Exhibit 99.1
Risk Factors
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Statements in this Form 10-Q that are not historical facts are "forward-looking
statements" (as defined in the Private Securities Litigation Reform Act of
1995). These statements include but are not limited to those relating to
projections regarding future network configuration and scope, revenues and
revenue growth, costs (direct and operating costs), earnings per share, EBITDA,
specific product and service sales and capital expenditures. These statements,
when made, are intended to reflect VIA management's then current views with
respect to future events and expectations and are subject to a number of risks,
assumptions and uncertainties which could cause our actual results to differ
materially from those projected in such statements.
Discussion of Risk Factors, Assumptions and Uncertainties
Risks Related to our Business
Our combined operating history is limited and may not be indicative of our
future performance.
Although a number of the operating companies we have acquired have been in
operation for some time, VIA, as a combined operation, has a limited history of
operations. Our limited history makes it more difficult to recognize operational
or financial trends and indicators that might otherwise allow us to predict
future financial performance with a higher degree of comfort.
Because we have grown rapidly and we expect our growth to continue, we may have
difficulty managing our growth effectively, which could adversely affect the
quality of our services and the results of our operations.
We have grown rapidly through acquisitions and focusing on our core market of
small and medium-size businesses. From June 1998 through December 2000, we
acquired 26 companies and increased the total number of our employees from five
to almost 1300. We expect to continue our growth by focusing sales efforts on
value-added services to our core market and continuing to develop our base of
larger corporate customers. To manage our expected growth effectively, we must
. implement additional management information systems
. develop additional operating, administrative, financial and accounting
systems and controls
. hire and train additional personnel
. expand the reach of our network and increase our Internet points of
presence
If we are unable to meet these demands, the quality of our services may
suffer, causing us to lose customers and revenues.
Our efforts to reduce our lower margin residential and wholesale customer base
may reduce our revenues in the short or intermediate term faster than we can
generate higher margin business and value-added services revenues
We have focused our sales and product development efforts on selling higher
margin products and pursuing greater market share of the business market for
Internet and Internet-related services. In doing so, we have allowed our legacy
residential and wholesale customer base to run off and, in certain markets, have
pursued or considered the sale of such customer accounts. We may not be able to
acquire business
customer revenues as quickly as our residential customer or wholesale revenues
diminish, which could adversely affect our operating results.
If we fail to integrate operating and information systems, networks and
management of our acquired companies successfully, we may suffer operating
inefficiencies and reduced operating cash flow.
We may not be able to integrate our acquired companies to the extent that we
have assumed because we currently operate in 14 different countries with
different governmental regulations, languages, customs, currencies and
availability of telecommunication capacity to carry data. Any material failure
to integrate systems, networks or management of these operations may have a
significant negative impact on the assumptions we make or have made with respect
to cost reductions, sales and marketing opportunities as well as our ability to
adequately serve and bill our customers. In addition, we have and will continue
to commit substantial management, operating, financial and other resources to
integrate our operating companies and implement our business model, which will
continue to reduce our operating cash flow.
Our integration efforts may lead to the loss of key staff and a distraction from
revenue-generating opportunities, which may lead to lower than expected
operating results
We have acquired multiple operations in the United Kingdom, France, Germany, The
Netherlands and Switzerland. In each of these countries, we are in various
stages of integrating legally, financially and operationally the separate
companies acquired in that country into a single operation. These efforts may
create operational and personnel disruptions that may lead to the loss of key
personnel or require that we increase salaries or fringe benefits to retain
staff. In addition, integration activities require significant attention from
key management and staff at these operations, which may distract management and
staff from revenue-generating opportunities and negatively affect our results.
Financial information on which we have relied to make acquisitions may not have
been accurate, which may result in our acquiring undisclosed liabilities or
experiencing lower than expected operating results.
The companies we have acquired typically have not had audited financial
statements and historically have varying degrees of internal controls and
detailed financial information. As a result, we may have acquired undisclosed
liabilities or experience lower-than-expected revenues or higher-than-expected
costs for those companies that we have acquired recently, which could adversely
affect our future operating results. To date, no issues of this kind have arisen
that have materially adversely affected our results; however, they may arise in
the future.
Fluctuations in the exchange rate between the U.S. dollar and the various
currencies in which we conduct business may affect our operating results.
We record the revenues and expenses of our local operations in their home
currencies and translate these amounts into U.S. dollars for purposes of
reporting our consolidated results. As a result, fluctuations in foreign
currency exchange rates may adversely affect our revenues, expenses and results
of operations as well as the value of our assets and liabilities. Fluctuations
may adversely affect the comparability of period-to-period results. For example,
the average value of the Euro ((euro)) decreased by 5.4% in relation to the U.S
dollar during the quarterly period ending June 30, 2001 but increased by 6.2% in
relation to the U.S. dollar during the quarterly period ended March 31, 2001.
Because each Euro converted to fewer U.S dollars during the quarterly period
ended June 30, 2001, we reported lower revenue growth than what would be
calculated in local currencies for the second quarter of 2001, and since each
Euro converted into more U.S. dollars during the quarterly period ended March
31, 2001, we reported higher revenue growth than what would be calculated in
local currencies for the first quarter of 2001. In addition, we hold foreign
currency balances that will create foreign exchange gains or losses, depending
upon the relative values of the foreign currency at the beginning and end of the
reporting period, affecting our net income and earnings per share. For example,
the decrease in the value of the Euro from the beginning to the end of our
second quarter of 2001 resulted in a $2.5 million foreign exchange loss and a
reduction in
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earnings per share of $0.04, and the decrease in value of the Euro from the
beginning to the end of the first quarter of 2001 resulted in a $5.5 million
foreign exchange loss and a decrease in earnings per share of $.09. In
projecting future operating results, we make certain assumptions about the
fluctuation of the home currencies of our operations. If these assumptions turn
out to be materially inaccurate, our actual operating results may be materially
different from our projections.
Logistical problems or economic downturns that could result from the
introduction of the Euro may affect our ability to operate and adversely impact
our operating results.
On January 1, 1999, 11 of the 15 European Union member countries adopted the
Euro as their common legal currency, at which time their respective individual
currencies became fixed at a rate of exchange to the Euro, and the Euro became a
currency in its own right. During a January 1, 1999 to January 1, 2002
transition period, we must manage transactions with our customers and our third-
party vendors who conduct business in Euro participating countries in both the
Euro and the individual currencies. If VIA, its customers or vendors, experience
systems problems in converting to the Euro, VIA may be unable to bill and
collect from customers or pay vendors for services, and our operating results
could be materially adversely affected. To date, we have not experienced any
material problems in this conversion effort.
Our brand names are difficult to protect and may infringe on the intellectual
property rights of third parties.
We are aware of other companies using or claiming to have rights to use
trademarks that are similar to our marks and variations of those marks,
including the VIA NET.WORKS mark. We have received several demands from third
parties to cease and desist using one or more of our trademarks. The users of
these or similar marks may be found to have senior rights if they were ever to
assert a claim against us for trademark infringement. If an infringement suit
were instituted against us, even if groundless, it could result in substantial
litigation expenses in defending the suit. If such a suit were to be successful,
we could be forced to cease using the mark and to pay damages. Moreover, if we
are forced to stop using any of our trademarks, we may have to expend
significant resources to establish new brands and our operating results may be
materially impacted.
Reaction by customers, investors or regulators to the restatement of our 2000
and first quarter 2001 financial results may adversely impact our revenues and
expenses.
On August 9, 2001, we announced the restatement of our financial results for
2000 and for the first quarter of 2001. As a result of the restatement, we may
be subject to adverse customer reaction, which may make it more difficult to
attract and retain customers and lead to loss of revenues. Adverse investor
reaction and inquiries by regulators may divert management's attention from core
business needs or strategic opportunities, reduce revenue opportunities or
increase costs.
Risks Related to our Industry
Regulatory and economic conditions of the countries where our operating
companies are located are uncertain and may decrease demand for our services,
increase our cost of doing business or otherwise reduce our business prospects.
Our operating companies are located in countries with rapidly changing
regulatory and economic conditions that may affect the Internet services
industry. Any new law or regulation pertaining to the Internet or
telecommunications, or the application or interpretation of existing laws, could
decrease demand for our services, increase our costs, or otherwise reduce our
profitability or business prospects. Specific examples of the types of laws or
regulations that could adversely affect us include laws that
. impose taxes on transactions made over the Internet
. impose telecommunications access fees on Internet services providers
. directly or indirectly affect telecommunications costs generally or
the costs of Internet telecommunications specifically
. prohibit the transmission over the Internet of various types of
information and content
. impose requirements on Internet services providers to protect Internet
users' privacy or to permit government interception of data traffic
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. increase the likelihood or scope of competition from
telecommunications or cable companies
For example, Germany has enacted legislation that requires Internet services
providers to establish technical means to permit German authorities to intercept
data traffic of identified customers. The application of the legislation to
Internet services providers has been subject to significant opposition from
Internet services providers industry groups because of the significant cost that
would be imposed on service providers to comply with the law. This opposition
has led to a delay in the implementation of the law. If the law is ultimately
applied to Internet services providers, our German operations could be
significantly impacted. Also, some states of Brazil impose a tax of up to 30% on
revenues generated by communications services. There has been no judicial
determination that Internet access services constitute communications services.
If Internet services providers were ultimately required to pay this tax, our
Brazilian operations would be negatively and significantly impacted.
These laws could require us to incur costs to comply with them or to incur new
liability. They could also increase our competition or change our competitive
environment so that customer demand for our products and services is affected.
In addition to risks we face from new laws or regulations, we face uncertainties
in connection with the application of existing laws to the Internet. It may take
years to determine the manner in which existing laws governing issues like
property ownership, libel, negligence and personal privacy will be applied to
communications and commerce over the Internet.
Increasing competition for customers in our markets may cause us to reduce our
prices or increase spending, which may negatively affect our revenues and
operating results.
There are competitors in our markets with more significant market presence and
brand recognition and greater financial, technical and personnel resources than
we have. We also face competition from new entrants such as ADSL/DSL and
wireless local loop providers who may have significantly reduced cost structures
in obtaining local access connectivity to the customer. Although the competitors
we face vary depending on the market and the country, these competitors may
include local and regional Internet services providers, telecommunication
companies and cable companies. Some of our competitors, especially the
telecommunications companies, have large networks in place as well as a
significant existing customer base. As a result of this competition, we
currently face and expect to continue to face significant pressure to reduce our
prices, particularly with respect to Internet access services, and to improve
the products and services we offer.
If demand for Internet services in our markets does not grow as we expect, our
ability to grow our revenues will be negatively affected.
Internet use in our markets is relatively low. If the market for Internet
services fails to develop, or develops more slowly than expected, we may not be
able to increase our revenues at the rate we have projected. Obstacles to the
development of Internet services in our markets include:
. low rates of personal computer ownership and usage
. lack of developed infrastructure to develop Internet access and
applications
. limited access to Internet services
In particular, we depend on increasing demand for Internet services by small to
mid-sized businesses in our geographic markets. Demand for Internet services by
these businesses will depend partly on the degree to which these businesses'
customers and suppliers adopt the Internet as a means of doing business, and
partly on the extent to which these businesses adopt Internet technologies to
deal with internal business processes, such as internal communications. Demand
will also partly depend on whether there is a general
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economic downturn in these markets, which may result in a cutback of
expenditures of the services we offer. Furthermore, as competitive pressures
drive down customer prices for Internet access in many of our markets, we depend
increasingly in such markets on our ability to sell our customers higher margin,
value added services such as security services, web hosting, and ecommerce
solutions.
We are in a rapidly evolving industry in which the products and services we
offer, their methods of delivery and their underlying technologies are changing
rapidly, and if we do not keep pace with these changes, we may fail to retain
and attract customers, which would reduce our revenues.
The Internet services market is characterized by changing customer needs,
frequent new service and product introductions, evolving industry standards and
rapidly changing technology. Our success will depend, in part, on our ability to
recognize and respond to these changes in a timely and cost-effective manner. If
we fail to do so, we will not be able to compete successfully.
We rely on telecommunications companies in our markets to provide our customers
with reliable access to our services, and failures or delays in providing access
could limit our ability to service our customers and impact our revenues and
operating results.
Our customers typically access our services either through their normal
telephone lines or dedicated lines provided by local telecommunications
companies specifically for that use. In some of our markets, we experience
delays in delivery of new telephone or dedicated lines that have prevented our
customers from accessing our services. These delays result in lost revenues.
Additionally, some local telecommunications companies that provide Internet
services provide delivery of telephone or dedicated lines to their Internet
customers on a preferential basis, which may cause us to lose current and
potential customers. We also lease network capacity from telecommunications
companies and rely on the quality and availability of their service. These
companies may experience disruptions of service, which could disrupt our
services to, or limit Internet access for, our customers. We may not be able to
replace or supplement these services on a timely basis or in a cost-effective
manner, which may result in customer dissatisfaction and lost revenues.
We depend on the reliability of our network, and a system failure or a breach of
our security measures could result in a loss of customers and reduced revenues.
We are able to deliver services only to the extent that we can protect our
network systems against damages from telecommunication failures, computer
viruses, natural disasters and unauthorized access. Any system failure, accident
or security breach that causes interruptions in our operations could impair our
ability to provide Internet services to our customers and negatively impact our
revenues and results of operations. To the extent that any disruption or
security breach results in a loss or damage to our customers' data or
applications, or inappropriate disclosure of confidential information, we may
incur liability as a result. In addition, we may incur additional costs to
remedy the damages caused by these disruptions or security breaches. Although we
currently possess errors and omissions insurance, business interruption
insurance, and insurance covering losses resulting from computer viruses and
security breaches, these policies may not provide effective coverage upon the
occurrence of all events.
If we fail to attract and retain qualified personnel or lose the services of our
key personnel, our operating results may suffer.
Our success depends on our key management, engineers, sales and marketing
personnel, technical support representatives and other personnel, many of whom
may be difficult to replace. If we lose key personnel, we may not be able to
find suitable replacements, which may negatively affect our business. In
addition, since the demand for qualified personnel in our industry is very high,
we may have to increase the salaries and fringe benefits we may offer to our
personnel, which may affect our operating results. We do not maintain key person
life insurance on, or restrictive employment agreements with, any of our
executive officers.
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We may be liable for information disseminated over our network.
We may face liability for information carried on or disseminated through our
network. Some types of laws that may result in our liability for information
disseminated over our network include:
. laws designed to protect intellectual property, including trademark
and copyright laws
. laws relating to publicity and privacy rights and laws prohibiting
defamation
. laws restricting the collection, use and processing of personal data
and
. laws prohibiting the sale, dissemination or possession of pornographic
material
The laws governing these matters vary from jurisdiction to jurisdiction.
Our Latin American markets have a history of political and economic instability
which may disrupt our operations and adversely affect our results.
We derive and expect to continue to derive a material portion of our revenues
from the Latin American markets. Latin America has experienced periods of
political and economic instability. If these conditions were to reoccur, our
business could be adversely affected. Historically, instability in Latin
American countries has been caused by
. extensive governmental involvement, control or ownership of industries
in local economies, including telecommunications facilities, financial
institutions and other commerce infrastructure
. unexpected changes in regulatory requirements such as imposing
licensing requirements or levying new taxes
. slow or negative growth as a result of recessionary trends caused by
foreign currency devaluations, interest rate hikes and inflation
. wage and price controls that reduce potential profitability of
businesses
We have made no allowances for the impact of any such potential events in
financial projections we have announced. The occurrence of any such adverse
political or economic conditions may deter growth in Internet usage or create
uncertainty regarding our operating climate, which my adversely impact our
business and operating results.
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