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 SEPTEMBER 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 November 1, 2001, there were outstanding 54,872,733 shares of the
registrant's common stock and 5,936,667 shares of the registrant's non-voting
common stock.
VIA NET.WORKS, INC.
TABLE OF CONTENTS
(UNAUDITED)
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of December 31, 2000 and
September 30, 2001....................................................... 3
Consolidated Statements of Operations for the three and nine months ended
September 30, 2000 and 2001.............................................. 4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2000 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................. 18
PART II. OTHER INFORMATION......................................................... 19
Item 1. Legal Proceedings......................................................... 19
Item 2. Changes in Securities and Use of Proceeds................................. 19
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...................................................................... 21
-2-
PART I
Item 1. Financial Statements
VIA NET.WORKS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S dollars, except share data)
December 31, September 30,
2000 2001
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 237,839 $ 163,523
Trade and other accounts receivable, net of allowance of $3,623 and $9,172,
respectively 16,570 16,913
Other current assets 5,228 5,633
--------- ---------
Total current assets 259,637 186,069
Property and equipment, net 39,227 43,873
Goodwill and other acquired intangible assets, net 181,082 106,431
Other noncurrent assets 1,202 978
--------- ---------
Total assets $ 481,148 $ 337,351
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 21,866 $ 13,312
VAT and other taxes payable 2,332 1,248
Current portion of long-term debt 3,265 2,537
Deferred revenue 14,360 12,723
Other current liabilities and accrued expenses 11,852 16,707
--------- ---------
Total current liabilities 53,675 46,527
Long-term debt, net of current portion 1,894 328
--------- ---------
Total liabilities 55,569 46,855
Commitments and contingencies - -
Minority interest in consolidated subsidiaries 597 -
Stockholders' equity:
Common stock, $.001 par value; 125,000,000 shares authorized; 54,061,998 and
54,908,233 shares issued and outstanding; respectively 54 55
Non-voting common stock, $.001 par value; 7,500,000 shares authorized;
6,770,001 and 5,936,667 shares issued and outstanding; respectively 7 6
Additional paid-in capital 558,196 558,300
Treasury Stock, $.001 par value; 0 and 510,311 shares; respectively - (671)
Accumulated deficit (113,693) (249,392)
Deferred compensation (6,409) (4,002)
Accumulated other comprehensive loss (13,173) (13,800)
--------- ---------
Total stockholders' equity 424,982 290,496
--------- ---------
Total liabilities and stockholders' equity $ 481,148 $ 337,351
========= =========
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 nine months ended
September 30, September 30,
------------- -------------
2000 2001 2000 2001
---- ---- ---- ----
Revenue $ 26,988 $ 21,357 $ 72,522 $ 70,225
-------- -------- -------- ---------
Operating costs and expenses:
Internet services 15,998 12,601 41,463 38,643
Selling, general and administrative 20,026 27,574 56,397 77,477
Goodwill impairment charge -- -- -- 47,992
Depreciation and amortization 11,797 13,110 31,700 43,870
-------- -------- -------- ---------
Total operating costs and expenses 47,821 53,285 129,560 207,982
Loss from operations (20,833) (31,928) (57,038) (137,757)
Interest income, net 3,372 1,511 9,420 5,876
Other expense, net (457) (644) (1,430) (751)
Foreign currency gains/(losses) (6,710) 4,684 (9,561) (3,358)
-------- -------- -------- --------
Loss before income taxes and minority interest (24,628) (26,377) (58,609) (135,990)
Income tax benefit/(expense) (340) 178 (840) 46
Minority interest in loss of consolidated subsidiaries 879 -- 2,295 245
-------- -------- -------- ---------
Net loss attributable to common stockholders $(24,089) $(26,199) $(57,154) $(135,699)
======== ======== ======== =========
Basic and diluted loss per share attributable to common
stockholders $(0.40) $(0.43) $(1.14) $(2.23)
======== ======== ======== =========
Shares used in computing basic and diluted loss per share 59,956,310 60,635,252 50,253,148 60,798,233
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,
-------------
2000 2001
---- ----
Cash flows from operating activities:
Net loss $(57,154) $(135,699)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 31,700 43,870
Goodwill impairment charge - 47,992
Employee stock compensation 4,297 2,229
Provision for doubtful accounts receivable 1,275 5,347
Unrealized foreign currency transaction losses 2,064 1,148
Deferred income taxes - (11)
Minority interest in loss of consolidated subsidiaries (2,295) (245)
Changes in assets and liabilities, net of acquisitions:
Trade accounts receivable (5,895) (6,898)
Other current assets (777) 161
Other noncurrent assets 354 (193)
Accounts payable 3,202 (8,102)
VAT and other taxes payable (405) (1,010)
Other current liabilities and accrued expenses 4,692 5,358
Deferred revenue 2,988 (1,367)
-------- ---------
Net cash used in operating activities (15,954) (47,420)
-------- ---------
Cash flows from investing activities:
Acquisitions, net of cash acquired (68,429) (8,637)
Proceeds from the disposition of operating subsidiary - 320
Purchases of property and equipment (14,611) (16,204)
Purchases/dispositions of other assets 2,298 (197)
-------- ---------
Net cash used in investing activities (80,742) (24,718)
-------- ---------
Cash flows from financing activities:
Repayment of debt (3,030) (1,959)
Proceeds from issuance of common stock, net 332,009 47
Purchase of treasury stock - (435)
Proceeds from borrowings - 240
-------- ---------
Net cash provided by (used in) financing activities 328,979 (2,107)
-------- ---------
Effect of currency exchange rate changes on cash (113) (71)
-------- ---------
Net increase (decrease) in cash and cash equivalents 232,170 (74,316)
Cash and cash equivalents, beginning of period 20,067 237,839
-------- ---------
Cash and cash equivalents, end of period $252,237 $ 163,523
======== =========
Noncash investing and financing transactions:
Common stock issued to satisfy debt $ 5,183 $ -
======== =========
Common stock issued in connection with acquisitions $ 4,657 $ -
======== =========
Treasury shares obtained in exchange for stock option exercises $ - $ 236
======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
VIA NET.WORKS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation and Restatement
These consolidated financial statements for the three and nine month periods
ended September 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 September 30, 2001 and the results of operations for the three and
nine month periods ended September 30, 2000 and 2001 and the cash flows for
the nine month periods ended September 30, 2000 and 2001. The results of
operations for the three and nine month periods ended September 30, 2001 may
not be indicative of the results expected for any succeeding quarter or for
the year ending December 31, 2001.
Simultaneously with the filing of this Form 10-Q, the Company is revising
its previously reported results for the three month period ending June 30,
2001 by filing Form 10-Q/A for that period. The principal effects of the
revision are noted in Note 1 to the consolidated financial statements in the
Form 10-Q/A. In this Form 10-Q, references or comparisons to results in the
second quarter 2001 are to the restated results.
Recent Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business
Combinations" ("SFAS 141") and Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141
requires all business combinations to be accounted for using the purchase
method of accounting and is effective for all business combinations
initiated after June 30, 2001. SFAS 142 requires goodwill to be tested for
impairment under certain circumstances, and written off when impaired,
rather than being amortized as previous standards required. SFAS 142 is
effective for fiscal years beginning after December 15, 2001. Upon
implementation of SFAS 142, the Company will reclassify the acquired
employee workforce as goodwill and will discontinue the amortization of
goodwill as of January 1, 2002. Amortization of goodwill and acquired
employee workforce for the third quarter of 2001 was $8.8 million. SFAS 142
requires the Company to test all goodwill for impairment as of January 1,
2001. The Company has not completed its assessment of the impact of SFAS 142
adoption and has not determined whether such impairment test will result in
a material write down of goodwill in fiscal year 2002.
In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets
and supersedes FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business. The provisions
of this Statement will be effective for financial statements issued for the
Company's fiscal year 2002. The adoption of this Statement is not expected
to have a significant impact on the Company's financial position or results
of operations.
2. Comprehensive Loss
Comprehensive loss for the three and nine months ended September 30, 2000
and 2001 was as follows (in thousands of U.S. dollars):
Three months ended September 30, Nine months ended September 30,
2000 2001 2000 2001
---- ---- ---- ----
Net loss $(24,089) $(26,199) $(57,154) $(135,699)
Foreign currency translation adjustment (3,690) 2,837 (10,095) (627)
-------- -------- -------- ---------
Comprehensive loss $(27,779) $(23,362) $(67,249) $(136,326)
======== ======== ======== =========
-6-
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, e-commerce, 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
-- -------- ------- -------
Total............................. 26 $207,259 $30,777 $31,825
In connection with the acquistion of Net4You, we paid approximately $195,000
to the minority shareholders of that company in the first quarter of 2001.
In connection with the purchase of ISAR, we paid an additional contingent
earn-out cash payment in the amount of $3.3 million in March 2001. The
payment amount was determined based on revenue and EBITDA of ISAR for the
year ended December 31, 2000. Additionally, in March 2001, as required under
the purchase agreement related to the acquisition of VIA NET.WORKS (Schweiz)
AG (formerly Smartcomp), we made a contingent earn-out cash payment of $3.2
million, based on year 2000 consolidated revenue and EBITDA of VIA NET.WORKS
(Schweiz) AG and its wholly-owned subsidiary, SmartWeb GmbH.
We have agreements with the minority stockholders of our majority-owned
operating companies that give us the right, after a specified period of time,
to purchase their shares in those operating companies based on predetermined
price formulas which consider revenue growth, operating results and cash
flows. In some cases, the minority stockholders, have the right to purchase
our shares in those operating companies if we do not exercise our purchase
right by a specified date. In March 2001, we exercised our right to purchase
the remaining shares of M&CNet, one of our operations in Switzerland, for
$1.1 million.
In January 2001, VIA NET.WORKS Deutschland completed the sale of its 100%
interest in Ecce Terram to that company's former owner. The transaction
resulted in no net gain or loss in the consolidated statements of VIA.
During the third quarter, we paid approximately $900,000 to retire debt and
approximately $402,000 for a back end earn-out payment recognized as
compensation expense, both in connection with the original acquisition of
DNS.
4. Property and Equipment
Property and equipment consisted of the following (in thousands of U.S.
dollars):
December 31, September 30,
2000 2001
-------- --------
Hardware and other equipment $ 23,615 $ 27,340
Network and data center assets 25,075 27,168
Software 7,595 15,133
Furniture and fixtures 2,999 3,572
-------- --------
59,284 73,213
Accumulated depreciation and amortization (20,057) (29,340)
-------- --------
Property and equipment, net $ 39,227 $ 43,873
======== ========
Depreciation expense was $2.6 million and $3.8 million for the three months
ended September 30, 2000 and 2001, respectively. Total depreciation expense
was $7.0 million and $10.4 million for the nine months ended September 30,
2000 and 2001, respectively. Certain network assets as of December
31, 2000 have been reclassified as hardware to reflect the current year
presentation.
-7-
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 31, September 30,
2000 2001
---- ----
Goodwill $220,378 $226,572
Customer base 8,360 8,680
Employee workforce 3,760 3,760
Goodwill impairment charge - (47,992)
Accumulated amortization (51,416) (84,589)
-------- --------
Total $181,082 $106,431
======== ========
Total amortization expense was $9.2 million and $9.3 million for the three
months ended September 30, 2000 and 2001, respectively. Total amortization
expense was $24.7 million and $33.5 million for the nine months ended
September 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 long-
lived assets in these countries at their estimated 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;
they were based primarily on an analysis of the operations' revenue streams,
based on multiples derived from comparable market transactions.
6. Long-term Debt
Long-term debt consisted of the following (in thousands of U.S. dollars):
December 31, September 30,
2000 2001
---- ----
Acquisition debt $ 1,495 $ -
Debt related to IRU Agreements, 12%, due quarterly to 2002 2,476 2,093
Capital lease obligations at interest rates ranging from 7.8% to 8.0%, due
monthly through 2004 866 457
Notes payable, due monthly through 2002 322 315
------- -------
5,159 2,865
Less current portion (3,265) (2,537)
------- -------
Long-term portion $ 1,894 $ 328
======= =======
Acquisition debt represents amounts due to current or former managers of
acquired businesses.
-8-
7. Treasury Stock
In June 2001, the Company announced a stock repurchase plan that will allow
the Company to spend up to $10 million to repurchase shares of its common
stock. Under the plan, the Company may repurchase shares of its common stock
from time to time, subject to market conditions, applicable legal
requirements and other factors. This plan does not require that the Company
purchase any specific number of shares and the plan may be suspended at any
time. The Company's repurchase of shares of common stock are recorded as
"Treasury Stock" and result in a reduction of "Stockholders' Equity." During
the third quarter of 2001, the Company repurchased 478,311 shares of its
common stock in connection with the aforementioned plan.
8. Contingencies
From time to time, the Company 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.
On November 5, 2001, the law firm of Wolf Haldenstein Adler Freeman & Herz
LLP issued a press release stating that it had initiated a class action
lawsuit in the District Court for the Southern District of New York against
VIA NET WORKS, Inc., certain of the underwriters who supported our initial
public offering ("IPO") and certain of our officers, under the title O'Leary
v. Via Net works et al [01-CV-9720] (the "Complaint"). While we have not yet
received service of the Complaint, we understand it alleges that the
prospectus the Company filed with its registration statement in connection
with our IPO was materially false and misleading because it failed to
disclose, among other things, that: (i) the named underwriters had solicited
and received excessive and undisclosed commissions from certain investors in
exchange for the right to purchase large blocks of VIA IPO shares; and (ii)
the named Underwriters had entered into agreements with certain of their
customers to allocate VIA IPO shares in exchange for which the customers
agreed to purchase additional VIA shares in the aftermarket at pre-
determined prices ("Tie-in Arrangements"), thereby artificially inflating
the Company's stock price. The Complaint further alleges violations of
Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and Section 10(b)
of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder
arising out of the alleged failure to disclose and the alleged materially
misleading disclosures made with respect to the commissions and the Tie-in
Arrangements in the prospectus. This Complaint is one of over 150 similar
suits filed to date against underwriters, issuers and their officers
alleging similar activities, known as "laddering". We believe that any
allegations in the Complaint of wrongdoing on the part of VIA or our
officers are without legal merit and we intend to vigorously defend against
them.
9. 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 September 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, consulting services, and
sale of third-party hardware and software. Corporate expenses that are not
allocated to one of the operating segments are shown to reconcile total
consolidated figures.
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 September 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 nine months ended September 30, 2000 and 2001,
net of intercompany revenue of $1.2 million, $3.3 million, $751,000 and $4.3
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 September 30, 2000:
Revenue....................................... $ -- 4,120 1,781 12,900 8,187 26,988
EBITDA........................................ $ (3,892) (1,363) (1,583) (65) (775) (7,678)
Assets........................................ $ 284,887 84,155 9,276 61,004 49,060 488,382
Three months ended September 30, 2001:
Revenue....................................... $ -- 4,330 1,335 8,041 7,651 21,357
EBITDA........................................ $ (2,138) (3,168) (917) (6,727) (5,120) (18,070)
Assets........................................ $ 257,144 13,672 (287) 25,219 41,603 337,351
Nine months ended September 30, 2000:
Revenue....................................... $ -- 9,740 4,721 34,840 23,221 72,522
EBITDA........................................ $ (11,632) (3,309) (4,014) 859 (2,946) (21,042)
Assets........................................ $ 284,887 84,155 9,276 61,004 49,060 488,382
Nine months ended September 30, 2001:
Revenue....................................... $ -- 13,350 4,654 25,178 27,043 70,225
EBITDA........................................ $ (8,212) (5,784) (4,248) (12,451) (12,971) (43,666)
Assets........................................ $ 257,144 13,672 (287) 25,219 41,603 337,351
A reconciliation from total EBITDA to loss before income taxes and minority
interest is as follows (in thousands of U.S. dollars):
-9-
For the For the For the For the
three months three months nine months nine months
ended September ended September ended September ended September
30, 2000 30, 2001 30, 2000 30, 2001
--------- --------- --------- ---------
EBITDA $ (7,678) $ (18,070) $ (21,042) $ (43,666)
Non-cash compensation (1,358) (748) (4,296) (2,229)
Goodwill impairment charge -- -- -- (47,992)
Depreciation and amortization (11,797) (13,110) (31,700) (43,870)
--------- --------- --------- ---------
Loss from operations (20,833) (31,928) (57,038) (137,757)
Other income and expense (3,795) 5,551 (1,571) 1,767
--------- --------- --------- ---------
Loss before income taxes and minority interest $ (24,628) $ (26,377) $ (58,609) $(135,990)
========= ========= ========= =========
The three largest revenue producing countries for the three and nine months
ended September 30, 2000, the United Kingdom, Germany and Mexico, generated
revenues in the amounts of $11.8 million, $3.4 million and $3.8 million, and
$31.5 million, $10.2 million and $9.4 million, respectively.
The three largest revenue producing countries for the three and nine months
ended September 30, 2001, the United Kingdom, Mexico and Germany, generated
revenues in the amounts of $6.3 million, $3.4 million and $2.6 million, and
$20.7 million, $10.5 million and $9.7 million, respectively. Revenue from our
U.S. operating company, for the three and nine months ended September 30,
2001 was $901,000 and $2.9 million, respectively.
10. Restatement of Financial Statements
Simultaneously with the filing of this Form 10-Q, the Company is revising its
results for the three month period ending June 30, 2001 by filing Form 10-Q/A
for that period. The principal reasons for the revision are noted in Note
1 to the consolidated financial statements in the Form 10-Q/A. In this Form
10-Q, references or comparisons to results in the second quarter 2001 are to
the restated results.
The principal effects of the restatement are noted in the table as follows:
Three months ended June 30, 2001 Six months ended June 30, 2001
As Reported As Restated As Reported As Restated
----------- ----------- ----------- -----------
Statement of Operations Data:
Revenue
Access 11,958 11,528 24,957 24,526
Value added 11,738 10,625 23,627 22,515
Other 1,279 1,279 1,827 1,827
Total Revenue 24,975 23,432 50,411 48,868
Direct Costs 12,568 12,551 26,059 26,042
Loss from Operations (77,068) (78,594) (104,301) (105,827)
Net Income (Loss) (77,484) (79,010) (107,974) (109,500)
Net Income (Loss) per share $(1.27) $(1.30) $(1.78) $(1.80)
June 30, 2001
As Reported As Restated
----------- -----------
Balance Sheet Data:
Accounts receivable ......................... 21,616 19,489
Other current assets ........................ 6,981 6,183
VAT and other taxes ......................... 2,598 2,275
Deferred revenue............................. 14,144 13,078
Cumulative translation adjustment ........... (16,627) (16,637)
Accumulated deficit ......................... (221,667) (223,193)
-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. Our U.S.
operation allows us to meet the U.S. web hosting 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, and
. continuing investment in network infrastructure and product
development.
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.
-11-
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 that
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 15 countries organized into four
geographic operating regions:
. Central and Western Europe
. United Kingdom, Ireland and Southern Europe
. South America
. North America
Percentages of Total Revenue Percentages of Total Revenue
---------------------------- ----------------------------
for the Three Months Ended for the Nine Months Ended
-------------------------- -------------------------
Country of Operation Operating Company September 30, 2001 September 30, 2001
- -------------------- ----------------- ------------------ ------------------
Central and Western Europe:
Austria Net4You...................................... 1% 1%
France VIA NET.WORKS France......................... 3% 2%
DNS.......................................... 8% 8%
Symphonie S.A. (MNET)........................ 1% 1%
Germany VIA NET.WORKS Deutschland (GTN, INS, ISAR &
Highspeed)................................. 12% 14%
The Netherlands VIA NET.WORKS Nederland (formerly bART & IAE) 6% 7%
Switzerland VIA NET.WORKS (Schweiz) (formerly Smartcomp
and M&CNET)................................ 5% 4%
United Kingdom, Ireland and Southern Europe:
United Kingdom VIA NET.WORKS UK............................. 30% 30%
Ireland VIA NET.WORKS Ireland........................ 2% 1%
Italy VIA NET.WORKS Italia......................... 1% 1%
Portugal VIA NET.WORKS Portugal....................... 3% 3%
Spain VIA NET.WORKS Espana......................... 2% 2%
South America:
Argentina VIA NET.WORKS Argentina...................... 3% 3%
ServiceNet................................... less than 1% less than 1%
Brazil VIA NET.WORKS Brasil......................... 3% 4%
North America:
Mexico VIA NET.WORKS Mexico......................... 16% 15%
United States VIA NET.WORKS USA............................ 4% 4%
-12-
RESULTS OF OPERATIONS
Three and nine months ended September 30, 2001 compared with the three and
nine months ended September 30, 2000
Revenue
Three months ended Nine months ended
September 30, September 30, % Increase/ September 30, September 30, % Increase/
2000 2001 (Decrease) 2000 2001 (Decrease)
---- ---- ----------- ---- ---- ---------
(in thousands of U.S. dollars) (in thousands of dollars)
Residential Access 2,022 1,561 (23%) 6,017 4,939 (18%)
% of Total Revenue 8% 7% 8% 7%
Business Access 14,587 9,498 (35%) 38,503 30,646 (20%)
% of Total Revenue 54% 45% 53% 44%
Value Added Services 10,379 10,298 (1%) 28,002 34,640 24%
% of Total Revenue 38% 48% 39% 49%
Total Revenue 26,988 21,357 72,522 70,225
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, is derived 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 September 30, 2001 decreased 21% to $21.4
million as compared to $27.0 million for the three months ended September 30,
2000. Revenue for the nine months ended September 30, 2001 decreased 3%
to $70.2 million as compared to $72.5 million for the nine months ended
September 30, 2000. Residential access revenue declined by 23% in the third
quarter 2001, as compared to the same period in 2000, reflecting the
continuing run-off of low margin residential customers. Business access
revenue decreased 35% for the three months ended September 30, 2001 as
compared to the three months ended September 30, 2000. This decrease resulted
primarily from the business access revenue we earned from one large wholesale
contract that peaked in the third quarter 2000 and was largely discontinued by
the first quarter 2001. Declining revenue from this and other low margin
wholesale and residential customers (which VIA obtained largely as part of its
original acquisitions) fits with VIA's strategy of focusing on higher margin
revenue streams. 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 decreased by 1% for the third quarter of 2001, as
compared to the same period in 2000. The decrease of value-added services was
partly attributable to economic conditions, which deteriorated sharply in all
our markets in the third quarter 2001 compared to the same period in 2000.
Additionally, beginning late in the first quarter 2001, in response to
deteriorating economic conditions and declining revenue growth rates in all
our markets, our operations began cost reduction programs, including the
reduction of direct costs, staff and, and in some cases, the consolidation of
office space. During the second and third quarters of 2001, the management
focus necessary to implement these cost reduction programs detracted from
revenue generation. We cannot predict whether economic conditions will
improve, but we do expect to continue our cost reduction programs through the
first half of 2002.
-13-
Internet services operating costs
Three months ended Nine months ended
September 30, September 30, % Increase/ September 30, September 30, % Increase/
2000 2001 (Decrease) 2000 2001 (Decrease)
---- ---- ----------- ---- ---- -----------
(in thousands of U.S. dollars) (in thousands of U.S. dollars)
Internet services 15,998 12,601 (21%) 41,463 38,643 (7%)
operating costs
% of Total Revenue 59% 59% 57% 55%
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 September 30, 2001 as compared to $16.0 million for the three months
ended September 30, 2000. The decrease in Internet services costs correspond
to the decrease in revenue for the three months ended September 30, 2001.
Internet services operating costs for the nine months ended September 30,
2001 decreased by 7% to $38.6 million as compared to $41.5 million for the
nine months ended September 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 expenses
Three months ended Nine months ended
September 30, September 30, % Increase/ September 30, September 30, % Increase/
2000 2001 (Decrease) 2000 2001 (Decrease)
---- ---- ----------- ---- ---- ----------
(in thousands of U.S. dollars) (in thousands of U.S. dollars)
Selling, general &
administrative costs 20,026 27,574 38% 56,397 77,477 37%
% of Total Revenue 74% 129% 78% 110%
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.
Beginning late in the first quarter 2001, in response to deteriorating
economic conditions and declining revenue growth rates in all our markets,
our operations began cost reduction programs, including the reduction of
direct costs, staff and, in some cases, the consolidation of office space. We
have incurred certain one-time expenses relating to staff lay-offs and lease
terminations, among other things. These one-time expenses, have increased our
general and administrative expenses, however, we expect recurring general and
administrative expense to decline significantly as we continue our cost
reduction programs. We expect to see additional one-time expenses at least
through the first half of 2002 as we continue to identify and implement cost
reduction opportunities.
We incurred selling, general and administrative expenses of $27.6 million for
the three months ended September 30, 2001, a 38% increase over the $20.0
million we incurred for the three months ended September 30, 2000. $2.6
million, or 34% of the increase resulted from one-time costs incurred by our
operating subsidiaries relating to our cost-reduction programs. Of this
amount, $2.1 million is comprised of severance payments and termination
benefits provided in connection with the termination of approximately 152
employees. The remaining $500,000 is comprised of lease cancellations costs,
professional fees and other related expenses. Additionally, $2.5 million or
33% of the increase in selling, general and administrative expenses on a
quarter over quarter comparison related to the 4 operations that were not
consolidated for all or part of the third quarter of 2000. Selling, general
and adm5nistrative expenses increased by 37% to $77.5 million for the nine
months ended September 30, 2001, as compared to the $56.4 million for the
corresponding period in the preceding year.
-14-
Bad debt expense for the nine months ended September 30, 2000 and 2001 was
$1.3 million and $5.3 million, respectively. The increase in bad debt was
largely attributable to the deteriorating economic conditions which
necessitate more conservative policies regarding reserving for bad debt.
Of the $27.6 million in costs in the third quarter 2001, $2.9 million, or
11%, of the costs were incurred by our corporate and regional organizations
and $24.7 million, or 89%, of the expenses were incurred by our 26
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 45% compared to the third quarter of 2000, and costs at the
operating subsidiaries increased 67% compared to the third quarter of 2000.
Depreciation, amortization and goodwill impairment
Three months ended Nine months ended
September 30, September 30, % Increase/ September 30, September 30, % Increase/
2000 2001 (Decrease) 2000 2001 (Decrease)
---- ---- ----------- ---- ---- -----------
(in thousands of U.S. dollars) (in thousands of U.S. dollars)
Depreciation and
amortization 11,797 13,110 11% 31,700 43,870 38%
% of Total Revenue 44% 61% 44% 62%
Goodwill Impairment - 47,992
% of Total Revenue 0% 68%
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 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.
Our depreciation and amortization expense was $13.1 million for the three
months ended September 30, 2001, up from $11.8 million for the three months
ended September 30, 2000. We incurred depreciation and amortization expense
of $43.9 million for the nine months ended September 30, 2001, up from $31.7
million for the nine months ended September 30, 2000. For the three months
ended September 30, 2001, $9.3 million, or 71%, of our depreciation and
amortization expense was related to the amortization of acquisition goodwill
and $3.8 million, or 29% was related to the depreciation of fixed assets. For
the same period in 2000, $9.2 million, or 78%, of our depreciation and
amortization expense was related to the amortization of acquisition goodwill
and $2.6 million, or 22% was related to the depreciation of fixed assets. For
the nine months ended September 30, 2001, $33.5 million, or 76%, of our
depreciation and amortization expense was related to the amortization of
acquisition goodwill and $10.4 million, or 24% was related to the
depreciation of fixed assets. For the nine months ended September 30, 2000,
$24.7 million, or 78%, of the total depreciation and amortization expense
related to the amortization of goodwill and $7.0 million, or 22% of the total
was related to the depreciation of fixed assets.
As a result of our acquisitions, we amortize substantial amounts of goodwill
and other intangible assets. Goodwill amortization will cease upon adoption
of SFAS 142 as of January 1, 2002. Goodwill will be periodically tested for
impairment in accordance with the provisions of SFAS 142.
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 impairment for these regions was $47.1
million, $524,000 and $324,000, respectively. As of September 30, 2001,
management concluded that no event had occurred in any of its operations that
would result in a further impairment of long-term assets. 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.
-15-
Interest income, net
Three months ended Nine months ended
September 30, September 30, % Increase/ September 30, September 30, % Increase/
2000 2001 (Decrease) 2000 2001 (Decrease)
---- ---- ----------- ---- ---- -----------
(in thousands of U.S. dollars) (in thousands of U.S. dollars)
Interest income, net 3,372 1,511 (55%) 9,420 5,876 (38%)
% of Total Revenue 12% 7% 13% 8%
For the three months ended September 30, 2001, we earned $1.6 million in
interest income, a 53% decrease over the $3.4 million we earned for the three
months ended September 30, 2000. We earned $6.2 million in interest income
for the nine months ended September 30, 2001, down from $9.4 million for the
nine months ended September 30, 2000. Interest income in both periods was
generated from investing funds received from our initial public offering in
February 2000, until those funds were used for acquisitions, operating
expenses or capital expenditures. Net proceeds from the public offering were
$333.0 million. We also incurred $61,000 of interest expense for the three
months ended September 30, 2001, as compared to $457,000 of interest expense
incurred in the same period in 2000. Interest expense for the nine months
ended September 30, 2001 and 2000 was $288,000 and $1.4 million,
respectively. Interest expense relates to the debt arising from the notes
payable to the former owners of businesses acquired and vendor financing at
both the subsidiary and corporate levels.
Foreign currency gains/(losses)
Three months ended Nine months ended
September 30, September 30, % Increase/ September 30, September 30, % Increase/
2000 2001 (Decrease) 2000 2001 (Decrease)
---- ---- ---------- ---- ---- -----------
(in thousands of U.S. dollars) (in thousands of U.S. dollars)
Foreign currency gains/(losses) (6,710) 4,684 170% (9,561) (3,358) 65%
% of Total Revenue 25% 22% 13% 5%
We recognized a $4.7 million foreign currency gain for the three months ended
September 30, 2001, as compared to a $6.7 million foreign currency loss for
the same period in the prior year. The gain in the third quarter is
primarily due to the increase in the value of the Euro and its positive
impact on our Euro denominated cash accounts, which were established to hold
part of the proceeds of our initial public offering in February 2000. Our
foreign currency loss was $3.4 million for the nine months ended September
30, 2001, as compared to a loss of $9.6 million for the nine months ended
September 30, 2000. Similarly, the loss in the nine months ended September
30, 2001, was primarily due to the decrease in the Euro and its negative
impact on the Euro denominated cash account. The remainder of the loss was
contributed by fluctuations in the five other non-Euro-linked currencies in
which we hold monetary assets.
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 September 30, 2001, we had cash and cash
equivalents of $163.5 million.
Cash used in operating activities was $47.4 million for the nine months ended
September 30, 2001 and $16.0 million for the nine months ended September 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 $24.7 million for the nine months ended
September 30, 2001 and $80.7 million for the same period in 2000. In 2001, we
used cash to increase our investment in one partially owned operation and to
make two contingent earn-out payments in connection with four companies
acquired in 2000. In the first nine months of 2000, cash was primarily used
for the acquisitions of DNS, Net4You, IAE, IMC Online, ISAR, Microtech and
SmartComp and for the increase in investments in various partially owned
subsidiaries. In both periods, we also used cash to fund continuing
investment in back-office systems and other supporting infrastructure.
-16-
Cash used by financing activities was $2.1 million for the nine months ended
September 30, 2001. In the same period in 2000, cash provided by financing
activities was $329.0 million. In the third quarter 2001, cash was used
primarily to repay debt and acquire treasury shares. In the corresponding
period in 2000, cash was primarily generated by the initial public offering
of our common stock in February 2000. 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. Despite lower than expected revenue growth rates, we believe
that our cost reduction programs will still allow us to become cash-flow
positive with significant remaining cash balances.
The foregoing statements regarding our liquidity and need for additional
capital resources 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 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. The Euro-linked currencies varied by
approximately 12% in relation to the U.S. dollar during the third quarter of
2001 and at September 30, 2001 were approximately 7% above where they were at
the beginning of the quarter. This increase in the exchange rate resulted in
a foreign currency gain of $4.7 million for the third quarter of 2001. The
Euro-linked currencies varied by approximately 15% in relation to the U.S.
dollar during the nine months ended September 30, 2001 and at that date the
Euro-linked currencies were approximately 3% below where they were at the
beginning of the year resulting in a foreign currency loss of $3.4 million
for the year. These gains and losses are primarily 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.
-17-
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
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 September 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 September 30, 2001 all of our investments are due to mature
within three 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 September 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 $3.0 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.
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PART II.
Item 1. Legal Proceedings
On November 5, 2001, the law firm of Wolf Haldenstein Adler Freeman & Herz LLP
issued a press release stating that it had initiated a class action lawsuit in
the District Court for the Southern District of New York against VIA NET.WORKS,
Inc., certain of the underwriters who supported our initial public offering
("IPO") and certain of our officers, under the title O'Leary v. Via Net.works et
al [01-CV-9720] (the "Complaint"). While we have not yet received service of
the Complaint, we understand it alleges that the prospectus the Company filed
with its registration statement in connection with our IPO was materially false
and misleading because it failed to disclose, among other things, that: (i) the
named underwriters had solicited and received excessive and undisclosed
commissions from certain investors in exchange for the right to purchase large
blocks of VIA IPO shares; and (ii) the named Underwriters had entered into
agreements with certain of their customers to allocate VIA IPO shares in
exchange for which the customers agreed to purchase additional VIA shares in the
aftermarket at pre-determined prices ("Tie-in Arrangements"), thereby
artificially inflating the Company's stock price. The Complaint further alleges
violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder arising out of the alleged failure to disclose and the alleged
materially misleading disclosures made with respect to the commissions and the
Tie-in Arrangements in the prospectus. This Complaint is one of over 150 similar
suits filed to date against underwriters, issuers and their officers alleging
similar activities, known as "laddering". We believe that any allegations in
the Complaint of wrongdoing on the part of VIA or our officers are without legal
merit and we intend to vigorously defend against them.
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
September 30, 2001, VIA has used $87.3 million for acquisitions of other
businesses, including the repayment of debt for 1999 acquisitions and increases
in VIA's investment in various partially owned subsidiaries, $36.5 million for
capital expenditures and approximately $60.9 million to fund operating losses.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibits
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Exhibit 99.1 Risk Factors
b) Reports on Form 8-K
VIA filed a report on Form 8-K on August 9, 2001 to announce VIA
NET.WORKS' second quarter 2001 results and the revision of its 2000 and
first quarter 2001 financial statements. VIA filed no other reports on
Form 8-K during the three months ended September 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: November 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: November 14, 2001 By: /s/ Catherine A. Graham
---------------------------
Catherine A. Graham
Vice President, Chief Financial Officer and
Treasurer (Principal Financial and Accounting
Officer)
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EXHIBIT INDEX
99.1 Risk Factors
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