CI4NET.COM, INC.
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For The Quarterly Period Ended October 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 of (I.R.S. Employer Identification No.)
incorporation or organization)
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. [|X| Yes] |_| No
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of December 8, 2000 was $18,522,121.
1
<PAGE>
CI4NET.COM, INC.
Page
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PART I FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements - unaudited 4
Condensed Consolidated Balance Sheets at January 31, 2000 and
October 31, 2000 3
Condensed Consolidated Statements of Operations for the three and
nine months ended October 31, 1999 and 2000 4
Condensed Consolidated Statements of Cash Flows for the six months
ended October 31, 1999 and 2000 5
Notes to the Condensed Consolidated Financial Statements 6
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk
PART II OTHER INFORMATION 23
ITEM 1 Legal Proceedings. 23
ITEM 2 Change in Securities and Use of Proceeds. 23
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk 23
ITEM 4 Submission of Matters to a Vote of Security Holders 23
ITEM 5 Other Information 23
ITEM 6 Exhibits and Reports on Form 8-K 23
Signatures 24
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".
2
<PAGE>
ITEM I CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CI4NET.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
January 31, October 31,
2000 2000
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets :
Cash and cash equivalents $ 254 $ 1,124
Restricted cash -- 10,886
Accounts receivable 725 11,942
Inventories 153 114
Other current assets 1,891 26,889
--------- ---------
Total current assets 3,023 50,955
Property, equipment and fixtures
Land and buildings 65 977
Motor vehicles 135 566
Computer equipment 3,120 1,923
Furniture and fixtures 1,105 2,129
Office Equipment 79 514
--------- ---------
4,504 6,109
Less accumulated depreciation 1,239 2,685
--------- ---------
3,265 3,424
Investments in affiliated companies -- 10,355
Intangible assets 90,683 121,641
Other assets -- 939
--------- ---------
$ 96,971 $ 187,314
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities :
Accounts payable $ 12,985 $ 15,310
Accrued expenses and other liabilities 2,360 21,269
Deferred Income -- 557
Short-term bank borrowings 10,122 15,041
Related party loan 5,141 10,548
Bridge Financing -- 6,079
Accrued interest 98 418
--------- ---------
Total current liabilities 30,706 69,222
Other non-current liabilities 880 2,476
Minority interests (217) (781)
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 -- 7
outstanding at October 31, 2000.
Common stock: $0.001 par value; 100,000,000 shares authorized, 25,485,513
issued and outstanding at January 31, 2000, and 31,140,958 issued
and outstanding at October 31, 2000 25 31
Additional paid in capital 104,187 259,660
Deferred compensation (8,670) (5,397)
Accumulated other comprehensive income (10) 4,888
Accumulated deficit (29,930) (142,792)
--------- ---------
Total stockholders' equity 65,602 116,397
--------- ---------
$ 96,971 $ 187,314
========= =========
</TABLE>
3
See accompanying notes
<PAGE>
CI4NET.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
--------------------------- ---------------------------
1999 2000 1999 2000
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Total revenues 1,100 25,048 4,813 53,657
Cost of revenues 1,492 25,425 4,882 69,436
--------- ------------ --------- ------------
Gross profit (loss) (392) (377) (69) (15,779)
Operating expenses:
Sales and marketing 70 4,232 186 7,690
Research and development -- 437 -- 730
General and administration 271 16,541 1,197 39,554
Amortization -- 16,530 -- 41,477
Depreciation 13 1,093 25 2,699
Goodwill write off -- 6,801 -- 6,801
--------- ------------ --------- ------------
Total operating expenses 354 45,634 1,408 98,951
Operating loss (746) (46,011) (1,477) (114,730)
Profit on disposal of investments -- 4,495 -- 4,495
Equity in losses of affiliated companies -- (314) -- (667)
Interest income -- 90 -- 545
Interest expense (133) (1,559) (347) (2,347)
--------- ------------ --------- ------------
Loss before income taxes (879) (43,299) (1,824) (112,704)
========= ============ ========= ============
Income tax expense 15 (57) -- (158)
--------- ------------ --------- ------------
Net loss $ (864) $ (43,356) $ (1,824) $ (112,862)
========= ============ ========= ============
Basic and diluted loss per share $ (1.18) $ (1.43) $ (2.49) $ (3.97)
========= ============ ========= ============
Shares used in computing basic and diluted
net loss per share 733,333 30,325,553 733,333 28,440,078
========= ============ ========= ============
</TABLE>
4
See accompanying notes
<PAGE>
CI4NET.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
October 31,
----------------------
1999 2000
------- ---------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $(1,954) $(112,862)
Adjustments to reconcile net loss to net cash
provided by / (used in) operating activities:
Depreciation and amortization 75 52,097
Loss on sale of fixed assets (1,439) --
Profit on disposal of Investments -- (4,495)
Deferred compensation -- 3,273
Equity in losses of affiliated companies -- 667
Other non cash charges -- 6,509
Changes in operating assets and liabilities:
Accounts receivable 23 (2,650)
Inventories 120 72
Restricted cash -- (10,886)
Other current assets (225) (14,414)
Other non-current assets -- 255
Deferred income -- 142
Accounts payable 615 14,558
Accrued expenses and other liabilities (514) 12,985
Accrued interest -- 1,180
------- ---------
Net cash provided by / (used in) operating activities (3,299) (53,569)
------- ---------
Cash flows from investing activities
Purchases of equipment and fixtures (76) (7,689)
Proceeds from disposal of assets 637 --
Purchase of trade marks (467) --
Proceeds from sale of trademarks 1,560 --
Investment in affiliates -- (8,879)
Acquisition of subsidiary -- (9,618)
------- ---------
Net cash provided by / (used in) investing activities 1,654 (26,186)
------- ---------
Cash flows from financing activities
Related party loan -- 5,407
Proceeds of long term debt -- 1,597
Proceeds from issuance of preferred shares -- 63,444
Proceeds from bank borrowings 1,310 80
Proceeds from bridge finance -- 7,389
------- ---------
Net cash provided by / (used in) financing activities 1,310 77,917
Effect of exchange rates on cash -- 2,708
------- ---------
Net increase (decrease) in cash and cash equivalents (335) 870
Cash and cash equivalents at the beginning of the period 403 254
------- ---------
Cash and cash equivalents at the end of the period $ 68 $ 1,124
------- ---------
Supplemental disclosure of cash flow information
Interest paid $ 215 $ 572
======= =========
</TABLE>
5
See accompanying notes
<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 a U.S. publicly held
holding company whose principal business is acquiring and developing early stage
Internet and communications/wireless applications businesses with a European and
Pacific Rim focus.
Recent market conditions have heavily affected the Internet and Technology
sectors, making it very difficult for companies within those sectors to raise
either public or private financing. Ci4net has adapted to these conditions by
rationalizing its portfolio to reduce the number of its portfolio companies from
40 to 25 companies, in order to focus on those portfolio companies with the best
long-term potential for growth and profitability. These businesses will be
resourced either directly from Ci4net or through co-investment with strategic
partners. The Company believes that these actions have and will continue to
reduce cash burn for the Company. The rationalization process involved the
disposal of holdings in three companies, 1 company being placed into
administration, and 11 initial stage concept companies going dormant with no
future investment planned.
The Company's segments (formally, "Business to Business", "Business to
Consumer", "Internet Infrastructure", and "holding company operations") have
also been reconfigured to better reflect the areas of focus for the Company
after the rationalization process.
The Company's portfolio of 25 operating companies is focused on 4 core
markets:
o Internet infrastructure and services - 7 companies
o Communications/wireless applications - 3 companies
o Digital markets/exchanges - 6 companies
o Digital businesses - 9 companies
Internet Infrastructure and Services. The Company's primary strategy in
this space is to build an Asian Pacific portfolio of free Internet service
providers, or ISPs, centered around the Company's proprietary ad-serving
technology. This technology was developed through the Company's wholly-owned
subsidiary, GlobalFreeway BVI Limited ("GlobalFreeway"), the largest free ISP in
Australia. The Company believes that its ad-serving technology will allow us to
increase customers rapidly while reaching profitability faster than any other
free ISP. The Company believes that it can leverage that rapid growth throughout
the Asia Pacific region. GlobalFreeway has already grown from its service launch
in January 2000 to have approximately 200,000 subscribers, and the Company
intends to seek significant growth and to achieve profitability in 2001. In
addition, the Company intends to leverage the intellectual property and product
and service offerings of its Internet services businesses to bundle fee-based
service and product offerings to the Company's ISP and other customers in the
Far East as well as to customers elsewhere in the world. The Company has 7
partner companies in this space, including Cassium Ltd., Chorus Europe Ltd., 4th
Wave/AKAS Ltd., GlobalFreeway, mostra Ltd., Perform.com LLC, and Splash
Communications Ltd.
Communications/Wireless Applications. The Company is building a portfolio
of companies operating in this space, centered upon the expertise and market
presence of our 86%-owned subsidiary, Systeam SpA. The Company intends to make
Systeam the core building block of this portion of our business, initially
European-focused but with the expectation of expansion into Asian markets,
aiming to deliver cutting-edge communications/wireless services and products.
The Company's other companies in this space at this time are enteraction tv Ltd.
and Kismet International NV.
Digital Markets/Exchanges. The Company is developing a portfolio of
companies operating or developing digital markets/exchanges. The Company is
currently centering our operations in this space on 6 development stage
companies: AirCharterExchange.com Ltd., Amossco Holding Ltd., Easy2Ship.com
Ltd., Fish Exchange.net Inc., ICM Resources Ltd. and tempz.com Ltd.
Digital Businesses. The Company has a portfolio of 9 development stage
companies that are operating or developing e-commerce businesses, including:
allCars.com Ltd., BusinessVillages.com Ltd., BuyThisFast Inc., go-within.com
Ltd. (formally, Femail.com Ltd), Kids Events Ltd., Personal Care Card Nederland
Holding BV, Property World (Internet) Ltd., Buyers Guide UK Ltd and trrravel.com
Ltd.
6
<PAGE>
CI4NET.COM, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Most of the businesses the Company has acquired or developed are wholly-
or majority-owned; the Company also has minority investments in some businesses.
All of the companies in which the Company has invested are referred to as
"partner companies". The Company's strategy is to identify market leaders in
emerging technologies in these core markets, develop the corporate
infrastructure of these companies and finance their growth through public and
private equity offerings by the operating companies themselves, once the
companies are sufficiently developed to obtain that financing, as well as
through strategic partnerships. The Company seeks to leverage expertise,
particularly technologies of the operating companies, and industry contacts and
opportunities for sales and marketing, among its portfolio companies. The
Company's revenue models for the companies in its portfolio are based primarily
upon fee-based services and products, although the revenue mix of some of our
companies, such as ISPs, may reflect a higher proportion of advertising revenue
during initial commercial operations only. To date, the Company has invested
approximately $80 million in cash and $120 million in our stock in approximately
50 investments. Our current portfolio of 25 partner companies reflects
consolidations of strategically related businesses, dispositions of businesses
and other adjustments in our corporate structure.
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. As part of the
consideration for the acquisition of equity in certain of our partner companies,
we agreed to make loans to those companies, subject to the partner companies
performing in accordance with mutually agreeable business plans and the
satisfaction of certain other conditions. At October 31, 2000, the total
commitments made by the company under these acquisition agreements amounted to
$53.5 million, of which $15.1 million had been advanced to partner companies. In
certain instances the Company has suspended or terminated funding of partner
company as a result of the failure of such partner companies to satisfy their
respective funding conditions. In other circumstances the Company is working
with the management of such partner companies to explore alternative financing
sources.
Although the Company has reduced its overheads inline with market
conditions there are certain funding requirements to maintain our staff and
operations apart from those subsidiaries and other companies. 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 October 31,
2000, we had approximately $1.1 million in cash and cash equivalents. These
funds, and the funds subsequently received from our principal shareholder and
the purchasers of our bridge notes, have largely been expended as of the date of
this report. Our overdraft facility with HSBC is anticipated to provide the
Company with sufficient proceeds to fund negative cash flow through to mid
January 2001. 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 could consist of common 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. Unless our financing requirements are met there
will be substantial doubt as to the company's ability to continue as a going
concern.
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 nine months ended October 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.
7
<PAGE>
CI4NET.COM, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
RESTRICTED CASH
Restricted cash amounting to $10.9 million was held by HSBC Bank plc as
security against the overdraft facility of Media Ventures plc.
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 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.
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.
LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long Lived
Assets to be Disposed", long-lived assets to be held and used by the Company are
reviewed to determine whether an event or change in circumstances indicates that
the carrying amount of the asset may not be recoverable. The Company has written
down the value of intangible assets by an amount of $6.8 million relating to
partner companies disposed of subsequent to October 31, 2000, being Planet Edge
Ltd., Warburton Lort Ltd. and Media Ventures plc. Intangible assets in
continuing partner companies are currently being reviewed; this process will be
complete during the next quarter and will be reported accordingly. A decline in
intangible assets is expected but cannot be determined at this time.
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 nine
months ended October 31, 2000, net loss per share on a diluted basis is
equivalent to basic net
8
<PAGE>
CI4NET.COM, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 nine
months October 31, 1999.
The computation of basic and diluted net loss per share is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
--------------------------- ---------------------------
1999 2000 1999 2000
--------- ------------ --------- ------------
In thousands, except share data and per share data
<S> <C> <C> <C> <C>
Net profit (loss) $ (864) $ (43,356) $ (1,824) $ (112,862)
========= ============ ========= ============
Weighted averages shares outstanding 733,333 30,325,553 733,333 28,440,078
Effect of diluted securities - employee stock option -- -- -- --
Shares used to compute basic and diluted net income (loss)
per share 733,333 30,325,553 733,333 28,440,078
========= ============ ========= ============
Basic and diluted net income (loss) per share $ (1.18) $ (1.43) $ (2.49) $ (3.97)
========= ============ ========= ============
</TABLE>
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 accumulated deficit.
RECENT ACCOUNTING PRONOUNCEMENTS
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.
2. BUSINESS COMBINATIONS, ACQUISITIONS AND DISPOSITIONS
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 1, 2000, Ci4net acquired Systeam SpA, one of Italy's leading
e-systems integrators. The purchase price consisted of $10.5 million in cash and
447,931 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 March 7, 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,
9
<PAGE>
CI4NET.COM, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 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 22, 2000, Ci4net acquired a 25% equity interest in Enteraction TV
Ltd., a privately held, United Kingdom-based developer of broadband and
interactive TV applications for $800,000. 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. 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.
On March 24, 2000, Ci4net acquired approximately 2% of the equity 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 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 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, a systems
integrator in the Netherlands, for 620,000 shares of the Company's common stock.
The Company also supplied a loan facility to Citee of up to $1,847,075, which
will be required to be repaid in full upon the occurrence of a liquidity event.
The acquisition was accounted for under the purchase method of accounting.
Subsequent to the date of acquisition, the Company was unable to meet certain of
its purchase price and other obligations under the Citee BV acquisition
agreement. On October 25, 2000, Ci4net relinquished its 51% equity stake in
Citee BV (the "Citee Shares") in consideration for the return by the original
sellers of the Citee Shares of the shares of Ci4net Common Stock issued to such
sellers pursuant to the acquisition agreement. The loss on disposition amounted
to $17.6 million due to the decline in market value of the Company's Common
Stock between the date of the Company's acquisition and disposition of the Citee
Shares. The trading activity of Citee BV was included as contract revenue of the
Company prior to the disposition of the Citee Shares. The loss on disposal was
set against the profit on disposal of Planet Edge Australia Ltd.
10
<PAGE>
CI4NET.COM, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On May 3, 2000, Ci4net acquired a 51% equity stake in
AirCharterExchange.com Ltd, 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 Ltd 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 PR 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 Aminex PLC hold a 50% equity
stake in Oilsupplyexchange.com Limited. The investment has been accounted for
under the equity method of accounting.
On June 7, 2000, Ci4net acquired a 10% equity stake in Cassium Ltd., a UK
company with offices in Sweden and Italy providing established corporate and B2B
clients with comprehensive high-end web base enterprise platforms and solutions
for $5.0 million. The investment is carried at cost.
On June 26, 2000, Ci4net acquired a 51% equity stake in Warburton Lort
Ltd, a United Kingdom based executive recruitment consultancy, for 61,552 common
stock of Ci4net. The acquisition was accounted for under the purchase method of
accounting. As described in Note 5, the transaction has been reversed.
On July 19, 2000, the Company acquired 100% of Global Freeway Pty Limited
("Global Freeway"), which had previously been held by its majority-owned
subsidiary Planet Edge Australia. Simultaneously, the Company sold a 30%
interest in Planet Edge Australia to a third party for a nominal purchase price,
reducing the Company's interest in Planet Edge Australia to 25%. The profit on
the decreased ownership of Planet Edge Australia was $22.1 million, this was set
against the loss on the disposal of Citee In addition, the Company acquired a
100% equity interest in Pacific Internet Solutions Limited ("Pacific Internet")
for 954,543 shares of common stock of Ci4net. Pacific Internet owns the
worldwide rights to develop Global Freeway.
On August 24, 2000, Ci4net signed an agreement with the minority
shareholders of I Global.com Inc. to acquire an additional 9% equity of
I-Global.com Inc. in exchange for 300,000 newly issued shares of the Company's
common stock, bringing the Company's ownership position to 70%.
PRO FORMA EFFECT OF ACQUISITIONS
The unaudited pro forma effect of the acquisitions set forth below,
assuming each of the acquisitions was consummated at the beginning of the
period, and the preceding period, is as follows:
Nine months ended October 31,
1999 2000
-------- ---------
In thousands
Revenues $ 28,055 $ 58,928
Net loss $ (2,696) $(113,531)
Net loss per share $ (3.68) $ (3.99)
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's old classification of "Business to Business", "Business to
Consumer", "Internet Infrastructure" has been reconfigured to better describe
the Company's focus on its partner companies within 5 core segments as described
below.
The Company has four principal segments: (1) Internet Infrastructure and
Services, (2) Communications/Wireless Applications, (3) Digital
Markets/Exchanges, and (4) Digital Businesses and (5) holding company
operations.
11
<PAGE>
CI4NET.COM, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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).
<TABLE>
<CAPTION>
Three Months Ended
October 31,
----------------------------------------------------------------------------
1999 2000
---------------------------------- --------------------------------------
Third Inter- Inter-
Party company Total Third Party company Total
------- ------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Revenue
Internet Infrastructure -- -- -- 8,066 (164) 7,902
Digital Markets/Exchanges -- -- -- 2,611 -- 2,611
Communications/ Wireless -- -- -- 2,162 -- 2,162
Applications
Digital Business 1,100 -- 1,100 12,209 7 12,216
Holding -- -- -- -- -- --
------- ------- -------- -------- -------- --------
$ 1,100 $ -- $ 1,100 $ 25,048 $ (157) $ 24,891
======= ======= ======== ======== ======== ========
Operating income (loss)
Internet Infrastructure -- -- -- (4,545) (164) (4,709)
Digital Markets/Exchanges -- -- -- (2,167) -- (2,167)
Communications/ Wireless -- -- -- (528) -- (528)
Applications
Digital Business (746) -- (746) (4,033) 7 (4,026)
Holding -- -- -- (34,738) -- (34,738)
------- ------- -------- -------- -------- --------
$ (746) $ -- $ (746) $(46,011) $ (157) $(46,168)
======= ======= ======== ======== ======== ========
<CAPTION>
Nine Months Ended
October 31,
----------------------------------------------------------------------------
1999 2000
---------------------------------- --------------------------------------
Third Inter- Inter-
Party company Total Third Party company Total
------- ------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Revenue
Internet Infrastructure -- -- -- 14,026 1,621 15,647
Digital Markets/Exchanges -- -- -- 4,615 -- 4,614
Communications/ Wireless -- -- -- 6,088 -- 6,088
Applications
Digital Business 4,813 -- 4,813 28,928 7 28,935
Holding -- -- -- -- -- --
------- ------- --------- --------- --------- ---------
$ 4,813 $ -- $ 4,813 $ 53,657 $ 1,628 $ 55,284
======= ======= ========= ========= ========= =========
Operating income (loss)
Internet Infrastructure -- -- -- (27,084) 1,621 (25,463)
Digital Markets/Exchanges -- -- -- (4,069) -- (4,069)
Communications/ Wireless -- -- -- (1,093) -- (1,093)
Applications
Digital Business (1,477) -- (1,477) (9,643) 7 (9,636)
Holding -- -- -- (72,841) -- (72,841)
------- ------- --------- --------- --------- ---------
$(1,477) $ -- $ (1,477) $(114,730) $ 1,628 $(113,102)
======= ======= ========= ========= ========= =========
</TABLE>
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
12
<PAGE>
CI4NET.COM, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. CONVERTIBLE DEBT
On November 24, 2000, the Company sold to certain investors 10% promissory
notes in the aggregate amount of $2,670,000 (the "Second Tranche Notes"). The
Second Tranche Notes carried warrant coverage of 100% which warrants have an
exercise price equal to the lower of $5 per share or the price per share that
the Company sells common stock or securities convertible into common stock in
the next round of financing, subject to certain provisions. The Second Tranche
Notes are due on April 1, 2001. In addition, the holders of these warrants will
be entitled to receive one additional share of Common Stock from Kevin R. Leech
for each share of Common Stock purchased upon the exercise of the warrants. At
an assumed exercise price of $5, these warrants would be exercisable in
aggregate for 534,000 shares of the Company's common stock and would
additionally result in Kevin R. Leech transferring 534,000 shares of Company
common stock currently owned by him to the investors who purchased the Second
Tranche Notes. The Second Tranche Notes are secured by the Company's 86%
ownership of Systeam SpA pursuant to a security agreement with the collateral
agent for the investors. If the holders of the First Tranche Notes act to seize
or dispose of the collateral for those notes that would also cause a default
under the Company's Second Tranche Notes.
As of December 2000, investors holding First Tranche Notes with an
aggregate principal amount of approximately $3,825,000 have verbally agreed to
convert their First Tranche Notes into Third Tranche Notes (as described below).
In order to induce the holders of the First Tranche Notes to convert their First
Tranche Notes into Third Tranche Notes, the Company has agreed to offer warrant
coverage of 150% which converts into common stock of the Company at a conversion
price of the lower of $5 per share or the price per share that the Company sells
common stock or securities convertible into common stock, in the next round of
financing, subject to certain provisions. The Third Tranche Notes are due on
April 1, 2001. In addition, the holders of these warrants will be entitled to
receive one additional share of Common Stock from Kevin R. Leech for each share
of Common Stock purchased upon the exercise of the warrants. Upon the conversion
of one of such warrants, the Company would receive $5 and the investor
exercising the warrant would receive one newly-issued common share of the
Company along with one common share of the Company previously owned by Kevin R.
Leech. At a warrant conversion price of $5, these warrants would be exercisable
in aggregate for 1,147,500 shares of the Company's common stock and would
additionally result in Kevin R. Leech transferring 1,147,500 shares of Company
common stock currently owned by him to the investors who converted their First
Tranche Notes into Third Tranche Notes. The Third Tranche Notes will be secured
by the Company's 86% ownership of Systeam SpA pursuant to a security agreement
with the collateral agent for the investors. If the holders of the First Tranche
Notes act to seize or dispose of the collateral for those notes that would also
cause a default under the Company's Third Tranche Notes
6. SUBSEQUENT EVENTS
On November 14, 2000, Ci4net sold a 100% equity stake in Planet Edge Ltd
for $15. The Company has agreed to allow to remain outstanding a loan to Planet
Edge Ltd of 1.649 million English Pounds for a period of 5 years at a rate of
interest equal to Barclays Bank PLC's base rate. The trading activities of
Planet Edge Ltd was included as contract revenue of the Company prior to its
disposal.
On December 1, 2000, Ci4net sold a 51% equity stake in Warburton Lort Ltd
for the return of 30,776 shares of common stock by former shareholders of
Warburton Lort Ltd of Ci4net. The trading activities of Warburton Lort Ltd was
included as other revenue of the Company prior to its disposal.
On December 4, 2000 insolvency proceedings were commenced against, and an
Administrator was appointed to oversee the affairs of, Media Ventures plc
("Media Ventures"). The trading activity of Media Ventures was included as
publishing revenue of the Company for the three and nine months ended October
31, 2000.
13
<PAGE>
CI4NET.COM, INC.
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
The Company is a U.S. publicly held holding company whose principal
business is acquiring and developing early stage Internet and
communications/wireless applications businesses with a particularly European and
Asian focus. Our portfolio of 25 operating companies includes 7 Internet
infrastructure and service companies, 3 communications/wireless applications
companies, 6 digital market/exchange companies and 9 digital business companies.
Most 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.
Our strategy is to identify market leaders in emerging technologies in
these core markets, develop the corporate infrastructure of these companies and
finance their growth through public and private equity offerings by the
operating companies themselves, once the companies are sufficiently developed to
obtain that financing, as well as through strategic partnerships. We seek to
leverage expertise, particularly technologies of the operating companies, and
industry contacts and opportunities for sales and marketing, among our portfolio
companies. Our revenue models for the companies in our portfolio are based
primarily upon fee-based services and products, although the revenue mix of some
of our companies, such as ISPs, may reflect a higher proportion of advertising
revenue during initial commercial operations only. To date, we have invested
approximately $80 million in cash and $120 million in our stock in approximately
50 investments. Our current portfolio of 25 partner companies reflects
consolidations of strategically related businesses, dispositions of businesses
and other adjustments in our corporate structure. Recent market conditions have
heavily affected the Internet and Technology sectors, making it very difficult
for companies within those sectors to raise either public or private financing.
Ci4net has adapted to these conditions by rationalizing its portfolio to reduce
the number of its portfolio companies from 40 to 25 companies, in order to focus
on those portfolio companies with the best long-term potential for growth and
profitability. These businesses will be resourced either directly from Ci4net or
through co-investment with strategic partners. The Company believes that these
actions have and will continue to reduce cash burn for the Company. The
rationalization process involved the disposal of holdings in three companies, 1
company being placed into administration, and 11 initial stage concept companies
going dormant with no future investment planned.
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 that was
subsequently disposed by the Company, as consideration for the prior acquisition
of Planet Edge by Old Ci4net, which occurred on December 6, 1999. Also upon
completion of its acquisition of Old Ci4net, the Company issued 1,200,000 shares
of its post-reverse split common stock to the former shareholders of Media
Ventures 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 nine months ended October 31, 2000
include the results of operations of the following majority-owned companies and
their related subsidiaries for the full quarter or through the date of
disposition in the case of Citee BV: Three W Capital Ltd, Ci4net Limited, Planet
Edge, MSK Industries, Inc., I-Global.com Inc., Media Ventures, Systeam S.p.A.,
Personal Care Card BV, Citee BV, AirCharterExchange.com Ltd, Splash
Communication Limited and Warburton Lort Ltd. Our interests in Citee BV was
disposed of on October 25, 2000. Subsequent to October 31, 2000, our interests
in Planet Edge and Warburton Lort Ltd. were disposed of.
14
<PAGE>
CI4NET.COM, INC.
Acquisitions and Dispositions
During the nine months ended October 31, 2000 the Company acquired
majority interests in 17 companies, 50% interests in 11 companies and minority
interests in 6 companies. The following are brief summaries of the terms of such
acquisitions:
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.
On March 1, 2000, Ci4net acquired Systeam S.p.A., one of Italy's leading
e-systems integrators. The purchase price consisted of $10.5 million in cash and
630,844 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.
On March 7, 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 I-ASP 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 22, 2000, Ci4net acquired a 51% equity stake in Mostra Ltd., a
privately held London-based consulting firm that offers expertise in online 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 company of up to $400,000, which will be required
to be repaid in full upon the occurrence of a liquidity event.
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, has established itself as one of Europe's
leading international business development specialists and has expertise in
assisting high-growth United States-based technology companies set-up European
business operations.
On March 22, 2000, Ci4net acquired a 25% equity interest in Enteraction TV
Ltd., a privately held, United Kingdom based developer of broadband and
interactive TV applications for $800,000.
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. 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.
On March 24, 2000, Ci4net acquired 70% of ICM Resources Limited, which
operates Eazyprint.com, Europe's first online 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.
On March 24, 2000, Ci4net acquired approximately 2% of the equity
interests in Perform.com, LLC., an I-ASP, 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.
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.
On April 1, 2000, Ci4net acquired approximately 5% of Kismet International
BV, a leading developer of online gaming systems, for $1 million.
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.
15
<PAGE>
CI4NET.COM, INC.
On May 1, 2000, Ci4net acquired a 51% equity stake in Citee BV, a systems
integrator in the Netherlands, for 620,000 shares of the Company's common stock.
The Company also supplied a loan facility to Citee of up to $1,847,075, which
will be required to be repaid in full upon the occurrence of a liquidity event.
The acquisition was accounted for under the purchase method of accounting.
Subsequent to the date of acquisition, the Company was unable to meet certain of
its purchase price and other obligations under the Citee BV acquisition
agreement. On October 25, 2000, Ci4net relinquished its 51% equity stake in
Citee BV (the "Citee Shares") in consideration for the return by the original
sellers of the Citee Shares of the shares of Ci4net Common Stock issued to such
sellers pursuant to the acquisition agreement. The loss on disposition amounted
to $17.6 million due to the decline in market value of the Company's Common
Stock between the date of the Company's acquisition and disposition of the Citee
Shares. The trading activity of Citee BV was included as contract revenue of the
Company prior to the disposition of the Citee Shares.
On May 3, 2000, Ci4net acquired a 51% equity stake in
AirCharterExchange.com Ltd, 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 Ltd of up to $2,000,000, which will be
required to be repaid in full upon the occurrence of a liquidity event.
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 PR and marketing agency
geared specifically towards internet based organizations.
On May 24, 2000, Ci4net signed an agreement with Aminex PLC to form a
joint venture pursuant to which each of ci4net and Aminex PLC hold a 50% equity
stake in Oilsupplyexchange.com Limited.
On June 7, 2000, Ci4net acquired a 10% equity stake in Cassium Ltd., a UK
company with offices in Sweden and Italy providing established corporate and B2B
clients with comprehensive high-end web base enterprise platforms and solutions
for $5.0 million.
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. On December 1, 2000, Ci4net sold a 51% equity
stake in Warburton Lort Ltd for the return of 30,776 shares of common stock by
former shareholders of Warburton Lort Ltd of Ci4net at $1.88 per share. The
trading activities of Warburton Lort Ltd were included as other revenue of the
Company prior to its disposal.
On July 19, 2000, the Company acquired 100% of Global Freeway Pty Limited
("Global Freeway"), which had previously been held by its majority-owned
subsidiary Planet Edge Australia. Simultaneously, the Company sold a 30%
interest in Planet Edge Australia to a third party for a nominal purchase price,
reducing the Company's interest in Planet Edge Australia to 25%. The profit on
the decreased ownership of Planet Edge Australia was $22.1 million, this was set
against the loss on the disposal of Citee In addition, the Company acquired a
100% equity interest in Pacific Internet Solutions Limited ("Pacific Internet")
for 954,543 shares of common stock of Ci4net. Pacific Internet owns the
worldwide rights to develop Global Freeway.
Subsequent Events
On November 14, 2000, Ci4net sold a 100% equity stake in Planet Edge Ltd
for $15. The Company has agreed to allow to remain outstanding a loan to Planet
Edge Ltd of 1.649 million English Pounds for a period of 5 years at a rate of
interest equal to Barclays Bank plc's base rate. The trading activities of
Planet Edge Ltd were included as contract revenue of the Company prior to its
disposal.
On December 1, 2000, Ci4net sold a 51% equity stake in Warburton Lort Ltd
for the return of 30,776 shares of common stock by former shareholders of
Warburton Lort Ltd of Ci4net at $1.88 per share. The trading activities of
Warburton Lort Ltd were included as other revenue of the Company prior to its
disposal. Goodwill was written down to its deemed fair value as of October 31,
2000.
On December 4, 2000 insolvency proceedings were commenced against, and an
Administrator was appointed to oversee the affairs of, Media Ventures. The
trading activity of Media Ventures was included as publishing revenue of the
Company for the three and nine months ended October 31, 2000. Goodwill was
written down to its deemed fair value as of October 31, 2000.
16
<PAGE>
CI4NET.COM, INC.
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.
On September 8, 2000, the Company sold to certain investors 10% promissory
notes in the aggregate amount of $5,425,000 (the "First Tranche Notes"). The
First Tranche Notes are secured by the Company's 86% ownership of Systeam SpA
pursuant to a security agreement entered into with a collateral agent for the
First Tranche Note investors. The First Tranche Notes carried warrant coverage
of 40% which warrants have an exercise price equal to the lower of $6 per share
or the price per share that the Company sells common stock or securities
convertible into common stock in the next round of financing subject to certain
provisions. The First Tranche Notes were due September 30, 2000 and are
currently in default. If that default is not cured, the holders of these notes
may exercise the customary remedies of noteholders upon default. In addition,
the noteholders may dispose of the Company's entire interest in Systeam.
Additionally, the First Tranche Notes are accruing interest at a rate of 18% per
annum as well as 10% additional warrant coverage per week. These additional
warrants have terms identical to those issued under the initially issued
warrants. To-date the First Tranche Notes have accumulated 150% warrant
coverage. At an assumed exercise price of $6, these warrants would be
exercisable in aggregate for 1,356,250 shares of the Company's common stock.
On November 24, 2000, the Company sold to certain investors 10% promissory
notes in the aggregate amount of $2,670,000 (the "Second Tranche Notes"). The
Second Tranche Notes carried warrant coverage of 100% which warrants have an
exercise price equal to the lower of $5 per share or the price per share that
the Company sells common stock or securities convertible into common stock in
the next round of financing, subject to certain provisions. The Second Tranche
Notes are due on April 1, 2001. In addition, the holders of these warrants will
be entitled to receive one additional share of Common Stock from Kevin R. Leech
for each share of Common Stock purchased upon the exercise of the warrants. At
an assumed exercise price of $5, these warrants would be exercisable in
aggregate for 534,000 shares of the Company's common stock and would
additionally result in Kevin R. Leech transferring 534,000 shares of Company
common stock currently owned by him to the investors who purchased the Second
Tranche Notes. The Second Tranche Notes are secured by the Company's 86%
ownership of Systeam SpA pursuant to a security agreement with the collateral
agent for the investors. If the holders of the First Tranche Notes act to seize
or dispose of the collateral for those notes that would also cause a default
under the Company's Second Tranche Notes.
As of December 2000, investors holding First Tranche Notes with an
aggregate principal amount of approximately $3,825,000 have verbally agreed to
convert their First Tranche Notes into Third Tranche Notes (as described below).
In order to induce the holders of the First Tranche Notes to convert their First
Tranche Notes into Third Tranche Notes, the Company has agreed to offer warrant
coverage of 150% which converts into common stock of the Company at a conversion
price of the lower of $5 per share or the price per share that the Company sells
common stock or securities convertible into common stock, in the next round of
financing, subject to certain provisions. The Third Tranche Notes are due on
April 1, 2001. In addition, the holders of these warrants will be entitled to
receive one additional share of Common Stock from Kevin R. Leech for each share
of Common Stock purchased upon the exercise of the warrants. Upon the conversion
of one of such warrants, the Company would receive $5 and the investor
exercising the warrant would receive one newly-issued common share of the
Company along with one common share of the Company previously owned by Kevin R.
Leech. At a warrant conversion price of $5, these warrants would be exercisable
in aggregate for 1,147,500 shares of the Company's common stock and would
additionally result in Kevin R. Leech transferring 1,147,500 shares of Company
common stock currently owned by him to the investors who converted their First
Tranche Notes into Third Tranche Notes. The Third Tranche Notes will be secured
by the Company's 86% ownership of Systeam SpA pursuant to a security agreement
with the collateral agent for the investors. If the holders of the First Tranche
Notes act to seize or dispose of the collateral for those notes that would also
cause a default under the Company's Third Tranche Notes.
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 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.
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CI4NET.COM, INC.
During the nine months ended October 31, 2000 Ci4net consummated 18
acquisitions which were accounted for using the consolidation method of
accounting.
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 nine months ended October 31, 2000 Ci4net consummated 6
acquisitions which were accounted for using the equity method of accounting.
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 nine months ended October 31, 2000 Ci4net consummated 5
acquisitions which were accounted for using the cost method of accounting.
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 nine months ended October 31, 2000
compared with the three and nine months ended October 31, 1999.
Revenues
Revenues, consisting of publishing revenues, contract revenues, travel
revenue and other revenues, were $25.0 million for the three months ended
October 31, 2000 compared to $1.1 million for the three months ended October 31,
1999 and were $53.7 million for the nine months ended October 31, 2000 compared
to $4.8 million for the nine months ended October 31, 1999.
Publishing revenues, consisting of revenues from the sale of publications
and titles by Media Ventures, were $1.2 million for the three months ended
October 31, 2000 compared to $ 1.1 million publishing revenues for the three
months ended October 31, 1999 and were $ 4.2 million for the nine months ended
October 31, 2000 compared to $ 4.8 million publishing revenues for the nine
months ended October 31, 1999. The decrease in publishing revenues for the nine
months ended October 31, 2000 compared with the period ended 1999 was
principally due to reduced level of magazine title sales. Due to the appointment
of an Administrator to Media Venture plc on December 4, 2000 there will be no
future publishing revenues
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 $ 8.5 million for
the three months ended October 31, 2000 and were $ 17.9 million for the nine
months ended October 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 October 31, 2000 and Citee BV for the period May 1
through October 31, 2000. There were no contract revenues earned during the
three and nine months ended October 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 $ 9.5 million for the
three months ended October 31, 2000 and were $ 20.6 million for the nine months
ended October 31, 2000. There were no travel revenues earned during the three
and nine months ended October 31, 1999.
Other revenues consist of revenues mainly generated from ICM, Mostra and
Allcars.com. Other revenues were $5.7 million
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CI4NET.COM, INC.
for the three months ended October 31, 2000 and were $10.9 million for the nine
months ended October 31, 2000; there were no other revenues for the nine months
ended October 31, 1999.
Cost of Revenues
Publishing costs were $1.6 million for the three months ended October 31,
2000 compared to $1.5 million for the three months ended October 31, 1999 and
were $ 5.3 million for the nine months ended October 31, 2000 compared to $ 4.9
million for the nine months ended October 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. Due to the appointment of an
Administrator to Media Venture plc on December 4, 2000 there will be no future
publishing cost of revenues
Cost of contract revenues were $9.2 million for the three months ended
October 31, 2000 and were $15.3 million for the nine months ended October 31,
2000. Cost of contract revenues has been incurred by Partner Companies that have
contract revenue for the three and nine months ended October 31, 2000. There was
no cost of contract revenues for the three and nine months ended October 31,
1999.
Cost of travel revenues were $9.1 million for the three months ended
October 31, 2000 and were $19.6 million for the nine months ended October 31,
2000. Cost of travel revenues was incurred by trrrravel.com and IAL Ltd. There
was no cost of other revenues for the three and nine months ended October 31,
1999.
Cost of other revenues were $5.5 million for the three months ended
October 31, 2000 and were $29.2 million for the nine months ended October 31,
2000. Cost of other revenues was predominately incurred by Planet Edge
(Australia) Ltd, due to an increase in telecommunication related costs, which
was not a Partner Companies during the nine months ended October 31, 1999. There
was no cost of other revenues for the three and nine months ended October 31,
1999.
Operating Expenses
Sales and marketing expenses were $4.2 million for the three months ended
October 31, 2000 compared to $0.07 million for the three months ended October
31, 1999 and were $7.7 million for the nine months ended July 31, 2000 compared
to $0.2 million for the nine months ended October 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 $0.4 million for the three months
ended October 31, 2000 were $0.7 million for the nine months ended October 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 nine months ended October 31, 1999.
General and administrative expenses were $16.5 million for the three
months ended October 31, 2000 compared to $0.3 million for the three months
ended October 31, 1999 were $39.6 million for the nine months ended October 31,
2000 compared to $1.2 million for the nine months ended October 31, 1999. The
increase was attributable primarily to new acquisitions, deferred compensation
costs, professional services and general overheads.
Depreciation expense were $1.1 million for the three months ended October
31, 2000 compared to $0.01 for the three months ended October 31, 1999 were $2.7
million for the nine months ended October 31, 2000 compared to $0.03 for the
nine months ended October 31, 1999. The increase in depreciation expense was
attributable to an increase in capital expenditures.
Amortization expense were $16.5 million for the three months ended October
31, 2000 and were $41.5 million for the nine months ended October 31, 2000;
there was no amortization expense for the three and nine months ended October
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.
Goodwill write off was $6.8 million for the three months ended October 31,
2000 and the nine months ended October 31, 2000. This is the goodwill write off
relating to investments of Planet Edge UK and Warburton Lort subsequently
disposed of, and the issuance of insolvency proceedings against Media Ventures.
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CI4NET.COM, INC.
Other Expenses and Loss
Profit on disposal of investments for the three months ended October 31,
2000 and nine months ended October 31, 2000 was $ 4,5 million which relates to a
loss made on the disposal of our interests in Citee BV and a profit on the
disposal of a 30% interest in Planet Edge Australia. There was no disposals of
investments for the three and nine months ended October 31, 1999.
Equity in losses of affiliated companies was $0.3 million for the three
months ended October 31, 2000 and was $0.7 million for the nine months ended
October 31, 2000; there was no equity in losses of affiliated companies for the
three and nine months ended October 31, 1999. The losses being attributable to
companies where Ci4net maintains an equity investment.
Interest income was $ 0.09 million for the three months ended October 31,
2000 and was $0.5 million for the nine months ended October 31, 2000; there was
no interest income for the three and nine months ended October 31, 1999. The
interest income primarily consists of interest received on monies held by
Ci4net.com.
Interest expense was $1.6 for the three months ended October 31, 2000
compared to $0.1 the for the three months ended October 31, 1999 and was $2.3
million for the nine months ended October 31, 2000 compared to $0.3 million for
the nine months ended October 31, 1999. Interest accrued on primarily on the
bridging loan and a related party loan to Ci4net from Gala Consultancy Limited
and POL Capital Limited, in which Kevin R. Leech, our Chairman, has a
controlling interest, and bank borrowing by Media Ventures.
Net loss
Net loss was $43.4 million for the three months ended October 31, 2000
compared to net loss of $0.9 million for the three months ended October 31, 1999
and was $112.9 million for the nine months ended October 31, 2000 compared to
net loss of $1.8 for the nine months ended October 31, 1999. The 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 nine months ended
October 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.
During August and September 2000, Kevin Leech, our Chairman, loaned the Company
and certain of its subsidiaries an aggregate of GBP3.9 million (approximately
$5.7 million), which funds were used for working capital and other general
corporate purposes. During September through November 2000, the Company issued
promissory notes to certain bridge investors resulting in gross proceeds to us
of $8,095,000. On September 30, 2000, the Company had sold to certain investors
10% promissory notes in the aggregate amount of $5425,000. The First Tranche
Notes are secured by the Company's 86% ownership of Systeam SpA pursuant to a
security agreement entered into with a collateral agent for the First Tranche
Note investors. The First Tranche Notes carried warrant coverage of 40% which
warrants have an exercise price equal to the lower of $6 per share or the price
per share that the Company sells common stock or securities convertible into
common stock in the next round of financing subject to certain provisions. The
First Tranche Notes were due September 30, 2000 and are currently in default. If
that default is not cured, the holders of these notes may exercise the customary
remedies of noteholders upon default. In addition, the noteholders may dispose
of the Company's entire interest in Systeam. Additionally, the First Tranche
Notes are accruing interest at a rate of 18% per annum as well as 10% additional
warrant coverage per week. These additional warrants have terms identical to
those issued under the initially issued warrants. To-date the First Tranche
Notes have accumulated 150% warrant coverage. At an assumed exercise price of
$6, these warrants would be exercisable in aggregate for 1,356,250 shares of the
Company's common stock.
On November 24, 2000, the Company sold to certain investors 10% promissory
notes in the aggregate amount of $2,670,000. The Second Tranche Notes carried
warrant coverage of 100% which warrants have an exercise price equal to the
lower of $5 per share or the price per share that the Company sells common stock
or securities convertible into common stock in the next round of financing,
subject to certain provisions. The Second Tranche Notes are due on April 1,
2001. In addition, the holders of these warrants will be entitled to receive one
additional share of Common Stock from Kevin R. Leech for each share of Common
Stock purchased upon the exercise of the warrants. At an assumed exercise price
of $5, these warrants would be exercisable in aggregate for 534,000 shares of
the Company's common stock and would additionally result in Kevin R. Leech
transferring 534,000 shares of Company common stock currently owned by him to
the investors who purchased the Second Tranche Notes. The Second Tranche Notes
are secured by the Company's 86% ownership of Systeam SpA pursuant to a security
agreement with the collateral agent for the investors. If the holders of the
First Tranche Notes act to seize or dispose of the collateral for those notes
that would also cause a default under the Company's Second Tranche Notes.
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CI4NET.COM, INC.
As of December 2000, investors holding First Tranche Notes with an
aggregate principal amount of approximately $3,825,000 have verbally agreed to
convert their First Tranche Notes into Third Tranche Notes. In order to induce
the holders of the First Tranche Notes to convert their First Tranche Notes into
Third Tranche Notes, the Company has agreed to offer warrant coverage of 150%
which converts into common stock of the Company at a conversion price of the
lower of $5 per share or the price per share that the Company sells common stock
or securities convertible into common stock, in the next round of financing,
subject to certain provisions. The Third Tranche Notes are due on April 1, 2001.
In addition, the holders of these warrants will be entitled to receive one
additional share of Common Stock from Kevin R. Leech for each share of Common
Stock purchased upon the exercise of the warrants. Upon the conversion of one of
such warrants, the Company would receive $5 and the investor exercising the
warrant would receive one newly-issued common share of the Company along with
one common share of the Company previously owned by Kevin R. Leech. At a warrant
conversion price of $5, these warrants would be exercisable in aggregate for
1,147,500 shares of the Company's common stock and would additionally result in
Kevin R. Leech transferring 1,147,500 shares of Company common stock currently
owned by him to the investors who converted their First Tranche Notes into Third
Tranche Notes. The Third Tranche Notes will be secured by the Company's 86%
ownership of Systeam SpA pursuant to a security agreement with the collateral
agent for the investors. If the holders of the First Tranche Notes act to seize
or dispose of the collateral for those notes that would also cause a default
under the Company's Third Tranche Notes.
In November 2000, the Company obtained an overdraft facility currently
under negotiation from HSBC Bank plc, the Company's bank, in the amount of
approximately $4.8 million (of which the Company has already drawn $3.9
million), which will be secured by the Company's holdings in certain of its
partner companies. Pending completion of negotiation of this overdraft facility,
Kevin Leech has agreed to personally guarantee any outstanding amounts
thereunder.
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. 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. As part of the consideration for the
acquisition of equity in certain of our partner companies, we agreed to make
loans to those companies, subject to the partner companies performing in
accordance with mutually agreeable business plans and the satisfaction of
certain other conditions. At October 31, 2000, the total commitments made by
the company under these acquisition agreements amounted to $53.5 million, of
which $15.1 million had been advanced to partner companies. In certain instances
the Company has suspended or terminated funding of partner company as a result
of the failure of such partner companies to satisfy their respective funding
conditions. In other circumstances the Company is working with the management of
such partner companies to explore alternative financing sources.
Although the Company has reduced its operating costs consistent with
market conditions, the Company requires funding to financially support the
Partner Companies and to cover the overhead of the Company. These funding
requirements, in aggregate, are expected to be significant and there can be no
assurance that the currently projected requirements will remain the same. As of
October 31, 2000, we had approximately $1.1 million in cash and cash
equivalents. These funds, and the funds subsequently received from Kevin Leech
and the purchasers of our bridge notes, have largely been expended as of the
date of this report. Our overdraft facility with HSBC is anticipated to provide
the Company with sufficient proceeds to fund negative cash flow through to mid
January 2001. 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 could consist of common stock
or debt securities. 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. Unless our
financing requirements are met there will be substantial doubt as to the
company's ability to continue as a going concern.
Net cash used by operating activities was approximately $53.6 million
during the nine months ended October 31, 2000. This movement is attributable to
the loss, as adjusted for non cash items, for the period of $53.9 million,
whilst the net movement in operating assets and liabilities resulted in a
decrease in cash used of $0.2 million.
Net cash used in investing activities was approximately $26.2 million
during the nine months ended October 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 $77.9 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.
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CI4NET.COM, INC.
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 Internet infrastructure and services
operations, Communications/wireless applications operations, Digital
markets/exchanges operations and Digital businesses operations. The above
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 and services Partner Companies
derive revenues principally from programming, consulting and maintenance. The
Company's Internet infrastructure and services Partner Companies also derive
revenue from hosting, data management services, provision of Internet data
center 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 center. We sell third-party equipment to our
customers as an accommodation to facilitate their purchase of services.
The Company's Communication and wireless Partner Companies derive revenues
from multiple sources, including commissions, advertising, consulting, and
e-commerce activities. Our Communication and wireless 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 Digital markets/exchanges 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 Digital markets/exchanges Partner Companies
continue to leverage their growing user bases.
The Company's Digital businesses Partner Companies derive revenues from
multiple sources, including advertising, sponsorships, publishing and e-commerce
transactions.
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.
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
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CI4NET.COM, INC.
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.
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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGE IN SECURITIES.
On August 23, 2000, Ci4net issued 954,543 shares of the Company's common
stock in a private placement to certain shareholders of Pacific Internet
Solutions Ltd in exchange for a 100% equity stake in Pacific Internet Solutions
Ltd.
On August 24, 2000, Ci4net issued 300,000 shares of the Company's common
stock in a private placement to certain shareholders of I-Global.com Inc. to
increase the Company's ownership position to 70%.
On September 6, 2000, Ci4net issued 113,697 shares of the Company's common
stock in a private placement to certain former shareholders of Personal Care
Card BV in exchange for the satisfaction and forgiveness of certain loans made
by such shareholders to Personal Care Card BV.
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
The First Tranche Notes due September 30, 2000 are currently in default.
If that default is not cured, the holders of these notes may exercise the
customary remedies of noteholders upon default. In addition, the noteholders may
dispose of the Company's entire interest in Systeam. Additionally, the First
Tranche Notes are accruing interest at a rate of 18% per annum as well as 10%
additional warrant coverage per week. These additional warrants have terms
identical to those issued under the initially issued warrants in connection with
the First Tranche Notes. To-date the First Tranche Notes have accumulated 150%
warrant coverage. At an assumed exercise price of $6, these warrants would be
exercisable in aggregate for 1,356,250 shares of the Company's common stock. If
the holders of the First Tranche Notes act to seize or dispose of the collateral
for those notes that would also cause a default under the Company's Second
Tranche Notes and the Company's Third Tranche Notes.
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 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.
Proceedings were commenced in June 2000 in the courts of the Isle of
Jersey, Channel Islands, relating to the affairs of a Jersey company - Milner
Laboratories Limited ("MLL") - of which Kevin Leech, our Chairman (Emeritus), a
director of our board of directors and our largest shareholder, is a director.
MLL is the largest shareholder in ML Laboratories Plc, listed on the London
Stock Exchange. The proceedings were brought by Ellen Milner, the minority
shareholder in MLL, against Mr. Leech, the other two directors and MLL itself.
Mrs. Milner alleges that the directors have breached their duties to MLL and
that her interests as a shareholder have been unfairly prejudiced. She seeks an
order that MLL or Mr. Leech buy her shareholdings in MLL at an enhanced notional
valuation. Mr. Leech and the other defendants have publicly stated that the
claim will be defended vigorously. No date has been set for trial. There has
been one hearing in the matter at which the Court found that Mrs. Milner had
wrongfully applied for an asset freezing order against MLL and an asset tracing
order against Mr. Leech without notifying Mr. Leech in advance, and that her
lawyers had failed to inform the Court of the relevant law when she did so. Mr.
Leech and his fellow directors had consented to an order preventing direct or
associated transactions between them and MLL pending trial. The Court refused
Mrs. Milner's request to reimpose the rest of the orders, finding that they were
not justified.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None.
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CI4NET.COM, INC.
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: January 8, 2001 /s/ Linden Boyne
--------------------------
Linden Boyne
Operations Director
Date: January 8, 2001 /s/ Ricky Weir
--------------------------
Ricky Weir
Principal Financial and
Accounting Officer
24
