<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 25, 1998
REGISTRATION NO. 333-63755
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------------
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 7375 51-0384117
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
(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
49-89-9931-5105
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
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<S> <C> <C>
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, N.W. 80538 MUNICH, GERMANY 10711 BERLIN, GERMANY
WASHINGTON, D.C. 20004 49-89-219-9920 49-308-902-1300
202-624-7235
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
---------------------------
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: [ ]
---------------------------
CALCULATION OF REGISTRATION FEE
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<CAPTION>
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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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<S> <C> <C> <C> <C>
Common Stock (par
value $.001 per
share)............... 1,500,000 shares $27 $30,000,000 $20,650(2)
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</TABLE>
(1) Estimated solely for the purpose of calculating the amount of the
registration fee.
(2) Paid to the Commission on September 18, 1998. The registration statement
originally contemplated sale of 3,500,000 shares.
---------------------------
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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<PAGE> 2
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CROSS-REFERENCE SHEET
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<S> <C> <C>
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
</TABLE>
<PAGE> 3
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.
1,500,000 SHARES OF COMMON STOCK
------------------------------
This Prospectus relates to the offering (the "Offering") of 1,500,000
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 to
non-U.S. persons 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 November 23, 1998, the last
reported sale price of the Common Stock on the Bulletin Board was $30.00 per
share. The Common Stock is also traded on the Freiverkehr of the Berlin and
Munich Stock Exchanges under the security number WP-Kenn-Nr. 906 623. On
November 23, 1998, the last reported sale of the Common Stock on the Berlin
Stock Exchange was $28.46 per share and $28.40 per share on the Munich Stock
Exchange (assuming an exchange rate of 1.75 Deutsche Marks for each $1.00)--see
page 5, footnote 1. It is anticipated that application will be made to include
the Common Stock for listing on the Neue Markt of the Frankfurt Stock Exchange,
and that closing of the Offering will take place when the prerequisites for
listing have been met.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS"--PAGE 7.
------------------------------
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.
<TABLE>
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==============================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT(1) COMPANY(2)(3)(4)
<S> <C> <C> <C>
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Per Share............................... $ $ $
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Total................................... $ $ $
==============================================================================================
</TABLE>
(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 Berliner Effektenbank AG, Berlin (the
"Underwriter") as agent for the Company, on a "best efforts, all or none"
basis, for a period of 45 days (which period may be extended for an
additional 30 days by mutual agreement of the Company and the Underwriter)
(the "Offering Period") 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 for the subscribers
of the Shares. If no closing takes place during the Offering Period, then
all funds promptly will be returned to the subscribers thereof without any
deduction therefrom but with interest earned thereon. During the Offering
Period subscribers have no right to the return of their subscription. In the
event that the Offering is oversubscribed, completed subscriptions will be
accepted on a first come, first served basis.
(4) The Company and the Underwriter have agreed that in the event of
oversubscriptions, up to an additional 300,000 Shares may be sold during the
Offering Period at the price set forth in this Prospectus.
-----------------------------------
The Common Stock is being offered by 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. It is anticipated that the price will be in the
range of $23-$27 per share. The initial Price to the Public will not be higher
than the last sale price reported on the Berlin Stock 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. The shares of Common
Stock offered hereby will be delivered in book-entry form through the facilities
of Deutsche Borse Clearing AG, at the closing of the Offering.
BERLINER EFFEKTENBANK AG, BERLIN
The date of this Prospectus is , 1998
<PAGE> 4
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
AVAILABLE INFORMATION
Prior to the Offering, the Company was not subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Subsequent to the Offering, the Company will register its common stock
under the Exchange Act and will become subject to such requirements and, in
accordance therewith, will be required to file reports and other information
with the Commission. Reports and other information filed with the Commission,
including copies of the Registration Statement, may be inspected without charge
and copied at prescribed rates at the public reference facilities maintained by
the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the Regional Offices of the Commission located at Suite 1400, Citicorp
Center, 500 West Madison Street, Chicago, Illinois 60661-2551 and Room 1300, 7
World Trade Center, New York, New York 10048. Copies of such material at
prescribed rates will also be available by mail from the Public Reference Branch
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. In
addition, 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 as indicated above.
EXPLANATORY NOTE
This registration statement contains two forms of prospectuses: one to be
used in connection with sales of the Company's securities in Germany and certain
other foreign countries (the "International Prospectus"), and one to be used to
comply with post-offering prospectus delivery requirements relating to resales
of the Company's securities into the United States as well as for sales of the
Company's securities in certain foreign countries (the "U.S. Prospectus"). The
International Prospectus, on the basis of which the Common Stock will be
admitted to trading on the Neue Markt of the Frankfurt Stock Exchange, contains,
in addition to the U.S. Prospectus, an alternate outside front cover, a German
offering, the alternate pages, Part II of the Registration
Statement -- Information Not Required in this Prospectus, and a Statement to the
effect that the Common Stock has been admitted to trading on the Neue
Markt -- the German Admission Clause.
3
<PAGE> 5
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. The Company currently provides services to
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.
The Company has grown through internal growth and 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; and Open:Net Internet Solutions GmbH
("Open:Net"), a wholly-owned ISP in southwest Germany. Concurrent with the
closing of the Offering, the Company will acquire 100% of Vianet EDV
Dienstleistungs GmbH ("Vianet") an Austrian ISP. The proceeds of the Offering
will be used in part to pay the cash portion of the purchase price for Vianet
and to pay the final cash amount due for the Open:Net acquisition.
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"). At the time that it acquired Cybernet AG,
Cybernet Utah had no material business activities, assets or liabilities.
Effective November 18, 1998, Cybernet Utah was merged into the Company, and the
Company is 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.
4
<PAGE> 6
THE OFFERING
Common Stock offered................ 1,500,000 shares
Common Stock to be outstanding after
the Offering........................ 18,462,138 shares (does not include
300,000 shares to be issued in
connection with the Vianet Acquisition)
Use of proceeds..................... The Company will utilize approximately
$7.3 million of the net proceeds of the
Offering to make acquisitions. Of this
amount, $4.3 million will be used to
pay the cash portion of the purchase
price of the Vianet Acquisition,
$585,750 will be used to make the
remaining cash payment required for the
Open:Net acquisition(1), and the
remainder will be used for additional
acquisitions. The Company will utilize
the balance: 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
(i.e. the over-the-counter markets), 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.
See -- The German Equity Market.
- ---------------
(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".
5
<PAGE> 7
SUMMARY FINANCIAL INFORMATION
SUMMARY HISTORICAL AND PRO FORMA SELECTED CONSOLIDATED FINANCIAL STATEMENT DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- ---------------------------
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 $ 699 $ 3,118 $ 3,579
Network Services.................... 91 716 3,441 285 2,260 4,905
----- ------ ------- ----- ------- -------
Total revenue.................. 308 2,314 7,467 984 5,378 8,484
Gross profit (loss)...................... (55) (180) 2,001 (297) 192 1,502
Net loss................................. (284) (984) (2,065) (568) (2,779) (3,647)
Basic and diluted loss per share......... $(.12) $ (.12) $ (.21) $(.10) $ (.18) $ (.21)
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-------------------
PRO
ACTUAL FORMA(3)
-------- --------
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BALANCE SHEET DATA:
Working capital (deficiency)................................ $ 2,567 $(2,197)
Total assets................................................ 33,247 38,891
Long-term debt (including capital lease obligations)........ 1,134 1,134
Shareholders' equity........................................ 21,057 21,057
</TABLE>
- ---------------
(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"), and (ii) the pending acquisition of Vianet and the
acquisition of Open:Net (the "1998 Acquisitions"). See "Use of Proceeds" and
the Pro Forma Consolidated Financial Statements and related notes included
elsewhere in this Prospectus.
(2) Gives effect to the 1998 Acquisitions as if they had occurred on January 1,
1998.
(3) Gives effect to the Vianet acquisition as if it had occurred on September
30, 1998.
6
<PAGE> 8
RISK FACTORS
Before purchasing shares of Common Stock offered hereby, a prospective
investor should consider, among other things, the following factors:
Future Acquisitions. The Company anticipates utilizing approximately $7.3
million of the estimated $34.5 million net proceeds of the Offering (assuming a
$25 per share offering price) for acquisitions. Of this amount, $4.3 million
will be used to pay the cash portion of the purchase price for Vianet and
$585,750 will be used to pay the final cash amount due for the Open:Net
acquisition. See "Use of Proceeds". The Company has no formal commitments to
acquire additional businesses. Accordingly, the Company will have to rely on
management to select future acquisition candidates. There can be no assurance
that suitable acquisition candidates can be identified or that such acquisitions
will be made successfully. In order to make future acquisitions, the Company may
be required to incur significant debt or to issue additional shares of stock,
thereby diluting existing shareholders. See "Risk Factors -- Discretionary
Authority Over Use of Net Proceeds; No Specified Use of Proceeds -- Risks
Associated with Business Expansion; Uncertainty of Acceptance of Services."
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. Moreover, even
if the Company determines to pay cash dividends to the holders of Common Stock
it must first pay accrued dividends to the holders of the Series A and Series B
Preferred Stock before paying dividends on the Common Stock. 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") (Article Tenth, Limitation
of Liability), 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 (Article Twelfth, Indemnification).
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, with
interest earned thereon and without 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.) Any such return of
subscription will be made within seven days after termination of the Offering
Period. During the Offering (or any extension thereof), subscribers will have no
right to the return of their subscriptions. See "Underwriting".
New Underwriter. The Underwriter is not registered with the Commission as
a broker-dealer under the Securities Exchange Act of 1934 ("Exchange Act"). It
was organized in October 1997 and has not underwritten any firm commitment
offerings. It has completed 5 offerings, on a best effort (all or none) basis.
The above factor may adversely affect the liquidity of the Shares. The
Underwriter has completed all of the offerings it has undertaken.
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. Since its
inception, the Company has not generated positive cash flow from operations.
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 nine months ended September 30, 1998, the
Company reported a net loss of $2,779,090. 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
7
<PAGE> 9
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 the acquisition of Open:Net 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. 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 program, as well
as product development, marketing, sales and customer support capabilities over
the longer term, the Company is relying upon the proceeds of the Offering. There
can be no assurance that such proceeds will be adequate and the Company may
require substantial funds in addition to the proceeds of the sale of Common
Stock offered hereby. To a significant extent, future acquisitions will, depend
upon the Company's ability to acquire other businesses for stock or other
securities of the Company, to obtain outside sources of financing, or to make
future offerings of securities. 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
8
<PAGE> 10
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
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 realize savings in operating
costs and 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. In addition, expansion and adaptation of the Company's network
infrastructure, which are intended to realize cost savings, may not result in
realization of the expected cost savings or such cost savings may be delayed,
adversely affecting profits.
Entry by the Company into a new telecommunications market, such as
telephone service, may place the Company in direct competition with the
providers of telecommunications services to the Company such as
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Deutsche Telecom AG ("DT"), 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.
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. Redundant systems duplicate the functions of other
systems and can be immediately deployed in case of a failure by the primary
system. Such redundancies are designed to eliminate the possibility of an
interruption in customer service and are maintained by the Company even where
the primary systems are highly reliable in order to meet customer expectations
of uninterrupted service. The Company's redundant systems include telephone
lines which carry the most significant portions of the Company's traffic, its
routers and its servers. Mission critical systems are designed to prevent loss
of a system on a permanent basis. An example of such a system includes back-up
data bases which are created and maintained by the Company. 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.
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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 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.
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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 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 DT, 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
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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 6,360,000 shares
were issued and outstanding at September 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 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 $22.17 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 has evaluated 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 substantially all of its Information Technology systems
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are Year 2000 compliant. 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 has
contacted suppliers, vendors and customers to determine whether existing systems
upon which the Company relies for products and services are Year 2000 compliant.
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 secondary
suppliers are Year 2000 compliant. These include lessors of leased telephone
lines, suppliers of local 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 and is not material. The Company does not presently
anticipate utilizing outside consultants and while the Company does not
anticipate it, it cannot predict with certainty whether Year 2000 compliance
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 $2.3 million of the net proceeds
to finance future acquisitions. The Company expects to use the remaining net
proceeds for the purchase or lease 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".
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
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<PAGE> 16
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.
All of the Company's directors, executive officers and certain of its
shareholders 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 first day
of trading on the Neue Markt of the Frankfurt Stock Exchange.
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".
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
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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.
Service of Process and Enforcement of Civil Liabilities. The Company is a
domestic Delaware corporation maintaining a registered agent in such state, and
may receive service of process at the address of the registered agent. However,
most of the Company's assets are located outside the United States. All of the
officers and most of the directors of the Company are non-residents of the
United States and all or a substantial portion of the assets of such persons are
located outside the United States. As a result, it may not be possible for
investors to effect service of process in the United States upon such
non-resident officers and directors or to enforce in the U.S. courts judgments
obtained against the Company or such persons in jurisdictions outside the United
States. This applies to any action, including actions predicated upon the civil
liability provisions of the federal securities laws in the United States. In
addition, awards of punitive damages in actions brought in the United States or
elsewhere may be unenforceable in Germany.
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 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.
16
<PAGE> 18
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 37.5% 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".
17
<PAGE> 19
NEW UNDERWRITER
The Underwriter is not a broker-dealer registered with the Commission
pursuant to the Exchange Act. It was organized in October 1997 and has completed
5 prior offerings, all of which were on a best efforts (all or none) basis. The
Underwriter has successfully placed all of the securities offered in each of the
prior offerings it has undertaken to do on a best efforts (all or none) basis.
The Underwriter is 40% owned by Berliner Freiverkehr AG, a publicly held
financial institution in which Holger Timm is a controlling shareholder. Holger
Timm is also a Director and a substantial shareholder of the Company.
Accordingly, a conflict of interest may exist. The Company does not anticipate
retaining an additional underwriter to separately assess the value of the
Company or the Shares.
USE OF PROCEEDS
The net proceeds to the Company from the sale of 1,500,000 shares of Common
Stock offered by the Company hereby (assuming a $25 per share offering price)
are estimated to be approximately $34.5 million after deducting the underwriting
discount and estimated Offering expenses payable by the Company.
The Company anticipates utilizing approximately $7.3 million for
acquisitions, including the cash payments of $4.3 million for the Vianet
Acquisition and $585,750 for the Open:Net acquisition; $9.3 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
$14.1 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.
Moreover, even if the Company determines to pay cash dividends to the holders of
Common Stock it must first pay accrued dividends to the holders of the Series A
and Series B Preferred Stock before paying dividends on the Common Stock.
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 906 623. The closing sale price of the Common Stock on a recent
date as reported on the Bulletin Board and these Exchanges is set forth on the
18
<PAGE> 20
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.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1998
Fourth Quarter (through October 30, 1998).............. $20.88 $13
Third Quarter.......................................... $29.875 $18
Second Quarter......................................... $28.75 $20
First Quarter.......................................... $34.5 $11.5
</TABLE>
<TABLE>
<S> <C> <C>
1997
Fourth Quarter......................................... $16.25 $7.75
Third Quarter.......................................... $11.125 $9.3125
Second Quarter......................................... $13.625 $0.625
First Quarter.......................................... $ 3.125 $0.625
</TABLE>
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.
<TABLE>
<CAPTION>
BERLIN MUNICH
------------- -------------
HIGH LOW HIGH LOW
----- ----- ----- -----
<S> <C> <C> <C> <C>
1998
Fourth Quarter (through October 30, 1998).............. 22.85 11.26 22.29 11.6
Third Quarter.......................................... 16.86 31.71 31.43 16.74
Second Quarter......................................... 29.14 21.94 28.86 21.26
First Quarter.......................................... 25.71 12.63 25.14 12.57
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
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 -- --
</TABLE>
DILUTION
At September 30, 1998, the Company had a net tangible book value of
$17,671,334 or $1.09 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 September 30, 1998, other than to give effect to the sale by the
Company of the 1,500,000 shares of Common Stock offered hereby at an assumed
public offering price of $25 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 September 30,
1998, would have been $52,171,334 or $2.83 per share. This represents an
immediate increase in the net tangible book value per share of $1.79 to existing
stockholders and an immediate dilution of the net tangible book value per share
of $22.17 to persons purchasing the Common Stock offered hereby (the "New
Investors"). The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ $25.00
Net tangible book value per share before the Offering....... 1.04
Increase per share attributable to New Investors............ 1.79
-----
Pro forma as adjusted net tangible book value per share
after the Offering........................................ 2.83
------
Dilution per share to New Investors......................... $22.17
======
</TABLE>
19
<PAGE> 21
CAPITALIZATION
The following table sets forth, as of September 30, 1998, (i) the actual
capitalization of the Company and (ii) the capitalization of the Company as
adjusted to reflect the sale of 1,500,000 shares of Common Stock offered hereby
by the Company and the application of the net proceeds therefrom, as if it had
occurred on September 30, 1998. See "Use of Proceeds" and "Pro Forma
Consolidated Financial Statements".
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1998
---------------------
(IN THOUSANDS)
ACTUAL AS ADJUSTED
------- -----------
<S> <C> <C>
Overdrafts and short-term borrowings(2)..................... $ 2,803 $ 2,803
======= =======
Long-term debt(2)........................................... $ 1,134 $ 1,134
Minority interest........................................... 122 122
Stockholders' equity:
Common stock, 50,000,000 shares authorized; 16,962,138
shares issued and outstanding; 18,462,138 shares
issued and outstanding as adjusted(1)................. 17 18
Preferred stock, 20,000,000 shares authorized 6,360,000
shares issued and outstanding......................... 6 6
Additional paid-in capital............................. 25,859 60,358
Cumulative translation adjustment...................... (383) (383)
Accumulated deficit.................................... (4,442) (4,442)
------- -------
Total stockholders' equity........................ 21,057 55,557
------- -------
Total capitalization.............................. $25,116 $59,616
======= =======
</TABLE>
- ---------------
(1) Includes 1,500,000 shares of Common Stock offered hereby.
(2) Including capital lease obligations.
20
<PAGE> 22
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 September 30, 1998,
and for the nine months ended September 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 nine months ended
September 30, 1998, are not necessarily indicative of results to be expected for
the full year. The pro forma consolidated financial data as of September 30,
1998, for the year ended December 31, 1997 and the nine months ended September
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.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------- --------------------------------
PRO FORMA PRO FORMA
1996 1997 1997 1997 1998 1998
------ ------- --------- -------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue
Internet Projects................ $ 217 $ 1,598 $ 4,026 $ 699 $ 3,118 $ 3,579
Network Services................. 91 716 3,441 285 2,260 4,905
------ ------- ------- ------- ------- -------
Total revenue............... 308 2,314 7,467 984 5,378 8,484
Cost of Revenue....................... 363 2,494 5,466 1,281 5,186 6,982
------ ------- ------- ------- ------- -------
Gross profit (loss)................... (55) (180) 2,001 (297) 192 1,502
General and administrative expenses... 269 497 1,601 274 1,299 1,643
Marketing expenses.................... 173 1,221 2,045 735 3,457 4,384
Research and development.............. 187 367 631 11 1,319 1,497
Amortization of goodwill.............. -- 19 1,064 -- 77 759
------ ------- ------- ------- ------- -------
629 2,104 5,341 1,020 6,152 8,283
Interest expense, net................. 2 39 58 12 47 59
------ ------- ------- ------- ------- -------
Loss before taxes..................... (686) (2,323) (3,395) (1,329) (6,007) (6,840)
Income tax benefit.................... 402 1,339 1,319 761 3,228 3,193
Minority interest..................... -- -- 11 -- -- --
------ ------- ------- ------- ------- -------
Net loss.............................. $ (284) $ (984) $(2,065) $ (568) $(2,779) $(3,647)
====== ======= ======= ======= ======= =======
Basic and diluted loss per share...... $ (.12) $ (.12) $ (.21) $ (.10) $ (.18) $ (.21)
====== ======= ======= ======= ======= =======
BALANCE SHEET DATA:
Working capital (deficiency).......... $ 339 $ 891 $ 2,652 $ 2,567 $(2,197)
Total assets.......................... 2,511 14,419 13,022 33,247 38,891
Long-term debt(1)..................... -- 42 1,479 1,134 1,134
Total stockholders' equity............ 1,790 8,908 8,075 21,057 21,057
</TABLE>
- ---------------
(1) Including capital lease obligations
21
<PAGE> 23
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 has experienced high rates of revenue growth since commencing
significant operations in 1996. Revenues increased from $307,673 in 1996 to
$2,314,021 in 1997. For the nine-months ended September 30, 1998 revenues
totaled $5,378,365. This revenue growth has been generated substantially through
internal growth and to a lesser extent by acquisitions. The Company anticipates
that these rates of revenue growth will continue in the near future as the
Company continues it's internal growth, completes the pending Vianet Acquisition
and seeks additional acquisition candidates.
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. Fees for Network Services 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.
22
<PAGE> 24
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.
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.
The Company has evaluated its state of readiness for the Year 2000 issue.
With regard to its Information Technology ("IT") systems, the Company has
concluded that substantially all of those systems are Year 2000 compliant. The
assessment is based upon testing and analysis performed by Company personnel in
the course of their regular quality control and research and development and did
not require the Company to incur significant expenses. The Company has also
instituted procedures to assure that IT 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 IT systems will be Year 2000 compliant.
In addition, the Company has contacted all of its major suppliers, vendors and
customers to determine whether existing IT systems, upon which the Company
relies for products and services and for internal operations, are Year 2000
compliant. The Company has received assurances that the following are all Year
2000 compliant: Cisco routers, used in connection with leased telephone line
communications; Ascend routers used in connection with telephone dial-up
communications; Sun Workstations, the Company's main Internet servers; Microsoft
software used in internal office operations; network facilities supplied by Info
AG; global transit facilities supplied by AT&T Unisource, leased telephone lines
supplied by DT and, electric power supplied by Stadtwerke Munich to the
Company's main offices and several of its nodes. Thus, the Company believes that
the IT systems utilized in its principal network, backbone and internal
operations will meet Year 2000 requirements, and the Company does not anticipate
significant interruptions of billings or service to customers or disruptions of
internal operations attributable to the Year 2000 issue. The Company had plans
to complete integration of operations of newly acquired subsidiaries within its
present IT systems during 1999. Thus, compliance with Year 2000 issues on a
company-wide basis will not require acceleration of planned expenditures for the
purpose of remediation. The Company is now determining whether suppliers of
secondary significance to the Company's business, such as local suppliers of
telephone service and electric power, are Year 2000 compliant. Some of these
subsidiary systems are non-essential, as they duplicate systems that the Company
has determined will operate in the Year 2000 environment. The Company
anticipates completing its inquiries regarding secondary systems during the
first quarter of 1999. Based on its experience to date, the Company does not
anticipate that it will be required to incur significant additional operating
expenses or to invest heavily to obtain Year 2000 compliance for these systems.
To date, the Company's costs in connection with its Year 2000 evaluation have
23
<PAGE> 25
been limited to internal staff costs, which have been expensed as incurred and
are reflected in the Company's financial information appearing elsewhere in this
Prospectus. Moreover, these expenses have not been material in amount. The
Company does not anticipate utilizing outside consultants. Because the Company
believes that its systems are Year 2000 compliant, it has not developed a
theoretical worst case analysis or a contingency plan to deal with such a
contingency. With respect to non-IT systems, the Company's operations do not
depend in a significant manner on such embedded technology. All of the Company's
computers and telephones are Year 2000 compliant, and the Company does not
depend on elevators for access to its principal offices. Accordingly, it has not
developed formal contingency plans in this regard.
HISTORICAL RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------- -----------------------
1996 1997 1997 1998
---------- ---------- ---------- ----------
(IN 000'S) (IN 000'S) (IN 000'S) (IN 000'S)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue..........................................
Internet Projects........................... $ 217 $ 1,598 $ 699 $ 3,118
Network Services............................ 91 716 285 2,260
----- ------- ------- -------
Total revenue.......................... 308 2,314 984 5,378
Cost of revenues................................. 363 2,494 1,281 5,186
----- ------- ------- -------
Gross profit (loss).............................. (55) (180) (297) 192
General and administrative expenses......... 269 497 274 1,299
Marketing expenses.......................... 173 1,221 735 3,457
Research and development.................... 187 367 11 1,319
Amortization................................ -- 19 -- 77
----- ------- ------- -------
Total.................................. 629 2,104 1,020 6,152
Interest expense................................. 2 39 12 47
----- ------- ------- -------
Loss before taxes................................ (686) (2,323) (1,329) (6,007)
Income tax benefit............................... 402 1,339 761 3,228
----- ------- ------- -------
Net loss......................................... $(284) $ (984) $ (568) $(2,779)
===== ======= ======= =======
Basic and diluted loss per share................. $(.12) $ (.12) $ (.10) $ (.18)
===== ======= ======= =======
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Total revenues increased 447% from $983,541 in 1997 to $5,378,365 in 1998.
Absent the impact of the revenues associated with consolidating Artwise,
Eclipse, and Open:Net in 1998, revenues would have increased approximately
$2,053,700 or 209% in 1998 compared to 1997. Internet Project revenue totaled
$3,117,810 in 1998 or 58% of total revenues, compared to $698,716 in 1997 or 71%
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 $284,825 in 1997 to $2,260,555 in 1998, principally as a result of these
new customers and partially as a result of the Eclipse acquisition.
Cost of revenues increased 305% from $1,280,616 in 1997 to $5,186,602 in
1998. As a percentage of revenues, cost of revenues decreased from 130% to 96%
as a result of a higher level of Network Services revenue.
General and administrative expenses increased 374% from $274,330 in 1997 to
$1,299,132 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 370% from $735,223 in 1997 to $3,457,440 in
1998, principally as a result of substantial investments by the Company in
marketing activities, including trade fairs, product literature and
24
<PAGE> 26
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.
Interest expense increased 302% from $11,809 in 1997 to $47,467 as a result
of a significant increase in overdrafts and short-term borrowings in 1998 to
fund the Company's working capital needs.
Income tax benefit in both 1997 and 1998 represents the capitalization of
the losses generated by the Company.
Net loss increased from $567,782 for the nine months ended September 30,
1997 to $2,779,090 in the same period in 1998 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 expenses 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.
25
<PAGE> 27
LIQUIDITY AND CAPITAL RESOURCES
As a result of negative cashflows from operations, the Company has financed
its growth primarily through the private placement of securities, and short-term
borrowings. 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.
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 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 July, 1998, the Company completed the sale of 700,000 shares of its
common stock for gross proceeds of approximately $12,600,000.
In August, 1998, the Company agreed to issue 58,852 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 $34.5 million. The Company anticipates utilizing approximately
$7.3 million for acquisitions, including the cash payments of $4.3 million for
the Vianet acquisition, and $585,750 for the Open:Net acquisition; $9.3 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 $14.1 million would be available as working capital, including
payment of fees required for licensing as a carrier.
The Company's primary source of short-term liquidity will be the proceeds
of the Offering. The Company anticipates that this source will be sufficient to
fund the anticipated growth of the Company, to allow the Company to continue its
acquisition program, and to reach profitability. If the planned Offering is
unsuccessful, the Company will be required to seek alternative financing
sources. 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 $891,027.
During the nine months ended September 30, 1998, the Company used cash in
operations of $2,235,661. Investing activities used cash of $12,693,980,
primarily for the purchase of infrastructure and product development. Financing
activities provided $16,110,410, primarily from issuance of common stock. As of
September 30, 1998, the Company had a working capital of $2,566,662. The Company
has no material commitments for capital expenditures.
The Company's accounts receivable balances have increased significantly in
relation to revenues. Although the Company's business is not seasonal, Network
Services revenues were heavy at the end of the year, leading to correspondingly
high accounts receivable. At September 30, 1998 accounts receivable from
Internet Project were a lower percentage of revenues than at the end of the
preceding year.
At December 31, 1997 the Company has available combined cumulative tax loss
carryforwards of approximately $6.2 million all of which relate to Germany.
Under current German tax law, these tax loss carryforwards have no expiration
date. The Company has not provided any valuation allowance against the
26
<PAGE> 28
deferred tax asset related to these loss carryforwards. The Company currently
expects to become profitable and to fully utilize the tax loss carryforwards in
the near to medium term. Based on the unlimited loss carryforward period and the
projected mid-term profitability of the Company, the Company believes it is more
likely than not that this deferred tax asset will be realized. However, if the
Company is unable to generate sufficient taxable income in the future or if the
current tax law were changed a valuation allowance will be required to be
established through a charge to income.
27
<PAGE> 29
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, and (ii) the 1998
Acquisitions. The Pro Forma Consolidated Statement of Operations for the nine
months ended September 30, 1998, is based on the historical consolidated
financial statements of the Company, adjusted as if the 1998 Acquisitions had
occurred on January 1, 1998. The unaudited Pro Forma Consolidated Balance Sheet,
as of September 30, 1998, is based on the historical consolidated financial
statements of the Company, adjusted as if the Vianet acquisition occurred on
September 30, 1998.
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.
28
<PAGE> 30
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL 1997 1998 AS
COMPANY ACQUISITIONS ACQUISITIONS ADJUSTED
---------- ------------ ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
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
---------- ------ ------ -----------
Gross profit (loss)......................... (180) 499 1,682 2,001
General and administrative expenses......... 497 275 (c) 829 (c) 1,601
Marketing expenses.......................... 1,221 199 (c) 625 (c) 2,045
Research and development.................... 367 70 (c) 194 (c) 631
Amortization................................ 19 107 (c) 938 (c) 1,064
---------- ------ ------ -----------
2,104 651 2,586 5,341
Interest income............................. -- -- 2 (d) 2
Interest expense............................ 39 3 (d) 18 (d) 60
---------- ------ ------ -----------
Loss before taxes........................... (2,323) (152) (920) (3,395)
Income tax (expense) benefit................ 1,339 -- (20)(e) 1,319
Minority interest........................... -- 11 (f) -- 11
---------- ------ ------ -----------
Net loss.................................... $ (984) $ (141) $ (940) $ (2,065)
========== ====== ====== ===========
Basic and diluted loss per share............ $ (.12) $ (.21)
========== ===========
Number of shares used to compute earnings
per share................................. 8,342,297 10,000,769
========== ===========
</TABLE>
29
<PAGE> 31
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL 1998 PRO FORMA AS
COMPANY ACQUISITIONS ADJUSTED
----------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenue
Internet Projects................................ $ 3,118 $ 461(a) $ 3,579
Network Services................................. 2,260 2,645(a) 4,905
----------- ------- -----------
Total revenues.............................. 5,378 3,106 8,484
Cost of revenues
Internet Projects................................ 2,227 254(b) 2,481
Network Services................................. 2,959 1,542(b) 4,501
----------- ------- -----------
Total cost of revenues...................... 5,186 1,796 6,982
----------- ------- -----------
Gross profit (loss)................................... 192 1,310 1,502
General and administrative expenses................... 1,299 344(c) 1,643
Marketing expenses.................................... 3,457 927(c) 4,384
Research and development.............................. 1,319 178(c) 1,497
Amortization.......................................... 77 682(c) 759
----------- ------- -----------
6,152 2,131 8,283
Interest income....................................... -- 1(d) 1
Interest expense...................................... 47 13(d) 60
----------- ------- -----------
Loss before taxes..................................... (6,007) (833) (6,840)
Income tax (expense) benefit.......................... 3,228 (35)(e) 3,193
----------- ------- -----------
Net loss.............................................. $ (2,779) $ (868) $ (3,647)
=========== ======= ===========
Basic and diluted loss per share...................... $ (.18) $ (.21)
=========== ===========
Number of shares used to compute earnings per share... 15,470,232 17,021,695
=========== ===========
</TABLE>
30
<PAGE> 32
PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL VIANET AS
COMPANY ACQUISITION ADJUSTED
---------- ------------ ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 3,247 $ 27(g) $ 3,274
Short-term investments................................. 3,958 -- 3,958
Inventories............................................ -- 6(g) 6
Trade accounts receivable.............................. 2,121 790(g) 2,911
Other receivables...................................... 831 30(g) 861
Prepaid expenses and other current assets.............. 72 27(g) 99
------- ------- -------
Total current assets.............................. 10,229 880 11,109
Property and equipment, net............................ 5,945 408(g) 6,353
Product development costs, net......................... 5,108 -- 5,108
Goodwill, net.......................................... 3,386 2,041(h) 5,427
Other intangible assets................................ -- 2,276(h) 2,276
Deferred income taxes.................................. 8,409 -- 8,409
Other assets........................................... 170 39(g) 209
------- ------- -------
TOTAL ASSETS................................................ $33,247 $ 5,644 $38,891
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Overdrafts and short term borrowings................... $ 2,278 $ --(g) $ 2,278
Trade accounts payable................................. 2,519 565(g) 3,084
Other accrued liabilities.............................. 1,531 386(g) 1,917
Deferred purchase obligations.......................... 602 4,404(h) 5,006
Deferred income........................................ -- 281(g) 281
Accrued personnel costs................................ 207 8(g) 215
Current portion capital lease obligations.............. 525 -- 525
------- ------- -------
Total current liabilities......................... 7,662 5,644 13,306
Long-term debt......................................... 131 -- 131
Capital lease obligations.............................. 1,003 -- 1,003
Deferred income taxes.................................. 3,272 -- 3,272
Minority interest...................................... 122 -- 122
STOCKHOLDERS' EQUITY:
Common stock........................................... 17 -- 17
Preferred stock........................................ 6 -- 6
Additional paid-in capital............................. 25,859 25,859
Accumulated deficit.................................... (4,442) -- (4,442)
Cumulative translation adjustment...................... (383) -- (383)
------- ------- -------
TOTAL STOCKHOLDERS' EQUITY.................................. 21,057 -- 21,057
------- ------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $33,247 $ 5,644 $38,891
======= ======= =======
</TABLE>
31
<PAGE> 33
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(a) Includes (i) the revenues of the companies acquired in the 1997
Acquisitions for the periods in 1997 prior to their respective
acquisition dates, (ii) the revenues of the 1998 Acquisitions for the
full year 1997, (iii) the revenues of Open:Net for the period in 1998
prior to its acquisition date, and (iv) the revenues of Vianet for the
nine months ended September 30, 1998. The amounts for each entity and
the related period are as follows:
<TABLE>
<CAPTION>
1997 ACQUISITIONS 1998 ACQUISITIONS
------------------------- -------------------------
ARTWISE ECLIPSE TOTAL VIANET OPEN:NET TOTAL
------- ------- ----- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
1997 Pro Forma
Internet Projects..... 1,288 478 1,766 -- 662 662
Network Services...... -- 156 156 2,233 336 2,569
1998 Pro Forma
Internet Projects..... -- -- -- -- 461 461
Network Services...... -- -- -- 2,273 372 2,645
</TABLE>
(b) Includes (i) the cost of revenues of the companies acquired in the 1997
Acquisitions for the periods in 1997 prior to their respective
acquisition dates, (ii) the cost of revenues of the 1998 Acquisitions
for the full year 1997, (iii) the cost of revenues of Open:Net for the
period in 1998 prior to its acquisition date, and (iv) the cost of
revenues of Vianet for the nine months ended September 30, 1998. The
amounts for each entity and the related period are as follows:
<TABLE>
<CAPTION>
1997 ACQUISITIONS 1998 ACQUISITIONS
------------------------- -------------------------
ARTWISE ECLIPSE TOTAL VIANET OPEN:NET TOTAL
------- ------- ----- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
1997 Pro Forma
Internet Projects..... 906 371 1,277 -- 263 263
Network Services...... -- 146 146 1,012 274 1,286
1998 Pro Forma
Internet Projects..... -- -- -- -- 254 254
Network Services...... -- -- -- 1,317 225 1,542
</TABLE>
(c) Includes (i) the other operating expenses of the companies acquired in
the 1997 Acquisitions for the periods in 1997 prior to their respective
acquisition dates, (ii) the other operating expenses of the 1998
Acquisitions for the full year 1997, (iii) the other operating expenses
of Open:Net for the period in 1998 prior to its acquisition date, and
(iv) the other operating expenses of Vianet for the nine months ended
September 30, 1998. The amounts for each entity and the related period
are as follows:
<TABLE>
<CAPTION>
1997 ACQUISITIONS 1998 ACQUISITIONS
------------------------- -------------------------
ARTWISE ECLIPSE TOTAL VIANET OPEN:NET TOTAL
------- ------- ----- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
1997 Pro Forma
General and administrative
expenses.................... 245 30 275 804 25 829
Marketing expenses............. 113 86 199 402 223 625
Research and development....... 70 -- 70 -- 194 194
Amortization................... 56 51 107 656 282 938
1998 Pro Forma
General and administrative
expenses.................... -- -- -- 319 25 344
Marketing expenses............. -- -- -- 590 337 927
Research and development....... -- -- -- -- 178 178
Amortization................... -- -- -- 494 188 682
</TABLE>
32
<PAGE> 34
Amortization is calculated in a straight line basis using the following
useful lives;
<TABLE>
<S> <C>
Goodwill............................................... 10 years
Customer base.......................................... 5 years
Management contracts................................... 3 years
</TABLE>
(d) Includes (i) interest income and expense of the companies acquired in
the 1997 Acquisitions for the periods in 1997 prior to their respective
acquisition dates, (ii) interest income and expense of the 1998
Acquisitions for the full year 1997, (iii) interest income and expense
of Open:Net for the period in 1998 prior to its acquisition date, and
(iv) interest income and expense of Vianet for the nine months ended
September 30, 1998. The amounts for each entity and the related periods
are as follows:
<TABLE>
<CAPTION>
1997 ACQUISITIONS 1998 ACQUISITIONS
------------------------- -------------------------
ARTWISE ECLIPSE TOTAL VIANET OPEN:NET TOTAL
------- ------- ----- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
1997 Pro Forma
Interest income........ -- -- -- 2 -- 2
Interest expense....... 3 -- 3 7 11 18
1998 Pro Forma
Interest income........ -- -- -- 1 -- 1
Interest expense....... -- -- -- 5 8 13
</TABLE>
(e) The income tax expense adjustment for the year ended December 31, 1997
includes expense of $16 and $4 for Vianet and Open:Net, respectively.
The income tax expense adjustment for the nine months ended September
30, 1998 includes expense of $35 for Vianet.
(f) The minority interest represents the minority owners' share in the
Eclipse loss for the period.
(g) Represents pro forma adjustments to reflect the assets and liabilities
of Vianet.
(h) Represents the pro forma adjustment to reflect the purchase accounting
for the Vianet acquisition. The calculation and allocation of purchase
price is as follows:
<TABLE>
<S> <C>
Cash to be paid (using the September 30, 1998 exchange
rate)................................................. $4,404
Less: net assets acquired (September 30, 1998)......... 87
------
Excess of purchase price over net assets acquired...... $4,317
======
Allocated to:
Goodwill............................................. $2,041
Customer base........................................ 1,764
Management contracts................................. 512
------
$4,317
======
</TABLE>
In addition to the cash to be paid, the acquisition includes 300,000 shares
of common stock of the Company which will be placed with a trustee to be
released annually over a five year period in 60,000 share increments as long as
the selling shareholders of Vianet remain employees of the Company.
The 300,000 shares of common stock will be treated as contingent
consideration and, accordingly, will be recorded as an additional cost of the
acquisition when the shares are released by the trustee.
33
<PAGE> 35
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. The Company currently provides services to
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.
The Company has grown through internal growth and 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
34
<PAGE> 36
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 "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.
35
<PAGE> 37
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.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED YEAR ENDED SEPTEMBER 30,
DECEMBER 31, 1996 DECEMBER 31, 1997 1998
----------------- ----------------- ----------------
<S> <C> <C> <C>
Network Services.............................. $ 90,377 $ 716,152 $2,260,555
Internet Projects............................. $217,296 $1,597,869 $3,117,810
</TABLE>
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, $366,829, and $1,318,446 in research
and development expenses during the years ended December 31, 1996 and 1997, and
the nine months ended September 30, 1998, respectively.
36
<PAGE> 38
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.
37
<PAGE> 39
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
The Company currently provides services to 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
September 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,
38
<PAGE> 40
$366,829, and $1,318,446 in research and development expenses during the years
ended December 31, 1996 and 1997, and the nine months ended September 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 the countries 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.
39
<PAGE> 41
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.
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<PAGE> 42
LEGAL PROCEEDINGS
On December 1, 1997, TUV Technischer Uberwachungsdrenst Osterreich (TUV)
filed an action against Vianet alleging a technical malfunction of certain Cisco
routers installed and programmed by Vianet. The alleged malfunction is said to
have resulted in substantially increased telephone charges to TUV. Trial counsel
to Vianet has estimated the maximum amount which could be claimed by TUV as
approximately $132,000. Other than as described above the Company is not
presently a party to any material legal proceeding.
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<PAGE> 43
MANAGEMENT
The following table sets forth the names, ages and positions of the
executive officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
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
</TABLE>
42
<PAGE> 44
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, a financial institution 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,
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<PAGE> 45
he was the head of the legal department of Schneider AG, a German real estate
development company. He 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
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<PAGE> 46
Committee also administers the Company's Stock Option Plan. Prior to the
creation of the Compensation 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.
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<PAGE> 47
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
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------
NAME AND PRINCIPAL POSITION SALARY BONUS(1) OTHER
--------------------------- -------- -------- -----
<S> <C> <C> <C>
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
</TABLE>
- ---------------
(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.
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 has also secured insurance on behalf of any officer, director,
employee or other agent for any liability arising out of claims under applicable
securities laws against such persons and the Company, and on behalf of directors
and officers with respect to other claims.
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.
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<PAGE> 48
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.
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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<PAGE> 49
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.
<TABLE>
<CAPTION>
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 PREFERRED(6) PREFERRED(6) STOCK PREFERRED PREFERRED
- -------------------------------- ---------- ------------ ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Holger Timm................... 1,044,900(2)(6) 721,500(2) 5,160,000(5) 6.2% 60.1% 100%
Trabener Strasse 12
14193, Berlin, Germany
Andreas Eder.................. 1,528,645(1)(6) 177,749(1) 9% 14.8%
Stefan-George-Ring 19
81929 Munich, Germany
Alessandro Giacalone.......... 309,600(3)(6) 36,000(3) 1.8% 3%
Stefan-George-Ring 19
81929 Munich, Germany
Rudolf Strobl................. 460,724(6) 53,572 2.7% 4.5%
Stefan-George-Ring 19
81929 Munich, Germany
Christian Moosmann............ 154,800(3)(6) 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(6) *
Mariannengasse 14
1090 Vienna, Austria
Alexander Wiesmueller......... 150,000(6) *
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%
Principal Stockholders other
than directors and officers
Franz Eder.................... 621,350(6) 72,250 3.7% 6%
Pariser Strasse 12
10719 Berlin, Germany
Thomas Schulz................. 614,282(6) 71,428 3.6% 6%
Pfaffing 15
83339 Chieming, Germany
<CAPTION>
SHARES BENEFICIALLY
NAME OWNED AFTER OFFERING
---- -----------------------
NUMBER OF PERCENTAGE
COMMON OF COMMON
EXECUTIVE OFFICERS AND DIRECTORS STOCK STOCK
- -------------------------------- ---------- ----------
<S> <C> <C>
Holger Timm................... 1,044,900(2) 5.6%
Trabener Strasse 12
14193, Berlin, Germany
Andreas Eder.................. 1,528,645(1) 8.1%
Stefan-George-Ring 19
81929 Munich, Germany
Alessandro Giacalone.......... 309,600(3) 1.7%
Stefan-George-Ring 19
81929 Munich, Germany
Rudolf Strobl................. 460,724 2.5%
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 20.3%
Principal Stockholders other
than directors and officers
Franz Eder.................... 621,350 3.3%
Pariser Strasse 12
10719 Berlin, Germany
Thomas Schulz................. 614,282 3.3%
Pfaffing 15
83339 Chieming, Germany
</TABLE>
- ---------------
* less than 1%
(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 or will be subject to pooling
trust agreements restricting the beneficial owner from selling the shares
(unless the transferee is also subject to such restrictions), but without
affecting the vote of the shares, if entitled to vote. The earliest date at
which such shares may be sold is January 1, 1999.
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<PAGE> 50
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, 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 16,962,138 shares of Common
Stock outstanding held of record by 209 stockholders. All issued shares of
Common Stock are fully paid and non-assessable. 18,462,138 shares of Common
Stock will be issued and outstanding if the Offering is fully subscribed. In
addition, 300,000 shares of common stock will be issued to consummate the Vianet
acquisition.
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 September 30, 1998, there were 6,360,000 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, and 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. The Company also has authorized 1.5 million shares of Series C
Preferred Stock (the "Series C Preferred Stock") and issued 1.4 million of such
shares on or about September 16, 1997. Between May 31, 1998 and September 30,
1998 all of the outstanding Series C Preferred Stock was converted to 1.4
million shares of common stock by the holders thereof. The Company has the right
to reissue the shares of any series of Preferred Stock upon conversion to Common
Stock. All issued shares of Preferred stock are fully paid and non-assessable.
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.
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<PAGE> 51
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 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.
50
<PAGE> 52
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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<PAGE> 53
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. All of the shares of Series C Preferred Stock have been converted
into Common Stock by the holders thereof.
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<PAGE> 54
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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<PAGE> 55
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 6,360,000 shares were issued and outstanding,
as of September 30, 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
54
<PAGE> 56
issuance could have the effect of decreasing the market price of the Common
Stock, as well as having the anti-takeover effect discussed above.
The Company's Certificate of Incorporation allows the 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.
GERMAN TAKE-OVER CODE
In connection with its listing on the Neue Markt of the Frankfurt Stock
Exchange, the Company is required to comply with the German Take-Over Code. The
German Take-Over Code regulates merger and acquisitions by public companies, and
requires that companies making an offer to a target company: notify the German
regulatory authorities and the public of the offer, provide certain disclosures
to the target company's
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stockholders, treat stockholders equally in an offer, and comply with certain
other regulatory requirements. In addition, the rights of the Company's
shareholders under the German Take-Over Code differ in certain respects from
rights afforded to shareholders under the United States federal and state laws
governing tender offers and takeovers. German regulatory authorities are given
broad authority to interpret the German Take-Over Code and to review and
regulate specific merger and acquisitions. Compliance with the German Take-Over
Code could have the effect of delaying, deferring or preventing a tender offer
or takeover, notwithstanding that such tender offer or takeover might result in
stockholders receiving a premium over the market price for their shares.
TRANSFER AGENT AND REGISTRAR
Interwest Transfer Company is the transfer agent and registrar for the
Company's capital stock.
BOOK-ENTRY-ONLY ISSUANCE OF COMMON STOCK TRADING ON GERMAN STOCK EXCHANGES
In general, the shares of Common Stock offered hereby will trade on the
Neue Markt of the Frankfurt Stock Exchange (when approved for listing) and on
the Freiverkehr of the Berlin Stock Exchange and the Munich Stock Exchange
(each, a "German Exchange") only through book entry transfers of interests
therein held through Deutsche Boerse Clearing AG ("DBC"). Any investor who has
an actual certificate representing shares of Common Stock who desires to sell
such shares of Common Stock on a German Exchange will be required to deposit
such Certificate with The Depository Trust Company ("DTC") for credit to DBC's
account as described below, which transfer will be reflected on DBC's books and
records. Certificates representing shares of Common Stock held through DBC will
not be issued unless such shares are withdrawn from DBC in which case the shares
will not be eligible to trade on a German Exchange unless redeposited as
described above. DBC will hold shares of Common Stock through its account with
DTC. DTC, or its nominee, will be the registered owner of all shares of Common
Stock that are held by investors through DBC.
Beneficial owners of Common Stock held through DBC will receive
confirmations and statements of their holdings from DBC (through their brokers
or other financial institutions that are DBC participants). DBC will register
all transfers of such Common Stock between DBC participants on its books and
records through its book-entry system. Shares of Common Stock held by DTC will
be registered in the name of DTC's nominee, Cede & Co.
Any dividend or other payments on Common Stock held through DBC will be
made by the Company to Cede & Co., as nominee of DTC. DTC, upon receipt of such
payments, will credit DBC's account at DTC for the amount of such payments.
Payments by DBC to the beneficial owners of Common Stock will be governed by
standing instructions and DBC's customary practices, subject to any statutory or
regulatory requirements as may be in effect from time to time. The dividends
will be converted into Deutsche marks, if requested, and distributed by DBC.
TAXATION
CERTAIN TAX CONSEQUENCES UNDER GERMAN LAWS
The following discussion is a summary of the material anticipated tax
consequences of an investment in the Common Stock under German tax laws. The
discussion does not deal with all possible tax consequences relating to an
investment in the Common Stock. In particular, the discussion does not address
the tax consequences under state, local, and other (e.g. non-German) tax laws,
nor does it address special circumstances of any individual investor. With the
exception of certain illustrative data, the discussion is limited to the
taxation of dividends, capital gains, income, gifts and inheritance under German
law, and does not address all aspects of such German taxation. The discussion
does not consider any specific facts or circumstances that may apply to a
particular purchaser. In particular, this discussion does not comprehensively
treat the tax considerations that will be relevant to prospective investors who
reside outside Germany. Accordingly, each prospective investor should consult
its tax advisor regarding the tax consequences of an
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investment in the Common Stock. The discussion is based on the tax laws of the
Federal Republic of Germany as in effect on the date of this Prospectus, which
are subject to change, possibly with retroactive effect, in particular with
respect to proposed or anticipated changes which may result from action by the
recently elected German government.
Thus, the following summary is for illustrative purposes only and not to be
relied upon. In addition, the Company has undertaken no obligation to update
this discussion for changes in facts or laws occurring subsequent to the date
hereof. Further, any variation or differences from the facts or representations
recited herein, for any reason, might affect the following discussion, perhaps
in an adverse manner, and render such discussion inapplicable.
Taxation of Dividends. Dividends on the Common Stock that are (i) paid to
holders who are German residents (for tax purposes, the term "resident" includes
a natural person having a residence or his or her habitual abode in Germany) or
who are corporations that maintain their statutory seat or principal place of
management in Germany (a "German Holder"), or (ii) attributable to a permanent
establishment maintained by, or a fixed base regularly available to a holder
otherwise not deemed to be a German resident (a "Foreign Holder"), are subject
to German income taxes or corporate income taxes, respectively, at regular
German tax rates. Such dividend payments also are subject to a surcharge equal
to 5.5% of the otherwise applicable German income or corporate income tax
liability (Solidaritaetszuschlag und Kirchensteuer).
German Holders who are natural persons may claim a tax allowance for income
derived from capital investments of $3,430 ($6,860 in the case of married
couples filing joint returns).
German Holders who are natural persons may deduct from dividend income the
expenses associated with the acquisition, safeguarding, or maintaining of the
Common Stock (the "Werbungskosten"), including fees for custodian and
re-financing costs. Without supporting documents, Werbungskosten in the amount
of $58 ($135 in the case of married couples filing joint returns) are deductible
for tax purposes from such dividend income.
In general, Germany imposes a withholding tax of 15% of the gross amount of
dividends paid. The double taxation treaty between the United States and Germany
reduces this withholding tax to 5% of the gross amount of the dividends if the
beneficial owner is a company that holds directly at least 10% of the voting
shares of the company paying the dividends. The withholding tax can be credited
against the part of the German income tax attributable to such dividend income.
If, however, the German income tax attributable to such dividends is lower than
the withholding tax because of a deduction of Werbungskosten (including, but not
limited to refinancing costs) from such dividends, withholding taxes can only be
credited against German income taxes up to an amount of German income tax
attributable to such dividend income. Instead of taking a credit for the
withholding tax, the German Holder can apply for a deduction of the withholding
tax from his taxable income.
Dividend income is tax-exempt if a German Holder that is a corporation owns
at least 10% of the voting share capital. If, however, the tax-exempt dividend
derived by a corporate German Holder is distributed to a German Holder who is a
natural person, the distribution is taxable.
Capital Gains. Capital gains from the sale of the Common Stock are not
subject to taxes in Germany, unless (i) in the case of a Foreign Holder, the
gains are attributable to a permanent establishment maintained by, or a fixed
base regularly available to, such holder in Germany, (ii) in the case of a
German Holder, such holder is a corporate entity that is a German resident or
the Common Stock was held by the holder as a business asset, (iii) the holder is
a German Holder who is a natural person that holds or has held at any time
during a period of five years before the disposal directly or indirectly more
than 25% of the share capital in his private property, or (iv) a speculative
capital gain (i.e. if the time period between the acquisition and the disposal
of the Common Stock do not exceed six months and the Common Stock do not qualify
as a business asset) is given by a German Holder who is a natural person who
holds the Common Stock.
Inheritance and Gift Tax. Under German law, a German gift or inheritance
tax is imposed on transfers of Common Stock by gift or at death if the donor or
transferor, or the heir, donee, or other beneficiaries, are German residents
within the meaning of Section 2 of the German Inheritance Tax Act.
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Other German Taxes. There do not appear to be German transfer, stamp, or
other similar taxes that apply on the sale or transfer of shares of Common
Stock.
Possible Change to Tax Laws. The newly elected German government has
announced various proposals to amend the tax laws, effective January 1, 1999
and, at this point, the Company cannot predict which amendments may effect the
foregoing sections.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO NON-UNITED STATES
HOLDERS
The following is a general discussion of the principal United States
federal income and estate tax consequences of the ownership and disposition of
Common Stock by a non-U.S. holder. As used herein, the term "non-U.S. holder" is
defined as any person or entity that is, for United States federal income tax
purposes, a foreign corporation, a non-resident alien individual, a foreign
partnership, or a non-resident fiduciary of a foreign estate or trust. This
discussion is based on currently existing provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), existing, final, temporary, and proposed
treasury regulations promulgated thereunder, and administrative and judicial
interpretations thereof, all as in effect or proposed on the date hereof and all
of which are subject to change, possibly with retroactive effect, or different
interpretations. This discussion is limited to non-U.S. holders who hold shares
of Common Stock as capital assets within the meaning of Section 1221 of the
Code. Moreover, this discussion is for general information only and does not
address all of the tax consequences that may be relevant to particular non-U.S.
holders in light of their personal circumstances, nor does it discuss certain
tax provisions which may apply to individuals who relinquish their U.S.
citizenship or residence.
An individual may, subject to certain exemptions, be deemed to be a
resident alien (as opposed to a non-resident alien) by virtue of being present
in the United States for at least 31 days in the calendar year and for an
aggregate of at least 183 days during a three-year period ending in the current
calendar year (counting for such purposes, all of the days present in the
current year, one-third of the days present in the immediately preceding year,
and one-sixth of the days present in the second preceding year). Resident aliens
are subject to U.S. federal income taxes as if they were U.S. citizens.
Each prospective purchaser of Common Stock should consult with a tax
advisor with respect to current and possible future tax consequences of
acquiring, holding, and disposing of Common Stock, as well as any tax
consequences that may arise under the laws of any U.S. state, municipality, or
other taxing jurisdiction.
Dividends. If dividends are paid on shares of Common Stock to a non-U.S.
holder, they will be subject to withholding of United States federal income
taxes at a 30% rate or such lower rate as may be specified by an applicable
income tax treaty. However, if (a) dividends are effectively connected with the
conduct of a trade or business by the non-U.S. holder within the United States
and, where a tax treaty applies, are attributable to a United States permanent
establishment of the non-U.S. holder, and (b) an Internal Revenue Service
("IRS") Form 4224 or successor form is filed with the payor, then the dividends
are not subject to withholding tax, but instead are subject to United States
federal income taxes on a net basis at the applicable graduated individual or
corporate rate. Any such effectively connected dividends received by a foreign
corporation may, under certain circumstances, be subject to an additional
"branch profits tax" at a rate of 30% or such lower rate as may be specified by
an applicable income tax treaty.
Dividends paid to an address outside the United States are presumed to be
paid to a resident of such country (unless the payor has knowledge to the
contrary) for purposes of the withholding discussed above and for purposes of
determining the applicability of the tax treaty rate. However, recently
finalized treasury regulations pertaining to United States federal withholding
tax, scheduled to take effect for payments made after December 31, 2000 (the
"Final Withholding Tax Regulations"), provide that a non-U.S. holder must comply
with certain certification procedures (or, in the case of payments made outside
the United States with respect to an offshore account, certain documentary
evidence procedures), directly or through an intermediary to obtain the benefits
of a reduced rate under an income tax treaty. In addition, the Final Withholding
Tax Regulations will require a non-U.S. holder who provides an IRS form 4224 or
successor form (as discussed above) also to provide its U.S. taxpayer
identification number.
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A non-U.S. holder of Common Stock eligible for a reduced rate of United
States withholding taxes pursuant to an income tax treaty may obtain a refund of
any excess amount withheld by filing an appropriate claim for refund with the
IRS.
Gain on Disposition of Common Stock. A non-U.S. holder generally will not
be subject to United States federal income taxes with respect to any gain
recognized on the sale or other disposition of Common Stock unless (a) the gain
is effectively connected with the conduct of a trade or business of the non-U.S.
holder in the United States and, where a tax treaty applies, is attributable to
a United States permanent establishment of the non-U.S. holder, (b) in the case
of a non-U.S. holder who is an individual and holds Common Stock as a capital
asset, such holder is present in United States for 183 or more days in the
taxable year of the sale or other disposition and certain other conditions are
met, or (c) the Company is or has been a U.S. Real Property Holding Corporation"
(a "USRPHC") for United States federal income tax purposes, as discussed below.
An individual non-U.S. holder who falls within clause (a) above will,
unless an applicable treaty provides otherwise, be taxed on his or her net gain
derived from the sale under regular graduated United States federal income tax
rates. An individual non-U.S. holder who falls under clause (b) above will be
subject to a flat 30% tax on the gain derived from the sale which may be offset
by certain United States capital losses.
A non-U.S. holder that is a foreign corporation falling under clause (a)
above will be taxed on its gain under regular graduated United States federal
income tax rates and may be subject to an additional branch profits tax equal to
30% of its effectively connected earnings and profits within the meaning of the
Code for the taxable year, as adjusted for certain items, unless it qualifies
for a lower rate under an applicable income tax treaty.
A corporation is a USRPHC if the fair market value of the U.S. real
property interests held by the corporation is 50% or more of the aggregate fair
market value of its U.S. and foreign real property interests and any other
assets used or held for use by the corporation in a trade or business. Based on
its current and anticipated assets, the Company believes that it currently is
not and is not likely to become a USRPHC. However, since the determination of
USRPHC status is based upon the composition of the assets of the Company from
time to time, and because there are uncertainties in the application of certain
relevant rules, there can be no assurance that the Company will not become a
USRPHC. If the Company were to become a USRPHC, then gains on the sale or other
disposition of Common Stock by a non-U.S. holder generally would be subject to
U.S. federal income taxes unless both (a) the Common Stock was "regularly
traded" on an established securities market within the meaning of the applicable
treasury regulations, and (b) the non-U.S. holder actually or constructively
owned 5% or less of the Common Stock. Non-U.S. holders should consult their tax
advisors concerning any U.S. tax consequences that may arise if the Company were
to become a USRPHC.
Federal Estate Tax. Common Stock held by an individual non-U.S. holder at
the time of death will be included in such holder's gross estate for United
States federal and state tax purposes, unless an applicable estate tax treaty
provides otherwise.
Information Reporting and Back Up Withholding Tax. Under treasury
regulations, the Company must report annually to the IRS and to each non-U.S.
holder the amount of dividends paid to such holder and the amount of any tax
withheld with respect to such dividends, regardless of whether withholding was
required. Copies of the information returns reporting such dividends and
withholding also may be made available to the tax authorities in the country in
which the non-U.S. holder resides under the provisions of an applicable income
tax treaty.
A back-up withholding tax is imposed at the rate of 31% on certain payments
to persons that fail to furnish certain identifying information to the payor.
Back-up withholding generally will not apply to dividends paid to a non-U.S.
holder at an address outside the United States (unless the payor has knowledge
that the payee is a U.S. person). However, in the case of dividends paid after
December 31, 2000, the Final Withholding Tax Regulations provide that a non-U.S.
holder generally will be subject to withholding tax at a 31% rate unless certain
certification procedures (or, in the case of payments made outside the United
States
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with respect to an offshore account, certain documentary evidence procedures)
are complied with, directly or through an intermediary. Back-up withholding and
information reporting generally will also apply to dividends paid on Common
Stock at addresses inside the United States to non-U.S. holders that fail to
provide certain identifying information in the manner required. The Final
Withholding Tax Regulations provide certain presumptions under which a non-U.S.
holder would be subject to back-up withholding and information reporting unless
the Company receives certification from the holder of its non-U.S. status.
Payment of the proceeds of the sale of Common Stock by or through a United
States office of a broker is subject to both back-up withholding and information
reporting unless the beneficial owner provides the payor with its name and
address and certifies under penalties of perjury that it is a non-U.S. holder,
or otherwise establishes an exemption. In general, back-up withholding and
information reporting will not apply to a payment of the proceeds of a sale of
Common Stock by or through a foreign office of a broker. If, however, such
broker is, for United States federal income tax purposes, a U.S. person, a
controlled foreign corporation, or a foreign person that derives 50% or more of
its gross income for certain periods from the conduct of a trade or business in
the United States (or, for periods after December 31, 2000, a foreign
partnership that at any time during its fiscal year either (a) is engaged in the
conduct of a trade or business in the United States, or (b) has as partners one
or more U.S. persons that, in the aggregate, hold more than 50% of the income or
capital interest in the partnership), such payments will be subject to
information reporting, but no back-up withholding, unless (aa) such broker has
documentary evidence in its records that the beneficial owner is a non-U.S.
holder and certain other conditions are met, or (bb) the beneficial owner
otherwise establishes an exemption.
A holder generally will be allowed a refund or a credit against such
holder's U.S. federal income tax liability for any amounts withheld under the
back-up withholding rules, provided the required information is furnished in a
timely manner to the IRS.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement between
the Company and the Underwriter, the Company has retained the Underwriter as its
exclusive agent to conduct an offering of 1,500,000 shares of Common Stock on a
best efforts, all-or-none basis. In the event of oversubscriptions, up to an
additional 300,000 shares may be sold during the Offering Period at the price
set forth in this Prospectus.
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 Company is informed that the Underwriter proposes to offer the Shares
directly to the public, but only to non-U.S. persons. Purchasers of the Shares
will be required to represent that they are not U.S. persons and are not
purchasing on behalf of U.S. persons. The Underwriter has informed the Company
that it will endeavor to place the Shares with purchasers who, based on the
Underwriters knowledge and past experience, are likely to retain the shares for
a reasonable period of time. In view of the foregoing, the Company believes that
a substantial portion of the Shares will not be resold to U.S. persons or others
in the immediate future. However, the Company does not know of any formal or
informal arrangements with retail or institutional investors with regard to
resales, holding periods or purchaser agreements. If significant resales into
the U.S. market were to take place, the shares resold would be freely tradeable
in accordance with the federal securities laws. The Company intends to register
the common stock under the Exchange Act and will thereafter be required to file
reports and other information with the Commission. Such filings will be
available to the public.
The public offering price and Underwriting Discount are set forth on the
cover page of this Prospectus. The Underwriting Agreement permits the
Underwriter to allow to certain dealers, such concessions out of the
Underwriting Discount as the Underwriter may determine. The Company is informed
that the Underwriter does not presently plan to place the Shares through
dealers. However, appropriate arrangements between the Underwriter and dealers
may be developed during the Offering Period.
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. If, during the Offering Period, subscriptions are
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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 subscriptions are not received for all
shares during the Offering Period, no closing will occur and all funds will be
returned to the subscribers without any deduction therefrom and with interest
thereon, within seven days after termination of the Offering Period. 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. In the event of oversubscriptions, completed
subscriptions will be accepted on a first come, first served basis.
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 for the benefit of the subscribers of the Shares,
no later than noon on the next business day following receipt by the
Underwriter.
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 Company and its directors and executive officers have agreed not to
sell Common Stock, directly or indirectly, or announce such action, or take
other measures economically equivalent to a sale for a period of six months from
the day of admission of the Common Stock to the Neue Markt of the Frankfurt
Stock Exchange.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act.
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THE GERMAN EQUITY MARKET
There are eight stock exchanges in Germany of which the most significant,
in terms of the number of shares traded, is the Frankfurt Stock Exchange. That
exchange accounted for approximately 78% of the number of shares traded in
Germany in 1997. The Berlin Stock Exchange and the Munich Stock Exchange are
much smaller. Each of the three exchanges has established a market segment
designed for small to mid-sized companies. These segments are known as the Neue
Markt in Frankfurt, and the Over-the-Counter markets in Berlin and Munich.
German trading in shares of the Company's Common Stock is now principally
conducted in the Berlin Stock Exchange Over-the-Counter market and, to a lesser
extent on the Munich Stock Exchange Over-the-Counter market. It is anticipated
that the Neue Markt will become the principal market for the shares of the
Company's common stock following the Offering and the closing of the Offering
will not take place until the Company's listing application on the Neue Markt
has been granted.
Trading on German Stock Exchanges in regulated by, among others, the
Federal Supervisory Office for Securities Trading (Bundesaufsichtsamt fur den
Wertpapierhandel).
THE NEUE MARKT
The Neue Markt was launched in March 1997. It is designed for innovative,
small to mid-size companies in high growth industries or in traditional
industries that have an international orientation and that are willing to
provide active investor relations. Issuers are requested to provide investors on
an ongoing basis with information such as annual and quarterly reports
(including cash flow statements) and a corporate action timetable. This
information is required to be submitted in English and German as well as in
electronic form, thus enabling the stock exchange to disseminate corporate
information via the Internet. The listing application process includes a
pre-application and a formal application stage. In the pre-application stage,
the Neue Markt determines on the basis of summary information whether an
applicant meets the criteria for listing. Following preliminary approval, a
formal application may be filed. The Company has received such preliminary
approval and will promptly file a formal listing application that includes this
Prospectus. The Company is informed that the review process will take
approximately three to four weeks and knows of no reason for delay or rejection
of its formal application. Trading on the Neue Markt is expected to commence
immediately following approval of the formal application or upon the closing of
the Offering period whichever is later.
Trading of shares listed on the Neue Markt takes place on the floor of the
stock exchange, but is computer-aided. Markets in listed securities are
generally of the auction type, but listed securities also change hands in
inter-bank dealer markets off the Frankfurt Stock Exchange. Price formation is
determined by open bid by state-appointed specialists (amtliche Makler) who are
themselves exchange members, but who do not, as a rule, deal with the public.
Prices of currently traded securities are displayed continuously during trading
hours. At the half-way point of each trading day, a single standard quotation is
determined for all shares.
The members' association of the Frankfurt Stock Exchange publishes a daily
list of prices which contains the standard prices of all traded securities, as
well as their highest and lowest quotations during the past year.
Shares traded on the Neue Markt are also traded on a computer-aided system
called Xetra. Trading takes place on every business day between 8:30 a.m. and
5:00 p.m., Frankfurt time. Trading within the Xetra system is done by banks and
securities dealers who have been admitted to trading on at least one of
Germany's stock exchanges. Xetra is integrated into the Frankfurt Stock Exchange
and is subject to its rules and regulations.
Transactions on the Frankfurt Stock Exchange (including transactions within
the Xetra system) are settled on the second business day following trading.
Transactions off the Frankfurt Stock Exchange (for large volumes or if one of
the parties is foreign) are generally also settled on the second business day
following trading, unless the parties have agreed upon a different date.
Following a recent amendment to the conditions of German banks for securities
trading (Sonderbedingungen fur Wertpapiergeschafte), customers' orders to buy or
sell listed securities must be executed on a stock exchange, unless the customer
instructs otherwise. Trading can be suspended by the Frankfurt Stock Exchange if
orderly stock exchange trading is temporarily endangered or if a suspension is
in the public interest.
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A specific feature of the Neue Markt of the Frankfurt Stock Exchange is the
introduction of the obligatory "Sponsor," i.e., an entity admitted for trading
at the Frankfurt Stock Exchange which provides additional liquidity by quoting
prices for the buying and selling of shares on request. Each issuer on the Neue
Markt of the Frankfurt Stock Exchange has to nominate at least two Sponsors
which will not only ensure that there is sufficient liquidity for its shares,
but also serve as consultants on all stock market related matters for the
issuer. Neue Markt equity listings are admitted to electronic trading through
Xetra.
THE BERLIN STOCK EXCHANGE OVER-THE-COUNTER MARKET
The Over-the-Counter market of the Berlin Stock Exchange ("Berlin OTC
Market") is designed for small and young innovative technology oriented
companies in areas of business which present above average growth prospects. It
specializes in non-German companies. In the year ended December 31, 1997, the
total value of shares traded on the Berlin OTC Market was approximately $15
billion. A total of 117 credit institutions and brokerage firms are admitted to
trading on the Berlin OTC Market which had a total of 300 new listings in 1997.
Trading on the Berlin OTC Market is partly computerized on the Boss Cube
system which matches bid and offers but does not set prices automatically.
Brokers are assigned by Berlin Over-the-Counter Trade Association to keep an
order book for each listed issue. Brokers keeping the order books are required
to buy or sell continuously during trading hours and publish the trades on the
exchange's electronic reporting system. The spread between bids and offers may
not exceed 3%. All prices determined in the Berlin OTC Market are published
daily in a supplement to the official price list of the Berlin Stock Exchange as
well as in German national newspapers, on videotext pages of German television
stations and on international financial news services.
The Rules and Regulations of the Berlin OTC Market provide that the
guidelines for establishing prices on the official market of the Berlin Stock
Exchange apply to trading on the Berlin OTC Market. The trade supervisory
authority at the Berlin Stock Exchange supervises compliance with these rules
with a view to establishing orderly and fair markets in the listed securities.
THE MUNICH STOCK EXCHANGE OVER-THE-COUNTER MARKET
The Over-the-Counter market of the Munich Stock Exchange ("Munich OTC
Market") also specializes in trading non-German securities. In the year ended
December 31, 1997 the total value of securities traded on the Munich OTC Market
was approximately $9.5 billion (including warrants and debt securities). At the
end of 1997, a total of 105 credit institutions and brokerage firms were
admitted to trading on the Munich OTC Market and 965 stocks were listed for
trading.
Trading on the Munich OTC Market utilizes the Boss Cube system which
computerizes the matching of bids and offers but does not set prices
automatically. Brokers are assigned to keep an order book for each issue. Such
brokers are required to buy and sell continuously during trading hours and to
maintain fair and orderly markets in the securities assigned to them. Trades are
published on the Munich Stock Exchange electronic reporting system. They also
appear on the financial pages of various newspapers and in international news
services.
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
18,762,138 shares of common stock. In addition, 300,000 shares of common stock
will be issued in connection with the Vianet Acquisition. All shares sold in the
Offering (other than shares which may be acquired by an affiliate) will be fully
tradeable
63
<PAGE> 65
in the public market under the Securities Act. Part of the acquisition price of
Cybernet AG, Eclipse, 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:
<TABLE>
<CAPTION>
SERIES A SERIES B
COMMON STOCK PREFERRED PREFERRED
------------ --------- ---------
<S> <C> <C> <C>
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
</TABLE>
- ---------------
(1) These shares are included in an additional lock-up agreement extending the
release date -- 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.
64
<PAGE> 66
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 and the financial statements of
Open:Net Netzwerkdienste GmbH at December 31, 1997 and for the year 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 financial statements of Vianet EDV Dienstleistungs GmbH at December 31,
1997 and 1996, and for the two years then ended, and at September 30, 1998 and
the nine months 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.
65
<PAGE> 67
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
September 30, 1998 (unaudited)......................... F-16
Consolidated Statements of Loss and Comprehensive Loss for
the nine months ended September 30, 1997 and 1998
(unaudited)............................................ F-17
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1997 and 1998 (unaudited).......... F-18
Notes to Consolidated Unaudited Interim Financial
Statements............................................. F-19
VIANET EDV DIENSTLEISTUNGS GMBH
Independent Public Auditors' Report....................... F-20
Balance Sheets September 30, 1998, December 31, 1997 and
1996................................................... F-21
Statements of Operations and Retained Earnings nine months
ended September 30, 1998 and years ended December 31,
1997 and 1996.......................................... F-22
Statements of Cash Flows nine months ended September 30,
1998 and years ended December 31, 1997 and 1996........ F-23
Notes to the Financial Statements......................... F-24
Statements of Operations for the nine months ended
September 30, 1997 (unaudited) and 1998................ F-28
Statements of Cash Flows for the nine months ended
September 30, 1997 (unaudited) and 1998................ F-29
Notes to Unaudited Financial Statements................... F-30
OPEN:NET NETZWERKDIENSTE GMBH
Independent Auditors Report............................... F-31
Balance Sheet December 31, 1997........................... F-32
Profit and Loss Statements year ended December 31, 1997
and eight months ended August 31, 1998 (unaudited)..... F-33
Notes to the Financial Statements......................... F-34
</TABLE>
F-1
<PAGE> 68
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
<PAGE> 69
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
---------- -----------
<S> <C> <C>
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
========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE> 70
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1996 1997
---------- ------------
<S> <C> <C>
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
--------- -----------
Gross 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)
========= ===========
Number of shares used to compute earnings per share......... 2,465,782 8,342,297
========= ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 71
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1996 1997
----------- -----------
<S> <C> <C>
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
=========== ===========
Supplemental disclosure of noncash investing and financing
activities:
Acquisitions (Note 3):
Fair value of assets acquired............................. -- $ 2,230,146
Less:
Cash acquired.......................................... -- 63,255
Cash paid.............................................. -- 451,866
Stock issued........................................... -- 1,051,322
----------- -----------
Liabilities assumed......................................... -- $ 663,703
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 72
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL ACCUMULATED OTHER
-------------------- ------------------ SUBSCRIPTION PAID-IN ACCUMULATED COMPREHENSIVE
SHARES AMOUNTS SHARES AMOUNT RECEIVABLE CAPITAL DEFICIT LOSS
---------- ------- --------- ------ ------------ ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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)
========== ======= ========= ====== ========= =========== =========== =========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
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
==========
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE> 73
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
<PAGE> 74
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
been established, which is defined as completion of a working model, such costs
are capitalized until the individual products are commercially available.
Amortization, which began in 1997, is calculated using the greater of (a) the
ratio that current gross revenues for a product bear to the total of current and
anticipated future revenues for that product or (b) the straight-line method
over four years. The carrying value of product development costs is regularly
reviewed by the Company and a loss recognized when the net realizable value
falls below the unamortized cost. No such losses have been recognized to date.
Accumulated amortization amounted to $75,494 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.
Goodwill
Amortization is provided for on goodwill, which represents the excess of
purchase price over fair value of net assets acquired, on a straight-line basis
over 10 years. Accumulated amortization at December 31, 1997
F-8
<PAGE> 75
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amounted to $18,693. The Company assesses the recoverability of goodwill by
determining whether the amortization of the related balance over its remaining
life can be recovered through reasonably expected undiscounted future cash
flows. Management evaluates the amortization period to determine whether later
events and circumstances warrant revised estimates of the amortization period.
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
Company, such shares representing the outstanding shares of the Company at that
date. Generally accepted accounting principles require that the Company be
considered the acquired company for financial statement purposes (a reverse
acquisition) even though the entity will continue to be called Cybernet Internet
Services International, Inc. Therefore, the acquisition has been recorded as a
recapitalization of Cybernet AG. The effects of the reverse acquisition have
been reflected for all share amounts in the accompanying financial statements.
The Company had no operations at the time of the reverse acquisition.
Effective September 16, 1997, the Company acquired 100% of the outstanding
shares of Artwise GmbH ("Artwise"), for a total consideration of DM 1,710,040
($954,263). DM 475,000 ($265,067) of the purchase price was paid in cash with
the remainder settled in exchange for the issuance of 72,620 shares of the
common stock of the Company in February, 1998. The shares issued in February
1998, which were recorded as additional goodwill, were partially contingent upon
the achievement of certain financial goals by Artwise for the year ended
December 31, 1997. The acquisition has been accounted for using the purchase
method of accounting and accordingly the accompanying financial statements
reflect Artwise's results of operations for the period September 16, 1997
through December 31, 1997. Goodwill recorded in connection with the acquisition
of Artwise, of DM 1,507,493 ($841,188), is being amortized over 10 years.
Effective December 11, 1997, the Company acquired 66% of the outstanding
shares of Eclipse s.r.l. ("Eclipse"), for a total consideration of DM 982,763
($548,386). DM 334,764 ($186,799) of the purchase price was paid in cash with
the remainder to be settled in exchange for the issuance of 27,000 shares of the
common stock of the Company in 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 recorded in
connection with the acquisition of Eclipse, of DM 909,418 ($507,459), is being
amortized over 10 years.
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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1997
---------- -----------
<S> <C> <C>
Revenue................................................. $2,143,488 $ 4,223,813
Net loss................................................ $ (362,974) $(1,071,948)
Basic and diluted loss per share........................ $ (.15) $ (.13)
</TABLE>
F-9
<PAGE> 76
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SHORT-TERM INVESTMENTS
Short term investments at cost consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
-------- --------
<S> <C> <C>
BHF Bank Accugeld Fund...................................... $453,698 $ --
BHF Bank US Dollar Plus Fund................................ -- 802,759
Commerzbank Geld Market Fund................................ -- 15,154
-------- --------
$453,698 $817,913
======== ========
</TABLE>
At December 31, 1996 and 1997 the estimated fair value of short-term
investments approximated cost.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
-------- ----------
<S> <C> <C>
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
======== ==========
</TABLE>
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:
<TABLE>
<S> <C>
Year ending December 31
1998................................................... $396,804
1999................................................... $421,492
2000................................................... $421,492
2001................................................... $181,947
2002................................................... $ 52,737
Thereafter.................................................. $ --
</TABLE>
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 through December 31, 1999. 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.
F-10
<PAGE> 77
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
9. LONG-TERM DEBT
Long-term debt consists of an unsecured promissory note 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
F-11
<PAGE> 78
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
converted commencing January 1, 2001; and (5) any conversion may not be for less
than all of the Series A Preferred Shares held by the converting shareholder
eligible for conversion at the time of the notice.
Upon the liquidation, dissolution or winding up, whether voluntary or
involuntary, of the Company, the holders of the Series A Preferred Stock will be
entitled to be paid the sum of $3.00 per share plus an amount equal to any
unpaid accrued dividends before any amount is paid to the holder of any other
series of Preferred Stock, other than the Series B Preferred Stock or the Series
C Preferred Stock, or to the Common Stock of the Company. After payment of these
amounts to the holders of the Series A Preferred Stock, the remaining assets of
the Company will be distributed to the holders of the Common Stock.
Series B Preferred Stock
The holders of the Series B Preferred Stock are entitled to receive
dividends at a rate equal to $0.01 per share per annum before any dividends are
paid or set apart for payment upon any other series of Preferred Stock of the
Company other than the Series C Preferred Stock or on the Common Stock of the
Company. Commencing with the fiscal year beginning on January 1, 1998, the
dividend on the Series B Preferred Stock will be paid for each fiscal year
within five months of the end of each fiscal year, subject to the availability
of surplus or net profits therefor. The dividends on the Series B Preferred
Stock will not be cumulative. The holders of the Series B Preferred Stock are
entitled to one vote per share.
The shares of Series B Preferred Stock may be redeemed by the Company at
any time after January 1, 2000, at a redemption price of one share of the Common
Stock of the Company for each share of Series B Preferred Stock plus any unpaid
dividends earned thereon through the date of redemption; provided that all and
not less than all of the shares of Series B Preferred Stock are so redeemed.
A holder of Series B Preferred Stock may convert each share held by him
into one share of the Common Stock of the Company provided, however, that (1) no
conversion may occur prior to January 1, 1999; (2) no more than 25% of the
Series B Preferred Shares held by the holder may be converted prior to January
1, 2000; (3) no more than an additional 25% of the Series B Preferred Shares
held by the holder may be converted prior to January 1, 2001; (4) the remainder
of the Series B Preferred Shares held by the holder may be converted commencing
January 1, 2001; and (5) any conversion may not be for less than all of the
Series B Preferred Shares held by the converting shareholder eligible for
conversion at the time of the notice.
Upon the liquidation, dissolution or winding up, whether voluntary or
involuntary, of the Company, the holders of the Series B Preferred Stock will be
entitled to be paid the sum of $3.00 per share plus an amount equal to any
unpaid accrued dividends before any amount is paid to the holder of any other
series of Preferred Stock other than the Series C Preferred Stock or to the
Common Stock of the Company. After payment of these amounts to the holders of
the Series B Preferred Stock, the remaining assets of the Company will be
distributed to the holders of the Common Stock.
Series C Preferred Stock
The holders of the Series C Preferred Stock are entitled to receive
dividends at a rate equal to $ .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.
F-12
<PAGE> 79
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
The holders of the Series C Preferred Stock are not entitled to receive
notice of or to vote on any matter that is the subject of a vote of the
stockholders of the Company, except as otherwise required by the laws of the
State of Delaware.
The shares of Series C Preferred Stock may be redeemed by the Company at
any time at a redemption price of 100% of the $7.00 purchase price paid to the
Company for such shares plus any unpaid accrued dividends thereon so long as
prior to the date of redemption the Company has offered to exchange each share
of Series C Preferred Stock for (a) one share of the Company's Common Stock,
plus (b) one warrant ("Warrant") to purchase the number of shares of Common
Stock equal in the aggregate to one-half the number of shares of Common Stock
received in the exchange, which Warrant will be exercisable at any time through
the first anniversary of the date of issuance of the Warrant at a purchase price
equal to $8.00 per share and a registration statement is in effect registering
the issuance of the Common Stock and Warrants.
A holder of Series C Preferred Stock may convert each share held by him
into one share of the Common Stock of the Company anytime after July 31, 1998;
provided, however, that any conversion be of all the Series C Preferred Shares
held by the shareholder.
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:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997
--------- -----------
<S> <C> <C>
Germany.................................................. $(685,627) $(2,303,448)
United States............................................ -- (19,799)
--------- -----------
$(685,627) $(2,323,247)
========= ===========
</TABLE>
The components of the provision for income taxes, all of which relates to
Germany, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997
--------- -----------
<S> <C> <C>
Current.................................................. $ -- $ 9,525
Deferred................................................. (401,849) (1,348,932)
--------- -----------
Income tax benefit....................................... $(401,849) $(1,339,407)
========= ===========
</TABLE>
F-13
<PAGE> 80
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. PROVISION FOR INCOME TAXES (CONTINUED)
The Company has net deferred tax assets as of December 31, 1996 and 1997 as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
-------- ----------
<S> <C> <C>
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
======== ==========
</TABLE>
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 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:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997
--------- -----------
<S> <C> <C>
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)
========= ===========
</TABLE>
12. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
--------- ---------
<S> <C> <C>
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)
========= =========
</TABLE>
F-14
<PAGE> 81
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EARNINGS PER SHARE (CONTINUED)
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. OPERATIONS
The Company operates in one business segment which is providing
international Internet backbone and access service and network business
solutions for corporate customers. Substantially all of the Company's operations
are carried out by its German subsidiaries. Consequently, all of the Company's
revenues and operating profit are generated in Germany and essentially all of
the Company's assets are located in Germany.
15. RECENT PRONOUNCEMENTS
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 supersedes 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.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information" (SFAS No.
131"). SFAS No. 131 requires the reconciliation of total segment information
presented to the corresponding amounts in the consolidated financial statements
and establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 is effective for the
Company's fiscal year ending December 31, 1998. The Company has not yet
determined what additional disclosures, if any, may be required in connection
with its adoption of SFAS No. 131.
In March 1998, the AICPA issued SOP 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". This standard
requires that computer software costs meeting the criteria for internal-use
software be expensed as incurred in the preliminary project stage and
capitalized thereafter. Amounts capitalized are required to be amortized on a
straight line basis over the estimated useful life of the software. The standard
is effective for fiscal years beginning after December 15, 1998. Earlier
application is permitted. The Company has not determined the impact of this
standard nor decided whether it will implement the standard before 1999.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133.
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133").
This statement establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments embedded
in other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement also requires that changes
in the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. SFAS No. 133 is effective for fiscal
years beginning after June 15, 1999 and cannot be applied retroactively. The
Company does not expect the impact of this new statement on the Company's
consolidated balance sheets or results of operations to be material.
F-15
<PAGE> 82
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents.............................. $ 2,238,909 $ 3,246,992
Short-term investments................................. 817,913 3,958,038
Accounts receivable.................................... 1,130,981 2,120,777
Other receivables...................................... 285,432 831,045
Prepaid expenses and other assets...................... 59,906 71,672
----------- -----------
Total current assets.............................. 4,533,141 10,228,524
Property and equipment, net............................ 2,284,793 5,945,357
Product development costs, net......................... 2,818,069 5,108,481
Goodwill, net.......................................... 1,322,566 3,386,013
Deferred income taxes.................................. 3,454,606 8,409,040
Other assets........................................... 5,679 169,891
----------- -----------
TOTAL ASSETS................................................ $14,418,854 $33,247,306
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Overdrafts and short-term borrowings................... $ 413,625 $ 2,278,024
Trade accounts payable................................. 1,373,901 2,519,194
Other accrued liabilities.............................. 480,228 1,530,348
Deferred purchase obligations.......................... 980,693 601,879
Accrued personnel costs................................ 393,667 207,184
Current portion capital lease obligation............... -- 525,233
----------- -----------
Total current liabilities......................... 3,642,114 7,661,862
Long-term debt......................................... 41,691 130,993
Capital lease obligation............................... -- 1,002,648
Deferred income taxes.................................. 1,801,797 3,272,157
Minority interest...................................... 24,937 122,301
SHAREHOLDERS' EQUITY
Common stock........................................... 14,682 16,962
Preferred stock........................................ 7,760 6,360
Subscription receivable................................ (735,000) --
Additional paid in capital............................. 11,102,257 25,859,111
Accumulated deficit.................................... (1,271,036) (4,442,054)
Cumulative translation adjustment...................... (210,348) (383,034)
----------- -----------
Total shareholders' equity............................. 8,908,315 21,057,345
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $14,418,854 $33,247,306
=========== ===========
</TABLE>
F-16
<PAGE> 83
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1997 1998
----------- -----------
<S> <C> <C>
Revenue
Internet Projects...................................... $ 698,716 $ 3,117,810
Network Services....................................... 284,825 2,260,555
----------- -----------
Total revenues.............................................. 983,541 5,378,365
Cost of revenues:
Internet Projects...................................... 652,397 2,227,224
Network Services....................................... 628,219 2,959,378
----------- -----------
Total cost of revenues...................................... 1,280,616 5,186,602
----------- -----------
Gross profit (loss)......................................... (297,075) 191,763
General and administrative expenses......................... 274,330 1,299,132
Marketing expenses.......................................... 735,223 3,457,440
Research and development.................................... 10,875 1,318,446
Amortization................................................ -- 76,648
----------- -----------
1,020,428 6,151,666
Interest expense............................................ 11,809 47,467
----------- -----------
Loss before taxes........................................... (1,329,312) (6,007,370)
Income tax benefit.......................................... 761,530 3,228,280
----------- -----------
Net loss.................................................... (567,782) (2,779,090)
Other comprehensive income (loss):
Foreign currency translation adjustments............... (105,625) (172,686)
----------- -----------
Comprehensive loss.......................................... $ (673,407) $(2,951,776)
=========== ===========
Basic and diluted loss per share............................ $ (.10) $ (.18)
=========== ===========
Number of shares used to compute earnings per share......... 5,689,000 15,547,621
=========== ===========
</TABLE>
F-17
<PAGE> 84
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1997 1998
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES........................ 425,538 (2,235,661)
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of short-term investments................... 438,472 (3,140,125)
Purchase of property and equipment.......................... (1,759,836) (6,722,246)
Product development costs................................... (1,707,970) (2,831,609)
---------- -----------
Net cash used in investing activities.................. (3,029,334) (12,693,980)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net................. 6,958,477 12,628,829
Proceeds from borrowings.................................... 829,927 4,913,789
Repayment of borrowings..................................... -- (1,432,208)
---------- -----------
Net cash provided by financing activities.............. 7,788,404 16,110,410
---------- -----------
Net (decrease) increase in cash and cash equivalents........ 5,184,608 1,180,769
Cash and cash equivalents at beginning of year.............. 27,889 2,238,909
Translation adjustments..................................... (105,624) (172,686)
---------- -----------
Cash and cash equivalents at end of period.................. 5,106,873 3,246,992
========== ===========
</TABLE>
F-18
<PAGE> 85
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 nine month period
ended September 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 300,000 shares of common stock of the Company will be placed with a
trustee to be released annually over a five year period in 60,000 share
increments as long as the selling shareholders of Vianet EDV remain employees of
the Company. In the event the selling shareholders resign or are terminated for
cause the shares held by the trustee will be returned to the Company. The
300,000 shares of common stock will be treated as contingent consideration and,
accordingly, will be recorded as additional goodwill when the shares are
released by the trustee. 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
58,852 shares of common stock of the Company.
3. FINANCING
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.
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.
4. OTHER
Between May 31, 1998 and September 30, 1998, all of the 1,400,000 shares of
Series C Preferred Stock were converted to the same number of shares of common
stock by the holders thereof.
F-19
<PAGE> 86
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 September 30, 1998, December 31, 1997 and 1996 and
the related statements of operations and retained earnings and cash flows for
the nine months ended September 30, 1998, and the years ended December 31, 1997
and 1996. 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 September 30, 1998, December 31, 1997 and 1996 and the results of
their operations and their cash flows for the nine months ended September 30,
1998, and the years ended December 31, 1997 and 1996 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
November 24, 1998
F-20
<PAGE> 87
VIANET EDV DIENSTLEISTUNGS GMBH
BALANCE SHEETS
(ALL AMOUNTS IN ATS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1996 1997 1998
--------- ---------- -------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................ 655,174 100,025 317,852
Recoverable taxes and other receivables (Note 2)..... 130,747 126,087 363,853
Trade accounts receivable (Note 3)................... 2,943,991 5,573,461 9,463,825
Inventories (Note 4)................................. 109,099 37,404 71,680
Prepaid expenses (Note 5)............................ 135,770 246,373 328,301
--------- ---------- ----------
Total current assets............................ 3,974,781 6,083,350 10,545,511
Deposits and Other Assets................................. 170,000 241,846 468,746
Fixed Assets (Note 6)
Leasehold improvements............................... 219,220 219,220 219,220
Office furniture and equipment....................... 2,745,313 6,470,090 7,874,927
--------- ---------- ----------
2,964,533 6,689,310 8,094,147
Accumulated depreciation............................. (669,029) (1,952,565) (3,200,547)
========= ========== ==========
2,295,504 4,736,745 4,893,600
Deferred tax asset (Note 12).............................. 18,899 -- --
--------- ---------- ----------
TOTAL ASSETS.............................................. 6,459,184 11,061,941 15,907,857
========= ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................... 3,103,262 5,911,889 6,765,513
Overdraft (Note 7)................................... -- 634,636 --
Accrued expenses (Note 8)............................ 938,000 1,906,500 1,996,900
Corporate tax (Note 12).............................. 7,500 139,200 529,978
Other payables....................................... 1,069,554 1,015,162 2,068,316
Deferred income (Note 9)............................. 841,983 953,178 3,363,592
--------- ---------- ----------
Total current liabilities....................... 5,960,299 10,560,565 14,724,299
Deferred tax liability (Note 12).......................... -- 26,024 45,585
Accrued employee benefits (Note 10)....................... 25,000 61,000 99,500
--------- ---------- ----------
25,000 87,024 145,085
SHAREHOLDERS' EQUITY (Note 11)
Share capital........................................ 250,000 250,000 750,000
Retained earnings.................................... 223,885 164,352 228,473
--------- ---------- ----------
473,885 414,352 1,038,473
--------- ---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................ 6,459,184 11,061,941 15,907,857
========= ========== ==========
</TABLE>
See accompanying notes to financial statements
F-21
<PAGE> 88
VIANET EDV DIENSTLEISTUNGS GMBH
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(ALL AMOUNTS IN ATS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------- NINE MONTHS ENDED
1996 1997 SEPTEMBER 30, 1998
----------- ----------- ------------------
<S> <C> <C> <C>
TOTAL REVENUES....................................... 16,174,241 27,390,233 28,665,709
COSTS AND EXPENSES
Costs of products sold.......................... 8,588,569 12,403,754 16,604,117
General and administrative expenses............. 2,504,500 4,929,219 4,007,743
Marketing expenses.............................. 5,008,998 9,858,437 7,442,951
---------- ---------- ----------
16,102,067 27,191,410 28,054,811
GROSS PROFIT......................................... 72,174 198,823 610,898
Interest income...................................... 23,389 20,972 8,591
Interest expense..................................... (3,726) (86,212) (55,147)
---------- ---------- ----------
19,663 (65,240) (46,556)
---------- ---------- ----------
Income before income taxes........................... 91,837 133,583 564,342
Provision for income taxes (Note 12)................. 3,899 (193,116) (440,221)
---------- ---------- ----------
NET INCOME (LOSS).................................... 95,736 (59,533) 124,121
Retained earnings, beginning......................... 128,149 223,885 164,352
---------- ---------- ----------
Retained earnings, ending............................ 223,885 164,352 288,473
========== ========== ==========
</TABLE>
See accompanying notes to financial statements
F-22
<PAGE> 89
VIANET EDV DIENSTLEISTUNGS GMBH
STATEMENTS OF CASH FLOWS
(ALL AMOUNTS IN ATS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------- NINE MONTHS ENDED
1996 1997 SEPTEMBER 30, 1998
----------- ----------- ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).................................... 95,736 (59,533) 124,121
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation.................................... 499,165 1,283,536 1,247,982
Deferred taxes.................................. -- 44,923 19,561
Change in accounts receivable, recoverable taxes
and other receivables......................... (145,264) (2,624,810) (4,128,131)
Change in deposits and other assets............. -- (71,846) (226,900)
Change in inventories........................... 34,781 71,695 (34,276)
Change in prepaid expenses...................... (12,004) (110,603) (81,927)
Change in accounts payable, accrued expenses and
other current liabilities..................... 1,624,620 4,001,630 4,836,870
---------- ---------- ----------
Net cash provided by operating activities............ 2,097,034 2,534,992 1,757,300
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and
equipment..................................... (2,059,575) (3,724,777) (1,404,837)
---------- ---------- ----------
Net cash used in investing activities................ (2,059,575) (3,724,777) (1,404,837)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issue of share capital............ -- -- 500,000
Proceeds (repayments) from borrowings........... -- 634,636 (634,636)
---------- ---------- ----------
Net cash provided by financing activities............ -- 634,636 (134,636)
(Decrease) Increase in cash and cash equivalents..... 37,459 (555,149) 217,827
Cash and cash equivalents at beginning of year....... 617,715 655,174 100,025
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........... 655,174 100,025 317,852
========== ========== ==========
</TABLE>
See accompanying notes to financial statements
F-23
<PAGE> 90
NOTES TO THE FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
United States generally accepted accounting principles ("U.S. GAAP"). The
Company maintains its financial records in accordance with the Austrian
Commercial Code, which represents generally accepted accounting principles in
Austria ("Austrian GAAP"). Generally, accepted accounting principles in Austria
vary in certain significant respects from U.S. GAAP. Accordingly, the Company
has recorded certain adjustments in order that these financial statements be in
accordance with U.S. GAAP.
BUSINESS
VIANET EDV Dienstleistungs Gesellschaft mbH ("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 monthly. Prepaid amounts are
recorded as deferred income and released into revenue over the period of three
months. Current fees are recognized as income in the month earned.
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-24
<PAGE> 91
NOTE 2. RECOVERABLE TAXES AND OTHER RECEIVABLES
Recoverable taxes and other receivables consist of (in ATS):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1996 1997 1998
------- ------- -------------
<S> <C> <C> <C>
Capital gains tax receivable.......................... 41,150 8,646 --
Value added tax....................................... 26,998 38,310 --
Employee loans........................................ 40,000 40,000 --
Prepayments........................................... -- -- 325,000
Other................................................. 22,599 39,131 38,853
------- ------- -------
130,747 126,087 363,853
======= ======= =======
</TABLE>
NOTE 3. TRADE ACCOUNTS RECEIVABLE
Total amount of accounts receivable is as follows (in ATS):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1996 1997 1998
--------- ---------- -------------
<S> <C> <C> <C>
Trade accounts receivable -- domestic............. 3,542,557 7,419,133 11,474,805
Provision for bad debts........................... (598,566) (1,845,672) (2,010,980)
--------- ---------- ----------
2,943,991 5,573,461 9,463,825
========= ========== ==========
</TABLE>
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 as well as the nine months ended September 30, 1998, 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:
<TABLE>
<S> <C>
Leasehold investments....................................... 10 years
Hardware equipment.......................................... 4-8 years
Office equipment............................................ 4-8 years
Intangible assets........................................... 4-7 years
</TABLE>
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-25
<PAGE> 92
NOTE 8. ACCRUED EXPENSES
Accruals for the following costs have been provided (in ATS):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1996 1997 1998
------- --------- -------------
<S> <C> <C> <C>
Unused holidays..................................... 111,300 177,600 194,800
Telecommunication fees.............................. 469,000 435,500 100,000
Professional fees................................... 127,700 629,000 392,000
Warranties.......................................... -- 210,000 210,000
Payroll taxes....................................... -- 224,400 472,100
Services not yet invoiced and other Accruals........ 230,000 230,000 628,000
------- --------- ---------
938,000 1,906,500 1,996,900
======= ========= =========
</TABLE>
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.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1996 1997 1998
------- ------- -------------
<S> <C> <C> <C>
Deferred revenue (in ATS)............................. 841,983 953,178 3,363,592
</TABLE>
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 (hereafter "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. Share capital was increased by ATS 500,000 in
September 1998.
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-26
<PAGE> 93
NOTE 12. PROVISION FOR INCOME TAXES
The components of the provisions for income taxes are as follows (in ATS):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1996 1997 1998
------- ------- -------------
<S> <C> <C> <C>
Current............................................... 15,000 148,193 420,660
Deferred.............................................. (18,899) 44,923 19,561
------- ------- -------
Income tax (benefit).................................. (3,899) 193,116 440,221
======= ======= =======
</TABLE>
The Company has net deferred taxes as of December 31, 1997 and 1996, and
September 30, 1998 (in ATS):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1996 1997 1998
------ ------- -------------
<S> <C> <C> <C>
Deferred tax assets
Net operating loss................................ 55,283 -- --
Accrued employee benefits......................... 8,500 20,740 33,830
------ ------- -------
63,783 20,740 33,830
====== ======= =======
Deferred tax liability
Depreciation...................................... 44,884 46,764 79,414
====== ======= =======
Net deferred tax asset (liability)..................... 18,899 (26,024) (45,584)
====== ======= =======
</TABLE>
Reconciliation of income taxes determining the Austrian statutory federal
income tax rate of 34% to actual income taxes provided is as follows (in ATS):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1996 1997 1998
------- ------- -------------
<S> <C> <C> <C>
Income tax at statutory rate.......................... 31,225 45,418 191,876
Permanent differences................................. (31,438) 166,409 286,384
Other................................................. (3,686) (18,711) (38,039)
------- ------- -------
(3,899) 193,116 440,221
======= ======= =======
</TABLE>
NOTE 13. COMMITMENTS
The Company has operating leases. The commitment for future minimum lease
payments is:
<TABLE>
<S> <C> <C>
1998........................................................ ATS 1,136,203
1999........................................................ ATS 759,040
2000........................................................ ATS 258,133
2001........................................................ ATS 53,179
</TABLE>
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, and ATS
1,073,328 for the nine months ended September 30, 1998.
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-27
<PAGE> 94
VIANET EDV DIENSTLEISTUNGS GMBH
STATEMENTS OF OPERATIONS
(ALL AMOUNTS IN ATS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1998 1997
---------- -----------
(UNAUDITED)
<S> <C> <C>
TOTAL REVENUES.............................................. 28,665,709 20,633,820
COSTS AND EXPENSES
Costs of revenues...................................... 16,604,117 9,280,392
General and administrative expenses.................... 4,007,743 3,958,236
Marketing expenses..................................... 7,442,951 7,351,009
---------- ----------
GROSS PROFIT................................................ 610,898 44,183
Interest income............................................. 8,591 5,756
Interest expense............................................ (55,147) 5,473
---------- ----------
Earnings before income taxes................................ 564,342 44,466
Provision for income taxes.................................. (440,221) 18,750
---------- ----------
NET INCOME (LOSS)........................................... 124,121 25,716
---------- ----------
</TABLE>
F-28
<PAGE> 95
VIANET EDV DIENSTLEISTUNGS GMBH
STATEMENTS OF CASH FLOWS
(ALL AMOUNTS IN ATS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1998 1997
---------- -----------
(UNAUDITED)
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES:.................. 1,757,300 1,490,906
INVESTING ACTIVITIES
Expenditures for property, plant and equipment......... (1,404,837) (1,737,127)
---------- ----------
Net cash (used in) investing activities..................... (1,404,837) (1,737,127)
---------- ----------
FINANCING ACTIVITIES
Repayments of borrowings............................... (634,636) --
Proceeds from issue of share capital................... 500,000 --
---------- ----------
Net cash provided by financing activities................... (134,636) --
---------- ----------
(Decrease) Increase in cash and cash equivalents............ 217,827 (246,221)
Cash and cash equivalents at beginning of year.............. 100,025 655,174
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. 317,852 408,953
========== ==========
</TABLE>
F-29
<PAGE> 96
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
nine month period ended September 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 November, 1998.
F-30
<PAGE> 97
INDEPENDENT AUDITORS REPORT
To the Management and Shareholders
of OPEN:NET Netzwerkdienste GmbH, Ulm
We have audited the accompanying balance sheet of OPEN:NET Netzwerkdienste
GmbH as of December 31, 1997 and the related profit and loss statement for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in Germany and the United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statements presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of OPEN:NET Netzwerkdienste
GmbH at December 31, 1997 and the results of operations for the year then ended,
in conformity with accounting principles generally accepted in Germany.
Accounting principles generally accepted in Germany vary in certain
significant respects from accounting principles generally accepted in the United
States of America to the extent summarized on page F-35-36 of the financial
statements.
/s/ Schitag Ernst & Young
Deutsche Allgemeine Treuhand AG
Wirtschaftsprufungsgesellschaft
Munich, Germany
November 10, 1998
F-31
<PAGE> 98
OPEN:NET NETZWERKDIENSTE GMBH, ULM
BALANCE SHEET
AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
DM DM
---------- ----------
<S> <C> <C> <C>
ASSETS
A. FIXED ASSETS
I. INTANGIBLE ASSETS
1. Franchises, trademarks, patents, licenses, and similar
rights and licenses to such rights.......................... 10,337.00
II. TANGIBLE ASSETS
1. Other equipment, furniture and fixtures..................... 130,152.10
B. CURRENT ASSETS..............................................
I. INVENTORIES
1. Work in process............................................. 20,000.00
II. RECEIVABLES AND OTHER ASSETS
1. Trade accounts receivable due after one year DM 0.00........ 476,206.02
2. Other assets due after one year DM 0.00..................... 15,942.01 492,198.53
----------
III. CHECKS, CASH ON HAND, FEDERAL BANK AND POSTAL GIRO BALANCES,
AND CASH IN BANKS........................................... 3,191.45
C. PREPAID EXPENSES AND DEFERRED CHARGES....................... 27,600.00
----------
683,429.08
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
A. EQUITY
I. Stated Capital.............................................. 50,000.00
II. Retained Earnings........................................... 5,958.98
B. ACCRUALS
1. Tax accruals................................................ 2,700
2. Other accruals.............................................. 38,400.00 41,100.00
----------
D. LIABILITIES
1. Liabilities due to banks due within one year: DM
38,211.17................................................... 182,181.78
2. Trade accounts payable due within one year: DM 116,257.44... 116,257.44
3. Other liabilities due within one year: DM 287,930.88 thereof
due to shareholders DM 136,718.71 thereof for taxes
DM 66,352.50 thereof for social security DM 18,892.52....... 287,930.88 586,370.10
---------- ----------
683,429.08
==========
</TABLE>
F-32
<PAGE> 99
OPEN:NET NETZWERKDIENSTE GMBH, ULM
PROFIT AND LOSS STATEMENTS
<TABLE>
<CAPTION>
(UNAUDITED)
EIGHT MONTHS
ENDED YEAR ENDED
AUGUST 31 DECEMBER 31
1998 1997
DM DM
------------ -----------
<C> <S> <C> <C>
1. Sales....................................................... 1,748,006.37 1,776,454.36
2. Increase/Decrease in work in process........................ -20,000.00 4,600.00
3. Other operating income...................................... 9,516.80 35,519.77
------------ ------------
1,737,523.25 1,816,574.13
4. Cost of materials
a) Cost of raw materials, supplies, production materials and
purchased goods......................................... 613,652.18 628,704.51
5. Personnel expenses
a) Wages and salaries....................................... 616,478.27 486,678.69
b) Social security, pension and other benefit costs thereof
for pensions DM 1,816.50 and DM 9,909.25.................... 97,388.82 61,240.67
------------ ------------
713,867.09 547,919.36
6. Depreciation and amortization
a) on intangible assets and tangible fixed assets........... 66,434.57 72,182.42
7. Other operating expenses.................................... 772,177.36 535,918.88
8. Other interest and similar income........................... 3.29 203.11
9. Interest and similar expenses............................... 5,836.51 15,854.63
------------ ------------
10. Result from ordinary operations............................. -434,441.17 16,197.44
11. Taxes on income............................................. 9,020.00 10,334.75
------------ ------------
12. Net income for the year..................................... -443,461.17 5,862.69
------------ ------------
13. Profit/Loss carry-forward from prior year................... 5,958.98 96.29
------------ ------------
14. Retained Earnings........................................... -437,502.19 5,958.98
============ ============
</TABLE>
F-33
<PAGE> 100
OPEN:NET NETZWERKDIENSTE GMBH, ULM
NOTES TO THE FINANCIAL STATEMENTS
GENERAL
The annual financial statements of OPEN: NET Netzwerkdienste GmbH have been
prepared in accordance with Section 242 and subsequent sections and Section 264
and subsequent sections of the German Commercial Code (HGB) as well as in
accordance with the relevant provisions of the Limited Liability Companies Law
(GmbHG). The Company is subject to the requirements for small companies.
The financial statement classifications remained unchanged. The profit and
loss statement was prepared in accordance with the total costs method and in
accordance with Sec. 275 of the German Commercial Code.
The company makes full use of the footnote disclosures exemptions for
smallsized corporations set forth in Sec. 288 of the commercial trade code.
ACCOUNTING AND VALUATION METHODS
The following accounting and valuation methods, which remained unchanged in
comparison to the previous year, were used for preparing the financial
statements.
Acquired INTANGIBLE AND TANGIBLE ASSETS are capitalized at acquisition cost
and, if they have a limited life, are reduced by ordinary depreciation in
accordance with their useful lives. To the extent permissible under the tax law,
the declining-balance method, otherwise the straight-line method is used.
Low-value assets of a value up to DM 800.00 are fully depreciated in the
year of acquisition with their immediate disposal being assumed. Depreciation on
additions to tangible assets is generally recognized proportionally based on the
month of acquisition. For movable assets, the simplification rule as defined in
R 44 Para. 2 of the Income Tax Guideline (EStR) is used.
RECEIVABLES AND OTHER ASSETS are stated at their nominal value. All
foreseeable valuation risks are provided for via adequate specific allowances.
General credit risk is provided for through a general allowance.
OTHER ACCRUALS take into account all contingent liabilities and anticipated
losses from pending transactions.
LIABILITIES are recorded at their repayment value.
EXPLANATIONS TO THE BALANCE SHEET
FIXED ASSETS
The roll-forward of the individual fixed asset positions including
current-year depreciation is disclosed under "Roll-Forward of Fixed Assets".
FIXED ASSETS ROLLFORWARD
<TABLE>
<CAPTION>
ACQUISITION AND PRODUCTION COST
------------------------------------------------
01.01.97 ADDITIONS DISPOSALS 31.12.97
DM DM DM DM
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
FIXED ASSETS
I. INTANGIBLE ASSETS
I. Franchises, trademarks,
patents, licenses and similar
rights and licenses to such
rights......................... 5,147.36 10,374.99 0.00 15,522.35
---------- ---------- ---- ----------
II. TANGIBLE ASSETS
3. Other equipment, furniture and
fixtures....................... 107,558.07 121,852.43 0.00 229,410.50
========== ========== ==== ==========
112,705.43 132,227.42 0.00 244,932.85
========== ========== ==== ==========
<CAPTION>
ACCUMULATED DEPRECIATION NET BOOK V
---------------------------------------------- ----------
01.01.97 ADDITIONS DISPOSALS 31.12.97 31.12.97
DM DM DM DM DM
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
FIXED ASSETS
I. INTANGIBLE ASSETS
I. Franchises, trademarks,
patents, licenses and similar
rights and licenses to such
rights......................... 1,358.36 3,826.99 0.00 5,185.35 10,337.00
--------- --------- ---- ---------- ----------
II. TANGIBLE ASSETS
3. Other equipment, furniture and
fixtures....................... 30,903.07 68,355.43 0.00 99,258.50 130,152.00
========= ========= ==== ========== ==========
32,261.43 72,182.42 0.00 104,443.85 140,489.00
========= ========= ==== ========== ==========
</TABLE>
F-34
<PAGE> 101
OPEN:NET NETZWERKDIENSTE GMBH, ULM
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RECEIVABLES AND OTHER ASSETS
Other assets include corporate income tax refunds and VAT deductible in
1998.
TAX AND OTHER ACCRUALS
Tax accruals relate to trade tax on income for 1997.
Other accruals were set up for outstanding vacation and tax consultant
fees.
LIABILITIES DUE TO BANKS
Liabilities with remaining terms of more than 5 years amount to
DM 26,760.00.
OTHER LIABILITIES
Other Liabilities include payables due to shareholders, VAT payables,
outstanding invoices and commissions.
The payables due to shareholders amount to DM 136,718.73.
CONTINGENT LIABILITIES AND OTHER FINANCIAL OBLIGATIONS
There are no contingent liabilities. Other financial obligations amount to
DM 52,425.00.
EXPLANATIONS TO THE PROFIT AND LOSS STATEMENT
OTHER OPERATING EXPENSES
Other expenses primarily contain expenses for premises and equipment, sales
commissions and external services.
OTHER DISCLOSURES
MANAGEMENT
General Managers during the financial year were:
Thomas Egner
Uwe Hagenmeier
Martin Heimann (until January 28, 1997)
Roland Lohmiller (until January 28, 1997)
RECOMMENDATION ON THE APPROPRIATION OF RETAINED EARNINGS
In agreement with the shareholders management recommends the carry forward
the retained earnings of DM 5,958.98 to the next financial year.
SIGNIFICANT DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN
GERMANY AND THE UNITED STATES OF AMERICA
Generally accepted accounting principles in Germany ("German GAAP") vary in
certain respects from generally accepted accounting principles in the United
States of America ("US GAAP"). The significant
F-35
<PAGE> 102
OPEN:NET NETZWERKDIENSTE GMBH, ULM
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
differences between the accounting principles applied and those which would be
applied under US GAAP are summarized below:
CASH FLOW STATEMENTS
Statements of cash flows are required to be presented under US GAAP. Cash
flow statements are not required by German GAAP.
SPECIAL ACCELERATED DEPRECIATION
Special accelerated depreciation for tax purposes has been recorded in the
accounts and deducted from the book value of fixed assets. Under US GAAP,
accelerated depreciation would not be recorded in the financial statements.
CAPITALIZATION OF INTEREST COST
In application of FAS-51 and under the provisions of FAS-34 certain
interest costs, if material, have to be capitalized and added to the acquisition
cost of assets which require a certain time to get ready for their intended use.
German GAAP does not allow for the capitalization of interest related to
constructed assets.
Gunzburg, August 1998
The management
OPEN NET Netzwerkdienste GmbH
F-36
<PAGE> 103
[This page intentionally left blank]
<PAGE> 104
- ------------------------------------------------------
- ------------------------------------------------------
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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................... 3
Prospectus Summary........................ 4
The Company............................... 4
The Offering.............................. 5
Risk Factors.............................. 7
New Underwriter........................... 18
Use of Proceeds........................... 18
Dividend Policy........................... 18
Price Range of Common Stock............... 18
Dilution.................................. 19
Capitalization............................ 20
Selected Consolidated Financial Data...... 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 22
Pro Forma Consolidated Financial
Statements.............................. 28
Business.................................. 34
Management................................ 42
Principal Stockholders.................... 48
Description of Capital Stock.............. 49
Anti-Takeover Provisions.................. 53
Transfer Agent and Registrar.............. 56
Taxation.................................. 56
Underwriting.............................. 60
The German Equity Market.................. 62
Certain Transactions...................... 63
Shares Eligible for Future Sale........... 63
Legal Matters............................. 65
Experts................................... 65
Additional Information.................... 65
Index to Consolidated Financial
Statements.............................. F-1
</TABLE>
UNTIL ______ ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
1,500,000 SHARES
[CYBERNET LOGO]
CYBERNET
INTERNET
SERVICES
INTERNATIONAL,
INC.
-------------------
PROSPECTUS
-------------------
BERLINER
EFFEKTENBANK AG, BERLIN
, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 105
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.
ALTERNATE PAGE
SUBJECT TO COMPLETION, DATED , 1998
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
SALES PROSPECTUS
FOR
1,500,000 SHARES OF COMMON STOCK OFFERED BY THE COMPANY
AND
SECURITIES NO. WP-KENN-NR. 906 623
THE SHARES OFFERED BY THE COMPANY ARE REGISTERED BY BOOK-ENTRY ONLY
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF
RISK AND IMMEDIATE AND SUBSTANTIAL DILUTION.
SEE "RISK FACTORS" COMMENCING ON
PAGE 7 AND "DILUTION."
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE UNITED STATES
SECURITIES AND EXCHANGE COMMISSION OR ANY U.S. STATE SECURITIES COMMISSION
NOR HAS THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR ANY
U.S. STATES SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE IN THE UNITED STATES.
------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT COMPANY(1)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
Per Share................................... $ $ $
- ------------------------------------------------------------------------------------------------
Total....................................... $ $ $
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) Before deducting estimated expenses of $ payable by the
Company.
(2) The Underwriting Discount is expected to be 6% of the Price to Public
(between $1.96 million and $2.36 million).
<PAGE> 106
ALTERNATE PAGE
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information....................................... 3
Prospectus Summary.......................................... 4
Risk Factors................................................ 7
New Underwriter............................................. 18
Use of Proceeds............................................. 18
Dividend Policy............................................. 18
Price Range of Common Stock................................. 18
Dilution.................................................... 19
Capitalization.............................................. 20
Selected Consolidated Financial Data........................ 21
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 22
Pro Forma Consolidated Financial Statements................. 28
Business.................................................... 34
Management.................................................. 42
Principal Stockholders...................................... 48
Description of Capital Stock................................ 49
Anti-Takeover Provisions.................................... 53
Transfer Agent and Registrar................................ 56
Taxation.................................................... 56
Underwriting................................................ 60
Certain Transactions........................................ 63
Shares Eligible for Future Sale............................. 63
Legal Matters............................................... 65
Experts..................................................... 65
Additional Information...................................... 65
Index to Financial Statements............................... F-1
</TABLE>
A-2
<PAGE> 107
ALTERNATE PAGE
GENERAL INFORMATION
RESPONSIBILITY FOR CONTENTS OF PROSPECTUS
CYBERNET INTERNET SERVICES INTERNATIONAL, INC., a Delaware corporation (the
"Company"), and Berliner Effektenbank AG, Berlin (the "Underwriter") assume
liability for the contents of this Prospectus (as defined on page 3) pursuant to
the German Sales Prospectus Act and Section 45 of the German Stock Exchange Act
and hereby state that to their knowledge the information contained in this
Prospectus is accurate and that no material circumstances have been omitted.
INSPECTION OF DOCUMENTS
All documents cited in this Prospectus relating to the incorporation of the
Company and the issuance of the shares (as well as the documents mentioned in
this Prospectus to the extent they relate to the Company), may be inspected in
the offices of the Company at Stefan-George-Ring 19-23, 81929 Munich, Germany.
SUBJECT OF PROSPECTUS
This Prospectus relates to the Company's offering (the "Offering") of
1,500,000 shares (the "Shares") of the Company's common stock, $0.001 par value
per share (the "Common Stock"). On the basis of this Prospectus the 16,962,138
of Common Stock outstanding will also be listed on the Neue Markt.
SALES OFFER
1,500,000 shares of Common Stock are offered by the Underwriter, as agent
for the Company, pursuant to resolutions duly adopted by the Board of Directors
of the Company at a meeting held on November 16, 1998. The price is $
per share, on a "best efforts, all-or-none" basis, for a period of 45 days (with
a possible extension of an additional 30 days) from the effective date 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 receipt by the Underwriter in an
escrow account, to be held in escrow for the subscribers of the Shares. If no
closing takes place during the offering period (or any extension thereof), all
funds will be promptly returned to the subscribers without any deduction
therefrom and with interest thereon, within seven days after termination of the
Offering Period. During the Offering Period (or any extension thereof)
subscribers have no right to the return of their subscriptions. In the event
that the Offering is oversubscribed, completed subscriptions will be accepted on
a first come, first served basis.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Shares, after
deduction of underwriting discounts ($2,250,000) and other estimated offering
expenses ($750,000), are estimated to be approximately $34,500,000. The Company
anticipates utilizing approximately $7.3 million for acquisitions, including the
cash payments of $4.3 million for the Vianet Acquisition and $585,750 for the
Open:Net acquisition and the remainder for additional acquisitions; $9.3 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 $14.1 million would be available as working capital, including payment of
fees required for licensing as a carrier.
CERTIFICATES OF DELIVERY
At the closing of the Offering, the Depository Trust Company ("DTC") will
electronically deposit the Shares in the account of Deutsche Boerse Clearing AG
("DBC") for the benefit of the Underwriter. Thereafter, the Underwriter will
electronically transfer beneficial ownership of the Shares to the purchasers
A-3
<PAGE> 108
ALTERNATE PAGE
thereof (through their brokers or other financial institutions that are DBC
participants). DBC will not hold certificates for shares of Common Stock, but
will maintain an account with DTC to which such shares are credited. DTC, or its
nominee, will be the registered owner of all shares of Common Stock that are
held by purchasers through DBC. Certificates representing shares of Common Stock
held through DBC will not be issued unless such shares are withdrawn from DBC,
in which case the shares will not be eligible to trade on the various German
stock exchanges unless such shares are redeposited with DTC for credit to DBC's
account. Shareholders holding share certificates who desire to transfer their
shares may effectuate the transfer by submitting to the transfer agent such
certificates and the transfer agent will issue a new certificate in the name of
the transferee. After December 8, 1998 the 16,962,138 shares of Common Stock
presently outstanding can also be traded electronically on the Neue Markt
through the Deutsche Boerse Clearing AG.
STOCK EXCHANGE ADMISSION AND PAYMENT DATE
The Common Stock currently is quoted on the Nasdaq OTC Bulletin Board under
the symbol "ZNET" and has been quoted on such market since March 10, 1997. The
Common Stock is also quoted under the Securities No. 906 623 on the Freiverkehr
of the Berlin and Munich Stock Exchanges. On October 30, 1998, the last reported
sale price of the Common Stock on the Nasdaq OTC Bulletin Board was $20.88 per
share. Application will be made to include all Common Stock for listing on the
Neue Markt of the Frankfurt Stock Exchange. The first day of trading on the Neue
Markt is expected to be December 9, 1998. Closing of the Offering will take
place when the prerequisites for listing have been met. Trading of the new
shares on the Nasdaq OTC Bulletin Board may legally commence promptly after
closing.
INDEMNIFICATION
The Company has agreed to indemnify the Underwriter against certain
liabilities. See "Underwriting."
INVESTMENTS
Pending application of the net proceeds as described above, the Company
intends to invest the net proceeds in low risk, high liquidity instruments.
BUSINESS STRATEGY AND OUTLOOK
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 or 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. The Company currently provides services to
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.
A-4
<PAGE> 109
ALTERNATE PAGE
The Company has grown through internal growth and 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.
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; and
(4) 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.
The Company currently provides service to approximately 6,000 customers. No
single customer or group of customers accounted for more than 10% of the
Company's revenues in the year ended December 30, 1997 or in the nine month
period ended September 30, 1998.
To achieve these goals, the Company has adopted and intends to maintain a
flexible organization 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 economics of scale.
The Company's primary sources of short-term liquidity will be the proceeds
of the Offering. 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. If the planned Offering is
unsuccessful, the Company will be required to seek alternative financing
sources. 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.
For the month of October 1998, Cybernet AG had sales of $762,868 and cost
of sales of $949,150. The work-in-process is in line with that of previous
months of 1998.
Following is a schedule of the Company and its subsidiaries:
A-5
<PAGE> 110
ALTERNATE PAGE
[Flow chart]
Cybernet Internet-Dienstleistungen AG, based in Munich, is the principal
office of the group. It was founded in 1995. It offers a full range of Internet-
and Internet-based telecommunication and system integration solutions. The
reported sales for the first three quarters of 1998 were $5.4 million.
Eclipse SpA, based in Trento, Italy, was founded in 1991 with the specific
aim of introducing the innovative technology of electronic communication into
the industrial, productive and financial world. The sales of Eclipse for the
first 3 quarters of 1998 are consolidated with Cybernet AG reported sales stated
above.
OpenNet GmbH, based in Ulm, was bought by Cybernet AG in August 1998.
OpenNet develops Internet services and products for corporate customers that
intend to utilize world wide communication networks. The reported sales for the
first eight months of 1998 were approximately $1.0 million.
Vianet AG, based in Vienna, Austria, is a full service ISP located in
Austria. The services it offers include concepts, development and organisation
of user oriented solutions as well as installation of software and hardware.
Vianet further offers workshops and support services. The reported sales for the
first three quarters of 1998 were $2.3 million.
The Company has additional offices in Stuttgart, Frankfurt and New Ulm.
OUTSTANDING SHARES
Prior to the Offering, the Company has outstanding 16,962,138 shares of
Common Stock of which 11,043,633 are legally free trading. Subsequent to the
Offering, the Company will have outstanding 18,462,138 shares of Common Stock.
Immediately following the Offering, the only Company shares outstanding will be
the shares issued in anticipation of the merger and the shares issued to
effectuate the merger; it is estimated that the number of freely tradeable
shares will be 12,543,633 (assuming an Offering of 1,500,000 shares). All the
shares of the Company are represented by certificates issued on behalf of the
Company by the transfer agent of the Company.
THE COMPANY
The purpose of the Company, as stated in its certificate of incorporation,
is to engage in any lawful act or activity for which corporations may be
organized under the Delaware General Corporation Law and no further purpose has
been specified in the Company Certificate of Incorporation. The predecessor to
the Company, Cybernet Internet Services International, Inc. ("Cybernet Utah")
was organized on September 27, 1983 in Utah and was authorized to issue
50,000,000 shares of common stock, par value $.001 per share. At the time
A-6
<PAGE> 111
ALTERNATE PAGE
of the acquisition of Cybernet Internet Dienstleistungen AG in 1997, Cybernet
Utah did not have any material business activities and had no material assets or
liabilities. At the time of the acquisition, Cybernet AG was a privately held
German corporation which had been founded in 1996 by Andreas Eder, Holge Timm,
Thomas Shulz and Cybermind AG. From January 1, 1995 to the present, the Company
made the following private placement of its common stock:
<TABLE>
<S> <C>
June 1997 5,160,000 shares for shares of Cybernet AG
June 23, 1997 1,400,000 shares (Series C Preferred Stock; later converted
to common stock); $9,800,000
September 1, 1997 72,620 shares $619,106
December 1997 27,000 shares Shares of Eclipse
May 1998 700,000 shares $12,600,000
August 1998 58,852 shares $94,286
</TABLE>
Effective on November 18, 1998, Cybernet Utah was merged into the Company and
the Company is the surviving entity of the merger. The Company was formed in
Delaware on September 18, 1998 for the sole purpose of moving Cybernet Utah's
state of incorporation to Delaware. It was not formed for any other purpose than
to effectuate such relocation. The Company will hold annual shareholders
meetings. The fiscal year of the Company is the calendar year.
DIVIDENDS
Each of the holders of the shares offered hereby will be eligible to
receive dividends if and when declared by the Board of Directors of the Company.
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.
Moreover, even if the Company determines to pay cash dividends to the holders of
Common Stock it must first pay the dividends accrued to the holders of its
holders of the Series A and Series B Preferred Stock, before paying dividends to
the Common Stock.
PLACE OF PAYMENT
Closing of the offering and payment for the shares will take place at the
offices of Berliner Effektenbank AG, Kurfuerstendamm 119, 10711 Berlin, Germany.
PUBLIC ANNOUNCEMENTS
Any announcement regarding shares of the Company will be published in a
newspaper which is admitted by the Frankfurter Wertpapierboerse.
LEGAL PROCEEDINGS
On December 1, 1997, TUV Technischer Uberwachungsdrenst Osterreich (TUV)
filed an action against Vianet alleging a technical malfunction of certain Cisco
routers installed and programmed by Vianet. The alleged malfunction is said to
have resulted in substantially increased telephone charges to TUV. Trial counsel
to Vianet has estimated the maximum amount which could be claimed by TUV as
approximately $132,000. Other than as described above the Company is not
presently, and during the past two fiscal years the Company has not been, a
party to any material legal proceeding.
A-7
<PAGE> 112
ALTERNATE PAGE
GERMAN TAKE-OVER CODE
In connection with its listing on the Neue Markt of the Frankfurt Stock
Exchange, the Company is required to comply with the German Take-Over Code and
has done so. The German Take-Over Code regulates merger and acquisitions by
public companies, and requires that companies making an offer to a target
company: notify the German regulatory authorities and the public of the offer,
provide certain disclosures to the target company's stockholders, treat
stockholders equally in an offer, and comply with certain other regulatory
requirements. In addition, the rights of the Company's shareholders under the
German Take-Over Code differ in certain respects from rights afforded to
shareholders under the United States federal and state laws governing tender
offers and take-overs. German regulatory authorities are given broad authority
to interpret the German Take-Over Code and to review and regulate specific
merger and acquisitions. Compliance with the German Take-Over Code could have
the effect of delaying, deferring or preventing a tender offer or takeover,
notwithstanding that such tender offer or takeover might result in stockholders
receiving a premium over the market price for their shares.
EMPLOYEES
During the years 1996 and 1997, the Company had, respectively, 9.5 and
48.25 employees per month on the average during the year. 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.
MANAGEMENT COMPENSATION
The aggregate amount paid to the Company's executive officers by the
Company and its subsidiaries, in 1997, was $238,000. For a description of the
salaries currently being paid to the executive officers of the Company, see
"Management" in the Prospectus.
COMPANY'S AUDITORS
The Company's independent auditors are:
Schitag Ernst & Young
Deutsche Allgemeine Treuhand AG
Elisenstrasse 3a
80335 Munich, Germany
A-8
<PAGE> 113
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.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $20.650
Printing and engraving expenses............................. *
Legal fees of Registrant.................................... *
Accountants' fees and expenses.............................. *
Miscellaneous............................................... *
-------
Total............................................. $ *
</TABLE>
- ---------------
* 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 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
<PAGE> 114
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:
<TABLE>
<CAPTION>
Securities Sold
----------------------------------- Purchasers Consideration Exemption
Date Number of Shares
Class of Stock
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 58,852 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
</TABLE>
(1) Between May 31, 1998 and September 30, 1998, all of the 1,400,000 shares of
Series C Preferred Stock were converted to the same number of shares of
Common Stock by the holders thereof.
II-2
<PAGE> 115
ITEM 16(a). EXHIBITS
<TABLE>
<C> <S>
1.1*** Amended Underwriting Agreement
2.1** Agreement and Plan of Merger between the Registrant and
Cybernet Internet Services International, Inc., a Utah
corporation, dated October 9, 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
</TABLE>
- ---------------
* To be filed by amendment
** Previously filed
*** Attached hereto
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriter
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
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 payment by the Registrant of expenses incurred or paid
by a director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted 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
II-3
<PAGE> 116
against public policy as expressed in the Securities Act and will be governed by
final adjudication of such issue.
The undersigned Registrant hereby undertakes that it will:
(1) For purposes of determining any liability under the Securities
Act, treat the information omitted from the form of Prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of Prospectus filed by the Registrant pursuant to Rule
424(b)(1), or (4) or 497(h) under the Securities Act as part of this
Registration Statement as of the time the Commission declared it effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of Prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
II-4
<PAGE> 117
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 of Amendment No. 4 to 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 November 24, 1998.
CYBERNET INTERNET SERVICES
INTERNATIONAL, INC.
By: /s/ ANDREAS EDER
------------------------------------------
Andreas Eder,
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ANDREAS EDER Chairman of the Board November 24, 1998
- ------------------------------------------------ of Directors, Chief
Andreas Eder Executive Officer
/s/ ANDREAS EDER Director November 24, 1998
- ------------------------------------------------
Tristan Libischer*
Director November , 1998
- ------------------------------------------------
Holger Timm
/s/ ANDREAS EDER Director November 24, 1998
- ------------------------------------------------
Hubert Besner*
/s/ ANDREAS EDER Director November 24, 1998
- ------------------------------------------------
G.W. Norman Wareham*
/s/ ANDREAS EDER Director November 24, 1998
- ------------------------------------------------
Robert Fratarcangelo*
/s/ ANDREAS EDER Principal Accounting November 24, 1998
- ------------------------------------------------ and Financial Officer
Christian Moosmann*
</TABLE>
* Powers of Attorney authorizing Andreas Eder to sign this Amendment to the
Registration Statement on behalf of the persons listed above, designated by
asterisks, in the capacities set forth opposite their respective names, are on
file with the Securities and Exchange Commission.
II-5
<PAGE> 1
EXHIBIT 1.1
AMENDED UNDERWRITING AGREEMENT
THIS AMENDED UNDERWRITING AGREEMENT (this "Agreement") is entered
into as of _________, 1998, among CYBERNET INTERNET SERVICES INTERNATIONAL,
INC., a Delaware corporation (the "Company"), and BERLINER EFFEKTENBANK AG, a
German corporation ("BEB").
BACKGROUND
The Company proposes to issue and sell through BEB 1,500,000 shares
(the "Securities") of its common stock par value $ 0.001 per share ("Common
Stock") on a "best efforts, all-or-none" basis (the "Offering").
In furtherance of the foregoing, the Company and BEB hereby agree as
follows:
SECTION 1
SALE OF SECURITIES
The Company proposes to issue and sell the Securities to the public
through BEB, as underwriter, at an offering price of US$____ per share in
consideration for which the Company shall pay BEB, at the Closing (as defined
below), a commission equal to six percent (6 %) of the aggregate purchase price
of the Securities.
SECTION 2
PAYMENT AND DELIVERY
2.1. The Company hereby appoints BEB as its exclusive agent (subject
to BEB's right to designate selected dealers who may participate in the
Offering) for a period (the "Offering Period") of forty-five (45) days from the
date on which the Registration Statement (as hereinafter defined) becomes
effective (the "Effective Date"), to sell the Securities on a "best-efforts,
all-or-none" basis; provided however, the Company and BEB, by their mutual
written consent, may extend the Offering Period for an additional period of up
to thirty (30) days. The Company and BEB, at any time, may agree to terminate
the Offering prior to the end of the Offering Period. BEB, on the basis of the
<PAGE> 2
representations and warranties contained herein, and subject to the terms and
conditions set forth herein, accepts such appointment and agrees to use its best
efforts to find purchasers for the Securities. BEB, as agent for the Company,
shall offer the shares of Common Stock to the public at a price of US$ _______
per share. If, at or prior to the end of the Offering Period, subscriptions are
received aggregating more than the Securities, then BEB shall allocate the
Securities among the subscribers on a first come first served basis. In the
event the Offering is over subscribed the Company will sell up to an additional
300,000 shares in the Offering, on the same terms and at the same price.
2.2 Until all of the Securities have been subscribed and paid for,
all subscription amounts shall be deposited no later than noon on the business
day next following their receipt by BEB or any participating Selected Dealer (as
hereinafter defined), directly into a escrow account which shall be established
pursuant to an escrow agreement substantially in the form annexed hereto as
Exhibit A (the "Escrow Agreement")
2.3 Promptly after the Effective Date, (i) the Company shall
deliver to its transfer agent (the "Transfer Agent") certificates which will be
used to represent the Securities to be sold hereunder through BEB; and (ii) the
Company shall instruct the Transfer Agent to deliver a certificate evidencing
the Securities (or shall electronically transfer evidence of the Securities) to
Depositary Trust Company for deposit into the account of BEB's clearing firm
for the benefit of BEB on the Closing Date.
2.4 If all of the Securities are not sold within the Offering
Period, this Agreement automatically shall terminate, the Securities held by BEB
shall be returned to the Transfer Agent, and all amounts in the Escrow Account
shall be distributed in accordance with the Escrow Agreement.
2.5 If all of the Securities have been subscribed for and payment
therefor has been tendered prior to the expiration of the Offering Period, BEB
promptly shall give written notice (the "Notice") to the Company and the
Transfer Agent so indicating and setting forth (i) the amount of BEB's
commission, (ii) the time and date (which date shall be no later than
seventy-five (75) days after the Effective Date) on which the closing (the
"Closing") shall take place (the "Closing Date"), and (iii) a written statement
reflecting each subscription which identifies, among other things, the name and
address of each subscriber, the number of Securities allocated to each
subscriber, the
2
<PAGE> 3
amount tendered as payment therefor, and, if the provisions of Section 2.7 below
are applicable, the amount equal to the aggregate price of that number of
Securities for which such subscription is not being accepted. The Closing shall
take place at the offices of BEB, Kurfurstendamm 119, 10711 Berlin, Germany, or
at such other place as BEB and the Company shall agree.
2.6 At the Closing, (i) the escrow agent shall deliver and remit to
the Company from the escrow account the purchase price of such Securities, less
BEB's commission, and (ii) the Company shall instruct Depositary Trust Company
to deposit the Securities into the account of BEB's clearing firm for the
benefit of BEB. Upon receipt of the Securities, BEB shall deliver to each
purchaser certificates representing the Securities sold to each purchaser (or
shall electronically transfer evidence of ownership to each such purchaser).
2.7 If, prior to the end of the Offering Period, subscriptions are
received aggregating more than the Securities, then (i) BEB shall allocate the
Securities among the subscribers on a first come first served basis and (ii) the
escrow agent shall remit to those subscribers whose subscriptions are not being
accepted, in whole or in part, an amount of money equal to the price of that
number of Securities for which such subscription is not being accepted.
SECTION 3
OFFERING OF THE SECURITIES ON BEHALF OF THE COMPANY
3.1. In offering the Securities for sale, BEB shall offer the
Securities solely as agent for the Company, and such offering shall be made upon
the terms and subject to the conditions set forth in the Registration Statement
and Prospectus (each as hereinafter defined). BEB shall commence offering the
Securities for sale as agent for the Company as soon after the Effective Date as
BEB may deem advisable; provided, however, if BEB does not commence such
offering within three (3) business days after the Effective Date, it promptly
shall so advise the Company and the Securities and Exchange Commission (the
"Commission").
3.2. In accordance with the applicable provisions of the
Registration Statement (as hereinafter defined) and this Agreement, BEB may
offer and sell the Securities for the account of the Company through registered
dealers selected by BEB (the "Selected Dealers"), and may allow such concessions
(out of the underwriting commission) to the Selected Dealers as BEB may
determine. All
3
<PAGE> 4
sales by Selected Dealers shall be on behalf of the Company. BEB shall have
the authority to appoint Selected Dealers as agents for the Company; provided,
however, no Selected Dealer shall be appointed by BEB unless such Selected
Dealer has entered into a Selected Dealers Agreement in the form approved by the
Company. In no event shall Selected Dealers be agents or sub-agents of BEB.
Except as herein provided, the Company shall not appoint any other agents in
offering the Securities for sale.
3.3. BEB represents, warrants, and covenants that, as part of the
distribution of the Securities, it has not offered or sold, and will not, offer,
sell, or deliver, directly or indirectly, any of the Securities or distribute
any prospectus relating to the offering of the Securities within the United
States or to any U.S. Person (as defined below). In addition, BEB has agreed
that it will offer to sell Securities only in compliance with all relevant
requirements of any applicable laws. As used herein, the term "U.S. Person"
means any resident or national of the United States, any corporation,
partnership, or other entity created or organized in or under the laws of the
United States, or any estate or trust the income of which is subject to United
States income taxation regardless of the source of its income (other than the
foreign branch of any U.S. Person), and includes any United States branch of a
person other than a U.S. Person.
3.4. BEB agrees that (i) it will not offer or sell any Securities
to persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purpose of their businesses or otherwise in
circumstances which will not involve an offer to the public in the United
Kingdom within the meaning of the Public Offers of the Securities Regulations
1995 ("the Regulations"); (ii) it will comply with all applicable provisions of
the Financial Services Act 1986 and the Regulations with respect to anything
done by it in relation to the Securities in, from, or otherwise involving the
United Kingdom; and (iii) it will only issue or pass on to any person in the
United Kingdom any document received by it in connection with the offer of the
Securities if that person is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemption) Order 1996
or is a person to whom such document may otherwise lawfully be issued or passed
on.
SECTION 4
REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
4
<PAGE> 5
The Company represents and warrants that:
4.1. A registration statement (File No. 333-63755) on Form S-1
relating to the Offering, including a form of prospectus subject to completion,
copies of which have heretofore been delivered to BEB has been prepared by the
Company in conformity with the requirements of the Securities Act of 1933, as
amended (the "Act"), and the rules and regulations promulgated thereunder by the
Commission (the "Rules and Regulations"), and has been filed with the Commission
under the Act. In addition, one or more amendments to such registration
statement may have been so filed. After the execution of this Agreement, (i) if
the Commission has declared such registration statement (as it may have been
amended) to be effective under the Act, then the Company, if required, will file
with the Commission a prospectus in the form most recently included in an
amendment to such registration statement (or, if no such amendment shall have
been filed, in such registration statement), with such changes or insertions as
are required by Rule 430A under the Act or permitted by Rule 424(b) under the
Act, and as has been furnished to and approved by BEB prior to the execution of
this Agreement; or (ii) if the Commission has not declared such registration
statement (as it may have been amended) to be effective under the Act, then the
Company will file with the Commission an amendment to such registration
statement, including a form of prospectus, a copy of which amendment has been
furnished to and approved by BEB prior to the execution of this Agreement. As
used in this Agreement, the term "Registration Statement" means such
registration statement, as amended at the time when it was or is declared
effective, including all financial schedules and exhibits thereto, and including
any information omitted therefrom pursuant to Rule 430A under the Act and
included in the Prospectus (as defined below); the term "Preliminary Prospectus"
means each prospectus subject to completion, filed with such registration
statement or any amendment thereto (including the prospectus subject to
completion, if any, included in the Registration Statement or any amendment
thereto at the time it was or is declared effective); and the term "Prospectus"
means the prospectus first filed with the Commission pursuant to Rule 424(b)
under the Act, or, if no prospectus is required to be filed pursuant to said
Rule 424(b), such term means the Prospectus included in the Registration
Statement; except that if such registration statement or prospectus is amended
or such prospectus is supplemented after the effective date of such registration
statement and prior to the Closing Date, then the term "Registration Statement"
shall include such registration statement as so amended, and the term
"Prospectus" shall include such prospectus as so amended or supplemented, or
both, as the case may be.
5
<PAGE> 6
4.2. The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus.
4.3. The Company and its subsidiaries as set forth in the Prospectus
(collectively, "Subsidiaries"), each has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the jurisdiction of
its incorporation, with full power and authority (corporate and other) to own or
lease its properties and to conduct its business as described in the Prospectus,
and is duly qualified to do business as a foreign corporation and is in good
standing as a foreign corporation in all other jurisdictions in which the nature
of its businesses or the character or location of its properties requires such
qualification, except where failure to so qualify will not materially affect the
Company's business, properties, or financial condition.
4.4. The authorized, issued, and outstanding capital stock of the Company
as of September 30, 1998 is as set forth in the Prospectus under the heading
"Capitalization", and the shares of issued and outstanding capital stock of the
Company set forth thereunder have been duly authorized, validly issued, and are
fully paid and non-assessable. Except as set forth in the Prospectus, no
options, warrants, or other rights to purchase, agreements or other obligations
to issue, or agreements or other rights to convert any obligation into, any
shares of capital stock of the Company have been granted or entered into by the
Company. The capital stock of the Company conforms to all statements relating
thereto contained in the Registration Statement and Prospectus.
4.5. The Securities are duly authorized, and when issued, delivered,
and paid for pursuant to this Agreement, shall be validly issued, fully paid and
non-assessable, and free of pre-emptive rights of any security holder of the
Company. Except as described in the Registration Statement, neither the filing
of the Registration Statement nor the offering or sale of the Securities as
contemplated by this Agreement gives rise to any rights, other than those which
have been waived or satisfied, for or relating to the registration of the sale
or transfer of any shares of Common Stock.
4.6. This Agreement has been duly and validly authorized, executed,
and delivered by the Company. The Company has full power and lawful authority to
authorize, issue, and sell the Securities to be sold by it hereunder on the
terms and conditions set forth herein. No consent, approval, authorization, or
other order of any governmental authority is required in connection with
6
<PAGE> 7
the authorization, execution, and delivery of this Agreement or with
the authorization, issuance, and sale of the Securities, except as may be
required under the Act or state securities laws.
4.7. Except as described in the Prospectus, (i) neither the Company
nor its Subsidiaries are in violation, breach, or default of or under, and the
consummation of the transactions herein contemplated and the fulfilment of the
terms of this Agreement shall not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a default under,
or result in the creation or imposition of any lien, charge, or encumbrance upon
any of the property or assets of the Company or its Subsidiaries pursuant to the
terms of, any indenture, mortgage, deed of trust, loan agreement, or other
agreement or instrument to which the Company or its Subsidiaries are a party or
by which the Company or its Subsidiaries may be bound or to which any of the
property or assets of the Company or its Subsidiaries is subject; and (ii) the
consummation of the transactions contemplated herein and the fulfilment of the
terms of this Agreement shall not result in any violation of the provisions of
the articles of incorporation or the by-laws of the Company or its Subsidiaries,
or any statute, or any applicable order, rule, or regulation of any court,
regulatory authority, or other governmental body having jurisdiction over the
Company or its Subsidiaries.
4.8. Subject to the qualifications stated in the Prospectus, the
Company and its Subsidiaries have good and marketable title to all properties
and assets described in the Prospectus as owned by them, free and clear of all
liens, charges, encumbrances, or restrictions, except such as are not materially
significant or important in relation to the business of the Company taken as a
whole. All of the material leases and subleases under which the Company or its
Subsidiaries are the lessor or sublessor of properties or assets, or under which
the Company or its Subsidiaries hold properties or assets as lessee or sublessee
as described in the Prospectus, are in full force and effect; except as
described in the Prospectus, neither the Company nor its Subsidiaries are in
default in any material respect with respect to any of the terms or provisions
of any of such leases or subleases, and no claim has been asserted by anyone
adverse to the rights of the Company or its Subsidiaries as lessor, sublessor,
lessee, or sublease under any of such leases or subleases; and the Company or
its Subsidiaries owns or leases all such properties described in the Prospectus
as are necessary to its operations as now conducted and, except as otherwise
stated in the Prospectus, as proposed to be conducted as set forth in the
Prospectus.
7
<PAGE> 8
4.9. Schitag Ernst & Young, AG and Ernst & Young, Wirtschaftsprufungs -
und Steuerberatungsgesellschaft MBH, have given their reports on certain
financial statements filed and to be filed with the Commission as a part of the
Registration Statement which are incorporated in the Prospectus; with respect
to the Company and its Subsidiaries, Schitag Ernst & Young, AG and Ernst &
Young, Wirtschaftsprufungs - und Steuerberatungsgesellschaft MBH, are
independent public accounting firms as required by the Act and the Rules and
Regulations.
4.10. The financial statements, together with related notes and
schedules, if any, set forth in the Prospectus and the Registration Statement
fairly present the financial position and results of operations and changes in
cash flow position of the Company and its Subsidiaries on the basis stated in
the Registration Statement at the respective dates and for the respective
periods to which they apply. Said statements and related notes and schedules
have been prepared in accordance with generally accepted accounting principles
applied on a basis which is consistent during the periods involved.
4.11. Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, and except as set forth in
or contemplated by the Prospectus (i) neither the Company nor its Subsidiaries
have incurred any liabilities or obligations, direct or contingent, not in the
ordinary course of business, or entered into any transaction not in the ordinary
course of business, which is material to the business of the Company or its
Subsidiaries; (ii) there has not been any change in the capital stock of the
Company or its Subsidiaries, any incurrence of short-term or long-term debt by
the Company or its Subsidiaries, any issuance of options, warrants, or other
rights to purchase the capital stock of the Company or its Subsidiaries, or any
adverse change or any development involving, so far as the Company can now
reasonably foresee, a prospective adverse change in the condition (financial or
other), net worth, results of operations, business, key personnel or properties
of the Company or its Subsidiaries which would be material to the business or
financial condition of the Company; and (iii) neither the Company nor its
Subsidiaries have become a party to, and neither the business nor the property
of the Company or its Subsidiaries have become the subject of, any material
litigation, whether or not in the ordinary of business.
4.12. Except as set forth in the Prospectus, there is not now
pending or threatened any action, suit, or proceeding in which the Company or
its Subsidiaries is a party, before or by any court or governmental agency or
body, which might result in any material adverse change in the condition
(financial or other), business, net worth, or properties of the Company or its
Subsidiaries, nor are
8
<PAGE> 9
there any pending or threatened actions, suits, or proceedings related to
environmental matters or discrimination on the basis of age, sex, religion, or
race; and no labour disputes involving the employees of the Company or its
Subsidiaries exist or are imminent which might be expected to adversely affect
the conduct of the business, property, or operations of the Company or its
Subsidiaries or the financial condition or results of operations of the Company
or its Subsidiaries.
4.13. Except as disclosed in the Prospectus, the Company and its
Subsidiaries have sufficient licenses, permits, and other governmental
authorizations currently required for the conduct of their business or the
ownership of their properties as described in the Prospectus and are in all
material respects complying therewith. In addition, except as otherwise
described in the Prospectus, the Company and its Subsidiaries own or possess
adequate rights to use all material patents, patent applications, trademarks,
service marks, trade-names, trademark registrations, service mark registrations,
copyrights, and licenses necessary for the conduct of such business, and have
not received any notice of conflict with the asserted rights of others in
respect thereof. To the Company's knowledge, none of the activities or
businesses of the Company or its Subsidiaries are in violation of, or cause the
Company or its Subsidiaries to violate, any law, rule, regulation, or order of
the United States or any state, county, or locality, or any agency or body of
the United States or any state, county, or locality, the violation of which
would have a material adverse impact upon the condition (financial or
otherwise), business, property, results of operations, or net worth of the
Company or its Subsidiaries.
4.14. Neither the Company nor its Subsidiaries, directly or
indirectly, (i) in violation of law, have made any contributions to any
candidate for political office or failed to disclose fully any such
contributions, or (ii) have made any payment to any state, federal, or foreign
governmental officer or official, or other person charged with similar public or
quasi-public duties, other than payments or contributions required or allowed by
applicable law. The Company's internal accounting controls and procedures are
sufficient to cause the Company to comply in all material respects with the
Foreign Corrupt Practices Act of 1977, as amended.
4.15. All contracts and other documents of the Company and its
Subsidiaries which are, under the Rules and Regulations, required to be filed as
exhibits to the Registration Statement have been so filed.
9
<PAGE> 10
4.16. The Company and its Subsidiaries, directly or indirectly, have
not taken and shall not take any action designed to cause or result in, or which
has constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the Common Stock to facilitate the
sale or resale of the Securities hereby.
4.17. Except for the Subsidiaries, the Company has no subsidiaries
or investments in, and has not made any loans or advances to, any other
corporation, partnership, or other entity.
4.18. The Company has not entered into any agreement or
understanding pursuant to which any person, either directly or indirectly, is
entitled to compensation from the Company or any principal stockholders,
officers, or directors of the Company for services as a finder in connection
with the offering of Securities contemplated by this Agreement.
SECTION 5
COVENANTS OF THE COMPANY
The Company covenants and agrees with BEB that:
5.1. The Company shall use its best efforts to cause the
Registration Statement to become effective. If required, the Company shall file
the Prospectus and any amendment or supplement thereto with the Commission in
the manner and within the time period required by Rule 424(b) under the Act.
Upon notification from the Commission that the Registration Statement has become
effective, the Company shall so advise BEB. The Company, at no time, whether
before or after the Effective Date, shall file any amendment to the Registration
Statement or amendment or supplement to the Prospectus without first advising
BEB of such filing and without furnishing BEB with a copy thereof. No such
amendment or supplement shall be filed if BEB or BEB's counsel has objected in
writing to such filing or if such filing is not in compliance with the Act and
the Rules and Regulations. At the request of BEB, made any time prior to the
expiration of the Offering Period, the Company shall prepare and file with the
Commission, promptly upon BEB's request, any amendments or supplements to the
Registration Statement or Prospectus in compliance with the Act which, in BEB's
opinion, may be necessary or advisable in connection with the sale of the
Securities.
10
<PAGE> 11
5.2. As soon as the Company is advised thereof, the Company shall
advise BEB and confirm such advice in writing (i) of the receipt of any comments
of the Commission with respect to any filing in connection with the Registration
Statement or supplement to the Prospectus, (ii) of the effectiveness of any
post-effective amendment to the Registration Statement, (iii) of the filing of
any supplement to the Prospectus or any amended Prospectus, (iv) of any request
made by the Commission for amendment of the Registration Statement, for
supplementing of the Prospectus, or for additional information with respect
thereto, or (v) of the issuance (or threat thereof) by the Commission or any
state or regulatory body of any stop order or other order suspending the
effectiveness of the Registration Statement or any order preventing or
suspending the use of any Preliminary Prospectus or suspending the qualification
of the Securities for offering in any jurisdiction, or of the institution of any
proceedings for any of such purposes. The Company shall use its best efforts to
prevent the issuance of any such order and, if issued, to obtain the lifting
thereof as soon as possible.
5.3. The Company has caused to be delivered to BEB copies of each
Preliminary Prospectus, and the Company has consented and hereby consents to the
use of such copies for the purposes permitted by the Act. The Company authorizes
BEB and the Selected Dealers (collectively, the "Dealers") to use the Prospectus
in connection with the sale of the Securities for such period as, in the opinion
of counsel to BEB, the use thereof is required to comply with the applicable
provisions of the Act and the Rules and Regulations. If, at any time within such
period as a Prospectus is required under the Act to be delivered in connection
with sales by any of the Dealers, (i) it shall be necessary to amend or
supplement the Prospectus to comply with law or with the Rules and Regulations,
or (ii) any event happens of which the Company has knowledge and which
materially affects the Company or the securities of the Company, or which, in
the opinion of counsel for the Company or counsel for BEB, should be set forth
in an amendment to the Registration Statement or an amendment or supplement to
the Prospectus in order to make the statements therein, in light of the
circumstances existing at the time the Prospectus is required to be delivered to
a purchaser of the Securities, not then misleading in any material respect, then
the Company promptly will notify BEB and forthwith prepare and furnish to BEB
copies of such amended Registration Statement or Prospectus or of such
supplement to be attached to the Prospectus, in such quantities as BEB may
reasonably request, in order that the Registration Statement and Prospectus, as
so amended or supplemented, will not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements in the Registration Statement and Prospectus, in the light of the
circumstances
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<PAGE> 12
under which they are made, not misleading in any material respect. The
preparation and furnishing of any such amendment or supplement to the
Registration Statement or Prospectus shall be without expense to BEB.
5.4. The Company shall comply with the Act, the Rules and
Regulations, the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations promulgated thereunder, in connection with
the offering and issuance of the Securities.
5.5. On the Effective Date and at all times subsequent thereto up to
the Closing Date, (i) the Registration Statement and Prospectus shall conform in
all material respects to the requirements of the Act and the Rules and
Regulations; and (ii) neither the Registration Statement nor the Prospectus
shall include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make statements
therein not misleading; provided, however, the Company makes no representations,
warranties, or agreements as to information contained in or omitted from the
Registration Statement of Prospectus in reliance upon, and in conformity with,
information furnished to the Company by or on behalf of BEB.
5.6. The Company shall use its best efforts (i) to cause a
registration statement under the Exchange Act to be declared effective
concurrently with the completion of the Offering and shall notify BEB, in
writing, immediately upon the effectiveness of such registration statement, and
(ii) if requested by BEB, to obtain and keep current a listing in the Standard &
Poor's Corporation Records, Standard and Poor's Monthly Stock Guide, and Moody's
Industrial OTC Manual, and to have the Company listed in such reports for a
period of not less than ten (10) years from the Closing Date.
5.7. For so long as the Company is a reporting company under either
Section 12(g) or 15(d) of the Exchange Act, the Company, at its expense, shall
furnish to its stockholders an annual report (including financial statements
audited by independent public accountants) in reasonable detail and, at its
expense, shall furnish to BEB during the period ending five (5) years from the
date hereof, (i) as soon as practicable after the end of each fiscal year, a
balance sheet of the Company and any of its subsidiaries, as of the end of such
fiscal year, together with statements of income, surplus, and cash flow of the
Company and any subsidiaries for such fiscal year, all in reasonable detail and
accompanied by a copy of the certificate or report thereon of independent
accountants; (ii) as soon as practicable after the end of each of the first
three (3) fiscal quarters of each fiscal year, consolidated
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<PAGE> 13
summary financial information of the Company for each such quarter in reasonable
detail; (iii) as soon as they are available, a copy of all reports (financial or
other) mailed to security holders; (iv) as soon as they are available, a copy of
all reports and financial statements furnished to or filed with the Commission
or any securities exchange or automated quotation system on which any class of
securities of the Company is listed, except such reports and financial
statements which may have been granted "confidential treatment" under the
Exchange Act or under any other applicable law, rule, or regulation; and (v)
such other information as BEB, from time to time, may request, but only to the
extent such information is not material, non-public information. In the event
the Company has an active subsidiary or subsidiaries, such financial statements
referred to above will be on a consolidated basis to the extent the accounts of
the Company and its subsidiary or subsidiaries are consolidated in reports
furnished to its stockholders generally.
5.8. The Company shall comply with all periodic reporting and proxy
solicitation requirements under the Exchange Act.
5.9. The Company shall deliver to BEB on or before the Closing Date
two (2) signed copies of the Registration Statement, including all financial
statements and exhibits filed therewith and all amendments thereto, and shall
deliver to BEB such number of conformed copies of the Registration Statement,
including such financial statements (but without exhibits) and all amendments
thereto, as BEB may request. The Company shall deliver to or upon the order of
BEB from time to time until the Effective Date, as many copies of any
Preliminary Prospectus filed with the Commission prior to the Effective Date as
BEB may request. The Company shall deliver to BEB on the Effective Date and
thereafter for so long as a Prospectus is required to be delivered under the
Act, as many copies of the Prospectus, in final form or as thereafter amended or
supplemented, as BEB from time to time may request.
5.10. The Company shall apply the net proceeds from the sale of the
Securities for the purposes set forth in the Prospectus under the heading "Use
of Proceeds", and shall file such reports with the Commission with respect to
the sales of the Securities and the application of the proceeds therefrom as may
be required under the Act.
5.11. Upon the Effective Date, the Company shall make all filings
required, including registration under the Exchange Act, to obtain the listing
of the Common Stock on the Neue Markt at
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<PAGE> 14
the Frankfurt Stock Exchange, and shall use its best efforts to maintain such
listings for at least ten (10) years from the date of this Agreement. With
respect to the listing of the Common Stock on the Neue Markt at the Frankfurt
Stock Exchange the Company shall cause its stockholders, who are currently part
of or related to the management of the Company, not to sell or offer to sell
their shares or shares held in their names in the Company for a period of six
months beginning on the first day on which shares of the Company's common stock
are traded on the Neue Markt. The Stockholders subject to the restrictions set
forth in the previous sentence are the following person:
Andreas Eder, Holger Timm, Cybermind AG, Rudolf Strobl, Dr.
Alessandro Giacalone, Christian Moosmann, Hans Bergbreiter, Dave
Morton, Todd Ferguson, Verena Czerny and Franz Eder.
5.13. The Company shall not take, directly or indirectly, any action
designed to, or which constitutes, or which might reasonably be expected to
cause or result in the stabilization or manipulation of the price of the
Securities.
5.14. The Company shall not effect a change in its accounting firm,
except to a internationally recognized accounting firm, for a period of five (5)
years from the Effective Date without the prior written consent of BEB.
5.15. During the Offering Period and for a twenty-five (25) day
period thereafter, the Company shall not issue press releases or engage in other
publicity without the prior written consent of BEB which consent shall not be
unreasonably withheld. Notwithstanding the foregoing, the Company may issue such
press releases to comply with its obligations under applicable securities laws.
5.16. On the Closing Date, all transfer or other taxes (including
franchise, capital stock, or other tax, other than income taxes, imposed by any
jurisdiction), if any, which are required to be paid in connection with the sale
and transfer of the Securities through BEB hereunder shall have been fully paid
or provided for by the Company and all laws imposing such taxes will have been
fully complied with.
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<PAGE> 15
SECTION 6
CONDITIONS TO THE OBLIGATIONS OF BEB
The obligations of BEB to act as agent of the Company hereunder, to
find purchasers for the Securities, and to consummate the transactions
contemplated on the Closing Date, are subject to the accuracy of (as of the date
hereof and as of the Closing Date) and compliance with the covenants,
representations and warranties of the Company contained herein, the performance
by the Company of its obligations hereunder, and the following conditions:
6.1. BEB shall have received notice of the effectiveness of the
Registration Statement not later than 9:30 a.m., New York time, on the day
following the date of this Agreement, or at such later time or on such later
date as to which BEB may agree in writing; on or prior to the Closing Date, no
stop order denying or suspending the effectiveness of the Registration Statement
shall have been issued and no proceedings for that or a similar purpose shall
have been instituted or shall be pending or, to BEB's knowledge or to the
knowledge of the Company, shall be contemplated by the Commission; and any
request on the part of the Commission for additional information shall have been
complied with to the reasonable satisfaction of BEB. If required, the Prospectus
shall have been filed with the Commission in the manner and within the time
period required by Rule 424(b) under the Act.
6.2. Prior to the Effective Date and again on and as of the Closing
Date, BEB shall have received a letter from Schitag Ernst & Young, Deutsche
Allgemeine Treuhand AG, independent public accountants for the Company,
substantially in the form approved by BEB, which sets forth for the period from
the last unaudited balance sheet included in the Registration Statement to a
date not more than five (5) business days prior to the date of such letter (i)
changes in the Company's capital stock, (ii) changes in the Company's net
assets, and (iii) changes in the Company's long term debt.
6.3. At the Closing Date, (i) the representations and warranties of
the Company contained in this Agreement shall be true and correct with the same
effect as if made on and as of the Closing Date, and the Company shall have
performed all of its obligations hereunder and satisfied all the conditions on
its part to be satisfied at or prior to the Closing Date; (ii) the Registration
Statement, the Prospectus, and any amendments or supplements thereto shall
contain all statements which are required to be stated therein in accordance
with the Act and the Rule and Regulations and shall
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<PAGE> 16
conform to the requirements thereof in all material respects, and neither the
Registration Statement, the Prospectus, nor any amendment or supplement thereto
shall contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading; (iii) since the respective dates as of which information
is given, there shall have been no material adverse change, or any development
involving a prospective material adverse change, in the business, properties,
condition (financial or otherwise), results of operations, capital stock,
long-term or short-term debt, or general affairs of the Company from that set
forth in the Registration Statement and the Prospectus, except changes which the
Registration Statement and Prospectus indicate might occur after the Effective
Date, and the Company shall not have incurred any material liabilities or
entered into any agreement not in the ordinary course of business, other than as
referred to in the Registration Statement and Prospectus; (iv) except as set
forth in the Prospectus, no action, suit, or proceedings, at law or in equity,
shall be pending or threatened against the Company which would be required to be
set forth in the Registration Statement, and no proceedings shall be pending or
threatened against the Company before or by any commission, board, or
administrative agency, in the United States or elsewhere, wherein an
unfavourable decision, ruling, or finding would materially and adversely affect
the business, property, condition (financial or otherwise), results of
operations, or general affairs of the Company, and (v) on the Closing Date, BEB
shall have received a certificate, signed by the principal financial officer of
the Company and by either the Chairman of the Board or the President of the
Company, dated as of the Closing Date, evidencing compliance with the provisions
of this Section 6.3.
6.4. All proceedings taken at or prior to the Closing Date in
connection with the issuance and sale of the Securities shall be satisfactory in
form and substance to BEB and BEB shall have been furnished with all such
documents, certificates, and opinions as BEB may reasonably request in
connection with this transaction in order to evidence the accuracy and
completeness of any of the representations, warranties, or statements of the
Company, or its compliance with any of the covenants or conditions contained
herein.
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SECTION 7
CONDITIONS TO THE OBLIGATIONS OF THE COMPANY
The obligation of the Company to sell and deliver the Securities is
subject to the following conditions:
7.1. The Registration Statement shall have become effective no later
than 9:30 a.m., New York time, on the day following the date of this Agreement,
or on such later date as the Company and BEB may agree in writing.
7.2. At the Closing Date, no stop orders suspending the
effectiveness of the Registration Statement shall have been issued under the
Act, and no proceedings therefor shall have been initiated or threatened by the
Commission.
SECTION 8
INDEMNIFICATION
8.1. The Company agrees to indemnify and hold harmless BEB against
any losses, claims, damages, or liabilities (which, for all purposes of this
Agreement, shall include, but shall not be limited to, all reasonable costs of
defense and investigations and all reasonable attorneys' fees and disbursements)
(collectively, "Liabilities"), to which BEB may become subject under the Act or
otherwise, and shall reimburse, as incurred, BEB for any legal or other expenses
reasonably incurred in connection with investigating, defending against, or
appearing as a third party witness in connection with any Liabilities, insofar
as such Liabilities (or actions in respect thereof) (i) arise out of or are
based upon any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, or (ii) arise out of or are
based upon the omission or alleged omission to state in the Registration
Statement, any Preliminary Prospectus, the Prospectus, any amendment or
supplement thereto, a material fact required to be stated therein or necessary
to make the statements therein not misleading; provided, however, the Company
shall not be liable in any such case to the extent, but only to the extent, that
any such Liability arises out of or is based upon an untrue statement, an
alleged untrue statement, an omission, or an alleged omission, made in reliance
upon and in conformity with information furnished to the Company by or on behalf
of BEB for use in the
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<PAGE> 18
preparation of the Registration Statement, any Preliminary Prospectus, the
Prospectus, any amendments or supplement thereto. This indemnity will be in
addition to any liability which the Company may otherwise have.
8.2. BEB will indemnify and hold harmless the Company, each of its
directors, each nominee for director named in the Prospectus (if any), each of
its officers who have signed the Registration Statement, and each person, if
any, who controls the Company within the meaning of the Act, against any
Liabilities to which the Company or any such director, nominee, officer, or
controlling person may become subject under the Act or otherwise, insofar as
such Liabilities (or actions in respect thereof) arise out of or are based upon
(i) a breach of the provisions of Sections 3.3 and 3.4 hereof, or (ii) any
untrue statement, or alleged untrue statement of any material fact contained in
the Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, or arise out or are based upon the omission or
the alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading; provided,
however, BEB shall be liable only to the extent that such untrue statement,
alleged untrue statement, omission, or alleged omission contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, was made in reliance upon and in conformity
with information furnished to the Company by BEB for use in the preparation
thereof. This indemnity will be in addition to any liability which BEB may
otherwise have.
8.3. If, after receipt by an indemnified party under this Section 8
of notice of the commencement of any action, a claim in respect thereof is to be
made against the indemnifying party under this Section 8, then such indemnified
party promptly shall notify the indemnifying party in writing of the
commencement thereof; however, the omission to notify the indemnifying party
shall not relieve the indemnifying party from any liability which it may have to
any indemnified party otherwise than under this Section 8. In case any such
action is brought against any indemnified party and it notifies the indemnifying
party of the commencement thereof, the indemnifying party, subject to the
provisions stated herein, shall be entitled to participate in, and to the extent
that it may wish, jointly with any other indemnifying party similarly notified,
assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party. After notice from the indemnifying party to such indemnified
party of its election to assume the defense thereof, the indemnifying party will
not be liable to such indemnified party under this Section 8 for any legal or
other expenses subsequently
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<PAGE> 19
incurred by such indemnified party in connection with the defense thereof, other
than for reasonable costs of investigation. The indemnified party shall have the
right to employ separate counsel in any such action and to participate in the
defense thereof, but the fees and expenses of such separate counsel shall not be
at the expense of the indemnifying party if the indemnifying party has assumed
the defense of the action with counsel reasonably satisfactory to the
indemnified party; provided, however, the fees and expenses of such separate
counsel shall be at the expense of the indemnifying party if (i) the employment
of such separate counsel has been specifically authorized in writing by the
indemnifying party, or (ii) the defendants in any such action include both the
indemnified and the indemnifying party, and the indemnified party reasonably has
concluded that (1) there may be a conflict between the positions of the
indemnifying party and the indemnified party in conducting the defense of any
such action, or (2) there may be legal defences available to the indemnified
party and/or other indemnified parties which are different from or additional to
those available to the indemnifying party (in which case the indemnifying party
shall not have the right to assume the defense of such action on behalf of such
indemnified party or parties). It is understood, however, that the indemnifying
party, in connection with any one such action, or in connection with any
separate but substantially similar or related action in the same jurisdiction
arising out of the same general allegations or circumstances, shall not be
liable for the fees and expenses of more than one such separate counsel for the
indemnified party in all such actions, which counsel shall be designated in
writing by the indemnified party. No settlement of any action against an
indemnified party shall be made without the consent of the indemnified party,
which consent shall not be unreasonably withheld.
SECTION 9
COST AND EXPENSES.
9.1. Whether or not the sale of the Securities through BEB is
consummated, the Company shall pay all costs and expenses incident to the
performance of this Agreement by the Company including, but not limited to: the
fees and expenses of counsel to the Company and of the Company's accountants;
the costs and expenses incident to the preparation, printing, filing, and
distribution under the Act of the Registration Statement (including the
financial statements therein and all amendments and exhibits thereto), each
Preliminary Prospectus, and the Prospectus, as amended or supplemented; the cost
of printing and furnishing to BEB copies of the Registration Statement, each
Preliminary Prospectus, the Prospectus, this Agreement,
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<PAGE> 20
any fees relating to the listing of the Securities on the Neue Markt at the
Frankfurt Stock Exchange or any other securities exchange; the cost of printing
the certificates representing the Securities; the fees of the transfer agent;
and the cost of publication of a "tombstone" of the Offering. The Company shall
pay any and all taxes (including any transfer, franchise, capital stock, or
other tax imposed by any jurisdiction) on sales through BEB hereunder. The
Company also shall pay all costs and expenses incident to the furnishing of any
amended Prospectus or any supplement to be attached to the Prospectus as called
for in Section 5.1 of this Agreement.
9.2. If the transactions contemplated hereby are not consummated by
reason of any action of BEB (except an action based upon the Company's breach of
any covenant, representation, or warranty contained herein, or because any other
condition to BEB's obligations hereunder which is required to be fulfilled by
the Company is not fulfilled), the Company shall be liable for the out-of-pocket
expenses of BEB up to $25,000, including the legal fees of, and disbursements
incurred by, BEB's counsel.
9.3. If the transactions contemplated hereby are not consummated by
reason of a breach by the Company of any covenant, representation, or warranty
herein, or (ii) if the Registration Statement is not declared effective by the
Commission within six (6) months after the date of the filing of the
Registration Statement with the Commission, and the Company elects to
discontinue the Offering through BEB, then the Company shall be liable for all
out-of-pocket expenses of BEB actually incurred (including the legal fees of and
disbursements incurred by BEB's counsel) in connection with the Offering.
9.4. Except as set forth in the Prospectus, (i) no person, directly
or indirectly, is entitled to compensation from the Company, BEB or any other
person for services as a finder in connection with the Offering, and (ii) the
Company agrees to indemnify and hold harmless BEB against any Liabilities to
which BEB may become subject, insofar as such Liabilities (or actions in respect
thereof) arise out of or are based upon the claim of any person (other than an
employee of the party claiming indemnity) or entity that he or it is entitled to
a finder's fee in connection with the Offering by reason of such person's or
entity's influence or prior contact with the indemnifying party.
SECTION 10
TERMINATION
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10.1. BEB may terminate this Agreement, except for Sections 8, 9 and
11.1, at any time prior to the Closing Date, if, in its sole judgement, it is
impracticable to offer for sale or to enforce contracts made by BEB for the sale
of the Securities hereunder by reason of (i) the Company having sustained a
material loss, whether or not insured, by reason of fire, earthquake, flood,
accident, or other calamity, or from any labour dispute or court or government
action, order, or decree, (ii) trading in securities on the New York Stock
Exchange or the American Stock Exchange having been suspended or limited, (iii)
material governmental restrictions having been imposed on trading in securities
generally (not in force and effect on the date hereof), (iv) a banking
moratorium having been declared by German state authorities, (v) an outbreak of
major international hostilities, or other national or international calamity
having occurred, (vi) a pending or threatened legal or governmental proceeding
or action relating generally to the Company's business, or a notification having
been received by the Company of the threat of any such proceeding or action,
which could materially adversely affect the Company; (vii) except as
contemplated by the Prospectus, the Company being merged or consolidated into,
or acquired by another company or group, or the existence of a binding legal
commitment for the foregoing, or any other material change of ownership or
control occurs; (viii) the passage of any act or measure by the Congress of the
United States or by any state legislative body of similar impact, or the
adoption of any orders, rules, or regulations by any governmental body,
authoritative accounting institute or board, or any governmental executive,
which is reasonably believed by BEB to have a material impact on the business,
financial condition, or financial statements of the Company or any subsidiary of
or successor to the Company; (ix) any material adverse change in the financial
or securities markets, beyond normal market fluctuations, having occurred since
the date of this Agreement, or (x) any material adverse change having occurred,
since the respective dates as of which information is given in the Registration
Statement and Prospectus, in the earnings, business prospectus, or general
condition of the Company, financial or otherwise, whether or not arising in the
ordinary course of business.
10.2. If, at the Closing Date, any of the conditions provided for in
Section 6 shall not have been fulfilled, BEB may terminate this Agreement and
all of its obligations hereunder, by notifying the Company of such termination,
in writing or by telefax, at or prior to the Closing Date.
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<PAGE> 22
10.3. If BEB elects to terminate this Agreement as provided in this
Section 10, the Company promptly shall be notified by BEB by telephone or
telefax, followed by confirmation by letter.
SECTION 11
MISCELLANEOUS
11.1. The respective indemnities, agreements, representations,
warranties, and other statements of and by the Company and BEB, and the
undertakings set forth in or made pursuant to this Agreement, shall remain in
full force and effect, regardless of any investigation made by or on behalf of
BEB, the Company or any of its officers or directors or any controlling person,
and shall survive delivery of and payment of the Securities and the termination
of this Agreement.
11.2. Each of the parties hereto will cooperate with the other and
execute and deliver to the other party hereto such other instruments and
documents and take such other actions as may be reasonably requested from time
to time by the other party hereto as necessary to carry out, evidence, and
confirm the intended purposes of this Agreement.
11.3. This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties.
11.4. This Agreement contains the entire agreement between the
parties with respect to the subject matter hereof and supersede all prior
arrangements and understandings, both written and oral, expressed or implied,
with respect thereto.
11.5. It is the desire and intent of the parties that the provisions
of this Agreement be enforced to the fullest extent permissible under the law
and public policies applied in each jurisdiction in which enforcement is sought.
Accordingly, in the event that any provision of this Agreement would be held in
any jurisdiction to be invalid, prohibited or unenforceable for any reason, such
provision, as to such jurisdiction, will be ineffective, without invalidating
the remaining provisions of this Agreement or affecting the validity or
enforceability of such provision in any other jurisdiction. Notwithstanding the
foregoing, if such provision could be more narrowly drawn so as not to be
invalid, prohibited or unenforceable in such jurisdiction, it will, as to such
jurisdiction, be so
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narrowly drawn, without invalidating the remaining provisions of this Agreement
or affecting the validity or enforceability of such provision in any other
jurisdiction.
11.6. All notices and other communications required or permitted
under to this Agreement must be in writing and will be deemed given if sent by
personal delivery, fax with electronic confirmation of delivery,
internationally-recognized overnight courier company that is able to provide
proof or receipt of delivery, or registered or certified mail (return receipt
requested), postage prepaid, to the parties at the following addresses (or at
such other address for a party as may be specified by like notice):
If to BEB: Berliner Effektenbank AG
Attention: Mr. Guido Sandler
Kurfurstendamm 119, 10711 Berlin, Germany
Tel: 49-30-89 02 13 00
Fax: 49-30-89 02 13 99
If to the Company: Cybernet Internet Services International, Inc.
Attention: Mr. Andreas Eder, President
Stefan-George-Ring 19, 81929 Munich, Germany
Tel: 49-89-99 31 50
Fax: 49-89-99 3151 99
With a copy to: Powell, Goldstein, Frazer & Murphy, LLP
Attention: Joseph M. Berl
1001 Pennsylvania Avenue, N. W. - Suite 600 South
Washington, D.C. 20004
Tel: 202-624-7271
Fax: 202-624-7222
All such notices and other communications will be deemed to have
been received (i) in the case of personal delivery, on the date of such
delivery, (ii) in the case of a fax, when the party sending such fax has
received electronic confirmation of its delivery, (iii) in the case of delivery
by internationally-recognized overnight courier, on the business day following
dispatch and (iv) in the case of mailing, on the third business day following
mailing.
11.7. The headings contained in this Agreement are for reference
purposes only and will not affect in any way the meaning or interpretation of
this Agreement.
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11.8. None of the provisions of this Agreement is or will be
construed as for the benefit of or enforceable by any person not a party to this
Agreement.
11.9. This Agreement may not be assigned by any party, by operation
of law or otherwise.
11.10. This Agreement will be governed by and construed in
accordance with the laws of the State of Delaware applicable to contracts made
and to be performed therein, without regard to conflicts of laws principles.
11.11. The language used in this Agreement will be deemed to be the
language chosen by the parties to express their mutual intent, and no rule of
strict construction will be applied against any party. Any reference to any
federal, state, local, or foreign statute or law will be deemed also to refer to
all rules and regulations promulgated thereunder, unless the context requires
otherwise. The parties intend that each representation, warranty, and covenant
contained herein will have independent significance. If any party has breached
any representation, warranty, or covenant contained herein in any respect, the
fact that there exists another representation, warranty, or covenant relating to
the same subject matter (regardless of the relative levels of specificity) which
the party has not breached will not detract from or mitigate the fact that the
party is in breach of the first representation, warranty, or covenant. Unless
otherwise expressly provided, the word "including" does not limit the preceding
words or terms.
11.12. This Agreement may be executed in one or more counterparts,
all of which will be considered one and the same agreement and will become
effective when one or more counterparts have been signed by each of the parties
and delivered to the other parties, it being understood that all parties need
not sign the same counterpart.
11.13. This Agreement may be executed by delivery of executed
signature pages by fax and such fax execution will be effective for all
purposes.
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Cybernet Internet Services International, Inc.
By:
-------------------
Name: Mr. Andreas Eder
Title: President
Berliner Effektenbank AG Berliner Effektenbank AG
By:
------------------------- By:
Name: Guido Sandler --------------------------
Title: Vorstand Name: Dr. Wolfgang Janka
Title: Vorstand
25
<PAGE> 26
ESCROW AGREEMENT
THIS AGREEMENT is made the 23rd day of November, 1998, among Berliner
Effektenbank AG, a German company (the "Underwriter" or the "Company's Agent"),
Cybernet Internet Services International, Inc., a Delaware corporation (the
"Company) and Reinhart C. Rath, a German certified public notary and attorney
at law, (the "Escrow Agent") for the benefit of the Investors (as hereinafter
defined).
W I T N E S S E T H:
WHEREAS, the Underwriter is selling to non-US persons (the
"Investors") shares of common stock of the Company pursuant to an offering (the
"Offering") registered with the Securities and Exchange Commission of the United
States of America (the "Commission") and delivering a prospectus as required by
the Commission to such Investors; and
WHEREAS, the Investors are directed in the Prospectus to execute a
subscription agreement and send the purchase price of the shares of common stock
to the Escrow Agent pending the completion of the Offering and delivery of the
shares thereof.
NOW, THEREFORE, in consideration of the promises made herein and
other valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. RECEIPT OF FUNDS. The Escrow Agent shall receive from
each of the Investors check or wired funds in an amount
equal to the price of each share of common stock
multiplied by the number of shares purchased by the
Investor.
2. INVESTMENT OF THE FUNDS. The Escrow Agent agrees to
invest the funds received by the Investors as follows:
a. The funds shall be held for the sole benefit of the
Investors,
b. The funds shall be invested in one of the following:
(i) obligations guaranteed as to principal by the
full faith and credit of the United States
Government, or
(ii) money market funds registered with the
Commission under the Investment Company Act
of 1940, or
(iii) insured deposits in banks insured by the
Federal Deposit Insurance Corporation.
c. Interest earned on the deposited funds shall be paid
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<PAGE> 27
to the investor if, and only if, the funds
are released to the Investors pursuant to Section
3(b) below.
3. DISPOSITION OF FUNDS. Until the occurrence of one or
more of the following events, the funds held in escrow
will be held by the Escrow Agent, and thereafter
delivered only as follows:
a. to the Company or its agent, the
Underwriter, if the Escrow Agent has
received a signed representation from the
Company, together with evidence acceptable
to the Escrow Agent, that the Company has
satisfied the conditions imposed by Rule 419
of the Regulations S-K of the Commission, or
b. to the Investor, if the Escrow Agent has not
received the notice set forth above within
45 days of the effective date of the
Offering unless the Offering has been
extended for an additional 30 days pursuant
to the Registration Statement.
4. LIMITATIONS OF LIABILITY. The foregoing instructions are
subject to the following provisions that are expressly approved by the parties
hereto:
4.1. Depository duty. The Escrow Agent will be
liable as a depository only, and will not be responsible for the sufficiency or
accuracy of the form, execution, or validity of any document delivered to it
hereunder or any description of the property or other thing contained therein or
the identity, authority, or rights of the persons executing or delivering, or
purporting to execute or deliver, any such document. The Escrow Agent's duties
hereunder are limited to the safekeeping and the delivery of the escrow funds
and interest accrued thereon in accordance with this Agreement.
4.2. Standard of care. The Escrow Agent will
not be liable for any act or omission done in good faith, or for any claim,
demand, loss, or damage made or suffered by any party to this Agreement, unless
it arose through or was caused by the Escrow Agent's willful misconduct or gross
negligence.
4.3. Reliance. The Escrow Agent shall in all
cases be entitled to rely upon and be fully protected in acting or in
refraining from acting under this Agreement in accordance with any and all
written notices, demands, directions, orders, or other documents received by it
in accordance with this Agreement and believed by it to be genuine and correct
and to have been signed or sent by the proper person.
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<PAGE> 28
4.4. Modification. This Agreement is the only
agreement binding on the Escrow Agent relating to the escrow funds and the
interest earned thereon, and the Escrow Agent may rely absolutely on it to the
exclusion of any and all other agreements between any of the parties hereto.
5. MISCELLANEOUS. It is further agreed as follows:
5.1. Time. Time is of the essence of this
Agreement.
5.2. Notice. All notices or communications
required or permitted under this Agreement shall be in writing and shall be
deemed duly given if in writing and delivered personally, or sent by reliable
overnight delivery service, each method with written receipt or other evidence
of delivery requested, to the following addresses (or such other addresses as
may be designated in writing):
(a) if to the Company:
Cybernet Internet Services International,
Inc.
Stefan-George Ring 23
81929 Munich, Germany
Attention: Andreas Eder
and with a copy to: Dr. Hubert Besner
Besner Kreifels Weber
Widenmayerstr 41
80538 Munich, Germany
(b) if to the Underwriter:
Berliner Effektenbank AG
Kurfuerstendamm 119
10711 Berlin, Germany
Attention: Mr. Guido Sandler
(c) if to Escrow Agent:
Reinhart C. Rath
Hagenstrasse 23
14193 Berlin, Germany
The date of such notice shall be the date it is received by the party it is
addressed to.
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<PAGE> 29
5.3. Binding effect. This Agreement shall be
binding on, and inure to the benefit of, the parties and their respective
heirs, personal representatives, successors and permitted assigns.
5.4 Governing Law. This Agreement is made
pursuant to and shall be governed, construed and enforced in all respects and
for all purposes by and in accordance with the laws of the Federal Republic of
Germany.
- 4 -
<PAGE> 30
IN WITNESS WHEREOF, this Agreement has been executed and delivered
on the date written above.
CYBERNET INTERNET SERVICES INTERNATIONAL, INC:
By: /s/ ANDREAS EDER
---------------------------------
Name: Andreas Eder
-------------------------------
Title: Chairman, President and Chief
Executive Officer
------------------------------
BERLINER EFFEKTENBANK AG
By: /s/ WOLFGANG YANKA
---------------------------------
Name: Wolfgang Yanka
-------------------------------
Title: Director
------------------------------
Receipt of these instructions is acknowledged and accepted this _____ day of
_______________, 1998.
By: /s/ REINHART C. RATH
---------------------------------
Name: Reinhart C. Rath
-------------------------------
Title: Public Notary and Attorney at Law
------------------------------
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<PAGE> 1
EXHIBIT 5.1
[LETTERHEAD OF POWELL, GOLDSTEIN, FRAZER & MURPHY LLP]
November 24, 1998
Cybernet Internet Services International, Inc.
Stefan-George-Ring 19-23
81929 Munich, Germany
Re: Registration Statement on Form S-1 (File Number 333-63755)
Ladies and Gentlemen:
We have served as counsel for Cybernet Internet Services International,
Inc., a Delaware corporation (the "Company"), in connection with the
registration under the Securities Act of 1933, as amended (the "Act"), pursuant
to a Registration Statement on Form S-1 (the "Registration Statement"), of
1,500,000 to 1,800,000 shares of common stock, par value $.001 per share, of the
Company (the "Shares"), to be offered and sold by the Company.
We have examined and are familiar with originals or copies (certified,
photostatic or otherwise identified to our satisfaction) of such documents,
corporate records and other instruments relating to the incorporation of the
Company as we have deemed necessary and advisable.
In all such examinations, we have assumed the genuineness of all
signatures on all originals and copies of documents we have examined, the
authenticity of all documents submitted to us as originals and the conformity to
original documents of all certified, conformed or photostatic copies. As to
questions of fact material and relevant to our opinion, we have relied upon
certificates or representations of Company officials and of appropriate state,
local or federal officials.
Based upon and subject to the foregoing and having regard for such legal
considerations as we have deemed relevant, it is our opinion that:
1. The Shares have been duly authorized; and
2. Upon the sale and issuance of the Shares pursuant to the
Registration Statement and upon the Company's receipt of payment
therefore in the amount specified in the Registration Statement, the
Shares will be validly issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving such consent, we do not concede that we are
experts within the meaning of the Act.
Very truly yours,
/s/ POWELL, GOLDSTEIN, FRAZER & MURPHY LLP
Powell, Goldstein, Frazer & Murphy LLP
<PAGE> 1
EXHIBIT 23.2
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated May 6, 1998, in the Registration Statement (Form S-1)
and related Prospectus of Cybernet Internet Services International, Inc. for
the registration of 1,500,000 shares of its common stock.
SCHITAG ERNST & YOUNG AG
Munich, Germany
November 23, 1998
<PAGE> 1
EXHIBIT 23.3
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated November 24, 1998, in the Registration Statement
(Form S-1) and related Prospectus of Cybernet Internet Services International,
Inc. for the registration of 1,500,000 shares of its common stock.
ERNST & YOUNG
WIRTSCHAFTSPRUFUNGS-UND
STEUERBERATUNGSGESELLSCHAFT MBH
Vienna, Austria
November 24, 1998
