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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
Amendment No. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. __________
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CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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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)
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49-89-993-150
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.001
PAR VALUE
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting common equity held by non-
affiliates of the registrant on December 28, 1999, based upon the closing price
of the Common Stock on The Nasdaq OTC Bulletin Board for such date, was
approximately $298,047,140. The number of outstanding shares of the registrant's
Common Stock as of December 28, 1999, was approximately 22,708,354 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of (a) the Registrant's Proxy Statement for the 2000 Annual Meeting of
Shareholders are incorporated by reference in Part III hereof, and (b) the
Form S-1 declared effective on December 2, 1998, located under Securities and
Exchange Commission File No. 333-63755 are incorporated by reference in Part IV
hereof.
The Index of Exhibits filed with this Report begins on page 39.
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TABLE OF CONTENTS
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Page
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PART I................................................................................................................... 1
ITEM 1. BUSINESS....................................................................................................... 1
ITEM 2. PROPERTIES..................................................................................................... 17
ITEM 3. LEGAL PROCEEDINGS.............................................................................................. 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS............................................................ 18
PART II.................................................................................................................. 18
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......................................... 18
ITEM 6. SELECTED FINANCIAL DATA........................................................................................ 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................... 21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................................................... 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................................................... 31
ITEM 9. CHANGES IN, AND DISAGREEMENTS WITH, ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ELECTED FINANCIAL DATA.. 32
PART III................................................................................................................. 32
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................................. 32
ITEM 11. EXECUTIVE COMPENSATION......................................................................................... 32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................................. 33
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................................. 33
PART IV.................................................................................................................. 33
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K............................................... 33
SIGNATURES.............................................................................................................. 37
INDEX TO FINANCIAL STATEMENTS........................................................................................... F-1
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Part I
ITEM 1. BUSINESS
We began our operations with the formation of Cybernet AG, a privately held
German stock company. Cybernet AG was organized in December 1995, and commenced
significant operations in 1996. On September 17, 1997, Cybernet AG was acquired
by Cybernet Utah. At the time that it acquired Cybernet AG, Cybernet Utah had
no material business activities, assets or liabilities. Effective November 18,
1998, Cybernet Utah was merged into Cybernet Delaware, and the Delaware
corporation is the surviving entity of the merger. The terms "Cybernet," "we,"
"us" and "our" refer to Cybernet Delaware and its subsidiaries as a combined
entity, except where its use is such that it is clear that such term means only
Cybernet Delaware.
Overview
Through our subsidiaries, we are a leading provider of Internet
communications services and solutions in Germany, Austria, Italy and
Switzerland, targeting small- to medium-sized enterprises. Our IP solutions are
based on a core product offering consisting of Internet connectivity and value-
added services. Such value-added services include VPNs, web-hosting, co-
location, security solutions, electronic commerce, Intranet/Extranet and
workflow solutions. We offer consulting, design and installation, training,
technical support, and operation and monitoring of IP-based systems. We market
our products and services primarily to small- and medium-sized enterprises in
Europe because we believe that they represent an underserved and sizeable
market. Companies in this market are characterized by a lack of internal
technical resources, rapidly expanding communications needs and a high
propensity to utilize third-party outsourcing. We are recognized as a provider
of high quality Internet connectivity services and solutions to enterprises and
as one of Germany's leading Internet access providers. IT Services, a leading
German computer magazine has ranked us number one among German ISPs in terms of
infrastructure, international outlook and customer service.
Our mission is to become a leading European provider of IP-based
communications services and network-based business solutions. We intend to
continue to focus on small- and medium-sized enterprises in Europe, offering a
full portfolio of advanced communications products, including Internet access
and value added services, as well as data and switched voice services.
We believe that our capabilities in Internet, telecommunications and systems
integration services differentiate us from many of our competitors who offer
some, but not all, of the products and services that we offer. We approach and
win business customers by offering and designing a full range of services and
solutions for mission critical communications needs, such as electronic
commerce solutions, Intranets and VPNs. This enables us to work directly with
different levels of our customers' organizations, to participate in the design
of customers' systems and to offer additional network and communications
services as our customers' businesses grow and their needs change. By basing
our solutions upon product modules, we are able to meet our customers'
individual needs at competitive prices, while realizing higher margins by
reducing costs through standardization. Also, as a result of the high quality
of our services and the value-added nature of our solutions, we believe that we
experience higher customer retention rates and that we are less vulnerable to
pricing pressures than many of our competitors in the telecommunications and
Internet industries.
We sell our services and solutions primarily through our direct sales force.
Most of our sales people are based in regional offices and are supported by
specialized technical and commercial assistance from our customer care centers
in Munich, Vienna, Zurich, Rome and Trento. We complement our direct sales
effort with an extensive reseller and referral network of over 100 companies
and by forming marketing alliances with technology leaders such as OpenShop,
Oracle, Intel, Teldefax, InfoAG, Cisco and SUN Microsystems. While our reseller
arrangements begin with sales of our basic product offerings, such as
connectivity, they can lead to direct sales by us of more complex solutions,
such as security solutions or VPNs.
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We operate a geographically distributed IP network based upon leased lines.
Our network is spread over six countries and consists of network nodes equipped
primarily with Cisco and Ascend routers connected to a redundant high-
performance backbone infrastructure. We help corporate customers reduce
telecommunications costs by offering Internet and voice connectivity through
dedicated lines at 56 directly owned points of presence or "POPs". We also
offer a system of dial-in nodes with ISDN or analog modem ports to smaller
enterprises, employees and affiliates of corporate customers. These nodes
permit local dial-in access throughout Germany, Italy and Switzerland and most
of Austria. Recently, we reorganized our dial-in network in Germany by
concentrating multiple dial-in access nodes into larger access points called
"Virtual POPs," which use a Public Switched Telephone Network ("PSTN") to
aggregate traffic. We expect this will generate operating efficiencies, in that
there will be fewer overall nodes to service. We are expanding our network
across Germany, Austria, Italy and Switzerland by installing additional POPs
and replacing dial-in access nodes with Virtual POPs.
We also plan to add digital circuit switching capabilities to our network to
offer switched voice telecommunications services to our customers, capture more
revenues from dial-in traffic and provide termination services to other
carriers by layering switched voice capability onto our expanded leased line
network. For these purposes, we require:
. licenses to offer voice telephone services in Germany, Austria, Italy
and Switzerland;
. up to eight carrier grade digital circuit switches;
. a billing system capable of capturing the necessary data and generating
invoices to our customers; and
. interconnection agreements with incumbent operators and other
telecommunications carriers.
In Germany, we have:
. obtained a license to offer voice telephone services in the entire
country and a license to operate a telecommunication infrastructure;
. installed 2 Nortel DMS-100 switches and ordered another 1;
. installed the Kenan billing system; and
. entered into an interconnection agreement with Deutsche Telecom.
In order to enable us to begin offering voice telephone service before our own
switched voice network begins operating fully, we have entered into an interim
agreement with a third-party carrier.
In Austria we have obtained a license to provide voice services and to
operate a telecommunications infrastructure. Interconnection discussions have
commenced. We have ordered 1 Nortel DMS-100 switch and we expect to complete its
installation in Vienna by the end of 2000.
In Switzerland, we have begun the process of obtaining a telecommunications
license and should receive it within the coming weeks. We have ordered 1 Nortel
DMS-100 switch. Switch implementation will commence shortly and should be fully
operational by the end of the third quarter of 2000.
In Italy, we hold a license to provide voice services throughout the entire
country and a license to operate a network. We have also entered into an
interconnection agreement with Telecom Italia. Switches in Rome and Milan are
operational, and we expect to have our remaining switches operational by the end
of the first quarter of 2000.
We have increased our revenues from $0.3 million in 1996 to $ 23.2 million in
1999. As of December 31, 1999, we provided services to approximately 10,600
business customers, an increase from approximately 200 customers at December
31, 1996. The majority of these customers are small- to medium-sized
enterprises. We also provide services to larger companies and organizations
such as BASF Corporation, German Parcel, Commerzbank, Hewlett-Packard, Start
Media Plus, DaimlerChrysler Aerospace Dornier, BMW Financial Services,
Raiffeisenbank, Zuegg, Honeywell, Lauda Air, Modern Times, Amadeus, Lufthansa,
News, Nokia Italia, ERG, Avis, Ferrovie dello Stato (Italian Railways) and the
Italian Parliament. We also have approximately 39,000 residential customers
primarily in Italy.
Our management team consists of individuals with extensive Internet, IT and
telecommunications expertise. Andreas Eder, co-founder and Chief Executive
Officer, previously held various positions at Siemens-Nixdorf Information
Systems and The Boston Consulting Group. Bernd Buchholz, our Executive Vice
President for Sales and Marketing, was previously with Esprit Telecom, Novell
and Symantec. Robert Eckert, our Chief Financial Officer, was previously with
Netsource A/S, Swisscom, and General Electric (USA). In addition, we have
recruited individuals at various managerial levels from leading industry
participants such as AT&T/Unisource, British Telecommunications and Deutsche
Telekom. Our policy is to retain the key executives of the companies we
acquire. To this end, we typically structure our acquisitions to give such
executives an equity participation in the future success of our Company. We
have retained many of the key managers in our acquisitions.
2
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Industry Background
The Internet is a global network of multiple private and public networks that
use standardized communication protocols to communicate with each other. Use of
the Internet has grown rapidly since its initial commercialization in the early
1990s. International Data Corporation ("IDC"), a market research organization,
has estimated that the number of Internet users worldwide will grow from
approximately 68.7 million in 1997 to approximately 319.8 million by the end of
2002, a compound annual rate of 36.0%. Consumers and companies in the United
States have spearheaded the adoption of the Internet. While other regions of
the world have been slower to accept the Internet, its use is becoming a
standard communications tool worldwide.
The Internet has become an important commercial medium and represents a
significant opportunity for businesses to interact in new and different ways
with a large number of customers, employees, suppliers and partners. As use of
the Internet grows, businesses are increasing the breadth and depth of their
Internet product and service offerings. Pioneering Internet-based businesses
have developed Internet products and services in areas such as finance,
insurance, media, tourism, retail and advertising. Other businesses have begun
to use the Internet for an expanding variety of applications, ranging from
corporate publicity and advertising, to sales, distribution, customer service,
employee training and communication with business partners. Increasingly,
Internet operations are becoming mission-critical for many of these
enterprises. To ensure the reliability of their Internet operations,
enterprises are requiring that these operations have performance, scalability
and expert management 24 hours a day, 7 days a week.
Companies generally utilize two types of Internet services: connectivity and
value-added services. Connectivity services provide access to the Internet,
while value-added services consist of products such as web-hosting, VPNs,
security solutions and systems integration that improve the internal and
external operations of a company.
The Internet is also experiencing rapid growth rates in Europe. According to
IDC, the number of Internet users in Europe reached 16.8 million in 1997 and is
expected to reach 82.0 million in 2002. Datamonitor, another market research
organization, estimates that the number of externally hosted commercial
websites in Europe will increase from 221,700 in 1997 to 981,900 in 2000, while
the number of VPNs will expand from 100 in 1997 to 27,900 in 2000. We believe
that the growing numbers of externally hosted websites and VPNs reliably
predict a corresponding growth in Internet traffic. We expect this projected
growth to be fueled by a number of factors, including the large and growing
installed base of advanced personal computers and increased availability of
bandwidth, resulting in faster and cheaper access to the Internet, improvements
in network architectures, increasing numbers of network-enabled applications,
and the emergence of compelling content and commerce-enabling technologies.
Europe lags the United States in terms of total Internet users, Internet
users as a percentage of population, and personal computers ("PCs") with
Internet access. An historical comparison reveals that Europe is between one
and two years behind the United States when the selected indicators are
considered. We expect European Internet usage to follow historical United
States growth rates and achieve current United States levels within one to two
years. The following table provides information about current and projected
Internet usage in Europe and the United States.
<TABLE>
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Europe United States
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1997 2002E 1995 1996 1997 2002E
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<S> <C> <C> <C> <C> <C> <C>
Internet users (millions)........... 16.8 82.0 9.7 23.2 38.7 135.9
Population (millions)............... 386.0 388.4 263.0 265.4 267.9 279.5
Internet users as a percent of
population......................... 4.4% 21.1% 3.7% 8.7% 14.4% 48.6%
PCs with internet access............ 19.7% 57.1% 11.5% 23.8% 36.3% 84.3%
</TABLE>
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Sources: IDC Corporation; population and Internet users as a percent of
population are based upon population figures provided by the United
States Bureau of the Census.
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Internet usage varies significantly between European regions. Northern
European countries generally have a higher level of market penetration and
service usage than countries in Southern Europe, which we believe currently
presents a growth opportunity. The following table summarizes certain
information and estimates about revenues from Internet connectivity and from
Internet hosting and VPNs in European countries.
<TABLE>
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Connectivity Hosting and VPN
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Anticipated Anticipated
1997 2000E Change 1997 2000E Change
($ in millions) ($ in millions) (%) per annum ($ in millions) ($ in millions) (%) per annum
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<S> <C> <C> <C> <C> <C> <C>
Finland................. 17 42 35.2% 1 20 171.4%
France.................. 94 383 59.7% 3 92 213.0%
Germany................. 447 1,084 34.4% 16 184 125.7%
Italy................... 30 169 77.9% 5 50 115.4%
Netherlands............. 28 85 44.8% 6 42 91.3%
Spain................... 35 136 57.2% 2 31 49.3%
Sweden.................. 31 67 29.3% 4 34 104.1%
United Kingdom.......... 154 381 35.2% 16 146 109.0%
Other (*)............... 83 272 48.5% 23 123 74.9%
--- ----- ---- --- --- -----
Total................. 919 2,619 41.8% 76 722 111.8%
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(*) Other includes Austria, Belgium, Ireland, Norway, Portugal and Switzerland.
Source: Datamonitor.
Datamonitor reports that the European corporate Internet connectivity market
consisted of 1.2 million accounts and generated total revenues of $919 million
in 1997. It estimates that corporate connectivity revenues will grow to $2.6
billion in 2000, a compound annual growth rate of 41.8%.
Datamonitor also reports that in 1997, European Internet value-added services
generated revenues of $287 million. It estimates that revenues from value-added
services will increase to $1.7 billion in 2000, a compound annual growth rate
of 80.7%. In 1997, revenues from hosting services and VPNs were $76 million,
26.5% of total European revenues from value-added services. In 2000, they are
expected to be $722 million, 43.2% of such revenues, a compound annual growth
rate of 111.8%.
We consider Germany to be the most important connectivity market in Europe in
terms of revenues, with a highly developed consumer and business on-line
customer base. As the chart above shows, in 1997, the German connectivity
market had revenues of $447 million, 48.6% of total European connectivity
revenues. It is estimated that, in 2000, Germany will generate connectivity
revenues of $1.1 billion, 41.4% of total European connectivity revenues.
Italy currently has a relatively low Internet penetration level. The Internet
connectivity market in Italy is very fragmented, with many small providers. We
expect that connectivity revenues in Italy will grow at one of the fastest
rates in Europe, particularly northern and central Italy, because much of
Italian business is concentrated in that area. We believe our acquisition of
Flashnet will permit us to take advantage of this growth opportunity.
Business Strategy
Our objective is to become a leading provider of communications services and
network-based business solutions to small- to medium-sized enterprises in
Europe. We currently offer a full-service portfolio of advanced communications
products including Internet access and value-added services, as well as
switched voice services. The principal elements of our business strategy are as
follows:
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Target Small- to Medium-Sized Business Enterprises. We focus on small- to
medium-sized enterprises. In Germany, we focus on companies that typically have
revenues between (Euro)25 million and (Euro)500 million. According to
Statistisches Bundesamt, a German government agency, such companies generate
45% of Germany's total corporate revenues. In other countries, the revenues of
small- to medium-sized enterprises as a portion of total corporate revenues
vary. We believe that this customer segment is underserved and has substantial
and increasing communications needs. Small- to medium-sized enterprises
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. We focus in particular on network intensive
industries, such as IT, tourism, retail, finance, government, media and
advertising. For many of these industries, utilization of the Internet has
become essential. In certain markets, we also serve high-end residential
customers.
Initiate Long-Term Relationships with Customers Through Local Coverage and at
an Early Stage. Unlike some of our competitors, we use strong local management
teams to address the needs of our customers. Most of our sales people are based
in regional offices and are supported by specialized technical and commercial
assistance from our offices in Munich, Vienna, Zurich, Rome and Trento. This
strategy allows us to initiate close relationships with our customers at an
early stage of their Internet services requirements, engage in strategic
discussions with senior management about their communications requirements,
participate in the design of their systems, services and solutions, and
establish the basis for long-term relationships at different levels of our
customers' organizations. We are then in a position to provide our customers
with additional services as their requirements increase or change over time.
This also enables us to offer additional solutions to our customers without
having to compete primarily on price.
Develop a Total Communications Offering. We currently offer both Internet
connectivity services and modular Internet business solutions to our customers.
Our modular solutions include web-hosting and -housing, VPNs, security
solutions, electronic commerce solutions and Intranet and workflow solutions.
As technology evolves, we intend to broaden our product offering to include
additional services, solutions and innovations that have proven reliable and
effective. In June 1999, we started offering voice services. Our ability to
offer voice services will allow us to provide one-stop shopping for integrated
voice and data solutions. We believe IP technology and IP applications will be
the primary platform and interface for business data and voice communications
in the future.
Expand Our Sales Channels. We are currently pursuing growth opportunities
through various sales channels. These include trained direct sales
representatives with strong technical backgrounds, an extensive reseller
program and marketing alliances with technology leaders like Hewlett-Packard,
Microsoft, Network Associates, and Sun Microsystems. We are expanding our
direct sales force and regional offices to increase our local coverage. We
intend to expand our reseller and referral arrangements to increase sales of
our basic connectivity services, and enhance our marketing alliances to obtain
more potential customer contacts.
Control Our Network. We consider it strategically important to control and
operate our own network infrastructure. This will enable us to:
(1)maximize revenues by offering total communications services, including
broad band and voice services;
(2)achieve the highest levels of service quality and reliability; and
(3)reduce transmission costs.
This involves:
. optimizing the configuration of our IP network, by concentrating
international access at a few select locations where the cost of global
access can be minimized; concentrating network planning and management
in one central location; and planning the network's redundancy on a pan-
European basis rather than on a local basis;
. establishing up to six large-scale data centers of up to 3,000 square
meters and five smaller data centers of up to 500 square meters to enhance
our co-location and housing service offering;
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. installing eight carrier grade digital circuit switches in key cities;
and
. leasing transmission capacity on a long-term basis, acquiring backbone
capacity, or constructing our own infrastructure in selected locations,
to transport high bandwidth data and voice services over all available
transmission protocols.
Accelerate Growth in Europe Through Targeted Acquisitions. We will seek to
acquire additional Internet-related companies to strengthen our presence in
other European countries, while continuing to grow internally. We look for
strategically and culturally compatible companies to add to our strong
management, enhance our technical expertise, and enhance our customer base in
our current coverage area and bordering countries.
Products and Services
We currently offer a comprehensive range of Internet connectivity services,
network solutions and business solutions to enterprises in Germany, Austria,
Italy, and Switzerland and have started to offer voice services.
Connectivity Services
We offer a variety of connectivity solutions, including Internet access,
third party software and hardware implementation and configuration services, in
bundled and unbundled packages. We offer dedicated line connectivity at speeds
ranging from 64 Kbps to multiples of 2 Mbps. We offer Internet connectivity to
our corporate customers through dedicated lines at our 56 directly owned POPs.
We also provide both analog and ISDN dial-in Internet access throughout
Germany, Italy and Switzerland as well as throughout most of Austria. In
Germany, Italy and Switzerland our dial-in service allows customers to dial
into one nation-wide number to access the Internet at local telephone rates.
Our dial-in services in Austria utilize seven dial-in access nodes, each of
which has its own dial-in number. Currently, we offer our dial-in service
through third party telephone networks. As we introduce our interconnection and
switching capabilities, we plan to offer dial-in access at a cost approximating
that of a local call and also to charge the customer for telephone minutes.
Outside the countries in which we operate, we offer roaming at local call rates
in cooperation with more than 350 international ISPs and telecommunications
companies which have joined the Global Reach Internet Connection.
We offer third-party software products such as electronic mail, news and
other solutions that permit customers to navigate and utilize the Internet and
give remote access to mobile personnel operating outside traditional office
settings. We also provide router services such as router renting,
configuration, supervision and maintenance. Overall, we are able to offer
customers a full portfolio of services with managed connectivity. Our principal
connectivity services include:
<TABLE>
<CAPTION>
Product Name Characteristics
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<S> <C>
Personal Connect, Office Single user dial-up services, with dynamic IP address and
Connect, Call & Surf, access speeds of up to 64 Kbps. Selection of usage-based
Call-to-Intranet or flat rate tariffs, including dial-in telephony costs
(except Personal Connect and Office Connect).
Business Connect, Call & Multi user dial-up service for workgroups, with multiple
Surf for Workgroups, IP addresses and access speeds of up to 128 Kbps.
Call-to-Intranet for Services provided via Local Area Networks ("LANs") with
Workgroups Ascend Pipeline 50/75 routers. Selection of usage-based
or flat rate tariffs, including dial-in telephony costs
(except Business Connect).
Business Line, Campus Leased line service for workgroups, with multiple IP
Line addresses and access speeds of up to 2 Mbps. Service
provided via LANs and Cisco 16xx routers. Selection of
usage-based and flat rate tariffs.
</TABLE>
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Network Solutions
Virtual Private Networks. Many companies today have private data
communication networks, which are often referred to as corporate networks.
These networks are used to transfer proprietary data between offices and use
relatively expensive leased lines to connect various locations. Our VPNs
utilize the Internet as a cost effective alternative to corporate networks to
provide secure transmission of data and voice with the added benefit of secure
remote access. In addition, our VPN products are often the basis for Intranet
services (connectivity of branch offices, teleworkers and mobile workforce) and
Extranet services (connectivity of business partners, suppliers and customers)
services. We offer these products in conjunction with additional hardware and
software solutions, as well as continuous operation and maintenance, customer
care and billing services. Flashnet offers a product called ALL IN ONE, an all
inclusive solution including combinations of data transmission, Internet access
and voice-over IP, representing the ideal platform to build VPNs for customers.
Security Solutions. Corporate networks and systems need to be protected
against unauthorized access and use. We currently offer a comprehensive set of
third-party supplied security products, including encryption, firewall and
authentication packages. We add value to this software by providing services
such as security consulting, installation support, on-the-job training of
customers' system administrators, hotline support (24 hours a day, 7 days a
week) and security audits. To assure the security of communication and business
transactions between users of networks, we integrate state-of-the-art software,
technologies and standards. We offer these security solutions as stand-alone
products or as part of broader solutions, such as VPNs or Intranets. Our
principal security solutions include:
<TABLE>
<CAPTION>
Product Name Characteristics
------------ ---------------
<S> <C>
Firewall 1, Gauntlet Third-party firewall software tailored to customer
requirements.
ACE / Server, SecurID Third-party authentication hardware and software.
Token
Idea@Exchange--Secure Third-party software for encryption of electronic mail
Messaging traffic tailored to customer requirements.
Business Solutions
Co-Location. We offer co-location solutions to customers who have the
resources to manage their own servers and websites and who prefer not to share
a server with others. Customers receive the benefits of having their servers
housed in one of our data centers, with full-time connection to the Internet,
direct access to our high-speed network, uninterrupted power supply, regular
back-up and monitoring and technical support 24 hours a day, seven days a week.
Our principal co-location services include:
<CAPTION>
Product Name Characteristics
------------ ---------------
<S> <C>
Server Housing Flexible service offering ranging from simple co-location
to dedicated ports and back-up facilities.
Rent-a-Server Rental of various high-end server types.
</TABLE>
Application and Website Hosting. We offer shared server application and
website hosting services, which permit corporations to market themselves and
their products on the Internet without having to invest in independent
technology infrastructure and operations staff. Such customers receive
sufficient bandwidth to meet their needs and the benefits of having their
systems housed in one of our continuously maintained data centers. Applications
on our servers, which our customers can access, include shop and mall systems,
payment systems, publishing systems and video conferencing.
Electronic Commerce. Electronic commerce is the execution of commercial
transactions on the Internet. We design and implement dedicated electronic
commerce systems or any component part which a customer may require, such as
shop or mall, credit verification and payment handling verification. These
systems are
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based on our electronic commerce platform which integrates systems and
technologies of third-party vendors, such as Brokat, Hewlett-Packard,
Intershop, Microsoft, SAP, Sun Microsystems, VeriFone and others. For customers
reluctant to undertake an investment in a proprietary electronic commerce
solution, we maintain our own electronic commerce system, which we provide on a
lease basis. Through working arrangements with content providers and media
companies, we also assist customers utilizing electronic commerce for retail
and wholesale sales to targeted groups on the Internet. This enables a customer
to establish a distribution channel for products or a channel for purchasing,
and to determine whether to invest in a dedicated system. Our principal
electronic commerce services include:
<TABLE>
<CAPTION>
Product Name Characteristics
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<S> <C>
Online Shopping-- Online shopping site hosted by Cybernet on a low cost
Cybernet Shop Hosting monthly rental basis, which is based on shop software
from Intershop and Beans, among others. Administration is
conducted via Internet.
Online Shopping-- Full license online shopping customized by Cybernet,
Cybernet Shop License based on Intershop, Microsoft Site Server and Openshop,
Model among others. Integration of an inventory control system
is possible.
Online Shopping-- Complex shop or mall applications, tailored to customer
Cybernet Shop and Mall requirements. Integration of an inventory control system
and/or special modules (e.g., customer retention) is
possible.
Imperia Website management system which facilitates the
administration and creation of new websites.
Digital Order Business-to-business system for the digital integration
of procurement processes, hosted on a Cybernet platform.
Auction Server Hosted module for on-line live auctions, providing
different auction rules and methods.
PictureBase Hosted on-line database to present, sell and archive
digital pictures through the Internet. Integration of
electronic payment is possible.
</TABLE>
Intranet and Workflow Solutions. Internet technologies can be utilized in a
customers' internal information technology system. We offer Intranet and
workflow solutions that enhance the capabilities, efficiencies and
functionality of our customers' systems, speed the development of new
applications, reduce the cost of developing and maintaining applications and
allow the integration of existing systems and databases. Thus, instead of
replacing their systems, customers can preserve their investment and upgrade
their systems with our enhanced solutions. Our Intranet platform integrates
basic dial-in and leased line connectivity with IP-based VPNs and a
communications infrastructure that includes facsimile, voice mail, electronic
mail and enhanced security solutions. Our principal Intranet and workflow
solutions include:
<TABLE>
<CAPTION>
Product Name Characteristics
------------ ---------------
<S> <C>
Faxination--Unified Third-party hardware and software which transforms
Messaging Server messages and documents from one medium into another
(e.g., fax to electronic mail, electronic mail to voice).
Service accessible via PSTN line.
Teleworkx Bundle of Cybernet and third-party hardware and software
targeted at teleworkers.
Intranet Access Control Third-party software which grants secure and controlled
access for teleworkers to the Intranet.
</TABLE>
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Voice Services
We offer switched voice services to our IP-based customers, as well as value-
added and integrated solutions combining switched voice solutions and IP
solutions. We also envision offering wholesale services to other carriers on a
case-by-case basis.
In Italy, we offer ALL IN ONE, an all-inclusive solution which combines data
transmission, Internet access and voice-over IP. This is an ideal platform for
building VPNs.
Initially, pending completion of our own interconnect arrangements, these
services are offered in co-operation with a third-party telecommunications
operator. As we complete the implementation of our own voice switching
capabilities and leased line network, we anticipate capturing more dial-up
revenues and reducing our transmission costs.
Sales and Marketing
We believe that our sales and marketing program enables us to effectively
market our comprehensive range of products and services to corporate customers.
We tailor our marketing approach as follows:
. to our principal target market of medium-sized corporations, we offer
customized solutions at competitive prices by designing systems that
integrate modular elements of proven functionality, effectiveness and
reliability;
. to some larger customers with more specialized needs, we offer more
sophisticated technical services and individualized solutions; and
. to customers with basic service needs, we provide services which require
minimal customization and installation, such as Internet connectivity.
Direct Sales. At December 31, 1999, our direct sales force consisted of 119
sales representatives located in 19 offices in 17 cities, Frankfurt,
Dusseldorf, Berlin, Munich, Stuttgart, Hamburg, Vienna, Trento, Rome, Milan,
Bologna, Venice, Florence, Padua, Verona, Zurich and Lausanne. We are in the
process of expanding that direct sales force and opening additional sales
offices. We are also increasing our local presence and enhancing client
coverage by shifting more of our direct sales representatives from our
headquarters to our regional offices, where they will be closer to customers.
Our sales force has a strong technical background and a detailed
understanding of the differing needs of the customers in the regions it serves.
It is knowledgeable about our main targeted industry segments, particularly IT,
tourism, retail, finance, government, media and advertising.
Channel Sales and Partnerships. Our channel sales group develops
relationships with resellers of our products and services and maintains
marketing alliances. In Germany, our three-person channel sales group works
with a network of more than 100 resellers, primarily software suppliers,
systems integrators and ISPs, through whom we offer basic services such as
Internet connectivity that can be delivered with a minimum of customization and
installation. Direct sales people in Austria and Italy also develop reseller
relationships. In addition, we utilize our reseller relationships to gain
direct access to customers for the sale of additional products and services.
Our marketing alliances with a select group of companies provide a strong
mutual referral program, which we believe will enable us to acquire new
customers cost effectively, benefit from association with well-known partners
and increase our brand awareness. We currently have marketing alliances with
Hewlett-Packard, Microsoft, Network Associates, Sun Microsystems and others.
We intend to conduct our operations and marketing under the Cybernet brand
name, although we use subsidiary brand names for transition periods after
acquisitions. We have undertaken public relations efforts to
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raise the awareness and visibility of the Cybernet name in our target markets.
We present ourselves as "The Communication People," providing connectivity,
value-added solutions and superior customer service.
Technology and Network Operations
Overview
The IP network of an ISP consists of a number of access nodes linked by owned
or leased lines. Access nodes are used to provide our customers with access to
our network either through dedicated lines or regular telephone lines (dial-in
access). The IP traffic generated at each access node is carried through our
backbone network to points of traffic exchange, where traffic is exchanged with
other providers' networks. These points of traffic exchange can be of two
types: peering points or transit points. Peering points provide for the free
exchange of traffic pursuant to agreements between ISPs. Transit points provide
global connectivity which we purchase from international carriers.
IP Network
We currently operate a geographically distributed IP based network in six
countries (Germany, Switzerland, Austria, Italy, Hungary and Luxembourg)
consisting of network nodes equipped primarily with Cisco and Ascend routers
connected to a redundant high-performance backbone infrastructure. The network
nodes are connected primarily by leased lines and include 15 POPs in Germany,
23 POPs in Italy, 6 POPs in Austria and 10 POPs in Switzerland, and a single
POP in Luxembourg and Budapest. We lease our lines from major
telecommunications carriers and backbone operators, such as Deutsche Telekom,
Telecom Italia, Swisscom, Telekom Austria and GTS. We also operate two
microwave links that connect Munich with Innsbruck and the Italian border at
speeds of 34 Mbps. Our network nodes are interconnected at E-1 to DS3 speeds.
We offer our dedicated line customers direct access to our POPs at bandwidths
ranging from 64 kbps to DS3. We have at present approximately 480 customers
using dedicated line access. We believe our network is recognized as one of
Germany's most extensive and highest quality Internet networks. We expect to
expand our network to include POPs in additional cities in Germany, and
Switzerland. We intend to acquire or enter into long-term leases for backbone
capacity or construct our own infrastructure in selected locations in order to
transport high bandwidth data and voice services over all available
transmission protocols, at lower costs than using leased lines.
Our IP network is designed to offer reliability, scalability and high
transmission speed to our customers. We achieve reliability by operating a
fault tolerant network through our redundant backbone in Germany, Austria,
Switzerland and Northern Italy, which is based on a hierarchical multiple ring
design. We include back-up routers in our access nodes to attain further
redundancy, and thereby minimize the risk of single points of failure. To
ensure constant worldwide connectivity, we use multiple global access
providers. In Italy, our extensive network is based on a star design and
achieves redundancy through back-up leased lines. We derive scalability from a
hierarchical multi-layer architecture that offers the opportunity to add
network locations without major infrastructure changes. We offer transmission
capacities ranging from 64 kbps to DS3 and intend to upgrade parts of our
network to STM-1 capacity in the near future. In addition, our network includes
cache servers in the major POPs to reduce the delivery time of regularly
requested information and reduce bandwidth needs for international traffic.
We offer dial-in Internet access through dial-in nodes with analog and ISDN
ports that provide coverage throughout Germany, Italy and Switzerland and
throughout most of Austria. In Germany, our BELT system enables us to offer
local dial-in connections to our customers throughout the country with a single
dial-in number. We have achieved this by concentrating multiple dial-in access
nodes into four larger access points called virtual POPs, using the PSTN to
aggregate traffic. We expect that these virtual POPs will generate operating
efficiencies, because there will be fewer locations we will be required to
service. We already offer local dial-in access through a single dial-in number
in Switzerland and Italy. In Austria, our dial-in customers can access our
network through seven telephone numbers.
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Peering and Transit Relationships. We have entered into peering agreements
with major ISPs in each of the countries in which we operate. We have peering
agreements with more than 25 ISPs in Germany, Austria, Italy and Switzerland.
Our main peering points are in Frankfurt, Munich, Milan, Rome, Vienna and
Zurich. We also peer directly through leased lines connected to some of our
peering partners, such as Deutsche Telekom. We plan to enter into additional
peering agreements in order to establish a direct presence in most European
peering centers and to reduce transit costs. We expect to connect to peering
points in France, Belgium, The Netherlands and the United Kingdom. Recently,
some ISPs have restricted peering agreements by implementing restrictive
criteria for small ISPs. We believe that our size and growth prospects will
allow us to maintain and extend our existing agreements.
We have entered into global transit agreements pursuant to which we have
purchased the right to route traffic across the networks maintained by Ebone,
Global One, Swisscom, AT&T Corporation/Unisource and MCI Worldcom. This
provides our customers with the ability to communicate with those European
countries in which we are not present, and with the rest of the world.
Frankfurt, Munich, Vienna and Zurich currently serve as our global access
points.
Network Management
The effective functioning of our network is one of the key elements of our
operations. We have developed network management capabilities to offer reliable
and cost efficient communications services and to deliver high quality services
to our customers. Our Network Operations Centers ("NOCs") in Munich, Vienna,
Zurich and Trento, monitor the performance of our network and our international
links 24 hours a day and seven days a week. Our NOCs have the capability to
identify network problems on a real-time basis. Our technical support groups
are equipped to take the necessary corrective measures quickly. We intend to
centralize our NOCs in a single facility in Munich.
Data Centers
We house servers in our data centers that are linked to our network. We
currently operate data centers in Munich, Frankfurt, Rome and Milan. Our main
data center in Munich has a capacity of 330 square meters for co-location and
230 square meters for electronic commerce. We intend to establish additional
data centers in Hamburg, Vienna, Trento, Padua, and Zurich. These data centers
will be co-located with certain of our IP nodes (POPs) and switching facilities.
We have already signed leases for the facilities in Hamburg, Frankfurt, Trento,
Milan, Rome and Munich. Each of these facilities will be between 300 and
approximately 2,000 square meters in size. We intend to secure an additional
1000 square meters of space at our Milan data center. We are designing these
facilities to house transmission, IP routing and switching equipment, and to
offer hosting, co-location, facilities management and interconnection services
to our corporate customers, ISPs and telecommunications carriers. Each facility
will offer uninterruptible power supply and back-up generators, air-
conditioning, constant monitoring and physical security to ensure a high quality
of service with minimal interruptions.
Switched Voice
We have added digital circuit switching capabilities to our network. Until we
finalize the installation of our switches and negotiate interconnection
agreements, we are able to offer switched voice services using a third-party
provider. We are installing carrier grade Nortel DMS-100 voice switches in
Germany, Italy, Austria and Switzerland. In Germany, we have obtained a class 4
license, which is necessary to offer telephony services. We expect to
interconnect with Deutsche Telekom at multiple points of interconnection,
thereby minimizing our interconnection costs in the German market. Cybernet
Italy has a telephony license to offer voice services throughout Italy and has
entered into an interconnection agreement with Telecom Italia. In Austria we
have received a national license to offer switched services and we have applied
for a similar license in Switzerland. We have started the process of entering
into interconnection agreements in Switzerland and Austria. We have installed
an integrated billing system through which we expect to be able to provide a
single bill to our German customers for voice and IP services. Over time, we
plan to centralize our billing and provide integrated bills to the customers in
all of the countries we service.
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<PAGE>
Customers
Our customers include businesses in IT, tourism, service, retail, finance,
government, media and advertising and manufacturing. Following is a list of
certain business groups in each of seven selected industry groups to which we
provided services and solutions as of December 31, 1999.
* Information Technology * Finance
Hewlett-Packard Julius Bar
Microsoft Austria AXA Nordstern Colonia
CompuNet HypoVereinsbank
Cyberlab Interactive BMW Leasing
Hogatex Commerzbank
Info AG GE Capital Finance
InstallShield Software VR--Leasing
Centro Informatica Raiffeisen
Prism Software Engineering
CompuServe Interactive Service * Government
Internet Consulting Federal Y2K Office
Swissdata Regulierungsbehoerde fur
PrimaCom Telekommunikation und Post
Bundesdruckerei
* Travel and Tourism Ministerium fur Wissenschaft
Frosch Touristik Stadtwerke Karlsruhe
START AMADEUS
START Media Plus * Media and Advertising
Lauda Air Finanzen-Verlag
Media Consulting
* Retail News Magazine
Eddie Bauer ORF Modern Times O Werbung
F.W. Woolworth Co.
Suzuki Auto * Manufacturing
Tengelmann Bayer
Wrigley Daimler Chrysler Aerospace
Zuegg Hugo Matthaes Druckerei
Customer Service
We provide high quality customer service and support in order to enhance the
strength of our brand name, increase customer retention rates and generate new
customer referrals. Our customer services are organized into technical support
and call center groups.
Our technical support group consists of technicians in our Munich NOC and
field engineers. The NOC-based technicians respond to customer requests 24
hours a day, seven days a week, diagnosing customers'
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<PAGE>
problems and providing immediate assistance. We believe that our centralized
technical support operations improve the quality and consistency of our
support, achieve scalability in our resources and benefit from economies of
scale. Our field engineers are available to visit our customers' premises, as
necessary.
Our call center provides complete information and specifications about each
of our products and advises our customers on service and solutions related
questions.
We have purchased and installed and are in the process of implementing an
integrated billing system for Internet and switched voice services and are in
the process of introducing this new system to our customers. We have licensed
the Kenan billing platform and have adapted it to our requirements.
Implementation of this system caused some delay in our processing of customer
invoices in the first quarter of 1999 and we are still experiencing some
problems with implementation. Kenan, a subsidiary of Lucent Technologies, is a
leading provider of billing solutions to the telecommunications industry.
Initially, this system will allow us to provide a single bill to our German
customers for all the different services they are purchasing from us, thereby
simplifying their internal operations and reducing our costs. We intend to
adopt the use of this integrated billing system on a Company-wide basis and to
manage it from our central offices in Munich.
Acquisitions
Since we began business in 1996, we have acquired seven companies through
which we have expanded our technical capabilities, attracted additional talent,
entered new markets and increased our customer base:
. Cybernet E-Commerce. In September 1997, we acquired 100% of Artwise
which was later renamed Cybernet E-Commerce, a German company which
provided us with expertise in Intranet messaging and workflow solutions
and established our presence in the Ulm region of Germany;
. Eclipse. In December 1997, we acquired 66% and in 1999 we acquired the
remaining 34% of Eclipse, an ISP based in Trento, Italy, through which
we established our presence in Northern Italy;
. Open:Net. In August 1998, we acquired 100% of Open:Net, an ISP through
which we increased our penetration of the southwest German market
serviced by Artwise;
. Vianet. In December 1998, we acquired 100% of Vianet, a leading Austrian
ISP through which we entered the Austrian market and significantly
increased our customer base;
. Sunweb. In May 1999, we acquired 51% and an option to purchase the
remaining 49% of Sunweb, through which we established a presence in
Switzerland and acquired substantial additional expertise in switched
voice services; and
. Flashnet. In June 1999, we acquired 100% of Flashnet, a leading Italian
ISP through which we gained access to all major business centers in
Italy. We have combined Eclipse and Flashnet into a single operation
which we call Cybernet Italy.
. Novento. In October 1999, we acquired 51% and in December we acquired
the remaining 49% of Novento Telecom AG and its sister organization,
Multicall Telefonmarketing AG, which are German direct marketing
organizations for communications services through which we expanded our
sales capabilities and acquired additional sales and marketing
expertise.
Competition
The business of providing Internet connectivity, services and solutions is
highly competitive and there are no substantial barriers to entry. We believe
that competition will intensify in the future and our ability to successfully
compete depends on a number of factors including: market presence; the
capacity, reliability and security of our network; the pricing structure of our
services; our ability to adapt our products and services to new technological
developments; and principal market and economic trends. Our competitors consist
of ISPs, telecommunications carrier, and system integrators/computer
manufacturers. Because few of our competitors in any of these groups provide
all of the products, services and solutions that we provide, we believe that we
are well positioned to compete in our market.
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<PAGE>
ISPs
We strive to differentiate ourselves from other ISPs by offering a full range
of services and solutions which business customers are likely to require in
connection with their use of the Internet. Most of our ISP competitors offer
fewer services and focus on connectivity. However, some competitor ISPs have
greater resources and larger communications and network infrastructures than we
do. In Germany, these competitors include: European Computer-Industry Research
Centre; Nacamar; PSINet; UUNet Technologies; and Xlink. In Austria, they
include Cybertron, EUnet Multimedia Network Services and Netway Austria; and in
Italy, they include I-Net.
Telecommunications carriers
Many telecommunications carriers are large organizations and do not provide
Internet services as their main product. With regard to Internet services, we
compete with these organizations by focusing on the Internet and offering
flexible decision making and execution, responsive customer service, recognized
technical expertise, and high quality products. Our main carrier competitors in
Germany are: Mannesmann Arcor, Deutsche Telekom and Viag Interkom. In Austria,
our principal carrier competitors are Telekom Austria, United Telecom and
Tele.ring. And in Italy, they are Infostrada, Telecom Italia and Wind.
In offering voice services, we compete directly with carriers, including
large carriers such as Mannesman Arcor, Deutsche Telekom and Viag Interkom in
that market segment. Most of these competitors are significantly larger and
have substantially greater market presence, financial, technical, operational,
marketing and other resources and experience than we do. In addition, carriers
have greater resources to engage in various forms of price competition, such as
bundling Internet services with other telecommunications services, thereby
offering lower prices for either telecommunications or Internet services.
Increased price competition could force us to reduce our prices, resulting in
lower profit margins. In addition, increased competition for new customers
could result in increased sales and marketing expenses and related customer
acquisition costs and could materially adversely affect our profitability.
Major System Integrators and Computer Manufacturers
Major systems integrators and computer manufacturers, such as Andersen
Consulting and IBM, provide IT solutions to their clients and have expanded
their offerings to include Internet-related products and solutions. Many of
these companies have established customer relationships and recognized
technical expertise, and some have significantly greater resources than we
have. However, most do not offer connectivity services and solutions. We
compete with these companies by offering a more complete Internet-related
service and product line than they offer. In fact, some system integrators and
computer manufacturers utilize our connectivity services and solutions to
complement their own lines of products and services.
Research and Development
Our future success will depend, in part, on our ability to offer services
that incorporate leading technology, address the increasingly sophisticated and
varied needs of current and prospective customers and respond to technological
advances and emerging industry standards and practices on a timely and cost
effective basis. The market for our services is characterized by rapidly
changing and unproven technology, evolving industry standards, changes in
customer needs, emerging competition and frequent introductions of new
services. We cannot assure you that future advances in technology will be
beneficial to, or compatible with, our business or that we will be able to
incorporate into our business such advances on a cost effective and timely
basis. Moreover, technological advances may have the effect of encouraging
certain of our current or future customers to rely on in-house personnel and
equipment to furnish the services we currently provide. In addition, keeping
pace with technological advances may require substantial expenditures and lead
time.
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Intellectual Property Rights
We rely on a combination of copyright, service mark and trade secret laws and
contractual restrictions to establish and protect certain proprietary rights in
our products and services. In this regard, we have applied to the EU and
received a trademark registration for the name "Cybernet" used in conjunction
with our logo. We have also applied for, but have not yet received a trademark
registration for the name "Cybernet." We have no patented technology that would
preclude or inhibit competitors from entering our market. We have entered into
confidentiality and invention assignment agreements with our employees, and
non-disclosure agreements with our consultants, vendors, suppliers,
distributors and appropriate customers in order to limit access to and
disclosure of our technology, documentation and other proprietary information.
We cannot assure you that these contractual arrangements or the other steps we
have taken to protect our intellectual property will prove sufficient to
prevent misappropriation of our technology or to deter independent third-party
development of similar technologies. The laws of the countries in which we
operate may not protect our products, services or intellectual property rights
to the same extent as do the laws of the United States. To date, we have not
been notified that our products are claimed to infringe the proprietary rights
of third parties, but we cannot assure you that third parties will not claim
infringement by us with respect to current or future products. We expect that
participants in our markets will be increasingly subject to infringement claims
as the number of products and competitors in our industry segment grows. Any
such claim, whether meritorious or not, could be time consuming, result in
costly litigation, cause product installation delays or require us to enter
into royalty or licensing agreements. Such royalty or licensing agreements
might not be available on terms acceptable to us, or at all. As a result, any
such claim could materially adversely affect our business, results of
operations and financial condition.
Regulation
Regulatory Environment in the Internet-Related Markets of the Company
Our Internet operations are not currently subject to direct regulation by
governmental agencies in the countries in which we operate (other than
regulations applicable to businesses generally). In 1997, Germany enacted the
Information and Communication Services Act which releases Internet access
providers from liability for third-party content in certain circumstances and
establishes a legal framework for Internet commerce with respect to the
identification of service providers, data privacy and price indications on the
Internet. A number of other legislative and regulatory proposals are under
consideration with respect to Internet user privacy, infringement, pricing,
quality of products and services and intellectual property ownership. There is
also controversy regarding the application of value-added taxes in the Internet
environment. The adoption of new laws could materially adversely affect our
business, result of operations and financial condition.
Regulation and Regulatory Authorities in the Telecommunications Market
Effective January 1, 1998, all of the countries in which we operate abolished
the monopoly rights of incumbent operators to provide fixed-line voice
telephone services to the public. As a result, competitive telecommunications
markets are now developing for long distance and international telephone
services. Competition for local telephone service has been much slower to
develop.
All of the countries in which we operate have enacted legislation and
regulations and have established regulatory authorities for the
telecommunications industry. The purpose of this regulation is to ensure:
(1)a wide range of high-quality, telecommunications services to private
individuals and businesses;
(2)reliable services to the entire population at affordable prices;
(3)the absence of interference with personal and intellectual property
rights in telecommunications traffic; and
(4)effective competition in the provision of telecommunications services
(5)access to the dominant operator's network on non-discriminatory
terms.
In each of the countries in which we operate, providing telecommunications
services and related facilities requires a license. The regulatory authorities
have various powers, including the authority to grant and revoke licenses,
assign and supervise frequencies, impose universal service obligations, control
network access and
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interconnection, and approve or review the tariffs and tariff-related general
business terms and conditions of market-dominant providers.
In the countries in which we operate, different classes of licenses are
required for different services offered and facilities operated. We have
obtained a "class 4 license" (voice telephone services based upon self-operated
telecommunications networks) in Germany. Geographically this license covers the
entire Federal Republic of Germany and is valid indefinitely. We have also
obtained a license to provide public telephony service and to operate our own
infrastructure in Austria and have applied for a similar license in
Switzerland. In Italy, we have a license which permits us to offer voice
telephone services in the entire country. We have also obtained a "class 3
license" in Germany which permits us to operate cables, radio links and other
telecommunications-related infrastructure throughout Germany.
In the switched voice telephony market, our ability to provide viable
services depends in significant part upon our ability to secure and maintain
interconnection agreements with the incumbent operators and other facilities-
based providers in our target markets. We have entered into interconnection
agreements with Deutsche Telekom in Germany and Telecom Italia in Italy. We are
negotiating for a similar agreement in Austria. We need interconnection to
complete calls that originate on our network but terminate outside our network
or originate elsewhere and terminate on our network. The cost of
interconnecting is a critical factor in determining whether services on our
network can be offered on a competitive basis.
Each of the countries in which we have operations has market-dominant
providers which are legally required to offer essential services such as
transmission, switching and operational interface to networks such as the one
we plan. Market-dominant operators of telecommunications facilities are
obligated to provide interconnection on a non-discriminatory basis and at cost-
related prices. If the terms and conditions of obligatory interconnection
cannot be agreed upon, the regulatory regimes of the countries in which we
operate provide for administrative proceedings which permit regulatory
authorities to set the conditions for interconnection.
Subscriber Line Charges
We rely upon Deutsche Telekom for leased lines so as to obtain direct access
to customers. Although the rates which Deutsche Telekom may charge for such
lines have been established by the Regulatory Authority
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and the ruling of the Regulatory Authority purports to establish rates which
will be in effect until March 31, 2001, the ruling has been appealed to a
court. Any possible increase in these rates of the rental charge could impede
our business development.
Internet Access Charges
T-Online, an ISP owned by Deutsche Telekom, has announced its intention to
charge Internet subscribers a flat rate that is significantly lower than the
rate charged by competitor ISPs. The District Court (Landgericht) Hamburg
enjoined T-Online from offering this rate because the telecommunications law
forbids market dominant providers from bundling services. However, this court
decision is not final and we cannot anticipate the final outcome of this issue.
If T-Online is permitted to charge the proposed rate, our ability to market
Internet access services might be adversely affected.
Employees
At the end of December 1999, we had a total of approximately 426 employees
organized as follows: 145 in sales and marketing, 198 in technical and
operational personnel and 83 in administration. There are no collective
bargaining agreements in effect. We believe that relations with our employees
are good.
Item 2. Properties
We lease the real estate where our business offices and certain nodes
containing servers, routers and other equipment are located. Our largest
leasehold property is our main office in Munich with approximately 2,000 square
meters. Other leasehold properties for our regional offices are located in Ulm,
Neu-Ulm, Frankfurt, Dusseldorf, Berlin, Munich, Stuttgart, Hamburg, Vienna,
Trento, Rome, Milan, Florence, Padua, Verona, Zurich, Lausanne and an
administrative office is located in Washington, D.C. In addition, we lease
approximately 3,500 square meters for our planned facility in Frankfurt, 2,500
square meters for our planned facility in Hamburg and 600 square meters for our
new Trento Data Center, and are planning to lease additional space in
Dusseldorf, Munich and Vienna.
We believe that none of these leases is critical to operations and that
relocation of any of the leased premises would be feasible on acceptable terms,
if necessary.
We lease dedicated telephone lines from telecommunications carriers and
resellers. Assets relating to our operations, including servers and routers,
are leased or owned.
Item 3. Legal Proceedings
In December 1998, we applied for and received a class 4 telecommunications
license from Germany's Regulierungsbehoerde fur Telekommunikation und Post. The
fee for this license was DM 3,000,000. The EU regulations set the maximum fee
that can be charged at the actual cost incurred by a government agency to
administer its regulations. We filed an action in a German court to recover a
portion of the fee paid for our license because we believe the fee charged
exceeded the amount chargeable under EC regulations in effect in 1998 and
prevailed in that action in the court of first instance. The decision is
subject to appeal and it is not possible to predict the ultimate outcome of our
action.
We are involved in several other legal proceedings, none of which we believe
to be material and if adversely determined, we believe none would have a
material adverse effect upon our business, financial condition or results of
operations.
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Item 4. Submission of Matters To a Vote of Security-Holders
At a special meeting held on November 16, 1998, shareholder action was
taken by the sole existing shareholder of the Company to approve the merger with
Cybernet Internet Services International, Inc., a Utah corporation, and the
adoption of our 1998 Stock Incentive Plan and 1998 Outside Director Stock Option
Plan.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Price Range Of Common Stock
Our common stock is traded on the OTC Bulletin Board under the symbol "ZNET"
and on the Neuer Markt of the Frankfurt Stock Exchange under the Symbol "CYN."
Our common stock also trades on the Freiverkehr of the Berlin and Munich Stock
Exchanges under the securities identification number WP-Kenn-Nr. 906 623. Our
principal foreign trading market is the Neuer Markt. As of August 2, 1999, the
Company had 169 registered stockholders of record. The closing price of the
common stock on the OTC Bulletin Board and the Neuer Markt on March 13, 2000
was $13.00 per share and (Euro)14.30 per share, respectively.
The following tables set forth for the periods indicated the high and low bid
prices for the common stock as reported each quarterly period in 1997 and 1998
and each monthly period in 1999 on the OTC Bulletin Board and the Neuer Markt.
Prices on the OTC Bulletin are reported in The NASDAQ Trading and Marketing
Services' Trading Activity Reports, Trade and Quote Summary. Prices on the
Neuer Markt are reported for trades on the electronic trading system of
Deutsche Borse A.G. The prices are inter-dealer prices, do not include retail
mark up, mark down or commission and may not necessarily represent actual
transactions.
OTC BULLETIN BOARD
<TABLE>
<CAPTION>
High Low
1997 ------- --------
<S> <C> <C>
Third Quarter(/1/)............................ $11.250 $ 9.310
Fourth Quarter................................ $16.250 $ 7.750
<CAPTION>
High Low
1998 ------- --------
<S> <C> <C>
First Quarter................................. $34.500 $11.500
Second Quarter................................ $28.750 $20.000
Third Quarter................................. $29.875 $18.000
Fourth Quarter................................ $37.250 $13.000
<CAPTION>
High Low
1999 ------- -------
<S> <C> <C>
January....................................... $47.000 $29.625
February...................................... $43.875 $33.500
March......................................... $36.000 $26.500
April......................................... $27.750 $23.000
May........................................... $24.000 $20.000
June.......................................... $20.000 $16.000
July.......................................... $21.750 $14.500
August........................................ $18.000 $14.000
September..................................... $20.875 $14.250
October....................................... $16.000 $13.750
November...................................... $15,500 $8.1250
December...................................... $12.000 $8.5075
<CAPTION>
High Low
2000 ------- -------
<S> <C> <C>
January....................................... $13.750 $ 8.750
February...................................... $17.500 $11.000
- --------
(1) On September 17, 1997, Cybernet Utah, the Company's predecessor, acquired
Cybernet AG. Prior to that date, Cybernet Utah had no material business
activities, assets or liabilities. Accordingly, stock prices for the period
prior to September 17, 1997, do not relate to the business in which the
Company is presently engaged.
NEUER MARKT OF THE FRANKFURT STOCK EXCHANGE
<CAPTION>
High Low
1998 ------------ ------------
<S> <C> <C>
Fourth Quarter (beginning December 9, 1998)... (Euro)33.029 (Euro)24.900
<CAPTION>
High Low
1999 ------------ ------------
<S> <C> <C>
January....................................... (Euro)41.200 (Euro)26.600
February...................................... (Euro)39.900 (Euro)31.400
March......................................... (Euro)32.500 (Euro)24.500
April......................................... (Euro)24.700 (Euro)21.650
May........................................... (Euro)23.400 (Euro)20.300
June.......................................... (Euro)19.500 (Euro)16.400
July.......................................... (Euro)19.800 (Euro)14.200
August........................................ (Euro)17.450 (Euro)13.300
September..................................... (Euro)19.400 (Euro)14.800
October....................................... (Euro)15.850 (Euro)13.300
November...................................... (Euro)15.200 (Euro)7.400
December...................................... (Euro)11.400 (Euro)8.900
<CAPTION>
High Low
2000 ------------ ------------
<S> <C> <C>
January.......................................(Euro)12.100 (Euro) 8.810
February......................................(Euro 18.500 (Euro)10.600
</TABLE>
18
<PAGE>
COMMON STOCK DIVIDEND POLICY
We have never declared or paid cash dividends on our Common Stock. We
currently intend to retain all of our earnings, if any, for use in our business
and do not anticipate paying any cash dividends on our common stock in the
foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
During the year ended December 31, 1999, we sold shares of Common Stock as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Securities Sold Purchasers Consideration Exemption
- ---------------------------------
Date Number of Shares
Class of Stock
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
February 25,000 Jurg Heim 51% of the shares of Section 4(2)
1999 Common Stock Marco Samek Sunweb Internet Services AG
(in connection with the Sunweb
acquisition)
- -------------------------------------------------------------------------------------------------------------
June 301,290 All the shares of Section 4(2)
1999 Common Stock Flashnet S.p.A.(in connection
with Flashnet acquisition)
- -------------------------------------------------------------------------------------------------------------
October 39,412 51% of the shares of Novento Section 4(2)
1999 Common Stock Bernd Buchholz Telecom AG (in connection
with Novento acquisition)
- -------------------------------------------------------------------------------------------------------------
October 136,402 34% of the shares of Section 4(2)
1999 Common Stock Eclipse S.p.A.
(in connection with
Eclipse acquisition)
- -------------------------------------------------------------------------------------------------------------
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated Statement of Operations data and Balance Sheet data
as of and for the years ended December 31, 1997, 1998 and 1999 set forth
below has been derived from the financial statements of the Company, which have
been audited by Schitag Ernst & Young AG, independent auditors. Business
acquisitions made by the Company during the periods for which selected financial
data is presented below materially affect the comparison of such data from
period to period. The selected consolidated financial data should be read in
conjunction with the Company's consolidated financial statements and notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this document.
19
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------
1997 1998 1999
(in thousands, except per share data)
<S> <C> <C> <C>
Statement of Operations Data:
Revenue
Internet Projects........ $ 1,598 $ 5,139 $ 5,663
Network Services......... 716 3,495 16,635
------- -------- --------
Total revenue................ 2,314 8,634 22,298
Cost of Revenues
Internet Projects........ 1,495 4,699 5,110
Network Services......... 866 4,067 17,148
Depreciation and
Amortization......... 171 1,674 3,804
------- -------- --------
Total cost of revenues....... 2,532 10,440 26,062
Gross profit (loss)...... (218) (1,806) (3,764)
General and administrative
expenses............. 482 1,576 18,844
Marketing expenses....... 1,188 3,844 12,238
Research and development. 280 2,941 4,304
Depreciation and
amortization......... 116 880 8,322
------- -------- --------
2,066 9,241 43,708
Interest expense, net.... 39 43 (18,547)
------- -------- --------
Loss before taxes and
minority interest.... (2,323) (11,090) (66,019)
Income tax benefit....... 1,339 6,173 14,384
Minority interest........ ----- 145 100
Net loss................. $ (984) $ (4,772) $(51,535)
======= ======== ========
Basic and diluted loss
per share............ $ (.12) $ (.30) $ (2.59)
Balance Sheet Data:
Working capital.......... $ 891 $ 37,751 $102,724
Total assets............. 12,617 79,445 287,800
Long-term debt(1)........ 42 1,383 180,809
Total stockholders'
equity............... 8,908 67,359 68,759
</TABLE>
- ----------------------------------
(1) Including lease obligations
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview:
The following table sets forth, the items of the consolidated statements of loss
for the years ended December 31st, 1997, 1998 and 1999, expressed as a
percentage of total revenues.
<TABLE>
<CAPTION>
For year ended December 31
------------------------------
1997 1998 1999
--------- --------- --------
<S> <C> <C> <C>
Revenue 69.1% 59.5% 25.4%
Internet Projects................................................................
Network Services................................................................. 30.9% 40.5% 74.6%
Total revenues........................................................................ 100.0% 100.0% 100.0%
Cost of revenues:
Internet Projects................................................................ 64.6% 54.4% 22.9%
Network Services................................................................. 37.4% 47.1% 76.9%
Depreciation and amortization.................................................... 7.4% 19.4% 17.1%
Total cost of revenues................................................................ 109.4% 120.9% 116.9%
Gross margin (loss)................................................................... -9.4% -20.9% -16.9%
20.8% 18.3% 84.5%
General and administrative expenses...............................................
Sales and Marketing expenses...................................................... 51.4% 44.5% 54.9%
Research and development.......................................................... 12.1% 34.1% 19.3%
Depreciation and amortization..................................................... 5.0% 10.2% 37.3%
Total operating expenses.............................................................. 89.3% 107.0% 196.0%
Operating loss........................................................................ -98.7% -128.0% -212.9%
Interest expense...................................................................... 1.7% 2.3% 80.9%
Interest income....................................................................... 0.0% 1.8% 18.6%
Realized foreign currency translation losses.......................................... 0.0% 0.0% -20.8%
Loss before taxes and minority interest............................................... -100.4% -128.5% -296.1%
Income tax benefit.................................................................... 57.9% 71.5% 64.5%
Net loss before minority interest..................................................... -42.5% -57.0% -231.6%
Minority interest..................................................................... 0.0% 1.7% 0.5%
Net loss.............................................................................. -42.5% -55.3% -231.1%
</TABLE>
Year Ended December 31, 1999 As Compared To The Year Ended December 31, 1998
Results of Operations
Total revenues increased by 158.3% from $8,634,000 in 1998 to $22,298,000 in
1999. Internet Project revenues increased 10.2% from $5,139,000 in 1998 to
$5,663,000 in 1999 and represented 59.5% and 25.4% of our total revenues in 1998
and 1999, respectively. Network Services revenues increased by 376.0% from
$3,495,000 in 1998 to $16,635,000 in 1999. In 1999, Network Services
represented 74.6% of total revenues as compared to 40.5% in 1998.
The increase in revenue from Network Services is partially a result of an
expansion of our customer base, which provides us with a stream of recurring
revenues. Although in 1999 the Company has
21
<PAGE>
focused primarily on building these recurring revenues from Network Services,
building relationships with customers through Internet Projects remains a
continuing strategy. In addition, in 1999 Network Service revenues include a
full year of Vianet revenues, nine months of Sunweb revenues, six months of
Flashnet revenues and three months of Novento revenues. Vianet and Novento
derive all revenues from Network Service sales. Excluding revenues from these
acquisitions, Network Service revenues would have increased 134% from $3,495,000
in 1998 to $7,811,000 in 1999.
The increase in Internet Project revenues from 1998 to 1999 is mainly a result
of consolidating the Internet Project revenues of $706,000 from Sunweb (nine
months) and $256,000 from Flashnet (six months). Excluding these acquisitions,
Internet Project revenues would have decreased 8.5% from $5,139,000 to
$4,701,000. This decrease is mostly the result of the Company being more
selective when taking on Internet Projects in order to apply its scarce human
resources to the projects most likely to generate long-term relationships and
generate revenues from network-based services.
We derived $12,080,000 or 54.2% of total revenues from our operations in Germany
compared with $7,693,000 or 89.1% in 1998, and $5,499,000 or 24.7% of total
revenues from our operations in Italy compared with $941,000 or 10.9% in 1998.
We derived $3,760,000 or 16.9% of total revenues from our operations in Austria
compared with none in 1998, and $959,000 or 4.2 % of total revenues from our
operations in Switzerland compared with none in 1998.
In Germany, the largest customer provides 7% of the revenues derived from that
market, in Italy 5% is derived from largest customer, in Austria 7% from the
largest customer and in Switzerland the largest customer provides 32% of our
revenues in that market.
Costs of Revenues
Total costs of revenues increased 149.6% from $10,440,000 in 1998 to $26,062,000
in 1999. Costs of revenues as a percentage of revenues decreased from 120.9% in
1998 to 116.9% in 1999. Cost of revenues mainly consists of (i)
telecommunications expenses, (ii) technical and operations personnel costs,
(iii) the cost of hardware and software sold, (iv) amortization of product
development costs, (v) depreciation of network facilities and equipment, and
(vi) consulting expenses in the area of network and software development.
Telecommunications expenses mainly represent the cost of transporting Internet
traffic from our customer's location through a local telecommunications carrier
to one of our access nodes and the cost of leasing lines to interconnect our
backbone nodes. Technical and operational personnel included in cost of revenues
are those individuals involved in the planning, building and management of our
network and the provision of services over this network. We had 198 technical
and operations personnel on December 31, 1999 and approximately 99 such
personnel at the end of 1998.
The cost of our Internet Projects revenues increased by 8,8% from $4,699,000 in
1998 to $5,110,000 in 1999. This increase primarily resulted from increased
purchases of hardware and software that was installed at customer sites, and the
costs of additional internal and external personnel hired to complete these
projects. Cost of Internet Projects as a percentage of related revenues
remained relatively stabile at 91.4% in 1998 and 90.2% in 1999. Although the
Company incurred costs in 1999 in developing proposals for some projects it did
not win, because the Company was generally more selective in taking on projects
it was able to offset these costs and keep margins at the same level as 1998.
The cost of our Network Services revenues increased 321.6% from $4,067,000 in
1998 to $17,148,000 in 1999. This increase primarily consisted of additional
leased line expenses related to
22
<PAGE>
the expansion of our network backbone, additional leased lines to our customers'
premises and a large increase in network personnel. Cost of Network Services as
a percentage of related revenues decreased from 116.4% in 1998 to 103.1% in
1999. This decrease is primarily attributable to a decline in personnel costs as
a percentage of revenues and a reduction in purchased Internet Services due to
the development of our own network. These decreases were partially offset by
additional leased line expenses.
Depreciation and amortization included in the Costs of Revenues, increased from
$1,674,000 in 1998 to $3,804,000 in 1999 as a result of investments in our own
network infrastructure and the supporting systems, including a billing system.
We have capitalized certain costs associated with designing the network,
including related software.
General and Administrative Expenses
General and administrative expenses increased 1096% from $1,576,000 in 1998 to
$18,844,000 in 1999. General and administrative expenses consist principally of
salaries and other personnel costs for our administrative staff, office rent and
depreciation of office equipment. The increase in our general and administrative
expenses reflects the costs of building a corporate infrastructure to support
our anticipated growth and the addition of general and administrative expenses
of companies acquired in 1997, 1998 and 1999. As a percentage of revenues,
general and administrative expenses increased from 18.3% in1998 to 84.5% in
1999.
General and Administrative staff increased from approximately 32 personnel at
the end of 1998 to 83 at the end of 1999. The increases were mostly in the areas
of Finance and Accounting, Human Resource management, IT, Executive Management
and other support functions. The Company has taken measures in the fourth
quarter of 1999 to reduce the number of staff in non-essential support
functions. The favorable impact of these reductions will not be realized until
the first quarter of 2000, since the Company has had to carry the related cost
of dismissed personnel through the end of 1999.
Additionally there was a significant increase in General and Administrative
expenses related to the build-up of an international executive management team
and supporting structures. Within this area there were also large increases in
legal, accounting and other external advisory costs associated with the
financing activities, acquisitions and alliances in 1999.
Excluding the general and administrative expenses in the companies acquired in
1999, G&A expenses would have increased 945% from $1,576,000 in 1998 to
$16,460,000 in 1999.
Sales and Marketing Expenses
Sales and marketing expenses increased by 218% from $3,844,000 in 1998 to
$12,238,000 in 1999. Sales and marketing expenses consist principally of
salaries of our sales force and marketing personnel and advertising and
communication expenditures. Higher sales and marketing expenses reflect our
larger sales and marketing teams, a company-wide increase in advertising and
communication expenses, and a major marketing campaign undertaken in the fourth
quarter of 1999 to launch the Cybernet brand in Italy. Sales and marketing
staff increased from approximately 83 on December 31, 1998 to 145 as of December
31, 1999. As a percentage of revenues, our sales and marketing expenses
increased from 44.5% in 1998 to 54.9% in 1999.
Excluding the sales and marketing expenses in the companies acquired in 1999,
sales and marketing expenses increased 151% from $3,844,000 in 1998 to
$9,660,000 in 1999.
23
<PAGE>
Research and Development
Research and development expenses increased 46.4% from $2,941,000 in 1998 to
$4,304,000 in 1999. Research and development expenses consist principally of
personnel costs of employees working on product development, consulting costs
and certain overhead items. The personnel utilized for this purpose include our
own marketing force and the portion of their time which was devoted to product
development is included in research and development. As a percentage of
revenues, research and development decreased from 34.1% in 1998 to 19.3% in
1999. Most of the research and development expenses have been incurred in our
German operations and the consolidation of acquired companies in 1999 only
had a minor impact on the growth in expenses in this area.
Depreciation and Amortization
Depreciation and amortization expenses increased from $880,000 in 1998 to
$8,322,000 in 1999. This increase reflects increased depreciation of capital
expenditures for property and equipment purchased to build the corporate
infrastructure necessary to support our anticipated growth, and increased
amortization of goodwill related to our 1997, 1998 and 1999 acquisitions.
Goodwill represents the excess of the purchase price of companies we purchased
over the fair value of the tangible assets of those companies. Goodwill is
amortized over 5 - 10 years.
Interest Income and Expense
Interest expense increased from $197,000 in 1998 to $ 18,039,000 in 1999 as a
result of the debt issued in 1999. Interest income increased significantly from
$154,000 in 1998 to $4,138,000 in 1999 as a result of interest earned on the
proceeds of these offerings before the proceeds are utilized in our business. In
1999 we incurred net foreign exchange losses of $4,646,000 as our borrowings are
denominated in US dollars but our operational currency is the Deutsche Mark.
Income Taxes
We recorded income tax benefits of $6,172,000 in 1998 and $14,384,000 in 1999,
arising principally from operating losses. Whilst the group has additional
operating losses, a valuation allowance has been made against some of these
losses to reflect the estimated amount which may not be realized. The majority
of the operating losses and the associated valuation allowance is associated
with operations subject to German tax, and under the current German tax code,
these net operating losses may be carried forward indefinitely and used to
offset our future taxable earnings.
Year Ended December 31, 1998 As Compared To The Year Ended December 31, 1997
Results of Operations
Revenues
Total revenues increased by 273.1% from $2,314,000 in 1997 to $8,634,000 in
1998. Internet Project revenues increased by 221.6% from $1,598,000 in 1997 to
$5,139,000 in 1998 and represented 69.1% and 59.5% of our total revenues in 1997
and 1998, respectively. Network Services revenues increased by 388.1% from
$716,000 in 1997 to $3,495,000 in 1998. In 1998,
24
<PAGE>
Network Services represented 40.5% of total revenues as compared to 30.9% in
1997. The primary reason for this shift is that our recurring revenues grow as
we expand our customer base. We expect this trend to continue.
Revenues from existing operations, accounted for 34.1% of Internet Project
revenues in 1998 compared with 57.1% in 1997. Revenues from existing operations
accounted for 23.7% of the growth in Internet Projects from year to year. This
growth is attributable to new customers and additional sales to existing
customers.
Revenues from acquired companies represented 65.9% of Internet Project revenues
in 1998 compared with 42.9% in 1997, and accounted for 76.3% of the growth in
Internet Projects revenues from year to year. In 1998 these revenues include a
full year of operations of Artwise and Eclipse and three months of operations of
Open:Net.
Network Services revenues increased by 387.9% from $716,000 in 1997 to
$3,494,000 in 1998 and represented 30.9% and 40.5% of total revenues in 1997 and
1998, respectively. Revenues from existing operations represented 78.3% of
Network Services revenues in 1998 compared with 100.0% in 1997. These revenues
accounted for 72.7% of the growth in Network Services revenues from year to
year.
Revenues from acquired companies represented 21.7% of Network Services revenues
in 1998. Acquired companies did not contribute any Network Services revenues in
1997. Revenues from acquired companies accounted for 27.3% of the growth in
Network Services revenues from year to year. In 1998 these revenues include a
full year of operations of Artwise and Eclipse and three month of operations of
Open:Net.
We derived $7,693,000 or 89.1% of total revenues in 1998 from our operations in
Germany and $941,000 or 10.9% of total revenues from our operations in Italy.
On December 28, 1998, we acquired Vianet, our Austrian subsidiary, which had
revenues of approximately $3.1 million in 1998. Future operating results will
include Vianet revenues in Austria and revenues from Sunweb, a Swiss company 51%
of which we have agreed to acquire.
Our total number of customers increased by 74.4% to approximately 7,400 at
December 31, 1998 from 4,300 at December 31, 1997. No single customer accounted
for more than 3% of our revenues in 1998.
Costs of Revenues
Total costs of revenues increased 312.4% from $2,532,000 in 1997 to $10,440,000
in 1998. Costs of revenues as a percentage of revenues increased from 109.4% in
1997 to 120.9% in 1998. Cost of revenues mainly consists of (i)
telecommunications expenses, (ii) personnel costs, (iii) cost of hardware and
software sold, (iv) amortization of product development costs, and (v) service
and consulting expenses. Telecommunications expenses mainly represent the cost
of transporting Internet traffic from our customer's location through a local
telecommunications carrier to one of our access nodes and the cost of leasing
lines to interconnect our backbone nodes.
The cost of our Internet Projects revenues increased by 214.2% from $1,495,000
in 1997 to $4,699,000 in 1998. This increase primarily resulted from increased
purchases of hardware and software, that was installed at customer sites, and
the costs of additional personnel. Cost of Internet Projects as a percentage of
related revenues decreased from 93.5% in 1997 to 91.4% in 1998. This
25
<PAGE>
decrease is primarily attributable to a reduction in training and seminar
expenditures, partially offset by an increase in purchases of hardware and
software.
The cost of our Network Services revenues increased by 370.0% from $866,000 in
1997 to $4,067,000 in 1998. This increase primarily consisted of additional
leased line expenses. Cost of Network Services as a percentage of related
revenues decreased from 120.8% in 1997 to 116.4% in 1998. This decrease is
primarily attributable to a decline in personnel costs as a percentage of
revenues and a reduction in purchased Internet Services due to the development
of our own network. These decreases were partially offset by additional leased
line expenses.
Depreciation and amortization, included in Costs of Revenues, increased from
$171,000 in 1997 to $1,674,000 in 1998 as a result of new investments in product
development from year to year. We have capitalized certain costs associated
with designing the network, including related software. We have also
capitalized investments made in building network capacity, including related
personnel and consulting costs. These costs appear in our balance sheet under
product development cost and are amortized over a period not exceeding four
years.
General and Administrative Expenses
General and administrative expenses increased 227.1% from $482,000 in 1997 to
$1,576,000 in 1998. General and administrative expenses consist principally of
salaries and other personnel costs for our administrative staff, office rent and
depreciation of office equipment. The increase in our general and administrative
expenses reflects the costs of building a corporate infrastructure to support
our anticipated growth and the addition of general and administrative expenses
of companies acquired in 1997 and 1998. As a percentage of revenues, general and
administrative expenses decreased from 20.8% in 1997 to 18.3% in 1998.
Marketing Expenses
Marketing expenses increased by 223.4% from $1,189,000 in 1997 to $3,844,000 in
1998. Marketing expenses consist principally of salaries of our sales force and
advertising and communication expenditures. Higher marketing expenses reflect
an increase in salary expense resulting from our larger sales force and an
increase in advertising and communication expenses reflecting our drive to
improve public awareness of our brand. As a percentage of revenues, our
marketing expenses decreased from 51.4% in 1997 to 44.5% in 1998.
Research and Development
Research and development expenses increased 950.4% from $280,000 in 1997 to
$2,941,000 in 1998. Research and development expenses consist principally of
personnel costs of employees working on product development, consulting costs
and certain overhead items. The development of our modular products and the
related pricing research which we conducted in 1998 is reflected in the higher
personnel costs included in research and development. The personnel utilized
for this purpose include our own marketing force and the portion of their time
which was devoted to product development is included in research and
development. We also incurred consulting expenses in 1998 while researching the
viability of certain telecommunications services that we plan to offer in the
future. As a percentage of revenues, research and development increased from
12.1% in 1997 to 34.1% in 1998.
Depreciation and Amortization
26
<PAGE>
Depreciation and amortization expense, increased from $116,000 in 1997 to
$880,000 in 1998. This increase reflects increased depreciation of capital
expenditures for property and equipment purchased to build the corporate
infrastructure necessary to support our anticipated growth, and increased
amortization of goodwill related to our 1997 and 1998 acquisitions.
Goodwill represents the excess of the purchase price of companies we purchased
over the fair value of the tangible assets of those companies. Goodwill is
amortized over 10 years.
Interest Income and Expense
Interest expense increased 392.7% from $40,000 in 1997 to $197,000 in 1998 as a
result of new capital lease obligations which we undertook in 1998 to finance
acquisitions of computer equipment. Interest income in 1998 was earned on
excess cash balances resulting from the proceeds of our 1998 equity offerings.
Income Taxes
We recorded income tax benefits of $1,339,000 in 1997 and $6,172,000 in 1998,
arising principally from incurred operating losses. Under the current German
tax code, these net operating losses may be carried forward indefinitely and
used to offset our future taxable earnings.
Year Ended December 31, 1997 As Compared To The Year Ended December 31, 1996
Results of Operations
Revenues
Total revenues increased by 652.1% from $308,000 in 1996 to $2,314,000 in 1997,
principally because 1997 was a full year of operation while 1996 involved
substantial start up and initial marketing activities.
Revenues from Internet Projects represented 70.6% and 69.1% of total revenues in
1996 and 1997, respectively, and increased by 635.3% from $217,000 in 1996 to
$1,598,000 in 1997. Revenues from Network Services represented 29.4% and 30.9%
of total revenues in 1996 and 1997, respectively, and increased by 692.4% from
$90,000 in 1996 to $716,000 in 1997.
Revenues from existing operations represented 57.1% of Internet Project revenues
in 1997 compared with 100.0% in 1996. These revenues accounted for 50.4% of the
growth in Internet Projects revenues from year to year. Revenues from acquired
companies represented 42.9% of Internet Project revenues in 1997. These revenues
accounted for 49.6% of the growth in Internet Projects revenues from year to
year. These revenues include the results of operations of Artwise for four
months in 1997.
Our total number of customers increased by 194.5% in 1997 to 4,300 customers
from 1,460 in 1996. No single customer accounted for more than 7% of our
revenues in 1997.
Costs of Revenues
Total costs of revenues increased 597.2% from $363,000 in 1996 to $2,532,000 in
1997. Costs of
27
<PAGE>
revenues as a percentage of revenues decreased from 118.0% in 1996 to 109.4% in
1997.
The cost of our Internet Projects revenues increased 530.8% from $237,000 in
1996 to $1,495,000 in 1997. This increase primarily resulted from increased
personnel costs, training and seminars, and purchases of software that was
installed at customer sites. Cost of Internet Projects as a percentage of
related revenues decreased from 109.1% in 1996 to 93.6% in 1997. This decrease
is primarily attributable to a reduction of free lance staff costs.
The cost of our Network Services revenues increased by 625.4% from $119,000 in
1996 to $865,000 in 1997. This increase primarily consisted of increased
personnel costs and the cost of additional leased lines. Cost of Network
Services as a percentage of related revenues decreased from 132.0% in 1996 to
120.8% in 1997. This decrease is primarily due to a decline in purchased
Internet services and leased line expenses as a percentage of revenues and was
partially offset by additional personnel costs.
General and Administrative Expenses
General and administrative expenses increased 83.0% from $263,000 to $482,000 in
1997. Increases in our general and administrative expenses reflect the costs of
building a corporate infrastructure, which will support our future growth. It
also reflects the impact of the addition of general and administrative expenses
of companies acquired in 1997. As a percentage of revenues, general and
administrative expenses decreased from 85.5% in 1996 to 20.8% in 1997.
Marketing Expenses
Marketing expenses increased by 621.8% from $165,000 in 1996 to $1,189,000 in
1997. Increases in our marketing expenses are attributable primarily to
increased salaries reflecting our efforts to build a larger sales force and
larger advertising and communication expenses in our drive to improve public
awareness of our brand name. As a percentage of revenues, our marketing
expenses decreased from 53.5% in 1996 to 51.4% in 1997 due to a reduction of
free lance staff costs and merchandising costs. These reductions were partially
offset by higher personnel costs and advertising and communication expenses.
Research and Development
Research and development expenses increased 56.3% from $179,000 in 1996 to
$280,000 in 1997 primarily as a result of increased personnel costs. As a
percentage of revenues, our research and development decreased from 58.2% in
1996 to 12.1% in 1997 due to the growth of our revenues.
Depreciation and Amortization
Depreciation and amortization, increased from $21,000 in 1996 to $116,000 in
1997, reflecting increased capital expenditures in property, plant and
equipment. The increase in goodwill amortization from 1996 to 1997 is due to
goodwill additions generated by the 1997 acquisitions.
Interest Income and Expense
Interest expense increased from $2,000 in 1996 to $40,000 in 1997, principally
due to the higher level of overdrafts and short term borrowings in 1997 compared
to 1996. These overdrafts were
28
<PAGE>
used to fund the Company's working capital requirements.
Income Taxes
We recorded income tax benefits of $402,000 in 1996 and $1,339,000 in 1997,
arising principally from operating losses incurred. Under the current German
tax code, these net operating losses may be carried forward indefinitely and
used to offset our future taxable earnings.
Liquidity and Capital Resources
Since our inception, we have financed our operations and growth primarily from
the proceeds of private and public sales of securities. Total net proceeds of
debt and equity offerings in the four years ended December 31, 1999 amounted to
approximately $293 million, including some $225 million during 1999.
Additionally, in 1998, our subsidiaries financed the acquisition of certain
equipment with capital lease obligations.
Our working capital, defined as the excess of our current assets over our
current liabilities, was $102,724,000 at December 31, 1999 compared with
$37,750,000 at December 31, 1998, and $891,000 at December 31, 1997.
Cash and cash equivalents amounted to $73,213,000 at December 31, 1999 compared
to $42,876,000 at December 31, 1998, and $2,239,000 at December 31, 1997. The
increase in cash and cash equivalents primarily resulted from the proceeds of
our offerage of debt in 1999. The cash is being held partly in Euro, our
principle operating currency, but mainly in US dollars, $61 million. In addition
at December 31, 1999 we had some $58 million of Restricted cash held in escrow,
to meet the first six semi-annual interest payments on the Company's 14% Senior
Notes. This amount is invested in US treasury bonds. Further we had various
short-term investments denominated in Euro's totaling $41.2 million at December
31, 1999.
Operating activities used cash of $38,040,000, $10,335,000 and $1,432,000 in
each of the three years ended December 31, 1999, 1998 and 1997, respectively.
The large increase in cash used in 1999 results from the significant loss before
taxes for the year ended December 31, 1999 since the Company significantly
increased expenditures in building its organizational infrastructure (staff more
than doubled from year-end 1998 to year-end 1999) and since it substantially
increased expenditures in the area of marketing.
Investing activities used cash of $154,776,000 and $9,929,000 and $4,791,000 in
each of the three years ended December 31, 1999, 1998 and 1997, respectively.
The large increase in 1999 results from the business acquisitions in 1999, the
increase in expenditures for property and equipment, together with the purchase
of the short term investments and restricted cash, noted above. Expenditures
for property and equipment consisted principally of purchases of equipment and
investments related to our data centers, Internet backbone, billing system and
other equipment necessary to support our growth.
The Company's capital expenditures increased 300% from $6,034,000 in 1998 to
$24,154,000 in 1999. Capital expenditures by country were $16,761,000 in
Germany, $4,015,000 in Italy and $3,234,000 in Austria and Switzerland.
Financing activities provided cash of, $223,632,000, $60,010,000 and $8,644,000
in each of the three years ended December 31, 1999, 1998 and 1997, respectively.
The large inflow in 1999
29
<PAGE>
results principally from our debt issuance in mid-1999 which generated $225
million in proceeds The inflow in 1998 results principally from our December
1998 public equity offering which generated $44,977,376 in net proceeds and the
May 1998 private equity offering which generated $12,600,000 in proceeds. In
June 1997, we completed a private placement that generated $8,070,427 in net
proceeds.
At December 31, 1999 we had available combined cumulative tax loss carryforwards
of approximately $66 million most of which relate to operations subject to
German tax. Under current German tax law, these tax loss carryforwards have no
expiration date. We have provided a valuation allowance against some of these
loss carryforwards, to reflect the estimated amount that may not be realized.
We believe that our cash and cash equivalents will provide adequate liquidity to
fund our normal operating activities over the next twelve months. However, our
plan is to continue to seek additional acquisitions and to enhance our
capabilities in both IP and other communications services through significant
capital expenditures and strategic alliances. These initiatives will be
initially financed from the portion of the proceeds of the 1999 debt issuance
that exceeds our normal operating requirements. Based on our current plan
additional financing will be needed in the first half of 2001 requiring the
offering of additional private or public debt or equity securities. Management
is continuously reviewing options to expand and develop the business, together
with the various options available to finance such activities.
30
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We do 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 mutual funds, therefore lowering
our exposure to interest income risks.
As a result of our Private Unit Offering in July 1999 and Private Discount
Notes Offering in August 1999, we have a substantial amount of debt in United
States dollars. While our reporting currency is United States dollars, our
functional currency is the Deutsche Mark and significant fluctuations in the
United States 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 rates between the Deutsche Mark
and the United States dollar would increase the Deutsche Mark amount required
to settle the debt outstanding from the Private Unit Offering and the Private
Discount Notes Offering by approximately $20,000,000.
All of our revenues and a significant portion of our expenses are denominated
in currencies other than our reporting currency, the United States dollar.
Approximately 89% of our revenues in 1998 and 52% of our revenues in the first
nine months of 1999 were denominated in Deutsche Mark. Another 45% of our
revenues in the first nine months of 1999 were denominated in other European
Monetary Union member currencies. The majority of our foreign exchange rate
exposure relates to the translation of our Deutsche Mark financial statements
into United States dollars which is impacted by changes in the exchange rates
between the Euro and the United States 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 United States 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 United States 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.
Item 8. Financial Statements and Supplementary Data
The information required by this item appears beginning on page F-1 of this
report.
31
<PAGE>
Item 9. Changes in, and Disagreements with, Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth the names, ages and positions of our executive
officers and directors:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Andreas Eder................. 39 Co-founder, Chairman of the Board of
Directors, President, Chief Executive
Officer, and Head of the Management Board of
Cybernet AG
Robert Eckert................ 38 Chief Financial Officer and Treasurer
Bernd Buchholz............... 46 Executive Vice President for Sales and
Marketing
Dr. Hubert Besner............ 36 Director and Member of the Management Board
of Cybernet AG
Robert Fratarcangelo......... 61 Director and Secretary
G.W. Norman Wareham.......... 46 Director
Tristan Libischer............ 30 Director, Co-Founder of Vianet and Member of
the Management Board of Vianet
Jurg Heim.................... 35 Co-Founder of Sunweb, Chief Executive Officer
of Subweb and Member of the Management Board
of Sunweb
Marco Samek.................. 27 Co-Founder of Sunweb, Chief Operational
Officer of Sunweb and Member of the
Management Board of Sunweb
Roberto Loro................. 33 Co-Founder of Eclipse, Director of Marketing
Division of Eclipse and Member of the
Management Board of Eclipse
Stefano Longano.............. 37 Co-Founder of Eclipse and Member of the
Management Board of Eclipse
Patrizia Loro................ 31 Manager of Eclipse and Member of the
Management Board of Eclipse
</TABLE>
Andreas Eder
Mr. Eder, a co-founder of Cybernet AG, has been Chairman, President, Chief
Executive Officer and Head of the Management Board of Cybernet AG since its
formation in December 1995 and has been Chairman of our Board of Directors,
President and Chief Executive Officer since we acquired Cybernet AG in 1997.
Before founding Cybernet AG, Mr. Eder held management positions with The Boston
Consulting Group from April 1991 to October 1995 and Siemens-Nixdorf
Information Systems from April 1986 to March 1991. Mr. Eder holds a Master
Degree in Business Administration from the University of Munich.
Robert Eckert
Mr. Eckert joined the Company as Chief Financial Officer and Treasurer in May
1999. From September 1998 to May 1999, Mr. Eckert was the Chief Financial
Officer of NetSource ASA, a pan-European reseller of telecommunications
services. From July 1997 to August 1998, Mr. Eckert was the Director of
International Business Development and from 1995 to July 1997, he was the
Finance Director at Swisscom International. From 1987 to 1994, Mr. Eckert was
with the General Electric Company (USA) where he held several finance positions
in various countries and business groups. He holds a BA in International
Business and Marketing from Northeastern University in the USA and an MBA from
INSEAD in France.
Dr. Hubert Besner
Dr. Besner is one of our Directors and a member of the Management Board of
Cybernet AG and has served in these capacities since February 1996. From April
1994 to the present, he has been a partner in the law firm of Besner Kreifels
Weber in Munich. From January 1992 to March 1994, he was the head of the legal
department of Schneider, a German real estate development company. He is
currently a Director of Marine Shuttle Operations, a member of the Supervisory
Board of Schuller Industsrieentsorgung, Typhoon Networks and IPO Beteiligungen,
and is the head of the Supervisory Board of PIPECAD Integrierte Softwaresyteme.
Dr. Besner received his First State Exam in law from Ludwig-Maximilians-
Universitat in 1986 and his Doctorate Degree magna cum laude from Ludwig-
Maximilians-Universitat in 1988.
Bernd Buchholz
Mr. Buchholz joined the Company as Executive Vice President Sales and
Marketing in November 1999. From July 1998 to October 1999, Mr. Buchholz was
Chief Executive Officer and a major stockholder of Novento Telecom AG. From
June 1997 to June 1998, Mr. Buchholz was Managing Director Germany for Esprit
Telecom GmbH (GTS Global Telesystems Group). From October 1996 to May 1997, Mr.
Buchholz was Vice President Europe for Novadigm Inc. From April 1995 to
September 1996, Mr. Buchholz was Chief Executive Officer and owner of Beki
GmbH. From June 1993 to March 1995, Mr. Buchholz was Managing Director for
Symantec Europe and from February 1989 to May 1993 Mr. Buchholz was Vice
President Europe and Managing Director for Novell Europe.
Robert Fratarcangelo
Since May 1999, Mr. Fratarcangelo has been our Secretary, and he has been one
of our Directors since September 1997. Since September 1996, he has been the
President and Chief Executive Officer of Criminal Investigative Technologies,
Inc. From 1993 to 1996, Mr. Fratarcangelo was a District Manager at EMC/2/ in
Massachusetts. From 1988 to 1993, Mr. Fratarcangelo was Vice President, Federal
Sales at Teradata and Digital Communications Associates. Previously, Mr.
Fratarcangelo held various positions at IBM. Mr. Fratarcangelo has a Bachelors
Degree in Political Science from the State University of New York.
G.W. Norman Wareham
Mr. Wareham has been one of our Directors since May 1997. Mr. Wareham is a
director of ZMAX Corporation and has served in this capacity since September
1996. He has been the President of Wareham Management Ltd. since May 1996. Mr.
Wareham is currently a director and officer of Aquaplan, British Brasses, Solar
Energy, Viper Resources and WattMonitor and has served in these capacities
since May 1997, December 1998, December, 1997, November 1998 and December 1998,
respectively. Since June 1998 and February 1997, respectively, Mr. Wareham has
been a director of two Canadian public companies, Anthian Resources and Orko
Gold. From June 1995 to January 1996, Mr. Wareham was an accountant with the
certified general accounting firm of Wanzel, Sigmund, & Overes. From April 1993
to February 1995, Mr. Wareham served as President and Chief Executive Officer
of Transatlantic Financial, a private investment banking company. From August
1986 to March 1993, Mr. Wareham was the proprietor of Wareham & Company,
providing accounting and management consulting services.
Tristan Libischer
Mr. Libischer has been one of our Directors since February 1999. He is co-
founder of Vianet and has been a Managing Director of Vianet since September
1994. From February 1992 to August 1994, Mr. Libischer held various positions
with BARK. From November 1990 to January 1992, Mr. Libischer was a senior
consultant and sales engineer with 3C Group.
Jurg Heim
Mr. Heim, a co-founder and member of the Management Board of Sunweb, has
served as Chief Executive Officer of Sunweb since its formation in March 1998.
From October 1997 to March 1998, Mr. Heim was a Systems Engineer of data and
intellectual property services at Netcom Services. Mr. Heim was head of Systems
Administration at Telepax Communications from February 1988 to March 1994. Mr.
Heim holds an Electronic Installation degree in Informatik Telephonie.
Marco Samek
Mr. Samek, a co-founder of Sunweb, has served as Chief Operational Officer
and as a member of the Management Board of Sunweb since its formation in March
1998. Since December 1997, Mr. Samek has also been a principal of Framenet EDP.
He was a Systems Engineer of Internet Services at Newtelco from August 1997 to
April 1998. From January 1996 to April 1997, Mr. Samek was Chief Systems
Engineer in the multimedia company Decatron. Mr. Samek has a technical degree
in Communications from Technikum Winterhur College.
Roberto Loro
Mr. Loro, a co-founder of Eclipse, has served as Director of the Marketing
Division of Eclipse and member of the Management Board of Eclipse since April
1998 and before that, he was Director of Project Development there since
January 1992. Previously, he performed various software, IT and mathematics
consulting assignments for a variety of public and private organizations. Mr.
Loro holds a Mathematics degree from the University of Trento.
Stefano Longano
Mr. Longano is a co-founder of Eclipse and has been a member of the
Management Board of Eclipse since April 1998. From January 1996 to March 1998,
Mr. Longano was technical director of Eclipse. From January 1991 to December
1995, he was a senior scientist and project manager for European projects at
the Laboratory of Information and Communication Technologies of the University
of Trento. He holds a Masters Degree in Physics from the University of Trento.
Patrizia Loro
Ms. Loro has been a member of the Management Board of Eclipse since April
1998 and a manager of Eclipse since January 1995. From March 1993 to December
1997, Ms. Loro was Managing Director and a major shareholder of Centro Servizi
Agiendali Sas. Since 1990, Ms. Loro has held various positions in accounting in
several companies. She attended economics courses at the University of Trento
and Italian Tax Code classes in Milan.
Except for a sibling relationship between Roberto and Patrizia Loro, no
family relationship exists between any director or executive officer and any
other director or executive officer.
Board Composition
We currently have six directors. In accordance with the terms of our
Certificate of Incorporation, the Board of Directors is divided into three
classes: Class A, whose term will expire at the annual meeting of stockholders
to be held in 2002; Class B, whose term will expire at the annual meeting of
stockholders to be held in 2000; and Class C, whose term will expire at the
annual meeting of stockholders to be held in 2001. The Class A directors are
Dr. Besner and Mr. Fratarcangelo, the Class B directors are Dr. Giacalone and
Mr. Wareham, and the Class C directors are Messrs. Eder and Libischer. At each
annual meeting of stockholders after the initial classification, the successors
to directors whose terms will then expire will be elected to serve from the time
of election and qualification until the third annual meeting following election.
Any additional directorships resulting from an increase in the number of
directors will be distributed among the three classes so that, as nearly as
possible, each class will consist of one-third of the directors. Directors may
be removed for cause by the affirmative vote of the holders of a majority of all
outstanding voting shares of Cybernet entitled to vote generally, voting
together as a single class.
Board Committees
The Board of Directors has three committees: an Executive Committee, an Audit
Committee and a Compensation Committee. The Executive Committee consists of Mr.
Eder, Dr. Besner and Dr. Giacalone. The Audit Committee consists of Messrs.
Fratarcangelo and Wareham. The Audit Committee reviews our accounting
processes, financial controls and reporting systems, as well as our selection
of independent auditors and the scope of the audits to be conducted.
The Compensation Committee consists of Dr. Besner, Mr. Fratarcangelo, and Mr.
Wareham. It reviews executive compensation and organization structure. The
Compensation Committee also administers our Stock Option Plan. Prior to the
creation of the Compensation Committee in November 1998, all decisions
concerning salaries, incentives and other forms of compensation of our
directors, officers and other employees were made by the whole Board of
Directors.
Director Compensation
Directors, who are not also employees, receive $15,000 annually and are
reimbursed for out-of-pocket expenses incurred in connection with their service
on the Board. Each outside director may elect to receive his annual director
fee in cash, stock options or a combination thereof. The value of the stock
options is determined pursuant to the Black-Scholes method and the options are
fully vested at the date of grant.
Employment Contracts
Our executive officers are appointed by the Board of Directors and serve
until their successors are elected or appointed.
We have entered into employment agreements with each of the following
officers and directors on the following material terms.
Andreas Eder. On March 1, 1999, we entered into an employment agreement with
Mr. Eder to serve as President and Chief Executive Officer. The agreement
provides for a three-year term and an annual base salary of approximately
$125,716 per year. It also permits Mr. Eder to earn an annual bonus of up to
approximately $41,906 if certain performance standards established by the
Compensation Committee are achieved. We may terminate the agreement if Mr. Eder
should suffer a "disability" or for "cause."
Upon Mr. Eder's death, we are obligated to pay to his estate an amount equal
to his base salary for the period ended 12 months after his death. If Mr. Eder
resigns or we terminate his employment as a result of a "disability" or for
"cause," we are obligated to pay his base salary through the date of
termination.
Under the agreement, "disability" is defined as: (a) any mental or physical
disability which the Board of Directors deems in good faith would preclude Mr.
Eder from performing his duties; or (b) a mental or physical disability which
lasts for a period of 60 consecutive days or for 90 days in any six-month
period and which the Board of Directors elects to treat as permanent in nature.
The agreement defines "cause" as any material breach of its terms by Mr. Eder
or the commission of a felony or a crime involving moral turpitude.
Alessandro Giacalone. On March 1, 1999, we entered into an employment
agreement with Dr. Giacalone to serve as Chief Operating Officer on the same
terms as described above with respect to Mr. Eder. Dr. Giacalone has since
resigned and we are attempting to negotiate an amicable severance arrangement.
Tristan Libischer. On December 28, 1998, Vianet entered into an employment
agreement with Mr. Libischer to serve as a member of the Management Board of
Vianet. The agreement is for a five-year term beginning January 1, 1999,
provides for an annual base salary of approximately $100,573 and permits
Mr. Libischer to earn an annual bonus of approximately $33,524 if certain
performance standards established by the Management Board of Vianet are
achieved.
Vianet may terminate the agreement for "good cause." "Good cause" is defined
as a gross breach of duty, the inability to properly conduct the affairs of
Vianet or a vote of no confidence at an annual meeting of Vianet.
Mr. Libischer is not entitled to severance pay if his employment is
terminated for good cause or if he resigns prematurely without the permission
of the Management Board of Vianet. If Mr. Libischer is unable to perform his
duties due to illness or accident, Vianet is required to pay his full base
salary for a maximum of six months and 49% of his base salary for another three
months. If Mr. Libischer leaves Vianet in the middle of a fiscal year, any
bonus earned will be paid on a pro-rata basis.
Robert Eckert. Mr. Eckert entered into an employment agreement with the
Company to serve as Chief Financial Officer which will become effective when
Mr. Eckert receives his working permit from the German governmental
authorities. The agreement is for a three-year term and provides for a base
salary of approximately $114,000. The agreement also provides for a bonus of up
to approximately $46,000 if certain performance standards established by the
Compensation Committee are achieved. Mr. Eckert will also receive an option to
purchase 100,000 shares of Cybernet's common stock pursuant to Cybernet's
Incentive Plan (as defined). In the event Mr. Eckert is unable to work due to
illness or other reasons, the Company is obligated to pay Mr. Eckert his base
salary for six months. In the event of Mr. Eckert's death, the Company is
obligated to pay Mr. Eckert's heirs his base salary for six months.
Jurg Heim. Sunweb has entered into an employment agreement with Mr. Heim for
a term expiring on March 31, 2001. The agreement provides for a base
compensation of approximately $98,115, in addition to certain management
bonuses and an option to purchase 15,000 shares of Cybernet's common stock if
Sunweb meets specified performance goals for 1999.
Marco Samek. Sunweb has entered into an employment agreement with Mr. Samek
on the same terms as described above for Mr. Heim.
Item 11. Executive Compensation
Our compensation program for executive management includes base salaries,
annual performance-based incentive bonus plans and stock option plans. The
compensation of each executive officer was established by the Board of
Directors acting upon the recommendations of the Compensation Committee.
The following table sets forth the annual long-term and other compensation
for our Chief Executive Officer and our other two most highly compensated
executive officers during the last fiscal year, as well as the total annual
compensation paid to each individual for the three previous fiscal years.
Each of the persons listed has or had an employment contract with us calling
for the payment of an annual bonus if certain performance standards are
achieved. No bonus was paid in the years listed.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
------------ ------------
Securities
Underlying All Other
Fiscal Options Compensation
Name and Principal Position Year Salary ($)/1/ SARs (#) ($)/1/
- --------------------------- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Andreas Eder/2/.......................................... 1999 108,173 200,000 0
Chairman of the Board, President, Chief Executive 1998 108,173 100,000 0
Officer, and Head of the Management Board of Cybernet AG 1997 36,058 0 0
Alessandro Giacalone/3/.................................. 1999 108,173 0 0
Former Director, Chief Operating Officer, and Member of 1998 108,173 100,000 0
the Management Board of Cybernet AG 1997 27,043 0 0
Tristan Libischer/4/..................................... 1999 96,153 200,000 33,654
Director, Co-Founder of Vianet and Member of 1998 47,676 0 0
the Management Board of Vianet 1997 N/A N/A N/A
Robert Eckert/5/......................................... 1999 42,735 200,000 17,094
Chief Financial Officer and Treasurer 1998 N/A N/A N/A
1997 N/A N/A N/A
Roberto Loro/6/.......................................... 1999 57,538 50,000 0
Director of Marketing Division of Eclipse and 1998 43,154 0 0
Member of the Management Board of Eclipse 1997 N/A N/A N/A
Stefano Longano/7/....................................... 1999 57,538 50,000 0
Member of the Management Board of Eclipse 1998 43,154 0 0
1997 N/A N/A N/A
Patrizia Loro/8/......................................... 1999 57,538 50,000 0
Member of the Management Board of Eclipse 1998 43,154 0 0
1997 N/A N/A N/A
Bernd Buchholz/9/........................................ 1999 18,029 200,000 0
Executive Vice President for Sales and Marketing 1998 N/A N/A N/A
1997 N/A N/A N/A
</TABLE>
- --------
/1/ Indicated amounts are translated into U.S. Dollars at an exchange rate of
2.08 DM for each U.S. Dollar unless otherwise indicated.
/2/ Mr. Eder became an executive officer of Cybernet in September 1997. As a
result, the information presented for fiscal 1997 represents payments made
from September 1, 1997 through December 31, 1997. Mr. Eder is entitled to
receive an annual salary of 225,000 DM.
/3/ Mr. Giacalone joined Cybernet in October 1997. The information presented for
fiscal 1997 represents payments made from October 1, 1997 through December
31, 1997. In 1999, Mr. Giacalone received an annual salary of 225,000 DM.
Mr. Giacalone resigned all positions with the Company on December 31, 1999.
/4/ Mr. Libischer joined Cybernet in June 1998. The information presented for
fiscal 1998 represents payments made from June 1, 1998 through December 31,
1998. In 1999, Mr. Libischer received an annual salary of 200,000 DM and a
bonus of 70,000 DM.
/5/ Mr. Eckert joined Cybernet in May 1999. The information presented for fiscal
1999 represents payments made from May 1, 1999 through December 31, 1999. In
1999, Mr. Eckert received an annual salary of 133,334 DM and a bonus of
53,334 DM.
/6/ Mr. Loro joined Cybernet in April 1998. The information presented for fiscal
1998 represents payments made from April 1, 1998 through December 31, 1998.
In 1999, Mr. Loro received an annual salary of 118,439,000 ITL. Mr. Loro's
salary was translated into U.S. Dollars at an exchange rate of 2058.45 ITL
for each U.S. Dollar.
/7/ Mr. Longano joined Cybernet in April 1998. The information presented for
fiscal 1998 represents payments made from April 1, 1998 through December 31,
1998. In 1999, Mr. Longano received an annual salary of 118,439,000 ITL. Mr.
Longano's salary was translated into U.S. Dollars at an exchange rate of
2058.45 ITL for each U.S. Dollar.
/8/ Ms. Loro joined Cybernet in April 1998. The information presented for fiscal
1998 represents payments made from April 1, 1998 through December 31, 1998.
In 1999, Ms. Loro received an annual salary of 118,439,000 ITL. Ms. Loro's
salary was translated into U.S. Dollars at an exchange rate of 2058.45 ITL
for each U.S. Dollar.
/9/ Mr. Buchholz joined the Company in November 1999. The information presented
for fiscal 1999 represents payments made from November 1, 1999 through
December 31, 1999. In 1999, Mr. Buchholz received an annual salary of
225,000 DM.
Option/SAR Grants in Last Fiscal Year
The following table provides information on options to purchase Cybernet's
common stock that were granted to named executives and directors during
fiscal 1999.
<TABLE>
<CAPTION>
Individual Grants
-------------------------
Percent of Potential Realizable
Number of Total Value at Assumed
Securities Options/SARs Annual Rates of Stock
Underlying Granted to Exercise Price Appreciation
Options/SARs Employees or Base for Option Term
Granted in Fiscal Price Expiration -----------------------
Name (#) Year ($/Sh) Date 5% ($) 10% ($)
- ---- ------------ ------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Andreas Eder........... 200,000 8.00% $ 9.0242 12/31/09 1,135,064 2,876,373
Chairman of the Board,
President, Chief
Executive Officer, and
Head of the Management
Board of Cybernet AG
Robert Eckert.......... 200,000 8.00% $ 9.0242 12/31/09 1,135,064 2,876,373
Chief Financial
Officer and Treasurer
Bernd Buchholz......... 200,000 8.00% $ 9.0242 12/31/09 1,135,064 2,876,373
Executive Vice President
for Sales and Marketing
Tristan Libischer...... 200,000 8.00% $ 9.0242 12/31/09 1,135,064 2,876,373
Director, Co-Founder
of Vianet and Member
of the Management
Board of Vianet
Roberto Loro........... 50,000 2.00% $ 9.0242 12/31/09 283,766 719,093
Director of Marketing
Division of Eclipse
and Member of the
Management Board of
Eclipse
Stefano Longano........ 50,000 2.00% $ 9.0242 12/31/09 283,766 719,093
Member of the Management
Board of Eclipse
Patrizia Loro.......... 50,000 2.00% $ 9.0242 12/31/09 283,766 719,093
Member of the Management
Board of Eclipse
Robert Fratarcangelo... 5,000 0.20% $ 9.0242 12/31/09 28,377 71,909
Secretary and Director
Dr. Hubert Besner...... 5,000 0.20% $ 9.0242 12/31/09 28,377 71,909
Director and Member of
the Management Board of
Cybernet AG
G.W. Norman Wareham.... 5,000 0.20% $ 9.0242 12/31/09 28,377 71,909
Director
</TABLE>
Indemnification of Directors and Officers
Our Certificate of Incorporation limits the liability of our directors and
executive officers to the maximum extent permitted by Delaware law. Delaware
law provides that directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, except
liability for:
(1) breach of their duty of loyalty to the corporation or its
stockholders,
(2) acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
(3) unlawful payments of dividends or unlawful stock repurchases or
redemptions, or
(4) any transaction from which the director derived an improper personal
benefit.
Such limitation of liability does not apply to liability arising under the
federal or state securities laws and does not affect the availability of
equitable remedies such as injunctive relief or rescission.
We have also secured insurance on behalf of each officer, director, employee
or other agent for any liability arising out of claims under applicable
securities laws against such persons and us, and on behalf of directors and
officers with respect to other claims.
At present, there is no pending litigation or proceeding involving any of our
directors or officers in which indemnification is required or permitted, and we
are not aware of any threatened litigation or proceeding that may result in a
claim for such indemnification.
Stock Incentive Plan
We maintain the Cybernet Internet Services International, Inc. 1998 Stock
Incentive Plan (the "Incentive Plan"). The Board of Directors has reserved
2,000,000 shares of Cybernet's common stock for issuance pursuant to awards that
may be made under the Incentive Plan, subject to adjustment as provided therein.
The number of shares of common stock associated with any forfeited stock
incentive are added back to the number of shares that can be issued under the
Incentive Plan. No participant may be granted during any one year period rights
to shares of common stock under options and stock appreciation rights which, in
the aggregate, exceed 100,000 shares of common stock. The Compensation Committee
granted options to purchase a total of 2,503,850 shares of common stock in
varying amounts during 1999.
The Incentive Plan allows for the grant of incentive stock options, non-
qualified stock options, stock appreciation rights, stock awards, dividend
equivalent rights, performance units and phantom shares. The exercise price of
an incentive stock option may not be less than the fair market value of the
common stock on the date of the grant (or less than 110% of the fair market
value if the participant controls more than 10% of the voting power of Cybernet
or a subsidiary thereof). Non-qualified stock options may be made exercisable
at a price equal to, less than or more than the fair market value of the common
stock on the date that the option is awarded. The term of an incentive stock
option may not exceed ten years from the date of grant. However, any incentive
stock option granted to a participant who controls more than 10% of the voting
power of Cybernet or a subsidiary thereof will not be exercisable after the
expiration of five years following the date the option is granted.
32
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of December 31, 1999, regarding
beneficial ownership of Cybernet's common stock, Series A Preferred Stock and
Series B Voting Preferred Stock by:
(1)each stockholder known by us to be the beneficial owner of more than
five percent of the outstanding shares of common stock or Series B Voting
Preferred Stock, as the case may be;
(2)each of our directors with respect to the equity securities held by
such director;
(3)each of our executive officers named in the Summary Compensation Table
with respect to the equity securities held by such executive officer; and
(4)all of our current executive officers and directors as a group with
respect to the equity securities held by such executive officers and
directors.
Stock ownership information has been furnished to us by such beneficial owners
or is based upon filings made by such owners with the Securities and Exchange
Commission. As of November 10, 1999, there were 21,164,681 shares of Cybernet
common stock, 923,440 shares of Series A Preferred Stock and 3,870,000 shares
of Series B Voting Preferred Stock issued and outstanding. The following table
assumes that all shares of Series A Preferred Stock and Series B Preferred
Stock which are convertible into common stock within 60 days have been
converted. For purposes of the column headed "Voting Distribution," the
percentages were calculated by adding the number of shares of common stock
outstanding to 100% of the Series B Voting Preferred. It does not take into
account the Series A Non-Voting Preferred Stock that is not presently
convertible or options granted to directors, employees or management that have
not been exercised.
<TABLE>
<CAPTION>
Name Shares Beneficially Owned Percentage of Class
- ---- ------------------------------------- -------------------------------------------------
Percentage of Percentage of
Series A Series B Series A Series B
Non-Voting Voting Percentage of Non-Voting Voting
Common Preferred Preferred Common Preferred Preferred Voting
Executive Officers and Directors Stock Stock Stock Stock Stock Stock Distribution
- --------------------------------- ------------- ------------- --------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Andreas Eder....................... 1,645,850/1/ 88,877/1/ 0 7.6% 14.8% * 6.4%
Stefan-George- Ring 19
81929 Munich, Germany
Alessandro Giacalone............... 360,933/2/ 18,000 0 1.5% 3.0% * 1.3%
Stefan-George-Ring 19
81929 Munich, Germany
Tristan Libischer.................. 183,333/2/ 0 0 * * * *
Mariannengasse 14
1090 Vienna, Austria
Bernd Buchholz..................... 39,412
Hm Muehlenbach 19
40670 Meerbusch, Germany
Hubert Besner...................... 1,261/3/ 0 0 * * * *
Widenmayerstrasse 41
80538 Munich, Germany
G.W. Norman Wareham................ 0 0 0 * * * *
1177 West Hastings Street
Suite 1818
Vancouver, B.C., Canada V6E 2K3
Robert Fratarcangelo............... 0 0 0 * * * *
10842 Oak Crest
Fairfax, Virginia 22030
All executive officers and
directors as a group (10
persons).......................... 2,229,428 106,877 0 10.5% 17.8% * 8.9%
Principal Stockholders Other
Than Executive Officers
and Directors
Rudolf Strobl...................... 487,510 26,786 0 2.3% 4.4% * 1.9%
Gleiwitzerstrasse 15
81929 Munich, Germany
Holger Timm... 3,766,446/4/ 393,750/5/ 2,580,000/6/ 17.8% 65.6% 100.0% 25.4%/7/
Trabner Strasse 12
14193 Berlin, Germany
Cybermind Interactive Europe....... 2,697,396 300,000 2,580,000 12.7% 50.0% 100.0% 21.0%
Am Borsigturm 48
13507 Berlin, Germany
</TABLE>
__________
*Indicates less than 1% beneficial ownership
(1) Includes 337,434 shares of common stock and 18,816 shares of Series A Non-
voting Preferred Stock held by Mr. Eder's spouse. She has sole investment
and sole voting power over all shares held by her, and Mr. Eder disclaims
beneficial ownership of any of the shares held by her. Includes 172,800
shares of common stock and 7,200 shares of Series A Preferred Stock subject
to an agreement between Andreas Eder and Dave Morton, an employee of the
Company, by which Mr. Morton has the option to acquire, (a) 25% of the
total number of shares starting on January 1, 1999, (b) 25% of the total
number of shares starting on January 1, 2000 and ending June 30, 2000, and
(c) 50% of the total number of shares starting on January 1, 2001, and
ending June 30, 2001 and (B) 100,800 shares of common stock and 4,200
shares of Series A Preferred Stock subject to an agreement between Andreas
Eder and Todd Ferguson, an employee of the Company or its subsidiary, by
which Mr. Ferguson has the option to acquire such shares at the same price
and under terms as for Mr. Morton. Includes options to purchase 33,333
shares of common stock under the Company's Incentive Plan which become
exercisable on December 28, 1999. Does not include options to purchase
67,667 shares of common stock under the Company's Incentive Plan, which
become exercisable on December 28, 2000 and 2001.
(2) Includes options to purchase 33,333 shares of common stock under the
Company's Incentive Plan which become exercisable on December 28, 1999.
Does not include options to purchase 66,337 shares of common stock under
the Company's Incentive Plan which become exercisable on December 28, 2000
and 2001.
(3) Includes 1,261 shares of common stock held by Dr. Besner's spouse who has
sole voting and investment power with respect to such shares. Dr. Besner
disclaims beneficial ownership of any of the shares held by her.
(4) Mr. Timm can be deemed to control Cybermind as a result of his position as
Chief Executive Officer and Head of the Managing Board and principal
shareholder. Includes 2,697,396 shares of common stock held by Cybermind
after the conversion of the Series B Preferred. Does not include an
aggregate of 673,200 shares of common stock sold by Mr. Timm to Alessandro
Giacalone, Christian Moosmann, Frank Lutze and Hans Bergbreiter pursuant to
stock purchase agreements dated April 8, 1997 (the "April 8 Stock Purchase
Agreements"). Also, does not include an aggregate of 36,000 shares of
Series A Preferred Stock sold by Mr. Timm to the same individuals pursuant
to the April 8 Stock Purchase Agreements. Each of the April 8 Stock
Purchase Agreements involved an employee purchaser and provides that,
subject to certain conditions, the securities sold shall revert to Mr. Timm
if the purchaser's employment terminates for any reason except termination
without cause by us or one of our subsidiaries, or if we or one of our
subsidiaries breaches our employment agreement with such buyer. If such
shares were included as beneficially owned by Mr. Timm for purposes of this
chart, he would be deemed to hold 21% of the common stock of Cybernet (28%
of Voting Distribution).
(5) Includes 300,000 shares of Series A Non-Voting Preferred Stock held by Mr.
Timm indirectly through Cybermind. For an explanation of Mr. Timm's
relationship to Cybermind, see Footnote 4 above.
(6) Reflects shares of Series B Voting Preferred Stock held by Mr. Timm
indirectly through Cybermind. For an explanation of Mr. Timm's relationship
to Cybermind, see Footnote 4 above.
(7) Assuming conversion of the remaining Series A Non-Voting Preferred Stock,
Mr. Timm would control approximately 26.3% of the voting securities of
Cybernet.
Item 13. Certain Relationships and Related Transactions
Dr. Besner, one of our Directors, is a partner with the law firm of Besner
Kreifels Weber, which represents us and to which we paid fees of approximately
$270,000 during fiscal 1999 and $98,303 during fiscal 1998.
In November 1998, Mr. Timm, one of our principal stockholders and a former
Director who resigned on December 2, 1998, advanced an interest free loan to us
for approximately $1,396,849. We repaid the loan in December 1998.
In December 1998, we paid $2,916,000 in underwriting fees to an investment
bank that is 40% owned by a company of which Mr. Timm is Head of the Managing
Board, President, Chief Executive Officer and a principal stockholder. These
underwriting fees were paid in connection with a best efforts all or nothing
public offering of our common stock.
We provide Internet connectivity services to Cybermind Interactive Europe
("Cybermind"), a principal stockholder of Cybernet, pursuant to a standard
service contract. In 1998, Cybermind paid us approximately $68,200 for such
services. Mr. Timm is Chief Executive Officer and Head of the Managing Board,
as well as the principal stockholder, of Cybermind.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
a. Documents filed as a part of this report.
1. FINANCIAL STATEMENTS
See Index to Financial Statements on page F-1.
2. FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statement schedule of Cybernet
Internet Services International, Inc. is included in Item 14(d) and
presented as a separate section of this Report: Schedule II Valuation and
Qualifying Accounts: page F-19.
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore
have been omitted.
3. EXHIBITS
Listed below are all of the Exhibits filed as part of this report.
Certain Exhibits are incorporated by reference from documents previously
filed by the Company with the Securities and Exchange Commission pursuant
to Rule 12b-32 under the Securities Exchange Act of 1934, as amended.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
3.1 Certificate of Incorporation. (Incorporated by reference as Exhibit
3.1 to the Form S-1 Registration Statement filed with the Commission
on September 18, 1998).
3.2 Bylaws (Incorporated by reference as Exhibit 3.2 to the Form S-1
Registration Statement filed with the Commission on September 18,
1998).
4.1 Unit Agreement dated as of July 8, 1999 by and among the Company,
Lehman Brothers International (Europe) and Morgan Stanley & Co.
International Limited (Incorporated by reference to the Form S-4
Registration Statement No. 333-86853 filed September 10, 1999).
4.2 Indenture dated as of July 8, 1999 by and between the Company and The
Bank of New York, relating to the Company's notes contained in the
Units (Incorporated by reference to the Form S-4 Registration Statement
No. 333-86853 filed September 10, 1999).
4.3 Collateral Agreement dated as of July 8, 1999 by and among the
Company, Lehman Brothers International (Europe) and Morgan Stanley &
Co. International Limited, relating to the Unit Agreement (Incorporated
by reference to the Form S-4 Registration Statement No. 333-86853 filed
September 10, 1999).
4.4 Registration Rights Agreement dated as of July 8, 1999 by and among
the Company, Lehman Brothers International (Europe) and Morgan Stanley
& Co. International Limited, relating to the Company's notes contained
in the Units (Incorporated by reference to the Form S-4 Registration
Statement No. 333-86853 filed September 10, 1999).
4.5 Warrant Agreement, dated as of July 8, 1999 by and among Cybernet
Internet Services International, Inc., Lehman Brothers International
(Europe) and Morgan Stanley & Co. International Limited, relating to
the Company's warrants contained in the Units (Incorporated by
reference to the Form S-4 Registration Statement No. 333-86853 filed
September 10, 1999).
10.1 Sale and Assignment of Business Shares of the Artwise GmbH Software
Losugen dated September 18, 1997 by and among Mr. Stefan
Heiligensetzer, Mr. Frank Marchewicz, Mr. Rolf Strehle, Mr. Gerhard
Schonenberger, Mr. Lothar Bernecker, Artwise GmbH Software Solutions,
Cybernet Internet--Dienstleistungen AG and Cybernet Internet--
Beteiligungs GmbH (Incorporated by reference as Exhibit 10.1 to the
Form S-1 Registration Statement filed with the Commission on September
18, 1998).
10.1.1 Amending Agreement Concerning the Sale and Assignment of Interest in
Artwise GmbH Software LoSungen of September 18, 1997 by and among Rolf
Strehle, Gerhard Schonenberger, Cybernet Internet-Dienstleistungen AG
and Cybernet Internet - Beteiligungs GmbH. (Incorporated by reference
as Exhibit 10.1.1 to the Form 10-K Annual Report filed with the
Commission on March 30, 2000).
10.2 Sale and Assignment of Shares in OpenNet Internet Solutions GmbH dated
August 12, 1998 by and among Mr. Thomas Egner, Mr. Uwe Hagenmeier, Mr.
Markus Kress, Mr. Oliver Schaffer, Cybernet Internet Dienstleistungen
AG, and Cybernet Internet--Beteiligungs GmbH (Incorporated by
reference as Exhibit 10.2 to the Form S-1 Registration Statement filed
with the Commission on September 18, 1998).
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.3 Private Agreement for the Sale of Company Shareholdings and Increase
of Share Capital dated December 4, 1997 by and among Cybernet Internet
Dienstleistung ag, Mr. Robert Loro, Stefano Longano, Domenico Loro,
Angelo Longano, Emma Pontara, Maria Teresa Francesconi and Mauro
Longano (Incorporated by reference as Exhibit 10.3 to the Form S-1
Registration Statement filed with the Commission on September 18,
1998).
10.4 Stock Purchase Agreement dated June 17, 1998 among the Company,
Tristan Libischer, and Alexander Wiesmuller (Incorporated by reference
as Exhibit 10.4 to the Form S-1 Registration Statement filed with the
Commission on September 18, 1998).
10.5 Stock Purchase Agreement, dated June 11, 1997, among the Company,
Cybermind Interactive Europe AG, Rudolf Strobl, Roland Manger, Thomas
Schulz, Andreas Eder, and Holger Timm (Incorporated by reference as
Exhibit 10.5 to the Form S-1 Registration Statement filed with the
Commission on September 18, 1998).
10.6 Pooling and Trust Agreement dated August 18, 1997 among Cybermind
Interactive Europe AG, Andreas Eder, Roland Manger, Thomas Schulz,
Rudolf Strobl, Holger Timm, and Dr. Hubert Besner, as trustee
(Incorporated by reference as Exhibit 10.6 to the Form S-1
Registration Statement filed with the Commission on September 18,
1998).
10.7 Pooling and Trust Agreement dated August 1, 1998 between Stefan
Heiligensetzer and Dr. Hubert Besner, as trustee (Incorporated by
reference as Exhibit 10.7 to the Form S-1 Registration Statement filed
with the Commission on September 18, 1998).
10.7.1 Schedule of Additional Artwise Pooling Agreements, referencing
agreements of Mr. Marchewicz, Mr. Strehle, Mr. Schonenberger and Mr.
Bernecker (Incorporated by reference as Exhibits 10.7 and 10.7.1 to
the Form S-1 Registration Statement filed with the Commission on
September 18, 1998).
10.8 Consulting Agreement dated December 15, 1997 between Cybernet
Internet--Dienstleistungen AG and Eiderdown Trading Ltd. (Incorporated
by reference as Exhibit 10.8 to the Form S-1 Registration Statement
filed with the Commission on September 18, 1998).
10.9 Employment Contract dated February 23, 1998 between Cybernet
Internet--Dienstleistungen Aktiengesellschaft and Andreas Eder
(Incorporated by reference as Exhibit 10.9 to the Form S-1
Registration Statement filed with the Commission on September 18,
1998).
10.10 Employment Contract dated May 15, 1997 between Cybernet Internet--
Dienstleistungen Aktiengesellschaft and Alessondro Giacalone
(Incorporated by reference as Exhibit 10.10 to the Form S-1
Registration Statement filed with the Commission on September 18,
1998).
10.11 Employment Contract dated April 28, 1997 between Cybernet Internet
Dienstleistungen AG and Christian Moosmann (Incorporated by reference
as Exhibit 10.11 to the Form S-1 Registration Statement filed with the
commission on September 18, 1998).
10.12 Employment Contract dated February 23, 1998 between Cybernet
Internet--Dienstleistungen Aktiengesellschaft and Rudolf Strobl
(Incorporated by reference as Exhibit 10.12 to the Form S-1
Registration Statement filed with the Commission on September 18,
1998).
10.13 Sublease for business premises office dated February 29, 1996 between
KG Bayerische Hausbau GmbH and Co. and Cybernet AG.i.G. (Incorporated
by reference as Exhibit 10.13 to the Form S-1 Registration Statement
filed with the Commission on September 18, 1998).
10.14 Full Amortization leasing Agreement No. 13 00 00 for Hard- and
Software with purchase, extension and return options between CyberNet
Internet--Dienstleistungen AG and Miller Leasing Miete GMbH dated
January 22, 1998 (Incorporated by reference as Exhibit 10.14 to the
Form S-1 Registration Statement filed with the Commission on September
18, 1998).
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.15 Agreement on the use of Data Communication Installations of Info AG
dated July 29, 1996 between Info AG and CyberNet Internet--
Dienstleistungen Ag (Incorporated by reference as Exhibit 10.15 to
the Form S-1 Registration Statement filed with the Commission on
September 18, 1998).
10.16 Ebone Internet Access Contract dated February 26, 1997 between Ebone
Inc. and Cybernet AG (Incorporated by reference as Exhibit 10.16 to
the Form S-1 Registration Statement filed with the Commission on
September 18, 1998).
10.17 Agreement, undated, between feratel International GmbH and Cybernet
Internet--Dienstleistungen AG (Incorporated by reference as Exhibit
10.17 to the Form S-1 Registration Statement filed with the
Commission on September 18, 1998).
10.18 Cybernet Internet Services International, Inc. 1998 Stock Incentive
Plan (Incorporated by reference as Exhibit 10.18 to the Form S-1/A
Registration Statement filed with the Commission on November 5,
1998).
10.19 Cybernet Internet Services International, Inc. 1998 Outside
Directors' Stock Option Plan (Incorporated by reference as Exhibit
10.19 to the Form S-1/A Registration Statement filed with the
Commission on November 5, 1998).
10.20 Agreement and Plan of Merger, dated October 9, 1998, between the
Company, a Utah corporation, and Cybernet Internet Services
International, Inc., a Delaware corporation (Incorporated by
reference as Exhibit 2.1 to the Form S-1/A Registration Statement
filed on November 5, 1998).
10.23 Registration Rights Agreement dated August 26, 1999 by and between
the Company and Morgan Stanley & Co. International Limited relating
to the Company's (Euro)25,000,000 Convertible Senior Subordinated
Pay-In-Kind Notes due 2009 (Incorporated by reference to the
Form S-4 Registration Statement No. 333-86853 filed September 10,
1999).
10.24 Indenture dated August 26, 1999 by and between the Company and The
Bank of New York relating to the Company's (Euro)25,000,000
Convertible Senior Subordinated Pay-In-Kind Notes due 2009
(Incorporated by reference to the Form S-4 Registration Statement
No. 333-86853 filed September 10, 1999).
10.26 Registration Rights Agreement dated August 26, 1999 by and between
the Company and Morgan Stanley & Co. International Limited relating
to the company's $35,000,000 13.0% Convertible Senior Subordinated
Discount Notes due 2009 (Incorporated by reference to the Form S-4
Registration Statement No. 333-86853 filed September 10, 1999).
10.27 Registration Rights Agreement dated August 26, 1999 by and between
the Company and Morgan Stanley & Co. International Ltd. relating to
the company's $15,002,183 13.0% Convertible Senior Subordinated
Discount Notes due 2009 (Incorporated by reference to the Form S-4
Registration Statement No. 333-86853 filed September 10, 1999).
10.28 Indenture dated August 26, 1999 by and between the Company and The
Bank of New York relating to the company's $35,000,000 and
$15,002,183 13.0% Convertible Senior Subordinated Discount Notes due
2009 (Incorporated by reference to the Form S-4 Registration
Statement No. 333-86853 filed September 10, 1999).
10.29 Condition Precedent Sale and Transfer of Novento Telecom AG and
Multicall Telefonmarketing AG Stock and Sale and Assignment of
Claims dated December 2, 1999. (Incorporated by reference as Exhibit
10.29 to the Form 10-K Annual Report filed with the Commission on
March 30, 2000.)
10.29.1 Sale and Transfer of Stock of Novento Telecom AG and Multicall
Telefonmarketing AG and Purchase and Assignment of Claims, dated
October 1, 1999. (Incorporated by reference as Exhibit 10.29.1 to
the Form 10-K Annual Report filed with the Commission on March 30,
2000.)
10.30 Framework Contract for the Performance of Project and Consulting
Services, dated November 19, 1999, by and between Beam GmbH and
Cybernet AG. (Incorporated by reference as Exhibit 10.30 to the Form
10-K Annual Report filed with the Commission on March 30, 2000.)
10.30.1 Loan and Security Agreement, dated November 10, 1999, by and between
Rolf Strehle, Gerhard Schonenberger and Cybernet Internet -
Dienstleistungen AG. (Incorporated by reference as Exhibit 10.30.1
to the Form 10-K Annual Report filed with the Commission on March
30, 2000.)
10.31 Stock Purchase Agreement, dated February 19, 1999, by and between
Jurg Heim, Marco Samek and Cybernet Internet Services International,
Inc. (Incorporated by reference as Exhibit 10.31 to the Form 10-K
Annual Report filed with the Commission on March 30, 2000.)
10.32 Cooperation Software Licensing Agreement, dated December 28, 1999,
by and between Berningshausen & Neben OHG and Cybernet Internet
Services International, Inc. (Incorporated by reference as Exhibit
10.32 to the Form 10-K Annual Report filed with the Commission on
March 30, 2000.)
10.33 Employment Agreement, dated as of November 1, 1999, by and between
Bernd Buchholz and Cybernet Internet Services International, Inc.
(Incorporated by reference as Exhibit 10.33 to the Form 10-K Annual
Report filed with the Commission on March 30, 2000.)
21 Subsidiaries. (Incorporated by reference as Exhibit 21 to the Form
10-K Annual Report filed with the Commission on March 30, 2000.)
27.1 Financial Data Schedule (Incorporated by reference as Exhibit 27.1
to the Form 10-K Annual Report filed with the Commission on
March 30, 2000.)
</TABLE>
- --------
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
April 28, 2000
/s/ Andreas Eder
By: _________________________________________
Chairman of the Board of Directors,
President and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Andreas Eder
_________________________________ Chairman of the Board April 28, 2000
Andreas Eder of Directors, President
and Chief Executive Officer
/s/ Tristan Libischer
_________________________________ Director April 28, 2000
Tristan Libischer
/s/ Hubert Besner
_________________________________ Director April 28, 2000
Hubert Besner
/s/ G.W. Norman Wareham
_________________________________ Director April 28, 2000
G.W. Norman Wareham
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert Fratarcangelo
_________________________________ Director and Secretary April 28, 2000
Robert Fratarcangelo
/s/ Robert Eckert Chief Financial Officer
_________________________________ and Treasurer (Principal April 28, 2000
Robert Eckert Financial and Accounting
Officer)
</TABLE>
38
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
---------
<S> <C>
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
Independent Auditors' Report............................................................................... F- 2
Consolidated Balance Sheets December 31, 1999 and 1998..................................................... F- 3
Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997................. F- 4
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997................. F- 5
Consolidated Statements of Shareholders' Equity years ended December 31, 1999, 1998 and 1997............... F- 6
Notes to Consolidated Financial Statements................................................................. F- 7
Independent Accountants' Report............................................................................ F-20
Independent Accountants' Report............................................................................ F-21
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
To the Board of Directors and Shareholders
Cybernet Internet Services International, Inc.:
We have audited the accompanying consolidated balance sheets of Cybernet
Internet Services International, Inc. and its subsidiaries ("the Company") as of
December 31, 1999, and 1998, and the related consolidated statements of
operations, cash flows and changes in shareholders' equity for each of the three
years in the period ended December 31, 1999. Our audits also included the
financial statements schedule listed in the Index at Item 14(a). These financial
statements and Schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits. We did not audit the financial statements of
Cybernet Italia S.p.A., or Eclipse s.r.l., both wholly owned subsidiaries, which
statements reflect total assets constituting 7% in 1999, and total revenues
constituting 25% in 1999 of the related consolidated totals. Those statements
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to data included for Cybernet Italia S.p.A. and
Eclipse s.r.l. is based solely on the report of the other auditors
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of the Company as of December 31, 1999 and
1998, and the consolidated results of its operations and its cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
Ernst & Young
Deutsche Allgemeine Treuhand AG
/s/ Geoffrey V. Hopper /s/ Ralf Broschulat
Geoffrey V. Hopper Ralf Broschulat
Certified Public Accountant Independent Public Accountant
Munich, Germany
March 29, 2000
F-2
<PAGE>
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
----------------- -----------------
( in thousands )
<S> <C> <C>
ASSETS
Cash and cash equivalents.......................................... $42,876 $ 73,213
Short-term investments............................................. 112 41,237
Accounts receivable -- trade, net of allowance for doubtful
accounts of $ 361,000 and $1,192,000 at December 31, 1998 and
1999 respectively................................................. 3,249 9,162
Other receivables.................................................. 1,793 5,052
Restricted investments............................................. 10,091
Prepaid expenses and other assets.................................. 423 2,201
------- --------
Total current assets............................................... 48,453 140,956
Property and equipment, net........................................ 7,970 28,479
Product development costs, net..................................... 5,743 3,096
Goodwill, net...................................................... 6,505 26,240
Deferred income taxes.............................................. 8,166 20,771
Restricted investments............................................. - 48,158
Other assets....................................................... 2,608 20,100
------- --------
TOTAL ASSETS.......................................................... $79,445 $287,800
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Overdrafts and short-term borrowings............................. $ 287 $ 437
Trade accounts payable........................................... 3,346 18,229
Other accrued liabilities........................................ 1,073 15,144
Deferred purchase obligations.................................... 4,483 -
Current portion long term debt and capital lease obligations..... 925 1,728
Accrued personnel costs.......................................... 589 2,694
------- --------
Total current liabilities................................... 10,703 38,232
Long-term debt................................................... 67 178,372
Capital lease obligations........................................ 1,316 2,437
SHAREHOLDERS' EQUITY
Common stock $.001 par value, 50,000,000 shares authorized,
18,762,000 and 20,970,000 shares issued and outstanding at
December 31, 1998 and 1999, respectively........................... 19 21
Preferred stock $.001 par value, 50,000,000 shares authorized,
6,360,000 and 4,793,000 issued and outstanding at December 31,
1998, and 1999, respectively....................................... 6 4
Subscription receivable.......................................... (19) -
Additional paid in capital....................................... 72,795 134,951
Accumulated deficit.............................................. (6,436) (57,971)
Other comprehensive income (loss)................................ 994 (8,246)
------- --------
Total shareholders' equity....................................... 67,359 68,759
------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................ $79,445 $287,800
======= ========
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For year ended December 31
----------------------------------------------------
1997 1998 1999
---------------- ---------------- ----------------
(in thousands, except share and per share data)
<S> <C> <C> <C>
Revenue
Internet Projects........................................ $ 1,598 $ 5,139 $ 5,663
Network Services......................................... 716 3,495 16,635
---------- ----------- -----------
Total revenues................................................ 2,314 8,634 22,298
Cost of revenues:
Internet Projects........................................ 1,495 4,699 5,110
Network Services......................................... 866 4,067 17,148
Depreciation and amortization............................ 171 1,674 3,804
---------- ----------- -----------
Total cost of revenues........................................ 2,532 10,440 26,062
---------- ----------- -----------
Gross margin (loss)........................................... (218) (1,806) (3,764)
General and administrative expenses....................... 482 1,576 18,844
Sales and marketing expenses.............................. 1,188 3,844 12,238
Research and development.................................. 280 2,941 4,304
Depreciation and amortization............................. 116 880 8,322
---------- ----------- -----------
Total operating expenses 2,066 9,241 43,708
---------- ----------- -----------
Operating loss................................................ (2,284) (11,047) (47,472)
Interest expense.............................................. 39 197 18,039
Interest income............................................... 154 4,138
Foreign currency gains(losses)................................ -- -- (4,646)
---------- ----------- -----------
Loss before taxes and minority interest....................... (2,323) (11,090) (66,019)
Income tax benefit............................................ 1,339 6,172 14,384
---------- ----------- -----------
Net loss before minority interest............................. (984) (4,918) (51,635)
Minority interest............................................. - 145 100
---------- ----------- -----------
Net loss...................................................... $ (984) $ (4,773) $ (51,535)
========== =========== ===========
Basic and diluted loss per share.............................. $(0.12) $(0.30) $(2.59)
========== =========== ===========
Number of shares used to compute earnings per share........... 8,342,297 16,012,653 19,877,290
========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For year ended December 31,
-------------------------------
1997 1998 1999
-------- --------- ----------
<S> <C> <C> <C>
(in thousands)
Cash Flows from Operating Activities:
Net loss...................................................................... $ (984) $ (4,773) $ (51,535)
Adjustments to reconcile net loss to net cash used by operations:
Minority interest......................................................... - (145) (100)
Deferred tax credit....................................................... (1,349) (6,172) (14,400)
Depreciation and amortization............................................. 287 2,554 12,126
Provision for losses on accounts receivable............................... 33 121 927
Amortization of Bond discount............................................. - - 2,710
Changes in operating assets and liabilities:
Trade accounts receivable................................................. (475) (1,296) (3,563)
Other receivables......................................................... (136) (1,423) (3,622)
Other assets.............................................................. - (2) (9,663)
Prepaid expenses and other current assets................................. (32) (310) (1,383)
Trade accounts payable.................................................... (402) 1,028 12,077
Accrued interest expense.................................................. - - 3,792
Other accrued expenses and liabilities.................................... 1,378 17 12,576
Accrued personnel costs................................................... 248 66 2,018
------- -------- ---------
Total changes in operating assets and liabilities 581 (1,920) 12,232
Net cash used in operating activities.................................... (1,432) (10,335) (38,040)
Cash Flows from Investing Activities:
Purchase of short term investments............................................ (7,280) (105) (77,537)
Proceeds from sale of short term investments.................................. 6,931 810 33,177
Restricted Cash............................................................... - - (58,249)
Purchase of property and equipment............................................ (1,708) (6,034) (24,010)
Product development costs..................................................... (2,465) (3,866) -
Acquisition of businesses, net of cash acquired............................... (269) (734) (24,072)
Payment of deferred purchase obligations...................................... - - (4,085)
------- -------- ---------
Net cash used in investing activities.................................... (4,791) (9,929) (154,776)
Cash Flows from Financing Activities:
Proceeds from issue of common stock, net...................................... 8,070 57,577 -
Receipt of subscription receivable............................................ - 716 19
Proceeds from issuance of warrants............................................ - - 51,199
Proceeds from issuance of bonds - and other borrowings........................ 700 2,092 174,355
Repayment of borrowings....................................................... (126) (375) (1,941)
------- -------- ---------
Net cash provided by financing activities................................ 8,644 60,010 223,632
------- -------- ---------
Translation adjustments....................................................... (210) 891 (479)
------- -------- ---------
Net (decrease) increase in cash and cash equivalents.......................... 2,211 40,637 30,337
Cash and cash equivalents at beginning of period.............................. 28 2,239 42,876
------- -------- ---------
Cash and cash equivalents at end of year...................................... $ 2,239 $ 42,876 $ 73,213
======= ======== =========
Supplemental disclosure of non-cash investing and financing activities:
Acquisitions (Note 3):
Fair value of assets acquired............................................. $ 2,230 $ 8,800 $ 35,575
Less:
Cash acquired........................................................ 183 129 256
Deferred purchase obligation......................................... - 4,483 -
Cash paid............................................................ 452 864 24,328
Stock issued......................................................... 1,051 1,677 8,560
------- -------- ---------
Liabilities assumed....................................................... $ 544 $ 1,647 $ 2,431
======= ======== =========
Stock dividend................................................................ - (392) -
Other supplemental cash flow disclosures:
Cash paid for interest................................................... 40 197 1,872
Cash paid for taxes...................................................... 17 11 16
Depreciation............................................................. 192 1,059 5,877
Amortization............................................................. 95 1,495 6,249
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(all amounts in thousands)
<TABLE>
<CAPTION>
Common Stock Preferred Stock Additional
--------------------------------- Subscription Paid-In
Shares Amount Shares Amount Receivable Capital
------ ------ -------- ------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 1996..... 5,160 $ 5 6,360 $ 6 $ 2,066
Issuance of shares in
reverse acquisition........ 9,522 10 232
Issuance of shares for cash. 1,400 1 (735) 8,804
Net loss....................
Comprehensive income items..
Comprehensive loss..........
------ --- ------ --- ----- --------
Balance December 31, 1997... 14,682 $15 7,760 $ 7 $(735) $ 11,102
------ --- ------ --- ----- --------
Conversion of preferred 1,400 1 (1,400) (1)
stock......................
Stock dividend.............. 22 392
Issuance of shares for 158 3,726
acquisitions...............
Issuance of shares for cash. 700 1 12,599
Payment of subscription 716
receivable.................
Issuance of shares for cash. 1,800 2 44,976
Net loss....................
Comprehensive income items..
Comprehensive loss..........
------ --- ------ --- ----- --------
Balance December 31, 1998... 18,762 $19 6,360 $ 6 $ (19) $ 72,795
------ --- ------ --- ----- --------
Issuance of shares for 607 10,260
acquisitions...............
Payment of subscription 19
receivable.................
Conversion of preferred 1,567 2 (1,567) (2) -
stock
Warrants.................... 51,198
Other issuances............. 34 698
Net loss....................
Comprehensive income items..
Comprehensive loss..........
------ --- ------ --- ----- --------
Balance December 31, 1999... 20,970 $21 4,793 $ 4 $ 0 $134,951
====== === ====== === ===== ========
</TABLE>
<TABLE>
<CAPTION>
Unrealised Accumulated Total
Accumulated holding Translation
Deficit gains/(losses) Adjustment Equity
------------ -------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance January 1, 1996..... $ (287) $ - $ 1,790
Issuance of shares in 242
reverse acquisition........
Issuance of shares for cash. 8,070
Net loss.................... (984) (984)
Comprehensive income items.. (210) (210)
--------
Comprehensive loss.......... (1,194)
-------- ------------- ------- --------
Balance December 31, 1997... $ (1,271) $ -- $ (210) $ 8,908
-------- ------------- ------- --------
Conversion of preferred --
stock......................
Stock dividend.............. (392) --
Issuance of shares for 3,726
acquisitions...............
Issuance of shares for cash. 12,600
Payment of subscription 716
receivable.................
Issuance of shares for cash. 44,978
Net loss.................... (4,773) (4,773)
Comprehensive income items.. 1,204 1,204
--------
Comprehensive loss.......... (3,567)
-------- ------------- ------- --------
Balance December 31, 1998... $ (6,436) $ -- $ 994 $ 67,359
-------- ------------- ------- --------
Issuance of shares for 10,260
acquisitions...............
Payment of subscription 19
receivable.................
Conversion of preferred -
stock
Warrants.................... 51,198
Other issuances............. 698
Net loss.................... (51,535) (51,535)
Comprehensive income items.. (870) (8,370) (9,240)
--------
Comprehensive loss.......... (60,775)
-------- ------------- ------- --------
Balance December 31, 1999... $(57,971) $(870) $(7,376) $ 68,759
======== ================ ======= ========
</TABLE>
F-6
<PAGE>
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
1. Basis of Presentation
Cybernet Internet Services International, Inc. ("Cybernet Inc") (formerly known
as New Century Technologies Corporation) was incorporated under the laws of the
State of Utah on September 27, 1983. Cybernet Inc changed its state of
incorporation to Delaware in November 1998. Effective September 16, 1997 the
Company acquired Cybernet Internet Dienstleistungen AG ("Cybernet AG"), a German
stock corporation which offers a variety of Internet related telecommunication
and systems integration services to corporate customers. Cybernet AG was founded
in December 1995, and commenced significant operations in 1996. The acquisition
has been accounted for as a reverse acquisition whereby the Cybernet Inc is
considered to be the acquiree even though legally it is the acquiror.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Cybernet Inc and
its subsidiaries ("the Company"). All significant intercompany investments,
accounts, and transactions have been eliminated.
Foreign Currency
The functional currency, for the Company and its subsidiaries is the German
Deutsche Mark ("DM").
The assets and liabilities for the Company's international subsidiaries are
translated into U.S. dollars using current exchange rates at the balance sheet
dates. Statement of operations items are translated at average exchange rates
prevailing during the period. The resulting translation adjustments are recorded
in the foreign currency translation adjustment account in equity. Foreign
currency transaction gains or losses are included in net earnings (loss).
Revenue Recognition`
The Company offers Internet telecommunication and systems integration products
and network services. Telecommunication and system integration products consist
of the development of customized business solutions, installation of hardware
and software and production support. Revenues from telecommunication and systems
integration products are recognized upon completion of the related project and
customer acceptance. Revenues from ongoing network access services are
recognized when provided to customers. Ongoing network services consist of
monthly user fees for network access and related services
Property and Equipment
Property and equipment are recorded at cost and depreciated using the straight-
line method over the estimated useful life of the asset, which ranges from 4
years (computer equipment and software) to 10 years (leasehold improvements and
furniture and fixtures).
Product Development Costs
The Company capitalizes costs incurred related to the development of products
that will be sold to customers. Costs capitalized include direct labor and
related overhead and third party costs related to establishing network systems.
All costs in the development process are classified as research and development
and expensed as incurred until technological feasibility has been established.
Once technological feasibility has been established, which is defined as
completion of a working model, such costs are capitalized until the individual
products are commercially available. Amortization, which began in 1997, is
calculated using the greater of (a) the ratio that current gross revenues for a
product bear to the total of current and anticipated future revenues for that
product or (b) the straight-line method over four years. The carrying value of
product development costs is regularly reviewed by the Company and a loss
recognized when the net realizable value falls below the unamortized cost. In
1999 such a loss totalling DM 800,000 ($436,000) was recorded as additional
amortization in the German operations as the related products are no longer
being marketed by the Company. Accumulated amortization amounted to $1,017,000
and $2,734,000 at December 31, 1998 and 1999 respectively.
Sales and Marketing Costs
Marketing costs include the costs of all personnel engaged in marketing
activities, the costs of advertising and public relations activities (e.g. trade
shows), and other related costs. Advertising costs are expensed as incurred.
Advertising expense was $227,000, $610,000 and $2,751,000 in the years ended
December 31, 1997, 1998 and 1999 respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
F-7
<PAGE>
Short Term Investments
In accordance with Statement of Financial Accounting Standard ("Statement") No.
115 "Accounting for Certain Investments in Debt and Equity Securities"
available- for-sale securities are carried at fair value, with unrealized gains
and losses reported as a separate component of stockholder's equity. Realized
gains and losses and declines in value judged to be other than temporary on
available-for-sale securities are included in other income. The Company has
classified all debt and equity securities as available-for-sale.
Income Taxes
The Company accounts for income taxes using the liability method. Under this
method, deferred income taxes are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities using enacted
tax rates in effect in the years in which the differences are expected to
reverse. The effect of a change in tax rates on deferred tax assets and
liabilities is recognized in the period that includes the enactment date.
Deferred tax assets are reduced by a valuation allowance when the Company cannot
make the determination that it is more likely than not that some portion or all
of the related tax asset will be realized.
Concentration of Credit Risk
Financial statements that potentially subject the Company to concentrations of
credit risks consist primarily of cash and cash equivalents, short term
investments, restricted cash and trade accounts receivable. Short term
investments are comprised highly liquid mutual fund investments. Credit risk on
trade receivable balances is minimized by the diverse nature of the Company's
customer base.
The Company is economically dependent on the entities from which it leases the
telecommunication lines comprising its network. It is probable that failure of
these entities to honor their lease obligations or to renew leases under
economically viable conditions could have a negative near-term impact on the
Company's growth and results of operations.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Goodwill
Goodwill, which represents the excess of purchase price over fair value of net
assets acquired, is amortized on a straight-line basis over a period between 5
and 10 years. Accumulated amortization totaled $358,000 and $2,861,000 at
December 31, 1998 and 1999, respectively. The Company assesses the
recoverability of goodwill by determining whether the amortization of the
related balance over its remaining life can be recovered through reasonably
expected undiscounted future cash flows. Management evaluates the amortization
period to determine whether later events and circumstances warrant revised
estimates of the amortization period.
Stock Compensation
The Company accounts for its stock option compensation under Accounting
Principles Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"). The Company presents all disclosures required
by Statement of Financial Accounting Standards No. 123 "Accounting for Stock-
based compensation" ("Statement 123") in Note 12.
Comprehensive Income
In 1998, the Company adopted Financial Accounting Standards Board Statement 130
"Reporting Comprehensive Standards" ("Statement 130"), which requires the
disclosure of the Company's comprehensive income. Comprehensive income is
defined as all changes in shareholders' equity exclusive of transactions with
owners such as capital investments and dividends. All prior periods have been
restated to conform with the reporting requirements of Statement 130.
Segment Disclosures
In 1998, the Company adopted Financial Accounting Standards Board Statement 131
"Disclosures About Segments of an Enterprise and Related Information"
("Statement 131"), which requires disclosures of certain financial information
of the Company's business operating segments. All prior periods have been
restated to conform with the disclosure requirements of Statement 131.
Reclassifications
Certain prior year amounts in the consolidated financial statements have been
reclassified to conform to the current year presentation.
F-8
<PAGE>
3. Business Acquisitions
On September 16, 1997, the Company acquired all of the outstanding shares of the
common stock of Cybernet AG in exchange for the issuance of 5,160,000 shares of
common stock of the Company, 1,200,000 shares of Series A preferred stock of the
Company and 5,160,000 shares of Series B preferred stock of the Company, such
shares representing the outstanding shares of the Company at that date.
Generally accepted accounting principles require that the Company be considered
the acquired company for financial statement purposes (a reverse acquisition)
even though the entity will continue to be called Cybernet Internet Services
International, Inc. Therefore, the acquisition has been recorded as a
recapitalization of Cybernet AG. The effects of the reverse acquisition have
been reflected for all share amounts in the accompanying financial statements.
The Company had no operations at the time of the reverse acquisition.
Effective September 16, 1997, the Company acquired 100% of the outstanding
shares of Artwise GmbH ("Artwise"), for a total consideration of DM 1,710,000
($954,000). DM 475,000 ($265,000) of the purchase price was paid in cash with
the remainder settled in exchange for the issuance of 72,620 shares of the
common stock of the Company in February, 1998. The shares issued in February
1998, which were recorded as additional goodwill, were partially contingent upon
the achievement of certain financial goals by Artwise for the year ended
December 31, 1997. The acquisition has been accounted for using the purchase
method of accounting and accordingly the accompanying financial statements
reflect Artwise's results of operations from September 16, 1997. Goodwill
recorded in connection with the acquisition of Artwise, of DM 1,507,000
($841,000), is being amortized over 10 years.
Effective December 11, 1997, the Company acquired 66% of the outstanding shares
of Eclipse s.r.l. ("Eclipse"), for a total consideration of DM 983,000
($548,000). DM 335,000 ($187,000) of the purchase price was paid in cash with
the remainder to be settled in exchange for the issuance of 27,000 shares of the
common stock of the Company in 1999. The acquisition has been accounted for
using the purchase method of accounting. Eclipse's results of operations for the
period December 11, 1997 through December 31, 1997 are not included in the
accompanying financial statements due to immateriality. Eclipse's results of
operations from January 1, 1998 are reflected in the accompanying financial
statements. Goodwill recorded in connection with the acquisition of Eclipse, of
DM 896,000 ($507,000), is being amortized over 10 years.
Effective August 15, 1998, the Company acquired 100% of the outstanding shares
of Open:Net Internet Solutions GmbH ("Open:Net") for a total consideration of DM
4,251,000 ($2,540,000). DM 1,445,000 ($864,000) of the purchase price was paid
in cash with the remainder settled in exchange for the issuance of 58,825 shares
of the common stock of the Company. The acquisition has been accounted for using
the purchase method of accounting and as such the accompanying financial
statements reflect Open:Net's results of operations from August 15, 1998.
Goodwill recorded in connection with the acquisition of Open:Net, of DM
3,520,000 ($2,298,000) was being amortized over 10 years. After a reassessment
by management, with effect from January 1, 1999 the remaining goodwill is being
amortized over four years
Effective December 28, 1998, the Company acquired 100% of the outstanding shares
of Vianet Internet Dienstleistungen AG ("Vianet") for a cash payment of DM
7,500,000 ($4,483,000) and 300,000 shares of the common stock of the Company
which were to be issued to the selling shareholders of Vianet in increments of
60,000 shares over five years contingent on the continued employment of the
individuals. In 1999, 30,000 shares were released in accordance with the terms
of the agreement and an additional 75,000 were released in connection with the
termination of one if the original shareholders, who lost his right to the
balance of the 150,000 due under the original agreement. The value of the
remaining 120,000 shares will be added to the cost of acquiring the Vianet when
the shares are issued to the selling shareholders. The acquisition has been
accounted for using the purchase method of accounting and as such the
accompanying financial statements reflect Vianet's results of operations from
January 1,1999. Goodwill recorded in connection with the acquisition of Vianet,
amounting to DM 6,419,000 ($3,838,000), is being amortized over 10 years.
The following unaudited pro forma consolidated results of operations for the
years ended December 31, 1997 and 1998 assume the acquisitions described above
occurred as of January 1, 1997:
<TABLE>
<CAPTION>
Year ended 31 December
----------------------
1997 1998
--------- ---------
(in thousand except per share data)
<S> <C> <C>
Revenue............................................. $ 7,468 $12,590
Net loss............................................ (2,066) (6,068)
Basic and diluted loss per share.................... $ (0.21) $ (0.38)
</TABLE>
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
3,103,000 ($1,639,000). DM 1,807,000 ($954,000) of the purchase price was paid
in cash (in Swiss Francs) with the remainder settled in exchange for the
issuance of 25,680 shares of the common stock of the Company.
F-9
<PAGE>
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 from April 13, 1999. Goodwill recorded in connection with the
acquisition of Sunweb, amounting to DM 2,678,000 ($1,414000), is being amortized
over 10 years.
Effective June 30, 1999, the Company acquired 100% of the outstanding shares of
Cybernet Italia S.p.A.(formerly Flashnet S.p.A.) for a total consideration of
DM52,816,000 ($27,890,000). DM41,464,000 ($21,896,000) of the purchase price was
paid in cash (in Italian Lire) with the remainder settled in exchange for the
issuance of 301,290 shares of the common stock of the Company. The acquisition
has been accounted for using the purchase method of accounting and as such the
accompanying financial statements reflect Cybernet Italia's results from June
30, 1999. Goodwill recorded in connection with the acquisition of Cybernet
Italia, amounting to DM 32,136,000 ($16,970,000), is being amortized over 10
years. The allocation of the excess purchase price over net assets acquired is
preliminary and is expected to be finalized by June 30, 2000,
Effective October 28 1999, the Company acquired of 51% of the outstanding shares
of Novento Telecom AG ("Novento") and 51% of Multicall Telefonmarketing AG
("Multicall") for a consideration of DM 3,178,000 ($ 2,373,000). DM 2,002,000
($1,092,000) of the purchase price was paid in cash with the remainder settled
in exchange for the issuance of 39,412 shares of the common stock of the
Company. The Company has an option to acquire the remaining 49% of the shares of
both companies. The acquisition has been accounted for using the purchase method
of accounting and as such the accompanying financial statements reflect Novento
and Multicall's results from October 28, 1999. Goodwill recorded in connection
with the acquisition of Novento, amounting to DM 1,913,000 ($1,043,000) is being
amortized over 10 years.
Effective October 29, 1999 the Company acquired the remaining 34% of the
outstanding shares of Eclipse, in which the Company already owned 66% of the
outstanding shares, for a total consideration of DM 4,320,000 ($2,356,000). DM
707,000 ($386,000) of the purchase price was paid in cash with the remainder
settled by way of the depositing of 136,402 shares of the common stock of the
Company in a pooling trust from which the shares will be released to the
sellers. Goodwill recorded in connection with the acquisition of the remaining
shares in Eclipse, amounting to DM 3,718,000 ($2,359,000), is being amortized
over the remaining life of the goodwill associated with the acquisition of the
majority shareholding at the end of 1997, as detailed above.
The following unaudited pro forma consolidated results of operations for the
years ended December 31, 1998 and 1999 assume the acquisitions of Open:Net,
Vianet, Sunweb, Cybernet Italia, Novento and Multicall had occurred as of
January 1, 1998.
<TABLE>
<CAPTION>
Year ended 31 December
---------------------------------------
1998 1999
---------------- ----------------
(in thousand except per share data)
<S> <C> <C>
Revenue $ 17,764 $ 30,281
Net loss (12,875) (54,669)
Basic and diluted loss per share $ (0.77) $ (2.75)
</TABLE>
F-10
<PAGE>
4. Short Term and Restricted Investments
Under the terms of Units issued on July 1, 1999 (refer note 9 below) amounts
equivalent to the first six scheduled interest payments were invested in US
government securities and restricted in their use to the payment of such
interest when falling due. These have been classified as Restricted Investments.
Short-term and restricted investments are summarized as follows:
<TABLE>
<CAPTION>
Cost Unrealized Unrealized Market
holding holding value
gains losses
Short term investments (in thousands)
<S> <C> <C> <C> <C>
December 31, 1999
Italian Government Treasury bonds............ $ 2,643 $- $ - $ 2,643
Activest Euro Geldmarkt Plus, WKN 975247..... 7,446 4 - 7,450
3.50% Allg. Hypo-Bank Pfandbriefe S. 482,
due 1.13.2000, WKN 202782.................... 30,210 - 72 30,138
HypoVereinsbank FLR-MTN, due 12.6.2009....... 1,002 4 - 1,006
------- ------------ ---- -------
$41,301 $8 $ 72 $41,237
======= ============ ==== =======
December 31, 1998
BHF Bank Accugeld Fund....................... $ 112 - - $ 112
------- ------------ ---- -------
$ 112 $- $ - $ 112
======= ============ ==== =======
Restricted Investments
December 31, 1999
7.75% US Treasury Notes due January1, 2000... 8,612 - 102 $ 8,510
5.875% US Treasury Notes due July 1, 2000.... 9,105 - 53 9,052
5.5% US Treasury Notes due January1, 2001.... 9,333 - 81 9,252
6.625% US Treasury Notes due July 1, 2001.... 9,780 - 164 9,616
6.125%US Treasury Notes due January1, 2002... 10,036 - 182 9,854
6.25% US Treasury Notes due July 1, 2002..... 10,396 - 220 10,176
------- ------------ ---- -------
$57,262 $- $802 $56,460
======= ============ ==== =======
</TABLE>
In addition at December 31, 1999 there was interest due on the restricted
investments totaling $1,789,000 which is also restricted for the payment of
interest and as such has been classified as restricted investments in the
balance sheet.
The net unrealized holding gains and losses are recorded as a separate component
of shareholder's equity.
Proceeds from the sale of available for sale securities in 1997, 1998 and 1999
were $6,931,000, $810,000 and $33,177,000, respectively. The Company did not
recognize any gains on the sales of short term investments in 1997, 1998 or
1999.
5. Property and Equipment
Net property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31
----------------------------------------
1998 1999
------------------ ------------------
( in thousands)
<S> <C> <C>
Computer equipment and software................. $ 7,274 $23,281
Leasehold improvements.......................... 426 2,755
Furniture and fixtures.......................... 1,980 8,633
------- -------
9,680 34,669
Less accumulated depreciation and amortization.. (1,710) (6,190)
------- -------
Total Net Property and Equipment................ $ 7,970 $28,479
======= =======
</TABLE>
F-11
<PAGE>
6. Leases
The Company leases facilities and equipment under long-term operating leases,
and has long term data and voice communication agreements. Future minimum
payments under non-cancelable operating leasing with initial terms of one year
or more are as follows:
<TABLE>
<CAPTION>
Year ending December 31 (in thousands)
<S> <C>
2000............................................................. $ 7,413
2001............................................................. 3,254
2002............................................................. 2,484
2003............................................................. 2,052
2004............................................................. 510
Thereafter......................................................... 232
-------
$15,945
=======
</TABLE>
The Company's rental expense under operating leases in the years ended December
31, 1997, 1998 and 1999 totaled approximately $177,000, $1,069,000 and
$7,375,000 respectively.
The Company has financed the acquisition of certain computer equipment through
capital lease agreements with interest rates ranging from 5% to 8%. At December
31, 1998 and 1999, the gross value of assets under capital leases was $2,580,000
and $6,885,000 and related accumulated depreciation was $610,000 and $
2,188,000, respectively. Future minimum lease payments in connection with these
leases are as follows:
<TABLE>
<CAPTION>
Year ending December 31 ( in thousands)
<S> <C>
2000............................................................ $1,993
2001............................................................ 1,280
2002............................................................ 600
2003............................................................ 513
2004............................................................ 314
Thereafter -
------
4,700
Less: Interest Portion............................................... (535)
------
$4,165
======
</TABLE>
7. Other assets
Other non current assets consists principally of expenses incurred in connection
with the bonds issued during 1999 and amounts allocated to customer base and
management contracts in connection with business acquisitions. Bond issuance
costs of DM 13,816,000 ($ 7,096,000) are being amortized to interest expense
over the period of the borrowings. The unamortized balance at December 31, 1999
was DM 13,929,000 ($ 7,154,000). Amounts allocated to customer base and
management contracts are being amortized on a straight line basis over their
useful lives - between three and five years. The unamortized balance of these
assets at December 31, 1999 was DM 20,746,000 ($10,656,000)
8. Overdrafts and Short-Term Borrowings
Overdrafts represent temporary overdrafts of bank balances. The overdrafts are
not subject to formal agreements with the banks and generally are not subject to
interest.
As of December 31, 1999, the Company had established short-term unsecured
overdraft facilities under which the Company and its subsidiaries could borrow
up to DM 1,637,000 ($840,000). The facilities are denominated in Italian Lire as
to DM 1,495,000 and in Austrian Schilling as to DM 142,000. The interest rate
fluctuates based on current lending rates and was 9.75 %and 5,25 % at December
31, 1998 and 1999, respectively. As of December 31, 1999, DM 124,000 ($63,000)
of the overdraft facility was used and DM1,513,000 ($776,000) was available.
As of December 31, 1999, Multicall had a loan payable to a minority shareholder
of DM 728,000 ($374,000).
F-12
<PAGE>
9. Long term debt
The Company's debt consisted of the following:
<TABLE>
<CAPTION>
December 31
----------------------------
1998 1999
------------- -------------
<S> <C> <C>
(in thousands)
Notes payable, 3.75% interest, due in quarterly installments of principal and interest $ 42 $ -
through January 2005....................................................................
Notes payable, 6.2% interest, due in monthly installments of principal and interest 5 -
through June 1999.......................................................................
Notes payable, 6.6% interest, due in monthly installments of principal and interest 39 -
through December 2002...................................................................
14% Senior Dollar Notes payable, due 2009................................................ - 99,593
13% Convertible Senior Euro Subordinated Payment-in-kind Notes, due 2009................. - 26,339
13% Convertible Senior Dollar Subordinated Discount Notes, due 2009 - Offering 1......... - 36,706
13% Convertible Senior Dollar Subordinated Discount Notes, due 2009 - Offering 2......... - 15,734
----- --------
86 178,372
Less current portion..................................................................... (19) -
----- --------
Long-term portion........................................................................ $ 67 $178,372
===== ========
</TABLE>
Notes payable outstanding at December 31, 1998 were paid with the proceeds of
the debt issued in 1999.
On July 1, 1999, the Company issued 150,000 Units, each unit consisting of
$1,000 principal amount of 14.0% Senior Dollar Notes due 2009 ("Notes") and one
Warrant ("Warrant") to purchase 30.2311 ordinary shares of Cybernet Internet
Services International, Inc. Interest on the Notes is payable on July 1 and
January 1 of each year, beginning January 1, 2000. The Notes will mature on July
1, 2009. The Notes and the Warrants became transferable on September 10, 1999.
The Warrants can be exercised at an exercise price of $22.278 per ordinary share
of Cybernet Internet Services International, Inc, and are exercisable from
January 1, 2000 to July 1, 2009.
The net proceeds of the unit offering were approximately $146 million.
$57,466,000 thereof was invested in U.S. government securities which are
restricted in use of the payment in full of the first six scheduled interest
payments. $51,199,000 of the net proceeds were allocated to the Warrants based
on a fair value allocation of the proceeds between the Notes and the Warrants
and have been recorded in additional paid in capital. The resultant discount on
the Notes is being accreted over the term of Notes using the straight line
method.
The Units contain covenants applicable to the Company, including limitations and
requirements to indebtedness, restricted payments, dividends and other payments,
the issuance and sale of capital stock, transactions with stockholders and
affiliates, liens, asset sales, issuance of guarantees of indebtedness, sale-
leaseback transactions, consolidations and mergers, and provision of financial
statements and reports.
On August 26, 1999 the Company completed private offerings of $50,002,183 in
aggregate initial accreted value of 13.0% Convertible Senior Subordinated
Discount Notes due 2009 (in two separate offerings) ("Discount Notes") and Euro
25 million aggregate principal amount of 13.0% Convertible Senior Subordinated
Pay-In-Kind Notes due 2009 ("Payment-in-kind Notes"). 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. After
payment of discounts and commissions, the net proceeds of these offerings were
approximately $72 million.
The covenants associated with the Discount Notes are in most material aspects
the same as those associated with Units, discussed above.
10. Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in estimating the
fair values of its financial instruments:
. Cash and equivalents, restricted cash, trade receivables, short term
investments, trade payables and accrued expenses - the carrying amounts
approximate fair value because of the short-term maturity of these
instruments.
F-13
<PAGE>
. Long-term debt - the fair value of the Company's 14% Senior Dollar Notes
payable, due 2009 is estimated based on quoted market values. The fair value
of, the 13% Convertible Senior Subordinated Discount Notes, and 13%
Convertible Senior Subordinated Pay-In-Kind Notes was also estimated on
quoted market values. The following table presents the carrying values and
fair values of the Company's long erm bonds at December 31, 1999
<TABLE>
<CAPTION>
Bond Carrying Fair
value value
----------- ----------
(in thousands)
<S> <C> <C>
14% Senior Dollar Notes payable, due 2009..................................................... $99,593 $141,000
13% Convertible Senior Euro Subordinated Payment-in-kind Notes, due 2009...................... 26,339 24,232
13% Convertible Senior Dollar Subordinated Discount Notes, due 2009 - Offering 1.............. 36,706 33,770
13% Convertible Senior Dollar Subordinated Discount Notes, due 2009 - Offering 2.............. 15,734 14,475
</TABLE>
. Capital lease and other long-term debt obligations - the fair value was
estimated using discounted cash flow analyses based on the Company's
incremental borrowing rates for similar type borrowings.
11. Stockholders' Equity
Common Stock
The Company is authorized to issue 50,000,000 shares of Common Stock. Holders of
Common Stock are entitled to one vote per share on all matters submitted to a
vote of stockholders. The Common Stock is not redeemable and has no conversion
or preemptive rights.
Preferred Stock
The Company is authorized to issue 50,000,000 shares of Preferred Stock with
relative rights, preferences and limitations determined at the time of issuance.
As of December 31, 1999, the Company has issued and outstanding Series A and B
Preferred Stock. All of the Company's previously issued Series C Preferred Stock
was converted to Common Stock in 1998.
Series A Preferred Stock
The holders of the Series A Preferred Stock are entitled to receive dividends at
a rate equal to $0.01 per share per annum before any dividends are paid or set
apart for payment upon any other series of Preferred Stock of the Company, other
than Series B or Series C Preferred Stock, or on the Common Stock of the
Company. Commencing with the fiscal year beginning on January 1, 1998, the
dividend on the Series A Preferred Stock will be paid for each fiscal year
within five months of the end of each fiscal year, subject to the availability
of surplus or net profits therefor. The dividends on the Series A Preferred
Stock are not cumulative. The holders of the Series A Preferred Stock are not
entitled to vote.
The shares of Series A Preferred Stock may be redeemed by the Company at any
time after January 1, 2000, at a redemption price of one share of the Common
Stock of the Company for each share of Series A Preferred Stock plus any unpaid
dividends earned thereon; provided that all and not less than all of the shares
of Series A Preferred Stock are so redeemed and provided further that if the
Company has not redeemed the Series A Preferred Stock by December 31, 2001, a
holder of Series A Preferred Shares may at any time commencing January 1, 2002,
require the Company to purchase all of the shares of the Series A Preferred
Stock held by him for a purchase price of $3.00 per share plus any dividends
earned but unpaid on such shares.
A holder of Series A Preferred Stock may convert each share held into one share
of the Common Stock of the Company; provided, however, that (1) no conversion
may occur prior to January 1, 1999; (2) no more than 25% of the Series A
Preferred Shares held by the holder may be converted prior to January 1, 2000;
(3) no more than an additional 25% of the Series A Preferred Shares held by the
holder may be converted prior to January 1, 2001; (4) the remainder of the
Series A Preferred Shares held by the holder may be converted commencing January
1, 2001; and (5) any conversion may not be for less than all of the Series A
Preferred Shares held by the converting shareholder eligible for conversion at
the time of the notice.
Upon the liquidation, dissolution or winding up, whether voluntary or
involuntary, of the Company, the holders of the Series A Preferred Stock will be
entitled to be paid the sum of $3.00 per share plus an amount equal to any
unpaid accrued dividends before any amount is paid to the holder of any other
series of Preferred Stock, other than the Series B Preferred Stock or the Series
C Preferred Stock, or to the Common Stock of the Company. After payment of these
amounts to the holders of the Series A Preferred Stock, the remaining assets of
the Company will be distributed to the holders of the Common Stock.
In July 1999, holders of 276,560 shares of Series A Preferred Stock converted
their shares into 276,560 shares of the Company's Common Stock.
Series B Preferred Stock
F-14
<PAGE>
The holders of the Series B Preferred Stock are entitled to receive dividends at
a rate equal to $0.01 per share per annum before any dividends are paid or set
apart for payment upon any other series of Preferred Stock of the Company other
than the Series C Preferred Stock or on the Common Stock of the Company.
Commencing with the fiscal year beginning on January 1, 1998, the dividend on
the Series B Preferred Stock will be paid for each fiscal year within five
months of the end of each fiscal year, subject to the availability of surplus or
net profits therefor. The dividends on the Series B Preferred Stock are not
cumulative. The holders of the Series B Preferred Stock are entitled to one vote
per share.
The shares of Series B Preferred Stock may be redeemed by the Company at any
time after January 1, 2000, at a redemption price of one share of the Common
Stock of the Company for each share of Series B Preferred Stock plus any unpaid
dividends earned thereon through the date of redemption; provided that all and
not less than all of the shares of Series B Preferred Stock are so redeemed.
A holder of Series B Preferred Stock may convert each share held into one share
of the Common Stock of the Company provided, however, that (1) no conversion may
occur prior to January 1, 1999; (2) no more than 25% of the Series B Preferred
Shares held by the holder may be converted prior to January 1, 2000; (3) no more
than an additional 25% of the Series B Preferred Shares held by the holder may
be converted prior to January 1, 2001; (4) the remainder of the Series B
Preferred Shares held by the holder may be converted commencing January 1, 2001;
and (5) any conversion may not be for less than all of the Series B Preferred
Shares held by the converting shareholder eligible for conversion at the time of
the notice.
Upon the liquidation, dissolution or winding up, whether voluntary or
involuntary, of the Company, the holders of the Series B Preferred Stock will be
entitled to be paid the sum of $3.00 per share plus an amount equal to any
unpaid accrued dividends before any amount is paid to the holder of any other
series of Preferred Stock other than the Series C Preferred Stock or to the
Common Stock of the Company. After payment of these amounts to the holders of
the Series B Preferred Stock, the remaining assets of the Company will be
distributed to the holders of the Common Stock.
In July 1999, holders of 1,209,000 shares of Series B Preferred Stock converted
their shares into 1,290,000 shares of the Company's Common Stock.
Series C Preferred Stock
In July 1998, holders of 1,400,000 shares of Series C Preferred Stock
(representing the entire amount outstanding) converted their shares into
1,400,000 shares of the Company's Common Stock. Prior to the conversion holders
of Series C Preferred Stock received a stock dividend in Common Stock of the
Company in lieu of a cash dividend. The stock dividend was valued at the closing
price of the Common Stock on the date the dividend was declared.
12. Stock Option Plan
Stock Incentive Plan
In 1998, the Company adopted a stock incentive plan (,,Stock Incentive Plan")
which provides for the grant of stock options to purchase shares of the
Company's common stock to key employees who make a significant contribution to
the success of the Company and members of the Board of Directors. The Company
has elected to follow APB 25 and the related interpretations in accounting for
its employee stock options. Under APB 25, as long as the exercise price of the
Company's employee stock options equals the market price of the underlying stock
at date of grant, no compensation expense is recorded.
The Company has reserved 5,000,000 shares of common stock for issuances under
the Stock Incentive Plan. The following table presents the changes in the stock
options during the year.
<TABLE>
<CAPTION>
Option Exercise Weighted Average
Stock Options Price per Share Exercise Price
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Outstanding at January 1, 1998 -- -- --
Granted 685,000 $31.96 - $32.04 $32.01
Exercised -- -- --
Forfeited -- -- --
Outstanding at December 31, 1998 685,000 $31.96 - $32.04 $32.01
Granted 1,846,625 $ 9.02 - $45.07 $12.68
Exercised -- -- --
Forfeited 337,610 $ 9.02 - $45.07 $30.64
Outstanding at December 31, 1999 2,194,015 $ 9.02 - $45.07 $16.10
</TABLE>
F-15
<PAGE>
As of December 31, 1999 the Company had 198,757 options outstanding that were
fully vested. Options vest over a period of three years from the date of grant.
Statement 123 requires the presentation of pro forma information regarding net
income and earnings per share as if the Company had accounted for its employee
stock options under the fair value method of that statement. The fair value of
these options was estimated at the date of grant using the Black-Scholes option
pricing model. The assumptions used in calculating the fair value of the
options granted in 1998 and 1999 were as follows.
<TABLE>
<CAPTION>
1998 Grants 1999 Grants
--------------------- ---------------------
<S> <C> <C>
Risk free interest rate..................... 4.5% 5.5%
Stock price volatility factor............... 0.8 0.8
Expected life of options.................... 5 years 5 years
Dividend yield.............................. 0.0% 0.0%
</TABLE>
The fair market value of the options using the Black-Scholes pricing model
granted in the years ended December 31, 1998 and 1999 was $13,320,000 and
$15,427,789, respectively. Had the Company determined compensation expense for
this plan in accordance with the provisions of Statement 123, the fair value of
the options would have been amortized over the option vesting periods. Under
this method, the Company's net loss and loss per share for the years ended
December 31, 1998 and 1999 would have been as follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
1998 1999
-------------------- --------------------
<S> <C> <C>
Proforma net loss- thousand................. $4,996 $56,944
Proforma net loss per share - basic and
diluted.................................... $ 0.31 $ 2.87
</TABLE>
13. Provision for 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 Company's principal operations are currently located in Germany. Pretax loss
for the years ended December 31, 1997, 1998 and 1999 were taxable in the
following jurisdictions:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------
1997 1998 1999
-------------------- ----------------- --------------
<S> <C> <C> <C>
( in thousands)
Germany........................................ $(2,303) $(10,481) $(58,081)
Others......................................... (20) (609) (7,938)
------- -------- --------
$(2,323) $(11,090) $(66,019)
======= ======== ========
</TABLE>
The components of the provision for income taxes, substantially all of which
relates to Germany, are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------
1997 1998 1999
----------------- ----------------- --------------
<S> <C> <C> <C>
( in thousands)
Current.......................................... 10 - 16
Deferred......................................... (1,349) (6,172) (14,400)
------- ------- --------
Income tax benefit............................... $(1,339) $(6,172) $(14,384)
======= ======= ========
</TABLE>
The Company has net deferred tax assets as of December 31,1998 and 1999 as
follows:
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1999
--------------- -------------
Deferred tax assets ( in thousands)
<S> <C> <C>
Net operating losses........................................ $11,695 $ 34,198
Other....................................................... 856
------- --------
11,695 35,054
Valuation allowance......................................... - (12,250)
------- --------
$11,695 $ 22,804
======= ========
</TABLE>
F-16
<PAGE>
<TABLE>
<S> <C> <C>
Deferred tax liabilities
Product development costs................................... 3,316 1,863
Depreciation and amortization............................... 212 169
Other....................................................... 1 1
------- --------
3,529 2,033
------- --------
Net deferred tax assets.......................................... $ 8,166 $ 20,771
======= ========
</TABLE>
As of December 31, 1999, the Company and its subsidiaries had available combined
cumulative tax loss carry forwards of approximately $67.9 million substantially
all of these loss carry forwards have an indefinite life. Management believes
that the remaining deferred tax assets of the $20.7 million is more likely than
not to be realised through future taxable income. However, if the Company is
unable to generate sufficient taxable income in the future through operating
results a valuation allowance will be required to be established through a
charge to income.
The Company has recorded a valuation allowance to reflect the estimated amount
of net operating loss carry-forward which may not be realized.
A reconciliation of income taxes determined using the United States statutory
federal income tax rate of 35% to actual income taxes provided is as follows:
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------------------------
1997 1998 1999
(in thousands)
<S> <C> <C> <C>
Income tax benefit at statutory rate............................ $ (813) $(3,881) $(23,107)
Higher foreign tax rates........................................ (530) (2,529) (9,161)
Valuation allowance............................................. - - 12,960
Goodwill and other intangibles.................................. - 133 4,287
Statutory rate change........................................... - - 550
Other........................................................... 4 105 87
------- ------- --------
Income tax benefit.............................................. $(1,339) $(6,172) $(14,384)
======= ======= ========
</TABLE>
14. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1999
---------------- ---------------
<S> <C> <C>
(in thousands, except per share data)
Numerator:
Net loss-numerator for basic and diluted loss per.......... $(4,773) $(51,535)
Denominator:
Denominator for basic and diluted loss per share --
weighted average shares outstanding....................... 16,013 19,877
Basic and diluted loss per share................................ $ (.30) $ (2.59)
</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.
15. Related Party Transaction
The Company paid DM 170,000 ($97,000), DM 173,000 ($98,000) and DM 479,000
($261,000) to a law firm for legal services where one of the members of the
board of directors is a partner in the years ended December 31, 1997 ,1998 and
1999, respectively.
In December 1998, the Company paid $2,916,000 in underwriting fees in connection
with the public sale of equity, to an investment bank in which one of the
Company's principal shareholders and a former member of the Company's Board of
Directors is a significant shareholder.
At December 31, 1999, Multicall owed DM 728,000 ($374,000) to its minority
shareholder.
In the year ended December 31, 1999, Sunweb purchased goods and services
totaling CHF 2,346,000 ($1,251,000) from a company owned by a relative of one of
its shareholders.
F-17
<PAGE>
16. Segment information
The Company evaluates performance, and allocates resources, based on the
operating profit of its subsidiaries. The accounting policies of the reportable
segments are the same as those described in the Summary of Significant
Accounting Policies in Note 2.
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.
Information concerning the Company's geographic locations is summarized as
follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------
1997 1998 1999
------------ ---------------- ---------------
<S> <C> <C> <C>
(in thousands)
Revenues:
Germany.............................................. $ 2,314 $ 7,693 $ 12,080
US................................................... -- -- -
Italy............................................... -- 941 5,499
Other................................................ -- -- 4,719
------- -------- --------
Total................................................ $ 2,314 $ 8,634 $ 22,298
======= ======== ========
Depreciation and Amortization:
Germany.............................................. $ 287 $ 2,377 $ 5,161
US................................................... -- 109 5,800
Italy............................................... -- 68 646
Other................................................ -- -- 519
------- -------- --------
Total................................................ $ 287 $ 2,554 $ 12,126
======= ======== ========
Interest Expense:
Germany.............................................. $ 40 $ 180 $ 114
US................................................... -- 3 17,719
Italy............................................... -- 14 185
Other................................................ -- -- 21
------- -------- --------
Total................................................ $ 40 $ 197 $ 18,039
======= ======== ========
Interest Income:
Germany.............................................. $ - $ 30 $ 26
US................................................... -- 124 4,110
Italy................................................ -- -- -
Other................................................ -- -- 2
------- -------- --------
Total................................................ $ - $ 154 $ 4,138
======= ======== ========
Loss before Taxes:
Germany.............................................. $(2,323) $(10,481) $(33,537)
US................................................... -- (175) (24,544)
Italy............................................... -- (434) (5,094)
Other................................................ -- -- (2,844)
------- -------- --------
Total................................................ $(2,323) $(11,090) $(66,019)
======= ======== ========
Income tax benefit:
Germany.............................................. $ 1,339 $ 6,172 $ 14,586
US................................................... -- -- (28)
Italy............................................... -- -- (170)
Other................................................ -- -- (4)
------- -------- --------
Total................................................ $ 1,339 $ 6,172 $ 14,384
======= ======== ========
Total Assets:
Germany.............................................. $12,343 $ 28,687 $ 59,149
US................................................... 47,689 207,339
Italy............................................... 1,512 15,561
Other................................................ 274 1,557 5,751
------- -------- --------
Total................................................ $12,617 $ 79,445 $287,800
======= ======== ========
</TABLE>
F-18
<PAGE>
The Company's property, plant and equipment by geographic location and capital
expenditures by geographic area are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1999
------------ -----------
Property, plant and equipment (in thousands)
<S> <C> <C>
Germany.............................................. $6,335 $18,918
US................................................... -- --
Italy................................................ 936 6,263
Other................................................ 699 3,298
------ -------
Total................................................ $7,970 28,479
====== =======
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------
Capital Expenditures: 1998 1999
----------- -----------
(in thousands)
<S> <C> <C>
Germany.............................................. $5,097 $16,761
US................................................... -- --
Italy................................................ 937 4,015
Other................................................ - 3,234
------ -------
Total................................................ $6,034 $24,010
====== =======
</TABLE>
17. Recent pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("Statement No.
133"). This statement establishes accounting and reporting standards requiring
that every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an asset
or liability measured at its fair value. The statement also requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Statement No. 133, as
amended, is effective for fiscal year beginning after June 15, 2000 and cannot
be applied retroactively. The Company does not expect the impact of this new
statement on the Company's consolidated balance sheets or results of operations
to be material.
18. Subsequent events
Effective January 1, 2000 the Company acquired the remaining 49% interest in
Novento for total consideration of DM 8,609,000 ($4,422,000).
On January 1, 2000 the Company invested DM 2,000,000 ($1,027,000) in a EDI
software development company based in Gottingen, Germany. In exchange the
Company has the option to acquire 51% of the company based on its revenue and
profitability for 2000, and exclusive right to market its product line.
In February 2000, the Company entered into a stock purchase agreement providing
for the purchase of 100% of the outstanding stock of Cybernet S.a.g.l., an
Internet Business-to-Business provider located in Lugano, Switzerland, for a
consideration of DM 592,000 ($304,000) and 12,000 shares of common stock of the
Company.
<TABLE>
<CAPTION>
___________________________________________________________________________________________________________________
Schedule II
$ thousand Balance at Charged to costs Recoveries Balance at end of
beginning of and expenses period
period
<S> <C> <C> <C> <C>
For the year ended December 31, 1997
- - Allowance for doubtful debt 15 18 - 33
For the year ended December 31, 1998
- - Allowance for doubtful debt 33 328 - 361
For the year ended December 31, 1999
- - Allowance for doubtful debt 361 831 - 1,192
- - Deferred tax asset valuation allowance - 12,250 - 12,250
</TABLE>
F-19
<PAGE>
Independent Accountants' Reports on Cybernet Italia S.p.A. and Eclipse S.p.A.
Presented below are the Independent Accountants' Reports on Cybernet Italia
S.p.A. and Eclipse S.p.A.. These audit reports and the related audited financial
statements were relied on by Ernst & Young in the performance of their audit of
the consolidated financial statements of the Company. Their audit report is
contained on page F-2. The audited financial statements of Cybernet Italia
S.p.A. and Eclipse S.p.A. referred to in these audit reports have not been
included in this document.
INDEPENDENT ACCOUNTANTS' REPORT
-------------------------------
The Board of Directors
Cybernet Italia S.p.A.
Via C. Veneziani, 48
Roma, Italy
We have audited the accompanying balance sheet of Cybernet Italia S.p.A. as
of December 31, 1999, and the related statements of loss, stockholders' equity
(deficit), and cash flows for the six months then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cybernet Italia S.p.A. as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the years then ended, in conformity with accounting principles generally
accepted in the United States of America.
Cybernet Italia S.p.A. is a wholly-owned subsidiary of Cybernet Internet
Services International, Inc. ("Cybernet"). As shown in the accompanying
financial statements, the Company has incurred a net loss of ITL 5,944 millions
for the six months ended December 31, 1999, and has incurred substantial net
losses for the past two years. At December 31, 1999, current liabilities
exceeded current assets by ITL 7,102 millions and total liabilities
substantially equalled total assets. Realization of a major portion of the
assets in the accompanying balance sheet is dependent upon continued operations
of the Company, which in turn is dependent upon the Company's success of its
future operations and the continuing financial support of Cybernet. As
discussed in Note 2.b, Management believes that actions presently taken to
revise the Company's operating and financial requirements provide the
opportunity for the Company to continue as a going concern. It is not possible,
however, to predict at this time the success of management efforts.
Accordingly, the Company has received firm commitments from Cybernet that
Cybernet will continue to meet the Company's financial requirements in the event
this is necessary.
March 29, 2000
/s/ Grant Thornton S.p.A.
Grant Thornton S.p.A.
F-20
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
-------------------------------
The Board of Directors
Eclipse S.p.A.
Vicolo S. Maria, 30
Rovereto, Italy
We have audited the accompanying balance sheet of Eclipse S.p.A. as of
December 31, 1999, and the related statement of loss, stockholders' equity, and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Eclipse S.p.A. as of
December 31, 1999, and the results of its operations and its cash flows for the
year then ended, in conformity with accounting principles generally accepted in
the United States of America.
Eclipse S.p.A. is a wholly-owned subsidiary of Cybernet Internet Services
International, Inc. ("Cybernet"). As shown in the accompanying financial
statements, the Company has incurred a net loss of ITL 3,814 millions. At
December 31, 1999, current liabilities exceed current assets by ITL 1,288
millions and total liabilities substantially equalled total assets. Realization
of a major portion of the assets in the accompanying balance sheet is dependent
upon continued operations of the Company, which in turn is dependent upon the
Company's success of its future operations and the continuing financial support
of Cybernet. As discussed in Note 2.b, Management believes that actions
presently taken to revise the Company's operating and financial requirements
provide the opportunity for the Company to continue as a going concern. It is
not possible, however, to predict at this time the success of management
efforts. Accordingly, the Company has received firm commitments from Cybernet
that Cybernet will continue to meet the Company's financial requirements in the
event this is necessary.
March 29, 2000
/s/ Grant Thornton S.p.A.
Grant Thornton S.p.A.
F-21
