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 JUNE 30, 2001 OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number: 000-29391
VIA NET.WORKS, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1412512
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
12100 Sunset Hills Road, Suite 110
Reston, Virginia 20190
(Address of principal executive offices)
Registrant's telephone number, including area code: (703) 464-0300
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
As of August 1, 2001, the aggregate market value of the 53,742,468 shares of
common stock held by non-affiliates of the registrant was $64,490,962 based on
the closing sale price ($1.20) of the registrant's common stock as reported on
the Nasdaq National Market on such date. (For this computation, the registrant
has excluded the market value of all shares of its common stock reported as
beneficially owned by executive officers and directors of the registrant and
certain other stockholders; such exclusion shall not be deemed to constitute an
admission that any such person is an "affiliate" of the registrant.) As of
August 1, 2001, there were outstanding 54,042,899 shares of the registrant's
common stock and 6,770,001 shares of the registrant's non-voting common stock.
EXPLANATORY NOTE
This Form 10-Q/A amends the Registrant's quarterly report on Form 10-Q for the
quarter ended June 30, 2001 as filed on August 15, 2001 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 9 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 disclosures 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 August 15, 2001. The Registrant has also not
updated Exhibit 99.1 "Risk Factors" which continues to speak as of August 15,
2001. 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 September 30, 2001.
1
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
June 30, 2001 (Restated)................................................ 3
Consolidated Statements of Operations for the three and six months
ended June 30, 2000 and 2001 (Restated)................................. 4
Consolidated Statements of Cash Flows for the six months ended
June 30, 2000 and 2001 (Restated)....................................... 5
Notes to the Consolidated Financial Statements.................................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results Of Operations........................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................. 21
PART II. OTHER INFORMATION...................................................................... 21
Item 1. Legal Proceedings............................................................... 21
Item 2. Changes in Securities and Use of Proceeds....................................... 21
Item 3. Defaults Upon Senior Securities................................................. 22
Item 4. Submission of Matters to a Vote of Security Holders............................. 22
Item 5. Other Information............................................................... 22
Item 6. Exhibits and Reports on Form 8-K................................................ 22
SIGNATURES...................................................................................... 23
EXHIBIT INDEX................................................................................... 24
2
PART I
Item 1. Financial Statements
VIA NET.WORKS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S dollars, except share data)
(Unaudited)
December 31, June 30,
2000 2001
(As Restated)
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents $237,839 $185,911
Trade and other accounts receivable, net of allowance of $3,623 and 4,224,
respectively 16,570 19,489
Other current assets 5,228 6,183
----- -----
Total current assets 259,637 211,583
Property and equipment, net 39,227 40,193
Goodwill and other acquired intangible assets, net 181,082 110,750
Other noncurrent assets 1,202 1,006
----- -----
Total assets $481,148 $363,532
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $21,866 $16,714
VAT and other taxes payable 2,332 2,275
Short-term notes and current portion of long-term debt 3,265 2,665
Deferred revenue 14,360 13,078
Other current liabilities and accrued expenses 11,852 13,905
------ ------
Total current liabilities 53,675 48,637
Long-term debt 1,894 1,340
----- -----
Total liabilities 55,569 49,977
Contingencies - -
Minority interest in consolidated subsidiaries 597 10
Stockholders' equity:
Common stock, $.001 par value; 125,000,000 shares authorized; 54,061,998 and
54,042,899 shares issued and outstanding; respectively 54 54
Non-voting common stock, $.001 par value; 7,500,000 shares authorized; 6,770,001
shares issued and outstanding 7 7
Treasury Stock, $.001 par value; 0 and 32,000 shares - (236)
Additional paid-in capital 558,196 558,300
Accumulated deficit (113,693) (223,193)
Deferred compensation (6,409) (4,750)
Accumulated other comprehensive loss (13,173) (16,637)
-------- --------
Total stockholders' equity 424,982 313,545
------- -------
Total liabilities and stockholders' equity $481,148 $363,532
======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
3
VIA NET.WORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of U.S. dollars, except share and per share data)
(Unaudited)
For the three months ended For the six months ended
June 30, June 30,
-------- --------
2000 2001 2000 2001
(As Restated) (As Restated)
------------- -------------
Revenue $ 25,638 23,432 $ 45,534 $ 48,868
-------- -------- -------- ---------
Operating costs and expenses:
Internet services 14,877 12,551 25,465 26,042
Selling, general and administrative 18,944 26,143 36,371 49,902
Goodwill impairment charge -- 47,992 -- 47,992
Depreciation and amortization 10,437 15,340 19,903 30,759
-------- -------- -------- ---------
Total operating costs and expenses 44,258 102,026 81,739 154,695
-------- -------- -------- ---------
Loss from operations (18,620) (78,594) (36,205) (105,827)
-------- -------- -------- ---------
Interest income, net 3,623 1,839 5,428 4,364
Other expense, net (114) (63) (353) (108)
Foreign currency losses (1,358) (2,497) (2,851) (8,042)
-------- -------- -------- ---------
Loss before income taxes and minority interest (16,469) (79,315) (33,981) (109,613)
Income tax expense (382) 201 (500) (131)
Minority interest in loss of consolidated subsidiaries 748 104 1,416 244
-------- -------- -------- ---------
Net loss attributable to common stockholders $(16,103) $(79,010) $(33,065) $(109,500)
======== ======== ======== =========
Basic and diluted loss per share attributable to common
stockholders $(0.27) $(1.30) $(0.73) $(1.80)
======== ======== ======== =========
Shares used in computing basic and diluted loss per share 59,636,544 60,812,900 45,324,270 60,812,045
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
4
VIA NET.WORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of U.S. dollars, except share and per share data)
(Unaudited)
For the six months ended
June 30,
------------------------
2000 2001
-------- --------
(As Restated)
------------
Cash flows from operating activities:
Net loss $(33,065) $(109,500)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 19,903 30,759
Goodwill impairment charge - 47,992
Employee stock compensation 2,938 1,480
Provision for doubtful accounts receivable 1,831 1,801
Unrealized foreign currency transaction (gains) losses 501 3,660
Minority interest in loss of consolidated subsidiaries (1,416) (244)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (7,185) (4,763)
Other current assets (1,320) (1,976)
Accounts payable 2,099 (4,293)
Other current liabilities and accrued expenses 2,967 3,197
Deferred revenue 3,413 (428)
Other noncurrent assets 286 (148)
-------- ---------
Net cash used in operating activities (9,048) (32,463)
-------- ---------
Cash flows from investing activities:
Acquisitions, net of cash acquired (31,329) (8,216)
Proceeds from the disposition of operating subsidiary 318
Purchases of property and equipment (10,537) (9,667)
Other assets 2,277 -
-------- ---------
Net cash used in investing activities (39,589) (17,565)
-------- ---------
Cash flows from financing activities:
Repayment of debt (3,072) (1,139)
Proceeds from issuance of common stock, net 331,642 47
Proceeds from borrowings 516 403
-------- ---------
Net cash provided by (used in) financing activities 329,086 (689)
-------- ---------
Effect of currency exchange rate changes on cash 653 (1,211)
-------- ---------
Net increase (decrease) in cash and cash equivalents 281,102 (51,928)
Cash and cash equivalents, beginning of period 20,067 237,839
-------- ---------
Cash and cash equivalents, end of period $301,169 $ 185,911
======== =========
Noncash investing and financing transactions:
Common stock issued to satisfy debt $5,183 $-
====== ==
Common stock issued in connection with acquisitions $3,907 $-
====== ==
The accompanying notes are an integral part of these consolidated financial
statements.
5
VIA NET.WORKS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
1. Basis of Presentation and Restatement
These consolidated financial statements for the three and six month periods
ended June 30, 2000 and 2001 and the related footnote information are unaudited
and have been prepared on a basis substantially consistent with the audited
consolidated financial statements of VIA NET.WORKS, Inc. ("VIA"or "the Company")
as of and for the year ended December 31, 2000, included in VIA's Annual Report
on Form 10-K as filed with the Securities and Exchange Commission (Annual
Report). These financial statements should be read in conjunction with the
audited consolidated financial statements and the related notes thereto included
in the Annual Report. In the opinion of management, the accompanying unaudited
financial statements contain all adjustments (consisting of normal recurring
adjustments) which management considers necessary to present fairly the
consolidated financial position of VIA at June 30, 2001 and the results of
operations and cash flows for the three and six month periods ended June 30,
2000 and 2001. The results of operations for the three and six month periods
ended June 30, 2001 may not be indicative of the results expected for any
succeeding quarter or for the year ending December 31, 2001.
On August 9, 2001, the Company announced that it was revising its financial
statements for the year ended December 31, 2000 and for the first quarter 2001
to correct certain errors involving improper accounting relating to the
recognition of certain revenue and associated costs at one of its acquired
subsidiaries. The errors, which were discovered at its Mexican subsidiary, were
identified in the course of a normal review and a subsequent more detailed
review conducted by the Company, assisted by outside professionals. During this
review, the Company and its outside professionals undertook certain procedures
to determine the nature and scope of these errors based upon information that
was presented at that time. On August 15 and 16, 2001, the Company filed amended
quarterly reports on Forms 10-Q/A for all quarters in 2000 and the first quarter
of 2001 and on Form 10-K/A for the full year 2000. Also during August 2001, the
Company terminated the senior management of its Mexican subsidiary who it
believes were responsible for the errors and engaged a new management group.
This new team has significant managerial and financial knowledge and experience,
and a strong background of working with US reporting controls and standards.
Subsequent to the end of the third quarter of 2001, this new Mexican management
group identified certain additional potential errors that had not presented
previously. Shortly thereafter, assisted by professional advisors, the Company
initiated a second review of accounting transactions at the Mexican operation.
During the course of this second review, the Company identified that prior to
August 2001, the Mexican subsidiary had improperly recorded revenue regarding
certain transactions without sufficient evidence of services having been
provided and accounted for certain disbursements, involving the same parties and
similar amounts, without sufficient evidence of services having been received.
The Company concluded that certain members of the former Mexican management team
had circumvented the Company's accounting policies and procedures by recording
revenues and costs in connection with these transactions and, accordingly,
the accounting for these transactions is being revised in this Form 10-Q/A.
In light of the discoveries in Mexico, the corporate finance group has adopted
procedures to enhance the scope of its review of financial reporting packages,
with particular focus on reporting from the Mexican subsidiary. The Company has
also increased its internal control mechanisms, for example, through lowered
authorization limits in all its operations. The Company has recently completed
the installation of its integrated financial reporting software in Mexico, which
will provide corporate finance staff the ability to view data and reconcile
accounts on a more timely basis and to assess financial transactions at the
journal entry level. This financial accounting and reporting system will be
completely implemented at the detailed level in all of the Company's operations
by the end of the fourth quarter 2001. In addition, the Company will implement
its fully integrated provisioning, billing and customer care platform in Mexico
by first quarter of 2002, which will provide Company management with greater
visibility into detailed accounting and operational records of the operation. On
the basis of the Company's response to the discoveries in Mexico, including the
steps described above, the two reviews it has conducted, and the replacement of
the Mexican management team, the Company is aware of no other material past
financial reporting issues at this operation and believes it has established the
necessary staffing, information systems and controls to assure future compliance
with the Company's financial reporting policies and procedures.
This Form 10-Q/A also addresses the adjustment of certain revenue transactions
recorded in the Company's United Kingdom operations in order to correct
inadvertent errors that arose primarily during the second quarter of 2001 in the
course of the integration of four acquired companies into a single operation in
the UK. Such integration included the consolidation of the process used to
invoice customers onto a common platform for all UK subsidiaries. During the
course of the integration, although the Company initially believed that the
integration team had taken appropriate steps to avoid such errors, it has
identified billing errors that caused revenue for the quarter ended June 30,
2001 to be overstated in the UK. The Company plans to perform integrations at
additional subsidiaries over the coming months to improve the efficiency of its
operations. It is instituting additional safeguards and controls, including
engaging outside advisors, and improving its testing methods in order to prevent
any such errors in the future integration of other operations.
For the principal effects of the revisions as to the affected period see Note 9
to the consolidated financial statements.
Recent Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. ("FAS") 141, "Business
Combinations" ("FAS 141") and FAS 142, "Goodwill and Other Intangible
Assets" ("FAS 142"). FAS 141 addresses the initial recognition and
measurement of goodwill and other intangible assets acquired in a business
combination. FAS 142 addresses the initial recognition and measurement of
intangible assets acquired outside of a business combination, whether
acquired individually or with a group of other assets, and the accounting
and reporting for goodwill and other intangibles subsequent to their
acquisition. These standards require all future business combinations to be
accounted for using the purchase method of accounting. Goodwill will no
longer be amortized but instead will be subject to impairment tests at
least annually.
The Company is required to adopt FAS 141 and FAS 142 on a prospective basis
as of January 1, 2002; however, certain provisions of these new standards
may also apply to any acquisitions concluded subsequent to June 30, 2001.
As a result of implementing these new standards, the Company will
discontinue the amortization of goodwill as of December 31, 2001.
6
2. Comprehensive Loss
Comprehensive loss for the three and six months ended June 30, 2000 and
2001 was as follows (in thousands of U.S. dollars):
Three months ended June 30, Six months ended June 30,
2000 2001 2000 2001
As Restated As Restated
----------- -----------
Net loss $(16,103) $(79,010) $(33,065) $(109,500)
Foreign currency translation adjustment (4,544) 607 (6,405) (3,464)
-------- -------- -------- ---------
Comprehensive loss $(20,647) $(78,403) $(39,470) $(112,964)
======== ======== ======== =========
3. Acquisitions of Certain Businesses
Beginning in June 1998 and continuing through October 2000, the Company made a
series of acquisitions of Internet services providers located in Europe, Latin
America and the U.S., each of which offered various Internet services including
Internet access, web hosting, ecommerce, Internet security and other services,
primarily to small and mid-sized businesses.
Each of the acquisitions has been accounted for using the purchase method of
accounting and, accordingly, the net assets and results of operations of the
acquired companies have been included in the Company's consolidated financial
statements since the acquisition dates. The purchase price of the acquisitions
was allocated to assets acquired, including intangible assets, and liabilities
assumed, based on their respective fair values at the acquisition dates.
Identifiable intangible assets as of the date of acquisition primarily consist
of a customer base, employee workforce and the trade name. Because the Company's
operating strategy following an acquisition generally results in changing the
existing target market from residential subscribers to small and mid-sized
businesses and a focus on the VIA NET.WORKS brand name, the value allocated to
the acquired customer bases and trade names has not been significant. Likewise,
due to the short operating history of most of these acquired businesses, there
is uncertainty as to employee retention. As a result, a significant portion of
the purchase price has been allocated to goodwill.
Acquisitions
Since 1998, the Company completed 26 acquisitions for cash, notes and common
stock:
Number of Businesses Aggregate Purchase Assets Liabilities
-------------------- ------------------ ------ -----------
Acquired Price Acquired Assumed
-------- ----- --------- -------
(In thousands of U.S. dollars)
1998................. 4 $39,217 $ 6,456 $ 7,148
1999................. 13 $92,327 $15,867 $18,321
2000................. 9 $75,715 $ 8,454 $ 6,356
-- ------- ------- -------
7
VIA NET.WORKS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
Total................ 26 $207,259 $30,777 $31,825
In connection with the acquisition of Net4You, we paid approximately $195,000
to the minority shareholders of that company in the first quarter of 2001. In
connection with the acquisition of DNS, we are obligated to pay off an
acquisition related promissory note, for approximately $901,000, to one of
the former owners, which we anticipate paying in the third quarter 2001.
4. Property and Equipment
Property and equipment consisted of the following (in thousands of U.S.
dollars):
December 31, June 30,
2000 2001
------------ -----------
Hardware and other equipment $ 23,615 $ 25,788
Network and data center assets 25,075 25,353
Software 7,595 10,775
Furniture and fixtures 2,999 3,396
--------- ---------
59,284 65,312
Accumulated depreciation and amortization (20,057) (25,119)
--------- ---------
Property and equipment, net $ 39,227 $ 40,193
======== ========
Depreciation expense was $2.3 million and $3.2 million for the three months
ended June 30, 2000 and 2001, respectively. Total depreciation expense was
$4.4 million and $6.6 million for the six months ended June 30, 2000 and
2001, respectively. In the United Kingdom in the first quarter 2001,
approximately $1.6 million in managed assets that were previously held under
the network and data center asset category were reclassified as hardware.
This reclassification was made based on the determination that assets held on
the customer premises should be classified as hardware rather than network
assets. Certain network assets as of December 31, 2000 have been reclassified
as hardware to reflect the current year presentation.
5. Goodwill and Other Acquired Intangible Assets
Goodwill and other intangible assets acquired through business acquisitions
consisted of the following (in thousands of U.S. dollars):
8
VIA NET.WORKS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
December 31, June 30,
2000 2001
---- ----
Goodwill $220,378 $221,961
Customer base 8,360 8,595
Employee workforce 3,760 3,760
Goodwill impairment charge - (47,992)
Accumulated amortization (51,416) (75,574)
-------- --------
Total $181,082 $110,750
======== ========
Total amortization expense was $8.1 million and $12.1 million for the three
months ended June 30, 2000 and 2001, respectively. Total amortization expense
was $15.5 million and $24.2 million for the six months ended June 30, 2000
and 2001, respectively. The value assigned to goodwill, customer base and
employee workforce is being amortized over its estimated useful life of five
years.
During the three months ended June 30, 2001, the Company determined that the
undiscounted cash flows associated with certain of its long-lived assets
would not be sufficient to recover the net book value of such assets. In
accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"), the Company has
recorded an impairment charge of approximately $48.0 million related to
operations in Mexico, United States, Spain and Brazil. The respective amounts
for this charge were $31.1 million, $16.1 million, $524,000 and $324,000.
This impairment charge was taken to reflect the operations in these countries
at fair value. The estimates of the fair values of the long-lived assets are
based on a valuation of such assets performed by management. The fair values,
as required by SFAS 121, did not consider the value of such assets in a
forced sale or liquidation and were based primarily on an analysis of the
operations' revenue streams, based on multiples derived from comparable
market transactions.
6. Short-term Notes and Long-term Debt
Short-term notes and long-term debt consisted of the following (in thousands
of U.S. dollars):
December 31, June 30,
2000 2001
------ -------
Acquisition debt $ 1,495 $ 901
Debt related to IRU Agreements, 12%, due quarterly to 2002 2,476 2,156
Capital lease obligations at interest rates ranging from 7.8% to 8.0%, due
monthly through 2004 866 453
Notes payable, due monthly through 2002 322 495
------- -------
5,159 4,005
Less current portion (3,265) (2,665)
------- -------
Long-term portion $ 1,894 $ 1,340
======= =======
The acquisition debt represents amounts due to current or former managers of
acquired businesses.
7. Contingencies
From time to time, VIA is subject to claims arising in the ordinary course of
business. In the opinion of management, no such matter, individually or in the
aggregate, exists which is expected to have a material effect on the results of
operations, cash flows or financial position of VIA.
8. Segment Reporting
The Company offers a variety of Internet access, web hosting, ecommerce,
Internet security and related services to businesses and consumers in Europe,
Latin America and the United States. As of June 30, 2001 the Company served
primary markets in 15 countries, with operations organized into four geographic
operating segments--North America, South America, the United Kingdom (UK),
Ireland and Southern Europe and Central and Western Europe. These segments
generate Internet-related revenues from leased lines, dial-up Internet access,
web hosting and design,
9
VIA NET.WORKS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
consulting services, and sale of third-party hardware and software. Corporate
expenses, which are not allocated to one of the operating segments, are shown to
reconcile to the total consolidated figures.
Beginning in the quarter ended September 30, 2000, VIA modified its definition
of total segment assets and beginning in the quarter ended December 31, 2000,
VIA reorganized its management reporting structure to create four reportable
segments rather than two. Prior amounts presented for the quarter ended June 30,
2000 have been revised to conform to the current presentation.
Each of these geographic operating segments is considered a reportable segment.
The Company evaluates the performance of its segments based on revenue and
earnings before interest, taxes, depreciation and amortization and non-cash
compensation charges ("EBITDA"). The table below presents information about the
reported revenue, EBITDA and assets of the Company's segments for the three and
six months ended June 30, 2000 and 2001, net of intercompany revenue of $1.1
million, $2.1 million, $1.9 million and $3.6 million, respectively, which was
eliminated upon consolidation. Additionally, the assets presented in this table
include intercompany receivables and payables. This table is presented in
thousands of U.S. dollars.
UK, Ireland
-----------
and Central and
---- -----------
North South Southern Western
------- ------- ----------- ---------
Corporate America America Europe Europe Total
--------- ------- ------- ------- ------- -------
Three months ended June 30,
2000:
Revenue........................................ $-- 3,233 1,517 12,471 8,417 25,638
EBITDA......................................... $ (3,853) (884) (1,516) 375 (945) (6,823)
Assets......................................... $339,286 36,563 11,196 63,909 52,195 503,149
Three months ended June 30, 2001(As Restated):
Revenue........................................ $-- 4,848 1,572 8,371 8,641 23,432
EBITDA......................................... $ (1,920) (1,357) (2,119) (4,099) (5,050) (14,545)
Assets......................................... $252,878 23,711 1,582 36,706 48,655 363,532
Six months ended June 30,
2000:
Revenue........................................ $-- 5,619 2,941 21,940 15,034 45,534
EBITDA......................................... $ (7,740) (1,946) (2,431) 925 (2,172) (13,364)
Assets......................................... $339,286 36,563 11,196 63,909 52,195 503,149
Six months ended June 30, 2001(As Restated):
Revenue........................................ $-- 9,020 3,319 17,136 19,393 48,868
EBITDA......................................... $ (6,073) (2,616) (3,331) (5,726) (7,850) (25,596)
Assets......................................... $252,878 23,711 1,582 36,706 48,655 363,532
A reconciliation from total EBITDA to loss before income taxes and minority
interest is as follows (in thousands of U.S. dollars):
For the For the For the six For the six
three months three months months months
ended June ended June ended June ended June
30, 2000 30, 2001 30, 2000 30, 2001
(As Restated) (As Restated)
----------------------------- ---------------------------
EBITDA $ (6,823) $ (14,545) $ (13,364) $ (25,596)
Non-cash compensation (1,360) (717) (2,938) (1,480)
Goodwill impairment charge -- (47,992) -- (47,992)
Depreciation and amortization (10,437) (15,340) (19,903) (30,759)
--------- --------- --------- ---------
Loss from operations (18,620) (78,594) (36,205) (105,827)
Other income, interest expense and foreign
currency losses 2,151 (721) 2,224 (3,786)
--------- --------- --------- ---------
Loss before income taxes and minority interest $ (16,469) $ (79,315) $ (33,981) $(109,613)
========= ========= ========= =========
9. Restatement of Financial Statements
As discussed in Note 1, the Company is restating the consolidated financial
statements as of June 30, 2001 and for the three and six month periods then
ended.
10
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)
11
VIA NET.WORKS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
The three largest revenue producing countries for the three and six months ended
June 30, 2000, the United Kingdom, Germany and Mexico, generated revenues in the
amounts of $11.4 million, $3.6 million and $3.2 million, and $19.7 million, $6.8
million and $5.6 million, respectively.
The three largest revenue producing countries for the three and six months ended
June 30, 2001, the United Kingdom, Mexico and Germany, generated revenues in the
amounts of $6.9 million, $3.9 million and $3.2 million, and $14.4 million, $7.0
million and $7.2 million, respectively. Revenue from our U.S. operating company,
for the three and six months ended June 30, 2001 was $987,000 and $2.0 million,
respectively.
12
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 June 30, 2001 are to
restated results. See Note 9 to the Consolidated Financial Statements.
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and related notes included in Item 1 of this
Form 10-Q. This discussion contains forward-looking statements based on current
expectations, which involve risks and uncertainties. Forward-looking statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "could," "believes," "estimates,"
"predicts," "potential" or "continue" or the negative of these terms or similar
words. Forward-looking statements on this Form 10-Q include, but by way of
example only, statements regarding our expectations about the future reach and
configuration of our network, and the future amounts and relative percentages as
compared to total revenues of our value-added revenues and our operating and
service-related costs. Actual events or results may differ materially.
Information regarding the risks, uncertainties and other factors that could
cause actual results to differ from the results in these forward-looking
statements are discussed in the "Risk Factors" included on this Form 10-Q as
Exhibit 99.1, as well as those described in the "Risk Factors" section of VIA's
Annual Report on Form 10-K as filed with the Securities and Exchange Commission
(Annual Report). You are urged to carefully consider these factors, as well as
other information contained in this Form 10-Q and in our other periodic reports
and documents filed with the Securities and Exchange Commission.
Overview
VIA NET.WORKS is a leading international provider of Internet access and value-
added services focused on small and mid-sized businesses in Europe, Latin
America and the United States. We have built our business through the
acquisition, integration and growth of 26 Internet services providers in 15
countries, all of which have been acquired since June 1998. We currently operate
in Argentina, Austria, Belgium, Brazil, France, Germany, Ireland, Italy, Mexico,
the Netherlands, Portugal, Spain, Switzerland, the United Kingdom and the United
States. By targeting businesses in Europe and Latin America, we have positioned
VIA to capitalize on some of the most rapidly growing areas of the Internet
market. Our European and Latin American markets have a relatively low number of
total Internet users, and businesses in each region have a relatively low number
of Internet services available to them. By choosing to serve these market
segments, we have the opportunity to sell our services to a large number of
businesses that have identifiable Internet needs but little or no Internet
experience. Once we have developed relationships with these customers, we seek
to upgrade them from entry-level Internet access services to more sophisticated
and higher margin solutions such as managed application hosting and virtual
private networking. In our U.S. market, we currently focus exclusively on web-
related services such as shared and dedicated web hosting, and domain name
registration, and Internet security services such as managed firewalls and
virtual private networks, or VPNs. Our U.S. operation allows us to meet the U.S.
web hosting and security needs of our large international customer base.
Our goal is to become the premier provider of international Internet
solutions for businesses in Europe and Latin America. We intend to reach our
goal by
. delivering world-class service and technical support,
. meeting business customers' needs with our reliable international
network,
. providing Internet solutions that provide businesses more productive,
cost effective ways to communicate information and transact business,
. building the VIA NET.WORKS brand name,
. delivering quality customer service through continued investment in
billing, back-office and customer care systems,
. continuing investment in network infrastructure and product
development.
13
Our pan-European and trans-Atlantic network provides our European operations
with high capacity and resilient transport, as well as redundant Internet
Protocol peering and transit arrangements. Our network is connected to the
Internet by multiple peering arrangements at major commercial Internet exchanges
and through transit agreements from multiple major carriers. Using these diverse
connections, our network dynamically routes traffic over the network of the
provider best able to deliver the data in the most efficient manner. Direct
connections to multiple major carriers and Internet exchanges assure reliable
service levels, protecting against traffic congestion and network outages. We
have designed a redundant network to avoid any single point of failure. Our U.S.
and Latin American operations are currently connected to the Internet by
multiple leased, high-speed links. We are in the process of connecting our U.S.
operations to our network and expect to expand our network and network
operations center infrastructure to Latin America as capacity becomes
commercially available.
We currently offer a comprehensive portfolio of single source Internet solutions
for business on both an integrated and stand-alone basis. Our solutions are
packaged to address the needs of businesses that have immediate needs for a web
presence or for specific Internet capabilities. Our solutions are also packaged
to address more sophisticated Internet requirements. For businesses new to the
Internet, our "Starter Solutions" provide a simple way to establish an online
presence quickly and easily. These solutions consist of pre-packaged Internet
tools that can be purchased individually or in a bundled solution, including
Internet access, email, web-site hosting and domain registration. For customers
ready to take advantage of more sophisticated Internet capabilities, our
"Tailored Solutions" combine the basic starter Internet services with advanced
Internet solutions. These customized solutions provide a comprehensive array of
Internet services which we integrate, manage and update for our customers on an
ongoing basis. Our tailored solutions include advanced connectivity services
which can address multiple-site, multiple-use and mobile user business
applications, advanced hosting services which combine basic web hosting with
more sophisticated applications such as intranets, extranets, exchanges, and
business productivity capabilities and security services which provide extensive
network security solutions to businesses of all sizes. Many of our customers do
not have the internal resources or personnel to design or maintain Internet
functions. As businesses rely more on the Internet for important business
applications, they are increasing their outsourcing of information technology
applications. To meet this need, we offer onsite, professional services to
customers. Our local operations offer a broad range of professional services to
their customers, including network and system design, web design, web-site
development and maintenance, VPN and Internet security design and
implementation, and other Internet-related services.
The following table summarizes our operations in Europe, Latin America and the
United States by geographic operating segment, country, operating company and
revenue contribution. VIA operates in 14 countries organized into four
geographic operating regions:
. Central and Western Europe
. United Kingdom, Ireland and Southern Europe
. South America
. North America
14
Percentages of Percentages of
-------------- --------------
Total Revenue Total Revenue
------------- -------------
for the Three for the Six
------------- -----------
Months Ended Months Ended
------------ ------------
June 30, 2001 June 30, 2001
------------- -------------
Operating Company (As Restated)
--------------------------------------------------------------------------
Country of Operation
--------------------
Central and Western Europe:
Austria Net4You................................................ 1% 1%
France Artinternet............................................ 2% 2%
DNS.................................................... 7% 9%
MNET................................................... 1% 1%
Germany VIA NET.WORKS Deutschland (formerly GTN)............... 7% 8%
Highspeed-Server Eisnet................................ 1% 1%
INS.................................................... 2% 2%
ISAR................................................... 3% 3%
The Netherlands bART................................................... 5% 4%
IAE.................................................... 3% 3%
Switzerland VIA NET.WORKS (Schweiz) (formerly Smartcomp and M&CNET) 4% 4%
United Kingdom, Ireland and Southern Europe:
United Kingdom VIA NET.WORKS UK....................................... 30% 30%
(formerly i-way, U-Net, WWS and Netlink)
Ireland VIA NET.WORKS Ireland (formerly MediaNet).............. 1% 1%
Italy VIA NET.WORKS Italia (formerly Meridian Microtech)..... 2% 2%
Portugal VIA NET.WORKS Portugal................................. 2% 3%
Spain VIA NET.WORKS Spain.................................... 2% 2%
South America:
Argentina VIA NET.WORKS Argentina................................ 2% 2%
ServiceNet............................................. less than 1% less than 1%
Brazil VIA NET.WORKS Brasil (formerly Dialdata)............... 4% 4%
North America:
Mexico VIA NET.WORKS Mexico (formerly InfoAcces).............. 16% 14%
United States VIA NET.WORKS USA (formerly IMC Online)................ 4% 4%
RESULTS OF OPERATIONS
Three and six months ended June 30, 2001 (As Restated) compared with the
three and six months ended June 30, 2000.
Revenue
Three months ended Six months ended
June 30, June 30, % Increase/ June 30, June 30, % Increase/
2000 2001 (Decrease) 2000 2001 (Decrease)
------ ------ ----------- ------ ------- ----------
(in thousands of U.S. dollars) (in thousands of dollars)
Residential Access 2,028 1,554 (23%) 3,995 3,378 (15%)
% of Total Revenue 8% 7% 9% 7%
Business Access 13,574 9,973 (27%) 23,916 21,148 (12%)
% of Total Revenue 53% 43% 53% 43%
Value Added Services 10,036 11,905 18% 17,623 24,342 38%
% of Total Revenue 39% 50% 38% 50%
Total Revenue 25,638 23,432 45,534 48,868
15
We generate revenue from the sale of Internet access services and Internet
value-added services. Revenue from Internet access services, both dial-up and
dedicated, derives primarily from subscriptions purchased by businesses and
consumers. Additionally, in some countries we receive revenue in the form of
payments from the telecommunications companies that our customers use to access
our services. All of our access revenues are recognized as they are earned over
the period the services are provided. Revenue from Internet value-added services
comes from web hosting, applications hosting and related maintenance, domain
name registration, Internet security services, sales of hardware and third-party
software, network installation, training and consulting and other services.
Services such as web and applications hosting and domain name registration are
generally sold on a subscription basis and are paid for in advance or by monthly
direct charges to credit or debit accounts. These revenues are recognized over
the period in which the services are provided. Revenue from hardware and third-
party software sales, installation, training and consulting, and other services
is on a contract basis. Revenue from installation, training and consulting is
recognized over the contract term as the related services are provided. Revenue
from hardware and third-party software sales is recognized upon delivery or
installation of the products, depending on the terms of the arrangement, and
when the fee is fixed or determinable and collectibility is considered probable.
Revenue for the three months ended June 30, 2001 decreased 9% to $23.4 million
as compared to $25.6 million for the three months ended June 30, 2000. Revenue
for the six months ended June 30, 2001 increased 7% to $48.9 million as compared
to $45.5 million for the six months ended June 30, 2000. Our second quarter 2001
revenue was favorably impacted by the acquisition of 5 operations that occurred
between July 1, 2000 and December 31, 2000. Residential access revenue declined
by 23% in the second quarter 2001, as compared to the same period in 2000,
reflecting the continuing run-off of low margin residential customers. Business
access revenue decreased 27% for the three months ended June 30, 2001 as
compared to the three months ended June 30, 2000. VIA obtained its wholesale and
residential customer bases as part of our original acquisitions. We do not
generally market to wholesale and residential customers in any of our operations
and hence we expect these revenues to continue to run off. Value-added services,
which include web-hosting, web-design, domain name registration, data
networking, managed bandwidth and bundled service offerings increased by 18% for
the second quarter of 2001, as compared to the same period in 2000.
Internet services operating costs
Three months ended Six months ended
June 30, June 30, % Increase/ June 30, June 30, % Increase/
2000 2001 (Decrease) 2000 2001 (Decrease)
------ --------- ----------- ------- -------- ----------
(in thousands of U.S. dollars) (in thousands of U.S. dollars)
Internet services 14,877 12,551 (16%) 25,465 26,042 2%
operating costs
% of Total Revenue 58% 54% 56% 53%
Our Internet services operating costs are the costs we incur to carry customer
traffic to and over the Internet. We lease lines that connect our points of
presence, or PoPs, either to our own network or to other network providers. We
pay other network providers for transit, which allows us to transmit our
customers' information to or from the Internet over their networks. We also pay
other recurring telecommunications costs and personnel costs, including the cost
of the local telephone lines used by customers to reach our PoPs and access our
services, and costs related to customer support and care. We expect that our
Internet services operating costs will increase by a percentage of any revenue
growth. We anticipate that these costs will decline as a percentage of revenue,
however, as we increase the percentage of higher margin value added services in
our revenue mix, expand our owned network facilities and as competition drives
the overall price of network capacity downward.
Our Internet services operating costs were $12.6 million for the three months
ended June 30, 2001. We had $14.9 million of Internet services operating costs
for the three months ended June 30, 2000. This decrease was due in part to a
one-time credit to leased line costs in one of our markets.
16
Internet services operating costs for the six months ended June 30, 2001
increased by 2% to $26.0 million as compared to $25.5 million for the six months
ended June 30, 2000. We incurred these costs primarily to lease lines, purchase
transit for the local networks and compensate customer care personnel.
Additionally, we incurred operating costs associated with our international
network that we established in June 1999.
Selling, general and administrative
Three months ended Six months ended
June 30, June 30, % Increase/ June 30, June 30, % Increase/
2000 2001 (Decrease) 2000 2001 (Decrease)
------ --------- ----------- ------- -------- ----------
(in thousands of U.S. dollars) (in thousands of U.S. dollars)
Selling, general &
administrative costs 18,944 26,143 38% 36,371 49,902 37%
% of Total Revenue 74% 112% 80% 102%
Our largest selling, general and administrative expenses are compensation costs
and the costs associated with marketing our products and services. Compensation
costs include salaries and related benefits, commissions and bonuses. In many of
our markets, we are required to make significant mandatory payments for
government-sponsored social welfare programs, and we have little control over
these costs. Our marketing expenses include the costs of direct mail and other
mass marketing programs, advertising, customer communications, trade show
participation, web site management and other promotional costs. Other selling,
general and administrative expenses include the costs of travel, rent,
utilities, insurance and professional fees. We expect that our selling, general
and administrative expenses will increase to support our growth, but decrease
over time as a percent of revenue.
We incurred selling, general and administrative expenses of $26.1 million for
the three months ended June 30, 2001, a 38% increase over the $18.9 million we
incurred for the three months ended June 30, 2000. Selling, general and
administrative expenses increased by 37% to $49.9 million for for the six months
ended June 30, 2001, as compared to the $36.4 million for the corresponding
period in the preceding year. Bad debt expense for the six months ended June 30,
2000 and 2001, was $806,000 and $1.8 million, respectively. Of the $26.1 million
in costs in the second quarter 2001, $2.6 million, or 10%, of the costs were
incurred by our corporate and regional organizations and $23.5 million, or 90%,
of the expenses were incurred by our 25 subsidiaries. Beginning in the second
quarter of 2001 the Company allocated corporate and regional expenses to the
local subsidiaries based upon revenue and other financial metrics. As a result,
corporate and regional expenses decreased, down 49% from the second quarter of
2000, and costs at the operating subsidiaries increased 52% from the second
quarter of 2000. The increase in costs is also partly attributable to planned
increases in sales staffing and training in support of our organic growth and
costs associated with the Company's integration activities in the second quarter
2001. Additionally, $2.6 million or 36% of the increase in costs at the
operating subsidiaries was due to the 5 consolidated operations acquired between
July 1, 2000 and December 31, 2000.
Depreciation, amortization and goodwill impairment
Three months ended Six months ended
June 30, June 30, % Increase/ June 30, June 30, % Increase/
2000 2001 (Decrease) 2000 2001 (Decrease)
------ --------- ----------- ------- -------- ----------
(in thousands of U.S. dollars) (in thousands of U.S. dollars)
Depreciation and
amortization 10,437 15,340 47% 19,903 30,759 55%
% of Total Revenue 41% 65% 44% 63%
Goodwill Impairment - 47,992 100% - 47,992 100%
% of Total Revenue 0% 205% 0% 98%
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
17
of use agreements (IRU) is being amortized over the lesser of the estimated
useful life or term of the agreement, generally 20 to 25 years. We expect
depreciation expense to increase as we expand our network supporting
infrastructures.
Our depreciation and amortization expense was $15.3 million for the three months
ended June 30, 2001, up from $10.4 million for the three months ended June 30,
2000. We incurred depreciation and amortization expense of $30.8 million for the
six months ended June 30, 2001, up from $19.9 million for the six months ended
June 30, 2000. For the three months ended June 30, 2001, $12.1 million, or 79%,
of our depreciation and amortization expense was related to the amortization of
acquisition goodwill and $3.2 million, or 21% was related to the depreciation of
fixed assets. For the same period in 2000, $8.1 million, or 77%, of our
depreciation and amortization expense was related to the amortization of
acquisition goodwill and $2.3 million, or 23% was related to the depreciation of
fixed assets. For the six months ended June 30, 2001, $24.2 million, or 79%, of
our depreciation and amortization expense was related to the amortization of
acquisition goodwill and $6.6 million, or 21% was related to the depreciation of
fixed assets. For the six months ended June 30, 2000, $15.5 million, or 78%, of
the total depreciation and amortization expense related to the amortization of
goodwill and $4.4 million, or 22% of the total was related to the depreciation
of fixed assets.
In the second quarter of 2001, the Company wrote down the value of the acquired
goodwill by $48.0 million. This one time adjustment relates to goodwill
impairments for operations in the North American; UK, Ireland and Southern
Europe and South American regions. The impairment charge for these regions was
$41.1 million, $524,000 and $324,000, respectively.
Three months ended Six months ended
June 30, June 30, % Increase/ June 30, June 30, % Increase/
2000 2001 (Decrease) 2000 2001 (Decrease)
------ --------- ----------- ------- -------- ----------
(in thousands of U.S. dollars) (in thousands of U.S. dollars)
Interest income 3,623 1,839 (49%) 5,428 4,364 (20%)
% of Total Revenue 14% 8% 12% 9%
For the three months ended June 30, 2001, we earned $2.1 million in interest
income, a 48% decrease over the $4.0 million we earned for the three months
ended June 30, 2000. We earned $4.6 million in interest income for the six
months ended June 30, 2001, down from $6.0 million for the six months ended June
30, 2000. Interest income in both periods was generated from investing funds
received from our initial public offering in February 2000, until those funds
are used for acquisitions, operating expenses or capital expenditures. Net
proceeds from the public offering were $333.0 million. We also incurred $211,000
of interest expense for the three months ended June 30, 2001, as compared to
$380,000 of interest expense incurred in the same period in 2000. Interest
expense for the six months ended June 30, 2001 and 2000 was $242,000 and
$586,000, respectively. Interest expense relates to the debt agreements arising
from the notes payable to the former owners of businesses acquired and lease
financing of equipment in our operating subsidiaries.
Foreign currency losses
Three months ended Six months ended
June 30, June 30, % Increase/ June 30, June 30, % Increase/
2000 2001 (Decrease) 2000 2001 (Decrease)
------ --------- ----------- ------- -------- ----------
(in thousands of U.S. dollars) (in thousands of U.S. dollars)
Foreign currency losses 1,358 2,497 84% 2,851 8,042 182%
% of Total Revenue 5% 11% 6% 16%
We recognized a $2.5 million foreign currency loss for the three months ended
June 30, 2001, as compared to a $1.4 million foreign currency loss for the same
period in the prior year. Our foreign currency loss was $8.0 million for the six
months ended June 30, 2001, as compared to a loss of $2.9 million for the six
months ended June 30, 2000. The loss in both periods was primarily due to the
impact of the fluctuation in the value of the Euro on our Euro denominated cash
accounts, which were established to hold part of the proceeds of our initial
public offering in February 2000. The remainder of the loss was contributed by
fluctuations in the five other non-Euro-linked currencies in which we hold
assets.
18
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through the sale of
equity securities. We raised approximately $181.0 million, in the aggregate,
through three private preferred stock offerings between August 1997 and April
1999. Through our initial public offering of common stock in February 2000, we
raised approximately $333.0 million, net of underwriting discounts and
commissions. At June 30, 2001, we had cash and cash equivalents of $185.9
million.
Cash used in operating activities was $32.5 million for the six months ended
June 30, 2001 and $9.0 million for the six months ended June 30, 2000. Cash
flows from operating activities can vary significantly from period to period
depending on the timing of operating cash receipts and payments and other
working capital changes, especially accounts receivable, other current assets,
accounts payable, accrued expenses and other current liabilities. In both
periods, our net losses were the primary component of cash used in operating
activities, offset by significant non-cash depreciation and amortization, non-
cash stock compensation charges and unrealized foreign currency transaction
gains and losses.
Cash used in investing activities was $17.6 million for the six months ended
June 30, 2001 and $39.6 million for the same period in 2000. In 2001 we used
cash to increase our investment in one partially owned operation and to pay two
contingent earn-out payments in connection with two companies acquired in 2000.
In the first six months of 2000, cash was primarily used for the acquisitions of
DNS, Net4You, IAE and ISAR and for the increase in investments in various
partially owned subsidiaries.
Cash used by financing activities was $689,000 for the six months ended June 30,
2001. In the same period in 2000, cash provided by financing activities was
$329.1 million. In the second quarter 2001, cash was used primarily to repay
debt. In the corresponding period in 2000, cash was primarily generated by the
initial public offering of our common stock in February 2000.
We continue to pursue an aggressive internal growth strategy, and we will
continue to consider strategic acquisitions on an opportunistic basis. Except
for the potential need to fund a specific larger acquisition, should such an
opportunity arise, we do not anticipate the need to obtain additional funding
before we become self-sustaining.
As a result of our acquisitions, we will continue to amortize substantial
amounts of goodwill and other intangible assets. As we grow, we expect that the
amount of goodwill and other intangibles we will amortize in connection with our
investments will represent an increasingly smaller portion of our expenses.
Therefore, we expect to continue to incur net losses until that point in time
when the goodwill and other intangibles we amortize represents a sufficiently
small amount of our expenses that it is exceeded by our net income before
amortization.
On a periodic basis, management reviews the carrying value of the Company's
investment in its operations to determine if an event has occurred, with respect
to any operation, which could result in an impairment of long-term assets,
primarily goodwill. In its review, management considers market and competitive
factors, operating and financial trends and the business outlook for each
operation. As of June 30, 2001, management concluded that an impairment of
goodwill and other acquired intangible assets had occurred. As a result, $48.0
million of goodwill was written off as of June 30, 2001, related to our North
American; UK, Ireland and South Europe; and South American regions. The goodwill
inpairment for these regions was $47.1 million, $524,000 and $324,000,
respectively. Future changes in operating results or business outlook could
result in a change in management's conclusions with respect to the
recoverability of its long-term assets in these and other locations.
The foregoing statements regarding our liquidity and need for additional capital
resources, as well as our expectations of future amortization of goodwill and
other intangibles, are forward-looking statements based on current expectations,
which involve certain risks and uncertainties. Actual results and the timing of
certain events could differ materially from these forward-looking statements
19
depending upon the nature, size and timing of future acquisitions, if any, and
future amounts of net income before amortization, which we cannot predict, as
well as other factors discussed in the "Risk Factors" included on this Form 10-Q
as Exhibit 99.1, as well as those described in the "Risk Factors" section of
VIA's Annual Report.
Foreign Currency Exchange Risks
We conduct business in 15 different currencies, including the Euro and the U.S.
dollar. With the exception of the Argentine Peso, the value of these currencies
fluctuates in relation to the U.S. dollar. At the end of each reporting period,
the revenues and expenses of our operating companies are translated into U.S.
dollars using the average exchange rate for that period, and their assets and
liabilities are translated into U.S. dollars using the exchange rate in effect
at the end of that period. Fluctuations in these exchange rates impact our
financial condition, revenues and results of operations, as reported in U.S.
dollars.
Exchange rates can vary significantly. During the six month period ended June
30, 2001, we experienced similar exchange rate fluctuations in all eight of
the Euro-linked currencies in which we transact business. The Euro-linked
currencies varied by approximately 8% in relation to the U.S. dollar during
the second quarter of 2001, and at June 30, 2001 were approximately 10% below
where they were at the beginning of the year. We recognized foreign currency
losses of $2.5 million and $8.0 for the three and six month periods ended
June 30, 2001, respectively, due to the impact of the fluctuation in the
value of the Euro on our Euro denominated cash accounts. Future changes in
the value of the Euro could have a material impact on our financial position
and results of operations. We also experienced fluctuations in other exchange
rates but they did not have a material impact on our results.
Our local operations transact business in their local currencies. They do not
have significant assets, liabilities or other accounts denominated in
currencies other than their local currency, and therefore are not subject to
exchange rate risk with respect to their normal operations. On a consolidated
basis, we are subject to exchange rate risks because we translate our local
operations' financial data into U.S. dollars.
Conversion to the Euro
On January 1, 1999, 11 of the 15 European Union member countries adopted the
Euro as their common legal currency, at which time their respective
individual currencies became fixed at a rate of exchange to the Euro, and the
Euro became a currency in its own right. Presently, the following 11
currencies are subject to the Euro conversion: the Austrian Schilling, the
Belgian Franc, the Dutch Guilder, the Finnish Markka, the French Franc, the
German Mark, the Irish Punt, the Italian Lire, the Luxembourg Franc, the
Portuguese Escudo and the Spanish Peseta.
During a January 1, 1999 through January 1, 2002 transition period, the Euro
will exist in electronic form only and the participating countries'
individual currencies will continue in tangible form as legal tender in fixed
denominations of the Euro. During the transition period, we must manage
transactions with our customers and our third-party vendors in both the Euro
and the participating countries' respective individual currencies. We have
purchased and specified our business support systems, including accounting
and billing, to accommodate Euro transactions and dual currency operations
during the transition period. In addition, we generally require all vendors
supplying third-party software to us to warrant that their software will be
Euro compliant. Because our acquired European companies generally have short
operating histories, most of their systems were acquired and implemented
after the Euro was already contemplated. Consequently, any expenditure
related to Euro compliance has largely been, and will be, in the normal
course of business.
We conduct business transactions with customers, network suppliers, banks and
other businesses, and we will be exposed to Euro conversion problems in these
third-party systems. During the transition period, to the extent we are
supplying local service, we can continue billings and collections in the
20
individual currencies to avoid Euro conversion problems. However, to the
extent we have cross-border transactions in European Union countries, we will
be exposed to Euro-related risks. The establishment of the European Monetary
Union may have a significant effect on the economies of the participant
countries. While we believe that the introduction of the Euro will eliminate
exchange rate risks in respect of the currencies of those member states that
have adopted the Euro, there can be no assurance as to the relative strength
of the Euro against other currencies. Because a substantial portion of our
net sales will be denominated in the Euro or currencies of European Union
countries, we will be exposed to that risk.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following discussion relates to our exposure to market risk, related to
changes in interest rates and changes in foreign exchange rates. This
discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results could differ materially due to a number of
factors, as set forth in the "Risk Factors" included as Exhibit 99.1 on this
Form 10-Q and included in the "Risk Factors" section of VIA's Annual Report
on Form 10-K for the year ended December 31, 2000.
VIA has exposure to financial market risks, including changes in interest
rates and foreign exchange rates. At June 30, 2001, VIA's financial
instruments consisted of short-term investments and fixed rate debt related
to acquisitions and network purchases. Our investments are generally fixed
rate short-term investment grade and government securities denominated in
U.S. dollars. At June 30, 2001 all of our investments are due to mature
within twelve months and the carrying value of such investments approximates
fair value. The majority of our debt obligations have fixed rates of
interest.
As mentioned previously in the "Foreign Currency Exchange Risks" section, VIA
has Euro denominated cash accounts, which expose the company to foreign
currency exchange rate risk. As of June 30, 2001, a 10 percent increase or
decrease in the level of the Euro exchange rate against the U.S. dollar with
all other variables held constant would result in a realized gain or loss of
$3.5 million. Additionally, VIA is exposed to foreign exchange rate risk
related to its obligations denominated in foreign currencies. These
obligations are a result of acquiring operating companies in various European
and Latin American countries. VIA is also subject to risk from changes in
foreign exchange rates for its international operations that use a foreign
currency as their functional currency and are translated into U.S. dollars.
These risks cannot be reduced through hedging arrangements.
PART II.
Item 1. Legal Proceedings
We are not a party to any material legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
None.
Use of Initial Public Offering Proceeds
On February 16, 2000, VIA completed its initial public offering of shares of
common stock, par value $.001 per share. VIA's initial public offering was made
pursuant to a prospectus dated February 11, 2000, which was filed with the SEC
as part of a registration statement, file no. 333-91615, that was declared
effective by the SEC on February 10, 2000.
The estimated net offering proceeds to VIA after deducting the estimated
expenses and underwriting discounts and commissions was approximately $333.0
million. From the effective date of the initial public offering through June 30,
2001, VIA has used $86.9 million for acquisitions of other businesses, including
the repayment of debt for 1999 acquisitions and increases in VIA's investment in
various partially owned
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subsidiaries, $30.0 million for capital expenditures and approximately $46.0
million to fund operating losses.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders
On May 23, 2001 we held our Annual Meeting of Shareholders at the Hyatt Regency
located at the Reston Town Center, in Reston, Virginia at 8:30 a.m.. At the
annual meeting, shareholders considered and approved the election of Class I
Director members of the board of directors, by the number of votes indicated
below:
DIRECTOR VOTES FOR WITHHELD
Stephen J. Eley................. 43,635,313 517,704
William A. Johnston............. 42,557,098 1,595,919
Mark J. Masiello................ 43,683,387 469,630
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibits
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Exhibit 99.1 Risk Factors
b) Reports on Form 8-K
VIA filed a report on Form 8-K on June 6, 2001 to announce
VIA NET.WORKS' stock repurchase plan. VIA filed no other reports on
Form 8-K during the three months ended June 30, 2001.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, VIA
NET.WORKS, Inc. has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized
VIA NET.WORKS, Inc.
Date: 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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