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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NO.: 000-25677
CYBERNET INTERNET SERVICES
INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 51-0384117
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
SUITE 1620 - 400 BURRARD STREET, VANCOUVER, BRITISH COLUMBIA, CANADA V6C 3A6
(Address of office)
(604) 683-5767
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
----- ------
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date:
Class Outstanding at May 15, 2002
----- -------------------------------
Common Stock, $0.001 26,445,627
par value
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FORWARD-LOOKING STATEMENTS
Statements in this report, to the extent they are not based on historical
events, constitute forward-looking statements. Forward-looking statements
include, without limitation, statements regarding the outlook for future
operations, forecasts of future costs and expenditures, the evaluation of market
conditions, the outcome of legal proceedings, the adequacy of reserves, or other
business plans. Investors are cautioned that forward-looking statements are
subject to an inherent risk that actual results may vary materially from those
described herein. Factors that may result in such variance, in addition to
those accompanying the forward-looking statements, include changes in interest
rates, commodity prices, and other economic conditions; actions by competitors;
changing weather conditions and other natural phenomena; actions by government
authorities; uncertainties associated with legal proceedings; technological
development; future decisions by management in response to changing conditions;
and misjudgments in the course of preparing forward-looking statements.
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2002
(UNAUDITED)
2
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, 2001 MARCH 31, 2002
------------------ ---------------
(Euros in thousands)
ASSETS
Current Assets
Cash and cash equivalents E 2,735 E 2,740
Restricted Cash 2,743 2,183
Short-term investments 149 77
Trade accounts receivable, net 8,903 6,636
Related party receivable 356 356
Other receivables 2,721 2,067
Restricted investments 10,567 5,328
Prepaid expenses 574 765
Other current assets 947 1,077
--------------- ------------
Total current assets 29,695 21,229
Property and equipment, net 32,653 29,760
Product development costs, net 806 624
Investments in equity-method investees 2,770 2,635
Other assets 6,048 5,792
--------------- ------------
TOTAL ASSETS E 71,972 E 60,040
=============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Current Liabilities
Overdrafts and short-term borrowings E 170 E 866
Trade accounts payable 13,155 12,850
Other accrued liabilities 11,835 9,764
Current portion long-term debt and
capital lease obligations 1,060 -
Accrued personnel costs 1,848 2,851
--------------- ------------
Total current liabilities 28,068 26,331
Long-term debt 164,573 169,958
Capital lease obligations 435 -
SHAREHOLDERS' EQUITY
Common stock 25 25
Additional paid in capital 127,718 127,718
Accumulated deficit (249,473) (264,045)
Cumulative other comprehensive income 626 53
--------------- ------------
Total shareholders' equity (121,104) (136,249)
--------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY E 71,972 E 60,040
=============== ============
The accompanying notes are an integral part of these financial statements.
3
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
--------------------------------
2001 2002
------------ ------------
(Euros in thousands,
except per share data)
Revenues E 9,880 E 9,308
Costs and expenses:
Direct cost of services 5,493 4,533
Network operations 2,127 1,019
General and administrative expenses 3,381 5,479
Sales and marketing expenses 2,685 1,927
Research and development 228 -
Depreciation and amortization 4,956 2,475
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Total costs and expenses 18,870 15,433
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(8,990) (6,125)
Other income and expenses:
Interest income 578 103
Interest expense (5,776) (6,834)
Equity in losses of equity-method investees (37) (135)
Foreign currency losses (6,260) (1,580)
----------- -----------
Loss before taxes and extraordinary item (20,485) (14,571)
Income tax expense (benefit) 1,590 (1)
----------- -----------
Loss before extraordinary item (18,895) (14,572)
Extraordinary item:
Gain on extinguishment of debt (net of tax) 4,016 -
----------- -----------
Net loss (14,879) (14,572)
Accumulated deficit, beginning of period (114,833) (249,473)
----------- -----------
Accumulated deficit, end of period E (129,712) E (264,045)
=========== ===========
Earnings (loss) per share, basic and diluted:
Loss before extraordinary item E (0.73) E (0.55)
Gain on extraordinary item 0.15 -
----------- -----------
Net loss E (0.58) E (0.55)
============ ===========
Number of shares used to compute
earnings (loss) per share (in thousands) 25,845 26,445
============ ===========
The accompanying notes are an integral part of these financial statements.
4
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
--------------------------------
2001 2002
------------ ------------
(Euros in thousands,
except per share data)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss E (14,879) E (14,572)
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH USED BY OPERATIONS:
Deferred taxes (1,589) -
Depreciation and amortization 4,956 2,475
Equity in (profits) losses of
equity-method investees (5) 135
Provision for losses on accounts
receivable 305 1,492
Loss on sale of short term investment 67 -
Amortization of bond discount 651 664
Accreted interest expense on long-term debt 1,371 3,443
Gain on extinguishment of debt (4,016) -
Foreign currency translation loss 3,895 639
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Restricted cash 286 560
Trade accounts receivable (345) 777
Other receivables 1,389 577
Other assets 176 (32)
Prepaid expenses (148) (193)
Other current assets 283 (130)
Trade accounts payable (1,136) (305)
Other accrued expenses and liabilities (4,519) (1,216)
Accrued personnel costs (251) 1,003
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Total changes in operating
assets and liabilities (4,265) 1,041
------------ -----------
Net cash used in operating
activities (13,509) (4,683)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of short-term investments 14,350 145
Proceeds from sale of restricted investments 4,192 5,304
Purchase of property and equipment (3,128) (87)
Proceeds from sale of property and equipment - 837
Payment of deferred purchase obligations (2,034) -
------------ -----------
Net cash provided by investing
activities 13,380 6,199
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital
lease obligations (569) (1,497)
Proceeds from borrowings 179 866
Repayment of borrowings (2,570) (1,036)
------------ -----------
Net cash used in financing
activities (2,960) (1,667)
------------ ----------
Impact of foreign exchange rate changes (39) 156
------------ ----------
Net (decrease) increase in cash and
cash equivalents (3,128) 5
Cash and cash equivalents at beginning
of period 5,972 2,735
------------ ----------
Cash and cash equivalents at end of period E 2,844 E 2,740
============ ==========
The accompanying notes are an integral part of these financial statements.
5
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THREE MONTHS ENDED MARCH 31, 2002
1. Basis of Presentation
-----------------------
The accompanying interim period unaudited consolidated financial statements have
been prepared in accordance with United States generally accepted accounting
principles ("U.S. GAAP") and the rules and regulations of the U.S. Securities
and Exchange Commission relating to interim financial information. Accordingly,
they do not include all of the information required under U.S. GAAP for
financial statements for a full year. In the opinion of management, all
adjustments (consisting of normal recurring adjustments and accruals) considered
necessary for a fair presentation of the financial position and results of
operations of Cybernet Internet Services International, Inc. (the "Company") for
the periods presented have been included. Operating results for the three months
ending March 31, 2002 are not necessarily indicative of results to be expected
for the year ended December 31, 2002. For further information, refer to the
audited consolidated financial statements and notes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 2001.
2. Going Concern
--------------
The Company has incurred significant operating losses since inception, and has
not achieved and does not expect to achieve sufficient revenues to support
future operations without additional financing. The Company is currently in the
process of identifying alternative financing sources, negotiating changes to its
debt structure and evaluating its strategic options. However, there are no
assurances that these plans can be accomplished nor that they will provide
sufficient cash to fund the Company's operations in the future.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern and, accordingly, do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of these uncertainties.
3. Earnings Per Share
--------------------
The following table sets forth the computation of basic and diluted loss per
share:
AS AT MARCH 31,
-----------------------------
2001 2002
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(in thousands, except
per share data)
Numerator:
Net loss (for basic and diluted
loss per share) E (14,879) E (14,572)
Denominator:
Weighted average shares outstanding
(for basic and diluted loss per share) 25,845 26,445
Basic and diluted loss per share E (0.58) E (0.55)
6
The denominator for diluted loss per share excludes the convertible preferred
stock and stock options because the inclusion of these items would have an
anti-dilutive effect.
4. Segment Information
--------------------
The Company operates in one line of business, which is providing international
Internet backbone and access services and network business solutions for
corporate customers.
5. Comprehensive Loss
-------------------
Accumulated other comprehensive loss consists of unrealized gains or losses on
marketable securities and translation adjustments from consolidation. At March
31, 2001 and 2002, the components of accumulated other comprehensive loss were
as follows:
THREE MONTHS ENDED MARCH 31,
-----------------------------
2001 2002
-------- --------
(Euros in thousands)
Net loss E (14,879) E (14,572)
Net unrealized gains on short-term investments 148 6
Unrealized gains (losses) on foreign currency
translation adjustments, net of tax 37 (579)
--------- ---------
Comprehensive loss E (14,694) E (15,145)
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6. Subsequent Events
------------------
On April 16, 2002, the Company entered into a share purchase agreement with
Westwood Corporation wherein the Company sold all of the shares of Cybernet
Italia S.p.A. ("Italia") to Westwood in consideration for $10,000. The Company
will recognize a loss of approximately Euro 1.8 million in connection with this
sale transaction, primarily as a result of the forgiveness of a loan to Italia.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Cybernet Internet Services International, Inc. is an Internet service provider,
providing international Internet backbone and access services and network
business solutions for corporate customers. The following discussion and
analysis of the results of operations and financial condition of the Company for
the three months ended March 31, 2002 should be read in conjunction with the
consolidated financial statements and related notes included in this quarter
report, as well as the Company's annual report on Form 10-K for the year ended
December 31, 2001.
RESULTS OF OPERATIONS - Three Months Ended March 31, 2002
- ----------------------- --------------------------------------
Revenues
- --------
The following table sets forth selected sales data for the Company for the
periods indicated:
THREE MONTHS ENDED MARCH 31,
----------------------------------
2001 2002
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(Euros in thousands)
Revenue
Internet data center services E 2,661 E 2,709
Connectivity 6,715 6,484
E-business 504 115
--------- ----------
Total revenues 9,880 9,308
Total revenues decreased 5.8% from Euro 9.9 million in the three months ended
March 31, 2001 to Euro 9.3 million in the first quarter of 2002, primarily as a
result of decreased Connectivity and E-Business revenues. E-Business revenues
decreased 77.2% from Euro 0.5 million in the first quarter of 2001 to Euro 0.1
million for the same period in 2002 and Connectivity revenues decreased 3.4%
from Euro 6.7 million for the first quarter 2001 to Euro 6.5 million in the
first quarter of 2002. Internet data center service ('IDC") revenues increased
1.8% from Euro 2.7 million in the first quarter of 2001 to Euro 2.7 million in
the first quarter of 2002.
The decrease in E-Business revenues is primarily the result of the decision to
sell more pre-packaged solutions that require less customized installation.
These revenues are recorded as IDC revenues. The Company also was more
selective when taking on E-Business projects in order to apply limited human
resources to the projects most likely to generate long-term relationships and
recurring revenues. In addition, the economic environment in the period was
particularly difficult, and companies have been delaying projects and
investments. Connectivity revenues decreased principally due to a decrease in
the number of customers in the Company's Italian and Austrian subsidiaries as a
result of competitive conditions in those markets. Revenues from IDC services
increased principally due to higher prices being attained for these services.
Direct Cost of Services
- --------------------------
Direct cost of services decreased 17.5% from Euro 5.5 million in the first
quarter of 2001 to Euro 4.5 million in the first quarter of 2002. Direct cost
of services consists of: 1) telecommunications expenses which mainly represent
the cost of transporting Internet traffic from our customers' locations through
a local telecommunications carrier to one of our access nodes, transit and
peering
8
costs, and the cost of leasing lines to interconnect the Company's backbone
nodes, and 2) the cost of hardware and software sold. The Company mainly
utilizes leased lines for it's backbone network and to connect its network to
its major customers' premises. Direct cost of services as a percentage of
revenues decreased from 55.6% in the first quarter of 2001 to 48.7% in the first
quarter of 2002. The decrease reflects a continuous effort by the Company to
reorganize its network.
Network Operations
- -------------------
Network operations costs decreased 52.1% from Euro 2.1 million in the first
quarter of 2001 to Euro 1.0 million in the first quarter of 2002. Network
operations mainly consist of: 1) the personnel costs of technical and
operational staff and related overhead, 2) the rental of premises solely or
primarily used by technical staff, including premises used to generate
co-location services revenues, and 3) consulting expenses in the area of network
and software development. The decrease reflects a continuous effort by the
Company to reorganize its technical structure and implement synergies, leading
to a significant decrease in personnel related costs.
General and Administrative Expenses
- --------------------------------------
General and administrative expenses increased 62.1% from Euro 3.4 million in the
first quarter of 2001 to Euro 5.5 million in the first quarter of 2002. The
increase is mainly due to a significant reserve for bad debt relating to one of
the Company's main resellers in Germany, as well as the provision for litigation
and legal fees. However, the Company achieved synergies from integrating
subsidiaries and cost control measures instituted during the last 12 months,
leading to a significant decrease in personnel and personnel related costs.
General and administrative expenses consist principally of salaries and other
personnel costs for administrative staff, office rent, allowance for bad debts
and professional fees and costs. The Company's had 42 general and
administrative personnel on March 31, 2002 compared to 60 at March 31, 2001.
Sales and Marketing Expenses
- -------------------------------
Sales and marketing expenses decreased by 23.6% from Euro 2.7 million in the
first quarter of 2001 to Euro 1.9 million in the first quarter of 2002. This
decrease is mainly due to the Company reorganizing its global sales and
marketing organization. Sales and marketing expenses consist principally of
salaries of the Company's sales force and marketing personnel and advertising
and communication expenditures. The Company had 117 sales and marketing
personnel on March 31, 2002 compared to approximately 133 on March 31, 2001.
Research and Development
- --------------------------
Research and development expenses decreased from Euro 0.2 million in the first
quarter of 2001 to nil in the first quarter of 2002. Research and development
expenses consist principally of personnel costs of employees working on product
development, consulting costs and certain overhead items. Due to the
availability of products from partners and suppliers, no research and
development expenses were necessary in the current period.
The Company had no research and development staff on March 31, 2002, compared to
approximately 7 people at March 31, 2001.
9
Depreciation and Amortization
- -------------------------------
Depreciation and amortization expenses decreased 50.1% from Euro 5.0 million in
the first quarter of 2001 to Euro 2.5 million in the first quarter of 2002. This
decrease reflects the nearly complete write off at December 31, 2001 of goodwill
related to prior acquisitions.
Interest Income and Expense
- ------------------------------
Interest expense increased 18.3% from Euro 5.8 million in the first quarter of
2001 to Euro 6.8 million in the first quarter of 2002, as a result of an
increase in indebtedness and changes in the exchange rate between the U.S.
dollar and the Euro.
Interest income decreased 82.1% from Euro 0.6 million in the first quarter of
2001 to Euro 0.1 million in the first quarter of 2002, as a result of the
utilization of the proceeds from the issuance of debt securities.
In the first quarter of 2002, the Company incurred a net foreign exchange
translation loss of Euro 1.6 million compared with Euro 6.3 million in the first
quarter of 2001, primarily due to U.S. dollar denominated borrowings.
Income Taxes
- -------------
The Company recorded income tax benefits of nil in the first quarter of 2002
compared with Euro 1.6 million in the first quarter of 2001, as a result of a
valuation allowance provided for the deferred tax assets in 2001.
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------
Cash flow
- ----------
Operating activities used cash of Euro 4.7 million in the first three months of
2002 compared to Euro 13.5 million for the comparable period in 2001. This is
principally the result of reduced losses and decreased expenditure in all areas
of the Company.
For the first three months of 2002, investing activities generated cash of Euro
6.2 million compared to Euro 13.4 million for the comparable period in 2001.
Cash generated from investing activities represents the net proceeds from the
sale of short-term investments, partially offset by purchases of property and
equipment. Expenditures for property and equipment consisted principally of the
fit-out of points of presence and data facilities, purchases of computer
hardware and software and other expenditures related to the maintenance of the
Company's Internet backbone and equipment.
For the first three months of 2002, net cash used by financing activities was
Euro 1.7 million compared Euro 3.0 million in the same period in 2001,
primarily due to the early termination of one of the Company's main leasing
contracts in the current period.
10
Working Capital
- ----------------
On March 31, 2002, working capital, defined as the excess of our current assets
over current liabilities, was Euro (5.1) million as compared to Euro 1.6 million
at December 31, 2001.
Net accounts receivable as at March 31, 2002 was Euro 6.6 million compared to
Euro 8.9 million as at December 31, 2001. The Company has taken steps to
improve the timely collection of receivables.
Cash and cash equivalents amounted to Euro 2.7 million at March 31, 2002 and
December 31, 2001, respectively.
The Company had various short-term investments denominated in Euro totaling Euro
0.1 million at March 31, 2002. In addition, at March 31, 2002, the Company had
approximately Euro 5.3 million of restricted investments held in escrow. This
amount is invested in U.S. treasury securities.
Credit Arrangements
- --------------------
As of March 31, 2002, the Company was granted a short-term credit facility from
a Swiss Bank. The credit facility is secured by substantially all of the
Company's assets. Under the credit facility, the lender has agreed to make
available up to Euro 7.0 million, subject to various terms and conditions. The
amount drawn and outstanding as of March 31, 2002 was Euro 0.9 million. The
Company is currently dependent on the credit facility to continue operations.
There can be no assurance that the Company will receive further advances under
the credit facility or that the Company will have sufficient funds to continue
operations in the future. The Company may need to obtain additional financing in
the future and there can be no assurance that the Company will be successful in
obtaining such financing or on satisfactory terms.
Capital Expenditures
- ---------------------
For the three months ended March 31, 2002, capital expenditures totaled
approximately Euro 0.1 million. These capital expenditures were funded primarily
from financing activities. Investments in the first three months of 2002
included: (i) investments in data facilities and data center premises, and (ii)
investments in other equipment.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to the Company's annual report on Form 10-K for the year ended
December 31, 2001 for information concerning market risk. The Company is of the
opinion that there have been no material changes in market risk since December
31, 2001.
11
PART II. OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the Company's annual report on Form 10-K for the year ended
December 31, 2001 for information concerning legal proceedings.
The Company is subject to routine litigation incidental to its business. The
Company does not believe that the outcome of such litigation will have a
material adverse effect on its business or financial condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K in the three months
ended March 31, 2002:
Form 8-K dated January 30, 2002:
Item 2. Acquisition and Disposition of Assets
Item 7. Financial Statements and Exhibits
Form 8-K dated March 27, 2002:
Item 5. Other Events
Item 7. Financial Statements and Exhibits
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CYBERNET INTERNET SERVICES
INTERNATIONAL, INC.
By: /s/ Michael Smith
----------------------------
Michael Smith
President and Chief
Financial Officer