<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. __________
______________
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
_______________
DELAWARE 51-0384117
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
STEFAN - GEORGE - RING 19-23
81929 MUNICH, GERMANY
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
_______________
49-89-993-150
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
_______________
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR
VALUE $.001
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Class OUTSTANDING AT MARCH 31, 1999
Common stock - $0.001 par value 19,034,798
The aggregate market value of the voting common equity held by non-affiliates
of the registrant on March 31, 1999, based upon the closing price of the Common
Stock on The Nasdaq OTC Bulletin Board for such date, was approximately
$532,974,344.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION.................................................................................. 3
ITEM 1. FINANCIAL STATEMENTS............................................................................. 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............ 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK........................................ 14
PART II - OTHER INFORMATION..................................................................................... 15
ITEM 1. LEGAL PROCEEDINGS................................................................................ 15
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS......................................................... 15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................................................. 15
ITEM 4. SUBMISSION TO A VOTE OF SECURITY HOLDERS......................................................... 15
ITEM 5. OTHER INFORMATION................................................................................ 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................................. 15
SIGNATURES...................................................................................................... 16
</TABLE>
PAGE 2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
---------------- ----------------
1998 1999
---------------- ----------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents.............................................................. $42,875,877 $ 29,106,533
Short-term investments................................................................. 112,503 288,170
Accounts receivable -- trade, net of allowance for doubtful
accounts of $ 361,393 and $ 515,591 at December 31, 1998 and March 31, 1999, 4,048,784
respectively......................................................................... 3,248,754
Other receivables...................................................................... 1,793,153 1,996,462
Prepaid expenses and other assets...................................................... $ 423,114 $ 346,884
----------- ------------
Total current assets.............................................................. 48,453,401 35,786,833
Property and equipment, net............................................................ 7,970,300 11,120,677
Product development costs, net......................................................... 5,742,793 5,625,782
Goodwill, net.......................................................................... 6,504,576 5,808,883
Deferred income taxes.................................................................. 8,166,171 9,565,612
Other assets........................................................................... 2,607,488 3,917,915
----------- ------------
TOTAL ASSETS................................................................................ $79,444,729 $ 71,825,702
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Overdrafts and short-term borrowings................................................... $ 287,097 $ 1,506,107
Trade accounts payable................................................................. 3,346,372 7,555,350
Other accrued liabilities.............................................................. 1,072,877 2,147,708
Deferred purchase obligations.......................................................... 4,482,967 358,480
Current portion long term debt and capital lease obligations........................... 924,670 1,157,445
Accrued personnel costs................................................................ 588,767 469,952
----------- ------------
Total current liabilities......................................................... 10,702,750 $ 13,195,042
Long-term debt......................................................................... 66,829 --
Capital lease obligations.............................................................. 1,315,737 1,271,297
Minority interest...................................................................... -- 124,197
SHAREHOLDERS' EQUITY
Common stock $.001 par value, 50,000,000 shares authorized,
18,762,138 shares issued and outstanding at
December 31, 1998 and March 31, 1999, respectively................................... 18,762 18,762
Preferred stock $.001 par value, 50,000,000 shares authorized,
6,360,000 issued and outstanding at December 31,
1998 and March 31, 1999, respectively................................................. 6,360 6,360
Subscription receivable................................................................ (19,210) --
Additional paid in capital............................................................. 72,794,936 72,359,365
Accumulated deficit.................................................................... (6,435,676) (10,003,328)
Other comprehensive income (loss)...................................................... 994,241 (5,145,993)
----------- ------------
Total shareholders' equity............................................................. 67,359,413 57,235,166
----------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................................................. $79,444,729 $ 71,825,702
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements
PAGE 3
<PAGE>
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
Three months ended March 31,
------------------------------
1998 1999
-------------- --------------
<S> <C> <C>
Revenue
Internet Projects...................................................................... $ 652,542 $ 1,392,202
Network Services....................................................................... 704,468 2,461,509
----------- ------------
Total revenues.............................................................................. 1,357,010 3,853,711
Cost of revenues:
Internet Projects...................................................................... 411,908 1,079,254
Network Services....................................................................... 402,612 2,970,187
Depreciation and amortization.......................................................... 200,683 413,450
----------- ------------
Total cost of revenues...................................................................... 1,015,203 4,462,891
----------- ------------
Gross profit / loss......................................................................... 341,807 (609,180)
General and administrative expenses......................................................... 209,707 1,455,853
Marketing expenses.......................................................................... 643,858 1,806,759
Research and development.................................................................... 409,691 1,263,061
Depreciation and amortization............................................................... 100,330 841,595
----------- ------------
1,363,586 5,367,268
Interest expense............................................................................ 17,950 10,559
Interest income............................................................................. 5,827 259,910
----------- ------------
Loss before taxes........................................................................... (1,033,902) (5,727,097)
Income tax benefit.......................................................................... 597,718 2,159,445
----------- ------------
Net loss.................................................................................... (436,184) (3,567,652)
Other comprehensive loss:
Foreign currency translation adjustments............................................... (476,555) ( 6,140,234)
----------- ------------
Comprehensive loss.......................................................................... ( 912,739) (9,707,886)
----------- ------------
Basic and diluted loss per share............................................................ $ (0,03) $(0,19.)
=========== ============
Number of shares used to compute earnings per share......................................... 14,741,167 18,762,138
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements
PAGE 4
<PAGE>
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
-----------------------------------------
1998 1999
------------------- --------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss.......................................................................... $ (436,184) $ (3,567,652)
Adjustments to reconcile net income to net cash provided by
operating activities:
Deferred tax credit............................................................... (597,718) (2,159,059)
Depreciation and amortization..................................................... 361,038 1,255,045
Provision for losses on accounts receivable....................................... 4,305 77,246
Changes in operating assets and liabilities:
Trade accounts receivable......................................................... (219,559) (1,305,478)
Other receivables................................................................. 775,313 (384,674)
Prepaid expenses and other current assets......................................... 2,405 (1,681,452)
Trade accounts payable............................................................ 857,495 4,685,720
Other accrued expenses and liabilities............................................ (495,506) 1,215,192
Accrued personnel costs........................................................... (284,436) (74,010)
---------- ------------
Total changes in operating assets and liabilities............................ 635,712 2,455,298
---------- ------------
Net cash used in operating activities........................................ (32,847) (1,939,122)
Cash Flows from Investing Activities:
Proceeds from (purchases of) short term investments............................... 644,404 (193,248)
Purchase of property and equipment................................................ (429,122) (4,534,224)
Product development costs......................................................... (337,143) (772,900)
Payment of deferred purchase obligations -- (3,929,737)
---------- ------------
Net cash used in investing activities........................................ (121,861) (9,430,109)
Cash Flows from Financing Activities:
Repayments of borrowings.......................................................... (47,241) (64,169)
Proceeds from borrowings.......................................................... -- 1,913,102
---------- ------------
Net cash (used in) provided by financing activities.......................... (47,241) 1,848,933
---------- ------------
Net (decrease) in cash and cash equivalents....................................... (201,949) (9,520,298)
Cash and cash equivalents at beginning of year.................................... 2,238,909 42,875,877
Translation adjustments........................................................... (418,733) (4,249,046)
---------- ------------
Cash and cash equivalents at end of period........................................ $1,618,227 $(29,106,533)
========== ============
</TABLE>
PAGE 5
<PAGE>
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED UNAUDITED
INTERIM FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by GAAP for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of financial position and results
of operations have been included. Operating results for the three month period
ended March 31, 1999 are not necessarily indicative of results to be expected
for the full year ended December 31, 1999. For further information, refer to
the Consolidated Financial Statements and Footnotes thereto included in the
Company's Annual Report or Form 10-K for the year ended December 31, 1998.
2. Earnings Per Share
The following table sets forth the computation of basic and diluted loss per
share:
<TABLE>
<CAPTION>
March 31,
-------------------------------------
1998 1999
------------------ -----------------
<S> <C> <C>
Numerator:
Net loss-numerator for basic and diluted loss per share.............. $ (436,184) $(3,567,652)
=========== ===========
Denominator:
Denominator for basic and diluted loss per
share -- weighted average shares outstanding....................... 14,741,167 18,762,138
=========== ===========
Basic and diluted loss per share.......................................... $ (.03) $ (.19)
=========== ===========
</TABLE>
The denominator for diluted earnings per share excludes the convertible
preferred stock and stock options because the inclusion of these items would
have an anti-dilutive effect.
3. Segment information
The Company evaluates performance and allocates resources based on the
operating profit of its subsidiaries. The Company operates in one line of
business, which is providing international Internet backbone and access services
and network business solutions for corporate customers. The Company's
reportable segments are divided by country since each country's operations are
managed and evaluated separately. The Company does not have any intercompany
sales between its subsidiaries.
Information concerning the Company's geographic locations is summarized as
follows:
<TABLE>
<CAPTION>
March 31,
-----------------------------------------
1998 1999
-------------------- -------------------
<S> <C> <C>
Revenues:
Germany.............................................................. $ 1,179,067 $ 2,528,944
US................................................................... -- --
Other................................................................ 177,943 1,324,767
----------- -----------
Total................................................................ $ 1,357,010 $ 3,853,711
=========== ===========
Cost of revenues:
Germany.............................................................. $ 860,644 $ 3,388,853
US................................................................... -- 80,860
Other................................................................ 154,559 993,178
----------- -----------
Total................................................................ $ 1,015,203 $ 4,462,891
=========== ===========
General and Administrative Expenses:
Germany.............................................................. $ 206,313 $ 1,179,595
US................................................................... 2,189 127,257
Other................................................................ 1,205 149,001
----------- -----------
Total................................................................ $ 209,707 $ 1,455,853
=========== ===========
</TABLE>
PAGE 6
<PAGE>
<TABLE>
<CAPTION>
March 31,
-----------------------------------------
1998 1999
-------------------- -------------------
<S> <C> <C>
Marketing Expenses:
Germany.............................................................. $ 640,357 $ 1,363,782
US................................................................... -- 130,154
Other................................................................ 3,501 312,823
----------- -----------
Total................................................................ $ 643,858 $ 1,806,759
=========== ===========
Research and Development:
Germany.............................................................. $ 404,089 $ 1,092,657
US................................................................... -- --
Other................................................................ 5,602 170,404
----------- -----------
Total................................................................ $ 409,691 $ 1,263,061
=========== ===========
Depreciation and Amortization:
Germany.............................................................. $ 82,312 $ 776,745
US................................................................... -- 30,047
Other................................................................ 18,018 34,803
----------- -----------
Total................................................................ $ 100,330 $ 841,595
=========== ===========
Interest Expense:
Germany.............................................................. $ 15,254 $ 5,424
US................................................................... -- --
Other................................................................ 2,696 5,135
----------- -----------
Total................................................................ $ 17,950 $ 10,559
=========== ===========
Interest Income:
Germany.............................................................. $ 5,827 $ 3,080
US................................................................... -- 256,809
Other................................................................ -- 21
----------- -----------
Total................................................................ $ 5,827 $ 259,910
=========== ===========
Loss before Taxes:
Germany.............................................................. $(1,040,585) $(5,275,032)
US................................................................... -- (111,509)
Other................................................................ 6,683 (340,556)
----------- -----------
Total................................................................ $(1,033,902) $(5,727,097)
=========== ===========
Income tax benefit:
Germany.............................................................. $ 597,718 $ 2,159,445
US................................................................... -- --
Other................................................................ -- --
----------- -----------
Total................................................................ $ 597,718 $ 2,159,445
=========== ===========
</TABLE>
4. Income Taxes
In March 1999, the German government passed new tax legislation which reduced
the corporate income tax rate from 45% to 40%. Accordingly, the Company's
deferred tax assets and liabilities related to Germany were remeasured using 40%
in the first quarter of 1999. The impact of remeasuring the deferred tax assets
and liabilities using the new rate was recorded as a reduction in the income tax
benefit of approximately $550,000 for the three months ended March 31, 1999.
5. Subsequent Events
In April 1999, the Company purchased 51% of the outstanding stock of Sunweb
Internet Services SIS AG ("Sunweb"), an Internet service provider located in
Switzerland, for a total consideration of CHF 1,477,000 ($1,024,182) and 25,000
shares of common stock of the Company. The Stock Purchase Agreement also
contains provisions for put and call options for the sellers and buyers,
respectively, for the remaining 49% of the outstanding stock of Sunweb. The
purchase price per the agreement for the remaining 49% of the shares is based on
a multiple of Sunweb's net profit or loss before taxes. The put and call
options both expire on December 31, 2001.
PAGE 7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS]
The following discussion is based on our consolidated financial
statements included elsewhere in this Form 10-Q report. This section contains
statements that are not historical fact and are "forward-looking statements".
These statements can often be identified by the use of forward-looking
terminology such as "estimate," "project," "believe," "expect," "may," "will,"
"should," "intends," or "anticipate" or the negative thereof or other variations
thereon or comparable terminology, or by discussions of strategy that involve
risks and uncertainties. We wish to caution the reader that these forward-
looking statements, such as statements relating to the timing, costs and scope
of construction of new facilities, the acquisition of, or investments in,
existing businesses, the revenue and profitability levels of such businesses,
and other matters contained in this Form 10-Q regarding matters that are not
historical facts, are only predictions. No assurance can be given that plans
for the future will be consummated or that the future results indicated, whether
expressed or implied, will be achieved. While sometimes presented with
numerical specificity, these plans and projections and other forward-looking
statements are based upon a variety of assumptions, which we consider
reasonable, but which nevertheless may not be realized. Because of the number
and range of the assumptions underlying our projections and forward-looking
statements, many of which are subject to significant uncertainties and
contingencies that are beyond our reasonable control, some of the assumptions
inevitably will not materialize, and unanticipated events and circumstances may
occur subsequent to the date of this Form 10-Q. Therefore, our actual
experience and results achieved during the period covered by any particular
projections or forward-looking statements may differ substantially from those
projected. Consequently, the inclusion of projections and other forward-looking
statements should not be regarded as a representation by us or any other person
that these plans will be consummated or that estimates and projections will be
realized, and actual results may vary materially. There can be no assurance
that any of these expectations will be realized or that any of the forward-
looking statements contained herein will prove to be accurate.
Through our subsidiaries, we are a leading provider of Internet
communications services and solutions, primarily to medium-sized corporations in
Germany, Austria, Northern Italy and Switzerland. Our Internet protocol
solutions are based on a core product offering which includes Internet
connectivity, virtual private networks, web-hosting, co-location, security
solutions, electronic commerce, Intranet/Extranet and workflow solutions. We
offer consulting, complete design and installation, training, technical support,
and operation and monitoring of IP-based systems. Between the commencement of
our operations in 1995 and December 1997, we concentrated our operations
entirely in Germany. During that period we built up our technical capabilities
by investing in personnel and research and development and by acquiring Artwise
in September, 1997. During the same period we established our German network.
Beginning in December 1997 we began to expand our operations outside Germany
through the acquisition of Eclipse in Northern Italy and Vianet in Austria. We
further strengthened our presence in Germany through the acquisition of
Open:Net. Based principally on leased lines, our network now consists
PAGE 8
<PAGE>
primarily of Cisco routers and Ascend nodes connected to a redundant high
performance backbone infrastructure that offers Internet connectivity through
dedicated leased lines at more than 100 POPs. It also offers a system of dial-up
nodes with ISDN or analog modem ports which permits local dial up access to the
entire population of Germany and Switzerland and a majority of the population of
Austria and Northern Italy.
We market our products and services primarily to medium-sized
corporations throughout Europe with revenues between Euros 25 million and 500
million. We believe that this customer segment is underserved and has
substantial and increasing communications needs. Medium-sized corporations
typically lack the technical resources to build and maintain extensive
communications systems and, as a consequence, they outsource many services and
solutions to third parties. In particular, we focus on network intensive
industries, such as Information Technology, tourism, service, retail, finance,
government, media, advertising and manufacturing. While our target market is the
medium-sized businesses, we also provide services and solutions to prominent
larger businesses.
We have experienced high rates of revenue growth since commencing
significant operations in 1996. Revenues increased from $307,673 in 1996 to
$2,314,021 in 1997 and $8,633,528 in 1998. In the first quarter of 1999, we had
revenues of $3,853,711 compared with $1,357,010 in the first quarter of 1998.
Our revenue growth has been generated through internal growth and by
acquisitions. We anticipate that these rates of revenue growth will continue in
the near future as we continue internal growth, and seek additional acquisition
candidates.
We classify our revenues into two categories, revenues from Internet
Projects and revenues from Network Services. Internet Project revenues result
from consulting, installation fees, training of customer employees and hardware
and software sales. Among other things this category includes the installation
of VPNs, websites, e-commerce solutions and customer servers in our Data
Centers. Internet project revenues depend on the number, size and complexity of
projects initiated by new and existing customers. Internet Projects typically
are completed within three months. Internet Project related revenues are
recognized upon completion and customer acceptance of the related project.
Although we typically initiate relationships with customers through Internet
Projects we also perform such projects for existing customers who require
additional services or upgrades.
In most cases, after completion of an Internet Project we derive a
recurring stream of revenues from the ongoing management and monitoring of the
services and solutions we have set up. We classify these recurring revenues as
Network Services revenues which include recurring connectivity, maintenance and
usage charges. Approximately 80% of Network Services revenues are from
connectivity charges and the remainder is derived from fees for maintenance of
VPNs, co-location and hosting services. Revenues from Network Services are
recognized when provided to customers.
FIRST QUARTER MARCH 31ST, 1999 AND 1998
Total revenues increased 184% from $1,357,010 in the first three
months in 1998 to $3,854,711 in the first quarter in 1999.
PAGE 9
<PAGE>
Internet Project revenue increased 113% form $1,392,202 in the first
three months of 1999 or 36% of total revenues compared to $652,542 in the first
quarter of 1998 or 47% of total revenues. This change in mix of revenues is
principally due to the continuing addition of new customers.
Network Services revenue increased 249% from $704,468 in the first
quarter of 1998 to $2,461,509 in the first quarter of 1999, as a result of
additional customers and the Open:Net and Vianet acquisitions.
Cost of revenues increased 340% from $1,015,203 in the first three
months of 1998 to $4,462,891 in the first three months of 1999, mainly as a
result of expenditures in connection with the growth of network infrastructure.
General and administrative expenses increased 126% from $643,858 in
the first quarter of 1998 to $1,455,853 in the first quarter of 1999. The
increase is attributable principally to the hiring of additional personnel and
to the impact of consolidating the results of operations of Open:Net and Vianet,
which results are reflected in the first quarter of 1999.
Marketing expenses increased 762% from $209,705 in the first quarter
of 1998 to $1,806,759 in the first three months of 1999, principally as a result
of substantial investments by the Company in trade fairs, product literature and
related expenditures. The increase was also influenced by the inclusion of
Open:Net and Vianet in the first quarter of 1999.
Research and development increased from $409,691 in the first quarter
of 1998 to $1,263,061 in the first quarter of 1999. The increase resulted
partly from the increase in personnel and costs related to development of our
modular solutions for sale to customers and partly from the cost of building up
our network infrastructure.
Depreciation and amortization increased 739% from $100,330 in the
first three months of 1998 to $841,595 in the first quarter of 1999. This
increase is principally due to amortization of the goodwill arising out of the
acquisition of Open:Net and Vianet in 1998. Interest expense decreased 41% from
$17,950 in the first quarter of 1998 to $10,559 in the first quarter of 1999 as
a result of fewer overdrafts and short-term borrowings to fund the Company's
working capital needs.
Income tax benefit in both 1998 and 1999 represents the capitalization
of the losses generated by the Company, offset in 1999 by the impact of
remeasuring the Company's deferred tax assets and liabilities using the new
German corporate tax rate of 40%.
Net loss increased from $436,182 for the first three months of 1998 to
$3,567,652 in the same period in 1999 as a result of the factors discussed
above.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations and growth
primarily from the proceeds of private and public sales of equity securities.
Total net proceeds of equity offerings in the three years ended December 31,
1998 amounted to approximately $67,661,000. Additionally, in 1998, our
subsidiaries financed the acquisition of certain equipment with capital lease
obligations.
PAGE 10
<PAGE>
Our working capital, defined as the excess of our current assets over
our current liabilities, was $22,591,791 at March 31, 1998 compared to
$37,750,651 at December 31, 1998, $891,027 at December 31, 1997 and $339,353 at
December 31, 1996. Cash and cash equivalents amounted to $29,106,533 at March
31, 1998 compared to $42,875,877 at December 31, 1998, $2,238,909 at December
31, 1997 and $27,889 at December 31, 1996. The decrease in cash and cash
equivalents primarily resulted from cash used for operating activities and
investing activities related to purchase of property and equipment and product
development costs.
Operating activities used cash of $32,847 in the three months ended
March 31, 1999 compared to $1,939,122 in the three months ended March 31, 1998.
The increase in cash used reflects our loss before taxes as we increased
expenditures for marketing, research and development.
Investing activities used cash of $9,430,109 in the first quarter of
1999, compared with $121,861 in the first quarter of 1998. The increase
resulted from the final cash payment for acquisition of Vianet, expenditures
for property and equipment and product development costs. Expenditures for
property and equipment consisted principally of purchases of computer hardware
and other expenditures related to our Internet backbone and equipment necessary
to support our anticipated growth.
Financing activities provided cash of $1,848,933 in the first quarter
of 1999 compared to $47,241 used in the first quarter of 1998. The increase is
principally related to capital leases entered into to finance property and
equipment purchases.
We believe that our cash and cash equivalents will provide adequate
liquidity to fund our normal operating activities over the next twelve months
and in the intermediate term. However, our strategic plan is to continue to seek
additional acquisitions and to enhance our capabilities in both IP and other
communications services through significant capital expenditures. These
strategic initiatives will be initially financed from the portion of the
proceeds of the December 1998 public equity offering which exceeds our normal
operating requirements and may require additional private or public offerings of
debt or equity securities.
YEAR 2000
The commonly referred to Year 2000 problem results from the fact that
many existing computer programs and systems use only two digits to identify the
year in the date field. These programs were designed and developed without
considering the impact of a change in the century designation. If not
corrected, computer applications that use a two-digit format could fail or
PAGE 11
<PAGE>
create erroneous results in any computer calculation or other process involving
the Year 2000 or a later date. We have identified two main areas of Year 2000
risk for our IT systems:
. our internal computer systems or embedded chips could be
disrupted or fail, causing an interruption or decrease in
productivity in our operations; and
. computer systems or embedded chips of third parties including
(without limitation) financial institutions, suppliers, vendors,
landlords, customers, suppliers of communications services and
others could be disrupted or fail, causing an interruption or
decrease in our ability to continue our operations.
We have evaluated our state of readiness for the Year 2000 issue.
With regard to our internal IT systems, we have concluded that substantially all
of those systems are Year 2000 compliant. Our personnel tested and analyzed our
systems in the course of regular quality control and research development. We
did not require significant additional expenses to do this evaluation. We have
also instituted procedures to assure that IT systems installed in 1999 will be
Year 2000 compliant. With regard to third parties, we make sure newly acquired
IT systems will be Year 2000 compliant. In addition, we have been assured by all
major suppliers, vendors and customers that the following existing IT and other
systems, upon which we rely for products and services and for internal
operations, are Year 2000 compliant:
. the Cisco routers we use in connection with leased telephone line
communications;
. the Ascend routers we use in connection with telephone dial-up
communications;
. Sun Workstations, our main Internet servers;
. the Microsoft software we use in our internal office operations;
. our network facilities supplied by Info AG;
. our global transit facilities supplied by AT&T Unisource;
. our leased telephone lines supplied by Deutsche Telekom AG;
. the electric power to our main offices and several of its nodes,
supplied by Stadtwerke Munich.
Based on those assurances, we believe that the IT systems utilized in
our principal network, backbone and internal operations will meet Year 2000
requirements. We do not anticipate significant interruptions of billings or
service to customers or disruptions of internal operations attributable to the
Year 2000 problem. We have plans to complete the integration of operations of
newly acquired subsidiaries into our current IT system during 1999. Compliance
with Year 2000 issues on a company-wide basis will not require acceleration of
planned expenditures for the purpose of remediation. We are now determining
whether suppliers of secondary significance to our business, such as local
suppliers of telephone service and electric power, are Year 2000 compliant. Some
of these subsidiary systems are non-essential, as they duplicate systems that we
have determined will operate in the Year 2000 environment. We anticipate
completing our inquiries regarding secondary systems during the first quarter of
1999. Based on our experience to date, we do not anticipate that we will be
required to incur significant additional operating expenses or to invest heavily
to obtain Year 2000 compliance for these systems. To date, the only costs in
connection with our Year 2000 evaluation have been limited to internal staff
costs, which have been expensed as incurred. The financial information contained
in this prospectus includes such costs,
PAGE 12
<PAGE>
which are not material. To respond to our customers' inquiries we are in the
process of developing a report to inform our customers about the effect of Year
2000 problem on our products and services. We anticipate utilizing an outside
consultant to prepare such report at a cost estimated to be 50,000 DM. Because
we believe that our systems are Year 2000 compliant, we have not developed a
theoretical worst case analysis or a contingency plan to deal with such a
contingency.
With respect to non-IT systems, our operations do not depend in a
significant manner on such embedded technology. All of our desk-type computers
and telephones are Year 2000 compliant. Our offices' climate control, elevators
[and monitor alarms] have embedded systems. Our operations do not depend on
elevators for access to the principal offices. We are in the process of
evaluating whether the embedded systems at our other facilities are Year 2000
compliant. Accordingly, we have not developed formal contingency plans in this
regard.
CONVERSION TO THE EURO
On January 1, 1999, 11 of the 15 EU member countries (the
"participating countries") adopted the Euro as their common legal currency, at
which time their respective individual currencies became irrevocably fixed at a
rate of exchange to the Euro, and the Euro became a currency in its own right.
Presently, the following 11 currencies are subject to the Euro conversion: The
Austrian Shilling, the Belgian Franc, the Dutch Guilder, the Finnish Markka, the
French Franc, the Deutsche Mark, the Irish Punt, the Italian Lira, the
Luxembourg Franc, the Portuguese Escudo and the Spanish Peseta.
From January 1, 1999 until January 1, 2002 (the "transition period"),
the Euro will exist in electronic form only and the participating countries'
individual currencies will persist in tangible form as legal tender in fixed
denominations of the Euro. During the transition period, we must manage
transactions with our customers and our third party vendors in both the Euro and
the participating countries' respective individual currencies. This may cause
significant logistical problems. We may incur increased operational costs and
may have to modify or upgrade our information systems in order to:
. convert individual currencies to Euro;
. convert individual currencies of participating countries into
each other;
. execute conversion calculations utilizing six-digit exchange
rates and
. other prescribed requirements;
. accommodate the new Euro currency symbol; and
. permit pricing, advertising, billing, accounting, internal
financial calculations, sales and other transactions or practices
to be effected simultaneously in Euro and the participating
countries' respective individual currencies.
Changes in pricing denominations for products once sold and advertised
in an individual currency and now sold and advertised in the Euro could cause
material billing errors and complications. Fluctuations in the business cycles
of a participating country or a failure on any participating country's part to
comply with EC directives could have negative economic effects on other
participating countries, including countries in which we operate. Additionally,
the participating countries' pursuant of a single monetary policy may adversely
affect the particular economies of markets in which we conduct business. Any of
the above could have a material adverse effect on Cybernet.
PAGE 13
<PAGE>
We have been selecting and purchasing our computer and operational
systems in an attempt to ensure that our ability to transact business will not
be impaired by complications resulting from the introduction of the Euro. While
we believe that our systems have not been adversely impacted by the Euro
conversion, we cannot guarantee that we will be able to avoid the accounting,
billing and logistical difficulties that might result from the introduction of
the Euro. In addition, we cannot be sure that we, our third-party suppliers or
our customers will be able to implement the necessary protocols successfully. If
we, our third-party vendors, customers or any others with whom we must interact
or interconnect, fail to adapt and modify our procedures and systems to
accommodate the Euro conversion, this could materially adversely affect our
results of operation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not utilize market-risk-sensitive instruments, such
as derivative financial instruments. Its primary market risk is in the area of
interest rate and foreign currency exchange rate risks.
The Company is exposed to typical interest rate risks insofar as
changes of future interest rates will lead to changes in interest income and
expense. However, the Company currently does not have any significant fixed rate
debt and maintains its cash balances in deposits at banks and highly liquid
short term investments, such as money market mutual funds. The Company does not
use interest rate sensitive instruments to hedge this interest rate risk
exposure, because it believes the exposure of its operating results to changes
in interest rates is insignificant.
All of the Company's revenues are denominated in currencies other than
the U.S. Dollar. However, the Company has chosen the U.S. Dollar as its
reporting currency. Approximately 89% of the Company's revenues in 1998 were
denominated in Deutsche Mark and as such, the majority of its foreign exchange
rate exposure relates to changes in the exchange rate between the Deutsche Mark
and United States Dollar. The Company estimates that a ten percent adverse
change in the exchange rate between the United States Dollar and the Deutsche
Mark would have increased the Company's reported net loss for 1998 by
approximately $530,300.
PAGE 14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
On December 2, 1998 the SEC declared effective the Company's
registration statement on Form S-1. Pursuant to that registration statement the
Company sold 1.8 million shares of common stock at a price of $27 per share (an
aggregate price of $48.6 million) in an offering for which the principal
underwriter was Berliner Effektenbank A.G., Berlin. The underwriting discount
amounted to $2.916 million. Holger Timm, a principal shareholder of the
Company, and a former director of the Company, is the controlling shareholder of
a financial institution which owns 40% of Berliner Effektenbank A.G. Berlin.
Expenses paid to others in connection with the offering were approximately
$1,308,000. Net proceeds of the Offering to the Company were approximately
$44.98 million. Between the closing of the Offering on December 9, 1998 and
December 31, 1998 approximately $1.76 million was used to pay for a license
required to become a Class 4 telecommunications carrier in Germany. Between
December 31, 1998 and March 31, 1999, $3,924,737 was used to make the final
payment in connection with the acquisition of Vianet Telekommunications A.G. The
remainder was used in operating and investing activities or invested in low
risk, high liquidity short term investments.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NOT APPLICABLE
ITEM 4. SUBMISSION TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
On May 12, 1999 we acquired 51% of the outstanding capital stock of
Sunweb Internet Services SIS AG (Sunweb) for 1,477,000 Swiss Francs and 25,000
shares of Cybernet Common Stock. The stock purchase agreement also provides for
put and call options pursuant to which we could acquire the remaining 49% of the
Sunweb stock at a price based on a multiple of Sunweb's future pre-tax profit or
loss. This Sunweb acquisition provides us with a presence in Switzerland and
substantial additional expertise in switched voice services.
On May 14, 1999 we entered into an agreement to purchase all of the
capital stock of Flashnet S.p.A., an Italian Internet Service Provider with a
principal office in Rome. The purchase price for the Flashnet stock is
approximately $27.5 million payable in a combination of cash and share of our
common stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
PAGE 15
<PAGE>
27.0 Financial Data Schedule for the period ended March 31,
1999.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended March
31, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CYBERNET INTERNET SERVICES
INTERNATIONAL, INC.
BY: /s/ Andreas Eder
---------------------------------------------
Andreas Eder
President, Chief Executive Officer
BY: /s/ Christian Moosmann
---------------------------------------------
Christian Moosmann
Principal Financial and Accounting Officer
Dated: May 17, 1999
PAGE 16
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