U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended July 31, 2000
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-25453
CI4NET.com Inc.
(Exact name of small business issuer as specified in its charter)
Delaware 98-0230944
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
32 Haymarket London SW1YT4P United Kingdom
(Address of principal executive offices including zip code)
Registrants' telephone number,
including area code: (212) 445-6581
Securities registered under Section 12 (b) of the Exchange Act:
None
Securities registered under Section 12 (g) of the Exchange Act:
Common Stock, par value $.001 per share
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
The aggregate market value of the voting stock held by non-
affiliates of the Registrant as of September 8, 2000 was
$160,937,224.
<PAGE>
CI4NET.com Inc.
Page
PART I FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
- unaudited
Condensed Consolidated Balance Sheets
at January 31, 2000 and July 31, 2000 5
Condensed Consolidated Statements of Operations
for the three and six months ended
July 31, 1999 and 2000 6
Condensed Consolidated Statements of Cash Flows
for the six months ended July 31, 1999 and 2000 7
Notes to the Condensed Consolidated Financial
Statements 8
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
ITEM 3 Quantitative and Qualitative Disclosures About
Market Risk 27
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings. 29
ITEM 2 Change in Securities and Use of Proceeds. 29
ITEM 3 Defaults Upon Senior Securities 29
ITEM 4 Submission of Matters to a Vote of
Security Holders 29
ITEM 5 Other Information 30
ITEM 6 Exhibits and Reports on Form 8-K 30
Signatures 31
<PAGE>
This Quarterly Report on Form 10-Q contains forward-looking
statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"). For
this purpose, any statements contained herein that are not
statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words
"believes," "anticipates," "plans," "expects" and similar
expressions are intended to identify forward-looking statements.
These forward-looking statements are subject to known and unknown
risks, uncertainties and assumptions about us and our partner
companies, that may cause our actual results, levels of activity,
performance, or achievements to be materially different from any
future results, levels of activity, performance, or achievements
expressed or implied by such forward-looking statements. Factors
that might cause or contribute to such a discrepancy include, but
are not limited to, those discussed in Part I, Item 2,
"Management's Discussion and Analysis".
<PAGE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CI4NET.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
January 31, 2000 July 31, 2000
(Unaudited) (Unaudited)
---------------------------------
<S> <C> <C>
ASSETS
Current assets :
Cash and cash equivalents $ 254 $ 1,550
Restricted cash - 11,269
Accounts receivable 725 18,902
Inventories 153 591
Other current assets 1,891 19,766
--------------------------
Total current assets 3,023 52,078
Property, equipment and fixtures
Land and buildings 65 1,078
Motor vehicles 135 661
Computer equipment 3,120 12,986
Furniture and fixtures 1,105 1,141
Office Equipment 79 705
---------------------------
4,504 16,571
Less accumulated depreciation (1,239) (3,592)
----------------------------
3,265 12,979
Investments in affiliated
in companies - 8,274
Intangible assets 90,683 135,053
Other assets - 1,197
---------------------------
Total Assets $ 96,971 $ 209,581
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities :
Accounts payable $ 12,985 $ 37,000
Accrued expenses and
other liabilities 2,360 22,226
Deferred Income - 4,673
Short-term bank borrowings 10,122 16,961
Related party loan 5,141 5,468
Accrued interest 98 276
---------------------------
Total current liabilities 30,706 86,604
Other non-current liabilities 880 2,488
Minority interests (217) (1,261)
Commitments
Stockholders' equity :
Preferred stock: $0.001 par value;
20,000,000 shares authorized none
issued and outstanding at January 31,
2000, 6,660,148 issued and outstanding
at July 31, 2000. - 7
Common stock: $0.001 par value;
100,000,000 shares authorized,
25,485,513 issued and outstanding at
January 31, 2000, and 28,345,121 issued
and outstanding at July 31, 2000. 25 28
Additional paid in capital 104,187 225,404
Deferred compensation (8,670) (6,497)
Accumulated other comprehensive
income (10) 2,244
Accumulated deficit (29,930) (99,436)
---------------------------
Total Stockholders' Equity 65,602 121,750
---------------------------
$ 96,971 $ 209,581
===========================
</TABLE>
See Accompanying Notes
5
<PAGE>
CI4NET.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
Three Months Ended Six Months Ended
July 31, July 31,
1999 2000 1999 2000
---------------------------------------------
<S> <C> <C> <C> <C>
Total revenue $ 970 $ 23,399 $ 3,713 $ 28,609
Cost of revenues 1,484 37,316 3,390 44,011
---------------------------------------------
Gross profit (loss) (514) (13,917) 323 (15,402)
Operating expenses :
Sales and marketing 63 1,774 116 3,458
Research and
development - 189 - 293
General and
administration 271 14,056 926 23,013
Amortization - 11,641 - 24,947
Depreciation 8 966 12 1,606
---------------------------------------------
Total operating expenses 342 28,626 1,054 53,317
Operating loss (856) (42,543) (731) (68,719)
Equity in losses of
affiliated companies - (281) - (353)
Interest income - 225 - 455
Interest expense (102) (457) (215) (788)
---------------------------------------------
Loss before income taxes (958) (43,056) (946) (69,405)
Income tax expense (15) 21 (15) (101)
---------------------------------------------
Net loss $ (973) $(43,035) $ (961) $(69,506)
=============================================
Basic and diluted
loss per share $ (1.33) $ (1.52) $ (1.31) $ (2.53)
=============================================
Shares used in
computing basic
and diluted net
loss per share 733,333 28,345,121 733,333 27,481,035
=============================================
</TABLE>
See Accompanying Notes
6
<PAGE>
<PAGE>
CI4NET.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
Six Months Ended
July 31, 1999 July 31, 2000
---------------------------------
<S> <C> <C>
Cash flows from operating
activities:
Net loss $ (961) $ (69,506)
Adjustments to reconcile
net loss to net cash
provided by / (used in)
operating activities:
Depreciation and amortization 45 26,552
Loss on sale of fixed assets (1,345) -
Deferred compensation - 2,173
Equity in losses of affiliated
companies - 353
Other non cash charges - 3,147
Changes in operating assets
and liabilities:
Accounts receivable 105 (4,718)
Inventories 42 60
Restricted cash - (11,269)
Other current assets - (15,584)
Other non-current assets (108) (3)
Deferred income - 4,258
Accounts payable 587 17,414
Accrued expenses and
other liabilities (458) 5,014
Accrued interest - 178
---------------------------------
Net cash used in operating
activities (2,093) (41,931)
---------------------------------
Cash flows from investing activities
Purchases of equipment and fixtures (63) (8,667)
Proceeds from disposal of assets 595 -
Purchase of trade marks (422) -
Proceeds from sale of trade marks 1,457 -
Investment in affiliates - (6,106)
Acquisition of subsidiary - (9,618)
---------------------------------
Net cash provided by/(used in)
investing activities 1,567 (24,391)
---------------------------------
Cash flows from financing activities
Related party loan - 327
Proceeds of long term debt - 1,608
Proceeds from issuance of
preferred shares - 63,444
Proceeds from bank borrowings 207 2,000
---------------------------------
Net cash provided by financing
activities 207 67,379
Effect of exchange rates on cash - 239
---------------------------------
Net increase (decrease) in cash and
cash equivalents (319) 1,296
Cash and cash equivalents at the
beginning of the period 377 254
---------------------------------
Cash and cash equivalents at the
end of the period $ 58 $ 1,550
=================================
Supplemental disclosure of cash
flow information
Interest paid $ 215 $ 572
=================================
</TABLE>
See accompanying notes
7
<PAGE>
CI4NET.COM, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business
CI4NET.com Inc ("Ci4net" or the "Company") is an economic
network, or Econet, with equity interests, as of July 31, 2000,
in 40 Internet-related companies ("Partner Companies"). The
Company has a 50% or greater interest in 33 of these companies
and holds minority interests in the remainder. The Partner
Companies include 8 Internet infrastructure companies, 19
business to business ("B2B") e-commerce companies, 12 business to
consumer ("B2C") e-commerce companies and 1 incubator company.
32 of our Partner Companies service the United Kingdom market.
The geographical focuses of the remaining Partner Companies
include Italy, The Netherlands, Europe as a whole, Australia and
the United States. The Company actively promotes collaboration
among its majority and minority-owned Partner Companies.
Basis of presentation
The accompanying unaudited condensed consolidated financial
statements apply to the Company and its subsidiaries. All
intercompany transactions and balances have been eliminated upon
consolidation.
The unaudited condensed consolidated financial statements
have been prepared by the Company and reflect all adjustments,
which consist only of normal recurring adjustments and, in the
opinion of management are necessary for a fair presentation of
the interim periods presented. The results of operations for the
three and six months ended July 31, 2000 are not necessarily
indicative of the results to be expected for any subsequent
quarter or for the fiscal year ending January 31, 2001. Certain
information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). The balance sheet at
January 31, 2000 has been derived from the audited financial
statements on that date but does not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements.
8
These unaudited condensed consolidated financial statements
and notes included herein should be read in conjunction with the
Company's audited consolidated financial statements and notes as
included in the Company's Annual Report on Form 10-K for the year
ended January 31, 2000.
Principles of Consolidation
Majority-owned ventures where ci4net has the ability to
exercise significant influence and directly or indirectly
owns more than 50% of the outstanding voting securities are
accounted for under the consolidation methods of accounting.
Those ventures where the Company exercises significant influence,
or owns 20-50% of the outstanding voting securities, are
accounted for by the equity method. If the Company has little
ability to exercise significant influence over a venture and has
ownership of less than 20% of the outstanding voting securities,
the venture is accounted for by the cost method. Results of
subsidiaries acquired and accounted for by the consolidation
method have been included in the operations from the relevant
date of acquisition.
Use of estimates
The preparation of financial statements in conformity with
generally accepted accounting principles 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.
Revenue recognition
In December 1999, the staff of the SEC issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition", which
provides guidance on the recognition, presentation and disclosure
of revenue in financial statements filed with the SEC. SAB No.101
outlines the basic criteria that must be met in order to
recognize revenue and provides guidance for disclosures related
to revenue recognition policies. The Company expects that
the requirements of SAB No. 101 will have no material impact on
its financial position or its results of operations.
The Company's contract revenues are derived principally from
the provision of Web site design services and hosting
arrangements. Revenues from the Web site design services are
9
recognized on the completion of each contract. Revenues from the
provision of hosting facilities are recognized ratably over the
term of the contract.
The Company's publishing revenues are derived from the sale
of publications and titles. Revenues from this source are
recognized at the point of sale and are stated net of returns.
The Company's travel revenue consists of revenue for travel
related services predominately consisting of airline seat sales
that are recognized on the date of travel.
Per share amounts
Net loss per share is computed using the weighted average
number of common shares outstanding. Since the Company has a net
loss for the three and six months ended July 31, 2000, net loss
per share on a diluted basis is equivalent to basic net loss per
share because the effect of converting outstanding stock options,
warrants, common stock subject to repurchase, convertible debt,
preferred stock and other common stock equivalents would be anti-
dilutive. There were no events that diluted the weighted average
shares outstanding for the three and six months July
31, 1999.
The computation of basic and diluted net loss per share is
as follows :
Three Months Ended Six Months Ended
July 31, July 31,
1999 2000 1999 2000
(In thousands, except
share data and per share data)
Net loss $ (973) $ (43,035) $ (961) $(69,506)
===========================================
Weighted averages shares
outstanding 733,333 28,345,121 733,333 7,481,035
Effect of diluted
securities -
employee stock option - - - -
Shares used to
compute basic and
diluted net income
(loss) per share 733,333 28,345,121 733,333 27,481,035
===========================================
Basic and diluted
net income (loss)
per share $ (1.33) $ (1.52) $ (1.31) $ (2.53)
===========================================
10
Reclassification
Certain prior period amounts have been reclassified to
conform with the current periods presentation. Such
reclassifications had no effect on the results of operations or
accumulative deficit.
2. BUSINESS COMBINATIONS AND ACQUISITIONS
On February 17, 2000, Ci4net acquired Systeam SpA, one of
Italy's leading e-systems integrators. The purchase price
consisted of $10.5 million in cash and 445,442 shares of the
Company's common stock. The Company has also provided a loan
facility to Systeam S.p.A. of up to $1,000,000 which will be
required to be repaid upon the occurrence of a liquidity event.
The acquisition has been accounted for under the purchase method
of accounting.
On February 23, 2000, Trrravel.com Ltd. ("trrravel.com"), an
indirect majority-owned subsidiary of Ci4net, acquired a 100%
equity stake in Independent Aviation Limited. The consideration
for the acquisition consisted of an option for the purchase of
shares of trrravel.com in the event that trrravel.com completes a
public offering. The acquisition has been accounted for under the
purchase method of accounting.
On March 3, 2000, Ci4net acquired a 66% equity stake in I
Consultants Limited, a UK company, which has a wholly owned
subsidiary 4thWave Technologies Ltd., a provider of local ISP
services and an IASP (an "Internet Application Service Provider")
developer of Internet-based clinical trial systems designed to
accelerate completion of clinical testing of new drugs, in
consideration for supplying a loan facility of up to $2,400,000,
which will be repaid upon a liquidity event taking place. The
acquisition has been accounted for under the purchase method of
accounting.
On March 13, 2000, Ci4net acquired a 25% equity interest in
Enteraction TV Ltd., a privately held, United Kingdom-based
developer of broadband and interactive TV applications. The
consideration for the acquisition consisted of the provision by
the Company to Enteraction TV Ltd. of a loan facility of up to
$1,200,000.00, which will by required to be repaid upon the
occurrence of a liquidity event, and for $800,000 in cash. The
investment has been accounted for under the equity method of
accounting.
11
On March 27, 2000, Ci4net acquired a 100% equity interest in
Personal Care Card BV, a provider of on-line consumer shopping
incentives and promotional discount cards based in the
Netherlands. The purchase price consisted of 2,000,000 shares of
common stock of the Company. The Company has also made available
a loan facility to company of up to $2 million, which will be
required to be repaid in full upon the occurrence of a liquidity
event. The acquisition has been accounted for under the purchase
method of accounting.
On March 22, 2000, Ci4net acquired a 51% equity stake in
Mostra Ltd., a privately held London-based consulting firm that
offers expertise in on-line and offline customer acquisition and
retention strategies. The purchase price consisted of 86,244
shares the Company's common stock. The Company has also made
available a loan facility to Mostra Ltd of up to $400,000, which
will be required to be repaid in full upon the occurrence of a
liquidity event. The acquisition has been accounted for under the
purchase method of accounting.
On March 22, 2000, Ci4net acquired a 50% equity stake in
Chorus Group Inc. The consideration for the acquisition consisted
of the provision by the Company to Chorus Group Inc. of a loan
facility of up to $5,500,000, which will be required to be repaid
upon the occurrence of a liquidity event. Chorus, a privately
held, London based firm, is a European leading international
business development specialists and has expertise in assisting
high-growth United States based technology companies set-up
European business operations. The investment has been accounted
for under the equity method of accounting.
On March 24, 2000, Ci4net acquired 50% of Business Villages
Ltd, which is developing a series of community sites targeted at
professional communities. The purchase price consisted of 20,000
shares of the Company's common stock., and $800,000 in cash. The
Company is also providing a loan facility to Business Villages
Ltd of up to $4,800,000, which will be required to be repaid in
full upon the occurrence of a liquidity event. The investment
has been accounted for under the equity method of accounting.
On March 24, 2000, Ci4net acquired 70% of ICM Resources
Limited, which operates Eazyprint.com, Europe's first on-line
print shop. The consideration for the acquisition was the
provision by the Company to ICM Resources Limited of a loan
facility of up to $2,208,000, which will be required to be repaid
in full upon the occurrence of a liquidity event. The acquisition
has been accounted for under the purchase method of accounting.
12
On March 24, 2000, Ci4net acquired approximately 2% of the
equity interests in Perform.com LLC., an IASP, for $500,000.
Perform.com has developed a suite of Internet-based tools to
facilitate the effective management of people, projects, goals,
communications, training and development. The investment is
carried at cost.
On April 1, 2000, Ci4net acquired approximately 5% of Kismet
International BV, a leading developer of online gaming systems,
for $1 million. The investment is carried at cost.
On April 4, 2000, Easy2ship, a majority owned subsidiary of
Ci4net, acquired E-Bidding.com Inc., a privately held United
States based freight and e-commerce company of which included an
end to end transaction engine for connecting carriers and
shippers. The purchase price consisted of 7,576 shares of the
Company's common stock. The acquisition has been accounted for
under the purchase method of accounting.
On May 1, 2000, Ci4net acquired a 51% equity stake in Citee
BV for 620,000 shares of the Company's common stock. Citee is a
systems integrator in The Netherlands employing 275 technically
trained specialists. Pursuant to the terms of the acquisition,
Ci4net will name a director to Citee's supervisory board. The
Company has also supplied a loan facility to Citee of up to
$1,847,075, which will be required to be paid in full upon the
occurrence of a liquidity event. The acquisition has been
accounted for under the purchase method of accounting.
On May 3, 2000, Ci4net acquired a 51% equity stake in
Aircharterexchange.com Limited, a United Kingdom based online
air charter business exchange for both passenger and cargo
airlines. The Company is also providing a loan facility to
aircharterexchange.com of up to $2,000,000, which will be
required to be repaid in full upon the occurrence of a liquidity
event. The acquisition has been accounted for under the purchase
method of accounting.
On May 19, 2000, Ci4net acquired a 51% equity stake in
Splash Communications Limited for 127,471 common stock of Ci4net
at $34.00 per share. Splash Communication Limited is a United
Kingdom based public relations and marketing agency geared
specifically towards internet based organizations. The
acquisition has been accounted for under the purchase method of
accounting.
On May 24, 2000, Ci4net signed an agreement with Aminex PLC
to form a joint venture pursuant to which each of Ci4net and
13
<PAGE>
Aminex PLC hold a 50% equity stake in Oilsupplyexchange.com
Limited. The investment will be accounted for under the equity
method of accounting.
On June 26, 2000, Ci4net acquired a 51% equity stake in
Warburton Lort Ltd for 61,552 common stock of Ci4net at $35.00
per share. Warburton Lort Ltd is a United Kingdom based
executive recruitment consultancy, which in conjunction with
Ci4net.com is developing an online career network, with vertical
industry specific job exchanges. The acquisition has been
accounted for under the purchase method of accounting.
Pro Forma Effect of Acquisitions
The unaudited pro forma effect of the acquisitions set forth
below, assuming each the acquisitions was consummated at the
beginning of the period, and the preceding period, is as follows:
Six months ended July 31,
1999 2000
In thousands, except share data
Revenues $16,851 $ 33,995
Net loss $(3,385) $(70,199)
Net loss per share $ (4.62) $ (2.48)
3. SEGMENTAL INFORMATION
The Company's businesses are organized, managed and
internally reported as separate business units which are
reportable under SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information".
The Company has four principal segments: (1) B2B operations,
(2) B2C operations, (3) Internet infrastructure operations, and
(4) holding company operations.
The accounting policies of the segments are the same as
those described in the summary of significant accounting
policies. We evaluate performance and allocate resources based on
segmental operating income (loss).
17
<PAGE>
Three Months Ended Six Months Ended
July 31, July 31,
1999 2000 1999 2000
Net Revenues
B2C 970 14,683 3,713 16,719
B2B - 1,984 - 2,430
Internet infrastructure - 6,732 - 9,460
Holding company - - - -
--------------------------------------
$970 $23,399 $3,713 $28,609
======================================
Operating loss
B2C (973) (4,873) (961) (6,902)
B2B - (261) - (874)
Internet infrastructure - (18,223) - (23,191)
Holding company - (19,678) - (38,539)
--------------------------------------
$(973) $(43,035) $(961) $(69,506)
======================================
4. STOCKHOLDERS EQUITY
On February 11, 2000, the Company amended its certificate of
incorporation to provide for blank check preferred stock. On
February 18, 2000, the Company completed the final closing of a
strategic private placement of its Series A preferred stock, par
value $0.001 per share, at a price of $10.00 per share of
preferred stock, resulting in net proceeds to the Company of
approximately $62,800,000. Each share of preferred stock is
initially convertible into two shares of common stock. The
conversion rate is subject to adjustment in certain
circumstances. The price at which the Series A preferred stock
was sold was determined in December 1999 before the Company, then
named Leisure Concepts International Inc., acquired a Delaware
corporation then named CI4NET.com Inc. in a change of control
transaction. The Series A preferred stock was sold only to a
limited number of accredited investors in a transaction pursuant
to an exemption from the registration requirements of the
Securities Act under 4(2) thereof, including Rule 506 of
Regulation D promulgated there under.
5. SUBSEQUENT EVENTS
On August 2000, Kevin Leech loaned the Company and certain
of its subsidiaries an aggregate of 3.9 million pounds, which
funds were used for working capital and other general corporate
purposes. On September 8, 2000, the Company issued promissory
notes to certain bridge investors resulting in gross proceeds to
the Company of $5,425.000.
15
<PAGE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The discussion in this report contains forward-looking
statements that involve risks and uncertainties. The
Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those
discussed below in "Factors that May Affect Future
Results".
Overview
Ci4net.com, Inc., ("Ci4net"or the "Company") is an economic
network, or Econet, with equity interests, as of July 31, 2000,
in 40 Internet-related companies, ("Partner Companies"). Ci4net
has a 50%-or-greater interest in 33 of these companies and holds
minority interests in the remainder. Our Partner Companies
include 8 Internet infrastructure companies, 19 B2B e-commerce
companies, 12 B2C e-commerce companies and 1 incubator company.
32 of our Partner Companies service the United Kingdom market.
The geographic focuses of our remaining Partner Companies include
Italy, The Netherlands, Europe as a whole, Australia and the
United States. The company actively promotes collaboration among
its majority-owned and minority-owned Partner Companies.
The Company was incorporated on December 29, 1995 and did
not have any operating activities until December 20, 1999, when
the Company purchased all of the issued and outstanding shares of
a Delaware corporation that was then named CI4NET.com Inc. ("Old
Ci4net"). In connection with its acquisition of Old Ci4net, the
Company effected a 1-for-15 reverse stock split, issued an
aggregate of 20,500,000 post-reverse split shares of common stock
to the former stockholders of Old Ci4net and simultaneously
changed its name from Leisure Concepts International Inc. to
CI4NET.com Inc. The pre existing stockholders of the Company held
555,446 post-reverse split shares of common stock following the
completion of our acquisition of Old Ci4net. Upon completion of
our acquisition of Old Ci4net, the Company issued 1,166,667
shares of its post-reverse split common stock to the former
shareholders of Planet Edge Limited ("Planet Edge"), a United
Kingdom information infrastructure development company, as
consideration for the prior acquisition of Planet Edge by Old
Ci4net, which occurred on December 6, 1999. Also upon completion
of our acquisition of Old Ci4net, the Company issued 1,200,000
17
shares of its post-reverse split common stock to the former
shareholders of Media Ventures Group plc ("Media Ventures"), a
United Kingdom magazine publisher, as consideration for the
acquisition of Media Ventures by Ci4net.com Limited, a Jersey
Channel Islands corporation ("Ci4net Limited"), which occurred on
December 17, 1999. Old Ci4net and Media Ventures were entities
under the common control of our principal shareholder, Kevin R.
Leech, and the acquisition has been accounted for in a manner
similar to a pooling of interests.
The Company's financial results for the six months ended
July 31, 2000 include the results of operations of the
following majority-owned companies and their related subsidiaries
for the full quarter: Three W Capital Ltd, Ci4net Limited,
Planet Edge, MSK Industries, Inc., I-Global.com Inc., Media
Ventures, Systeam SpA, Personal Care Card BV, Citee BV,
aircharterexchange.com. Limited, Splash Communication Limited and
Warburton Lort Ltd.
The Company's comparative financial results for the six
months ended July 31, 1999 consist solely of the results of
operations of Media Ventures.
Acquisitions
During the six months ended July 31, 2000 the Company
acquired majority interests in 17 companies, 50% interests in 11
companies and minority interests in 6 companies. The terms of
such acquisitions are summarized within footnote 2 to the
Company's financial statements included herein.
Private Placement
On February 18, 2000, the Company closed a private equity
placement which raised approximately $66 million in gross
proceeds and generated net cash proceeds of approximately $63
million.
Effect of Various Accounting Methods on Our Results of Operations
The Company's ownership interests in its Partner Companies
are accounted for under one of three methods: the consolidation
(or "purchase") method, the equity method and the cost method.
The applicable accounting method is generally determined based on
the Company's voting interest in the Partner Company.
Consolidation Method: Partner Companies in which the
Company directly or indirectly own more than 50% of the
18
outstanding voting securities are generally accounted for under
the consolidation method of accounting. Under this method, a
partner company's results of operations are reflected within the
Company's Consolidated Statements of Operations from the date of
acquisition.
During the six months ended July 31, 2000 acquisitions made
by Ci4net and accounted for using the consolidation method of
accounting were as follows: Independent Aviation Group Limited
(100%), Systeam SpA (79%), I Consultants Limited (66%), Mostra
Limited (51%), ICM Resources (70%), E Bidding.com Inc (100%),
Citee BV (51%), aircharterexchange.com Limited (51%), Splash
Communications Limited (51%) and Warburton Lort Ltd (51%).
Equity Method: Partner Companies whose results the Company
does not consolidate, but over whom the Company exercises
significant influence, will generally be accounted for under the
equity method of accounting. Whether or not the Company
exercises significant influence with respect to a Partner Company
depends on an evaluation of several factors including, among
others, representation on the Partner Company's board of
directors and ownership level, which is generally a 20% to 50%
interest in the voting securities of the Partner Company,
including voting rights associated with the Company's holding of
common stock, preferred stock and other equity derivatives of the
Partner Company. Under the equity method of accounting, a
Partner Company's results of operations are not reflected within
the Company's Consolidated Statements of Operations; however, the
Company's share of the earnings or losses of a Partner Company,
accounted for under the equity method, would be reflected
separately in the Company's Consolidated Statements of
Operations.
During the six months ended July 31, 2000 acquisitions made
by Ci4net and accounted for using the equity method of accounting
were as follows: Chorus Group Inc. (50%), Businessvillages.com
Limited (50%), Enteraction TV Limited (25%) and
Oilsupplyexchange.com Limited (50%).
Cost Method: Companies in which the Company has minority
investments that are not accounted for under either the
consolidation or the equity method of accounting are accounted
for under the cost method of accounting. Under this method, the
Company's share of the earnings or losses of these companies is
not included in Ci4net's Consolidated Statements of Operations.
During the six months ended July 31, 2000 acquisitions made
by Ci4net and accounted for using the cost method of accounting
19
were as follows: Perform.com (2%) and Kismet International NV
(5%).
All of the Partner Companies' financial statements have been
prepared in accordance with United States generally accepted
accounting principles and applicable SEC rules and regulations.
Results of Operations for the three and six months ended July 31,
2000 compared with the three and six months ended July 31, 1999.
Revenues
Revenues, consisting of publishing revenues, contract
revenues and other revenues, were $23.4 million for the three
months ended July 31, 2000 compared to $1.0 million for the three
months ended July 31, 1999 and were $28.6 million for the six
months ended July 31, 2000 compared to $3.7 million for the six
months ended July 31, 1999.
Publishing revenues, consisting of revenues from the sale of
publications and titles by Media Ventures, were $1.7 million for
the three months ended July 31, 2000 compared to $1.0 million
publishing revenues for the three months ended July 31, 1999 and
were $3.0 million for the six months ended July 31, 2000 compared
to $3.7 publishing revenues for the six months ended July 31,
1999. The decrease in publishing revenues for the six months
ended July 31, 2000 compared with the period ended 1999 was
principally due to reduced level of magazine title sales.
Contract revenues consist of revenues for Web site design
services and hosting arrangements. Revenues from Web site design
services are recognized upon the completion of each contract.
Revenues for hosting facilities are recognized ratably over the
term of the contract. Contract revenues were $6.7 million for
the three months ended July 31, 2000 and were $9.4 million for
the six months ended July 31, 2000. Contract revenue was
primarily attributable to the operations of Planet Edge for the
full quarter, and Systeam SpA for the period February 17
through July 31, 2000 and Citee BV for the period May 1 through
July 31, 2000. There were no contract revenues earned during the
three and six months ended July 31, 1999.
Travel revenue, generated by trrravel.com and IAL Ltd.
consists of revenue for travel related services predominately
consisting of airline seat sales that are recognized on the date
of travel. Travel revenues were $10.4 million for the three
20
months ended July 31, 2000 and were $11.0 million for the six
months ended July 31, 2000. There were no travel revenues earned
during the three and six months ended July 31, 1999.
Other revenues consist of revenues mainly generated from
ICM, Mostra and Allcars.com. Other revenues were $4.6 million
for the three months ended July 31, 2000 and were $5.2 for the
six months ended July 31, 2000; there were no other revenues for
the six months ended July 31, 1999.
Cost of Revenues
Publishing costs were $2.0 million for the three months
ended July 31, 2000 compared to $1.5 million for the three
months ended July 31, 1999 and were $3.7 million for the six
months ended July 31, 2000 compared to $3.4 million for the six
months ended July 31, 1999. Media Ventures acquires magazine
titles that have suffered from reduced circulation and
advertising revenues. It is expected that costs will exceed
revenue while Media Ventures is rebuilding the circulation and
advertising revenue.
Cost of contract revenues were $5.6 million for the three
months ended July 31, 2000 and were $6.1 million for the six
months ended July 31, 2000. Cost of contract revenues has been
incurred by Partner Companies that have contract revenue for the
three and six months ended July 31, 2000. There was no cost of
contract revenues for the three and six months ended July 31,
1999.
Cost of travel revenues were $10.1 million for the three
months ended July 31, 2000 and were $10.6 million for the six
months ended July 31, 2000. Cost of travel revenues was incurred
by trrrravel.com and IAL Ltd. There was no cost of travel
revenues for the three and six months ended July 31, 1999.
Cost of other revenues were $19.6 million for the three
months ended July 31, 2000 and were $23.7 million for the six
months ended July 31, 2000. Cost of other revenues was
predominately incurred due to a reallocation of research and
development expenses and an increase in telecommunication related
costs by Planet Edge (Australia) Ltd., which was not a Partner
Company during the six months ended July 31, 1999. There was no
cost of other revenues for the three and six months ended July
31, 1999.
21
<PAGE>
Operating Expenses
Sales and marketing expenses were $1.8 million for the three
months ended July 31, 2000 compared to $0.1 million for the three
months ended July 31, 1999 and were $3.5 for the six months ended
July 31, 2000 compared to $0.1 million for the six months ended
July 31, 1999. The substantial increase in sales and marketing
expenses resulted from expenses related to a marketing campaign
intended to assist in establishing Partner Company market
share and brand recognition within Europe.
Research and development costs were $0.2 million for the
three months ended July 31, 2000 were $0.3 million for the six
months ended July 31, 2000. Research and development costs relate
to 4th Wave Ltd, I Global Inc., Planet Edge (Australia) Ltd and
Systeam S.p.a. There were no research and development costs for
the six months ended July 31, 1999.
General and administrative expenses were $14.0 million for
the three months ended July 31, 2000 compared to $0.3 million for
the three months ended July 31, 1999 and were $23.0 million for
the six months ended July 31, 2000 compared to $0.9 million for
the six months ended July 31, 1999. The increases were
attributable primarily to new acquisitions, deferred compensation
costs, professional services and general overheads.
Depreciation expenses were $1.0 million for the three months
ended July 31, 2000 compared to $8,000 for the three months ended
July 31, 1999 and were $1.6 million for the six months ended
July 31, 2000 compared to $12,000 for the six months ended July
31, 1999. The increases in depreciation expenses were
attributable to an increase in capital expenditures, primarily in
Planet Edge Australia relating to the development of its ISP
service.
Amortization expenses were $11.6 million for the three
months ended July 31, 2000 and were $24.9 for the six months
ended July 31, 2000; there was no amortization expense for the
three and six months ended July 31, 1999. The amortization
expense consisted of amortization of goodwill related to the
acquisition of interests in Partner Companies. Goodwill related
to acquisitions is amortized in equal installments over three
years.
22
<PAGE>
Other Expenses and Loss
Equity in losses of affiliated companies was $0.3 million
for the three months ended July 31, 2000 and was $0.4 million for
the six months ended July 31, 2000; there was no equity in losses
of affiliated companies for the three and six months ended July
31, 1999. The losses were attributable to Ci4net's acquisition
of minority holdings in various partner companies during the
aforementioned period in 2000.
Interest income was $0.2 million for the three months ended
July 31, 2000 and was $0.5 million for the six months ended July
31, 2000; there was no interest income for the three and six
months ended July 31, 1999. Interest income primarily consists
of interest received on monies held by Ci4net.com.
Interest expense was $0.5 for the three months ended July
31, 2000 compared to $0.1 the three ended July 31, 1999 and was
$0.8 million six months ended July 31, 2000 compared to $0.2
million for the six months ended July 31, 1999. Interest expense
was attributable primarily to related party loans to Ci4net from
Gala Consultancy Limited and POL Capital Limited, in which Kevin
R. Leech, our Chairman, has controlling interests, and bank
borrowings by Media Ventures.
Net loss
The Company's net loss was $43.0 million for the three
months ended July 31, 2000 compared to a net loss of $1.0 million
for the three months ended July 31, 1999 and was $69.5 million
for the six months ended July 31, 2000 compared to a net loss of
$1.0 for the six months ended July 31, 1999. The increase in net
loss was due to increases in cost of revenue, general and
administration expenses, sales and marketing expense and
amortization expense.
Liquidity and Capital Resources
The Company's principal source of funds during the six
months ended July 31, 2000 was from the closing of a private
equity placement pursuant to which approximately $63.4 million in
net proceeds were received by the Company. Subsequent to July
31, 2000, Kevin Leech loaned the Company and certain of its
subsidiaries an aggregate of 3.9 million pounds which funds were
used for working capital and other general corporate purposes,
and the Company issued promissory notes to certain bridge
investors resulting in gross proceeds to the Company of
$5,425,000. The promissory notes were secured by those shares of
Systeam SpA held by the Company as of the date thereof.
23
Existing Partner Companies are, and any Partner Companies
acquired in the future will likely be, in early stages of
development and therefore are expected to require Company
financing to fund their operations. Such financing requirements
are expected to be substantial and there can be no assurance that
the currently projected requirements will remain the same. As of
July 31, 2000, we had approximately $1.5 million in cash and cash
equivalents and these funds, as well as funds subsequently
received from Kevin Leech and the purchasers of our promissory
notes, have largely been expended as of the date of this report.
We require significant additional financing in the very near
future to fund operations. We are presently pursuing a permanent
financing but have not completed it and cannot provide assurance
as to whether it will be completed. The permanent financing
being pursued is expected to consist of preferred stock. If
additional funds are raised through the issuance of equity
securities, our existing security holders may experience
substantial dilution. Alternatively, we may seek to obtain bank
financing or other sources of credit for purposes of funding
future operations, although there can be no assurance that such
funds will be available on acceptable terms. We will not be able
to continue to operate our business unless our financing
requirements are met.
Net cash used by operating activities was approximately
$41.9 million during the six months ended July 31, 2000. This
movement is attributable to the loss, as adjusted for non cash
items, for the period of $37.3 million, whilst the net movement
in operating assets and liabilities resulted in a further
increase in cash used of $4.6 million
Net cash used in investing activities was approximately
$24.4 million during the six months ended July 31, 2000.
These amounts were used primarily used to fund new acquisitions
and to fund the purchases of fixed assets.
Net cash from financing activities was approximately $67.4
million which primarily consists of the net proceeds, amounting
to $63.4 million, from the sale of approximately 6.6 million
shares of the Company's Series A Preferred Stock in a transaction
exempt from registration pursuant to Regulation D under the
Securities Act.
24
<PAGE>
Reportable Business Segments
The Company's reportable segments determined in accordance
with Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related
Information" are B2B operations, B2C operations, Internet
infrastructure operations and holding company operations. B2B,
B2C and Internet infrastructure operations include the effect of
consolidating from their dates of acquisition and recording our
share of earnings or losses of Partner Companies accounted for
under the consolidation method of accounting. Because the
aggregation of our Partner Companies and the initiation of
coordinated operations among a large number of previously
unrelated entities occurred only recently, we do not believe that
a detailed discussion of business segment results is pertinent to
an understanding of our current business.
The Company's Internet infrastructure Partner Companies
derive revenues principally from programming, consulting and
maintenance. The Company's Internet infrastructure Partner
Companies also derive revenue from hosting, data management
services, provision of Internet data centre sites, network
services, managed services (such as professional services), sales
of equipment, licensing of software and the provision of a
variety of other products and services. Revenues, other than
revenues attributable to installation fees, equipment sales to
customers and certain professional services, are generally billed
and recognized ratably over the term of the applicable contract,
which is generally one year. Installation fees are typically
recognized at the time the installation occurs. Equipment
revenues are typically recognized when the equipment is delivered
to the customer or placed into service at an Internet data
centre. We sell third-party equipment to our customers as an
accommodation to facilitate their purchase of services.
25
The Company's B2B Partner Companies derive revenues from
multiple sources, including commissions, advertising, consulting,
and e-commerce activities. Our B2B Partner Companies typically
earn a commission when each transaction is completed on their Web
sites. Revenues are also derived from various advertising
packages and marketing solutions provided by these Partner
Companies. Revenues are also derived from consulting services.
E-commerce revenues are derived from online sales and from
revenue sharing arrangements with third party operators. In such
sharing arrangements, the Partner Company and a third party
operator jointly create a Web site or avail themselves of one
another's Web site development resources and share the resulting
revenues.
The Company's B2C Partner Companies derive revenues from
multiple sources, including advertising, sponsorships, publishing
and e-commerce transactions. E-commerce and advertising revenues
are expected to grow in importance as the Company's B2C Partner
Companies continue to leverage their growing user bases.
Holding company operations represent the expense of
providing strategic and operational support to our Partner
Companies and related administrative costs. Holding company
operations also include the effect of transactions and other
events incidental to our ownership interests in our Partner
Companies and our general operations.
Recent Accounting Pronouncements
In December 1999, the staff of the Securities and Exchange
Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition", which provides guidance on the
recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. SAB No.101 outlines the basic
criteria that must be met in order to recognize revenue and
provides guidance for disclosures related to revenue recognition
policies. The Company expects that the requirements of SAB No.
101 will have no material impact on its financial position
or its results of operations.
In January 2000, the Emerging Issues Task Force ("EITF")
reached a consensus on EITF Issue 99-17, "Accounting for
Advertising Barter Transactions." The EITF agreed that
advertising barter transactions entered into subsequent to
January 20, 2000 should be accounted for at fair value only if
there is verifiable objective evidence provided by sufficient
cash transactions received by the seller of the advertising or
26
similar advertising. If the seller of advertising does not have
verifiable objective evidence, then the transaction is recognized
at the recorded amount of the advertising surrendered, that is,
zero. The EITF also concluded that the volume of similar cash
transactions should be at least equal to the volume of barter
transactions.
The Company has adopted the policies of EITF Issue 99-17and
there are no material effects on the financial statements.
The Financial Accounting Standards Board ("FASB") has issued
Statement of Financial Accounting Standards 133, which has not
yet been adopted by the Company. SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities" is effective for
fiscal years beginning after June 15, 2000. This standard
requires all derivatives to be recognized as either assets or
liabilities on the balance sheet at their fair values. It also
prescribes the accounting to be followed for the changes in the
fair values of derivatives depending upon their intended use and
resulting designation. It supersedes or amends the existing
standards, which deal with hedge accounting and derivatives. The
Company does not expect the effect of adopting this standard will
have a material impact on the amounts reported in its financial
statements.
Year 2000 Compliance
To date, we have not experienced significant Year 2000
disruptions to our operating or administrative systems.
The Company believes that its significant vendors and service
providers are Year 2000 compliant and we have not, to date, been
made aware that any of our significant vendors or service
providers have suffered Year 2000 disruptions in their systems.
Accordingly, we do not anticipate incurring material expenses or
experiencing any material operational disruptions as a result of
any Year 2000 problems. The Company spent an immaterial amount
on Year 2000 testing and compliance during 1999.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The Company does not currently hold any public securities
and therefore is not exposed to equity price risks on the
marketable of its equity securities. However, it is possible
that some of the Company's subsidiaries may go public in the near
future. At such time, the Company would be exposed to equity
risks on the marketable portion of those equity securities.
27
The carrying values of financial instruments including cash
and cash equivalents, accounts receivable, accounts payable and
notes payable, approximate fair value because of the short
maturity of these instruments. The carrying value of long-term
debt approximates its fair value, as estimated by using
discounted future cash flows based on the Company's current
incremental borrowing rates for similar types of borrowing
arrangements.
As the Company expands globally, the risk of foreign
currency exchange rate fluctuation may dramatically increase.
Therefore, in the future, the Company may consider utilizing
derivative instruments to mitigate such risks.
28
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGE IN SECURITIES.
On May 1, 2000, Ci4net issued 620,000 shares of the
Company's common stock in a private placement to certain
shareholders of Citee BV in exchange for a 51% equity stake in
Citee BV.
On May 19, 2000, Ci4net issued 127,471 shares of the
Company's common stock in a private placement to certain
shareholders in exchange for a 51% equity stake in Splash
Communications Limited.
On June 26, 2000, Ci4net issued 61,552 shares of common
stock in a private placement to certain shareholders of Warburton
Lort Ltd in exchange for a 51% equity stake in Warburton Lort
Ltd.
The sale and issuance of securities in the transaction
described above were exempt from registration under the
Securities Act in reliance on Section 4(2) of the Securities Act
as transactions by an issuer not involving a public offering,
where the purchasers were sophisticated investors who represented
their intention to acquire securities for investment only and not
with a view to distribution and received or had access to
adequate information about Ci4net.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
A majority of the Company's common shareholders by written
consent approved a Restated Certificate of Incorporation on June
1, 2000. The Company's Board of Directors had unanimously
recommended, approved and adopted the Restated Certificate of
Incorporation, pursuant to a resolution adopted on April 3, 2000.
Pursuant to Rule 14c-2 of the Securities Exchange Act of 1934, as
amended, the Company, in connection with the taking of this
corporate action, transmitted a written information statement on
29
May 4, 2000 to every security holder of the class that was
entitled to vote or give an authorization or consent. Proxy
authorizations or consents were not solicited.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None.
30
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
Registrant has caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CI4NET.COM INC.
(Registrant)
Date: September 22, 2000
Linden Boyne
Chief Operations Officer
Date: September 22, 2000
Ricky Weir
(Principal Financial and
Accounting Officer)
31
