<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: JULY 15, 1999
(Date of earliest event reported: JUNE 30, 1999)
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware _________ 51-0384117
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
Stefan-George-Ring 19-23
81929 Munich, Germany
(Address, including zip code,
of registrant's principal executive offices)
49-89-9931-5105
(Registrant's telephone number, including area code)
Not applicable.
(Former name or former address, if changed since last report)
<PAGE>
2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On June 30, 1999, Registrant purchased from the existing stockholders all
of the issued and outstanding capital stock of Flashnet S.p.A. ("Flashnet"), a
leading Italian Internet Service Provider ("ISP"), for a purchase price
consisting of Lit. 41.0 billion ($22.1 million) in cash and 301,290 newly issued
shares of Registrant's common stock, a total purchase price valued at Lit. 54.2
billion ($29.2 million) as of May 14, 1999, the contract date. The purchase
price was determined through arms-length negotiations between Registrant and the
selling stockholders. The selling stockholders consisted of: (i) two affiliates
of 3i, an English investment group, which together owned 42.6% of Flashnet's
stock, on a fully diluted basis, and who received their portion of the purchase
price in cash; and (ii) members of Flashnet's management and their affiliates
who owned the remaining stock and received a combination of Registrant's stock
and cash. Among the selling stockholders were the President, Managing Director,
Sales Director and two technical directors, all of whom have agreed to continue
as employees under long-term contracts with customary covenants not to compete.
The Registrant financed the cash portion of the purchase price with an
interim loan (the "Interim Loan") of approximately $22 million made by Lehman
Commercial Paper, Inc. and Morgan Stanley Senior Funding, Inc. The Interim Loan
was repaid out of the proceeds of Registrant's private offering of Units to
Qualified Institutional Buyers pursuant to Rule 144A promulgated under the
Securities Act of 1933 as amended (the "Securities Act"). See Item 5.
Headquartered in Rome, Flashnet is the third largest ISP in Italy, offering
business and residential customers dedicated lines, dial-in and satellite access
to the Internet, web hosting, co-location services, electronic commerce, virtual
private networks and a variety of other services. It maintains a customer care
center which is available 24 hours per day to business customers and 18 hours
per day to residential customers.
Founded in 1994 as a division of a computer distribution group, Flashnet
originally focused on the residential market and built a clientele which totaled
approximately 38,000 residential customers as of March 31, 1999. Over the last
18 months, it has shifted its marketing focus to businesses and has already
developed a business customer base consisting of approximately 1,600 customers
as of March 31, 1999.
Flashnet owns 20 Points of Presence ("POPs") for dedicated lines and has
access to more than 300 dial-in access nodes which can also accommodate dial-in
traffic. The POPs interconnect with each other through leased lines. In Rome,
Flashnet has international access through primary links with MCI/WorldCom,
Global One and Ebone. Most of Flashnet's network equipment is manufactured by
Cisco.
ITEM 5. OTHER EVENTS
Pursuant to Rule 144A promulgated under the Securities Act, on July
8, 1999 Registrant sold to Qualified Institutional Buyers a total of 150,000
Units, each consisting of Registrant's 14% Senior Note due 2009 in the principal
amount of $1,000 and a Warrant to purchase 30.2310693 shares of Registrant's
common stock at a price of $22.278 per share. The Warrants entitle the holders
thereof to purchase in the aggregate 15% of Registrant's outstanding common
stock on a fully diluted basis.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
The following Financial Statements, Pro Forma Financial Information and
Exhibits are filed herewith:
(a) Financial Statements of Business Acquired
<PAGE>
3
(1) Balance sheet of Flashnet S.p.A. as of December 31, 1998 and
related statements of loss, stockholders' deficit and cash flows
for the year then ended, expressed in Italian Lire, together with
the report thereon by Grant Thornton S.p.A., independent auditors.
(2) Unaudited balance sheet of Flashnet S.p.A. as of March 31, 1999
and 1998 and related statements of loss, stockholders'
deficit and cash flows for the periods then ended,
expressed in Italian Lire.
(b) Pro Forma Financial Statements
(1) Pro Forma Consolidated Financial Information
(c) Exhibits
2.1 Flashnet Stock Purchase Agreement
23.1 Consent of Grant Thornton S.p.A.
27.1 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Cybernet Internet Service
International, Inc.
_________________________________
(Registrant)
Date : July 15, 1999 By: /s/ Andreas Eder
_____________________________
(Signature)
Its Chairman
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Chairman of the Board
Flashnet S.p.A
Via della Pisana 280/A
Rome, Italy
We have audited the accompanying balance sheet of Flashnet S.p.A (an Italian
Company) as of December 31, 1998, and the related statements of loss,
stockholders' deficit, and cash flows for the year then ended, expressed in
Italian Lire. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statements presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Flashnet S.p.A as of December
31, 1998, and the results of its operations and its cash flows for the year
then ended, in conformity with accounting principles generally accepted in the
United States of America.
May 14, 1999
Grant Thornton S.p.A.
Rome, Italy
F-1
<PAGE>
FLASHNET S.p.A.
BALANCE SHEET
DECEMBER 31, 1998
(amounts in thousands of ITL)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets
Cash............................................................. 32,034
Accounts receivable, net of allowance for doubtful accounts of
50,000 (Note 2.c)............................................... 4,499,540
Inventories (Notes 2.d and 3).................................... 174,770
Deferred income taxes (Notes 2.i and 14)......................... 964,301
Prepaid cable rentals............................................ 530,294
Other current assets............................................. 301,985
----------
Total current assets........................................... 6,502,924
Property, plant, and equipment (Notes 2.e and 4)................... 3,647,901
Other assets (Note 5).............................................. 1,288,611
----------
Total Assets................................................... 11,439,436
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Bank overdraft................................................... 716,437
Accounts payable................................................. 4,966,300
Current maturities of long-term debt............................. 365,995
Deferred income (Note 2.j)....................................... 2,774,708
Other current liabilities (Note 6)............................... 1,626,158
----------
Total current liabilities...................................... 10,449,598
Long-term liabilities
Obligations under capital leases (Note 7)........................ 628,885
Severance indemnities (Notes 2.g and 8).......................... 94,344
Bonds payable (Note 9)........................................... 800,000
----------
Total Liabilities.............................................. 11,972,827
----------
Stockholders' deficit..............................................
Common stock, par value ITL 1,000, authorized 2,297,142 shares,
issued, and outstanding 2,182,857 shares (Note 10).............. 2,182,857
Additional paid-in capital....................................... 983,891
Accumulated deficit (Notes 2.h and 11)........................... (3,700,139)
----------
Total Stockholders' Deficit.................................... (533,391)
----------
Total Liabilities and Stockholders' Deficit.................... 11,439,436
==========
</TABLE>
See accompanying notes.
F-2
<PAGE>
FLASHNET S.p.A.
STATEMENT OF LOSS
FOR THE YEAR ENDED DECEMBER 31, 1998
(amounts in thousands of ITL)
<TABLE>
<S> <C>
Net sales........................................................... 8,334,043
Cost of sales....................................................... (6,615,614)
----------
Gross profit........................................................ 1,718,429
Operating expenses.................................................. (4,562,098)
----------
Loss from operations................................................ (2,843,669)
Other income (expense)
Interest expense, net............................................. (369,914)
Penalties and interest on late payment of payroll taxes........... (358,780)
Rent income....................................................... 42,000
Others............................................................ 149,691
----------
Total other income (expense).................................... (537,003)
----------
Loss before income taxes............................................ (3,380,672)
Income taxes (Notes 2.i and 14)..................................... 1,015,169
----------
Net loss............................................................ (2,365,503)
==========
</TABLE>
See accompanying notes.
F-3
<PAGE>
FLASHNET S.p.A.
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1998
(amounts in thousands of ITL)
<TABLE>
<CAPTION>
Additional
Common paid-in Accumulated
Total stock capital deficit
---------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Beginning balance............... (434,636) 900,000 (1,334,636)
Sale of stock................... 2,200,000 282,857 1,917,143
Stock split..................... 1,000,000 (1,000,000)
Shareholders contribution of
additional paid-in capital..... 66,748 66,748
Net loss for the period......... (2,365,503) (2,365,503)
---------- --------- ---------- ----------
Ending balance.................. (533,391) 2,182,857 983,891 (3,700,139)
========== ========= ========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
FLASHNET S.p.A.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
(amounts in thousands of ITL)
<TABLE>
<S> <C> <C>
Cash flows from operating activities
Net loss.................................................... (2,365,503)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.............................. 656,685
Change in assets and liabilities
Increase in accounts receivable........................... (2,320,596)
Decrease in inventories................................... 24,663
Increase in deferred tax asset--current................... (388,590)
Increase in deferred tax asset--noncurrent................ (728,197)
Increase in other current assets.......................... (201,760)
Increase in accounts payable.............................. 2,237,870
Increase in deferred income............................... 1,379,045
Increase in other current liabilities..................... 885,468
Increase in severance indemnities, net.................... 62,313
----------
Net cash used in operating activities.................... (758,602)
----------
Cash flows from investing activities
Purchase of property, plant, and equipment................. (1,487,740)
Payment to purchase the assets of Venezia Net Srl, net of
cash acquired............................................. (85,500)
Increase in other assets................................... (16,152)
----------
Net cash used in investing activities.................... (1,589,392)
----------
Cash flows from financing activities
Decrease in bank overdraft................................. (338,985)
Proceeds from sale of common stock......................... 2,200,000
Proceeds from issuance of bonds............................ 800,000
Proceeds from contribution of additional paid-in capital... 66,748
Principal payments under capital lease obligation.......... (366,041)
----------
Net cash provided by financing activities................ 2,361,722
Net change in cash and cash equivalents...................... 13,728
Cash and cash equivalents--beginning of period............... 18,306
----------
Cash and cash equivalents--end of period..................... 32,034
==========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest................................................... 118,727
Income taxes............................................... 87,045
Supplemental schedule of noncash investing and financing
activities:
1. Capital lease obligations of ITL 648,231 were incurred when the Company
entered into 10 leases for new telephone and computer equipment and
vehicles.
2. Additional capital stock was issued as a result of the stock splits
described in Note 11.
3. The Company purchased the assets of Venezia Net Srl for ITL 85,500. In
conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired ........................... 150,528
Cash paid to acquire the assets.......................... (85,500)
----------
Liabilities assumed.................................... 65,028
==========
</TABLE>
See accompanying notes.
F-5
<PAGE>
FLASHNET S.p.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. General
Flashnet S.p.A., the "Company", was established in Italy in 1995, and is
mainly involved in providing internet and long-distance telephone services.
2. Summary of Significant Accounting Policies
a. Basis of Financial Statements presentation
The company maintains its accounting records in Italian Liras ("ITL") and
prepares its statutory financial statements in confirmity with accounting
principles generally accepted in Italy.
The accompanying financial statements have been restated in order to comply
with accounting principles generally accepted in the United States of America,
for consolidation purposes. The main adjustments have been made to reflect the
provisions of FAS-13 (Accounting for Leases), and SOP 98-1 (Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use).
All information contained in the accompanying financial statements and
related notes are expressed in thousands of ITL ("ITL/000"), unless differently
indicated.
b. Statements of cash flows
For purposes of the statement of cash flows, cash equivalents include time
deposits, certificate of deposits, and all highly liquid debt instruments with
original maturities of three months or less.
c. Accounts receivable
Accounts receivable are reported at net realizable value. Net realizable
value is equal to the gross amount of receivable less an allowance for doubtful
accounts, based on an estimate of the collectibility of individual accounts and
prior years' bad debt experience.
d. Inventories
Inventories are stated at the lower of cost, determined by the FIFO method,
or market.
e. Property, plant, and equipment
The cost of property, plant, and equipment is depreciated over the estimated
useful lives of the related assets. Leasehold improvements are depreciated over
the lesser of the term of the related lease or the estimated useful lives of
the assets.
Depreciation is computed using the straight line method for both financial
reporting and income tax purposes.
Maintenance and repairs are charged to operations when incurred. Betterment
and renewals are capitalized. When property, plant, and equipment is sold or
otherwise disposed of, the asset account and related accumulated depreciation
account are relieved and any gain or loss is included in operations.
The useful lives of property, plant, and equipment for purposes of computing
depreciation are:
<TABLE>
<S> <C>
Computer and telephone equipment ............................... 8.5 years
Office furniture and equipment.................................. 3-8 years
Vehicles........................................................ 4 years
</TABLE>
Property, plant, and equipment costing less than ITL 1,000,000 is entirely
expensed in the year of acquisition.
F-6
<PAGE>
FLASHNET S.p.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
g. Severance indemnities
Under Italian Law, all employees are entitled to receive severance
indemnities upon termination of their employment, based on salary paid and
increase in cost of living. The severance indemnities accrue approximately at
the rate of 1/13.5 of the gross salaries paid during the year, and are
revaluated applying a cost of living factor established by the Italian
Government.
h. Retained Earnings
Italian corporations are required, under Italian Business Law, to appropriate
to a legal reserve not less than 1/20 of the net income for the period, until
the legal reserve reaches an amount equal to 1/5 of the capital stock. The
legal reserve is not available for distribution.
i. Income taxes
Income taxes are accounted for by the asset/liability approach in accordance
with FASB Statement 109. Deferred taxes arising from taxable temporary
differences and deductible temporary differences are included in the tax
expense in the income statement and in the deferred tax balances in the balance
sheet. Deferred tax assets are subject to reduction by a valuation account if
evidence indicates that it is more likely than not that some or all the
deferred tax assets will not be realized. Income taxes attributable to items
charged or credited directly to shareholders' equity, are charged or credited
to that component of shareholders' equity.
j. Deferred income
The Company collects in advance the subscriptions as provider of Internet
services from customers, and allocates the related revenues based on time
remaining to the end of the contract. Deferred income represents the unearned
portion at the balance sheet date.
k. Goodwill
Goodwill represents the excess of the cost of companies acquired over the
fair value of its net assets at dates of acquisition, and is being amortized on
the straight-line method over five years. The carrying amount of goodwill is
reviewed if the facts and circumstances suggest that it may be impaired.
Negative operating results, negative cash flows from operations, among other
factors, could be indicative of the impairment of goodwill. If this review
indicates that goodwill will not be recoverable, the Company's carrying value
of goodwill would be reduced.
l. Research and development costs and advertising costs
Research and development costs and advertising costs, are charged to
operations when incurred and are included in operating expenses.
3. Inventories
Inventories at December 31, 1998 consist of;
<TABLE>
<CAPTION>
ITL/000
-------
<S> <C>
Finished goods....................................................... 174,770
Less: allowance for obsolete inventory............................... 0
-------
174,770
=======
</TABLE>
F-7
<PAGE>
FLASHNET S.p.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
4. Property, Plant, and Equipment
Following is a summary of property, plant, and equipment at cost, less
accumulated depreciation at December 31, 1998:
<TABLE>
<CAPTION>
ITL/000
---------
<S> <C>
Telephone and computer equipment (owned).......................... 2,111,169
Telephone and computer equipment (leased)......................... 1,454,404
Office furniture and equipment.................................... 283,929
Leasehold improvements............................................ 445,339
Vehicles (leased)................................................. 184,870
---------
4,479,711
Less: accumulated depreciation (831,810)
---------
3,647,901
=========
</TABLE>
Depreciation expense charged to operations for the year ended December 31,
1998 was ITL/000 525,270.
5. Other Assets
Other assets at December 31, 1998 consist of:
<TABLE>
<CAPTION>
ITL/000
---------
<S> <C>
Goodwill (net of accumulated amortization of ITL/000 456,416).... 278,527
Deferred income taxes............................................ 991,374
Others........................................................... 18,710
---------
1,288,611
=========
</TABLE>
Amortization of goodwill charged to operations for the year ended December
31, 1998 was ITL/000 131,416.
6. Other Current Liabilities
Other current liabilities at December 31, 1998 consist of:
<TABLE>
<CAPTION>
ITL/000
---------
<S> <C>
Provision for penalties and interest on late payment of payroll
taxes.......................................................... 358,780
Income taxes payable............................................ 101,619
Payroll taxes payable........................................... 679,613
Salaries payable................................................ 116,076
VAT payable..................................................... 98,584
Others.......................................................... 271,486
---------
1,626,158
=========
</TABLE>
7. Obligations under Capital Leases
The Company is the lessee of computer and telephone equipment and five
vehicles under capital leases expiring in various years through October 2003.
The assets and liabilities under capital leases are recorded at the fair value
of the leased property, which approximates the present value of the minimum
lease payments.
F-8
<PAGE>
FLASHNET S.p.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
Depreciation of the assets under capital lease is included in depreciation
expense for the period and is based on the assets estimated useful life.
Accumulated depreciation of as of December 31, 1998 was ITL/000 241,657.
Minimum future lease payments as of December 31, 1998 for each of the next
five years and in the aggregate are:
<TABLE>
<CAPTION>
ITL/000
---------
<S> <C>
Year ending December 31:
1999............................................................ 555,536
2000............................................................ 483,909
2001............................................................ 204,843
2002............................................................ 20,438
2003............................................................ 16,174
Subsequent to December 31, 2003................................... 0
---------
Total minimum lease payments...................................... 1,280,900
Less: amount representing interest................................ (286,020)
---------
Present value of minimum lease payments........................... 994,880
=========
</TABLE>
The above payments are computed using the interest rate in effect at December
31, 1998; actual payments may vary because of changes in applicable rates.
All leases provide for purchase options at the expiration of the lease; the
minimum future lease payments above, include the payments required to exercise
the purchase options.
8. Severance Indemnities
The amount shown in the financial statements represents the actual liability
at the balance sheet date. Following is detail of changes during the year ended
December 31, 1998:
<TABLE>
<CAPTION>
ITL/000
-------
<S> <C>
Balance--December 31, 1997.......................................... 32,030
Severance indemnities expense for the year.......................... 72,232
Indemnities paid during the year.................................... (9,918)
------
Balance--December 31, 1998.......................................... 94,344
======
</TABLE>
Severance indemnities expense for the year ended December 31, 1998 includes
the following components:
<TABLE>
<CAPTION>
ITL/000
-------
<S> <C>
Indemnities accrued for the year..................................... 71,494
Revaluation of indemnities accrued at December 31, 1997.............. 738
------
72,232
======
</TABLE>
F-9
<PAGE>
FLASHNET S.p.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
9. Bonds Payable
Bonds payable consist of 800,000, 5% unsecured convertible bonds, face value
ITL 1,000 per bond, payable in quarterly installments from December 31, 2001 to
December 31, 2003. The bonds are convertible in 114,285 common shares (7-for-
1), par value ITL 1,000 per share.
Maturities as of December 31, 1998 for each of the next 5 years and in the
aggregate are:
<TABLE>
<CAPTION>
ITL/000
-------
<S> <C>
Year ending December 31:
1999............................................................... 0
2000............................................................... 0
2001............................................................... 120,000
2002............................................................... 400,000
2003............................................................... 400,000
-------
920,000
=======
</TABLE>
Interest expense for the year ended December 31, 1998 was ITL/000 14,696.
10. Capital Stock
On August 5, 1998, the Stockholders approved:
a) A 1000-for-1 stock split, thereby increasing the number of issued and
outstanding shares from 900 to 900,000, and decreasing the par value of
each share from ITL 1,000,000 to ITL 1,000.
b) To increase the Company's capital stock from ITL 900,000,000 to ITL
1,182,857,000, issuing 282,857 additional shares of the Company's ITL
1,000 par value common stock, at a price of ITL 7,777.7817 per share.
c) A 1.84541073-for-1 stock split of the Company's ITL 1,000 par value
common stock. As a result of the split, 1,000,000 additional shares were
issued, additional paid-in capital was reduced from ITL 1,917,143,000 to
ITL 917,143,000, and common stock was increased from ITL 1,182,857,000
to ITL 2,182,857,000.
d) A capital contribution of ITL 66,748,000 as additional paid-in capital.
11. Accumulated Deficit
As described in Note 2.i, Italian corporations are required to maintain a
legal reserve that is not available for distribution, and only the
unappropriated retained earnings resulting from the statutory financial
statements prepared in accordance with Italian GAAP are available for
distribution.
Accumulated deficit as of December 31, 1998 consists of:
<TABLE>
<CAPTION>
ITL/000
----------
<S> <C>
Legal reserve (restricted)....................................... 175
Net loss for the period--Italian GAAP basis...................... (1,207,286)
Increase in accumulated deficit due to US GAAP adjustments....... (2,493,028)
----------
(3,700,139)
==========
</TABLE>
F-10
<PAGE>
FLASHNET S.p.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
12. Business combinations
On November 26, 1998, the Company acquired the assets of Venezia Net S.r.l.
in a business combination accounted for as a purchase. Venezia Net S.r.l. is
primarily engaged in providing internet services. The results of operations of
Venezia Net S.r.l. are included in the accompanying financial statements since
the date of acquisition. The total cost of the acquisition was ITL/000 94,477,
which exceeded the fair value of the net assets of Venezia Net S.r.l. by
ITL/000 84,943. As indicated in Note 2.k, the excess is being amortized on the
straight-line method over five years.
13. Related-Party Transactions
The Company sells Internet services, purchases part of its computer
equipment, and leases part of its office to a minority stockholder. The Company
is also indebted with two minority stockholders because of the bonds and
related interest, described in Note 9. Following is a summary of transactions
and balances at December 31, 1998:
<TABLE>
<CAPTION>
ITL/000
-------
<S> <C>
Purchases from stockholder........................................... 375,092
=======
Sales to stockholder................................................. 57,410
=======
Rent income.......................................................... 42,000
=======
Interest on bonds.................................................... 14,696
=======
Due from stockholder (included in accounts receivable)............... 351,641
=======
Bonds payable........................................................ 800,000
=======
</TABLE>
14. Income Taxes
Income tax expense for the year ended December 31, 1998 consists of:
<TABLE>
<CAPTION>
ITL/000
---------
<S> <C>
Current........................................................... (101,618)
Deferred.......................................................... 1,116,787
---------
1,015,169
=========
</TABLE>
The following temporary differences gave rise to the current and noncurrent
deferred tax asset at December 31, 1998:
<TABLE>
<CAPTION>
ITL/000
-------
<S> <C>
Service income deferred for financial accounting purposes......... 964,301
-------
Total Deferred Tax Asset--Current................................. 964,301
=======
Lease capitalized for financial accounting purposes but expensed
for tax purposes................................................. (83,007)
Intangible assets expensed for financial accounting purposes and
deferred for tax purposes........................................ 839,381
Net operating loss carryforward................................... 235,000
-------
Total Deferred Tax Asset--Noncurrent.............................. 991,374
=======
</TABLE>
F-11
<PAGE>
FLASHNET S.p.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
15. Research and Development Costs
Research and development costs charged to operations for the year ended
December 31, 1998 were ITL/000 834,041.
16. Commitments and Contingencies
a. At December 31, 1998, the Company is contingently liable for penalties
and interest relating to late payment of payroll taxes. Accordingly, a
provision of ITL/000 358,780 has been charged to operations in the
accompanying financial statements.
b. The Company leases office space under operating leases expiring in
various years through January 2004. Minimum future rental payments under
non-cancelable operating leases having remaining terms in excess of 1
year as of December 31, 1998 for each of the next 5 years and in the
aggregate are:
<TABLE>
<CAPTION>
ITL/000
---------
<S> <C>
Year ending December 31:
1999............................................................. 344,252
2000............................................................. 344,252
2001............................................................. 344,252
2002............................................................. 344,252
2003............................................................. 57,780
Subsequent to December 31, 2003.................................. 1,050
---------
Total minimum future rental payments............................. 1,435,838
=========
</TABLE>
Rental expense under operating leases for the year ended December 31, 1998
was ITL/000 118,820.
17. Subsequent Events
On April 9, 1999, the Stockholders approved:
a. To increase the Company's capital stock from ITL 2,182,857,000 to ITL
2,690,937,000, issuing 427,080 additional shares of the Company's ITL
1,000 par value common stock, at a price of ITL 4,214.667 par share.
b. To issue at no cost 171,428 warrants to purchase 171,428 shares of the
Company's common stock, ITL 1,000 par value, at ITL 7,000.0233 per
share. On the same date the Stockholders authorized the issuance of
171,428 additional shares of the Company's ITL 1,000 par value common
stock, that were reserved for that purpose. The warrants are exercisable
through December 31, 2001.
F-12
<PAGE>
FLASHNET S.p.A.
BALANCE SHEETS
MARCH 31, 1999 AND 1998
(amounts in thousands of ITL)
(unaudited)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets
Cash................................................. 45,333 21,563
Accounts receivable (Note 2.c and 3)................. 5,886,650 2,127,182
Inventories (Notes 2.d and 4)........................ 489,895 197,190
Deferred income taxes (Notes 2.i and 13)............. 993,775 517,243
Prepaid cable rentals................................ 200,808 53,096
Other current assets................................. 403,341 61,276
---------- ----------
Total current assets............................... 8,019,802 2,977,550
Property, plant, and equipment (Notes 2.e and 5)....... 3,962,956 2,304,606
Other assets (Note 6).................................. 1,611,896 856,432
---------- ----------
Total Assets....................................... 13,594,654 6,138,588
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Bank overdraft....................................... 534,966 1,089,447
Accounts payable..................................... 7,585,701 2,999,429
Current maturities of long-term debt................. 401,217 220,614
Deferred income (Note 2.j)........................... 2,886,431 1,267,735
Other current liabilities (Note 7)................... 1,995,149 1,209,351
---------- ----------
Total current liabilities.......................... 13,403,464 6,786,576
Long-term liabilities
Obligations under capital leases (Note 8)............ 623,106 516,395
Severance indemnities (Notes 2.g and 9).............. 134,638 38,867
Bonds payable (Note 10).............................. 800,000 0
---------- ----------
Total Liabilities.................................. 14,961,208 7,341,838
---------- ----------
Stockholders' deficit
Common stock, par value ITL 1,000 in 1999 and ITL
1,000,000 in 1998, authorized 2,297,142 shares in
1999 and 900 shares in 1998, issued and outstanding
2,182,857 shares in 1999 and 900 shares in 1998..... 2,182,857 900,000
Additional paid-in capital........................... 983,891 0
Accumulated deficit (Notes 2.h and 11)............... (4,533,302) (2,103,250)
---------- ----------
Total Stockholders' Deficit........................ (1,366,554) (1,203,250)
---------- ----------
Total Liabilities and Stockholders' Deficit........ 13,594,654 6,138,588
========== ==========
</TABLE>
See accompanying notes.
F-13
<PAGE>
FLASHNET S.p.A.
STATEMENTS OF LOSS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(amounts in thousands of ITL)
(unaudited)
<TABLE>
<S> <C> <C>
Net sales............................................. 3,174,987 1,243,465
Cost of sales......................................... (2,735,912) (1,129,140)
----------- ----------
Gross profit.......................................... 439,075 114,325
Operating expenses.................................... (1,510,442) (815,964)
----------- ----------
Loss from operations.................................. (1,071,367) (701,639)
----------- ----------
Other income (expense)
Interest expense, net .............................. (113,646) (104,334)
Penalties and interest on late payment of payroll
taxes.............................................. (11,341) (222,547)
Rent income......................................... 10,500 10,500
Others.............................................. 13,185 9,119
----------- ----------
Total other income (expense)...................... (101,302) (307,262)
----------- ----------
Loss before income taxes.............................. (1,172,669) (1,008,901)
Income taxes (Notes 2.i and 13)....................... 339,506 240,287
----------- ----------
Net loss.............................................. (833,163) (768,614)
=========== ==========
</TABLE>
See accompanying notes.
F-14
<PAGE>
FLASHNET S.p.A.
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(amounts in thousands of ITL)
(unaudited)
<TABLE>
<CAPTION>
Additional
Common paid-in Accumulated
Total stock capital deficit
---------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Balance, Jan. 1, 1998 ITL/000.... (434,636) 900,000 (1,334,636)
Net loss for the period ......... (768,614) (768,614)
---------- --------- ------- ----------
Balance, Mar. 31, 1998 ITL/000... (1,203,250) 900,000 (2,103,250)
========== ========= ======= ==========
Balance, Jan. 1, 1999 ITL/000.... (533,391) 2,182,857 983,891 (3,700,139)
Net loss for the period ......... (833,163) (833,163)
---------- --------- ------- ----------
Balance, Mar. 31, 1999 ITL/000... (1,366,554) 2,182,857 983,891 (4,533,302)
========== ========= ======= ==========
</TABLE>
See accompanying notes.
F-15
<PAGE>
FLASHNET S.p.A.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(amounts in thousands of ITL)
(unaudited)
<TABLE>
<CAPTION>
1999 1998
---------- --------
<S> <C> <C>
Cash flows from operating activities
Net loss................................................ (833,163) (768,614)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization.......................... 208,548 111,937
Change in assets and liabilities
(Increase) decrease in accounts receivable............ (1,387,110) 51,762
(Increase) decrease in inventories.................... (315,125) 2,243
(Increase) decrease in deferred tax asset-current..... (29,474) 58,468
(Increase) decrease in deferred tax asset-noncurrent.. (360,032) (298,755)
Decrease in other current assets...................... 228,130 516,147
Increase in accounts payable.......................... 2,619,401 270,999
Increase (decrease) in deferred income................ 111,723 (127,928)
Increase in other current liabilities................. 368,991 468,661
Increase in severance indemnities, net................ 40,294 6,836
---------- --------
Net cash provided by operating activities............ 652,183 291,756
---------- --------
Cash flows from investing activities.....................
Purchase of property, plant, and equipment.............. (343,545) (240,668)
---------- --------
Net cash used in investing activities................ (343,545) (240,668)
---------- --------
Cash flows from financing activities.....................
(Decrease) increase in bank overdraft................... (181,471) 34,025
Principal payments under capital lease obligations...... (113,868) (81,856)
---------- --------
Net cash used in financing activities................ (295,339) (47,831)
---------- --------
Net change in cash and cash equivalents.................. 13,299 3,257
Cash and cash equivalents--beginning of period........... 32,034 18,306
---------- --------
Cash and cash equivalents--end of period................. 45,333 21,563
========== ========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest.............................................. 28,643 9,174
Income taxes.......................................... 0 0
Supplemental schedule of noncash investing and financing
activities:
The following capital obligations were incurred when
the Company entered into new leases for new telephone
and computer equipment................................ 143,311 106,175
</TABLE>
See accompanying notes.
F-16
<PAGE>
FLASHNET S.p.A.
NOTES TO FINANCIAL STATEMENTS
March 31, 1999 and 1998
(unaudited)
1. General
Flashnet S.p.A., the "Company", was established in Italy in 1995, and is
mainly involved in providing internet and long-distance telephone services.
2. Summary of Significant Accounting Policies
a. Basis of Financial Statements presentation
The Company maintains its accounting records in Italian Liras ("ITL") and
prepares its statutory financial statements in conformity with accounting
principles generally accepted in Italy. The accompanying financial statements
have been restated in order to comply with accounting principles generally
accepted in the United States of America, for consolidation purposes. The main
adjustments have been made to reflect the provisions of FAS-13 (Accounting for
Leases), and SOP 98-1 (Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use).
All information contained in the accompanying financial statements and
related notes are expressed in thousands of ITL ("ITL/000"), unless otherwise
indicated.
b. Statement of cash flows
For purposes of the statement of cash flows, cash equivalents include time
deposits, certificate of deposits, and all highly liquid debt instruments with
original maturities of three months or less.
c. Accounts receivable
Accounts receivable are reported at net realizable value. Net realizable
value is equal to the gross amount of receivable less an allowance for doubtful
accounts, based on an estimate of the collectibility of individual accounts and
prior years' bad debt experience.
d. Inventories
Inventories are stated at the lower of cost, determined by the FIFO method,
or market.
e. Property, plant, and equipment
The cost of property, plant, and equipment is depreciated over the estimated
useful lives of the related assets. Leasehold improvements are depreciated over
the lesser of the term of the related lease or the estimated useful lives of
the assets. Depreciation is computed using the straight line method for both
financial reporting and income tax purposes.
Maintenance and repairs are charged to operations when incurred. Betterment
and renewals are capitalized. When property, plant, and equipment is sold or
otherwise disposed of, the asset account and related accumulated depreciation
account are relieved and any gain or loss is included in operations.
The useful lives of property, plant, and equipment for purposes of computing
depreciation are:
<TABLE>
<S> <C>
Computer and telephone equipment................................. 8.5 years
Office furniture and equipment................................... 3-8 years
Vehicles......................................................... 4 years
</TABLE>
Property, plant, and equipment costing less than ITL 1,000,000 is entirely
expensed in the year of acquisition.
F-17
<PAGE>
FLASHNET S.p.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 1999 and 1998
(unaudited)
g. Severance indemnities
Under Italian Law, all employees are entitled to receive severance
indemnities upon termination of their employment, based on salary paid and
increase in cost of living. The severance indemnities accrue approximately at
the rate of 1/13.5 of the gross salaries paid during the year, and are
revaluated applying a cost of living factor established by the Italian
Government.
h. Retained Earnings
Italian corporations are required, under Italian Business Law, to appropriate
to a legal reserve not less than 1/20 of the net income for the period, until
the legal reserve reaches an amount equal to 1/5 of the capital stock. The
legal reserve is not available for distribution.
i. Income taxes
Income taxes are accounted for by the asset/liability approach in accordance
with FASB Statement 109. Deferred taxes arising from taxable temporary
differences and deductible temporary differences are included in the tax
expense in the income statement and in the deferred tax balances in the balance
sheet. Deferred tax assets are subject to reduction by a valuation account if
evidence indicates that it is more likely than not that some or all the
deferred tax assets will not be realized. Income taxes attributable to items
charged or credited directly to shareholders' equity, are charged or credited
to that component of shareholders' equity.
j. Deferred income
The Company collects in advance the subscriptions as provider of internet
services from customers, and allocates the related revenues based on time
remaining to the end of the contract. Deferred income represents the unearned
portion at the balance sheet date.
k. Goodwill
Goodwill represents the excess of the cost of companies acquired over the
fair value of its net assets at dates of acquisition, and is being amortized on
the straight-line method over five years. The carrying amount of goodwill is
reviewed if the facts and circumstances suggest that it may be impaired.
Negative operating results, negative cash flows from operations, among other
factors, could be indicative of the impairment of goodwill. If this review
indicates that goodwill will not be recoverable, the Company's carrying value
of goodwill would be reduced.
I. Research and development costs and advertising costs
Research and development costs and advertising costs, are charged to
operations when incurred and are included in operating expenses.
3. Accounts Receivable
Following is a summary of accounts receivable at March 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C> <C>
Trade accounts............................... ITL/000 5,936,650 2,177,182
Less: allowance for doubtful accounts........ (50,000) (50,000)
--------- ---------
ITL/000 5,886,650 2,127,182
========= =========
</TABLE>
F-18
<PAGE>
FLASHNET S.p.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 1999 and 1998
(unaudited)
4. Inventories
Inventories at March 31, 1999 and 1998 consist of:
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C> <C>
Finished goods............................. ITL/000 489,895 197,190
Less: allowance for obsolete inventory..... 0 0
---------- ---------
ITL/000 489,895 197,190
========== =========
5. Property, Plant, and Equipment
Following is a summary of property, plant, and equipment at cost, less
accumulated depreciation at March 31, 1999 and 1998:
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C> <C>
Telephone and computer equipment (owned)... ITL/000 2,327,829 1,387,880
Telephone and computer equipment (leased).. 1,597,715 1,097,218
Office furniture and equipment............. 377,630 147,301
Leasehold improvements..................... 477,990 58,633
Vehicles (leased).......................... 185,403 0
---------- ---------
4,966,567 2,691,032
Less: accumulated depreciation............. (1,003,611) (386,426)
---------- ---------
ITL/000 3,962,956 2,304,606
========== =========
Depreciation expenses charged to operations for the three months ended March
31, 1999 and 1998, was ITL/000 171,801 and ITL/000 79,437, respectively.
6. Other Assets
Other assets at March 31, 1999 and 1998 consist of:
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C> <C>
Goodwill (net of accumulated amortization
of ITL/000 493,163 in 1999 and ITL/000
357,500 in 1998).......................... ITL/000 241,780 292,500
Deferred income taxes...................... 1,351,406 561,932
Others..................................... 18,710 2,000
---------- ---------
ITL/000 1,611,896 856,432
========== =========
</TABLE>
Amortization of goodwill charged to operations for the three months ended
March 31, 1999 and 1998, was ITL/000 36,747 and ITL/000 32,500, respectively.
F-19
<PAGE>
FLASHNET S.p.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 1999 and 1998
(unaudited)
7. Other Current Liabilities
Other current liabilities at March 31, 1999 and 1998 consist of:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C> <C>
Provision for penalties and interest on late
payment of payroll taxes..................... ITL/000 370,121 222,547
Income taxes payable.......................... 71,031 22,967
Payroll taxes payable......................... 656,738 449,682
Salaries payable.............................. 147,419 42,146
VAT payable................................... 101,407 158,655
Others........................................ 648,433 313,354
--------- ---------
ITL/000 1,995,149 1,209,351
========= =========
</TABLE>
8. Obligations Under Capital Leases
The Company is the lessee of computer and telephone equipment and five
vehicles under capital leases expiring in various years through December 2003.
The assets and liabilities under capital leases are recorded at the fair value
of the leased property, which approximates the present value of the minimum
lease payments.
Depreciation of the assets under capital lease is included in depreciation
expense for the period and is based on the assets estimated useful life.
Accumulated depreciation of as of March 31, 1999 and 1998 was ITL/000 298,994
and ITL/000 103,146, respectively.
Minimum future lease payments as of March 31, 1999 for each of the next five
years and in the aggregate are:
<TABLE>
<S> <C> <C>
Year ending March 31:
1999...................................................... ITL/000 585,557
2000...................................................... 451,600
2001...................................................... 196,200
2002...................................................... 49,805
2003...................................................... 19,148
Subsequent to March 31, 2003.............................. 0
---------
Total minimum lease payments.............................. 1,302,310
Less: amount representing interest........................ (277,987)
---------
Present value of minimum lease payments................... ITL/000 1,024,323
=========
</TABLE>
The above payments are computed using the interest rate in effect at December
31, 1998; actual payments may vary because of changes in applicable rates.
All leases provide for purchase options at the expiration of the lease; the
minimum future lease payments above, include the payments required to exercise
the purchase options.
F-20
<PAGE>
FLASHNET S.p.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 1999 and 1998
(unaudited)
9. Severance Indemnities
The amount shown in the financial statements represents the actual liability
at the balance sheet date. Following is detail of changes during the three
months ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------- ------
<S> <C> <C> <C>
Balance--beginning of period........................ ITL/000 94,344 32,030
Severance indemnities expense for the period........ 42,474 10,244
Indemnities paid during the period.................. (2,180) (3,407)
------- ------
Balance--end of period.............................. ITL/000 134,638 38,867
======= ======
</TABLE>
Severance indemnities expense for the three months ended March 31, 1999 and
1998, includes the following components:
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C> <C>
Revaluation of indemnities accrued at the beginning
of the year ....................................... ITL/000 616 232
Indemnities accrued for the period.................. 41,858 10,012
------ ------
ITL/000 42,474 10,244
====== ======
</TABLE>
10. Bonds Payable
Bonds payable consist of 800,000, 5% unsecured convertible bonds, face value
ITL 1,000 per bond, payable in quarterly installments from December 31, 2001 to
December 31, 2003. The bonds are convertible in 114,285 common shares (7-for-
1), par value ITL 1,000 per share.
Maturities as of March 31, 1999 for each of the next 5 years and in the
aggregate are:
<TABLE>
<S> <C> <C>
Year ending March 31:
1999....................................................... ITL/000 0
2000....................................................... 0
2001....................................................... 220,000
2002....................................................... 400,000
2003....................................................... 300,000
-------
ITL/000 920,000
=======
</TABLE>
Interest expense for the three months ended March 31, 1999 and 1998 was
ITL/000 9,864 and ITL/000 -0-, respectively.
11. Accumulated Deficit
As described in Note 2.i, Italian corporations are required to maintain a
legal reserve that is not available for distribution, and only the
unappropriated retained earnings resulting from the statutory financial
statements prepared in accordance with Italian GAAP are available for
distribution.
Accumulated deficit as of March 31, 1999 and 1998 consists of:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C> <C>
Legal reserve (restricted)................. ITL/000 175 175
Net loss of prior periods-Italian GAAP
basis..................................... (1,207,286) (66,748)
Net loss for the period--Italian GAAP
basis..................................... (772,995) (987,066)
Increase in accumulated deficit due to US
GAAP adjustments.......................... (2,553,196) (1,049,611)
---------- ----------
ITL/000 (4,533,302) (2,103,250)
========== ==========
</TABLE>
F-21
<PAGE>
FLASHNET S.p.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 1999 and 1998
(unaudited)
12. Related Party Transactions
The Company sells internet services, purchases part of its computer
equipment, and leases part of its office to a minority stockholder.
The Company is also indebted with two minority stockholders because of the
bonds and related interest, described in Note 9.
Following is a summary of transactions and balances at March 31, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C> <C>
Purchases from stockholder......................... ITL/000 71,022 60,966
======= =======
Sales to stockholder............................... 82,193 14,085
======= =======
Rent income........................................ 10,500 10,500
======= =======
Interest on bonds.................................. 9,864 0
======= =======
Due from stockholder (included in accounts
receivable)....................................... 613,898 514,524
======= =======
Due to stockholder (included in accounts payable).. 144,734 173,419
======= =======
Bonds payable...................................... ITL/000 800,000 0
======= =======
</TABLE>
13. Income Taxes
Income tax expense for the three months ended March 31, 1999 and 1998
consists of:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C> <C>
Current............................................. ITL/000 (50,000) 0
Deferred............................................ 389,506 240,287
------- -------
ITL/000 339,506 240,287
======= =======
</TABLE>
The following temporary differences gave rise to the current and noncurrent
deferred tax asset at March 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
--------- -------
<S> <C> <C> <C>
Service income deferred for financial
accounting purposes........................... ITL/000 993,775 517,243
--------- -------
Total Deferred Tax Asset--Current.............. ITL/000 993,775 517,243
========= =======
<CAPTION>
1999 1998
--------- -------
<S> <C> <C> <C>
Lease capitalized for financial accounting
purposes but expensed for tax purposes........ ITL/000 (94,152) (39,578)
Intangible assets expensed for financial
accounting purposes and deferred for tax
purposes...................................... 970,558 363,278
Net operating loss carryforward................ 475,000 238,232
--------- -------
Total Deferred Tax Asset--Noncurrent....... ITL/000 1,351,406 561,932
========= =======
</TABLE>
F-22
<PAGE>
FLASHNET S.p.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 1999 and 1998
(unaudited)
14. Research and Development Costs
Research and development costs charged to operations for the three months
ended March 31, 1999 and 1998 were ITL/000 113,504 and ITL/000 212,639.
15. Commitments and Contingencies
a) At March 31, 1999, the Company is contingently liable for penalties and
interest relating to late payment of payroll taxes. The accompanying
financial statements at March 31, 1999, include a provision of ITL/000
370,121 with regards to such contingency.
b) The Company leases office space under operating leases expiring in
various years through January 2004. Minimum future rental payments under
non-cancelable operating leases having remaining terms in excess of 1
year as of March 31, 1999 for each of the next 5 years and in the
aggregate are:
<TABLE>
<S> <C> <C>
Year ending March 31:
1999................................................... ITL/000 344,252
2000................................................... 344,252
2001................................................... 344,252
2002................................................... 272,634
2003................................................... 43,598
Subsequent to March 31, 2003............................. 788
---------
Total minimum future rental payments..................... ITL/000 1,349,776
=========
</TABLE>
Rental expense under operating leases for the three months ended March 31,
1999 and 1998 was ITL/000 102,155 and ITL/000 61,144, respectively.
16. Subsequent Events
On April 9, 1999, the Stockholders approved:
a) To increase the Company's capital stock from ITL 2,182,857,000 to ITL
2,609,937,000, issuing 427,080 additional shares of the Company's ITL
1,000 par value common stock, at a price of ITL 4,214.667 per share.
b) To issue, at no-cost, 171,428 warrants to purchase 171,428 shares of the
Company's common stock, ITL 1,000 par value, at ITL 7,000.0233 per
share. On the same date the Stockholders authorized the issuance of
171,428 additional shares of the Company's ITL 1,000 par value common
stock, that were reserved for that purpose. The warrants are exercisable
through December 31, 2001.
F-23
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited Pro Forma Consolidated Financial Statements are based on
our Consolidated Financial Statements. The accompanying unaudited Pro Forma
Consolidated Balance Sheet as of March 31, 1999 is based on the historical
financial position of the Company at March 31, 1999, adjusted as if the
acquisition of Flashnet and the Interim Loan incurred by the Company to fund
that acquisition had occurred on March 31, 1999. The accompanying unaudited Pro
Forma Consolidated Statements of Loss for the year ended December 31, 1998 and
the three months ended March 31, 1999, are based on the historical consolidated
financial statements of the Company, adjusted as if the acquisitions of
Open:Net, Vianet and Flashnet, collectively referred to as the "Acquisitions,"
and the Interim Loan had occurred on January 1, 1998. These unaudited Pro Forma
Consolidated Financial Statements do not include the results of operations of
Sunweb due to the relative insignificance of the amounts involved nor do they
reflect this Offering or application of the proceeds therefrom.
The unaudited Pro Forma Consolidated Financial Statements combine the
historical financial position and results of the Company with the historical
financial position and results of the Acquisitions, prior to the dates the
Company made such acquisitions, using the purchase method of accounting. The
Pro Forma Consolidated Statements of Loss presented are not necessarily
indicative of the operating results that would have been achieved had such
transactions occurred at the dates indicated above. These statements are based
on the assumptions set forth in the notes to such statements and should be read
in conjunction with the related financial statements and notes thereto of the
Company, Open:Net, Vianet, and Flashnet included elsewhere in this Offering
Memorandum.
The accounting adjustments reflected in the accompanying unaudited Pro Forma
Consolidated Financial Statements reflect estimates made by the Company and
assumptions which the Company believes to be reasonable. The Company believes
that no significant uncertainties should affect the pro forma adjustments and
considers the impact of any such uncertainties to be immaterial.
F-24
<PAGE>
PRO FORMA CONSOLIDATED STATEMENTS OF LOSS
Year ended December 31, 1998
(unaudited)
<TABLE>
<CAPTION>
Pro Forma
Historical as
Company Acquisitions Adjusted
------------- -------------- -------------
(in thousands, except per share data)
<S> <C> <C> <C>
Revenue
Internet Projects........ $ 5,139 $ 1,067 (a) $ 6,206
Network Services......... 3,495 7,689 (a) 11,184
------------- ---------- -------------
Total revenues......... 8,634 8,756 17,390
Cost of revenues
Internet Projects........ 4,699 801 (b) 5,500
Network Services......... 4,067 4,882 (b) 8,949
Depreciation and
amortization............ 1,674 376 (b) 2,050
------------- ---------- -------------
Total cost of
revenues.............. 10,440 6,059 16,499
------------- ---------- -------------
Gross profit (loss)........ (1,806) 2,697 891
General and administrative
expenses.................. 1,576 1,936 (c) 3,512
Marketing expenses......... 3,844 1,692 (c) 5,536
Research and development... 2,941 917 (c) 3,858
Depreciation and
amortization.............. 880 4,131 (c)(d) 5,011
------------- ---------- -------------
Total operating
expenses.............. 9,241 8,676 17,917
------------- ---------- -------------
Operating loss............. (11,047) (5,979) (17,026)
Interest expense........... 197 234 (e) 431
Interest income............ 154 10 (e) 164
------------- ---------- -------------
Loss before taxes and
minority interest......... (11,090) (6,203) (17,293)
Income tax benefit......... 6,173 580 (f) 6,753
Minority interest.......... 145 -- 145
------------- ---------- -------------
Net loss................... $ (4,772) $ (5,623) $ (10,395)
============= ========== =============
Basic and diluted loss per
share..................... $ (0.30) $ (0.64)
============= =============
Number of shares used to
compute loss per share.... 16,012,653 339,887 (g) 16,352,540
============= ========== =============
</TABLE>
F-25
<PAGE>
PRO FORMA CONSOLIDATED STATEMENTS OF LOSS
Three months ended March 31, 1999
(unaudited)
<TABLE>
<CAPTION>
Pro Forma
Historical as
Company Acquisitions Adjusted
------------- -------------- -------------
(in thousands, except per share data)
<S> <C> <C> <C>
Revenue
Internet Projects........ $ 1,392 $ 159 (a) $ 1,551
Network Services......... 2,462 1,682 (a) 4,144
------------- ---------- -------------
Total revenues......... 3,854 1,841 5,695
Cost of revenues
Internet Projects........ 1,079 142 (b) 1,221
Network Services......... 2,970 1,418 (b) 4,388
Depreciation and
amortization............ 414 94 (b) 508
------------- ---------- -------------
Total cost of
revenues.............. 4,463 1,654 6,117
------------- ---------- -------------
Gross (loss)............... (609) 187 (422)
General and administrative
expenses.................. 1,456 509 (c) 1,965
Marketing expenses......... 1,807 230 (c) 2,037
Research and development... 1,263 66 (c) 1,329
Depreciation and
amortization.............. 841 774 (c)(d) 1,615
------------- ---------- -------------
Total operating
expenses.............. 5,367 1,579 6,946
------------- ---------- -------------
Operating loss............. (5,976) (1,392) (7,368)
Interest expense........... 11 35 (e) 46
Interest income............ 260 1 (e) 261
------------- ---------- -------------
Loss before taxes.......... (5,727) (1,426) (7,153)
Income tax benefit......... 2,159 197 (f) 2,356
------------- ---------- -------------
Net loss................... $ (3,568) $ (1,229) $ (4,797)
============= ========== =============
Basic and diluted loss per
share..................... $ (0.19) $ (0.25)
============= =============
Number of shares used to
compute loss per share.... 18,762,138 301,290 (g) 19,063,428
============= ========== =============
</TABLE>
F-26
<PAGE>
PRO FORMA CONSOLIDATED BALANCE SHEET
March 31, 1999
(unaudited)
<TABLE>
<CAPTION>
Historical Pro Forma
Company Flashnet as Adjusted
---------- -------- -----------
(in thousands)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............ $ 29,107 $ 672(d)(h)(i) $ 29,779
Short-term investments............... 288 -- 288
Accounts receivable, net............. 4,049 3,266 (h) 7,315
Other receivables.................... 1,996 -- 1,996
Current deferred income taxes........ -- 551 (h) 551
Prepaid expenses and other assets ... 347 607 (h) 954
-------- ------- --------
Total current assets............... 35,787 5,096 40,883
Property and equipment, net.......... 11,121 2,199 (h) 13,320
Product development costs, net....... 5,626 -- 5,626
Goodwill, net........................ 5,809 29,958 (d)(h) 35,767
Deferred income taxes................ 9,565 750 (h) 10,315
Other assets......................... 3,918 10 (h) 3,928
-------- ------- --------
Total Assets........................... $ 71,826 $38,013 $109,839
======== ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Overdrafts and short-term
borrowings.......................... $ 1,506 $ 297 (h) $ 1,803
Trade accounts payable............... 7,555 4,209 (h) 11,764
Other accrued liabilities............ 2,148 2,261 (h) 4,409
Deferred purchase obligations........ 359 -- 359
Interim loan payable................. -- 22,783 (i) 22,783
Current portion of long-term debt and
capital lease obligations........... 1,157 223 (h) 1,380
Accrued personnel costs.............. 470 446 (h) 916
-------- ------- --------
Total current liabilities.......... 13,195 30,219 43,414
Long-term debt....................... -- 444 (h) 444
Capital lease obligations............ 1,272 345 (h) 1,617
Severance indemnities................ -- 75 (h) 75
Minority interest.................... 124 -- 124
SHAREHOLDERS' EQUITY
Common stock......................... 19 -- 19
Preferred stock...................... 6 -- 6
Additional paid in capital........... 72,359 6,930 (d) 79,289
Accumulated deficit.................. (10,003) -- (10,003)
Other comprehensive loss............. (5,146) -- (5,146)
-------- ------- --------
Total shareholders' equity......... 57,235 6,930 64,165
-------- ------- --------
Total Liabilities and Shareholders'
Equity................................ $ 71,826 $15,230 $109,839
======== ======= ========
</TABLE>
F-27
<PAGE>
NOTES TO THE PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, unless otherwise indicated)
(a) Includes the revenues of the Acquisitions for the periods prior to their
respective acquisition dates as follows.
<TABLE>
<CAPTION>
Vianet Open:Net Flashnet Total
------ -------- -------- -----
<S> <C> <C> <C> <C>
1998 Pro Formas
Internet Projects........................... -- 461 606 1,067
Network Services............................ 3,123 372 4,194 7,689
1999 Pro Formas
Internet Projects........................... -- -- 159 159
Network Services............................ -- -- 1,682 1,682
</TABLE>
(b) Includes the cost of revenues of the Acquisitions for the periods prior to
their respective acquisition dates as follows.
<TABLE>
<CAPTION>
Vianet Open:Net Flashnet Total
------ -------- -------- -----
<S> <C> <C> <C> <C>
1998 Pro Formas
Internet Projects........................... -- 242 559 801
Network Services............................ 1,682 215 2,985 4,882
Depreciation and amortization............... 88 22 266 376
1999 Pro Formas
Internet Projects........................... -- -- 142 142
Network Services............................ -- -- 1,418 1,418
Depreciation and amortization............... -- -- 94 94
</TABLE>
(c) Includes the operating expenses of the Acquisitions for the periods prior
to their respective acquisition dates as follows.
<TABLE>
<CAPTION>
Vianet Open:Net Flashnet Total
------ -------- -------- -----
<S> <C> <C> <C> <C>
1998 Pro Formas
General and administrative expenses........ 420 26 1,490 1,936
Marketing expenses......................... 741 310 641 1,692
Research and development expenses.......... 259 178 480 917
Depreciation and amortization.............. 75 27 112 214
1999 Pro Formas
General and administrative expenses........ -- -- 509 509
Marketing expenses......................... -- -- 230 230
Research and development expenses.......... -- -- 66 66
Depreciation and amortization.............. -- -- 28 28
</TABLE>
(d) Represents the amortization of goodwill and other intangible assets arising
from the Acquisitions.
<TABLE>
<CAPTION>
Vianet Open:Net Flashnet Total
------ -------- -------- -----
<S> <C> <C> <C> <C>
1998 Pro Formas
Amortization................................ 766 168 2,983 3,917
1999 Pro Formas
Amortization................................ -- -- 746 746
</TABLE>
Amortization is calculated on a straight line basis using the following
useful lives.
<TABLE>
<S> <C>
Goodwill.......................................................... 10 years
Customer base..................................................... 5 years
Management contracts.............................................. 3 years
</TABLE>
F-28
<PAGE>
The calculation and allocation of the purchase price was as follows:
<TABLE>
<CAPTION>
Vianet Open:Net Flashnet Total
------ -------- -------- -------
<S> <C> <C> <C> <C>
Purchase price....................... $4,483 $2,541 $29,066 $36,090
Less: net assets acquired............ (37) 130 (758) (665)
------ ------ ------- -------
Excess of purchase price over net
assets acquired..................... $4,520 $2,411 $29,824 $36,755
Allocated to:
Goodwill........................... $2,063 $2,299 $29,824 $34,186
Customer base...................... 1,945 112 -- 2,057
Management contracts............... 512 -- -- 512
------ ------ ------- -------
$4,520 $2,411 $29,824 $36,755
====== ====== ======= =======
</TABLE>
In addition to cash of $4,483 (of which $4,125 was paid in the first
quarter of 1999), the purchase price for Vianet includes 225,000 shares of
common stock of the Company which were placed with a trustee to be released
annually over a five year period. Of these shares, 150,000 are to be
released in 30,000 share increments as long as the owner of these shares
remains an employee of the Company. The remaining 75,000 shares are to be
released annually over a five year period in 15,000 share increments. The
150,000 shares as to which release will be made so long as the owner
thereof remains an employee of the Company are being treated as contingent
consideration and, accordingly, will be recorded as an additional cost of
the acquisition when the shares are released by the trustee.
The purchase price of Flashnet was paid in the form of cash of Lit. 41.0
billion ($22.1 million) and the issuance of 301,290 shares of Cybernet
common stock. The purchase price reflected in these Unaudited Pro Forma
Consolidated Financial Statements represents the cash portion of the
purchase price translated to U.S. dollars using the exchange rate in effect
on May 28, 1999 and the fair market value of the Cybernet common stock to
be issued based on the stock's closing price on May 14, 1999.
(e) Includes interest income and expense of the Acquisitions for the periods
prior to their respective acquisition dates as follows:
<TABLE>
<CAPTION>
Vianet Open:Net Flashnet Total
------ -------- -------- -----
<S> <C> <C> <C> <C>
1998 Pro Formas
Interest expense............................ 3 8 223 234
Interest income............................. -- -- 10 10
1999 Pro Formas
Interest expense............................ -- -- 35 35
Interest income............................. -- -- 1 1
</TABLE>
(f) The income tax adjustment represents Vianet income tax expense of $4 and
Flashnet income tax benefit of $584 for 1998 and a Flashnet income tax
benefit of $197 for 1999.
(g) Weighted average shares outstanding for the purposes of calculating pro
forma basic and diluted loss per share is as follows:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Historical weighted average shares................. 16,012,653 18,762,138
Shares issued in connection with certain of the
Acquisitions and not reflected in historical
weighted average shares;
Open:Net acquisition............................. 38,597 --
Flashnet acquisition............................. 301,290 301,290
---------- ----------
16,352,540 19,063,428
========== ==========
</TABLE>
(h) Represents pro forma adjustments to reflect the assets and liabilities of
Flashnet.
(i) Represents the issuance of the Interim loan payable of $22,783 obtained in
connection with the Flashnet acquisition.
F-29
<PAGE>
EXHIBIT 2.1
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "Agreement") is entered into as of May
14, 1999,
BETWEEN
Cybernet Internet Services International, Inc., a Delaware corporation
("Cybernet"), duly represented by its President and CEO Mr. Andreas Eder,
AND
Giovanni Prignano, born in Naples on June 15, 1961, resident in Rome, Via Aurano
171, Italian tax number PRG GNN 61H15 F839N,
Antonio Ferreri, born in Trieste on March 4, 1964, resident in Rome, Via F.
Grossi Gondi 45, Italian tax number FRR NTN 64C04 L424M,
Massimiliano Ziegler, born in Rome on January 3, 1964, resident in Rome, Via
Leonida Rech 44/D, Italian tax number ZGL MSM 64A03 H501N,
Andrea Colangelo, born in Rome on March 16, 1970, resident in Rome, Via
Bacchiglione 3, Italian tax number CLN NDR 70C16 H501B,
Michele Trotta, born in Rome on April 23, 1970, resident in Rome, Via Anapo 29,
Italian tax number TRT MHL 70D23 H501I,
Catia Ravaioli, born in Rome on September 17, 1961, resident in Rome, Via Aurano
171, Italian tax number RVL CTA 61P57 H501G,
Data Flash S.r.l., an Italian corporation, with registered offices in Ponte
Galeria (Rome), Via G.B. Molinelli 74/76, Italian tax number 08394760584, duly
represented by its legal representative, Mr. Giovanni Prignano,
Eurel International S.A., a Luxembourg corporation, with registered offices in
Luxembourg, L2324, 4 Avenue del Pescatore, duly represented by its legal
representative, Mr. Enzo Costa being the holders of number 1,660,869 shares of
the issued and outstanding share capital of Flashnet S.p.A., an Italian
corporation ("Flashnet"), (individually, a "Flashnet Stockholder" and
collectively, the "Flashnet Stockholders"), as per the table enclosed under
Exhibit 1
- ---------
and
3i Group plc, an English company with registered offices in Waterloo Road 91,
London SE1 8XP, duly represented by its attorney-in-fact Mr. Marco Franzini, and
3i Eurofund II LP, an English partnership with registered offices in Waterloo
Road 91, London SE1 8XP, duly represented by its attorney-in-fact Mr. Marco
Franzini,
<PAGE>
being the holders of number 949,068 shares of the issued and outstanding share
capital of Flashnet, and of 171,428 warrants and 800,000 convertible bonds
(collectively "3i", being intended that all the obligations of the 3i entities
under the Agreement shall be several and not joint) as per the table enclosed
under Exhibit 1.
---------
The Flashnet Stockholders and 3i are collectively hereinafter also referred to
as "Sellers"; the rights and obligations of each Seller under the Agreement
shall be several
BACKGROUND:
(a) All of the issued and outstanding share capital of Flashnet S.p.A., and
the warrants and convertible bonds mentioned above (collectively, the "Flashnet
Stock") are owned by the Sellers;
(b) the Flashnet Stockholders and 3i have agreed to sell to Cybernet and
Cybernet has agreed to purchase the Flashnet Stock from the Flashnet
Stockholders and 3i on the terms and conditions set forth in this Agreement;
(c) in consideration of the mutual representations, warranties, covenants
of Cybernet, the Flashnet Stockholders and 3i and in consideration of the
agreements contained in this Agreement, the parties agree as follows:
STATEMENT OF TERMS:
SECTION 1
PURCHASE AND SALE OF STOCK
1.1 Purchase and Sale of Stock. Flashnet Stockholders and 3i hereby
--------------------------
severally undertake to sell to Cybernet, who hereby undertakes to purchase from
Flashnet Stockholders and 3i all of the Flashnet Stockholders' and 3i's right,
title and interest in the Flashnet Stock.
1.2 Consideration, Stock Exchange. At the Closing (as defined in Section
-----------------------------
2.1 below), upon transfer and assignment of the Flashnet Stock to Cybernet,
Cybernet (i) shall pay an amount of Lit. 40,964,440,454 to the Sellers and (ii)
will cause 301,290 shares of the common voting stock, par value $ 0,001 of
Cybernet (the "Cybernet Stock") to be issued to the Pooling Trustee (as defined
in Section 2.2 below) on behalf of the Flashnet Stockholders (collectively, the
"Consideration") as specified by each Seller at the execution of this Agreement
in correspondence with his, her or its sig-
<PAGE>
nature. It is agreed that the Consideration has been calculated in relation to
the number of shares owned by each Seller and, for 3i, also in relation to the
number of Flashnet shares theoretically deriving to 3i in case of conversion of
the warrants and the convertible bonds.
1.3 Payment, Delivery of Cybernet Stock to the Sellers. At the Closing,
--------------------------------------------------
the Flashnet Stockholders and 3i will receive the agreed amount in cash,
credited by wire transfer on the bank account(s) designated by the Sellers, and
the Pooling Trustee (as defined in Section 2.2 (b) below) will receive stock
certificates evidencing shares which amount to the number of Cybernet Stock
requested for each Flashnet Stockholder as shown next to its name at the end of
this Agreement.
1.4 No Further Ownership Rights in Flashnet Stock. The Payment of the
---------------------------------------------
cash to the Flashnet Stockholders and 3i and the issuance of the shares of
common voting stock of Cybernet to be delivered the Pooling Trustee at the
Closing will be deemed to have been given in full satisfaction of all rights
pertaining to the Flashnet Stock.
SECTION 2
CLOSING; CLOSING CONDITIONS
2.1 Closing. The parties to this Agreement will hold a closing (the
-------
"Closing") for the purpose of consummating the transactions contemplated by this
Agreement at 10:00 a.m. on June 30, 1999 or such other date and time mutually
agreed upon by the parties. At the Closing, the transfer of full title and
ownership of the Flashnet Shares shall take place by means of endorsement to be
executed in the presence of a notary agreed between the parties in the manner
provided for in article 2023 of the Civil Code, when Sellers will deliver the
Flashnet Shares to Cybernet. The date on which the Closing actually occurs is
hereinafter referred to as the "Closing Date." At the Closing, the parties will
execute and exchange the documents, items, certificates and instruments
described in this Section 2.
2.2. Conditions to Closing of Cybernet. Cybernet's obligation to
----------------------------------
consummate the transactions contemplated by this Agreement is subject to the
satisfaction of the conditions set forth below and/or the delivery of all of the
documents, items, certificates and instruments described below, unless such
condition is waived by Cybernet at the Closing. The Closing of the transactions
contemplated by this Agreement will be deemed to mean a waiver of all conditions
to Closing.
<PAGE>
(a) Transaction Documents. The Flashnet Stockholders and 3i will have
---------------------
executed this Agreement and delivered all of the issued and outstanding shares,
warrants and convertible bonds of the Flashnet Stock to Cybernet as provided in
Section 1.2 above.
(b) Pooling Trust Agreement. The Flashnet Stockholders who receive part of
-----------------------
the Consideration in Cybernet Stock will have executed a pooling trust agreement
(the "Pooling Trust Agreement"), subject to the terms and conditions as set
forth in the Pooling Trust Agreement attached as Exhibit 2, with a pooling
---------
trustee (the "Pooling Trustee") providing that the Cybernet Stock making up a
part of the Purchase Price shall be held by the Pooling Trustee and not sold
until released by the Pooling Trustee, that thirty-three percent (33%) of such
Cybernet shares shall be released on the first anniversary of the Closing date,
that further thirty-three percent (33%) of such Cybernet shares shall be
released on the second anniversary of the Closing date and that the remaining
thirty-four percent (34%) of such Cybernet shares shall be released on the third
anniversary of the Closing date.
2.3 Conditions to Closing of the Flashnet Stockholders and 3i. The
---------------------------------------------------------
Flashnet Stockholders' and 3i's obligation to consummate the transactions
contemplated by this Agreement is subject to the satisfaction of the conditions
set forth below and/or the delivery of all of the documents, items, certificates
and instruments described below, unless such condition is waived by the Flashnet
Stockholders and 3i at the Closing. The Closing of the transactions contemplated
by this Agreement will be deemed to mean a waiver of all conditions to Closing.
(a) Transaction Documents. Cybernet will have (i) executed this Agreement,
---------------------
(ii) paid an amount corresponding to the part of the Consideration to be paid in
cash to the Flashnet Stockholders and 3i and (iii) delivered the Cybernet Stock
to the Pooling Trustee, as provided in Section 1.3 above.
(b) Copies of Resolutions. Cybernet will have furnished the Flashnet
---------------------
Stockholders and 3i with certified copies of resolutions duly adopted by the
Board of Directors of Cybernet approving the execution and delivery of this
Agreement and the other documents to be executed and delivered in connection
with this Agreement and consummation of the transactions contemplated hereby and
thereby.
(c) Stock Options. Cybernet will have executed Stock Option Awards under
--------------
the Cybernet 1998 Stock Incentive Plan according to which the management of
Flashnet consisting of Mr. Prig-
<PAGE>
nano, Mr. Ferreri, Mr. Ziegler, Mr. Colangelo and Mr. Trotta will be entitled to
purchase in total 200,000 shares of common stock of Cybernet subject to the
terms and conditions as set forth in the Stock Option Award Form as attached in
Exhibit 3. The exercise price shall be the market price of Cybernet's common
- ---------
stock at the Frankfurt Stock Exchange on the day before the Closing Date.
(d) Release. Cybernet shall have fully and unconditionally released all
--------
Flashnet directors, statutory auditors and consultants from any and all
liabilities in relation to their actions in their capacity as directors,
statutory auditors and consultants of Flashnet, such a release to be in a form
substantially acceptable to the Sellers.
(e) Employment agreements. The Flashnet Stockholders who are presently
----------------------
managers of Flashnet shall have entered into employment agreement substantially
at the conditions attached hereto as Exhibit 4, for a minimum period
---------
corresponding to the non-competition undertaking as per Section 6 below, and at
overall economical conditions not inferior to the current conditions.
SECTION 3
REPRESENTATIONS AND WARRANTIES OF THE SELLERS
The Flashnet Stockholders, severally and not jointly, represent and warrant
to Cybernet:
3.1 Corporate Organization and Good Standing. Flashnet is an Italian
----------------------------------------
corporation ("S.p.A.") duly organized and validly existing under the laws of
Italy, with all requisite corporate power and authority to own, operate and
lease its properties and to carry on its business as it is now being conducted.
Flashnet is qualified or licensed to do business in each jurisdiction in which
the ownership or leasing of property by it or the conduct of its business
requires such licensing or qualification, except where the failure to be so
qualified or licensed or in good standing will not have a Flashnet Material
Adverse Effect. Flashnet has no subsidiaries. For purposes of this Agreement,
"Flashnet Material Adverse Effect" means any materially adverse change in or
effect on the business, operations, properties, assets, liabilities, financial
condition or results of operations of Flashnet, since December 31, 1998, but
does not mean any losses, adverse developments or other conditions suffered by
Flashnet arising from normal operations or market, political or economic
conditions affecting the business of Flashnet as a whole. As of the date of this
Agreement Flashnet is entered in the commercial register of Rome. All facts
relating to Flashnet and eligible for registration in the com-
<PAGE>
mercial register have actually been entered, or shall timely be entered before
Closing, in the applicable commercial register. Its articles of association are
those enclosed as Exhibit 5.
---------
3.2 Due Execution; Enforceability. This Agreement has been, and all other
-----------------------------
documents, agreements and instruments to be executed in connection with the
consummation of the transactions contemplated by this Agreement (collectively,
the "Flashnet Transaction Documents") will be, duly executed and delivered by
the Flashnet Stockholders and this Agreement is, and the other Flashnet
Transaction Documents when executed and delivered by the Flashnet Stockholders
as contemplated by this Agreement will be, the valid and binding obligation of
the Flashnet Stockholders enforceable in accordance with their respective terms,
except (1) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium, and other laws of general application affecting enforcement of
creditors' rights generally, and (2) as limited by laws relating to the
availability of specific performance, injunctive relief, or other equitable
remedies.
3.3 Capitalization. The entire authorized share capital and other equity
--------------
securities of Flashnet consists of a share capital par value Lit. 2,895,650,000
(the "Flashnet Shares") all of which shares are issued and outstanding, but for
the shares deriving from conversion of the warrants and convertible bonds, as
specified above. All of the issued and outstanding Flashnet Shares have been
duly authorized, are validly issued, were not issued in violation of any
preemptive rights and are fully paid and nonassessable, are not subject to
preemptive rights other than those specified below under Sections 3.4 and 3.20
and were issued in full compliance with all federal, state and local laws, rules
and regulations. Each Flashnet Stockholder owns beneficially and of record all
of the shares of Flashnet issued to such shareholder. There are no outstanding
options, warrants, subscriptions, conversion rights, or other rights,
agreements, or commitments obligating Flashnet to issue any additional Flashnet
Shares, or any other securities convertible into, exchangeable for, or
evidencing the right to subscribe for or acquire from Flashnet any Flashnet
Shares. There are no agreements purporting to restrict the transfer of the
Flashnet Shares, no voting agreements, voting trusts, or other arrangements
restricting or affecting the voting of the Flashnet Shares.
3.4 Title to Flashnet Shares. The Flashnet Shares are lawfully owned by
------------------------
the Flashnet Stockholders in the respective amounts set forth opposite his, her
or its name by its signature below, free of preemptive rights other than those
under the Flashnet articles of association and free and clear of all claims,
liens, charges, security interest, encumbrances and other restrictions or
limitations of any
<PAGE>
kind other than those under the by-laws and Flashnet shareholders' agreement of
July 29, 1998 as amended pursuant to the deed of amendment of April 9, 1999.
Each Flashnet Stockholder has the full power, right, and authority to transfer
the Flashnet Shares held by him pursuant to this Agreement.
3.5 Financial Statements. Attached to this Agreement as Disclosure
--------------------
Schedule 3.5 are true, correct, and complete copies of unaudited Flashnet
Balance Sheets and Income Statements for the periods ending December 31, 1996,
1997, audited Flashnet Balance Sheets and Income Statements for year 1998, and
audited accounts for the three-month period ending March 31, 1999 (collectively,
the "Flashnet Financial Statements"). The Flashnet Financial Statements (a) are
in accordance with the books and records of Flashnet and (b) present the
financial condition of Flashnet as of the respective dates indicated and the
results of operations for such periods in compliance with Italian GAAP.
Flashnet has not received any advice or notification from its independent
certified public accountants that Flashnet has used any improper accounting
practice that would have the effect of not reflecting or incorrectly reflecting
in the Flashnet Financial Statements or the books and records of Flashnet, any
properties, assets, liabilities, revenues, or expenses. The books, records, and
accounts of Flashnet accurately reflect, in accordance with Italian GAAP and in
reasonable detail, the transactions, assets, and liabilities of Flashnet.
Flashnet has not engaged in any transaction, maintained any bank account, or
used any funds of Flashnet, except for transactions, bank accounts, and funds
which have been and are reflected in the normally maintained books and records
of Flashnet.
3.6 Absence of Certain Changes. Since December 31, 1998 (the "Flashnet
--------------------------
Reference Balance Sheet") Flashnet has not suffered any Flashnet Material
Adverse Effect.
3.7 Filings, Consents and Approvals. Except for any filings required by
-------------------------------
applicable law and as otherwise set forth on Disclosure Schedule 3.7, no filing
or registration with, no notice to and no permit, authorization, consent, or
approval of any public or governmental body or authority or any other person or
entity is necessary for the consummation by the Flashnet Stockholders of the
transactions contemplated by this Agreement or to enable Flashnet to continue to
conduct its business after the Closing Date in a manner consistent with that in
which it is presently conducted.
3.8 Noncontravention. Neither the execution, delivery and performance of
----------------
the Flashnet Transaction Documents, nor the consummation of the transactions
contemplated thereby nor compliance with the provisions thereof, will:
<PAGE>
(1) Except as set forth in Disclosure Schedule 3.8, conflict with,
result in a violation of, cause a default under (with or without notice,
lapse of time or both) or give rise to a right of termination, amendment,
cancellation or acceleration of any obligation contained in or the loss of
any material benefit under, or result in the creation of any lien, security
interest, charge or encumbrance upon any of the material properties or
assets of Flashnet under any term, condition or provision of any loan or
credit agreement, note, bond, mortgage, indenture, lease or other
agreement, instrument, permit, license, judgment, order, decree, statute,
law, ordinance, rule or regulation applicable to Flashnet or its properties
or assets;
(2) Violate any provision of the articles of incorporation or bylaws
of Flashnet; or
(3) Violate any order, writ, injunction, decree, statute, rule, or
regulation of any court or governmental or regulatory authority applicable
to Flashnet or any of its properties or assets.
3.9 Litigation. There is no claim, charge, arbitration, action, suit,
----------
investigation or proceeding by or before any court, arbiter, administrative
agency or other governmental authority now pending or, to the Flashnet
Stockholders' knowledge, threatened in writing against Flashnet or which
involves any of the business, or the properties or assets of Flashnet that, if
adversely resolved or determined, would have a Flashnet Material Adverse Effect.
To the Flashnet Stockholders' knowledge, there is no reasonable basis for any
claim or action that, based upon the likelihood of its being asserted and its
success if asserted, would have a Flashnet Material Adverse Effect.
3.10 Material Contracts and Transactions. Disclosure Schedule 3.10,
-----------------------------------
contains copies of all material contracts, agreements, licenses, leases,
permits, arrangements, commitments, instruments, understanding or contracts,
whether written or oral, express or implied, contingent, fixed or otherwise, to
which Flashnet is a party (collectively, the "Flashnet Contracts"). Except as
shown on Disclosure Schedule 3.10, Flashnet is not a party to any written or
oral:
(1) contract for the purchase, sale or lease of any material capital
assets, or continuing contracts for the purchase or lease of any material
lines, bandwidth, network, supplies, materials, equipment or services;
(2) interconnection agreements;
(3) agreement to pay material commissions or sales representative
agreements;
<PAGE>
(4) agreement for the employment or consultancy or any person or
entity except those routinely entered into with employees and contracts
with members of the Board of Directors and Officers of Flashnet;
(5) note, debenture, bond, trust agreement, letter of credit
agreement, loan agreement, or other contract or commitment for the
borrowing or lending of money in excess of Lire 100,000,000, or agreement
or arrangement for a line of credit or guarantee, pledge, or undertaking of
the indebtedness of any other person;
(6) agreement, contract, or commitment for any charitable or
political contribution;
(7) agreement, contract, or commitment limiting or restraining
Flashnet in its business or any successor thereto from engaging or
competing in any manner or in any business or from hiring any employees,
nor, to the Flashnet Stockholders' knowledge, is any employee or
independent contractor of Flashnet subject to any such agreement, contract,
or commitment;
(8) material agreement, contract, or commitment not made in the
ordinary course of business;
(9) agreement establishing or providing for any joint venture,
partnership, or similar arrangement between Flashnet and any other person
or entity; or
(10) power of attorney or similar authority to act for Flashnet.
Each Flashnet Contract is in full force and effect, and there exists no
material breach or violation of or default by Flashnet under any Flashnet
Contract nor, to the Flashnet Stockholders' knowledge, by any other party to a
Flashnet Contract, or any event that with notice or the lapse of time, or both,
will create a material breach or violation thereof or default under any Flashnet
Contract by Flashnet nor, to the Flashnet Stockholders' knowledge, by any other
party to a Flashnet Contract. Except as set forth on Disclosure Schedule 3.10,
the continuation, validity, and effectiveness of each Flashnet Contract will in
no way be affected by this Agreement. Except as indicated on Disclosure Schedule
3.10, there exists no actual or, to the Flashnet Stockholders' knowledge, any
threatened termination, cancellation, or limitation of, or any amendment,
modification, or change to any Flashnet Contract, which would have a Flashnet
Material Adverse Effect. A true, correct and complete copy (and if oral, a
description of material terms) of each Flashnet Contract, as amended to date, is
contained in Disclosure Schedule 3.10.
<PAGE>
3.11 Intellectual Property. Disclosure Schedule 3.11, contains a list of
---------------------
all material intellectual property rights owned, licensed or used by Flashnet in
the conduct of its business (collectively, the "Flashnet Intellectual Property")
and a list of all agreements and contracts relating to the Flashnet Intellectual
Property. No use by Flashnet of any Flashnet Intellectual Property violates and
no use by Flashnet of the Flashnet Intellectual Property as contemplated will
violate the terms of any agreement pursuant to which such Flashnet Intellectual
Property is licensed. No claim is pending, or, to the Flashnet Stockholders'
knowledge, threatened, which alleges that the ownership of, rights as licensee
to, or other right to use any Flashnet Intellectual Property is invalid or
unenforceable by Flashnet. Except as shown on Disclosure Schedule 3.11, no
royalties or fees are payable by Flashnet to anyone for use of the Flashnet
Intellectual Property. A true, correct, and complete copy of each agreement
listed on Disclosure Schedule 3.11, as such agreement have been amended to date,
has been furnished to Cybernet. All such agreements are in full force and effect
and there are no existing material defaults or events of default, real or
claimed, or events which with or without notice or lapse of time or both would
constitute material defaults under such agreements that would give the non-
defaulting party a right to terminate such agreement or a right to receive any
payment pursuant to such agreement and all of such agreements will in no way be
affected by the consummation of the transactions contemplated by this Agreement.
Flashnet has no registered or unregistered, foreign or Italian patents, utility
models, trademarks, trade names, trade styles, and service marks and copyrights,
trade secrets or know-how, except as listed on Disclosure Schedule 3.11.
3.12. Real Property and Real Property Leases. Flashnet does not own any
--------------------------------------
real property. Disclosure Schedule 3.12 sets forth the name, parties, and date
of each lease and sublease of real property that is occupied by Flashnet
("Flashnet Leases"), and the address of each parcel of leased real property and
a list of all amendments to such Flashnet Leases. Each Flashnet Lease is in full
force and effect and there is no default asserted thereunder by any party
thereto and, to the Flashnet Stockholders' knowledge, there are no unasserted
defaults (including any events which with the passage of time or giving of
notice or both would constitute a default). True, correct and complete copies of
all the Flashnet Leases, as amended to date, have been delivered to Cybernet.
Flashnet has not been notified that the use and operation of any of the real
properties leased by Flashnet does not conform to applicable building, zoning,
safety, environmental, and other laws, ordinances, regulations, codes, permits,
licenses, and certificates and all restrictions and conditions affecting title,
except where the failure to conform would not have an Flashnet Material Adverse
Effect.
<PAGE>
3.13 Personal Property and Personal Property Leases. Flashnet owns or
----------------------------------------------
leases the use of, all material equipment, furniture, fixtures and other
material tangible personal property and assets necessary for the continued
operation of the business of Flashnet as presently conducted and where the
absence of such property and assets would have a Flashnet Material Adverse
Effect. All of such personal properties are in good operating condition (normal
wear and tear excepted), and are reasonably fit for the purposes for which the
such personal property is presently used.
3.14 Compliance with Law. Flashnet holds and is in compliance with all
-------------------
permits, certificates, licenses, approvals, registrations and authorizations
necessary for the conduct of its business or the ownership of its properties or
assets, except where the failure to hold or comply could not have a Flashnet
Material Adverse Effect, and all of such permits, certificates, licenses,
approvals, registrations, and authorizations are in full force and effect.
Flashnet is in compliance with all applicable laws, statutes, ordinances, rules
and regulations (including without limitation those relating to environmental
protection, occupational safety and health, and equal employment practices) and
all orders, judgments and decrees, except where the failure to comply would not
have a Flashnet Material Adverse Effect.
3.15 Taxes. Flashnet has timely filed with the appropriate taxing
-----
authorities all returns required to be filed on or prior to the date hereof in
respect of all taxes of Flashnet, and, except as set forth in Disclosure
Schedule 3.15, has paid all such taxes, including interest, penalties, and
additions in connection therewith shown to have become due on such returns or
for which a notice of assessment or demand for payment has been received. All
such returns have been prepared in accordance with all applicable laws and
requirements. Any accruals for such taxes reflected in the Flashnet Reference
Balance Sheet are sufficient to satisfy the accrued liability for such taxes as
of the date of the Flashnet Reference Balance Sheet. No material tax issues have
been raised by the competent tax authorities in connection with any of the tax
returns referred to above, and no waivers of statutes of limitations or
extensions of time within which to file any tax return or with respect to a tax
assessment or deficiency have been given or requested with respect to Flashnet.
3.16 Labor Relations. Disclosure Schedule 3.16 sets forth the name,
---------------
occupation and annual salary of each of Flashnet's employees and the respective
date of each employment agreement entered into by Flashnet. There is no unfair
labor practice charge or other labor related grievance pending or, to the
Stockholders' knowledge, threatened against Flashnet that might have a Flashnet
Material Adverse Effect. Flashnet has in relation to each of its employees and
to each of its former
<PAGE>
employees complied in all material respect with all its obligations under
statute and otherwise concerning the health and safety at work of each of the
employees and has not incurred any liability to any employee in respect of any
accident or injury which is not fully covered by insurance.
3.17 Pension and Employee Benefit Plans and Compensation. Flashnet
---------------------------------------------------
maintains no employee pension benefit plans, welfare benefit plans, bonus, share
purchase, share ownership, share option, deferred compensation, incentive,
severance, termination or other compensation plan or arrangement, and other
material employee fringe benefit plans, with the exception of what provided for
by labor laws or National Collective Bargaining Agreements. No salary or other
payment due to the Flashnet Stockholders remains unpaid by Flashnet and the
salaries have been completely paid for past services rendered to Flashnet, other
than current unpaid salary and current business expenses to be paid or
reimbursed by Flashnet in the ordinary course of business.
3.18 Insurance. Set forth in Disclosure Schedule 3.18 is a list of all
---------
insurance policies that relate to Flashnet's business. The coverage under each
such policy is in full force and effect, and no notice of cancellation or non
renewal with respect to, or disallowance of any claim under, any such policy has
been received by Flashnet. The Flashnet Stockholders have no knowledge of any
facts or the occurrence of any event that reasonably might form the basis of any
claim against Flashnet relating to its business or operations or any of its
assets or properties covered by any of such policy that may materially increase
the insurance premiums payable under any such policy.
3.19 Affiliate Transactions. Except as disclosed in Disclosure Schedule
----------------------
3.19, no officer, director, stockholder or affiliate of Flashnet provides any
assets, services or facilities used or held for use in connection with
Flashnet's business and Flashnet does not provide or cause to be provided any
assets, services or facilities to any such officer, director, stockholder or
affiliate.
3i Group plc and 3i Europartners II LP, severally and not jointly,
represent and warrant to Cybernet that:
3.20 Title to Flashnet Shares. 3i is the lawful owner of the Flashnet
------------------------
shares, warrants and convertible bonds in the respective amounts set forth
opposite the name of 3i Group plc and 3i Europartners II LP, respectively, on
the signature pages below, free of preemptive rights other than those under the
Flashnet articles of association and free and clear of all claims, liens,
charges, security inter-
<PAGE>
est, encumbrances and other restrictions or limitations of any kind other than
those under the by-laws and under the Flashnet shareholders' agreement of July
29, 1998 as amended pursuant to the deed of amendment of April 9, 1999. 3i Group
plc and 3i Europartners II LP have the full power, right and authority to
transfer the Flashnet shares, warrants and convertible bonds held by them
pursuant to this Agreement. The representations and warranties of 3i shall
expire and become void after 12 months following the Closing Date. In any case
the maximum liability for 3i under this article 3.20 shall not exceed the total
Consideration received by 3i.
3.21 Correctness of Representations. No representation or warranty of the
------------------------------
Flashnet Stockholders and of 3i, limited to Section 3.20 above, in this
Agreement or in any exhibit, certificate, or schedule attached to this Agreement
or furnished pursuant to this Agreement contains, or at the Closing Date will
contain, any untrue statement of fact or omits, or at the Closing Time will
omit, to state any material fact necessary in order to make the statements
contained therein not misleading, and all such statements, representations,
warranties, exhibits, certificates, and schedules shall be true and complete in
all material respects on and as of the Closing Time as though made on that date.
SECTION 4
REPRESENTATIONS AND WARRANTIES
OF CYBERNET
Cybernet represents and warrants to the Sellers as follows:
4.1 Organization and Good Standing. Cybernet is a corporation duly
------------------------------
organized, validly existing and in good standing under the laws of Delaware and
has all requisite corporate power and authority to own, lease and operate its
properties and to carry on its business as now being conducted. Except for
Cybernet Internet Dienstleistungen AG, Germany, and its subsidiaries, Eclipse
S.p.A., Italy, Vianet Telekommunikations AG, Austria, and Sunweb Internet
Services SIS AG, and its subsidiaries, Cybernet has no subsidiaries.
4.2 Capital Structure. The entire authorized capital stock and other
-----------------
equity securities of Cybernet consists of 50,000,000 shares of $0.001 par value
common stock of which as of the date of this Agreement 19,089,298 shares are
issued and outstanding and 10,000,000 shares of preferred stock of which as of
the date of this Agreement 6,360,000 are issued and outstanding. All of the
issued and
<PAGE>
outstanding shares of Cybernet Stock have been duly authorized, are validly
issued fully paid and nonassessable and are not subject to preemptive rights.
4.3 Authority. Cybernet has all requisite corporate power and authority
---------
to enter into this Agreement and the Transaction Documents to which it is a
party and to perform its obligations thereunder and to consummate the
transactions contemplated thereby. The execution and delivery of this Agreement
and each of the Transaction Documents to which it is a party by Cybernet and the
consummation by Cybernet of the transactions contemplated thereby, have been
duly authorized by the board of directors of Cybernet and no other corporate
proceedings on the part of Cybernet are necessary to authorize such documents or
to consummate the transactions contemplated thereby. This Agreement has been,
and all the other Transaction Documents to which it is a party when executed and
delivered by Cybernet as contemplated by this Agreement will be, duly executed
and delivered by Cybernet and this Agreement is, and the other Transaction
Documents when executed and delivered by Cybernet as contemplated hereby will
be, the valid and binding obligation of Cybernet enforceable in accordance with
their respective terms, except (1) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium, and other laws of general application
affecting enforcement of creditors' rights generally, and (2) as limited by laws
relating to the availability of specific performance, injunctive relief, or
other equitable remedies.
4.4 Financial Statements. Attached to this Agreement as Disclosure
--------------------
Schedule 4.4 are true, correct, and complete copies of audited Cybernet Balance
Sheets and Income Statements for the period ending December 31, 1998
(collectively, the "Cybernet Financial Statements"). The Cybernet Financial
Statements are in accordance with the books and records of Cybernet and present
fairly the financial condition of Cybernet as of the respective dates indicated
and the results of operations for such periods. Cybernet has not received any
advice or notification from its independent certified public accountants that
Cybernet has used any improper accounting practice that would have the effect of
not reflecting or incorrectly reflecting in the Cybernet Financial Statements or
the books and records of Cybernet, any properties, assets, liabilities,
revenues, or expenses. The books, records, and accounts of Cybernet accurately
and fairly reflect, in reasonable detail, the transactions, assets, and
liabilities of Cybernet. Cybernet has not engaged in any transaction,
maintained any bank account, or used any funds of Cybernet, except for
transactions, bank accounts, and funds which have been and are reflected in the
normally maintained books and records of Cybernet.
<PAGE>
4.5 Noncontravention. Neither the execution, delivery and performance of
----------------
the Transaction Documents, nor the consummation of the transactions contemplated
thereby nor compliance with the provisions thereof, will:
(1) Conflict with, result in a violation of, cause a default under
(with or without notice, lapse of time or both) or give rise to a right of
termination, amendment, cancellation or acceleration of any obligation
contained in or the loss of any material benefit under, or result in the
creation of any lien, security interest, charge or encumbrance upon any of
the material properties or assets of Cybernet under any term, condition or
provision of any loan or credit agreement, note, bond, mortgage, indenture,
lease or other agreement, instrument, permit, license, judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to Cybernet
or its material properties or assets;
(2) Violate any provision of the articles or certificate of
incorporation or by-laws of Cybernet; or
(3) Violate any order, writ, injunction, decree, statute, rule, or
regulation of any court or governmental or regulatory authority applicable
to Cybernet or any of its properties or assets.
4.6 Litigation. There is no claim, charge, arbitration, grievance,
----------
action, suit, investigation or proceeding by or before any court, arbiter,
administrative agency or other governmental authority now pending or, to
Cybernet's knowledge, threatened against Cybernet, or which involves any of the
business, or the properties or assets of Cybernet that, if adversely resolved or
determined, would have a Cybernet Material Adverse Effect on Cybernet. There is
no reasonable basis for any claim or action that, based upon the likelihood of
its being asserted and its success if asserted, would have a Cybernet Material
Adverse Effect.
4.7 Filings, Consents and Approvals. Except for any filings required by
-------------------------------
applicable laws, no filing or registration with, no notice to and no permit,
authorization, consent, or approval of any public or governmental body or
authority or other person or entity is necessary for the consummation by
Cybernet of the transactions contemplated by this Agreement or to enable
Cybernet to continue to conduct its business after the Closing Date in a manner
which is consistent with that in which it is presently conducted.
<PAGE>
4.8 Absence of Certain Changes. Since December 31, 1998 Cybernet has not
--------------------------
suffered any Cybernet Material Adverse Effect. For purposes of this Agreement,
"Cybernet Material Adverse Effect" means any materially adverse change in or
effect on the business, operations, properties, assets, liabilities, financial
condition or results of operations of Cybernet, but does not mean any losses,
adverse developments or other conditions suffered by Cybernet arising from
normal operations or market, political or economic conditions affecting the
business of Cybernet as a whole.
4.8 Transparent offer. Cybernet declares that it has disclosed in full
------------------
transparency and good faith to all of the Flashnet Stockholders and 3i any and
all terms and conditions of its offer for the purchase of the Flashnet Stock.
Cybernet represents and warrants that (i) the economic terms and conditions
offered for the purchase of the Flashnet Stock are equivalent to each of the
Flashnet Stockholders and 3i and (ii) no agreements, deeds or undertakings of
any kind (including, inter alia, shareholders' agreements, stock options, put
and call, take-along or come-along agreements) have been entered into or are
under negotiation with, or have been promised to, any of the Flashnet
Stockholders or 3i or their affiliates, successors or assignees in relation to
the sale and purchase of the Flashnet Stock as well as in relation to the
Cybernet Stock, besides those expressly included in this Agreement.
SECTION 5
SURVIVAL AND INDEMNIFICATION
5.1 Survival of Representations and Warranties. The representations,
------------------------------------------
warranties and covenants made by the parties shall survive the Closing for a
period of two (2) years from the Closing Date and, as regards the
representations and warranties of 3i pursuant to Section 3.20, 12 (twelve)
months from the Closing Date.
5.2 Indemnification by Flashnet Stockholders. The Flashnet Stockholders,
----------------------------------------
and 3i as regards exclusively 3i's representations and warranties of Section
3.20 of this Agreement, severally and not jointly, agree to indemnify pro quota
Cybernet in respect of, and hold it harmless from and against, any and all
damages, fines, fees, penalties, deficiencies, losses and expenses (including
without limitation interest, court costs, reasonable fees of attorneys,
accountants and other experts or other expenses of litigation or other
proceedings or of any claim, default or assessment), net of the tax effect,
suffered, incurred or sustained by Cybernet or to which Cybernet becomes
subject, resulting
<PAGE>
from, arising out of or relating to any misrepresentation, breach of warranty or
nonfulfillment of or failure to perform any of their respective representations,
warranties and covenants contained in this Agreement ("Indemnifiable Loss").
5.3 Indemnification by Cybernet Cybernet agrees to indemnify the Sellers
---------------------------
in respect of, and hold each of them harmless from and against, any and all
damages, fines, fees, penalties, deficiencies, losses and expenses (including
without limitation interest, court costs, reasonable fees of attorneys,
accountants and other experts or other expenses of litigation or other
proceedings or of any claim, default or assessment), net of the tax effect,
suffered, incurred or sustained by any of them or to which any of them becomes
subject, resulting from, arising out of or relating to any misrepresentation,
breach of warranty or nonfulfillment of or failure to perform any covenant or
agreement on the part of Cybernet contained in this Agreement.
5.4 Procedures for Indemnification for Third Party Claims. Whenever
-----------------------------------------------------
indemnification is sought under this Section 5 in connection with a claim or
demand brought by a third party, the party seeking indemnification (the
"Indemnitee") will promptly notify the party from whom indemnification is sought
(the "Indemnitor"), specifying the nature of such claims, the amount or
estimated amount of such claim and attaching copies of all relevant information
concerning the underlying claim of liability. Within fifteen business days of
receipt of such notice, the Indemnitor will notify the Indemnitee promptly
whether it disputes its indemnification obligation. If the indemnification
obligation is not so disputed, the Indemnitor, at the option of the Indemnitee,
will, at the Indemnitor's cost and expense, defend any such claim. If the
Indemnitee so elects for the Indemnitor to defend any claim, the Indemnitor will
have full control over the conduct of such proceeding, although the Indemnitee
will have the right to retain legal counsel at its own expense and will have the
right to approve any settlement of any claim, provided that such approval may
not be withheld unreasonably. If the Indemnitee does not elect for the
Indemnitor to assume the defense of such claim, the Indemnitee will have the
right to defend the claim at the reasonable cost and expense of the Indemnitor,
who shall not be prevented from participating in the defense of such claim. The
Indemnitor will not be obligated to indemnify the Indemnitee with respect to
such third party claim to the extent that the Indemnitor's ability to defend has
been irreparably prejudiced by the failure or delay of the Indemnitee to give
Indemnitor the notice required by this Section 5.4. Any dispute of an
indemnification obligation under this Agreement shall be resolved by arbitration
pursuant to Section 7.17 below.
<PAGE>
5.5 Procedures for Indemnification for Non-Third Party Claims. If any
---------------------------------------------------------
Indemnitee has a claim under Section 5 against any Indemnitor that does not
involve a third party claim as described in Section 5.4 above, the Indemnitee
will promptly notify the Indemnitor of such claim, specifying the nature of such
claim and the amount of any loss incurred by the Indemnitee. The failure by any
Indemnitee to give such notice will not impair such party's rights under this
Agreement except to the extent that the Indemnitor demonstrates that it has been
irreparably prejudiced thereby. If the Indemnitor notifies the Indemnitee that
it does not dispute the claim described in such notice or fails to notify the
Indemnitee within 30 days its receipt of such notice, the loss in the amount
specified in the notice will be conclusively deemed a liability of the
Indemnitor under Section 5 and the Indemnitor will pay the amount of such loss
to the Indemnitee on demand. If the Indemnitor has timely disputed its liability
with respect to such claim, the Indemnitor and the Indemnitee will proceed in
good faith to negotiate a resolution of such dispute, and if not resolved
through negotiations within 60 days after the Indemnitor's receipt of the
initial claim notice, such dispute shall be resolved by arbitration pursuant to
Section 7.17 below.
5.6 Indemnification for Fees and Commissions. Each party to this
----------------------------------------
Agreement is responsible for paying any broker, finder or investment banker that
is entitled to receive any brokerage, finder's or other fee or commission in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of such party and indemnifies and holds
harmless the other parties from any such fees or commissions.
It is understood by all the parties hereto that 3i shall not be bound to
pay any broker, finder or investment banker fee or commission, or any other fee
or commission, in connection with the transaction contemplated in this
Agreement, nor shall 3i have and undertaking to indemnify and hold harmless the
other parties from any such fees or commissions.
5.7 Minimum and maximum amounts for indemnification. An Indemnitee shall
-----------------------------------------------
not be entitled to make a claim under this Section 5 with respect to any breach
of warranty of this Agreement, unless and until (a) a claim has a value in
excess of Lit. 20 million, and (b) the aggregate amount of claims for such
Indemnitee exceeds Lit. 300 million, in which event only the excess over Lit.
300 million shall be recoverable. In any event the maximum aggregate liability
of the Flashnet Stockholders shall be limited to Lit. 15 (fifteen) billion. The
above limit of Lit. 15 billion shall not apply to breaches of warranty or
representation under Section 3.4 above (Title to Flashnet Shares), for
<PAGE>
which the maximum liability for the Flashnet Stockholders shall not exceed the
Consideration received by the Flashnet Stockholders. As regards 3i, section 3.20
shall apply.
SECTION 6
NON-COMPETITION
6.1 Non-Competition. Without the prior approval of Cybernet, during a
---------------
period of two (2) years after the Closing Date, no Flashnet Stockholder and no
companies in which a Flashnet Stockholder maintains a controlling interest will
directly or indirectly compete with or assist in the competition with Flashnet
or Cybernet as to the present subject matter of Flashnet or Cybernet and the
present area of their business. The subject matter of the business of Flashnet
and Cybernet within the meaning of this covenant shall be internet services. The
business area of Flashnet and Cybernet within the meaning of this covenant shall
be Italy. It is agreed between the parties that this Section 6 shall apply to
Flashnet Stockholders only, and not to 3i Group plc and 3i Europartners II LP.
6.2 Contractual Penalty. For every case of a violation of the covenant
-------------------
under this section 6 the defaulting Flashnet Stockholder shall pay a contractual
penalty in the amount of Lit. 100,000,000 to Cybernet. The right to claim
damages for breach of the covenant under this section 6 or specific enforcement
shall not be effected by the payment of the contractual penalty. Notwithstanding
that, the amount of contractual penalty will be credited to the amount of
damages.
SECTION 7
MISCELLANEOUS PROVISIONS
7.1 Effectiveness of Representations. Each party is entitled to rely on
--------------------------------
the representations, warranties and agreements of each of the other parties.
Notwithstanding the above, no party shall be able to raise a claim in case it
has been provided by the other party before the Closing with the documents and
information containing evidence of a potential violation of the representation
and warranties and has failed to raise the issue with the other party.
7.2 Termination. Cybernet expressly waives any rights under Section 1460
-----------
of the Italian Civil Code as well as, to the extent permitted by law, any right
of termination, rescission, or annulment of this Agreement under Sections 1440,
1453 ff., 1463 ff., 1467 ff. of the Italian Civil Code, it
<PAGE>
being expressly understood and agreed that the only remedies available to
Cybernet for any breach of the warranties is damages, subject to the provisions
provided for in Section 5 hereof. As an exception to the above, this Agreement
may be terminated at any time prior to the Closing of the transactions
contemplated hereby by:
(a) Mutual agreement of Cybernet and Flashnet Stockholders and 3i;
(b) Cybernet, pursuant to Section 1373 of the Italian Civil Code, (i)
if there has been a breach by Flashnet Stockholders or 3i of any of their
representations and warranties set forth in this Agreement under Sections
3.4 and 3.20, respectively; (ii) if the independent audit jointly performed
by Ernst & Young and Grant Thornton of the Flashnet financial statements as
of December 31, 1998 results in a decrease of the total assets as
registered in the said Financial Statements (Lit. 10,536,944,948) or an
increase of the total liabilities as registered in the same Financial
Statements (Lit. 7,599,156,238) amounting to Lit. 5,268,472,474 or more.
For the avoidance of doubt it is agreed that any such increases of
liabilities or decreases in assets shall be netted of any corresponding
increases in assets or decreases in liabilities, respectively.
The audit shall be performed at Cybernet's expenses, the auditors
shall apply Italian GAAP, and shall deliver copy of the joint audit report
to the each of Cybernet and the Sellers. The joint report shall be
delivered by June 15, 1999.
(c) Cybernet or Flashnet Stockholders or 3i if any permanent
injunction or other order of a governmental entity of competent authority
preventing the consummation of the transactions contemplated by this
Agreement has become final and nonappealable.
7.3 Effect of Termination. In the event of the termination of this
---------------------
Agreement as provided in Section 7.2, this Agreement will be of no further force
or effect, provided, however, that no termination of this Agreement will relieve
any party of liability for any breaches of this Agreement that are based on a
wrongful refusal or failure to perform any obligations. Upon termination of this
Agreement, each party will, upon request, destroy all documents, work papers and
other materials of the other parties relating to the transaction contemplated by
this Agreement, whether obtained before or after execution of this Agreement.
<PAGE>
7.4 Further Assurances. Each of the parties hereto will cooperate with
------------------
the other and execute and deliver to the other parties hereto such other
instruments and documents and take such other actions as may be reasonably
requested from time to time by any other party hereto as necessary to carry out,
evidence, and confirm the intended purposes of this Agreement.
7.5 Expenses. Except as otherwise expressly provided in this Agreement,
--------
each party to this Agreement will bear its respective expenses incurred in
connection with the preparation, execution, and performance of this Agreement
and the transactions contemplated hereby, including all fees and expenses of
agents, representatives, counsel, and accountants. In the event of termination
of this Agreement, the obligation of each party to pay its own expenses will be
subject to any rights of such party arising from a breach of this Agreement by
another party. In any case, Cybernet shall pay all taxes, duties, stamps and
notarial fees and costs relating to the transfer of the Flashnet Stock.
7.6 Public Announcements. Any public announcement or similar publicity
--------------------
with respect to this Agreement or the transactions contemplated hereby will be
issued, if at all, at such time and in such manner as Cybernet and the Flashnet
Stockholders and 3i mutually determine. Unless consented to by the parties in
advance or required by law, prior to the Closing the parties will keep this
Agreement strictly confidential and may not make any disclosure of this
Agreement to any person or entity. Flashnet Stockholders and 3i and Cybernet
will consult with each other concerning the means by which the Flashnet's
employees, customers, and suppliers and others having dealings with Flashnet
will be informed of the transactions contemplated by this Agreement, and
Cybernet and 3i will have the right to be present for any such communication.
7.7 Confidentiality. Between the date of this Agreement and the Closing
---------------
Date, and for one year after the Closing Date in case the Closing is not
executed for whatever reason, Cybernet and the Flashnet Stockholders and 3i will
maintain in confidence, and will cause the directors, officers, employees,
agents, and advisors of Cybernet and Flashnet to maintain in confidence, and not
use to the detriment of another party or Flashnet any written, oral, or other
information obtained in confidence from another party or Flashnet in connection
with this Agreement or the transactions contemplated hereby, unless (a) such
information is already known to such party or to others not bound by a duty of
confidentiality or such information becomes publicly available through no fault
of such party, (b) the use of such information is necessary or appropriate in
making any filing or obtaining any consent or approval required for the
consummation of the transactions contemplated hereby, or (c) the
<PAGE>
furnishing or use of such information is required by legal proceedings. If the
Closing is not consummated, each party will return or destroy as much of such
written information as the other party may reasonably request.
7.8 Amendment. This Agreement may not be amended except by an instrument
---------
in writing signed on behalf of each of the parties.
7.9 Extension; Waiver. At any time prior to the Closing, the parties may
-----------------
(a) extend the time for the performance of any of the obligations or other acts
of the other parties, (b) waive any inaccuracies in the representations and
warranties contained in this Agreement and (c) waive compliance with any of the
agreements or conditions contained in this Agreement. Any agreement on the part
of a party to any such extension or waiver will be valid only if set forth in a
written instrument and signed by the party granting such extension or waiver.
7.10 Entire Agreement. This Agreement, the Exhibits, Schedules attached
----------------
hereto and the other Transaction Documents contain 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, in particular the Letter of Intent dated April 21, 1999.
7.11 Severability. 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 narrowly drawn, without invalidating the
remaining provisions of this Agreement or affecting the validity or
enforceability of such provision in any other jurisdiction.
7.12 Notices. 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
<PAGE>
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 Flashnet Stockholders Mr. Giovanni Prignano
Via Aurano 171, Roma
Tel: +39-6-____________
Fax: +39-6-____________
With a copy to La Compagnia Finanziaria S.p.A.
Piazza Belgioioso 2
20121 Milan, Italy
Attn.: Mr. Alberto Franceschini
Tel: +39-02-77061
Fax: +39-02-783218
If to 3i 3i Group plc
91 Waterloo Road
SE1 8XP London, UK
Attn.: Mrs. Christine Pohlen
Tel. +44-171-928 3131
Fax: +44-171-928 0058
With a copy to 3i Europe plc Italian Branch
Via Orefici 2
20123 Milan, Italy
Attn.: Mr. Giorgio Colombo
Tel: +39-02-7200 3210
Fax: +39-02-7200 3205
If to Cybernet: Cybernet Internet Services International, Inc.
Attn.: Mr. Andreas Eder
Stefan-George-Ring 19, 81929 Munich, Germany
<PAGE>
Tel: 49-89-993150
Fax: 49-89-99315199
With a copy to: Besner Kreifels Weber
Attn.: Dr. Hubert Besner
Widenmayerstr. 41, 80538 Munich, Germany
Tel: 49-89-2199920
Fax: 49-89-21999233
All such notices and other communications will be deemed to have been
received (a) in the case of personal delivery, on the date of such delivery, (b)
in the case of a fax, when the party sending such fax has received electronic
confirmation of its delivery, (c) in the case of delivery by internationally-
recognized overnight courier, on the business day following dispatch and (d) in
the case of mailing, on the seventh business day following mailing.
7.13 Headings. 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.
7.14 Benefits. 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.
7.15 Assignment. This Agreement may not be assigned by any party, by
----------
operation of law or otherwise.
7.16 Governing Law and Jurisdiction. This Agreement will be governed by
------------------------------
and construed in accordance with the laws of the Republic of Italy applicable to
contracts made and to be performed therein, without regard to conflicts of laws
principles. Any disputes arising in respect of this Agreement, including
disputes regarding the validity, performance and termination thereof, shall be
settled under the international arbitration rules of the Camera Arbitrale
Nazionale e Internazionale of Milan by three arbitrators appointed in accordance
with the same rules. Arbitration will be held in Milan, in the English
language. Arbitration shall be "rituale" and according to law. In case more
than two parties are involved in the arbitration, all three arbitrators shall be
appointed by the chairman of the Tribunale of Milan.
<PAGE>
7.17 Construction. 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.
7.18 Counterparts. 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.
7.19 Shareholders' agreements. It is agreed among all parties to the
------------------------
Agreement that the Flashnet shareholders' agreement of July 29, 1998 as amended
pursuant to the deed of amendment of April 9, 1999 shall not affect in any way
the rights of Cybernet after the Closing Date.
7.20 Fax--Execution. This Agreement may be executed by delivery of
--------------
executed signature pages by fax and such fax execution will be effective for all
purposes.
[SIGNATURES ON FOLLOWING PAGE]
<PAGE>
___________, this day of May 14, 1999
Cybernet Internet Services International, Inc.
By: _____________________
Name: Andreas Eder
Title: President and CEO
<TABLE>
<CAPTION>
Sellers: Shares Cash part of the Shares of
of Flashnet Stock Purchase Price in Lit. Cybernet Stock
(including shares
deriving from
warrants and
convertible bonds)
<S> <C> <C> <C>
50% 50%
__________________ 415,217 Lit. 3,728,227,514 101,787
Giovanni Prignano
50% 50%
__________________ 83,043 Lit. 745,641,911 20,357
Antonio Ferreri
50% 50%
__________________ 49,826 Lit. 447,386,942 12,214
Massimiliano Ziegler
50% 50%
__________________ 16,609 Lit. 149,131,974 4,072
Andrea Colangelo
50% 50%
__________________ 16,609 Lit. 149,131,974 4,072
Michele Trotta
70% 30%
__________________ 166,087 Lit. 2,087,809,922 24,429
Catia Ravaioli
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
70% 30%
Data Flash S.r.l. 581,304 Lit. 7,307,328,441 85,501
by: _______________
Name: Giovanni Prignano
Title: Chairman
Eurel International S.A. 70% 30%
332,174 Lit. 4,175,619,844 48,858
by: _______________
Name: Enzo Costa
Title: Director
3i Group plc 100% 0%
617,391 Lit. 11,087,089,945
by: _______________
Name: Marco Franzini
Title: attorney-in-fact
3i Europartners II LP 100% 0%
617,390 Lit. 11,087,071,987
by: _______________
Name: Marco Franzini
Title: attorney-in-fact
</TABLE>
<PAGE>
Exhibit 23.1
[LETTERHEAD OF GRANT THORNTON SPA APPEARS HERE]
CONSENT OF INDEPENDENT AUDITORS
FLASHNET S.p.A.
As independent auditors of Flashnet S.p.A., we consent to the inclusion and/or
incorporation by reference in the Report on Form 8-K of Cybernet Internet
Services International, Inc. dated July 15, 1999 of our report dated May 14,
1999 with respect to the balance sheet of Flashnet S.p.A. as of December 31,
1998 and the related statements of loss, stockholders' deficit and cash flows
for the year then ended, expressed in Italian Lire.
/s/ Felice Duca
--------------------------
Felice Duca
(Partner)
Rome - Italy
July 14, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
<CASH> 32,034
<SECURITIES> 0
<RECEIVABLES> 4,549,540
<ALLOWANCES> (50,00)
<INVENTORY> 174,770
<CURRENT-ASSETS> 6,502,924
<PP&E> 4,479,711
<DEPRECIATION> (831,810)
<TOTAL-ASSETS> 11,439,436
<CURRENT-LIABILITIES> 10,449,598
<BONDS> 800,000
0
0
<COMMON> 2,182,857
<OTHER-SE> (2,716,248)
<TOTAL-LIABILITY-AND-EQUITY> 11,439,436
<SALES> 8,334,043
<TOTAL-REVENUES> 8,334,043
<CGS> 6,615,614
<TOTAL-COSTS> 4,562,098
<OTHER-EXPENSES> (167,089)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 369,914
<INCOME-PRETAX> (3,380,672)
<INCOME-TAX> 1,015,169
<INCOME-CONTINUING> 1,015,169
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,015,169
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
