1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON
REGISTRATION NO.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7375
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ANDREAS EDER
STEFAN-GEORGE-RING 19-23
81929 MUNICH, GERMANY
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
MICHAEL H. CHANIN, ESQ. HUBERT BESNER GUIDO SANDLER
POWELL, GOLDSTEIN, FRAZER BESNER KREIFELS WEBER BERLINER EFFEKTENBANK AG
& MURPHY LLP WIDENMAYERSTR 41 KURFUERSTENDAMM 119
1001 PENNSYLVANIA AVENUE, 80538 MUNICH, GERMANY 10711 BERLIN, GERMANY
N.W.
WASHINGTON, D.C. 20004
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
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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: [ ]
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CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE(1) FEE
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Common Stock (par
value $.001 per
share)............... 3,500,000 shares $20 $70,000,000 $20,650
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(1) Estimated solely for the purpose of calculating the amount of the
registration fee.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE 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 THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
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CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CROSS-REFERENCE SHEET
I. Forepart of the Registration Statement and Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus Outside Front Cover Page of Prospectus
II. Inside Front and Outside Back Cover Pages Inside Front and Outside Back Cover Pages
of Prospectus of Prospectus
III. Summary Information, Risk Factors and Prospectus Summary; Selected Consolidated
Ratio of Earnings to Fixed Charges Financial Data and Risk Factors (Ratio
of Earnings to Fixed Charges not
applicable)
IV. Use of Proceeds Use of Proceeds
V. Determination of Offering Price Underwriting, Outside Front Cover of
Prospectus
VI. Dilution Dilution
VII. Selling Security Holders Not Applicable
VIII. Plan of Distribution Front Cover Page of Prospectus;
Underwriting
IX. Description of Securities to be Registered Description of Capital Stock
X. Interest of Named Experts and Counsel Experts; Legal Matters
XI. Information with Respect to the Registrant Business; Legal Matters; Price Range of
Range of Common Stock; Consolidated
Financial Statements; Prospectus
Summary; Selected Consolidated Financial
Data; Management's Discussion and
Analysis of Financial Condition and
Results of Operations; Management;
Principal Stockholders
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED
PROSPECTUS
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
3,500,000 SHARES OF COMMON STOCK
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This Prospectus relates to the offering (the "Offering") of 3,500,000
shares of common stock, $0.001 par value per share (the "Common Stock" or the
"Shares") of Cybernet Internet Services International, Inc., a Delaware
corporation (the "Company"), all of which are being offered by the Company
outside of the United States on a "best efforts, all or none" basis. The Common
Stock currently is quoted on the Nasdaq OTC Bulletin Board (the "Bulletin
Board") under the symbol "ZNET". On August 26, 1998, the last reported sale
price of the Common Stock on the Bulletin Board was $20 per share. The Common
Stock is also traded on the Freiverkehr of the Berlin and Munich Stock Exchanges
under the security number 906623. On August 26, 1998, the last reported sale of
the Common Stock on the Berlin Stock Exchange was $22.60 per share and $22.74
per share on the Munich Stock Exchange (assuming an exchange rate of 1.75
Deutsche Marks for each $1.00)--see page 4, footnote 1. It is anticipated that
applications will be made to include the Common Stock for listing on the Neue
Markt of the Frankfurt Stock Exchange.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS".
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATES SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT(1) COMPANY(2)(3)
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Per Share.................................. $ $ $
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Total...................................... $ $ $
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(1) The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933.
(2) Before deducting estimated expenses of $ payable by the Company.
(3) The Shares are offered by the Underwriter, as agent for the Company, on a
"best efforts, all or none" basis, for a period of 45 days from the
effective date of the registration statement of which this Prospectus forms
a part (the "Registration Statement"). All funds received by the Underwriter
will be deposited no later than noon on the next business day following
their receipt by the Underwriter in a separate account, to be held in escrow
by the Underwriter as agent for the subscribers of the Shares. If no closing
takes place during the offering period (or any extension thereof), then all
funds promptly will be returned to the subscribers thereof without any
deduction therefrom or interest therein.
-----------------------------------
The Common Stock is being offered by the Berliner Effektenbank AG (the
"Underwriter"), as agent for the Company on a "best efforts, all or none" basis,
subject to prior sale, withdrawal, or cancellation of the Offering without
notice. The initial Price to the Public and the Underwriting Discount will be
determined by agreement between the Company and the Underwriter. The initial
Price to the Public will not be higher than the last sale price reported on the
Berlin Exchange immediately prior to such determination. The Underwriter
reserves the right to reject any order for the Common Stock offered hereby, in
whole or in part. It is expected that delivery of the certificates evidencing
the Common Stock offered hereby will be made at the offices of Berliner
Effektenbank AG, Berlin, Germany, at the closing of the Offering.
BERLINER EFFEKTENBANK AG
The date of this Prospectus is , 1998
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[PICTURE OF A PORTION OF THE EARTH WITH COMPANY LOGO]
AVAILABLE INFORMATION
The Company is not subject to the informational requirements of the
Securities Exchange Act of 1934, as amended. The Company intends to furnish its
stockholders with annual reports containing financial statements audited by its
independent certified public accountants and quarterly reports for the first
three quarters of each fiscal year containing unaudited interim financial
information.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the Common Stock
offered hereby. In accordance with the rules and regulations of the Commission,
this Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the shares of Common Stock offered
hereby, reference is made to the Registration Statement, including the exhibits
and schedules filed as a part thereof, copies of which may be obtained from the
Commission upon payment of the fees prescribed therefore or examined without
charge at the Commission's offices at 450 Fifth Street N.W., Washington, D.C.
20549.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes appearing elsewhere in this
Prospectus including the information under "Risk Factors".
THE COMPANY
The Company is a leading provider of international Internet backbone and
access services and network business solutions to companies in Germany, Austria
and Northern Italy. In addition to backbone and access, it offers a full range
of solutions and services, which business customers are likely to require to
establish and maintain their Internet related systems. Among the specific
services and solutions offered by the Company are virtual private networks,
web-hosting, co-location services, security solutions, electronic commerce
solutions and services, Intranet solutions and workflow solutions. The Company
offers consulting, complete design and installation, training, technical
support, operation and monitoring of systems. In addition, the Company sells on
a turnkey basis customer premise equipment required to connect to the Internet,
such as routers, servers and other hardware.
The Company maintains geographically distributed, state-of-the-art Internet
nodes connected to a redundant high performance backbone infrastructure.
Utilizing a combination of leased and Company owned lines and equipment, it
helps businesses reduce telecommunications costs by offering access to the world
wide Internet through dedicated leased lines at more than 100 nodes. For smaller
enterprises, it offers a system of more than 90 dial-up nodes with ISDN or
analog modem ports. These nodes permit local dial-up access to a majority of the
population of Germany and Austria. As of August 15, 1998, the Company had
approximately 6,000 customers, an increase from approximately 4,300 customers at
December 31, 1997, 3,000 customers at June 30, 1997, and 1,460 customers at
December 31, 1996.
To a significant extent, the Company has grown through acquisitions, and
the Company continues to seek additional acquisitions which will permit
expansion of the type and quality of the services offered, of the geographical
areas in which those services are offered, and increased penetration of the
Company's current markets. Significant acquisitions to date include the
acquisition of Artwise GmbH ("Artwise"), a wholly-owned German company which
provides Intranet messaging and workflow solutions, and whose operations have
been fully integrated with the Company's; Eclipse s.r.l. ("Eclipse"), a 66%
owned Internet Service Provider ("ISP") in Northern Italy; Vianet EDV
Dienstleistungs GmbH ("Vianet"), a wholly-owned ISP in Austria; and Open:Net
Internet Solutions GmbH ("Open:Net"), a wholly-owned ISP in southwest Germany.
The Company's business began with the formation of Cybernet Internet
Dienstleistungen AG ("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
Internet Services International, Inc., a Utah corporation, organized on
September 27, 1983 ("Cybernet Utah"). Contemporaneously with the closing of this
Offering, Cybernet Utah will be merged into the Company, and the Company will be
the surviving entity of the merger. Unless the context otherwise requires, the
term "Company" or "Cybernet" refers to Cybernet Internet Services International,
Inc., its consolidated subsidiaries and its Utah and German predecessors. The
Company has agreed to purchase all of the issued and outstanding shares of
capital stock of Vianet, which acquisition (the "Vianet Acquisition") will be
consummated concurrently with consummation of the sale of the shares offered
hereby. The information presented in this Prospectus assumes that the Vianet
Acquisition has been consummated.
The Company's principal executive offices are located at Stefan-George-Ring
19-23, 81929 Munich, Germany, and the Company's registered address in the United
States is CSC, 1013 Centre Road, Wilmington, Delaware 19805. The Company
maintains various sites on the Internet's world wide web. Information contained
in the Company's world wide web sites shall not be deemed to be part of this
Prospectus.
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THE OFFERING
Common Stock offered................ 3,500,000 shares
Common Stock to be outstanding after
the Offering........................ 20,787,111 shares
Use of proceeds..................... The Company will apply $4.3 million of
the net proceeds to pay the cash
portion of the purchase price of the
Vianet Acquisition and $585,750 to make
the remaining cash payment required by
the Open:Net acquisition(1). The
Company will utilize the balance: to
make additional acquisitions; to expand
infrastructure and to acquire
equipment, including the equipment
necessary to become licensed as a
telephone carrier in Germany; and, for
working capital.
Listings............................ The Common Stock is quoted on the
Bulletin Board under the symbol "ZNET".
It is also traded on the Freiverkehr of
the Berlin and Munich Stock Exchanges.
It is anticipated that the Common Stock
will also be listed on the Neue Markt
of the Frankfurt Stock Exchange.
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(1) The purchase agreements provide for payment of the cash portion of the
purchase prices in Deutsche Marks ("DM"). For purposes of this Prospectus,
foreign currency amounts not presented in the audited, unaudited or pro
forma financial statements contained herein, or derived from such financial
statements, are translated into U.S. dollars at an exchange rate of 1.75 DM
for each U.S. dollar. Foreign currency amounts presented in the audited,
unaudited or pro forma financial statements are translated into U.S. dollars
in the manner described in Note 2 of Notes to the Consolidated Financial
Statements.
RISK FACTORS
Before purchasing shares of Common Stock offered hereby, investors should
consider the matters set forth under "Risk Factors".
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SUMMARY FINANCIAL INFORMATION
SUMMARY HISTORICAL AND PRO FORMA SELECTED CONSOLIDATED FINANCIAL STATEMENT DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
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PRO FORMA PRO FORMA
1996 1997 1997(1) 1997 1998 1998(2)
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STATEMENT OF OPERATIONS DATA:
Revenue
Internet Projects................... $ 217 $1,598 $ 4,026 $ 446 $ 1,863 $ 2,209
Network Services.................... 91 716 3,441 150 1,489 3,126
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Total revenue.................. 308 2,314 7,467 596 3,352 5,335
Operating profit (loss).................. (55) (180) 2,001 (50) (24) 937
Net loss................................. (284) (984) (2,371) (340) (1,606) (2,338)
Basic and diluted loss per share......... $(.12) $ (.12) $ (.13) $(.02) $ (.07) $ (.13)
JUNE 30, 1998
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PRO
ACTUAL FORMA(3)
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BALANCE SHEET DATA:
Working capital (deficiency)................................ $ (3,851) $ 68,268
Total assets................................................ 20,449 108,113
Long-term debt (including lease obligations)................ 1,134 1,221
Shareholders' equity........................................ 8,631 94,743
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(1) Gives effect to the following as if each had occurred January 1, 1997: (i)
acquisitions completed during the year ended December 31, 1997 (the "1997
Acquisitions"), (ii) the pending acquisition of Vianet and the acquisition
of Open:Net (the "1998 Acquisitions"), and (iii) this Offering and the
application of the net proceeds to the Company therefrom. See "Use of
Proceeds" and the Pro Forma Consolidated Financial Statements and related
notes included elsewhere in this Prospectus.
(2) Gives effect to the following as if each had occurred on January 1, 1998:
(i) the 1998 Acquisitions, and (ii) this Offering and the application of the
net proceeds to the Company therefrom.
(3) Gives effect to the following as if each had occurred on June 30, 1998: (i)
the 1998 Acquisitions, and (ii) the sale of 700,000 shares of Common Stock
completed in July 1998, and (iii) this Offering and the application of the
net proceeds to the Company therefrom.
5
8
RISK FACTORS
Before purchasing shares of Common Stock offered hereby, a prospective
investor should consider, among other things, the following factors:
No Dividends. The Company has never paid cash dividends on its Common
Stock. It intends to retain future earnings to fund growth of its business and
does not anticipate paying any cash dividends on shares of Common Stock in the
foreseeable future. If and when the Company determines to pay cash dividends, it
will rely upon its subsidiaries to generate the necessary cash. See "Dividend
Policy".
Limitation of Liability; Indemnification of Directors and Officers. The
Company's Certificate of Incorporation: (i) eliminates the personal liability of
the directors of the Company to the fullest extent permitted by the General
Corporation Law of the State of Delaware (the "GCL"), and (ii) provides that the
Company shall indemnify, to the fullest extent permitted by the GCL, any and all
persons whom it shall have the power to indemnify under the GCL from all
expenses, liabilities or other matters referred to in, or covered by, the GCL.
No Commitment to Purchase Securities; Escrow of Subscription
Proceeds. Under the terms of the Offering, the Underwriter is offering the
Shares on a "best efforts, all or none" basis. Unless subscriptions are received
for all of the Shares, none of the Shares will be issued and the Offering will
be withdrawn. No person is committed to purchase any of the Shares. Under the
terms of the Offering, subscribers' funds will be returned to subscribers,
without interest thereon or deduction therefrom, if subscriptions for all of the
Shares are not received during the 45 day offering period (which period may be
extended for an additional 30 days.) During the Offering, subscribers will have
no right to the return of their subscriptions. See "Underwriting".
History of Losses. The Company started operations in 1996. The Company has
incurred net losses since its inception, and management expects to incur
significant additional losses as the Company continues its investment and
acquisition program, as well as the building of its infrastructure. Prospective
investors have limited operating and financial data about the Company upon which
to base an evaluation of the Company's performance and an investment in the
Common Stock offered hereby. For the years ended December 31, 1996, and December
31, 1997, the Company reported net losses of $283,778 and $983,840,
respectively. For the six months ended June 30, 1998, the Company reported a net
loss of $1,605,685. For the two years ending December 31, 1997, the Company
reported cumulative cash used by operating activities of $2,069,665. The Company
expects to generate negative operating cash flow for at least the next several
years while it continues to make acquisitions and invest in telecommunications
infrastructure. The extent to which the Company experiences negative cash flow
will depend upon a number of factors, including the number and size of its
acquisitions and investments, the ability to generate increasing revenues and
cash flow, the amount of expenditures incurred, and any adverse developments.
The Company may be dependent on various financing sources to fund its growth as
well as continued losses from operations. There can be no assurance that the
Company will achieve or sustain positive operating cash flow or generate net
income in the future. To achieve profitability, the Company must, among other
things, develop and market products and services which are accepted on a broad
commercial basis. Given the Company's limited operating history, there can be no
assurance that the Company will ever achieve broad commercial acceptance or
profitability.
Availability or Reliability of Information about Acquisitions. Businesses
which the Company may acquire typically do not have audited financial statements
and have varying degrees of internal controls and detailed financial
information. The pro forma financial information in this Prospectus includes
financial information concerning one recently completed acquisition for which
audited financial statements are not presently available. While the Company
believes such information to be reliable, the Company has only recently acquired
that company. There can be no assurance that a subsequent audit will not reveal
matters of significance, including with respect to liabilities, contingent or
otherwise. The Company's business strategy involves continued and potentially
rapid acquisitions. While the Company is not currently party to any acquisition
agreements, the Company is seeking additional acquisition candidates.
Accordingly, the Company expects that, from time to time in the future, it will
enter into additional acquisition agreements, the pro forma effect of which is
not known, cannot be predicted and has not been included herein. The Company's
completion of additional acquisitions may have a material impact on the
financial information set forth herein.
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9
There can be no assurance as to the number, timing or size of future
acquisitions, if any, or the effect any such acquisitions would have on the
Company's operating or financial results.
Requirements for Additional Capital. The Company's operations have
required and will continue to require substantial capital for investments,
including additional acquisitions, the deployment of the Company's
infrastructure, and the funding of capital expenditures for expansion of
services. In order to continue funding the Company's investment and acquisition
program, as well as product development, marketing, sales and customer support
capabilities over the longer term, the Company may require substantial funds in
addition to the proceeds of the sale of Common Stock offered hereby. The Company
would need to meet its additional capital needs with sales of additional equity
securities and borrowings. The failure to raise and generate sufficient
additional funds could require the Company to delay or abandon some of its
planned future expansion or expenditures, which could have a material adverse
effect on the Company's growth and its ability to compete in the Internet and
telecommunications industry. No assurance can be given that the Company will
have sufficient cash flow or capital available to maintain its current or future
growth plans or operations.
Management of Growth; Integration of Acquisitions and Investments;
Challenges of Growth by Acquisitions. The Company is currently experiencing a
period of rapid expansion. The rapid growth of the Company's business and its
product and service offerings has placed, and is likely to continue to place, a
significant strain on the Company's managerial, operating, financial and other
resources. In addition, the Company may be required to manage multiple
relationships with a growing number of third parties as it seeks to increase its
service offerings. The Company's future performance will depend, in part, upon
its ability to manage its growth effectively. The Company's ability to manage
its growth effectively will require it to continue to expand its operating and
financial procedures and controls, to replace or upgrade its operational,
financial and management information systems, and to attract, train, motivate,
manage and retain key employees. Failure to develop adequate operational and
control systems or to attract and retain highly qualified management, financial,
technical, sales and marketing and customer service personnel could materially
adversely affect the Company's ability to integrate the companies it has
acquired and will continue to acquire, and could have a material adverse effect
on the Company's business, financial condition and results of operations. While
the Company anticipates that it will recognize various economies and
efficiencies of scale as a result of acquisitions and the integration of the
businesses it has acquired and may acquire in the future, the process of
consolidating the businesses and implementing the strategic integration, even if
successful, may take a significant period of time, will place a significant
strain on the Company's resources, and could subject the Company to additional
expenses during the integration process. There can be no assurance that the
Company will be able to integrate the companies it has acquired successfully or
in a timely manner in accordance with its strategic objectives, or that the
Company's management, personnel, systems, procedures and controls will be
adequate to support the Company's existing and future operations. The Company's
business strategy is dependent, in part, upon its ability to continue to
successfully identify and acquire ISPs and other businesses that meet the
Company's criteria in order to optimize its market presence in the regions it
currently serves and to expand to other European countries. In pursuing such
acquisitions, the Company may compete with other companies with similar
acquisition strategies, many of which may be larger and have greater financial
and other resources than the Company. Competition for acquisitions is based on a
number of factors, including price, terms and conditions, size and access to
capital, ability to offer cash, stock, or other forms of consideration and other
matters. No assurance can be given that the Company will be able to successfully
identify suitable companies or, once identified, will be able to consummate
acquisitions of those targets on terms and conditions acceptable to the Company.
Competition; Pricing Fluctuation. Other companies, including
telecommunications carriers and other ISPs, may offer competitive products and
services at lower prices, which could affect the Company's ability to maintain
its price structure and its ability to generate profits. See
"Business -- Competition".
Dependence upon Implementation of Network Infrastructure. The Company's
success will depend upon its ability to complete the implementation of and to
continue to expand its network infrastructure and support services in order to
supply sufficient geographic reach, capacity, reliability and security at an
acceptable cost. The continued development and expansion of the Company's
network will require that it either enter into additional agreements, on
acceptable terms and conditions, with the various providers of infrastructure
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10
capacity and equipment and support services or independently develop such
infrastructure. No assurance can be given that any or all of the requisite
agreements can be obtained on satisfactory terms and conditions or that the
Company will have the necessary capital and regulatory clearances to develop the
infrastructure.
Following current industry practice, the Company has peering arrangements
with a number of other ISPs, by which the ISPs agree to carry each other's
traffic without paying transit costs. Although unlikely, this industry practice
may change and companies that have previously offered peering may cut back or
eliminate peering relationships, establishing new and more restrictive criteria
for peering. Furthermore, if additional requirements associated with maintaining
peering with the major ISPs develop, the Company may have to comply with those
additional requirements in order to continue to maintain its peering
relationships. Thus, the Company would incur additional costs, which would
reduce its profit margin.
The Company also anticipates that future expansions and adaptations of its
network infrastructure may be necessary in order to respond to growth in the
number of customers served, increased demands to transmit larger amounts of data
and changes to its customers' product and service requirements. The expansion
and adaptation of the Company's network infrastructure will require substantial
financial, operational and managerial resources. There can be no assurance that
the Company will be able to expand or adapt its network infrastructure to meet
the industry's evolving standards or its customers' growing demands and changing
requirements on a timely basis, at a commercially reasonable cost, or at all, or
that the Company will be able to deploy successfully any expanded and adapted
network infrastructure. Moreover, there is no assurance that the Company will be
able to integrate its network as anticipated. Thus, the Company may not realize
the expected cost savings or such cost savings may be delayed, adversely
affecting profits.
Entry by the Company into a new telecommunications market may place the
Company in direct competition with the providers of telecommunications services
to the Company in some areas, adversely affecting the Company's relationship
with such carriers and endangering the Company's business to serve customers.
Dependence on Key Personnel; Limited Senior Management Resources. The
Company is highly dependent upon the efforts of its senior management team, the
loss of any of whom could impede the achievement of product development and
marketing objectives and could have a material adverse effect on the Company. A
number of persons on the management team and key employees have entered into
employment agreements with the Company. However, those agreements, except for
certain directors, do not contain non-compete clauses. The Company believes that
its future success will depend, in large part, on its ability to attract and
retain qualified technical and marketing personnel. Competition for such
personnel is intense in the areas of the Company's activities. There can be no
assurance that the Company will be able to attract and retain the personnel
necessary for the development and integration of its business. Delays in hiring
such personnel could delay the achievement of development and marketing
objectives. The loss of the services of key personnel, or the failure to attract
additional personnel as required, could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
does not maintain any key person insurance for its executives. See
"Business -- Management".
Risk of System Failure. The Company's operations are dependent upon its
ability to protect its network infrastructure and customers' equipment against
damage from human error, fire, earthquakes, floods, power loss,
telecommunications failures, sabotage, intentional acts of vandalism and similar
events. Despite precautions taken by and planned to be taken by the Company, the
occurrence of a natural disaster or other unanticipated problems at one or more
of the Company's centers could result in interruptions in the services provided
by the Company or significant damage to customer equipment. In addition, failure
of any of the Company's telecommunications providers to provide the data
communications capacity required by the Company, as a result of human error, a
natural disaster or other operational disruption, could result in interruptions
in the Company's services. Any damage to, or failure of, the systems of the
Company or service providers upon which it relies, could result in reductions
in, or terminations of, services supplied to the Company's customers, which
could have a material adverse effect on the Company's business, results of
operations and financial condition. In addition, the Company's reputation could
be materially adversely affected.
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With respect to its electronic commerce activities, the Company's success,
in particular its ability to successfully receive and fulfill orders and provide
high quality customer service, largely depends on the efficient and
uninterrupted operation of its computer and communications hardware systems. The
Company does presently have a number of redundant and mission-critical systems,
but does not have a formal disaster recovery plan and does not carry business
interruption insurance. Despite the implementation of network security measures
by the Company, its servers are vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions, which could lead to interruptions,
delays, loss of data or the inability to accept and fill customer orders. The
occurrence of any of the foregoing risks could have a material adverse effect on
the Company's business, prospects, financial condition and results of
operations.
Security Risks. SYSTEM SECURITY RISKS -- A significant barrier to
electronic commerce and communications is the secure transmission of
confidential information over public networks. Certain of the Company's services
rely on encryption and authentication technology licensed from third parties to
provide the security and authentication necessary to effect secure transmission
of confidential information. Despite the Company's design and implementation of
a variety of network security measures, there can be no assurance that
unauthorized access, computer viruses, accidental or intentional actions and
other disruptions will not occur.
There can be no assurance that advances in computer capabilities, new
discoveries in the field of cryptography, or other events or developments will
not result in a compromise or breach of the algorithms used by the Company to
protect customer transaction data. If any such compromise of the Company's
security were to occur, it could have a material adverse effect on the Company's
reputation, business, prospects, financial condition and results of operations.
A party who is able to circumvent the Company's security measures could
misappropriate proprietary information or cause interruptions in the Company's
operations.
The costs required to eliminate computer viruses and alleviate other
security problems could be prohibitive and the efforts to address such problems
could result in interruptions, delays or cessation of service to the Company's
customers, which could have a material adverse effect on the Company's business,
results of operations and financial condition.
GLOBAL SECURITY RISKS -- Concerns over the security of the Internet and
other online transactions and the privacy of users may also inhibit the growth
of the Internet and other online services generally, especially as a means of
conducting commercial transactions. To the extent that activities of the Company
or third-party contractors involve the storage and transmission of proprietary
information, such as credit card numbers, security breaches could damage the
Company's reputation and expose the Company to a risk of loss or litigation and
possible liability.
Dependence on the Internet; Uncertain Adoption of Internet as a Medium of
Commerce and Communications. The Company's products and services are targeted
toward users of the Internet. Use of the Internet has experienced rapid growth.
As is typical in the case of a new and rapidly evolving industry characterized
by rapidly changing technology, evolving industry standards and frequent new
product and service introductions, demand and market acceptance for recently
introduced products and services are subject to a high level of uncertainty.
While the Company believes that European companies will adopt this new
technology with the same enthusiasm as in the United States, there is no
assurance that the European market will develop in the same manner. 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 market
targeted by the Company. 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, inconsistent quality
of service, lack of availability of cost effective, high speed options, 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, numerous
published reports have indicated that a perceived lack of security of commercial
data, such as credit card numbers, has significantly impeded commercial
exploitation of the Internet to date, and there can be no assurance that
encryption or other technologies will be developed that satisfactorily address
these security
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concerns. Published reports have also indicated that capacity constraints caused
by growth in the use of the Internet may, unless resolved, impede further
development 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, particularly by those individuals and
enterprises which have historically relied upon alternative means of commerce
and communication, generally requires the understanding and acceptance of a new
way of conducting business and exchanging information.
The Company is also at risk as a result of fundamental technological
changes in the way Internet solutions may be marketed and delivered. Integrating
technological advances may require substantial time and expense, and there can
be no assurance that the Company will succeed in adapting its network
infrastructure. While the Company believes that its plan of combining
telecommunications and Internet services offers significant advantages for
medium sized companies, there can be no assurance that commerce and
communications over the Internet will become widespread, or that the Company's
offered Internet access and telecommunications services will be widely adopted
for these purposes. The failure of the market for business related Internet
solutions to continue to develop would adversely impact the Company's business,
financial condition and results of operations.
In addition, new technologies or industry standards have the potential to
replace or provide lower cost alternatives to the Company's existing products
and services. The adoption of such new technologies or industry standards could
render the Company's existing products and services obsolete and unmarketable.
If the market for Internet access services fails to develop, develops more
slowly than expected, or becomes saturated with competitors, or if the Internet
access and services offered by the Company are not broadly accepted, the
Company's business, operating results and financial condition will be materially
adversely affected.
Rapid Technological Change; Evolving Industry Standards. The Company's
future success will depend, in part, on its ability to offer services that
incorporate leading technology, address the increasingly sophisticated and
varied needs of its 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 the Company's services is characterized
by rapidly changing and unproven technology, evolving industry standards,
changes in customer needs, emerging competition and frequent new service
introductions. There can be no assurance that future advances in technology will
be beneficial to, or compatible with, the Company's business or that the Company
will be able to incorporate such advances on a cost effective and timely basis
into its business. Moreover, technological advances may have the effect of
encouraging certain of the Company's current or future customers to rely on
in-house personnel and equipment to furnish the services currently provided by
the Company. In addition, keeping pace with technological advances in the
Company's industry may require substantial expenditures and lead time.
The Company believes that its ability to compete successfully is also
dependent upon the continued compatibility and interoperability of its services
with products, services and architectures offered by various vendors. There can
be no assurance that industry standards will be established or that, if they
become established, the Company will be able to conform to these new standards
in a timely fashion and maintain a competitive position in the market. The
failure of the Company to conform to a prevailing standard, or the failure of a
common standard to emerge, could have a material adverse effect on the Company's
business, results of operations and financial condition. In addition, there can
be no assurance that products, services or technologies developed by others will
not render the Company's services non-competitive or obsolete.
If the Company is unable, for technical, legal, financial or other reasons,
to adapt in a timely manner in response to changing market conditions or
customer requirements, its business, prospects, financial condition and results
of operations would be materially adversely affected. See "Business -- The
Internet in Germany and Europe".
Potential Liability for Information Disseminated over Networks; Regulatory
Matters. The law relating to liability of ISPs for information carried on or
disseminated through networks is currently unsettled. 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 the majority of the Company's
operations are located, has
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recently found the manager of an ISP liable for the contents of materials which
were not removed from an ISP's news-server, despite requests from government
authorities.
The imposition of potential liability for materials carried on or
disseminated through the Company's network could require the Company to
implement measures to reduce its exposure to such liability. Such measures may
require the expenditure of substantial resources or the discontinuation of
certain product or service offerings, any of which could have a material adverse
effect on the Company's business, operating results and financial condition.
Dependence Upon Suppliers. The Company relies on other companies to supply
certain key components of its network infrastructure, including
telecommunications services and networking equipment which, in the quantities
and quality demanded by the Company, are available only from limited sources.
For example, the Company currently relies on Cisco Systems to supply routers
critical to the Company's network, and the Company could be adversely affected
if routers from Cisco were to become unavailable on commercially reasonable
terms. Info AG, a potential competitor, and Deutsche Telekom, a competitor, are
the Company's primary providers of data communications facilities and network
capacity. The Company is also dependent upon telecommunications carriers, which
often are competitors of the Company, to provide telecommunications services and
lease physical space to the Company for routers, modems and other equipment.
There can be no assurance that, on an ongoing basis, the Company will be able to
obtain such services on the scale and within the time frames required by the
Company at a commercially reasonable cost, or at all. Failure to obtain or to
continue to make use of such services would have a material adverse effect on
the Company's business, operating results and financial condition.
Anti-Takeover Provisions. Certain provisions of Delaware law and the
Company's Certificate of Incorporation (the "Certificate of Incorporation") and
Bylaws (the "Bylaws") may 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
Bylaws may also 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. The Company's Certificate of Incorporation
places certain restrictions on who may call a special meeting of stockholders.
In addition, the Company's Board of Directors has the authority to issue up
to 50,000,000 shares of undesignated Preferred Stock, of which 7,760,000 shares
were issued and outstanding at June 30, 1998, 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 Common Stock are
subject to, and may be adversely affected by, the rights of the holders of the
Preferred Stock and any holders of Preferred Stock that may be issued in the
future. The issuance of additional shares of Preferred Stock, while potentially
providing desirable flexibility in connection with possible acquisitions and
serving other corporate purposes, could have the effect of making it more
difficult for a third party to acquire, or may discourage a third party from
attempting to acquire, a majority of the outstanding voting stock of the
Company.
In addition, the Company is subject to the anti-takeover provisions of
Section 203 of the GCL, which prohibits the Company from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
The application of Section 203 of the GCL also could have the effect of delaying
or preventing a change of control of the Company. In addition, the Company's
Certificate of Incorporation provides that, upon consummation of the Offering,
the Board of Directors will be divided into three classes of directors serving
staggered terms, and all stockholder actions must be effected at a duly called
meeting and not by a consent in writing. The classification provision and the
prohibition on stockholder action by written consent could have the effect of
discouraging a third party from
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making a tender offer or otherwise attempting to gain control of the Company.
Additionally, certain federal regulations require prior approval of certain
transfers of control which could also have the effect of delaying, deferring or
preventing a change of control. See "Description of Capital
Stock -- Anti-Takeover Provisions".
Dilution. The public offering price is substantially higher than the book
value per outstanding share of Common Stock. Accordingly, purchasers in this
Offering will suffer an immediate and substantial dilution of $15.98 per share
in the net tangible book value of the Common Stock from the public offering
price. See "Dilution".
Year 2000 Issue. Currently, many computer and software products are coded
to accept two-digit entries in the date code field. These date code fields will
need to accept four-digit entries to distinguish 21(st) century dates from
20(th) century dates. As a result, many companies' software and computer systems
may need to be upgraded or replaced, in order to comply with Year 2000
requirements. The Company and numerous third parties with which the Company does
business rely on numerous computer programs in their day-to-day operations. The
Company is evaluating the Year 2000 issue as it relates to the Company's
internal computer systems and third-party computer systems with which the
Company interacts. With regard to the internal computer systems, the Company has
concluded that the internal networking equipment related to its German operation
is Year 2000 compliant. It is continuing to evaluate the internal systems of
Vianet, Open:Net and Eclipse. It has also instituted procedures to assure that
systems installed in 1998 and 1999 will be Year 2000 compliant. With regard to
third parties, the Company has instituted procedures to assure that newly
acquired systems will be Year 2000 compliant. In addition, the Company is in the
process of contacting suppliers, vendors and customers to determine whether
existing systems upon which the Company relies for products and services are
Year 2000 compliant. This process has not been completed. To date, the Company
has received assurances from the respective suppliers that the following are all
Year 2000 compliant: Cisco routers, used in connection with leased telephone
line communications; Sun Workstations, the Company's main Internet servers;
network facilities supplied by Info AG; and, electric power supplied by
Stadtwerke Munich to the Company's main offices and several of its nodes. The
Company is in the process of determining whether its other major suppliers are
Year 2000 compliant. These include lessors of leased telephone lines, suppliers
of telephone service and electric power and suppliers of routers for dial-up
service. To date, the Company's costs in connection with its Year 2000
evaluation have been limited to internal staff costs, which have been expensed
as incurred. The Company does not presently anticipate utilizing outside
consultants and cannot predict whether the continuing evaluation of the Year
2000 compliance matter will require an upgrade or replacement of systems or
equipment. Should such an upgrade or replacement be required, it could represent
a significant cost to the Company. There can be no assurance that the Company
will be successful in identifying and planning for all Year 2000 issues. To the
extent that the Company is not successful, disruptions of the Company's
operations could result and the Company's revenues, results of operations and
financial conditions could be materially and adversely affected.
Discretionary Authority Over Use of Net Proceeds; No Specific Use of
Proceeds. Management will retain a significant amount of discretion over the
application of the net proceeds of the Offering. Because of the number and
variability of factors that determine the Company's use of the net proceeds of
the Offering, there can be no assurance that such applications will not vary
substantially from the Company's current intentions. Pending such utilization,
the Company intends to invest the net proceeds of the Offering in low risk, high
liquidity instruments. See "Use of Proceeds".
In addition to the payment of the consideration to the stockholders of
Vianet in the amount of $4.3 million, and to stockholders of Open:Net in the
amount of $585,750, the Company has set aside $23 million of the net proceeds to
finance future acquisitions. The Company expects to use the remaining net
proceeds for the purchase of telecommunications and networking equipment, for
the acquisition and development of software, and working capital. In the
ordinary course of business, the Company expects to evaluate potential
acquisitions of complementary businesses, products or technologies. Management
will have significant flexibility in applying the net proceeds of this Offering.
The failure of management to apply such funds effectively could have a material
adverse effect on the Company's business, prospects, financial condition and
results of operations. See "Use of Proceeds".
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Forward-looking Statements. The statements contained in this Prospectus
that are not historical fact are "forward-looking statements". These statements
can often be identified by the use of forward-looking terminology such as
"estimates," "projects," "believes," "expects," "may," "will," "should,"
"intends," or "anticipates" or the negative thereof or other variations thereon
or comparable terminology, or by discussions of strategy that involve risks and
uncertainties. Management wishes to caution the reader that these
forward-looking statements, such as the timing, costs and scope of its
acquisition of, or investments in, existing businesses, the revenue and
profitability levels of such businesses, and other matters contained above and
herein in this Prospectus regarding matters that are not historical facts, are
only predictions. No assurance can be given that the future results indicated,
whether expressed or implied, will be achieved. While sometimes presented with
numerical specificity, these projections and other forward-looking statements
are based upon a variety of assumptions relating to the business of the Company
which, although considered reasonable by the Company, may not be realized.
Because of the number and range of the assumptions underlying the Company's
projections and forward-looking statements, many of which are subject to
significant uncertainties and contingencies that are beyond the reasonable
control of the Company, some of the assumptions inevitably will not materialize
and unanticipated events and circumstances may occur subsequent to the date of
this Prospectus. These forward-looking statements are based on current
expectations, and the Company assumes no obligation to update this information.
Therefore, the actual experience of the Company and results achieved during the
period covered by any particular projections or forward-looking statements may
differ substantially from those projected. Consequently, the inclusion of
projections and other forward-looking statements should not be regarded as a
representation by the Company or any other person that these estimates and
projections will be realized, and actual results may vary materially. There can
be no assurance that any of these expectations will be realized or that any of
the forward-looking statements contained herein will prove to be accurate.
Risks Associated with Business Expansion; Uncertainty of Acceptance of
Services. The Company's strategy is to expand the breadth and depth of products
and services offered and to expand its market presence in the countries in which
it is presently operating and to new countries. In addition, the Company may
pursue the acquisition of complementary businesses, products or technologies,
although it has no present understandings, commitments or agreements with
respect to any material acquisitions or investments. There can be no assurance
that the Company would be able to expand its efforts and operations in a cost
effective or timely manner or that any such efforts would increase overall
market acceptance. Furthermore, new products or services launched by the Company
that were not favorably received by customers could damage the Company's
reputation. Expansion of the Company's operations in this manner would also
require significant additional expenses and could strain the Company's
management, financial and operational resources. The lack of market acceptance
of such efforts or the Company's inability to generate satisfactory revenues
from such expanded services or products to offset their cost could have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations.
Shares Eligible for Future Sale. Sales of substantial amounts of the
Company's Common Stock in the public market after this Offering could adversely
affect prevailing market prices for the Common Stock. The shares of Common Stock
offered hereby will be freely tradable without restriction under the Securities
Act. Taking into account restrictions imposed by the Securities Act, rules
promulgated by the Commission thereunder, and lock-up agreements relating to
certain stockholders, substantial additional shares will be available for sale
in the public market, subject in some cases to the volume and other restrictions
of Rule 144 under the Securities Act.
The Company, its directors, and its executive officers who held, as of
September 10, 1998, approximately 1,906,537 shares of Common Stock, or preferred
stock convertible into Common Stock, that would have been otherwise salable on
January 1, 1999, have agreed not to sell any shares of Common Stock for a period
of six months from the date of the closing of this Offering.
Sales of a substantial amount of Common Stock in the public market, or the
perception that such sales may occur, could adversely affect the market price of
the Common Stock prevailing from time to time in the public market and could
impair the Company's ability to raise additional capital through the sale of its
equity securities. See "Shares Eligible for Future Sale".
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Risk Associated with International Operations. A component of the
Company's long-term strategy is to expand into a number of European markets.
Revenue generated by any current or future international operations needs to
offset the expense of establishing and maintaining any such international
operation, or the Company's business, results of operations and financial
condition could be materially adversely affected. There can be no assurance that
the Company will be able to market, sell and deliver successfully its services
outside Germany and the areas presently served. In addition to the uncertainty
as to the Company's ability to expand into new international markets, there are
certain risks inherent in conducting business internationally, such as
unexpected changes in regulatory requirements, export restrictions, tariffs and
other trade barriers, challenges in staffing and managing foreign operations,
differing technology standards, employment laws and practices in foreign
countries, longer payment cycles, problems in collecting accounts receivable,
political instability and, to a lesser extent, because of the unification of
Europe, fluctuations in currency exchange rates, imposition of currency exchange
controls, seasonal reductions in business activity and potentially adverse tax
consequences, any of which could adversely affect the Company's international
operations. Certain foreign governments, including certain countries in Europe,
have enforced laws and regulations related to content distributed over the
Internet that are more strict than those currently in place in the United
States. There can be no assurance that one or more of these factors will not
have a material adverse effect on the Company's current or future international
operations and, consequently, on the Company's business, results of operations
and financial condition. In addition, there can be no assurance that the Company
will be able to obtain the necessary telecommunications infrastructure in a cost
effective manner or compete effectively in international markets. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
All of the Company's activities are located overseas. All of the Company's
revenues are in European currencies (DM, Lira and Austrian Schilling, and Euro
after January 1, 1999.) Fluctuation in currency exchange rates could cause the
Company's profits to vary, even though such a risk is mitigated by the adoption
of a unified currency throughout the European Union. If the Company were to pay
dividends to holders of the Common Stock, the fluctuation in currency exchange
could also adversely affect the U.S. shareholders. The Company purchases a large
portion of its equipment from U.S. manufacturers in U.S. dollars, and
fluctuation in currency exchange may adversely affect the Company's operating
results and financial condition. The Company has not engaged in hedging
activities to reduce its currency exchange rate exposure.
Possible Volatility of Stock Price. The trading price of the Common Stock
is likely to be highly volatile and could be subject to wide fluctuations in
response to factors such as actual or anticipated variations in quarterly
operating results, announcements of technological innovations, new sales formats
or new products or services by the Company or its competitors, changes in
financial estimates by securities analysts, conditions or trends in the Internet
and online commerce industries, changes in the market valuations of other
Internet, online service or retail companies, announcements by the Company of
significant acquisitions, strategic partnerships, joint ventures or capital
commitments, additions or departures of key personnel, sales of Common Stock and
other events or factors, many of which are beyond the Company's control. In
addition, the market for Internet related and technology companies in particular
has experienced extreme price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of such companies.
The trading prices of many technology companies' stocks are at or near
historical highs and reflect price earnings ratios substantially above
historical levels. There can be no assurance that these trading prices and price
earnings ratios will be sustained. These broad market and industry factors may
materially and adversely affect the market price of the Common Stock, regardless
of the Company's operating performance.
Uncertainty Regarding Protection of Proprietary Rights. The Company has
applied to the European Union for a trademark for the name "Cybernet". In
addition, the Company relies on a combination of copyright, service mark and
trade secret laws and contractual restrictions to establish and protect certain
proprietary rights in its products and services. The Company has no patented
technology that would preclude or inhibit competitors from entering the
Company's market. The Company has entered into confidentiality and invention
assignment agreements with its employees and non-disclosure agreements with its
suppliers, distributors and appropriate customers in order to limit access to
and disclosure of its proprietary information. There can be no assurance that
these contractual arrangements or the other steps taken by the Company to
protect its intellectual property will prove sufficient to prevent
misappropriation of the Company's technology
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or to deter independent third-party development of similar technologies. The
laws of different countries may not protect the Company's products, services or
intellectual property rights in similar manners or to the same extent.
To date, the Company has not been notified that the Company's products
infringe the proprietary rights of third parties, but there can be no assurance
that third parties will not claim infringement by the Company with respect to
current or future products. The Company expects that participants in its markets
will be increasingly subject to infringement claims as the number of products
and competitors in the Company's industry segment grows. Any such claim, whether
meritorious or not, could be time consuming, result in costly litigation, cause
product installation delays, or require the Company to enter into royalty or
licensing agreements. Such royalty or licensing agreements might not be
available on terms acceptable to the Company or at all. As a result, any such
claim could have a material adverse effect upon the Company's business, results
of operations and financial condition. See "Business -- Intellectual Property
Rights".
Control By Principal Stockholders, Executive Officers and Directors. Upon
completion of this Offering, the Company's executive officers and directors (and
their affiliates) will, in the aggregate, own approximately 40.6% of the
Company's outstanding voting stock (including Common Stock and voting Series A
Preferred Stock). In all likelihood, such persons acting together, will have the
ability to control matters submitted to stockholders of the Company for approval
(including the election and removal of directors and any merger, consolidation
or sale of all or substantially all of the Company's assets), and to control the
management and affairs of the Company. Accordingly, such concentration of
ownership may have the effect of delaying, deferring or preventing a change in
control of the Company, impede a merger, consolidation, takeover or other
business combination involving the Company or discourage a potential acquirer
from making a tender offer or otherwise attempting to obtain control of the
Company, which in turn could have an adverse effect on the market price of the
Company's Common Stock. See "Management" and "Principal Stockholders".
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NEW UNDERWRITER
The Underwriter was organized in October, 1997, and has completed at least
four unrelated offerings since that time. The Underwriter is 40% owned by
Berliner Freiverkehr AG, a publicly held financial institution in which Holger
Timm, a Director of the Company, is a controlling shareholder.
USE OF PROCEEDS
The net proceeds to the Company from the sale of 3,500,000 shares of Common
Stock offered by the Company hereby are estimated to be approximately
$66,000,000 million after deducting the underwriting discount and estimated
Offering expenses payable by the Company.
The Company anticipates utilizing approximately $28 million for
acquisitions, including the cash payments of $4.3 million for the Vianet
Acquisition and $585,750 for the Open:Net acquisition; $15.6 million for the
purchase of telecommunications and networking equipment, including the equipment
required in order to become licensed as a telecommunications carrier in Germany;
$3.8 million for software acquisition and development. The remainder of $18.6
million would be available as working capital, including payment of fees
required for licensing as a carrier.
Pending application of the net proceeds as described above, the Company
intends to invest the net proceeds in low risk, high liquidity instruments.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock. It intends
to retain future earnings to fund growth of its business and does not anticipate
paying any cash dividends on shares of Common Stock in the foreseeable future.
PRICE RANGE OF COMMON STOCK
The Common Stock is quoted on the Bulletin Board under the symbol "ZNET"
and on the Freiverkehr of the Berlin and Munich Stock Exchanges under the
security number 906623. The closing sale price of the Common Stock on a recent
date as reported on these Exchanges is set forth on the cover page of this
Prospectus. The following table sets forth the range of high and low closing
sale prices for the Common Stock, as reported by Nasdaq for the indicated
periods.
HIGH LOW
------- -------
1998
Third Quarter (through August 24, 1998)................ $29.875 $19
Second Quarter......................................... $28.75 $20
First Quarter.......................................... $34.5 $11.5
1997
Fourth................................................. $16.25 $7.75
Third Quarter.......................................... $11.125 $9.3125
Second Quarter......................................... $13.625 $0.625
First Quarter.......................................... $ 3.125 $0.625
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The following table sets forth the range of high and low closing sale
prices for the Common Stock, as reported on the Berlin and Munich Exchanges.
BERLIN MUNICH
------------- -------------
HIGH LOW HIGH LOW
----- ----- ----- -----
1998
Third Quarter (through July 31, 1998).................. 28.50 22.02 28.29 22.17
Second Quarter......................................... 29.14 21.94 28.86 21.26
First Quarter.......................................... 25.71 12.63 25.14 12.57
1997
Fourth Quarter......................................... 14.80 8.29 14.51 8.06
Third Quarter.......................................... 11.77 9.49 11.80 9.26
Second Quarter......................................... 13.71 8.06 -- --
DILUTION
At June 30, 1998, the Company had a net tangible book value of $7,355,461
or $.50 per share of Common Stock. "Net tangible book value per share"
represents the tangible book value of the Company (total tangible assets less
total liabilities) divided by the number of shares of Common Stock outstanding.
Without taking into account any changes in such net tangible book value as of
June 30, 1998, other than to give effect to the sale by the Company of the
3,500,000 shares of Common Stock offered hereby at an assumed public offering
price of $20 per share and after deducting the estimated underwriting discounts
and commissions and offering expenses payable by the Company, the pro forma net
tangible book value of the Company at June 30, 1998, would have been $73,355,461
or $4.02 per share. This represents an immediate increase in the net tangible
book value per share of $3.52 to existing stockholders and an immediate dilution
of the net tangible book value per share of $15.98 to persons purchasing the
Common Stock offered hereby (the "New Investors"). The following table
illustrates this per share dilution:
Assumed initial public offering price per share............. $ $20.00
Net tangible book value per share before the Offering....... .50
Increase per share attributable to New Investors............ 3.52
-----
Pro forma as adjusted net tangible book value per share
after the Offering........................................ 4.02
------
Dilution per share to New Investors......................... $15.98
======
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CAPITALIZATION
The following table sets forth, as of June 30, 1998, (i) the actual
capitalization of the Company and (ii) the capitalization of the Company (a) pro
forma to reflect consummation of the 1998 Acquisitions and (b) as further
adjusted to reflect the sale of 700,000 shares of Common Stock completed in July
1998 and the sale of 3,500,000 shares of Common Stock offered hereby by the
Company and the application of the net proceeds therefrom, all as if they
occurred on June 30, 1998. See "Use of Proceeds" and "Pro Forma Consolidated
Financial Statements".
AS OF JUNE 30, 1998
---------------------------------
(IN THOUSANDS)
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
Overdrafts and short-term borrowings(3)..................... $ 4,496 $ 4,638 $ 4,638
======= ======= =======
Long-term debt(3)........................................... $ 1,134 $ 1,221 $ 1,221
Minority interest........................................... 89 89 89
Stockholders' equity:
Common stock, 50,000,000 shares authorized; 14,754,511
shares issued and outstanding; 15,113,336 shares
issued and outstanding, pro forma(1); 19,313,336
shares issued and outstanding pro forma as
adjusted(2).......................................... 15 15 19
Preferred stock, 20,000,000 shares authorized 7,760,000
shares issued and outstanding........................ 8 8 8
Additional paid-in capital............................. 11,674 20,286 97,782
Cumulative translation adjustment...................... (189) (189) (189)
Accumulated deficit.................................... (2,877) (2,877) (2,877)
------- ------- -------
Total stockholders' equity........................ 8,631 17,243 94,743
------- ------- -------
Total capitalization.............................. $ 9,854 $18,553 $96,053
======= ======= =======
- ---------------
(1) Includes the issuance of 358,825 shares of Common Stock in the 1998
Acquisitions.
(2) Includes 700,000 shares of Common Stock issued in July 1998 and 3,500,000
shares of Common Stock offered hereby.
(3) Including capital lease obligations.
18
21
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of December 31, 1996
and 1997, and for each of the two years then ended, are derived from the audited
consolidated financial statements of the Company included elsewhere in this
Prospectus. The selected consolidated financial data as of June 30, 1998, and
for the six months ended June 30, 1997 and 1998, are unaudited, but have been
prepared on the same basis as the audited financial data, and in the opinion of
management, contain all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of the results of operations for
such periods. The results of operations for the six months ended June 30, 1998,
are not necessarily indicative of results to be expected for the full year. The
pro forma consolidated financial data as of June 30, 1998, for the year ended
December 31, 1997 and the six months ended June 30, 1998, respectively, are
derived from the Pro Forma Consolidated Financial Information included elsewhere
in this Prospectus. The data should be read in conjunction with the Consolidated
Financial Statements, related notes and other financial information included
elsewhere in this Prospectus.
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------- -----------------------------
PRO FORMA PRO FORMA
1996 1997 1997 1997 1998 1998
------ ------- --------- ------- ------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue
Internet Projects................ $ 217 $ 1,598 $ 4,026 $ 446 $ 1,863 $ 2,209
Network Services................. 91 716 3,441 150 1,489 3,126
------ ------- ------- ------- ------- --------
Total revenue............... 308 2,314 7,467 596 3,352 5,335
Cost of Revenue....................... 363 2,494 5,466 646 3,376 4,398
------ ------- ------- ------- ------- --------
Operating profit (loss)............... (55) (180) 2,001 (50) (24) 937
General and administrative expenses... 269 497 1,601 228 669 888
Marketing expenses.................... 172 1,221 2,045 514 1,714 2,366
Research and development.............. 187 367 631 -- 1,051 1,185
Amortization of goodwill.............. -- 19 1,367 -- 45 684
------ ------- ------- ------- ------- --------
628 2,104 5,644 742 3,479 5,123
Interest expense, net................. 2 39 58 14 110 117
------ ------- ------- ------- ------- --------
Loss before taxes..................... (686) (2,323) (3,701) (806) (3,613) (4,303)
Income tax benefit.................... 402 1,339 1,319 466 2,007 1,965
Minority interest..................... -- -- 11 -- -- --
Net loss.............................. $ (284) $ (984) $(2,371) $ (340) $(1,606) $ (2,338)
====== ======= ======= ======= ======= ========
Basic and diluted loss per share...... $ (.12) $ (.12) $ (.13) $ (.02) $ (.07) $ (.13)
====== ======= ======= ======= ======= ========
BALANCE SHEET DATA:
Working capital (deficiency).......... $ 339 $ 891 $(1,682) $(3,851) $ 68,268
Total assets.......................... 2,511 15,154 4,045 20,449 108,113
Long-term debt(1)..................... -- 42 -- 1,134 1,221
Total stockholders' equity............ 1,790 9,643 1,279 8,631 94,743
- ---------------
(1) Including lease obligations
19
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the "Selected Consolidated Financial Data" and the historical and pro forma
financial statements and notes thereto appearing elsewhere in this Prospectus.
Certain statements set forth below constitute "forward-looking statements"
within the meaning of the Securities Act and the Securities Exchange Act of
1934, as amended (the "Exchange Act"). The safe harbor provisions provided in
Section 27A of the Securities Act and Section 21E of the Exchange Act do not
apply to forward-looking statements made in connection with an initial public
offering. Such forward-looking statements involve known and unknown risks,
uncertainties, and other factors that may cause the actual results, performance
or achievements of the Company, or industry results, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Given these uncertainties, prospective
investors are cautioned not to place undue reliance on such forward-looking
statements. See "Risk Factors -- Forward-looking Statements".
OVERVIEW
The Company commenced significant operations in 1996. Between the
commencement of operations and December, 1997, the Company concentrated its
operations entirely in Germany. It rapidly established a state-of-the-art
network of Internet nodes connected to a redundant high performance backbone
infrastructure that offers dedicated leased lines access to the Internet at more
than 100 nodes, and the availability of local dial-up access to the Internet to
a majority of the population of Germany. In order to establish this network
rapidly, the Company relied heavily on leased equipment and outside personnel,
particularly equipment and personnel provided pursuant to an agreement with Info
AG, a German carrier (the "Info AG Agreement"), which also acts as a reseller of
the Company's services. As the Company has grown and established its identity
and presence in the German market, it has, to an increasing extent, purchased or
leased its own equipment, hired its own personnel, established independent nodes
and other facilities, and replaced the network facilities leased from Info AG.
Effective July, 1999, the Company has given notice, terminating the Info AG
Agreement, although the Company anticipates that it will continue to maintain a
working relationship with Info AG.
By acquiring Artwise in September, 1997, and by investing in personnel and
research and development, the Company developed the capability to be a sole
source supplier of most solutions and services that a business customer is
likely to require in connection with its use of the Internet. See
"Business -- Services and Products". The Company attempts to differentiate
itself from competitors by marketing its high level of technical expertise and
its ability to be a sole source supplier of Internet related solutions and
services to large and medium sized businesses, particularly businesses with
limited technical resources.
In December, 1997, the Company acquired a 66% interest in Eclipse, an ISP
in Northern Italy. In August, 1998, the Company acquired Open:Net, an ISP in
southwest Germany. Concurrent with the closing of this Offering, the Company
will acquire Vianet, an Austrian ISP.
The Company's revenues are derived from two principal sources: Network
Services and Internet Projects. Network Services consist of access to, and usage
of, the Company's network. These include an initial one-time setup fee and
recurring monthly service charges. Revenues from Network Services are recognized
when provided. Internet Projects include telecommunications and systems
integration solutions and services provided by the Company. Typically, the
Company charges a flat fee for Internet Projects, which fee is payable in three
installments: upon contracting for the project; upon completion; and upon
customer acceptance. Revenues from Internet Projects are recognized upon
customer acceptance.
The Company incurs substantial costs in connection with the development of
products that will be sold to customers, such as the Company's electronic
commerce and Intranet platforms. These costs, including direct labor, related
overhead and third-party costs related to establishing network systems, are
expensed as research and development until technological feasibility has been
established. Once technological feasibility has been established, costs are
capitalized until an individual product is commercially available. Commencing in
the month of a product's release, the amount attributable to that product is
thereafter amortized, using the straight-line method, over a period not to
exceed four years.
20
23
Substantially all of the Company's revenues are derived from sales outside
the United States and are paid in foreign currencies, principally the DM and, to
a lesser extent, the Austrian Schilling and the Italian Lira. See "Risk
Factors -- Risks Associated with International Operations". For purposes of the
Company's statement of operations, items are translated into U.S. dollars at
average currency exchange rates prevailing during the period. Assets and
liabilities on the Company's balance sheet are translated into U.S. dollars at
currency exchange rates prevailing at the balance sheet dates. The Company
purchases a large portion of its equipment from U.S. manufacturers, and
fluctuations in currency exchange rates may adversely affect the Company's
operating results and financial condition. The Company has not engaged in
hedging activities to reduce its currency exchange rate exposure.
A significant part of the operating costs of any ISP represents the cost of
leasing telephone lines and the cost of access to the global Internet. In
Germany, the Company currently leases telephone lines from several
telecommunications carriers and resellers in order to obtain the lowest
available rates. However, the rates charged by carriers to end users, such as
the Company, are generally higher than the rates charged to other carriers. The
Company intends to become licensed as a carrier in Germany in order to benefit
from lower rates. See "Business -- The Internet in Europe and Germany". In
addition, the Company intends to make use of alternative technologies as they
become available, in order to reduce the costs of international
telecommunications and the cost of access to the global Internet.
Currently, many computer and software products are coded to accept
two-digit entries in the date code field. These date code fields will need to
accept four-digit entries to distinguish 21(st) century dates from 20(th)
century dates. As a result, many companies' software and computer systems may
need to be upgraded or replaced in order to comply with Year 2000 requirements.
The Company and numerous third parties with which the Company does business rely
on numerous computer programs in their day-to-day operations. The Company is
evaluating the Year 2000 issue as it relates to the Company's internal computer
systems and third-party computer systems with which the Company interacts. With
regard to the internal computer systems, the Company has concluded that the
internal networking equipment related to its German operation is Year 2000
compliant. It is continuing to evaluate the internal systems of Vianet, Open:Net
and Eclipse. It has also instituted procedures to assure that systems installed
in 1998 and 1999 will be Year 2000 compliant. With regard to third parties, the
Company has instituted procedures to assure that newly acquired systems will be
Year 2000 compliant. In addition, the Company is in the process of contacting
suppliers, vendors and customers to determine whether existing systems, upon
which the Company relies for products and services, are Year 2000 compliant.
This process has not been completed. To date, the Company has received
assurances from the respective suppliers that the following are all Year 2000
compliant: Cisco routers, used in connection with leased telephone line
communications; Sun Workstations, the Company's main Internet servers; network
facilities supplied by Info AG; and, electric power supplied by Stadtwerke
Munich to the Company's main offices and several of its nodes. The Company is in
the process of determining whether its other major suppliers are Year 2000
compliant. These include lessors of leased telephone lines, suppliers of
telephone service and electric power and suppliers of routers for dial-up
service. To date, the Company's costs in connection with its Year 2000
evaluation have been limited to internal staff costs, which have been expensed
as incurred. The Company does not presently anticipate utilizing outside
consultants and cannot predict whether the continuing evaluation of the Year
2000 compliance matter will require an upgrade or replacement of systems or
equipment. Should such an upgrade or replacement be required, it could represent
a significant cost to the Company.
21
24
HISTORICAL RESULTS OF OPERATIONS
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------------- -----------------------
1996 1997 1997 1998
---------- ---------- ---------- ----------
(IN 000'S) (IN 000'S) (IN 000'S) (IN 000'S)
STATEMENT OF OPERATIONS DATA:
Revenue..........................................
Internet Projects........................... 217 1,598 446 1,863
Network Services............................ 91 716 150 1,489
----- ------- ----- -------
Total revenue.......................... 308 2,314 596 3,352
Cost of revenues................................. 363 2,494 646 3,376
----- ------- ----- -------
Operating loss................................... (55) (180) (50) (24)
General and administrative expenses......... 269 497 228 669
Marketing expenses.......................... 172 1,221 514 1,714
Research and development.................... 187 367 -- 1,051
Amortization................................ -- 19 -- 45
----- ------- ----- -------
Total.................................. 628 2,104 742 3,479
Interest expense................................. 2 39 14 110
----- ------- ----- -------
Loss before taxes................................ (686) (2,323) (806) (3,613)
Income tax benefit............................... 402 1,339 466 2,007
----- ------- ----- -------
Net loss......................................... (284) (984) (340) 1,606
===== ======= ===== =======
Basic and diluted loss per share................. $(.12) $ (.12) $(.02) $ (.07)
===== ======= ===== =======
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Total revenues increased 463% from $595,571 in 1997 to $3,352,487 in 1998.
Absent the impact of the revenues associated with consolidating Artwise and
Eclipse in 1998, revenues would have increased approximately $1,257,000 or 211%
in 1998 compared to 1997. Internet Project revenue totaled $1,863,075 in 1998 or
55% of total revenues, compared to $445,330 in 1997 or 75% of total revenues.
This change in mix of revenues is principally due to the continuing addition of
new network customers. Network Services revenue increased from $150,241 in 1997
to $1,489,412 in 1998, principally as a result of these new customers and
partially as a result of the Eclipse acquisition. At June 30, 1998, the Company
had approximately 5,800 customers.
Cost of revenues increased 423% from $645,943 in 1996 to $3,376,112 in
1997. As a percentage of revenues, cost of revenues decreased from 108% to 101%
as a result of a higher level of Network Services revenue.
General and administrative increased 194% from $227,759 in 1997 to $668,542
in 1998, principally as a result of adding additional personnel in 1998, as well
as the impact of consolidating Artwise and Eclipse in the 1998 period.
Marketing expenses increased 234% from $513,793 in 1997 to $1,713,782 in
1998, principally as a result of substantial investments by the Company in
marketing activities, including trade fairs, product literature and related
expenditures. The increase was also influenced by the impact of consolidating
Artwise and Eclipse in the 1998 period.
Research and development expenditures began in the second half of 1997, as
the Company started significant operations. The 1998 research and development
expenditures result from the increase in personnel and related costs to develop
Internet Projects for sale to customers.
Amortization in 1998 represents the amortization of the goodwill associated
with the Artwise and Eclipse acquisitions made in the second half of 1997.
22
25
Interest expense increased 669% from $14,359 in 1997 to $110,393 as a
result of a significant increase in overdrafts and short-term borrowings in 1998
to fund the Company's working capital needs during its early growth stages.
Income tax benefit in both 1997 and 1998 represents the capitalization of
the losses generated by the Company.
Net loss increased from $340,156 in 1997 to $1,605,685 as a result of the
factors discussed above.
FISCAL YEARS ENDED DECEMBER 31, 1997 AND 1996
Total revenues increased 652% from $307,673 in 1996 to $2,314,021 in 1997.
Internet Project revenues increased 635% from $217,296 to $1,597,869 and Network
Services revenues increased 692% from $90,377 to $716,152. These increases are
primarily related to the fact that 1997 was a full operational year, as opposed
to 1996 when the Company was in the initial stages of marketing and selling its
services and projects. The Company had approximately 4,300 customers at December
31, 1997, compared to 1,460 customers at December 31, 1996. Revenues were also
partially influenced by the acquisition of Artwise effective September 1, 1997.
Cost of revenues increased 587% from $363,120 in 1996 to $2,493,738 in
1997. As a percentage of revenues, cost of revenues decreased from 118% to 108%.
Cost of revenues did not increase as much as revenues, due to the fact that
installation costs for customers represent a proportionately higher cost at the
beginning of the related service contract. After installation, the cost of
Network Services principally represents network lease and maintenance costs.
General and administrative costs increased 85% from $268,762 in 1996 to
$496,950 in 1997. The increase is principally attributable to costs of adding
additional personnel in 1997, increased costs for more office space and
increased costs related to consulting, legal and financial advice related to the
growth of the Company.
Marketing expenses increased 609% from $172,209 in 1996 to $1,221,508 in
1997. This increase is the result of the Company's efforts to build its sales
organization with additional personnel, as well as costs associated with
advertising, firm brochures and participation in trade fairs in 1997.
Research and development expenses increased 96% from $187,130 in 1996 to
$366,829 in 1997. This increase represents efforts by the Company to develop and
improve the range and qualities of products offered for sale, as well as the
addition of personnel.
Amortization of goodwill in 1997 represents the amortization of the
goodwill associated with the Artwise acquisition in September, 1997.
Interest expense increased 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 in order to fund the Company's working capital
requirements.
Income tax benefit in both 1996 and 1997 represents the capitalization of
the losses generated by the Company.
Net loss increased from $283,778 to $983,840 as a result of the factors
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations through the
private placement of securities, short-term borrowing, and cash from operations.
The Company has made the following placements of its securities:
Effective September 16, 1997, the Company issued 5,160,000 shares of common
stock, 1,200,000 shares of Series A Preferred Stock, and 5,160,000 shares of
Series B Preferred Stock in exchange for all of the issued and outstanding
shares of the common stock of Cybernet AG.
23
26
Effective September 1, 1997, the Company issued 72,620 shares of its common
stock in payment of $689,196 of the purchase price of Artwise.
In September, 1997, the Company completed the sale of 1,400,000 shares of
its Series C Preferred Stock for gross proceeds of approximately $9,800,000.
In December, 1997, the Company also agreed to issue 27,000 shares of common
stock to Eiderdown Trading, Ltd. in connection with the purchase of Eclipse.
In July, 1998, the Company completed the sale of 700,000 shares of its
common stock for gross proceeds of approximately $12,600,000.
In June, 1998, the Company agreed to issue 300,000 shares of common stock
to the selling shareholders of Vianet to fund a portion of acquisition price for
all of the stock of Vianet.
In August, 1998, the Company agreed to issue 58,825 shares of common stock
to the selling shareholders of Open:Net to fund a portion of the acquisition
price for all of the stock of Open:Net.
The Company anticipates that the net proceeds of the Offering will be
approximately $66 million. The Company anticipates utilizing approximately $28
million for acquisitions, including the cash payments of $4.3 million for the
Vianet acquisition, and $585,750 for the Open:Net acquisition; $15.6 million for
the purchase of telecommunications and networking equipment, including the
equipment required in order to become licensed as a telecommunications carrier
in Germany; and $3.8 million for software acquisition and development. The
remainder of $18.6 million would be available as working capital, including
payment of fees required for licensing as a carrier.
The Company's primary sources of short-term liquidity will be the proceeds
of the Offering and cash from operations. The Company anticipates that these
sources will be sufficient to fund the anticipated growth of the Company, to
allow the Company to continue its acquisition program, and to reach
profitability. During the year ended December 31, 1997, the Company used cash
for operations of $1.5 million. Investing activities used cash of $4.7 million,
primarily for the purchase of infrastructure, product development and
acquisitions of businesses. Financing activities provided $8.6 million,
primarily from the private placement of equity securities and short-term
borrowing. As of December 31, 1997, the Company had working capital of
approximately $891,000.
During the six months ended June 30, 1998, the Company used cash in
operations of $3,518,286. Investing activities used cash of $2,160,959,
primarily for the purchase of infrastructure and product development. Financing
activities provided $3,567,131, primarily from borrowings. As of June 30, 1998,
the Company had a working capital deficiency of $3,851,241.
24
27
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited Pro Forma Consolidated Statement of Operations
for the year ended December 31, 1997, is based on the historical consolidated
financial statements of the Company, adjusted as if the following events
occurred on January 1, 1997: (i) the 1997 Acquisitions, (ii) the 1998
Acquisitions, and (iii) the sale of the Common Stock offered hereby by the
Company at an assumed public offering price of $20 per share and the application
of the net proceeds therefrom. The Pro Forma Consolidated Statement of
Operations for the six months ended June 30, 1998, is based on the historical
consolidated financial statements of the Company, adjusted as if the following
events occurred on January 1, 1998: (i) the 1998 Acquisitions, and (ii) the sale
of Common Stock offered hereby by the Company at an assumed public offering
price of $20 per share, and the application of the net proceeds therefrom. The
unaudited Pro Forma Consolidated Balance Sheet, as of June 30, 1998, is based on
the historical consolidated financial statements of the Company, adjusted as if
the following events occurred on June 30, 1998: (i) the 1998 Acquisitions, (ii)
the sale of 700,000 shares of Common Stock completed in July 1998; and (iii) the
sale of 3,500,000 shares of Common Stock offered hereby by the Company at an
assumed public offering price of $20 per share, and the application of the net
proceeds therefrom.
The unaudited Pro Forma Consolidated Statements of Operations combine the
historical results of the Company with the historical results of the 1997
Acquisitions or the 1998 Acquisitions, as the case may be, prior to the dates
the Company made such acquisitions, using the purchase method of accounting.
These Pro Forma Consolidated Financial Statements are not necessarily indicative
of the operating results that would have been achieved had such transactions
occurred at the beginning of each period presented. 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 and Vianet included elsewhere in this Prospectus.
25
28
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
PRO
HISTORICAL 1997 1998 FORMA AS
COMPANY ACQUISITIONS ACQUISITIONS ADJUSTED
---------- ------------ ------------ --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue
Internet Projects............................ $ 1,598 $1,766 (a) $ 662 (a) $ 4,026
Network Services............................. 716 156 (a) 2,569 (a) 3,441
------- ------ ------- -------
Total revenues.......................... 2,314 1,922 3,231 7,467
Cost of revenues
Internet Projects............................ 1,564 1,277 (b) 263 (b) 3,104
Network Services............................. 930 146 (b) 1,286 (b) 2,362
------- ------ ------- -------
Total cost of revenues.................. 2,494 1,423 1,549 5,466
------- ------ ------- -------
Operating profit (loss)........................... (180) 499 1,682 2,001
General and administrative expenses............... 497 275 (b) 829 (b) 1,601
Marketing expenses................................ 1,221 199 (b) 625 (b) 2,045
Research and development.......................... 367 70 (b) 194 (b) 631
Amortization...................................... 19 71 (c) 1,277 (c) 1,367
------- ------ ------- -------
2,104 615 2,925 5,644
Interest income................................... -- -- 2 (b) 2
Interest expense.................................. 39 3 (b) 18 (b) 60
------- ------ ------- -------
Loss before taxes................................. (2,323) (119) (1,259) (3,701)
Income tax (expense) benefit...................... 1,339 -- (20)(b) 1,319
Minority interest................................. -- 11 (b) -- 11
------- ------ ------- -------
Net loss.......................................... $ (984) $ (108) $ (1,279) $ (2,371)
======= ====== ======= =======
Basic and diluted loss per share.................. $ (.12) $ (.13)
======= =======
26
29
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
PRO
HISTORICAL 1998 FORMA AS
COMPANY ACQUISITIONS ADJUSTED
---------- ------------ --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue
Internet Projects...................................... $ 1,863 $ 346(a) $ 2,209
Network Services....................................... 1,489 1,637(a) 3,126
------- ------ -------
Total revenues.................................... 3,352 1,983 5,335
Cost of revenues
Internet Projects...................................... 1,660 190(b) 1,850
Network Services....................................... 1,716 832(b) 2,548
------- ------ -------
Total cost of revenues............................ 3,376 1,022 4,398
------- ------ -------
Operating profit (loss)..................................... (24) 961 937
General and administrative expenses......................... 669 219(b) 888
Marketing expenses.......................................... 1,714 652(b) 2,366
Research and development.................................... 1,051 134(b) 1,185
Amortization................................................ 45 639(c) 684
------- ------ -------
3,479 1,644 5,123
Interest income............................................. -- 1(b) 1
Interest expense............................................ 110 8(b) 118
------- ------ -------
Loss before taxes........................................... (3,613) (690) (4,303)
Income tax (expense) benefit................................ 2,007 (42)(b) 1,965
------- ------ -------
Net loss.................................................... $(1,606) $ (732) $(2,338)
======= ====== =======
Basic and diluted loss per share............................ $ (.07) $ (.13)
======= =======
27
30
PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
(UNAUDITED)
PRO FORMA
HISTORICAL 1998 AS
COMPANY ACQUISITIONS OFFERING ADJUSTED
---------- ------------ -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents................. $ 148 $ 102(d) $72,554(f)(g) $ 72,804
Short-term investments.................... 104 -- 104
Inventories............................... -- 5(d) 5
Trade accounts receivable................. 1,921 836(d) 2,757
Other receivables......................... 820 50(d) 870
Prepaid expenses and other current
assets.................................. 1,416 37(d) 1,453
------- ------- ------- --------
Total current assets................. 4,409 1,030 72,554 77,993
Property and equipment, net............... 5,162 524(d) 5,686
Product development costs, net............ 3,595 -- 3,595
Goodwill, net............................. 1,275 10,706(d) 11,981
Other intangible assets................... -- 2,826(d) 2,826
Deferred income taxes..................... 5,977 -- 5,977
Other assets.............................. 31 24(d) 55
------- ------- ------- --------
TOTAL ASSETS................................... $20,449 $15,110 $72,554 $108,113
======= ======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Overdrafts and short term borrowings...... $ 3,983 $ 141(d) $ 4,124
Trade accounts payable.................... 1,715 664(d) 2,379
Other accrued liabilities................. 1,030 333(d) 1,363
Deferred purchase obligations............. 358 4,946(e) (4,946)(f) 358
Deferred income........................... -- 249(d) 249
Accrued personnel costs................... 661 77(d) 738
Current portion capital lease
obligations............................. 514 -- 514
------- ------- ------- --------
Total current liabilities............ 8,261 6,410 (4,946) 9,725
Long-term debt............................ 40 88(d) 128
Capital lease obligations................. 1,093 -- 1,093
Deferred income taxes..................... 2,335 -- 2,335
Minority interest......................... 89 -- 89
STOCKHOLDERS' EQUITY:
Common stock.............................. 15 -- 4(f)(g) 19
Preferred stock........................... 8 -- 8
Additional paid-in capital................ 11,674 8,612(e) 77,496(f)(g) 97,782
Accumulated deficit....................... (2,877) -- (2,877)
Cumulative translation adjustment......... (189) -- (189)
------- ------- ------- --------
TOTAL STOCKHOLDERS' EQUITY..................... 8,631 8,612 77,500 94,743
------- ------- ------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..... $20,449 $15,110 $72,554 $108,113
======= ======= ======= ========
28
31
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(a) Includes the revenues of the companies acquired in the 1997
Acquisitions for the periods in 1997 prior to their respective
acquisition dates and the revenues of the 1998 Acquisitions for the
full year 1997 and the six months ended June 30, 1998.
(b) Includes the cost of revenues and other expenses of the companies
acquired in the 1997 Acquisitions for the periods in 1997 prior to
their respective acquisition dates and the cost of revenues and other
expenses of the companies acquired in the 1998 Acquisitions for the
full year 1997 and the six months ended June 30, 1998.
(c) Includes amortization of goodwill and other intangible assets resulting
from the 1997 Acquisitions for the periods in 1997 prior to the
respective acquisition dates and for the 1998 Acquisitions for the full
year 1997 and the six months ended June 30, 1998. Amortization on a
straight-line basis is reflected over the following periods:
Goodwill 15 years
Other intangible assets:
Customer base 5 years
Management contracts 3 years
(d) Includes the net assets acquired in the 1998 Acquisitions. The
following represents the preliminary allocation of the excess of the
purchase price over the historical net book value of the acquired net
assets:
(IN THOUSANDS)
Purchase price......................................... $13,558
Acquired net assets at book value (June 30, 1998)...... 26
-------
Excess of purchase price over acquired net assets...... $13,532
=======
Allocated to:
Goodwill............................................... $10,706
Customer base.......................................... 2,314
Management............................................. 512
-------
$13,532
=======
(e) Reflects the purchase price of the 1998 Acquisitions consisting of:
Deferred purchase price................................ $ 4,946
Common stock........................................... --
Additional paid-in capital............................. 8,612
-------
$13,558
=======
A total of 358,825 shares of Common Stock are to be issued. These
shares have been valued at $24 per share, the approximate average of
the high and low prices of the Company's Common Stock during the second
quarter of 1998.
(f) To reflect the offering of 3,500,000 shares at $20 per share and the
receipt of the net proceeds of $66 million and the further application
of the proceeds to the payment of the deferred purchase price of the
1998 Acquisitions.
(g) To reflect the completion in July 1998 of the sale of 700,000 shares of
Common Stock for net proceeds of approximately $11,500,000.
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BUSINESS
OVERVIEW
The Company is a leading provider of international Internet backbone and
access services and network business solutions to companies in Germany, Austria
and Northern Italy. In addition to backbone and access, it offers a full range
of solutions and services which business customers are likely to require to
establish and maintain their Internet related systems. Among the specific
services and solutions offered by the Company are virtual private networks,
web-hosting, co-location services, security solutions, electronic commerce
solutions and services, and Intranet workflow solutions. The Company offers
consulting, complete design and installation, training, technical support,
operation and monitoring of systems. In addition, the Company sells on a turnkey
basis customer premise equipment required to connect to the Internet, such as
routers, servers and other hardware.
The Company maintains geographically distributed, state-of-the-art Internet
nodes connected to a redundant high performance backbone infrastructure.
Utilizing a combination of leased and Company owned lines and equipment, it
helps businesses reduce telecommunications costs by offering access to the world
wide Internet through dedicated leased lines at more than 100 nodes. For smaller
enterprises, it offers a system of more than 90 dial-up nodes with ISDN or
analog modem ports. These nodes permit local dial-up access to a majority of the
population of Germany and Austria. As of August 15, 1998, the Company had
approximately 6,000 customers, an increase from approximately 4,300 customers at
December 31, 1997, 3,000 customers at June 30, 1997, and 1,460 customers at
December 31, 1996.
To a significant extent, the Company has grown through acquisitions and the
Company continues to seek additional acquisitions which will permit expansion of
the type and quality of the services offered, of the geographical areas in which
those services are offered, and increased penetration of the Company's current
markets. Significant acquisitions to date include the acquisitions of Artwise,
Eclipse, and Open:Net.
The Company's business goals are:
(1) To take advantage of the convergence of Internet Protocol ("IP")
technology and telecommunications services, so as to offer businesses a
portfolio of advanced telecommunications services;
(2) To develop and manage a network of its own which links Europe's
principal business centers by exploiting the Company's high level of
networking expertise;
(3) To become Europe's supplier of choice for business customers in
conceiving, developing, and operating network based solutions, such as
electronic commerce and corporate intranet or workflow solutions;
(4) To become Europe's leading supplier of sophisticated hosting and
electronic commerce services.
To achieve these goals, the Company has adopted and intends to maintain a
flexible organizational structure which enables efficient marketing of its
products and services; cultivation of long-term relationships with key
customers; and rapid exploitation of opportunities for acquisitions or other
expansion of operations into additional European business centers. The Company
intends to maintain a growth rate greater than that of its market and to realize
additional economies of scale.
THE INTERNET
The Internet is a world wide connection of tens of thousands of networks
belonging to many owners which communicate using IP. Established in 1969, it was
originally designed to electronically link military, government and research
sites. Beginning in the early 1990s, other uses of the Internet expanded
rapidly, with commercial uses as a significant part of the expansion. Among the
entities commercially involved in the Internet are ISPs, backbone providers, and
telecommunications carriers. ISPs provide access to the Internet to individuals
and business customers, combine computer processing, information storage,
protocol conversion and routing with transmission to enable users to access
Internet content and services. Backbone providers
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supply high speed networks that interconnect smaller independent networks, route
traffic between ISPs, and interconnect with other backbone providers. Like the
Company, many ISPs are also backbone providers. Telecommunications carriers
provide the infrastructure used to enable the traffic of Internet communication.
Telecommunications carriers and resellers sell or lease capacity on their
facilities to ISPs, backbone providers, or other service providers. In Europe,
there is currently a trend towards Internet companies offering
telecommunications services and telecommunications carriers and resellers
companies offering Internet services.
As use of the Internet grows, businesses are increasing the number and
types of products and services offered over the Internet. Internet based
businesses now offer products and services in areas such as finance, banking,
entertainment, education and advertising. Other businesses have begun to use the
Internet for an expanding variety of applications, including advertising and
public relations, sales, purchasing, distribution, customer service, employee
training and communications. Internet operations are mission-critical for
virtually all Internet based businesses and are becoming increasingly
mission-critical for more traditional enterprises. Loss of the availability of
mission-critical Internet sites can result in losses of revenue and impairment
of customer goodwill. The proliferation of Internet services offered and the
growth in mission-critical Internet applications increase the complexity of
commercial Internet sites. In order to ensure the quality, reliability,
availability and redundancy of these Internet operations, businesses must either
make substantial investments in developing Internet expertise and infrastructure
or enter into outsourcing arrangements with providers such as the Company who
offer consulting, complete design and installation, training, web-hosting,
co-location services, security solutions, virtual private networks, electronic
commerce solutions and services, Intranet workflow solutions, technical support
and monitoring of systems. Enterprises relying on outsourcing demand expert
customer service, rapid adaptation of solutions and services to technological
developments, and redundant network facilities.
THE INTERNET IN GERMANY AND EUROPE
The Internet relies upon leased telecommunications infrastructure provided
by telecommunications carriers in each country in which it is operated. Due to
the regulated nature of the telecommunications industry in Europe, including
Germany, Austria and Italy, fees for the usage of this infrastructure have
traditionally been very high. Those rates have been much higher than the rates
charged in countries with competing suppliers of telecommunications. Therefore,
the telecommunications infrastructure costs are a major component of the overall
cost of Internet services. The Company believes that these high costs have
slowed the growth of the Internet in each of these countries. These costs have
begun to come down as Germany, Austria, Italy and other European countries, have
each moved towards permitting competing suppliers of telecommunications. That
process is farthest along in Germany. Effective January 1, 1998, the
Regulierungsbehoerde fuer Telekommunikation und Post ("Reg TP"), the German
governmental agency charged with deregulating the telecommunications industry,
mandated that licensed carriers, other than Deutsche Telekom AG ("DT"), be
allowed to offer telecommunications services in competition with DT. The Reg TP
further set interconnection fees which DT is permitted to charge new carriers
for the interconnection with the DT network that all competing German carriers
require in order to exchange traffic and reach end users. As a result, a new
generation of competing carriers has entered the market and access charges and
the total cost of Internet usage have come down.
The Company believes that, because of these cost reductions, European
businesses will rapidly increase their usage of the Internet. Datamonitor (1998
Datamonitor, Corporate Internet Services in Europe, Electronic Commerce
Integration Services) estimates that, in 1998, Internet services to business
customers in Europe will generate a total of $4.8 billion of which $1.89 billion
will be generated by Internet connectivity services. Datamonitor further
forecasts that, in the year 2000, total revenues will grow to $16.2 billion of
which $4.3 billion will be for connectivity services including $2.6 billion for
access and set up services, $546 million for hosting and $1.12 billion for value
added services, such as consulting, security, systems integration, voice
services and virtual private networks. Electronic commerce set up and
facilitating services will grow to $12 billion.
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The Company's goal is to become a full service ISP and provider of
telecommunications services to business customers in Europe. To achieve that
goal, the Company intends to expand the geographical area in which its customer
base is located through acquisitions, increase penetration of the Company's
current markets, and expand the range of products and services offered through
internal development and acquisitions.
In Germany, ISPs are also beginning to reduce telecommunications costs by
acquiring the necessary infrastructure and becoming licensed as
telecommunications carriers. Once licensed as carriers, they lease lines from DT
or others at the lower rates available to carriers. The same infrastructure
enables the ISPs who become carriers to use IP technology to offer
telecommunications services such as voice and fax at competitive rates without
significant additional capital investment. Thus, the Company believes that, to
an increasing extent, telecommunications services will be offered by the same
providers as Internet services, and the Internet will provide the future
platform for an increasing portion of business telecommunications services. The
Company intends to utilize a portion of the proceeds of the Offering to acquire
the necessary infrastructure and to pay the other costs necessary in order to
become a carrier and reduce its telecommunications costs. Thereafter, as
reasonably priced equipment which improves the quality of voice transmissions
utilizing IP technology becomes available, the Company intends to offer voice,
fax and other telecommunications services to business customers.
Because the market for additional services is just beginning to develop, it
is difficult to predict which products and services will become available or to
identify the ones which the Company will offer. Additionally, the availability
of some or all such additional services will depend upon agreements for
standardization and specification which have not been developed. However, the
Company does believe that a variety of new products will become available and
intends to fully exploit this opportunity by offering the maximum number of such
services reasonable under the circumstances.
SERVICES AND PRODUCTS
The Company's two main sources of revenue are Network Services and Internet
Projects. Network Services consist of access to and usage of the Company's
network. These include an initial one-time setup fee and recurring monthly
charges. Internet Projects are the solutions and services which the Company
provides in addition to access. Typically, the Company charges a flat fee for
Internet Projects, which fee is payable in three installments: upon contracting;
upon completion; and, upon customer acceptance. The following table sets forth
certain historical revenue data relating to the Company.
YEAR ENDED YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997 JUNE 30, 1998
----------------- ----------------- ----------------
Network Services.............................. $ 90,377 $ 716,152 $1,489,412
Internet Projects............................. $217,296 $1,597,869 $1,863,075
The Company strives to differentiate itself from competitors by offering a
full range of solutions and services which business customers are likely to
require in connection with their use of the Internet. The Company believes that,
to the extent it can be a customer's sole provider of such solutions and
services, quality and performance are enhanced because complexities are reduced,
fewer interfaces are required and integration of the customer's system is
optimized. The Company dedicates a significant part of its technical staff to
the evaluation of technological product development and incorporation of
advances into the business. In addition, the Company develops software for use
by customers and for its own use in delivering solutions and services. In
particular, dedicated teams develop software for use in connection with the
Company's electronic commerce and Intranet and workflow solutions. Approximately
22 of the Company's 125 employees are principally devoted to research and
development of the types described above. In addition, the Company frequently
utilizes its other technical personnel for similar research and development
projects. The Company incurred $187,130, $366,824, and $1,051,264 in research
and development expenses during the years ended December 31, 1996 and 1997, and
6 months ended June 30, 1998, respectively.
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The principal solutions and services currently offered by the Company are:
- Connectivity. The Company currently offers a variety of
connectivity solutions, which include Internet access and
third-party software and hardware implementation and configuration
services, which are offered in bundled and unbundled packages.
Internet access currently includes ISDN and analog technologies. The
Company also offers a selection of software products, including
electronic mail, news and other solutions that permit customers to
navigate and utilize the Internet.
- Web-Hosting and Co-Location. Web-hosting and Co-Location give
business customers a presence on the Internet for purposes such as
marketing, customer service, and dissemination of internal company
information. These services include web-hosting, web site
maintenance, operations and maintenance, back-up, software up-date
and ongoing consulting services.
- Security Solutions. Corporate networks and systems need to be
protected against unauthorized access and use. The Company currently
offers a comprehensive set of firewall products from Trusted
Information Systems (Gauntlet, Firewall), Checkpoint (Firewall-1)
and SunSoft (SunScreen), with services such as security consulting,
installation support, on-the-job training of customers' system
administrators, hotline support (24 hours, 7 days) and security
audits. To assure the security of communication and business
transactions between users of networks, the Company integrates
state-of-the-art software, technologies and standards such as
SecureID (Security Dynamics), ATMP, VPos and VGate (VeriFone) and
SET.
- Virtual Private Networks. ("VPN"). Many companies today have
private data communication networks, which are often referred to as
corporate networks. These are built on expensive leased lines and
are used to transfer proprietary data between office locations. VPNs
utilize the Internet as a cost effective alternative to corporate
networks to provide secure transmission of private IP and to provide
authorized users with secure remote access to the corporate
networks. VPN products are available in hardware, software, and
firewall formats.
- National and International Roaming. Roaming provides access to the
Internet locally, i.e., at local phone tariffs as users travel.
Outside the countries in which the Company operates, roaming is
offered in cooperation with more than 350 international ISPs and
telecommunications companies which have joined the Global Reach
Internet Connection(TM).
- Electronic Commerce. Electronic Commerce is the execution of
commercial transactions on the Internet. This may include retail
sales or business-to-business transactions. The system necessary to
conduct electronic commerce is complex and involves several
different components. The Company designs and implements dedicated
electronic commerce systems or any component part which a customer
may require. These systems are based on the Company's electronic
commerce platform which integrates systems and technologies of
third-party vendors, such as Microsoft, Sun, HP, Intershop, Brokat,
VeriFone, SAP and others. A dedicated electronic commerce solution
may require a significant investment. For customers reluctant to
undertake such an up-front expenditure, the Company maintains its
own electronic commerce system which it provides on a lease basis.
Through working arrangements with content providers and media
companies, the Company also assists customers utilizing electronic
commerce for retail and wholesale sales in marketing products 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.
- Intranet and Workflow Solutions. Internet technologies can be
utilized in a customer's internal information technology system. The
Company offers a platform which, when introduced into an Intranet,
enhances the capabilities, efficiencies and functionality of the
system, speeds the development of new applications, reduces the cost
of developing and maintaining applications, and allows the
integration of existing systems and databases; thus, customers can
preserve their investment in existing systems.
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The Company constantly works to enhance its products and services. In
particular, it is currently engaged in efforts to improve the functionality and
capabilities of its security solutions, VPN, communications services, and
electronic commerce platforms.
SALES AND MARKETING
The Company intends to conduct its operations and marketing under the
"Cybernet" brand name, although subsidiaries' brand names are used for
transition periods after acquisitions. The Company has undertaken public
relations efforts to raise the awareness and visibility of the "Cybernet" name
in its target markets.
The Company markets its products and services directly through a force of
35 sales representatives. Sales offices are located in Munich, Neu-Ulm,
Frankfurt, Stuttgart and Hamburg, Germany, in Vienna, Austria, and Rovereto,
Italy. Each sales representative is required to have a strong Internet technical
background and an understanding of local telecommunications tariffs, the needs
of the business community and the companies in his or her respective territory.
The Company also maintains industry sales teams which are responsible for
marketing customized turnkey solutions to larger accounts. The Company has
developed regional programs to attract and train high quality, motivated sales
representatives that have the necessary technical skills, consultative sales
experience and knowledge of their local markets.
The Company is also building a network of accredited resellers of its
standardized products and solutions. These include software suppliers, systems
integrators and ISPs. The Company also attempts to utilize its relationships
among these resellers to gain access to customers for the sale of additional
products and services.
CUSTOMERS
As of August 15, 1998, the Company had approximately 6,000 customers, an
increase from approximately 4,300 as of December 31, 1997, approximately 3,000
as of June 30, 1997, and approximately 1,460 as of December 31, 1996. The
Company provides sophisticated technical services and customized solutions to
prominent businesses such as Germany's leading MasterCard credit card processor,
several of Germany's largest financial institutions, Germany's largest
nationwide network for the travel industry and the German government. However,
the Company believes that mainstream medium sized businesses represent an
attractive target market because of their expanding Internet needs and their
willingness to adopt new technology. In addition, their limited internal
technical resources create a demand for the type of high quality turnkey
solutions and the customized support, maintenance and training services which
the Company provides. Thus, to a significant extent, the Company focuses its
efforts on large and medium sized business customers who utilize both the
Company's systems integration and networking capabilities. For smaller
businesses, the Company offers a range of standardized products and services.
No single customer or group of customers accounted for more than 10% of the
Company's revenues in the year ended December 31, 1997, or in the period ended
June 30, 1998.
PRODUCT DEVELOPMENT
The Company's future success will depend, in part, on its ability to offer
services that incorporate leading technology, address the increasingly
sophisticated and varied needs of its 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 the Company's services is
characterized by rapidly changing and unproven technology, evolving industry
standards, changes in customer needs, emerging competition and frequent
introductions of new services. There can be no assurance that future advances in
technology will be beneficial to, or compatible with, the Company's business or
that the Company will be able to incorporate such advances on a cost effective
and timely basis into its business. Moreover, technological advances may have
the effect of encouraging certain of the Company's current or future customers
to rely on in-house personnel and equipment to furnish the services currently
provided by the Company. In addition, keeping pace with technological advances
may require substantial expenditures and lead time. The Company incurred
$187,130,
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$366,829, and $1,051,264 in research and development expenses during the years
ended December 31, 1996 and 1997, and 6 months ended June 30, 1998,
respectively.
INTELLECTUAL PROPERTY RIGHTS
The Company has applied to the European Union for a trademark for the name
"Cybernet". In addition, the Company relies on a combination of copyright,
service mark and trade secret laws and contractual restrictions to establish and
protect certain proprietary rights in its products and services. The Company has
no patented technology that would preclude or inhibit competitors from entering
the Company's market. The Company has entered into confidentiality and invention
assignment agreements with its employees, and non-disclosure agreements with its
suppliers, distributors and appropriate customers in order to limit access to
and disclosure of its proprietary information. There can be no assurance that
these contractual arrangements or the other steps taken by the Company to
protect its intellectual property will prove sufficient to prevent
misappropriation of the Company's technology or to deter independent third-party
development of similar technologies. The laws of the countries where the Company
operates may not protect the Company's products, services or intellectual
property rights to the same extent as do the laws of the United States. To date,
the Company has not been notified that the Company's products infringe the
proprietary rights of third parties, but there can be no assurance that third
parties will not claim infringement by the Company with respect to current or
future products. The Company expects that participants in its markets will be
increasingly subject to infringement claims as the number of products and
competitors in the Company's industry segment grows. Any such claim, whether
meritorious or not, could be time consuming, result in costly litigation, cause
product installation delays or require the Company to enter into royalty or
licensing agreements. Such royalty or licensing agreements might not be
available on terms acceptable to the Company or at all. As a result, any such
claim could have a material adverse effect upon the Company's business, results
of operations and financial condition.
GENERAL REGULATORY ENVIRONMENT
The Company's Internet operations are not currently subject to direct
regulation by governmental agencies in which the Company operates (other than
regulations applicable to businesses generally). As the Internet becomes more
widely used, countries in which the Company now operates or expects to operate,
may adopt regulations relating to prices charged users, content, privacy,
intellectual property protection, libel or other matters. If adopted, such
regulations could significantly affect the results of operations of the Company
and its competitors. See "Risk Factors -- Potential Liability for Information
Disseminated over Networks; Regulatory Matters".
The Company also intends to become licensed as a telecommunications carrier
in Germany. See "Business -- The Internet in Germany and Europe". To qualify for
that license, the Company will have to demonstrate good character, in addition
to the financial resources and expertise needed to meet German regulatory
requirements.
COMPETITION
The business of providing Internet connectivity, solutions and services is
highly competitive and there are no substantial barriers to entry. The Company
believes that competition will intensify in the future and its ability to
successfully compete depends on a number of factors including, market presence;
the capacity, reliability and security of its network; the pricing structure of
its services; the Company's ability to adapt its product services to new
technological developments and principal market and economic trends. The
Company's competitors consist of (a) ISPs, (b) telecommunications carriers and
(c) system integrators/computer manufacturers.
The Company strives to differentiate itself from other ISPs by offering a
full range of solutions and services which business customers are likely to
require in connection with their use of the Internet. Most of the Company's
competitors offer fewer services focused on connectivity. However, some
competitor ISPs have greater resources and larger communications and network
infrastructure than the Company. The Company's ISP competitors include: European
Computer-Industry Research Center, Xlink, PSINet, UUNet and Nacamar.
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Telecommunications carriers tend to be large organizations for whom
Internet services are not their main business. The Company's main carrier
competitors are: DT; Arcor (a consortium of Deutsche Bahn, Mannesmann, AT&T, and
Unisource); Viag Interkom (a joint venture of Viag and British Telecom); and
O.tel.o (a joint venture of Veba and RWE). The Company competes 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.
When the Company begins to utilize IP technology for telephone service, the
Company will compete directly with carriers, including large carriers such as
Arcor, DT and Viag Interkom. Most of these competitors are significantly larger
and have substantially greater market presence, financial, technical,
operational, marketing and other resources and experience than the Company. 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 the Internet services. Increased
price competition could force the Company to reduce its prices and profit
margins. In addition, increased competition for new customers could result in
increased sales and marketing expenses and related customers acquisition costs
and could materially adversely affect the Company's profitability.
Major systems integrators and computer manufacturers, such as IBM, SNI
Andersen Consulting and Digital Equipment Corp., provide information technology
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 the Company. However, most do not offer
connectivity services and solutions. The Company competes by offering a more
complete Internet related service and product line. In addition, some system
integrators and computer manufacturers utilize the Company's connectivity
services and solutions to complement their own line of products and services.
BILLING AND COLLECTION
Network Services are billed monthly, based on a customer's use. Internet
Projects are typically payable in three increments. Presently, the Company's
subsidiaries in each country bill customers on a country by country basis. In
Germany, the Company generates a single bill to each customer for all services
provided. As the Company begins to offer telecommunications services, the
Company plans to outsource its billing and collection to centralize billing and
facilitate the integration of access service charges, voice and data telephony
charges and project billing.
PROPERTIES
The Company leases the real estate where its business offices and certain
nodes containing servers, routers and other equipment are located. The largest
leasehold property is the Company's main office in Munich with approximately
20,450 square feet (1,900 square meters). Other leasehold properties are located
in Neu-Ulm, Frankfurt, Stuttgart and Hamburg, Germany, Vienna, Austria and
Rovereto, Italy. The Company believes 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.
Dedicated telephone lines are leased by the Company from telecommunications
carriers and resellers. Assets relating to its operations, including servers and
routers, are leased or owned. See Note 6 of Notes to Financial Statements.
EMPLOYEES
At August 15, 1998, the Company had a total of approximately 125 employees:
48 of whom were in sales and marketing; 53 in research and development and
engineering, and 24 in administration. There are no collective bargaining
agreements in effect. The Company believes that relations with its employees are
satisfactory.
LEGAL PROCEEDINGS
The Company is not presently party to any material legal proceeding.
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MANAGEMENT
The following table sets forth the names, ages and positions of the
executive officers and directors of the Company:
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
Andreas Eder.......................... 38 Director
Chairman, President, CEO
Head of Managing Board of Cybernet AG
Rudolf Strobl......................... 39 Member of Managing Board of Cybernet
AG
Alessandro Giacalone.................. 47 Member of Managing Board of Cybernet
AG
Chairman of Board of Directors of
Eclipse
Christian Moosmann.................... 36 Treasurer
Chief Financial Officer
Tristan Libischer..................... 29 Director
Managing Director of Vianet
Alexander Wiesmueller................. 29 Managing Director of Vianet
Holger Timm........................... 40 Director
Member of Supervisory Board of
Cybernet AG
Dr. Hubert Besner..................... 35 Director
Member of Supervisory Board of
Cybernet AG
G.W. Norman Wareham................... 44 Director
Secretary
Robert Fratarcangelo.................. 59 Director
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ANDREAS EDER
Mr. Eder, a co-founder of Cybernet AG, has been Chairman, President, Chief
Executive Officer and Head of the Managing Board of Cybernet AG since its
formation and has been Chairman of the Board of Directors, President and Chief
Executive Officer of the Company since it acquired Cybernet AG. Before founding
Cybernet AG, Mr. Eder held management positions with Siemens-Nixdorf and The
Boston Consulting Group. Mr. Eder holds a Masters degree in Business
Administration from the University of Munich.
RUDOLF STROBL
Mr. Strobl is a co-founder of Cybernet AG, and has been an Executive
Officer of Cybernet AG since February, 1996, and of the Company since it
acquired Cybernet AG. Before founding Cybernet AG, Mr. Strobl worked for Digital
Equipment Corp. He also co-founded ARTICON, a systems integration company in
Munich. Mr. Strobl holds a Masters degree in Engineering from the University of
Munich.
ALESSANDRO GIACALONE
Mr. Giacalone has been a Member of the Managing Board of Cybernet AG since
October, 1997. From 1990 to 1997, Mr. Giacalone was Research Group Leader,
Research Director and subsequently Managing Director of the European
Computer-Industry Research Centre in Munich, where he was responsible for
building the Internet operations. From 1984 to 1990, he taught computer science
at the State University of New York. Mr. Giacalone holds an undergraduate degree
and Masters of Science in Computer Science from the University of Pisa, and a
Doctorate in Computer Science from Brown University.
CHRISTIAN MOOSMANN
Christian Moosmann is Treasurer and Chief Financial Officer of the Company,
having joined the Company in 1997. Before joining the Company, he held
management positions with European Computer Research Center from 1995 to 1997
and with Siemens from 1990 to 1995. He holds a degree in accounting from
Rosenheim College.
TRISTAN LIBISCHER
Mr. Libischer is a Director of the Company and a Managing Director and
co-founder of Vianet. He has been a Managing Director of Vianet since 1994. From
1992 to 1994, he held various positions with Bark Computer. From 1990 to 1992,
he was a senior consultant and sales engineer with 3C Group.
ALEXANDER WIESMUELLER
Mr. Wiesmueller is a co-founder of Vianet and has been a Managing Director
of Vianet since 1994. Prior to 1994, he was technical manager for B.O.T. Bura
Organization Team-Metro and held various technical positions with
Grafotron-Berthold & Stempel, and with Bohmann, Druck und Verlag (New Media).
HOLGER TIMM
Mr. Timm, a Director of the Company, is a co-founder and member of the
Supervisory Board of Cybernet AG, and Chief Executive Officer of Cybermind
Interactive Europe AG ("Cybermind"). Mr. Timm is Head of the Managing Board and
Chief Executive Officer and a controlling shareholder of Berliner Freiverkehr
(Aktien) AG, an investment bank which owns approximately 40% of the Underwriter.
He is also a member of the Board of the Berlin Stock Exchange. He holds a law
degree from the Free University, Berlin.
HUBERT BESNER
Dr. Besner is a Director of the Company and a member of the Supervisory
Board of Cybernet AG. Since 1994, he has been a partner in the law firm of
Besner Kreifels Weber, Munich, Germany. From 1992 to 1994, he was the head of
the legal department of Schneider AG, a German real estate development company.
He
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currently is a director of Marine Shuttle Operations, Inc., a member of the
supervisory board of Schuller Industrieentsorgung AG, and the head of the
supervisory board of PIPECAD Integrierte Softwaresysteme AG. Dr. Besner received
his First State Exam in Law from Ludwig-Maximilians-Universitat in 1986, and his
doctorate magna cum laude from Ludwig-Maximilians-Universitat in 1988.
G.W. NORMAN WAREHAM
Mr. Wareham is Secretary and a Director of the Company. He is a certified
general accountant and has been engaged in the public practice of accounting for
over twenty years. Mr. Wareham has been Vice President, Chief Financial Officer,
and a director of ZMAX Corporation since September, 1996. He is also a director
and officer of Intercap Resources Management Corp., an oil and gas exploration
and development company, and President of Wareham Management Ltd., which
provides management consulting and accounting service to Canadian and American
public companies. From 1994 to April 1995, Mr. Wareham served as the President
of Global Financial Corporation, a Turks and Caicos investment company.
ROBERT FRATARCANGELO
Mr. Fratarcangelo has been a Director of the Company since September, 1997.
He has previously held management positions with IBM. He is President and Chief
Executive Officer of Criminal Investigative Technologies, Inc. in Virginia.
No family relationship exists between any director or executive officer and
any other director or executive officer.
BOARD COMPOSITION
The Company currently has authorized 6 directors. In accordance with the
terms of the Company's Certificate of Incorporation, the terms of office of the
Board of Directors will be divided into three classes: Class A, whose term will
expire at the annual meeting of stockholders to be held in 1999; 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 Messrs. Besner and Fratarcangelo, the Class B
directors are Messrs. Timm and 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 the voting power of all outstanding shares of Company
entitled to vote generally, voting together as a single class.
The Company's executive officers are appointed by the Board of Directors
and serve until their successors are elected or appointed.
BOARD COMMITTEES
The Board of Directors has three committees: an Executive Committee, an
Audit Committee, and a Compensation Committee. The Committees were created
contemporaneously with the Company's re-incorporation in Delaware. The Board's
Executive Committee consists of Messrs. Andreas Eder, Hubert Besner and Holger
Timm. The Board's Audit Committee consists of Messrs. Holger Timm, Robert
Fratarcangelo, and G.W. Norman Wareham. The Audit Committee reviews the
Company's accounting processes, financial controls and reporting systems, as
well as the selection of the Company's independent auditors and the scope of the
audits to be conducted.
The Compensation Committee consists of Messrs. Holger Timm, Robert
Fratarcangelo, and G.W. Norman Wareham. It reviews executive compensation and
organization structure. The Compensation Committee also administers the
Company's Stock Option Plan. Prior to the creation of the Compensation
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Committee, all decisions concerning salaries, incentives and other forms of
compensation of directors, officers and other employees of the Company were made
by the whole Board of Directors.
None of the members of the Compensation Committee of the Board of Directors
is currently, or has been at any time since the formation of the Company, an
officer or employee of the Company. No executive officer of the Company serves
as a member of the board of directors or compensation committee of any entity
that has one or more executive officers serving on the Company's Board of
Directors or Compensation Committee.
DIRECTOR COMPENSATION
Directors, who are not also employees of the Company ("Outside Directors"),
receive $15,000 annually (the "Annual Director Fee") and are reimbursed for
out-of-pocket expenses incurred in connection with their serving on the Board.
Each Outside Director will elect to receive his Annual Director Fee in cash,
stock options or a combination thereof. The value of the stock options will be
determined pursuant to the Black-Sholes method, and the options will be fully
vested at the date of grant.
EMPLOYMENT CONTRACTS
Messrs. Andreas Eder and Rudolf Strobl have employment agreements with the
Company. The three-year terms of these agreements commenced on February 16,
1998. The agreements provide for base annual compensation of $103,000. Messrs.
Eder and Strobl also have non-compete agreements that prohibit them from
engaging, directly or indirectly, in the business of Internet access and related
services to commercial and business entities in the United States and Europe
until September 16, 2002. Mr. Giacalone has a three-year employment agreement
with the Company, commencing on October 1, 1997, and providing for base annual
compensation of $128,600. Each employment agreement provides for a year-end
bonus in an amount to be determined pursuant to an incentive bonus plan. Unless
terminated by the Company at least one year prior to the end of the three-year
term, or by the employee with six months notice, the term of each agreement is
automatically extended for two additional years.
Mr. Moosmann entered into an employment agreement with the Company,
commencing on April 28, 1997, and providing for base annual compensation of
$80,000. That agreement is terminable by either the Company or Mr. Moosmann with
six months prior notice.
SUMMARY COMPENSATION TABLE
The following table sets forth the current annual compensation of the Chief
Executive Officer and the Company's five most highly compensated executive
officers.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
---------------------------
NAME AND PRINCIPAL POSITION SALARY BONUS(1) OTHER
--------------------------- -------- -------- -----
Andreas Eder................................................ $103,000 $25,700 (2)
Chairman, President and Chief Executive Officer
Head of Managing Board of Cybernet AG
Alessandro Giacalone........................................ $128,600 $ 8,600 (2)
Member of Managing Board of Cybernet AG
Rudolf Strobl............................................... $103,000 $25,700 (2)
Member of Managing Board of Cybernet AG
Tristan Libischer........................................... $103,000 $25,700 (2)
Managing Director of Vianet
Alexander Wiesmueller....................................... $103,000 $25,700 (2)
Managing Director of Vianet
- ---------------
(1) Maximum amount payable to executive upon achievement of specified business
targets; lower amounts may be paid.
(2) The Company provides leased automobiles and cellular telephones to
executives. The amounts attributable to personal use of these items are less
than 10% of each Executive's total compensation.
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INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation limits the liability of
directors and executive officers to the maximum extent permitted by Delaware
law. Delaware law provides that directors of a corporation will not be
personally liable for monetary damages for breach of their fiduciary duties as
directors, except liability for (i) breach of their duty of loyalty to the
corporation or its stockholders, (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
unlawful payments of dividends or unlawful stock repurchases or redemptions, or
(iv) any transaction from which the director derived an improper personal
benefit. Such limitation of liability does not apply to liability arising under
the federal or state securities laws and does not affect the availability of
equitable remedies such as injunctive relief or rescission.
The Company's Bylaws provide that the Company shall indemnify its
directors, officers, employees and other agents to the fullest extent permitted
by law. The Company believes that indemnification under its Bylaws covers at
least negligence and gross negligence on the part of indemnified parties. The
Company has also secured insurance on behalf of any officer, director, employee
or other agent for any liability arising out of his or her actions in such
capacity, regardless of whether the Bylaws permit such indemnification.
At present, there is no pending litigation or proceeding involving a
director or officer of the Company in which indemnification is required or
permitted, and the Company is not aware of any threatened litigation or
proceeding that may result in a claim for such indemnification.
STOCK OPTION PLAN
The Company has adopted a Stock Option Plan (the "Stock Option Plan") to
further the growth and development of the Company by encouraging and enabling
employees of the Company to obtain a proprietary interest in the Company through
the ownership of stock and to attract persons of outstanding quality to the
Company's service. Options granted under the Stock Option Plan may be either
incentive stock options, as defined in Section 422 of the Internal Revenue Code
of 1986, as amended, or non-qualified stock options. The Company has reserved
2,000,000 shares of Common Stock for issuance under the Stock Option Plan. The
Company will grant options to purchase a total of 285,000 shares in varying
amounts under the Stock Option Plan to 95 employees, none of whom are members of
management.
The Stock Option Plan is administered by the Compensation Committee of the
Board, which has the power to determine the terms of any options granted,
including the exercise price, the number of shares subject to the option, and
the exercisability thereof. Options granted under the Stock Option Plan
generally are not transferable, and each option is exercisable during the
lifetime of the optionee only by such optionee.
Non-qualified Options. The non-qualified option grants are evidenced by a
written agreement which will contain the following general conditions:
Initial Grant. An initial grant to each eligible employee is made,
which vests ratably based on continuing employment over a designated number
of years.
Annual Grant. In addition to the initial grant, the Compensation
Committee will annually grant to management employees additional stock
options, based upon performance. This grant will be an option to purchase a
number of shares with a value per share at the date of grant equal to a
percentage of the employee's bonus. The annual option grants will contain a
vesting schedule, which requires the employee to work a designated number
of years before vesting.
Exercise During Employment. Stock options can be exercised any time
before expiration after they are vested, as long as the employee remains
employed.
Exercise After Termination of Employment. Upon termination of
employment, all unvested options will terminate and any vested options that
have not yet been exercised will be exercisable for 90 days after
termination unless the employee is terminated for cause or violates a
non-solicitation, non-compete, or confidentiality requirement.
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Expiration. Any stock options, which have not previously been
exercised or forfeited, will terminate ten years after the date of grant.
Option Cash-Out. The Company retains the right, in the event of a
merger or sale of over 50% of the Company's assets or similar event, to
cancel any outstanding options in exchange for paying the optionee the
excess over the exercise price of the fair market value of the shares
purchasable with the vested portion of the option.
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PRINCIPAL STOCKHOLDERS
The following table sets forth, certain information as of September 10,
1998, regarding beneficial ownership of Common Stock and Preferred Stock by (i)
each stockholder known by the Company to be the beneficial owner of more than
five percent (5%) of the outstanding shares of Common Stock; (ii) each director
of the Company; (iii) each executive officer of the Company; and (iv) all of the
Company's current executive officers and directors as a group.
SHARES BENEFICIALLY
NAME OWNED PRIOR TO OFFERING
---- ----------------------------------------
NUMBER OF NUMBER OF NUMBER OF PERCENTAGE PERCENTAGE PERCENTAGE
COMMON SERIES A SERIES B OF COMMON OF SERIES A OF SERIES B
EXECUTIVE OFFICERS AND DIRECTORS STOCK(6) PREFERRED(6) PREFERRED(6) STOCK PREFERRED PREFERRED
- -------------------------------- ---------- ------------ ------------ ---------- ----------- -----------
Holger Timm.................... 1,044,900(2) 721,500(2) 5,160,000(5) 6.2% 60.1% 100%
Trabener Strasse 12
14193, Berlin, Germany
Andreas Eder................... 1,528,645(1) 177,749(1) 9% 14.8%
Stefan-George-Ring 19
81929 Munich, Germany
Alessandro Giacalone........... 309,600(3) 36,000(3) 1.8% 3%
Stefan-George-Ring 19
81929 Munich, Germany
Rudolf Strobl.................. 460,724 53,572 2.7% 4.5%
Stefan-George-Ring 19
81929 Munich, Germany
Christian Moosmann............. 154,800(3) 18,000(3) * 1.5%
Stefan-George-Ring 19
81929 Munich, Germany
Hubert Besner.................. 7,261(4) *
Widenmayerstr. 41
80538 Munich, Germany
Tristan Libischer.............. 150,000 *
Mariannengasse 14
1090 Vienna, Austria
Alexander Wiesmueller.......... 150,000 *
Mariannengasse 14
1090 Vienna, Austria
All executive officers and
directors as a group (8
persons)..................... 3,805,930 1,006,821 5,160,000 22.5% 83.9% 100%
* less than 1%.................
Principal Stockholders other
than directors and officers...
Franz Eder..................... 621,350 72,250 3.7% 6%
Pariser Strasse 12
10719 Berlin, Germany
Thomas Schulz.................. 614,282 71,428 3.6% 6%
Pfaffing 15
83339 Chieming, Germany
SHARES BENEFICIALLY
NAME OWNED AFTER OFFERING
---- -----------------------
NUMBER OF PERCENTAGE
COMMON OF COMMON
EXECUTIVE OFFICERS AND DIRECTORS STOCK STOCK
- -------------------------------- ---------- ----------
Holger Timm.................... 1,044,900(2) 5.0%
Trabener Strasse 12
14193, Berlin, Germany
Andreas Eder................... 1,528,645(1) 7.4%
Stefan-George-Ring 19
81929 Munich, Germany
Alessandro Giacalone........... 309,600(3) 1.5%
Stefan-George-Ring 19
81929 Munich, Germany
Rudolf Strobl.................. 460,724 2.2%
Stefan-George-Ring 19
81929 Munich, Germany
Christian Moosmann............. 154,800(3) *
Stefan-George-Ring 19
81929 Munich, Germany
Hubert Besner.................. 7,261(4) *
Widenmayerstr. 41
80538 Munich, Germany
Tristan Libischer.............. 150,000 *
Mariannengasse 14
1090 Vienna, Austria
Alexander Wiesmueller.......... 150,000 *
Mariannengasse 14
1090 Vienna, Austria
All executive officers and
directors as a group (8
persons)..................... 3,805,930 18.3%
* less than 1%.................
Principal Stockholders other
than directors and officers...
Franz Eder..................... 621,350 3%
Pariser Strasse 12
10719 Berlin, Germany
Thomas Schulz.................. 614,282 3.0%
Pfaffing 15
83339 Chieming, Germany
- ---------------
(1) Includes (i) 323,620 shares of Common Stock and 37,630 shares of Series A
Preferred Stock held by Mr. Eder's spouse, Verena Czerny, for which shares
Ms. Czerny has the sole investment and voting power, and Mr. Eder disclaims
any beneficial ownership, and (ii)(A) 165,500 shares of Common Stock and
14,400 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 and ending June 30, 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) 96,600 shares of Common Stock and 8,400 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.
(2) Does not include shares of Common Stock and Series A Preferred Stock sold by
Mr. Timm to Alessandro Giacalone, Christian Moosmann and Hans Bergbreiter
(each, individually, the "Purchaser") pursuant to Stock Purchase Agreements
dated April 28, 1997, which provide that such Shares shall revert back to
Mr. Timm if the Purchaser's employment with the Company terminates for any
reason except termination without cause by the Company or if the Company
breaches its employment agreement with the Purchaser; includes 600,000
shares held by Cybermind, a German company of which Mr. Timm is Chief
Executive Officer and Head of the Managing Board and a controlling
shareholder.
(3) Includes shares purchased from Mr. Timm pursuant to Stock Purchase
Agreements dated April 28, 1997. See Note 2 above.
(4) These shares are held by Ms. Katharina Besner, Mr. Hubert Besner's spouse,
and Mr. Besner disclaims any beneficial ownership in such shares.
(5) All of the Series B Preferred Stock is held by Cybermind (See Note 2 for
control and ownership of Cybermind.)
(6) All the shares of capital stock listed are subject to a Pooling Trust
Agreement restricting the beneficial owner from selling the shares prior to
specified dates (unless the transferee is also subject to such
restrictions), but without affecting the vote of the shares, if entitled to
vote.
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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 Bylaws is a summary
and is qualified in its entirety by the provisions of the Certificate of
Incorporation, Bylaws, and resolutions creating the Series A, Series B and
Series C Preferred Stock (as defined below), which have been filed as exhibits
to the Company's Registration Statement of which this Prospectus is a part.
Upon the closing of the Offering, the authorized capital stock of the
Company will be 100,000,000 shares of capital stock, consisting of 50,000,000
shares of Common Stock, par value $0.001 per share, and 50,000,000 shares of
Preferred Stock, par value $0.001 per share (the "Preferred Stock"). The
Certificate of Incorporation of Cybernet Utah authorized 20,000,000 shares of
preferred stock. Upon reincorporation of the Company in Delaware, the authorized
amount was increased to 50,000,000.
COMMON STOCK
As of a recent date, there were approximately 16,901,286 shares of Common
Stock outstanding held of record by 209 stockholders. 20,787,111 shares of
Common Stock will be issued and outstanding if the Offering is fully subscribed.
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.
PREFERRED STOCK
As of July 22, 1998, there were 6,477,510 shares of Preferred Stock
outstanding, of which 1,200,000 shares are issued and outstanding as Series A
Preferred Stock (the "Series A Preferred Stock") and held of record by 9
stockholders, 5,160,000 shares are issued and outstanding as Series B Preferred
Stock (the "Series B Preferred Stock") and held of record by 1 stockholder, and
117,510 shares are issued and outstanding as Series C Preferred Stock (the
"Series C Preferred Stock") and held of record by 61 stockholders.
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
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 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 therefore. Any dividends paid on the Series A
Preferred Stock in an amount less than the total amount of dividends at the time
payable on the shares will be allocated pro rata in accordance with the number
of shares then outstanding.
The dividends on the Series A Preferred Stock are not cumulative. Following
payment of the dividends on the Series A Preferred Stock, the holders of the
Series A Preferred Stock shall share pari passu on a per
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share basis of the distribution in any dividends by the Company, with the
holders of shares of Common Stock of the Company and shares of any other class
of stock of the Company entitled to share therein.
Voting Rights. The holders of the Series A Preferred Stock are not
entitled to receive notice of, or to vote on, any matter that is the subject of
a vote of the stockholders of the Company, except as otherwise required by the
laws of the State of Delaware.
Redemption and Put. The shares of Series A Preferred Stock may be redeemed
by the Company at any time after January 1, 2000, upon ten (10) 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 (10) days'
written notice to the Company; provided, that (1) no conversion may 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, 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, subject to any other preferences granted to the holders of any
other series of Preferred Stock as created by the Board of Directors of the
Company prior to such time.
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.
Transferability. The Series A Preferred Stock may not be transferred by
the holder except in compliance with applicable securities laws.
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, given in person or by proxy whether in writing
or at a meeting at which the holders of the shares of Series A Preferred Stock
are entitled to vote 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.
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SERIES B PREFERRED STOCK
Dividends. The 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 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 therefore.
Any dividends paid on the Series B Preferred Stock in an amount less than the
total amount of dividends at the time payable on the shares will be allocated
pro rata in accordance with the number of shares then outstanding.
The dividends on the Series B Preferred Stock are not cumulative. Following
payment of the dividends on the Series B Preferred Stock, the holders of the
Series B Preferred Stock shall share pari passu on a per share basis of the
distribution of any dividends by the Company with the holders of shares of
Common Stock of the Company and shares of any other class of stock of the
Company entitled to share therein.
Voting Rights. The holders of the Series B Preferred Stock are entitled to
receive notice of, and to vote on, any matter that is the subject of a vote of
the stockholders of the Company.
Redemption. The shares of Series B Preferred Stock may be redeemed by the
Company at any time after January 1, 2000, upon ten (10) days' prior written
notice to the holder thereof of the Company's intention to redeem the Series B
Preferred Stock at a redemption price of one share of the Common Stock of the
Company for each share of Series B Preferred Stock, plus any unpaid dividends
earned thereon through the date of redemption; provided, that all and not less
than all of the shares of Series B Preferred Stock are so redeemed.
Conversion. A holder of Series B Preferred Stock may convert each share
held into one share of the Common Stock of the Company upon ten (10) days'
written notice to the Company; provided, that (1) no conversion may 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 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, subject to
any other preferences granted to the holders of any other series of Preferred
Stock as created by the Board of Directors of the Company prior to such time.
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.
Transferability. The Series B Preferred Stock may not be transferred by
the holder except in compliance with applicable securities laws.
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
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shares of Series B Preferred Stock then outstanding, given in person or by proxy
whether in writing or at a meeting at which the holders of the shares of Series
B Preferred Stock are entitled to vote 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.
SERIES C PREFERRED STOCK
Dividends. The holders of the Series C Preferred Stock are entitled to
receive out of the surplus or net profits of the Company dividends at a rate
equal to $0.56 per share 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 began to accrue on January 1, 1998.
Commencing with the fiscal year beginning on January 1, 1998, the dividend on
the Series C 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 therefore. Any dividends paid on the Series C Preferred Stock in an
amount less than the total amount of dividends at the time accrued and payable
on the shares will be allocated pro rata in accordance with the number of shares
then outstanding.
At the election of the Board of Directors, dividends may be paid in the
form of the Common Stock. The number of shares of Common Stock to be issued in
payment of such dividends, with respect to each share of Series C Preferred
Stock, is equal to the quotient derived by dividing the fair value of a share of
Common Stock (as determined by the Board of Directors on the date the dividend
is declared) into the dollar amount of the dividend being declared.
The dividends on the Series C Preferred Stock are cumulative so that, if
for any period the dividend is not paid, the right to such dividend will
accumulate and all arrears so accumulated will be paid before any dividends are
paid to any other series of Preferred Stock or the Common Stock of the Company.
Voting Rights. 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.
Redemption and Exchange. The shares of Series C Preferred Stock may be
redeemed by the Company at any time upon ten (10) days' prior written notice to
the holder thereof of the Company's intention to redeem the Series C Preferred
Stock at a redemption price of 100% of the $7.00 per share purchase price paid
to the Company for such shares, plus any unpaid accrued dividends thereon
through the date of redemption so long as prior to the date of redemption the
following has occurred:
(i) The Company must have offered to exchange on the terms set forth
below (the "Exchange Offer") each share of Series C Preferred Stock for (a)
one share of the Company's Common Stock, plus (b) one 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 Offer, 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. The Exchange Offer will remain open for at least twenty (20) days;
and
(ii) A registration statement under the Securities Act must be in
effect registering the issuance of the Common Stock and warrants pursuant
to the Exchange Offer.
Conversion. A holder of Series C Preferred Stock may convert each share
held by him into one share of the Common Stock of the Company upon ten (10)
days' written notice to the Company anytime after May 31, 1998; provided,
however, that any conversion be of all the Series C Preferred Stock held by the
shareholder. As of July 22, 1998, 1,282,490 shares of Series C Preferred Stock
had been converted into Common Stock by the holders thereof and 117,510 shares
of Series C Preferred Stock remained outstanding.
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50
Liquidation, Dissolution or Winding Up. Upon the liquidation, dissolution
or winding up, whether voluntary or involuntary, of the Company, the holders of
the Series C Preferred Stock are entitled to be paid the sum of $7.00 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 or to the Common Stock of
the Company. After payment of these amounts to the holders of the Series C
Preferred Stock, the remaining assets of the Company will be distributed to the
holders of the Common Stock, subject to any other preferences granted to the
holders of any other series of Preferred Stock as created by the Board of
Directors of the Company prior to such time.
Preemptive Rights. The holders of the Series C 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 C Preferred Stock.
Transferability. The Series C Preferred Stock may be transferred by the
holder only after the Company relinquishes its right of first refusal to
purchase the shares on the same terms and conditions as the holder of the Series
C Preferred Stock proposes to dispose of the shares in accordance with the
Company's Certificate of Incorporation. Any attempted transfers that do not
comply with the Company's right of first refusal will not be recognized by the
Company or its stock transfer agent.
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 C Preferred Stock must be approved by the
affirmative vote of the holders of a majority of the shares of Series C
Preferred Stock then outstanding, given in person or by proxy whether in writing
or at a meeting at which the holders of the shares of Series C Preferred Stock
will be entitled to vote 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 C Preferred Stock, the Series C Preferred Stock do not
have any rights, powers, privileges, preferences, designations, qualifications,
limitations, restrictions or conditions other than as specifically set forth in
Series C Preferred Stock Certificate of Designation, as the same may be amended
and/or restated from time to time.
ANTI-TAKEOVER PROVISIONS
GENERAL
Certain provisions of the GCL and the Company's Certificate of
Incorporation and Bylaws 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
Bylaws 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 -- Anti-Takeover
Provisions".
CERTIFICATE OF INCORPORATION AND BYLAWS
Certain provisions of the Certificate of Incorporation and Bylaws could
have the effect of discouraging potential acquisition proposals or delaying or
preventing a change of control of the Company. In particular, effective upon
consummation of the Offering, 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 may be called
only by the Board of Directors pursuant to a resolution stating the purpose
thereof approved by a majority of
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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 Bylaws 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 GCL, a director on a classified board may be removed by the
stockholders of the corporation only 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 6,477,510 shares were issued and outstanding,
as of July 22, 1998. 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
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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 Bylaws of the Company
to be altered or repealed and new Bylaws 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 Bylaws 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 -- Anti-Takeover Provisions".
DELAWARE TAKEOVER STATUTE
The Company is subject to Section 203 of the GCL ("Section 203") 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 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: (i) 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.
TRANSFER AGENT AND REGISTRAR
Interwest Transfer Company is the transfer agent and registrar for the
Company's capital stock.
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53
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement between
the Company and Berliner Effektenbank AG (the "Underwriter"), the Company has
retained the Underwriter as its exclusive agent to conduct an offering of
3,500,000 shares of Common Stock on a best efforts, all-or-none basis.
The Underwriting Agreement provides that the obligations of the Underwriter
are subject to various conditions. The Underwriter is not obligated to purchase
any shares of the Common Stock.
The Underwriter proposes to offer the shares of Common Stock directly to
the public, but only to non-U.S. persons, at the public offering price set forth
on the cover page of this Prospectus, and to certain dealers to whom it may
allow such concessions out of the underwriting commission as the Underwriter may
determine.
The Offering will be conducted for a period of 45 days and may be extended
for an additional 30 days by mutual agreement of the Company and the Underwriter
(the "Offering Period"). If, during the Offering Period, subscriptions are
received for all of the Shares, then the Company and the Underwriter may conduct
a closing to accept such subscriptions. At the closing, all funds received, less
the Underwriter's commissions, will be delivered to the Company, and
certificates representing the Shares purchased will be delivered to, or for the
account of, the subscribers thereof. If no closing takes place during the
Offering Period, all funds will be promptly returned to the subscribers without
any deduction therefrom or interest thereon. Until such time as funds have been
released from escrow and the Shares have been delivered to, or for the account
of, the subscribers therefore, subscribers will not be deemed to be holder of
the Shares.
Payments for Shares shall be made either by check or by wire transfer. All
checks for subscriptions of the shares of Common Stock are to be made payable to
"Berliner Effektenbank AG".
Pending the closing, all funds received by the Underwriter will be
deposited in an escrow account no later than noon on the next business day
following receipt by the Underwriter, to be held by the Underwriter as agent for
the subscribers of the Shares.
Holger Timm, a Director of the Company, is a controlling shareholder and
the Head of the Managing Board, President, and Chief Executive Officer of
Berliner Freiverkehr (Aktien) AG, a financial institution which owns
approximately 40% of the Underwriter.
The Executive Officers and Directors and certain persons who acquired stock
in the Company from those persons and certain affiliates have agreed that, for a
period of six months following the closing of the Offering, they will not sell
or offer to sell their shares in the Company, pursuant to a lock-up agreement.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act.
CERTAIN TRANSACTIONS
DIRECTOR LOAN
In May 1997, Mr. Timm advanced DM 1.5 million, on an interest free basis,
to Cybernet AG with repayment due on July 31, 1997. On October 7, 1997, Cybernet
AG repaid the loan.
The firm of Besner Kreifels Weber, of which Hubert Besner, a Director of
the Company, is a partner, acts as regular counsel to the Company, for which it
has received fees in the approximate amount of $85,000 during 1998.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
20,787,111 shares of Common Stock. All shares sold in the Offering (other than
shares which may be acquired by an affiliate) will be fully tradable in the
public market under the Securities Act. Part of the acquisition price of
Cybernet AG, Eclipse,
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Artwise, Vianet and Open:Net has or will be paid in shares of Common Stock and
Preferred Stock of the Company. The total number of such shares is 5,618,445
shares of Common Stock, 1,200,000 shares of Series A Preferred and 5,160,000
shares of Series B Preferred. In each case, the shares are subject to a pooling
agreement restricting the owners of those shares from selling the shares prior
to some specified dates. On the following dates, the following number of shares
will be salable pursuant to each of the pooling agreements, subject to the
provisions of Rule 144 under the Securities Act:
SERIES A SERIES B
COMMON STOCK PREFERRED PREFERRED
------------ --------- ---------
January 1, 1999(1)................................. 1,306,537 300,000 1,290,000
February 10, 1999.................................. 14,706
August 10, 1999.................................... 14,706
September 1999..................................... 6,750
January 1, 2000.................................... 1,313,287 300,000 1,290,000
February 10, 2000.................................. 14,706
August 10, 2000.................................... 14,706
January 1, 2001.................................... 2,626,574 600,000 2,580,000
- ---------------
(1) These shares are included in a lock-up agreement with the Underwriter -- see
Underwriter.
In addition, 60,000 shares of Common Stock issued in the Vianet Acquisition
will be released on each of the first five anniversaries of the closing of the
Vianet Acquisition. The closing of the Vianet Acquisition is scheduled to occur
contemporaneously with the closing of the Offering.
The Shares sold in the Offering will be freely tradable without restriction
or further registration under the Securities Act, except for any Shares
purchased by an affiliate of the Company, which will be subject to the
limitations of Rule 144 under the Securities Act.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned his or her restricted
securities (as that term is defined in Rule 144) for at least one year from the
date such securities were acquired from the Company or an affiliate of the
Company would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of (i) one percent of the then
outstanding shares of the Common Stock and (ii) the average weekly trading
volume of the common stock during the four calendar weeks preceding a sale by
such person. Sales under Rule 144 are also subject to certain manner-of-sale
provisions, notice requirements and the availability of current public
information about the Company. Under Rule 144, however, a person who has held
shares for a minimum of two years from the later of the date such securities
were acquired from the Company or an affiliate of the Company and who is not,
and for the three months prior to the sale of such shares has not been, an
affiliate of the Company is free to sell such shares without regard to the
volume, manner-of-sale and certain other limitations contained in Rule 144.
In general, under Rule 701 of the Securities Act as currently in effect,
any employee, officer, director, consultant or advisor of the Company who
purchased shares from the Company in connection with a compensatory stock or
option plan or written employment agreement is eligible to resell such shares 90
days after the effective date of this Offering in reliance on Rule 144, but
without compliance with certain restrictions, including the holding period
contained in Rule 144.
Prior to the Offering, there has been only a limited market for the Common
Stock in the United States and no predictions can be made about the effect, if
any, that market sales of Common Stock or the availability of such shares for
sale will have on the market price prevailing from time to time. Nevertheless,
the actual sale of, or the perceived potential for the sale of, Common Stock in
the public market may have an adverse effect on the market price for the Common
Stock.
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LEGAL MATTERS
The validity of the Shares offered hereby and general corporate legal
matters will be passed upon for the Company by Powell, Goldstein, Frazer &
Murphy LLP.
EXPERTS
The consolidated financial statements of the Company at December 31, 1997
and 1996, and for the two years then ended, appearing in this Prospectus and
Registration Statement, have been audited by Schitag Ernst & Young AG,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
The consolidated financial statements of Vianet at December 31, 1997 and
1996, and for the two years then ended, appearing in this Prospectus and
Registration Statement, have been audited by Ernst & Young,
Wirtschaftsprufungs-Und, Steuerberatungsgesellschaft MBH, independent auditors,
as set forth in their report thereon appearing elsewhere herein, and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company is not currently subject to the information requirements of the
Exchange Act. When the Commission declares effective the Registration Statement
on Form S-1, the Company will be required to file reports and other information
with the Commission pursuant to the informational requirements of the Exchange
Act. Such reports and other information can be inspected and copied at the
Public Reference Section of the Commission and at the Commission's regional
offices at the addresses given below.
As permitted by the rules and regulations of the Commission, this
Prospectus omits certain information, exhibits, schedules and undertakings set
forth elsewhere in this Registration Statement. For further information
pertaining to the Company and the securities offered hereby, reference is made
to such Registration Statement and the exhibits and schedules thereto.
Statements contained in this Prospectus as to the contents or provisions of any
documents referred to herein are not necessarily complete and, in each instance,
reference is made to the copy of the document filed as an exhibit to this
Registration Statement. The Company will issue annual and quarterly reports.
Annual reports will include audited financial statements prepared in accordance
with accounting principles generally accepted in the United States and a report
of its independent auditors with respect to the examination of such financial
statements. In addition, the Company will issue to its security holders such
other unaudited quarterly or other interim reports as it deems appropriate.
This Registration Statement may be inspected without charge at the office
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies may
be obtained from the Commission at prescribed rates from the Public Reference
Section of the Commission at such address, and at the Commission's regional
offices located at 7 World Trade Center, 13th Floor, New York, New York 10048,
and at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. In addition, registration statements and certain other filings
made with the Commission through its Electronic Data Gathering, Analysis and
Retrieval ("EDGAR") system are publicly available through the Commission's site
on the Internet's World Wide Web, located at http://www.sec.gov.
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INDEX TO FINANCIAL STATEMENTS
PAGE
----
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
Report of Schitag Ernst & Young AG, Independent
Auditors............................................... F- 2
Consolidated Balance Sheets December 31, 1997 and 1996.... F- 3
Consolidated Statements of Loss and Comprehensive Loss
years ended December 31, 1997 and 1996................. F- 4
Consolidated Statements of Cash Flows years ended December
31, 1997 and 1996...................................... F- 5
Consolidated Statements of Shareholders' Equity years
ended December 31, 1997 and 1996....................... F- 6
Notes to Consolidated Financial Statements................ F- 7
Consolidated Balance Sheets December 31, 1997 and June 30,
1998 (unaudited)....................................... F-15
Consolidated Statements of Loss and Comprehensive Loss for
the six months ended June 30, 1997 and 1998 (unaudited) F-16
Consolidated Statements of Cash Flows for the six months
ended June 30, 1997 and 1998 (unaudited)............... F-17
Notes to Consolidated Unaudited Interim Financial
Statements............................................. F-18
VIANET EDV DIENSTLEISTUNGS GMBH
Independent Public Auditors' Report....................... F-19
Balance Sheets December 31, 1997 and 1996................. F-20
Statements of Operations and Retained Earnings years ended
December 31, 1997 and 1996............................. F-21
Statements of Cash Flows years ended December 31, 1997 and
1996................................................... F-22
Notes to the Financial Statements......................... F-23
Balance Sheets December 31, 1997 and June 30, 1998
(unaudited)............................................ F-27
Statements of Operations for the six months ended June 30,
1997 and 1998 (unaudited).............................. F-28
Statements of Cash Flows for the six months ended June 30,
1997 and 1998 (unaudited).............................. F-29
Notes to Unaudited Financial Statements................... F-30
F-1
57
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, 1997 and 1996, and the related consolidated statements of loss and
comprehensive loss, cash flows and changes in shareholders' equity 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 audit.
We conducted our audit 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, 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.
/s/ Schitag Ernst & Young
Deutsche Allgemeine Treuhand AG
Munich, Germany
May 6, 1998
F-2
58
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------------
1996 1997
---------- -----------
ASSETS
Cash and cash equivalents.............................. $ 27,889 $ 2,238,909
Short-term investments (Note 4)........................ 453,698 817,913
Accounts receivable -- trade, net of allowance for
doubtful accounts of $15,161 and $33,417 at December
31, 1996 and 1997, respectively....................... 183,513 1,130,981
Other receivables...................................... 84,675 285,432
Prepaid expenses and other assets...................... 10,607 59,906
---------- -----------
Total current assets.............................. 760,382 4,533,141
Property and equipment, net (Note 5)................... 630,760 2,284,793
Product development costs, net......................... 426,996 2,818,069
Goodwill, net.......................................... -- 1,322,566
Deferred income taxes (Note 11)........................ 692,694 3,454,606
Other assets........................................... -- 5,679
---------- -----------
TOTAL ASSETS................................................ $2,510,832 $14,418,854
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Overdrafts and short-term borrowings (Note 8).......... $ 71,881 $ 413,625
Trade accounts payable................................. 226,379 1,373,901
Other accrued liabilities.............................. 40,953 480,228
Deferred purchase obligations (Note 3)................. -- 980,693
Accrued personnel costs................................ 81,816 393,667
---------- -----------
Total current liabilities......................... 421,029 3,642,114
Long-term debt (Note 9)................................ -- 41,691
Deferred income taxes (Note 11)........................ 299,717 1,801,797
Minority interest...................................... -- 24,937
SHAREHOLDERS' EQUITY
Common stock $.001 per value, 50,000,000 shares
authorized, 5,160,000 and 14,681,891 shares issued and
outstanding at December 31, 1996 and 1997,
respectively.......................................... 5,160 14,682
Preferred stock $.001 par value, 20,000,000 shares
authorized, 6,360,000 and 7,760,000 issued and
outstanding at December 31, 1996 and 1997,
respectively.......................................... 6,360 7,760
Subscription receivable................................ -- (735,000)
Additional paid in capital............................. 2,065,899 11,102,257
Accumulated deficit.................................... (287,196) (1,271,036)
Cumulative translation adjustment...................... (137) (210,348)
---------- -----------
Total shareholders' equity............................. 1,790,086 8,908,315
---------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $2,510,832 $14,418,854
========== ===========
See accompanying notes to consolidated financial statements
F-3
59
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 31,
-------------------------
1996 1997
---------- ------------
Revenue
Internet Projects...................................... $ 217,296 $ 1,597,869
Network Services....................................... 90,377 716,152
--------- -----------
Total revenues.............................................. 307,673 2,314,021
Cost of revenues:
Internet Projects...................................... 243,823 1,564,072
Network Services....................................... 119,297 929,666
--------- -----------
Total cost of revenues...................................... 363,120 2,493,738
--------- -----------
Operating loss.............................................. (55,447) (179,717)
General and administrative expenses......................... 268,762 496,950
Marketing expenses.......................................... 172,209 1,221,508
Research and development.................................... 187,130 366,829
Amortization of goodwill.................................... -- 18,693
--------- -----------
628,101 2,103,980
Interest expense............................................ 2,079 39,550
--------- -----------
Loss before taxes........................................... (685,627) (2,323,247)
Income tax benefit.......................................... 401,849 1,339,407
--------- -----------
Net loss.................................................... (283,778) (983,840)
Other comprehensive loss:
Foreign currency translation adjustments............... (5,089) (210,211)
--------- -----------
Comprehensive loss.......................................... $(288,867) $(1,194,051)
========= ===========
Basic and diluted loss per share............................ $ (.12) $ (.12)
========= ===========
See accompanying notes to consolidated financial statements
F-4
60
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------
1996 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $ (283,778) $ (983,840)
Adjustments to reconcile net income to net cash provided by
operating activities:
Deferred tax credit......................................... (401,849) (1,348,932)
Depreciation and amortization............................... 47,031 200,565
Provision for losses on accounts receivable................. 15,456 33,417
Changes in operating assets and liabilities:
Trade accounts receivable................................... (203,112) (475,300)
Other receivables........................................... (69,583) (136,141)
Prepaid expenses and other current assets................... (10,847) (32,120)
Trade accounts payable...................................... 231,490 (401,835)
Other accrued expenses and liabilities...................... 40,826 1,377,685
Accrued personnel costs..................................... 83,663 247,539
----------- -----------
Total adjustments...................................... 72,437 579,828
----------- -----------
Net cash used in operating activities.................. (550,703) (1,518,962)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments.......................... (463,941) (349,002)
Purchase of property and equipment.......................... (552,104) (1,707,843)
Product development costs................................... (576,567) (2,377,782)
Acquisition of businesses, net of cash acquired............. -- (269,316)
----------- -----------
Net cash used in investing activities.................. (1,592,612) (4,703,943)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issue of common stock, net.................... 2,051,997 8,070,402
Proceeds from borrowings.................................... 73,505 700,000
Repayments of borrowings.................................... -- (126,266)
----------- -----------
Net cash provided by financing activities.............. 2,125,502 8,644,136
----------- -----------
Net (decrease) increase in cash and cash equivalents........ (17,813) 2,421,231
Cash and cash equivalents at beginning of year.............. 49,143 27,889
Translation adjustments..................................... (3,441) (210,211)
----------- -----------
Cash and cash equivalents at end of year.................... $ 27,889 $ 2,238,909
=========== ===========
See accompanying notes to consolidated financial statements
F-5
61
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK PREFERRED STOCK ADDITIONAL ACCUMULATED OTHER
-------------------- ------------------ SUBSCRIPTION PAID-IN ACCUMULATED COMPREHENSIVE
SHARES AMOUNTS SHARES AMOUNT RECEIVABLE CAPITAL DEFICIT LOSS
---------- ------- --------- ------ ------------ ----------- ----------- -----------------
Balance
January 1, 1996..... 161,250 $ 161 6,360,000 $6,360 -- $ 57,995 $ (3,418) $ 4,952
Issuance of shares
for cash............ 4,998,750 4,999 2,007,904
Net loss............. -- -- (283,778)
Currency translation
adjustment.......... -- (5,089)
---------- ------- --------- ------ --------- ----------- ----------- ---------
Balance December 31,
1996................ 5,160,000 $5,160 6,360,000 $6,360 -- $ 2,065,899 $ (287,196) $ (137)
Issuance of shares in
reverse
acquisition......... 9,521,891 9,522 232,331
Issuance of shares
for cash............ 1,400,000 1,400 (735,000) 8,804,027
Currency translation
adjustment.......... (210,211)
Net loss............. (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)
========== ======= ========= ====== ========= =========== =========== =========
TOTAL
STOCKHOLDERS'
EQUITY
-------------
Balance
January 1, 1996..... $ 66,050
Issuance of shares
for cash............ 2,012,903
Net loss............. (283,778)
Currency translation
adjustment.......... (5,089)
----------
Balance December 31,
1996................ $1,790,086
Issuance of shares in
reverse
acquisition......... 241,853
Issuance of shares
for cash............ 8,070,427
Currency translation
adjustment.......... (210,211)
Net loss............. (983,840)
----------
Balance December 31,
1997................ $8,908,315
==========
See accompanying notes to consolidated financial statements
F-6
62
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. 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 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
F-7
63
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
been established, such costs are capitalized until the individual products are
commercially available. Amortization, which began in 1997, is provided using the
straight-line method over the lesser of four years or the economic life of the
related product, commencing the month after the date of product release. 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 at December 31, 1997.
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.
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.
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-8
64
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. BUSINESS ACQUISITIONS (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 through 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 acquisition has been
accounted for using the purchase method of accounting and accordingly the
accompanying financial statements reflect Artwise's results of operations for
the period September 16, 1997 through December 31, 1997. Goodwill, representing
the excess of the purchase price over the fair market value of the net assets
acquired, of DM 1,507,493 ($841,188) is being amortized over 15 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 1998. The acquisition has been accounted for
using the purchase method of accounting. Eclipse's results of operations for the
period December 4, 1997 through December 31, 1997 are not included in the
accompanying financial statements due to immateriality. Goodwill, representing
the excess of the purchase price over the fair market value of the net assets
acquired, of DM 909,418 ($507,459) is being amortized over 15 years.
Accumulated amortization of goodwill at December 31, 1997 amounted to
$18,693.
The following unaudited pro forma consolidated results of operations for
the years ended December 31, 1996 and 1997 assume the Artwise and Eclipse
acquisitions occurred as of January 1, 1996:
YEARS ENDED DECEMBER 31,
----------------------------
1996 1997
---------- -----------
Revenue................................................. $2,143,488 $ 4,223,813
Net loss................................................ $ (362,974) $(1,071,948)
Basic and diluted loss per share........................ $ (.15) $ (.13)
4. SHORT-TERM INVESTMENTS
Short term investments at cost consist of the following:
DECEMBER 31,
-----------------------
1996 1997
-------- --------
BHF Bank Accugeld Fund...................................... $453,698 $ --
BHF Bank US Dollar Plus Fund................................ -- 802,759
Commerzbank Geld Market Fund................................ -- 15,154
-------- --------
$453,698 $817,913
======== ========
At December 31, 1996 and 1997 the estimated fair value of short-term
investments approximated cost.
F-9
65
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31,
-------------------------
1996 1997
-------- ----------
Computer equipment and software............................. $444,695 $1,942,485
Leasehold improvements...................................... 30,452 75,796
Furniture and fixtures...................................... 201,606 478,504
-------- ----------
676,753 2,496,785
Less accumulated depreciation and amortization.............. (45,993) (211,992)
-------- ----------
Net property and equipment.................................. $630,760 $2,284,793
======== ==========
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
1998................................................... $396,804
1999................................................... $421,492
2000................................................... $421,492
2001................................................... $181,947
2002................................................... $ 52,737
Thereafter.................................................. $ --
The Company's rental expense under operating leases in the years ended
December 31, 1996 and 1997 totaled approximately $56,508 and $176,687
respectively.
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 the agreements aggregate $1,890,195 and
$991,205 for the years ending December 31, 1998 and 1999, respectively. Amounts
paid under these agreements in the years ended December 31, 1996, and 1997,
amounted to approximately $117,630 and $1,593,145, 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, 1997, the Company had established short-term unsecured
overdraft facilities under which the Company and its subsidiaries could borrow
up to DM 330,000. The facilities are denominated in Deutsche Mark as to DM
200,000 and Italian Lire as to DM 130,000. The interest rate fluctuates based on
current lending rates and was 8.5% and 8.25% at December 31, 1996 and 1997,
respectively. As of December 31, 1997, $46,006 of the overdraft facility was
used.
F-10
66
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LONG-TERM DEBT
Long-term debt consists of an unsecured promissory notes due in varying
amounts of principal and interest through 2001. The interest rate on the note is
variable. At December 31, 1997 the interest rate was 5.15%.
10. STOCKHOLDERS' 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 20,000,000 shares of Preferred Stock
with relative rights, preferences and limitations determined at the time of
issuance. As of December 31, 1997, the Company has issued Series A, B and C
Preferred Stock.
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.
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.
F-11
67
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
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 $ .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 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.
F-12
68
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
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.
Upon the liquidation, dissolution or winding up, whether voluntary or
involuntary, of the Company, the holders of the Series C Preferred Stock will be
entitled to be paid the sum of $7.00 per share before any amount is paid to the
holder of any other series of Preferred Stock or to the Common Stock of the
Company. After payment of these amounts to the holders of the Series C Preferred
Stock the remaining assets of the Company will be distributed to the holders of
the Common Stock.
11. PROVISION FOR INCOME TAXES
The Company's principal operations are currently located in Germany. Pretax
(loss) for the years ended December 31, 1996 and 1997 was generated in the
following jurisdictions:
DECEMBER 31,
---------------------------
1996 1997
--------- -----------
Germany.................................................. $(685,627) $(2,303,448)
United States............................................ -- (19,799)
--------- -----------
$(685,627) $(2,323,247)
========= ===========
The components of the provision for income taxes, all of which relates to
Germany, are as follows:
DECEMBER 31,
---------------------------
1996 1997
--------- -----------
Current.................................................. $ -- $ 9,525
Deferred................................................. (401,849) (1,348,932)
--------- -----------
Income tax benefit....................................... $(401,849) $(1,339,407)
========= ===========
The Company has net deferred tax assets as of December 31, 1996 and 1997 as
follows:
DECEMBER 31,
-------------------------
1996 1997
-------- ----------
Deferred tax assets
Net operating losses................................... $692,694 $3,454,606
-------- ----------
692,694 3,454,606
======== ==========
Deferred tax liabilities
Product development costs.............................. 251,038 1,625,857
Depreciation and amortization.......................... 44,195 175,454
Other.................................................. 4,484 486
-------- ----------
299,717 1,801,797
======== ==========
Net deferred tax assets..................................... $392,977 $1,652,809
======== ==========
As of December 31, 1997, the Company and its subsidiaries had available
combined cumulative tax loss carryforwards of approximately $6.2 million 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
F-13
69
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. PROVISION FOR INCOME TAXES (CONTINUED)
future taxable income to realize the entire deferred tax asset and that the
realization of the $1,652,809 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.
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
--------- -----------
Income tax benefit at statutory rate..................... $(239,969) $ (813,136)
Higher foreign tax rates................................. (157,694) (529,793)
Other.................................................... (4,186) 3,522
--------- -----------
Income tax benefit....................................... $(401,849) $(1,339,407)
========= ===========
12. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
DECEMBER 31,
-------------------------
1996 1997
--------- ---------
Numerator:
Net loss -- numerator for basic and diluted loss per
share.............................................. $(283,778) $(983,840)
========= =========
Denominator:
Denominator for basic and diluted loss per
share -- weighted average shares................... 2,465,782 8,342,297
========= =========
Basic and diluted loss per share.......................... $ (.12) $ (.12)
========= =========
The denominator for diluted earnings per share excludes the convertible
preferred stock because treatment of the preferred stock as if converted would
have an anti-dilutive effect. For additional disclosures regarding the
outstanding preferred stock, see Note 10.
13. 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.
14. RECENT PRONOUNCEMENT
On October 27, 1997 the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
97-2 Software Revenue Recognition ("SOP 97-2") that supercedes prior guidance
for software revenue recognition. The new rules are effective for transactions
entered into in fiscal years beginning after December 15, 1997. The Company does
not believe the impact of SOP 97-2 will be significant to its accounting
policies.
F-14
70
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
ASSETS
Cash and cash equivalents.............................. $ 2,238,909 $ 147,685
Short-term investments................................. 817,913 104,063
Accounts receivable.................................... 1,130,981 1,921,033
Accounts receivable -- share issuance.................. 735,000 --
Other receivables...................................... 285,432 820,164
Prepaid expenses and other assets...................... 59,906 1,416,494
----------- -----------
Total current assets.............................. 5,268,141 4,409,439
Property and equipment, net............................ 2,284,793 5,161,606
Product development costs, net......................... 2,818,069 3,594,692
Goodwill, net.......................................... 1,322,566 1,275,246
Deferred income taxes.................................. 3,454,606 5,976,923
Other assets........................................... 5,679 31,233
----------- -----------
TOTAL ASSETS................................................ $15,153,854 $20,449,139
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Overdrafts and short-term borrowings................... $ 413,625 $ 3,982,508
Trade accounts payable................................. 393,208 1,714,737
Other accrued liabilities.............................. 1,460,921 1,030,348
Deferred purchase obligations.......................... 980,693 358,268
Accrued personnel costs................................ 393,667 660,905
Current portion capital lease obligation............... -- 513,914
----------- -----------
Total current liabilities......................... 3,642,114 8,260,680
Long-term debt......................................... 41,691 39,939
Capital lease obligation............................... -- 1,093,824
Deferred income taxes.................................. 1,801,797 2,334,903
Minority interest...................................... 24,937 89,086
SHAREHOLDERS' EQUITY
Common stock........................................... 14,682 14,755
Preferred stock........................................ 7,760 7,760
Additional paid in capital............................. 11,102,257 11,674,371
Accumulated deficit.................................... (1,271,036) (2,876,721)
Cumulative translation adjustment...................... (210,348) (189,458)
----------- -----------
Total shareholders' equity............................. 9,643,315 8,630,707
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $15,153,854 $20,449,139
=========== ===========
F-15
71
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1998
---------- ------------
Revenue
Internet Projects...................................... $ 445,330 $ 1,863,075
Network Services....................................... 150,241 1,489,412
--------- -----------
Total revenues.............................................. 595,571 3,352,487
Cost of revenues:
Internet Projects...................................... 324,070 1,660,034
Network Services....................................... 321,873 1,716,078
--------- -----------
Total cost of revenues...................................... 645,943 3,376,112
--------- -----------
Operating loss.............................................. (50,372) (23,625)
General and administrative expenses......................... 227,759 668,542
Marketing expenses.......................................... 513,793 1,713,782
Research and development.................................... -- 1,051,264
Amortization................................................ -- 44,955
--------- -----------
741,552 3,478,543
Interest expense............................................ 14,359 110,393
--------- -----------
Loss before taxes........................................... (806,283) (3,612,561)
Income tax benefit.......................................... 466,127 2,006,876
--------- -----------
Net loss.................................................... (340,156) (1,605,685)
Other comprehensive income (loss):
Foreign currency translation adjustments............... (171,365) 20,890
--------- -----------
Comprehensive loss.......................................... $(511,521) $(1,584,795)
========= ===========
Basic and diluted loss per share............................ $ (.02) $ (.07)
========= ===========
F-16
72
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
--------------------------
1997 1998
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... (340,156) (1,605,685)
Adjustments to reconcile net income to net cash provided by
operating activities:
Deferred tax credit......................................... (416,735) (1,989,211)
Depreciation and amortization............................... 56,461 860,708
Provision for losses on accounts receivable................. 40,804 45,121
Changes in operating assets and liabilities:
Trade accounts receivable................................... (335,713) (835,173)
Other receivables........................................... (3,686) 174,215
Prepaid expenses and other current assets................... 896 (1,356,588)
Trade accounts payable...................................... 264,057 1,337,752
Other accrued expenses and liabilities...................... 4,292 (416,663)
Accrued personnel costs..................................... 102,400 267,238
--------- ----------
Total adjustments...................................... 32,246 (829,219)
--------- ----------
Net cash used in operating activities.................. (627,380) (3,518,286)
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of short-term investments.............................. 453,698 713,850
Purchase of property and equipment.......................... (185,132) (1,742,537)
Product development costs................................... (964,081) (1,132,272)
--------- ----------
Net cash used in investing activities.................. (695,515) (2,160,959)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings.................................... 1,468,227 3,567,131
--------- ----------
Net cash provided by financing activities.............. 1,468,227 3,567,131
--------- ----------
Net (decrease) increase in cash and cash equivalents........ 145,332 (2,112,114)
Cash and cash equivalents at beginning of year.............. 27,889 2,238,909
Translation adjustments..................................... (171,365) 20,890
--------- ----------
Cash and cash equivalents at end of year.................... 1,856 147,685
========= ==========
F-17
73
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED UNAUDITED
INTERIM FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by GAAP for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of financial position and results
of operations have been included. Operating results for the six month period
ended June 30, 1998 are not necessarily indicative of results to be expected for
the full year ended December 31, 1998.
2. BUSINESS ACQUISITIONS
On June 17, 1998 the Company entered into a Stock Purchase Agreement to
purchase Vianet EDV Dienstleistungs GmbH, an Austrian Internet provider, for a
total consideration of DM 7,500,000 and 300,000 shares of common stock of the
Company. The closing of the sale is expected to take place contemporaneously
with the closing of the Offering.
Effective August 15, 1998 the Company purchased Open:Net Internet Solutions
GmbH, a German Internet provider, for a total consideration of DM 1,445,000 and
58,825 shares of common stock of the Company.
3. FINANCING
In May 1998 the Company offered for sale 700,000 shares of common stock at
an offering price of $18 per share in an offshore private placement. The net
proceeds from the sale of approximately $11.5 million was received in July,
1998.
In January, 1998, the Company acquired approximately $1.6 million in fixed
assets financed through lease arrangements which have been accounted for as
capital lease obligations.
F-18
74
REPORT OF INDEPENDENT AUDITORS
To the Shareholder
VIANET EDV Dienstleistungs GmbH
We have audited the accompanying balance sheets of VIANET EDV
Dienstleistungs GmbH as of December 31, 1997 and 1996 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 EDV Dienstleistungs
GmbH as of December 31, 1997 and 1996 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.
Ernst & Young
Wirtschaftsprutungs-und
Steuerberatungs gesellschaft mbH
(Gerd Haberfehlner)
(Edith Schmit)
Vienna, Austria
July 31, 1998
F-19
75
VIANET EDV DIENSTLEISTUNGS GMBH
BALANCE SHEET
(ALL AMOUNTS IN ATS)
DECEMBER 31,
--------------------------
1996 1997
--------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents.............................. 655,174 100,025
Recoverable taxes and other receivables (Note 2)....... 130,747 126,087
Trade accounts receivable (Note 3)..................... 2,943,991 5,573,461
Inventories (Note 4)................................... 109,099 37,404
Prepaid expenses (Note 5).............................. 135,770 246,373
--------- ----------
Total current assets.............................. 3,974,781 6,083,350
Deposits and Other Assets................................... 170,000 241,846
Fixed Assets (Note 6)
Leasehold improvements................................. 219,220 219,220
Office furniture and equipment......................... 2,745,313 6,470,090
--------- ----------
2,964,533 6,689,310
Accumulated depreciation............................... (669,029) (1,952,565)
========= ==========
2,295,504 4,736,745
Deferred tax asset (Note 12)................................ 18,899 --
TOTAL ASSETS................................................ 6,459,184 11,061,941
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....................................... 3,103,262 5,911,889
Overdraft (Note 7)..................................... -- 634,636
Accrued expenses (Note 8).............................. 938,000 1,906,500
Corporate tax (Note 12)................................ 7,500 139,200
Other payables......................................... 1,069,554 1,015,162
Deferred income (Note 9)............................... 841,983 953,178
--------- ----------
Total current liabilities......................... 5,960,299 10,560,565
Deferred tax liability (Note 12)............................ -- 26,024
Accrued employee benefits (Note 10)......................... 25,000 61,000
--------- ----------
25,000 61,000
SHAREHOLDERS' EQUITY (Note 11)
Share capital.......................................... 250,000 250,000
Retained earnings...................................... 223,885 164,352
--------- ----------
473,885 414,352
--------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. 6,459,184 11,061,941
========= ==========
See accompanying notes to financial statements
F-20
76
VIANET EDV DIENSTLEISTUNGS GMBH
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(ALL AMOUNTS IN ATS)
YEARS ENDED DECEMBER 31,
-------------------------
1996 1997
----------- -----------
TOTAL REVENUES.............................................. 16,174,241 27,390,233
COSTS AND EXPENSES
Costs of products sold................................. 8,588,569 12,403,754
General and administrative expenses.................... 2,504,500 4,929,219
Marketing expenses..................................... 5,008,998 9,858,437
---------- ----------
16,102,067 27,191,410
OPERATING PROFIT............................................ 72,174 198,823
Interest income............................................. 23,389 20,972
Interest expense............................................ (3,726) (86,212)
---------- ----------
19,663 (65,240)
Income before income taxes.................................. 91,837 133,583
Provision for income taxes (Note 12)........................ 3,899 (193,116)
---------- ----------
NET INCOME (LOSS)........................................... 95,736 (59,533)
Retained earnings, beginning................................ 128,149 223,885
---------- ----------
Retained earnings, ending................................... 223,885 164,352
---------- ----------
See accompanying notes to financial statements
F-21
77
VIANET EDV DIENSTLEISTUNGS GMBH
STATEMENT OF CASH FLOWS
(ALL AMOUNTS IN ATS)
YEARS ENDED DECEMBER 31,
-------------------------
1996 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................... 95,736 (59,533)
Adjustments to reconcile net earnings to net cash provided
by
operating activities:
Depreciation........................................... 499,165 1,283,536
Deferred taxes......................................... -- 44,923
Change in accounts receivable, recoverable taxes and
other receivables..................................... (145,264) (2,624,810)
Change in deposits and other assets.................... -- (71,846)
Change in inventories.................................. 34,781 71,695
Change in prepaid expenses............................. (12,004) (110,603)
Change in accounts payable, accrued expenses and
other current liabilities............................ 1,624,620 4,001,630
---------- ----------
Net cash used by operating activities....................... 2,097,034 2,534,992
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment......... (2,059,575) (3,724,777)
---------- ----------
Net cash (used in) investing activities..................... (2,059,575) (3,724,777)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings............................... -- 634,636
---------- ----------
Net cash provided by financing activities................... -- 634,636
(Decrease) Increase in cash and cash equivalents............ 37,459 (555,149)
Cash and cash equivalents at beginning of year.............. 617,715 655,174
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... 655,174 100,025
---------- ----------
See accompanying notes to financial statements
F-22
78
NOTES TO THE FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997
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 ("the Company"), an Austrian
limited liability company, was established in 1994. The Company provides
Internet services and connections.
CASH AND CASH EQUIVALENTS
Highly-liquid investments, with an original maturity of three months or
less from the date of purchase, are classified as cash equivalents. Overdraft
balances are considered 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 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-23
79
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1997
NOTE 2. RECOVERABLE TAXES AND OTHER RECEIVABLES
Recoverable taxes and other receivables consist of (in ATS):
1996 1997
------- -------
Capital gains tax receivable................................ 41,150 8,646
Value added tax............................................. 26,998 38,310
Employee loans.............................................. 40,000 40,000
Other....................................................... 22,599 39,131
------- -------
130,747 126,087
======= =======
NOTE 3. TRADE ACCOUNTS RECEIVABLE
Total amount of accounts receivable is as follows (in ATS):
1996 1997
--------- ----------
Trade accounts receivable -- domestic....................... 3,542,557 7,419,133
Provision for bad debts..................................... (598,566) (1,845,672)
--------- ----------
2,943,991 5,573,461
========= ==========
Provisions for bad debts were made for accounts receivable on a specific
risk of collection.
NOTE 4. INVENTORY
Merchandise refers only to hardware devices which are sold to various
customers. Valuation is done at cost (purchase price). In both the financial
years 1996 and 1997, there was no need to make any provision for obsolete goods.
NOTE 5. PREPAID EXPENSES
In the FY 1997 this position includes mainly prepaid telecommunication fees
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
During the first year of usage depreciation is either calculated on a one
year basis, when usage begins prior to half year-end, or with a half year rate
in the case usage begins after half year-end.
NOTE 7. OVERDRAFT
Overdrafts represent temporary overdrafts to bank balances. The Company has
a total overdraft limit, which was not subject to formal agreements, of ATS
750,000. This line was used as of December 31, 1997 with ATS 634,636.
F-24
80
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1997
NOTE 8. ACCRUED EXPENSES
Accruals for the following costs have been provided (in ATS):
1996 1997
------- ---------
Unused holidays............................................. 111,300 177,600
Telecommunication fees...................................... 469,000 435,500
Professional fees........................................... 127,700 629,000
Warranties.................................................. -- 210,000
Payroll taxes............................................... -- 224,400
Services not yet invoiced and other Accruals................ 230,000 230,000
------- ---------
938,000 1,906,500
======= =========
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 that has to be paid three months in advance and current fees which are
invoiced after the relevant period. Prepaid amounts are deferred under deferred
income.
1996 1997
------- -------
Deferred revenue (in ATS)................................... 841,983 953,178
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 in case of retirement. The calculation of this payment amount
depends on the service time by 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 25,000 for FY 1996 and ATS 61,000 for FY 1997. The calculation was carried
out 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 limited liability company (herafter "GmbH") under Austrian
law. Shareholders are generally not liable for a GmbH's obligations, except to
the extent of their capital investment. Share capital of a GmbH is not in the
form of shares and does not represent negotiable securities.
As of December 31, 1997 VIANET's common stock of ATS 500,000 has been paid
up to an amount of ATS 250,000.
The shareholders are also the general managers of VIANET.
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, 1997, 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-25
81
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1997
NOTE 12. PROVISION FOR INCOME TAXES
The components of the provisions for income taxes are as follows (in ATS):
1996 1997
------- -------
Current..................................................... 15,000 148,193
Deferred.................................................... (18,899) 44,923
------- -------
Income tax (benefit)........................................ (3,899) 193,116
======= =======
The Company has net deferred tax assets as of December 31, 1996 and net
deferred tax liability as of December 31, 1997 (in ATS):
1996 1997
------ -------
Deferred tax assets
Net operating loss..................................... 55,283 --
Accrued employee benefits.............................. 8,500 20,740
------ -------
63,783 20,740
====== =======
Deferred tax liability
Depreciation........................................... 44,884 46,764
====== =======
Net deferred tax asset (liability).......................... 18,899 (26,024)
====== =======
Reconciliation of income taxes determining the Austrian statutory federal
income tax rate of 34% to actual income taxes provided is as follows (in ATS):
1996 1997
------- -------
Income tax at statutory rate................................ 31,225 45,418
Permanent differences....................................... (31,438) 166,409
Other....................................................... (3,686) (18,711)
------- -------
(3,899) 193,116
======= =======
NOTE 13. COMMITMENTS
The Company has operating leases. The commitment for future minimum lease
payments is:
1998........................................................ ATS 1,136,203
1999........................................................ ATS 759,040
2000........................................................ ATS 258,133
2001........................................................ ATS 53,179
Rent expense for operating leases approximated ATS 747,484,56 and ATS
535,563,42 for the years ended December 31, 1997 and 1996, respectively.
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. According to the company's lawyer, TUV could claim up to ATS 1,535,000.
Costs have been estimated by the lawyers with ATS 600,000. Management believes
that the lawsuit will be settled with cost of maximal ATS 250,000 from which an
amount of ATS 210,000 is accrued in the balance sheet.
F-26
82
VIANET EDV DIENSTLEISTUNGS GMBH
CONSOLIDATED BALANCE SHEETS
(ALL AMOUNTS IN ATS)
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED) (AUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents.............................. 1,289,466 100,025
Recoverable taxes and other receivables................ 359,302 126,087
Accounts receivable.................................... 7,947,413 5,573,461
Inventories............................................ 71,680 37,404
Prepaid expenses....................................... 301,720 246,373
---------- ----------
Total current assets.............................. 9,969,581 6,083,350
Deposits and Other Assets................................... 300,846 241,846
Fixed Assets:
Leasehold improvements................................. 219,220 219,220
Office furniture and equipment......................... 7,232,708 6,470,090
---------- ----------
7,451,928 6,689,310
Accumulated depreciation............................... (2,760,153) (1,952,565)
---------- ----------
4,691,775 4,736,745
========== ==========
TOTAL ASSETS................................................ 14,962,202 11,061,941
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....................................... 6,781,241 5,911,889
Overdrafts............................................. 0 634,636
Accrued expenses....................................... 1,413,800 1,906,500
Corporate tax.......................................... 673,300 139,200
Other payables......................................... 1,743,320 1,015,162
Deferred income........................................ 3,172,679 953,178
---------- ----------
Total current liabilities......................... 13,784,340 10,560,565
Deferred tax liability...................................... 6,178 26,024
Accrued employee benefits................................... 87,000 61,000
---------- ----------
87,000 61,000
SHAREHOLDERS' EQUITY
Share capital.......................................... 250,000 250,000
Retained earnings...................................... 834,684 164,352
---------- ----------
1,084,684 414,352
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. 14,962,202 11,061,941
========== ==========
F-27
83
VIANET EDV DIENSTLEISTUNGS GMBH
STATEMENTS OF OPERATIONS
(ALL AMOUNTS IN ATS)
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
TOTAL REVENUES.............................................. 17,266,356 12,873,347
COSTS AND EXPENSES
Costs of revenues...................................... 8,426,021 6,847,761
General and administrative expenses.................... 2,541,150 2,056,546
Marketing expenses..................................... 5,082,300 4,113,093
---------- ----------
16,049,471 13,017,400
OPERATING PROFIT............................................ 1,216,885 (144,053)
Interest income............................................. 7,998 5,334
Interest expense............................................ (23,063) (647)
---------- ----------
(15,065) 4,687
Earnings before income taxes................................ 1,201,820 (139,366)
Provision for income taxes.................................. (531,488) (20,959)
---------- ----------
NET INCOME (LOSS)........................................... 670,332 (160,325)
---------- ----------
F-28
84
VIANET EDV DIENSTLEISTUNGS GMBH
STATEMENTS OF CASH FLOWS
(ALL AMOUNTS IN ATS)
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings................................................ 670,332 (160,325)
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation........................................... 807,588 406,590
Deferred taxes......................................... (19,846) --
Change in accounts receivable, recoverables taxes and
other receivables..................................... (2,607,167) (2,759,469)
Change in inventories.................................. (34,276) --
Change in prepaid expenses:............................ (55,347) --
Change in deposits and other assets.................... (59,000) --
Change in accounts payable, accrued expenses
and other liabilities................................ 3,249,775 3,200,259
---------- ----------
Net cash provided by operating activities................... 1,952,059 687,055
INVESTING ACTIVITIES
Expenditures for property, plant and equipment......... (762,618) (1,252,032)
---------- ----------
Net cash (used in) investing activities..................... (762,618) (1,252,032)
---------- ----------
(Decrease) Increase in cash and cash equivalents............ 1,189,441 (564,977)
Cash and cash equivalents at beginning of year.............. 100,025 655,174
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. 1,289,466 90,197
========== ==========
F-29
85
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with United States generally accepted accounting principles ("U.S.
GAAP") for interim financial information. Accordingly, they do not include all
of the information and footnotes required by U.S. 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 six
month period ended June 30, 1998 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1998. All amounts in the
accompanying unaudited condensed financial statements are presented in ATS. For
further information, refer to the financial statements and footnotes thereto for
the year ended December 31, 1997.
Effective for companies with fiscal years beginning after December 15,
1997, comprehensive income and its components are required to be reported in the
financial statements in accordance with Statement of Financial Accounting
Standard No 130, Reporting Comprehensive Income. For the periods presented, the
Company has no comprehensive income.
NOTE 2. SALE OF THE COMPANY
On June 17, 1998 the Company's shareholders entered into a Stock Purchase
Agreement to sell their share capital to Cybernet Internet Services
International, Inc. ("Cybernet") for a total consideration of DM 7,500.000 and
300,000 shares of common stock of Cybernet. The closing of the sale is expected
to take place in October, 1998.
F-30
86
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS NOT
LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
PAGE
----
Available Information................. 2
Prospectus Summary.................... 3
The Company........................... 3
The Offering.......................... 4
Risk Factors.......................... 6
Use of Proceeds....................... 16
Dividend Policy....................... 16
Price Range of Common Stock........... 16
Dilution.............................. 17
Capitalization........................ 18
Selected Consolidated Financial
Data................................ 19
Management's Discussion and Analysis
of Financial Position and Results of
Operations.......................... 20
Business.............................. 30
Management............................ 37
Principal Stockholders................ 43
Description of Capital Stock.......... 44
Anti-Takeover Provisions.............. 48
Transfer Agent........................ 50
Underwriting.......................... 51
Certain Transactions.................. 51
Shares Eligible for Future Sale....... 51
Legal Matters......................... 53
Experts............................... 53
Additional Information................ 53
Index to Consolidated Financial
Statements.......................... F-1
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
3,500,000 SHARES
[LOGO]
CYBERNET
INTERNET
SERVICES
INTERNATIONAL,
INC.
-------------------
PROSPECTUS
-------------------
BERLINER
EFFEKTENBANK AG
, 1998
- ------------------------------------------------------
- ------------------------------------------------------
87
PART II
INFORMATION NOT REQUIRED IN 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......... $20.650
Printing and engraving expenses............................. *
Legal fees of Registrant.................................... *
Accountants' fees and expenses.............................. *
Miscellaneous............................................... *
-------
Total............................................. $ *
- ---------------
* To be supplied by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Delaware General Corporation Law, Section 145, provides that a
corporation shall have the power to indemnify a director, officer, employee or
agent of the corporation, consistent with law, as may be provided by its
articles of incorporation, bylaws, general or specific action of its board of
directors or contract. The Company's Articles of Incorporation and bylaws
provide for indemnification of directors, officers, employees or agents of the
Company and limit the liability of the directors of a corporation. The Company
does maintain directors and officer's insurance coverage.
II-1
88
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the years ended December 31, 1995, 1996 and 1997, and the eight
months ended August 30, 1998, the Company sold shares of Common Stock, Class A
Preferred, Class B Preferred and Class C Preferred, as follows:
Securities Sold
Purchasers Consideration Exemption
Date Number of Shares
Class of Stock
June 1997 5,160,000 Series Cybermind Shares of Section 4(2)
B Preferred Cybernet AG
June 1997 1,200,000 Series 600,000 Cybermind Shares of Section 4(2)
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 Common 2,257,500 Andreas Eder Shares of Section 4(2)
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 Investors
Preferred
September 1, 1997 72,620 Common Stefan Heiligensetzer $619,106 Section 4(2)
Stock Lothar Bernecker Purchase of
Frank Marchewicz Artwise
Gerhard Schoenenberger
Rolf Strehle
December 1997 27,000 Common Eiderdown Trading Ltd Payment in Section 4(2)
Stock connection
with the
Eclipse
acquisition
August 1998 58,825 Common Open:Net Sellers Shares of Section 4(2)
Stock Thomas Egner Open:Net
Uwe Hagenmeier valued at
Markus Kress $94,286
Oliver Schaeffer
May 1998 700,000 Common Private Placement $12,600,000 Regulation S
Stock Investors
Closing of the 300,000 Common Vianet Sellers: Shares of Section 4(2)
Vianet Stock Tristan Libischer Vianet
Acquisition Alexander Wiesmueller
(1) Between May 31, 1998 and July 22, 1998, 1,282,490 shares of Series C
Preferred Stock were converted to the same number of shares of Common Stock
by the holders thereof.
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89
ITEM 16(A). EXHIBITS
1.1* Underwriting Agreement
2.1* Agreement and Plan of Merger between the Registrant and
Cybernet Internet Services International, Inc., a Utah
corporation, dated , 1998
3.1 Certificate of Incorporation
3.2 Bylaws
5.1* Opinion of Powell, Goldstein, Frazer & Murphy, LLP
10.1 Sale and Assignment of Business Shares of Artwise GmbH
Software Solutions
10.2 Sale and Assignment of Shares in Open:Net Internet Solutions
GmbH
10.3 Sale of Eclipse srl
10.4 Stock Purchase Agreement; Vianet
10.5 Stock Purchase Agreement; Cybernet AG
10.6 Pooling Agreement (Cybernet AG Acquisition)
10.7 Pooling Agreement (Artwise Acquisition)
10.7.1 Schedule of Additional Artwise Pooling Agreements
10.8 Consulting Agreement (Eclipse Acquisition)
10.9 Employment Agreement (Andreas Eder)
10.10 Employment Agreement (Alessandro Giacalone)
10.11 Employment Agreement (Christian Moosmann)
10.12 Employment Agreement (Rudolf Strobl)
10.13 Lease Munich
10.14 Form of Miller Leasing Agreement
10.15 Info AG Agreement
10.16 Ebone Agreement
10.17 Feratel Agreement
10.18* Stock Option Plan
10.19* Director Stock Option Plan
21.1 Subsidiaries
23.1* Consent of Powell, Goldstein, Frazer & Murphy LLP (included
in Exhibit 5.1)
23.2 Consent of Schitag Ernst & Young AG
23.3 Consent of Ernst & Young Wirtschaftsprufungs-und
Steuerberatungsgesellschaft m.b.H
24 Power of Attorney
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* To be filed by amendment
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in
successful defense of any action, suit or proceeding) is asserted against the
Registrant by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
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90
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement, or amendment thereto, to be signed on its behalf by the undersigned,
thereunto duly authorized, on September , 1998.
CYBERNET INTERNET SERVICES, INC.
By: /s/
------------------------------------------
Chairman, Chief Executive Officer and
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement, or amendment thereto, has been signed by the following
persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
Chairman of the Board September , 1998
- ------------------------------------------------ of Directors, Chief
Andreas Eder Executive Officer
Director September , 1998
- ------------------------------------------------
Tristan Libischer
Director September , 1998
- ------------------------------------------------
Holger Timm
Director September , 1998
- ------------------------------------------------
Hubert Besner
Director September , 1998
- ------------------------------------------------
G.W. Norman Wareham
Director September , 1998
- ------------------------------------------------
Robert Fratarcangelo
Principal Accounting September , 1998
- ------------------------------------------------ and Financial Officer
Christian Moosmann
II-4