10-Q 1 doc1.txt 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, 2002 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 the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date: Class Outstanding at August 31, 2002 ----- ------------------------------ Common Stock, $0.001 26,445,627 par value FORWARD-LOOKING STATEMENTS Statements in this report, to the extent they are not based on historical events, constitute forward-looking statements. Forward-looking statements include, without limitation, statements regarding the outlook for 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. When used herein, such statements may use words such as "may", "will", "expect", "believe", "plan" and similar terminology. These statements reflect management's current expectations regarding future events and operating performance and speak only as of the date hereof. Investors are cautioned that forward-looking statements are subject to an inherent risk that actual results may vary materially from those described herein. Factors that may result in such variance, in addition to those accompanying the forward-looking statements, include changes in international, national and local business and economic conditions, competition, changes in interest rates, actions by competitors, actions by government authorities, uncertainties associated with legal proceedings, technological development, future decisions by management in response to changing conditions and misjudgments in the course of preparing forward-looking statements. The foregoing list of factors is not exhaustive. PART I. FINANCIAL INFORMATION --------------------- ITEM 1. FINANCIAL STATEMENTS CYBERNET INTERNET SERVICES INTERNATIONAL, INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2002 (UNAUDITED) 2 CYBERNET INTERNET SERVICES INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED)

December 31, ~~September~~2001 June 30, ~~------------~~2002 ------------- ~~2000 2001~~ ----~~--------~~ ------------- (Euros in thousands ~~- unaudited~~) ASSETS Current Assets Cash and cash equivalents -E ~~Including~~2,735 ~~restricted~~E ~~amounts~~36,126 ~~held~~Restricted bycash ~~Banks as compensating balances of Euro~~ 2,~~791,587~~743 ~~and Euro~~ 2,~~436,704~~315 ~~at December 31, 2000 and September 30, 2001, respectively................... (EURO) 8,763 (EURO) 5,916~~ Short-term investments~~....................................................~~ ~~23,040~~149 ~~3,262~~67 ~~Accounts~~Trade accounts receivable, net~~...................................................~~ 128,~~939~~903 123,~~029~~558 Related party ~~receivables.................................................~~receivable 356 ~~356~~- Other receivables~~.........................................................~~ 42,~~885~~721 31,~~404~~629 Restricted investments~~....................................................~~ 1110,~~509~~567 104,~~137~~686 Prepaid expenses ~~and~~574 ~~other~~205 Other current assets~~.........................................~~ ~~5,059~~947 ~~2,025~~221 -------- --------~~---------------------~~ Total current assets~~......................................................~~ 6629,~~551~~695 3748,~~129~~807 Long-Term Assets Property and equipment, net~~...............................................~~ 4232,~~585~~653 424,~~483~~964 Product development costs, net~~............................................~~ ~~2,465~~806 ~~935~~- ~~Goodwill, net............................................................. 26,054 23,025~~ Investments in equity-method investees~~....................................~~ 2,~~899~~770 ~~2,810~~400 Deferred ~~income~~debt ~~taxes.....................................................~~issuance ~~27,657~~and ~~33,965~~other ~~Restricted~~charges ~~investments.................................................... 10~~6,~~608~~048 ~~- Other assets.............................................................. 17~~4,~~002~~072 ~~12,023~~ -------- --------~~---------------------~~ TOTAL ASSETS~~.................................................................~~ ~~(EURO)~~E ~~195~~71,~~821~~972 ~~(EURO)~~E ~~152~~58,~~370~~243 ========~~=======~~ ========~~======~~ LIABILITIES ~~AND~~Current ~~SHAREHOLDERS'~~Liabilities ~~EQUITY~~Overdrafts ~~(DEFICIT)~~and ~~LIABILITIES~~short-term borrowings E 170 E - Overdrafts and short-term borrowings~~....................................~~, ~~(EURO)~~related ~~567~~party ~~(EURO)~~- ~~265~~3,417 Trade accounts payable~~..................................................~~ 1113,~~429~~155 106,~~918~~108 Other accrued liabilities~~...............................................~~ 1211,~~893~~835 816,~~436~~408 ~~Deferred purchase obligation............................................ 2,078 -~~ Current portion long-term debt and capital lease obligations~~............~~ 1,~~187~~060 ~~1,593~~- Accrued personnel costs~~.................................................~~ 21,~~330~~848 1,~~807~~645 -------- --------~~---------------------~~ Total current liabilities~~..........................................~~ 3028,~~484~~068 2327,~~019~~578 Long-Term Liabilities Long-term debt, ~~net of current portion.................................. 150~~164,~~693~~573 156,~~828~~431 Capital lease obligations, ~~net~~435 of- ~~current~~-------- ~~portion.......................~~-------- ~~1,441~~Total ~~274~~liabilities ~~SHAREHOLDERS' EQUITY (DEFICIT) Common stock $.001 par value~~193,076 50184,~~000,000~~009 ~~shares~~-------- ~~authorized,~~-------- ~~25,845,663~~SHAREHOLDERS' ~~shares~~DEFICIENCY ~~issued~~Common ~~and outstanding at December 31, 2000 and September 30, 2001. 24 24 Preferred~~ stock ~~$.001~~25 ~~par~~25 ~~value, 50,000,000 shares authorized, 600,000 issued and outstanding at December 31, 2000 and September 30, 2001........ 1 1~~ Additional paid-in capital~~..............................................~~ 127,718 127,~~719~~718 Accumulated deficit~~.....................................................~~ (~~114~~249,~~833~~473) (~~156~~253,~~110~~565) ~~Accumulated~~Other ~~other~~ comprehensive income~~..................................~~ ~~293~~626 ~~615~~56 -------- --------~~---------------------~~ Total shareholders' ~~equity~~deficiency (~~deficit~~121,104)~~....................................~~ ~~13,203~~ (27125,~~751~~766) -------- --------~~---------------------~~ TOTAL LIABILITIES AND SHAREHOLDERS' ~~EQUITY~~DEFICIENCY ~~(DEFICIT).........................~~E ~~(EURO) 195~~71,~~821~~972 ~~(EURO)~~E ~~152~~58,~~370~~243 ========~~======~~ ========~~======~~

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)

Three ~~months~~Months ~~ended~~Ended ~~Nine~~Six ~~months~~Months ~~ended~~Ended June 30, June 30, ---------------------- ----------------------~~---~~ ~~September~~2001 302002 ~~September~~2001 302002 ----------~~------------~~ ----------~~---------------~~ ~~2000 2001 2000 2001~~ ------- ---~~----~~ ------- ---~~----~~ (Euros in thousands, except per share data ~~- unaudited~~) ~~Revenue~~Revenues ~~Internet~~E ~~data centre services..................... (EURO) 1~~9,~~241~~901 ~~(EURO)~~E 26,~~294~~724 ~~(EURO)~~E 219,~~582~~781 ~~(EURO) 7,595 Connectivity...................................... 7,162 7,317 20,279 21,173~~ E~~-Business........................................~~ 116,~~143~~032 ~~268~~Costs ~~3,151~~and ~~893~~expenses: ~~------------ ------------ ------------------------------- Total revenues......................................... 9,546 9,879 26,012 29,661~~ Direct cost of services~~................................~~ 6,~~528~~160 54,~~601~~004 1711,~~074~~653 ~~17,255 ------------ ------------ ------------------------------- Gross margin........................................... 3,018 4,278~~ 8,~~938~~537 ~~12,406 Other costs and expenses~~ Network operations~~.................................~~ 2,~~201~~103 1,~~695~~310 54,~~980~~230 52,~~925~~329 General and administrative expenses~~................~~ 3,~~770~~160 34,~~149~~744 156,~~258~~541 910,~~690~~223 Sales and marketing expenses~~.......................~~ 2,~~358~~824 21,~~692~~337 95,~~776~~509 83,~~201~~264 Research and development~~...........................~~ ~~564~~156 ~~344~~- 1384 - Impairment of assets 2,~~273~~556 ~~728~~6,645 2,556 6,645 Depreciation and amortization~~......................~~ 45,~~398~~029 62,~~384~~037 139,~~517~~871 164,~~255~~512 ---------~~---~~ ---------~~---~~ --------- ---------~~-------------~~ Total ~~other~~ costs and expenses~~.........................~~ 1321,~~291~~988 1420,~~264~~077 4540,~~804~~744 4035,~~799~~510 --------- --------- --------- ---------~~------------------------~~ Operating loss~~.........................................~~ (1012,~~273~~087) (913,~~986~~353) (3620,~~866~~963) (2819,~~393~~478) Other income and expenses: Interest expense~~.......................................~~ (86,~~562~~657) (6,~~668~~559) (2712,~~502~~433) (1913,~~101~~393) Interest income~~........................................~~ 501 98 1,~~327~~079 ~~272~~201 4Gain on disposal of assets and businesses - 13,~~653~~233 1- 13,~~351~~233 ~~Other~~Equity in losses~~...........................................~~ -of equity-method -investees (~~2,556~~153) (134) (304) (269) Foreign currency gains (losses)~~........................~~ (34,~~883~~415) 817,~~158~~187 (910,~~158~~674) (215,~~516)~~607 ---------~~---~~ ---------~~---~~ --------- ---------~~-------------~~ ~~Loss~~Income (loss) before taxes and ~~minority~~extraordinary ~~interest................~~item (2122,~~391~~811) (810,~~224)~~472 (6843,~~873~~295) (514,~~215~~099) Income tax benefit~~.....................................~~ 32,~~814~~836 ~~1,881~~8 104,~~207~~425 ~~6,306~~7 ------------ ---------~~---~~ --------- ---------~~-------------~~ ~~Net~~Income (loss) before ~~minority~~extraordinary ~~interest......................~~item (1719,~~577~~975) (610,~~323)~~480 (5838,~~666~~870) (444,~~909~~092) ~~Equity~~Extraordinary initem: ~~losses~~Gain ofon ~~equity-method~~extinguishment ~~investees~~of -debt (~~671~~net of tax) - ~~(975)~~- 4,016 - --------- --------- --------- --------- Net income (loss) (19,975) 10,480 (34,854) (4,092) Accumulated deficit, beginning of period (129,712) (264,045) (114,833) (249,473) ---------- --------- --------- ~~Extraordinary~~--------- ~~items:~~Accumulated ~~Profit~~deficit, onend ~~early extinguishment~~ of ~~debt~~period E(~~net~~149,687) ofE(253,565) ~~tax~~E(149,687) E(~~EURO~~253,565) 12========= ========= ========= ========= Earnings (loss) per share,~~743~~ basic: Earnings (~~EURO~~loss) ~~592~~per share before extraordinary item E (~~EURO~~0.77) ~~12,743~~E 0.39 E (~~EURO~~1.50) ~~4,607~~E (0.15) Gain on extraordinary item - - 0.15 - ---------- ---------~~---~~ --------- ---------~~--------------~~ Net ~~loss...............................................~~income (~~EURO~~loss) ~~(4,834)~~per ~~(EURO)(6,422)~~share ~~(EURO)~~E (~~45,923~~0.77) E 0.39 E (~~EURO~~1.35) E (~~41,277~~0.15) =========~~====~~ =========~~===~~ =========~~=====~~ =========~~=====~~ ~~Loss~~Earnings (loss) per share, ~~Basic and~~ diluted~~..................................~~: Earnings (~~EURO~~loss) per share before extraordinary item E (0.7677) ~~(EURO)~~E (0.~~27)~~12 ~~(EURO)~~E (21.5350) ~~(EURO)~~E (10.7857) ~~Loss per share before extraordinary items..........~~ Gain ~~per~~on ~~share for~~ extraordinary ~~items.............~~item ~~0.55~~- ~~0.02~~- 0.5515 ~~0.18~~- ---------~~----~~ ---------~~---~~ --------- ---------~~--------------~~ Net income (loss) per share~~.................................~~ ~~(EURO)~~E (0.2177) ~~(EURO)~~E (0.~~25)~~12 ~~(EURO)~~E (1.9835) ~~(EURO)~~E (10.6057) =========~~====~~ =========== =========~~=====~~ =========~~=====~~ ~~Number~~Weighted average number of shares ~~used~~outstanding to(in ~~compute~~thousands): For basic loss (earnings) per share ~~23,236~~ 25,~~846~~845 2326,~~156~~445 25,~~846~~845 26,445 ========= ========= ========= ========= For diluted loss (earnings) per share 25,845 30,391 25,845 30,391 ========= ========= ========= =========

The accompanying notes are an integral part of these financial statements. 4 CYBERNET INTERNET SERVICES INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

~~For~~Six ~~nine~~Months ~~months~~Ended ~~ended~~June ~~------------------------------------- September~~ 30, -------------------------~~------------~~ ~~2000~~ 2001 2002 ----------~~----~~ ------------~~---~~ (Euros in thousands) Cash Flows from Operating Activities: ~~(in thousands - unaudited)~~ Net loss~~....................................................................~~ ~~(EURO)~~E (4534,~~923~~854) ~~(EURO)~~E (414,~~277~~092) Adjustments to reconcile net loss to net cash used by operations: Deferred taxes~~..........................................................~~ (104,~~212~~425) ~~(6,306)~~- Depreciation and amortization~~...........................................~~ 139,~~517~~871 164,~~732~~512 Equity in losses of equity-method investees~~.............................~~ -141 ~~498~~269 Provision for losses on accounts receivable~~.............................~~ ~~(235)~~528 12,~~002~~298 Loss on sale of short-term investment~~...................................~~ 122 - ~~266~~ Amortization of bond discount~~...........................................~~ 41,~~215~~335 21,~~044~~298 Accreted interest expense on long -term debt~~.............................~~ 75,~~601~~443 86,~~697~~771 ~~Profit~~Impairment onof ~~early~~assets ~~extinguishment~~2,556 6,645 Gain on disposal of ~~debt..................................~~assets ~~(12,743)~~- (415,~~608~~011) ~~Write~~Loss ~~off~~on ~~inventory/assets~~disposal ~~held~~of ~~for~~businesses ~~disposal............................~~ - 21,~~556~~778 ~~Unrealized~~Gain ~~foreign~~on extinguishment of debt (4,016) - Foreign currency ~~transaction~~translation ~~losses..........................~~loss 9(gain) 10,~~158~~950 4(14,~~247~~810) Changes in operating assets and liabilities: Restricted cash 137 428 Trade accounts receivable~~...............................................~~ ~~(1,686)~~310 ~~(92)~~716 Other receivables~~.......................................................~~ (1,~~259)~~284 ~~1,481~~983 Other assets~~............................................................~~ 39530 ~~330~~21 Prepaid expenses ~~and~~7 ~~other~~(3) Other current assets~~...............................~~ ~~1,097~~282 ~~478~~(130) Trade accounts payable~~..................................................~~ (71,~~382~~949) (~~511~~1,063) Other accrued expenses and liabilities~~..................................~~ ~~(6,636)~~540 (4,~~446)~~415 Accrued personnel costs~~.................................................~~ (~~842~~560) ~~(523)~~324 ---------~~------~~ ---------~~-------~~ Net cash used in operating activities~~..................................~~ (5111,~~291~~768) (194,~~432~~651) Cash Flows from Investing Activities: ~~Purchase of short term investments.......................................... (35,740) -~~ Proceeds from sale of short -term investments~~................................~~ 7916,~~838~~496 ~~21,238~~85 Proceeds from sale of restricted investments~~................................~~ -4,192 105,~~194~~368 ~~Product~~Purchase ~~development~~of ~~costs...................................................~~property and equipment (~~162~~6,455) -(334) ~~Purchase~~Proceeds from sale of property and equipment~~..........................................~~ ~~(25~~- 32,~~014)~~106 Acquisition of equity method investments (~~8,408~~409) ~~Acquisition~~- Sale of businesses, net of cash ~~acquired.............................~~sold - (~~1,857~~346) - Payment of deferred purchase obligations~~....................................~~ - (2,034) ~~Acquisition of equity investments...........................................~~ - ~~(409)~~ ---------~~------~~ ---------~~-------~~ Net cash provided by investing activities~~..............................~~ 1711,~~065~~790 2036,~~581~~879 Cash Flows from Financing Activities: ~~Proceeds~~Principal ~~from~~payments ~~borrowings.................................................... 798 - Payments~~ under capital lease obligations~~....................................~~ -(278) (~~397~~1,561) Proceeds from borrowings - 3,417 Repayment of borrowings~~.....................................................~~ (273,~~106~~430) (~~3,626~~170) --------- --------- Net cash (used in) provided by financing activities~~......................~~ (263,~~308~~708) (41,~~023)~~686 --------- --------- Impact of foreign exchange rate changes~~.....................................~~ ~~5,778~~(77) 27(523) ---------~~------~~ ---------~~-------~~ Net (decrease) increase in cash and cash equivalents~~...................................~~ (543,~~756~~763) (233,~~847)~~391 Cash and cash equivalents at beginning of period~~............................~~ 725,~~819~~972 82,~~763~~735 ---------~~------~~ ---------~~-------~~ Cash and cash equivalents at end of period~~..................................~~ ~~(EURO)~~E 182,~~123~~209 ~~(EURO)~~E 536,~~916~~126 =========~~======~~ =========~~=======~~

The accompanying notes are an integral part of these financial statements. 5 CYBERNET INTERNET SERVICES INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR SIX MONTHS ENDED JUNE 30, 2002 1. Basis of Presentation The accompanying interim period unaudited consolidated financial statements of Cybernet Internet Services International, Inc. (the "Company") 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 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, 2002 are not necessarily indicative of results to be expected for the year ended December 31, 2002. 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, 2001. 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. The Company is currently in the process of identifying alternative financing sources, negotiating changes to its debt structure and evaluating its strategic options. However, there are no assurances that these plans can be accomplished or that they will provide sufficient cash to fund the Company's operations 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 June 30, 2001, 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. 4. Segment Information The Company operates in one line of business, which is providing international Internet backbone and access services and network business solutions for corporate customers. 6 5. Comprehensive Income (Loss) Accumulated other comprehensive income (loss) consists of unrealized gains or losses on available-for-sale securities and translation adjustments from consolidation. The following table sets forth the comprehensive income (loss) for the periods ended June 30, 2001 and 2002:

~~September~~Three ~~30,~~Months ~~September~~Ended ~~30,~~Six ~~------------------------------~~Months ~~-----------------------------~~Ended ~~three~~June ~~month~~30, ~~ended~~June ~~nine~~30, ~~months ended~~ ---------------------~~-------~~ ------------------~~-----------~~ ~~2000~~ 2001 ~~2000~~2002 2001 2002 --------~~----~~ --------~~-----~~ --------~~-----~~ --------~~------~~ (Euros in thousands~~, except per share data~~) ~~Numerator:~~ Net ~~loss-numerator~~income ~~for basic and diluted loss per~~ (~~EURO~~loss) E(419,~~834~~975) ~~(EURO)~~E (610,~~422)~~480 E(~~EURO~~34,854) E(454,~~923~~092) ~~(EURO)~~Net unrealized gains (~~41,277~~losses) ~~share~~on ~~Denominator: Denominator~~ available-for-sale ~~basic~~securities ~~and~~12 ~~diluted~~(52) ~~loss~~160 ~~per~~(46) ~~share~~Unrealized -gains ~~Weighted-average~~(losses) ~~shares~~on ~~outstanding~~foreign ~~23,236~~currency 25adjustments,~~846~~ ~~23,156~~net ~~25,846~~of ~~Basic~~tax ~~and~~(4) ~~diluted~~55 ~~loss~~33 ~~per share~~ (~~EURO~~524) ~~(0.21)~~-------- ~~(EURO)~~-------- ~~(0.25)~~-------- ------- Comprehensive income (~~EURO~~loss) E(~~1.98~~19,967) E 10,483 E(~~EURO~~34,661) E(~~1.60~~4,662) ======== ======== ======== =======

6. Disposal of Assets and of Businesses On April 16, 2002, the Company entered into a share purchase agreement with Westwood Corporation ("Westwood") wherein the Company sold all of the shares of Cybernet Italia S.p.A. to Westwood in consideration for $10,000. The Company recognized a loss of approximately Euro 1.8 million in connection with this sale transaction. On June 25, 2002, Cybernet Internet Dienstleistungen AG ("Cybernet AG"), a wholly-owned subsidiary of the Company, entered into an asset purchase and transfer agreement (the "Data Center Agreement") with Disko Leasing GmbH ("Disko"), pursuant to which Cybernet AG sold assets, equipment, furniture and fixtures located in its data centers in Hamburg, Frankfurt and Munich, Germany (the "Data Centers") to Disko, effective April 30, 2002. Pursuant to the Data Center Agreement, Cybernet AG also cancelled certain lease agreements for the Data Centers, terminated operating agreements for the Data Centers, amended certain service agreements for the Data Centers in Frankfurt and Munich, Germany and paid an arrangement fee to Telehouse Deutschland GmbH. The Company recognized a gain of approximately Euro 15.0 million as a result of this sale transaction. 7. Deferred Debt Issuance and Other Charges Deferred debt issuance and other charges consist principally of expenses incurred by the Company in connection with the notes issued during 1999 and amounts allocated to customer base and management contracts in connection with business acquisitions. Deferred debt issuance charges are being amortized to interest expense over the period of the maturity of the said notes. Other deferred charges are being amortized on a straight-line basis over their useful lives. 8. Related Party Transactions MFC Bancorp Ltd. ("MFC") is considered a related party as MFC maintains voting rights on behalf of two shareholders that hold approximately 26% of the Company's outstanding shares and 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 provides a revolving senior secured credit facility in an aggregate amount of Euro 7.0 million to the Company. In April 2002, 7 the Company entered into an agreement to engage MFC to provide strategic advisory and restructuring services. Pursuant to such agreement, MFC will be be paid a success fee upon the 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 Euro 175,000 to MFC. The agreement is terminable by either party on 30 days' prior written notice. 9. Commitments/Leases As at June 30, 2002, the Company had commitments under operating leases and rental payments totaling approximately Euro 4.5 million, payable over the 18-month period ending December 31, 2003. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cybernet Internet Services International, Inc. (the "Company" and together with its subsidiaries "Cybernet") is an Internet service provider, providing international Internet backbone and access services and network business solutions for corporate customers. The following discussion and analysis of the results of operations and financial condition of the Company for the six month and three month periods ended June 30, 2002 should be read in conjunction with the consolidated financial statements and related notes included elsewhere herein. Results Of Operations - Six Months Ended June 30, 2002 ----------------------- ----------------------------------- The following table sets forth selected sales data for the Company for the periods indicated:

~~Three~~Six ~~months~~Months ~~ended~~Ended ~~Nine~~June ~~months ended ---------------------------- -------------------------------- September~~ 30, ~~September 30~~ -------------------------~~---~~ ~~-------------------------------- 2000~~ 2001 ~~2000~~2002 ~~2001~~ ----------~~---~~ ------------ ~~--------------- -------------~~ (inEuros ~~thousands) (~~in thousands) ~~---------------------------- ---------------------------------~~ Revenues: ~~Germany..........................~~Internet ~~(EURO)~~data ~~5,848~~center ~~(EURO)~~services ~~6,461~~E ~~(EURO) 14,412 (EURO) 19,263 US............................... - - - - Italy............................ 1,705 1,557 6,213~~ 5,~~091~~301 ~~Other............................~~E 1,993 1,862 5,387 5,307 ------------- ------------- --------------- --------------- Total............................ (EURO) 9,546 (EURO) 9,880 (EURO) 26,012 (EURO) 29,661 ============= ============= =============== =============== Depreciation and Amortization: Germany........................ (EURO) 1,750 (EURO) 2,553 (EURO) 4,818 (EURO) 7,278 US............................. 1,859 3,~~427~~811 ~~6,551~~Connectivity 613,~~435~~855 ~~Italy.......................... 359 314 1~~11,~~024~~822 ~~853 Other.......................... 429 714 1,124 1,689~~ E-~~------------~~business ~~-------------~~625 ~~---------------~~399 --------~~-------~~ Total.......................... (EURO) 4,397 (EURO) 7,008 (EURO) 13,517 (EURO) 16,255 ============= ============= =============== =============== Interest Expense: Germany........................ (EURO) 69 (EURO) 16 (EURO) 154 (EURO) 78 US............................. 8,371 6,587 27,066 18,874 Italy.......................... 120 63 277 146 Other.......................... 2 1 5 3 --------~~-----~~ ~~------------- --------------- ---------------~~ Total~~..........................~~ ~~(EURO)~~revenues ~~8,562~~E ~~(EURO) 6,667 (EURO) 27,502 (EURO)~~ 19,~~101~~781 ~~=============~~E ~~============= =============== =============== Interest Income: Germany........................ (EURO) 72 (EURO) 4 (EURO) 127 (EURO) 82 US............................. 1~~16,~~250~~032 265 4,510 1,263 Italy.......................... 3 3 12 4 Other.......................... 1 - 4 2 ------------- ------------- --------------- --------------- Total.......................... (EURO) 1,326 (EURO) 272 (EURO) 4,653 (EURO) 1,351 ========~~=====~~ ============= =============== =============== Loss before Taxes: Germany........................ (EURO) (4,470) (EURO)(3,844) (EURO) (12,324) (EURO) (15,801) US............................. (14,086) (1,863) (46,396) (28,410) Italy.......................... (1,407) (1,075) (5,008) (3,410) Other.......................... (1,428) (1,442) (5,145) (3,594) ------------- ------------ --------------- --------------- Total.......................... (EURO)(21,391) (EURO)(8,224) (EURO) (68,873) (EURO) (51,215) ============= ============ =============== =============== Income tax benefit: Germany........................ (EURO) 3,813 (EURO) 1,883 (EURO) 10,207 (EURO) 6,306 US............................. - - - - Italy.......................... - - - - Other.......................... - - - - ------------- ------------ --------------- --------------- Total.......................... (EURO) 3,813 (EURO) 1,883 (EURO) 10,207 (EURO) 6,306 ============= ============ =============== =============== Total Assets: Germany........................ (EURO) 89,841 (EURO) 86,429 US............................. 112,237 47,403 Italy.......................... 13,825 12,678 Other.......................... 8,322 5,860 --------------- --------------- Total.......................... (EURO) 224,225 (EURO) 152,370 =============== ===============

In the six months ended June 30, 2002, total revenues decreased to Euro 16.0 million from Euro 19.8 million in the comparable period of 2001. The decrease in revenues reflected lower revenues in all segments, resulting from a difficult economic environment wherein customers have been delaying projects and investments. For the six months ended June 30, 2002, internet data center service ("IDC") revenues decreased to Euro 3.8 million from Euro 5.3 million in the same period of 2001. Connectivity revenues decreased to Euro 11.8 million in the first half of 2002 from Euro 13.9 million in the same period of 2001. Such decreases in revenues resulted primarily from the disposition of the Company's operations in Italy in April 2002 and the sales of assets and equipment located in its data centers in Hamburg, Frankfurt and Munich, Germany (the "Data Centers") effective April 30, 2002 pursuant to an asset purchase and transfer Agreement (the "Data Center Agreement") made between the Company's wholly-owned subsidiary, Cybernet Internet Dienstleistungen AG ("Cybernet AG"), and Disko Leasing GmbH ("Disko") dated June 25, 2002. Direct cost of services decreased to Euro 8.5 million in the first six months of 2002 from Euro 11.7 million in the comparable period of 2001. Direct cost of services consists of: 1) telecommunications expenses which mainly 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 2) the cost of hardware and software sold. The Company mainly utilizes leased lines for its backbone network, and to connect its network to its major customers' premises. Network operations costs decreased to Euro 2.3 million in the first six months of 2002 from Euro 4.2 million in the comparable period of 2001. Network operations mainly consist of: 1) the personnel costs of technical and operational staff and related overhead, 2) the rental of premises solely or primarily used by technical staff, including premises used to generate our co-location services revenues and 3) consulting expenses in the area of network and software development. The decrease 9 reflects a continuous effort to reorganize Cybernet's technical structure to reduce personnel related costs. Cybernet had 33 network operations personnel at June 30, 2002, compared to 84 at June 30, 2001. General and administrative expenses increased to Euro 10.2 million in the first six months of 2002 from Euro 6.5 million in the comparable period of 2001. The increase results primarily from reserves for accounts receivable from a principal distressed connectivity reseller in Germany and provisions for potential litigation, business rationalization and related costs. Synergies from integrating various operations and cost control measures instituted during the last 12 months resulted in lower personnel and personnel related costs. General and administrative expenses consist principally of salaries and other personnel costs for administrative staff, rent, allowance for bad debts and external advisory costs. Cybernet had 26 general and administrative personnel at June 30, 2002, compared to 48 at June 30, 2001. Sales and marketing expenses decreased to Euro 3.3 million in the first six months of 2002 from Euro 5.5 million in the comparable period of 2001. This decrease is mainly due to Cybernet reorganizing its sales and marketing organization. Sales and marketing expenses consist principally of salaries for sales and marketing personnel and advertising and communication expenditures. Cybernet had 50 sales and marketing personnel at June 30, 2002, compared to approximately 131 at June 30, 2001. During 2002, Cybernet continued to re-focus its activities towards its core operations and rationalize its business. As a result, Cybernet terminated or re-assessed various projects and initiatives, such as Voice Telephony and Connectivity, and the Company recorded impairment losses of approximately Euro 6.6 million in the first six months of 2002. Cybernet's review of its core and other operations is currently ongoing and may, in the future, result in the Company reassessing the carrying value of its assets and/or providing for associated costs and expenses. Depreciation and amortization expenses decreased to Euro 4.5 million in the first six months of 2002 from Euro 9.9 million in the comparable period of 2001. This decrease reflects the nearly complete write-off on December 31, 2001 of goodwill related to prior acquisitions. For the six months ended June 30, 2002, the Company reported an operating loss of Euro 19.5 million, compared to Euro 21.0 million in the comparable period of 2001. Interest expense for the six months ended June 30, 2002 increased to Euro 13.4 million from Euro 12.4 million in the comparable period of 2001, primarily as a result of an increase in indebtedness during the current period. In the first half of 2002, the Company reported a net gain of Euro 13.2 million on the disposition of assets and businesses, primarily resulting from the sale of the Data Centers by Cybernet AG pursuant to the Data Center Agreement. In the first six months of 2002, the Company recorded a net foreign currency gain of Euro 15.6 million, primarily as a result of the effect of the strengthening of the Euro versus the U.S. dollar on the Company's U.S. dollar denominated debt. The Company reports its financial results in Euros and a portion of its outstanding indebtedness is denominated and payable in U.S. dollars. As the Euro fluctuates in value against the U.S. dollar, the amount of the Company's U.S. dollar denominated debt as reported in Euros also fluctuates. These differences are recorded as either foreign currency 10 gains or losses by the Company in any particular reporting period. Such reported foreign currency gains or losses will fluctuate with the exchange rate for Euros to U.S. dollars from reporting period to reporting period. In the comparable period of 2001, the Company recorded a net foreign exchange loss of Euro 10.7 million. For the six months ended June 30, 2002, the Company's net loss decreased to Euro 4.1 million from Euro 34.9 million for the comparable period of 2001, primarily as a result of the non-recurring gain resulting from the sale of the Data Centers by Cybernet AG and a non-cash foreign currency translation gain. Results of Operations - Three Months Ended June 30, 2002 ----------------------- ------------------------------------- The following table sets forth selected sales data for the Company for the periods indicated:

Three ~~months~~Months ~~ended~~Ended ~~September~~June 30 2000 2001 ------------------ ----------------- Net loss (EURO) (4.834) (EURO) (6.422) Net unrealized gains (losses) on short-term investments 654 160 Unrealized gains (losses) on foreign currency translation adjustments, ~~net of tax 241 (31)~~ ----------------- ----------~~-------~~ ~~Comprehensive income (loss) (EURO) (3.939) (EURO) (6.293) ================= ================= Nine months ended September 30 2000~~ 2001 2002 ----------~~--------~~ ----------~~-------~~ ~~Net loss~~ (~~EURO)~~Euros ~~(45.923)~~in ~~(EURO~~thousands) ~~(41.277)~~Revenues ~~Net~~Internet ~~unrealized~~data ~~gains~~center ~~(losses)~~services onE ~~short-term~~2,640 ~~investments~~E ~~408~~1,102 ~~297~~Connectivity ~~Unrealized~~7,140 ~~gains (losses) on foreign currency translation adjustments~~5,338 ~~net~~E-business of121 ~~tax~~284 ~~(268) 25~~ -------~~----------~~ -------~~----------~~ ~~Comprehensive~~Total ~~income~~revenues ~~(loss)~~E ~~(EURO)~~9,901 ~~(45.783)~~E ~~(EURO)~~6,724 ~~(40.955)~~ =======~~==========~~ =======~~==========~~

Total revenues decreased to Euro 6.7 million in the three months ended June 30, 2002 from Euro 9.9 million in the second quarter of 2001, primarily as a result of lower IDC and Connectivity revenues, resulting from a difficult economic environment wherein customers have been delaying projects and investments. For the quarter ended June 30, 2002, IDC revenues decreased to Euro 1.1 million from Euro 2.6 million in the comparable period of 2001. Connectivity revenues decreased to Euro 5.3 million in the quarter ended June 30, 2002 from Euro 7.1 million in the comparable period of 2001. Connectivity revenues decreased principally due to a decrease in the number of customers as a result of competitive conditions and the disposition of the Company's Italian operations. Direct cost of services decreased to Euro 4.0 million in the second quarter of 2002 from Euro 6.2 million in the second quarter of 2001. The decrease reflects a continuous effort by the Company to reorganize and rationalize its network. Network operations costs decreased to Euro 1.3 million in the second quarter of 2002 from Euro 2.1 million in the second quarter of 2001. The decrease reflects a continuous effort by the Company to reorganize its technical structure and reduce personnel related costs. General and administrative expenses increased to Euro 4.7 million in the second quarter of 2002 from Euro 3.2 million in the second quarter of 2001. The increase resulted primarily from reserves for accounts receivable from a principal distressed connectivity reseller in Germany, as well as provisions for litigation, business rationalization and related expenses. Sales and marketing expenses decreased to Euro 1.3 million in the second quarter of 2002 from Euro 2.8 million in the second quarter of 2001. Depreciation and amortization expenses decreased to Euro 2.0 million in the second quarter of 2002 from Euro 5.0 million in the second quarter of 2001. In the second quarter of 2002, the Company reported an operating loss of Euro 13.4 million, compared to Euro 12.1 million for the same period of 2001. 11 Interest expense was Euro 6.6 million in the second quarter of 2002, compared to Euro 6.7 million in the second quarter of 2001. During the second quarter of 2002, the Company recorded a net gain of Euro 13.2 million on the disposition of assets primarily resulting from the sale of the Data Centers by Cybernet AG pursuant to the Data Center Agreement. In the second quarter of 2002, the Company reported a net foreign currency translation gain of Euro 17.2 million, compared to a net loss of Euro 4.4 million in the second quarter of 2001, primarily reflecting the effect of the strengthening of the Euro versus the U.S. dollar on the Company's U.S. dollar denominated debt. During the second quarter of 2002, the Company reported net income of Euro 10.5 million, compared to a net loss of Euro 20.0 million for the comparable period of 2001, primarily as a result of a non-recurring gain resulting from the sale of the Data Centers by Cybernet AG and a non-cash foreign currency translation gain. Liquidity and Capital Resources ---------------------------------- Operating activities used cash of Euro 4.7 million in the first six months of 2002, compared to Euro 11.8 million in the comparable period in 2001. This reflected lower losses and decreased expenditures in all major areas of the Company. For the first six months of 2002, investing activities generated cash of Euro 36.9 million, compared to Euro 11.8 million in the comparable period in 2001. The increase in cash resulted primarily from the disposition of the Data Centers by Cybernet AG pursuant to the terms of the Data Center Agreement, as well as the sale of investments, partially offset by the cash outflows for the purchases of property and equipment. Expenditures for property and equipment consisted principally of the fit-out of POP's and data facilities, the purchases of computer hardware and software and other expenditures related to the maintenance of the Company's Internet backbone and equipment. For the first six months of 2002, financing activities provided cash of Euro 1.7 million. The increase in cash generated from financing activities represents the net proceeds of approximately Euro 3.2 million from borrowings partially offset by the cash outflows for the early termination of one leasing contract in the amount of Euro 1.6 million. In the comparable period in 2001, financing activities used cash of Euro 3.7 million. On July 1, 2002, the Company paid the semi-annual interest payment of Euro 4.7 million on its outstanding senior convertible notes due 2009 from restricted investments deposited in its interest escrow account. As a result, the interest escrow account for such notes has been fully disbursed. On June 30, 2002, working capital, defined as the excess of current assets over current liabilities, was Euro 21.2 million, compared to Euro 1.6 million at December 31, 2001. Net accounts receivable as at June 30, 2002 decreased to Euro 3.6 million from Euro 8.9 million as at December 31, 2001. Cash and cash equivalents amounted to Euro 36.1 million and Euro 2.7 million at June 30, 2002 and December 31, 2001, respectively. At June 30, 2002, the Company had approximately Euro 4.7 million of restricted investments held in escrow. This amount was invested 12 in U.S. treasury securities and was used to pay interest on the Company's senior convertible notes in July 2002. In March 2002, the Company was granted a revolving senior secured credit facility from a Swiss Bank, a related party, that matures in March 2003 for maximum borrowings of Euro 7.0 million. The Company is obligated to borrow in three tranches and each tranche is dependent upon certain conditions. The credit facility bears interest at a rate of 14% per annum and is secured by substantially all of the Company's assets excluding restricted cash and investments. The amount drawn and outstanding under the credit facility as of June 30, 2002 was Euro 3.4 million. There can be no assurance that the Company will receive further advances under the credit facility or that the Company will have sufficient funds to continue its current operations in the future. The Company may need to obtain additional financing in the future and there can be no assurance that the Company will be successful in obtaining such financing. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Reference is made to the Company's annual report on Form 10-K for the year ended December 31, 2001 for information concerning market risk. The Company is of the opinion that there have been no material changes in market risk since December 31, 2001. 13 PART II. OTHER INFORMATION ----------------- ITEM 1. LEGAL PROCEEDINGS The Company is subject to routine litigation incidental to its business and is named from time to time as a defendant in various legal actions. Reference is made to the Company's annual report on Form 10-K for the year ended December 31, 2001 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, the Company cannot state what the eventual outcome of pending matters will be. The Company is contesting the allegations made in each pending matter and while it believes, based upon its current knowledge, that the outcome of such matters will not have a material adverse effect on the Company's consolidated financial position, such matters may be material to the Company's operating results for a particular period. ITEM 5. OTHER INFORMATION The Company's board of directors was realigned to be comprised of three directors, being Michael Smith, Slobodan Andjic and Jong Dal Lee. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 99.1 - Certification of Periodic Report (b) Reports on Form 8-K The Company filed the following reports on Form 8-K in the three months ended June 30, 2002 and in July 2002: Form 8-K dated April 3, 2002: Item 2. Acquisition or Disposition of Assets Form 8-K dated April 19, 2002: Item 2. Acquisition or Disposition of Assets Item 7. Financial Statements and Exhibits Form 8-K/A dated April 30, 2002: Item 7. Financial Statements and Exhibits Form 8-K dated May 2, 2002: Item 2. Acquisition or Disposition of Assets 14 Form 8-K dated May 13, 2002: Item 4. Changes in Registrant's Certifying Accountant Item 7. Financial Statements and Exhibits Form 8-K dated May 21, 2002: Item 2. Acquisition or Disposition of Assets Form 8-K dated June 19, 2002: Item 2. Acquisition or Disposition of Assets Form 8-K dated June 27, 2002: Item 2. Acquisition or Disposition of Assets Item 7. Financial Statements and Exhibits Form 8-K/A dated July 10, 2002: Item 7. Financial Statements and Exhibits Form 8-K dated July 22, 2002: Item 5. Other Events and Regulation FD Disclosure 15 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. Date: September 19, 2002 By: /s/ Michael J. Smith ------------------------------------------- Michael J. Smith Chief Executive Officer and Chief Financial Officer 16 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; and 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. Date: September 19, 2002 /s/ Michael J. Smith ------------------------------------------- Michael J. Smith Chief Executive Officer and Chief Financial Officer 17

For three months ended For nine months ended ---------------------------- -------------------------------- September 30 September 30 ---------------------------- -------------------------------- 2000 2001 2000 2001 ------------- ------------- -------------- --------------- Revenue Internet Data Center Services............................ 13.0 % 23.2 % 9.9 % 25.6 % Connectivity............................................. 75.0 % 74.1 % 78.0 % 71.4 % E-Business............................................... 12.0 % 2.7 % 12.1 % 3.0 % ------ ------ ------ ------ Total revenues................................................ 100.0 % 100.0 % 100.0 % 100.0 % Direct cost of services................................... 68.4 % 56.7 % 65.6 % 58.2 % ------ ------ ------ ------ Gross margin.................................................. 31.6 % 43.3 % 34.4 % 41.8 % Other costs and expenses Network Operations........................................ 23.0 % 17.2 % 23.0 % 20.0 % General and administrative expenses....................... 39.5 % 31.9 % 58.6 % 32.7 % Sales and Marketing expenses.............................. 24.7 % 27.2 % 37.6 % 27.6 % Research and development.................................. 5.9 % 3.5 % 4.9 % 2.5 % Depreciation and amortization............................. 46.1 % 69.6 % 52.0 % 54.8 % ------ ------ ------ ------ Total other costs and expenses................................ 139.2 % 144.4 % 176.1 % 132.6 % ------ ------ ------ ------ Operating loss................................................ (107.6)% (101.1)% (141.7)% (95.4)% Interest expense.............................................. (89.7)% (67.5)% (105.7)% (64.4)% Interest income............................................... 13.9 % 2.8 % 17.9 % 4.6 % Foreign currency gains (losses)............................... (40.7)% 82.6 % (35.2)% (8.5)% Other losses.................................................. 0.0 % 0.0 % 0.0 % 8.6 % ------ ------ ------ ------ Loss before taxes and minority interest....................... (224.1)% 83.2 % (264.8)% (172.7)% Income tax benefit............................................ 40.0 % 19.0 % 39.2 % 21.3 % ------ ------ ------ ------ Net loss before minority interest............................. (184.1)% (64.2)% (225.5)% (151.4)% Minority interest............................................. 0.0 % 0.0 % 0.0 % 0.0 % Equity in losses of equity-method investees................... 0.0 % (6.8)% 0.0 % (3.3)% ------ ------ ------ ------ Net loss before extraordinary items........................... (184.1)% (71.0)% (225.5)% (154.6)% Profit on early extinguishments of debt (net of tax).......... 133.5 % 6.0 % 49.0 % 15.5 % ------ ------ ------ ------ Net loss...................................................... (50.6)% (65.0)% (176.5)% (139.2)% ====== ====== ====== ======

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