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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 MARCH 31, 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 July 29, 2003.
================================================================================
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(UNAUDITED)
2
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, 2002 MARCH 31, 2003
----------------- --------------
(Euros in thousands)
ASSETS
Current Assets
Cash and cash equivalents E 22,976 E 21,039
Restricted cash 1,815 923
Receivables 5,355 588
Prepaid and other 419 772
--------- ---------
Total current assets 30,565 23,322
Long-Term Assets
Properties 1,125 190
Deferred debt issuance cost 3,653 3,364
--------- ---------
4,778 3,554
--------- ---------
Total assets E 35,343 E 26,876
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current Liabilities
Trade accounts payable E 3,078 E 1,395
Other accrued expenses 10,838 6,649
Accrued personnel costs 1,079 987
--------- ---------
Total current liabilities 14,995 9,031
Long-Term Liabilities
Long-term debt 158,342 157,409
--------- ---------
Total liabilities 173,337 166,440
Common stock 25 25
Additional paid-in capital 127,718 127,718
Accumulated deficit (287,931) (293,609)
Other comprehensive income 22,194 26,302
--------- ---------
Total shareholders' deficiency (137,994) (139,564)
--------- ---------
E 35,343 E 26,876
========= =========
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 THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 2002 MARCH 31, 2003
--------------- --------------
(Euros in thousands, except per share data)
Revenues E 9,308 E 630
Costs and expenses:
Direct cost of services 4,533 397
Network operations 1,019 80
General and administrative expenses 5,479 2,116
Sales and marketing expenses 1,927 124
Depreciation and amortization 2,475 62
--------- ---------
Total costs and expenses 15,433 2,779
--------- ---------
Operating loss (6,125) (2,149)
Other income and expenses:
Interest expense (6,834) (6,044)
Interest income 103 41
Equity in losses of equity-method investees (135) -
Gain on sale of assets and other - 2,437
Foreign currency gains (losses) (1,580) 37
--------- ---------
Loss before taxes (14,571) (5,678)
Income tax benefit (expense) (1) -
--------- ---------
Net loss (14,572) (5,678)
Accumulated deficit, beginning of period (249,473) (287,931)
--------- ---------
Accumulated deficit, end of period E(264,045) E(293,609)
========= =========
Loss per share, basic and diluted E (0.55) E (0.21)
========= =========
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 SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 2002 MARCH 31, 2003
-------------- --------------
(Euros in thousands)
Net loss E (14,572) E (5,678)
Other comprehensive income (loss):
Foreign currency translation adjustment 6 4,108
Net unrealized gains (losses) on
available-for-sale securities (579) -
----------- ----------
Other comprehensive income (loss) (573) 4,108
----------- ----------
Comprehensive loss E (15,145) E (1,570)
=========== ==========
The accompanying notes are an integral part of these financial statements.
5
CYBERNET SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 2002 MARCH 31, 2003
-------------- --------------
(Euros in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss E (14,572) E (5,678)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN OPERATIONS:
Depreciation and amortization 2,475 62
Equity in losses of equity-method investees 135 -
Provision for losses on accounts receivable 1,492 378
Amortization of bond discount 664 544
Accreted interest expense on long-term debt 3,443 3,674
Gain on disposal of assets - (1,969)
Foreign currency translation loss (gain) 639 (25)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Restricted cash 560 891
Trade accounts receivable 777 1,946
Other receivables 577 1,071
Other assets (32) (416)
Prepaid expenses (193) (3)
Other current assets (130) 57
Trade accounts payable (305) (1,171)
Other accrued expenses and liabilities (1,216) (2,632)
Accrued personnel costs 1,003 (17)
----------- ----------
Net cash used in operating activities (4,683) (3,288)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of short-term investments 145 -
Proceeds from restricted investments 5,304 -
Purchase of property and equipment (87) (1)
Proceeds from sale of property and equipment 837 -
Sale of businesses, net of cash sold - 1,733
Payment of deferred purchase obligations - (2)
----------- ----------
Net cash provided by investing activities 6,199 1,730
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligations (1,497) -
Proceeds from borrowings 866 -
Repayment of borrowings (1,036) -
----------- ----------
Net cash used in financing activities (1,667) -
Impact of foreign exchange rate changes 156 (379)
----------- ----------
Net increase (decrease) in cash and cash equivalents 5 (1,937)
Cash and cash equivalents at beginning of period 2,735 22,976
----------- ----------
Cash and cash equivalents at end of period E 2,740 E 21,039
=========== ==========
The accompanying notes are an integral part of these financial statements.
6
CYBERNET INTERNET SERVICES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 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 three months ended March
31, 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. 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. 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.
3. 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 periods ended March 31, 2002 and 2003, the computation of
diluted loss per share excludes the convertible preferred stock, convertible
notes and stock options because the inclusion of these items would have an
anti-dilutive effect.
7
4. SEGMENT INFORMATION
The Company operates in one line of business, which is providing Internet
related communication services, principally for corporate customers.
5. DISPOSAL OF ASSETS AND BUSINESSES
In the quarter ended March 31, 2003, the Company completed asset dispositions
for total sales proceeds of approximately E2.7 million, which relates to the
disposal of assets of Cybernet (Schweiz) AG to Viatel AG for a gain of
approximately E2.5 million, subject to adjustments.
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.
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 March 31, 2003, the Company had commitments under rental payments totaling
approximately E0.6 million, payable over the nine-month period ending December
31, 2003.
9. SUBSEQUENT EVENTS
Subsequent to March 31, 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.
Subsequent to March 31, 2003, the Company also 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.
10. RECLASSIFICATIONS
Certain reclassifications have been made to the prior period financial
statements to conform with the current period's presentation.
8
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 three month
period ended March 31, 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.
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 March 31, 2003,
unless otherwise stated; (iii) all references to monetary amounts are to
"Euros", the lawful currency adopted by most members of the European Union,
unless otherwise stated; and (iv) "E" refers to Euros.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2003
The following table sets forth selected sales data for the Company for the
periods indicated:
THREE MONTHS ENDED MARCH 31,
-----------------------------------
2002 2003
---------- ----------
(Euros in thousands)
Revenues
Internet data center services E 2,709 E 47
Connectivity 6,484 583
E-business 115 -
-------- --------
Total revenues E 9,308 E 630
======== ========
Total revenues decreased from E9.3 million in the three-month period ended March
31, 2002 to E0.6 million in the comparative period of 2003. The decrease in
revenues resulted primarily from the disposition of assets in 2002 as part of
the rationalization of our operations. Internet data center revenues decreased
from E2.7 million in the three-month period ended March 31, 2002 to
approximately E47,000 in the comparative period of 2003. Connectivity revenues
decreased from E6.5 million in the first three months of 2002 to E0.6 in the
current quarter.
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 disposition of assets in 2002 as part of
the rationalization of our operations. Direct cost of services decreased from
E4.5 million in the three months ended March 31, 2002 to E0.4 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.
9
Network operations costs decreased from E1.0 million in the first three months
of 2002 to E0.1 million in the current quarter. General and administrative
expenses decreased from E5.5 million in the three months ended March 31, 2002 to
E2.1 million in the current quarter. Sales and marketing expenses decreased
from E1.9 million in the first three months of 2002 to E0.1 million in the
current quarter.
Depreciation and amortization expenses decreased from E2.5 million in the three
months ended March 31, 2002 to E0.1 million in the current quarter, as a result
of the disposition of various assets in 2002.
Interest expense decreased from E6.8 million in the three months ended March 31,
2002 to E6.0 million in the current quarter as a result of the lower exchange
rate between the U.S. dollar and Euro in the current period. Interest income
decreased from E0.1 million in the three months ended March 31, 2002 to
approximately E41,000 in the current quarter and represented interest earned on
the proceeds of offerings before the proceeds were utilized in our business. We
had other income of E2.4 million in the current period, primarily from the
disposition of assets of our Swiss subsidiary, Cybernet (Schweiz) AG.
For the three months ended March 31, 2003, we reported a net loss of E5.7
million, or E0.21 per share on a basic and diluted basis, compared to a net loss
of E14.6 million, or E0.55 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 March 31, 2003, we had cash and cash equivalents totalling approximately
E21.0 million, compared to approximately E23.0 million at December 31, 2002.
Our working capital, defined as the excess of our current assets over our
current liabilities, was E14.3 million at March 31, 2003.
Operating activities used cash of E3.3 million in the three months ended March
31, 2003, compared to E4.7 million in the comparative period of 2002, primarily
to fund operations. A decrease in restricted cash provided cash of E0.9 million
in the current quarter, compared to E0.6 million in the comparative quarter of
2002. A decrease in trade accounts receivable provided cash of E1.9 million in
the current quarter, compared to E0.8 million in the comparative quarter of
2002. A decrease in other receivables provided cash of E1.1 million in the
current quarter, compared to E0.6 million in the comparative quarter of 2002. A
decrease in trade accounts payable used cash of E1.2 million in the current
quarter, compared to E0.3 million in the comparative quarter of 2002. A
decrease in other accrued expenses and liabilities used cash of E2.6 million in
the current quarter, compared to E1.2 million in the comparative quarter of
2002.
10
Investing activities provided cash of E1.7 million in the three months ended
March 31, 2003, primarily as a result of the disposition of businesses, net of
cash sold. Investing activities provided cash of E6.2 million in the three
months ended March 31, 2002, primarily as a result of the sale of certain
restricted investments.
Financing activities did not use cash in the three months ended March 31, 2003.
Financing activities used cash of E1.7 million in the comparative period of
2002, primarily as a result of the early termination of one of our main leasing
contracts.
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.
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.
As a result of certain dispositions made in 2002, we have a sufficient amount of
funds to finance our present operations. 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.
11
FOREIGN CURRENCY
We have incurred a substantial amount of debt in U.S. dollars. Accordingly, our
financial position for any given period, when reported in Euros, can be
significantly affected by the exchange rate for the U.S. dollar to the Euro
prevailing during the period.
We translate foreign assets and liabilities into Euros at the rate of exchange
on the balance sheet date. Revenues and expenses 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 three months ended March 31, 2003, we reported a net E4.1 million foreign
exchange translation gain, which was included in the consolidated statement of
comprehensive loss. The U.S. dollar declined by approximately 3.7% against the
Euro in the current period from December 31, 2002.
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.
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
12
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 or substantially 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:
* we may have difficulty borrowing money in the future, or accessing sources
of funding;
* we may need to use substantially all of our cash flow from future
operations to pay principal and interest on our indebtedness, which would
reduce the amount of cash available to finance our operations and
other business activities; and
* 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 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
13
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:
* 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;
* adverse changes in the market conditions in our industry and the specific
markets for our products and services;
* the overall trend toward industry consolidation and rationalization;
* governmental regulation; and
* 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.
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.
14
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 be material to
our operating results for a particular period.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Joint Venture Agreement dated May 8, 2003 between Cybernet
Internet Services International, Inc. and Ravin Prakash
99.1* - Certifications
------------------------
* 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 have filed the following reports on Form 8-K with respect to the
indicated items since December 31, 2002:
Form 8-K dated January 2, 2003:
Item 5. Other Events and Regulation FD Disclosure
Form 8-K dated January 24, 2003:
Item 5. Other Events and Regulation FD Disclosure
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: July 29, 2003
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CERTIFICATION OF PERIODIC REPORT
I, Michael J. Smith, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cybernet Internet
Services International, Inc. (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented
in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others
with those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of the Registrant's board of directors (or persons performing
the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's
ability to record, process, summarize and report financial data
and have identified for the Registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: July 29, 2003
/s/ Michael J. Smith
--------------------------------
Michael J. Smith
Chief Executive Officer and
Chief Financial Officer
18