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, 2001 OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number: 000-29391
----------------
VIA NET.WORKS, INC.
(Exact name of registrant as specified in its charter)
----------------
Delaware 84-1412512
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
12100 Sunset Hills Road, Suite 110
Reston, Virginia 20190
(Address of principal executive offices)
Registrant's telephone number, including area code: (703) 464-0300
-------------------------------------------------------------
(Former name or former address, if changed since last report)
-------------------------------------------------------------
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 report) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
As of August 1, 2001, the aggregate market value of the 53,742,468 shares of
common stock held by non-affiliates of the registrant was $64,490,962 based on
the closing sale price ($1.20) of the registrant's common stock as reported on
the Nasdaq National Market on such date. (For this computation, the registrant
has excluded the market value of all shares of its common stock reported as
beneficially owned by executive officers and directors of the registrant and
certain other stockholders; such exclusion shall not be deemed to constitute an
admission that any such person is an "affiliate" of the registrant.) As of
August 1, 2001, there were outstanding 54,042,899 shares of the registrant's
common stock and 6,770,001 shares of the registrant's non-voting common stock.
1
VIA NET.WORKS, INC.
TABLE OF CONTENTS
(UNAUDITED)
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets as of December 31, 2000 (Restated) and
June 30, 2001 ................................................................ 3
Consolidated Statements of Operations for the three and six months ended
June 30, 2000 (Restated) and 2001 ............................................ 4
Consolidated Statements of Cash Flows for the six months ended
June 30, 2000 (Restated) and 2001 ............................................ 5
Notes to the Consolidated Financial Statements ........................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
Of Operations ............................................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk ............................. 16
PART II. OTHER INFORMATION ..................................................................... 16
Item 1. Legal Proceedings ..................................................................... 16
Item 2. Changes in Securities and Use of Proceeds ............................................. 16
Item 3. Defaults Upon Senior Securities ....................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders ................................... 18
Item 5. Other Information ..................................................................... 18
Item 6. Exhibits and Reports on Form 8-K ...................................................... 18
SIGNATURES ..................................................................................... 19
EXHIBIT INDEX .................................................................................. 20
2
PART I
Item 1. Financial Statements
VIA NET.WORKS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands of U.S dollars, except share data)
(Unaudited)
--------
December 31, June 30,
2000 2001
(As Restated)
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents $ 237,839 $ 185,911
Trade and other accounts receivable, net of allowance of $3,623 and 4,555,
respectively 16,570 21,616
Other current assets 5,228 6,981
------------ -----------
Total current assets 259,637 214,508
Property and equipment, net 39,227 40,193
Goodwill and other acquired intangible assets, net 181,082 110,750
Other noncurrent assets 1,202 1,006
------------ -----------
Total assets $ 481,148 $ 366,457
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 21,866 $ 16,714
VAT and other taxes payable 2,332 2,598
Short-term notes and current portion of long-term debt 3,265 2,665
Deferred revenue 14,360 14,144
Other current liabilities and accrued expenses 11,852 13,905
------------ -----------
Total current liabilities 53,675 50,026
Long-term debt 1,894 1,340
------------ ------------
Total liabilities 55,569 51,366
Contingencies - -
Minority interest in consolidated subsidiaries 597 10
Stockholders' equity:
Common stock, $.001 par value; 125,000,000 shares authorized; 54,061,998 and
54,042,899 shares issued and outstanding; respectively 54 54
Non-voting common stock, $.001 par value; 7,500,000 shares authorized; 6,770,001
shares issued and outstanding 7 7
Treasury Stock, $.001 par value; 0 and 32,000 shares - (236)
Additional paid-in capital 558,196 558,300
Accumulated deficit (113,693) (221,667)
Deferred compensation (6,409) (4,750)
Accumulated other comprehensive loss (13,173) (16,627)
------------ -----------
Total stockholders' equity 424,982 315,081
------------ -----------
Total liabilities and stockholders' equity $ 481,148 $ 366,457
============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
3
VIA NET.WORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of U.S. dollars, except share and per share data)
(Unaudited)
--------
For the three months ended For the six months ended
June 30, June 30,
--------------------------- --------------------------------
2000 2001 2000 2001
(As Restated) (As Restated)
----------- ----------- ------------- --------------
Revenue $ 25,638 24,975 $ 45,534 $ 50,411
----------- ----------- ------------- --------------
Operating costs and expenses:
Internet services 14,877 12,568 25,465 26,059
Selling, general and administrative 18,944 26,143 36,371 49,902
Goodwill impairment charge -- 47,992 -- 47,992
Depreciation and amortization 10,437 15,340 19,903 30,759
----------- ----------- ------------- --------------
Total operating costs and expenses 44,258 102,043 81,739 154,712
----------- ----------- ------------- --------------
Loss from operations (18,620) (77,068) (36,205) (104,301)
----------- ----------- ------------- --------------
Interest income, net 3,623 1,839 5,428 4,364
Other expense, net (114) (63) (353) (108)
Foreign currency losses (1,358) (2,497) (2,851) (8,042)
----------- ----------- ------------- --------------
Loss before income taxes and minority interest (16,469) (77,789) (33,981) (108,087)
Income tax expense (382) 201 (500) (131)
Minority interest in loss of consolidated subsidiaries 748 104 1,416 244
----------- ----------- ------------- --------------
Net loss attributable to common stockholders $ (16,103) $ (77,484) $ (33,065) $ (107,974)
=========== =========== ============= ==============
Basic and diluted loss per share attributable to common
stockholders $ (0.27) $ (1.27) $ (0.73) $ (1.78)
=========== =========== ============= ==============
Shares used in computing basic and diluted loss per share 59,636,544 60,812,900 45,324,270 60,812,045
=========== =========== ============= ==============
The accompanying notes are an integral part of these consolidated financial
statements.
4
VIA NET.WORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of U.S. dollars, except share and per share data)
(Unaudited)
_______
For the six months ended
June 30,
-------------------------
2000 2001
------------ -----------
(As Restated)
Cash flows from operating activities:
Net loss $ (33,065) $ (107,974)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 19,903 30,759
Goodwill impairment charge - 47,992
Employee stock compensation 2,938 1,480
Provision for doubtful accounts receivable 1,831 1,801
Unrealized foreign currency transaction (gains) losses 501 3,660
Minority interest in loss of consolidated subsidiaries (1,416) (244)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (7,185) (6,895)
Other current assets (1,320) (2,787)
Accounts payable 2,099 (4,293)
Other current liabilities and accrued expenses 2,967 3,511
Deferred revenue 3,413 652
Other noncurrent assets 286 (148)
------------ -----------
Net cash used in operating activities (9,048) (32,486)
------------ -----------
Cash flows from investing activities:
Acquisitions, net of cash acquired (31,329) (8,216)
Proceeds from the disposition of operating subsidiary 318
Purchases of property and equipment (10,537) (9,667)
Other assets 2,277 -
------------ -----------
Net cash used in investing activities (39,589) (17,565)
------------ -----------
Cash flows from financing activities:
Repayment of debt (3,072) (1,139)
Proceeds from issuance of common stock, net 331,642 47
Proceeds from borrowings 516 403
------------ -----------
Net cash provided by (used in) financing activities 329,086 (689)
------------ -----------
Effect of currency exchange rate changes on cash 653 (1,188)
------------ -----------
Net increase (decrease) in cash and cash equivalents 281,102 (51,928)
Cash and cash equivalents, beginning of period 20,067 237,839
------------ -----------
Cash and cash equivalents, end of period $ 301,169 $ 185,911
============ ===========
Noncash investing and financing transactions:
Common stock issued to satisfy debt $ 5,183 $ -
============ ===========
Common stock issued in connection with acquisitions $ 3,907 $ -
============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
5
VIA NET.WORKS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
1. Basis of Presentation and Restatement
These consolidated financial statements for the three and six month periods
ended June 30, 2000 and 2001 and the related footnote information are
unaudited and have been prepared on a basis substantially consistent with
the audited consolidated financial statements of VIA NET.WORKS, Inc. ("VIA"
or "the Company") as of and for the year ended December 31, 2000, included
in VIA's Annual Report on Form 10-K as filed with the Securities and
Exchange Commission (Annual Report). These financial statements should be
read in conjunction with the audited consolidated financial statements and
the related notes thereto included in the Annual Report. In the opinion of
management, the accompanying unaudited financial statements contain all
adjustments (consisting of normal recurring adjustments) which management
considers necessary to present fairly the consolidated financial position
of VIA at June 30, 2001 and the results of operations and cash flows for
the three and six month periods ended June 30, 2000 and 2001. The results
of operations for the three and six month periods ended June 30, 2001 may
not be indicative of the results expected for any succeeding quarter or for
the year ending December 31, 2001.
On August 9, 2001, the Company announced that it was revising our financial
statements for the year ended December 31, 2000 and for the first quarter
2001 to correct certain revenue recognition and cost accounting errors
arising at one of our acquired subsidiaries. During the course of a normal
review of aged accounts receivable at the subsidiary and a subsequent
detailed review, the Company, assisted by outside professionals identified
improper accounting relating to the recognition of certain revenue and
associated costs during this period. The revisions primarily address the
reversal of recorded revenue that was not adequately supported by fully
executed customer contracts and of costs that had not been incurred; other
errors addressed include revenue recognized before the provision of service
where revenue should have been spread over the contract period or
recognized upon completion, and revenue recognized when payment was in
bartered services and the value of those bartered services could not be
determined. The principal effects of the revisions as to each of the
affected periods was noted in our announcement of August 9, 2001, as filed
with the Securities and Exchange Commission ("SEC") on Form 8-K dated
August 10, 2001, see Note 9 to the consolidated financial statements. In
this Form 10-Q, references or comparisons to results in 2000 or the first
quarter of 2001 are to the restated results.
As a result of the revisions to our 2000 and first quarter 2001 financial
statements, we will be amending our SEC filings for those periods to
reflect the revisions to our results.
The Company acquired 32,000 shares of common stock in an exchange for the
exercise of employee stock options. This transaction was completed in the
second quarter 2001.
Recent Pronouncement
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. ("FAS") 141, "Business
Combinations" ("FAS 141") and FAS 142, "Goodwill and Other Intangible
Assets" ("FAS 142"). FAS 141 addresses the initial recognition and
measurement of goodwill and other intangible assets acquired in a business
combination. FAS 142 addresses the initial recognition and measurement of
intangible assets acquired outside of a business combination, whether
acquired individually or with a group of other assets, and the accounting
and reporting for goodwill and other intangibles subsequent to their
acquisition. These standards require all future business combinations to be
accounted for using the purchase method of accounting. Goodwill will no
longer be amortized but instead will be subject to impairment tests at
least annually.
The Company is required to adopt FAS 141 and FAS 142 on a prospective basis
as of January 1, 2002; however, certain provisions of these new standards
may also apply to any acquisitions concluded subsequent to June 30, 2001.
As a result of implementing these new standards, the Company will
discontinue the amortization of goodwill as of December 31, 2001.
2. Comprehensive Loss
Comprehensive loss for the three and six months ended June 30, 2000 and
2001 was as follows (in thousands of U.S. dollars):
Three months ended June 30, Six months ended June 30,
2000 2001 2000 2001
As Restated As Restated
----------- ----------- ----------- -----------
Net loss $ (16,103) $ (77,484) $ (33,065) $ (107,974)
Foreign currency translation adjustment (4,544) 617 (6,405) (3,454)
----------- ----------- ----------- -----------
Comprehensive loss $ (20,647) $ (76,867) $ (39,470) $ (111,428)
=========== =========== =========== ===========
3. Acquisitions of Certain Businesses
Beginning in June 1998 and continuing through October 2000, the Company
made a series of acquisitions of Internet services providers located in
Europe, Latin America and the U.S., each of which offered various Internet
services including Internet access, web hosting, ecommerce, Internet
security and other services, primarily to small and mid-sized businesses.
Each of the acquisitions has been accounted for using the purchase method
of accounting and, accordingly, the net assets and results of operations of
the acquired companies have been included in the Company's consolidated
financial statements since the acquisition dates. The purchase price of the
acquisitions was allocated to assets acquired, including intangible assets,
and liabilities assumed, based on their respective fair values at the
acquisition dates. Identifiable intangible assets as of the date of
acquisition primarily consist of a customer base, employee workforce and
the trade name. Because the Company's operating strategy following an
acquisition generally results in changing the existing target market from
residential subscribers to small and mid-sized businesses and a focus on
the VIA NET.WORKS brand name, the value allocated to the acquired customer
bases and trade names has not been significant. Likewise, due to the short
operating history of most of these acquired businesses, there is
uncertainty as to employee retention. As a result, a significant portion of
the purchase price has been allocated to goodwill.
Acquisitions
Since 1998, the Company completed 26 acquisitions for cash, notes and
common stock:
Number of Businesses Aggregate Purchase Assets Liabilities
-------------------- ------------------ ------ -----------
Acquired Price Acquired Assumed
-------- ----- -------- -------
(In thousands of U.S. dollars)
1998... 4 $ 39,217 $ 6,456 $ 7,148
1999... 13 $ 92,327 $15,867 $18,321
2000... 9 $ 75,715 $ 8,454 $ 6,356
--------------- ---------- ------- -------
6
VIA NET.WORKS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
Total... 26 $ 207,259 $30,777 $31,825
In connection with the acquisition of Net4You, we paid approximately
$195,000 to the minority shareholders of that company in the first quarter
of 2001. In connection with the acquisition of DNS, we are obligated to pay
off an acquisition related promissory note, for approximately $901,000, to
one of the former owners, which we anticipate paying in the third quarter
2001.
4. Property and Equipment
Property and equipment consisted of the following (in thousands of U.S.
dollars):
December 31, June 30,
2000 2001
----------------------------
Hardware and other equipment $ 23,615 $ 25,788
Network and data center assets 25,075 25,353
Software 7,595 10,775
Furniture and fixtures 2,999 3,396
------------ ------------
59,284 65,312
Accumulated depreciation and amortization (20,057) (25,119)
------------ ------------
Property and equipment, net $ 39,227 $ 40,193
===========================
Depreciation expense was $2.3 million and $3.2 million for the three months
ended June 30, 2000 and 2001, respectively. Total depreciation expense was
$4.4 million and $6.6 million for the six months ended June 30, 2000 and
2001, respectively. In the United Kingdom in the first quarter 2001,
approximately $1.6 million in managed assets that were previously held
under the network and data center asset category were reclassified as
hardware. This reclassification was made based on the determination that
assets held on the customer premises should be classified as hardware
rather than network assets. Certain network assets as of December 31, 2000
have been reclassified as hardware to reflect the current year
presentation.
5. Goodwill and Other Acquired Intangible Assets
Goodwill and other intangible assets acquired through business acquisitions
consisted of the following (in thousands of U.S. dollars):
7
VIA NET.WORKS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
December 31, June 30,
2000 2001
Goodwill $ 220,378 $ 221,961
Customer base 8,360 8,595
Employee workforce 3,760 3,760
Goodwill impairment charge - (47,992)
Accumulated amortization (51,416) (75,574)
---------- -----------
Total $ 181,082 $ 110,750
========== ===========
Total amortization expense was $8.1 million and $12.1 million for the three
months ended June 30, 2000 and 2001, respectively. Total amortization
expense was $15.5 million and $24.2 million for the six months ended June
30, 2000 and 2001, respectively. The value assigned to goodwill, customer
base and employee workforce is being amortized over its estimated useful
life of five years.
During the three months ended June 30, 2001, the Company determined that
the undiscounted cash flows associated with certain of its long-lived
assets would not be sufficient to recover the net book value of such
assets. In accordance with SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS
121"), the Company has recorded an impairment charge of approximately $48.0
million related to operations in Mexico, United States, Spain and Brazil.
The respective amounts for this charge were $31.1 million, $16.1 million,
$524,000 and $324,000. This impairment charge was taken to reflect the
operations in these countries at fair value. The estimates of the fair
values of the long-lived assets are based on a valuation of such assets
performed by management. The fair values, as required by SFAS 121, did not
consider the value of such assets in a forced sale or liquidation and were
based primarily on an analysis of the operations' revenue streams, based on
multiples derived from comparable market transactions.
6. Short-term Notes and Long-term Debt
Short-term notes and long-term debt consisted of the following (in
thousands of U.S. dollars):
------------ ------------
December 31, June 30,
2000 2001
------------ ------------
Acquisition debt $ 1,495 $ 901
Debt related to IRU Agreements, 12%, due quarterly to 2002 2,476 2,156
Capital lease obligations at interest rates ranging from 7.8% to 8.0%, due
monthly through 2004 866 453
Notes payable, due monthly through 2002 322 495
------------ ------------
5,159 4,005
Less current portion (3,265) (2,665)
------------ ------------
Long-term portion $ 1,894 $ 1,340
============ ============
The acquisition debt represents amounts due to current or former managers
of acquired businesses.
7. Contingencies
From time to time, VIA is subject to claims arising in the ordinary course
of business. In the opinion of management, no such matter, individually or
in the aggregate, exists which is expected to have a material effect on the
results of operations, cash flows or financial position of VIA.
8. Segment Reporting
The Company offers a variety of Internet access, web hosting, ecommerce,
Internet security and related services to businesses and consumers in
Europe, Latin America and the United States. As of June 30, 2001 the
Company served primary markets in 15 countries, with operations organized
into four geographic operating segments--North America, South America, the
United Kingdom (UK), Ireland and Southern Europe and Central and Western
Europe. These segments generate Internet-related revenues from leased
lines, dial-up Internet access, web hosting and design,
8
VIA NET.WORKS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
consulting services, and sale of third-party hardware and software.
Corporate expenses, which are not allocated to one of the operating
segments, are shown to reconcile to the total consolidated figures.
Beginning in the quarter ended September 30, 2000, VIA modified its
definition of total segment assets and beginning in the quarter ended
December 31, 2000, VIA reorganized its management reporting structure to
create four reportable segments rather than two. Prior amounts presented
for the quarter ended June 30, 2000 have been revised to conform to the
current presentation.
Each of these geographic operating segments is considered a reportable
segment. The Company evaluates the performance of its segments based on
revenue and earnings before interest, taxes, depreciation and amortization
and non-cash compensation charges ("EBITDA"). The table below presents
information about the reported revenue, EBITDA and assets of the Company's
segments for the three and six months ended June 30, 2000 and 2001, net of
intercompany revenue of $1.1 million, $2.1 million, $1.9 million and $3.6
million, respectively, which was eliminated upon consolidation.
Additionally, the assets presented in this table include intercompany
receivables and payables. This table is presented in thousands of U.S.
dollars.
UK, Ireland
-----------
and Central and
--- -----------
North South Southern Western
----- ----- -------- -------
Corporate America America Europe Europe Total
--------- ------- ------- ------ ------ -----
Three months ended June 30,
2000 (As Restated):
Revenue ........................ $ -- 3,233 1,517 12,471 8,417 25,638
EBITDA ......................... $ (3,853) (884) (1,516) 375 (945) (6,823)
Assets ......................... $ 339,286 36,563 11,196 63,909 52,195 503,149
Three months ended June 30, 2001:
Revenue ........................ $ -- 5,673 1,572 9,089 8,641 24,975
EBITDA ......................... $ (1,920) (549) (2,119) (3,381) (5,050) (13,019)
Assets ......................... $ 252,878 24,524 1,582 38,818 48,655 366,457
Six months ended June 30,
2000 (As Restated):
Revenue ........................ $ -- 5,619 2,941 21,940 15,034 45,534
EBITDA ......................... $ (7,740) (1,946) (2,431) 925 (2,172) (13,364)
Assets ......................... $ 339,286 36,563 11,196 63,909 52,195 503,149
Six months ended June 30, 2001:
Revenue ........................ $ -- 9,845 3,319 17,854 19,393 50,411
EBITDA ......................... $ (6,073) (1,808) (3,331) (5,008) (7,850) (24,070)
Assets ......................... $ 252,878 24,524 1,582 38,818 48,655 366,457
A reconciliation from total EBITDA to loss before income taxes and minority
interest is as follows (in thousands of U.S. dollars):
For the For the For the six For the six
three months three months months months
ended June ended June ended June ended June
30, 2000 30, 2001 30, 2000 30, 2001
(As Restated) (As Restated)
------------- ------------ ------------ -----------
EBITDA $ (6,823) $ (13,019) $ (13,364) $ (24,070)
Non-cash compensation (1,360) (717) (2,938) (1,480)
Goodwill impairment charge -- (47,992) -- (47,992)
Depreciation and amortization (10,437) (15,340) (19,903) (30,759)
------------- ------------ ------------- -----------
Loss from operations (18,620) (77,068) (36,205) (104,301)
Other income, interest expense and foreign
currency losses 2,151 (721) 2,224 (3,786)
------------- ------------ ------------- -----------
Loss before income taxes and minority interest $ (16,469) $ (77,789) $ (33,981) $ (108,087)
============= ============ ============= ===========
9. Restatement of Financial Statements
On August 9, 2001, the Company announced that it was revising its financial
statements for the year ended December 31, 2000 and for the first quarter
2001 to correct certain revenue and cost recognition issues arising at one
of the Company's acquired subsidiaries. During the course of a normal
review of aged accounts receivables at the subsidiary and a subsequent
detailed review, the Company, assisted by outside professionals, identified
improper accounting relating to the recognition of certain revenue and
associated costs during this period. The revisions primarily address the
reversal of recorded revenue that was not adequately supported by fully
executed customer contracts and of costs that had not been incurred; other
errors addressed include revenue recognized before the provision of service
where revenue should have been spread over the contract period or
recognized upon completion and revenue recognized when payment was in
bartered services and the value of those bartered services could not be
determined. The principal effects of the revisions as to each of the
affected periods were noted in the Company's announcement of August 9,
2001, as filed with the SEC on Form 8-K dated August 10, 2001. In this Form
10-Q, references or comparisons to results in 2000 or the first quarter of
2001 are to the restated results.
Three months ended June 30, 2000 Six months ended June 30, 2000
As Reported As Restated As Reported As Restated
----------- ----------- ----------- -----------
Statement of Operations Data:
Revenue
Access 15,767 15,603 28,333 27,912
Value added 9,502 9,322 16,094 16,048
Other 733 713 1,594 1,574
Total Revenue 26,002 25,638 46,021 45,534
Direct Costs 14,877 14,877 25,241 25,465
Loss from Operations (18,256) (18,620) (35,494) (36,205)
Net Income (Loss) (15,739) (16,103) (32,354) (33,065)
Net Income (Loss) per share $ (0.26) $ (0.27) $ (0.71) $ (0.73)
Year ended December 31, 2000
As Reported As Restated
----------- -----------
Balance Sheet Data
Accounts Receivable, net 20, 305 16,570
Other current liabilities and
accrued expenses 12,828 11,852
Accumulated other comprehensive
income (13,202) (13, 173)
Accumulated deficit (110,905) (113,693)
9
VIA NET.WORKS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
The three largest revenue producing countries for the three and six months
ended June 30, 2000, the United Kingdom, Germany and Mexico, generated
revenues in the amounts of $11.4 million, $3.6 million and $3.2 million,
and $19.7 million, $6.8 million and $5.6 million, respectively.
The three largest revenue producing countries for the three and six months
ended June 30, 2001, the United Kingdom, Mexico and Germany, generated
revenues in the amounts of $7.7 million, $4.7 million and $3.2 million, and
$15.1 million, $7.9 million and $7.2 million, respectively. Revenue from
our U.S. operating company, for the three and six months ended June 30,
2001 was $987,000 and $2.0 million, respectively.
10
Item. 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and related notes included in Item 1
of this Form 10-Q. This discussion contains forward-looking statements
based on current expectations, which involve risks and uncertainties.
Forward-looking statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans,"
"anticipates," "could," "believes," "estimates," "predicts," "potential" or
"continue" or the negative of these terms or similar words. Forward-looking
statements on this Form 10-Q include, but by way of example only,
statements regarding our expectations about the future reach and
configuration of our network, and the future amounts and relative
percentages as compared to total revenues of our value-added revenues and
our operating and service-related costs. Actual events or results may
differ materially. Information regarding the risks, uncertainties and other
factors that could cause actual results to differ from the results in these
forward-looking statements are discussed in the "Risk Factors" included on
this Form 10-Q as Exhibit 99.1, as well as those described in the "Risk
Factors" section of VIA's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission (Annual Report). You are urged to
carefully consider these factors, as well as other information contained in
this Form 10-Q and in our other periodic reports and documents filed with
the Securities and Exchange Commission.
Overview
VIA NET.WORKS is a leading international provider of Internet access and
value-added services focused on small and mid-sized businesses in Europe,
Latin America and the United States. We have built our business through the
acquisition, integration and growth of 26 Internet services providers in 15
countries, all of which have been acquired since June 1998. We currently
operate in Argentina, Austria, Belgium, Brazil, France, Germany, Ireland,
Italy, Mexico, the Netherlands, Portugal, Spain, Switzerland, the United
Kingdom and the United States. By targeting businesses in Europe and Latin
America, we have positioned VIA to capitalize on some of the most rapidly
growing areas of the Internet market. Our European and Latin American
markets have a relatively low number of total Internet users, and
businesses in each region have a relatively low number of Internet services
available to them. By choosing to serve these market segments, we have the
opportunity to sell our services to a large number of businesses that have
identifiable Internet needs but little or no Internet experience. Once we
have developed relationships with these customers, we seek to upgrade them
from entry-level Internet access services to more sophisticated and higher
margin solutions such as managed application hosting and virtual private
networking. In our U.S. market, we currently focus exclusively on
web-related services such as shared and dedicated web hosting, and domain
name registration, and Internet security services such as managed firewalls
and virtual private networks, or VPNs. Our U.S. operation allows us to meet
the U.S. web hosting and security needs of our large international customer
base.
Our goal is to become the premier provider of international Internet
solutions for businesses in Europe and Latin America. We intend to reach
our goal by
. delivering world-class service and technical support,
. meeting business customers' needs with our reliable international
network,
. providing Internet solutions that provide businesses more productive,
cost effective ways to communicate information and transact business,
. building the VIA NET.WORKS brand name,
. delivering quality customer service through continued investment in
billing, back-office and customer care systems,
. continuing investment in network infrastructure and product
development.
11
Our pan-European and trans-Atlantic network provides our European
operations with high capacity and resilient transport, as well as redundant
Internet Protocol peering and transit arrangements. Our network is
connected to the Internet by multiple peering arrangements at major
commercial Internet exchanges and through transit agreements from multiple
major carriers. Using these diverse connections, our network dynamically
routes traffic over the network of the provider best able to deliver the
data in the most efficient manner. Direct connections to multiple major
carriers and Internet exchanges assure reliable service levels, protecting
against traffic congestion and network outages. We have designed a
redundant network to avoid any single point of failure. Our U.S. and Latin
American operations are currently connected to the Internet by multiple
leased, high-speed links. We are in the process of connecting our U.S.
operations to our network and expect to expand our network and network
operations center infrastructure to Latin America as capacity becomes
commercially available.
We currently offer a comprehensive portfolio of single source Internet
solutions for business on both an integrated and stand-alone basis. Our
solutions are packaged to address the needs of businesses that have
immediate needs for a web presence or for specific Internet capabilities.
Our solutions are also packaged to address more sophisticated Internet
requirements. For businesses new to the Internet, our "Starter Solutions"
provide a simple way to establish an online presence quickly and easily.
These solutions consist of pre-packaged Internet tools that can be
purchased individually or in a bundled solution, including Internet access,
email, web-site hosting and domain registration. For customers ready to
take advantage of more sophisticated Internet capabilities, our "Tailored
Solutions" combine the basic starter Internet services with advanced
Internet solutions. These customized solutions provide a comprehensive
array of Internet services which we integrate, manage and update for our
customers on an ongoing basis. Our tailored solutions include advanced
connectivity services which can address multiple-site, multiple-use and
mobile user business applications, advanced hosting services which combine
basic web hosting with more sophisticated applications such as intranets,
extranets, exchanges, and business productivity capabilities and security
services which provide extensive network security solutions to businesses
of all sizes. Many of our customers do not have the internal resources or
personnel to design or maintain Internet functions. As businesses rely more
on the Internet for important business applications, they are increasing
their outsourcing of information technology applications. To meet this
need, we offer onsite, professional services to customers. Our local
operations offer a broad range of professional services to their customers,
including network and system design, web design, web-site development and
maintenance, VPN and Internet security design and implementation, and other
Internet-related services.
The following table summarizes our operations in Europe, Latin America and
the United States by geographic operating segment, country, operating
company and revenue contribution. VIA operates in 14 countries organized
into four geographic operating regions:
. Central and Western Europe
. United Kingdom, Ireland and Southern Europe
. South America
. North America
12
Percentages of Percentages of
-------------- --------------
Total Revenue Total Revenue
------------- -------------
for the Three for the Six Months
------------- ------------------
Months Ended Ended
------------ -----
June 30, 2001 June 30, 2001
------------- -------------
Operating Company
------------------------------------------------
Country of Operation
----------------------
Central and Western Europe:
Austria Net4You..................................................... 1% 1%
France Artinternet................................................. 2% 2%
DNS......................................................... 6% 8%
MNET........................................................ 1% 1%
Germany VIA NET.WORKS Deutschland (formerly GTN).................... 7% 8%
Highspeed-Server Eisnet..................................... 1% 1%
INS......................................................... 2% 2%
ISAR........................................................ 3% 3%
The Netherlands bART........................................................ 4% 4%
IAE......................................................... 3% 3%
Switzerland VIA NET.WORKS (Schweiz) (formerly Smartcomp and M&CNET) .... 3% 4%
United Kingdom, Ireland and Southern Europe:
United Kingdom VIA NET.WORKS UK............................................ 31% 30%
(formerly i-way, U-Net, WWS and Netlink)....................
Ireland VIA NET.WORKS Ireland (formerly MediaNet)................... 1% 1%
Italy VIA NET.WORKS Italia (formerly Meridian Microtech).......... 2% 1%
Portugal VIA NET.WORKS Portugal...................................... 2% 3%
Spain VIA NET.WORKS Spain......................................... 2% 2%
South America:
Argentina VIA NET.WORKS Argentina..................................... 2% 2%
ServiceNet.................................................. less than 1% less than 1%
Brazil VIA NET.WORKS Brasil (formerly Dialdata).................... 4% 4%
North America:
Mexico VIA NET.WORKS Mexico (formerly InfoAcces)................... 19% 16%
United States VIA NET.WORKS USA (formerly IMC Online)..................... 4% 4%
RESULTS OF OPERATIONS
Three and six months ended June 30, 2001 compared with the three and six
months ended June 30, 2000 (As Restated)
Revenue
Three months ended Six months ended
June 30, June 30, % Increase/ June 30, June 30, % Increase/
2000 2001 (Decrease) 2000 2001 (Decrease)
-----------------------------------------------------------------------------------------
(in thousands of U.S. dollars) (in thousands of dollars)
Residential Access 2,028 1,554 (23%) 3,995 3,378 (15%)
% of Total Revenue 8% 6% 9% 7%
Business Access 13,574 10,404 (23%) 23,916 21,579 (10%)
% of Total Revenue 53% 42% 53% 43%
Value Added Services 10,036 13,017 30% 17,623 25,454 44%
% of Total Revenue 39% 52% 38% 50%
Total Revenue 25,638 24,975 45,534 50,411
13
We generate revenue from the sale of Internet access services and Internet
value-added services. Revenue from Internet access services, both dial-up
and dedicated, derives primarily from subscriptions purchased by businesses
and consumers. Additionally, in some countries we receive revenue in the
form of payments from the telecommunications companies that our customers
use to access our services. All of our access revenues are recognized as
they are earned over the period the services are provided. Revenue from
Internet value-added services comes from web hosting, applications hosting
and related maintenance, domain name registration, Internet security
services, sales of hardware and third-party software, network installation,
training and consulting and other services. Services such as web and
applications hosting and domain name registration are generally sold on a
subscription basis and are paid for in advance or by monthly direct charges
to credit or debit accounts. These revenues are recognized over the period
in which the services are provided. Revenue from hardware and third-party
software sales, installation, training and consulting, and other services
is on a contract basis. Revenue from installation, training and consulting
is recognized over the contract term as the related services are provided.
Revenue from hardware and third-party software sales is recognized upon
delivery or installation of the products, depending on the terms of the
arrangement, and when the fee is fixed or determinable and collectibility
is considered probable.
Revenue for the three months ended June 30, 2001 decreased 3% to $25.0
million as compared to $25.6 million for the three months ended June 30,
2000. Revenue for the six months ended June 30, 2001 increased 11% to $50.4
million as compared to $45.5 million for the six months ended June 30,
2000. Our second quarter 2001 revenue was favorably impacted by the
acquisition of 5 operations that occurred between July 1, 2000 and
December 31, 2000. Residential access revenue declined by 23% in the second
quarter 2001, as compared to the same period in 2000, reflecting the
continuing run-off of low margin residential customers. Business access
revenue decreased 23% for the three months ended June 30, 2001 as compared
to the three months ended June 30, 2000. VIA obtained its wholesale and
residential customer bases as part of our original acquisitions. We do not
generally market to wholesale and residential customers in any of our
operations and hence we expect these revenues to continue to run off.
Value-added services, which include web-hosting, web-design, domain name
registration, data networking, managed bandwidth and bundled service
offerings increased by 30% for the second quarter of 2001, as compared to
the same period in 2000.
Internet services operating costs
Three months ended Six months ended
June 30, June 30, % Increase/ June 30, June 30, % Increase/
2000 2001 (Decrease) 2000 2001 (Decrease)
---------------------------------------------------------------------------------------
(in thousands of U.S. dollars) (in thousands of U.S. dollars)
Internet services 14,877 12,568 (16%) 25,465 26,059 2%
operating costs
% of Total Revenue 58% 50% 56% 52%
Our Internet services operating costs are the costs we incur to carry
customer traffic to and over the Internet. We lease lines that connect our
points of presence, or PoPs, either to our own network or to other network
providers. We pay other network providers for transit, which allows us to
transmit our customers' information to or from the Internet over their
networks. We also pay other recurring telecommunications costs and
personnel costs, including the cost of the local telephone lines used by
customers to reach our PoPs and access our services, and costs related to
customer support and care. We expect that our Internet services operating
costs will increase by a percentage of any revenue growth. We
anticipate that these costs will decline as a percentage of revenue,
however, as we increase the percentage of higher margin value added
services in our revenue mix, expand our owned network facilities and as
competition drives the overall price of network capacity downward.
Our Internet services operating costs were $12.6 million for the three
months ended June 30, 2001. We had $14.9 million of Internet services
operating costs for the three months ended June 30, 2000. This decrease was
due in part to a one-time credit to leased line costs in one of our
markets.
14
Internet services operating costs for the six months ended June 30, 2001
increased by 2% to $26.1 million as compared to $25.5 million for the six
months ended June 30, 2000. We incurred these costs primarily to lease
lines, purchase transit for the local networks and compensate customer care
personnel. Additionally, we incurred operating costs associated with our
international network that we established in June 1999.
Selling, general and administrative
Three months ended Six months ended
June 30, June 30, % Increase/ June 30, June 30, % Increase/
2000 2001 (Decrease) 2000 2001 (Decrease)
----------------------------------------------------------------------------------------
(in thousands of U.S. dollars) (in thousands of U.S. dollars)
Selling, general &
administrative costs 18,944 26,143 38% 36,371 49,902 37%
% of Total Revenue 74% 105% 80% 99%
Our largest selling, general and administrative expenses are compensation
costs and the costs associated with marketing our products and services.
Compensation costs include salaries and related benefits, commissions and
bonuses. In many of our markets, we are required to make significant
mandatory payments for government-sponsored social welfare programs, and we
have little control over these costs. Our marketing expenses include the
costs of direct mail and other mass marketing programs, advertising,
customer communications, trade show participation, web site management and
other promotional costs. Other selling, general and administrative expenses
include the costs of travel, rent, utilities, insurance and professional
fees. We expect that our selling, general and administrative expenses will
increase to support our growth, but decrease over time as a percent of
revenue.
We incurred selling, general and administrative expenses of $26.1 million
for the three months ended June 30, 2001, a 38% increase over the $18.9
million we incurred for the three months ended June 30, 2000. Selling,
general and administrative expenses increased by 37% to $49.9 million for
for the six months ended June 30, 2001, as compared to the $36.4 million
for the corresponding period in the preceding year. Bad debt expense for
the six months ended June 30, 2000 and 2001, was $806,000 and $1.8 million,
respectively. Of the $26.1 million in costs in the second quarter 2001,
$2.6 million, or 10%, of the costs were incurred by our corporate and
regional organizations and $23.5 million, or 90%, of the expenses were
incurred by our 25 subsidiaries. Beginning in the second quarter of 2001
the Company allocated corporate and regional expenses to the local
subsidiaries based upon revenue and other financial metrics. As a result,
corporate and regional expenses decreased, down 49% from the second
quarter of 2000, and costs at the operating subsidiaries increased 52%
from the second quarter of 2000. The increase in costs is also partly
attributable to planned increases in sales staffing and training in
support of our organic growth and costs associated with the Company's
integration activities in the second quarter 2001. Additionally,
$2.6 million or 36% of the increase in costs at the operating subsidiaries
was due to the 5 consolidated operations acquired between July 1, 2000 and
December 31, 2000.
Depreciation, amortization and goodwill impairment
Three months ended Six months ended
June 30, June 30, % Increase/ June 30, June 30, % Increase/
2000 2001 (Decrease) 2000 2001 (Decrease)
----------------------------------------------------------------------------------------
(in thousands of U.S. dollars) (in thousands of U.S. dollars)
Depreciation and
amortization 10,437 15,340 47% 19,903 30,759 55%
% of Total Revenue 41% 61% 44% 61%
Goodwill Impairment - 47,992 100% - 47,992 100%
% of Total Revenue 0% 192% 0% 95%
The largest component of our depreciation and amortization expense is the
amortization of the goodwill arising from our acquisitions. Goodwill, which
we amortize over five years, is created when the price at which we acquire
a company exceeds the fair value of its net tangible and intangible assets.
We also recognize depreciation expense primarily related to
telecommunications equipment, computers and network infrastructure. We
depreciate these assets over their useful lives, generally ranging from
three to five years. Our network infrastructure is depreciated over 20 or
25 years, depending on the contract term. The cost of network
infrastructure purchased under indefeasible right
15
of use agreements (IRU) is being amortized over the lesser of the estimated
useful life or term of the agreement, generally 20 to 25 years. We expect
depreciation expense to increase as we expand our network supporting
infrastructures.
Our depreciation and amortization expense was $15.3 million for the three
months ended June 30, 2001, up from $10.4 million for the three months
ended June 30, 2000. We incurred depreciation and amortization expense of
$30.8 million for the six months ended June 30, 2001, up from $19.9 million
for the six months ended June 30, 2000. For the three months ended June 30,
2001, $12.1 million, or 79%, of our depreciation and amortization expense
was related to the amortization of acquisition goodwill and $3.2 million,
or 21% was related to the depreciation of fixed assets. For the same period
in 2000, $8.1 million, or 77%, of our depreciation and amortization
expense was related to the amortization of acquisition goodwill and $2.3
million, or 23% was related to the depreciation of fixed assets. For the
six months ended June 30, 2001, $24.2 million, or 79%, of our depreciation
and amortization expense was related to the amortization of acquisition
goodwill and $6.6 million, or 21% was related to the depreciation of fixed
assets. For the six months ended June 30, 2000, $15.5 million, or 78%, of
the total depreciation and amortization expense related to the amortization
of goodwill and $4.4 million, or 22% of the total was related to the
depreciation of fixed assets.
In the second quarter of 2001, the Company wrote down the value of the
acquired goodwill by $48.0 million. This one time adjustment relates to
goodwill impairments for operations in the North American; UK, Ireland
and Southern Europe and South American regions. The impairment charge for
these regions was $41.1 million, $524,000 and $324,000, respectively.
Interest income, net
Three months ended Six months ended
June 30, June 30, % Increase/ June 30, June 30, % Increase/
2000 2001 (Decrease) 2000 2001 (Decrease)
----------------------------------------------------------------------------------------
(in thousands of U.S. dollars) (in thousands of U.S. dollars)
Interest income 3,623 1,839 (49%) 5,428 4,364 (20%)
% of Total Revenue 14% 7% 12% 9%
For the three months ended June 30, 2001, we earned $2.1 million in
interest income, a 48% decrease over the $4.0 million we earned for the
three months ended June 30, 2000. We earned $4.6 million in interest income
for the six months ended June 30, 2001, down from $6.0 million for the six
months ended June 30, 2000. Interest income in both periods was generated
from investing funds received from our initial public offering in February
2000, until those funds are used for acquisitions, operating expenses or
capital expenditures. Net proceeds from the public offering were $333.0
million. We also incurred $211,000 of interest expense for the three months
ended June 30, 2001, as compared to $380,000 of interest expense incurred
in the same period in 2000. Interest expense for the six months ended June
30, 2001 and 2000 was $242,000 and $586,000, respectively. Interest
expense relates to the debt agreements arising from the notes payable to
the former owners of businesses acquired and lease financing of equipment
in our operating subsidiaries.
Foreign currency losses
Three months ended Six months ended
June 30, June 30, % Increase/ June 30, June 30, % Increase/
2000 2001 (Decrease) 2000 2001 (Decrease)
----------------------------------------------------------------------------------------
(in thousands of U.S. dollars) (in thousands of U.S. dollars)
Foreign currency losses 1,358 2,497 84% 2,851 8,042 182%
% of Total Revenue 5% 10% 6% 16%
We recognized a $2.5 million foreign currency loss for the three months
ended June 30, 2001, as compared to a $1.4 million foreign currency loss
for the same period in the prior year. Our foreign currency loss was $8.0
million for the six months ended June 30, 2001, as compared to a loss of
$2.9 million for the six months ended June 30, 2000. The loss in both
periods was primarily due to the impact of the fluctuation in the value of
the Euro on our Euro denominated cash accounts, which were established to
hold part of the proceeds of our initial public offering in February 2000.
The remainder of the loss was contributed by fluctuations in the five other
non-Euro-linked currencies in which we hold assets.
16
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through the sale
of equity securities. We raised approximately $181.0 million, in the
aggregate, through three private preferred stock offerings between August
1997 and April 1999. Through our initial public offering of common stock in
February 2000, we raised approximately $333.0 million, net of underwriting
discounts and commissions. At June 30, 2001, we had cash and cash
equivalents of $185.9 million.
Cash used in operating activities was $32.7 million for the six months
ended June 30, 2001 and $9.0 million for the six months ended June 30,
2000. Cash flows from operating activities can vary significantly from
period to period depending on the timing of operating cash receipts and
payments and other working capital changes, especially accounts receivable,
other current assets, accounts payable, accrued expenses and other current
liabilities. In both periods, our net losses were the primary component of
cash used in operating activities, offset by significant non-cash
depreciation and amortization, non-cash stock compensation charges and
unrealized foreign currency transaction gains and losses.
Cash used in investing activities was $17.6 million for the six months
ended June 30, 2001 and $39.6 million for the same period in 2000. In 2001
we used cash to increase our investment in one partially owned operation
and to pay two contingent earn-out payments in connection with two
companies acquired in 2000. In the first six months of 2000, cash was
primarily used for the acquisitions of DNS, Net4You, IAE and ISAR and for
the increase in investments in various partially owned subsidiaries.
Cash used by financing activities was $689,000 for the six months ended
June 30, 2001. In the same period in 2000, cash provided by financing
activities was $329.1 million. In the second quarter 2001, cash was used
primarily to repay debt. In the corresponding period in 2000, cash was
primarily generated by the initial public offering of our common stock in
February 2000.
We continue to pursue an aggressive internal growth strategy, and we will
continue to consider strategic acquisitions on an opportunistic basis.
Except for the potential need to fund a specific larger acquisition, should
such an opportunity arise, we do not anticipate the need to obtain
additional funding before we become self-sustaining.
As a result of our acquisitions, we will continue to amortize substantial
amounts of goodwill and other intangible assets. As we grow, we expect that
the amount of goodwill and other intangibles we will amortize in connection
with our investments will represent an increasingly smaller portion of our
expenses. Therefore, we expect to continue to incur net losses until that
point in time when the goodwill and other intangibles we amortize
represents a sufficiently small amount of our expenses that it is exceeded
by our net income before amortization.
On a periodic basis, management reviews the carrying value of the Company's
investment in its operations to determine if an event has occurred, with
respect to any operation, which could result in an impairment of long-term
assets, primarily goodwill. In its review, management considers market and
competitive factors, operating and financial trends and the business
outlook for each operation. As of June 30, 2001, management concluded that
an impairment of goodwill and other acquired intangible assets had
occurred. As a result, $48.0 million of goodwill was written off as of June
30, 2001, related to our North American; UK, Ireland and South Europe; and
South American regions. The goodwill inpairment for these regions was $47.1
million, $524,000 and $324,000, respectively. Future changes in operating
results or business outlook could result in a change in management's
conclusions with respect to the recoverability of its long-term assets in
these and other locations.
The foregoing statements regarding our liquidity and need for additional
capital resources, as well as our expectations of future amortization of
goodwill and other intangibles, are forward-looking statements based on
current expectations, which involve certain risks and uncertainties. Actual
results and the timing of certain events could differ materially from these
forward-looking statements
17
depending upon the nature, size and timing of future acquisitions, if any,
and future amounts of net income before amortization, which we cannot
predict, as well as other factors discussed in the "Risk Factors" included
on this Form 10-Q as Exhibit 99.1, as well as those described in the "Risk
Factors" section of VIA's Annual Report.
Foreign Currency Exchange Risks
We conduct business in 15 different currencies, including the Euro and the
U.S. dollar. With the exception of the Argentine Peso, the value of these
currencies fluctuates in relation to the U.S. dollar. At the end of each
reporting period, the revenues and expenses of our operating companies are
translated into U.S. dollars using the average exchange rate for that
period, and their assets and liabilities are translated into U.S. dollars
using the exchange rate in effect at the end of that period. Fluctuations
in these exchange rates impact our financial condition, revenues and
results of operations, as reported in U.S. dollars.
Exchange rates can vary significantly. During the six month period ended
June 30, 2001, we experienced similar exchange rate fluctuations in all
eight of the Euro-linked currencies in which we transact business. The
Euro-linked currencies varied by approximately 8% in relation to the U.S.
dollar during the second quarter of 2001, and at June 30, 2001 were
approximately 10% below where they were at the beginning of the year. We
recognized foreign currency losses of $2.5 million and $8.0 for the three
and six month periods ended June 30, 2001, respectively, due to the impact
of the fluctuation in the value of the Euro on our Euro denominated cash
accounts. Future changes in the value of the Euro could have a material
impact on our financial position and results of operations. We also
experienced fluctuations in other exchange rates but they did not have a
material impact on our results.
Our local operations transact business in their local currencies. They do
not have significant assets, liabilities or other accounts denominated in
currencies other than their local currency, and therefore are not subject
to exchange rate risk with respect to their normal operations. On a
consolidated basis, we are subject to exchange rate risks because we
translate our local operations' financial data into U.S. dollars.
Conversion to the Euro
On January 1, 1999, 11 of the 15 European Union member countries adopted
the Euro as their common legal currency, at which time their respective
individual currencies became fixed at a rate of exchange to the Euro, and
the Euro became a currency in its own right. Presently, the following 11
currencies are subject to the Euro conversion: the Austrian Schilling, the
Belgian Franc, the Dutch Guilder, the Finnish Markka, the French Franc, the
German Mark, the Irish Punt, the Italian Lire, the Luxembourg Franc, the
Portuguese Escudo and the Spanish Peseta.
During a January 1, 1999 through January 1, 2002 transition period, the
Euro will exist in electronic form only and the participating countries'
individual currencies will continue in tangible form as legal tender in
fixed denominations of the Euro. During the transition period, we must
manage transactions with our customers and our third-party vendors in both
the Euro and the participating countries' respective individual currencies.
We have purchased and specified our business support systems, including
accounting and billing, to accommodate Euro transactions and dual currency
operations during the transition period. In addition, we generally require
all vendors supplying third-party software to us to warrant that their
software will be Euro compliant. Because our acquired European companies
generally have short operating histories, most of their systems were
acquired and implemented after the Euro was already contemplated.
Consequently, any expenditure related to Euro compliance has largely been,
and will be, in the normal course of business.
We conduct business transactions with customers, network suppliers, banks
and other businesses, and we will be exposed to Euro conversion problems in
these third-party systems. During the transition period, to the extent we
are supplying local service, we can continue billings and collections in
the
18
individual currencies to avoid Euro conversion problems. However, to the
extent we have cross-border transactions in European Union countries, we
will be exposed to Euro-related risks. The establishment of the European
Monetary Union may have a significant effect on the economies of the
participant countries. While we believe that the introduction of the Euro
will eliminate exchange rate risks in respect of the currencies of those
member states that have adopted the Euro, there can be no assurance
as to the relative strength of the Euro against other currencies. Because a
substantial portion of our net sales will be denominated in the Euro or
currencies of European Union countries, we will be exposed to that risk.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following discussion relates to our exposure to market risk, related to
changes in interest rates and changes in foreign exchange rates. This
discussion contains forward-looking statements that are subject to risks
and uncertainties. Actual results could differ materially due to a number
of factors, as set forth in the "Risk Factors" included as Exhibit 99.1 on
this Form 10-Q and included in the "Risk Factors" section of VIA's Annual
Report on Form 10-K for the year ended December 31, 2000.
VIA has exposure to financial market risks, including changes in interest
rates and foreign exchange rates. At June 30, 2001, VIA's financial
instruments consisted of short-term investments and fixed rate debt related
to acquisitions and network purchases. Our investments are generally fixed
rate short-term investment grade and government securities denominated in
U.S. dollars. At June 30, 2001 all of our investments are due to mature
within twelve months and the carrying value of such investments
approximates fair value. The majority of our debt obligations have fixed
rates of interest.
As mentioned previously in the "Foreign Currency Exchange Risks" section,
VIA has Euro denominated cash accounts, which expose the company to foreign
currency exchange rate risk. As of June 30, 2001, a 10 percent increase or
decrease in the level of the Euro exchange rate against the U.S. dollar
with all other variables held constant would result in a realized gain or
loss of $3.5 million. Additionally, VIA is exposed to foreign exchange rate
risk related to its obligations denominated in foreign currencies. These
obligations are a result of acquiring operating companies in various
European and Latin American countries. VIA is also subject to risk from
changes in foreign exchange rates for its international operations that use
a foreign currency as their functional currency and are translated into
U.S. dollars. These risks cannot be reduced through hedging arrangements.
PART II.
Item 1. Legal Proceedings
We are not a party to any material legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
None.
Use of Initial Public Offering Proceeds
On February 16, 2000, VIA completed its initial public offering of shares
of common stock, par value $.001 per share. VIA's initial public offering was
made pursuant to a prospectus dated February 11, 2000, which was filed with the
SEC as part of a registration statement, file no. 333-91615, that was declared
effective by the SEC on February 10, 2000.
The estimated net offering proceeds to VIA after deducting the estimated
expenses and underwriting discounts and commissions was approximately $333.0
million. From the effective date of the initial public offering through June 30,
2001, VIA has used $86.9 million for acquisitions of other businesses, including
the repayment of debt for 1999 acquisitions and increases in VIA's investment in
various partially owned
19
subsidiaries, $30.0 million for capital expenditures and approximately $46.2
million to fund operating losses.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders
On May 23, 2001 we held our Annual Meeting of Shareholders at the Hyatt Regency
located at the Reston Town Center, in Reston, Virginia at 8:30 a.m.. At the
annual meeting, shareholders considered and approved the election of Class I
Director members of the board of directors, by the number of votes indicated
below:
DIRECTOR VOTES FOR WITHHELD
Stephen J. Eley.................... 43,635,313 517,704
William A. Johnston................ 42,557,098 1,595,919
Mark J. Masiello................... 43,683,387 469,630
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibits
- --------
Exhibit 99.1 Risk Factors
b) Reports on Form 8-K
VIA filed a report on Form 8-K on June 6, 2001 to announce
VIA NET.WORKS' stock repurchase plan. VIA filed no other reports on
Form 8-K during the three months ended June 30, 2001.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, VIA
NET.WORKS, Inc. has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized
VIA NET.WORKS, Inc.
Date: August 14, 2001 By: /s/ DAVID M. D'OTTAVIO
---------------------------------
David M. D'Ottavio
Chief Executive Officer, Chairman
of the Board of Directors (Duly Authorized
Officer)
Date: August 14, 2001 By: /s/ CATHERINE A. GRAHAM
----------------------------------
Catherine A. Graham
Vice President, Chief Financial Officer and
Treasurer (Principal Financial and Accounting
Officer)
21
EXHIBIT INDEX
99.1 Risk Factors
22
Exhibit 99.1
Risk Factors
------------
Statements in this Form 10-Q that are not historical facts are "forward-looking
statements" (as defined in the Private Securities Litigation Reform Act of
1995). These statements include but are not limited to those relating to
projections regarding future network configuration and scope, revenues and
revenue growth, costs (direct and operating costs), earnings per share, EBITDA,
specific product and service sales and capital expenditures. These statements,
when made, are intended to reflect VIA management's then current views with
respect to future events and expectations and are subject to a number of risks,
assumptions and uncertainties which could cause our actual results to differ
materially from those projected in such statements.
Discussion of Risk Factors, Assumptions and Uncertainties
Risks Related to our Business
Our combined operating history is limited and may not be indicative of our
future performance.
Although a number of the operating companies we have acquired have been in
operation for some time, VIA, as a combined operation, has a limited history of
operations. Our limited history makes it more difficult to recognize operational
or financial trends and indicators that might otherwise allow us to predict
future financial performance with a higher degree of comfort.
Because we have grown rapidly and we expect our growth to continue, we may have
difficulty managing our growth effectively, which could adversely affect the
quality of our services and the results of our operations.
We have grown rapidly through acquisitions and focusing on our core market
of small and medium-size businesses. From June 1998 through December 2000, we
acquired 26 companies and increased the total number of our employees from five
to almost 1300. We expect to continue our growth by focusing sales efforts on
value-added services to our core market and continuing to develop our base of
larger corporate customers. To manage our expected growth effectively, we must
. implement additional management information systems
. develop additional operating, administrative, financial and accounting
systems and controls
. hire and train additional personnel
. expand the reach of our network and increase our Internet points of
presence
If we are unable to meet these demands, the quality of our services may
suffer, causing us to lose customers and revenues.
Our efforts to reduce our lower margin residential and wholesale customer base
may reduce our revenues in the short or intermediate term faster than we can
generate higher margin business and value-added services revenues
We have focused our sales and product development efforts on selling higher
margin products and pursuing greater market share of the business market for
Internet and Internet-related services. In doing so, we have allowed our legacy
residential and wholesale customer base to run off and, in certain markets, have
pursued or considered the sale of such customer accounts. We may not be able to
acquire business
23
customer revenues as quickly as our residential customer or wholesale revenues
diminish, which could adversely affect our operating results.
If we fail to integrate operating and information systems, networks and
management of our acquired companies successfully, we may suffer operating
inefficiencies and reduced operating cash flow.
We may not be able to integrate our acquired companies to the extent that
we have assumed because we currently operate in 14 different countries with
different governmental regulations, languages, customs, currencies and
availability of telecommunication capacity to carry data. Any material failure
to integrate systems, networks or management of these operations may have a
significant negative impact on the assumptions we make or have made with respect
to cost reductions, sales and marketing opportunities as well as our ability to
adequately serve and bill our customers. In addition, we have and will continue
to commit substantial management, operating, financial and other resources to
integrate our operating companies and implement our business model, which will
continue to reduce our operating cash flow.
Our integration efforts may lead to the loss of key staff and a distraction from
revenue-generating opportunities, which may lead to lower than expected
operating results
We have acquired multiple operations in the United Kingdom, France,
Germany, The Netherlands and Switzerland. In each of these countries, we are in
various stages of integrating legally, financially and operationally the
separate companies acquired in that country into a single operation. These
efforts may create operational and personnel disruptions that may lead to the
loss of key personnel or require that we increase salaries or fringe benefits to
retain staff. In addition, integration activities require significant attention
from key management and staff at these operations, which may distract management
and staff from revenue-generating opportunities and negatively affect our
results.
Financial information on which we have relied to make acquisitions may not have
been accurate, which may result in our acquiring undisclosed liabilities or
experiencing lower than expected operating results.
The companies we have acquired typically have not had audited financial
statements and historically have varying degrees of internal controls and
detailed financial information. As a result, we may have acquired undisclosed
liabilities or experience lower-than-expected revenues or higher-than-expected
costs for those companies that we have acquired recently, which could adversely
affect our future operating results. To date, no issues of this kind have arisen
that have materially adversely affected our results; however, they may arise in
the future.
Fluctuations in the exchange rate between the U.S. dollar and the various
currencies in which we conduct business may affect our operating results.
We record the revenues and expenses of our local operations in their home
currencies and translate these amounts into U.S. dollars for purposes of
reporting our consolidated results. As a result, fluctuations in foreign
currency exchange rates may adversely affect our revenues, expenses and results
of operations as well as the value of our assets and liabilities. Fluctuations
may adversely affect the comparability of period-to-period results. For example,
the average value of the Euro ((euro)) decreased by 5.4% in relation to the U.S
dollar during the quarterly period ending June 30, 2001 but increased by 6.2% in
relation to the U.S. dollar during the quarterly period ended March 31, 2001.
Because each Euro converted to fewer U.S dollars during the quarterly period
ended June 30, 2001, we reported lower revenue growth than what would be
calculated in local currencies for the second quarter of 2001, and since each
Euro converted into more U.S. dollars during the quarterly period ended March
31, 2001, we reported higher revenue growth than what would be calculated in
local currencies for the first quarter of 2001. In addition, we hold foreign
currency balances that will create foreign exchange gains or losses, depending
upon the relative values of the foreign currency at the beginning and end of the
reporting period, affecting our net income and earnings per share. For example,
the decrease in the value of the Euro from the beginning to the end of our
second quarter of 2001 resulted in a $2.5 million foreign exchange loss and a
reduction in
24
earnings per share of $0.04, and the decrease in value of the Euro from the
beginning to the end of the first quarter of 2001 resulted in a $5.5 million
foreign exchange loss and a decrease in earnings per share of $.09. In
projecting future operating results, we make certain assumptions about the
fluctuation of the home currencies of our operations. If these assumptions turn
out to be materially inaccurate, our actual operating results may be materially
different from our projections.
Logistical problems or economic downturns that could result from the
introduction of the Euro may affect our ability to operate and adversely impact
our operating results.
On January 1, 1999, 11 of the 15 European Union member countries adopted
the Euro as their common legal currency, at which time their respective
individual currencies became fixed at a rate of exchange to the Euro, and the
Euro became a currency in its own right. During a January 1, 1999 to January 1,
2002 transition period, we must manage transactions with our customers and our
third-party vendors who conduct business in Euro participating countries in both
the Euro and the individual currencies. If VIA, its customers or vendors,
experience systems problems in converting to the Euro, VIA may be unable to bill
and collect from customers or pay vendors for services, and our operating
results could be materially adversely affected. To date, we have not experienced
any material problems in this conversion effort.
Our brand names are difficult to protect and may infringe on the intellectual
property rights of third parties.
We are aware of other companies using or claiming to have rights to use
trademarks that are similar to our marks and variations of those marks,
including the VIA NET.WORKS mark. We have received several demands from third
parties to cease and desist using one or more of our trademarks. The users of
these or similar marks may be found to have senior rights if they were ever to
assert a claim against us for trademark infringement. If an infringement suit
were instituted against us, even if groundless, it could result in substantial
litigation expenses in defending the suit. If such a suit were to be successful,
we could be forced to cease using the mark and to pay damages. Moreover, if we
are forced to stop using any of our trademarks, we may have to expend
significant resources to establish new brands and our operating results may be
materially impacted.
Reaction by customers, investors or regulators to the restatement of our 2000
and first quarter 2001 financial results may adversely impact our revenues and
expenses.
On August 9, 2001, we announced the restatement of our financial results
for 2000 and for the first quarter of 2001. As a result of the restatement, we
may be subject to adverse customer reaction, which may make it more difficult to
attract and retain customers and lead to loss of revenues. Adverse investor
reaction and inquiries by regulators may divert management's attention from core
business needs or strategic opportunities, reduce revenue opportunities or
increase costs.
Risks Related to our Industry
Regulatory and economic conditions of the countries where our operating
companies are located are uncertain and may decrease demand for our services,
increase our cost of doing business or otherwise reduce our business prospects.
Our operating companies are located in countries with rapidly changing
regulatory and economic conditions that may affect the Internet services
industry. Any new law or regulation pertaining to the Internet or
telecommunications, or the application or interpretation of existing laws, could
decrease demand for our services, increase our costs, or otherwise reduce our
profitability or business prospects. Specific examples of the types of laws or
regulations that could adversely affect us include laws that
. impose taxes on transactions made over the Internet
. impose telecommunications access fees on Internet services providers
. directly or indirectly affect telecommunications costs generally or
the costs of Internet telecommunications specifically
. prohibit the transmission over the Internet of various types of
information and content
. impose requirements on Internet services providers to protect Internet
users' privacy or to permit government interception of data traffic
25
. increase the likelihood or scope of competition from
telecommunications or cable companies
For example, Germany has enacted legislation that requires Internet
services providers to establish technical means to permit German authorities to
intercept data traffic of identified customers. The application of the
legislation to Internet services providers has been subject to significant
opposition from Internet services providers industry groups because of the
significant cost that would be imposed on service providers to comply with the
law. This opposition has led to a delay in the implementation of the law. If the
law is ultimately applied to Internet services providers, our German operations
could be significantly impacted. Also, some states of Brazil impose a tax of up
to 30% on revenues generated by communications services. There has been no
judicial determination that Internet access services constitute communications
services. If Internet services providers were ultimately required to pay this
tax, our Brazilian operations would be negatively and significantly impacted.
These laws could require us to incur costs to comply with them or to incur
new liability. They could also increase our competition or change our
competitive environment so that customer demand for our products and services is
affected.
In addition to risks we face from new laws or regulations, we face
uncertainties in connection with the application of existing laws to the
Internet. It may take years to determine the manner in which existing laws
governing issues like property ownership, libel, negligence and personal privacy
will be applied to communications and commerce over the Internet.
Increasing competition for customers in our markets may cause us to reduce our
prices or increase spending, which may negatively affect our revenues and
operating results.
There are competitors in our markets with more significant market presence
and brand recognition and greater financial, technical and personnel resources
than we have. We also face competition from new entrants such as ADSL/DSL and
wireless local loop providers who may have significantly reduced cost structures
in obtaining local access connectivity to the customer. Although the competitors
we face vary depending on the market and the country, these competitors may
include local and regional Internet services providers, telecommunication
companies and cable companies. Some of our competitors, especially the
telecommunications companies, have large networks in place as well as a
significant existing customer base. As a result of this competition, we
currently face and expect to continue to face significant pressure to reduce our
prices, particularly with respect to Internet access services, and to improve
the products and services we offer.
If demand for Internet services in our markets does not grow as we expect, our
ability to grow our revenues will be negatively affected.
Internet use in our markets is relatively low. If the market for Internet
services fails to develop, or develops more slowly than expected, we may not be
able to increase our revenues at the rate we have projected. Obstacles to the
development of Internet services in our markets include:
. low rates of personal computer ownership and usage
. lack of developed infrastructure to develop Internet access and
applications
. limited access to Internet services
In particular, we depend on increasing demand for Internet services by
small to mid-sized businesses in our geographic markets. Demand for Internet
services by these businesses will depend partly on the degree to which these
businesses' customers and suppliers adopt the Internet as a means of doing
business, and partly on the extent to which these businesses adopt Internet
technologies to deal with internal business processes, such as internal
communications. Demand will also partly depend on whether there is a general
26
economic downturn in these markets, which may result in a cutback of
expenditures of the services we offer. Furthermore, as competitive pressures
drive down customer prices for Internet access in many of our markets, we depend
increasingly in such markets on our ability to sell our customers higher margin,
value added services such as security services, web hosting, and ecommerce
solutions.
We are in a rapidly evolving industry in which the products and services we
offer, their methods of delivery and their underlying technologies are changing
rapidly, and if we do not keep pace with these changes, we may fail to retain
and attract customers, which would reduce our revenues.
The Internet services market is characterized by changing customer needs,
frequent new service and product introductions, evolving industry standards and
rapidly changing technology. Our success will depend, in part, on our ability to
recognize and respond to these changes in a timely and cost-effective manner. If
we fail to do so, we will not be able to compete successfully.
We rely on telecommunications companies in our markets to provide our customers
with reliable access to our services, and failures or delays in providing access
could limit our ability to service our customers and impact our revenues and
operating results.
Our customers typically access our services either through their normal
telephone lines or dedicated lines provided by local telecommunications
companies specifically for that use. In some of our markets, we experience
delays in delivery of new telephone or dedicated lines that have prevented our
customers from accessing our services. These delays result in lost revenues.
Additionally, some local telecommunications companies that provide Internet
services provide delivery of telephone or dedicated lines to their Internet
customers on a preferential basis, which may cause us to lose current and
potential customers. We also lease network capacity from telecommunications
companies and rely on the quality and availability of their service. These
companies may experience disruptions of service, which could disrupt our
services to, or limit Internet access for, our customers. We may not be able to
replace or supplement these services on a timely basis or in a cost-effective
manner, which may result in customer dissatisfaction and lost revenues.
We depend on the reliability of our network, and a system failure or a breach of
our security measures could result in a loss of customers and reduced revenues.
We are able to deliver services only to the extent that we can protect our
network systems against damages from telecommunication failures, computer
viruses, natural disasters and unauthorized access. Any system failure, accident
or security breach that causes interruptions in our operations could impair our
ability to provide Internet services to our customers and negatively impact our
revenues and results of operations. To the extent that any disruption or
security breach results in a loss or damage to our customers' data or
applications, or inappropriate disclosure of confidential information, we may
incur liability as a result. In addition, we may incur additional costs to
remedy the damages caused by these disruptions or security breaches. Although we
currently possess errors and omissions insurance, business interruption
insurance, and insurance covering losses resulting from computer viruses and
security breaches, these policies may not provide effective coverage upon the
occurrence of all events.
If we fail to attract and retain qualified personnel or lose the services of our
key personnel, our operating results may suffer.
Our success depends on our key management, engineers, sales and marketing
personnel, technical support representatives and other personnel, many of whom
may be difficult to replace. If we lose key personnel, we may not be able to
find suitable replacements, which may negatively affect our business. In
addition, since the demand for qualified personnel in our industry is very high,
we may have to increase the salaries and fringe benefits we may offer to our
personnel, which may affect our operating results. We do not maintain key person
life insurance on, or restrictive employment agreements with, any of our
executive officers.
27
We may be liable for information disseminated over our network.
We may face liability for information carried on or disseminated through
our network. Some types of laws that may result in our liability for information
disseminated over our network include:
. laws designed to protect intellectual property, including trademark
and copyright laws
. laws relating to publicity and privacy rights and laws prohibiting
defamation
. laws restricting the collection, use and processing of personal data
and
. laws prohibiting the sale, dissemination or possession of pornographic
material
The laws governing these matters vary from jurisdiction to jurisdiction.
Our Latin American markets have a history of political and economic instability
which may disrupt our operations and adversely affect our results.
We derive and expect to continue to derive a material portion of our
revenues from the Latin American markets. Latin America has experienced periods
of political and economic instability. If these conditions were to reoccur, our
business could be adversely affected. Historically, instability in Latin
American countries has been caused by
. extensive governmental involvement, control or ownership of industries
in local economies, including telecommunications facilities, financial
institutions and other commerce infrastructure
. unexpected changes in regulatory requirements such as imposing
licensing requirements or levying new taxes
. slow or negative growth as a result of recessionary trends caused by
foreign currency devaluations, interest rate hikes and inflation
. wage and price controls that reduce potential profitability of
businesses
We have made no allowances for the impact of any such potential events in
financial projections we have announced. The occurrence of any such adverse
political or economic conditions may deter growth in Internet usage or create
uncertainty regarding our operating climate, which my adversely impact our
business and operating results.
28