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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NO.: 000-25677
CYBERNET INTERNET SERVICES
INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 51-0384117
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
SUITE 1620 - 400 BURRARD STREET, VANCOUVER, BRITISH COLUMBIA, CANADA V6C 3A6
(ADDRESS OF OFFICE)
(604) 683-5767
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the SECURITIES EXCHANGE ACT OF 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO ____
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) YES _____ NO X
The Registrant had 26,445,627 shares of common stock, $0.001 par value
outstanding as of September 30, 2003.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2003
(UNAUDITED)
2
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, 2002 JUNE 30, 2003
----------------- -------------
(in thousands)
ASSETS
Current Assets
Cash and cash equivalents................................................ $ 24,094 $ 22,816
Restricted cash.......................................................... 1,903 1,062
Receivables.............................................................. 5,616 559
Prepaid and other........................................................ 439 21
----------- ------------
Total current assets................................................. 32,052 24,458
Long-Term Assets
Properties............................................................... 1,180 2
Deferred debt issuance cost.............................................. 3,831 3,712
----------- ------------
5,011 3,714
----------- ------------
Total assets......................................................... $ 37,063 $ 28,172
=========== ============
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current Liabilities
Trade accounts payable................................................... $ 3,228 $ 892
Other accrued expenses................................................... 11,365 8,952
Accrued personnel costs.................................................. 1,132 811
----------- ------------
Total current liabilities............................................ 15,725 10,655
Long-Term Liabilities
Long-term debt .......................................................... 166,012 180,936
----------- ------------
Total liabilities.................................................... 181,737 191,591
Common stock................................................................. 26 26
Additional paid-in capital................................................... 140,540 140,540
Accumulated deficit.......................................................... (284,639) (303,384)
Other comprehensive loss..................................................... (601) (601)
----------- ------------
Total shareholders' deficiency....................................... (144,674) (163,419)
------------ ------------
$ 37,063 $ 28,172
=========== ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(UNAUDITED)
FOR THE SIX FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2003
----------------- ------------------
(in thousands, except per share data)
Revenues.................................................................. $ 14,388 $ 722
Costs and expenses:
Direct cost of services............................................... 7,661 426
Network operations.................................................... 2,090 86
General and administrative expenses................................... 9,174 3,995
Sales and marketing expenses.......................................... 2,929 133
Impairment of assets.................................................. 5,963 -
Depreciation and amortization......................................... 4,049 276
------------- -----------
Total costs and expenses.......................................... 31,866 4,916
------------- -----------
Operating loss............................................................ (17,478) (4,194)
Other income and expenses:
Interest expense....................................................... (12,019) (12,940)
Interest income........................................................ 180 61
Equity in losses of equity-method investees............................ (241) -
Gain on sale of assets and other....................................... 11,876 3,532
Foreign currency losses................................................ (7,055) (5,204)
------------- -----------
Loss before taxes......................................................... (24,737) (18,745)
Income tax benefit........................................................ 8 -
------------- -----------
Net loss.................................................................. (24,729) (18,745)
Accumulated deficit, beginning of period.................................. (231,873) (284,639)
------------- -----------
Accumulated deficit, end of period........................................ $ (256,602) $ (303,384)
============= ===========
Loss per share, basic and diluted......................................... $ (0.94) $ (0.71)
============= ===========
Number of shares used to compute loss per share (thousands).............. 26,445 26,445
============= ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(UNAUDITED)
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2003
--------------- ---------------
(in thousands, except per share data)
Revenues.................................................................. $ 6,225 $ 46
Costs and expenses:
Direct cost of services............................................... 3,686 -
Network operations.................................................... 1,196 -
General and administrative expenses................................... 4,369 1,724
Sales and marketing expenses.......................................... 1,239 -
Impairment of assets.................................................. 5,963 -
Depreciation and amortization......................................... 1,879 209
------------- -----------
Total costs and expenses.......................................... 18,332 1,933
------------- -----------
Operating loss............................................................ (12,107) (1,887)
Other income and expenses:
Interest expense....................................................... (6,026) (6,452)
Interest income........................................................ 90 17
Equity in losses of equity-method investees............................ (123) -
Gain on sale of assets and other....................................... 11,876 916
Foreign currency losses................................................ (7,701) (3,698)
------------- -----------
Income before taxes....................................................... (13,991) (11,104)
Income tax benefit........................................................ 8 -
------------- -----------
Net loss.................................................................. (13,983) (11,104)
Accumulated deficit, beginning of period.................................. (242,619) (292,280)
------------- -----------
Accumulated deficit, end of period........................................ $ (256,602) $ (303,384)
============= ===========
Loss per share, basic and diluted $ (0.53) $ (0.42)
============= ===========
Number of shares used to compute loss per share (thousands).............. 26,445 26,445
============= ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
CYBERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
FOR THE SIX FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2003
------------- -------------
(in thousands)
Net loss..................................................................... $ (24,729) $ (18,745)
Other comprehensive income:
Foreign currency translation adjustment.................................. 5,800 -
Net unrealized gains on available-for-sale securities.................... 109 -
---------- -----------
Other comprehensive income............................................... 5,909 -
---------- -----------
Comprehensive loss........................................................... $ (18,820) $ (18,745)
========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
6
CYBERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2003
------------- -------------
(in thousands)
Net income................................................................... $ (13,983) $ (11,104)
Other comprehensive income:
Foreign currency translation adjustment.................................. 2,007 -
Net unrealized gains on available-for-sale securities.................... 9 -
---------- -----------
Other comprehensive income............................................... 2,016 -
---------- -----------
Comprehensive loss........................................................... $ (11,967) $ (11,104)
========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
7
CYBERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2003
------------- -------------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................................................... $ (24,729) $ (18,745)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN OPERATIONS:
Depreciation and amortization............................................. 4,049 276
Equity in losses of equity-method investees............................... 241 -
Provision for losses on accounts receivable............................... 2,062 537
Amortization of bond discount.............................................. 1,165 1,167
Accreted interest expense on long-term debt................................ 6,076 7,054
Impairment of assets....................................................... 5,963 -
Gain on disposal of assets................................................. (13,471) (2,173)
Loss on disposal of businesses............................................. 1,596 -
Foreign currency translation loss.......................................... 10,977 7,391
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Restricted cash............................................................ 384 983
Trade accounts receivable.................................................. 643 2,692
Other receivables.......................................................... 882 1,140
Other assets............................................................... 19 -
Prepaid expenses........................................................... (3) 317
Other current assets....................................................... (117) 63
Trade accounts payable..................................................... (954) (1,978)
Other accrued expenses and liabilities..................................... 3,962 (1,531)
Accrued personnel costs.................................................... 291 (330)
---------- -----------
Net cash used in operating activities............................... (964) (3,137)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of short-term investments.................................. 76 -
Proceeds from sale of restricted investments.................................. 4,817 -
Purchase of property and equipment............................................ (300) (1)
Proceeds from sale of property and equipment.................................. 28,813 -
Sale of businesses, net of cash sold.......................................... (311) 1,912
---------- -----------
Net cash provided by investing activities........................... 33,095 1,911
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligations............................ (1,401) -
Proceeds from borrowings...................................................... 3,066 -
Repayment of borrowings....................................................... (153) -
---------- -----------
Net cash provided by financing activities........................... 1,512 -
Impact of foreign exchange rate changes....................................... (466) (52)
---------- -----------
Net increase (decrease) in cash and cash equivalents.......................... 33,177 (1,278)
Cash and cash equivalents at beginning of period.............................. 2,436 24,094
---------- -----------
Cash and cash equivalents at end of period.................................... $ 35,613 $ 22,816
========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
8
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2003
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying interim period unaudited consolidated financial statements of
Cybernet Internet Services International, Inc. (the "Company" and together with
its subsidiaries "Cybernet") have been prepared in accordance with United States
generally accepted accounting principles ("U.S. GAAP") and the rules and
regulations of the U.S. Securities and Exchange Commission (the "SEC") relating
to interim financial information. Accordingly, they do not include all of the
information required under U.S. GAAP for financial statements for a full year.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments and accruals) considered necessary for a fair presentation of the
financial position and results of operations of the Company for the periods
presented have been included. Operating results for the six months ended June
30, 2003 are not necessarily indicative of results to be expected for the year
ended December 31, 2003. For further information, refer to the audited
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K for the year ended December 31, 2002. Certain
reclassifications have been made to the prior period financial statements to
conform to the current period presentation.
2. REPORTING CURRENCY
Effective April 1, 2003, the Company changed its reporting currency from the
Euro to the U.S. dollar. The reason for this change is because the Company is a
U.S. company and no longer retains significant assets or liabilities that are
denominated in Euros. All periods presented in these financial statements are
restated in U.S. dollars consistent with the guidance in Statement of Financial
Accounting Standards No. 52, "Foreign Currency Translation". Therefore, the
financial statements for prior years depict the same trends that the previous
financial statements presented in Euros show.
By reverting to the U.S. dollar as the Company's reporting currency, most of the
cumulative foreign currency translation gain was eliminated from the Company's
balance sheets and most of the foreign currency translation gains and losses
were eliminated from the Company's statements of comprehensive income. As of
December 31, 2002, most of this cumulative foreign currency translation gain
resulted from the conversion of significant U.S. denominated debt into Euros.
Prior to the restatement, at December 31, 2002, there was a cumulative foreign
currency translation gain of E21,477 (in thousands of Euros) included as
part of shareholders' equity in the balance sheet. In conjunction with the
restatement, the majority of this amount was eliminated. During the three months
ended March 31, 2003, there was a foreign currency translation gain of
E4,108 (in thousands of Euros) included as part of comprehensive income
(loss). In conjunction with the restatement, the majority of this amount was
eliminated.
Until September 30, 2000, the Company's reporting currency was the U.S. dollar.
At that date, the Company changed its reporting currency to the Euro. That
change was made because the Company believed reporting using the Euro resulted
in a more meaningful presentation since the majority of its operations were
conducted in Euros and in currencies linked to the Euro.
9
During 2002 and in the first six months of 2003, the Company disposed of a
majority of its assets and operations and, as a result, management believes the
U.S. dollar represents a more meaningful presentation of the remaining assets
and liabilities of the Company, particularly since the Company's U.S. dollar
denominated debt represents a majority of the Company's liabilities outstanding
as of March 31, 2003.
3. GOING CONCERN
The Company has incurred significant operating losses since inception, and has
not achieved and does not expect to achieve sufficient revenues to support
future operations without additional financing and/or the disposition of
assets. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. The Company is currently reviewing its
strategic options including identifying alternative financing sources, seeking
changes to its debt structure, considering sales of assets and liquidation.
However, there are no assurances that management's review of these options
will result in a plan which can be accomplished or will provide sufficient
cash to fund the Company's operations or satisfy its creditors in the future.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern and, accordingly, do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of these uncertainties.
4. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing income (loss) available
to common shareholders by the weighted average number of shares outstanding
during the period. Diluted earnings per share takes into consideration shares
outstanding (computed under basic earnings per share) and potentially dilutive
shares. For the six-month and three-month periods ended June 30, 2002 and 2003,
the computation of diluted loss per share excludes the convertible notes and
stock options because the inclusion of these items would have an anti-dilutive
effect.
5. SEGMENT INFORMATION
The Company operates in one line of business, which is providing Internet
related communication services, principally for corporate customers.
6. DEFERRED DEBT ISSUANCE COSTS
Deferred debt issuance costs consist principally of expenses incurred by the
Company in connection with the notes issued during 1999. Deferred debt issuance
costs are being amortized to interest expense over the period of the maturity of
the said notes.
10
7. RELATED PARTY TRANSACTIONS
MFC Bancorp Ltd. ("MFC") is considered a related party as an executive officer
and a member of MFC's board of directors is an executive officer and a member of
the Company's board of directors. A Swiss bank affiliate of MFC provided a
revolving senior secured credit facility in an aggregate amount of E7.0
million to the Company, which expired on March 12, 2003. In April 2002, the
Company entered into an agreement to engage MFC to provide strategic advisory
and restructuring services. Pursuant to such agreement, MFC will be paid a
success fee upon completion of a successful debt restructuring and on specified
transactions, measured as a percentage of the amount of debt restructured or
transactions completed and subject to an overall cap on total fees. In the
interim, the Company pays a monthly work fee of E175,000 in advance to MFC.
The agreement is terminable by either party on 30 days' prior written notice.
8. COMMITMENTS/LEASES
As at June 30, 2003, the Company had commitments under rental payments totaling
approximately $0.1 million, payable over the six-month period ending December
31, 2003.
9. MATERIAL TRANSACTIONS
In the second quarter of 2003, the Company entered into a joint venture
agreement for the participation and investment in the field of electronic
commerce. The joint venture will provide customer relationship management
services through an Internet enabled contact center in India for technology
companies and financial institutions in the European and United States markets.
In the six months ended June 30, 2003, the Company completed asset dispositions
for total sales proceeds of approximately $2.9 million, which relates to the
disposal of assets of Cybernet (Schweiz) AG to Viatel AG for a gain of
approximately $2.7 million, subject to adjustments.
10. SUBSEQUENT EVENTS
On July 1, 2003, the Company made its semi-annual interest payment on its 14%
senior notes due 2009, totaling $4.7 million. In July 2003, the Company
repurchased for cancellation approximately $46.0 million in principal amount
of its outstanding 14% senior notes due 2009 for approximately $9.4 million,
or $20.50 per $100 face value of each note.
11. RECLASSIFICATIONS
Certain reclassifications have been made to the prior period financial
statements to conform with the current period's presentation.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the results of operations and financial
condition of Cybernet Internet Services International, Inc. for the six-month
and three-month periods ended June 30, 2003 should be read in conjunction with
the consolidated financial statements and related notes included in this
quarterly report, as well as our latest annual report on Form 10-K for the year
ended December 31, 2002. Certain reclassifications have been made to the prior
period financial statements to conform to the current period presentation.
Effective April 1, 2003, the Company changed its reporting currency from the
Euro to U.S. dollar because the Company is a U.S. company and no longer retains
significant assets and liabilities that are denominated in Euros. All periods
presented in the financial statements included herein are restated in U.S.
dollars consistent with the guidance in Statement of Financial Accounting
Standards No. 52, "Foreign Currency Translation". Therefore, the financial
statements included herein for prior periods depict the same trends that the
previous financial statements presented in Euros show. The Company translates
assets and liabilities of subsidiaries not denominated in U.S. dollars at the
rate of exchange on the balance sheet date. Revenues and expenses of
subsidiaries not denominated in U.S. dollars are translated at the average
rate of exchange prevailing during the period. The period end exchange rate
for the Euro to the U.S. dollar as at June 30, 2003 was E1 = U.S.$1.1502. The
period average exchange rates for the Euro to the U.S. dollar for the
six-month and three-month periods ended June 30, 2003 were E1 = U.S.$1.1035
and E1 = U.S.$1.1364, respectively. See Note 2 to the interim period
consolidated financial statement included in this quarterly report.
In this document: (i) "we", "our", "us", the "Company" or "Cybernet" mean
Cybernet Internet Services International, Inc. and its subsidiaries, unless the
context otherwise suggests; (ii) information is provided as of June 30, 2003,
unless otherwise stated; and (iii) "E" refers to Euros, the lawful currency
adopted by most members of the European Union.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2003
The following table sets forth selected sales data for the Company for the
periods indicated:
SIX MONTHS ENDED JUNE 30,
--------------------------------------
2002 2003
----------------- ----------------
(in thousands)
Revenues
Internet data center services........................................... $ 3,420 $ 52
Connectivity............................................................ 10,610 644
E-business.............................................................. 358 26
--------------- --------------
Total revenues........................................................ $ 14,388 $ 722
============== ==============
Total revenues decreased from $14.4 million in the six-month period ended June
30, 2002 to $0.7 million in the comparative period of 2003. The decrease in
revenues resulted primarily from the rationalization of assets in 2002.
Internet data center revenues decreased from $3.4 million in the six-month
period ended June 30, 2002 to approximately $52,000 in the comparative period
of 2003. Connectivity revenues decreased from $10.6 million in the first six
months of 2002 to $0.6 million in the current period.
12
We have entered into a joint venture agreement for the participation and
investment in the field of electronic commerce. The joint venture will provide
customer relationship management services through an Internet enabled contact
center in India for technology companies and financial institutions in the
European and United States markets. The joint venture is in the developmental
stage. We intend to focus our activities upon opportunities in the electronic
commerce field.
Costs and expenses decreased in the current period from the comparative period
in 2002, primarily as a result of the rationalization of assets in 2002.
Direct cost of services decreased from $7.7 million in the six months ended
June 30, 2002 to $0.4 million in the comparative period of 2003. Direct cost
of services consists of: (i) telecommunications expenses which primarily
represent the cost of transporting Internet traffic from our customers'
locations through a local telecommunications carrier to one of our access
nodes, transit and peering costs, and the cost of leasing lines to
interconnect our backbone nodes; and (ii) the cost of hardware and software
sold.
Network operations costs decreased from $2.1 million in the first six months of
2002 to $0.1 million in the current period. General and administrative expenses
decreased from $9.2 million in the six months ended June 30, 2002 to $4.0
million in the current period, and included professional fees and expenses.
Sales and marketing expenses decreased from $2.9 million in the first six months
of 2002 to $0.1 million in the current period.
Depreciation and amortization expenses decreased from $4.0 million in the six
months ended June 30, 2002 to $0.3 million in the current period, as a result of
the disposition of various assets in 2002.
Interest expense increased from $12.0 million in the six months ended June 30,
2002 to $12.9 million in the current period as a result of increased
indebtedness. Interest income, which represents income earned on the proceeds of
offerings before the proceeds were utilized in our business, decreased from $0.2
million in the six months ended June 30, 2002 to approximately $61,000 in the
current period. We had other income of $3.5 million in the current period,
primarily from the disposition of assets of our Swiss subsidiary, Cybernet
(Schweiz) AG. We had foreign currency losses of $5.2 million in the current
period, primarily as a result of the fluctuation of the exchange rate between
the U.S. dollar and Euro in the current period on certain Euro denominated
debt and foreign currency losses recognized as a result of the disposition of
Euro denominated assets.
For the six months ended June 30, 2003, we reported a net loss of $18.7 million,
or $0.71 per share on a basic and diluted basis, compared to $24.7 million, or
$0.94 per share on a basic and diluted basis, in the comparative period of
2002.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2003
The following table sets forth selected sales data for the Company for the
periods indicated:
THREE MONTHS ENDED JUNE 30,
--------------------------------------
2002 2003
----------------- ----------------
(in thousands)
Revenues
Internet data center services........................................... $ 1,020 $ -
Connectivity............................................................ 4,942 -
E-business.............................................................. 263 46
--------------- --------------
Total revenues........................................................ $ 6,225 $ 46
============== ==============
13
Total revenues decreased from $6.2 million in the three-month period ended
June 30, 2002 to approximately $46,000 in the comparative period of 2003. The
decrease in revenues resulted primarily from the rationalization of assets in
2002.
We have entered into a joint venture agreement for the participation and
investment in the field of electronic commerce, which will provide customer
relationship management services through an Internet enabled contact center in
India for technology companies and financial institutions in the European and
United States markets.
Costs and expenses decreased from $18.3 million in the three-month period ended
June 30, 2002 to $1.9 million in the current period, primarily as a result of
the rationalization of assets in 2002.
Interest expense increased from $6.0 million in the three months ended June
30, 2002 to $6.5 million in the comparative period of 2003 as a result of
increased indebtedness. Interest income, which represents interest earned on
the proceeds of offerings before the proceeds were utilized in our business,
decreased from $0.1 million in the three months ended June 30, 2002 to
approximately $17,000 in the comparative period of 2003. We had other income
of $0.9 million in the current period, primarily as a result of the reversal
of certain liabilities due to the successful renegotiation thereof, and
foreign currency losses of $3.7 million as a result of the fluctuation of the
exchange rate between the U.S. dollar and Euro in the current period on
certain Euro denominated debt.
For the three months ended June 30, 2003, we reported a net loss of $11.1
million, or $0.42 per share on a basic and diluted basis, compared to $14.0
million, or $0.53 per share on a basic and diluted basis, in the comparative
period of 2002.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations and growth primarily from
the proceeds of private and public sales of securities and, accordingly, have
incurred a significant amount of debt. Total net proceeds of debt and equity
offerings in the past five years amounted to approximately $293 million,
including the issuance of $225 million of public debt during 1999. As a result
of the significant adjustment in the telecommunications industry and capital
market trends that began in 2001 and which continued and worsened in 2002, our
financial condition has been materially adversely affected. The significant
amount of debt we have incurred has hindered our ability to raise further funds.
At June 30, 2003, we had cash and cash equivalents totaling approximately
$22.8 million, compared to approximately $24.1 million at December 31, 2002.
Our working capital, defined as the excess of our current assets over our
current liabilities, was $13.8 million at June 30, 2003. On July 1, 2003, we
made our semi-annual interest payment on our 14% senior notes due 2009,
totaling $4.7 million. In July 2003, we repurchased for cancellation
approximately $46.0 million in principal amount of our outstanding 14% senior
notes due 2009 for approximately $9.4 million, or $20.50 per $100 face value
of each note.
Operating activities used cash of $3.1 million in the six months ended June 30,
2003, compared to $0.1 million in the comparative period of 2002, primarily to
fund operations. A decrease in restricted cash provided cash of $1.0 million in
the current period, compared to $0.4 million in the comparative period of 2002.
A decrease in trade accounts receivable provided cash of $2.7 million in the
current period, compared to $0.6 million in the comparative period of 2002. A
decrease in other receivables provided cash of $1.1 million in the current
period, compared to $0.9 million in the comparative period of 2002. A decrease
in trade accounts payable used cash of $2.0 million in the
14
current period, compared to $1.0 million in the comparative period of 2002. A
decrease in other accrued expenses and liabilities used cash of $1.5 million in
the current period, compared to an increase in the same providing cash of $4.0
million in the comparative period of 2002.
Investing activities provided cash of $1.9 million in the six months ended June
30, 2003, primarily as a result of the disposition of businesses, net of cash
sold. Investing activities provided cash of $33.1 million in the six months
ended June 30, 2002, primarily as a result of the sale of property and
equipment.
Financing activities did not use cash in the six months ended June 30, 2003.
Financing activities provided cash of $1.5 million in the comparative period of
2002, primarily as a result of borrowings.
On March 12, 2002, we entered into a Credit Facility Agreement with MFC Merchant
Bank S.A. which provided for a credit facility in the aggregate principal amount
of up to E7.0 million (the "Credit Facility") to be made available to us.
The Credit Facility expired on March 12, 2003 pursuant to its terms. There were
no amounts outstanding under the Credit Facility when it expired.
As a result of certain dispositions made in 2002, we expect to have a
sufficient amount of funds to finance our present operations in the near term.
However, we do not have the financial resources to satisfy our debt
obligations as they mature or upon acceleration in the event of default. Our
ability to continue as a going concern is dependent upon our ability to obtain
additional financing and restructure our debt. We are currently in the process
of identifying sources of additional financing, seeking changes to our debt
structure and evaluating our strategic options. However, there are no
assurances that these plans can be accomplished on satisfactory terms, or at
all, or that they will provide sufficient cash to fund our operations, pay the
principle of, and interest on, our indebtedness, fund our other liquidity
needs or permit us to refinance our indebtedness. Options under review
include, but are not limited to, pursuing restructuring of our indebtedness on
a consensual basis or under the provisions of bankruptcy legislation, or
liquidating our business and operations.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires our 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 periods.
Our management routinely makes judgments and estimates about the effects of
matters that are inherently uncertain. As the number of variables and
assumptions affecting the probable future resolution of the uncertainties
increase, these judgments become even more subjective and complex. We have
identified certain accounting policies that are the most important to the
portrayal of our financial condition and results of operations.
For information about our critical accounting policies, see our annual report on
Form 10-K for the year ended December 31, 2002.
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FOREIGN CURRENCY
Effective April 1, 2003, the Company changed its reporting currency from the
U.S. dollar to the Euro because the Company is a U.S. company and no longer
retains significant assets or liabilities that are denominated in Euros. By
reverting to the U.S. dollar as the Company's reporting currency, most of the
cumulative foreign currency translation gain was eliminated from the Company's
balance sheets and most of the foreign currency translation gains and losses
were eliminated from the Company's statements of comprehensive income. However,
the Company has certain assets and liabilities and revenues and expenses that
are denominated in Euros. Accordingly, the Company's consolidated financial
results are subject to foreign currency exchange rate fluctuations.
For the preparation of our consolidated financial statements, we translate
assets and liabilities of subsidiaries not denominated in U.S. dollars into
U.S. dollars at the rate of exchange on the balance sheet date. Revenues and
expenses of subsidiaries not denominated in U.S. dollars are translated at the
average rate of exchange prevailing during the period. Unrealized gains or
losses from these translations are recorded as shareholders' equity on our
balance sheet and do not affect our net earnings.
In the six months ended June 30, 2003, we reported no foreign exchange
translation gain or loss in the consolidated balance sheet under other
comprehensive income.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
The statements in this report that are not based on historical facts are called
"forward-looking statements" within the meaning of the United States PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. These statements appear in a number of
different places in this report and can be identified by words such as
"estimates", "projects", "expects", "intends", "believes", "plans", or their
negatives or other comparable words. Also look for discussions of strategy that
involve risks and uncertainties. Forward-looking statements include statements
regarding the outlook for our future operations, forecasts of future costs and
expenditures, the evaluation of market conditions, the outcome of legal
proceedings, the adequacy of reserves, or other business plans. You are
cautioned that any such forward-looking statements are not guarantees and may
involve risks and uncertainties. Our actual results may differ materially from
those in the forward-looking statements due to risks facing us or due to actual
facts differing from the assumptions underlying our estimates. Some of these
risks and assumptions include those set out below, as well as those contained in
reports and other documents we have filed with or furnished to the SEC,
including our annual report on Form 10-K for the year ended December 31, 2002.
We advise you that these cautionary remarks expressly qualify in their entirety
all forward-looking statements attributable to us or persons acting on our
behalf. Unless required by law, we do not assume any obligation to update
forward-looking statements based on unanticipated events or changed
expectations. However, you should carefully review the reports and other
documents we file from time to time with the SEC.
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WE MAY NOT BE ABLE TO CONTINUE OUR BUSINESS AS A GOING CONCERN.
Our ability to continue as a going concern and realize the carrying value of our
assets is dependent upon our ability to obtain additional financing or
restructure our debt. We are currently in the process of identifying sources of
additional financing and seeking changes to our debt structure. However, there
are no assurances that these plans can be accomplished on satisfactory terms, or
at all, or that they will provide sufficient cash to fund our future operations,
pay the principal of, and interest on, our indebtedness, fund our other
liquidity needs or permit us to refinance our indebtedness. Our inability to
obtain additional financing or restructure our indebtedness would have a
material adverse effect on our financial condition, results of operations and
ability to satisfy our obligations in the future, and may result in our pursuing
a restructuring of our indebtedness either on a consensual basis or under the
provisions of bankruptcy legislation, or liquidating our business and
operations. Further, our inability to obtain additional financing or restructure
our indebtedness, or our pursuing a restructuring of our indebtedness either on
a consensual basis or under the provisions of bankruptcy legislation, may result
in our securityholders losing all of their investment in our securities.
WE HAVE INCURRED A SUBSTANTIAL AMOUNT OF DEBT.
In order to finance our business, we may need to secure additional sources of
funding, including debt and/or equity financing, in the future. However, we have
incurred a substantial amount of debt, which hinders our ability to raise
further funds. There can be no assurance that we will be able to secure
additional funding in the future. A high level of debt, arduous or restrictive
terms and conditions relating to accessing certain sources of funding, poor
business performance in the future or lower than expected cash inflows from
future operations could have materially adverse consequences on the future
operation of our business and result in our securityholders losing all or
substantially all of their investment in our securities.
Other effects of a high level of debt include the following:
o we may not be able to borrow money in the future, or access other
sources of funding;
o we used substantially all of our cash flow from future operations to
pay principal and interest on our indebtedness, and as a result,
there may be no cash available to finance our operations and other
business activities; and
o a high debt level, arduous or restrictive terms and conditions, or
lower than expected cash flows from future operations would make us
more vulnerable to economic downturns and adverse developments in our
business.
WE MAY BE SUBJECT TO INTERNATIONAL BANKRUPTCY AND RELATED LAWS WHICH MAY AFFECT
THE ENFORCEABILITY OF BANKRUPTCY JUDGMENTS.
Our subsidiaries are incorporated under the laws of various countries and
conduct operations in countries around the world. Consequently, the bankruptcy
laws of one or more countries in which our subsidiaries operate could apply.
Under bankruptcy laws in the United States, courts typically have jurisdiction
over a debtor's property, wherever located, including property situated in other
countries. There can be no assurance, however, that courts elsewhere would
recognize the United
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States bankruptcy court's jurisdiction. Accordingly, difficulties may arise in
administering a United States bankruptcy case involving a debtor with its
principal operating assets outside the United States, and any orders or
judgments of a bankruptcy court in the United States may not be enforceable.
AS MOST OF OUR ASSETS AND OFFICERS AND DIRECTORS ARE OUTSIDE THE UNITED STATES,
SERVICE OF PROCESS AND ENFORCEMENT OF JUDGEMENT MAY BE DIFFICULT.
We are a Delaware corporation. However, most of our assets are located outside
the United States. Further, our officers and directors are not residents of the
United States, and their assets are located outside the United States. Also,
most of our subsidiaries are incorporated in countries other than the United
States and conduct their operations and hold their assets outside the United
States. As a result, it may not be possible for holders of our common stock to
effect service of process in the United States upon such non-resident officers
and directors or to enforce in jurisdictions outside the United States
judgements obtained against us or our directors and officers. This applies to
any action, including civil actions based on the United States federal
securities laws. In addition, awards for punitive damages in actions brought in
the United States or elsewhere may be unenforceable in jurisdictions outside the
United States.
ECONOMIC CONDITIONS IN THE UNITED STATES, EUROPE AND GLOBALLY, AFFECTING THE
TELECOMMUNICATIONS INDUSTRY, AS WELL OTHER TRENDS AND FACTORS AFFECTING THE
TELECOMMUNICATIONS INDUSTRY, ARE BEYOND OUR CONTROL AND MAY RESULT IN REDUCED
DEMAND AND PRICING PRESSURE FOR OUR PRODUCTS AND SERVICES.
There are trends and factors affecting the telecommunications industry which are
beyond our control and may affect our future operations. Such trends and factors
include:
o adverse changes in the public and private equity and debt markets and
our ability to obtain financing or to fund working capital and capital
expenditures;
o adverse changes in the market conditions in our industry and the
specific markets for our products and services;
o the overall trend toward industry consolidation and rationalization;
o governmental regulation; and
o the effects of war and acts of terrorism.
Economic conditions affecting the telecommunications industry in the United
States, Europe and globally may affect our business. Reduced capital spending
and/or negative economic conditions in the United States, Europe and/or other
areas of the world could result in reduced demand for or pricing pressure on our
products and services.
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WE HAVE A LIMITED OPERATING HISTORY.
We have a relatively short operating history and we are involved in a rapidly
evolving and unpredictable industry.
WE OPERATE IN A HIGHLY DYNAMIC AND VOLATILE INDUSTRY CHARACTERIZED BY RAPIDLY
CHANGING TECHNOLOGIES AND EVOLVING INDUSTRY STANDARDS.
Our industry is characterized by rapidly changing technologies and evolving
industry standards. Our success will depend on our ability to comply with
emerging industry standards, to address emerging market trends and to compete
with technological and other developments carried out by others. We may not be
successful in targeting new market opportunities or in achieving market
acceptance for our business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Reference is made to our annual report on Form 10-K for the year ended December
31, 2002 for information concerning market risk. We are of the opinion that
there have been no material changes in market risk since December 31, 2002.
ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, we carried out an evaluation,
under the supervision and with the participation of our principal executive
officer and principal financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on this evaluation,
our principal executive officer and principal financial officer concluded that
our disclosure controls and procedures are effective in timely alerting them to
material information required to be included in our periodic reports filed with
the SEC. It should be noted that the design of any system of controls is based
in part upon certain assumptions about the likelihood of certain events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all future conditions, regardless of how remote. In addition, we
reviewed our internal controls, and there have been no significant changes in
such internal controls or in other factors that could significantly affect those
controls subsequent to the date of their last evaluation.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are subject to routine litigation incidental to our business and are named
from time to time as a defendant in various legal actions. Reference is made to
our annual report on Form 10-K for the year ended December 31, 2002 for
information concerning legal proceedings.
In view of the inherent difficulty of predicting the outcome of such matters,
particularly in cases in which damages are sought, we cannot state what the
eventual outcome of pending matters will be. We are contesting the allegations
made in each pending matter and while we believe, based upon our current
knowledge, that the outcome of such matters will not have a material adverse
effect on our consolidated financial position, such matters may have a material
adverse effect on our consolidated financial position.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
31.1 Section 302 Certification of Chief Executive Officer and Chief
Financial Officer
32.1* Section 906 Certification of Chief Executive Officer and Chief
Financial Officer
------------------------
* In accordance with Release 33-8212 of the SEC, these Certificates:
(i) are "furnished" to the SEC and are not "filed" for the purposes
of liability under the SECURITIES EXCHANGE ACT OF 1934, as amended;
and (ii) are not to be subject to automatic incorporation by
reference into any of our registration statements filed under the
SECURITIES ACT OF 1933, as amended, for the purposes of liability
thereunder, unless we specifically incorporate them by reference
therein.
(b) REPORTS ON FORM 8-K
We filed the following reports on Form 8-K with respect to the indicated
items in the second quarter of 2003:
Form 8-K dated April 29, 2003:
Item 5. Other Events
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SIGNATURES
Pursuant to the requirements of the SECURITIES EXCHANGE ACT OF 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
By: /s/ Michael J. Smith
----------------------------------------
Michael J. Smith
President and Chief Financial Officer
Date: September 30, 2003
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