10-Q 1 a2119691z10-q.txt FORM 10-Q ================================================================================ 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. ================================================================================ 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 ~~MARCH~~JUNE 3130, 2003 ----------------- -------------- (~~Euros~~ in thousands) ASSETS Current Assets Cash and cash equivalents................................................ E$ 2224,~~976~~094 E$ 2122,~~039~~816 Restricted cash.......................................................... 1,~~815~~903 ~~923~~1,062 Receivables.............................................................. 5,~~355~~616 ~~588~~559 Prepaid and other........................................................ ~~419~~439 ~~772~~21 ----------- ------------ Total current assets................................................. 3032,~~565~~052 2324,~~322~~458 Long-Term Assets Properties............................................................... 1,~~125~~180 ~~190~~2 Deferred debt issuance cost.............................................. 3,~~653~~831 3,~~364~~712 ----------- ------------ 45,~~778~~011 3,~~554~~714 ----------- ------------ Total assets......................................................... E$ 3537,~~343~~063 E$ 2628,~~876~~172 =========== ============ LIABILITIES AND SHAREHOLDERS' DEFICIENCY Current Liabilities Trade accounts payable................................................... E$ 3,~~078~~228 E$ ~~1,395~~892 Other accrued expenses................................................... 1011,~~838~~365 68,~~649~~952 Accrued personnel costs.................................................. 1,~~079~~132 ~~987~~811 ----------- ------------ Total current liabilities............................................ 1415,~~995~~725 910,~~031~~655 Long-Term Liabilities Long-term debt ~~158~~.......................................................... 166,~~342~~012 ~~157~~180,~~409~~936 ----------- ------------ Total liabilities.................................................... ~~173~~181,~~337~~737 ~~166~~191,~~440~~591 Common stock................................................................. 2526 2526 Additional paid-in capital................................................... ~~127~~140,~~718~~540 ~~127~~140,~~718~~540 Accumulated deficit.......................................................... (~~287~~284,~~931~~639) (~~293~~303,~~609~~384) Other comprehensive ~~income~~loss..................................................... ~~22,194~~(601) ~~26,302~~(601) ----------- ------------ Total shareholders' deficiency....................................... (~~137~~144,~~994~~674) (~~139~~163,~~564~~419) ------------ ------------ E$ 3537,~~343~~063 E$ 2628,~~876~~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 ~~THREE~~SIX FOR THE ~~THREE~~SIX MONTHS ENDED MONTHS ENDED ~~MARCH~~JUNE 3130, 2002 ~~MARCH~~JUNE 3130, 2003 ----------------- ------------------ (~~Euros~~ in thousands, except per share data) Revenues.................................................................. E$ 914,~~308~~388 E$ ~~630~~722 Costs and expenses: Direct cost of services............................................... 47,~~533~~661 ~~397~~426 Network operations.................................................... 12,~~019~~090 8086 General and administrative expenses................................... 59,~~479~~174 23,~~116~~995 Sales and marketing expenses.......................................... 12,~~927~~929 ~~124~~133 Impairment of assets.................................................. 5,963 - Depreciation and amortization......................................... 24,~~475~~049 62276 ------------- ----------- Total costs and expenses.......................................... 1531,~~433~~866 24,~~779~~916 ------------- ----------- Operating loss............................................................ (617,~~125~~478) (24,~~149~~194) Other income and expenses: Interest expense....................................................... (612,~~834~~019) (612,~~044~~940) Interest income........................................................ ~~103~~180 4161 Equity in losses of equity-method investees............................ (~~135~~241) - Gain on sale of assets and other....................................... -11,876 23,~~437~~532 Foreign currency ~~gains~~losses................................................ (~~losses~~7,055) (15,~~580~~204) 37 ------------- ----------- Loss before taxes......................................................... (1424,~~571~~737) (518,~~678~~745) Income tax benefit........................................................ ~~(expense)~~8 ~~(1)~~ - ------------- ----------- Net loss.................................................................. (1424,~~572~~729) (518,~~678~~745) Accumulated deficit, beginning of period.................................. (~~249~~231,~~473~~873) (~~287~~284,~~931~~639) ------------- ----------- Accumulated deficit, end of period........................................ E$ (~~264~~256,~~045~~602) E$ (~~293~~303,~~609~~384) ============= =========== Loss per share, basic and diluted......................................... E$ (0.5594) E$ (0.2171) ============= =========== 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 ~~MARCH~~JUNE 3130, 2002 ~~MARCH~~JUNE 3130, 2003 --------------- --------------- (~~Euros~~ in thousands, except per share data) ~~Net~~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............................................................ E(12,107) (141,~~572~~887) EOther income and expenses: Interest expense....................................................... (56,~~678~~026) ~~Other~~(6,452) ~~comprehensive~~Interest income........................................................ 90 17 Equity in losses of equity-method investees............................ (~~loss~~123): ~~Foreign~~- ~~currency~~Gain ~~translation~~on ~~adjustment~~sale 6of 4assets and other....................................... 11,~~108~~876 ~~Net~~916 ~~unrealized~~Foreign ~~gains~~currency (losses................................................ (7,701) on(3,698) ~~available~~-~~for~~-~~sale~~----------- ~~securities~~----------- Income before taxes....................................................... (~~579~~13,991) (11,104) Income tax benefit........................................................ 8 - ------------- ----------- ~~Other~~Net ~~comprehensive~~loss.................................................................. ~~income~~(13,983) (~~loss~~11,104) Accumulated deficit, beginning of period.................................. (~~573~~242,619) 4(292,~~108~~280) ------------- ----------- ~~Comprehensive~~Accumulated ~~loss~~deficit, Eend of period........................................ $ (15256,~~145~~602) E$ (1303,~~570~~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 ~~THREE~~SIX FOR THE ~~THREE~~SIX MONTHS ENDED MONTHS ENDED ~~MARCH~~JUNE 3130, 2002 ~~MARCH~~JUNE 3130, 2003 -------------- -------------- (~~Euros~~ in thousands) ~~CASH FLOWS FROM OPERATING ACTIVITIES:~~ Net loss..................................................................... E$ (1424,~~572~~729) E$ (518,~~678~~745) ~~ADJUSTMENTS~~Other TOcomprehensive ~~RECONCILE NET LOSS TO NET CASH USED IN OPERATIONS~~income: 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~~adjustment.................................. ~~(gain) 639 (25) CHANGES IN OPERATING ASSETS AND LIABILITIES: Restricted cash 560 891 Trade accounts receivable 777 1~~5,~~946~~800 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~~unrealized ~~used~~gains inon ~~operating activities (4,683) (3,288) CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of short~~available-~~term investments 145~~ for- ~~Proceeds from restricted investments 5,304 - Purchase of property and equipment (87) (1) Proceeds from~~ sale ofsecurities.................... ~~property~~109 ~~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~~Other ~~from~~comprehensive ~~borrowings~~income............................................... ~~866 - Repayment of borrowings (1~~5,~~036)~~909 - ----------- ----------- ~~Net~~Comprehensive ~~cash~~loss........................................................... ~~used~~$ ~~in financing activities~~ (118,~~667~~820) -$ ~~Impact of foreign exchange rate changes 156~~ (~~379) ----------- ---------- Net increase (decrease) in cash and cash equivalents 5 (1~~18,~~937~~745) ~~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 SERVICES INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)

FOR THE THREE FOR THE THREE MONTHS ENDED ~~MARCH~~MONTHS 31ENDED 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 ~~2002~~securities.................... ~~2003~~9 - ---------- ----------- ~~(Euros~~Other incomprehensive ~~thousands)~~income............................................... ~~Revenues Internet data center services E~~ 2,~~709~~016 ~~E 47 Connectivity 6,484 583 E~~-~~business~~ ~~115~~ - --------- ----------- ~~Total~~Comprehensive ~~revenues~~loss........................................................... E$ 9(11,~~308~~967) E$ ~~630~~(11,104) ========== ===========

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 7 CYBERNET SERVICES INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

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:

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:

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. 15 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. 16 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 17 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. 18 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. 19 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 20 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 21

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