Trade Payables, in each case provided in the
ordinary course of business;
(B) under Currency Agreements and Interest Rate Agreements; provided
that such agreements (x) are designed solely to protect against
fluctuations in foreign currency exchange rates or interest rates
and (y) do not increase the Indebtedness of the obligor
outstanding at any time other than as a result of fluctuations in
foreign currency exchange rates or interest rates or by reason of
fees, indemnities and compensation payable thereunder; and
(C) arising from agreements providing for indemnification, adjustment
of purchase price or similar obligations, or from Guarantees or
letters of credit, bankers' acceptances, surety bonds or
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performance bonds securing any obligations of the Company or any of
its Restricted Subsidiaries pursuant to such agreements, in any case
Incurred in connection with the disposition of any business, assets
or Restricted Subsidiary of the Company (other than Guarantees of
Indebtedness Incurred for the purpose of financing such acquisition
by the Person acquiring all or any portion of such business, assets
or Restricted Subsidiary), in a principal amount not to exceed the
gross proceeds actually received by the Company or any Restricted
Subsidiary in connection with such disposition.
(5) Indebtedness, to the extent that the net proceeds thereof are promptly
(A) used to repurchase Discount Notes tendered in a Change of Control
Offer as described under "--Repurchase of Discount Notes upon a Change
of Control" or (B) deposited to defease all of the Discount Notes as
described under "--Legal Defeasance and Covenant Defeasance."
(6) Indebtedness of the Company represented by the Discount Notes.
(7) Indebtedness represented by a Guarantee of the Discount Notes and
Guarantees of other Indebtedness of the Company by a Restricted
Subsidiary in each case permitted by and made in accordance with the
"Limitation on Issuances of Guarantees of Indebtedness by Restricted
Subsidiaries" covenant described below.
(8) Indebtedness under one or more Credit Facilities (which shall be in
addition to any such Indebtedness incurred under one or more Credit
Facilities under clause (1) of this paragraph (b)) in an aggregate
principal amount at any one time outstanding not to exceed the greater
of (A) (Euro)50.0 million and (B) 80% of Eligible Accounts Receivable
at such time.
(9) Acquired Indebtedness; provided that the aggregate amount of such
Acquired Indebtedness of the Person that is to become a Restricted
Subsidiary, or to be merged or consolidated with or into the Company or
any Restricted Subsidiary in the contemplated transaction, or to be
assumed by the Company or a Restricted Subsidiary in connection with an
Asset Acquisition, outstanding at the time of such transaction does not
exceed the Fair Market Value of the equipment, inventory, network
assets and Cash Equivalents of any Restricted Subsidiary so acquired or
that are acquired in such Asset Acquisition, as the case may be.
(10) Indebtedness of the Company not to exceed, at any one time
outstanding, the sum of:
(A) 2.00 times the Net Cash Proceeds received from the issuance and
sale, other than to a Subsidiary of Equity Interests (other than
Redeemable Stock and excluding any Equity Interests issued in
connection with the Offering) of the Company, less
(1) the amount of such proceeds used to make Restricted Payments as
provided in clause (C)(2) of paragraph (a) or clauses (3) or
(4) of paragraph (b) of the "Limitation on Restricted Payments"
covenant described below, and
(2) if such proceeds are used to consummate a transaction pursuant
to which the Company Incurs Acquired Indebtedness, one-half of
the amount of such Acquired Indebtedness so Incurred, and
(B) The Fair Market Value of any Permitted Assets acquired by the
Company in exchange for Equity Interests of the Company issued
after August 26, 1999.
In determining the Fair Market Value of any such Permitted Assets so
acquired, if the estimated Fair Market Value of such Permitted Assets
exceeds (Euro)2.0 million then the Fair Market Value of such Permitted
Assets will be determined by a majority of the Board of Directors. if
the Estimate Fair Market Value exceeds (Euro)10.0 million, then the
Company will deliver to the Discount Notes Trustee a written appraisal
as to the fair market value of such Permitted Assets prepared by an
internationally recognized investment banking or public accounting firm
(or, if no such investment banking or public accounting firm is
qualified to prepare such an appraisal, by an internationally
recognized appraisal firm). Indebtedness permitted under this clause
(10) (other than the Indebtedness Incurred under one or more Credit
Facilities, under one or more Capitalized Leases or from the vendor of
assets,
124
property or services acquired with the proceeds of such Indebtedness)
may not mature prior to the Stated Maturity of the Discount Notes and
the Weighted Average Life to Maturity of such Indebtedness must be
longer than that of the Discount Notes.
(11) Indebtedness outstanding as of August 26, 1999.
(12) Unsecured Indebtedness of the Company (in addition to Indebtedness
permitted under clauses (1) through (11) above) in an aggregate
principal amount outstanding at any one time not to exceed (Euro)200.0
million.
(c) For purposes of determining any particular amount of Indebtedness under
the "Limitation on Indebtedness" covenant, Guarantees, Liens or obligations
with respect to letters of credit supporting Indebtedness otherwise included in
the determination of such particular amount will not be included. The
foregoing, however, will not in any way limit the provisions of the "Limitation
on Issuances of Guarantees of Indebtedness by Restricted Subsidiaries" covenant
described below.
For purposes of determining compliance with the "Limitation on Indebtedness"
covenant:
(A) in the event that an item of Indebtedness meets the criteria of more
than one of the types of Indebtedness described in clauses (1) through
(12) of paragraph (b) above, the Company will classify the item of
Indebtedness in its sole discretion and will only be required to
include the amount and type of such Indebtedness in one of such
clauses; and
(B) the principal amount of Indebtedness issued at a price that is less
than the principal amount thereof will be equal to the amount of the
liability in respect thereof determined in conformity with US GAAP.
(d) For purposes of determining compliance with any Euro-denominated
restriction on the Incurrence of Indebtedness, the Euro-equivalent principal
amount of Indebtedness denominated in a non-Euro currency will be calculated
based on the relevant currency exchange rate in effect on the date such
Indebtedness was Incurred, in the case of term Indebtedness, or first
committed, in the case of revolving credit Indebtedness. However, if such
Indebtedness is Incurred to refinance other Indebtedness denominated in a non-
Euro currency, and such refinancing would cause the applicable Euro-denominated
restriction to be exceeded if calculated at the relevant currency exchange rate
in effect on the date of such refinancing, such Euro-denominated restriction
will be deemed not to have been exceeded so long as the principal amount of
such refinancing Indebtedness does not exceed the principal amount of such
Indebtedness being refinanced. The principal amount of any Indebtedness
incurred to refinance other Indebtedness, if Incurred in a different currency
from the Indebtedness being refinanced, will be calculated based on the
currency exchange rate applicable to the currencies in which such refinancing
Indebtedness is denominated that is in effect on the date of such refinancing.
Limitation on Restricted Payments
(a) The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly:
(1) declare or pay any dividend or make any distribution on account of
any Equity Interest in the Company or any Restricted Subsidiary to
the holders thereof, including any dividend or distribution payable
in connection with any merger or consolidation, other than:
(A) dividends or distributions payable solely in Equity Interests
(other than Redeemable Stock) of the Company,
(B) dividends or distributions made only to the Company or a
Restricted Subsidiary, and
(C) pro rata dividends or distributions of Capital Stock of a
Restricted Subsidiary held by Persons other than the Company or
a Restricted Subsidiary;
(2) purchase, redeem, retire or otherwise acquire for value any Equity
Interests of the Company, an Unrestricted Subsidiary or a
Restricted Subsidiary (other than any such Equity Interests owned
by the Company or any Restricted Subsidiary);
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(3) make any principal payment or redeem, purchase, repurchase,
defease, or otherwise acquire or retire for value, in each case,
prior to any scheduled repayment, or maturity, any Indebtedness of
the Company that is subordinated in right of payment to the
Discount Notes; or
(4) make any Investment, other than a Permitted Investment, in any
Person
(all such payments or any other actions described in clauses (1) through (4)
above being collectively referred to as "Restricted Payments"), unless, at the
time of, and after giving effect to, the proposed Restricted Payment:
(A) no Default or Event of Default has occurred and is continuing;
(B) the Company could Incur at least (Euro)1.00 of additional
Indebtedness under paragraph (a) of the "Limitation on
Indebtedness" covenant described above; and
(C) the aggregate amount expended for all Restricted Payments (the
amount so expended, if other than in cash, to be determined in good
faith by the Board of Directors) after August 26, 1999, is less
than the sum of:
(1) 50% of the aggregate amount of the Consolidated Net Income (or,
if the Consolidated Net Income is a loss, 100% of the amount of
such loss) accrued on a cumulative basis during the period
(taken as one accounting period) beginning on the first day of
the fiscal quarter beginning immediately following August 26,
1999, and ending on the last day of the last fiscal quarter
preceding the Transaction Date for which reports have been filed
with the Commission or provided to the Discount Notes Trustee
pursuant to the "Provision of Financial Statements and Reports"
covenant described below, plus
(2) 100% of the aggregate Net Cash Proceeds received by the Company
after August 26, 1999, from the issuance and sale of its Equity
Interests (other than Redeemable Stock and excluding any Equity
Interests issued in connection with the Offering) to a Person
(other than a Subsidiary of the Company), except to the extent
that such Net Cash Proceeds are used
(a) to purchase, redeem or otherwise retire Equity Interests or
Indebtedness as set forth below in clause (3) or (4) of the
immediately succeeding paragraph, or
(b) to Incur Indebtedness pursuant to clause (10) of paragraph
(b) of the "Limitation on Indebtedness" covenant described
above, plus
(3) the aggregate amount by which Indebtedness (other than any
Indebtedness subordinated in right of payment to the Discount
Notes) of the Company or any Restricted Subsidiary is reduced on
the Company's balance sheet upon the conversion or exchange
(other than by a Subsidiary of the Company) subsequent to August
26, 1999, into Equity Interests (other than Redeemable Stock and
less the amount of any cash, or the fair value of property,
distributed by the Company or any Restricted Subsidiary upon
such conversion or exchange), plus
(4) without duplication of any amount included in the calculation of
Consolidated Net Income, in the case of repayment of, or return
of capital with respect to, any Investment constituting a
Restricted Payment (including the redesignation of Unrestricted
Subsidiaries as Restricted Subsidiaries) made after August 26,
1999, an amount equal to the lesser of (x) the repayment of, or
the return of capital with respect to, such Investment and (y)
the cost of such Investment, in either case less the cost of the
disposition of such Investment and net of taxes.
(b)The foregoing provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration thereof if, at the date of declaration, such payment
would comply with the provisions of the Discount Notes Indenture;
(2) the redemption, repurchase, defeasance or other acquisition or
retirement for value of Indebtedness that is subordinated in right
of payment to the Discount Notes including premium,
126
if any, and accrued and unpaid interest, with the proceeds of, or in
exchange for, Indebtedness Incurred under clause (3) of paragraph (b)
of the "Limitation on Indebtedness" covenant described above;
(3) the repurchase, redemption or other acquisition of Equity Interests
in the Company in exchange for, or out of the Net Cash Proceeds of,
a substantially concurrent offering of Equity Interests (other than
Redeemable Stock and excluding any Equity Interests issued in
connection with the Offering) in the Company to any Person (other
than a Subsidiary);
(4) the repurchase, redemption or other acquisition of Indebtedness of
the Company which is subordinated in right of payment to the
Discount Notes in exchange for, or out of the Net Cash Proceeds of,
a substantially concurrent offering of Equity Interests (other than
Redeemable Stock and excluding any Equity Interests issued in
connection with the Offering), in the Company to any Person (other
than a Subsidiary);
(5) repurchases of Equity Interests of the Company from employees of the
Company or any of its Restricted Subsidiaries deemed to occur upon
exercise of stock options if such Equity Interests represent a
portion of the exercise price of such options, provided that any
payments made pursuant to this clause (5) may not exceed in the
aggregate (Euro)5.0 million in any fiscal year of the Company;
(6) Investments in any Person (the primary business of which is related,
ancillary or complementary to the business of the Company and its
Restricted Subsidiaries on the date of such Investment); provided
that the aggregate amount of Investments made pursuant to this
clause (6) does not exceed the sum of:
(A) (Euro)25.0 million, plus
(B) the amount of Net Cash Proceeds received by the Company after
August 26, 1999, from the issuance and sale of its Equity
Interests (other than Redeemable Stock and excluding any Equity
Interests issued in connection with the Offering), to a Person
(other than a Subsidiary of the Company), except to the extent
that such Net Cash Proceeds are used
(i) to make Restricted Payments pursuant to clause (C)(2) of
paragraph (a) of this "Limitation on Restricted Payments
Covenant" or clause (3) or (4) of this paragraph (b) or
(ii) to Incur Indebtedness pursuant to clause (10) of paragraph
(b) of the "Limitation on Indebtedness" covenant described
above, plus
(C) the aggregate amount by which Indebtedness (other than any
Indebtedness subordinated in right of payment to the Discount
Notes) of the Company or any Restricted Subsidiary is reduced on
the Company's balance sheet upon the conversion or exchange
(other than by a Subsidiary of the Company) subsequent to August
26, 1999, into Equity Interests (other than Redeemable Stock and
less the amount of any cash, or the fair value of property,
distributed by the Company or any Restricted Subsidiary upon
such conversion or exchange); and
(7) Investments acquired in exchange for Capital Stock (other than
Redeemable Stock) of the Company;
provided that, in the case of clauses (2) through (7) above, no Default or
Event of Default shall have occurred and be continuing or occur as a
consequence of the actions or payments set forth therein.
(c)Each Restricted Payment permitted pursuant to the immediately preceding
paragraph (b) (other than the Restricted Payments referred to in clauses (2)
and (7) thereof and the Net Cash Proceeds from any issuance of Equity
Interests referred to in clauses (3) and (4) thereof) will be included in
calculating whether the conditions of clause (C) of paragraph (a) of this
"Limitation on Restricted Payments" covenant have been met with respect to any
subsequent Restricted Payments. In the event the proceeds of an issuance of
Equity Interests (other than Redeemable Stock and excluding any Equity
Interests issued in connection with the
127
Offering), of the Company are used for the redemption, repurchase or other
acquisition of the Discount Notes, then the Net Cash Proceeds of such issuance
will be included in clause (C) of paragraph (a) of this "Limitation on
Restricted Payments" covenant only to the extent such proceeds are not used for
such redemption, repurchase or other acquisition of the Discount Notes.
Limitation on Subordinate Indebtedness
The Company will not Incur any Indebtedness if such Indebtedness is
subordinate or junior in ranking in any respect to any Senior Indebtedness
unless such Indebtedness is Senior Subordinated Indebtedness or is
contractually subordinated in right of payment to Senior Subordinated
Indebtedness.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
(a)The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, create or otherwise cause or suffer to exist or become
effective any consensual encumbrance or restriction of any kind on the ability
of any Restricted Subsidiary to:
(1) pay dividends or make any other distributions permitted by
applicable law on any Equity Interests of such Restricted
Subsidiary owned by the Company or any other Restricted Subsidiary;
(2) pay any Indebtedness owed to the Company or any other Restricted
Subsidiary;
(3) make loans or advances to the Company or any other Restricted
Subsidiary; or
(4) transfer any of its property or assets to the Company or any other
Restricted Subsidiary.
(b)The provisions described in the immediately preceding paragraph will not
prohibit any encumbrances or restrictions:
(1) existing by reason of any agreement in effect on August 26, 1999,
and any amendments, supplements, extensions, refinancings, renewals
or replacements of such agreements; provided that the encumbrances
and restrictions in any such amendments, supplements, extensions,
refinancings, renewals or replacements are no more restrictive than
those that are then in effect and are being amended, supplemented,
extended, refinanced, renewed or replaced;
(2) existing by reason of applicable law;
(3) existing with respect to any Restricted Subsidiary acquired by the
Company or any Restricted Subsidiary after August 26, 1999, or the
property or assets of such Restricted Subsidiary, and existing at
the time of such acquisition and not incurred in contemplation
thereof, which encumbrances or restrictions are not applicable to
any Person or the property or assets of any Person other than such
Person or the property or assets of such Person so acquired;
(4) in the case of clause (4) of the immediately preceding paragraph
(a),
(A) that restrict in a customary manner the subletting, assignment
or transfer of any property or asset that is, or is subject to,
a lease, purchase mortgage obligation, license, conveyance or
contract or similar property or asset,
(B) existing by virtue of any transfer of, agreement to transfer,
option or right with respect to, or Lien on, any property or
assets of the Company or any Restricted Subsidiary not otherwise
prohibited by the Discount Notes Indenture, or
(C) arising or agreed to in the ordinary course of business, not
relating to any Indebtedness, and that do not, individually or
in the aggregate, materially detract from the value of property
or assets of the Company or any Restricted Subsidiary to the
Company or any Restricted Subsidiary;
(5) with respect to a Restricted Subsidiary and imposed pursuant to an
agreement that has been entered into for the sale or disposition of
all or substantially all of the Capital Stock in, or
128
property and assets of, such Restricted Subsidiary; provided that
such restriction shall terminate if such transaction is abandoned or
if such transaction is not consummated within six months of the date
such agreement was entered into; or
(6) contained in the terms of any Indebtedness or any agreement pursuant
to which such Indebtedness was issued if:
(A) the encumbrance or restriction applies only in the event of a
payment default or a default with respect to a financial
covenant contained in such Indebtedness or agreement,
(B) the encumbrance or restriction is not materially more
disadvantageous to the holders of the Discount Notes than is
customary in comparable financings (as determined by the Board
of Directors), and
(C) the Board of Directors determines that any such encumbrance or
restriction will not materially affect the Company's ability to
make payments of principal or interest on the Discount Notes.
(c)The "Limitation on Dividend and Other Payment Restrictions Affecting
Restricted Subsidiaries" covenant will not prevent the Company or any
Restricted Subsidiary from creating, incurring, assuming or suffering to exist
any Liens otherwise permitted in the "Limitation on Liens" covenant described
below that limit the right of the debtor to dispose of the assets securing
such Indebtedness.
Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue, transfer, convey, sell, lease or otherwise
dispose of any shares of Capital Stock (including options, warrants or other
rights to purchase shares of such Capital Stock) of such Restricted Subsidiary
or any other Restricted Subsidiary to any Person (other than to the Company or
a Wholly Owned Restricted Subsidiary and issuances of director's qualifying
shares of Capital Stock of foreign Restricted Subsidiaries, in each case, to
the extent required by applicable law), unless:
(1) the Net Cash Proceeds from such issuance, transfer, conveyance, sale,
lease or other disposition are applied in accordance with the
provisions of the "Limitation on Asset Sales" covenant described below;
(2) immediately after giving effect to such issuance, transfer, conveyance,
sale, lease or other disposition, such Restricted Subsidiary would no
longer constitute a Restricted Subsidiary; and
(3) any Investment in such Person remaining after giving effect to such
issuance, transfer, conveyance, sale, lease or other disposition would
have been permitted to be made under the "Limitation on Restricted
Payments" covenant if made on the date of such issuance, transfer,
conveyance, sale, lease or other disposition (valued as provided in the
definition of "Investment").
Limitation on Transactions with Shareholders and Affiliates
(a)The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction or series
of transactions (including, without limitation, the purchase, sale, lease or
exchange of property or assets, or the rendering of any service) with any
direct or indirect holder (or any Affiliate of such holder) of 5% or more of
any class of Capital Stock of the Company or with any Affiliate of the Company
or any Restricted Subsidiary, unless:
(1) such transaction or series of transactions is on terms that are no
less favorable to the Company or such Restricted Subsidiary than
could reasonably be obtained in a comparable arm's-length
transaction with a Person that is not such a holder or Affiliate;
(2) if such transaction or series of transactions involves aggregate
consideration in excess of (Euro)2.5 million, the Company shall have
delivered to the Discount Notes Trustee, a resolution set forth in
an Officers' Certificate adopted by a majority of the Board of
Directors, including a
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majority of the independent, disinterested directors, approving such
transaction or series of transactions, and certifying that such
transaction or series of transactions comply with clause (1) above;
and
(3) if such transaction or series of transactions involves aggregate
consideration in excess of (Euro)7.5 million, the Company shall
have delivered to the Discount Notes Trustee, a written opinion as
to the fairness to the Company or such Restricted Subsidiary of
such transaction or series of transactions from a financial point
of view from an internationally recognized investment banking firm
(or, if an investment banking firm is generally not qualified to
give such an opinion, by an internationally recognized appraisal
firm or accounting firm).
(b)The foregoing limitation will not limit and will not apply to:
(1) any transaction between the Company and any of its Restricted
Subsidiaries or between Restricted Subsidiaries;
(2) the payment of reasonable and customary regular fees to directors
of the Company who are not employees of the Company;
(3) the payment of dividends, distributions or other amounts by the
Company or any Restricted Subsidiary permitted by the "Limitation
on Restricted Payments" covenant described above;
(4) issuances of Equity Interests (other than Redeemable Stock) on
terms consistent with the requirements of clause (1) of the
immediately preceding paragraph; and
(5) any payments or other transactions pursuant to tax-sharing
agreements between the Company and any other Person with which the
Company files a consolidated tax return or with which the Company
is part of a consolidated group for tax purposes.
Limitation on Liens
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, create, incur, assume or suffer to exist any Lien
(other than Permitted Liens) securing Senior Subordinated Indebtedness or
Subordinated Obligations on any asset or property of the Company or any
Restricted Subsidiary without making effective provisions for all of the
Discount Notes and all other amounts due under the Discount Notes Indenture to
be directly secured equally and ratably with (or, if the obligation or
liability to be secured by such Lien is subordinated in right of payment to the
Discount Notes, prior to) the obligation or liability secured by such Lien. Any
Lien which is granted to secure the Discount Notes under this covenant may be
discharged at the same time as the discharge of the Lien that gave rise to the
obligation to so secure the Discount Notes.
Limitation on Asset Sales
The Company will not, and will not permit any Restricted Subsidiary to, make
any Asset Sale unless:
(1) the Company or the Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the Fair
Market Value of the assets sold or disposed of; and
(2) at least 75% of the consideration received for such Asset Sale consists
of cash or Cash Equivalents or Replacement Assets or the assumption of
Indebtedness which ranks equal in right of payment with the Discount
Notes.
Within 360 days after receipt of any Net Cash Proceeds from an Asset Sale,
the Company must apply such Net Cash Proceeds at its option:
(1) to permanently prepay, repay or purchase Senior Indebtedness of the
Company or Senior Subordinated Indebtedness of the Company or
Indebtedness of any Restricted Subsidiary providing a Guarantee
pursuant to the "Limitation on Issuances of Guarantees by Restricted
Subsidiaries"
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covenant or Indebtedness of any other Restricted Subsidiary, in each
case owing to a Person other than the Company or any of its Restricted
Subsidiaries;
(2) to invest in Replacement Assets; or
(3) in any combination of prepayment, repayment, purchase and reinvestment
permitted by the foregoing clauses (1) and (2).
Any Net Cash Proceeds from the Asset Sale that are not applied or invested
as provided and within the time period set forth in the immediately preceding
paragraph will constitute "Excess Proceeds." If at any time the aggregate
amount of Excess Proceeds exceeds (Euro)5.0 million, the Company is required
to make an offer (an "Asset Sale Offer") to all holders of Discount Notes and
to the extent required by the terms thereof, to all holders of other Senior
Subordinated Indebtedness outstanding with similar provisions requiring the
Company to make an offer to purchase such Senior Subordinated Indebtedness
with the proceeds from any Asset Sale ("Pari Passu Notes").
An Asset Sale Offer is an offer by the Company to purchase on a pro rata
basis the maximum principal amount (or Accreted Value, as the case may be) of
Discount Notes and such Pari Passu Notes to which the Asset Sale Offer
applies, in an integral multiple of $1,000 (or (Euro)1,000 as the case may
be), that may be purchased out of the Excess Proceeds at the offer price in
cash. The offer price in an Asset Sale Offer is in an amount equal to 100% of
the outstanding principal amount or Accreted Value, as the case may be, of the
Discount Notes and Pari Passu Notes, plus accrued and unpaid interest thereon
plus Additional Amounts, if any, to the date fixed for the closing of such
offer (and, in the case of definitive, registered Discount Notes, subject to
the right of a holder of record on the relevant record date to receive
interest due on the relevant Interest Payment Date and Additional Amounts, if
any, in respect thereof).
To the extent that the aggregate amount of Discount Notes and Pari Passu
Notes tendered pursuant to an Asset Sale Offer is less than the Excess
Proceeds, the Company may use any remaining Excess Proceeds for general
corporate purposes. If the aggregate amount of Discount Notes and Pari Passu
Notes tendered pursuant to an Asset Sale Offer exceeds the amount of Excess
Proceeds, the selection of Discount Notes for purchase will be made by the
Discount Notes Trustee in the same manner as the Discount Notes are selected
for partial redemption, as described under "--Optional Redemption." Upon
completion of any such Asset Sale Offer, the amount of Excess Proceeds will be
reset at zero.
The Company is required to comply with the requirements of Rule 14e-1 under
the Exchange Act and any other securities laws and regulations thereunder and
with the applicable laws of any non-U.S. jurisdiction in which an Asset Sale
Offer is made, in each case, to the extent such laws or regulations are
applicable in connection with the repurchase of the Discount Notes pursuant to
an Asset Sale Offer. To the extent that the provisions of any securities laws
or regulations conflict with the provisions of the Discount Notes Indenture,
the Company will comply with the applicable securities laws and regulations
and will not be deemed to have breached its obligations described in the
Discount Notes Indenture by virtue thereof.
Limitation on Issuances of Guarantees of Indebtedness by Restricted
Subsidiaries
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to guarantee, assume or in any other manner become liable with
respect to any Indebtedness of the Company unless:
(1) such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture to the Discount Notes Indenture providing for a
Guarantee of all of the Company's obligations under the Discount Notes
and the Discount Notes Indenture on terms substantially similar to the
guarantee of such Indebtedness, except that if the Indebtedness is by
its express terms subordinated in right of payment to the Discount
Notes, any such assumption, Guarantee or other liability of such
Restricted Subsidiary with respect to such Indebtedness will be
subordinated in right of payment to such Restricted Subsidiary's
assumption, Guarantee or other liability with respect to the Discount
Notes substantially to the same extent as such Indebtedness is
subordinated to the Discount Notes, and
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(2) such Restricted Subsidiary waives, and will not in any manner
whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against the
Company or any other Restricted Subsidiary as a result of any payment
by such Restricted Subsidiary under its Guarantee.
Any Restricted Subsidiary may, however, guarantee Senior Indebtedness of the
Company, including Indebtedness under a Credit Facility if such Indebtedness is
Incurred in accordance with the "Limitation on Indebtedness" covenant discussed
above. In addition, the immediately preceding paragraph will not apply to any
Guarantee of any Restricted Subsidiary that existed at the time such Person
became a Restricted Subsidiary and was not incurred in connection with, or in
contemplation of, such Person becoming a Restricted Subsidiary.
Any Guarantee of all of the Company's obligations under the Discount Notes
and the Discount Notes Indenture by a Restricted Subsidiary may, in any case,
provide by its terms that it will be automatically and unconditionally released
and discharged upon
(1) any sale, exchange or transfer, to any Person not an Affiliate of the
Company, of all of the Company's and each Restricted Subsidiary's
Equity Interests in, or all or substantially all of the assets of, such
Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the Discount Notes Indenture), or
(2) the release or discharge of the guarantee which resulted in the
creation of such Guarantee, except a discharge or release by or as a
result of payment under such guarantee.
Business of the Company; Restriction on Transfers of Existing Business
The Company will not, and will not permit any Restricted Subsidiary to, be
principally engaged in any business or activity other than a Permitted
Business. In addition, the Company and any Restricted Subsidiary will not be
permitted, directly or indirectly, to transfer to any Unrestricted Subsidiary
(1) any of the licenses, permits or authorizations used in the Permitted
Business of the Company or any Restricted Subsidiary, or
(2) any material portion of the "property and equipment" (as such term is
used in the Company's consolidated financial statements) of the Company
or any Restricted Subsidiary used in the licensed service areas of the
Company or any Restricted Subsidiary.
Provision of Financial Statements and Reports
The Company is required to file on a timely basis with the Commission, to the
extent such filings are accepted by the Commission and whether or not the
Company has a class of securities registered under the Exchange Act,
(1) all annual and quarterly financial statements and other financial
information that would be required to be contained in a filing with the
Commission on Forms 10-K and 10-Q (which financial statements shall be
prepared in accordance with US GAAP), including a "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual financial information, a
report thereon by the Company's certified independent accountants, and
(2) all current reports that would be required to be filed with the
Commission on Form 8-K, in each case, if the Company had a class of
securities registered under the Exchange Act, whether or not the
Company has such a class of securities registered under the Exchange
Act.
Such quarterly financial information must be filed with the Commission within
45 days following the end of each fiscal quarter of the Company, and such
annual financial information must be furnished within 90 days following the end
of each fiscal year of the Company. Such annual financial information must
include the geographic segment financial information required to be disclosed
by the Company under Item 101(d) of Regulation S-K under the Securities Act.
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The Company is also required (1) to file with the Discount Notes Trustee, and
provide to each holder of Discount Notes, without cost to such holder, copies
of such reports and documents within 15 days after the date on which the
Company files such reports and documents with the Commission or the date on
which the Company would be required to file such reports and documents if the
Company were so required, and (2) if filing such reports and documents with the
Commission is not accepted by the Commission or is prohibited under the
Exchange Act, to supply, at the Company's cost, copies of such reports and
documents to any prospective holder of Discount Notes promptly upon request.
In addition, if and so long as the Discount Notes are listed or admitted for
trading on a stock exchange and the rules or regulations of such stock exchange
shall require, copies of all reports and information described above will be
available in such places and during such times as such rules or regulations may
require.
Limitation on Investment Company Activities
The Company will not, and will not permit any of its Restricted Subsidiaries
or controlled Affiliates to, conduct its business in a fashion that would cause
the Company to be required to register as an "investment company" (as that term
is defined in the Investment Company Act of 1940, as amended (the "Investment
Company Act")), or otherwise to become subject to regulation under the
Investment Company Act. For purposes of establishing the Company's compliance
with this provision, any exemption which is or would become available under
Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act will be
disregarded.
Repurchase of Discount Notes upon a Change of Control
If a Change of Control occurs, the Company is required to make an offer (the
"Change of Control Offer") to purchase the Discount Notes at a price in cash
(the "Change of Control Payment") equal to 101% of the aggregate principal
amount of the Discount Notes, plus accrued and unpaid interest thereon to the
date of repurchase, plus Additional Amounts, if any, to the date of repurchase
(subject to the right of holders of record of definitive, registered Discount
Notes on the relevant Record Date to receive interest due on the relevant
Interest Payment Date and Additional Amounts, if any, in respect thereof).
Within 30 days following any Change of Control, the Company will give notice to
the holders of the Discount Notes describing the transaction or transactions
that constitute the Change of Control and offering to repurchase the Discount
Notes on the Change of Control Payment date specified in the notice, pursuant
to the procedures required by the Discount Notes Indenture and described in the
notice.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder and will
comply with the applicable laws of any non-U.S. jurisdiction in which a Change
of Control Offer is made, in each case, to the extent such laws or regulations
are applicable in connection with the repurchase of the Discount Notes pursuant
to a Change of Control Offer. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of the Discount
Notes Indenture, the Company will comply with the applicable securities laws
and regulations and will not be deemed to have breached its obligations
contained in the Discount Notes Indenture by virtue thereof. The provisions
relating to the Company's obligation to make an offer to repurchase the
Discount Notes as a result of a Change of Control may be waived or modified
with the written consent of the holders of a majority in principal amount of
the Discount Notes.
If the Company is unable to repay all of its Indebtedness that contains
restrictions prohibiting the repurchase of the Discount Notes or is unable to
obtain the consents of the holders of Indebtedness, if any, of the Company
outstanding at the time of a Change of Control whose consent would be so
required to permit the repurchase of Discount Notes, then the Company will be
unable to fulfil its repurchase obligations to holders of the Discount Notes,
thereby resulting in a breach of the "Repurchase of Notes upon a Change of
Control" covenant. Such breach will constitute an Event of Default under the
Discount Notes Indenture if it continues for a period of 30 consecutive days
after written notice is given to the Company by the Trustee or the holders of
at least 25% in aggregate principal amount of the Discount Notes outstanding.
In addition, the failure by the
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Company to repurchase Discount Notes at the conclusion of the Change of Control
Offer will constitute an Event of Default without any waiting period or notice
requirements.
There can be no assurances that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Discount Notes) required by the foregoing covenant
(as well as may be contained in other securities of the Company which might be
outstanding at the time, including the senior notes and the Discount Notes).
The above covenant requiring the Company to repurchase the Discount Notes will,
unless the consents referred to above are obtained, require the Company to
repay all Indebtedness then outstanding which by its terms would prohibit such
Discount Notes repurchase.
The existence of a holder's right to require the Company to repurchase such
holder's Discount Notes upon the occurrence of a Change of Control may deter a
third party from seeking to acquire the Company in a transaction that would
constitute a Change of Control.
Consolidation, Merger and Sale of Assets
The Company may not consolidate with, merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of its
property and assets (as an entirety or substantially an entirety in one
transaction or in a series of related transactions) to, any Person or permit
any Person to merge with or into the Company and the Company will not permit
any of its Restricted Subsidiaries to enter into any such transaction or series
of transactions if such transaction or series of transactions, in the
aggregate, would result in the sale, assignment, conveyance, transfer, lease or
other disposition of all or substantially all of the properties and assets of
the Company or the Company and its Restricted Subsidiaries, taken as a whole,
to any other Person or Persons, unless:
(1) the Company is the continuing Person, or the Person (if other than the
Company) formed by such consolidation or into which the Company is
merged or that acquired or leased such property and assets of the
Company is a corporation organized and existing under the laws of the
United States of America, any state thereof or the District of Columbia
and expressly assumes, by a supplemental indenture, all of the
obligations of the Company with respect to the Discount Notes and under
the Discount Notes Indenture;
(2) immediately after giving effect to such transaction, no Default or
Event of Default exists;
(3) immediately after giving effect to such transaction on a pro forma
basis, the Company, or any Person becoming the successor obligor of the
Discount Notes:
(A) has a Consolidated Net Worth equal to or greater than the
Consolidated Net Worth of the Company immediately prior to such
transaction; and
(B) could Incur at least (Euro)1.00 of Indebtedness under paragraph (a)
of the "Limitation on Indebtedness" covenant described above;
(4) the Company delivers to the Discount Notes Trustee an Officers'
Certificate and an opinion of counsel, in each case stating that such
consolidation, merger or transfer and such supplemental indenture
complies with the Discount Notes Indenture; and
(5) the Company delivers to the Discount Notes Trustee an opinion of tax
counsel stating that:
(A) holders of Discount Notes will not recognize income, gain or loss
for U.S. federal or German income tax purposes as a result of such
transaction;
(B) any payment of Accreted Value, principal, redemption price or
purchase price of, premium (if any) and interest on the Discount
Notes by the Company to a holder after the consolidation, merger,
conveyance, transfer or lease of assets will be exempt from the
Taxes described under "--Withholding Taxes and Additional Amounts"
and
(C) no other taxes on income (including taxable capital gains) will be
payable under the tax laws of the Relevant Taxing Jurisdiction (as
defined in "--Withholding Taxes and Additional
134
Amounts") by a holder who is or who is deemed to be a non-resident of
the Relevant Taxing Jurisdiction in respect of the acquisition,
ownership or disposition of the Discount Notes, including the receipt
of Accreted Value, principal of, premium and interest paid pursuant
to such Discount Notes.
Events of Default
The following constitute "Events of Default" under the Discount Notes
Indenture:
(1) default for 30 days or more in the payment when due of interest or
Additional Amounts on the Discount Notes;
(2) default in the payment of principal of (or premium, if any, on) any
Discount Notes when the same becomes due and payable at maturity, upon
acceleration, redemption or otherwise;
(3) default in the payment of principal or interest on Discount Notes
required to be purchased pursuant to an Asset Sale Offer as described
under "--Certain Covenants--Limitation on Asset Sales" or pursuant to a
Change of Control Offer as described under "--Repurchase of Discount
Notes upon a Change of Control;"
(4) failure to perform or comply with the provisions described under "--
Consolidation, Merger and Sale of Assets;"
(5) failure to comply with any other covenant or agreement of the Company
in the Discount Notes Indenture or under the Discount Notes for 30 days
after written notice by the Discount Notes Trustee or the holders of
25% or more in aggregate principal amount of the Discount Notes;
(6) a default on any other Indebtedness of the Company or any Restricted
Subsidiary if:
(A) either (i) such default is a failure to pay principal of such
Indebtedness when due after any applicable grace period or (ii) as a
result of such default, the maturity of such Indebtedness has been
accelerated prior to its scheduled maturity and such default has not
been cured within the shorter of 30 days and the applicable grace
period, and such acceleration has not been rescinded; and
(B) the principal amount of such Indebtedness, together with the
principal amount of any other Indebtedness of the Company and its
Restricted Subsidiaries that is also in default as to principal, or
the maturity of which has also been accelerated, aggregates
(Euro)5.0 million or more;
(7) failure to pay final judgments and orders against the Company or any
Restricted Subsidiary (not covered by insurance) aggregating in excess
of (Euro)5.0 million (treating any deductibles, self-insurance or
retention as not so covered), which final judgments remain unpaid,
undischarged and unstayed for a period in excess of 30 consecutive days
following entry of the final judgment or order that causes the
aggregate amount for all such final judgments or orders outstanding and
not paid, discharged or stayed to exceed (Euro)5.0 million; and
(8) certain events of bankruptcy or insolvency with respect to the Company
or any of its Significant Subsidiaries.
If an Event of Default (other than an Event of Default described in clause
(8) above) occurs and is continuing under the Discount Notes Indenture, the
Discount Notes Trustee or the holders of at least 25% in aggregate principal
amount of the Discount Notes then outstanding, by written notice to the
Company, may declare the Accreted Value or principal of, premium, if any,
interest and other monetary obligations (including Additional Amounts, if any)
on all the then outstanding Discount Notes, to be immediately due and payable.
Upon such a declaration, such Accreted Value or principal of, premium, if any,
interest and other monetary obligations on the Discount Notes, shall be
immediately due and payable.
In the event of an acceleration because of the occurrence of an Event of
Default described in clause (6) above, such acceleration will be automatically
rescinded and annulled if the default triggering such Event of
135
Default is remedied or cured by the Company and/or the relevant Restricted
Subsidiaries or waived by the holders of the relevant Indebtedness within 60
days after the declaration of acceleration with respect thereto.
If an Event of Default described in clause (8) above occurs, the Accreted
Value or principal of, premium, if any, accrued interest and other monetary
obligations on the Discount Notes then outstanding shall ipso facto become and
be immediately due and payable without any declaration or other act on the part
of the Discount Notes Trustee or any holder.
Holders of at least a majority in principal amount of the outstanding
Discount Notes, by written notice to the Company and to the Discount Notes
Trustee, may waive all past defaults and rescind and annul a declaration of
acceleration and its consequences, if:
(1) all existing Events of Default, other than the nonpayment of the
Accreted Value or principal of, premium, if any, interest and other
monetary obligations on the Discount Notes that have become due solely
by such declaration of acceleration, have been cured or waived; and
(2) the rescission would not conflict with any judgment or decree of a
court of competent jurisdiction.
For additional information as to the waiver of defaults, see "--Amendment,
Supplement and Waiver."
Holders of the Discount Notes may not enforce the Discount Notes Indenture or
the Discount Notes except as provided in the Discount Notes Indenture. Subject
to certain limitations, holders of a majority in principal amount of the then
outstanding Discount Notes may direct the Discount Notes Trustee in its
exercise of any trust or power. The Discount Notes Trustee may withhold from
holders of the Discount Notes notice of any continuing Default (except a
Default relating to the payment of Accreted Value, principal, premium, if any,
interest and Additional Amounts, if any) if it determines that withholding
notice is in their interest. The Discount Notes Trustee has no obligation to
accelerate the Discount Notes if in its best judgment acceleration is not in
the best interest of the holders of the Discount Notes.
The Company is required to deliver annually an Officers' Certificate to the
Discount Notes Trustee certifying that a review has been conducted of the
activities of the Company and the Company's performance under the Discount
Notes Indenture and that the Company has fulfilled all obligations thereunder
or, if there has been a default in the fulfillment of any such obligation,
specifying each such default and the nature and status thereof. The Company is
also obligated to notify the Discount Notes Trustee of any default or defaults
in the performance of any covenants or agreements under the Discount Notes
Indenture within five business days of becoming aware of any such default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of the Company
will have any liability for any obligations of the Company under the Discount
Notes or the Discount Notes Indenture or for any claim based on, in respect of,
or by reason of such obligations or their creation. Each holder of the Discount
Notes by accepting a Discount Note waives and releases all such liability. The
waiver and release are part of the consideration for issuance of the Discount
Notes. Such waiver and release may not be effective to waive liabilities under
the U.S. federal securities laws, and it is the view of the Commission that
such a waiver is against public policy.
Legal Defeasance and Covenant Defeasance
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Discount Notes ("Legal
Defeasance") and cure all then existing Events of Default except for:
(1) the rights of holders of outstanding Discount Notes to receive payments
in respect of the principal of, premium, if any, interest and
Additional Amounts, if any, on the Discount Notes when such payments
are due from the trust referred to below;
136
(2) the Company's obligations with respect to registration of Discount
Notes; mutilated, destroyed, lost or stolen Discount Notes; and the
maintenance of an office or agency for payment and money for security
payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the Discount Notes
Trustee, and the Company's obligations in connection therewith; and
(4) the Legal Defeasance provisions of the Discount Notes Indenture.
In addition, the Company may, at its option and at any time, elect to have
the obligations of the Company released with respect to certain covenants that
are described in the Discount Notes Indenture ("Covenant Defeasance"), and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Discount Notes. In the event
Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events) described under
"Events of Default" will no longer constitute an Event of Default with respect
to the Discount Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance with
respect to the Discount Notes:
(1) the Company must irrevocably deposit with the Discount Notes Trustee,
in trust, for the benefit of the holders of the Discount Notes cash in
Euro, Euro Government Securities or a combination thereof, in such
amounts as will be sufficient, in the opinion of an internationally
recognized firm of independent public accountants, to pay the principal
of, premium, if any, interest and Additional Amounts, if any, due on
the outstanding Discount Notes, on the stated maturity date or on the
applicable redemption date, as the case may be;
(2) in the case of Legal Defeasance, the Company must have delivered to the
Discount Notes Trustee:
(A) an opinion of counsel in the United States reasonably acceptable to
the Trustee confirming that, subject to customary assumptions and
exclusions, (1) the Company has received from, or there has been
published by, the U.S. Internal Revenue Service a ruling or (2)
since August 26, 1999, there has been a change in the applicable
U.S. federal income tax law, in either case to the effect that, and
based thereon such opinion of counsel shall confirm that, subject
to customary assumptions and exclusions, the holders of the
outstanding Discount Notes will not recognize income, gain or loss
for U.S. federal income tax purposes as a result of such Legal
Defeasance and will be subject to U.S. federal income tax on the
same amounts, in the same manner and at the same times as would
have been the case if such Legal Defeasance had not occurred, and
(B) an opinion of counsel in the Federal Republic of Germany reasonably
acceptable to the Discount Notes Trustee to the effect that (1)
holders will not recognize income, gain or loss for German income
tax purposes as a result of such Legal Defeasance and will be
subject to German income tax on the same amounts, in the same
manner and at the same times as would have been the case if such
Legal Defeasance had not occurred and (2) payments from the
defeasance trust will be free and exempt from any and all
withholding and other income taxes of whatever nature imposed or
levied by or on behalf of the German government or any political
subdivision thereof or therein having the power to tax;
(3) in the case of Covenant Defeasance, the Company must have delivered to
the Discount Notes Trustee:
(A) an opinion of counsel in the United States reasonably acceptable to
the Trustee confirming that, subject to customary assumptions and
exclusions, the holders of the outstanding Discount Notes will not
recognize income, gain or loss for U.S. federal income tax purposes
as a result of such Covenant Defeasance and will be subject to such
tax on the same amounts, in the same manner and at the same times
as would have been the case if such Covenant Defeasance had not
occurred, and
(B) an opinion of counsel in the Federal Republic of Germany reasonably
acceptable to the Discount Notes Trustee to the effect that (1)
holders will not recognize income, gain or loss for German
137
income tax purposes as a result of such Covenant Defeasance and will
be subject to German income tax on the same amounts, in the same
manner and at the same times as would have been the case if such
Covenant Defeasance had not occurred and (2) payments from the
defeasance trust will be free and exempt from any and all
withholding and other income taxes of whatever nature imposed or
levied by or on behalf of the German government or any political
subdivision thereof or therein having the power to tax; and
(4) no Default or Event of Default shall have occurred and be continuing
with respect to certain Events of Default on the date of such deposit;
(5) such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under any material
agreement or instrument to which the Company is a party or by which the
Company is bound;
(6) the Company shall have delivered to the Discount Notes Trustee an
opinion of counsel to the effect that, as of the date of such opinion
and subject to customary assumptions and exclusions, following the
deposit, the trust funds will not be subject to the effect of any
applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally under any applicable German law
or U.S. federal or state law, and that the trustee has a perfected
security interest in such trust funds for the ratable benefit of the
holders;
(7) the Company shall have delivered to the Discount Notes Trustee an
Officers' Certificate stating that the deposit was not made by the
Company with the intent of defeating, hindering, delaying or defrauding
any creditors of the Company or others; and
(8) the Company shall have delivered to the Discount Notes Trustee an
Officers' Certificate and an opinion of counsel in the United States
(which opinion of counsel may be subject to customary assumptions and
exclusions) each stating that all conditions precedent provided for or
relating to the Legal Defeasance or the Covenant Defeasance, as the
case may be, have been complied with.
Satisfaction and Discharge
The Discount Notes Indenture will be discharged and will cease to be of
further effect as to all Discount Notes issued thereunder when either:
(1) all such Discount Notes theretofore authenticated and delivered (except
lost, stolen or destroyed notes which have been replaced or paid and
notes for whose payment money has theretofore been deposited in trust
and thereafter repaid to the Company) have been delivered to the
Discount Notes Trustee for cancellation; or
(2)(A) all such Discount Notes not theretofore delivered to the Discount
Notes Trustee for cancellation have become due and payable by reason
of the making of a notice of redemption or otherwise or will become
due and payable within one year, and the Company has irrevocably
deposited with the Discount Notes Trustee as trust funds in trust an
amount of money sufficient to pay and discharge the entire
indebtedness on the Discount Notes not theretofore delivered to the
Discount Notes Trustee for cancellation to the date of maturity or
redemption;
(B) no Default with respect to the Discount Notes or the Discount Notes
Indenture shall have occurred and be continuing on the date of such
deposit or shall occur as a result of such deposit and such deposit
will not result in a breach or violation of, or constitute a default
under, any other instrument to which the Company is a party or by
which it is bound;
(C) the Company has paid all sums payable by it under the Discount Notes
Indenture; and
(D) the Company has delivered irrevocable instructions to the Discount
Notes Trustee to apply the deposited money toward the payment of
such Notes at maturity or the redemption date, as the case may be.
138
In addition, the Company must deliver an Officers' Certificate and an opinion
of counsel to the Discount Notes Trustee stating that all conditions precedent
to satisfaction and discharge have been satisfied.
Withholding Taxes and Additional Amounts
All payments made by the Company on the Discount Notes will be made without
withholding or deduction for, or on account of, any present or future taxes,
duties, assessments or governmental charges of whatever nature (collectively,
"Taxes") imposed or levied by or on behalf of Germany, or any jurisdiction in
which the Company or any successor Company is organized or is otherwise
resident for tax purposes or any political subdivision thereof or any authority
having power to tax therein or any jurisdiction from or through which payment
is made (each, a "Relevant Taxing Jurisdiction"), unless the withholding or
deduction of such Taxes is then required by law.
If any deduction or withholding for, or on account of, any Taxes of any
Relevant Taxing Jurisdiction, is at any time required on any payments made by
the Company with respect to the Discount Notes, including payments of
principal, redemption price, interest or premium, the Company will pay such
additional amounts (the "Additional Amounts") as may be necessary in order that
the net amounts received in respect of such payments by the holders of the
Discount Notes or the Discount Notes Trustee, as the case may be, after such
withholding or deduction, equal the respective amounts which would have been
received in respect of such payments in the absence of such withholding or
deduction; except that no such Additional Amounts will be payable with respect
to:
(1) any payments on a Discount Note held by or on behalf of a holder or
beneficial owner who is liable for such Taxes in respect of such note
by reason of the holder or beneficial owner having some connection with
the Relevant Taxing Jurisdiction (including being a citizen or resident
or national of, or carrying on a business or maintaining a permanent
establishment in, or being physically present in, the Relevant Taxing
Jurisdiction) other than by the mere holding of such Note or
enforcement of rights thereunder or the receipt of payments in respect
thereof;
(2) any Taxes that are imposed or withheld as a result of a change in law
after August 26, 1999 where such withholding or imposition is by reason
of the failure of the holder or beneficial owner of the Discount Note
to comply with any request by the Company to provide information
concerning the nationality, residence or identity of such holder or
beneficial owner or to make any declaration or similar claim or satisfy
any information or reporting requirement, which is required or imposed
by a statute, treaty, regulation or administrative practice of the
Relevant Taxing Jurisdiction as a precondition to exemption from all or
part of such Taxes;
(3) except in the case of the winding up of the Company, any Discount Note
presented for payment (where presentation is required) in the Relevant
Taxing Jurisdiction; or
(4) any Discount Note presented for payment (where presentation is
required) more than 30 days after the relevant payment is first made
available for payment to the holder.
Such Additional Amounts will also not be payable where, had the beneficial
owner of the Discount Note been the holder of the Discount Note, he would not
have been entitled to payment of Additional Amounts by reason of clauses (1) to
(4) inclusive above.
Upon request, the Company will provide the Discount Notes Trustee with
documentation satisfactory to the trustee evidencing the payment of Additional
Amounts. Copies of such documentation will be made available to the holders
upon request.
The Company will pay any present or future stamp, court or documentary taxes,
or any other excise or property taxes, charges or similar levies which arise in
any jurisdiction from the execution, delivery or registration of the Discount
Notes or any other document or instrument referred to therein, or the receipt
of any payments with respect to the Discount Notes, excluding any such taxes,
charges or similar levies imposed by any jurisdiction outside of the
139
Federal Republic of Germany, the United States of America or any jurisdiction
in which a Paying Agent is located, other than those resulting from, or
required to be paid in connection with, the enforcement of the Discount Notes
or any other such document or instrument following the occurrence of any Event
of Default with respect to the Discount Notes.
Amendment, Supplement and Waiver
Except as provided in the next two succeeding paragraphs, the Discount Notes
Indenture and the Discount Notes may be amended or supplemented with the
consent of the holders of at least a majority in principal amount of the
Discount Notes then outstanding (including consents obtained in connection with
a tender offer or exchange offer for the Discount Notes), and any existing
Default or Event of Default and its consequences or compliance with any
provision of the Discount Notes Indenture or the Discount Notes may be waived
with the consent of the holders of a majority in principal amount of the
outstanding Discount Notes (including consents obtained in connection with a
tender offer or exchange offer for such Discount Notes).
The Discount Notes Indenture provides that without the consent of each holder
affected, an amendment or waiver may not (with respect to any Discount Notes
held by a non-consenting holder of the Discount Notes):
(1) reduce the principal amount of the Discount Notes whose holders must
consent to an amendment, supplement or waiver,
(2) reduce the Accreted Value or principal of or change the fixed maturity
of any such Discount Note or alter or waive the provisions with respect
to the redemption of such Discount Notes,
(3) reduce the rate of or change the time for payment of interest on any
Discount Note,
(4) waive a Default in the payment of principal of, or premium, if any,
interest or Additional Amounts, if any, on the Discount Notes (except a
rescission of acceleration of such Discount Notes by the holders of at
least a majority in aggregate principal amount of such Notes and a
waiver of the payment default that resulted from such acceleration with
respect to such Notes), or in respect of a covenant or provision
contained in the Discount Notes Indenture which cannot be amended or
modified without the consent of all holders,
(5) make any Discount Note payable in money other than that stated in the
Discount Notes,
(6) make any change in the provisions of the Discount Notes Indenture
relating to waivers of past Defaults or the rights of holders of such
Discount Notes to receive payments of principal of, or premium, if any,
interest or Additional Amounts, if any, on such Notes,
(7) make any change in the amendment and waiver provisions in the Discount
Notes Indenture,
(8) make any change in the provisions of the Discount Notes Indenture
described under "--Withholding Taxes and Additional Amounts" that
adversely affects the rights of any holder of the Discount Notes,
(9) amend the terms of the Discount Notes or the Discount Notes Indentures
in a way that would result in the loss of an exemption from any of the
Taxes described thereunder or an exemption from any obligation to
withhold or deduct Taxes as described thereunder unless the Company
agrees to pay Additional Amounts, if any, in respect thereof, or
(10) impair the right of any holder of the Discount Notes to receive
payment of principal of, and interest on, such holder's Discount Notes
on or after the due dates therefor or to institute suit for the
enforcement of any payment on or with respect to such holder's
Discount Notes.
Notwithstanding the foregoing, without the consent of any holder of Discount
Notes, the Company and the Discount Notes Trustee together may amend or
supplement the Discount Notes Indenture or the Discount Notes:
(1) to cure any ambiguity, omission, defect or inconsistency;
140
(2) to provide for uncertificated Discount Notes in addition to or in place
of certificated Discount Notes, or to provide for additional forms of
global Discount Notes containing transfer and other restrictions and
which comply with applicable U.S. securities and other laws;
(3) to comply with the covenant relating to mergers, consolidations and
sales of assets;
(4) to provide for the assumption of the Company's obligations to holders
of such Discount Notes;
(5) to make any change that would provide any additional rights or benefits
to the holders of the Discount Notes or that does not adversely affect
the legal rights under the Discount Notes Indenture of any such holder;
(6) to add covenants for the benefit of the holders of Discount Notes or to
surrender any right or power conferred upon the Company; or
(7) to comply with requirements of the Commission in order to effect or
maintain the qualification of the Discount Notes Indenture under the
Trust Indenture Act.
No amendment may be made to the subordination provisions of the Discount
Notes Indenture that adversely affects the rights of any holder of Senior
Indebtedness then outstanding unless the holders of such Senior Indebtedness
(or any group or representative thereof authorized to give a consent) consent
to such change.
The consent of the holders of Discount Notes is not necessary under the
Discount Notes Indenture to approve the particular form of any proposed
amendment. It is sufficient if such consent approves the substance of the
proposed amendment.
Notices
Notices regarding the Discount Notes which have been issued in global form
will be published in a leading newspaper having a general circulation in New
York (which is expected to be The Wall Street Journal) and in Frankfurt (which
is expected to be the Frankfurter Allgemeine Zeitung). If and so long as the
Discount Notes are listed, admitted or eligible for trading on a stock exchange
or trading market and the rules or regulations of such stock exchange or
trading market so require, notice will also be published in a newspaper having
a general circulation in the additional jurisdictions as such rules or
regulations may require.
Notices regarding the Discount Notes issued in definitive, registered form
will be mailed to holders by first-class mail at their respective addresses as
they appear on the registration books of the Registrar.
Notices given by publication will be deemed given on the first date on which
publication is made and notices given by first-class mail, postage prepaid,
will be deemed given five calendar days after mailing.
Concerning the Trustee
The Discount Notes Indenture contains certain limitations on the rights of
the Discount Notes Trustee, should the Discount Notes Trustee become a creditor
of the Company, to obtain payment of claims in certain cases, or to realize on
certain property received in respect of any such claim as security or
otherwise. The Discount Notes Trustee will be permitted to engage in other
transactions; provided, however, if the Discount Notes Trustee acquires any
conflicting interest it must eliminate such conflict within 90 days, apply to
the Commission for permission to continue, or resign.
The Discount Notes Indenture provides that in case an Event of Default shall
occur (which shall not be cured), the Discount Notes Trustee will be required,
in the exercise of its power, to use the degree of care of a prudent person in
the conduct of his own affairs. Subject to such provisions, the trustee will be
under no obligation to exercise any of its rights or powers under the Discount
Notes Indenture at the request of any
141
holder of such Discount Notes, unless such holder shall have offered to the
Discount Notes Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
Governing Law
The Discount Notes Indenture and the Discount Notes and the rights and duties
of the parties thereunder shall be governed by, and construed in accordance
with, the laws of the State of New York.
Enforceability of Judgments
Since most of the operating assets of the Company and its Subsidiaries are
outside the United States, any judgment obtained in the United States against
the Company or a Subsidiary, including judgments with respect to the payment of
principal, premium, if any, interest, Additional Amounts, if any, redemption
price and any purchase price with respect to the Discount Notes, may not be
collectible within the United States.
The Company has been informed by its German counsel, Besner Kreifels Weber,
that, subject to certain exceptions, the laws of the Federal Republic of
Germany permit an action to be brought in a court of competent jurisdiction in
the Federal Republic of Germany permitting the enforcement of a judgment of a
United States federal court or a court of the State of New York sitting in the
Borough of Manhattan in the City of New York awarding claims under the terms
and conditions of the Discount Notes and the Discount Notes Indenture. In
granting permission to enforce the United States or New York State court
ruling, the respective German court would not substantively re-examine or re-
litigate the case on the merits of the subject matter thereof.
The exceptions to permission of enforcement of United States and New York
State court judgments provide, among other things, that a judgment may not be
enforced in Germany, if:
. such judgment is not final and remains subject to appeal or any other
form of contestation in the United States;
. the court having rendered such judgment is not the court of competent
jurisdiction pursuant to German international law;
. the judgment contradicts an earlier final and enforceable judgment
rendered in Germany or abroad on the same subject matter; or
. the enforcement of such judgment would contradict essential principles
of German law and German ordre public (which especially excludes the
enforcement of judgments with a penal or revenue character).
Book-Entry, Delivery and Form
The Discount Notes were issued in one or more global units in registered,
global form (collectively, the "Global Notes") and registered in the name of
Depository Trust Company ("DTC"), New York, New York.
Payments of any amounts owing in respect of the global securities will be
made through one or more paying agents to DTC or its nominee in proportion to
their respective interests as the registered owner thereof. All amounts payable
under the Discount Notes will be payable in dollars. None of Cybernet, the
Discount Notes Trustee, the transfer agent or any paying agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the global
securities or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interest.
Cybernet expects that DTC or any nominee thereof, upon receipt of any
payments made in respect of the global securities, will credit participants'
accounts with payments in amounts proportionate to their respective
142
beneficial interests in the principal amount of the Global Notes as shown on
the records of DTC. Cybernet also expects that payments by participants to
owners of beneficial interests in the global securities held through such
participants will be governed by standing instructions and customary practice,
as is now the case with securities held for the accounts of customers
registered in the names of nominees for such customers. Such payments will be
the responsibility of such participants.
Investors may be subject to foreign exchange risks that may have important
economic and tax consequences to them.
Except as set forth below, the Global Notes may be transferred, in whole and
not in part, only to DTC, a nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global Notes may not be exchanged for
Notes in certificated form except in the limited circumstances described below.
Transfer of beneficial interests in Global Notes will be subject to the
applicable rules and procedures of DTC and its direct or indirect participants
(including, if applicable, those of the Euroclear System ("Euroclear") and
Cedel Society Anonyme ("Cedel")), which may change from time to time.
The Notes may be presented for registration of transfer and exchange at the
offices of the Registrar.
Depositary Procedures
DTC has advised Cybernet that DTC is a limited-purpose trust company created
to hold securities for its participating organizations (collectively, the
"Participants") and to facilitate the clearance and settlement of transactions
in those securities between Participants through electronic book-entry changes
in accounts of Participants. The Participants include securities brokers and
dealers banks, trust companies, clearing corporations and certain other
organizations. Access to DTC's system is also available to other entities such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly
(collectively, "Indirect Participants"). Persons who are not Participants may
beneficially own securities held by or on behalf of DTC only through the
Participants or Indirect Participants. The ownership interest and transfer of
ownership interest of each actual purchaser of each security held by or on
behalf of DTC are recorded on the records of the Participants and Indirect
Participants.
DTC has also advised Cybernet that pursuant to procedures established by it
ownership of interests in the Global Notes will be shown on, and the transfer
of ownership thereof will be effected only through, records maintained by DTC
(with respect to Participants) or by Participants and the Indirect Participants
(with respect to other owners of beneficial interests in such securities).
Euroclear and Cedel will hold interests in the Global Notes on behalf of
their Participants through customers' securities accounts in their respective
names on the books of their respective depositories, which are Morgan Guaranty
Trust Company of New York, Brussels office, as operator of Euroclear, and
Citibank, N.A. as operator of Cedel. The depositories, in turn, will hold such
interests in the Global Notes, in customers' securities accounts in the
depositories' names on the books of DTC. All interests in a Global Note,
including those held through Euroclear or Cedel, may be subject to the
procedures and requirements of DTC. Those interests held by Euroclear or Cedel
may also be subject to the procedures and requirements of such system.
The laws of some states require that certain persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interests in a Global Note to such persons may be limited
to that extent. Because DTC can act only on behalf of Participants, which in
turn act on behalf of Indirect Participants and certain banks, the ability of a
person having a beneficial interest in a Global Note to pledge such interest to
persons or entities that do not participate in DTC's book-entry system, or
otherwise take actions in respect of such interests, may be affected by the
lack of physical certificates evidencing such interests.
143
Except as described below, owners of interests in the Global Notes will not
have Discount Notes registered in their names, will not receive physical
delivery of Discount Notes in certificated form and will not be considered the
registered owners or holders thereof under the Discount Indenture for any
purpose.
Payments in respect of the principal, premium, Additional Amounts (as
defined), if any, and interest on a Global Note registered in the name of DTC
or its nominee will be payable by the paying agent to DTC or its nominee in its
capacity as the registered holder of a Global Note under the Discount
Indenture. Under the terms of the Discount Indenture, Cybernet and the Trustee
will treat the persons in whose names the Discount Notes, including the Global
Notes, are registered as the owners thereof for the purpose of receiving such
payments and for any and all other purposes whatsoever. Consequently, neither
Cybernet, the Discount Trustee, nor any agent of Cybernet or the Discount
Trustee, has or will have any responsibility or liability for (i) any aspect of
DTC's records or any Participant's or Indirect Participant's records relating
to or payments made on account of beneficial ownership interests in the Global
Notes, or for maintaining, supervising or reviewing any of DTC's records or any
Participant's or Indirect Participant's records relating to the beneficial
ownership interests in the Global Notes or (ii) any other matter relating to
the actions and practices of DTC or any of its Participants or Indirect
Participants.
DTC has advised Cybernet that its current practices, upon receipt of any
payment in respect of securities such as the Discount Notes (including
principal and interest), is to credit the accounts of the relevant Participants
with the payment on the payment date, in amounts proportionate to their
respective holdings in principal amount of beneficial interests in the relevant
security such as the Global Notes as shown on the records of DTC. Payments by
Participants and the Indirect Participants to the beneficial owners of Notes
will be governed by standing instructions and customary practices and will not
be the responsibility of DTC, the Discount Trustee or Cybernet. Neither
Cybernet nor the Discount Notes Trustee will be liable for any delay by DTC or
its Participants in identifying the beneficial owners of the Discount Notes and
Cybernet and the Discount Notes Trustee may conclusively rely on and will be
protected in relying on instructions from DTC or its nominee as the registered
owner of the Discount Notes for all purposes.
Except for trades involving only Euroclear and Cedel participants, interests
in the Global Notes will trade in DTC's Same-Day Funds Settlement System and
secondary market trading activity in such interests will, therefore, settle in
immediately available funds, subject in all cases to the rules and procedures
of DTC and its Participants.
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds. Transfers between
participants in Euroclear and Cedel will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the
Discount Notes described herein, cross market transfers between Participants in
DTC, on the one hand, and Euroclear or Cedel participants, on the other hand,
will be effected through DTC in accordance with DTC's rules on behalf of
Euroclear or Cedel, as the case may be, by its respective depository; however,
such cross market transactions will require delivery of instructions to
Euroclear or Cedel, as the case may be, by the counterparty in such system in
accordance with the rules and procedures and within the established deadlines
(Brussels time) of such system. Euroclear or Cedel, as the case may be, will,
if the transaction meets its settlement requirements, deliver instructions to
its respective depositary to take action to effect final settlement on its
behalf by delivering or receiving interests in the relevant Global Note in DTC,
and making or receiving payment in accordance with normal procedures for same-
day fund settlement applicable to DTC. Euroclear participants and Cedel
participants may not deliver instructions directly to the depositaries for
Euroclear or Cedel.
Due to time zone differences, the securities accounts of a Euroclear or Cedel
participant purchasing an interest in a Global Note from a Participant in DTC
will be credited, and any such crediting will be reported to the relevant
Euroclear or Cedel participant, during the securities settlement processing day
(which must be a business day for Euroclear or Cedel) immediately following the
settlement date of DTC. Cash received in
144
Euroclear or Cedel as a result of sales of interests in a Global Note by or
through a Euroclear or Cedel participant to a Participant in DTC will be
received with value on the settlement date of DTC but will be available in the
relevant Euroclear or Cedel cash account only as of the business day for
Euroclear or Cedel following DTC's settlement date.
DTC has advised Cybernet that it will take any action permitted to be taken
by a holder of Discount Notes only at the direction of one or more Participants
to whose account interests in the Global Notes are credited and only in respect
of such portion of the aggregate principal amount of the Discount Notes as to
which such Participant or Participants has or have given direction. However, if
there is an Event of Default under the Discount Notes, DTC reserves the right
to exchange the applicable Global Notes for legended Notes in certificated
form, and to distribute such Notes to its Participants.
The information in this section concerning DTC, Euroclear and Cedel and their
book-entry systems has been obtained from sources that Cybernet believes to be
reliable, but Cybernet takes no responsibility for the accuracy thereof.
Although DTC, Euroclear and Cedel have agreed to the foregoing procedures to
facilitate transfer of interests in the Global Notes among participants in DTC,
Euroclear and Cedel, they are under no obligation to perform or continue to
perform such procedures, and such procedures may be discontinued at any time.
Neither Cybernet nor the Discount Notes Trustee will have any responsibility
for the performance by DTC, Euroclear or Cedel or their respective participants
or indirect participants of their respective obligations under the rules and
procedures governing their operations.
Definitive Securities
If (i) at any time DTC is unwilling or unable to continue as a depositary, or
Euroclear and Cedel cease to be clearing agencies, for the Global Notes and a
successor depositary or clearing agency, as the case may be, is not appointed
by Cybernet within 90 days or (ii) certain other events occur, as provided in
the Discount Notes Indenture, then, definitive securities will be issued in
exchange for the Global Notes.
Same Day Settlement and Payment
The Discount Notes Indenture requires that payments in respect of Discount
Notes represented by the Global Notes (including principal, premium, if any,
interest, and Additional Amounts, if any) be made by wire transfer of
immediately available funds to the accounts specified by DTC. With respect to
Definitive Notes, Cybernet will make all payments of principal, premium, if
any, interest, and Additional Amounts, if any, by wire transfer of immediately
available funds to the accounts specified by the holders thereof or, if no such
account is specified, by mailing a check to each such holder's registered
address. Cybernet expects that secondary trading in the Definitive Notes will
also be settled in immediately available funds.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the PIK
Notes Indenture and the Discount Notes Indenture (collectively the
"Indentures"). Reference is made to each Indenture for the full definition of
all terms as well as any other capitalized term used herein for which no
definition is provided. For purposes of each Indenture, unless otherwise
specifically indicated, the term "consolidated" with respect to any Person
refers to such Person consolidated with its Restricted Subsidiaries, and
excludes from such consolidation any Unrestricted Subsidiary as if such
Unrestricted Subsidiary were not an Affiliate of such Person. For purposes of
the following definitions and the Indentures generally, all calculations and
determinations shall be made in accordance with US GAAP and shall be based upon
the consolidated financial statements of the Company and its subsidiaries
prepared in accordance with US GAAP.
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"Accreted Value" is defined to mean, for any Specified Date, the amount
provided for each $1,000 principal amount at maturity of the Discount Notes:
(1) if the Specified Date occurs on one of the following dates (each, a
"Semi-Annual Accrual Date"), the Accreted Value will equal the amount set
forth below for such Semi-Annual Accrual Date:
Semi-
Annual
Accrual Accreted
Date Value
------- ---------
February 15, 2000.............................................. $567.35
August 15, 2000................................................ $604.23
February 15, 2001.............................................. $643.50
August 15, 2001................................................ $685.33
February 15, 2002.............................................. $729.88
August 15, 2002................................................ $777.32
February 15, 2003.............................................. $827.84
August 15, 2003................................................ $881.65
February 15, 2004.............................................. $938.96
August 15, 2004................................................ $1,000.00
(2) if the Specified Date occurs before the first Semi-Annual Accrual
Date, the Accreted Value will equal the sum of (a) the original issue price
and (b) an amount equal to the product of (1) the Accreted Value for the
first Semi-Annual Accrual Date less the original issue price multiplied by
(2) a fraction, the numerator of which is the number of days from the Issue
Date to the Specified Date, using a 360-day year of twelve 30-day months,
and the denominator of which is the number of days elapsed from the Issue
Date to the first Semi-Annual Accrual Date, using a 360-day year of twelve
30-day months;
(3) if the Specified Date occurs between two Semi-Annual Accrual Dates,
the Accreted Value will equal the sum of (a) the Accreted Value for the
Semi-Annual Accrual Date immediately preceding such Specified Date and (b)
an amount equal to the product of (1) the Accreted Value for the
immediately following Semi-Annual Accrual Date less the Accreted Value for
the immediately preceding Semi-Annual Accrual Date multiplied by (2) a
fraction, the numerator of which is the number of days from the immediately
preceding Semi-Annual Accrual Date to the Specified Date, using a 360-day
year of twelve 30-day months, and the denominator of which is 180; or
(4) if the Specified Date occurs after the last Semi-Annual Accrual Date,
the Accreted Value will equal $1,000.
"Acquired Indebtedness" is defined to mean Indebtedness of a Person existing
at the time such Person becomes a Restricted Subsidiary or is merged or
consolidated with or into the Company or any Restricted Subsidiary or assumed
in connection with an Asset Acquisition by the Company or a Restricted
Subsidiary and not incurred in connection with, or in anticipation of, such
Person becoming a Restricted Subsidiary, such merger or consolidation or such
Asset Acquisition; provided that Indebtedness of such Person which is redeemed,
defeased, retired or otherwise repaid at the time of or immediately upon the
consummation of the transactions by which such Person becomes a Restricted
Subsidiary or is merged or consolidated with or into the Company or any
Restricted Subsidiary or such Asset Acquisition shall not be Indebtedness.
"Affiliate" is defined to mean, as applied to any Person, any other Person
directly or indirectly controlling, controlled by, or under direct or indirect
common control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, is defined to mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" is defined to mean (1) any capital contribution (by means
of transfers of cash or other property to others or payments for property or
services for the account or use of others, or otherwise) by
146
the Company or any Restricted Subsidiary to any other Person, or any
acquisition or purchase of Equity Interests of any other Person by the Company
or any Restricted Subsidiary, in either case pursuant to which such Person
shall become a Restricted Subsidiary or shall be consolidated, merged with or
into the Company or any Restricted Subsidiary or (2) an acquisition by the
Company or any of its Restricted Subsidiaries of the property and assets of any
Person (other than the Company or any of its Restricted Subsidiaries) that
constitute substantially all of an operating unit or line of business of such
Person or which is otherwise outside the ordinary course of business.
"Asset Sale" is defined to mean any sale, transfer or other disposition
(including by way of merger, consolidation or sale-leaseback transactions) in
one transaction or a series of related transactions by the Company or any of
its Restricted Subsidiaries to any Person (other than the Company or any of its
Restricted Subsidiaries) of:
(1) all or any of the Equity Interests in any Subsidiary;
(2) all or substantially all of the property and assets of an operating
unit or line of business of the Company or any of its Restricted
Subsidiaries; or
(3) any other property and assets of the Company or any of its Restricted
Subsidiaries outside the ordinary course of business (including the
receipt of proceeds paid on account of the loss of or damage to any
property or asset and awards of compensation for any asset taken by
condemnation, eminent domain or similar proceedings).
For the purposes of this definition with respect to a particular Indenture, the
term "Asset Sale" shall not include:
(a) any transaction consummated in compliance with the covenant contained
in the applicable Indenture with respect to consolidations, mergers and
sales of assets and the creation of any Lien not prohibited by the
"Limitation on Liens" covenant contained in the applicable Indenture;
provided, however, that any transaction consummated in compliance with
such covenant with respect to consolidations, mergers and sales of
assets involving a sale, conveyance, assignment, transfer, lease or
other disposal of less than all of the properties or assets of the
Company and the Restricted Subsidiaries shall be deemed to be an Asset
Sale with respect to the properties or assets of the Company and
Restricted Subsidiaries that are not so sold, conveyed, assigned,
transferred, leased or otherwise disposed of in such transaction;
(b) sales of property or equipment that has become worn out, obsolete or
damaged or otherwise unsuitable for use in connection with the business
of the Company or any Restricted Subsidiary, as the case may be;
(c) sales of telecommunications network capacity of the Company or any
Restricted Subsidiary including sales of indefeasible rights of use of
or transfers of dark fiber optic transmission cable, in each case in
the ordinary course of business; and
(d) any transaction consummated in compliance with the "Limitation on
Restricted Payments" covenant in the applicable Indenture.
In addition, solely for purposes of the "Limitation on Asset Sales" covenant,
any sale, conveyance, transfer, lease or other disposition of any property or
asset, whether in one transaction or a series of related transactions,
involving assets with a Fair Market Value not in excess of (Euro)1.0 million in
any fiscal year shall be deemed not to be an "Asset Sale."
"Board of Directors" is defined to mean the Board of Directors of the
Company.
"Board Resolution" is defined to mean a duly authorized resolution of the
Board of Directors.
"Business Day" is defined to mean a day other than a Saturday, Sunday or
other day on which commercial banks in New York City and Munich, Germany are
authorized or required by law to close.
147
"Capital Stock" is defined to mean, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) in equity of such Person, including, without
limitation, if such Person is a partnership, partnership interests (whether
general or limited) and any other interest or participation that confers on a
Person the right to receive a share of the profits and losses of, or
distributions of assets of, such partnership.
"Capitalized Lease" is defined to mean, as applied to any Person, any lease
of any property (whether real, personal or mixed) of which the discounted
present value of the rental obligations of such Person as lessee, in conformity
with US GAAP, is required to be capitalized and reflected as a liability on the
balance sheet of such Person; and "Capitalized Lease Obligation" is defined to
mean, at the time any determination thereof is to be made, the discounted
present value of the rental obligations under such lease.
"Cash Equivalents" is defined to mean:
(a) securities issued or directly and fully guaranteed or insured by the
U.S. government or any agency or instrumentality thereof or by the
German government or any agency or instrumentality thereof having
maturities of not more than 360 days from the date of acquisition;
(b) overnight bank deposits or certificates of deposit, eurodollar time
deposits and bankers' acceptances with maturities of 360 days or less
from the date of acquisition, in each case with any commercial bank
having capital and surplus in excess of $500 million and outstanding
debt rated at least "A" or the equivalent thereof by S&P or Moody's;
(c) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (a) and (b)
entered into with any financial institution meeting the qualifications
specified in clause (b) above;
(d) commercial paper rated at least A-1 or P-1, or the equivalent thereof
by S&P or Moody's, respectively, and in each case maturing within 360
days after the date of acquisition; and
(e) direct obligations of, or obligations fully and unconditionally
guaranteed by, any member of the European Community rated at least
"AAA" or the equivalent thereof by both S&P and Moody's.
"Change of Control" is defined to mean such time as:
(1) a "person" or "group" (within the meaning of Sections 13(d) and
14(d)(2) of the Exchange Act) (other than a Permitted Holder) becomes
the ultimate "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act) of more than 35% of the total voting power of the then
outstanding Voting Stock of the Company on a fully diluted basis,
provided that the relevant threshold in the case of Cybermind
Interactive Europe and Holger Timm shall be 40%;
(2) individuals who at the beginning of any period of two consecutive
calendar years constituted the Board of Directors (together with any
directors who are members of the Board of Directors August 26, 1999,
and any new directors whose election by the Board of Directors or
whose nomination for election by the Company's stockholders was
approved by a vote of at least two-thirds of the members of the Board
of Directors then still in office who either were members of the Board
of Directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any
reason to constitute a majority of the members of such Board of
Directors then in office;
(3) the sale, lease, transfer, conveyance or other disposition (other than
by way of merger or consolidation), in one or a series of related
transactions, of all or substantially all of the assets of the Company
to any such "person" or "group" (other than to a Restricted
Subsidiary); or
(4) the merger or consolidation of the Company with or into another
corporation or the merger of another corporation with or into the
Company with the effect that immediately after such transaction any
such "person" or "group" of persons or entities shall have become the
beneficial owner of securities of
148
the surviving corporation of such merger or consolidation representing a
majority of the total voting power of the then outstanding Voting Stock
of the surviving corporation.
"Commission" is defined to mean the United States Securities and Exchange
Commission, as from time to time constituted, or, if at any time after the
execution of the Indenture such commission is not existing and performing the
duties now assigned to it under the Trust Indenture Act, then the body
performing such duties at such time.
"Common Stock" is defined to mean the authorized common Capital Stock of the
Company, par value $0.001 per share.
"Consolidated Cash Flow" is defined to mean with respect to any Person for
any period, the Consolidated Net Income of such Person for such period plus,
to the extent deducted in computing such Consolidated Net Income (and without
duplication):
(1) Consolidated Fixed Charges;
(2) any provision for taxes (other than taxes (either positive or negative)
attributable to extraordinary and nonrecurring gains or losses or sales
of assets);
(3) any amount attributable to depreciation and amortization expense and
(4) all other non-cash items reducing Consolidated Net Income (excluding
any non-cash charge to the extent that it requires or represents an
accrual of, or reserve for, cash charges in any future period),
less all non-cash items increasing Consolidated Net Income (excluding any
items which represent the reversal of an accrual of, or reserve for,
anticipated cash charges at any prior period), all as determined on a
consolidated basis for such Person and its Restricted Subsidiaries in
accordance with US GAAP; provided, however, that there shall be excluded
therefrom the Consolidated Cash Flow (if positive) of any Restricted
Subsidiary (calculated separately for such Restricted Subsidiary in the same
manner as provided above) that is subject to a restriction which prevents the
payment of dividends or the making of distributions to the Company or another
Restricted Subsidiary to the extent of such restriction.
"Consolidated Fixed Charges" is defined to mean, with respect to any Person
for any period, Consolidated Interest Expense plus dividends declared and
payable on Preferred Stock.
"Consolidated Interest Expense" is defined to mean with respect to any
Person for any period, the aggregate amount of interest in respect of
Indebtedness (including capitalized interest, amortization of original issue
discount on any Indebtedness and the interest portion of any deferred payment
obligation) calculated in accordance with US GAAP; all commissions, discounts
and other fees and charges owed with respect to letters of credit and bankers'
acceptance financing; the net costs associated with Interest Rate Agreements,
and interest on Indebtedness that is Guaranteed or secured by such Person or
any of its Restricted Subsidiaries, less the principal component of rentals in
respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid
or to be accrued by such Person and its Restricted Subsidiaries during such
period; excluding, however, any amount of such interest of any Restricted
Subsidiary to the extent the net income of such Restricted Subsidiary is
excluded in the calculation of Consolidated Net Income pursuant to the last
proviso of such definition.
"Consolidated Net Income" is defined to mean, for any period, the net income
(or loss) of the Company and its consolidated Restricted Subsidiaries
determined in accordance with US GAAP; provided, however, that there will not
be included in such Consolidated Net Income:
(1) any net income (loss) of any Person if such Person is not a Restricted
Subsidiary, except that
(a) subject to the limitations contained in clauses (4), (5) and (6)
below, the Company's equity in the net income of any such Person for
such period will be included in such Consolidated Net Income up to
the aggregate amount of cash actually distributed by such Person
during such
149
period to the Company or a Restricted Subsidiary as a dividend or
other distribution (subject, in the case of a dividend or other
distribution to a Restricted Subsidiary, to the limitations contained
in clause (3) below) and
(b) the Company's equity in a net loss of any such Person (other than an
Unrestricted Subsidiary) for such period will be included in
determining such Consolidated Net Income to the extent such loss has
been funded with cash from the Company or a Restricted Subsidiary;
(2) any net income (loss) of any Person acquired by the Company or a
Subsidiary in a pooling of interests transaction for any period prior
to the date of such acquisition;
(3) any net income (but not loss) of any Restricted Subsidiary if such
Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to the Company, except that
(a) subject to the limitations contained in clauses (4), (5) and (6)
below, the Company's equity in the net income of any such Restricted
Subsidiary for such period will be included in such Consolidated Net
Income up to the aggregate amount of cash that could have been
distributed by such Restricted Subsidiary during such period to the
Company or another Restricted Subsidiary as a dividend (subject, in
the case of a dividend to another Restricted Subsidiary, to the
limitation contained in this clause) and
(b) the Company's equity in a net loss of any such Restricted Subsidiary
for such period will be included in determining such Consolidated
Net Income;
(4) any gain (loss) realized upon the sale or other disposition of any
property, plant or equipment of the Company or its consolidated
Restricted Subsidiaries which is not sold or otherwise disposed of in
the ordinary course of business and any gain (loss) realized upon the
sale or other disposition of any Capital Stock of any Person;
(5) any extraordinary gain or loss; and
(6) the cumulative effect of a change in accounting principles.
"Consolidated Net Worth" is defined to mean, at any date of determination,
stockholders' equity as set forth on the most recently available quarterly or
annual consolidated balance sheet of such Person and its Restricted
Subsidiaries (which shall be as of a date not more than 90 days prior to the
date of determination), less any amounts attributable to Redeemable Stock or
any equity security convertible into or exchangeable for Indebtedness, the
cost of treasury stock and the principal amount of any promissory notes
receivable from the sale of Equity Interests in the Company or any of its
Restricted Subsidiaries, each item to be determined in conformity with US GAAP
(excluding the effects of foreign currency exchange adjustments under
Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 52).
"Credit Facilities" is defined to mean one or more senior credit agreements,
senior loan agreements or similar senior facilities with banks or other
institutional lenders providing for revolving credit loans, term loans,
receivables financing (including through the sale of receivables to such
lenders or to special purpose entities formed to borrow from such lenders
against such receivables) or letters of credit, in each case, as amended,
restated, modified, renewed, refunded, replaced or refinanced in whole or in
part from time to time.
"Cumulative Consolidated Cash Flow" is defined to mean, for the period
beginning on August 26, 1999 through and including the end of the last fiscal
quarter (taken as one accounting period) preceding the date of any proposed
Restricted Payment, Consolidated Cash Flow of the Company and its Restricted
Subsidiaries for such period determined on a consolidated basis in accordance
with US GAAP.
"Cumulative Consolidated Fixed Charges" is defined to mean, for the period
beginning on August 26, 1999 through and including the end of the last fiscal
quarter (taken as one accounting period) preceding the date of any proposed
Restricted Payment, Consolidated Fixed Charges of the Company and its
Restricted Subsidiaries for such period determined on a consolidated basis in
accordance with US GAAP.
150
"Currency Agreement" is defined to mean any foreign exchange contract,
currency swap agreement and any other arrangement or agreement designed to
provide protection against fluctuations in currency values.
"Current Market Price" is defined to mean:
(1) if the security is not registered under the Exchange Act, the fair
market value of the security (without any discount for lack of
liquidity, the amount of such security offered to be purchased or the
fact that such securities may represent a minority interest in a
private company or a company under the control of another Person) as
determined in good faith by the Board of Directors and certified in a
board resolution that is delivered to the trustee under the applicable
Indenture, and determined to be fair, from a financial point of view,
to the holders of such security or another security exercisable for
such security, by an Independent Financial Expert (as set forth in
such Independent Financial Expert's written fairness opinion); or
(2) if the security is registered under the Exchange Act, the average of
the last reported sale price of the security on the principal exchange
on which it trades (or the equivalent in an over-the-counter market)
for each Business Day during the period commencing 15 Business Days
before such date and ending on the date one day prior to such date, or
if the security has been registered under the Exchange Act for less
than 15 consecutive Business Days before such date, the average of the
daily closing bid prices (or such equivalent) for all of the Business
Days before such date for which daily closing bid prices are available
(provided, however, that if the closing bid price is not determinable
for at least 10 Business Days in such period, the "Current Market
Price" of the security shall be determined as if the security were not
registered under the Exchange Act).
The Company shall pay the fees and expenses of any Independent Financial Expert
in the determination of Current Market Price.
"Default" with respect to a particular Indenture is defined to mean any event
that is, or after notice or passage of time or both would be, an Event of
Default under that Indenture.
"Designated Senior Indebtedness" under the Notes is defined to mean the
Senior Notes and any Indebtedness constituting Senior Indebtedness that, at the
date of determination, has an aggregate principal amount of, or under which the
holders thereof are committed to lend up to, (Euro)20.0 million and that is
specifically designated by the Company in the instrument creating or evidencing
such Senior Indebtedness as "Designated Senior Indebtedness."
"Eligible Accounts Receivable" is defined to mean the accounts receivables
(net of any reserves and allowances for doubtful accounts in accordance with US
GAAP) of any Person that are not more than 60 days past their due date and that
were entered into in the ordinary course of business on normal payment terms as
shown on the most recent consolidated balance sheet of such Person filed with
the Commission, all in accordance with US GAAP.
"Equity Interests" is defined to mean Capital Stock and all warrants, options
or other rights to acquire Capital Stock (but excluding any debt security that
is convertible into, or exchangeable for, Capital Stock).
"Exchange Act" is defined to mean the United States Securities Exchange Act
of 1934, as amended, or any successor statute, and the rules and regulations
thereunder.
"Fair Market Value" is defined to mean, with respect to any asset or
property, the price (after taking into account any liabilities relating to such
assets) which could be negotiated in an arm's-length free market transaction,
for cash, between a willing seller and a willing and able buyer, neither of
which is under any compulsion to complete the transaction; provided, however,
that the Fair Market Value of any such asset or assets shall be determined
conclusively by the Board of Directors acting in good faith, which
determination shall be evidenced by a resolution of such Board delivered to the
trustee under the applicable Indenture.
151
"Guarantee" is defined to mean any obligation, contingent or otherwise, of
any Person directly or indirectly guaranteeing any Indebtedness or other
obligation in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof) of any other Person; provided that
the term "Guarantee" shall not include endorsements for collection or deposit
in the ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning.
"Incur" is defined to mean, with respect to any Indebtedness, to incur,
create, issue, assume, Guarantee or otherwise become liable for or with respect
to, or become responsible for, the payment of, contingently or otherwise, such
Indebtedness, including an Incurrence of Indebtedness by reason of the
acquisition of more than 50% of the Equity Interests in any Person; provided
that none of the accrual of interest, the payment of interest in the form of
additional Indebtedness or the accretion of original issue discount shall be
considered an Incurrence of Indebtedness.
"Indebtedness" is defined to mean, with respect to any Person at any date of
determination (without duplication):
(1) all indebtedness of such Person, whether or not contingent (A) in
respect of borrowed money, (B) evidenced by bonds, debentures, notes or
other similar instruments or letters of credit or other similar
instruments (including reimbursement obligations with respect thereto),
(C) representing the balance deferred and unpaid of the purchase price
of property or services, which purchase price is due more than six
months after the date of placing such property in service or taking
delivery and title thereto or the completion of such services, except
Trade Payables, (D) representing Capitalized Lease Obligations,
(2) all Indebtedness of other Persons secured by a Lien on any asset of
such Person, whether or not such Indebtedness is assumed by such
Person; provided that the amount of such Indebtedness shall be the
lesser of (A) the fair market value of such asset at such date of
determination and (B) the amount of such Indebtedness;
(3) all Indebtedness of other Persons Guaranteed by such Person to the
extent such Indebtedness is Guaranteed by such Person;
(4) the maximum fixed redemption or repurchase price of Redeemable Stock of
such Person at the time of determination; and
(5) to the extent not otherwise included in this definition, obligations
under Currency Agreements and Interest Rate Agreements.
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and,
with respect to contingent obligations, the maximum liability upon the
occurrence of the contingency giving rise to the obligation; provided that (x)
the amount outstanding at any time of any Indebtedness issued with original
issue discount is the face amount of such Indebtedness less the remaining
unamortized portion of the original issue discount of such Indebtedness at such
time as determined in conformity with US GAAP, (y) money borrowed and set aside
at the time of the Incurrence of any Indebtedness for the sole purpose of
prefunding the payment of interest on such Indebtedness (and which is pledged
in favor of the holders of such Indebtedness pending such application) shall
not be deemed to be "Indebtedness" so long as such money is held to secure the
payment of such interest and (z) Indebtedness shall not include any liability
for federal, state, local or other taxes.
"Independent Financial Expert" is defined to mean an internationally
recognized investment bank that does not (and the directors, executive officers
and 5% stockholders of which do not) have a direct or indirect financial
interest in the Company or any of its Subsidiaries or Affiliates, which has not
been for at least five years, and at the time it is called upon to give
independent financial advice to the Company is not (and none of its directors,
executive officers or 5% stockholders is), a promoter, director, or officer of
the Company or any of its Subsidiaries or Affiliates. The Independent Financial
Expert may be compensated and indemnified by the Company for opinions or
services it provides as an Independent Financial Expert.
152
"Interest Rate Agreement" is defined to mean any interest rate swap
agreement, interest rate cap agreement, interest rate insurance, and any other
arrangement or agreement designed to provide protection against fluctuations in
interest rates.
"Investment" in any Person is defined to mean any direct or indirect advance,
loan or other extension of credit (including, without limitation, by way of
Guarantee or similar arrangement but excluding advances to customers in the
ordinary course of business that are, in conformity with US GAAP, recorded as
accounts receivable on the balance sheet of such Person or its Restricted
Subsidiaries) or capital contribution to (by means of any transfer of cash or
other tangible or intangible property to another Person or any payment for any
property or services for the account or use of another Person), or any purchase
or acquisition of Equity Interests, bonds, notes, debentures, or other similar
instruments issued by any other Person. For purposes of the definition of
"Unrestricted Subsidiary," the "Limitation on Restricted Payments" covenant and
the "Limitation on Issuance and Sale of Capital Stock of Restricted
Subsidiaries" covenant in the applicable Indenture:
(1) "Investment" shall include:
(a) the Fair Market Value of the assets (net of liabilities) of any
Restricted Subsidiary of the Company at the time that such
Restricted Subsidiary of the Company is designated an Unrestricted
Subsidiary and shall exclude the Fair Market Value of the assets
(net of liabilities) of any Unrestricted Subsidiary at the time
that such Unrestricted Subsidiary is designated a Restricted
Subsidiary of the Company, and
(b) the Fair Market Value, in the case of a sale of Equity Interests in
accordance with the "Limitation on the Issuance and Sale of Capital
Stock of Restricted Subsidiaries" covenant in the applicable
Indenture such that a Person no longer constitutes a Restricted
Subsidiary, of the remaining assets (net of liabilities) of such
Person after such sale, and shall exclude the Fair Market Value of
the assets (net of liabilities) of any Unrestricted Subsidiary at
the time that such Unrestricted Subsidiary is designated a
Restricted Subsidiary of the Company; and
(2) any property transferred to or from an Unrestricted Subsidiary shall be
valued at its Fair Market Value at the time of such transfer.
"Lien" is defined to mean any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind in respect of an asset, whether or not
filed, recorded or otherwise perfected under applicable law (including, without
limitation, any conditional sale or other title retention agreement or lease in
the nature thereof, any sale with recourse against the seller or any Affiliate
of the seller, or any option or other agreement to sell or give any security
interest).
"Moody's" is defined to mean Moody's Investors Service, Inc. and its
successors.
"Most Recent Balance Sheet" is defined to mean, with respect to any Person,
the most recent consolidated balance sheet of such Person reported on by an
internationally recognized firm of independent accountants without
qualification as to scope.
"Net Cash Proceeds" is defined to mean:
(a) with respect to any Asset Sale, the proceeds of such Asset Sale in the
form of cash or Cash Equivalents, including payments in respect of
deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the
form of cash or Cash Equivalents (except to the extent such obligations
are financed or sold with recourse to the Company or any Restricted
Subsidiary of the Company) and proceeds from the conversion of other
property received when converted to cash or Cash Equivalents, net of:
(i) brokerage commissions and other fees and expenses (including fees
and expenses of counsel and investment bankers) related to such
Asset Sale,
153
(ii) taxes paid or payable as a result thereof (after taking into
account any available tax credits or deductions and any tax
sharing agreements),
(iii) payments made to repay Indebtedness or any other obligation
outstanding at the time of such Asset Sale that either (A) is
secured by a Lien on the property or assets sold or (B) is
required to be paid as a result of such sale and
(iv) appropriate amounts to be provided by the Company or any
Restricted Subsidiary of the Company as a reserve against any
liabilities associated with such Asset Sale, including, without
limitation, pension and other post-employment benefit
liabilities, liabilities related to environmental matters and
liabilities under any indemnification obligations associated with
such Asset Sale, all as determined in conformity with US GAAP;
provided that such amounts which cease to be held as reserves
shall be deemed Net Cash Proceeds; and
(b) with respect to any issuance or sale of Equity Interests (other than
Redeemable Stock) and excluding any Equity Interests issued in
connection with the Offering, the proceeds of such issuance or sale in
the form of cash or Cash Equivalents, including payments in respect of
deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the
form of cash or Cash Equivalents (except to the extent (1) such
obligations are financed, directly or indirectly, with money borrowed
from the Company or any Restricted Subsidiary or otherwise financed or
sold with recourse to the Company or any Restricted Subsidiary or (2)
the purchase of the Equity Interests is otherwise financed, directly or
indirectly, by the Company or any Restricted Subsidiary, including
through funds contributed, extended, guaranteed or otherwise advanced
by the Company or any Affiliate) and proceeds from the conversion of
other property received when converted to cash or Cash Equivalents, net
of attorneys' fees, accountants' fees, underwriters' or placement
agents' fees, discounts or commissions and brokerage, consultant and
other fees incurred in connection with such issuance or sale and net of
taxes paid or payable as a result thereof.
"Neuer Markt" is defined to mean the Neuer Markt of the Frankfurt Stock
Exchange.
"Offering" is defined to mean with respect to each Indenture the securities
initially offered by such Indenture.
"Officers' Certificate" is defined to mean a certificate signed on behalf of
the Company by two officers of the Company, one of whom must be the principal
executive officer, the principal financial officer, the treasurer or the
principal accounting officer of the Company that meets the requirements set
forth in the applicable Indenture.
"Permitted Assets" is defined to mean, with respect to any Person, assets
used in the Permitted Business (or Equity Interests of a Person that becomes a
Restricted Subsidiary, the assets of which consist principally of such
Permitted Assets) that are purchased or acquired by the Company or a Restricted
Subsidiary after the Issue Date.
"Permitted Business" is defined to mean the business of:
(1) operating an Internet connectivity or internet enhancement service as
it may exist from time to time, including, without limitation,
providing dial up or dedicated internet service, web hosting or
co-location services, security solutions, configuration services,
electronic commerce, intranet solutions, data backup and restoral,
business content and collaboration or consulting services with respect
to the foregoing (including, without limitation, any business
conducted by the Issuer or any Restricted Subsidiary on August 26,
1999);
(2) transmitting or providing services relating to the transmission of,
voice, video or data through owned or leased transmission facilities;
154
(3) constructing, creating, developing, providing or marketing
communications-related network equipment, products, software and other
devices for use in an Internet or telecommunications business; or
(4) evaluating, participating in or pursuing any other activity or
opportunity that is primarily related to those identified in clause
(1), (2) or (3) above.
A good faith determination by a majority of the Board of Directors as to
whether a business meets the requirements of this definition shall be
conclusive, absent manifest error.
"Permitted Holder" is defined to mean Andreas Eder, Alessandro Giacalone and
any Affiliate of the foregoing Persons.
"Permitted Investment" is defined to mean:
(1) an Investment in a Restricted Subsidiary or a Person which will, upon
the making of such Investment, become a Restricted Subsidiary or be
merged or consolidated with or into or transfer or convey all or
substantially all its assets to, the Company or a Restricted
Subsidiary;
(2) payroll, travel and similar advances to cover matters that are expected
at the time of such advance ultimately to be treated as expenses in
accordance with US GAAP;
(3) stock, obligations or securities received (a) in satisfaction of
judgments or (b) in settlement of debts, or as a result of foreclosure,
perfection or enforcement of any Lien, in each case under this
clause (b) arising in the ordinary course of business and not in
contemplation of the acquisition of such stock, obligations or
securities;
(4) Investments in Cash Equivalents;
(5) Investments made as a result of the receipt of noncash consideration
from any Asset Sale made in compliance with the "Limitation on Asset
Sales" covenant in the applicable Indenture;
(6) Investments in negotiable instruments held for collection, lease,
utility and workers' compensation, performance and other similar
pledges or deposits, and other pledges or deposits permitted under the
"Limitation on Liens" covenant in the applicable Indenture;
(7) obligations under Interest Rate Agreements or Currency Agreements;
provided that such agreements (a) are designed solely to protect the
Company or the Restricted Subsidiary, as the case may be, against
fluctuations in foreign currency exchange rates or interest rates and
(b) do not increase the Indebtedness of the obligor outstanding at any
time other than as a result of fluctuations in foreign currency
exchange rates or interest rates or by reason of fees, indemnities and
compensation payable thereunder;
(8) Investments made in the ordinary course of business and on ordinary
business terms in the Permitted Business in consortia formed to
construct transmission infrastructure for use primarily in the
Permitted Business, provided such Investment entitles the Company to
rights of way or rights of use on such transmission infrastructure; and
(9) any Investment purchased by the Company and deposited in an escrow
account established in connection with the issuance of any Senior
Indebtedness of the Company that is pari passu with the Senior Notes.
"Permitted Liens" is defined to mean:
(1) Liens for taxes, assessments, governmental charges or claims that are
being contested in good faith by appropriate legal proceedings promptly
instituted and diligently conducted and for which a reserve or other
appropriate provision, if any, as shall be required in conformity with
US GAAP shall have been made;
(2) statutory Liens of landlords and carriers, warehousemen, mechanics,
suppliers, materialmen, repairmen or other similar Liens arising in the
ordinary course of business and with respect to
155
amounts not yet delinquent or being contested in good faith by
appropriate legal proceedings promptly instituted and diligently
conducted and for which a reserve or other appropriate provision, if
any, as shall be required in conformity with US GAAP shall have been
made;
(3) Liens incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other
types of social security or other similar legislation and other
insurance-related obligations (including, without limitation, pledges
or deposits securing liability to insurance carriers under insurance or
self-insurance arrangements);
(4) easements, rights-of-way, municipal and zoning ordinances and similar
charges, encumbrances, title defects or other irregularities that do
not materially interfere with the ordinary course of business of the
Company or any of its Restricted Subsidiaries;
(5) Liens (including extensions and renewals thereof) upon real or personal
property of a Restricted Subsidiary purchased or leased after August
26, 1999; provided that (a) such Lien is created solely for the purpose
of securing Indebtedness Incurred by such Restricted Subsidiary in
compliance with the "Limitation on Indebtedness" and "Limitation on
Issuances of Guarantees of Indebtedness by Restricted Subsidiaries"
covenants in the applicable Indenture (i) to finance the cost of the
item of property or assets subject thereto and such Lien is created
prior to, at the time of or within six months after the later of the
acquisition and the Incurrence of such Indebtedness or (ii) to
refinance any Indebtedness of a Restricted Subsidiary previously so
secured, (b) the principal amount of the Indebtedness secured by such
Lien does not exceed 100% of such cost and (c) any such Lien shall not
extend to or cover any property or assets other than such item of
property or assets;
(6) any interest or title of a lessor in the property subject to any
Capitalized Lease or operating lease of a Restricted Subsidiary which,
in each case, is permitted under the applicable Indenture;
(7) Liens on property of, or on Equity Interests in or Indebtedness of, any
Person existing at the time such Person becomes, or becomes a part of,
any Restricted Subsidiary; provided that such Liens were not created,
incurred or assumed in contemplation of such transaction and do not
extend to or cover any property or assets of the Company or any
Restricted Subsidiary other than the property or assets so acquired;
(8) Liens arising from the rendering of a final judgment or order against
the Company or any Restricted Subsidiary of the Company that does not
give rise to an Event of Default under the applicable Indenture;
(9) Liens encumbering customary initial deposits and margin deposits and
other Liens that are either within the general parameters customary in
the industry or incurred in the ordinary course of business, in each
case, securing Indebtedness under Interest Rate Agreements and Currency
Agreements;
(10) Liens arising out of conditional sale, title retention, consignment or
similar arrangements for the sale of goods entered into by the Company
or any of its Restricted Subsidiaries in the ordinary course of
business in accordance with the past practices of the Company and its
Restricted Subsidiaries prior to August 26, 1999;
(11) Liens existing on August 26, 1999 or securing the PIK Notes or
Discount Notes, as applicable, or any Guarantee of the PIK Notes or
Discount Notes, as applicable;
(12) Liens granted after August 26, 1999, on any assets or Equity Interests
in the Company or its Restricted Subsidiaries created in favor of the
holders of the PIK Notes or Discount Notes, as applicable;
(13) Liens with respect to the assets of a Restricted Subsidiary granted by
such Restricted Subsidiary to the Company or another Restricted
Subsidiary to secure Indebtedness owing to the Company or such
Restricted Subsidiary and Incurred in compliance with the related
provisions of the "Limitation on Indebtedness" covenant in the
applicable Indenture;
156
(14) Liens created in connection with the incurrence of certain refinancing
or refunding Indebtedness permitted to be Incurred under the
"Limitation on Indebtedness" covenant in the applicable Indenture;
provided that the Indebtedness which it refinances is secured by
similar Liens;
(15) Liens securing Indebtedness under Credit Facilities incurred in
compliance with the related provisions of the "Limitation on
Indebtedness" covenant in the applicable Indenture;
(16) Liens securing other Senior Indebtedness of the Company;
(17) Liens incurred or deposits made to secure the performance of tenders,
bids, leases, subleases, licenses, sublicenses, obligations for
utilities, statutory or regulatory obligations, bankers' acceptances,
letters of credit, surety and appeal bonds, government or other
contracts, completion guarantees, performance and return-of-money
bonds and other obligations of a similar nature incurred in the
ordinary course of business (exclusive of obligations for the payment
of borrowed money);
(18) Liens in favor of customs and revenue authorities arising as a matter
of law to secure payment of customs duties in connection with the
importation of goods; and
(19) Liens with respect to an escrow account established in connection with
the issuance of any Senior Indebtedness which are pari passu with the
Senior Notes.
"Preferred Stock" is defined to mean, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) which is preferred as to the payment of dividends
or distributions, or as to the distribution of assets upon any voluntary or
involuntary liquidation or dissolution of such Person, over Equity Interests of
any other class in such Person.
"Pro forma Consolidated Cash Flow" is defined to mean with respect to any
Person for any period, the Consolidated Cash Flow of such Person for such
period calculated on a pro forma basis to give effect to any Asset Sale or
Asset Acquisition (including acquisitions of other Persons by merger,
consolidation or purchase of Equity Interests) during such period as if such
Asset Sale or Asset Acquisition had taken place on the first day of such period
and income (or losses) ceased to accrue or accrued, as the case may be,
therefrom from such date.
"Redeemable Stock" is defined to mean, with respect to any Person, any
Capital Stock which by its terms (or by the terms of any security into which it
is convertible or for which it is exchangeable) or upon the happening of any
event:
(1) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise,
(2) is convertible or exchangeable for Indebtedness or Redeemable Stock or
(3) is redeemable or must be purchased, upon the occurrence of certain
events or otherwise, by such Person at the option of the holder
thereof, in whole or in part, in each case on or prior to the first
anniversary of the Stated Maturity of the PIK Notes or Discount Notes,
as applicable.
However, any Capital Stock that would not constitute Redeemable Stock but for
provisions thereof giving holders thereof the right to require such Person to
purchase or redeem such Capital Stock upon the occurrence of an "asset sale" or
"change of control" occurring prior to the first anniversary of the Stated
Maturity of the PIK Notes or Discount Notes, as applicable, shall not
constitute Redeemable Stock if (x) the "asset sale" or "change of control"
provisions applicable to such Capital Stock are not more favorable to the
holders of such Capital Stock than the provisions applicable to the PIK Notes
or Discount Notes in such events, and (y) any such requirement only becomes
operative after compliance with such terms applicable to the PIK Notes or
Discount Notes, including the purchase of any such Notes tendered pursuant
thereto.
"Replacement Assets" is defined to mean any property, plant or equipment of a
nature or type that are used or usable in the Permitted Business (as determined
in good faith by the Board of Directors, whose determination shall be evidenced
by a Board Resolution).
157
"Restricted Subsidiary" is defined to mean, at any time, any direct or
indirect Subsidiary of the Company that is then not an Unrestricted Subsidiary.
"S&P" is defined to mean Standard & Poor's Ratings Services, a division of
the McGraw-Hill Companies, and its successors.
"Securities Act" is defined to mean the United States Securities Act of 1933,
as amended, or any successor statute, and the rules and regulations thereunder.
"Senior Indebtedness" is defined to mean the following obligations of the
Company, whether outstanding on the date of the Indenture or thereafter
Incurred:
(1) all Indebtedness and all other monetary obligations of the Company
under the Senior Notes;
(2) all other Indebtedness of the Company other than the PIK Notes and the
Discount Notes, if any (including, without limitation, Indebtedness
Incurred under Credit Facilities), including principal and interest on
such Indebtedness, unless such Indebtedness, by its terms or by the
terms of any agreement or instrument pursuant to which such
Indebtedness is issued, is pari passu with, or subordinated in right of
payment to, the PIK Notes or Discount Notes, as applicable; and
(3) all fees, expenses and indemnities payable in connection with the
Senior Notes (including any agreement pursuant to which the Senior
Notes were issued).
The term "Senior Indebtedness" shall not, however, include:
(a) any Indebtedness of the Company that, when Incurred and without
respect to any election under Section 1111(b) of the United States
Bankruptcy Code, was without recourse to the Company,
(b) any Indebtedness of the Company to a Subsidiary of the Company or a
joint venture in which the Company has an interest,
(c) any Indebtedness of the Company, to the extent not permitted under
the Indenture,
(d) any repurchase, redemption or other obligation in respect of
Redeemable Stock,
(e) any Indebtedness to any employee of the Company or one of its
Subsidiaries,
(f) any liability under federal, state, local, foreign or other taxes
owed or owing by the Company,
(g) any accounts payable or other liability to trade creditors arising
in the ordinary course of business (including Guarantees thereof or
instruments evidencing such liabilities), or
(h) any Indebtedness, guarantee or obligation of the Company that is
expressly subordinate or junior in right of payment to any other
Indebtedness, Guarantee or obligation of the Company, including
without limitation, any Senior Subordinated Indebtedness and
Subordinated Obligations. Senior Indebtedness will also include
interest accruing subsequent to events of bankruptcy of the Company
and its Subsidiaries at the rate provided for in the document
governing such Senior Indebtedness, whether or not such interest is
an allowed claim enforceable against the debtor in a bankruptcy
case under federal bankruptcy law.
"Senior Subordinated Indebtedness" is defined to mean the PIK Notes and the
Discount Notes and any other Indebtedness of the Company that specifically
provides that such Indebtedness is to rank equally with the PIK Notes and the
Discount Notes, as applicable, in right of payment and is not subordinated by
its terms in right of payment to any Indebtedness or other obligation of the
Company which is not Senior Indebtedness.
"Share Capital" is defined to mean, at any time of determination, the stated
capital of the Equity Interests (other than Redeemable Stock) and additional
paid-in capital of the Company as set forth on the Most Recent Balance Sheet of
the Company at such time.
158
"Significant Subsidiary" is defined to mean, at any time of determination,
any Restricted Subsidiary that, together with its Subsidiaries, (1) for the
most recent fiscal year of the Company, accounted for more than 10% of the
consolidated revenues of the Company and its Restricted Subsidiaries or (2) as
of the end of such fiscal year, was the owner of more than 10% of the
consolidated assets of the Company and its Restricted Subsidiaries, all as set
forth on the most recently available consolidated financial statements of the
Company for such fiscal year.
"Specified Date" is defined to mean any redemption date, any date of purchase
for any purchase of the PIK Notes or Discount Notes, as applicable, pursuant to
the "Limitation on Asset Sales" covenant in the applicable Indenture or the
"Repurchase of Notes upon a Change of Control" provision in the applicable
Indenture, any date of conversion or exchange of PIK Notes or Discount Notes,
as applicable, or any date on which the PIK Notes or Discount Notes, as
applicable, are due and payable after an Event of Default.
"Stated Maturity" is defined to mean, (1) with respect to any debt security,
the date specified in such debt security as the fixed date on which the final
installment of principal of such debt security is due and payable and (2) with
respect to any scheduled installment of principal of or interest on any debt
security, the date specified in such debt security as the fixed date on which
such installment is due and payable.
"Subordinated Obligations" is defined to mean any Indebtedness of the Company
(whether outstanding on the Issue Date or thereafter Incurred) which is
subordinate or junior in right of payment to the PIK Notes or Discount Notes,
as applicable, pursuant to a written agreement.
"Subsidiary" is defined to mean, with respect to any Person:
(1) any corporation, association or other business entity of which more
than 50% of the outstanding Voting Stock is at the time of
determination owned, directly or indirectly, by such Person or one or
more other Subsidiaries of such Person, and
(2) any partnership, joint venture, limited liability company or similar
entity of which
(A) more than 50% of the capital accounts, distribution rights, total
equity and voting interests or general or limited partnership
interests, as applicable, are owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries
of that Person or a combination thereof whether in the form of
membership, general, special or limited partnership or otherwise,
and
(B) such Person or any Restricted Subsidiary of such Person is a
controlling general partner, co-venturer, manager or similar
position or otherwise controls such entity.
"Trade Payables" is defined to mean any accounts payable or any other
indebtedness or monetary obligation to trade creditors created, assumed or
Guaranteed by the Company or any of its Restricted Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods and
services.
"Trading Day" is defined to mean, so long as the Common Stock trades on the
Neuer Markt, a day on which such exchange is open for the transaction of
business, or, if the Common Stock ceases to trade on the Neuer Markt, a day on
which the principal national securities exchange on which the Common Stock is
listed or admitted to trading is open for the transaction of business, or, if
the Common Stock is not so listed or admitted to trading on any national
securities exchange, a day on which the Nasdaq National Market System (or any
successor thereto) or such other system then in use is open for the transaction
of business, or, if the Common Stock is not quoted by any such organization,
any day other than a Saturday, Sunday or a day on which banking institutions in
the State of New York are authorized or obligated by law or executive order to
close.
"Transaction Date" is defined to mean, with respect to the Incurrence of any
Indebtedness by the Company or any of its Restricted Subsidiaries, the date
such Indebtedness is to be Incurred and, with respect to any Restricted
Payment, the date such Restricted Payment is to be made.
159
"Unrestricted Subsidiary" is defined to mean (1) any Subsidiary of the
Company which at the time of determination is an Unrestricted Subsidiary (as
designated by the Board of Directors in the manner provided below) and (2) any
Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate
any Subsidiary of the Company (including any newly acquired or newly formed
Subsidiary of the Company) to be an Unrestricted Subsidiary unless such
Subsidiary, or any of its Subsidiaries, owns any Equity Interests or
Indebtedness of, or owns or holds any Lien on any property of, the Company or
any Restricted Subsidiary; provided that:
(a) the Company certifies in an Officers' Certificate that such designation
complies with the covenants described under "Limitation on Restricted
Payments,"
(b) such Subsidiary is not party to any agreement, contract, arrangement or
understanding with the Company or any Restricted Subsidiary of the
Company unless the terms of any such agreement, contract, arrangement
or understanding are no less favorable to the Company or such
Restricted Subsidiary than those that might reasonably be obtained in a
comparable arm's-length transaction at the time from Persons who are
not Affiliates of the Company,
(c) neither the Company nor any of its Restricted Subsidiaries has any
direct or indirect obligation (1) to subscribe for additional Equity
Interests in such Subsidiary or any Subsidiary of such Subsidiary or
(2) to maintain or preserve such Subsidiary's financial condition or to
cause such Subsidiary to achieve any specified levels of operating
results, and
(d) such Subsidiary and its Subsidiaries have not at the time of
designation, and do not thereafter, Incur any Indebtedness other than
Unrestricted Subsidiary Indebtedness.
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary of the Company; provided that immediately after giving
effect to such designation (x) the Company could Incur (Euro)1.00 of additional
Indebtedness under the first paragraph of the "Limitation on Indebtedness"
covenant described above on a pro forma basis taking into account such
designation and (y) no Default or Event of Default shall have occurred and be
continuing. Any such designation by the Board of Directors shall be evidenced
to the Trustee by promptly filing with the Trustee a copy of the resolution of
the Board of Directors giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
provisions.
"Unrestricted Subsidiary Indebtedness" is defined to mean Indebtedness of any
Unrestricted Subsidiary (1) as to which neither the Company nor any Restricted
Subsidiary is directly or indirectly liable (by virtue of the Company or any
such Restricted Subsidiary being the primary obligor on, guarantor of, or
otherwise liable in any respect to, such Indebtedness), and (2) which, upon the
occurrence of a default with respect thereto, does not result in, or permit any
holder of any Indebtedness of the Company or any Restricted Subsidiary to
declare, a default on such Indebtedness of the Company or any Restricted
Subsidiary or cause the payment thereof to be accelerated or payable prior to
its Stated Maturity.
"US GAAP" is defined to mean, at any date of determination, generally
accepted accounting principles as in effect in the United States of America
which are applicable at the date of determination and which are consistently
applied for all applicable periods.
"U.S. Government Securities" is defined to mean direct obligations of, or
obligations guaranteed by, the United States of America for the payment of
which obligations or guarantee the full faith and credit of the United States
is pledged and are not callable or redeemable at the option of the issuer
thereof.
"Voting Stock" is defined to mean with respect to any Person, Capital Stock
of any class or kind ordinarily entitled to vote for the election of directors
thereof at a meeting of Stockholders called for such purpose, without the
occurrence of any additional event or contingency.
160
"Weighted Average Life to Maturity" is defined to mean, at any date of
determination with respect to any Indebtedness, the quotient obtained by
dividing (i) (a) the sum of the products of the number of years from such date
of determination to the dates of each successive scheduled principal payment
of, or redemption or similar payment with respect to, such Indebtedness
multiplied by (b) the amount of such principal payment, by (ii) the sum of all
such principal payments.
"Wholly Owned Restricted Subsidiary" is defined to mean any Restricted
Subsidiary all of the outstanding voting Equity Interests (other than
directors' qualifying shares) of which are owned, directly or indirectly, by
the Company.
161
REGISTRATION RIGHTS
Conversion Shelf Registration Rights
We have filed the registration statement of which this prospectus is a part
to comply with requirements under registration rights agreements we entered
into with the initial purchaser of the Notes. We are further required to use
our best efforts to maintain the effectiveness of the registration statement
until the earlier of (i) such time as all Notes (including all Secondary PIK
Notes that have been or could be issued pursuant to the terms of the PIK Notes
Indenture) have been converted or redeemed and (ii) August 15, 2009.
Holders of Notes will be able to convert their Notes only if a registration
statement relating to the common stock underlying the Notes is then effective
and available, or the conversion of the Notes is exempt from the registration
requirements of the Securities Act, and such securities are qualified for sale
or exempt from qualification under the applicable securities laws of the states
or other jurisdictions in which the various holders of the Notes reside.
Suspension
During any consecutive 365-day period, we are entitled to suspend the
registration statement for up to two 30 consecutive-day periods (except for the
30 consecutive-day period prior to August 15, 2009) if our Board of Directors
determines in the exercise of its reasonable judgment that there is a valid
business purpose for such suspension and provides notice to holders of Notes
that such determination was made. In no event will we be required to disclose
the business purpose for such suspension if we determine in good faith that
such business purpose must remain confidential.
Indemnity
The registration rights agreement contains provisions providing for indemnity
and contribution with respect to the registration statement to, and from, the
persons who are issued, or the persons (other than the Company) that receive or
sell common stock underlying the Notes.
162
DESCRIPTION OF SENIOR NOTES
On July 8, 1999, the Company issued 150,000 units consisting of $150,000,000
in aggregate principal amount of the Senior Notes and Warrants to purchase an
aggregate of 4,534,661 shares of common stock. Interest on the Senior Notes is
payable semi-annually on July 1 and January 1 of each year, beginning
January 1, 2000. In connection with that offering, the Company purchased,
pledged and placed in escrow U.S. government securities in an amount sufficient
to fund the first six interest payments on the Senior Notes (through the
interest payment date on July 1, 2002). The Senior Notes are redeemable at the
Company's option, in whole or in part, at any time on or after July 1, 2004, at
110% of their principal amount, plus accrued interest, declining to 100% of
their principal amount, plus accrued interest on or after July 1, 2007. The
Senior Notes may also be redeemed at the option of the Company, in whole but
not in part, at any time at a redemption price equal to the aggregate principal
amount thereof, on the date fixed by the Company for redemption, and all
additional amounts, if any, then due and which will become due as a result of
the redemption or otherwise, in the event of changes affecting certain German
taxes or as a result of any change in the application of certain German tax
laws or regulations that require the Company to pay additional amounts that the
Company determines cannot be avoided by taking reasonable steps. The Senior
Notes rank equal in right of payment to all other senior indebtedness of the
Company and are senior in right of payment to the Notes and any future
subordinated indebtedness of the Company.
The Indenture relating to the Senior Notes contains covenants applicable to
the Company and certain of its subsidiaries, including limitations and
requirements with respect to indebtedness, restricted payments, dividends and
other payments affecting restricted subsidiaries, the issuance and sale of
capital stock of restricted subsidiaries, transactions with stockholders and
affiliates, liens, asset sales, issuances of guarantees of indebtedness by
restricted subsidiaries, sale-leaseback transactions, consolidations and
mergers and provision of financial statements and reports. The Indenture also
requires the Company to commence and consummate an offer to purchase the Senior
Notes for 101% of their principal amount upon events constituting or which may
constitute a Change of Control of the Company. In addition, under certain
circumstances, the Company is required by the Indenture to offer to purchase
the Senior Notes with the proceeds of certain sales of assets. The Indenture
also provides for events of default which, if any of them occurs, would permit
or require the principal of, premium, if any, interest and any other monetary
obligations on the Senior Notes to become or to be declared to be immediately
due and payable. Holders of Senior Notes may under certain circumstances be
entitled to receive additional payments in respect of taxes and similar charges
in respect of payments on the Senior Notes. The terms of such covenants, such
required offers to purchase, such events of default and their consequences and
such additional payments, as well as related definitions, are set forth in the
Indenture, which is filed as an exhibit to the registration statement which
includes this prospectus.
163
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company and certain
provisions of the Company's Certificate of Incorporation and By-laws is a
summary and is qualified in its entirety by the provisions of the Certificate
of Incorporation and By-laws.
The Company has authorized capital of 100,000,000 shares, consisting of
50,000,000 shares of common stock, par value $0.001 per share (the "Common
Stock"), and 50,000,000 shares of Preferred Stock, par value $0.001 per share
(the "Preferred Stock"). The Company has also issued 150,000 units as part of
the Private Unit Offering which include Warrants to purchase an aggregate of
4,534,661 shares of Common Stock of the Company.
Common Stock
As of November 10, 1999, there were 21,164,681 shares of Common Stock
outstanding. All issued shares of Common Stock are fully paid and non-
assessable.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. In the event of
the liquidation or dissolution of the Company, subject to the rights of the
holders of Preferred Stock, the holders of Common Stock are entitled to share
pro rata in any balance of corporate assets available for distribution after
payment of all creditors. Holders of Common Stock have no preemptive rights or
rights to convert their Common Stock into any other securities. There are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are, and all shares of Common Stock to be
outstanding upon completion of the Offering will be, fully paid and non-
assessable. The rights of holders of Common Stock are subject to, and may be
adversely affected by, the rights of any series of Preferred Stock which the
Company may issue in the future. The Company may pay dividends if, when, and as
declared by the Board of Directors from funds legally available therefore,
subject to the dividend provisions of any outstanding shares of Preferred Stock
and restrictions that may be set forth in the Company's debt instruments and
the Notes. For a description of provisions in our Certificate of Incorporation
and bylaws that would have the effect of delaying, deferring or preventing a
change in control of the Company, please see "Anti-Takeover Provisions"
appearing elsewhere in this prospectus.
Preferred Stock
As of November 10, 1999 there were 4,793,440 shares of Preferred Stock
outstanding, of which 923,440 shares were issued and outstanding as Series A
Preferred Stock (the "Series A Preferred Stock") and held of record by 15
stockholders, and 3,870,000 shares were issued and outstanding as Series B
Preferred Stock (the "Series B Preferred Stock") and held of record by one
stockholder. The Company has also authorized the issuance of 1,500,000 shares
of Series C Preferred Stock which are not currently outstanding.
Series A Preferred Stock
Dividends. The holders of the Series A Preferred Stock are entitled to
receive out of the surplus or net profits of the Company legally available for
the dividends, whether or not declared, dividends at a rate equal to $0.01 per
share per annum, and no more, before any dividends are paid or set apart for
payment upon any other series of preferred stock of the Company, other than
Series B Preferred Stock and Series C Preferred Stock, if any, or on the Common
Stock of the Company. The dividend on the Series A Preferred Stock will be paid
for each fiscal year within five months of the end of each fiscal year, subject
to the availability of surplus or net profits.
The dividends on the Series A Preferred Stock are not cumulative.
164
Voting Rights. The holders of the Series A Preferred Stock are not entitled
to receive notice of, or to vote on, any matter that is the subject of a vote
of the stockholders of the Company, except as otherwise required by the laws of
the State of Delaware.
Redemption and Put. The shares of Series A Preferred Stock may be redeemed by
the Company at any time after January 1, 2000, upon ten days prior written
notice to the holder thereof of the Company's intention to redeem the Series A
Preferred Stock at a redemption price of one share of Common Stock for each
share of Series A Preferred Stock, plus payment of any unpaid dividends earned
thereon through the date of redemption; provided, that all and not less than
all of the shares of Series A Preferred Stock are so redeemed and, provided
further, that, if the Company has not redeemed the Series A Preferred Stock by
December 31, 2001, a holder of Series A Preferred Stock may at any time,
commencing January 1, 2002, require the Company to purchase all of the shares
of the Series A Preferred Stock held by him for a purchase price of $3.00 per
share, plus any dividends earned but unpaid on such shares.
Conversion. A holder of Series A Preferred Stock may convert each share held
into one share of the Common Stock of the Company upon ten days written notice
to the Company; provided, that (1) no conversion was permitted to occur prior
to January 1, 1999; (2) no more than 25% of the Series A Preferred Stock held
by any holder may be converted prior to January 1, 2000; (3) no more than an
additional 25% of the Series A Preferred Stock held by the holder may be
converted prior to January 1, 2001; (4) the remainder of the Series A Preferred
Stock held by such holder may be converted commencing January 1, 2001; and (5)
any conversion may not be for less than all of the Series A Preferred Stock
held by the converting shareholder eligible for conversion at the time of the
notice.
Liquidation, Dissolution or Winding Up. Upon the liquidation, dissolution or
winding up, whether voluntary or involuntary, of the Company, the holders of
the Series A Preferred Stock will be entitled to be paid the sum of $3.00 per
share, plus an amount equal to any unpaid dividends, before any amount is paid
to the holder of any other series of Preferred Stock, other than the Series B
Preferred Stock or the Series C Preferred Stock, if any, or to the Common Stock
of the Company.
Preemptive Rights. The holders of the Series A Preferred Stock have no
preemptive right by virtue of their holding the Series A Preferred Stock to
subscribe for or purchase any shares of stock or any other securities that may
be issued by the Company.
Variation of Rights. Any amendment to the Certificate of Incorporation of the
Company (including any certificates of designation pursuant to a resolution of
the Board of Directors) to delete or vary the rights, powers, privileges,
preferences, designations, qualifications, limitations, restrictions or
conditions attaching to the Series A Preferred Stock must be approved by the
affirmative vote of the holders of a majority of the shares of Series A
Preferred Stock then outstanding, voting separately as a class.
Exclusion of Other Rights. Except as may otherwise be required by law and for
the equitable rights and remedies that may otherwise be available to the
holders of the Series A Preferred Stock, the Series A Preferred Stock do not
have any rights, powers, privileges, preferences, designations, qualifications,
limitations, restrictions or conditions other than as specifically set forth in
the Series A Preferred Stock Certificate of Designation, as the same may be
amended and/or restated from time to time.
Series B Preferred Stock
Dividends. Holders of the Series B Preferred Stock are entitled to receive
out of the surplus or net profits of the Company legally available for
dividends, whether or not declared, dividends at a rate equal to $0.01 per
share per annum, and no more, before any dividends are paid or set apart for
payment upon any other series of preferred stock of the Company, if any, or on
the Common Stock of the Company. The dividend on the Series B Preferred Stock
or Series C Preferred Stock, if any, will be paid for each fiscal year within
five months of the end of each fiscal year, subject to the availability of
surplus or net profits therefore.
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The dividends on the Series B Preferred Stock are not cumulative.
Voting Rights. The holders of the Series B Preferred Stock are entitled to
receive notice of, and to vote on, any matter that is the subject of a vote of
the stockholders of the Company.
Redemption. The shares of Series B Preferred Stock may be redeemed by the
Company at any time after January 1, 2000, upon ten (10) days prior written
notice to the holder thereof of the Company's intention to redeem the Series B
Preferred Stock at a redemption price of one share of the Common Stock of the
Company for each share of Series B Preferred Stock, plus any unpaid dividends
earned thereon through the date of redemption; provided, that all and not less
than all of the shares of Series B Preferred Stock are so redeemed.
Conversion. A holder of Series B Preferred Stock may convert each share held
into one share of the Common Stock of the Company upon ten days written notice
to the Company; provided, that (1) no conversion was permitted to occur prior
to January 1, 1999; (2) no more than 25% of the Series B Preferred Stock held
by the holder may be converted prior to January 1, 2000; (3) no more than an
additional 25% of the Series B Preferred Stock held by the holder may be
converted prior to January 1, 2001; (4) the remainder of the Series B Preferred
Stock held by the holder may be converted commencing January 1, 2001; and (5)
any conversion may not be for less than all of the Series B Preferred Stock
held by the converting shareholder eligible for conversion at the time of the
notice.
Liquidation, Dissolution or Winding Up. Upon the liquidation, dissolution or
winding up, whether voluntary or involuntary, of the Company, the holders of
the Series B Preferred Stock will be entitled to be paid the sum of $3.00 per
share, plus an amount equal to any unpaid dividends before any amount is paid
to the holder of any other series of Preferred Stock other than the Series C
Preferred Stock, if any, or to the Common Stock of the Company.
Preemptive Rights. The holders of the Series B Preferred Stock have no
preemptive right to subscribe for or purchase any shares of stock or any other
securities that may be issued by the Company by virtue of their holding the
Series B Preferred Stock.
Variation of Rights. Any amendment to the Certificate of Incorporation of the
Company (including any certificates of designation pursuant to a resolution of
the Board of Directors) to delete or vary the rights, powers, privileges,
preferences, designations, qualifications, limitations, restrictions or
conditions attaching to the Series B Preferred Stock must be approved by the
affirmative vote of the holders of a majority of the shares of Series B
Preferred Stock then outstanding, voting separately as a class.
Exclusion of Other Rights. Except as may otherwise be required by law and for
the equitable rights and remedies that may otherwise be available to the
holders of the Series B Preferred Stock, the Series B Preferred Stock do not
have any rights, powers, privileges, preferences, designations, qualifications,
limitations, restrictions or conditions other than as specifically set forth in
the Series B Preferred Stock Certificate of Designation, as the same may be
amended and/or restated from time to time.
Warrants
As part of the Private Unit Offering, the Company issued 150,000 units which
include Warrants to purchase an aggregate of 4,534,661 shares of Common Stock
of the Company (representing approximately 15% of our issued and outstanding
capital stock on a fully diluted basis as of the time of the Private Unit
Offering). The number of shares of Common Stock for which a Warrant is
exercisable and its exercise price are both subject to adjustment upon the
occurrence of certain events as described in the agreement pursuant to which
the warrants are issued.
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Exercise and Expiration. The Warrants may be exercised at an exercise price
of $22.278 per share of Common Stock upon the earliest to occur of:
. the six month anniversary of the date of issue (subject to certain
exceptions) of the Units;
. certain public equity offerings of the Company;
. certain mergers, consolidations or asset purchases concerning the
Company; and
. a dissolution, liquidation or winding up of the Company.
The Warrants expire on July 1, 2009.
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ANTI-TAKEOVER PROVISIONS
General
Certain provisions of the Delaware General Corporate Law and the Company's
Certificate of Incorporation and By-laws could have the effect of delaying,
deterring or preventing a future takeover or change in control of the Company,
unless such takeover or change in control is approved by the Company's Board of
Directors. Such provisions also may render the removal of directors and
management more difficult. Such provisions could limit the price that certain
investors might be willing to pay in the future for shares of the Company's
Common Stock. These provisions of Delaware law and the Company's Certificate of
Incorporation and By-laws also may have the effect of discouraging or
preventing certain types of transactions involving an actual or threatened
change of control of the Company (including unsolicited takeover attempts),
even though such a transaction may offer the Company's stockholders the
opportunity to sell their stock at a price above the prevailing market price.
See "Risk Factors--We are Subject to Certain Anti-Takeover Provisions which May
Delay or Prevent a Change of Control."
Certificate Of Incorporation And By-laws
Certain provisions of the Certificate of Incorporation and By-laws could have
the effect of discouraging potential acquisition proposals or delaying or
preventing a change of control of the Company. In particular, all stockholder
actions must be effected at a duly called annual or special meeting and not by
a consent in writing. Except as otherwise required by law and subject to the
rights of the holders of any preferred stock, special meetings of stockholders
for any purpose thereof approved by a majority of the total number of directors
which the Board of Directors of the Company would have if there were no
vacancies or by the Chairman of the Board of Directors, and any power of
stockholders to call a special meeting is specifically denied. No business
other than that stated in the notice may be transacted at any special meeting.
Furthermore, the Company's By-laws require advance written notice, which must
be received by the Secretary of the Company not less than 30 days nor more than
60 days prior to the meeting, by a stockholder of a proposal or director
nomination which such stockholder desires to present at a meeting of
stockholders. An affirmative vote of the holders of at least 80% of the Voting
Stock, voting together as a single class, is required to amend this provision.
The Board of Directors is divided into three classes of directors, as nearly
equal in number as is reasonably possible, serving staggered terms so that
directors' initial terms will expire at the annual meetings of the stockholders
in 1999, 2000, and 2001, respectively. At each such succeeding annual meeting
of stockholders, directors elected to succeed those directors whose terms are
expiring at such meeting shall be elected for a term of office to expire at the
third succeeding annual meeting of stockholders following such election. The
number of the directors of the Company may be fixed from time to time
exclusively pursuant to a resolution adopted by a majority of the total number
of directors which the Board of Directors of the Company would have if there
were no vacancies (but may not be less than two). An affirmative vote of the
holders of at least 80% of the Voting Stock, voting together as a single class,
is required to amend this provision.
The Company believes that a classified board of directors will help to assure
the continuity and stability of the Board of Directors and the Company's
business strategies and policies, since a majority of the directors at any
given time will have had prior experience as directors of the Company. The
Company believes that this, in turn, will permit the Board of Directors to more
effectively represent the interests of stockholders. With a classified board of
directors, at least two annual meetings of stockholders, instead of one, will
generally be required to effect a change in the majority of the Board of
Directors. As a result, provisions relating to a classified Board of Directors
may discourage proxy contests for the election of directors or purchases of a
substantial block of the Common Stock, because its provisions could operate to
prevent obtaining control of the Board of Directors in a relatively short
period of time. The classification provision and the prohibition on stockholder
action by written consent could also have the effect of discouraging a third
party from making a tender offer or otherwise attempting to obtain control of
the Company. Under the Delaware General Corporation Law, a director on a
classified board may be removed by the stockholders of the corporation only
168
for cause, and the Company's Certificate of Incorporation permits stockholders
to remove directors only for cause pursuant to a majority vote of all
stockholders entitled to vote. An affirmative vote of the holders of at least
80% of the Voting Stock, voting together as a single class, is required to
amend this provision.
The Company's Certificate of Incorporation does not include a provision for
cumulative voting in the election of directors. Under cumulative voting, a
minority stockholder holding a sufficient number of shares may be able to
ensure the election of one or more directors. The absence of cumulative voting
may have the effect of limiting the ability of minority stockholders to effect
changes in the Board of Directors and, as a result, may have the effect of
deterring a hostile takeover or delaying or preventing changes in control or
management of the Company.
The Company's Certificate of Incorporation provides that newly created
directorships resulting from any increase in the number of directors and any
vacancies on the Board of Directors will be filled by the affirmative vote of a
majority of the remaining directors then in office, although less than a quorum
and not by the stockholders unless authorized by the Board of Directors at a
special meeting of the stockholders. An affirmative vote of the holders of at
least 80% Voting Stock, voting together as a single class, is required to amend
this provision.
The Certificate of Incorporation allows the Company to issue up to 50,000,000
shares of undesignated preferred stock with rights senior to those of the
Common Stock and that otherwise could adversely affect the interests of holders
of Common Stock, of which 4,793,440 shares were issued and outstanding, as of
November 10, 1999. The issuance of additional shares of Preferred Stock could
further decrease the amount of earnings or assets available for distribution to
the holders of Common Stock or could adversely affect the rights and powers,
including voting rights, of the holders of Common Stock. In certain
circumstances, such issuance could have the effect of decreasing the market
price of the Common Stock, as well as having the anti-takeover effect discussed
above.
The Company's Certificate of Incorporation allows the By-laws of the Company
to be altered or repealed and new By-laws to be adopted either: (i) at any
annual or special meeting of stockholders, by the affirmative vote of a
majority of the Voting Stock, provided that in the case of any such stockholder
action at a special meeting of stockholders, notice of the proposed alteration,
repeal or adoption of any By-laws must be contained in the notice of such
special meeting; or (ii) by the vote of a majority of the total number of
directors which the Board of Directors of the Company would have if there were
no vacancies. An affirmative vote of at least 80% of the Voting Stock, voting
together as a single class, is required to amend this provision.
These provisions are intended to enhance the likelihood of continuity and
stability in the composition of the Board of Directors and in the policies
formulated by the Board of Directors and to discourage certain types of
transactions that may involve an actual or threatened change of control of the
Company. These provisions are designed to reduce the vulnerability of the
Company to an unsolicited acquisition proposal and to discourage certain
tactics that may be used in proxy fights. Such provisions could have the effect
of discouraging others from making tender offers for the Company's shares and
may inhibit fluctuations in the market price of the Company's shares that could
otherwise result from actual or rumored takeover attempts. Such provisions also
may have the effect of preventing changes in the management of the Company. See
"Risk Factors--The Company Has Implemented Certain Measures that Make a
Takeover More Difficult."
Delaware Takeover Statute
The Company is subject to Section 203 of the Delaware General Corporation Law
which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in a business combination with an interested stockholder for a period
of three years following the date that such stockholder became an interested
stockholder, unless: (i) prior to such date, the board of directors of the
corporation approved either the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder, (ii) upon
consummation of the transaction that resulted in the stockholder becoming an
interested stockholder, the
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interested stockholder owned at least 85% of the Voting Stock of the
corporation outstanding at the time the transaction commenced, excluding for
purposes of determining the number of shares outstanding those shares owned (x)
by persons who are directors and also officers and (y) by employee stock plans
in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer, or (iii) on or subsequent to such date, the business
combination is approved by the board of directors and authorized at an annual
or special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding Voting Stock that is
not owned by the interested stockholder.
Section 203 defines business combination to include: (1) any merger or
consolidation involving the corporation and the interested stockholder; (ii)
any sale, transfer, pledge or other disposition of 10% or more of the assets of
the corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding Voting Stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO
HOLDERS OF PIK NOTES
The registration of the PIK Notes will not be a taxable event. Holders of PIK
Notes after registration will receive the same federal income tax treatment
with respect to their investment in the PIK Notes after the registration as
they received before the registration.
The following summary describes the material United States federal income tax
consequences of the ownership of PIK Notes, or after conversion, shares of
common stock of the Company as of the date hereof. The discussion below is
based upon the provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), and regulations, rulings and judicial decisions thereunder as of the
date hereof, and such authorities may be repealed, revoked or modified so as to
result in United States federal income tax consequences different from those
discussed below. Persons considering the purchase, ownership or disposition of
PIK Notes should consult their own tax advisors concerning the United States
federal income tax consequences in light of their particular situations as well
as any consequences arising under the laws of any other taxing jurisdiction.
As used herein, a "U.S. Holder" means a holder of a PIK Note, or after
conversion, a share of common stock issued upon conversion that is (i) a
citizen or resident of the United States, (ii) a corporation or partnership
created or organized in or under the laws of the United States or any political
subdivision thereof, (iii) an estate the income of which is subject to United
States federal income taxation regardless of its source or (iv) a trust
(X) that is subject to the supervision of a court within the United States and
the control of one or more United States persons as described in section
7701(a)(30) of the Code or (Y) that has a valid election in effect under
applicable U.S. Treasury regulations to be treated as a United States person.
As used herein, a "Non-U.S. Holder" means a holder of a PIK Note, or after
conversion, a Conversion Share that is not (i) a citizen or resident of the
United States, (ii) a corporation or partnership created or organized in or
under the laws of the United States or any political subdivision thereof, (iii)
an estate the income of which is subject to United States federal income
taxation regardless of its source or (iv) a trust (X) that is subject to the
supervision of a court within the United States and the control of one or more
United States persons as described in section 7701(a)(30) of the Code or (Y)
that has a valid election in effect under applicable U.S. Treasury regulations
to be treated as a United States person.
Non-U.S. Holders of Notes
U.S. Federal Withholding Tax
The 30% U.S. federal withholding tax will not apply to any payment of
principal or OID on a PIK Note owned by a Non-U.S. Holder provided that (i) the
beneficial owner does not actually or constructively (including by reason of
owning PIK Notes) own 10% or more of the total combined voting power of all
classes of stock of the Company entitled to vote within the meaning of section
871(h)(3) of the Code and the regulations thereunder, (ii) the beneficial owner
is not a controlled foreign corporation that is related to the Company through
stock ownership, (iii) the beneficial owner is not a bank whose receipt of
interest on a PIK Note is described in section 881(c)(3)(A) of the Code and
(iv) the beneficial owner provides its name and address, and certifies, under
penalties of perjury, that it is not a United States person (which
certification may be made on an IRS W-8BEN (or successor form)) or a financial
institution holding the PIK Note on behalf of the beneficial owner certifies,
under penalties of perjury, that such statement has been received by it and
furnishes a paying agent with a copy thereof.
If a Non-U.S. Holder cannot satisfy the requirements described above,
payments of OID (but not the Secondary PIK Notes themselves) will be subject to
the 30% U.S. federal withholding tax, unless the Non-U.S. Holder provides the
Company with a properly executed (1) IRS Form W-8BEN (or successor form)
claiming an exemption from or reduction in withholding under the benefit of a
tax treaty or (2) IRS Form W-8ECI (or
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successor form) stating that interest paid on the PIK Note is not subject to
withholding tax because it is effectively connected with the Non-U.S. Holder's
conduct of a trade or business in the United States.
Any dividends paid to a Non-U.S. Holder with respect to the shares of common
stock issuable upon conversion of PIK Notes (and, after December 31, 2000, any
deemed dividends resulting from certain adjustments, or failure to make
adjustments, to the number of shares to be issued on conversion) generally will
be subject to withholding tax at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty. However, dividends that are
effectively connected with the conduct of a trade or business within the United
States and, where a tax treaty applies, are attributable to a United States
permanent establishment, are not subject to the withholding tax, but instead
are subject to United States federal income tax on a net income basis at
applicable graduated individual or corporate rates. In order to be exempt from
withholding tax under this exception a Non-U.S. Holder must provide the Company
with a properly executed IRS Form W-8ECI (or successor form) stating that
dividends paid on the shares of common stock issuable upon conversion of PIK
Notes are not subject to withholding tax because the shares are effectively
connected with the Non U.S. Holder's conduct of a trade or business in the
United States. Any such effectively connected dividends received by a foreign
corporation may, under certain circumstances, be subject to an additional
"branch profits tax" at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty.
Until December 31, 2000, dividends paid to an address outside the United
States are presumed to be paid to a resident of such country (unless the payer
has knowledge to the contrary) for purposes of the withholding tax discussed
above and, under the current interpretation of United States Treasury
regulations, for purposes of determining the applicability of a tax treaty
rate. However, in order to claim the benefit of an applicable treaty rate (and
avoid backup withholding as discussed below) for dividends paid after December
31, 2000, a Non-U.S. Holder is required to provide the Company with a properly
executed IRS Form w-8BEN (or successor form) claiming an exemption from
withholding under the benefit of a tax treaty.
U.S. Federal Estate Tax
The U.S. federal estate tax will not apply to PIK Notes owned by an
individual Non-U.S. Holder at the time of his death, provided that (i) the Non-
U.S. Holder did not own 10% or more of the total combined voting power of all
classes of the Company's voting stock (within the meaning of the Code and the
U.S. Treasury regulations) and (ii) interest on the PIK Notes would not have
been, if received at the time of the Non-U.S. Holder's death, effectively
connected with the conduct by the Non-U.S. Holder of a trade or business in the
United States. However, shares of common stock issued on conversion held by an
individual Non-U.S. Holder at the time of his death will be included in the
Non-U.S. Holder's gross estate for United States federal estate tax purposes,
unless an applicable estate tax treaty provides otherwise.
U.S. Federal Income Tax
If a Non-U.S. Holder is engaged in a trade or business in the United States
and OID on a PIK Note or dividends on a share of common stock issued on
conversion are effectively connected with the conduct of that trade or
business, the Non-U.S. Holder (although exempt from the 30% withholding tax)
will be subject to U.S. federal income tax on that interest or dividend on a
net income basis in the same manner as if the Non-U.S. Holder were a U.S.
person as defined under the Code. In addition, if the Non-U.S. Holder is a
foreign corporation, it may be subject to a branch profits tax equal to 30% (or
lower applicable treaty rate) of the Non-U.S. Holder's earnings and profits for
the taxable year, subject to adjustments, that are effectively connected with
the Non-U.S. Holder's conduct of a trade or business in the United States. For
this purpose, OID on the PIK Notes and dividends on the shares of common stock
issued on conversion will be included in earnings and profits.
Any gain or income realized on the disposition of a PIK Note or share of
common stock issued on conversion generally will not be subject to U.S. federal
income tax unless (1) that gain or income is effectively connected with the
conduct of a trade or business in the United States by the Non-U.S. Holder, (2)
the Non-
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U.S. Holder is an individual who is present in the United States for 183 days
or more in the taxable year of that disposition, and certain other conditions
are met or (3) the Company is or has been a "U.S. real property holding
corporation" for U.S. federal income tax purposes.
The Company believes it is not and does not anticipate becoming a U.S. real
property holding corporation.
Information Reporting and Backup Withholding
In general, no information reporting or backup withholding will be required
with respect to payments made by the Company or any paying agent to Non-U.S.
Holders if a statement described in(iv) under "--U.S. Federal Withholding Tax"
has been received (and the payor does not have actual knowledge that the
beneficial owner is a United States person).
In addition, a Non-U.S. Holder will not be subject to backup withholding and
information reporting with respect to the proceeds of the sale of a PIK Note or
share of common stock issued on conversion within the United States or
conducted through certain U.S.-related financial intermediaries, if the payor
receives the statement described above and does not have actual knowledge that
the Non-U.S. Holder is a U.S. person, as defined under the Code, or the Non-
U.S. Holder otherwise establishes an exemption.
U.S. Treasury regulations were recently issued that generally modify the
information reporting and backup withholding rules applicable to certain
payments made after December 31, 2000. In general, the new U.S. Treasury
regulations would not significantly alter the present rules discussed above,
except in certain special situations.
Any amounts withheld under the backup withholding rules will be allowed as a
refund or a credit against such holder's United States federal income tax
liability provided the required information is furnished to the IRS.
Certain Tax Consequences to the Company
Applicable High Yield Discount Obligations
The PIK Notes were issued with original issue discount ("OID") in an amount
equal to the difference between the stated redemption price at maturity of the
PIK Notes (i.e., the sum of all payments to be made on the PIK Notes including
payments on the Secondary PIK Notes, but excluding the Secondary PIK Notes
themselves) and the "issue price of the PIK Notes." The "issue price" of the
PIK Notes is the first price at which a substantial amount of the offering was
sold (other than to an underwriter, placement agent or wholesaler). The PIK
Notes are "applicable high yield discount obligations" ("AHYDOs"), as defined
in the Code, because (i) the yield to maturity on the PIK Notes exceeds the
"applicable federal rate" in effect at the time of their issuance (the "AFR")
plus five percentage points and (ii) the PIK Notes have "significant OID" as
that term is defined in the Code. As a result, the Company will not be allowed
to take a deduction for OID accrued on the PIK Notes for U.S. federal income
tax purposes until such time as the Company actually pays such OID. Moreover,
since the yield to maturity on the PIK Notes exceeds the AFR plus 6% (such
excess shall be referred to hereinafter as the "Disqualified Yield"), the
deduction for OID accrued on the PIK Notes will be permanently disallowed for
U.S. federal income tax purposes to the extent such interest or OID is
attributable to the Disqualified Yield on the PIK Notes.
Deductibility of Interest Payments by the Company under Section 163(l) of the
Code
Under Section 163(l) of the Code, no deduction is permitted for interest paid
or accrued on any indebtedness of a corporation that is "payable in equity" of
the issuer. Debt is treated as payable in equity of the issuer if a substantial
amount of the principal or interest is required to be paid in, or converted
into, equity of the issuer or if the debt is part of an arrangement which is
reasonably expected to result in a substantial amount of the principal or
interest being paid in, or converted into, equity of the issuer. The
legislative history to section 163(l) indicates that it is not expected the
provision will affect debt convertible at the holder's option
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if the conversion price is significantly higher than the market price of the
stock on the date of the debt issuance. However, the legislative history does
not address debt instruments, such as the PIK Notes, that mandatorily convert
if the market price of the stock reaches certain thresholds. Thus, it is
unclear whether 163(l) will disallow the Company's interest deduction with
respect to the PIK Notes.
U.S. Holders of PIK Notes
United States Holders of PIK Notes will be subject to federal income tax on
the OID deemed to be received by the U.S. Holder with respect to the PIK Note.
The calculation of OID is set forth in "Certain United States Federal Income
Tax Consequences to Holders of Discount Notes--Original Issue Discount". Except
as provided below under "Conversion of PIK Notes into Common Stock," United
States Holders of PIK Notes will generally recognize gain or loss upon the
sale, exchange, retirement or other disposition of PIK Notes equal to the
difference between the amount realized upon the sale, exchange or other
disposition and the U.S. Holder's adjusted basis in the PIK Notes. A U.S.
Holder's adjusted basis in a PIK Note will, in general, be the U.S. Holder's
cost therefor, increased by OID and reduced by any cash payments on the PIK
Notes. Capital gains of individuals derived in respect of capital assets held
for more than one year are eligible for reduced rates of federal income
taxation. The deductibility of capital losses is subject to limitations.
Conversion of PIK Notes into Common Stock
A U.S Holder of a PIK Note will not recognize gain or loss on the conversion
of the PIK Note into shares of common stock (except to the extent of cash
received in lieu of a fractional share). The amount of gain or loss on the
deemed sale of a fractional share will be equal to the difference between the
amount of cash received by such U.S. Holder in respect of such fractional share
and the portion of the U.S. Holder's adjusted basis in the PIK Note that is
allocable to the fractional share. The adjusted basis of any shares received
upon conversion of PIK Notes will equal the adjusted basis of the PIK Notes
converted, reduced by the portion of the adjusted basis allocable to any
fractional share, and a U.S. Holder's holding period for a share will include
the period during which the U.S. Holder held the PIK Note.
U.S. Holders should contact their tax advisors concerning the federal income
tax consequences of owning common stock.
Information Reporting and Backup Withholding
In general, information reporting requirements will apply to certain payments
of principal and OID paid on the PIK Notes and dividends paid on the shares of
common stock issued on conversion of PIK Notes and to the proceeds of sale of a
PIK Note or such share made to U.S. Holders other than certain exempt
recipients (such as corporations). A 31 percent backup withholding tax will
apply to such payments if the U.S. Holder fails to provide a taxpayer
identification number or certification of foreign or other exempt status or
fails to report in full dividend and interest income.
U.S. Treasury regulations were recently issued that generally modify the
information reporting and backup withholding rules applicable to certain
payments made after December 31, 2000. In general, the new U.S. Treasury
regulations would not significantly alter the present rules discussed above,
except in certain special situations.
Any amounts withheld under the backup withholding rules will be allowed as a
refund or a credit against such holder's United States federal income tax
liability provided the required information is furnished to the IRS.
174
CERTAIN UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES TO HOLDERS OF DISCOUNT NOTES
The registration of the Discount Notes will not be a taxable event. Holders
of Discount Notes will receive the same federal income tax treatment with
respect to their investment in the Discount Notes after the registration as
they received before the registration.
The following summary describes the material United States federal income tax
consequences of the ownership of Discount Notes, or after conversion, shares of
common stock to U.S. Holders, as defined below, as of the date hereof. Except
where noted, it deals only with Discount Notes, or after conversion, shares of
common stock held as capital assets and does not deal with special situations,
such as those of dealers in securities or currencies, financial institutions,
tax-exempt entities, life insurance companies, persons holding Notes, or after
conversion, shares of common stock as a part of a hedging, integrated,
conversion or constructive sale transaction or a straddle, holders of Discount
Notes whose "functional currency" is not the U.S. dollar or traders who elect
to mark-to-market their securities. Furthermore, the discussion below is based
upon the provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), and regulations, rulings and judicial decisions thereunder as of the
date hereof, and such authorities may be repealed, revoked or modified so as to
result in United States federal income tax consequences different from those
discussed below. Persons considering the purchase, ownership or disposition of
Notes should consult their own tax advisors concerning the United States
federal income tax consequences in light of their particular situations as well
as any consequences arising under the laws of any other taxing jurisdiction.
As used herein, a "U.S. Holder" means a holder of a Discount Note, or after
conversion, a share of common stock issued upon conversion that is (i) a
citizen or resident of the United States, (ii) a corporation or partnership
created or organized in or under the laws of the United States or any political
subdivision thereof, (iii) an estate the income of which is subject to United
States federal income taxation regardless of its source or (iv) a trust (X)
that is subject to the supervision of a court within the United States and the
control of one or more United States persons as described in section
7701(a)(30) of the Code or (Y) that has a valid election in effect under
applicable U.S. Treasury regulations to be treated as a United States person.
Original Issue Discount
The Discount Notes will be issued with original issue discount ("OID") in an
amount equal to the difference between their stated redemption price at
maturity (the sum of all payments to be made on the Discount Notes) and their
"issue price." The "issue price" of the Discount Notes will be the first price
at which a substantial amount of the offering is sold (other than to an
underwriter, placement agent or wholesaler). U.S. Holders should be aware that
they generally must include OID in gross income in advance of the receipt of
cash attributable to that income. However, U.S. Holders of such Discount Notes
generally will not be required to include separately in income cash payments
received on the Discount Notes, even if denominated as interest.
The amount of OID includible in income by the initial U.S. Holder of a
Discount Note is the sum of the "daily portions" of OID with respect to the
Discount Note for each day during the taxable year or portion of the taxable
year in which such U.S. Holder held such Discount Note ("accrued OID"). The
daily portion is determined by allocating to each day in any "accrual period" a
pro rata portion of the OID allocable to that accrual period. The "accrual
period" for a Discount Note may be of any length and may vary in length over
the term of the Discount Note, provided that each accrual period is no longer
than one year and each scheduled payment of principal or interest occurs on the
first day or the final day of an accrual period. The amount of OID allocable to
any accrual period is an amount equal to the product of the Discount Note's
adjusted issue price at the beginning of such accrual period and its yield to
maturity (determined on the basis of compounding at the close of each accrual
period and properly adjusted for the length of the accrual period). OID
allocable to a final accrual period is the difference between the amount
payable at maturity and the adjusted issue price at the beginning of the final
accrual period. The "adjusted issue price" of a Discount Note at the beginning
of
175
any accrual period is equal to its issue price increased by the accrued OID for
each prior accrual period and reduced by any payments made on such Discount
Note on or before the first day of the accrual period. Under these rules, a
U.S. Holder will have to include in income increasingly greater amounts of OID
in successive accrual periods. The Company is required to provide information
returns stating the amount of OID accrued on Discount Notes held of record by
persons other than corporations and other exempt holders.
Applicable High Yield Discount Obligations
The Discount Notes will be "applicable high yield discount obligations"
("AHYDOs"), as defined in the Code, because (i) the yield to maturity on the
Discount Notes exceeds the "applicable federal rate" in effect at the time of
their issuance (the "AFR") plus five percentage points and (ii) the Discount
Notes have "significant OID" as that term is defined in the Code. As a result,
the Company will not be allowed to take a deduction for OID accrued on the
Notes for U.S. federal income tax purposes until such time as the Company
actually pays such OID. Moreover, since the yield to maturity on the Discount
Notes exceeds the AFR plus 6% (such excess shall be referred to hereinafter as
the "Disqualified Yield"), the deduction for OID accrued on the Discount Notes
will be permanently disallowed for U.S. federal income tax purposes to the
extent such interest or OID is attributable to the Disqualified Yield on the
Notes ("Dividend-Equivalent Interest"). For purposes of the dividends received
deduction, such Dividend-Equivalent Interest will be treated as a dividend to
the extent it is deemed to have been paid out of the Company's current or
accumulated earnings and profits. Accordingly, a U.S. Holder of the Discount
Notes that is a corporation may, subject to applicable limitations be entitled
to take a dividends received deduction with respect to any Dividend-Equivalent
Interest received by such corporate holder on such Discount Note.
Deductibility of Interest Payments by the Company under Section 163(1) of the
Code
Under Section 163(1) of the Code, no deduction is permitted for interest paid
or accrued on any indebtedness of a corporation that is "payable in equity" of
the issuer. Debt is treated as payable in equity of the issuer if a substantial
amount of the principal or interest is required to be paid in, or converted
into, equity of the issuer or if the debt is part of an arrangement which is
reasonably expected to result in a substantial amount of the principal or
interest being paid in, or converted into, equity of the issuer. The
legislative history to section 163(1) indicates that it is not expected the
provision will affect debt convertible at the holder's option if the conversion
price is significantly higher than the market price of the stock on the date of
the debt issuance. However, the legislative history does not address debt
instruments, such as the Discount Notes, that mandatorily convert if the market
price of the stock reaches certain theresholds. Thus, it is unclear whether
163(1) will disallow the Company's interest deduction with respect to the
Discount Notes.
Constructive Dividend
The conversion price of the Discount Notes is subject to adjustment in
certain circumstances. Under Section 305(c) of the Code, adjustments (or
failures to make adjustments) that have the effect of increasing the
proportionate interest of U.S. Holders of the Discount Notes in the assets or
earnings of the Company may in some circumstances give rise to a deemed
distribution to U.S. Holders of the Notes. Such deemed distributions will be
taxable as a dividend, return or capital, or capital gain in accordance with
the earnings and profits rules discussed under "--Dividends on Shares of Common
Stock."
Sale, Exchange and Retirement of Notes
Except as provided below under "--Conversion of Notes into Common Stock," a
U.S. Holder of a Discount Note will generally recognize gain or loss upon the
sale, exchange, retirement or other disposition of the Discount Note equal to
the difference between the amount realized upon the sale, exchange, retirement
or other disposition and the U.S. Holder's adjusted tax basis in the Discount
Note. A U.S. Holder's tax basis in a Discount Note will, in general, be the
U.S. Holder's cost therefor, increased by OID and reduced by any cash payments
on the Discount Note. Such gain or loss will be capital gain or loss. Capital
gains of individuals
176
derived in respect of capital assets held for more than one year are eligible
for reduced rates of taxation. The deductibility of capital losses is subject
to limitations.
Conversion of Notes into Conversion Shares
A U.S. Holder of a Discount Note will not recognize gain or loss on the
conversion of the Discount Note into shares of common stock (except to the
extent of cash received in lieu of a fractional share). The amount of gain or
loss on the deemed sale of such fractional share will be equal to the
difference between the amount of cash received by such U.S. Holder in respect
of such fractional share, and the portion of the U.S. Holder's adjusted tax
basis in its Discount Note that is allocable to such fractional share. The
adjusted tax basis of any shares of common stock received upon a conversion of
Discount Notes will equal the adjusted tax basis of the Discount Notes so
converted, reduced by the portion of such adjusted tax basis that is allocable
to any fractional share, and a U.S. Holder's holding period for such shares of
common stock will include the period during which such U.S. Holder held such
Discount Notes.
U.S. Holders should contact their tax advisers concerning the ownership of
shares of common stock.
Information Reporting and Backup Withholding
In general, information reporting requirements will apply to certain payments
of principal and OID paid on the Discount Notes and dividends paid on the
shares of common stock issued on conversion and to the proceeds of sale of a
Discount Note or share of common stock issued on conversion made to U.S.
Holders other than certain exempt recipients (such as corporations). A 31
percent backup withholding tax will apply to such payments if the U.S. Holder
fails to provide a taxpayer identification number or certification of foreign
or other exempt status or fails to report in full dividend and interest income.
U.S. Treasury regulations were recently issued that generally modify the
information reporting and backup withholding rules applicable to certain
payments made after December 31, 2000. In general, the new U.S. Treasury
regulations would not significantly alter the present rules discussed above,
except in certain special situations.
Any amounts withheld under the backup withholding rules will be allowed as a
refund or a credit against such holder's United States federal income tax
liability provided the required information is furnished to the IRS.
177
SELLING SECURITYHOLDERS
The Notes were originally issued by the Company and sold by the initial
purchaser in transactions exempt from registration requirements of the
Securities Act, to persons reasonably believed by the initial purchaser to be
qualified institutional buyers under Rule 144A of the Securities Act and
outside the United States to persons other than U.S. persons in reliance upon
Regulation S under the Securities Act.
The selling securityholders may from time to time offer and sell pursuant to
this prospectus any or all of the Notes and the shares of common stock
underlying the Notes. The term "selling securityholders" includes the holders
listed below and the beneficial owners of the offered securities and their
transferees, pledgees, donees or other successors.
The following table sets forth information with respect to the selling
securityholders and with respect to the offered securities beneficially owned
by each selling securityholder that may be offered pursuant to this prospectus.
Selling Description of
Securityholder Offered Securities
- -------------- ------------------
[INSERT CHART]
Except as shown above, none of the selling securityholders has, or within the
past three years has had, any position, office or other material relationship
with the Company or any of its predecessors or affiliates. Because the selling
securityholders may, pursuant to this prospectus, offer all or some portion of
the offered securities, no estimate can be given as to the amount of the
offered securities that will be held by the selling securityholders upon
termination of any such sales. In addition, the selling securityholders
identified above may have sold, transferred or otherwise disposed of all or a
portion of their offered securities since the date on which they provided the
information regarding their offered securities, in transactions exempt from the
registration requirements of the Securities Act, including transactions
pursuant to Rules 144 and 144A and Regulation S under the Securities Act.
PLAN OF DISTRIBUTION
The Notes and the shares of common stock may be sold from time to time by the
selling securityholders after the date of this prospectus. We have agreed,
among other things, to bear all expenses (other than underwriting discounts and
selling commissions) in connection with the registration and sale of the Notes
and shares of common stock covered by this prospectus.
We will not receive any of the proceeds from the sale of the Notes or the
shares by the selling securityholders. The Notes and shares may be sold from
time to time:
. directly by any selling securityholder to one or more purchasers,
. to or through underwriters, brokers or dealers,
. through agents on a best-efforts basis or otherwise, or
. through a combination of such methods of sale.
If Notes or shares are sold through underwriters, brokers or dealers, the
selling securityholder will be responsible for underwriting discounts or
commissions or agents' commissions.
178
The Notes or shares may be sold:
. in one or more transactions at a fixed price or prices, which may be
changed,
. at prevailing market prices at the time of sale or at prices related to
such prevailing prices,
. at varying prices determined at the time of sale, or
. at negotiated prices.
Such sales may be effected in transactions (which may involve crosses or
block transactions):
. on any national securities exchange or quotation service on which the
Notes or shares may be listed or quoted at the time of sale,
. in the over-the-counter market,
. in transactions otherwise than on such exchanges or services or in the
over-the-counter market, or
. through the writing of options.
At the time a particular offer of Notes or shares is made, a prospectus
supplement, if required will be distributed which will set forth the aggregate
amount and type of securities being offered and the terms of the offering,
including the name or names of any underwriters broker/dealers or agents, any
discounts, commissions and other terms constituting compensation from the
selling securityholders and any discounts, commissions or concessions allowed
or reallowed or paid to broker/dealers.
To comply with the securities laws of certain jurisdictions, if applicable,
the offered securities will be offered or sold in such jurisdictions only
through registered or licensed brokers or dealers. In addition, in certain
jurisdictions the offered securities may not be offered or sold unless they
have been registered or qualified for sale in such jurisdictions or any
exemption from registration or qualification is available and is complied with.
The selling securityholders will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, which may limit the
timing of the purchases and sales of any of the offered securities by the
selling securityholders. The foregoing may affect the marketability of the
securities.
The selling securityholders and any brokers, dealers, agents or underwriters
that participate with the selling securityholders in the distribution of the
Notes or the shares may be deemed to be "underwriters" within the meaning of
the Securities Act, in which event any commissions received by such brokers,
dealers, agents or underwriters and any profits realized by the selling
securityholders on the resales of the Notes or the shares may be deemed to be
underwriting commissions or discounts under the Securities Act.
In addition, any securities covered by this prospectus which qualify for sale
pursuant to Rule 144, Rule 144A, Regulation S or any other available exemption
from registration under the Securities Act may be sold under Rule 144,
Rule 144A, Regulation S or such other available exemption rather than pursuant
to this prospectus. There is no assurance that any selling securityholder will
sell any or all of the Notes or shares, and any selling securityholder may
transfer, devise or gift such securities by other means not described herein.
We have agreed to indemnify and hold the initial purchaser of the Notes
harmless against certain liabilities under the Securities Act. The registration
rights agreements for the Notes provide for Cybernet and the selling
securityholders to indemnify each other against certain liabilities arising
under the Securities Act.
179
LEGAL MATTERS
Certain legal matters with respect to the Notes and the common stock will be
passed upon for Cybernet by Powell, Goldstein, Frazer & Murphy LLP, Washington,
D.C. Certain matters of German law with respect to the Notes and the common
stock will be passed upon for Cybernet by Besner Kreifels Weber, Munich,
Germany.
INDEPENDENT ACCOUNTANTS
Our consolidated financial statements at December 31, 1998, 1997 and 1996,
and for each of the years then ended and the financial statements of Open:Net
at December 31, 1997 and for the year then ended appearing elsewhere in this
prospectus have been audited by Schitag Ernst & Young, AG, independent
accountants.
The financial statements of Vianet at December 31, 1997 and 1998, and for
each of the three years in the period ended December 31, 1998 appearing in this
prospectus have been audited by Ernst & Young, Wirtschaftsprufungs-Und,
Steuerberatungsgesellschaft MBH, independent accountants.
The financial statements of Flashnet at December 31, 1998 and for the year
then ended appearing in this prospectus have been audited by Grant Thornton
S.p.A., independent accountants.
AVAILABLE INFORMATION
We have filed with the Commission a Registration Statement on Form S-1 under
the Securities Act of 1933 with respect to the Notes and the shares of common
stock issuable upon conversion of the Notes. This prospectus, which forms a
part of the Registration Statement, does not contain all the information set
forth in the Registration Statement, certain parts of which have been omitted
in accordance with the rules and regulations of the Commission. For further
information with respect to our Company, the Notes, and the common stock
reference is made to the Registration Statement. Statements contained in this
prospectus as to the contents of certain documents are not necessarily
complete, and, in each instance, reference is made to the copy of the document
filed as an exhibit to the Registration Statement, and each such statement is
qualified in its entirety by such reference.
Cybernet is subject to the informational requirements of the Exchange Act. In
accordance with those requirements, Cybernet is required to file reports, proxy
statements and other information with the Commission. Reports, proxy statements
and other information filed with the Commission may be inspected without charge
and copied at prescribed rates at the public reference facilities maintained by
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Regional Offices of the Commission located at Suite 1400, Citicorp Center, 500
West Madison Street, Chicago, Illinois 60661-2551 and Room 1300, 7 World Trade
Center, New York, New York 10048. Information on the operation of the Public
Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. In
addition, such reports, proxy statements and other information can be inspected
on the Commission's website at http://www.sec.gov. In addition, Cybernet
intends to furnish its stockholders with annual reports containing financial
statements audited by its independent certified public accountants.
If and so long as the Notes or the shares are listed on or admitted for
trading on an internationally recognized stock exchange and the rules of such
exchange shall so require, copies of the information described above will also
be available in such places and for such times as the rules of such stock
exchange may require.
180
LISTING AND GENERAL INFORMATION
1. Listing: Application will be made to list the Notes on the Luxembourg Stock
Exchange. The legal notice relating to the issue of the Notes and the
Certificate of Incorporation of the Company will be registered prior to the
listing with the Registrar of the District Court in Luxembourg (Greffier en
Chef du Tribunal d'Arrondissement de et a Luxembourg), where such documents
are available for inspection and where copies thereof can be obtained upon
request. As long as the Notes are listed on the Luxembourg Stock Exchange,
an agent for making payments on, transfers and conversions of the Notes will
be maintained in Luxembourg.
2. Authorizations: The Company has obtained all necessary consents, approvals
and authorizations in connection with the issue of the Notes. The issue of
the Notes was authorized by resolutions of the Board of Directors of the
Company passed on August 10, 1999 and August 19, 1999.
3. Material Change: Except as disclosed in this prospectus, there has been no
significant change in the financial or trading position of the Company and
its subsidiaries since September 30, 1999 and no material adverse change in
the financial position or prospects of the Company and its subsidiaries
since September 30, 1999.
4. Litigation: Neither the Company nor any of its subsidiaries is involved in
any litigation or arbitration proceedings which may have, or have had during
the 12 months preceding November 19, 1999, a material adverse effect on the
financial position of the Company and its subsidiaries, nor, so far as any
of them is aware, is any such proceeding pending or threatened.
5. Auditors: The Company's consolidated balance sheets as of December 31, 1998,
1997 and 1996 and the related consolidated statements of loss and
comprehensive loss, cash flows and changes in stockholder's equity for each
of the three years then ended have been audited by Schitag Ernst & Young in
accordance with United States generally accepted auditing standards. Schitag
Ernst & Young have given and not withdrawn their written consent to the
issuer of this prospectus to the inclusion in it of their reports in the
form and context in which they are included.
6. Documents Available: Copies (and certified English translations where the
documents are not in English) of the following documents may be inspected at
the specified office of Kredietbank S.A. in Luxembourg for so long as the
Notes are listed on the Luxembourg Stock Exchange:
. Certificate of Incorporation of the Company;
. a copy of the reports of the independent accountants and the audited
consolidated financial statements of the Company and its
subsidiaries for the three years ended December 31, 1998;
. the purchase agreement relating to the Notes;
. the Discount Notes Indenture and the PIK Notes Indenture (which
includes the form of the Global Note and Definitive Notes); and
. such other documents as the rules and regulations of such stock
exchange may require.
In addition, copies of the most recent consolidated financial statements of
the Company for the preceding financial year, and any quarterly interim
financial statements published by the Company, will be available at the
specification of the Kredietbank S.A. in Luxembourg for as long as the
Notes are listed on the Luxembourg Stock Exchange. The Company does not
prepare non-consolidated financial statements for public release.
181
7. Clearing Systems: The Notes will be cleared, either directly or indirectly,
through The Depository Trust Company, Euroclear and/or Cedel Bank. Relevant
trading information is set forth below:
Common Stock
CUSIP Number................................................. 232503 10 2
ISIN......................................................... US 232503 10 2 7
PIK Notes:
Common Code.................................................. 010117208
ISIN......................................................... XS010117208 7
Discount Notes
CUSIP Number................................................. 232503 AG 7
ISIN......................................................... US232503 AG 7 8
8. Accounts: The Company prepares annual consolidated balances sheets,
consolidated statements of loss and comprehensive loss, consolidated
statements of cash flows and consolidated statements of stockholders' equity
and quarterly consolidated balance sheets, consolidated statements of loss
and comprehensive loss and consolidated statements of cash flows.
9. Notes: Application will be made to list the Notes on the Luxembourg Stock
Exchange. The Notes will be accepted for clearance through the accounts of
the Euroclear Operator and Cedelbank and they will have a new common code
and a new common ISIN number, which will be transmitted to the Luxembourg
Stock Exchange. All documents prepared in connection with this prospectus
will be available at the office of the special agent in Luxembourg and all
necessary actions and services in respect of the prospectus may be done at
the office of the special agent in Luxembourg. The special agent appointed
for these purposes is Kredietbank S.A. Luxembourgeoise, 43, Boulevard Royal,
L-2955 Luxembourg.
182
GLOSSARY OF TERMS
Set forth below are definitions of some of the terms used in this prospectus.
Backbone..................... A centralized high-speed network that
interconnects smaller, independent networks.
Bandwidth.................... A measure of the amount of information which
can move through a communications medium in a
given amount of time; the capacity of a
telecommunications circuit/network to carry
voice, data and video information. Typically
measured in kb/s and Mb/s.
Caching...................... Temporary storage or replication of Web server
content at one or more locations throughout the
Internet to provide a quicker response to a
local browser request.
CGI.......................... Custom Gateway Interface.
Co-Location.................. Housing of a server owned and maintained by
another.
DS-3 or T-3.................. A data communications circuit capable of
transmitting data at 45 Mb/s. Equivalent to 28
T-1's of data capacity. Currently used only by
business/institutions and carriers for high-end
applications.
E-1.......................... The European counterpart to T1 which transmits
at 2.0448 Mb/s.
Electronic mail or e-mail.... An application that allows a user to send or
receive text messages to or from any other user
with an Internet address, commonly termed an e-
mail address.
Ethernet..................... A common method of networking computers in a
LAN. Ethernet will handle about 10 Mb/s and can
be used with almost any kind of computer.
Extranet..................... A company Website that is made available to
external customers or organizations for
electronic commerce.
FDDI......................... Fiber Distributed Data Interface. A standard
for transmitting data on fiber-optic cables at
a rate of 100 Mb/s.
Firewall..................... A gateway between two networks that buffers and
screens all information and prevents
unauthorized traffic from passing between such
networks.
Frame relay.................. A communications standard that is optimized for
efficient switching of variable-length data
packets.
Host......................... A computer with direct access to the Internet.
Internet..................... A global collection of interconnected computer
networks which use a specific communications
protocol.
Intranet..................... A TCP/IP based network and Website which is
securely isolated from the Internet and serves
the internal needs of a company or institution.
183
IP or Internet Protocol......
Network protocols that allow computers with
different architectures and operating systems
software to communicate with other computers on
the Internet.
ISDN or Integrated Services
Digital Network.............. An information transfer standard for
transmitting digital voice and data over
telephone lines at speeds up to 128 Kb/s
ISPs or Internet Service Companies formed to provide access to the
Providers.................... Internet to consumer and business customers via
local networks.
Kbps or Kilobits per A transmission rate. One kilobit equals 1,024
second....................... bits of information.
LAN or Local Area Network.... A data communications network designed to
interconnect personal computers, workstations,
minicomputers, file servers and other
communications and computing devices within a
localized environment.
Leased Lines................. Telecommunications lines dedicated to a
particular customer along predetermined routes.
Mbps or Megabits per A transmission rate. One megabit equals 1,024
second....................... kilobits.
MMDS......................... Microwave Multipoint Distribution Service.
Modem........................ A device for transmitting digital information
over an analog telephone line.
Network...................... A collection of distributed computers which
share data and information through inter-
connected lines of communication.
NOC or Network Operations
Center....................... Facility where we monitor and manage our
network.
Peering...................... The commercial practice under which nationwide
ISPs exchange each other's traffic, in most
cases without the payment of settlement
charges.
POPs or Points-of-Presence... An interlinked group of modems, routers and
other computer equipment, located in a
particular city or metropolitan area, that
allows a nearby subscriber to access the
Internet through a local telephone call or by
using a short-distance permanent data circuit.
Protocol..................... A formal description of message formats and the
rules two or more machines must follow in order
to communicate.
Router....................... A device that receives and transmits data
packets between segments in a network or
different networks.
Server....................... Software that allows a computer to offer a
service to another computer. Other computers
contact the server program by means of matching
client software. The term also refers to the
computer on which server software runs.
STM-1........................
A data communication circuit capable of
transmitting data at 155 Mb/s.
184
VPN or Virtual Private
Network...................... A network capable of providing the tailored
services of a private network (i.e., low
latency, high throughput, security and
customization) while maintaining the benefits
of a public network (i.e., ubiquity and
economies of scale).
WAN or Wide Area Network..... A data communications network designed to
interconnect personal computers, workstations,
mini computers, file servers and other
communications and computing devices across a
broad geographic region.
Web or World Wide Web........ A network of computer servers that uses a
special communications protocol to link
different servers throughout the Internet and
permits communication of graphics, video and
sound.
Web-hosting/housing..........
A service in which websites are housed on third
party computers and maintained online using the
Internet.
Websites or Webpages......... A site located on the Web, written in the HTML
or SGML language.
185
INDEX TO FINANCIAL STATEMENTS
Page
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CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
Independent Auditors' Report............................................ F-2
Consolidated Balance Sheets December 31, 1998, 1997 and 1996............ F-3
Consolidated Statements of Loss and Comprehensive Loss years ended
December 31, 1998, 1997 and 1996....................................... F-4
Consolidated Statements of Cash Flows years ended December 31, 1998,
1997 and 1996.......................................................... F-5
Consolidated Statements of Shareholders' Equity years ended December 31,
1996, 1997 and 1998.................................................... F-6
Notes to the Consolidated Financial Statements.......................... F-7
Consolidated Balance Sheets December 31, 1998 and September 30, 1999
(unaudited)............................................................ F-21
Consolidated Statements of Loss and Comprehensive Loss nine months ended
September 30, 1998 and 1999 (unaudited)................................ F-22
Consolidated Statements of Cash Flows nine months ended September 30,
1998 and 1999 (unaudited).............................................. F-23
Notes to the Consolidated Unaudited Interim Financial Statements
(unaudited)............................................................ F-24
VIANET TELEKOMMUNIKATIONS AG
Independent Auditors' Report............................................ F-28
Balance Sheets December 31, 1998, 1997 and 1996......................... F-29
Statements of Operations and Retained Earnings years ended December 31,
1998, 1997 and 1996.................................................... F-30
Statements of Cash Flows years ended December 31, 1998, 1997 and 1996... F-31
Notes to the Financial Statements....................................... F-32
OPEN:NET NETZWERKDIENSTE GMBH
Independent Auditors' Report............................................ F-37
Balance Sheet as of December 31, 1997................................... F-38
Profit and Loss Statements year ended December 31, 1997 and eight months
ended August 31, 1998 (unaudited)...................................... F-39
Notes to the Financial Statements....................................... F-40
FLASHNET S.P.A.
Independent Auditors' Report............................................ F-43
Balance Sheet December 31, 1998......................................... F-44
Statement of Loss for the year ended December 31, 1998.................. F-45
Statement of Stockholders' Deficit year ended December 31, 1998......... F-46
Statement of Cash Flows year ended December 31, 1998.................... F-47
Notes to the Financial Statements....................................... F-48
Balance Sheets March 31, 1999 and 1998 (unaudited)...................... F-55
Statements of Loss three months ended March 31, 1999 and 1998
(unaudited)............................................................ F-56
Statements of Stockholders' Deficit three months ended March 31, 1999
and 1998 (unaudited)................................................... F-57
Statements of Cash Flows three months ended March 31, 1999 and 1998
(unaudited)............................................................ F-58
Notes to the Financial Statements (unaudited)........................... F-59
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Cybernet Internet Services International, Inc.:
We have audited the accompanying consolidated balance sheets of Cybernet
Internet Services International, Inc. and its subsidiaries ("the Company") as
of December 31, 1998, 1997 and 1996, and the related consolidated statements of
loss and comprehensive loss, cash flows and changes in shareholders' equity for
each of the three years then ended. 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 audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company as of
December 31, 1998, 1997 and 1996, and the consolidated results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
Schitag Ernst & Young
Deutsche Allgemeine Treuhand AG
Munich, Germany
March 12, 1999
F-2
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------------
1996 1997 1998
---------- ----------- -----------
ASSETS
Cash and cash equivalents................ $ 27,889 $ 2,238,909 $42,875,877
Short-term investments (Note 4).......... 453,698 817,913 112,503
Accounts receivable -- trade, net of
allowance for doubtful accounts of
$15,164, $33,417 and $361,393 at
December 31, 1996, 1997 and 1998,
respectively............................ 183,513 1,130,981 3,248,754
Other receivables........................ 84,675 285,432 1,793,153
Prepaid expenses and other assets........ 10,607 59,906 423,114
---------- ----------- -----------
Total current assets................. 760,382 4,533,141 48,453,401
Property and equipment, net (Note 5)..... 630,760 2,284,793 7,970,300
Product development costs, net........... 426,996 2,818,069 5,742,793
Goodwill, net............................ -- 1,322,566 6,504,576
Deferred income taxes (Note 12).......... 392,977 1,652,809 8,166,171
Other assets............................. -- 5,679 2,607,488
---------- ----------- -----------
Total Assets......................... $2,211,115 $12,617,057 $79,444,729
========== =========== ===========
LIABILITIES AND SHAREHOLDERS EQUITY
LIABILITIES
Overdrafts and short-term borrowings
(Note 8).............................. $ 71,881 $ 413,625 $ 287,097
Trade accounts payable................. 226,379 1,373,901 3,346,372
Other accrued liabilities.............. 40,953 480,228 1,072,877
Deferred purchase obligations (Note
3).................................... -- 980,693 4,482,967
Current portion long term debt and
capital lease obligations............. -- -- 924,670
Accrued personnel costs................ 81,816 393,667 588,767
---------- ----------- -----------
Total current liabilities............ 421,029 3,642,114 10,702,750
Long-term debt (Note 9)................ -- 41,691 66,829
Capital lease obligations.............. -- -- 1,315,737
Minority interest...................... -- 24,937 --
SHAREHOLDERS EQUITY
Common stock $.001 par value,
50,000,000 shares authorized,
5,160,000, 14,681,891 and 18,762,138
shares issued and outstanding at
December 31, 1996, 1997 and 1998,
respectively ......................... 5,160 14,682 18,762
Preferred stock $.001 par value,
50,000,000 shares authorized,
6,360,000 7,760,000 and 6,360,000
issued and outstanding at December 31,
1996, 1997 and 1998, respectively .... 6,360 7,760 6,360
Subscription receivable................ -- (735,000) (19,210)
Additional paid in capital............. 2,065,899 11,102,257 72,794,936
Accumulated deficit.................... (287,196) (1,271,036) (6,435,676)
Other comprehensive income (loss)...... (137) (210,348) 994,241
---------- ----------- -----------
Total shareholders equity.............. 1,790,086 8,908,315 67,359,413
---------- ----------- -----------
Total Liabilities and Shareholders
Equity.............................. $2,211,115 $12,617,057 $79,444,729
========== =========== ===========
See accompanying notes to consolidated financial statements
F-3
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
Years ended December 31,
-------------------------------------
1996 1997 1998
---------- ----------- ------------
Revenue
Internet Projects.................... $ 217,296 $ 1,597,869 $ 5,139,110
Network Services..................... 90,377 716,152 3,494,418
---------- ----------- ------------
Total revenues..................... 307,673 2,314,021 8,633,528
Cost of revenues:
Internet Projects.................... 237,037 1,495,234 4,698,557
Network Services..................... 119,297 865,357 4,067,513
Depreciation and amortization........ 6,786 171,196 1,673,938
---------- ----------- ------------
Total cost of revenues............. 363,120 2,531,787 10,440,008
---------- ----------- ------------
Gross loss............................. (55,447) (217,766) (1,806,480)
General and administrative expenses.... 263,175 481,700 1,575,758
Marketing expenses..................... 164,669 1,188,634 3,844,232
Research and development............... 178,994 279,698 2,940,865
Depreciation and amortization.......... 21,263 115,899 879,978
---------- ----------- ------------
Total operating expenses........... 628,101 2,065,931 9,240,833
---------- ----------- ------------
Operating loss......................... (683,548) (2,283,697) (11,047,313)
Interest expense....................... 2,079 39,550 197,243
Interest income........................ -- -- 154,296
---------- ----------- ------------
Loss before taxes and minority
interest.............................. (685,627) (2,323,247) (11,090,260)
Income tax benefit..................... 401,849 1,339,407 6,172,645
---------- ----------- ------------
Net loss before minority interest...... (283,778) (983,840) (4,917,615)
Minority interest...................... -- -- 144,925
Net loss............................... (283,778) (983,840) (4,772,690)
Other comprehensive loss:
Foreign currency translation
adjustments......................... (5,089) (210,211) 1,204,589
---------- ----------- ------------
Comprehensive loss..................... $ (288,867) $(1,194,051) $ (3,568,101)
========== =========== ============
Basic and diluted loss per share....... $ (.12) $ (.12) $ (.30)
========== =========== ============
Number of shares used to compute earn-
ings per share........................ 2,465,782 8,342,297 16,012,653
========== =========== ============
See accompanying notes to consolidated financial statements
F-4
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
-----------------------------------
1996 1997 1998
---------- ---------- -----------
Cash Flows from Operating Activities:
Net loss................................. $ (283,778) $ (983,840) $(4,772,690)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Minority interest....................... -- -- (144,925)
Deferred tax credit..................... (401,849) (1,348,932) (6,172,645)
Depreciation and amortization........... 28,049 287,095 2,553,916
Provision for losses on accounts
receivable............................. 15,456 33,417 120,862
Changes in operating assets and
liabilities:
Trade accounts receivable.............. (203,112) (475,300) (1,295,646)
Other receivables...................... (69,583) (136,141) (1,424,697)
Prepaid expenses and other current
assets................................ (10,847) (32,120) (310,176)
Trade accounts payable................. 231,490 (401,835) 1,027,728
Other accrued expenses and
liabilities........................... 40,826 1,377,685 16,748
Accrued personnel costs................ 83,663 247,539 66,397
---------- ---------- -----------
Total changes in operating assets and
liabilities.......................... 72,437 579,828 (1,919,646)
---------- ---------- -----------
Net cash used in operating
activities........................... (569,685) (1,432,432) (10,355,128)
Cash Flows from Investing Activities:
Purchase of short-term investments....... (727,693) (7,280,037) (104,654)
Proceeds from sale of short term
investments............................. 304,470 6,931,035 810,063
Purchase of property and equipment....... (552,104) (1,707,843) (6,033,959)
Product development costs................ (557,585) (2,464,312) (3,865,930)
Acquisition of businesses, net of cash
acquired................................ -- (269,316) (734,154)
---------- ---------- -----------
Net cash used in investing
activities........................... (1,532,912) (4,790,473) (9,928,634)
Cash Flows from Financing Activities:
Proceeds from issue of common stock,
net..................................... 2,012,903 8,070,427 57,577,376
Repayment of subscription receivable..... -- -- 715,790
Proceeds from borrowings................. 71,881 700,000 2,092,163
Repayments of borrowings................. -- (126,266) (375,161)
---------- ---------- -----------
Net cash provided by financing
activities........................... 2,084,784 8,644,161 60,010,168
---------- ---------- -----------
Net (decrease) increase in cash and cash
equivalents.............................. (17,813) 2,421,256 39,746,406
Cash and cash equivalents at beginning of
year..................................... 49,143 27,889 2,238,909
Translation adjustments................... (3,441) (210,236) 890,562
---------- ---------- -----------
Cash and cash equivalents at end of
year................................... $ 27,889 $2,238,909 $42,875,877
========== ========== ===========
Supplemental disclosure of noncash investing and
financing activities:
Acquisitions (Note 3):
Fair value of assets acquired............ -- $2,230,146 $ 8,800,013
Less:
Cash acquired........................... -- 182,550 129,564
Deferred purchase obligation............ -- -- 4,482,965
Cash paid............................... -- 451,866 863,718
Stock issued............................ -- 1,051,322 1,677,223
---------- ---------- -----------
Liabilities assumed...................... -- $ 544,408 $ 1,646,543
========== ========== ===========
Stock dividend.......................... -- -- (391,950)
Other supplemental cash flow disclosures:
Cash paid for interest.................. (2,079) (39,550) (197,243)
Cash paid for taxes..................... -- 16,550 11,457
See accompanying notes to consolidated financial statements
F-5
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Preferred Stock
------------------ ------------------
Additional Accumulated Other Total
Subscription Paid-In Accumulated Comprehensive Stockholders'
Shares Amounts Shares Amount Receivable Capital Deficit Income (Loss) Equity
---------- ------- ---------- ------ ------------ ----------- ----------- ----------------- -------------
Balance
January 1,
1996............ 161,250 $ 161 6,360,000 $6,360 $ 57,995 $ (3,418) $ 4,952 $ 66,050
Issuance of
shares for
cash............ 4,998,750 4,999 2,007,904 2,012,903
Net loss......... (283,778) (283,778)
Currency
translation
adjustment...... (5,089) (5,089)
---------- ------- ---------- ------ --------- ----------- ----------- --------- -----------
Balance
December 31,
1996........... 5,160,000 $ 5,160 6,360,000 $6,360 -- $ 2,065,899 $ (287,196) $ (137) $ 1,790,086
Issuance of
shares in
reverse
acquisition.... 9,521,891 9,522 232,331 241,853
Issuance of
shares for
cash........... 1,400,000 1,400 (735,000) 8,804,027 8,070,427
Currency
translation
adjustment..... (210,211) (210,211)
Net loss........ (983,840) (983,840)
---------- ------- ---------- ------ --------- ----------- ----------- --------- -----------
Balance
December 31,
1997........... 14,681,891 $14,682 7,760,000 $7,760 $(735,000) $11,102,257 $(1,271,036) $(210,348) $ 8,908,315
Conversion of
preferred
stock.......... 1,400,000 1,400 (1,400,000) (1,400)
Stock dividend.. 21,775 22 391,928 (391,950)
Issuance of
shares for
Artwise
acquisition.... 72,620 72 1,052,919 1,052,991
Issuance of
shares for
cash........... 700,000 700 12,599,300 12,600,000
Payment of
subscription
receivable..... 715,790 715,790
Issuance of
shares for
cash........... 1,800,000 1,800 44,975,576 44,977,376
Issuance of
shares for
Open:Net
acquisition.... 58,852 59 1,677,223 1,677,282
Issuance of
shares for
Eclipse
acquisition.... 27,000 27 995,733 995,760
Currency
translation
adjustment..... 1,204,589 1,204,589
Net loss........ (4,772,690) (4,772,690)
---------- ------- ---------- ------ --------- ----------- ----------- --------- -----------
Balance
December 31,
1998........... 18,762,138 $18,762 6,360,000 $6,360 $ (19,210) $72,794,936 $(6,435,676) $ 994,241 $67,359,413
========== ======= ========== ====== ========= =========== =========== ========= ===========
See accompanying notes to consolidated financial statements
F-6
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Cybernet Internet Services International, Inc. ("the Company") (formerly
known as New Century Technologies Corporation) was incorporated under the laws
of the State of Utah on September 27, 1983. The Company changed its state of
incorporation to Delaware in September 1998. Effective September 16, 1997 the
Company acquired Cybernet Internet Dienstleistungen AG ("Cybernet AG"), a
German stock corporation which offers a variety of Internet related
telecommunication and systems integration services to corporate customers.
Cybernet AG was founded in December 1995, and commenced significant operations
in 1996. The acquisition has been accounted for as a reverse acquisition
whereby the Company is considered to be the acquiree even though legally it is
the acquiror. Accordingly, the accompanying financial statements present the
historical financial statements of Cybernet AG from January 1, 1996, through
the acquisition date of September 16, 1997 and the consolidated financial
statements of the Company and Cybernet AG since that date. Since the fair value
of the net assets of the Company were equal to their net book value on
September 16, 1997, the assets and liabilities of the Company remained at their
historical cost following the acquisition.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of all majority-
owned subsidiaries of the Company. All significant intercompany investments,
accounts, and transactions have been eliminated.
Foreign Currency
The assets and liabilities for the Company's international subsidiaries are
translated into U.S. dollars using current exchange rates at the balance sheet
dates. Statement of operations items are translated at average exchange rates
prevailing during the period. The resulting translation adjustments are
recorded in the foreign currency translation adjustment account in equity.
Foreign currency transaction gains or losses are included in net earnings
(loss).
Revenue Recognition
The Company offers Internet telecommunication and systems integration
products and network access services. Telecommunication and system integration
products consist of the development of customized business solutions,
installation of hardware and software and production support. Ongoing network
services consist of monthly user fees for network access and related services.
Revenues from telecommunication and systems integration products are
recognized upon completion of the related project and customer acceptance.
Revenues from ongoing network access services are recognized when provided to
customers.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful life of the asset, which ranges
from 4 years (computer equipment and software) to 10 years (leasehold
improvements and furniture and fixtures).
Product Development Costs
The Company capitalizes costs incurred related to the development of products
that will be sold to customers. Costs capitalized include direct labor and
related overhead and third party costs related to
F-7
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
establishing network systems. All costs in the development process are
classified as research and development and expensed as incurred until
technological feasibility has been established. Once technological feasibility
has been established, which is defined as completion of a working model, such
costs are capitalized until the individual products are commercially available.
Amortization, which began in 1997, is calculated using the greater of (a) the
ratio that current gross revenues for a product bear to the total of current
and anticipated future revenues for that product or (b) the straight-line
method over four years. The carrying value of product development costs is
regularly reviewed by the Company and a loss recognized when the net realizable
value falls below the unamortized cost. No such losses have been recognized to
date. Accumulated amortization amounted to $75,494 and $1,016,700 at December
31, 1997 and 1998 respectively.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was $49,906,
$226,763 and $609,948 in the years ended December 31, 1996, 1997 and 1998.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents.
Short Term Investments
In accordance with Statement of Financial Accounting Standard ("SFAS") No.
115 "Accounting for Certain Investments in Debt and Equity Securities"
available-for-sale securities are carried at fair value, with unrealized gains
and losses reported as a separate component of stockholder's equity.
Realized gains and losses and declines in value judged to be other than
temporary on available-for-sale securities are included in other income. The
Company has classified all debt and equity securities as available-for-sale.
Income Taxes
The Company accounts for income taxes using the liability method. Under this
method, deferred income taxes are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the differences are expected
to reverse. The effect of a change in tax rates on deferred tax assets and
liabilities is recognized in the period that includes the enactment date.
Deferred tax assets are reduced by a valuation allowance when the Company
cannot make the determination that it is more likely than not that some portion
or all of the related tax asset will be realized.
Fair Value of Financial Instruments
The carrying value of financial instruments such as cash, accounts
receivable, short term investments and accounts payable approximate their fair
value based on the short-term maturities of these instruments. The carrying
value of bank debt approximates fair value based on quoted market prices for
the same or similar issues as well as the current rates offered to the Company.
Note 4 contains a detail of short-term investments held by the Company.
Substantially all of the Company's cash is deposited in a local German bank.
Short term investments are comprised of investments in highly liquid mutual
funds. Credit risk in connection with accounts receivable is minimized by the
diverse nature of the Company's customer base.
F-8
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Goodwill
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over 10 years.
Accumulated amortization totaled $18,693 and $312,436 at December 31, 1997 and
1998, respectively. The Company assesses the recoverability of goodwill by
determining whether the amortization of the related balance over its remaining
life can be recovered through reasonably expected undiscounted future cash
flows. Management evaluates the amortization period to determine whether later
events and circumstances warrant revised estimates of the amortization period.
Stock Compensation
The Company accounts for its stock option compensation under Accounting
Principles Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"). The Company presents all disclosures required
by Statement of Financial Accounting Standards No. 123 ("Statement 123") in
Note 11.
Comprehensive Income
In 1998, the Company adopted Financial Accounting Standards Board Statement
130 "Reporting Comprehensive Standards" ("Statement 130"), which requires the
disclosure of the Company's comprehensive income. Comprehensive income is
defined as all changes in shareholders' equity exclusive of transactions with
owners such as capital investments and dividends. All prior periods have been
restated to conform with the reporting requirements of Statement 130.
Segment Disclosures
In 1998, the Company adopted Financial Accounting Standards Board Statement
131 "Disclosures About Segments of an Enterprise and Related Information"
("Statement 131"), which requires disclosures of certain financial information
of the Company's business operating segments. All prior periods have been
restated to conform with the disclosure requirements of Statement 131.
Reclassifications
Certain prior year amounts in the consolidated financial statements have been
reclassified to conform to the current year presentation.
3. Business Acquisitions
On September 16, 1997, the Company acquired all of the outstanding shares of
the common stock of Cybernet AG in exchange for the issuance of 5,160,000
shares of common stock of the Company, 1,200,000 shares of Series A preferred
stock of the Company and 5,160,000 shares of Series B preferred stock of the
F-9
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company, such shares representing the outstanding shares of the Company at that
date. Generally accepted accounting principles require that the Company be
considered the acquired company for financial statement purposes (a reverse
acquisition) even though the entity will continue to be called Cybernet
Internet Services International, Inc. Therefore, the acquisition has been
recorded as a recapitalization of Cybernet AG. The effects of the reverse
acquisition have been reflected for all share amounts in the accompanying
financial statements. The Company had no operations at the time of the reverse
acquisition.
Effective September 16, 1997, the Company acquired 100% of the outstanding
shares of Artwise GmbH ("Artwise"), for a total consideration of DM 1,710,040
($954,263). DM 475,000 ($265,067) of the purchase price was paid in cash with
the remainder settled in exchange for the issuance of 72,620 shares of the
common stock of the Company in February, 1998. The shares issued in February
1998, which were recorded as additional goodwill, were partially contingent
upon the achievement of certain financial goals by Artwise for the year ended
December 31, 1997. The acquisition has been accounted for using the purchase
method of accounting and accordingly the accompanying financial statements
reflect Artwise's results of operations from September 16, 1997. Goodwill
recorded in connection with the acquisition of Artwise, of DM 1,507,493
($841,188), is being amortized over 10 years.
Effective December 11, 1997, the Company acquired 66% of the outstanding
shares of Eclipse s.r.l. ("Eclipse"), for a total consideration of DM 982,763
($548,386). DM 334,764 ($186,799) of the purchase price was paid in cash with
the remainder to be settled in exchange for the issuance of 27,000 shares of
the common stock of the Company in 1999. The acquisition has been accounted for
using the purchase method of accounting. Eclipse's results of operations for
the period December 11, 1997 through December 31, 1997 are not included in the
accompanying financial statements due to immateriality. Eclipse's results of
operations for the full year 1998 are included in the results of operations of
Cybernet Inc. for the year ended December 31, 1998. Goodwill recorded in
connection with the acquisition of Eclipse, of DM 909,418 ($507,459), is being
amortized over 10 years.
Effective August 15, 1998, the Company acquired 100% of the outstanding
shares of Open:Net Internet Solutions GmbH ("Open:Net") for a total
consideration of DM 4,251,093 ($2,540,091). DM 1,445,000 ($863,718) of the
purchase price was paid in cash with the remainder settled in exchange for the
issuance of 58,825 shares of the common stock of the Company. The acquisition
has been accounted for using the purchase method of accounting and as such the
accompanying financial statements reflect Open:Net's results of operations for
the period August 15, 1998 through December 31, 1998. Goodwill recorded in
connection with the acquisition of Open:Net, of DM 3,520,178 ($2,298,341) is
being amortized over 10 years.
Effective December 28, 1998, the Company acquired 100% of the outstanding
shares of Vianet Telekommunikations AG ("Vianet") for a cash payment of DM
7,500,000 ($4,482,965) and 300,000 shares of the common stock of the Company
which is to be issued to the selling shareholders of Vianet in increments of
60,000 shares over five years contingent upon the continued employment of the
individuals. The acquisition has been accounted for using the purchase method
of accounting. The value of the 300,000 shares will be added to the cost of
acquiring the Company when the shares are issued to the selling shareholders.
Vianet's results of operations subsequent to December 28, 1998 are not included
in the accompanying financial statements due to immateriality. Goodwill
recorded in connection with the acquisition of Vianet, amounting to DM
3,449,307 ($2,061,750), is being amortized over 10 years.
F-10
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following unaudited pro forma consolidated results of operations for the
years ended December 31, 1997 and 1998 assume the acquisitions described above
occurred as of January 1, 1997:
Years ended December
31,
------------------------
1997 1998
----------- -----------
Revenue........................................ $ 7,467,666 $12,589,528
Net loss....................................... (2,065,929) (6,068,365)
Basic and diluted loss per share............... $ (.21) $ (.38)
4. Short-Term Investments
Short-term investments at cost, which represents the cost to purchase the
securities, consist of the following:
December 31,
--------------------------
1996 1997 1998
-------- -------- --------
BHF Bank Accugeld Fund........................ $453,698 $ -- $112,503
BHF Bank US Dollar Plus Fund.................. -- 802,759 --
Commerzbank Geld Market Fund.................. -- 15,154 --
-------- -------- --------
$453,698 $817,913 $112,503
======== ======== ========
At December 31, 1996, 1997 and 1998 the estimated fair value of short-term
investments approximated cost. Proceeds from the sale of short-term investments
in 1996, 1997 and 1998 were $263,751, $6,931,035, $810,063, respectively. The
Company did not recognize any gains on the sales of short-term investments in
1996, 1997 or 1998.
5. Property and Equipment
Property and equipment consist of the following:
December 31,
---------------------------------
1996 1997 1998
-------- ---------- -----------
Computer equipment and software...... $444,695 $1,942,485 $ 7,274,601
Leasehold improvements............... 30,452 75,796 425,786
Furniture and fixtures............... 201,606 478,504 1,979,873
-------- ---------- -----------
676,753 2,496,785 9,680,260
Less accumulated depreciation and
amortization........................ (45,993) (211,992) (1,709,960)
-------- ---------- -----------
Net property and equipment........... $630,760 $2,284,793 $ 7,970,300
======== ========== ===========
6. Leases
The Company leases facilities and equipment under long-term operating leases.
Future minimum payments under non-cancellable operating leasing with initial
terms of one year or more are as follows:
Year ending December 31
1999.............................. $2,105,459
2000.............................. 1,749,784
2001.............................. 1,575,547
2002.............................. 940,702
2003.............................. 635,797
Thereafter........................ 2,167,557
----------
$9,174,846
==========
F-11
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's rental expense under operating leases in the years ended
December 31, 1996, 1997 and 1998 totaled approximately $56,508, $176,687 and
$1,068,645 respectively.
The Company has financed the acquisition of certain computer equipment
through capital lease agreements with interest rates ranging from 5% to 8%. At
December 31, 1998, the gross value of assets under capital leases is $2,580,307
and related accumulated depreciation was $609,520. The Company had no capital
lease obligations at December 31, 1996 or 1997. Future minimum lease payments
in connection with these leases are as follows:
Year ending December 31
1999............................ $ 892,984
2000............................ 892,984
2001............................ 176,536
2002............................ 171,871
2003............................ 133,646
----------
$2,268,021
==========
Less: Interest Portion............ (165,273)
==========
$2,102,748
==========
7. Commitments
The Company has entered into long term data and voice communications
agreements with several vendors. The agreements enable the Company and its
customers to access data networks necessary for the use of its products and
services. The minimum payments under these agreements aggregate $1,382,228,
$84,806, $84,806, $84,806, $16,139 and $80,693 in 1999, 2000, 2001, 2002, 2003
and thereafter, respectively.
8. Overdrafts and Short-Term Borrowings
Overdrafts represent temporary overdrafts of bank balances. The overdrafts
are not subject to formal agreements with the banks and generally are not
subject to interest.
As of December 31, 1998, the Company had established short-term unsecured
overdraft facilities under which the Company and its subsidiaries could borrow
up to DM 463,340 ($276,952). The facilities are denominated in Deutsche Mark as
to DM 200,000, in Italian Lire as to DM 121,200 and in Austrian Schilling as to
DM 142,140. The interest rate fluctuates based on current lending rates and was
8.25% and 9.75% at December 31, 1997 and 1998, respectively. As of December 31,
1998, DM 342,247 ($204,571) of the overdraft facility was used and DM 121,093
($72,381) was available.
F-12
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Long-Term Debt
Long-term debt consists of the following:
Years ended December 31,
------------------------
1997 1998
------------------------
Note payable, 5.15% interest, due in monthly
installments of principal and interest through
2001............................................. $ 41,691 $ --
Note payable, 3.75% interest, due in quarterly
installments of principal and interest through
January 2005..................................... -- 41,626
Note payable, 6.2% interest, due in monthly
installments of principal and interest through
June 1999........................................ -- 5,039
Note payable, 6.6% interest, due in monthly
installments of principal and interest through
December 2002.................................... -- 39,409
----------- ------------
41,691 86,074
Less current portion.............................. -- (19,245)
----------- ------------
Long-term portion................................. $ 41,691 $ 66,829
=========== ============
10. Shareholders Equity
Common Stock
The Company is authorized to issue 50,000,000 shares of Common Stock. Holders
of Common Stock are entitled to one vote per share on all matters submitted to
a vote of stockholders. The Common Stock is not redeemable and has no
conversion or preemptive rights.
Preferred Stock
The Company is authorized to issue 50,000,000 shares of Preferred Stock with
relative rights, preferences and limitations determined at the time of
issuance. As of December 31, 1998, the Company has issued and outstanding
Series A and B Preferred Stock. All of the Company's previously issued Series C
Preferred Stock was converted to Common Stock in 1998.
Series A Preferred Stock
The holders of the Series A Preferred Stock are entitled to receive dividends
at a rate equal to $0.01 per share per annum before any dividends are paid or
set apart for payment upon any other series of Preferred Stock of the Company,
other than Series B or Series C Preferred Stock, or on the Common Stock of the
Company. Commencing with the fiscal year beginning on January 1, 1998, the
dividend on the Series A Preferred Stock will be paid for each fiscal year
within five months of the end of each fiscal year, subject to the availability
of surplus or net profits therefor. The dividends on the Series A Preferred
Stock are not cumulative. The holders of the Series A Preferred Stock are not
entitled to vote.
The shares of Series A Preferred Stock may be redeemed by the Company at any
time after January 1, 2000, at a redemption price of one share of the Common
Stock of the Company for each share of Series A Preferred Stock plus any unpaid
dividends earned thereon; provided that all and not less than all of the shares
of Series A Preferred Stock are so redeemed and provided further that if the
Company has not redeemed the Series A Preferred Stock by December 31, 2001, a
holder of Series A Preferred Shares may at any time commencing January 1, 2002,
require the Company to purchase all of the shares of the Series A Preferred
Stock held by him for a purchase price of $3.00 per share plus any dividends
earned but unpaid on such shares.
F-13
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A holder of Series A Preferred Stock may convert each share held by him into
one share of the Common Stock of the Company; provided, however, that (1) no
conversion may occur prior to January 1, 1999; (2) no more than 25% of the
Series A Preferred Shares held by the holder may be converted prior to January
1, 2000; (3) no more than an additional 25% of the Series A Preferred Shares
held by the holder may be converted prior to January 1, 2001; (4) the remainder
of the Series A Preferred Shares held by the holder may be converted commencing
January 1, 2001; and (5) any conversion may not be for less than all of the
Series A Preferred Shares held by the converting shareholder eligible for
conversion at the time of the notice.
Upon the liquidation, dissolution or winding up, whether voluntary or
involuntary, of the Company, the holders of the Series A Preferred Stock will
be entitled to be paid the sum of $3.00 per share plus an amount equal to any
unpaid accrued dividends before any amount is paid to the holder of any other
series of Preferred Stock, other than the Series B Preferred Stock or the
Series C Preferred Stock, or to the Common Stock of the Company. After payment
of these amounts to the holders of the Series A Preferred Stock, the remaining
assets of the Company will be distributed to the holders of the Common Stock.
Series B Preferred Stock
The holders of the Series B Preferred Stock are entitled to receive dividends
at a rate equal to $0.01 per share per annum before any dividends are paid or
set apart for payment upon any other series of Preferred Stock of the Company
other than the Series C Preferred Stock or on the Common Stock of the Company.
Commencing with the fiscal year beginning on January 1, 1998, the dividend on
the Series B Preferred Stock will be paid for each fiscal year within five
months of the end of each fiscal year, subject to the availability of surplus
or net profits therefor. The dividends on the Series B Preferred Stock will not
be cumulative. The holders of the Series B Preferred Stock are entitled to one
vote per share.
The shares of Series B Preferred Stock may be redeemed by the Company at any
time after January 1, 2000, at a redemption price of one share of the Common
Stock of the Company for each share of Series B Preferred Stock plus any unpaid
dividends earned thereon through the date of redemption; provided that all and
not less than all of the shares of Series B Preferred Stock are so redeemed.
A holder of Series B Preferred Stock may convert each share held by him into
one share of the Common Stock of the Company provided, however, that (1) no
conversion may occur prior to January 1, 1999; (2) no more than 25% of the
Series B Preferred Shares held by the holder may be converted prior to January
1, 2000; (3) no more than an additional 25% of the Series B Preferred Shares
held by the holder may be converted prior to January 1, 2001; (4) the remainder
of the Series B Preferred Shares held by the holder may be converted commencing
January 1, 2001; and (5) any conversion may not be for less than all of the
Series B Preferred Shares held by the converting shareholder eligible for
conversion at the time of the notice.
Upon the liquidation, dissolution or winding up, whether voluntary or
involuntary, of the Company, the holders of the Series B Preferred Stock will
be entitled to be paid the sum of $3.00 per share plus an amount equal to any
unpaid accrued dividends before any amount is paid to the holder of any other
series of Preferred Stock other than the Series C Preferred Stock or to the
Common Stock of the Company. After payment of these amounts to the holders of
the Series B Preferred Stock, the remaining assets of the Company will be
distributed to the holders of the Common Stock.
Series C Preferred Stock
The holders of the Series C Preferred Stock are entitled to receive dividends
at a rate equal to $0.56 per annum, and no more, before any dividends are paid
or set apart for payment upon any other series of Preferred Stock or on the
Common Stock of the Company. Dividends will begin to accrue on January 1, 1998.
Commencing with the fiscal year beginning on January 1, 1998, the dividend on
the Series C Preferred Stock
F-14
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
will be paid for each fiscal year within five months of the end of each fiscal
year, subject to the availability of surplus or net profits therefor. The
dividends of the Series C Preferred Stock are cumulative.
The holders of the Series C Preferred Stock are not entitled to receive
notice of or to vote on any matter that is the subject of a vote of the
stockholders of the Company, except as otherwise required by the laws of the
State of Delaware.
The shares of Series C Preferred Stock may be redeemed by the Company at any
time at a redemption price of 100% of the $7.00 purchase price paid to the
Company for such shares plus any unpaid accrued dividends thereon so long as
prior to the date of redemption the Company has offered to exchange each share
of Series C Preferred Stock for (a) one share of the Company's Common Stock,
plus (b) one warrant ("Warrant") to purchase the number of shares of Common
Stock equal in the aggregate to one-half the number of shares of Common Stock
received in the exchange, which Warrant will be exercisable at any time through
the first anniversary of the date of issuance of the Warrant at a purchase
price equal to $8.00 per share and a registration statement is in effect
registering the issuance of the Common Stock and Warrants.
A holder of Series C Preferred Stock may convert each share held by him into
one share of the Common Stock of the Company anytime after July 31, 1998;
provided, however, that any conversion be of all the Series C Preferred Shares
held by the shareholder.
In July 1998, holders of 1,400,000 shares of Series C Preferred Stock
(representing the entire amount outstanding) converted their shares into
1,400,000 shares of the Company's Common Stock. Prior to the conversion holders
of Series C Preferred Stock received a stock dividend in Common Stock of the
Company in lieu of a cash dividend. The stock dividend was valued at the
closing price of the Common Stock on the date the dividend was declared.
11. Stock Incentive Plan
In 1998 the Company adopted a stock incentive plan ("Stock Incentive Plan")
which provides for the grant of a variety of stock award instruments to key
employees and members of the Board of Directors.
The Company has reserved 2,000,000 shares of common stock for issuances under
the Stock Incentive Plan. During the year ended December 31, 1998, the Company
granted 285,000 stock options with an exercise price of $31.96 per share and
400,000 stock options with an exercise price of $32.04 pursuant to the Stock
Incentive Plan. All options granted have 10 year terms and vest over three
years. All options were still outstanding at December 31, 1998. None of the
options outstanding at December 31, 1998 were exercisable.
The Company has elected to follow APB 25 and related interpretations in
accounting for the stock options granted under the Stock Incentive Plan. Under
APB 25, as long as the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized. Pro forma information regarding net income
and earnings per share is required by Statement 123 as if the Company had
accounted for its employee stock options under the fair value method of that
statement. The fair value for these options was estimated at the date of grant
using the Black-Scholes option pricing model using a risk-free interest rate of
4.5%, an expected common stock price volatility factor of 0.8, a weighted-
average expected life of the options of 5 years, and a expected dividend yield
of 0%.
The fair value of the options granted in 1998 using the Black-Scholes model
was $13,320,000. Had the Company determined compensation cost for this plan in
accordance with Statement 123, the value of the
F-15
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
options granted would have been amortized over the option vesting period. The
Company's pro forma loss and pro forma basic and diluted earnings per share for
1998 would have been $4,995,690 and $(.31), respectively.
12. Provision for Income Taxes
The Company's principal operations are currently located in Germany. Pretax
loss for the years ended December 31, 1996, 1997 and 1998 was generated in the
following jurisdictions:
December 31,
------------------------------------
1996 1997 1998
--------- ----------- ------------
Germany................................ $(685,627) $(2,303,448) $(10,655,410)
Others................................. -- (19,799) (434,850)
--------- ----------- ------------
$(685,627) $(2,323,247) $(11,090,260)
========= =========== ============
The components of the provision for income taxes, substantially all of which
relates to Germany, are as follows:
December 31,
-----------------------------------
1996 1997 1998
--------- ----------- -----------
Current................................. $ -- $ 9,525 $ --
Deferred................................ (401,849) (1,348,932) (6,172,645)
--------- ----------- -----------
Income tax benefit...................... $(401,849) $(1,339,407) $(6,172,645)
========= =========== ===========
The Company has net deferred tax assets as of December 31, 1996, 1997 and
1998 as follows:
December 31,
-------------------------------
1996 1997 1998
-------- ---------- -----------
Deferred tax assets
Net operating losses...................... $692,694 $3,454,606 $11,695,379
-------- ---------- -----------
692,694 3,454,606 11,695,379
======== ========== ===========
Deferred tax liabilities
Product development costs................. 251,038 1,625,857 3,315,814
Depreciation and amortization............. 44,195 175,454 212,148
Other..................................... 4,484 486 1,246
-------- ---------- -----------
299,717 1,801,797 3,529,208
======== ========== ===========
Net deferred tax assets..................... $392,977 $1,652,809 $ 8,166,171
======== ========== ===========
As of December 31, 1998, the Company and its subsidiaries had available
combined cumulative tax loss carryforwards of approximately $20,230,048 million
substantially all of which relates to Germany. Under German tax laws, these
loss carryforwards have an indefinite life. The tax loss carryforwards have
been generated during the establishment of the Company's operations. Management
believes that the Company will generate sufficient future taxable income to
realize the entire deferred tax asset and that the realization of the
$8,166,171 net deferred tax asset is more likely than not. However, if the
Company is unable to generate sufficient taxable income in the future through
operating results a valuation allowance will be required to be established
through a charge to income.
F-16
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of income taxes determined using the United States statutory
federal income tax rate of 35% to actual income taxes provided is as follows:
December 31,
-----------------------------------
1996 1997 1998
--------- ----------- -----------
Income tax benefit at statutory
rate................................ $(239,969) $ (813,136) $(3,881,591)
Higher foreign tax rates............. (157,694) (529,793) (2,528,579)
Other................................ (4,186) 3,522 237,525
--------- ----------- -----------
Income tax benefit................... $(401,849) $(1,339,407) $(6,172,645)
========= =========== ===========
13. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share:
December 31,
-----------------------------------
1996 1997 1998
---------- ---------- -----------
Numerator:
Net loss-numerator for basic and
diluted loss per share............... $ (283,778) $ (983,840) $(4,772,690)
========== ========== ===========
Denominator:
Denominator for basic and diluted loss
per share -- weighted average shares
outstanding.......................... 2,465,782 8,342,297 16,012,653
========== ========== ===========
Basic and diluted loss per share........ $ (.12) $ (.12) $ (.30)
========== ========== ===========
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. The Company's preferred stock is described in
Note 10 and the Company's stock options are described in Note 11.
14. Related Party Transaction
On May 30, 1997, a principal shareholder of Cybernet AG advanced Cybernet AG
an interest free loan of DM 1.5 million ($837,895) due July 31, 1997. On
October 7, 1997, Cybernet AG repaid the loan.
The Company paid DM 17,250 ($11,345), DM 169,804 ($97,470) and DM 173,013
($98,303) to a law firm for legal services where one of the members of the
board of directors is a partner in the years ended December 31, 1996, 1997 and
1998, respectively.
In November 1998, one of the members of the Board of Directors of Cybernet
Inc. and a principal Shareholder advanced an interest free loan to Cybernet
Inc. of DM 2.5 million ($1,494,322). The Company repaid the loan in December
1998.
In December 1998, the Company paid $2,916,000 in underwriting fees in
connection with the public sale of equity, to an investment bank in which one
of the Company's principal shareholders and a former member of the Company's
Board of Directors is a significant shareholder.
15. Segment information
The Company evaluates performance and allocates resources based on the
operating profit of its subsidiaries. The accounting policies of the reportable
segments are the same as those described in the Summary of Significant
Accounting Policies in Note 2.
F-17
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 intercompany sales between its
subsidiaries.
Information concerning the Company's geographic locations is summarized as
follows:
December 31,
-------------------------------
1996 1997 1998
-------- ---------- -----------
Revenues:
Germany................................... $307,673 $2,314,021 $ 7,692,555
US........................................ -- -- --
Other..................................... -- -- 940,973
-------- ---------- -----------
Total..................................... $307,673 $2,314,021 $ 8,633,528
======== ========== ===========
Cost of revenues:
Germany................................... $363,120 $2,531,787 $ 9,609,699
US........................................ -- -- --
Other..................................... -- -- 830,309
-------- ---------- -----------
Total..................................... $363,120 $2,531,787 $10,440,008
======== ========== ===========
General and Administrative Expenses:
Germany................................... $263,175 $ 481,700 $ 1,341,077
US........................................ -- -- 186,345
Other..................................... -- -- 48,336
-------- ---------- -----------
Total..................................... $263,175 $ 481,700 $ 1,575,758
======== ========== ===========
Marketing Expenses:
Germany................................... $164,669 $1,188,634 $ 3,708,831
US........................................ -- -- --
Other..................................... -- -- 135,401
-------- ---------- -----------
Total..................................... $164,669 $1,188,634 $ 3,844,232
======== ========== ===========
Research and Development:
Germany................................... $178,994 $ 279,698 $ 2,642,140
US........................................ -- -- --
Other..................................... -- -- 298,725
-------- ---------- -----------
Total..................................... $178,994 $ 279,698 $ 2,940,865
======== ========== ===========
Depreciation and Amortization:
Germany................................... $ 21,263 $ 115,899 $ 721,677
US........................................ -- -- 108,976
Other..................................... -- -- 49,325
-------- ---------- -----------
Total..................................... $ 21,263 $ 115,899 $ 879,978
======== ========== ===========
Interest Expense:
Germany................................... $ 2,079 $ 39,550 $ 180,496
US........................................ -- -- 3,006
Other..................................... -- -- 13,741
-------- ---------- -----------
Total..................................... $ 2,079 $ 39,550 $ 197,243
======== ========== ===========
F-18
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31,
-------------------------------------
1996 1997 1998
---------- ----------- ------------
Interest Income:
Germany............................. $ -- $ -- $ 30,581
US.................................. -- -- 123,715
Other............................... -- -- --
---------- ----------- ------------
Total............................... $ -- $ -- $ 154,296
========== =========== ============
Loss before Taxes:
Germany............................. $ (685,627) $(2,323,247) $(10,480,794)
US.................................. -- -- (174,612)
Other............................... -- -- (434,854)
---------- ----------- ------------
Total............................... $ (685,627) $(2,323,247) $(11,090,260)
========== =========== ============
Income tax benefit:
Germany............................. $ 401,849 $ 1,339,407 $ 6,172,645
US.................................. -- -- --
Other............................... -- -- --
---------- ----------- ------------
Total............................... $ 401,849 $ 1,339,407 $ 6,172,645
========== =========== ============
Total Assets:
Germany............................. $2,211,115 $12,343,057 $ 28,686,897
US.................................. -- -- 47,688,998
Austria............................. -- -- 1,556,895
Other............................... -- 274,000 1,511,939
---------- ----------- ------------
Total............................... $2,211,115 $12,617,057 $ 79,444,729
========== =========== ============
The Company's property, plant and equipment by geographic location and
capital expenditures by geographic area are as follows:
December 31,
------------------------------
1996 1997 1998
-------- ---------- ----------
Long lived assets:
Germany..................................... $630,760 $2,208,781 $6,334,809
US.......................................... -- -- --
Austria..................................... -- -- 699,511
Other....................................... -- 76,012 935,980
-------- ---------- ----------
Total....................................... $630,760 $2,284,793 $7,970,300
======== ========== ==========
December 31,
------------------------------
1996 1997 1998
-------- ---------- ----------
Capital Expenditures:
Germany..................................... $552,104 $1,707,843 $5,097,077
US.......................................... -- -- --
Other....................................... -- -- 936,882
-------- ---------- ----------
Total....................................... $552,104 $1,707,843 $6,033,959
======== ========== ==========
F-19
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. Recent Pronouncements
In March 1998, the AICPA issued SOP 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". This standard
requires that computer software costs meeting the criteria for internal-use
software be expensed as incurred in the preliminary project stage and
capitalized thereafter. Amounts capitalized are required to be amortized on a
straight line basis over the estimated useful life of the software. The
standard is effective for fiscal years beginning after December 15, 1998.
Earlier application is permitted. The Company does not expect the impact of
this new statement on the Company's consolidated balance sheet or results of
operations to be material.
In April 1998, the AICPA issued SOP 98-5 "Reporting on the Costs of Start-Up-
Activities". This standard requires costs of start-up-activities and
organization costs to be expensed as incurred. The standard is effective for
fiscal years beginning after December 15, 1998. Earlier application is
encouraged. The Company does not expect the impact of this new statement on the
Company's consolidated balance sheet or results of operations to be material.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133.
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). This statement establishes accounting and reporting standards requiring
that every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an
asset or liability measured at its fair value. The statement also requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. SFAS No. 133 is effective
for fiscal years beginning after June 15, 1999 and cannot be applied
retroactively. The Company does not expect the impact of this new statement on
the Company's consolidated balance sheets or results of operations to be
material.
17. Subsequent Events
In February 1999, the Company entered into a stock purchase agreement
providing for the purchase of 51% of the outstanding stock of Sunweb Internet
Services SIS AG ("Sunweb"), an Internet service provider located in
Switzerland, for total consideration CHF 1,477,000 ($1,024,182) and 25,000
shares of 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 Sunweb's net profit or loss before taxes. The put and call
options both expire on December 31, 2001.
In March 1999, the German government passed new tax legislation which reduced
the corporate income tax rate from 45% to 40%. In accordance with accounting
principles generally accepted in the United States of America, the Company's
deferred tax assets and liabilities related to Germany are calculated using
45%, the rate in effect at December 31, 1998. The impact of remeasuring the
deferred tax assets and liabilities using the new rate is required to be
recorded in the period the rate is enacted. The impact on net income of the
corporate tax rate reduction is estimated to be approximately $522,000 and will
be recorded in the first quarter of 1999.
F-20
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
1998 1999
------------ -------------
(unaudited)
-------------
(in thousands)
ASSETS
Cash and cash equivalents.......................... $42,876 $140,079
Short-term investments............................. 112 32
Accounts receivable, net of allowance for doubtful
accounts of $810 and $361 for June 30, 1999 and
December 31, 1998 respectively.................... 3,249 8,854
Other receivables.................................. 1,793 2,490
Prepaid expenses and other assets.................. 423 1,193
------- --------
Total current assets............................. 48,453 152,648
Property and equipment, net........................ 7,970 18,291
Product development costs, net..................... 5,743 4,794
Goodwill, net...................................... 6,505 35,633
Deferred income taxes.............................. 8,166 21,140
Restricted cash.................................... -- 58,377
Other assets....................................... 2,608 11,294
------- --------
TOTAL ASSETS..................................... $79,445 $302,177
======= ========
LIABILITIES AND SHAREHOLDERS EQUITY
LIABILITIES
Overdrafts and short-term borrowings............... $ 287 $ 88
Trade accounts payable............................. 3,346 10,165
Other accrued liabilities.......................... 1,073 8,583
Deferred purchase obligations...................... 4,483 3
Current portion long term debt and capital lease
obligations....................................... 925 1,552
Accrued personnel costs............................ 589 1,258
------- --------
Total current liabilities.......................... 10,703 21,649
Long-term debt..................................... 67 176,328
Capital lease obligations.......................... 1,316 1,175
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......................... 72,795 131,230
Accumulated deficit................................ (6,436) (24,338)
Other Comprehensive income (loss).................. 994 (3,893)
------- --------
Total shareholders equity........................ 67,359 103,025
------- --------
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY........ $79,445 $302,177
======= ========
See accompanying notes to consolidated financial statements
F-21
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
(unaudited)
Nine months ended September 30,
--------------------------------
1998 1999
--------------- ---------------
(in thousands,
except per share data)
--------------------------------
Revenue
Internet Projects........................... $ 3,118 $ 3,452
Network Services............................ 2,261 11,292
--------------- ---------------
Total revenues............................ 5,379 14,744
Cost of revenues:
Internet Projects........................... 1,887 3,238
Network Services............................ 2,619 10,702
Depreciation and amortization............... 680 2,374
--------------- ---------------
Total cost of revenues.................... 5,186 16,314
--------------- ---------------
Gross margin (loss)......................... 193 (1,570)
General and administrative expenses......... 1,241 9,377
Marketing expenses.......................... 3,268 7,244
Research and development.................... 1,166 3,796
Depreciation and amortization............... 475 2,922
--------------- ---------------
Total operating expenses.................. 6,150 23,339
Interest expense............................ 114 8,294
Interest income............................. 67 2,183
Realized foreign currency translation
losses..................................... -- (651)
--------------- ---------------
Loss before taxes and minority interest..... (6,004) (31,671)
Income tax benefit.......................... 3,226 13,668
--------------- ---------------
Net loss before minority interest........... (2,778) (18,003)
Minority interest........................... -- 101
Net loss.................................... (2,778) (17,902)
Other comprehensive loss:
Foreign currency translation adjustments.... (173) (3,892)
--------------- ---------------
Comprehensive loss.......................... $ (2,951) $ (21,794)
--------------- ---------------
Basic and diluted loss per share............ $ (0.18) $ (0.92)
=============== ===============
Number of shares used to compute earnings
per share.................................. 15,547,621 19,525,557
=============== ===============
See accompanying notes to consolidated financial statements
F-22
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine months ended
September 30,
------------------
1998 1999
-------- --------
(in thousands)
------------------
Cash Flows from Operating Activities:
Net loss.................................................. $ (2,778) $(17,902)
Adjustments to reconcile net income to net cash provided
by operations:
Deferred tax credit...................................... (3,484) (13,996)
Depreciation and amortization............................ 1,539 5,296
Provision for losses on accounts receivable.............. 30 183
Changes in operating assets and liabilities:
Trade accounts receivable................................. (1,020) (2,462)
Other receivables........................................ (710) (854)
Other assets............................................. -- (9,447)
Prepaid expenses and other assets........................ (12) (249)
Trade accounts payable................................... 2,126 3,544
Accrued interest expense................................. -- 1,270
Amortization of Bond discount............................ -- 1,360
Other accrued expenses and liabilities................... 2,262 5,885
Accrued personnel costs.................................. (186) 726
-------- --------
Total changes in operating assets and liabilities....... 2,460 (227)
-------- --------
Net cash used in operating activities.................... (2,233) (26,646)
Cash Flows from Investing Activities:
Proceeds from sale of short term investments.............. (3,140) 71
Purchase of property and equipment........................ (6,725) (10,724)
Product development costs................................. (2,758) (778)
Acquisition of businesses, net of cash acquired........... -- (22,749)
Payment of deferred purchase obligations.................. -- (4,119)
-------- --------
Net cash used in investing activities.................... (12,623) (38,299)
Cash Flows from Financing Activities:
Proceeds from issue of common stock, net.................. 12,629 --
Proceeds from issuance of bonds warrants.................. -- 51,199
--------
Proceeds from issuance of bonds and other borrowings...... 3,482 174,063
Restricted Cash........................................... -- (58,839)
Repayment of borrowings................................... -- (382)
-------- --------
Net cash provided by financing activities................ 16,111 166,041
-------- --------
Net (decrease) increase in cash and cash equivalents...... 1,255 101,096
Cash and cash equivalents at beginning of period.......... 2,239 42,876
Translation adjustments................................... (173) (3,893)
-------- --------
Cash and cash equivalents at end of period................ $3,321 140,079
======== ========
Supplemental disclosure of non-cash investing and
financing activities:
Acquisitions (Note 5):
Fair value of assets acquired............................ $2,847 33,922
Less:
Cash Acquired........................................... 6 73
Cash paid............................................... 849 22,850
Stock issued............................................ 1,468 5,249
Liabilities assumed....................................... 524 5,755
======== ========
See accompanying notes to consolidated financial statements
F-23
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 nine
month period end September 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 notes 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:
September 30
------------------------
1998 1999
----------- -----------
Numerator:
Net loss-numerator for basic and diluted loss per
share (U.S. dollars in thousands).................. $ (2,781) $ (17,902)
Denominator:
Denominator for basic and diluted loss per share --
weighted average shares outstanding................ 15,547,621 19,525,557
Basic and diluted loss per share.................... $ (0.18) $ (0.92)
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:
September 30
----------------
1998 1999
------- --------
(in thousands)
----------------
Revenues
Germany....................................................... $ 4,788 $ 7,591
US............................................................ -- --
Other......................................................... 591 7,153
------- --------
Total......................................................... $ 5,379 $ 14,744
======= ========
Cost of Revenues
Germany....................................................... $ 4,641 $ 11,065
US............................................................ -- --
Other......................................................... 545 5,249
------- --------
Total......................................................... $ 5,186 $ 16,314
======= ========
General and Admin Exp.
Germany....................................................... $ 1,030 $ 4,909
US............................................................ 128 2,098
Other......................................................... 83 2,370
------- --------
Total......................................................... $ 1,241 $ 9,377
======= ========
F-24
September 30
--------------
1998 1999
------ -------
(in thousands)
--------------
Marketing Expenses
Germany....................................................... $3,163 $ 5,525
US............................................................ -- 320
Other......................................................... 105 1,399
------ -------
Total......................................................... $3,268 $ 7,244
====== =======
Research & Development
Germany....................................................... $ 989 $ 3,497
US............................................................ -- --
Other......................................................... 177 299
------ -------
Total......................................................... $1,166 $ 3,796
====== =======
Depreciation & Amortization
Germany....................................................... $ 456 $ 2,288
US............................................................ -- 329
Other......................................................... 19 305
------ -------
Total......................................................... $ 475 $ 2,922
====== =======
Interest Expense
Germany....................................................... $ 103 $ 23
US............................................................ -- 8,146
Other......................................................... 11 125
------ -------
Total......................................................... $ 114 $ 8,294
====== =======
Interest Income
Germany....................................................... $ 12 $ 15
US............................................................ 55 2,168
Other......................................................... -- --
------ -------
Total......................................................... $ 67 $ 2,183
====== =======
Realized foreign currency translation adjustments
Germany....................................................... $ -- $ --
US............................................................ -- (651)
Other......................................................... -- --
------ -------
Total......................................................... $ -- $ (651)
====== =======
Loss before Taxes
Germany....................................................... $5,582 $19,701
US............................................................ 73 9,376
Other......................................................... 349 2,594
------ -------
Total......................................................... $6,004 $31,671
====== =======
Income Tax Benefit
Germany....................................................... $3,226 $ 8,792
US............................................................ -- 4,848
Other......................................................... -- 28
------ -------
Total......................................................... $3,226 $13,668
====== =======
Minority Interest
Germany....................................................... $ -- $ --
US............................................................ -- --
Other......................................................... -- 101
------ -------
Total......................................................... $ -- $ 101
====== =======
Net Loss
Germany....................................................... $2,356 $10,909
US............................................................ 73 4,528
Other......................................................... 349 2,465
------ -------
Total......................................................... $2,778 $17,902
====== =======
F-25
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
nine months ended September 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.
Nine months ended September 30,
---------------------------------
1998 1999
---------------- ---------------
Revenue..................................... $ 11,482,224 $ 19,051,642
Net loss.................................... 7,390,040 19,749,389
Basic and diluted loss per share............ $ (0.43) $ (1.00)
6. Financing
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
"Units"). The net proceeds (gross proceeds less discounts and commissions) of
the Unit offering were approximately $146 million.
On August 26, 1999, the Company sold $50,002,183 13% Convertible Senior
Subordinated Discount Notes due 2009. On August 26, 1999 the Company also sold
Euro 25,000,000 ($26,662,168) 13% Convertible Senior Subordinated Pay In Kind
Notes due 2009. The net proceeds of these convertible note offerings were
approximately $67 million.
F-26
7. Subsequent events
On October 28, 1999, the Company acquired 51% of the outstanding shares of
Novento Telecom AG ("Novento") and 51% of Novento's 100% owned subsidiary
Multicall Telefonmarketing AG. ("Multicall"). Novento and Multicall are German
direct marketing companies for telecommunication services. The Company has paid
cash consideration of DM 2,002,000 ($1,091,663) and transferred 39,412 shares
of its common stock to the owners of the companies. The Company has an option
to acquire the remaining 49% of the shares of both companies.
On October 29, 1999 the Company acquired the remaining 34% of the outstanding
shares of Eclipse S.p.A., an Italian corporation of which the Company already
owns 66% of the outstanding shares. The sellers of the shares are the original
founders of the Company and are currently the Managers of Finance, Marketing
and Operations in the Cybernet Italy organization. The Company has paid a
consideration of DM 707,000 ($385,517) and has deposited 136,402 shares of its
common stock in a pooling trust from which the shares will be released to the
sellers in equal installments over the next three years.
F-27
REPORT OF INDEPENDENT AUDITORS
To the Shareholder
VIANET Telekommunikations AG
We have audited the accompanying balance sheets of VIANET Telekommunikations
AG as of December 31, 1996, 1997 and 1998 and the related statements of
operations and retained earnings and cash flows for the years then ended. 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 audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 statement presentation. We believe that our
audits provide 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 VIANET Telekommunikations AG
as of December 31, 1996, 1997 and 1998 and the results of their operations and
their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
By Ernst & Young
Wirtschaftsprutungs-und
Steuerberatungs gesellschaft mbH
(Gerd Haberfehlner)
(Edith Schmit)
February 12, 1999
F-28
VIANET TELEKOMMUNIKATIONS AG
BALANCE SHEET
December 31,
---------------------------------
1996 1997 1998
--------- ---------- ----------
(all amounts in ATS)
ASSETS
Current Assets
Cash and cash equivalents................. 655,174 100,025 1,524,978
Recoverable taxes and other receivables
(Note 2)................................. 130,747 126,087 45,184
Trade accounts receivable (Note 3)........ 2,943,991 5,573,461 7,927,150
Inventories (Note 4)...................... 109,099 37,404 111,111
Prepaid expenses (Note 5)................. 135,770 246,373 593,997
--------- ---------- ----------
Total current assets.................... 3,974,781 6,083,350 10,202,420
Deposits and Other Assets................... 170,000 241,846 407,300
Fixed Assets (Note 6)
Leasehold improvements.................... 219,220 219,220 383,998
Office furniture and equipment (Note 15).. 2,745,313 6,470,090 12,079,314
--------- ---------- ----------
2,964,533 6,689,310 12,463,311
Accumulated depreciation.................. (669,029) (1,952,565) (3,787,592)
--------- ---------- ----------
2,295,504 4,736,745 8,675,719
Deferred tax asset (Note 12)................ 18,899 4,739
--------- ---------- ----------
TOTAL ASSETS................................ 6,459,184 11,061,941 19,290,177
========= ========== ==========
LIABILITIES AND SHAREHOLDERS EQUITY
Current Liabilities
Accounts payable.......................... 3,103,262 5,911,889 7,075,048
Current portion of obligations under
capital leases (Note 15)................. 976,858
Overdraft (Note 7)........................ 634,636 794,768
Accrued expenses (Note 8)................. 938,000 1,906,500 2,120,100
Corporate tax (Note 12)................... 7,500 139,200
Other payables............................ 1,069,554 1,015,162 1,744,845
Deferred income (Note 9).................. 841,983 953,178 4,747,993
--------- ---------- ----------
Total Current Liabilities............... 5,960,299 10,560,565 17,459,612
Deferred tax liability (Note 12)............ 26,024
Obligations under capital lease (Note 15)... 1,944,448
Accrued employee benefits (Note 10)......... 25,000 61,000 322,000
--------- ---------- ----------
TOTAL LIABILITIES........................... 5,985,299 10,647,589 19,726,060
--------- ---------- ----------
Shareholders Equity (Deficit) (Note 11)
Share capital............................. 250,000 250,000 750,000
Retained earnings (Accumulated deficit)... 223,885 164,352 (1,185,883)
--------- ---------- ----------
473,885 414,352 (435,883)
--------- ---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY... 6,459,184 11,061,941 19,290,177
========= ========== ==========
See accompanying notes to financial statements
F-29
VIANET TELEKOMMUNIKATIONS AG
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Years ended December 31,
----------------------------------
1996 1997 1998
---------- ---------- ----------
(all amounts in ATS)
Total revenues............................ 16,174,241 27,390,233 37,617,683
Costs and Expenses
Costs of products sold.................. 8,588,569 12,403,754 17,051,503
Research and development................ 0 0 1,282,625
General and administrative expenses..... 7,513,498 14,787,656 20,558,892
---------- ---------- ----------
16,102,067 27,191,410 38,893,020
---------- ---------- ----------
Operating profit (loss)................... 77,174 198,823 (1,275,337)
Interest income........................... 23,389 20,972 8,966
Interest expense.......................... (3,726) (86,212) (88,803)
---------- ---------- ----------
19,663 (65,240) (79,837)
---------- ---------- ----------
Income (loss) before income taxes......... 91,837 133,583 (1,355,175)
Provision for income taxes (Note 12)...... 3,899 (193,116) 4,940
---------- ---------- ----------
NET INCOME (LOSS)......................... 95,736 (59,533) (1,350,235)
Retained earnings, beginning.............. 128,149 223,885 164,352
---------- ---------- ----------
Retained earnings (Accumulated deficit),
ending................................... 223,885 164,352 (1,185,883)
========== ========== ==========
See accompanying notes to financial statements
F-30
VIANET TELEKOMMUNIKATIONS AG
STATEMENTS OF CASH FLOWS
Years ended December 31,
----------------------------------
1996 1997 1998
---------- ---------- ----------
(all amounts in ATS)
Cash Flows from Operating Activities
Net income (loss)......................... 95,736 (59,533) (1,350,235)
Adjustments to reconcile net earnings to
net cash provided by operating
activities:
Depreciation............................. 499,165 1,283,536 2,060,230
Deferred taxes........................... (18,899) 44,923 (30,763)
Change in accounts receivable,
recoverable taxes and other
receivables............................. (145,264) (2,624,810) (2,272,786)
Change in deposits and other assets...... -- (71,846) (165,454)
Change in inventories.................... 34,781 71,695 (73,707)
Change in prepaid expenses............... (12,004) (110,603) (347,624)
Change in accounts payable, accrued
expenses and other current liabilities.. 1,624,620 4,001,630 6,023,057
---------- ---------- ----------
Net cash provided by operating
activities............................ 2,078,135 2,534,992 3,842,718
Investing Activities
Expenditures for property, plant and
equipment............................... (2,059,575) (3,724,777) (3,077,897)
---------- ---------- ----------
Net cash (used in) investing
activities............................ (2,059,575) (3,724,777) (3,077,897)
Financing Activities
Increase share capital................... -- -- 500,000
Change in overdraft...................... -- 634,636 160,132
---------- ---------- ----------
-- 634,636 660,132
(Decrease) Increase in cash and cash
equivalents............................... 18,560 (555,149) 1,424,953
Cash and cash equivalents at beginning of
year...................................... 636,614 655,174 100,025
---------- ---------- ----------
Cash and Cash Equivalents at End of Year... 655,174 100,025 1,524,978
========== ========== ==========
See accompanying notes to financial statements
F-31
VIANET TELEKOMMUNIKATIONS AG
NOTES TO THE FINANCIAL STATEMENTS
As of December 31, 1998
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements have been prepared in accordance with
United States generally accepted accounting principles ("U.S. GAAP"). The
Company maintains its financial records in accordance with the Austrian
Commercial Code, which represents generally accepted accounting principles in
Austria ("Austrian GAAP"). Generally, accepted accounting principles in Austria
vary in certain significant respects from U.S. GAAP. Accordingly, the Company
has recorded certain adjustments in order that these financial statements be in
accordance with U.S. GAAP.
Business
VIANET EDV Dienstleistungs Gesellschaft mbH, an Austrian limited liability
company, was established in 1994. As of September 30, 1998 VIANET EDV
Dienstleistungs Gesellschaft mbH was legally transformed into VIANET
Telekommunikations AG, an Austrian joint-stock company ("the Company"). The
share capital of the Company was increased to ATS 1,000,000, of which ATS
750,000 has been paid in. The Company provides Internet services and
connections.
Cash & Cash Equivalents
Highly-liquid investments, with an original maturity of three months or less
from the date of purchase, are classified as cash equivalents.
Inventories
Inventories are valued at the lower of cost or market, with cost determined
on an actual basis.
Property, Plant and Equipment
The Company records fixed assets at cost less accumulated depreciation.
Depreciation, which begins when assets are placed in service, is calculated on
a straight-line basis over the estimated service lives.
Revenue Recognition
The Company's revenues consist of the basic fee that is paid three months in
advance and current fees which are invoiced after the relevant period. Prepaid
amounts are deferred under deferred income and are released into revenue over
the period of three months. Current fees are recognized as income immediately.
Fair Value of Financial Instruments
The carrying value of financial instruments such as cash, accounts receivable
and accounts payable approximate their fair value based on the short-term
maturities of these instruments. The carrying value of bank debt approximates
fair value based on quoted market prices for the same or similar issues as well
as the current rates offered to the Company.
Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-32
VIANET TELEKOMMUNIKATIONS AG
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Note 2. Recoverable Taxes and Other Receivables
Recoverable taxes and other receivables consist of (in ATS):
1996 1997 1998
--------- ---------- ----------
Capital gains tax receivable.............. 41,150 8,646 --
Value added tax........................... 26,998 38,310 29,860
Employee loans............................ 40,000 40,000 14,861
Other..................................... 22,599 39,131 463
--------- ---------- ----------
130,747 126,087 45,184
========= ========== ==========
Note 3. Trade Accounts Receivable
Total amount of accounts receivable is as follows (in ATS):
1996 1997 1998
--------- ---------- ----------
Trade accounts receivable--domestic....... 3,542,557 7,419,133 10,360,528
Provision for bad debts................... (598,566) (1,845,672) (2,433,378)
--------- ---------- ----------
2,943,991 5,573,461 7,927,150
========= ========== ==========
Provisions for bad debts were made for accounts receivable on a specific risk
of collection.
Note 4. Inventory
Inventory consists of hardware devices which are sold to customers. At
December 31, 1997 and 1998, there was no need to record a provision for
obsolete goods.
Note 5. Prepaid Expenses
Prepaid expenses consist principally of prepaid telecommunication fees,
licenses and rent expenses for a trade fair site.
Note 6. Fixed Assets
The range of estimated useful lives for different asset categories are as
follows:
Leasehold investments.............. 10 years
Hardware equipment................. 4-8 years
Office equipment................... 4-8 years
Intangible assets.................. 4-7 years
In the year of acquisition depreciation is provided for a full year basis
when acquisition is in the first half of the year or with a half year rate when
acquisition is in the second half of the year.
Intangible assets relate to EDP software and amount to ATS 36.232,00.
Note 7. Overdraft
Overdrafts represent temporary overdrafts of bank balances. The overdrafts
are not subject to formal agreements and at December 31, 1998 and 1997 carried
interest rates of 7.5% and 14%, respectively.
F-33
VIANET TELEKOMMUNIKATIONS AG
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Note 8. Accrued Expenses
Accrued expenses consist of the following (in ATS):
1996 1997 1998
------- --------- ---------
Unused holidays................................. 111,300 187,600 363,300
Telecommunication fees.......................... 469,000 435,500 --
Professional fees............................... 137,700 629,000 622,000
Lawsuits........................................ -- -- 200,000
Warranties...................................... -- 210,000 210,000
Payroll taxes................................... -- 224,400 419,500
Services not yet invoiced and other accruals.... 230,000 230,000 305,300
------- --------- ---------
948,000 1,906,500 2,120,100
======= ========= =========
Note 9. Deferred Income
The Company is an Internet provider and concludes contracts with various
private and business customers. Amounts on invoices consist of two parts: the
basic fee which is required to be paid three months in advance and current fees
which are invoiced on a current basis. Prepaid amounts are deferred under
deferred income.
1996 1997 1998
------- ------- ---------
Deferred revenue................................... 841,983 953,178 4,747,993
Note 10. Accrued Employee Benefits
According to Austrian labor law, employees are entitled to receive a
termination payment in case of termination of the employment contract by the
employer or upon retirement. The calculation of the amount due depends on the
service time and compensation of the employee. The amount ranges from two
months compensation for three months of services to 12 months compensation for
services of 25 years or longer.
The Company has recorded a provision for termination payments amounting to
ATS 61,000 and ATS 322,000 at December 31, 1997 and 1998, respectively. The
provision was calculated according to Austrian Commercial Code prescribing
application of a discounting method (discount rate 6%, retirement age 55/60 for
women/men).
Note 11. Shareholders Equity
The Company is a joint-stock company under Austrian law.
As of December 31, 1998 the Company's common stock of ATS 1,000,000 has been
paid up to an amount of ATS 750,000.
Dividends may only be declared and paid from the accumulated retained
earnings (after deduction of certain reserves) shown in the Company's annual
Austrian statutory unconsolidated accounts. Such amounts differ from the total
of retained earnings as shown in the accompanying financial statements in
accordance with U.S. GAAP. As of December 31, 1998, the Company's Austrian
statutory unconsolidated accounts reflected no accumulated earnings available
for distribution, and accordingly, the Company's ability to pay dividends in
the future will depend on the future earnings of the Company.
F-34
VIANET TELEKOMMUNIKATIONS AG
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Note 12. Provision for Income Taxes
The components of the provisions for income taxes are as follows (in ATS):
1996 1997 1998
------- ------- --------
Current.......................................... 15,000 148,193 25,823
Deferred......................................... (18,899) 44,923 (30,763)
------- ------- --------
Income tax (benefit)............................. (3,899) 193,116 (4,940)
======= ======= ========
The components of the Company's deferred tax assets and liabilities are as
follows:
1996 1997 1998
------- ------- --------
Deferred tax assets
Net operating loss............................. 55,283 -- --
Accrued employee benefits...................... 8,500 20,740 109,480
------- ------- --------
63,783 20,740 109,480
======= ======= ========
Deferred tax liability
Depreciation................................... 44,899 46,764 104,741
------- ------- --------
Net deferred tax asset (liability)............... 18,899 (26,024) 4,739
======= ======= ========
A reconciliation of income taxes using the Austrian statutory federal income
tax rate of 34% to actual income taxes provided is as follows:
1996 1997 1998
------- ------- --------
Income tax at statutory rate..................... 31,225 45,418 (457,319)
Permanent differences............................ (31,438) 166,409 351,248
Other............................................ (3,686) (18,711) 101,131
------- ------- --------
(3,899) 193,116 (4,940)
======= ======= ========
Permanent differences mainly consist of non-deductible entertainment costs
and non-deductible car costs.
Note 13. Commitments
The Company leases certain equipment under operating leases. The commitment
to future minimum lease payments is:
1999............................. ATS 591,725
2000............................. ATS 75,798
Rent expense for operating leases approximated ATS 868,402, ATS 747,484.56
and ATS 535,563.42 for the years ended December 31, 1998, 1997 and 1996,
respectively.
F-35
VIANET TELEKOMMUNIKATIONS AG
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Note 14. Contingencies
TUV Technischer Uberwachungsdienst Osterreich (TUV) filed a lawsuit against
the Company on December 1, 1997. TUV claimed ATS 210,000 for technical
malfunction of Cisco Routers which were installed and programmed by the
Company. TUV claims that the malfunction resulted in substantially increased
telephone charges. The Company has been advised by its outside counsel that TUV
could claim up to ATS 1,535,000. The company believes that the lawsuit can be
settled for a maximum amount of ATS 250,000 from which an amount of ATS 210,000
has been accrued. During the financial year 1998 no changes occurred in this
matter.
Note 15. Finance Lease
The Company has entered into a capital lease arrangement for the financing of
certain computer equipment. Future minimum lease payments are as follows (in
ATS):
1999........................................................... ATS 1,120,524
2000........................................................... ATS 1,120,524
2001........................................................... ATS 933,770
-------------
ATS 3,174,818
Less amount representing interest.............................. ATS 253,513
-------------
Present value of future minimum lease payments................. ATS 2,921,305
=============
Thereof noncurrent obligations................................. ATS 1,944,448
=============
The net book value of computer equipment under capital lease included in
fixed assets at December 31, 1998 was ATS 2,917,327.
Note 16. Change of Ownership
Effective December 28, 1998, 100% of the Company's outstanding share capital
was acquired by Cybernet Internet Services International, Inc.
F-36
INDEPENDENT AUDITORS REPORT
To the Management and Shareholders
of OPEN:NET Netzwerkdienste GmbH, Ulm
We have audited the accompanying balance sheet of OPEN:NET Netzwerkdienste
GmbH as of December 31, 1997 and the related profit and loss statement for the
year then ended. 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 audits.
We conducted our audits in accordance with auditing standards generally
accepted in Germany and the United States of America. 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
audits provide 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 OPEN:NET Netzwerkdienste GmbH
at December 31, 1997 and the results of operations for the year then ended, in
conformity with accounting principles generally accepted in Germany.
Accounting principles generally accepted in Germany vary in certain
significant respects from accounting principles generally accepted in the
United States of America to the extent summarized on page F-35-36 of the
financial statements.
/s/ Schitag Ernst & Young
Deutsche Allgemeine Treuhand AG
Wirtschaftsprufungsgesellschaft
Munich, Germany
November 10, 1998
F-37
OPEN:NET NETZWERKDIENSTE GmbH, Ulm
BALANCE SHEET
As of December 31, 1997
DM DM
---------- ----------
ASSETS
A. Fixed Assets
I. Intangible Assets
1. Franchises, trademarks, patents, licenses, and
similar rights and licenses to such rights......... 10,337.00
II. Tangible Assets
1. Other equipment, furniture and fixtures............ 130,152.10
B. Current Assets
I. Inventories
1. Work in process.................................... 20,000.00
II. Receivables and Other Assets.
1. Trade accounts receivable due after one year DM
0.00............................................... 476,206.02
2. Other assets due after one year DM 0.00............ 15,942.01 492,198.53
----------
III. Checks, cash on hand, Federal Bank and postal
giro balances, and cash in banks................. 3,191.45
C. Prepaid Expenses and Deferred Charges................. 27,600.00
----------
683,429.08
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
A. Equity
I. Stated Capital..................................... 50,000.00
II Retained Earnings.................................. 5,958.98
B. Accruals
1. Tax accruals....................................... 2,700.00
2. Other accruals..................................... 38,400.00 41,100.00
----------
C. Liabilities
1. Liabilities due to banks due within one year: DM
38,211.17.......................................... 182,181.78
2. Trade accounts payable due within one year: DM
116,257.44......................................... 116,257.44
3. Other liabilities due within one year: DM
287,930.88 thereof due to shareholders DM
136,718.71 thereof for taxes DM 66,352.50 thereof
for social security DM 18,892.52................... 287,930.88 586,370.10
---------- ----------
683,429.08
==========
F-38
OPEN:NET NETZWERKDIENSTE GmbH, Ulm
PROFIT AND LOSS STATEMENTS
(Unaudited)
Eight Months
Ended Year ended
August 31 December 31
1998 1997
DM DM
------------ ------------
1. Sales........................................ 1,748,006.37 1,776,454.36
2. Increase/Decrease in work in process......... (20,000.00) 4,600.00
3. Other operating income....................... 9,516.80 35,519.77
------------ ------------
1,737,523.25 1,816,574.13
4. Cost of materials
a) Cost of raw materials, supplies,
production materials and purchased goods.. 613,652.18 628,704.51
5. Personnel expenses
a) Wages and salaries........................ 616,478.27 486,678.69
b) Social security, pension and other benefit
costs thereof for pensions DM 1,816.50 and
DM 9,909.25............................... 97,388.82 61,240.67
------------ ------------
713,867.09 547,919.36
6. Depreciation and amortization
a) on intangible assets and tangible fixed
assets.................................... 66,434.57 72,182.42
7. Other operating expenses..................... 772,177.36 535,918.88
8. Other interest and similar income............ 3.29 203.11
9. Interest and similar expenses................ 5,836.51 15,854.63
------------ ------------
10. Result from ordinary operations.............. (434,441.17) 16,197.44
11. Taxes on income.............................. 9,020.00 10,334.75
------------ ------------
12. Net income for the year...................... (443,461.17) 5,862.69
------------ ------------
13. Profit/Loss carry-forward from prior year.... 5,958.98 96.29
------------ ------------
14. Retained Earnings............................ (437,502.19) 5,958.98
============ ============
F-39
OPEN:NET NETZWERKDIENSTE GmbH, Ulm
NOTES TO THE FINANCIAL STATEMENTS
General
The annual financial statements of OPEN: NET Netzwerkdienste GmbH have been
prepared in accordance with Section 242 and subsequent sections and Section 264
and subsequent sections of the German Commercial Code (HGB) as well as in
accordance with the relevant provisions of the Limited Liability Companies Law
(GmbHG). The Company is subject to the requirements for small companies.
The financial statement classifications remained unchanged. The profit and
loss statement was prepared in accordance with the total costs method and in
accordance with Sec. 275 of the German Commercial Code.
The company makes full use of the footnote disclosures exemptions for
smallsized corporations set forth in Sec. 288 of the commercial trade code.
Accounting and Valuation Methods
The following accounting and valuation methods, which remained unchanged in
comparison to the previous year, were used for preparing the financial
statements.
Acquired intangible and tangible assets are capitalized at acquisition cost
and, if they have a limited life, are reduced by ordinary depreciation in
accordance with their useful lives. To the extent permissible under the tax
law, the declining-balance method, otherwise the straight-line method is used.
Low-value assets of a value up to DM 800.00 are fully depreciated in the year
of acquisition with their immediate disposal being assumed. Depreciation on
additions to tangible assets is generally recognized proportionally based on
the month of acquisition. For movable assets, the simplification rule as
defined in R 44 Para. 2 of the Income Tax Guideline (EStR) is used.
Receivables and other assets are stated at their nominal value. All
foreseeable valuation risks are provided for via adequate specific allowances.
General credit risk is provided for through a general allowance.
Other accruals take into account all contingent liabilities and anticipated
losses from pending transactions.
Liabilities are recorded at their repayment value.
Explanations to the Balance Sheet
Fixed Assets
The roll-forward of the individual fixed asset positions including current-
year depreciation is disclosed under "Roll-Forward of Fixed Assets".
F-40
OPEN:NET NETZWERKDIENSTE GmbH, Ulm
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Fixed Assets Rollforward
Acquisition and Production Cost Accumulated Depreciation Net Book V
------------------------------------------ ---------------------------------------- ----------
01.01.97 Additions Disposals 31.12.97 01.01.97 Additions Disposals 31.12.97 31.12.97
DM DM DM DM DM DM DM DM DM
---------- ---------- --------- ---------- --------- --------- --------- ---------- ----------
Fixed Assets
I. Intangible Assets
I. Franchises,
trademarks,
patents, licenses
and similar rights
and licenses to
such rights........ 5,147.36 10,374.99 0.00 15,522.35 1,358.36 3,826.99 0.00 5,185.35 10,337.00
---------- ---------- ---- ---------- --------- --------- ---- ---------- ----------
II. Tangible Assets
3. Other equipment,
furniture and
fixtures............ 107,558.07 121,852.43 0.00 229,410.50 30,903.07 68,355.43 0.00 99,258.50 130,152.00
========== ========== ==== ========== ========= ========= ==== ========== ==========
112,705.43 132,227.42 0.00 244,932.85 32,261.43 72,182.42 0.00 104,443.85 140,489.00
========== ========== ==== ========== ========= ========= ==== ========== ==========
Receivables and Other Assets
Other assets include corporate income tax refunds and VAT deductible in 1998.
Tax and other accruals
Tax accruals relate to trade tax on income for 1997.
Other accruals were set up for outstanding vacation and tax consultant fees.
Liabilities due to banks
Liabilities with remaining terms of more than 5 years amount to DM 26,760.00.
Other Liabilities
Other Liabilities include payables due to shareholders, VAT payables,
outstanding invoices and commissions.
The payables due to shareholders amount to DM 136,718.73.
Contingent Liabilities and Other Financial Obligations
There are no contingent liabilities. Other financial obligations amount to DM
52,425.00.
Explanations to the Profit and Loss Statement
Other Operating Expenses
Other expenses primarily contain expenses for premises and equipment, sales
commissions and external services.
F-41
OPEN:NET NETZWERKDIENSTE GmbH, Ulm
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Other Disclosures
Management
General Managers during the financial year were:
Thomas Egner
Uwe Hagenmeier
Martin Heimann (until January 28, 1997)
Roland Lohmiller (until January 28, 1997)
Recommendation on the Appropriation of Retained Earnings
In agreement with the shareholders management recommends the carry forward
the retained earnings of DM 5,958.98 to the next financial year.
Significant Differences between Generally Accepted Accounting Principles in
Germany and the United States of America
Generally accepted accounting principles in Germany ("German GAAP") vary in
certain respects from generally accepted accounting principles in the United
States of America ("US GAAP"). The significant differences between the
accounting principles applied and those which would be applied under US GAAP
are summarized below:
Cash Flow Statements
Statements of cash flows are required to be presented under US GAAP. Cash
flow statements are not required by German GAAP.
Special accelerated depreciation
Special accelerated depreciation for tax purposes has been recorded in the
accounts and deducted from the book value of fixed assets. Under US GAAP,
accelerated depreciation would not be recorded in the financial statements.
Capitalization of Interest Cost
In application of FAS-51 and under the provisions of FAS-34 certain interest
costs, if material, have to be capitalized and added to the acquisition cost of
assets which require a certain time to get ready for their intended use. German
GAAP does not allow for the capitalization of interest related to constructed
assets.
Gunzburg, August 1998
The management
OPEN NET Netzwerkdienste GmbH
F-42
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-43
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-44
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-45
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-46
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-47
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-48
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-49
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-50
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-51
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-52
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-53
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-54
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-55
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-56
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-57
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-58
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-59
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.
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. 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-60
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-61
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-62
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-63
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-64
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-65
Head Office of the Company
Stefan-George-Ring 19-23
D-81929 Munich
Germany
Auditors to the Company
Schitag Ernst & Young
Deutsche Allgemeine Treuhand AG
Eschersheimer Landstrasse 14
D-60322 Frankfurt
Germany
Trustee
The Bank of New York
101 Barclay Street
New York, New York 10286
U.S.A.
Legal Advisors to the Company
as to U.S. law as to German law
Powell, Goldstein, Frazer & Murphy Besner Kreifels Weber
LLP 41 Widenmayerstrasse
1001 Pennsylvania Ave, NW D-80538 Munich
Washington, DC 20004 Germany
U.S.A.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Euro)25,000,000 13%
CONVERTIBLE SENIOR SUBORDINATED
PAY-IN-KIND NOTES
DUE 2009
$50,002,183 13%
CONVERTIBLE SENIOR SUBORDINATED
DISCOUNT NOTES
DUE 2009
5,617,138 SHARES OF
COMMON STOCK
[LOGO]
---------------
PROSPECTUS
---------------
Dated . 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The expenses in connection with the issuance and distribution of the
securities being registered, other than underwriting discounts and commissions,
are set forth in the following table. All amounts except the Securities and
Exchange Commission registration fee are estimated.
Securities and Exchange Commission registration fee................. $27,890.62
Printing and engraving expenses..................................... *
Legal fees.......................................................... *
Accountants' fees and expenses...................................... *
Miscellaneous....................................................... *
----------
Total............................................................. $ *
- --------
*To be completed
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law permits indemnification
of directors, officers, employees and agents of corporations for liabilities
arising under the Securities Act of 1933, as amended.
The registrant's Certificate of Incorporation and By-laws provide for
indemnification of the registrant's directors and officers to the fullest
extent permitted by Section 145 of the Delaware General Corporation Law.
Statutory Provisions
Section 102(b)(7) of the Delaware General Corporation Law enables a
corporation in its certificate of incorporation to eliminate or limit the
personal liability of members of its Board of Directors to the corporation or
its stockholders for monetary damages for violations of a director's fiduciary
duty of care. The provision would have no effect on the availability of
equitable remedies, such as an injunction or rescission, for breach of
fiduciary duty. In addition, no provision may eliminate or limit the liability
misconduct or knowingly violating a law, paying an unlawful dividend or
approving an illegal stock repurchase, or obtaining an improper personal
benefit.
Section 145 of the Delaware General Corporation Law empowers a corporation to
indemnify any person who was or is a party to or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he is or was a director, officer, employee or agent of the corporation,
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with the
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. No indemnification shall
be made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the
extent that the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for expenses which the court shall deem proper. Additionally, a
corporation is required to indemnify its directors and officers against
expenses to the extent that the directors or officers have been successful on
the merits or otherwise in any action, suit or proceeding or in defense of any
claim, issue or matter.
An indemnification can be made by the corporation only upon a determination
that indemnification is proper in the circumstances because the party seeking
indemnification has met the applicable standard of conduct as set forth in the
Delaware General Corporation Law. The indemnification provided by the Delaware
II-1
General Corporation Law shall not be deemed exclusive of any other rights to
which those seeking indemnification may be entitled under any bylaw, agreement,
vote of stockholders or disinterested directors, or otherwise. A corporation
also has the power to purchase and maintain insurance on behalf of any person,
whether or not the corporation would have the power to indemnify him against
such liability. The indemnification provided by the Delaware General
Corporation Law shall, unless otherwise provided when authorized or ratified,
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs, executors and administrators
of the person.
The Company's Charter Provision
Our Company's Certificate of Incorporation limits a director's liability for
monetary damages to our Company and our stockholders for breaches of fiduciary
duty except under the circumstances outlined in the Delaware General
Corporation Law as described above under "Statutory Provisions."
Our Company's Certificate of Incorporation extends indemnification rights to
the fullest extent authorized by the Delaware General Corporation Law to
directors and officers involved in any action, suit or proceeding where the
basis of the involvement is the person's alleged action in an official capacity
or in any other capacity while serving as a director or officer of our Company.
Item 15. Recent Sales of Unregistered Securities
During the past three years the Company sold shares of Common Stock, Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, as
follows:
Date Securities Sold Purchasers Consideration Exemption
---- ------------------ ---------------------- ------------------- ------------
June 1997 5,160,000 Cybermind Shares of Section 4(2)
Series B Preferred Cybernet AG
June 1997 1,200,000 600,000 Cybermind Shares of Section 4(2)
Series A Preferred 262,500 Andreas Eder Cybernet AG
18,750 Roland Manger
75,000 Thomas Schulz
56,250 Rudolf Strobl
187,500 Holger Timm
June 1997 5,160,000 2,257,500 Andreas Eder Shares of Section 4(2)
Common Stock 161,250 Roland Manger Cybernet AG
645,000 Thomas Schulz
483,750 Rudolf Strobl
1,612,500 Holger Timm
June 23, 1997 1,400,000(1) Private Placement $9,800,000 Regulation S
Series C Preferred Investors
September 1, 1997 72,620 Stefan Heiligensetzer $619,106 Section 4(2)
Common Stock Lothar Bernecker Purchase of Artwise
Frank Marchewicz
Gerhard Schoenenberger
Rolf Strehle
December 1997 27,000 Eiderdown Trading Ltd Payment in Section 4(2)
Common Stock connection with
the Eclipse
acquisition
II-2
Date Securities Sold Purchasers Consideration Exemption
---- --------------------- ---------------------- ------------------- ------------
August 1998 58,852 Open: Net Sellers Shares of Open: Net Section 4(2)
Common Stock Thomas Egner valued at
Uwe Hagenmeier $94,286
Markus Kress
Oliver Schaeffer
May 1998 700,000 Private Placement $12,600,000 Regulation S
Common Stock Investors
January 1999 300,000 Vianet Sellers: Shares of Vianet Section 4(2)
Common Stock Tristan Libischer
Alexander Wiesmueller
April 13, 1999 25,600 Sunweb Sellers 51% of Sunweb stock Section 4(2)
Common Stock
June 30, 1999 301,290 Flashnet Sellers Shares of Flashnet Section 4(2)
Common Stock
July 8, 1999 150,000 Units, Initial Purchasers: $145,500,000 Section 144A
each consisting Morgan Stanley,
of $1,000 Dean Witter,
14% Note and Lehman Brothers
a fraction of
warrants for
aggregate of
4,534,661 shares.
August 26, 1999 13% Discount Notes Principal Underwriter: $50,002,183 Section 144A
Morgan Stanley
August 26, 1999 13% pay-in-kind Notes Principal Underwriter: (Euro)25,000,000 Section 144A
Morgan Stanley
October 9, 1999 39,412 Common Stock Novento Seller 51% of Novento Section 4(2)
October 29, 1999 136,402 Common Stock Eclipse Sellers 34% of Eclipse Section 4(2)
- --------
(1) Between May 31, 1998 and September 30, 1998, all of the 1,400,000 shares of
Series C Preferred Stock were converted to the same number of shares of
Common Stock by the holders thereof.
II-3
Item 16. Exhibits.
Exhibit
Number Description
------- -----------
1.1 Amended Underwriting Agreement (Incorporated by reference to Exhibit
1.1 to Form S-1/A Registration Statement No. 333-63755 filed with the
Commission on November 25, 1998).
1.2 Purchase Agreement dated July 1, 1999 by and among the Company, Lehman
Brothers International (Europe) and Morgan Stanley & Co. International
Limited relating to the Company's $150,000,000 in Units comprised of
14% Senior Notes due 2009 and Warrants. (Incorporated by reference to
Exhibit 1.2 to Form S-4 Registration Statement No. 333-86853 filed
September 10, 1999.)
1.3 Purchase Agreement dated as of August 19, 1999 by and between the
Company and Morgan Stanley & Co. International Limited relating to the
Company's (Euro)25,000,000 Convertible Senior Subordinated Pay-In-Kind
Notes due 2009. (Incorporated by reference to Exhibit 1.3 to Form S-4
Registration Statement No. 333-86853 filed September 10, 1999.)
1.4 Purchase Agreement dated as of August 19, 1999 by and between the
Company and Morgan Stanley & Co. International Limited relating to the
Company's $35,000,000 13.0% Convertible Senior Subordinated Discount
Notes due 2009. (Incorporated by reference to Exhibit 1.4 to Form S-4
Registration Statement No. 333-86853 filed September 10, 1999.)
1.5 Purchase Agreement dated as of August 23, 1999 by and between the
Company and Morgan Stanley & Co. International Limited relating to the
Company's $15,002,183 13.0% Convertible Senior Subordinated Discount
Notes due 2009. (Incorporated by reference to Exhibit 1.5 to Form S-4
Registration Statement No. 333-86853 filed September 10, 1999.)
3.1 Certificate of Incorporation. (Incorporated by reference to Exhibit
3.1 to Form S-1 Registration Statement No. 333-63755 filed with the
Commission on September 18, 1998).
3.2 Bylaws (Incorporated by reference to Exhibit 3.2 to Form S-1
Registration Statement No. 333-63755 filed with the Commission on
September 18, 1998).
4.1 Unit Agreement dated as of July 8, 1999 by and among the Company,
Lehman Brothers International (Europe) and Morgan Stanley & Co.
International Limited. (Incorporated by reference to Exhibit 4.1 to
Form S-4 Registration Statement No. 333-86853 filed September 10,
1999.)
4.2 Indenture dated as of July 8, 1999 by and between the Company and The
Bank of New York, relating to the Company's notes contained in the
Units. (Incorporated by reference to Exhibit 4.2 to Form S-4
Registration Statement No. 333-86853 filed September 10, 1999.)
4.3 Collateral Agreement dated as of July 8, 1999 by and among the
Company, Lehman Brothers International (Europe) and Morgan Stanley &
Co. International Limited, relating to the Unit Agreement.
(Incorporated by reference to Exhibit 4.3 to Form S-4 Registration
Statement No. 333-86853 filed September 10, 1999.)
4.4 Registration Rights Agreement dated as of July 8, 1999 by and among
the Company, Lehman Brothers International (Europe) and Morgan Stanley
& Co. International Limited, relating to the Company's notes contained
in the Units. (Incorporated by reference to Exhibit 4.4 to Form S-4
Registration Statement No. 333-86853 filed September 10, 1999.)
4.5 Warrant Agreement, dated as of July 8, 1999 by and among Cybernet
Internet Services International, Inc., Lehman Brothers International
(Europe) and Morgan Stanley & Co. International Limited, relating to
the Company's warrants contained in the Units. (Incorporated by
reference to Exhibit 4.5 to Form S-4 Registration Statement No. 333-
86853 filed September 10, 1999.)
5.1** Opinion of Powell, Goldstein, Frazer & Murphy LLP.
II-4
Exhibit
Number Description
------- -----------
10.1 Sale and Assignment of Business Shares of the Artwise GmbH Software
Losugen dated September 18, 1997 by and among Mr. Stefan
Heiligensetzer, Mr. Frank Marchewicz, Mr. Rolf Strehle, Mr. Gerhard
Schonenberger, Mr. Lothar Bernecker, Artwise GmbH Software Solutions,
Cybernet Internet--Dienstleistungen AG and Cybernet Internet--
Beteiligungs GmbH (Incorporated by reference Exhibit 10.1 to Form S-1
Registration Statement No. 333-63755 filed with the Commission on
September 18, 1998).
10.2 Sale and Assignment of Shares in OpenNet Internet Solutions GmbH dated
August 12, 1998 by and among Mr. Thomas Egner, Mr. Uwe Hagenmeier, Mr.
Markus Kress, Mr. Oliver Schaffer, Cybernet Internet Dienstleistungen
AG, and Cybernet Internet--Beteiligungs GmbH (Incorporated by
reference to Exhibit 10.2 to Form S-1 Registration Statement No. 333-
63755 filed with the Commission on September 18, 1998).
10.3 Private Agreement for the Sale of Company Shareholdings and Increase
of Share Capital dated December 4, 1997 by and among Cybernet Internet
Dienstleistung ag, Mr. Robert Loro, Stefano Longano, Domenico Loro,
Angelo Longano, Emma Pontara, Maria Teresa Francesconi and Mauro
Longano (Incorporated by reference to Exhibit 10.3 to Form S-1
Registration Statement No. 333-63755 filed with the Commission on
September 18, 1998).
10.4 Stock Purchase Agreement dated June 17, 1998 among the Company,
Tristan Libischer, and Alexander Wiesmuller (Incorporated by reference
to Exhibit 10.4 to Form S-1 Registration Statement No. 333-63755 filed
with the Commission on September 18, 1998).
10.5 Stock Purchase Agreement, dated June 11, 1997, among the Company,
Cybermind Interactive Europe AG, Rudolf Strobl, Roland Manger, Thomas
Schulz, Andreas Eder, and Holger Timm (Incorporated by reference to
Exhibit 10.5 to Form S-1 Registration Statement No. 333-63755 filed
with the Commission on September 18, 1998).
10.6 Pooling and Trust Agreement dated August 18, 1997 among Cybermind
Interactive Europe AG, Andreas Eder, Roland Manger, Thomas Schulz,
Rudolf Strobl, Holger Timm, and Dr. Hurbert Besner, as trustee
(Incorporated by reference to Exhibit 10.6 to Form S-1 Registration
Statement No. 333-63755 filed with the Commission on September 18,
1998).
10.7 Pooling and Trust Agreement dated August 1, 1998 between Stefan
Heiligensetzer and Dr. Hubert Besner, as trustee (Incorporated by
reference to Exhibit 10.7 to Form S-1 Registration Statement No. 333-
63755 filed with the Commission on September 18, 1998).
10.7.1 Schedule of Additional Artwise Pooling Agreements, referencing
agreements of Mr. Marchewicz, Mr. Strehle, Mr. Schonenberger and Mr.
Bernecker (Incorporated by reference to Exhibits 10.7 and 10.7.1 to
Form S-1 Registration Statement No. 333-63755 filed with the
Commission on September 18, 1998).
10.8 Consulting Agreement dated December 15, 1997 between Cybernet
Internet--Dienstleistungen AG and Eiderdown Trading Ltd. (Incorporated
by reference to Exhibit 10.8 to Form S-1 Registration Statement No.
333-63755 filed with the Commission on September 18, 1998).
10.9 Employment Contract dated February 23, 1998 between Cybernet
Internet--Dienstleistungen Aktiengesellschaft and Andreas Eder
(Incorporated by reference to Exhibit 10.9 to Form S-1 Registration
Statement No. 333-63755 filed with the Commission on September 18,
1998).
10.10 Employment Contract dated May 15, 1997 between Cybernet Internet--
Dienstleistungen Aktiengesellschaft and Alessondro Giacalone
(Incorporated by reference to Exhibit 10.10 to Form S-1 Registration
Statement No. 333-63755 filed with the Commission on September 18,
1998).
II-5
Exhibit
Number Description
------- -----------
10.11 Employment Contract dated April 28, 1997 between Cybernet Internet
Dienstleistungen AG and Christian Moosmann (Incorporated by reference
to Exhibit 10.11 to Form S-1 Registration Statement No. 333-63755
filed with the commission on September 18, 1998).
10.12 Employment Contract dated February 23, 1998 between Cybernet
Internet--Dienstleistungen Aktiengesellschaft and Rudolf Strobl
(Incorporated by reference to Exhibit 10.12 to Form S-1 Registration
Statement No. 333-63755 filed with the Commission on September 18,
1998).
10.13 Sublease for business premises office dated February 29, 1996 between
KG Bayerische Hausbau GmbH and Co. and Cybernet AG.i.G. (Incorporated
by reference to Exhibit 10.13 to Form S-1 Registration Statement No.
333-63755 filed with the Commission on September 18, 1998).
10.14 Full Amortization leasing Agreement No. 13 00 00 for Hard- and
Software with purchase, extension and return options between CyberNet
Internet--Dienstleistungen AG and Miller Leasing Miete GMbH dated
January 22, 1998 (Incorporated by reference to Exhibit 10.14 to Form
S-1 Registration Statement No. 333-63755 filed with the Commission on
September 18, 1998).
10.15 Agreement on the use of Data Communication Installations of Info AG
dated July 29, 1996 between Info AG and CyberNet Internet--
Dienstleistungen Ag (Incorporated by reference to Exhibit 10.15 to
Form S-1 Registration Statement No. 333-63755 filed with the
Commission on September 18, 1998).
10.16 Ebone Internet Access Contract dated February 26, 1997 between Ebone
Inc. and Cybernet AG (Incorporated by reference to Exhibit 10.16 to
Form S-1 Registration Statement No. 333-63755 filed with the
Commission on September 18, 1998).
10.17 Agreement, undated, between feratel International GmbH and Cybernet
Internet--Dienstleistungen AG (Incorporated by reference to Exhibit
10.17 to Form S-1 Registration Statement No. 333-63755 filed with the
Commission on September 18, 1998).
10.18 Cybernet Internet Services International, Inc. 1998 Stock Incentive
Plan (Incorporated by reference to Exhibit 10.18 to Form S-1/A
Registration Statement No. 333-63755 filed with the Commission on
November 5, 1998).
10.19 Cybernet Internet Services International, Inc. 1998 Outside Directors'
Stock Option Plan (Incorporated by reference to Exhibit 10.19 to Form
S-1/A Registration Statement No. 333-63755 filed with the Commission
on November 5, 1998).
10.20 Agreement and Plan of Merger, dated October 9, 1998, between the
Company, a Utah corporation, and Cybernet Internet Services
International, Inc., a Delaware corporation (Incorporated by reference
to Exhibit 2.1 to Form S-1/A Registration Statement No. 333-63755
filed on November 5, 1998).
10.23 Registration Rights Agreement dated August 26, 1999 by and between the
Company and Morgan Stanley & Co. International Limited relating to the
Company's (Euro)25,000,000 Convertible Senior Subordinated Pay-In-Kind
Notes due 2009. (Incorporated by reference to Exhibit 10.23 to Form S-
4 Registration Statement No. 333-86855 filed with the Commission on
September 10, 1999).
10.24 Indenture dated August 26, 1999 by and between the Company and The
Bank of New York relating to the Company's (Euro)25,000,000
Convertible Senior Subordinated Pay-In-Kind Notes due 2009.
(Incorporated by reference to Exhibit 10.25 to Form S-4 Registration
Statement No. 333-86855 filed with the Commission on September 10,
1999).
10.26 Registration Rights Agreement dated August 26, 1999 by and between the
Company and Morgan Stanley & Co. International Limited relating to the
company's $35,000,000 13.0% Convertible Senior Subordinated Discount
Notes due 2009 (Incorporated by reference to Exhibit 10.26 to Form S-4
Registration Statement No. 333-86855 filed with the Commission on
September 10, 1999).
10.27 Registration Rights Agreement dated August 26, 1999 by and between the
Company and Morgan Stanley & Co. International Ltd. relating to the
company's $15,002,183 13.0% Convertible Senior Subordinated Discount
Notes due 2009. (Incorporated by reference to Exhibit 10.27 to Form S-
4 Registration Statement No. 333-86855 filed with the Commission on
September 10, 1999).
II-6
Exhibit
Number Description
------- -----------
10.28 Indenture dated August 26, 1999 by and between the Company and The
Bank of New York relating to the company's $35,000,000 and $15,002,183
13.0% Convertible Senior Subordinated Discount Notes due 2009.
(Incorporated by reference to Exhibit 10.28 to Form S-4 Registration
Statement No. 333-86855 filed with the Commission on September 10,
1999).
10.29* Condition Precedent Sale and Transfer of Novento Telecom AG and
Multicall Telefonmarketing AG Stock and Sale and Assignment of Claims.
21.1* Subsidiaries.
23.4* Consent of Ernst & Young Deutsche Allgemeine Treuhand AG.
23.5* Consent of Ernst & Young, Wirtschaftsprufungs-Und,
Steuerberatungsellschaft MBH.
23.6* Consent of Grant Thornton S.p.A.
24.1* Power of Attorney (included in the signature page hereto).
25.1* Statement of Eligibility of Trustee Regarding Pay-In-Kind Notes.
25.2* Statement of Eligibility of Trustee Regarding Discount Notes.
27.1 Financial Data Schedule (Incorporated by reference to Exhibit 27 to
the Quarterly Report on Form 10-Q for Cybernet filed November 15,
1999).
- --------
* Previously filed
**To be filed by amendment
II-7
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
The undersigned registrant hereby undertakes that, for purposes of determining
any liability under the Securities Act of 1933, each filing of the registrant's
annual report pursuant to section 13(a) or section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to section 15(d) of the Securities Exchange Act
of 1934) that is incorporated by reference in the registration statement shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this amendment to its registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Munich, Germany,
on January 7, 2000.
Cybernet Internet Services
International, Inc.
/s/ Andreas Eder
By: _________________________________
Andreas Eder
Chairman of the Board of
Directors, President and Chief
Executive Officer
The undersigned Attorney-in-Fact, by signing his name below, does hereby sign
Amendment No. 1 to this registration statement on behalf of the indicated
officers and directors of the Registrant pursuant to a power of attorney
executed by such persons and filed as part of the original registration
statement.
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed below by the following persons in the capacities and
on the dates indicated.
SIGNATURE TITLE DATE
/s/ Andreas Eder Chairman of the Board of January 7,
- ----------------------------- Directors, President and Chief 2000
ANDREAS EDER Executive Officer (Principal
Executive Officer)
Alessandro Giacalone* Director and Chief Operating January 7,
- ----------------------------- Officer 2000
DR. ALESSANDRO GIACALONE
Robert Fratarcangelo* Director and Secretary January 7,
- ----------------------------- 2000
ROBERT FRATARCANGELO
Hubert Besner* Director January 7,
- ----------------------------- 2000
DR. HUBERT BESNER
Tristan Libischer* Director January 7,
- ----------------------------- 2000
TRISTAN LIBISCHER
G. W. Norman Wareham* Director January 7,
- ----------------------------- 2000
G. W. NORMAN WAREHAM
Robert Eckert* Chief Financial Officer and January 7,
- ----------------------------- Treasurer (Principal Financial 2000
and Accounting Officer)
ROBERT ECKERT
/s/ Andreas Eder
*By:
-------------------------
ANDREAS EDER AS ATTORNEY-IN-FACT
II-9
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
1.1 Amended Underwriting Agreement (Incorporated by reference as Exhibit
1.1 to the Form S-1/A Registration Statement filed with the Commission
on November 25, 1998).
1.2 Purchase Agreement dated July 1, 1999 by and among the Company, Lehman
Brothers International (Europe) and Morgan Stanley & Co. International
Limited relating to the Company's $150,000,000 in Units comprised of
14% Senior Notes due 2009 and Warrants.
1.3 Purchase Agreement dated as of August 19, 1999 by and between the
Company and Morgan Stanley & Co. International Limited relating to the
Company's (Euro)25,000,000 Convertible Senior Subordinated Pay-In-Kind
Notes due 2009.
1.4 Purchase Agreement dated as of August 19, 1999 by and between the
Company and Morgan Stanley & Co. International Limited relating to the
Company's $35,000,000 13.0% Convertible Senior Subordinated Discount
Notes due 2009.
1.5 Purchase Agreement dated as of August 23, 1999 by and between the
Company and Morgan Stanley & Co. International Limited relating to the
Company's $15,002,183 13.0% Convertible Senior Subordinated Discount
Notes due 2009.
3.1 Certificate of Incorporation. (Incorporated by reference as Exhibit
3.1 to the Form S-1 Registration Statement filed with the Commission
on September 18, 1998).
3.2 Bylaws (Incorporated by reference as Exhibit 3.2 to the Form S-1
Registration Statement filed with the Commission on September 18,
1998).
4.1 Unit Agreement dated as of July 8, 1999 by and among the Company,
Lehman Brothers International (Europe) and Morgan Stanley & Co.
International Limited.
4.2 Indenture dated as of July 8, 1999 by and between the Company and The
Bank of New York, relating to the Company's notes contained in the
Units.
4.3 Collateral Agreement dated as of July 8, 1999 by and among the
Company, Lehman Brothers International (Europe) and Morgan Stanley &
Co. International Limited, relating to the Unit Agreement.
4.4 Registration Rights Agreement dated as of July 8, 1999 by and among
the Company, Lehman Brothers International (Europe) and Morgan Stanley
& Co. International Limited, relating to the Company's notes contained
in the Units.
4.5 Warrant Agreement, dated as of July 8, 1999 by and among Cybernet
Internet Services International, Inc., Lehman Brothers International
(Europe) and Morgan Stanley & Co. International Limited, relating to
the Company's warrants contained in the Units.
5.1** Opinion of Powell, Goldstein, Frazer & Murphy LLP.
10.1 Sale and Assignment of Business Shares of the Artwise GmbH Software
Losugen dated September 18, 1997 by and among Mr. Stefan
Heiligensetzer, Mr. Frank Marchewicz, Mr. Rolf Strehle, Mr. Gerhard
Schonenberger, Mr. Lothar Bernecker, Artwise GmbH Software Solutions,
Cybernet Internet--Dienstleistungen AG and Cybernet Internet--
Beteiligungs GmbH (Incorporated by reference as Exhibit 10.1 to the
Form S-1 Registration Statement filed with the Commission on September
18, 1998).
10.2 Sale and Assignment of Shares in OpenNet Internet Solutions GmbH dated
August 12, 1998 by and among Mr. Thomas Egner, Mr. Uwe Hagenmeier, Mr.
Markus Kress, Mr. Oliver Schaffer, Cybernet Internet Dienstleistungen
AG, and Cybernet Internet--Beteiligungs GmbH (Incorporated by
reference as Exhibit 10.2 to the Form S-1 Registration Statement filed
with the Commission on September 18, 1998).
Exhibit
Number Description
------- -----------
10.3 Private Agreement for the Sale of Company Shareholdings and Increase
of Share Capital dated December 4, 1997 by and among Cybernet Internet
Dienstleistung ag, Mr. Robert Loro, Stefano Longano, Domenico Loro,
Angelo Longano, Emma Pontara, Maria Teresa Francesconi and Mauro
Longano (Incorporated by reference as Exhibit 10.3 to the Form S-1
Registration Statement filed with the Commission on September 18,
1998).
10.4 Stock Purchase Agreement dated June 17, 1998 among the Company,
Tristan Libischer, and Alexander Wiesmuller (Incorporated by reference
as Exhibit 10.4 to the Form S-1 Registration Statement filed with the
Commission on September 18, 1998).
10.5 Stock Purchase Agreement, dated June 11, 1997, among the Company,
Cybermind Interactive Europe AG, Rudolf Strobl, Roland Manger, Thomas
Schulz, Andreas Eder, and Holger Timm (Incorporated by reference as
Exhibit 10.5 to the Form S-1 Registration Statement filed with the
Commission on September 18, 1998).
10.6 Pooling and Trust Agreement dated August 18, 1997 among Cybermind
Interactive Europe AG, Andreas Eder, Roland Manger, Thomas Schulz,
Rudolf Strobl, Holger Timm, and Dr. Hurbert Besner, as trustee
(Incorporated by reference as Exhibit 10.6 to the Form S-1
Registration Statement filed with the Commission on September 18,
1998).
10.7 Pooling and Trust Agreement dated August 1, 1998 between Stefan
Heiligensetzer and Dr. Hubert Besner, as trustee (Incorporated by
reference as Exhibit 10.7 to the Form S-1 Registration Statement filed
with the Commission on September 18, 1998).
10.7.1 Schedule of Additional Artwise Pooling Agreements, referencing
agreements of Mr. Marchewicz, Mr. Strehle, Mr. Schonenberger and Mr.
Bernecker (Incorporated by reference as Exhibits 10.7 and 10.7.1 to
the Form S-1 Registration Statement filed with the Commission on
September 18, 1998).
10.8 Consulting Agreement dated December 15, 1997 between Cybernet
Internet--Dienstleistungen AG and Eiderdown Trading Ltd. (Incorporated
by reference as Exhibit 10.8 to the Form S-1 Registration Statement
filed with the Commission on September 18, 1998).
10.9 Employment Contract dated February 23, 1998 between Cybernet
Internet--Dienstleistungen Aktiengesellschaft and Andreas Eder
(Incorporated by reference as Exhibit 10.9 to the Form S-1
Registration Statement filed with the Commission on September 18,
1998).
10.10 Employment Contract dated May 15, 1997 between Cybernet Internet--
Dienstleistungen Aktiengesellschaft and Alessondro Giacalone
(Incorporated by reference as Exhibit 10.10 to the Form S-1
Registration Statement filed with the Commission on September 18,
1998).
10.11 Employment Contract dated April 28, 1997 between Cybernet Internet
Dienstleistungen AG and Christian Moosmann (Incorporated by reference
as Exhibit 10.11 to the Form S-1 Registration Statement filed with the
commission on September 18, 1998).
10.12 Employment Contract dated February 23, 1998 between Cybernet
Internet--Dienstleistungen Aktiengesellschaft and Rudolf Strobl
(Incorporated by reference as Exhibit 10.12 to the Form S-1
Registration Statement filed with the Commission on September 18,
1998).
10.13 Sublease for business premises office dated February 29, 1996 between
KG Bayerische Hausbau GmbH and Co. and Cybernet AG.i.G. (Incorporated
by reference as Exhibit 10.13 to the Form S-1 Registration Statement
filed with the Commission on September 18, 1998).
10.14 Full Amortization leasing Agreement No. 13 00 00 for Hard- and
Software with purchase, extension and return options between CyberNet
Internet--Dienstleistungen AG and Miller Leasing Miete GMbH dated
January 22, 1998 (Incorporated by reference as Exhibit 10.14 to the
Form S-1 Registration Statement filed with the Commission on September
18, 1998).
Exhibit
Number Description
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10.15 Agreement on the use of Data Communication Installations of Info AG
dated July 29, 1996 between Info AG and CyberNet Internet--
Dienstleistungen Ag (Incorporated by reference as Exhibit 10.15 to the
Form S-1 Registration Statement filed with the Commission on September
18, 1998).
10.16 Ebone Internet Access Contract dated February 26, 1997 between Ebone
Inc. and Cybernet AG (Incorporated by reference as Exhibit 10.16 to
the Form S-1 Registration Statement filed with the Commission on
September 18, 1998).
10.17 Agreement, undated, between feratel International GmbH and Cybernet
Internet--Dienstleistungen AG (Incorporated by reference as Exhibit
10.17 to the Form S-1 Registration Statement filed with the Commission
on September 18, 1998).
10.18 Cybernet Internet Services International, Inc. 1998 Stock Incentive
Plan (Incorporated by reference as Exhibit 10.18 to the Form S-1/A
Registration Statement filed with the Commission on November 5, 1998).
10.19 Cybernet Internet Services International, Inc. 1998 Outside Directors'
Stock Option Plan (Incorporated by reference as Exhibit 10.19 to the
Form S-1/A Registration Statement filed with the Commission on
November 5, 1998).
10.20 Agreement and Plan of Merger, dated October 9, 1998, between the
Company, a Utah corporation, and Cybernet Internet Services
International, Inc., a Delaware corporation (Incorporated by reference
as Exhibit 2.1 to the Form S-1/A Registration Statement filed on
November 5, 1998).
10.23 Registration Rights Agreement dated August 26, 1999 by and between the
Company and Morgan Stanley & Co. International Limited relating to the
Company's (Euro)25,000,000 Convertible Senior Subordinated Pay-In-Kind
Notes due 2009.
10.24 Indenture dated August 26, 1999 by and between the Company and The
Bank of New York relating to the Company's (Euro)25,000,000
Convertible Senior Subordinated Pay-In-Kind Notes due 2009.
10.26 Registration Rights Agreement dated August 26, 1999 by and between the
Company and Morgan Stanley & Co. International Limited relating to the
company's $35,000,000 13.0% Convertible Senior Subordinated Discount
Notes due 2009
10.27 Registration Rights Agreement dated August 26, 1999 by and between the
Company and Morgan Stanley & Co. International Ltd. relating to the
company's $15,002,183 13.0% Convertible Senior Subordinated Discount
Notes due 2009.
10.28 Indenture dated August 26, 1999 by and between the Company and The
Bank of New York relating to the company's $35,000,000 and $15,002,183
13.0% Convertible Senior Subordinated Discount Notes due 2009.
10.29* Condition Precedent Sale and Transfer of Novento Telecom AG and
Multicall Telefonmarketing AG Stock and Sale and Assignment of Claims.
21.1* Subsidiaries.
23.4* Consent of Ernst & Young Deutsche Allgemeine Treuhand AG.
23.5* Consent of Ernst & Young, Wirtschaftsprufungs-Und,
Steuerberatungsellschaft MBH.
23.6* Consent of Grant Thornton S.p.A.
24.1* Power of Attorney (included in the signature page hereto).
25.1* Statement of Eligibility of Trustee Regarding Pay-In-Kind Notes.
25.2* Statement of Eligibility of Trustee Regarding Discount Notes.
27.1 Financial Data Schedule (Incorporated by reference to Exhibit 27 to
the Quarterly Report on Form 10-Q for Cybernet filed November 15,
1999).
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* Previously filed
** To be filed by amendment