<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 SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ________ to _________
COMMISSION FILE NO. 0-25677
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 OFFICES)
49-89-993-150
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL
YEAR IF CHANGED SINCE LAST REPORT)
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 Sections 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 SEPTEMBER 30, 1999
Common stock - $0.001 par value 20,764,207
<PAGE>
TABLE OF CONTENTS
PAGE
----
PART I FINANCIAL INFORMATION............................................ 1
ITEM 1. FINANCIAL STATEMENTS.......................................... 1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................... 7
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.... 10
PART II OTHER INFORMATION............................................... 10
ITEM 1. LEGAL PROCEEDINGS............................................ 10
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.................... 10
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.............................. 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 11
ITEM 5. OTHER INFORMATION............................................ 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................. 11
SIGNATURES............................................................... 12
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
---------------- ----------------
Unaudited
----------------
( in thousands )
<S> <C> <C>
ASSETS
Cash and cash equivalents........................................ $42,876 $140,079
Short-term investments........................................... 112 32
Accounts receivable, net of allowance for doubtful accounts
of $183,460 and $361,393 for September 30, 1999 and December 31,
1998 respectively................................................ 3,249 8,854
Other receivables................................................ 1,793 2,490
Prepaid expenses and other assets................................ 423 1,193
------- --------
Total current assets............................................ 48,453 152,648
Property and equipment, net...................................... 7,970 18,291
Product development costs, net................................... 5,743 4,794
Goodwill, net.................................................... 6,505 35,633
Deferred income taxes............................................ 8,166 21,140
Restricted cash - 58,377
Other assets..................................................... 2,608 11,294
------- --------
TOTAL ASSETS.......................................................... $79,445 $302,177
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Overdrafts and short-term borrowings............................. $ 287 $ 88
Trade accounts payable........................................... 3,346 10,165
Other accrued liabilities........................................ 1,073 8,583
Deferred purchase obligations.................................... 4,483 3
Current portion long term debt and capital lease obligations..... 925 1,552
Accrued personnel costs.......................................... 589 1,258
------- --------
Total current liabilities....................................... 10,703 21,649
Long-term debt................................................... 67 176,328
Capital lease obligations........................................ 1,316 1,175
SHAREHOLDERS' EQUITY
Common stock $.001 par value, 50,000,000 shares authorized,
20,764,207 shares issued and outstanding at September 30, 1999
and 18,762,138 issued and outstanding at December 31, 1998....... 19 21
Preferred stock $.001 pr value, 50,000,000 shares authorized,
4,793,440 shares issued and outstanding at September 30, 1999 and
6,360,000 issued and outstanding at December 31, 1998............ 6 5
Subscription receivable.......................................... (19) -
Additional paid in capital....................................... 72,795 131,230
Accumulated deficit.............................................. (6,436) (24,338)
Other comprehensive income (loss)................................ 994 (3,893)
------- --------
Total shareholders' equity....................................... 67,359 103,025
------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................ $79,445 $302,177
======= ========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
(Unaudited)
<TABLE>
<CAPTION>
For three months ended For nine months ended
September 30, September 30,
------------------------------ -------------------------------
1998 1999 1998 1999
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenue
Internet Projects................................ $ 1,255 $ 993 $ 3,118 $ 3,452
Network Services................................. 772 5,298 2,261 11,292
----------- ----------- ----------- -----------
Total revenues........................................ 2,027 6,291 5,379 14,744
Cost of revenues:
Internet Projects................................ 449 1,182 1,887 3,238
Network Services................................. 872 4,168 2,619 10,702
Depreciation and amortization.................... 348 829 680 2,374
----------- ----------- ----------- -----------
Total cost of revenues................................ 1,669 6,179 5,186 16,314
----------- ----------- ----------- -----------
Gross margin (loss)................................... 358 112 193 (1,570)
General and administrative expenses............... 586 5,607 1,241 9,377
Marketing expenses................................ 1,660 2,097 3,268 7,244
Research and development.......................... 345 1,650 1,166 3,796
Depreciation and amortization..................... 203 1,694 475 2,922
----------- ----------- ----------- -----------
Total operating expenses.............................. 2,794 11,048 6,150 23,339
Interest expense...................................... 8 8,230 114 8,294
Interest income....................................... 55 1,800 67 2,183
Realized foreign currency translation losses.......... - (651) - (651)
----------- ----------- ----------- -----------
Loss before taxes and minority interest............... (2,389) (18,017) (6,004) (31,671)
Income tax benefit.................................... 1,218 8,366 3,226 13,668
----------- ----------- ----------- -----------
Net loss before minority interest..................... (1,171) (9,651) (2,778) (18,003)
Minority interest..................................... - (2) 101
----------- -----------
Net loss.............................................. (1,171) (9,653) (2,778) (17,902)
Other comprehensive loss:
Foreign currency translation adjustments......... (173) 2,737 (173) (3,892)
----------- ----------- ----------- -----------
Comprehensive income (loss)........................... $ (1,344) $ (6,916) $ (2,951) $ (21,794)
----------- ----------- ----------- -----------
Basic and diluted loss per share...................... $ (0.07) $ (0.47) $ (0.18) $ (0.92)
=========== =========== =========== ===========
Number of shares used to compute earnings per share... 16,884,415 20,737,037 15,547,621 19,525,557
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ending September 30,
-----------------------------------
1998 1999
<S> <C> <C>
(in thousands)
Cash Flows from Operating Activities:
Net loss........................................................................... $ (2,778) $(17,902)
Adjustments to reconcile net income to net cash provided by operations:
Deferred tax credit.............................................................. (3,484) (13,996)
Depreciation and amortization.................................................... 1,539 5,296
Provision for losses on accounts receivable...................................... 30 183
Changes in operating assets and liabilities:
Trade accounts receivable........................................................ (1,020) (2,462)
Other receivables................................................................ (710) (854)
Other assets..................................................................... - (9,447)
Prepaid expenses and other assets................................................ (12) (249)
Trade accounts payable........................................................... 2,126 3,544
Accrued interest expense......................................................... - 1,270
Amortization of Bond discount.................................................... - 1,360
Other accrued expenses and liabilities........................................... 2,262 5,885
Accrued personnel costs.......................................................... (186) 726
-------- --------
Total changes in operating assets and liabilities............................. 2,460 (227)
-------- --------
Net cash used in operating activities............................................ (2,233) (26,646)
Cash Flows from Investing Activities:
Purchase of short term investments................................................. (-----) (------)
Proceeds from sale of short term investments....................................... (3,140) 71
Purchase of property and equipment................................................. (6,725) (10,724)
Product development costs.......................................................... (2,758) (778)
Acquisition of businesses, net of cash acquired.................................... - (22,749)
Payment of deferred purchase obligations........................................... - (4,119)
-------- --------
Net cash used in investing activities............................................ (12,623) (38,299)
Cash Flows from Financing Activities:
Proceeds from issue of common stock, net........................................... 12,629 -
Proceeds from issuance of bonds warrants.......................................... - 51,199
--------
Proceeds from issuance of bonds and other borrowings.............................. 3,482 174,063
Restricted Cash.................................................................... - (58,839)
Repayment of borrowings............................................................ - (382)
-------- --------
Net cash provided by financing activities........................................ 16,111 166,041
-------- --------
Net (decrease) increase in cash and cash equivalents............................... 1,255 101,096
Cash and cash equivalents at beginning of period................................... 2,239 42,876
Translation adjustments............................................................ (173) (3,893)
-------- --------
Cash and cash equivalents at end of period......................................... $ 3,321 140,079
======== ========
Supplemental disclosure of non-cash investing and financing activities:
Acquisitions (Note 5):
Fair value of assets acquired.................................................... $ 2,847 $ 33,922
Less:
Cash acquired................................................................. 6 73
Cash paid..................................................................... 849 22,850
Stock issued.................................................................. 1,468 5,249
Liabilities assumed.............................................................. 524 5,755
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles ("GAAP") for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation of financial position and results of
operations have been included. Operating results for the nine month period
ending September 30, 1999 are not necessarily indicative of results to be
expected for the year ended December 31, 1999. For further information, refer to
the Consolidated Financial Statements and Footnotes thereto included in the
Company's annual report of 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 earnings per
share:
<TABLE>
<CAPTION>
September 30,
--------------------------------
1998 1999
--------------- ---------------
<S> <C> <C>
Numerator:
Net loss-numerator for basic and diluted loss per share
(USD in thousands)............................................... $ (2,781) $ (17,902)
========== -----------
Denominator:
Denominator for basic and diluted loss per
share -- weighted average shares outstanding 15,547,621 19,525,557
Basic and diluted loss per share.................................. $ (0.18) $ (0.92)
</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 inter-company sales between its
subsidiaries. Information concerning the Company's geographic locations is
summarized as follows:
<TABLE>
<CAPTION>
September 30,
--------------------------------------
1998 1999
-------------- ----------------
(in thousands)
Revenues
<S> <C> <C>
Germany $4,788 $ 7,591
US - -
Other 591 7,153
------ -------
Total $5,379 $14,744
====== =======
Cost of Revenues
Germany $4,641 $11,065
US - -
Other 545 5,249
------ -------
Total $5,186 $16,314
====== =======
General and Admin Exp.
Germany $1,030 $ 4,909
US 128 2,098
Other 83 2,370
------ -------
Total $1,241 $ 9,377
====== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
September 30,
--------------------------------------
1998 1999
-------------- ----------------
(in thousands)
<S> <C> <C>
Marketing Expenses
Germany $3,163 $ 5,525
US - 320
Other 105 1,399
------ -------
Total $3,268 $ 7,244
====== =======
Research & Development
Germany $ 989 $ 3,497
US - -
Other 177 299
------ -------
Total $1,166 $ 3,796
====== =======
Depreciation &Amortization
Germany $ 456 $ 2,288
US - 329
Other 19 305
------ -------
Total $ 475 $ 2,922
====== =======
Interest Expense
Germany $ 103 $ 23
US - 8,146
Other 11 125
------ -------
Total $ 114 $ 8,294
====== =======
Interest Income
Germany $ 12 $ 15
US 55 2,168
Other - -
------ -------
Total $ 67 $ 2,183
====== =======
Realized FX translation adjustments
Germany - -
US - $ (651)
Other - -
------ -------
Total - $ (651)
====== =======
Loss before Taxes
Germany $5,582 $19,701
US 73 9,376
Other 349 2,594
------ -------
Total $6,004 $31,671
====== =======
Income Tax Benefit
Germany $3,226 $ 8,792
US - 4,848
Other - 28
------ -------
Total $3,226 $13,668
====== =======
Minority Interest
Germany - -
US - -
Other - $ 101
------ -------
Total - $ 101
====== =======
Net Loss
Germany $2,356 $10,909
US 73 4,528
Other 349 2,465
------ -------
Total $2,778 $17,902
====== =======
</TABLE>
<PAGE>
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 re-measured using 40% in the
first quarter of 1999. The impact of re-measuring 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 quarter ended March 31, 1999.
5. Business Acquisitions
Effective April 13, 1999, the Company acquired 51% of the outstanding shares of
Sunweb Internet Services SIS AG ("Sunweb") for a total consideration of DM
2,887,494 ($1,524,790). DM 1,806,957 ($954,193) of the purchase price was paid
in cash with the remainder settled in exchange for the issuance of 25,680 shares
of the 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 expire on
December 31, 2001. The acquisition has been accounted for using the purchase
method of accounting and as such the accompanying financial statements reflect
Sunweb's results of operations for the period April 13, 1999 through June 30,
1999. Goodwill recorded in connection with the acquisition of Sunweb, amounting
to DM 2,696,456 ($1,423,909), is being amortized over 10 years.
Effective June 25, 1999, the Company acquired 100% of the outstanding shares of
Flashnet S.p.A. ("Flashnet") for a total consideration of DM 50,323,031
($26,573,919). DM 41,464,040 ($21,895,781) of the purchase price was paid in
cash with the remainder settled in exchange for the issuance of 332,329 shares
of the common stock of the Company. The acquisition has been accounted for using
the purchase method of accounting. Flashnet's results of operations subsequent
to June 25, 1999 in the first six months of 1999 are not included in the
accompanying financial statements due to immateriality. Goodwill recorded in
connection with the acquisition of Flashnet, amounting to DM 51,817,875
($27,363,297), is being amortized over 10 years.
The following unaudited pro forma consolidated results of operations for the
nine months ended September 30, 1998 and 1999 assume the acquisitions of
Open:Net, Vianet and Flashnet had occurred as of January 1, 1998. The unaudited
pro forma consolidated results of operations do not include the results of
operations of Sunweb due to the relative insignificance of the amounts involved.
<TABLE>
<CAPTION>
Nine months ended September 30,
1998 1999
---------------------------------
<S> <C> <C>
Revenue........................... $11,482,224 $19,051,642
Net loss.......................... 7,390,040 19,749,389
Basic and diluted loss per share.. $ (0.43) $ (1.00)
</TABLE>
6. Financing
On July 1, 1999, the Company sold 150,000 units consisting of 14.0% Senior Notes
due 2009 and warrants to purchase 4,534,604 shares of Common Stock (the
"Units"). The net proceeds (gross proceeds less discounts and commissions) of
the Unit offering were approximately $146 million.
On August 19, 1999, the Company sold $35,000,000 13% Convertible Senior
Subordinated Discount Notes due 2009. On August 19, 1999 the Company also sold
Euro 25,000,000 ($26,662,168) 13% Convertible Senior Subordinated Pay In Kind
Notes due 2009. On August 23, 1999, the Company sold $15,002,183 13% Convertible
Senior Subordinated Discount notes due 2009. The net proceeds of these three
convertible bond offerings were approximately $67 million.
7. Subsequent events
On October 28, 1999, the Company acquired 51% of the outstanding shares of
Novento Telecom AG ("Novento") and 51% of Novento's 100% owned subsidiary
Multicall Telefonmarketing AG. ("Multicall"). Novento and Multicall are German
direct marketing companies for telecommunication services. The Company has paid
cash consideration of DM 2,002,000 ($1,091,663) and transferred 39,412 shares of
its common stock to the owners of the companies. The Company has an option to
acquire the remaining 49% of the shares of both companies.
On October 29, 1999 the Company acquired the remaining 34% of the outstanding
shares of Eclipse S.p.A., an Italian corporation of which the Company already
owns 66% of the outstanding shares. The sellers of the shares are the original
founders of the Company and are currently the Managers of Finance, Marketing and
Operations in the Cybernet Italy organization. The Company has paid a
consideration of DM 707,000 ($385,517) and has deposited 136,402 shares of its
common stock in a pooling trust from which the shares will be released to the
sellers in equal installments over the next three years.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The following table sets forth, for the periods indicated, the items of
Consolidated Statements of Loss for the nine months ended September 30, 1998 and
1999, respectively, expressed as a percentage of total revenues:
<TABLE>
<CAPTION>
Percent of Total Revenues
-----------------------------------------
Nine Months Ended September 30,
-----------------------------------------
1998 1999
------------- -------------
<S> <C> <C>
Revenue
Internet Projects........................ 58.0 % 23.4 %
Network Services......................... 42.0 % 76.6 %
Total Revenues......................... 100.0 % 100.0 %
Cost of Revenues
Internet Projects........................ 35.1 % 22.0 %
Network Services......................... 48.7 % 72.6 %
Depreciation and amortization............ 12.6 % 16.0 %
Total cost of revenues................. 96.4 % 110.6 %
Gross (income) loss...................... (3.6) % 10.6 %
Operating Expenses
General and administrative expenses...... 23.1 % 63.6 %
Marketing expenses....................... 60.8 % 49.1 %
Research and development................. 21.7 % 25.7 %
Depreciation and amortization............ 8.8 % 19.8 %
Total operating expenses............... 114.4 % 158.3 %
Operating loss........................... 110.8 % 169.0%
Interest expense......................... 2.1% 56.3 %
Interest income.......................... 1.2 % 14.8 %
Realized FX translation adjustments - 4.4 %
Loss before taxes and minority interest.. 111.7 % 214.8 %
Income tax benefit....................... 60 % 92.7 %
Net loss before minority interest........ 51.7 % 122.1 %
Minority interest........................ 0.0 % 0.7 %
Net loss................................. 51.7 % 121.4 %
</TABLE>
Results of operations--Three Months Ended September 30, 1998 Compared to the
Three Months Ended September 30, 1999
Revenues
Total revenues increased 210.4% from $2,027,000 in the three months ending
September 30, 1998 to $6,291,000 in the three months ending September 30, 1999.
Internet Project revenues decreased 20.9% from 1,255,000 in the three months
ended September 30, 1998 to $993,000 for the same time period in 1999 while
Network Services revenues increased 586.3% from $772,000 to $11,292,000.
Cost of Revenues
Cost of revenues increased 270.2% from $1,669,000 in the three months ending
September 30, 1998 to $6,179,000 in the comparable period in 1999. Cost of
revenues for Internet Projects increased 163.3% from $449,000 to $3,238,000.
Cost of revenues for Network Services increased 378.0% from $872,000 to
$10,702,000. A portion of this increase in Network Services costs reflects the
consolidation of Vianet, Sunweb and Flashnet.
General and Administrative Expenses
General and administrative expenses increased 856.8% from $586,000 in the three
months ending September 30, 1998 to $5,607,000 in the comparable period in 1999.
Marketing Expenses
Marketing expenses increased 26.3% from $1,660,000 in the three months ending
September 30, 1998 to $2,097,000 in the comparable period in 1999.
Research and Development
Research and development expenditures increased 26.3% from $345,000 in the three
months ending September 30, 1998 to $1,650,000 in the same period of 1999.
Depreciation and Amortization
Depreciation and amortization increased 734.5% from $203,000 in the three months
ending September 30, 1998 to $2,922,163 in the first nine months of 1999.
Interest Expense and Income
Interest expense increased from $8,000 in the three months ending September 30,
1998 to $8,230,000 in the same period of 1999. This was a result of primarily
the interest expense incurred during the third quarter of 1999 on the Units sold
in July. Our interest income increased from $55,000 in the three months ending
September 30, 1998 to $1,800,000 in the same period of 1999. This increase is a
result of interest earned on cash proceeds from our December 1998 equity
offering and the interest earned on the proceeds from the July Units Offering
and August Convertible Note Offerings.
Realized Foreign Currency Translation Gains or Losses
The Company incurred $650,644 of foreign exchange translation losses in the
three months ending September 30, 1999.
Results of Operations--Nine Months Ended September 30, 1998 Compared to the Nine
Months Ended September 30, 1999
Revenues
Total revenues increased 174.1% from $5,378,365 in the first nine months of 1998
to $14,743,590 in the first nine months 1999, primarily as a result of
increased Network Services revenues. Internet Project revenues increased 10.7%
from 3,117,810 in the first nine months of 1998 to $3,451,588 for the same time
period in 1999 while Network Services revenues increased 399.5% from $2,260,555
to $11,292,001. The first nine months Network Services revenues represented
76.6% of total revenues in 1999, as compared with 42.0% in 1998.
The increase in revenues from Network Services is mainly a result of expansion
of our customer base, which provides us with a stream of recurring revenues.
Although the Company has focused on building these recurring revenues from
Network Services, building relations with Internet Project customers remains a
continuing strategy. In addition, we consolidated $2,808,707 of Vianet revenues,
$258,305 of Sunweb revenues (second and third quarters of 1999), and $2,825,593
of Flashnet revenues (third quarter of 1999 only) in the first nine months of
1999. Vianet's revenues are derived primarily from Network Services, Sunweb's
revenues are more heavily weighted toward projects, and Flashnet's revenues are
principally derived from Network Services. Excluding the impact of consolidating
Vianet's, Open:Net's, Sunweb's and Flashnet's revenues, Network Services
revenues in the first nine months of 1999 would have increased 64.6% from the
first nine months of 1998.
<PAGE>
Cost of Revenues
Cost of revenues increased 214.5 % from $5,186,602 in the first nine months of
1998 to $16,313,600 in the first nine months of 1999. Cost of revenues for
Internet Projects increased 71.6% from $1,887,073 to $3,237,129. Cost of
revenues for Network Services increased 308.6% from $2,619,227 to $10,701,583. A
portion of the increase in Network Services costs reflects the consolidation of
Vianet, Sunweb and Flashnet, the acquisitions discussed above. Excluding these
acquisitions, our cost of revenues increases approximately 137.3%. This increase
was due to expenditures for personnel and expenses associated with the expansion
of our network (newly hired personnel for network deployment and management and
network facilities) and the cost of leasing additional lines to provide the
increased capacity we will require as our business grows. In the first nine
months of 1999, the Company's technical and operational staff increased from 61
to 151 (excluding the acquisition of Vianet, Sunweb and Flashnet) and 99 to 214
on a pro forma basis (i.e. including these acquisitions).
Gross Margin (Loss)
While total revenues increased significantly in the first nine months of 1999,
larger increases in the cost of revenues led to a decline in gross margin from
$191,763 in the first nine months of 1998 to $(1,570,010) in the first nine
months of 1999. Cost of revenues as a percentage of total revenues increased
from 96.4 % in the first nine months of 1998 to 110.6% in the same time period
for 1999. This is principally due to our investment in Network Services
infrastructure, discussed above. We expect to see improvement in our gross
margin generally and in Network Service in particular as we expand our customer
base and increase revenues per account and are thereby able to spread the costs
of product and network development over a larger revenue base. We also expect
our gross margin to improve over time as a result of our strategy to construct
our own infrastructure, including the replacement of leased transmission
facilities with owned facilities and the purchase of domestic and international
transmission capability as a telecommunications operator (rather than as a
purchaser at retail prices).
General and Administrative Expenses
General and administrative expenses increased 655.5% from $1,241,134 in the
first nine months of 1998 to $9,376,941 in the first nine months of 1999. These
expenses constituted 63.6% of revenues in the first nine months of 1999,
compared to 23.1% for the same period in 1998. During the first nine months of
1999, the Company added more than 50 employees in general and administrative
functions. Personnel additions were made to develop and manage information
systems, strengthen finance and accounting functions and better manage customer
care and billing. In addition, the Company added senior management to oversee
corporate development and international operations.
The impact of consolidating Vianet, Sunweb and Flashnet in the first nine months
of 1999 has also had an unfavorable impact on these expenses. Vianet, Sunweb and
Flashnet together incurred general and administrative expenses of $1,088,522 in
the first nine months of 1999.
Marketing Expenses
Marketing expenses increased 121.6% from $3,268,811 in the first nine months of
1998 to $7,244,310 in the first nine months of 1999, principally as a result of
substantial investments in marketing activities, including trade fairs, product
literature and related expenditures. These investments have also included
consolidating the various local brands that we have acquired. This increase also
reflects the impact of consolidating Vianet, Sunweb and Flashnet in 1999, which
together incurred marketing expenses of $1,062,833. Although we expect marketing
expenses to decrease as a percentage of revenues over time, we expect marketing
expenses to increase as we increase spending to further establish our trade name
locally and internationally. We are beginning both national and international
advertising campaigns, the first step of which is the launch of the new
Cybernet-Italy organization scheduled for November 1999.
Research and Development
Research and development expenditures increased 225.6% from $1,166,003 in the
first nine months of 1998 to $3,796,087 in the first nine months of 1999, as the
Company continues to invest in the development of new products and services. We
are currently performing a detailed assessment of our current products and
services in an attempt to better focus our products and services to be offered
to customers in the future. As part of this process we are evaluating the
strategic significance of certain products in the Company's portfolio.
Depreciation and Amortization
Depreciation and amortization increased 514.3% from $475,718 in the first six
months of 1998 to $2,922,163 in the first nine months of 1999. This increase is
attributable to the additional amortization of the goodwill arising from the
acquisition of Open:Net and Vianet in 1998 and the acquisition of Sunweb and
Flashnet in 1999. In addition, depreciation expense increased due to increased
investments in computer hardware and software and office facilities.
<PAGE>
Interest Expense and Income
Interest expense increased from $114,179 in the first nine months of 1998 to
$8,294,452 in the same period of 1999. This was primarily a result of the
interest expense incurred during the third quarter of 1999 on the Units sold in
July. Our interest income increased from $66,712 in the first nine months of
1998 to $2,182,718 in the same period of 1999. This increase is a result of
interest earned on cash proceeds from our December 1998 equity offering and the
interest earned on the proceeds from the July Units Offering and the August
Convertible Note Offerings.
Realized Foreign Currency Translation Gains or Losses
The Company incurred $650,644 of foreign exchange losses in the first nine
months of 1999.
Other Comprehensive Loss: Foreign Currency Translation Adjustments
Foreign currency translation adjustments resulted in a loss of $172,686 in the
first nine months of 1998 and a loss of $3,891,924 in the first nine months of
1999. The decrease in 1999 over 1998 is a result of the strengthening of the
U.S. dollar in the first nine months of 1999 in relation to the Deutsche Mark.
Liquidity and Capital Resources
Cash Flow
Operating activities used cash of $26,646,458 for the nine months ended
September 31, 1999 compared to $2,232,661 for the comparable period in 1998.
This is principally the result of higher net losses, increases in deferred tax
assets, increases in accounts receivables and other assets.
For the nine months ended September 31, 1999, investing activities used cash of
$38,298,792 compared to $12,630,021 for the comparable period in 1998. This
increase in use of cash reflects the acquisition of Flashnet and Sunweb
($22,749,328), the payment of the deferred purchase obligation for Vianet
($4,119,266), and purchases of property and equipment ($10,724,156).
Expenditures for property and equipment consisted principally of purchases of
computer hardware and software and other expenditures related to our Internet
backbone and equipment necessary to support our anticipated growth.
For the nine months ended September 30, 1999, net cash provided by financing
activities was $166,040,789 compared to $16,110,411 for the comparable period in
1998. This increase resulted from the issuance of the Units and Convertible
bonds in July and August of 1999 respectively. The Units Offering in July 1999
generated $144,500,000 in net proceeds, $22,374,264 of which was used to repay
in full an Interim Loan which financed the acquisition of Flashnet and
$57,466,076 of which was placed in an escrow account, in accordance with the
terms of the Senior Notes Indenture, to fund the first six interest payments on
the Senior Notes. In addition, the Convertible Bond Offering in August 1999
generated $ 69,899,282 in net proceeds.
Working Capital
On September 30, 1999, our working capital, defined as the excess of our current
assets over our current liabilities, was $130,999,452 as compared to $37,750,651
on December 31, 1998. The increase in working capital resulted from cash
proceeds from the Units and Convertible bonds issued in July and August of 1999,
from an increase in accounts receivable partially offset by increases in
accounts payable, and from a decrease in deferred purchase obligations related
to the Vianet acquisition at the end of 1998.
Our balance sheet as of September 31, 1999, reflects $8,853,665 for net accounts
receivable compared to $3,248,754 for the period ended December 31, 1998 and
$7,436,206 for the period ended June 30, 1999. We have instituted various
measures which we expect will facilitate collection of these receivables
including realignment of sales force compensation schemes, pre-contract credit
evaluations for both business and residential customers and assignment of direct
responsibility to managers at the subsidiary-level for reductions in receivables
balances.
Credit Arrangements
As of September 30, 1999, we had short-term unsecured overdraft facilities under
which the Company and its subsidiaries could borrow up to DM 1,133,647
($618,162). These facilities are denominated in Italian Lire (in the amount of
DM 930,302 ($507,281)), Austrian Schilling (in the amount of DM 142,100
($77,485)) and Swiss Franc (in the amount of DM 61,245 ($33,396)). The interest
rates fluctuate based upon current lending rates. The weighted average borrowing
rate on these facilities was 7.5% as of September 30, 1999. In addition, certain
of our banks provide overdraft protection exceeding the limits specified in
these agreements. As of September 30, 1999, the Company and its subsidiaries had
used DM 162,161 ($88,424) of these facilities. In addition, as of September 30,
1999, we had long-term capitalized lease obligations of DM 2,155,995
($1,175,634).
<PAGE>
Amounts expressed in Deutsche Marks in this paragraph have been translated for
convenience purposes into U.S. dollars at the rate of DM 1.8339 = $1.00 (the
balance sheet conversion rate on September 30, 1999).
Capital Expenditures
For the nine months ended September 30, 1999, capital expenditures totaled
$12,787,342. We funded these capital expenditures primarily from net cash
provided by financing activities. Our major investments in the first nine months
of 1999 included: (i) progress payments on a new billing system totaling
approximately DM 5,379,472 ($2,933,350), (ii) investments in Point of Presence
equipment of approximately DM 3,986943 ($2,174,024), (iii) investments in
various computer and technical equipment totalling approximately DM 4,486,545
($1,185,465), and (iv) investments in facilities and office infrastructure
totalling approximately DM 5,358,725 ($2,922,037) . We have planned
approximately $30.0 million in capital expenditures for the remainder of 1999.
We expect to make these expenditures to install carrier grade digital circuit
switches and related equipment for voice services, to build data centers and
office infrastructure and to purchase transmission facilities (including
alternative long-haul transmission capabilities) and related equipment. We also
expect to use a portion of the budgeted amount for the continued implementation
of our billing system.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not utilize market-risk-sensitive instruments, such as
derivative financial instruments. Our primary market risk is in the area of
interest rate and foreign currency exchange rate fluctuations.
We maintain our cash balances in deposits at banks and in highly liquid short-
term investments, such as money market funds, therefore lowering our exposure to
interest income risks. As a result of our sale of Units consisting of 14.0%
Senior Notes due 2009 and warrants in July 1999 (the "Unit Offering"), as well
as our sale of Convertible Notes in August 1999 we have a substantial amount of
debt in U.S. dollars.
While our reporting currency is U.S. dollars, our functional currency is the
Deutsche Mark and significant fluctuations in the U.S. dollar to Deutsche Mark
exchange rate could have an adverse impact on the amount of Deutsche Marks
required to satisfy this debt. We estimate that a 10% increase in the exchange
rate between the Deutsche Mark and the U.S. dollar would increase the Deutsche
Mark amount required to settle the debt outstanding from the Unit and
Convertible Offerings by approximately $20,000,000.
All of the Company's revenues and a significant portion of our expenses are
denominated in currencies other than our reporting currency, the U.S. dollar.
Approximately 52% of our revenues in the first nine months of 1999 were
denominated in Deutsche Marks and another 45% of revenues were denominated in
other European Monetary Union member currencies. The majority of our foreign
exchange rate exposure therefore relates to the translation of our Deutsche Mark
financial statements into U.S. dollars which is impacted by changes in the
exchange rates between the Euro and the U.S. dollar.
We prepared a sensitivity analysis to assess the impact of exchange rate
fluctuations on our 1998 operating results. Based on this analysis, we estimated
that a 10% adverse change in the exchange rates between the Deutsche Mark and
the U.S. dollar would have increased our reported net loss for 1998 by
approximately $530,300. Our analysis also indicated that a 10% decrease in the
exchange rate between the U.S. dollar and the Deutsche Mark would result in a
decrease of our March 31, 1999 net assets of approximately $1,997,900. We have
not entered into any derivative hedging instruments to reduce the risk of
exchange rate fluctuations.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 8,1999 we sold 150,000 Units (the "Units") to Qualified Institutional
Buyers pursuant to Rule 144A under the Securities Act of 1933 as amended (the
"'33 Act"). Each Unit consisted of our 14.0% Senior Note due 2009 in the
principal amount of $1,000 (the "Senior Notes") and a Warrant to purchase
30.2310693 shares of our common stock par value $0.001 per share at a price of
$22.278 per share (the "Warrants"). Shares issuable upon exercise of the
Warrants represented 15% of our issued and outstanding capital stock at that
time. The Units were sold through Lehman Brothers and Morgan Stanley Dean Witter
for an aggregate offering price of $150,000,000. The aggregate discounts and
commissions were $4,500,000 and the net proceeds were $144,500,000. Of this
amount, $57,466,076 was used to purchase U.S. government securities pledged to
an escrow account to secure payment of the first six interest payments on the
Senior Notes, and $22,374,264 was used to repay an interim loan incurred to
finance the cash portion of the acquisition price of Flashnet S.p.A.
("Flashnet").
On August 26, 1999 we completed private offerings of $50,002,183 in aggregate
initial accreted value of our 13.0% Convertible Senior Subordinated Discount
Notes due 2009 and Euro 25 million aggregate principal amount of our 13.0%
Convertible Senior Subordinated Pay-In-Kind Notes due 2009. The Discount Notes
do not accrue cash interest prior to August 15, 2004 and the first semi-annual
payment of cash interest is payable on February 15, 2004. The Payment-in-Kind
Notes require payment of interest semi-annually in the form of secondary notes
issued under the pay-in-kind feature starting on February 15, 2000 and
continuing through August 15, 2004, and in the form of cash starting on February
15, 2005 and continuing to maturity on August 15, 2004. The Discount Notes are
convertible at any time after August 26, 2000 and prior to maturity at the rate
of one share of common stock for each $25.00 of accreted value of the Discount
Notes being converted. The Payment-in-Kind Notes are convertible at any time
after August 26, 1999 and prior to maturity at the rate of one share of common
stock for each Euro 25 in principal amount of the notes being converted. Both
the Discount Notes and the Payment-in-Kind Notes were sold through Morgan
Stanley Dean Witter for aggregate offering prices of $50,002,183 and Euro 25
million respectively. After payment of discounts and commissions, the aggregate
proceeds of these offerings were approximately $67 million.
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NOT APPLICABLE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NOT APPLICABLE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27.0 Financial Data Schedule for the period ended September 30, 1999.
(b) REPORTS ON FORM 8-K
None.
<PAGE>
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
Chairman of the Board, President, and
Chief Executive Officer
BY: /s/ Robert Eckert
-----------------
Robert Eckert
Chief Financial Officer and Treasurer
Dated: November 15, 1999
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