As filed with the Securities and Exchange Commission on March 23, 2000
Registration No. 333-96525
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 (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) 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
Title of Each Class of Proposed Maximum Maximum
Securities to be Amount to be Aggregate Price Per Aggregate Amount of
Registered Registered Unit Offering Price Registration Fee
- -------------------------------------------------------------------------------------------------
Common Stock, par value
$.001 per share........ 4,534,661 shares(2) $10.875 per share(2) $49,314,438.38 $13,019.01(3)
- -------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Represents 4,534,661 shares issuable upon exercise of warrants. Such number
of shares registered hereby shall include an indeterminable number of
shares that may be issued in connection with a stock split, stock dividend,
recapitalization or similar event.
(2) Based upon the average of the high and low price of shares of common stock
on February 3, 2000.
(3) 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 MARCH 23, 2000
PROSPECTUS
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
[LOGO]
4,534,661 Shares of Common Stock
This prospectus relates to the resale from time to time of the securities set
forth above by selling securityholders identified on pages 85 and 86.
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 March 21, 2000, the last
reported sale price for our common stock on the OTC Bulletin Board and the
Neuer Market was $13.75 per share and (Euro)14.63 per share, respectively.
------------
An investment in our common stock involves a high degree of risk. Please see
"Risk Factors" beginning on page 5.
------------
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 March , 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 Charges....................................... 4
Risk Factors............................................................. 5
Use of Proceeds.......................................................... 20
Exchange Rate Information................................................ 21
Price Range of Common Stock and Dividend Policy.......................... 22
Capitalization........................................................... 23
Selected Consolidated Financial and Operating Data....................... 24
Unaudited Pro Forma Consolidated Financial Statements.................... 26
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 31
Page
----
Quantitative and Qualitative Disclosures About Market Risk................. 48
Business................................................................... 49
Information Regarding Significant Subsidiaries............................. 66
Management................................................................. 67
Related Party Transactions................................................. 73
Stock Ownership of Principal Beneficial Owners and Management.............. 74
Description of Material Indebtedness....................................... 77
Description of Capital Stock............................................... 79
Anti-Takeover Provisions................................................... 82
Selling Securityholders.................................................... 85
Plan of Distribution....................................................... 87
Legal Matters.............................................................. 89
Independent Accountants.................................................... 89
Available Information...................................................... 89
Listing and General Information............................................
Glossary of Terms.......................................................... 90
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)1.0312 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 March 17, 2000. 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 5.
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 90 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 "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 their use is such that it is clear that a
term means only Cybernet Internet Services International, Inc. 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 and voice 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 4,534,661 shares of our common stock issuable upon
exercise of stock purchase warrants which we issued on July 8, 1999, and which
we refer to as the Warrants. The Warrants were issued as part of units
consisting of $150 million in aggregate principal amount of our senior notes
and the Warrants.
Risk Factors
See "Risk Factors" for a discussion of factors you should carefully consider
before deciding to invest in our common stock. Risk Factors begin on page 5.
2
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 have been derived from our
audited Consolidated Financial Statements included elsewhere in this
prospectus. The summary financial data as of and for the nine months ended
September 30, 1998 and 1999 have been derived from unaudited Interim Financial
Statements. 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,
----------------------------------- ----------------------------
(Unaudited)
Pro forma
1998 Pro forma
1996 1997 1998 (Unaudited) 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)
===== ====== ======= ======= ======= ======== ========
3
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)
4
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.
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
5
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 (the
"Private Unit Offering") we made in July 1999 has been set aside for the
payment of interest on the senior notes issued in the aggregate
principal amount of $150 million which were included in the units (the
"Senior Notes");
. the covenants included in the indenture governing the Senior Notes and
the indentures governing our Convertible Senior Subordinated Discount
Notes issued in the aggregate initial accreted value of $50,002,183 (the
"Discount Notes") and our Convertible Senior Subordinated Pay-In-Kind
Notes issued in the aggregate principal amount of (Euro)25 million (the
"PIK Notes") may restrict our ability to expand or pursue certain
business opportunities;
. 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 Discount Notes, we will need to use a large
portion of the money earned by our subsidiaries to pay interest on the
Discount 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;
. 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 our debt 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 Our Obligations.
We cannot be certain that our subsidiaries will earn enough money to allow us
to pay the principal and interest on our debt, 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.
6
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 our debt instruments 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.
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.
The Agreements Governing Our Material Debt Contain Restrictive Covenants--The
restrictive covenants in the agreements may restrict our ability to operate our
business and expand our operations.
Each of the agreements governing our Material debt 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 Material
Indebtedness."
Our financing agreements could trigger defaults under such agreements even if
we are able to pay our debt.
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;
7
. 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
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--Without these arrangements our services could be
noncompetitive.
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") 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
8
additional qualified personnel, this could materially adversely affect our
business, financial condition and results of operations.
We Are Dependent on Our Suppliers to Maintain the Price and Quality of our
Services.
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 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.
9
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;
. 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 the Private Unit Offering and the Discount 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
governing the Senior Notes, Discount Notes and PIK Notes), we will be required
to make an offer to purchase all of such 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
10
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.
Questions About Our Status Under German Law Could Interfere with Some of Our
Contracts.
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 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, as of November 10, 1999 Holger Timm, a former director of
Cybernet who resigned on December 2, 1998, either directly or indirectly
through a company controlled by him, owned 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.
As of November 10, 1999, Holger Timm, a former director of Cybernet who
resigned on December 2, 1998, directly or indirectly, held 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,
11
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
Discourage Bids for Our Common Stock.
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.
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.
12
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;
. 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 which Prevent us from Providing
Uninterrupted Access to the Internet.
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.
13
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.
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.
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. 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.
14
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.
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. Please refer to "Business--
Regulation" on page 64 for a fuller discussion of the regulations which affect
our business.
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. Any claims for infringement of trademark
or other intellectual property 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.
15
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 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.
16
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 on our debt. 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 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 growing and
changing rapidly. 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.
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. 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.
17
The Markets in Which We Operate Are Highly Competitive:
Competition in the Internet Services Market
The Internet services market is extremely competitive and there are no
substantial barriers to entry. We expect competition in this market to
intensify in the future.
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;
18
. 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.
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 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.
19
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.
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
any of the shares of common stock.
20
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 1999/2000(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
January 31........................................... 1.0249 0.9930 1.0249
- --------
(a) On March 17, 2000, the Noon Buying Rate was $1.00 = (Euro)1.0312 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 (www.ny.frb.org; statistics; noon buying rates).
21
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 March 21, 2000
was $13.75 per share and (Euro)14.63 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.
22
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
========
23
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,
------------------------------------- -----------------------------
(Unaudited)
Pro forma
1998 (/1/) Pro forma
1996 1997 1998 (Unaudited) 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)
===== ======= ======== ======== ======= ======== ========
24
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.
25
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.
26
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
========== ======== ==========
27
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
============= ========== =============
28
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
29
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
========== ==========
30
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.
31
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
32
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
33
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.
34
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).
35
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
36
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 the Units sold in
July. 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
which consisted of the Senior Notes and the Warrants (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
37
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.
38
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.
39
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
40
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
41
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,
42
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 indentures for the Senior
Notes, to fund the first six interest payments on the Senior Notes. In
addition, the private offerings of the Discount Notes and the PIK Notes 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.
43
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:
1. progress payments on a new billing system totaling approximately DM
5,379,472 ($2,933,350),
2. investments in POP equipment of approximately DM 3,986,943 ($2,174,024),
3. investments in various computer and technical equipment totaling
approximately DM 4,486,454 ($1,185,465), and
4. 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
44
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.
45
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
46
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.
47
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.
48
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. The terms "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.
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 OpenShop,
Oracle, Intel, Teldefax, InfoAG, Cisco and SUN Microsystems. 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.
49
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 and voice 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. 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 eight 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 and a license to operate a telecommunication infrastructure;
. installed 2 Nortel DMS-100 switches and ordered another 1;
. installed the Kenan billing system; and
. entered into an interconnection agreement with Deutsche Telecom.
In order to enable us to begin offering voice telephone service before our own
switched voice network begins operating fully, we have entered into an interim
agreement with a third-party carrier.
In Austria we have obtained a license to provide voice services and to
operate a telecommunications infrastructure. Interconnection discussions have
commenced. We have ordered 1 Nortel DMS-100 Switch and we expect to complete
its installation in Vienna by the end of 2000.
In Switzerland, we have begun the process of obtaining a telecommunications
license and should receive it within the coming weeks. We have ordered 1 Nortel
DMS-1OO switch. Switch implementation will commence shortly and should be fully
operational by the end of the third quarter of 2000.
In Italy, we hold a license to provide voice services throughout the entire
country and a license to operate a network. We have also entered into an
interconnection agreement with Telecom Italia. Switches in Rome and Milan are
operational, and we expect to have our remaining switches operational by the
end of the first quarter of 2000.
We have increased our revenues from $0.3 million in 1996 to $23.2 million in
1999. As of December 31, 1999, we provided services to approximately 10,600
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
50
Italia, ERG, Avis, Ferrovie dello Stato (Italian Railways) and the Italian
Parliament. We also have approximately 39,000 residential customers primarily
in Italy.
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. Bernd Buchholz, our Executive Vice
President for Sales and Marketing, was previously with Esprit Telecom, Novell
and Symantec. Robert Eckert, our Chief Financial Officer, was previously with
Netsource A/S, Swisscom, 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 many of the key managers in our acquisitions.
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.
51
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.
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.
52
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:
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.
53
Control Our Network. We consider it strategically important to control and
operate our own network infrastructure. This will enable us to:
(1)maximize revenues by offering total communications services, including
broad band and voice services;
(2)achieve the highest levels of service quality and reliability; and
(3)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 six large-scale data centers of up to 3,000 square
meters and five smaller data centers of up to 500 square meters to
enhance our co-location and housing service offering;
. installing eight carrier grade digital circuit switches 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.
Accelerate Growth in Europe Through Targeted Acquisitions. 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 our dial-in service allows customers to dial
into one nation-wide number to access the Internet at local telephone rates.
Our dial-in services in Austria utilize seven dial-in access nodes, each of
which has its own dial-in number. Currently, 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
54
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.
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
55
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 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.
56
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.
57
Voice Services
We offer 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.
In Italy, we offer ALL IN ONE, an all-inclusive solution which combines data
transmission, Internet access and voice-over IP. This is an ideal platform for
building VPNs.
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.
Direct Sales. At December 31, 1999, our direct sales force consisted of 119
sales representatives located in 19 offices in 17 cities, 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.
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 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.
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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 15 POPs in Germany,
23 POPs in Italy, 6 POPs in Austria and 10 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 GTS. 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 480 customers
using dedicated line access. We believe our network is recognized as one of
Germany's most extensive and highest quality Internet networks. We expect to
expand our network to include POPs in additional cities in Germany, and
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, our 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, our BELT system 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.
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, Austria,
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Italy and Switzerland. Our main peering points are in Frankfurt, Munich, Milan,
Rome, 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. 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. 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, Rome and Milan. Our main
data center in Munich has a capacity of 330 square meters for co-location and
230 square meters for electronic commerce. We intend to establish additional
data centers in Hamburg, Vienna, Trento, Padua, 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
between 300 and approximately 2,000 square meters in size. We intend to secure
an additional 1000 square meters of space at our Milan data center. 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 are 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. Cybernet
Italy has a telephony license to offer voice services throughout Italy and has
entered into an interconnection agreement with Telecom Italia. In Austria we
have received a national license to offer switched services and we have applied
for a similar license in Switzerland. We have started the process of entering
into interconnection agreements in Switzerland and Austria. We have installed
an integrated billing system through which we expect to be able to 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.
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Customers
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, 1999.
* Information Technology * Finance
Julius Bar
Hewlett-Packard AXA Nordstern Colonia
Microsoft Austria HypoVereinsbank
CompuNet BMW Leasing
Cyberlab Interactive Commerzbank
Hogatex GE Capital Finance
Info AG VR--Leasing
InstallShield Software Raiffeisen
Prism Software Engineering
CompuServe Interactive Service * Government
Internet Consulting Federal Y2K Office
Swissdata Regulierungsbehoerde fur
PrimaCom Telekommunikation und Post
Bundesdruckerei
* Travel and Tourism Ministerium fur Wissenschaft
Stadtwerke Karlsruhe
Frosch Touristik
START AMADEUS
START Media Plus * Media and Advertising
Lauda Air Finanzen-Verlag
Media Consulting
* Retail News Magazine
O Werbung
Eddie Bauer ORF Modern Times
F.W. Woolworth Co.
Suzuki Auto * Manufacturing
Tengelmann Bayer
Wrigley Daimler Chrysler Aerospace
Zuegg Hugo Matthaes Druckerei
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' 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 and we are still experiencing some
problems with implementation. 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
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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. 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% and in 1999 we acquired the
remaining 34% 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. We have combined Eclipse and Flashnet into a single operation
which we call Cybernet Italy.
. Novento. In October 1999, we acquired 51% and in December we acquired
the remaining 49% 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.
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.
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Telecommunications carriers
Many telecommunications carriers are large organizations and do not provide
Internet services as their main product. With regard to Internet services, 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.
In offering voice services, we 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.
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 and
received a trademark registration for the name "Cybernet" used in conjunction
with our logo. We have also applied for, but have not yet received 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
63
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:
(1) a wide range of high-quality, telecommunications services to private
individuals and businesses;
(2) reliable services to the entire population at affordable prices;
(3) the absence of interference with personal and intellectual property
rights in telecommunications traffic; and
(4) effective competition in the provision of telecommunications services
(5) access to the dominant operator's network on non-discriminatory
terms.
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 service obligations, control
network access and 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-
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operated telecommunications networks) in Germany. Geographically this license
covers the entire Federal Republic of Germany and is valid indefinitely. We
have also obtained a license to provide public telephony service and to operate
our own infrastructure in Austria and have applied for a similar license in
Switzerland. In Italy, we have 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.
In the switched voice telephony market, our ability to provide viable
services depends 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 have entered into interconnection
agreements with Deutsche Telekom in Germany and Telecom Italia in Italy. We are
negotiating for a similar agreement in Austria. We 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 is 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.
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
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 December 1999, we had a total of approximately 426 employees
organized as follows: 145 in sales and marketing, 198 in technical and
operational personnel and 83 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,
65
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 and Vienna.
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 involved in several other legal proceedings, none of which we believe
to be material and if adversely determined, we believe none would have a
material adverse effect upon our business, financial condition or results of
operations.
66
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
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.
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
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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.
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.
68
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.
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.
69
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.
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. Dr. Giacalone has since
resigned and we are attempting to negotiate an amicable severance arrangement.
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.
70
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 $98,115, in addition to certain management
bonuses and an option to purchase 15,000 shares of Cybernet's common stock if
Sunweb meets specified performance goals for 1999.
Marco Samek. Sunweb has entered into an employment agreement with Mr. Samek
on the same terms as described above for Mr. Heim.
Summary Compensation Table
Our compensation program for executive management includes base salaries,
annual performance-based incentive bonus plans and stock option plans. The
compensation of each executive officer was established by the Board of
Directors acting upon the recommendations of the Compensation Committee.
The following table sets forth the annual long-term and other compensation
for our Chief Executive Officer and our other two most highly compensated
executive officers during the last fiscal year, as well as the total annual
compensation paid to each individual for the three previous fiscal years.
Each of the persons listed has or had an employment contract with us calling
for the payment of an annual bonus if certain performance standards are
achieved. No bonus was paid in the years listed.
Summary Compensation Table
Annual Long-Term
Compensation Compensation
------------ ------------
Securities
Underlying All Other
Fiscal Options Compensation
Name and Principal Position Year Salary ($) SARs (#) ($)
- --------------------------- ------ ------------ ------------ ------------
Andreas Eder............................................. 1998 $96,135 100,000(/2/) N/A
Chairman of the Board, President, Chief Executive 1997 65,066(/1/) 0 N/A
Officer, and Head of the Management Board of Cybernet AG 1996 N/A(/1/) N/A(/1/) N/A
Alessandro Giacalone..................................... 1998 125,716 100,000(/2/) N/A
Former Director, Chief Operating Officer, and Member of 1997 31,429(/1/) 0 N/A
Management Board of Cybernet AG 1996 N/A(/1/) N/A(/1/) N/A
Rudolf Strobl............................................ 1998 96,163 0 $251,433(/3/)
Former Member of Management 1997 70,616(/1/) 0 N/A
Board of Cybernet AG 1996 N/A(/1/) N/A(/1/) N/A
- --------
(1) Messrs. Eder and Strobl became executive officers of Cybernet in connection
with our acquisition of Cybernet AG in September 1997. As a result, the
information presented for fiscal 1997 represents payments made from the
time of such acquisition through December 31, 1997 and no information is
presented for fiscal 1996. Dr. Giacalone joined the Company in October
1997.
(2) Represents shares of Cybernet's common stock subject to an option granted
to the named executive on December 27, 1998.
(3) The amount indicated was paid to Mr. Strobl in December 1998 as severance
pay in connection with the termination of his employment agreement. Mr.
Strobl's employment terminated on December 31, 1998.
71
Option/SAR Grants in Last Fiscal Year
The following table provides information on options to purchase Cybernet's
common stock that were granted to two of the above named executives during
fiscal 1998. Mr. Strobl received no option grants in fiscal 1998.
Individual Grants
-------------------------
Percent of Potential Realizable
Number of Total Value at Assumed
Securities Options/SARs Annual Rates of Stock
Underlying Granted to Exercise Price Appreciation
Options/SARs Employees or Base for Option Term
Granted in Fiscal Price Expiration ---------------------
Name (#) Year ($/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
Former Director, 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:
1. breach of their duty of loyalty to the corporation or its stockholders,
2. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
3. unlawful payments of dividends or unlawful stock repurchases or
redemptions, or
4. 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.
72
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.
73
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:
1. 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;
2. each of our directors with respect to the equity securities held by such
director;
3. each of our executive officers named in the Summary Compensation Table
with respect to the equity securities held by such executive officer;
and
4. 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. For purposes of the column headed "Voting Distribution", 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.
74
Name Shares Beneficially Owned
- ---- ---------------------------------------
Series A Series B
Non-Voting Voting
Common Preferred Preferred
Executive Officers and Directors Stock Stock Stock
- --------------------------------- --------- ---------- ---------
Andreas Eder.. 1,645,850(/1/) 88,877(/1/) 0
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
- --------------------------------- ------------- ------------- ------------- --------------
Andreas Eder.. 7.6% 14.8% * 6.4%
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. Norman 0 0 0
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 Timm... 3,766,446(/4/) 393,750(/5/) 2,580,000(/6/)
Trabner
Strasse 12
14193 Berlin,
Germany
Holger Timm... 17.8% 65.6% 100.0% 25.4%(/8/)
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
- --------
*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.
75
(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) Assuming conversion of the remaining Series A Non-Voting Preferred Stock,
Mr. Timm would control approximately 26.3% of the voting securities of
Cybernet.
76
DESCRIPTION OF MATERIAL INDEBTEDNESS
Senior Notes
On July 8, 1999, we 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. 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 were issued. The Warrants expire on
July 1, 2009.
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.
Discount Notes
On August 26, 1999, we sold $50,002,183 in aggregate initial accreted value
of our 13.0% Convertible Senior Subordinated Discount Notes due 2009. Each
Discount Note was sold at an initial accreted value of $534.78, a substantial
discount from its principal amount at maturity of $1,000. There will not be any
accrual of cash interest on the Discount Notes prior to August 15, 2004 or
payment of cash interest prior to February 15, 2005. Holders of the Discount
Notes may convert the Discount Notes at their option into our common stock at
any time after August 26, 2000. 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 events. If the market price of our
common stock exceeds certain prices at any time after August 26, 2000, the
Discount Notes will automatically convert into shares of our common stock at
the same conversion ratio.
PIK Notes
On August 26, 1999, we sold (Euro)25 million aggregate principal amount of
our 13.0% Convertible Senior Subordinated Pay-In-Kind Notes due 2009. We will
pay interest on the PIK Notes in the form of additional notes issued under the
pay-in-kind feature through August 15, 2004. From that date to maturity
interest will accrue and will be paid in cash. Holders of the PIK Notes and any
additional notes issued under the pay-in-kind feature may convert both types of
notes at their option into our common stock at any time after August 26, 2000.
The number of shares of our common stock issuable upon conversion of these
notes is equal to the principal value of the notes being converted divided by
$25.00, subject to adjustment under certain circumstances.
Restrictive Covenants Applicable the Senior Notes, Discount Notes and PIK Notes
Each of the indentures relating to the Senior Notes, the Discount Notes and
the PIK Notes contains covenants applicable to the Company and certain of its
subsidiaries, including limitations and requirements
77
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. Each of the indentures also
requires the Company to commence and consummate an offer to purchase the Senior
Notes, the Discount Notes and the PIK Notes, as the case may be, for 101% of
their principal amount or accreted value, as applicable, upon events
constituting or which may constitute a Change of Control of the Company. In
addition, under certain circumstances, the Company is required by each of the
indentures to offer to purchase the Senior Notes, the Discount Notes and the
PIK Notes, as the case may be, with the proceeds of certain sales of assets.
Each of the indentures 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, the Discount
Notes and the PIK Notes, as the case may be, to become or to be declared to be
immediately due and payable. Holders of Senior Notes, the Discount Notes and
the PIK Notes, as the case may be, 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 Discount Notes or the PIK Notes,
as applicable. 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 respective indentures, which
are filed as exhibits to the registration statement which includes this
prospectus.
78
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.
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.
79
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.
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.
80
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.
81
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
82
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
83
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.
84
SELLING SECURITYHOLDERS
The Company issued the Warrants in July of 1999 as part of units consisting
of Senior Notes and Warrants. The units 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 Warrants are now exercisable, each for the purchase of 30.2310693 shares
of Common Stock at an exercise price of $22.278 per share. From time to time
after their exercise, the selling securityholders may offer and sell pursuant
to this prospectus any or all of the shares of common stock from the exercise
of the Warrants. 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.
It is the Conversion Shares which are being registered hereby. The stock
ownership percentages are computed based upon 100% being all shares currently
issued and all shares underlying the Warrants. A total of 150,000 Warrants are
outstanding.
Other Total
Conversion Common Common Stock
Selling Securityholder Warrants Shares Stock upon Conversion
---------------------- -------- ---------- ------ -----------------
AXP Variable Portfolio-Extra
Income Fund (1)............... 2,000 60,462 -- 60,462 *
Aim High Yield Fund (2)........ 23,000 695,315 -- 695,315 2.8%(3)
Aim High Yield Fund II (2)..... 1,000 30,231 5,000 35,231 *
Atlantic Security Bank......... 81 2,449 -- 2,449 *
CNA Income Shares, Inc......... 500 15,116 -- 15,116 *
Combined Insurance Co.
America....................... 77 2,328 -- 2,328 *
Daniel Gordon.................. 50 1,512 -- 1,512 *
Deltec High Yield Partners
(4)........................... 103 3,114 -- 3,114 *
Deltec Panamerica Trust Co.
(4)........................... 1,279 38,666 -- 38,666 *
Douglas Tansill................ 50 1,512 -- 1,512 *
Eaton Vance High Income
Portfolio (5)................. 4,825 145,865 -- 145,865 *
Eaton Vance Income Fund of
Boston (5).................... 1,675 50,637 -- 50,637 *
Global Horizon Diversified
Strategic Income Portfolio.... 25 756 -- 756 *
Greenwich St. Series:
Diversified Strategic Income
Portfolio..................... 60 1,814 -- 1,814 *
High Income Opportunity Fund,
Inc. (6)...................... 1,705 51,544 -- 51,544 *
High Yield Portfolio (1)....... 10,250 309,868 -- 309,868 1.2%
Lutheran Brotherhood High Yield
Portfolio..................... 2,500 75,578 -- 75,578 *
Lutheran Brotherhood Series
Fund Inc., High Yield
Portfolio..................... 5,250 158,713 -- 158,713 *
Managed High Income Fund, Inc.
(6)........................... 1,005 30,382 -- 30,382 *
MFS Meridian US High Yield Fund
(7)........................... 1,400 42,323 -- 42,323 *
MFS Series Trust III: MFS High
Income Fund (7)............... 6,125 185,165 -- 185,165 *
MFS Series Trust III: MFS High
Yield Opportunities Fund (7).. 50 1,512 -- 1,512 *
MFS Sica V: MFS Funds--European
High Yield Bond Fund (7)...... 50 1,512 -- 1,512 *
MFS/Sun Life Series Trust: High
Yield Series (7).............. 1,425 43,079 -- 43,079 *
Morgan Stanley Dean Witter High
Income Advantage Trust (8).... 900 27,208 -- 27,208 *
85
Other Total
Conversion Common Common Stock
Selling Securityholder Warrants Shares Stock upon Conversion
---------------------- -------- ---------- ------ -----------------
Morgan Stanley Dean Witter High
Income Advantage Trust II (8).... 300 9,069 -- 9,069 *
Morgan Stanley Dean Witter High
Income Advantage Trust III (8)... 500 15,116 -- 15,116 *
Morgan Stanley Dean Witter High
Yield Securities (8)............. 13,300 402,073 -- 402,073 1.6%
Nomora Global Investment Fund..... 35 1,058 -- 1,058 *
Penates Foundation, The........... 36 1,088 -- 1,088 *
Penn Series Funds, Inc.--High
Yield Bond Fund.................. 150 4,535 -- 4,535 *
Robert J. Allison, Jr............. 50 1,512 -- 1,512 *
Rodgers Family Partnership........ 50 1,512 -- 1,512 *
Sarah Gordon...................... 50 1,512 -- 1,512 *
SB/Travelers High Income Portfolio
(6).............................. 430 12,999 -- 12,999 *
Smith Barney Balanced Fund (6).... 505 15,267 -- 15,267 *
Smith Barney Diversified Strategic
Income Fund (6).................. 2,095 63,334 -- 63,334 *
Smith Barney High Income Fund
(6).............................. 3,650 110,343 -- 110,343 *
Smith Barney USA High Yield Fund
(6).............................. 165 4,988 -- 4,988 *
Sweetwater Partners, L.P.......... 80 2,418 -- 2,418 *
T. Rowe Price High Yield Fund,
Inc. ............................ 3,350 101,274 -- 101,274 *
Tair Ltd. ........................ 50 1,512 -- 1,512 *
Target/United Funds, Inc.--High
Income Portfolio................. 1,000 30,231 -- 30,231 *
United High Income Fund, Inc...... 3,250 98,251 -- 98,251 *
United High Income Fund II, Inc... 1,000 30,231 -- 30,231 *
Virginia Surety Corp.............. 44 1,330 -- 1,330 *
Waddell & Reed Funds, Inc.--High
Income Fund...................... 250 7,558 -- 7,558 *
Zenix Income Fund................. 325 9,825 -- 9,825 *
------
Total........................... 96,050
======
- --------
(1) AXP Variable Portfolio-Extra Income Fund and High Yield Portfolio are
affiliates.
(2) Aim High Yield Fund and Aim High Yield Fund II are affiliates.
(3) Aim High Yield Fund ("AIM") also holds Discount Notes convertible into
450,000 shares. If all such securities were converted AIM would hold 3.66%
of the Company's Common Stock
(4) Deltec High Yield Partners and Deltec Panamerica Trust Co. are affiliates.
(5) Eaton Vance High Income Portfolio and Eaton Vance Income Fund of Boston are
affiliates.
(6) The Smith Barney funds are all affiliated.
(7) The MFS funds are all affiliated.
(8) The Morgan Stanley Dean Witter funds are all affiliated.
* Less than 1%.
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.
86
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.
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.
87
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.
88
LEGAL MATTERS
Certain legal matters with respect to 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 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 shares of common stock issuable
upon exercise of the Warrants. 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 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 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.
89
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.
90
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.
91
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.
92
INDEX TO FINANCIAL STATEMENTS
Page
----
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
Legal Advisors to the Company
as to U.S. law as to German law
Powell, Goldstein, Frazer & Murphy LLP Besner Kreifels Weber
1001 Pennsylvania Ave, NW 41 Widenmayerstrasse
Washington, DC 20004 D-80538 Munich
U.S.A. Germany
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4,534,661 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................. $13,019.01
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
4,534,604 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.
(Incorporated by reference to Exhibit 10.29 to Form S-1 Registration
Statement No. 333-91595 filed with the Commission on November 24,
1999).
21.1 Subsidiaries. (Incorporated by reference to Exhibit 21.1 to Form S-1
Registration Statement No. 333-91595 filed with the Commission on
November 24, 1999).
23.4A** Consent of Ernst & Young Deutsche Allgemeine Treuhand AG.
23.5A** Consent of Ernst & Young, Wirtschaftsprufungs-Und,
Steuerberatungsellschaft MBH.
23.6A** Consent of Grant Thornton S.p.A.
24.1 Power of Attorney (included in the signature page of the orginal
filing).
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
**Filed herewith
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 March 23, 2000.
Cybernet Internet Services
International, Inc.
/s/ Andreas Eder
By: _________________________________
Andreas Eder
Chairman of the Board of
Directors, President and Chief
Executive Officer
POWER OF ATTORNEY
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 March 23, 2000
______________________________________ Directors, President and
Andreas Eder Chief Executive Officer
(Principal Executive
Officer)
/s/ Robert Fratarcangelo Director and Secretary March 23, 2000
______________________________________
Robert Fratarcangelo
Dr. Hubert Besner* Director March 23, 2000
______________________________________
Dr. Hubert Besner
Tristan Libischer* Director March 23, 2000
______________________________________
Tristan Libischer
G. W. Norman Wareham* Director March 23, 2000
______________________________________
G. W. Norman Wareham
Robert Eckert* Chief Financial Officer March 23, 2000
______________________________________ and Treasurer (Principal
Robert Eckert Financial and Accounting
Officer)
/s/ Robert Fratarcangelo
*By: _________________________________
Robert Fratarcangelo
Attorney-in-Fact
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.
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).
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).
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.
(Incorporated by reference to Exhibit 10.29 to Form S-1 Registration
Statement No. 333-91595 filed with the Commission on November 24,
1999).
21.1 Subsidiaries. (Incorporated by reference to Exhibit 21.1 to Form S-1
Registration Statement No. 333-91595 filed with the Commission on
November 24, 1999).
23.4A** Consent of Ernst & Young Deutsche Allgemeine Treuhand AG regarding
this amendment.
23.5A** Consent of Ernst & Young, Wirtschaftsprufungs-Und,
Steuerberatungsellschaft MBH regarding this amendment.
23.6A** Consent of Grant Thornton S.p.A. regarding this amendment.
24.1 Power of Attorney (included in the signature page of the original
filing).
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
**Filed herewith