PETERSON SULLIVAN PLLC
601 UNION STREET SUITE 2300 SEATTLE WA 98101 (206) 382-7777 FAX
382-7700
CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITORS' REPORT
To the Shareholders
Cybernet Internet Services International, Inc.
We have audited the accompanying consolidated balance sheet of Cybernet Internet
Services International Inc. and its subsidiaries as of December 31, 2002, and
the related consolidated statements of operations, comprehensive loss, changes
in shareholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of Cybernet Internet Services International
Inc. and its subsidiaries as of December 31, 2001 and 2000, were audited by
other auditors whose report dated April 15, 2002, included an explanatory
paragraph that referred to conditions raising substantial doubt about the
Company's ability to continue as a going concern.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 audit provides 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 and
its subsidiaries as of December 31, 2002, and the consolidated results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As more fully described in
Note 1, the Company has incurred recurring operating losses and used significant
amounts of cash to operate the Company. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The accompanying
consolidated financial statements 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 this uncertainty.
[GRAPHIC OMITED]
[GRAPHIC OMITED]
Peterson Sullivan P.L.L.C.
March 13, 2003
Seattle, Washington
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
(In Thousands of Euros)
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
(In Thousands of Euros)
2002 2001
---- ----
ASSETS
Cash and cash equivalents E 22,976 E 2,735
Restricted cash 1,815 2,743
Receivables 5,355 11,980
Restricted investments - 10,567
Prepaid and other 419 1,670
Total current assets 30,565 29,695
Long-Term Assets
Properties 1,125 32,653
Investments in equity method investees - 2,770
Deferred debt issuance cost 3,653 6,048
Other - 806
---------- ---------
4,778 42,277
---------- ---------
E 35,343 E 71,972
========== =========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current Liabilities
Trade accounts payable E 3,078 E 13,325
Other accrued expenses 10,838 11,835
Capital lease obligations - 1,060
Accrued personnel costs 1,079 1,848
--------- ---------
Total current liabilities 14,995 28,068
Long-Term Liabilities
Long term debt 158,342 164,573
Capital lease obligations - 435
--------- ---------
158,342 165,008
--------- ---------
Total liabilities 173,337 193,076
SHAREHOLDERS' EQUITY
Preferred stock, US$0.001 par value; 50,000,000
shares authorized, none issued and outstanding
at December 31, 2002 and 2001, respectively - -
Common stock, US$0.001 par value; 50,000,000 shares
authorized, 26,445,663 shares issued and
outstanding at December 31, 2002 and 2001 25 25
Additional paid-in capital 127,718 127,718
Accumulated deficit (287,931) (249,473)
Accumulated other comprehensive income 22,194 626
--------- ---------
Total shareholders' deficiency (137,994) (121,104)
--------- ---------
E 35,343 E 71,972
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2002, 2001 and 2000
(In Thousands of Euros, Except Per Share Data)
2002 2001 2000
----- ----- -----
Revenues E 25,078 E 39,077 E 35,831
Costs and expenses
Direct cost of services 13,370 25,105 23,117
Network operations 5,784 7,861 8,426
General and administrative expenses 16,244 18,842 21,318
Sales and marketing expenses 5,295 10,186 13,428
Impairments 7,305 37,110 2,265
Depreciation and amortization 6,621 20,156 19,563
--------- --------- ---------
54,619 119,260 88,117
--------- --------- ---------
Loss from operations (29,541) (80,183) (52,286)
Other income (expense)
Interest expense (26,034) (25,728) (35,189)
Interest income 930 1,477 5,437
Gain on sale of assets and other 17,175 123 198
Foreign currency losses (597) (6,721) (3,670)
--------- --------- ---------
Loss before taxes, loss in equity
method investees and extraordinary
item (38,067) (111,032) (85,510)
Income tax benefit (expense) - (27,678) 6,976
--------- --------- ---------
Loss before loss in equity method
investees and extraordinary items (38,067) (138,710) (78,534)
Loss in equity method investees (391) (538) (168)
Loss before extraordinary item (38,458) (139,248) (78,702)
Extraordinary item, gain on
extinguishment of debt, net of tax - 4,608 17,754
--------- --------- ---------
Net loss E (38,458) E(134,640) E 60,948
========= ========= =========
Basic and diluted loss per share:
Loss per share before extraordinary
item E (1.45) E (5.36) E (3.38)
Extraordinary item - 0.18 0.76
--------- --------- ---------
Loss per share E (1.45) E (5.18) E 2.62
========= ========= =========
The accompanying notes are an integral part of these consolidated
Financial statements.
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the Years Ended December 31, 2002, 2001 and 2000
(In Thousands of Euros)
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the Years Ended December 31, 2002, 2001 and 2000
(In Thousands of Euros)
2002 2001 2000
----- ----- -----
Net loss E (38,458) E (134,640) E (60,948)
Other comprehensive income
Foreign currency translation
adjustment 21,511 90 (128)
Unrealized holding gains (losses)
arising during the period (61) (47) 579
Reclassification adjustment for
(gains) losses included in net loss 118 290 (46)
---------- ----------- ----------
57 243 533
Other comprehensive income 21,568 333 405
---------- ----------- ----------
Comprehensive loss E (16,890) E (134,307) E (60,543)
========== =========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2002, 2001 and 2000
(In Thousands of Euros)
ACCUMULATED OTHER
COMPREHENSIVE INCOME
--------------------
FOREIGN UNREALIZED
ADDITIONAL CURRENCY GAINS
PREFERRED STOCK COMMON STOCK PAID-IN ACCUMULATED TRANSLATION (LOSSES) ON SHAREHOLDERS'
--------------- ------------
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT SECURITIES EQUITY
------- ------- ------ ------ -------- ---------- ----------- ----------- -------------
Balance at December 31, 1999 4,793 E 5 20,970 E 20 E122,417 E(53,885) E 721 E (833) E 68,445
Issuance of shares for acquisitions - - 652 - 5,246 - - - 5,246
Conversion of preferred stock (4,193) (4) 4,193 4 - - - - -
Other issuances - - 30 - 55 - - - 55
Net loss - - - - - (60,948) - - (60,948)
Other comprehensive income (loss) - - - - - - (128) 533 405
------ ----- ------ ----- --------- --------- ----- ------ ---------
Balance at December 31, 2000 600 1 25,845 24 127,718 (114,833) 593 (300) 13,203
Conversion of preferred stock (600) (1) 600 1 - - - - -
Net loss - - - - - (134,640) - - (134,640)
Other comprehensive income - - - - - - 90 243 333
------ ----- ------ ----- -------- -------- ----- ------ ---------
Balance at December 31, 2001 - - 26,445 25 1 27,718 (249,473) 683 (57) (121,104)
Net loss - - - - - (38,458) - - (38,458)
Other comprehensive income - - - - - - 21,511 57 21,568
------ ----- ------ ----- -------- --------- ------- ------ ---------
Balance at December 31, 2002 - E - 26,445 E 25 E127,718 E(287,931) E22,194 E - E(137,994)
======= === ====== ===== ======== ========= ======= ====== ========
The accompanying notes are an integral part of these consolidated
financial statements.
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2002, 2001 and 2000
(In Thousands of Euros)
2002 2001 2000
----- ----- -----
Cash Flows from Operating Activities:
Net loss E(38,458) E(134,640) E(60,948)
Adjustments to reconcile net loss to net cash used in operations:
Deferred taxes - 27,657 (6,976)
Depreciation 6,621 8,365 8,125
Amortization - 11,791 11,438
Losses in equity method investees 391 538 168
Provision for losses on accounts receivable 1,807 5,514 1,305
(Gain) loss on sale of investments 118 290 (46)
Loss on disposal of leased assets 113 - 198
Amortization of bond discount 2,471 2,656 4,663
Accreted interest expense on long-term debt 13,364 11,861 13,484
Impairment 7,305 32,354 2,265
Loss (gain) on disposal of assets (18,345) 4,756 -
Loss on disposal of business 1,170 - -
Gain on extinguishment of debt - (4,608) (17,754)
Foreign currency transaction losses 131 7,786 6,427
Changes in operating assets and liabilities:
Restricted cash 928 49 (2,792)
Receivables 1,403 686 (5,338)
Prepaid and other (81) 500 (3,655)
Trade accounts payable (3,963) 1,726 (6,716)
Other accrued expenses 264 (1,058) (2,172)
Accrued personnel costs (127) (482) (351)
-------- --------- --------
Net cash used in operating activities (24,888) (24,259) (58,675)
Cash Flows from Investing Activities:
Purchase of short-term investments - - (35,924)
Proceeds from sale of short-term investments - 25,230 72,201
Proceeds from sales of property and equipment 37,336 - -
Proceeds from restricted investments 8,994 10,194 21,014
Product development costs - - (623)
Purchase of property and equipment (473) (5,905) (23,888)
Acquisition of businesses, net of cash acquired - - (2,037)
Sale of business, net of cash sold 541 - -
Acquisition of investments in equity method investees - (409) (1,000)
Payment of deferred purchase obligations - (2,078) -
-------- --------- --------
Net cash provided by investing activities 46,398 27,032 29,743
Cash Flows from Financing Activities:
Principal payments under capital lease obligations (1,495) (1,347) (2,140)
Proceeds from issuance of bonds and other borrowings - - 962
Repayment of borrowings - (3,722) (36,664)
-------- --------- --------
Net cash used in financing activities (1,495) (5,069) (37,842)
Effect of foreign exchange rate on cash and cash equivalents 226 (940) (134)
-------- --------- --------
Net increase (decrease) in cash and cash equivalents 20,241 (3,236) (66,908)
Cash and Cash Equivalents, beginning of year 2,735 5,971 72,879
-------- --------- --------
Cash and Cash Equivalents, end of year E 22,976 E 2,735 E 5,971
======== ========= ========
The accompanying notes are an integral part of these consolidated
financial statements.
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
For the Years Ended December 31, 2002, 2001 and 2000
(In Thousands of Euros)
2002 2001 2000
------ ------ ------
Noncash investing and financing transactions:
Transfer from restricted investments to
short-term investment due to removal of
restrictions E 10,567 E 2,339 E 20,374
======== ======= ========
Conversion of preferred stock into
common stock E - E 1 E 4
======== ======= ========
Acquisition of property and equipment
through capital lease obligations E - E 214 522
======== ======= =======
Other supplemental cash flow disclosures
Cash paid for interest E 10,970 E10,476 E 27,791
======== ======= ========
Cash paid for taxes E - E 109 E 149
======== ======= ========
The accompanying notes are an integral part of these consolidated
financial statements.
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The Company and Summary of Significant Accounting Policies
Cybernet Internet Services International, Inc. ("the Company") is a U.S.
corporation incorporated in Delaware. The amounts in the notes are rounded to
the nearest thousand except per share amounts.
Going Concern
- --------------
The Company, through its European subsidiaries, offered a variety of Internet
related telecommunication and systems integration services to corporate
customers located in Europe. However, the Company has incurred significant
losses from operations resulting in a shareholders' deficiency of (137,994) at
December 31, 2002. The Company does not expect to achieve sufficient revenues
to support future operations without additional financing. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. The Company is in the process of reviewing its strategic options
including seeking additional financing, restructuring its debt, sales of assets
and liquidation. However, there are no assurances that management's review of
these options will result in a plan which can be accomplished or will provide
sufficient cash to fund the Company's operations or satisfy its creditors in the
future. The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. Accordingly, these
consolidated financial statements 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 this uncertainty.
The Company sold subsidiaries and assets during 2002 to raise cash and reduce
operating losses. The Company sold two subsidiaries and the stock of an equity
method investee for cash of 1,128 resulting in a loss of (1,170) and also sold
assets for cash amounting to 37,336 resulting in a gain of 18,345. Subsequent
to December 31, 2002, the Company sold assets for cash amounting to 2,700
resulting in a gain of 2,415 and also sold three subsidiaries for cash of 10
resulting in a gain of 2.
Estimates
- ---------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
- ------
Principles of Consolidation
- -----------------------------
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries. Investments in entities where the Company owns
at least a 20% interest, but does not have control, are accounted for under the
equity method. Significant intercompany accounts and transactions have been
eliminated.
Reclassifications
- -----------------
Certain prior year amounts in the consolidated financial statements have been
reclassified to conform to the current year presentation.
Foreign Currency
- -----------------
The functional currency for the Company and its subsidiaries is the local
currency of the country in which the subsidiary is located. In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency
Translation," the assets and liabilities for the Company's international
subsidiaries are translated into the Euro using current exchange rates at the
balance sheet dates. Revenue and expenses are translated at average exchange
rates prevailing during the applicable period. The gains and losses resulting
from the changes in exchange rates from year to year are reported in accumulated
other comprehensive income. Foreign currency transaction gains or losses are
included in the calculation of net loss.
Cash and Cash Equivalents
- ----------------------------
Cash and cash equivalents include highly liquid investments with an original
maturity of three months or less. The Company maintains cash balances in
financial institutions in excess of insured limits.
Restricted Cash
- ----------------
Restricted cash consists of cash in bank for bank guarantees used to secure
miscellaneous obligations.
Goodwill and Other Intangible Assets
- ----------------------------------------
Prior to January 1, 2002, the Company had been amortizing goodwill and other
intangible assets to expense. Based on a new accounting standard, amortization
of goodwill and other intangible assets with indefinite lives are no longer to
be amortized beginning January 1, 2002. However, during 2001, management
determined, based on estimated future cash flows, that the remaining carrying
value of goodwill and other intangible assets should be written off. Therefore,
no amount for goodwill and other intangible assets are reflected in the December
31, 2002 and 2001, consolidated balance sheets.
- ------
Properties
- ----------
Depreciable properties are stated at cost unless the estimated undiscounted cash
flows that result from either the use of an asset or its eventual disposition
are less than its carrying amount. In that situation, an impairment loss is
recognized based on the fair value of the asset. Depreciation is based on the
estimated useful lives of the assets (four to ten years) and is computed using
the straight-line method. Repairs and maintenance are charged to expense
incurred.
Based on management's analyses, impairment losses on properties were recorded
during 2002, 2001 and 2000 in amounts of 5,629, 3,937 and 1,620,
respectively.
Revenue Recognition
- --------------------
The Company offers Internet telecommunication and system integration products,
data center services, network services and voice telephony products.
The Company recognizes revenue pursuant to Securities & Exchange Commission
("SEC") Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements." In accordance with SAB No. 101, revenue is recognized
when all four of the following criteria are met: (i) persuasive evidence that
arrangement exists; (ii) delivery of the products and/or services has occurred;
(iii) the selling price is both fixed and determinable; and, (iv) collectibility
is reasonably probable.
Revenues from Internet telecommunication and system integration products, which
includes equipment sales, are recognized upon completion of the related project
and receipt of customer acceptance. Revenues from ongoing network services,
voice telephony and data center services, including co-location, are recognized
when services are provided. All payments received in advance of providing
services are deferred until the period that such services are provided which
amounted to 1,162 and 594 at December 31, 2002 and 2001, respectively. These
amounts are included in other accrued liabilities on the consolidated balance
sheets.
The Company enters into multiple element arrangements, which may include any
combination of monthly network services, professional consulting services and/or
equipment sales. Each element of a multiple element arrangement is evaluated to
determine whether it represents a separate earnings process. If a multiple
element arrangement can be segmented, revenue is allocated among the multiple
elements based upon the fair value of the elements. If an undelivered element
is essential to the functionality of a delivered element, no revenue allocated
to the delivered element is recognized until that undelivered element is
delivered.
Direct Cost of Services
- --------------------------
Direct cost of services consists of 1) telecommunications expenses, which mainly
represent the cost of transporting Internet traffic from a customer's location
through a local telecommunications carrier to one of the Company's access nodes,
transit and peering 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 its backbone network, and to connect
its network to its major customers premises.
Network Operations
- -------------------
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 our
co-location services revenue, and 3) consulting expenses in the area of network
and software development.
General and Administrative Expenses
- --------------------------------------
General and administrative expenses consist principally of salaries and other
personnel costs for our administrative staff, office rent and maintenance of
office equipment.
Sales and Marketing Costs
- ----------------------------
Marketing costs include the costs of all personnel engaged in marketing
activities, the costs of advertising and public relations activities (e.g. trade
shows), and other related costs. Advertising costs are expensed as incurred.
Advertising expense was approximately 553, 1,706 and 3,095 in the years ended
December 31, 2002, 2001 and 2000, respectively.
Taxes on Income
- -----------------
The Company accounts for income taxes under an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for expected
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. In estimating future tax consequences, the
Company generally considers all expected future events other than enactments of
changes in the tax laws or rates.
Deferred Debt Issuance Costs
- -------------------------------
Deferred debt issuance costs are amortized to interest expense over the term of
the related debt. Any remaining balance will be charged to expense if the debt
is retired early.
Stock-Based Compensation
- -------------------------
The Company has a stock-based employee compensation plan, which is described
more fully in Note 9. The Company accounts for the plan under the recognition
and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under the
plan had an exercise price equal to or greater than the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net income and earnings per share if the Company had applied the
fair value recognition provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," to stock-based employee
compensation.
2002 2001 2000
-------- -------- --------
Reported loss before extraordinary item E (38,458) E (139,248) E (78,072)
Deduct: Total stock-based employee
compensation expense determined under
fair value based methods for all awards,
net of any related tax effects (2,848) (3,251) (3,654)
--------- ---------- ---------
Proforma loss before extraordinary item (41,306) (142,499) (81,726)
Extraordinary item - 4,608 17,754
--------- ---------- ---------
Proforma net loss E (41,306) E (137,891) E (63,972)
========= ========== =========
Basic and diluted loss per share
As reported before extraordinary item E (1.45) E (5.36) E (3.38)
Extraordinary item - .18 .76
--------- ---------- ---------
As reported E (1.45) E (5.18) E (2.62)
========= ========== =========
Proforma before extraordinary item E (1.56) E (5.48) E (3.51)
Extraordinary item - .18 .76
--------- ---------- ---------
Proforma E (1.56) E (5.30) E (2.75)
========= ========== =========
Earnings Per Share
- --------------------
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding in the
period. Diluted earnings per share takes into consideration common shares
outstanding (computed under basic earnings per share) and potentially dilutive
common shares.
Segment Reporting
- ------------------
The Company operates primarily in one business segment, which is providing
international Internet backbone and access services and related communication
services for corporate customers. The Company's operations are in Europe and
present management does not find it useful to segment operations any further.
Therefore, no country segment data is provided in these consolidated financial
statements.
New Accounting Standards
- --------------------------
Statements of Financial Accounting Standards No. ("SFAS") 145 and 146 are
generally modifications to previously adopted standards. A part of SFAS 145 is
effective for years beginning after May 15, 2002, and SFAS 146 is effective for
years beginning after December 31, 2002. These new standards do not have an
effect on the Company's consolidated financial statements.
Note 2. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill during 2001 and 2000 are
summarized below:
2001 2000
-------- -------
Balance, beginning of year E 26,054 E 26,120
Acquired 354 6,968
Amortization expense (4,386) (7,034)
Impairment losses (22,022) -
-------- --------
Balance, end of year E - E 26,054
======== ========
The Company did not acquire any goodwill or other intangible assets during 2002.
Other intangible assets consist of customer lists and management contracts and
are summarized below:
2002 2001 2000
---- ----- ------
Gross carrying amount . . . E - E - E 17,392
Accumulated amortization. . - - 7,991
Amortization for the period - 3,006 4,142
Impairment recognized . . . - 6,395 -
In addition, impairments of other assets of 1,676, 4,756, and 645 were
recorded for the years ended December 31, 2002, 2001 and 2000, respectively.
The transitional disclosures required under Statement of Financial Accounting
Standards No. 142 with respect to goodwill and other intangible assets are as
follows:
Year Ended December 31
-------------------------------------
2002 2001 2000
-------- -------- ---------
Reported loss before extraordinary item E (38,458) E (139,248) E (78,702)
Add back amortization
Goodwill - 4,386 7,034
Other intangible assets - 3,006 4,142
---------- ---------- ---------
Adjusted loss before extraordinary item (38,458) (131,856) (67,526)
Extraordinary item - 4,608 17,754
---------- ---------- ---------
Adjusted net loss E (38,458) E (127,248) E (49,772)
========= ========== =========
Basic and diluted loss per share
Reported loss before extraordinary item E (1.45) E (5.36) E (3.38)
Amortization
Goodwill - .17 .30
Other intangible assets - .12 .18
Extraordinary item - .18 .76
--------- ---------- ---------
Adjusted net loss per share E (1.45) E (4.89) E (2.14)
========= ========== =========
Note 3. Restricted Investments
Restricted investments were required as part of the Company's debt financing.
These investments were classified as available-for-sale securities at December
31, 2001, and consisted of U.S. Treasury Notes which matured in 2002. There
were no available-for-sale securities at December 31, 2002. Proceeds from the
sales of available-for-sale securities amounted to 8,994, 10,194 and 21,014
during 2002, 2001 and 2000, respectively. Realized gains (losses) on the sales
of these securities were (118), (290) and 46 in 2002, 2001 and 2000,
respectively. The cost of these securities was 9,112 and 20,395 at December
31, 2001 and 2000, respectively, which resulted in unrealized losses of 57 and
300 being recorded in accumulated comprehensive income at December 31, 2001 and
2000, respectively. Cost is based on the specific identification method to
determine realized gains or losses.
Note 4. Receivables
December 31
----------------------
2002 2001
-------- --------
Trade accounts receivable E 7,956 E 14,717
Receivables from affiliates - 356
Other 1,534 2,721
------- --------
9,490 17,794
Less allowance for doubtful accounts (4,135) (5,814)
------- --------
E 5,355 E 11,980
======= ========
Receivables are stated at their outstanding principal balances. Management
reviews the collectibility of receivables on a periodic basis and determines the
appropriate amount of any allowance. Based on this review procedure, management
has determined that the allowances were adequate at December 31, 2002 and 2001.
The Company charges off receivables to any allowance when management determines
that a receivable is not collectible. The Company does not generally require
collateral for any of its receivables.
Note 5. Properties
December 31
--------------------
2002 2001
-------- --------
Computer equipment and software E 4,383 E 23,846
Leasehold improvements 4,349 24,607
Furniture and fixtures 587 2,753
-------- --------
9,319 51,206
Less accumulated depreciation and amortization (8,194) (18,553)
-------- --------
E 1,125 E 32,653
======== ========
NOTE 6. DEBT
December 31
--------------------
2002 2001
-------- --------
Senior Dollar Notes, interest at 14% due January 1
and July 1 until maturity on July 1, 2009,
originally issued in US $1,000 principal units
including one warrant to purchase approximately
30 common shares of the Company's stock at an
exercise price of US$22.278 per share exercisable
until July 1, 2009 resulting in E45,405 being
allocated to additional paid-in capital and a
discount applied to the original principal amount
of debt of which E14,918 and E20,104 remained at
December 31, 2002 and 2001, respectively; E2,481,
E2,677 and E6,498 was charged as interest expense
resulting from the amortization of the discount
during 2002, 2001 and 2000, respectively; at
December 31, 2002,4,535 shares of the Company's
Common stock have been reserved as a result of the
Warrants E 49,697 E 55,672
Convertible Senior Euro Subordinated Payment-
in-Kind Notes, interest at 13% payable in the
form of secondary payment-in-kind notes on
February 15 and August 15 each year until August
15, 2004, when beginning with the February 15
semi-annual interest due date, current interest
is payable in cash until maturity on August 15,
2009, these notes are convertible at any time
prior to maturity at the rate of one share
of the Company's common stock for each E25
in outstanding note balance at the option of
the creditor, at December 31, 2002, 1,439 of
the Company's common stock have been reserved
in connection with these notes 35,969 32,619
Convertible Senior Dollar Subordinated Discount
Notes, 13% interest due semi-annually beginning
February 15, 2004, until maturity on August 15,
2009, convertible prior to maturity at the rate
of one share of the Company's common stock for
each US $25 of accreted value, as defined, of
the notes being converted 72,676 76,282
--------- ---------
E 158,342 E 164,573
========= =========
During 2001 and 2000, the Company extinguished Senior Dollar Notes in the
carrying amount of 7,933 and 51,591 for cash of 3,325 and 33,837 resulting
in extraordinary gains. None of the warrants associated were acquired in the
extinguishments.
Note 7. Income Taxes
The provision for income taxes (benefit) for years ended December 31 consists of
the following:
2002 2001 2000
------ ------ ------
Provision for income taxes
Current E - E 21 E 3
Deferred - 27,657 (6,979)
------ ------- -------
- 27,678 (6,976)
====== ======= =======
Differences between the U.S. Federal Statutory and the Company's effective
income tax rate for years ended December 31 are as follows:
2002 2001 2000
------ ------ ------
U.S. Federal statutory rate on loss
from operations E (13,460) E (20,228) E (20,926)
Tax differential on foreign losses 360 (3,191) 3,214
Valuation allowance 13,100 51,209 2,265
Other (112) 8,471
--------- --------- ---------
E - E 27,678 E (6,976)
========= ========= =========
Deferred income tax assets are composed of the following:
December 31
2002 2001
------ ------
Tax loss carryforwards:
U.S. E 35,564 E 22,439
Germany 39,891 40,176
Other 3,314 3,054
-------- --------
78,769 65,669
Valuation allowance (78,769) (65,669)
-------- --------
Net deferred income tax asset E - E -
======== ========
The tax loss carryforwards are subject to audit by the applicable tax
authorities which may result in changes to the amounts above. Since the Company
has incurred significant losses and does not expect to generate taxable income
in the near future, a valuation reserve for all of the deferred income tax
assets has been deemed appropriate by management.
Losses from foreign source operations amounted to E(4,733), E(41,718) and
E(35,077) for 2002, 2001 and 2000, respectively.
The Company has U.S. total estimated net operating loss carryforward amounting
to 101,612 at December 31, 2002, which, if not utilized, will expire in years
ended 2022. Other tax loss amounts approximate 97,628 at December 31, 2002,
result primarily from operations in Germany which may be carried forward
indefinitely under current tax law.
Note 8. Shareholders' Equity
The Company is authorized to issue 50,000,000 shares of Preferred Stock with
relative rights, preferences and limitations determined at the time of issuance.
As of December 31, 2002, the Company has no issued and outstanding Series A and
B and C Preferred Stock. All of the Company's previously issued Preferred Stock
was converted to Common Stock.
Series A Preferred Stock entitles the holder to receive dividends at a rate
equal to US $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.
Dividends on the Series A Preferred Stock are to be paid for each fiscal year
within five months of the end of each fiscal year, subject to the availability
of surplus or net profits. The dividends on the Series A Preferred Stock are
not cumulative. 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, 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
provided that all and not less than all of the shares of Series A Preferred
Stock are so redeemed.
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 US $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 holder of any 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.
The Series B Preferred Stock entitles the holder to receive dividends at a rate
equal to US $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. Dividends
on Series B Preferred Stock are to be paid for each fiscal year within five
months of the end of each fiscal year, subject to the availability of surplus or
net profits. The dividends on the Series B Preferred Stock are not 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 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 into one share of the Common Stock of the Company
provided, however, 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 US $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.
Note 9. Stock Based Compensation
In 1998, the Company adopted a stock incentive plan that provides for the grant
of stock options to purchase shares of the Company's common stock to employees
and members of the Board of Directors. The Company has reserved 5,000,000
shares of common stock for issuances under the plan. The following table
presents the changes in the stock options during the year.
Weighted Average
Exercise Price
Stock Options (In US Dollars)
---------------------- ----------------
Outstanding at December 31, 1999 2,194,015 $ 16.10
Granted 2,307,700 7.25
Cancelled 1,068,550 15.94
Forfeited 1,082,533 15.78
-----------
Outstanding at December 31, 2000 2,350,632 9.68
Granted 1,666,450 1.54
Forfeited 1,258,616 10.04
-----------
Outstanding at December 31, 2001 2,758,466 4.60
Forfeited 2,456,541 4.36
-----------
Outstanding at December 31, 2002 301,925 6.54
===========
Since plan inception through December 31, 2002, no options have been exercised
and none have expired. The weighted-average remaining contractual life of
options outstanding at December 31, 2002, was 7.30 years with a contractual life
of 10 years.
As of December 31, 2002, 2001 and 2000, the Company had 249,225, 1,079,049 and
568,869 options exercisable, respectively. The weighted-average exercise price
of options exercisable as of December 31, 2002, is US $7.28. Options vest over
a period of three years from the date of grant and become exercisable upon
vesting. The Company has not recognized any compensation expense related to
stock options in 2002, 2001 or 2000.
The following table presents information about options outstanding as of
December 31, 2002.
Weighted Weighted Weighted
Average Average Average
Exercise Remaining Exercise
Number of Price Contractual Number of Price
Exercise Price Options (In US Life Options (In US
Range Outstanding Dollars) (In Years) Exercisable Dollars)
- --------------- ----------- -------- ---------- ----------- ---------
0.41 - 1.89 51,850 $ 1.44 8.23 17,117 $ 1.45
3.06 - 6.65 103,800 4.94 7.27 87,133 4.79
8.19 - 14.36 143,775 9.14 7.01 142,475 9.12
20.30 - 35.43 2,500 29.63 6.00 2,500 29.63
-------- --------
301,925 249,225
======== ========
The fair value of each option granted is estimated at the date of grant using
the Black-Scholes option-pricing model. The assumptions used in calculating the
fair value of the options granted were as follows:
2002 2001 2000
-------- -------- --------
Risk-free interest rate 3.5% 4.61% 5.5%
Stock price volatility factor 4.498 1.242 0.859
Expected life of the options. 5 years 5 years 5 years
Dividend yield 0.0% 0.0% 0.0%
During 2000, the Company offered plan participants the opportunity to exchange
stock options previously granted for new options at the current stock price.
Approximately 1.07 million new options with an exercise price of US $9.02, the
fair market value of the stock on the date of the exchange, were exchanged for
previously issued options. This exchange is considered a re-pricing and changes
the status of these options to variable options. These options are accounted
for as variable from July 1, 2000, until the options are exercised, forfeited or
expire unexercised. However, because the market price of the Company's stock
decreased since July 1, 2000, the effect has had no impact on net loss. But,
any future increases in the market price of the stock, above the exercise price
of the options, will result in recognition of stock-based compensation expense
in future reporting periods.
Note 10. Earnings Per Share
Earnings per share data for year ended December 31 is summarized as follows:
Net Income (Loss)
--------------------------------
2002 2001 2000
------ ------ ------
Loss available to common
shareholders before
extraordinary item E (38,458) E (139,248) E (78,702)
Extraordinary item - 4,608 17,754
--------- ---------- ---------
Net loss E (38,458) E (134,640) E (60,948)
========= ========== =========
Weighted average number of shares
outstanding - basic and diluted 26,445 25,996 23,266
========= ========== =========
Warrants and options were not included in the computation of diluted earnings
per share because they were anti-dilutive in each year.
Note 11. Transactions with Related Parties
The Company paid E242, E435 and E209 to a law firm for legal services where a
former member of the board of directors is a partner in the years ended December
31, 2002, 2001 and 2000, respectively.
The Company granted interest free loans totaling E356 to three former Italian
management employees. The loans were due on December 31, 2000, and are
denominated in Italian Lire. No payments have been made on the loans to date.
Following the sale of stock of the subsidiary in 2002, the Company no longer has
a receivable due from the former Italian management employees.
During 2002, MFC Merchant Bank S.A., an affiliate of MFC Bancorp Ltd. ("MFC"),
provided a revolving senior secured credit line to the Company of up to E7,000.
At December 31, 2002, the Company had no balance outstanding on this line which
bears interest at 14%, is due on March 12, 2003, and is secured by the Company's
ownership in its subsidiaries. Interest expense of E177 was incurred and paid
on the borrowing in 2002. The Company engaged MFC to provide strategic advisory
and restructuring services. Beginning April 2002, the Company agreed to pay to
MFC US $175 per month payable in advance. Additionally, pursuant to such
agreement, the Company agreed to pay MFC a fee on the completion of a successful
debt restructuring and on other specified transactions. The success fee is
computed based on specified percentages received by the Company from: asset
sales, security issuances and debt restructurings with a cap on total fees
payable to MFC of US $5,500. An expense of E2,289 was recorded under this
agreement in 2002. MFC is a related party because it maintains certain voting
rights with respect to approximately 26% of the Company's outstanding common
shares on behalf of two shareholders and an officer and director of MFC is also
an officer and director of the Company.
NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments at December 31 is summarized below:
2002 2001
=================== ===================
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- ------ --------- ------
Cash and cash equivalents E 22,976 E 22,976 E 2,735 E 2,735
Restricted cash 1,815 1,815 2,743 2,743
Other receivables 1,534 1,534 3,077 3,077
Capital lease obligations - - 1,495 1,495
The fair value of cash and cash equivalents is based on reported market value.
The fair value of restricted cash is equal to its carrying amount because it is
in an account which bears a market rate of interest. The fair value of other
receivables approximates carrying value due to the short-term maturity of the
receivables. The fair value of capital lease obligations, which approximates
carrying value, was estimated using discounted cash flow analyses based on the
Company's incremental borrowing rates for similar types of borrowings.
At December 31, 2002, no quoted market exists for the Company's long-term debt.
Also, based on the Company's current financial position, management believes a
discounted cash flow valuation is not appropriate. Therefore, no fair value
information is presented for the Company's long-term debt at either December 31,
2002, or 2001.
Note 13. Commitments and Contingencies
The Company is subject to pending and threatened legal actions that arise in the
normal course of business. In the opinion of management, no such actions are
known to have a material adverse impact on the financial position of the
Company.
The Company has no lease commitments beyond December 31, 2002. Rental expense
was E4,280, E3,504 and E12,171 for 2002, 2001 and 2000, respectively.
The Company is economically dependent on the entities from which it leases their
telecommunication lines comprising its network. It is probable that failure of
these entities to honor their lease obligations or to renew leases under
economically viable conditions would have a negative near-term impact on any
Company growth and results of operations.