SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 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
of incorporation or organization) Identification No.)
12100 Sunset Hills Road, Suite 110
Reston, Virginia 20190
(Address of principal executive offices)
Registrant's telephone number, including area code: (703) 464-0300
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(Former name or former address, if changed since last report)
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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 November 1, 2000, the aggregate market value of the 60,679,103 shares of
common stock held by non-affiliates of the registrant was $424,753,721 based on
the closing sale price ($7.00) 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
November 1, 2000, there were outstanding 53,909,102 shares of the registrant's
common stock and 6,770,001 shares of the registrant's non-voting common stock.
EXPLANATORY NOTE
This Form 10-Q/A amends the Registrant's quarterly report on Form 10-Q for the
quarter ended September 30, 2000 as filed on November 13, 2000 and is being
filed to reflect the restatement of the Registrant's consolidated financial
statements. The reasons for and effects of this restatement are presented in
Note 10 to the consolidated financial statements. Except for Items 1 and 2 of
Part I, no other information included in the original report on Form 10-Q is
amended by this Form 10-Q/A. The Registrant has not updated disclosure in this
Form 10-Q/A to reflect any events subsequent to the Registrant's initial filing
of its quarterly report on Form 10-Q on November 13, 2000. The Registrant has
also not updated Exhibit 99.1 "Risk Factors" which continues to speak as of
November 13, 2000. For the most recent information concerning the Registrant and
updated Risk Factors, please see the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001.
1
VIA NET.WORKS, INC.
TABLE OF CONTENTS
(UNAUDITED)
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets as of September 30, 2000 (As Restated) and
December 31, 1999 ................................................................................... 3
Consolidated Statements of Operations for the three and nine months ended
September 30, 2000 (As Restated) and 1999 ........................................................... 4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2000 (As Restated) and 1999 ........................................................... 5
Notes to the Consolidated Financial Statements (As Restated) ............................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
Of Operations ....................................................................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................................. 17
PART II OTHER INFORMATION
Item 1. Legal Proceedings ......................................................................................... 18
Item 2. Changes in Securities and Use of Proceeds ................................................................. 18
Item 3. Defaults Upon Senior Securities ........................................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders ....................................................... 19
Item 5. Other Information ......................................................................................... 19
Item 6. Exhibits and Reports on Form 8-K .......................................................................... 19
SIGNATURES ......................................................................................................... 20
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 September
31, 1999 30, 2000
-------- --------
(As Restated)
ASSETS
Current assets:
Cash and cash equivalents $ 20,067 $ 252,237
Restricted cash 15,000 2,722
Trade and other accounts receivable, net of allowance of $1,296 and $2,033,
respectively 9,197 16,038
Other current assets 3,074 3,780
--------- ---------
Total current assets 47,338 274,777
Property and equipment, net 28,909 35,452
Goodwill and other acquired intangible assets, net 115,194 174,524
Other noncurrent assets 8,142 3,629
--------- ---------
Total assets $ 199,583 $ 488,382
========= =========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 12,735 $ 17,208
VAT and other taxes payable 1,904 2,082
Short-term notes and current portion of long-term debt 7,808 1,939
Deferred revenue 9,777 13,597
Other current liabilities and accrued expenses 5,660 10,391
--------- ---------
Total current liabilities 37,884 45,217
Long-term debt, less current portion 5,846 3,557
--------- ---------
Total liabilities 43,730 48,774
Contingencies
Minority interest in consolidated subsidiaries 4,422 887
Mandatorily redeemable convertible preferred stock: 180,933 --
Stockholders' equity (deficit):
Common stock, $.001 par value; 57,000,000 and 125,000,000 shares authorized;
1,962,671 and 53,718,709 shares issued and outstanding; respectively 2 53
Non-voting common stock, $.001 par value; 7,500,000 shares authorized; 0 and
6,770,001 shares issued and outstanding; respectively -- 7
Additional paid-in capital 26,023 556,740
Accumulated deficit (36,658) (93,812)
Deferred compensation (12,788) (8,091)
Accumulated other comprehensive loss (6,081) (16,176)
--------- ---------
Total stockholders' equity (deficit) (29,502) 438,721
--------- ---------
Total liabilities, mandatorily redeemable convertible preferred
stock and stockholders' equity (deficit) 199,583 $ 488,382
========= =========
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)
-----------
Three Months ended Nine Months ended
September 30, September 30,
------------ ------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
(As Restated) (As Restated)
Revenue $ 11,264 $ 26,988 $ 22,361 $ 72,522
Operating costs and expenses:
Internet services 5,045 15,998 10,606 41,463
Selling, general and administrative 9,970 20,026 20,732 56,397
Depreciation and amortization 5,763 11,797 10,635 31,700
------------ ------------ ------------ ------------
Total operating costs and expenses 20,778 47,821 41,973 129,560
Loss from operations (9,514) (20,833) (19,612) (57,038)
Interest income 971 3,372 2,281 9,420
Interest expense (415) (457) (973) (1,430)
Gain (loss) in unconsolidated affiliate (17) -- (177) --
Foreign currency gains/(losses) (488) (6,710) 1,283 (9,561)
------------ ------------ ------------ ------------
Loss before income taxes and minority interest (9,463) (24,628) (17,198) (58,609)
Income tax expense -- (340) -- (840)
Minority interest in loss of consolidated
subsidiaries 410 879 1,241 2,295
------------ ------------ ------------ ------------
Net loss attributable to common stockholders $ (9,053) $ (24,089) $ (15,957) $ (57,154)
Basic and diluted loss per share attributable to
common stockholders $ (6.64) $ (0.40) $ (20.17) $ (1.14)
Shares used in computing basic and diluted loss
per share 1,363,005 59,956,310 790,953 50,253,148
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 nine months ended
September 30,
-------------
1999 2000
---- ----
(As Restated)
Cash flows used in operating activities:
Net loss $ (15,957) $ (57,154)
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation and amortization 10,635 31,700
Employee stock compensation 483 4,297
Unrealized foreign currency transaction (gains)/losses (1,283) 2,064
Minority interest in loss of consolidated subsidiaries (1,241) (2,295)
Loss in unconsolidated affiliate 177 --
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (740) (4,620)
Other current assets (23) (777)
Accounts payable 139 3,202
Other current liabilities and accrued expenses (407) 4,287
Deferred revenue 1,340 2,988
Other noncurrent assets -- 354
--------- ---------
Cash used in operating activities (6,877) (15,954)
--------- ---------
Cash flows used in investing activities:
Acquisitions, net of cash acquired (49,944) (68,429)
Purchases of property and equipment (11,318) (14,611)
Other assets (354) 2,298
--------- ---------
Cash used in investing activities (61,616) (80,742)
--------- ---------
Cash flows from financing activities:
Repayment of debt (3,389) (3,030)
Proceeds from issuance of common stock, net 1,525 332,009
Proceeds from issuance of preferred stock 127,858 --
--------- ---------
Cash provided by financing activities 125,994 328,979
--------- ---------
Effect of currency exchange rate changes on cash (710) (113)
--------- ---------
Net increase (decrease) in cash and cash equivalents 56,791 232,170
Cash and cash equivalents, beginning of period 34,711 20,067
--------- ---------
Cash and cash equivalents, end of period $ 91,502 $ 252,237
========= =========
Noncash investing and financing transactions:
Common stock issued to satisfy debt $ -- $ 5,183
--------- ---------
Common stock issued in connection with acquisitions $ 2,619 $ 4,657
--------- ---------
The accompanying notes are an integral part of these consolidated
financial statements
5
1. Basis of Presentation
The consolidated financial statements of VIA NET.WORKS, Inc. (VIA) for the
three and nine month periods ended September 30, 1999 and 2000 are
unaudited and have been prepared on a basis substantially consistent with
the audited consolidated financial statements as of and for the year ended
December 31, 1999, included in VIA's Annual Report on Form 10-K (Annual
Report). The financial statements should be read in conjunction with the
audited consolidated financial statements included in the Annual Report
and the unaudited consolidated financial statements for the three month
periods ended March 31, 2000 and June 30, 2000 included in VIA's quarterly
reports on Form 10-Q. In the opinion of management, the accompanying
unaudited consolidated financial statements contain all adjustments
(consisting of normal recurring adjustments) which management considers
necessary to present fairly the consolidated financial position of VIA at
September 30, 2000, the results of its operations for the three and nine
month periods ended September 30, 1999 and 2000 and its cash flows for the
nine month periods ended September 30, 1999 and 2000. The results of
operations for the three and nine month periods ended September 30, 2000
may not be indicative of the results expected for any succeeding quarter
or for the year ending December 31, 2000.
The preparation of financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect the amounts reported in the financial statements.
Actual results may differ from those estimates.
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 recognition and cost
accounting errors arising at one of the Company's 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 related to the
recognition of certain revenue and associated costs during the 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 the Company's
announcement of August 9, 2001, as filed with the Securities and Exchange
Commission on Form 8-K dated August 10, 2001. See Note 10 to these
consolidated financial statements. In this Form 10-Q/A, references or
comparisons to results in 2000 are to the restated results.
Recent Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. Upon
initial application of SFAS No. 133, as amended by SFAS No. 138, all
derivatives are required to be recognized in the statement of financial
position as either assets or liabilities and measured at fair value. In
addition, all hedging relationships must be reassessed and documented
pursuant to the provisions of SFAS No. 133. Subsequent to the issuance of
SFAS No. 133, the Financial Accounting Standards Board issued SFAS No. 137
which defers the effective date of SFAS No. 133 to fiscal years beginning
after June 15, 2000, the first quarter of VIA's fiscal 2001. VIA does not
anticipate that this pronouncement will have a significant effect on its
results of operations or financial position.
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 (SAB No. 101) which summarizes certain
of the SEC staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. SAB No. 101, as
amended by SAB No.101B, is effective no later than the fourth fiscal
quarter of fiscal years beginning after December 15, 1999, the fourth
quarter of VIA's fiscal 2000. The initial adoption of this guidance is not
anticipated to have a material impact on VIA's results of operations or
financial position, however, the guidance may impact the way in which VIA
will account for future transactions.
6
2. Comprehensive Loss
Comprehensive loss for the three and nine months ended September 30, 1999 and
2000 was as follows (in thousands of U.S. dollars):
3 months ended September 30, 9 months ended September 30,
---------------------------- ----------------------------
1999 2000 1999 2000
-------- -------- -------- --------
(As Restated) (As Restated)
Net Loss $ (9,053) $(24,089) $(15,957) $(57,154)
Foreign currency translation
adjustment 1,997 (3,690) (3,174) (10,095)
-------- -------- -------- --------
Comprehensive Loss $ (7,056) $(27,779) $(19,131) $(67,249)
======== ======== ======== ========
3. Acquisitions of Certain Businesses
Between June 18, 1998 and September 30, 2000, VIA acquired 25 Internet
services, web-hosting and advanced data networking providers located in
Europe, Latin America and the United States, offering services that include
Internet connectivity, web-hosting, e-commerce, Internet security and other
services, primarily to businesses.
During the nine months ended September 30, 2000, VIA acquired the following
operating companies:
Aggregate Ownership
Aquiree Acquisition Purchase Interest
Business Acquired Location Date Price Acquired
- ----------------- -------- ---- ----- --------
Net4You EDV Dienstleistungs und Handelges.m.b.H
(Net4You) Austria January 4, 2000 $ 2.9 million 58%
DNS Telecom SAS (DNS) France January 7, 2000 11.8 million 100%
I.S.A.R. Netzwerke Dienstleistungs GmbH (ISAR) Germany February 16, 2000 8.6 million 100%
Internet Access Eindhoven BV (IAE) Netherlands April 3, 2000 7.5 million 100%
SmartComp AG (SmartComp) Switzerland July 26, 2000 4.0 million 100%
Interactive Multimedia Corporation (IMC Online) USA August 31, 2000 28.8 million 100%
Meridian Microtech s.r.l (Microtech) Italy September 15, 2000 3.3 million 100%
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 operating companies have been included in VIA consolidated
financial statements since the acquisition dates. The purchase price of the
acquisitions has been allocated to assets acquired, including intangible
assets, and liabilities assumed, based on their respective fair values.
The allocation of the purchase price to the acquired tangible and
intangible assets of IAE, SmartComp, IMC Online and Microtech have not been
finalized pending an analysis of the amount of assets and liabilities
acquired. Currently, the entire excess purchase price has been allocated to
goodwill. The actual purchase accounting adjustments may be revised and VIA
may
7
allocate a portion of the purchase price to intangible assets other than
goodwill.
4. Property and Equipment
Property and equipment consisted of the following (in thousands of U.S.
dollars):
December 31, September
1999 30, 2000
---- --------
Equipment $ 23,255 $ 32,010
Indefeasible rights of use (IRU) 12,484 11,093
Furniture and fixtures 2,113 3,416
Purchased software 1,752 5,482
-------- --------
39,604 52,001
Accumulated depreciation and amortization (10,695) (16,549)
-------- --------
Property and equipment, net $ 28,909 $ 35,452
======== ========
Depreciation expense was $1.3 and $2.6 million for the three months ended
September 30, 1999 and 2000, respectively. Total depreciation expense was
$2.4 and $7.0 million for the nine months ended September 30, 1999 and 2000,
respectively.
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):
December September
31, 1999 30, 2000
--------- --------
Goodwill $ 126,731 $ 208,658
Customer base 2,123 3,896
Employee workforce 1,213 1,992
--------- ---------
130,067 214,546
Accumulated amortization (14,873) (40,022)
--------- ---------
Goodwill and other acquired
intangibles, net $ 115,194 $ 174,524
========= =========
Amortization expense was $4.5 and $9.2 million for the three months ended
September 30, 1999 and 2000, respectively. Amortization expense was $8.2 and
$24.7 million for the nine months ended September 30, 1999 and 2000,
respectively. The value assigned to goodwill, customer base and employee
workforce is being amortized over estimated useful lives of five years.
8
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 September
31, 1999 30, 2000
--------------------------
Acquisition debt $ 6,108 $ 1,021
Debt related to IRU Agreements, 12%, due quarterly to 2002 3,899 2,848
Capital lease obligations 858 615
Advances from related parties, noninterest bearing, due 2000 1,968 374
Notes payable 821 638
-------- --------
13,654 5,496
Less current portion (7,808) (1,939)
-------- --------
Long-term portion $ 5,846 $ 3,557
======== ========
The acquisition obligations and advances from related parties represent 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.
During 1999 and 2000, VIA granted stock options to non-U.S. employees at
many of its subsidiaries in Europe and Latin America. As a result of these
stock option grants, the subsidiaries are liable for the payment of certain
employer payroll taxes and social charges based on the difference between
the exercise price and fair market value of the stock options granted. Such
payroll taxes and social charges generally become payable upon exercise at
rates ranging between 11% and 24%, as determined by the prevailing tax laws
in those jurisdictions. Amounts are recognized as an expense when the
related stock options are exercised. To date the amounts accrued for payroll
taxes and social charges have not been material, as few stock options
granted to our non-U.S. employees have been exercised.
8. Segment Reporting
The Company's operations are organized into three geographic operating
segments; Europe, Latin America and the United States. These segments
generate Internet-related revenues from leased lines, dial-up Internet
access, web-hosting and design, consulting services, advanced data
networking and sale of third-party hardware and software. Operations of the
Company's United States segment include shared network costs and corporate
functions, which the Company does not allocate to its other geographic
segments for management reporting purposes.
9
Each of the geographic operating segments is considered a reportable
segment. VIA 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 VIA's segments for the three and
nine month periods ended September 30, 1999 and 2000 (in thousands of U.S.
dollars). Beginning in the quarter ended September 30, 2000, VIA modified
its definition of total segment assets. Prior amounts have been revised to
conform to the current presentation.
United Latin
States Europe America Total
--------- --------- --------- ---------
Three months ended
September 30, 1999:
Revenue $ - $ 9,819 $ 1,445 $ 11,264
EBITDA $ (2,389) $ (904) $ (365) $ (3,658)
Assets $ 99,648 $ 101,633 $ 13,814 $ 215,095
Three months ended
September 30, 2000 (As Restated):
Revenue $ 363 $ 21,087 $ 5,538 $ 26,988
EBITDA $ (3,790) $ (840) $ (3,048) $ (7,678)
Assets $ 314,708 $ 110,064 $ 63,610 $ 488,382
Nine months ended
September 30, 1999:
Revenue $ - $ 18,373 $ 3,988 $ 22,361
EBITDA $ (5,664) $ (1,928) $ (902) $ (8,494)
Assets $ 99,648 $ 101,633 $ 13,814 $ 215,095
Nine months ended
September 30, 2000 (As Restated):
Revenue $ 363 $ 58,061 $ 14,098 $ 72,522
EBITDA $ (11,530) $ (2,087) $ (7,425) $ (21,042)
Assets $ 314,708 $ 110,064 $ 63,610 $ 488,382
10
A reconciliation from total EBITDA to loss before income taxes and minority
interest is as follows:
For the three months ended For the nine months ended
September 30, September 30,
(in thousands of US dollars) 1999 2000 1999 2000
(As Restated) (As Restated)
EBITDA $ (3,658) $ (7,678) $ (8,494) $(21,042)
Non-cash compensation (93) (1,358) (483) (4,296)
Depreciation and amortization (5,763) (11,797) (10,635) (31,700)
------- -------- -------- --------
Loss from operations (9,514) (20,833) (19,612) (57,038)
Other income and interest income, net 68 (3,795) 2,591 (1,571)
Loss in unconsolidated affiliate (17) - (177) -
-------- -------- -------- --------
Loss before income taxes and minority interest $ (9,463) $(24,628) $(17,198) $(58,609)
======== ========= ======== =========
For the three and nine month periods ended September 30, 1999, the largest
contributors to revenue, on a per country basis, were Germany with $2.3 and
$5.6 million, respectively, and the United Kingdom with $5.0 and $8.9
million, respectively.
For the three and nine month periods ended September 30, 2000, the largest
contributors to revenue, on a per country basis, were Germany with $3.4 and
$10.2 million, respectively, Mexico with $3.8 and $9.4 million,
respectively, and the United Kingdom with $11.8 and $31.5 million,
respectively.
9. Subsequent Events
On October 6, 2000, VIA acquired a 100% interest in Highspeed-Server Eisnet
GmbH in Forchheim, Germany (Highspeed). Highspeed specializes in delivering
high quality web-hosting and server housing to commercial customers in
Germany and was acquired for approximately $5 million in cash and stock.
On October 10, 2000 VIA acquired a 100% interest in Symphonie S.A.(trading
as MNet) in Montpellier, France for approximately $3 million in cash and
stock. MNet is a full service business focused Internet solutions company.
On November 7, 2000, VIA made a further investment in and acquired the
remaining minority interest in VIA NET.WORKS Deutschland GmbH (formerly GTN
Gesellschaft fur Telekommunikations und Netzwerkdienste mbH) for a total of
approximately $3 million in cash. VIA acquired a controlling interest in VIA
NET.WORKS Deutschland GmbH in October 1998.
10. Restatement of Financial Statements
As announced on August 9, 2001, the Company revised its 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 the Company's 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 related to the recognition of certain revenue and
associated costs during the 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 Company's financial statements for the relevant periods have been
restated to adjust the financial results appropriately. The following chart
details the effects of the restatement on the quarter ended September 30,
2000 as follows:
- -----------------------------------------------------------------------------------------------------------------------------
Three months ended Sept 30, 2000 Nine months ended Sept 30, 2000
-------------------------------- ----------------------------------
As Reported As Restated As Reported As Restated
----------- ----------- ----------- -----------
Statement of Operations Data:
- ----------------------------
Revenue
-------
Access 16,498 16,609 44,831 44,521
------------------------------------------------------------------------------------------------------------------------
Value added 11,441 9,812 27,535 25,860
------------------------------------------------------------------------------------------------------------------------
Other 567 567 2,161 2,141
------------------------------------------------------------------------------------------------------------------------
Total Revenue 28,506 26,988 74,527 72,522
--------------------------------------------------------------------------------------------------------------------------
Direct Costs 15,998 15,998 41,239 41,463
--------------------------------------------------------------------------------------------------------------------------
Loss from Operations (19,315) (20,833) (54,809) (57,038)
--------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) (22,571) (24,089) (54,925) (57,154)
--------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) per share: $ (0.38) $ (0.40) (1.09) (1.14)
--------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data
- ------------------
Accounts Receivable, net 18,245 16,038 18,245 16,038
--------------------------------------------------------------------------------------------------------------------------
Other current liabilities and accrued expenses 10,390 10,391 10,390 10,391
--------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income (16,197) (16,176) (16,197) (16,176)
--------------------------------------------------------------------------------------------------------------------------
Accumulated deficit (91,583) (93,812) (91,583) (93,812)
--------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
11
Item. 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
In this Item 2, references to results for the quarter ended September 30, 2000
or results of other 2000 periods are to restated results. See Note 10 to the
consolidated financial statements.
OVERVIEW
VIA is a leading international provider of Internet access and services focused
on businesses in Europe, Latin America and the U.S. By targeting these customers
and regions, we are positioned to capitalize on some of the most rapidly growing
areas of the Internet market. Both of these regions 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 can
upgrade them from entry-level Internet access services to more sophisticated and
higher margin products and services like web-hosting, virtual private networks
and e-commerce solutions which will allow them to compete in both local and
global markets.
Since our founding in late 1997, we have rapidly established our international
presence by acquiring, integrating and growing 25 Internet services, web-hosting
and advanced data networking providers in the United States and 13 European and
Latin American countries. We currently operate in Argentina, Austria, Brazil,
France, Germany, Ireland, Italy, Mexico, the Netherlands, Portugal, Spain,
Switzerland, the United Kingdom and the United States.
We are a customer-focused sales, marketing and service organization. We leverage
our local marketing, sales and customer care efforts with the benefits of our
global scale by providing our local operations international network capacity,
marketing support, capital and management resources. We believe that our local
focus combined with our global capabilities will allow us to increase both our
market share and revenue.
RECENT BUSINESS ACQUISITIONS
On July 26, 2000, VIA acquired a 100% interest in SmartComp AG, an Internet
services provider in Switzerland, for approximately $4.0 million in cash. Under
the agreement, we are obligated to pay a conditional contingent earn out based
upon SmartComp's operating results for the year ending December 31, 2000. We
believe, based on current projections, that the total conditional contingent
earn out will not exceed $3.6 million.
On August 31, 2000, VIA acquired 100% of IMC Online, a Microsoft-certified
web-hosting company located in Atlanta, Georgia. The total purchase price was
approximately $28.8 million in cash and stock. This company represents VIA's
first acquisition in the United States.
On September 15, 2000, VIA acquired 100% of Meridian Microtech (Microtech), for
approximately $3.3 million. Microtech is an NT based web-hosting company located
in Milan, Italy. This company represents VIA's first acquisition in Italy.
RESULTS OF OPERATIONS
Three and nine months ended September 30, 2000 compared with the three and nine
months ended September 30, 1999
12
Revenue. We generate revenue primarily from the sale of Internet access
services, both dial-up and dedicated, and Internet value added services.
Internet value added services consist of advanced data networking, web-hosting,
applications hosting and related maintenance, domain name registration, sales of
hardware and third-party software, installation, training and consulting and
other services. Revenue for the three months ended September 30, 2000 was $27.0
million, an increase of 140% as compared to $11.3 million for the three months
ended September 30, 1999. Revenue for the nine months ended September 30, 2000
was $72.5 million, an increase of 224% as compared to $22.4 million for the nine
months ended September 30, 1999. Of the 140% revenue increase for the three
months ended September 30, 2000 compared to the corresponding period of the
prior year, 85% was organic growth (internally generated) and 55% was acquired
growth attributable to the 10 operating companies we acquired between October 1,
1999 and September 30, 2000. Our internally generated revenue growth is
attributable to a number of factors, including an increase in business customers
and an increase in average revenue per business customer. We have seen an
increase in the number of business customers, particularly in our core customer
base of business customers with multiple services. We had 39,000 business
customers at September 30, 1999 and have increased our business customers by 97%
to 77,000 at September 30, 2000, with 46% of that growth being organic
(internally generated). Additionally, the average annualized revenue per
business customer increased by 44% over the first nine months of 2000. This
increase is related to our efforts to expand our product portfolio and to our
focus on upgrading our customers from entry-level Internet access to more
sophisticated and higher margin products and services, such as web-hosting,
virtual private networks and e-commerce solutions.
Internet services operating costs. Internet services operating costs are the
costs we incur to carry customer traffic over the Internet. These costs were
$16.0 million for the three months ended September 30, 2000, an increase of 217%
as compared to $5.0 million for the corresponding period in the preceding year.
Internet services operating costs for the nine months ended September 30, 2000
were $41.5 million, an increase of 291% as compared to $10.6 million for the
nine months ended September 30, 1999. We incurred these costs primarily to lease
lines, purchase transit for the local networks and compensate customer care
personnel maintained by the 25 consolidated operating subsidiaries that we owned
for all or a portion of the nine months ended September 30, 2000. We have
continued to invest in points of presence and other local network infrastructure
in all 14 countries in which we operate.
Selling, general and administrative. Selling, general and administrative
expenses are primarily compensation and occupancy costs and costs associated
with marketing our products and services. We incurred selling, general and
administrative expense of $20.0 million for the three months ended September 30,
2000, a 100% increase over the $10.0 million we incurred for the three months
ended September 30, 1999. Selling, general and administrative expenses were
$56.4 million for the nine months ended September 30, 2000, an increase of 172%
as compared to the $20.7 million for the corresponding period in the preceding
year. A portion of the increase relates to the increase in corporate expenses,
which increased by 111 % to $5.2 million for the third quarter 2000 from $2.5
million for the third quarter 1999. Non-cash compensation expense, which was
$1.4 million and $93,000 for the third quarters 2000 and 1999, respectively,
accounted for a portion of this increase. Corporate expenses also increased as a
result of obtaining additional insurance coverage, hiring new corporate staff
and incurring additional legal and accounting fees as a public company. The
remaining increase resulted from the fact that we had 25 consolidated operating
subsidiaries for all or a portion of the nine months ended September 30, 2000,
as compared to only 15 consolidated operating subsidiaries for all or a portion
of the corresponding period in 1999.
Depreciation and amortization. Depreciation and amortization expenses were $11.8
million, an increase of 105% for the three months ended September 30, 2000, as
compared to the $5.8 million for the corresponding period in the
13
preceding year. We incurred depreciation and amortization expense of $31.7
million for the nine months ended September 30, 2000, up from $10.6 million for
the nine months ended September 30, 1999. This increase was primarily due to the
amortization of goodwill and other intangibles arising from the acquisitions of
the 10 consolidated operating subsidiaries completed between October 1, 1999 and
September 30, 2000. The implementation of our international network and our
global accounting software system also increased our depreciation expense for
telecommunications equipment, computers, computer software and other fixed
assets. For the three months ended September 30, 2000, $2.6 million, or 22%, of
our depreciation and amortization expense related to the amortization of
goodwill and other intangibles and $9.2 million, or 78%, was related to the
depreciation of fixed assets. For the corresponding period in 1999, $1.3
million, or 23%, of our depreciation and amortization expense related to the
amortization of goodwill and other intangibles and $4.5, or 77%, was related to
the depreciation of fixed assets.
Interest income. Interest income was $3.4 million for the three months ended
September 30, 2000, an increase of 247% as compared to $971,000 for the same
period in the preceding year. We earned $9.4 million in interest income for the
nine months ended September 30, 2000, up from $2.3 million for the nine months
ended September 30, 1999. This increase is due primarily to the increase in our
cash balance as a result of our initial public offering in February 2000.
Interest expense. For the three months ended September 30, 2000, we recognized
interest expense of $457,000 as compared to $415,000 for the same period in the
preceding year. Our interest expense was $1.4 million for the nine months ended
September 30, 2000, an increase of 47% from the $973,000 recognized during the
nine months ended September 30, 1999. This increase is primarily due to the
impact of debt that we incurred in mid-1999 related to our network
infrastructure expansion.
Interest in unconsolidated subsidiary. We recognized a loss of $17,000 and a
loss of $177,000 for the three and nine months ended September 30, 1999,
respectively, related to our minority investment in i-way Limited (i-way). I-way
is an Internet services provider located in the United Kingdom which we
originally acquired a 36% interest in June 1998. In June 1999, we negotiated the
purchase of the remaining 64% equity interest in i-way for total consideration
of $13.1 million, including cash and shares of VIA's common stock. We have not
acquired a minority interest in any other affiliates and therefore have not
recognized any losses related to investments in unconsolidated subsidiaries for
the three months and nine months ended September 30, 2000.
Foreign currency gains and losses. We recognized a $6.7 million foreign currency
loss for the three months ended September 30, 2000, as compared to a $488,000
loss for the corresponding period in the preceding year. Our foreign currency
loss was $9.6 million for the nine months ended September 30, 2000, as compared
to a $1.3 million foreign currency gain for the nine months ended September 30,
1999. The loss in 2000 is primarily due to the impact of the fluctuation in the
value of the Euro on our Euro denominated cash accounts. We established these
Euro denominated cash accounts in connection with our initial public offering in
February 2000, in which we sold shares of our common stock for both US dollars
and Euros. Additionally, during the third quarter 2000, we were operating in 14
countries and 15 different currencies as compared to operating in only 9
countries and 11 currencies in the corresponding period in 1999. Our operating
currencies include the Euro.
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
14
1999. Through our initial public offering of common stock in February 2000, we
raised approximately $333 million, net of underwriting discounts and
commissions. At September 30, 2000, we had cash and cash equivalents of $254.9
million, including $2.7 million in restricted cash.
Cash used in operating activities was $16.0 million for the nine months ended
September 30, 2000 and $6.9 million for the nine months ended September 30,
1999. In each period, cash was used primarily to fund operating losses.
Cash used in investing activities was $80.7 million for the nine months ended
September 30, 2000 and $61.6 million for the same period in 1999. In each
period, cash was primarily used for acquisitions, including bART, VIA NET.WORKS
Ireland Ltd. (formerly known as Medianet), Ecce Terram, ArtInternet, VIA
NET.WORKS Portugal, WWS, INS, Netlink, ServiceNet and VIA NET.WORKS Espana in
the first nine months of 1999. In the first nine months of 2000, VIA acquired
Net4You, DNS, ISAR, IAE, SmartComp, IMC Online and Microtech and increased
investments in various partially owned subsidiaries.
Cash provided by financing activities was $329.0 million for the nine months
ended September 30, 2000 and $126.0 for the same period in 1999. In each period,
cash was primarily generated by the sale of equity securities, including the
private placement of our Series C Preferred Stock in 1999 and the initial public
offering of our common stock in 2000. Immediately subsequent to our initial
public offering, we paid $10.4 million and issued 316,994 shares of our common
stock to repay notes we had issued to the sellers of U-Net, VIA NET.WORKS
Portugal, formerly known as Esoterica, VIA NET.WORKS Espana, also known as
Interbook, and DNS, and to acquire the remaining minority interest in Dialdata.
In conjunction with our acquisition of VIA NET.WORKS Mexico in October 1999, we
agreed to pay additional purchase price consideration of up to $30.0 million
based on that company's revenue growth between the time of acquisition and
December 31, 2000. Based on the formula, for the fourth quarter of 1999 and the
first two quarters of 2000, we paid an aggregate of $25.7 million as additional
purchase price. We had restricted cash of $15.0 million to secure the payment of
any additional earned purchase price and are entitled to reduce the restricted
cash as payments are made. To date, we have reduced the restricted cash by half
of all payments made, equal to approximately $12.9 million.
We continue to pursue an aggressive internal growth strategy and will continue
to pursue 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.
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
depending upon the nature, size and timing of future acquisitions, if any, and
future amounts of net income before amortization, which we cannot
15
predict, as well as other factors referred to in the "Risk Factors" section of
VIA's Annual Report and those noted in Exhibit 99.1 on this Form 10-Q.
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 third quarter of 2000, 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 19% in relation to the U.S. dollar during the first nine months of
2000, and at September 30, 2000 were approximately 13% below where they were at
the beginning of the year. We realized foreign currency losses of $5.1 and $7.5
million for the three and nine months ended September 30, 2000, 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 collect revenues and pay expenses 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 intend to 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.
16
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
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. Since 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.
Recent Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. Upon initial
application of SFAS No. 133, as amended by SFAS No. 138, all derivatives are
required to be recognized in the statement of financial position as either
assets or liabilities and measured at fair value. In addition, all hedging
relationships must be reassessed and documented pursuant to the provisions of
SFAS No. 133. Subsequent to the issuance of SFAS No. 133, the Financial
Accounting Standards Board issued SFAS No. 137 which defers the effective date
of SFAS No. 133 to fiscal years beginning after June 15, 2000, the first quarter
of VIA's fiscal 2001. VIA does not anticipate that this pronouncement will have
a significant effect on its results of operations or financial position.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB No. 101) which summarizes certain of the SEC
staff's views in applying generally accepted accounting principles to revenue
recognition in financial statements. SAB No. 101, as amended by SAB No. 101B, is
effective no later than the fourth fiscal quarter of fiscal years beginning
after December 15, 1999, the fourth quarter of VIA's fiscal 2000. The initial
adoption of this guidance is not anticipated to have a material impact on VIA's
results of operations or financial position, however, the guidance may impact
the way in which VIA will account for future transactions.
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" section of VIA's Annual Report for the year ended December
31, 1999.
VIA has exposure to financial market risks, including changes in interest rates
and foreign exchange rates. At September 30, 2000, 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
September 30, 2000 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
17
currency exchange rate risk. As of September 30, 2000, 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 $5.9
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 which 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
Recent Sales of Unregistered Securities.
Between July 1, 2000 and September 30, 2000, VIA sold and issued the following
unregistered securities:
On August 31, 2000, VIA sold 653,844 shares of common stock to stockholders of
one of VIA's operating companies in connection with the operating company's
acquisition by VIA. The shares were valued at approximately $8.5 million and
were issued in reliance on Regulation D under the Securities Act.
On September 15, 2000, VIA sold 96,060 shares of common stock to stockholders of
one of VIA's operating companies in connection with the operating company's
acquisition by VIA. The shares were valued at approximately $1.2 million and
were issued in reliance on Regulation S under the Securities Act.
Appropriate legends are affixed to the stock certificates issued in the
aforementioned transactions. Similar legends were imposed in connection with any
subsequent sales of any such securities. All recipients received adequate
information about VIA or had access, through employment or other relationships,
to such information.
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.
In total, VIA registered and sold an aggregate of 17,000,000 shares of common
stock in its initial public offering at an aggregate purchase price of $357
million. Of these shares, 16,300,000 were sold pursuant to the underwritten
portion of VIA's initial public offering, which was managed by Donaldson, Lufkin
& Jenrette Securities Corporation, Morgan Stanley & Co. Incorporated, Salomon
Smith Barney Inc. and DLJdirect Inc. in the United States and by DLJ
International Securities, Morgan Stanley & Co. International Limited, Salomon
Brothers International Limited, Cazenove & Co. and MeesPierson N.V.
internationally. The remaining 700,000 shares were sold directly by VIA.
The estimated net offering proceeds to VIA after deducting the estimated
expenses described above and underwriting discounts and commissions was
approximately $333.0 million. From the effective date of the initial public
offering through September 30, 2000, VIA has used $68.4 million for acquisitions
of other businesses, including the repayment of debt for 1999
18
acquisitions and increases in VIA's investment in various partially owned
subsidiaries, $14.6 million for capital expenditures and $15.9 million to fund
operating losses.
Item 3. Defaults Upon Senior Securities.
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit
- -------
99.1 Risk Factors
b) Reports on Form 8-K
VIA filed no reports on Form 8-K during the three months ended
September 30, 2000.
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 15, 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 15, 2001 By: /s/ Catherine A. Graham
-------------------- ------------------------------
Catherine A. Graham
Vice President, Chief Financial
Officer and Treasurer (Principal
Financial and Accounting Officer)
19
EXHIBIT INDEX
99.1 Risk Factors
20