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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period ________ to _________
COMMISSION FILE NO. 0-25677
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 51-0384117
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
STEFAN - GEORGE - RING 19-23
81929 MUNICH, GERMANY
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
49-89-993-150
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL
YEAR IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Number of shares outstanding of the issuer's class of Common Stock as of
September 30, 2000: 23,355,663
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<PAGE>
TABLE OF CONTENTS
PAGE
----
PART I FINANCIAL INFORMATION ...................................... 3
ITEM 1. FINANCIAL STATEMENTS ................................... 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
AND RESULTS OF OPERATIONS ............................. 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK ........................................... 16
PART II OTHER INFORMATION ......................................... 17
ITEM 1. LEGAL PROCEEDINGS ...................................... 17
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS .............. 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ........................ 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .... 17
ITEM 5. OTHER INFORMATION ...................................... 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ....................... 17
SIGNATURES ......................................................... 17
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
1999 2000
---- ----
(in thousands, except share
data) - (Unaudited)
ASSETS
Cash and cash equivalents ....................... e72,879 e18,123
Short-term investments .......................... 41,048 32,683
Accounts receivable--trade, net of allowance
for doubtful accounts of Euro 1,187,000 and
Euro 1,422,000 at December 31, 1999 and
September 30, 2000 respectively ................ 9,120 11,041
Other receivables ............................... 5,029 6,288
Restricted investments .......................... 10,045 15,512
Prepaid expenses and other assets ............... 2,191 1,095
-------- --------
Total current assets ............................ 140,312 84,742
Property and equipment, net ..................... 28,349 46,183
Product development costs, net .................. 3,082 2,314
Goodwill, net ................................... 26,120 27,411
Deferred income taxes ........................... 20,676 30,888
Restricted investments .......................... 47,938 13,295
Other assets .................................... 20,009 19,392
-------- --------
TOTAL ASSETS ....................................... e286,486 e224,225
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Overdrafts and short-term borrowings .......... e435 e424
Trade accounts payable ........................ 18,146 10,765
Other accrued liabilities ..................... 15,076 8,439
Current portion long term debt and
capital lease obligations .................... 1,720 1,057
Accrued personnel costs ....................... 2,681 1,839
-------- --------
Total current liabilities ................ 38,058 22,524
Long-term debt ................................ 177,557 170,739
Capital lease obligations ..................... 2,426 2,652
SHAREHOLDERS' EQUITY
Common stock $.001 par value, 50,000,000
shares authorized, 20,970,000 and
23,355,663 shares issued and outstanding
at December 31, 1999 and September 30, 2000
respectively ................................... 19 20
Preferred stock $.001 par value,
50,000,000 shares authorized, 4,793,000 and
3,180,000 issued and outstanding December 31,
1999 and September 30, 2000 respectively ....... 3 2
Additional paid in capital .................... 123,818 129,466
Accumulated deficit ........................... (53,885) (99,808)
Other comprehensive income (loss) ............. (1,510) (1,370)
-------- --------
Total shareholders' equity .................... 68,445 28,310
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ......... e286,486 e224,225
======== ========
See accompanying notes to consolidated financial statements
3
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CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF LOSS
(Unaudited)
Three months ended Nine months ended
September 30 September 30
----------------- -----------------
1999 2000 1999 2000
---- ---- ---- ----
(in thousands, except per share data)
Revenue
Internet Projects ............. e953 e1,143 e3,211 e3,151
Network Services .............. 4,999 8,403 10,505 22,861
------- ------- ------- -------
Total revenues ..................... 5,952 9,546 13,716 26,012
Direct cost of services ............ 3,492 6,528 7,874 17,074
------- ------- ------- -------
Gross margin ....................... 2,460 3,018 5,842 8,938
Other costs and expenses
Network operations ............. 2,143 2,201 5,071 5,980
General and administrative
expenses ...................... 4,045 3,770 8,357 15,258
Sales and marketing expenses ... 2,402 2,358 7,130 9,776
Research and development ....... 1,829 564 3,531 1,273
Depreciation and amortization .. 2,379 4,398 4,927 13,517
------- ------- ------- -------
Total Other costs and expenses ..... 12,798 13,291 29,016 45,804
Operating loss ..................... (10,338) (10,273) (23,173) (36,866)
Interest expense ................... 7,657 8,562 7,716 27,502
Interest income .................... 1,679 1,327 2,031 4,653
Foreign currency gains (losses) .... (606) (3,883) (606) (9,158)
------- ------- ------- -------
Loss before taxes and minority
interest .......................... (16,922) (21,391) (29,463) (68,873)
Income tax benefit ................. 7,846 3,814 12,716 10,207
------- ------- ------- -------
Net loss before minority interest .. (9,076) (17,577) (16,748) (58,666)
Minority interest .................. -- -- 94 --
------- ------- ------- -------
Net loss before Extraordinary items (9,076) (17,577) (16,654) (58,666)
Extraordinary items:
Profit on early extinguishment
of debt (net of tax) .......... -- 12,743 -- 12,743
------- ------- ------- -------
Net loss ........................... e(9,076) e(4,834) e(16,654) e(45,923)
======= ======= ======= =======
Earnings per share
Basic and diluted
Loss per share before
extraordinary items ........... (0.44) (0.76) (0.85) (2.53)
Gain per share for extraordinary
items ......................... -- 0.55 -- 0.55
------- ------- ------- -------
Net loss per share ............. (0.44) (0.21) (0.85) (1.98)
======= ======= ======= =======
Number of shares used to compute
earnings per share ................ 20,737 23,236 19,526 23,156
======= ======= ======= =======
See accompanying notes to consolidated financial statements
4
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CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For nine months ended
September 30,
----------------------
1999 2000
---- ----
Cash Flows from Operating Activities: (in thousands)
Net loss ............................................. e(16,654) e(45,923)
Adjustments to reconcile net loss to net
cash used by operations:
Deferred tax credit .............................. (13,021) (10,212)
Depreciation and amortization .................... 4,927 13,517
Provision for losses on accounts receivable ...... 170 (235)
Amortization of bond discount .................... 1,265 4,215
Accreted interest expense on long term debt ...... 1,181 7,601
Profit on early extinguishment of debt ........... -- (12,743)
Foreign currency translation loss ................ 606 9,158
Changes in operating assets and liabilities:
Trade accounts receivable ........................ (2,308) (1,686)
Other receivables ................................ (801) (1,260)
Other assets ..................................... (8,858) 39
Prepaid expenses and other current assets ........ (233) 1,097
Trade accounts payable ........................... 3,323 (7,381)
Other accrued expenses and liabilities ........... 5,518 (6,636)
Accrued personnel costs .......................... 681 (842)
-------- --------
Total changes in operating assets
and liabilities ............................. (2,678) (16,669)
-------- --------
Net cash (used in) operating activities ......... (24,204) (51,291)
Cash Flows from Investing Activities:
Purchase of short term investments ................... -- (35,740)
Proceeds from sale of short term investments ......... 67 79,838
Purchase of property and equipment ................... (10,055) (25,014)
Product development costs ............................ (729) (162)
Acquisition of businesses, net of cash acquired ...... (21,330) (1,857)
Payment of deferred purchase obligations ............. (3,862) --
-------- --------
Net cash (used in) provided by investing
activities ..................................... (35,909) 17,065
Cash Flows from Financing Activities:
Proceeds from issuance of bonds and other
borrowings .......................................... 163,210 798
Proceeds from the issuance of bond warrants .......... 48,006 --
purchase of Restricted investments ................... (55,170) --
Repayment of borrowings .............................. (358) (27,106)
-------- --------
Net cash (used in) provided by financing
activities ..................................... 155,688 (26,308)
-------- --------
Impact of foreign exchange rate changes .............. (941) 5,778
-------- --------
Net (decrease) increase in cash and cash
equivalents ......................................... 94,634 (54,756)
Cash and cash equivalents at beginning of period ..... 36,711 72,879
-------- --------
Cash and cash equivalents at end of period ........... e131,345 e18,123
======== ========
See accompanying notes to consolidated financial statements
5
<PAGE>
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with United States generally accepted accounting principles ("U.S. GAAP") for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
adjustments and accruals) considered necessary for a fair presentation of
financial position and results of operations have been included. Operating
results for the nine months ending September 30, 2000 are not necessarily
indicative of results to be expected for the year ended December 31, 2000. For
further information, refer to the Consolidated Financial Statements and
Footnotes thereto included in the Company's annual report of Form 10-K for the
year ended December 31, 1999.
The Company changed its reporting currency from US dollars to Euro's ('e') in
the quarter ended September 30, 2000. This change was made because management
believes that it results in a more meaningful presentation of the financial
position and results of operations of the Company since the majority of its
operations are conducted in currencies that are linked to the Euro. All prior
period amounts have been translated to the Euro using the dollar Euro rate in
effect for those periods.
In addition, during the third quarter of 2000 management revised the layout of
the consolidated statements of loss to be more comparable with peer group
companies, and in management's belief, to make the financial statements more
useable to readers. Prior period statements have been reclassified to conform
with the current presentation. The principal revision relates to the statement
of operations where direct cost of service has replaced costs of revenues.
Direct cost of service consists of 1) telecommunications expenses which mainly
represent the cost of transporting Internet traffic from our customer's location
through a local telecommunications carrier to one of our access nodes, transit
and peering costs, and the cost of leasing lines to interconnect our backbone
nodes, and 2) the cost of hardware and software sold. Depreciation and
amortisation is no longer allocated to direct cost of service. Cybernet mainly
utilizes leased lines for it's network backbone, and for connecting network to
its major customers premises.
2. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
September 30,
-------------------------
1999 2000
---- ----
(in thousands, except
per share data)
Numerator:
Net loss-numerator for basic and
diluted loss per share ................... e(16,654) e(45,923)
Denominator:
Denominator for basic and diluted
loss per share--weighted average
shares outstanding ....................... 19,526 23,165
Basic and diluted loss per share ............... e(0.85) e(1.98)
The denominator for diluted earnings per share excludes the convertible
preferred stock and stock options because the inclusion of these items would
have an anti-dilutive effect.
3. Segment information
The Company evaluates performance and allocates resources based on the operating
profit of its subsidiaries. The Company operates in one line of business, which
is providing international Internet backbone and access services and network
business solutions for corporate customers. The Company's reportable segments
are divided by country since each country's operations are managed and evaluated
separately. Information concerning the Company's geographic locations is
summarized as follows:
6
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Nine months ended
September 30
--------------------------
1999 2000
---- ----
(in thousands)
Revenues:
Germany ................................. e7,062 e14,412
US ...................................... -- --
Italy ................................... 3,801 6,213
Other ................................... 2,853 5,387
--------- --------
Total ................................... e13,716 e26,012
========= ========
Depreciation and Amortization:
Germany ................................. e4,025 e4,818
US ...................................... 306 6,551
Italy ................................... 280 1,024
Other ................................... 316 1,124
--------- --------
Total ................................... e4,927 e13,517
========= ========
Interest Expense:
Germany ................................. e21 e154
US ...................................... 7,578 27,066
Italy ................................... 104 277
Other ................................... 12 5
--------- --------
Total ................................... e7,716 e27,502
========= ========
Interest Income:
Germany ................................. e14 e127
US ...................................... 2,017 4,510
Italy ................................... -- 12
Other ................................... -- 4
--------- --------
Total ................................... e2,031 e4,653
========= ========
Loss before Taxes:
Germany ................................. e(18,328) e(12,324)
US ...................................... (8,722) (46,396)
Italy ................................... (1,805) (5,008)
Other ................................... (608) (5,145)
--------- --------
Total ................................... e(29,463) e(68,873)
========= ========
Income tax benefit:
Germany ................................. e8,179 e10,207
US ...................................... 4,510 --
Italy ................................... 33 --
Other ................................... (6) --
--------- --------
Total ................................... e12,716 e10,207
========= ========
Total Assets:
Germany ................................. e41,037 e89,841
US ...................................... 232,579 112,237
Italy ................................... 9,995 13,825
Other ................................... 2,875 8,322
--------- --------
Total ................................... e286,486 e224,225
========= ========
4. Business Acquisitions
Effective April 13, 1999, the Company acquired 51% of the outstanding shares of
Sunweb Internet Services SIS AG ("Sunweb") for a total consideration of Euro
1,587,000. Euro 924,000 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. Goodwill recorded in connection with the
acquisition, amounting to Euro 1,369,000, is being amortized over 10 years.
Effective June, 2000, the Company acquired the remaining 49% of the outstanding
shares of Sunweb AG, for a consideration of Euro 480,000. The entire purchase
price was paid in cash. Goodwill recorded in connection with the acquisition of
the remaining shares in Sunweb amounting to Euro 480,000 was recorded in Q2
1999, and is being amortized over the remaining life of the goodwill associated
with the acquisition of the majority shareholding in Q2 1999.
7
<PAGE>
Effective June 30, 1999, the Company acquired 100% of the outstanding shares of
Cybernet Italia S.p.A.("Cybernet Italia")(formerly Flashnet S.p.A.) for a total
consideration of Euro 27,004,000. Euro 21,200,000 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 Euro 16,431,000, is being amortized over 10 years.
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 Euro 1,625,000. Euro 1,014,000 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 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 Euro 978,000, is being amortized over 10 years. Effective
January 1, 2000, the Company acquired the remaining 49% of the outstanding
shares of Novento Telecom AG ("Novento") and the remaining 49% of Multicall
Telefonmarketing AG ("Multicall") (together "Novento"), for a consideration of
Euro 5,553,000. Euro 1,022,000 of the purchase price was paid in cash with the
remainder settled in exchange for the issuance of 543,812 shares of the common
stock of the Company. Goodwill recorded in connection with the acquisition of
the remaining shares in Novento, amounting to Euro 2,964,000 was recorded in Q1
2000, and is being amortized over the remaining life of the goodwill associated
with the acquisition of the majority shareholding in Q4 1999.
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 Euro 2,209,000. Euro 361,000 of
the purchase price was paid in cash with the remainder settled by 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 Euro 1,901,000,
is being amortized over the remaining life of the goodwill associated with the
acquisition of the majority shareholding at the end of 1997. Under the terms of
the agreement the price was reviewed in light of the subsequent movement in the
share price of Cybernet. As a consequence of this review an additional 108,390
shares were issued to the selling shareholders in May 2000. Goodwill of Euro
1,118,000 was recorded in Q2 1999, and is being amortized over the remaining
life of the goodwill associated with the acquisition of the majority
shareholding at the end of 1997.
Effective April 17, 2000, the Company acquired Cybernet S.a.g.l., an internet
service provider located in Lugano Switzerland, for a maximum purchase price of
SFr 500,000 and 12,000 shares of our common stock. The 12,000 shares of common
stock will be released to the former owners only upon the achievement of certain
revenue targets during the fiscal year 2000. Of the purchase price SFr 400,000
was paid in cash at September 30, 2000. The acquisition has been accounted for
using the purchase method of accounting and as such the accompanying financial
statements reflect Cybernet S.a.g.l's results from April, 1999. Goodwill
recorded in connection with the acquisition of Cybernet S.a.g.l, amounting to
Euro 297,000, is being amortized over 10 years
The following unaudited pro forma consolidated results of operations for the
nine months ended September 30, 1999 and 2000 assume the acquisitions of Sunweb,
Cybernet Italia, Novento and Multicall had occurred as of January 1, 1999.
Nine months ended
September 30,
-----------------------
1999 2000
---- ----
(in thousand except
per share data)
Revenue ........................................ e21,208 e26,012
Net loss ....................................... (20,057) (45,923)
Basic and diluted loss per share ............... e(0.99) e(1.98)
5. Extraordinary items
During the third quarter of 2000, the Company repurchased a portion of its 14%
Senior Notes due 2009 (the "Notes"). The Company repurchased Euro 59.8 million
($52.6 million) of Notes at average prices equal to
8
<PAGE>
44% of the face value of the Notes repurchased. As required by the terms of the
Notes, the Company had established an escrow account to provide for payment in
full of the first six scheduled interest payments on the Notes. The amounts
contained in the escrow account are carried on the Company's balance sheet as
"Restricted investments". As a result of the repurchase of Notes in July,
approximately Euro 15.6 million will be released from the escrow account and
will be available to the Company. The price of the Notes repurchased in the
third quarter of 2000 net of amounts released from the escrow account was
approximately Euro 10.7 million. The face amount of the Notes outstanding after
the July repurchases is approximately Euro 110.8 million ($97.4 million).
The amount shown as an extraordinary item represents the difference between the
amount paid to extinguish the Senior Notes and the carrying value on the balance
sheet, as of the date of extinguishment, net of associated costs. The per share
amount of the net gain is Euro 0.55.
6. Subsequent events
Subsequent to September 30, 2000, the Company purchased additional 14% Senior
Dollar Notes payable, due 2009, with a face value of Euro 22.8 million ($20.0
million). Following this purchase the face value of the remaining outstanding
14% Senior Dollar Notes payable, due 2009, was approximate Euro 88.0 million
($77.4 million). The Notes were purchased by the Company for an average of 44%
of face value. The Company intends to cancel these Notes. This will permit
release of approximately Euro 5.9 million from its restricted investments.
7. Other matters
On July 14, 2000, the German government approved legislation which will, among
other things, reduce the corporate tax rate to 25% and eliminate the tax credit
system. Furthermore, the capital gains tax was reduced from 25% to 20%. The new
law is effective January 1, 2001. As final registration of the new law has not
yet been completed, the accompanying financial statements do not include any
adjustments to reflect this change. The Company is currently assessing the
impact of this new tax legislation and will make any required adjustments to its
deferred tax balances in the quarter ended December 31, 2000.
In August 2000, the Company agreed to take a 25% equity interest in
Bernigshausen & Neben OHG ("B&N) an EDI software development company based in
Gottingen, Germany, for Euro 3,067,000. Thus far the company has paid Euro
1,022,000 towards this commitment.
During the first nine months of 2000 1,613 Preferred stock have been converted
into common stock.
8. Revenue seasonality
The Company's revenues are traditionally lower in the third quarter of the year
due to the impact of the European holiday season in July and August.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
During the third quarter of 2000 management revised the layout of the Company's
consolidated statements of loss to be more comparable with peer companies, and
in management's belief, to make the financial statements more useable to
readers. As such certain prior period amounts in the consolidated financial
statements have been reclassified to conform with the current presentations. The
main elements of the revision to the layout of the statements are
1. Costs previously reported as Cost of revenues were divided between the
Direct cost of services and Other costs and expenses (Network Operations).
Costs of revenue were previously split between Internet projects and
network services, and
2. Depreciation and amortization is now included as one amount in Other costs
and expenses. Previously it was split between Cost or revenue and Operating
costs.
In addition, the Company changed its reporting currency from U.S. dollars to
Euro to improve the presentation of its financial statements.
The following table sets forth the items of the Consolidated Statements of Loss
for the three month and nine month periods ended September 30, 1999 and 2000,
expressed as a percentage of total revenues:
For three For nine
months ended months ended
September 30 September 30
------------------ -------------------
1999 2000 1999 2000
---- ---- ---- ----
Revenue
Internet Projects .............. 16.0% 12.0% 23.4% 12.1%
Network Services ............... 84.0% 88.0% 76.6% 87.9%
Total revenues ...................... 100.0% 100.0% 100.0% 100.0%
Direct cost of services ......... 58.7% 68.4% 57.4% 65.6%
Gross margin ........................ 41.3% 31.6% 42.6% 34.4%
Other costs and expenses
Network Operations .............. 36.0% 23.1% 37.0% 23.0%
General and administrative
expenses ....................... 68.0% 39.5% 60.9% 58.7%
Sales and Marketing expenses .... 40.4% 24.7% 52.0% 37.6%
Research and development ........ 30.7% 5.9% 25.7% 4.9%
Depreciation and amortization ... 40.0% 46.1% 35.9% 52.0%
Total other costs and expenses ...... 215.0% 139.2% 211.5% 176.1%
Operating loss ...................... (173.7)% (107.6)% (168.9)% (141.7)%
Interest expense .................... 128.6% 89.7% 56.3% 105.7%
Interest income ..................... 28.2% 13.9% 14.8% 17.9%
Realized foreign currency
translation losses ................. (10.2)% (40.7)% (4.4)% (35.2)%
Loss before taxes and minority
interest ........................... (284.3)% (224.1)% (214.8)% (264.8)%
Income tax benefit .................. 131.8% 40.0% 92.7% 39.2%
Net loss before minority interest ... (152.5)% (184.1)% (122.1)% (225.5)%
Minority interest ................... 0.0% 0.7% 0.0%
Net loss before extraordinary
items .............................. (152.5)% (184.1)% (121.4)% (225.5)%
Extraordinary items ................. -- 133.5% -- 49.0%
Net loss ............................ (152.5)% (50.6)% (121.4)% (176.5)%
Results of operations--Three Months Ended September 30, 2000 Compared to the
Three Months Ended September 30, 1999
Revenues
Total revenues increased 60.4% from Euro 5,952,000 in the three months ended
September 30, 1999 to Euro 9,546,000 in the third quarter of 2000, primarily as
a result of increased Network Services revenues. Internet Project revenues
increased 20% from Euro 953,000 in the third quarter of 1999 to Euro 1,143,000
for the same period in 2000, while Network Services revenues increased 68.1%
from Euro 4,999,000 to
10
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Euro 8,403,000. The third quarter Network Services revenues represented 84.0% of
total revenues in 1999, as compared with 88.0% in 2000
The increase in revenues from Network Services is mainly a result of expansion
of our customer base, which provides us with a stream of recurring revenues.
Although we have focused on building recurring revenues from Network Services,
building relations with Internet Project customers remains a continuing
strategy. In the third quarter of 2000, we consolidated Euro 1,049,000 of
revenues from Novento, a company acquired after September 1999. Novento's
revenues are derived primarily from Network Services. Excluding Novento's
revenues, Network Services revenues increased 47.1% in the third quarter of
2000 compared with revenues of the corresponding period in 1999, and Internet
Projects revenues increased by 20%.
Direct Cost of Services
Direct cost of services increased 86.9% from Euro 3,492,000 in the third
quarter of 1999 to Euro 6,528,000 in the third quarter of 2000. Direct cost of
services consists of 1) telecommunications expenses which mainly represent the
cost of transporting Internet traffic from our customers' location through a
local telecommunications carrier to one of our access nodes, transit and peering
costs, and the cost of leasing lines to interconnect our backbone nodes, and 2)
the cost of hardware and software sold. Cybernet mainly utilizes leased lines
for it's backbone network, and to connect its network to its major customers'
premises. Direct cost of services as a percentage of revenues increased from
58.7% in the third quarter of 1999 to 68.4% in the third quarter of 2000.
Network Operations
Network operations costs increased 2.7% from Euro 2,143,000 in the third quarter
of 1999 to Euro 2,201,000 in the third quarter of 2000. Network operations
mainly consist of 1) the personnel costs of technical and operational staff and
related overheads, 2) the rental of premises solely or primarily used by
technical staff, including premises used to generate our colocation services
revenue and 3) consulting expenses in the area of network and software
development. Network operations costs, as a percentage of revenues fell from
36.0% in the third quarter of 1999 to 23.1% in the third quarter of 2000.
We had 214 technical and operations personnel on September 30, 2000 compared to
approximately 101 at September 30, 1999.
General and Administrative Expenses
General and administrative expenses decreased 6.8% from Euro 4,045,000 in the
third quarter of 1999 to Euro 4,209,000 in the third quarter of 2000. General
and administrative expenses consist principally of salaries and other personnel
costs for our administrative staff, office rent, and external legal and
accounting advisory costs. As a percentage of revenues, general and
administrative expenses decreased from 67.9% in the third quarter of 1999 to
39.5% in the third quarter of 2000. The reduction reflects cost control measures
instituted towards the end of 1999.
General and Administrative personnel decreased from approximately 93 at the end
of September 1999 to 79 at the end of September 2000.
Excluding the general and administrative expenses in the companies acquired
since the end of the third quarter of 1999, general and administrative expenses
decreased 12% from Euro 4,045,000 in the third quarter of 1999 to Euro 3,557,000
in the third quarter of 2000.
Sales and Marketing Expenses
Sales and marketing expenses decreased by 1.8% from Euro 2,402,000 in the third
quarter of 1999 to Euro 2,358,000 in the third quarter of 2000. Sales and
marketing expenses consist principally of salaries of our sales force and
marketing personnel and advertising and communication expenditures. The number
of sales and marketing staff decreased from approximately 143 on September 30,
1999 to 124 on September 30, 2000. As a percentage of revenues, our sales and
marketing expenses decreased from 40.4% in the third quarter of 1999 to 24.7%
in the third quarter of 2000.
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Excluding the sales and marketing expenses in the companies acquired since the
end of the third quarter of 1999, sales and marketing expenses decreased 5.0%
from Euro 2,402,000 in the third quarter of 1999 to Euro 2,282,000 in the third
quarter of 2000.
Research and Development
Research and development expenses decreased 69.2% from Euro 1,829,000 in the
third quarter of 1999 to Euro 564,000 in the third quarter of 2000. Research and
development expenses consist principally of personnel costs of employees working
on product development, consulting costs and certain overhead items. As a
percentage of revenues, research and development decreased from 30.7% in the
third quarter of 1999 to 5.9% in the third quarter of 2000.
Depreciation and Amortization
Depreciation and amortization expenses increased from Euro 2,379,000 in the
third quarter of 1999 to Euro 4,398,000 in the third quarter of 2000. This
increase reflects 1) increased depreciation of property and equipment purchased
to build the corporate infrastructure necessary to support our anticipated
growth, and 2) additional investments in our own network infrastructure and
supporting systems and 3) increased amortization of goodwill related to our
acquisitions. Goodwill represents the excess of the purchase price of companies
we purchased over the fair value of the assets of those companies. Goodwill is
amortized over 5 - 10 years.
Interest Income and Expense
Interest expense increased from Euro 7,657,000 in the third quarter of 1999 to
Euro 8,562,000 in the third quarter of 2000 as a result of our issuance of debt
securities in the third quarter of 1999.
Interest income decreased from Euro 1,679,000 in the third quarter of 1999 to
Euro 1,327,000 in the third quarter of 2000 as a result of the utilization of
the proceeds from the issuance of debt securities in the third quarter of 1999
In the third quarter of 2000, we incurred net foreign exchange losses of Euro
3,883,000 compared with Euro 606,000 in the third quarter of 1999, because our
borrowings are denominated in US dollars but our principal operating currency is
the Euro. We will continue to record such losses while the US dollar strengthens
against the Euro.
Income Taxes
We recorded income tax benefits of Euro 7,846,000 in the third quarter of 1999
and Euro 3,814,000 in the third quarter of 2000 arising principally from
operating losses. Although we have additional operating losses, a valuation
allowance has been established to reflect the estimated amount of the tax
benefit that may not be realized. The majority of the operating losses are
associated with operations subject to taxation under the German tax code. We
have recorded valuation allowances on all tax assets arising from operating
losses generated outside of Germany since we can not make the determination that
the eventual realization of these assets is more likely than not. Under the
current German tax code, these net operating losses may be carried forward
indefinitely and used to offset our future taxable earnings.
As described in the Subsequent Events note to the financial statements above,
the German government has enacted legislation which will, among other things,
reduce the corporate tax rate to 25% and eliminate the tax credit system.
Further, the capital gains tax was reduced from 25% to 20%. The new law is
effective January 1, 2001. The impact of this new tax legislation will be
reflected in the deferred tax balances in the quarter ended December 31, 2000.
Extraordinary Items
During the third quarter of 2000, the Company repurchased Euro 59.8 million
($52.6 million) of its 14% Senior Notes due 2009 (the "Notes") generating a gain
of Euro 12.7 million. The Notes were repurchased at average prices equal to 44%
of face value. As required by the terms of the Notes, the Company had
established an escrow account to provide for payment in full of the first six
scheduled interest payments on the Notes. The amounts contained in the escrow
account are carried on the Company's balance sheet
12
<PAGE>
as "Restricted investments". As a result of the repurchase of Notes in the third
quarter, approximately Euro 15.6 million ($13.7 million) will be released from
the escrow account and will be available to the Company. The purchase price of
the Notes repurchased, net of amounts released from the escrow account, was
approximately Euro 10.7 million ($9.4 million). The face amount of the Notes
outstanding after these repurchases is approximately Euro 110.8 million ($97.4
million).
The amount shown as an extraordinary item represents the difference between the
amount paid to extinguish the Senior Notes and the carrying value on the balance
sheet, as of the date of extinguishment, net of associated costs
Results of operations--Nine Months Ended September 30, 2000 compared to the Nine
Months Ended September 30, 1999
Revenues
Total revenues increased 89.6% from Euro 13,716,000 in the nine months to
September 30, 1999 to Euro 26,012,000 in the first nine months of 2000,
primarily as a result of increased Network Services revenues. Internet Project
revenues decreased 1.9% from Euro 3,211,000 in the first nine months of 1999 to
Euro 3,151,000 for the same period in 2000, while Network Services revenues
increased 117.6% from Euro 10,505,000 to Euro 22,861,000. Network Services
revenues represented 76.6% of total revenues in the first nine months of 1999,
compared with 87.9% in the first nine months of 2000.
The increase in revenues from Network Services is mainly a result of expansion
of our customer base, which provides us with a stream of recurring revenues.
Although we have focused on building recurring revenues from Network Services,
building relations with Internet Project customers remains a continuing
strategy. In the first none months of 2000, we consolidated Euro 3,555,000 of
revenues from Novento, a company which was acquired after September 1999.
Novento's revenues are derived primarily from Network Services. Excluding
Novento's revenues, Network Services revenues increased 83.8% in the first nine
months of 2000 compared with the corresponding period in 1999, and Internet
Projects revenues decreased by 1.9%.
Direct Cost of Services
Direct cost of services increased 118.0% from Euro 7,874,000 in the nine months
ended September 30, 1999 to Euro 17,074,000 in the nine months ended September
30, 2000. Direct cost of services consists of 1) telecommunications expenses
which mainly represent the cost of transporting Internet traffic from our
customer's location through a local telecommunications carrier to one of our
access nodes, transit and peering costs, and the cost of leasing lines to
interconnect our backbone nodes, and 2) the cost of hardware and software sold.
Cybernet mainly utilizes leased lines for it's backbone network, and to connect
its network to its major customers' premises. Direct cost of services as a
percentage of revenues increased from 57.4% in the nine months ended September
30, 1999 to 65.6% in the nine months ended September 30, 2000.
Network operations
Network operations costs increased 17.9% from Euro 5,071,000 in nine months to
September 30, 1999 to Euro 5,980,000 in the nine months to September 30, 2000.
Network operations mainly consist of 1) the personnel costs of technical and
operational staff and related overheads, 2) the rental of premises solely or
primarily used by technical staff, including premises used to generate our
colocation services revenue and 3) consulting expenses in the area of network
and software development. Network operations as a percentage of revenues fell
from 37.0% in the nine months to September 30, 1999 to 23.0% in the nine months
to September 30, 2000.
We had 214 technical and operations personnel on September 30, 2000 compared to
approximately 101 at September 30, 1999.
General and Administrative Expenses
General and administrative expenses increased 87.8% from Euro 8,357,000 in the
first nine months of 1999 to Euro 15,258,000 in the first nine months of 2000.
General and administrative expenses consist principally of salaries and other
personnel costs for our administrative staff, office rent, and external legal
13
<PAGE>
and accounting advisory costs. The increase in our general and administrative
expenses reflects the costs of building a corporate infrastructure to support
our growth. As a percentage of revenues, general and administrative expenses
fell from 60.4% in the first nine months of 1999 to 58.7% in the first nine
months of 2000.
General and Administrative personnel decreased from 93 at the end of September
1999 to 79 at the end of September 2000.
Excluding the general and administrative expenses of Novento which was acquired
after the end of September 1999, general and administrative expenses increased
79.0% from Euro 8,357,000 in the first nine months of 1999 to Euro 14,921,000
in the first nine months of 2000.
Sales and Marketing Expenses
Sales and marketing expenses increased by 37.1% from Euro 7,130,000 in the first
nine months of 1999 to Euro 9,776,000 in the first nine months of 2000. Sales
and marketing expenses consist principally of salaries of our sales force and
marketing personnel and advertising and communication expenditures. The growth
in these expenses was partially due to additions to the sales and marketing
staff which increased from approximately 88 on September 30, 1999 to 124 on
September 30, 2000. As a percentage of revenues, our sales and marketing
expenses decreased from 52.0% in the first nine months of 1999 to 37.6% in the
first nine months of 2000.
Excluding the sales and marketing expenses of Novento which was acquired since
the end of September 1999, sales and marketing expenses increased 34% from Euro
7,130,000 in the first nine months of 1999 to Euro 9,266,000 in the first nine
months of 2000.
Research and Development
Research and development expenses decreased 63.9% from Euro 3,531,000 in the
first nine months of 1999 to Euro 1,273,000 in the first nine months of 2000.
Research and development expenses consist principally of personnel costs of
employees working on product development, consulting costs and certain overhead
items. As a percentage of revenues, research and development decreased from
25.7% in the first nine months of 1999 to 4.9% in the first nine months of 2000.
Depreciation and Amortization
Depreciation and amortization expenses increased from Euro 4,927,000 in the
first nine months of 1999 to Euro 13,517,000 in the first nine months of 2000.
This increase reflects 1) increased depreciation of property and equipment
purchased to build the corporate infrastructure necessary to support our
anticipated growth, and 2) additional investments in our own network
infrastructure and supporting systems and 3) increased amortization of goodwill
related to our acquisitions. Goodwill represents the excess of the purchase
price of companies we purchased over the fair value of the assets of those
companies. Goodwill is amortized over 5 - 10 years.
Interest Income and Expense
Interest expense increased from Euro 7,716,000 in the first nine months of 1999
to Euro 27,502,000 in the first nine months of 2000 as a result of our issuance
of debt securities in the second half of 1999.
Interest income increased from Euro 2,030,000 in the first nine months of 1999
to Euro 4,653,000 in the first nine months of 2000 as a result of interest
earned on the unutilized proceeds of these offerings.
In the first nine months of 2000 we incurred net foreign exchange losses of Euro
9,158,000 compared with Euro 606,000 for the first nine months of 1999, because
our borrowings are denominated in US dollars but our principal operating
currency is the Euro. We will continue to record such losses if the US dollar
strengthens against the Euro.
Income Taxes
We recorded income tax benefits of Euro 12,715,000 in the first nine months of
1999 and Euro 10,207,000 in the first nine months of 2000, arising principally
from operating losses. Although we have additional
14
<PAGE>
operating losses, a valuation allowance has been established to reflect the
estimated amount of the tax benefit that may not be realized. The majority of
the operating losses are associated with operations subject to taxation under
the German tax code. We have recorded valuation allowances on all tax assets
arising from operating losses generated outside of Germany since we can not make
the determination that the eventual realization of these assets is more likely
than not. Under the current German tax code, these net operating losses may be
carried forward indefinitely and used to offset our future taxable earnings.
As described in the Subsequent events note to the financial statements above,
the German government has enacted legislation which will, among other things,
reduce the corporate tax rate to 25% and eliminate the tax credit system.
Further, the capital gains tax was reduced from 25% to 20%. The new law is
effective January 1, 2001. The impact of this new tax legislation will be
reflected in the deferred tax balances in the quarter ended December 31, 2000.
Extraordinary Items
During the third quarter of 2000, the Company repurchased Euro 59.8 million
($52.6 million) of its 14% Senior Notes due 2009 (the "Notes") generating a gain
of Euro 12.7 million. The Notes were repurchased at average prices equal to 44%
of face value. As required by the terms of the Notes, the Company had
established an escrow account to provide for payment in full of the first six
scheduled interest payments on the Notes. The amounts contained in the escrow
account are carried on the Company's balance sheet as "Restricted investments".
As a result of the repurchase of Notes in the third quarter, approximately Euro
15.6 million ($13.7 million) will be released from the escrow account and will
be available to the Company. The purchase price of the Notes repurchased, net of
amounts released from the escrow account, was approximately Euro 10.7 million
($9.4 million). The face amount of the Notes outstanding after these repurchases
is approximately Euro 110.8 million ($97.4 million).
The amount shown as an extraordinary item represents the difference between the
amount paid to extinguish the Senior Notes and the carrying value on the balance
sheet, as of the date of extinguishment, net of associated costs.
Liquidity and Capital Resources
Cash Flow
Operating activities used cash of Euro 51,291,000 in the first nine months of
2000 compared to Euro 24,204,000 for the comparable period in 1999. This is
principally the result of higher net losses as explained above.
For the first nine months of 2000 investing activities generated cash of
Euro17,065,000 compared to cash used of Euro 39,909,000 for the comparable
period in 1999. This increase in cash generated from investing activities
represents the net proceeds from the purchase and sale of short-term
investments, partially offset by the cash outflows for the purchases of property
and equipment (Euro 25,014,000). Expenditures for property and equipment
consisted principally of the fit-out of POP's and data facilities, the purchases
of computer hardware and software and other expenditures related to our Internet
backbone and equipment.
For the first nine months of 2000, net cash used by financing activities was
Euro 26,308,000 compared to the provision of Euro 155,688,000 in the same period
in 1999. The cash was used in the third quarter of 2000 to repurchase part of
the outstanding Senior Notes as detailed under Extraordinary items above
Working Capital
On September 30, 2000, our working capital, defined as the excess of our current
assets over our current liabilities, was Euro 62,218,000 as compared Euro
102,255,000 at December 31, 1999.
Our net accounts receivable as of September 30, 2000, was Euro 11,041,000
compared to Euro 9,120,000 as at December 31, 1999. We have taken steps to
improve the timely collection of receivables, some of which have started to show
an impact, as the level of accounts receivable compared with the level of
activity is lower in 2000 than in 1999.
Cash and cash equivalents amounted to Euro 18,123,000 at September 30, 2000
compared to Euro 72,878,000 at December 31, 1999. Of this, approximately Euro
15.8 million was held in US dollars.
15
<PAGE>
We also had various short-term investments denominated in Euro's totaling Euro
17.2 million and short-term investments denominated in US dollars totaling Euro
15.5 million at September 30, 2000. In addition, at September 30, 2000 we had
approximately Euro 28.9 million of Restricted investments held in escrow, to
meet the next four semi-annual interest payments on our 14% Senior Notes. This
amount is invested in US treasury securities.
Credit Arrangements
As of September 30, 2000, we had short-term unsecured overdraft facilities under
which we and our subsidiaries could borrow up to Euro 1,248,000. These
facilities are denominated in Italian Lire (in the amount of Euro 1,176,000) and
Austrian Schilling (in the amount of Euro 72,000). The interest rates fluctuate
based upon current lending rates. The weighted average borrowing rate on these
facilities was 5.56% as September 30, 2000. In addition, certain of our banks
provide overdraft protection exceeding the limits specified in these agreements.
As of September 30, 2000, we and our subsidiaries had used Euro 404,000 of these
facilities. In addition, as September 30, 2000, we had long-term capitalized
lease obligations of Euro 3,709,000.
Capital Expenditures
For the nine months ended September 30, 2000, capital expenditures totaled
approximately Euro 25,014,000. We funded these capital expenditures primarily
from net cash provided by financing activities. Our investments in the first
nine months of 2000 included: (i) investments in our backbone infrastructure and
equipment of approximately Euro 2,483,000, (ii) investments in data facilities
and data center premises totaling approximately Euro 14,664,000, and (iii)
investments in other equipment totaling approximately Euro 7,898,000.
ITEM 3. 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 funds and US Treasury Bonds, therefore
lowering our exposure to interest income risks. As a result of our sale of Units
consisting of 14.0% Senior Notes due 2009 and warrants in July 1999 (the "Unit
Offering"), as well as our sale of Convertible Notes in August 1999 we have a
substantial amount of debt in U.S. dollars.
Significant fluctuations in the U.S. dollar to Euro exchange rate could have an
adverse impact on the amount of Deutsche Marks required to satisfy this debt. We
estimate that a 10% increase in the exchange rate between the Deutsche Mark and
the U.S. dollar would increase the Deutsche Mark amount required to settle the
debt outstanding from the Unit offering and our sale of Convertible Notes by
approximately Euro 22 million.
16
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INDEX TO EXHIBITS
Exhibit Number Description
-------------- -----------
10.1 B&N Software AG Shareholders' Agreement
27.1 Financial Data Schedule which is submitted electronically to
the Securities and Exchange Commission for information
purposes only and is not filed
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
NOT APPLICABLE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NOT APPLICABLE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NOT APPLICABLE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-B:
10.1 B&N Software AG Shareholders' Agreement
27.1 Financial Data Schedule which is submitted electronically to the
Securities and Exchange Commission for information purposes only and
is not filed
(b) Reports on Form 8-K:
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
BY: /s/ Andreas Eder
-------------------------------------
Andreas Eder
Chairman of the Board, President, and
Chief Executive Officer
BY: /s/ Paolo Di Fraia
-------------------------------------
Paolo Di Fraia
Chief Financial Officer and Treasurer
Dated: November 7, 2000
17
