<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number: 000-29391
----------------
VIA NET.WORKS, INC.
(Exact name of registrant as specified in its charter)
----------------
Delaware 84-1412512
(State or other jurisdiction (I.R.S. Employer 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, 2000, the aggregate market value of the 52,795,416 shares of
common stock held by non-affiliates of the registrant was $828,254,486 based on
the closing sale price ($15.688) 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, 2000, there were outstanding 52,909,620 shares of the registrant's
common stock and 6,770,001 shares of the registrant's non-voting common stock.
1
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VIA NET.WORKS, INC.
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets as of June 30, 2000 and December 31, 1999
(unaudited)...............................................................................3
Consolidated Statements of Operations for the three and six months ended
June 30, 2000 and 1999 (unaudited)........................................................4
Consolidated Statements of Cash Flows for the six months ended
June 30, 2000 and 1999 (unaudited)........................................................5
Notes to the Consolidated Financial Statements (unaudited).....................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
Of Operations............................................................................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk...............................17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................18
Item 2. Changes in Securities and Use of Proceeds................................................18
Item 3. Defaults Upon Senior Securities..........................................................18
Item 4. Submission of Matters to a Vote of Security Holders......................................18
Item 5. Other Information........................................................................18
Item 6. Exhibits and Reports on Form 8-K.........................................................19
SIGNATURES.........................................................................................20
EXHIBIT INDEX......................................................................................21
</TABLE>
2
<PAGE>
PART I
Item 1. Financial Statements
VIA NET.WORKS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands of U.S dollars, except share data)
(Unaudited)
-----------
<TABLE>
<CAPTION>
December June 30,
31, 1999 2000
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 20,067 $ 301,169
Restricted cash 15,000 12,234
Trade and other accounts receivable, net of allowance of $1,296 and $1,831, 9,197 17,620
respectively
Other current assets 3,074 4,200
------------ ------------
Total current assets 47,338 335,223
Property and equipment, net 28,909 34,601
Goodwill and other acquired intangible assets, net 115,194 130,340
Other noncurrent assets 8,142 3,688
------------ ------------
Total assets $ 199,583 $ 503,852
============ ============
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 12,735 $ 15,593
VAT and other taxes payable 1,904 2,225
Short-term notes and current portion of long-term debt 7,808 1,966
Deferred revenue 9,777 13,490
Other current liabilities and accrued expenses 5,660 8,935
------------ ------------
Total current liabilities 37,884 42,209
Long-term debt, less current portion 5,846 3,980
------------ ------------
Total liabilities 43,730 46,189
Contingencies
Minority interest in consolidated subsidiaries 4,422 1,908
Mandatorily redeemable convertible preferred stock: 180,933 -
Stockholders' equity (deficit):
Common stock, $.001 par value; 57,000,000 and 125,000,000 shares
authorized; 1,962,671 and 52,904,328 shares issued and outstanding;
respectively 2 53
Non-voting common stock, $.001 par value; 7,500,000 shares authorized; 0
and 6,770,001 shares issued and outstanding; respectively - 7
Additional paid-in capital 26,023 547,637
Accumulated deficit (36,658) (69,012)
Deferred compensation (12,788) (10,436)
Accumulated other comprehensive loss (6,081) (12,494)
------------ ------------
Total stockholders' equity (deficit) (29,502) 455,755
------------ ------------
Total liabilities, mandatorily redeemable convertible preferred stock
and stockholders' equity (deficit) $ 199,583 $ 503,852
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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VIA NET.WORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of U.S. Dollars, except share and per share data)
(Unaudited)
-----------
<TABLE>
<CAPTION>
Three Months ended Six Months ended
June 30, June 30,
---------------------------- --------------------------
1999 2000 1999 2000
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue $ 6,588 $ 26,002 $ 11,097 $ 46,021
Operating costs and expenses:
Internet services 3,336 14,877 5,561 25,241
Selling, general and administrative 6,792 18,944 10,762 36,371
Depreciation and amortization 3,002 10,437 4,872 19,903
------- ---------- ------- ----------
Total operating costs and expenses 13,130 44,258 21,195 81,515
Loss from operations (6,542) (18,256) (10,098) (35,494)
Interest income 920 4,037 1,310 6,048
Interest expense (282) (528) (558) (973)
Gain (loss) in unconsolidated affiliate 35 - (159) -
Foreign currency gains/(losses) 378 (1,358) 1,771 (2,851)
------- ---------- ------- ----------
Loss before minority interest and income taxes (5,491) (16,105) (7,734) (33,270)
Income tax expense - (382) - (500)
Minority interest in loss of consolidated 558 748 831 1,416
subsidiaries ------- ---------- ------- ----------
Net loss attributable to common stockholders (4,933) (15,739) (6,903) (32,354)
Basic and diluted loss per share attributable to $ (9.05) $ (0.26) $ (13.56) $ (0.71)
common stockholders
Shares used in computing basic and diluted loss 545,326 59,636,544 509,222 45,324,270
per share
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
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VIA NET.WORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of U.S. Dollars, except share and per share data)
(Unaudited)
_______
<TABLE>
<CAPTION>
For the six months ended
June 30,
-----------------------------------------
<S> <C> <C>
1999 2000
----------------- -----------------
Cash flows from operating activities:
Net loss $ (6,903) $ (32,354)
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation and amortization 4,872 19,903
Employee stock compensation 390 2,938
Unrealized foreign currency transaction (gains)/losses (1,771) 501
Minority interest in loss of consolidated subsidiaries (831) (1,416)
Loss in unconsolidated affiliate 159 -
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (37,380) (6,065)
Other current assets (2,841) (1,320)
Accounts payable 57 2,099
Other current liabilities and accrued expenses (2,026) 2,967
Deferred revenue 750 3,413
Other noncurrent assets (34) 286
----------------- -----------------
Cash used in operating activities (45,558) (9,048)
----------------- -----------------
Cash flows from investing activities:
Acquisitions, net of cash acquired (26,103) (31,329)
Purchases of property and equipment (2,448) (10,537)
Other assets 7 2,277
----------------- -----------------
Cash used in investing activities (28,544) (39,589)
----------------- -----------------
Cash flows from financing activities:
Repayment of debt (1,456) (3,072)
Proceeds from issuance of common stock, net 653 331,642
Proceeds from issuance of preferred stock 127,858 -
Proceeds from borrowings 4,047 516
----------------- -----------------
Cash provided by financing activities 131,102 329,086
----------------- -----------------
Effect of currency exchange rate changes on cash (274) 653
----------------- -----------------
Net increase (decrease) in cash and cash equivalents 56,726 281,102
Cash and cash equivalents, beginning of period 34,711 20,067
----------------- -----------------
Cash and cash equivalents, end of period $ 91,437 $ 301,169
================= =================
Noncash investing and financing transactions:
Common stock issued to satisfy debt $ - $ 5,183
================= =================
Common stock issued in connection with acquisitions $ - $ 3,907
================= =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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VIA NET.WORKS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
1. Basis of Presentation
The consolidated financial statements of VIA NET.WORKS, Inc. (VIA) for the
three and six month periods ended June 30, 1999 and 2000 are unaudited and
have been prepared on a basis substantially consistent with the audited
consolidated financial statements as of and for the year ended December 31,
1999, included in VIA's Annual Report on Form 10-K (Annual Report). The
financial statements should be read in conjunction with the audited
consolidated financial statements included in the Annual Report and the
unaudited consolidated financial statements for the three month period ended
March 31, 2000. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting of
normal recurring adjustments) which management considers necessary to
present fairly the consolidated financial position of VIA at June 30, 2000,
the results of its operations for the three and six month periods ended June
30, 1999 and 2000 and its cash flows for the six month periods ended June
30, 1999 and 2000. The results of operations for the three and six month
periods ended June 30, 2000 may not be indicative of the results expected
for any succeeding quarter or for the year ending December 31, 2000.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements.
Actual results may differ from those estimates.
Recent Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. Upon initial
application of SFAS No. 133, as amended by SFAS No. 38, all derivatives are
required to be recognized in the statement of financial position as either
assets or liabilities and measured at fair value. In addition, all hedging
relationships must be reassessed and documented pursuant to the provisions
of SFAS No. 133. Subsequent to the issuance of SFAS No. 133, the Financial
Accounting Standards Board issued SFAS No. 137 which defers the effective
date of SFAS No. 133 to fiscal years beginning after June 15, 2000, the
first quarter of VIA's fiscal 2001. VIA does not anticipate that this
pronouncement will have a significant effect on its results of operations or
financial position.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB No. 101) which summarizes certain of the
SEC staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. SAB No. 101, as amended by SAB
No.101B, is effective no later than the fourth fiscal quarter of fiscal
years beginning after December 15, 1999, the fourth quarter of VIA's fiscal
2000. The initial adoption of this guidance is not anticipated to have a
material impact on VIA's results of operations or financial position,
however, the guidance may impact the way in which VIA will account for
future transactions.
6
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VIA NET.WORKS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
2. Comprehensive Loss
Comprehensive loss for the three and six months ended June 30, 1999 and 2000
was as follows (in thousands of U.S. dollars):
3 months ended June 30, 6 months ended June 30,
------------------------ -----------------------
1999 2000 1999 2000
---- ---- ---- ----
Net Loss $ (4,933) $ (15,739) $ (6,903) $ (32,354)
Foreign currency translation
adjustment (1,733) (4,556) (5,171) (6,413)
------ ------ ------ ------
Comprehensive Loss $ (6,666) $ (20,295) $ (12,074) $ (38,767)
======= ======== ======== ========
3. Acquisitions of Certain Businesses
Between June 18, 1998 and June 30, 2000, VIA has acquired 22 Internet
services, web-hosting, and advanced data networking providers located in
Europe and Latin America, offering services that include Internet
connectivity, web hosting, e-commerce, Internet security and other services,
primarily to small and mid-sized businesses.
During the six months ended June 30, 2000, VIA acquired the following
companies:
<TABLE>
<CAPTION>
Aggregate Ownership
Aquiree Acquisition Purchase Interest
Business Acquired Location Date Price Acquired
-------------------------------------------------------- ------------- ------------------- --------------- -------------
<S> <C> <C> <C> <C>
Net4You EDV Dienstleistungs und Handelges.m.b.H Austria January 4, 2000 $ 2.9 million 58%
(Net4You)
DNS Telecom SAS (DNS) France January 7, 2000 11.8 million 100%
I.S.A.R. Netzwerke Dienstleistungs GmbH (ISAR) Germany February 16, 2000 8.6 million 100%
Internet Access Eindhoven BV (IAE) Netherlands April 3, 2000 7.5 million 100%
</TABLE>
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 VIA consolidated financial
statements since the acquisition dates. The purchase price of the
acquisitions has been allocated to assets acquired, including intangible
assets, and liabilities assumed, based on their respective fair values.
The allocation of the purchase price to the acquired tangible and intangible
assets of IAE has not been finalized pending an analysis of the amount of
assets and liabilities acquired. Currently, the entire excess purchase price
has been allocated to goodwill. The actual purchase accounting adjustments
may be revised and VIA may allocate a portion of the purchase price to
intangible assets other than goodwill.
7
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VIA NET.WORKS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
4. Property and Equipment
Property and equipment consisted of the following (in thousands of U.S.
dollars):
-----------------------
December June 30,
31, 1999 2000
-----------------------
Machinery and equipment $ 23,255 $ 32,895
Indefeasible rights of use (IRU) 12,484 11,818
Furniture and fixtures 2,113 3,224
Purchased software 1,752 917
-----------------------
39,604 48,854
Accumulated depreciation and amortization (10,695) (14,253)
-----------------------
Property and equipment, net $ 28,909 $ 34,601
=======================
Depreciation expense was $714,000 and $2.3 million for the three months
ended June 30, 1999 and 2000, respectively. Total depreciation expense was
$1.1 and $4.4 million for the six months ended June 30, 1999 and 2000,
respectively.
5. Goodwill and Other Acquired Intangible Assets
Goodwill and other intangible assets acquired through business acquisitions
consisted of the following (in thousands of U.S. dollars):
December June
31, 1999 30, 2000
------------- ----------
Goodwill $ 126,731 $ 155,576
Customer base 2,123 4,160
Employee workforce 1,213 1,608
---------- ---------
130,067 161,344
Accumulated amortization (14,873) (31,004)
---------- ---------
Goodwill and other acquired intangibles, net $ 115,194 $ 130,340
========== =========
Amortization expense was $2.3 and $8.1 million for the three months ended
June 30, 1999 and 2000, respectively. Amortization expense was $3.7 and
$15.5 million for the six months ended June 30, 1999 and 2000, respectively.
The value assigned to goodwill, customer base and employee workforce is
being amortized over estimated useful lives of five years.
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):
8
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VIA NET.WORKS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
<TABLE>
<CAPTION>
December June
31, 1999 30, 2000
--------- ---------
<S> <C> <C>
Acquisition debt $ 6,108 $ 1,105
Debt related to IRU Agreements, 12%, due quarterly to 2002 3,899 3,209
Capital lease obligations 858 642
Advances from related parties, noninterest bearing, due 2000 1,968 403
Notes payable 821 587
--------- ---------
13,654 5,946
Less current portion (7,808) (1,966)
--------- ---------
Long-term portion $ 5,846 $ 3,980
========= =========
</TABLE>
The acquisition obligations and advances from related parties
represent amounts due to current or former managers of acquired
businesses.
7. Contingencies
From time to time, VIA is subject to claims arising in the ordinary course
of business. In the opinion of management, no such matter, individually or
in the aggregate, exists which is expected to have a material effect on the
results of operations, cash flows or financial position of VIA.
During 1999 and 2000, VIA granted stock options to non-U.S. employees at
several of its subsidiaries in Europe and Latin America. As a result of
these stock option grants, the subsidiaries are liable for the payment of
certain employer payroll taxes and social charges based on the difference
between the exercise price and fair market value of the stock options
granted. Such payroll taxes and social charges generally become payable upon
exercise at rates ranging between 11% and 24%, as determined by the
prevailing tax laws in those jurisdictions. To date the amounts accrued for
payroll taxes and social charges have not been material, as few stock
options granted to our non-U.S. employees have been exercised.
8. Segment Reporting
VIA offers Internet connectivity, web hosting, e-commerce, Internet security
and related services to businesses and consumers in Europe and Latin
America. Both segments generate Internet-related revenues from leased lines,
dial-up Internet access, web hosting and design, consulting services, and
sale of third-party hardware and software.
Each of these geographic operating segments is considered a reportable
segment. VIA evaluates the performance of its segments based on revenue and
earnings before interest, taxes, depreciation and amortization and non-cash
compensation charges (EBITDA). The table below presents information about
the reported revenue, EBITDA and assets of VIA's segments for the three and
six month periods ended June 30, 1999 and 2000 (in thousands of U.S.
dollars).
9
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VIA NET.WORKS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
<TABLE>
<CAPTION>
Latin
Corporate Europe America Total
----------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Three months ended June 30, 1999:
Revenue $ - $ 5,283 $ 1,305 $ 6,588
EBITDA $ (1,936) $ (917) $ (297) $ (3,150)
Assets $ 189,705 $ 7,470 $ 502 $ 197,677
Three months ended June 30, 2000:
Revenue $ - $ 20,888 $ 5,114 $ 26,002
EBITDA $ (3,853) $ (570) $ (2,036) $ (6,459)
Assets $ 522,334 $ (7,339) $ (11,143) $ 503,852
Six months ended June 30, 1999:
Revenue $ - $ 8,554 $ 2,543 $ 11,097
EBITDA $ (3,276) $ (1,023) $ (537) $ (4,836)
Assets $ 189,705 $ 7,470 $ 502 $ 197,677
Six months ended June 30, 2000:
Revenue $ - $ 36,974 $ 9,047 $ 46,021
EBITDA $ (7,740) $ (1,247) $ (3,666) $ (12,653)
Assets $ 522,334 $ (7,339) $ (11,143) $ 503,852
</TABLE>
A reconciliation from total EBITDA to loss before income taxes and minority
interest is as follows:
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
<S> <C> <C> <C> <C> <C>
(in thousands of US dollars) 1999 2000 1999 2000
EBITDA $ (3,150) $ (6,459) $ (4,836) $ (12,653)
Non-cash compensation (390) (1,360) (390) (2,938)
Depreciation and amortization (3,002) (10,437) (4,872) (19,903)
-----------------------------------------------------------------------------
Loss from operations (6,542) (18,256) (10,098) (35,494)
Other income and interest income, net 1,016 2,151 2,523 2,224
Loss in unconsolidated affiliate 35 - (159) -
-----------------------------------------------------------------------------
Loss before income taxes and minority interest $ (5,491) $ (16,105) $ (7,734) $ $ (33,270)
</TABLE>
For the three and six months ended June 30, 1999, the largest contributors
to revenue, on a country basis, were the United Kingdom with $2.3 and $3.9
million and Germany with $1.7 and $3.3. million, respectively.
For the three and six months ended June 30, 2000, the largest contributors
to revenue, on a country basis, were the United Kingdom with $11.4 and $19.7
million, Germany with $3.6 and $6.8 million and Mexico with $3.6 and $6.1
million, respectively.
10
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VIA NET.WORKS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
9. Subsequent Event
On July 26, 2000, VIA acquired 100% of SmartComp AG, an Internet services
provider in Switzerland for approximately $4.2 million in cash. VIA may be
obligated to pay additional consideration of up to $3.6 million depending
upon SmartComp's operating results for the year ending December 31, 2000.
11
<PAGE>
Item. 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
OVERVIEW
VIA is a leading international provider of Internet access and services
focused on small and mid-sized businesses in Europe and Latin America. By
targeting these customers and regions, we are positioned to capitalize on some
of the most rapidly growing areas of the Internet market. Both of these regions
have a relatively low number of total Internet users, and small and mid-sized
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 small and mid-sized
businesses that have identifiable Internet needs but little or no Internet
experience. Once we have developed relationships with these customers, we can
upgrade them from entry-level Internet access services to more sophisticated and
higher margin products and services like web hosting, virtual private networks
and e-commerce solutions which will allow them to compete in both local and
global markets.
Since our founding in late 1997, we have rapidly established our
international presence by acquiring, integrating and growing 22 Internet
services, web-hosting, and advanced data networking providers in 12 European and
Latin American countries. We currently operate in Argentina, Austria, Brazil,
France, Germany, Ireland, Mexico, the Netherlands, Portugal, Spain, Switzerland
and the United Kingdom.
We are a customer-focused sales, marketing and service organization. We
leverage our local marketing, sales and customer care efforts with the benefits
of our global scale by providing our local operations international network
capacity, marketing support, capital and management resources. We believe that
our local focus combined with our global capabilities will allow us to increase
both our market share and revenue.
RECENT BUSINESS ACQUISITIONS
On April 3, 2000, VIA acquired 100% of Internet Access Eindhoven BV (IAE), a
business-focused Internet services provider located in the Netherlands, for
approximately $7.5 million in cash.
On July 26, 2000, VIA acquired a 100% interest in SmartComp AG, an Internet
services provider in Switzerland, for approximately $4.2 million in cash. We may
be obligated to pay additional consideration of up to $3.6 million depending
upon SmartComp's operating results for the year ending December 31, 2000.
RESULTS OF OPERATIONS
Three and six months ended June 30, 2000 compared with the three and six months
ended June 30, 1999
Revenue. We generate revenue primarily from the sale of Internet access
services, both dial-up and dedicated, and Internet value added services.
Internet value added services consist of web-hosting, applications hosting and
related maintenance, domain name registration, sales of hardware and third-party
software, installation, training and consulting and other services.
Revenue for the three months ended June 30, 2000 increased by 295% to $26.0
million as compared to $6.6 million for the three months ended June 30, 1999.
Revenue for the six months ended June 30, 2000 increased by 315% to $46.0
million as compared to $11.1 million for the six months ended June 30, 1999.
12
<PAGE>
Of the 295% quarterly revenue growth in 2000, 157% was organic growth
(internally generated) and 138% was acquired growth attributable to the 12
companies we acquired between July 1, 1999 and June 30, 2000. Our internally
generated revenue growth is attributable to a number of factors, including an
increase in business customers and an increase in average revenue per business
customer. We have seen an increase in the number of business customers,
particularly in our core customer base of business customers with multiple
services. We had 25,800 business customers at June 30, 1999 but have increased
our business customers by 148% through the end of June 30, 2000, with 60% of
that growth being organic (internally generated). Additionally, the average
annualized revenue per business customer increased by 18% over the first six
months of 2000. This increase is related to our focus on upgrading our customers
from entry-level Internet access to more sophisticated and higher margin
products and services, such as web-hosting, virtual private networks and e-
commerce solutions.
Internet services operating costs. Internet services operating costs are the
costs we incur to carry customer traffic over the Internet. These costs
increased by 346% to $14.9 million for the three months ended June 30, 2000, as
compared to $3.3 million for the corresponding period in the preceding year.
Internet services operating costs for the six months ended June 30, 2000
increased by 354% to $25.2 million as compared to $5.6 million for the six
months ended June 30, 1999. We incurred these costs primarily to lease lines,
purchase transit for the local networks and compensate customer care personnel
maintained by the 22 consolidated subsidiaries that we owned for all or a
portion of the six months ended June 30, 2000. We have continued to invest in
points of presence and other local network infrastructure in all 12 countries in
which we operate.
Selling, general and administrative. Selling, general and administrative
expenses are primarily compensation and occupancy costs and costs associated
with marketing our products and services. We incurred selling, general and
administrative expense of $18.9 million for the three months ended June 30,
2000, a 179% increase over the $6.8 million we incurred for the three months
ended June 30, 1999. Selling, general and administrative expenses increased by
238% to $36.4 million for the six months ended June 30, 2000, as compared to the
$10.8 million for the corresponding period in the preceding year. A portion of
the increase relates to the increase in corporate expenses, which increased by
124% from $2.3 million for the second quarter 1999 to $5.2 million for the
second quarter 2000. Non-cash compensation expense, which was $390,000 and $1.4
million for the second quarters 1999 and 2000, respectively, accounted for a
portion of this increase. Corporate expenses also increased as a result of
obtaining additional insurance coverage, hiring new corporate staff and
incurring additional legal and accounting fees as a public company. The
remaining increase resulted from the fact that we owned 22 consolidated
subsidiaries for all or a portion of the six months ended June 30, 2000, as
compared to only 10 consolidated subsidiaries for all or a portion of the
corresponding period in 1999.
Depreciation and amortization. Depreciation and amortization expenses
increased by 248% to $10.4 million for the three months ended June 30, 2000, as
compared to the $3.0 million for the corresponding period in the preceding year.
We incurred depreciation and amortization expense of $19.9 million for the six
months ended June 30, 2000, up from $4.9 million for the six months ended June
30, 1999. This increase was primarily due to the amortization of goodwill and
other intangibles arising from the acquisitions of the 12 consolidated
subsidiaries completed between July 1, 1999 and June 30, 2000. The
implementation of our international network and our global accounting software
system also increased our depreciation expense for telecommunications equipment,
computers, computer software and other fixed assets. For the three months ended
June 30, 2000, $8.1 million, or 77%, of our depreciation and amortization
expense related to the amortization of goodwill and other intangibles and $2.3
million, or 23%, was related to the depreciation of fixed
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assets. For the corresponding period in 1999, $2.3 million, or 76%, of our
depreciation and amortization expense related to the amortization of goodwill
and other intangibles and $714,000, or 24%, was related to the depreciation of
fixed assets.
Interest income. Interest income increased by 339% to $4.0 million for the
three months ended June 30, 2000, as compared to $920,000 for the same period in
the preceding year. We earned $6.0 million in interest income for the six months
ended June 30, 2000, up from $1.3 million for the six months ended June 30,
1999. This increase is due primarily to the increase in our cash balance as a
result of our initial public offering in February 2000.
Interest expense. For the three months ended June 30, 2000, we recognized
interest expense of $528,000 as compared to an expense of $282,000 for the same
period in the preceding year. Our interest expense increased by 74% to $973,000
for the six months ended June 30, 2000, up from $558,000 for the six months
ended June 30, 1999. This increase is primarily due to the increased debt that
we incurred in 2000 related to our network infrastructure expansion.
Interest in unconsolidated subsidiary. We recognized a gain of $35,000 and a
loss of $159,000 for the three and six months ended June 30, 1999, respectively,
related to our minority investment in i-way Limited (i-way). I-way is an
Internet services provider located in the United Kingdom which we originally
acquired a 36% interest in June 1998. In June 1999, we negotiated the purchase
of the remaining 64% equity interest in i-way for total consideration of $13.1
million, including cash and shares of VIA's common stock. We have not acquired
a minority interest in any other affiliates and therefore have not recognized
any losses related to investments in unconsolidated subsidiaries for the three
months and six months ended June 30, 2000.
Foreign currency gains and losses. We recognized a $1.4 million foreign
currency loss for the three months ended June 30, 2000, as compared to a
$378,000 gain for the corresponding period in the preceding year. Our foreign
currency loss was $2.9 million for the six months ended June 30, 2000, as
compared to a $1.8 million foreign currency gain for the six months ended June
30, 1999. The loss in 2000 is primarily due to the impact of the fluctuation in
the value of the Euro on our Euro denominated cash accounts. We established
these Euro denominated cash accounts in connection with our initial public
offering, in February 2000, in which we sold shares of our common stock for both
US dollars and Euros. Additionally, during the second quarter 2000, we were
operating in 12 countries and 14 different currencies as compared to operating
in only 8 countries and 10 currencies in the corresponding period in 1999. Our
operating currencies include the Euro and the US dollar.
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 million, net of underwriting discounts and
commissions. At June 30, 2000, we had cash and cash equivalents of $313.4
million, including $12.2 million in restricted cash.
Immediately subsequent to our initial public offering, we used $8.5 million
to complete the acquisition of ISAR, a German Internet services provider.
Additionally, we paid $10.4 million and issued 316,994 shares of our common
stock to repay notes we had issued to the sellers of U-Net, VIA NET.WORKS
Portugal, formerly known as Esoterica, VIA NET.WORKS Spain, also known as
Interbook, and DNS, and to acquire the remaining minority interest in Dialdata.
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Cash used in operating activities was $9.0 million for the six months ended
June 30, 2000 and $45.6 million for the six months ended June 30, 1999. In each
period, cash was used primarily to fund operating losses.
Cash used in investing activities was $39.6 million for the six months ended
June 30, 2000 and $28.5 million for the same period in 1999. In each period,
cash was primarily used for acquisitions, including bART, Medianet, Ecce Terram,
ArtInternet, VIA NET.WORKS Portugal and WWS in the first half of 1999. In the
first half of 2000, VIA acquired Net4You, DNS, ISAR and IAE and increased its
investment in various partially owned subsidiaries.
Cash provided by financing activities was $329.1 million for the six months
ended June 30, 2000 and $131.1 for the same period in 1999. In each period, cash
was primarily generated by the sale of equity securities, including the private
placement of our Series C Preferred Stock in 1999 and the initial public
offering of our common stock in 2000.
In conjunction with our acquisition of VIA NET.WORKS Mexico in October 1999,
we agreed to pay additional purchase price consideration of up to $30.0 million
based on that company's revenue growth between the time of acquisition and
December 31, 2000. Based on the formula, for the fourth quarter of 1999 and the
first quarter of 2000, we paid an aggregate of $5.5 million as additional
purchase price. We had restricted cash of $15.0 million to secure the payment of
any additional earned purchase price and are entitled to reduce the restricted
cash as payments are made. To date, we have reduced the restricted cash by half
of all payments made, equal to approximately $2.8 million.
We continue to pursue an aggressive internal growth and acquisition strategy
that we anticipate will require us to obtain significant additional funding
before we become self-sustaining. Additionally, as a result of our acquisitions,
we will continue to amortize substantial amounts of goodwill and other
intangible assets. As we grow, we expect that the amount of goodwill and other
intangibles we will amortize in connection with our investments will represent
an increasingly smaller portion of our expenses. Therefore, we expect to
continue to incur net losses until that point in time when the goodwill and
other intangibles we amortize represents a sufficiently small amount of our
expenses that it is exceeded by our net income before amortization.
The forgoing statements regarding our liquidity and need for additional
capital resources, as well as our expectations of future amortization of
goodwill and other intangibles, are forward-looking statements based on current
expectations, which involve certain risks and uncertainties. Actual results and
the timing of certain events could differ materially from these forward-looking
statements depending upon the nature, size and timing of future acquisitions and
future amounts of net income before amortization, which we cannot predict, as
well as other factors referred to in the "Risk Factors" section of VIA's Annual
Report.
Foreign Currency Exchange Risks
We conduct business in 14 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 second quarter of 2000, we
experienced similar exchange rate fluctuations in all eight of the Euro-
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linked currencies we deal in. The Euro-linked currencies varied by approximately
15% in relation to the U.S. dollar during the first half of 2000, and at June
30, 2000 were approximately 5.5% below where they were at the beginning of the
year. We realized foreign currency losses of $791,000 and $2.3 million for the
three and six months ended June 30, 2000, respectively, due to the impact of the
fluctuation in the value of the Euro on our Euro denominated cash accounts.
Future changes in the value of the Euro could have a material impact on our
financial position and results of operations. We also experienced fluctuations
in other exchange rates but they did not have a material impact on our results.
Our local operations collect revenues and pay expenses in their local
currencies. They do not have significant assets, liabilities or other accounts
denominated in currencies other than their local currency, and therefore are not
subject to exchange rate risk with respect to their normal operations. On a
consolidated basis, we are subject to exchange rate risks because we translate
our local operations' financial data into U.S. dollars.
Conversion to the Euro
On January 1, 1999, 11 of the 15 European Union member countries adopted the
Euro as their common legal currency, at which time their respective individual
currencies became fixed at a rate of exchange to the Euro, and the Euro became a
currency in its own right. Presently, the following 11 currencies are subject to
the Euro conversion: the Austrian Schilling, the Belgian Franc, the Dutch
Guilder, the Finnish Markka, the French Franc, the German Mark, the Irish Punt,
the Italian Lire, the Luxembourg Franc, the Portuguese Escudo and the Spanish
Peseta.
During a January 1, 1999 through January 1, 2002 transition period, the Euro
will exist in electronic form only and the participating countries' individual
currencies will continue in tangible form as legal tender in fixed denominations
of the Euro. During the transition period, we must manage transactions with our
customers and our third-party vendors in both the Euro and the participating
countries' respective individual currencies. We have purchased and specified our
business support systems, including accounting and billing, to accommodate Euro
transactions and dual currency operations during the transition period. In
addition, we intend to require all vendors supplying third-party software to us
to warrant that their software will be Euro compliant. Because our acquired
European companies generally have short operating histories, most of their
systems were acquired and implemented after the Euro was already contemplated.
Consequently, any expenditure related to Euro compliance has largely been, and
will be, in the normal course of business.
We conduct business transactions with customers, network suppliers, banks
and other businesses, and we will be exposed to Euro conversion problems in
these third-party systems. During the transition period, to the extent we are
supplying local service, we can continue billings and collections in the
individual currencies to avoid Euro conversion problems. However, to the extent
we have cross-border transactions in European Union countries, we will be
exposed to Euro-related risks. The establishment of the European Monetary Union
may have a significant effect on the economies of the participant countries.
While we believe that the introduction of the Euro will eliminate exchange rate
risks in respect of the currencies of those member states that have adopted the
Euro, there can be no assurance as to the relative strength of the Euro against
other currencies. Since a substantial portion of our net sales will be
denominated in the Euro or currencies of European Union countries, we will be
exposed to that risk.
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Recent Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. Upon initial
application of SFAS No. 133, as amended by SFAS No. 38, all derivatives are
required to be recognized in the statement of financial position as either
assets or liabilities and measured at fair value. In addition, all hedging
relationships must be reassessed and documented pursuant to the provisions of
SFAS No. 133. Subsequent to the issuance of SFAS No. 133, the Financial
Accounting Standards Board issued SFAS No. 137 which defers the effective date
of SFAS No. 133 to fiscal years beginning after June 15, 2000, the first quarter
of VIA's fiscal 2001. VIA does not anticipate that this pronouncement will have
a significant effect on its results of operations or financial position.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB No. 101) which summarizes certain of the SEC
staff's views in applying generally accepted accounting principles to revenue
recognition in financial statements. SAB No. 101, as amended by SAB No. 101B,
is effective no later than the fourth fiscal quarter of fiscal years beginning
after December 15, 1999, the fourth quarter of VIA's fiscal 2000. The initial
adoption of this guidance is not anticipated to have a material impact on VIA's
results of operations or financial position, however, the guidance may impact
the way in which VIA will account for future transactions.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following discussion relates to our exposure to market risk, related to
changes in interest rates and changes in foreign exchange rates. This discussion
contains forward-looking statements that are subject to risks and uncertainties.
Actual results could differ materially due to a number of factors, as set forth
in the "Risk Factors" section of VIA's Annual Report for the year ended December
31, 1999.
VIA has exposure to financial market risks, including changes in interest
rates and foreign exchange rates. At June 30, 2000, VIA's financial instruments
consisted of short-term investments and fixed rate debt related to acquisitions
and network purchases. Our investments are generally fixed rate short-term
investment grade and government securities denominated in U.S. dollars. At June
30, 2000 all of our investments are due to mature within twelve months and the
carrying value of such investments approximates fair value. The majority of our
debt obligations have fixed rates of interest.
As mentioned previously in the "Foreign Currency Exchange Risks" section,
VIA has Euro denominated cash accounts which expose the company to foreign
currency exchange rate risk. Additionally, VIA is exposed to foreign exchange
rate risk related to its obligations denominated in foreign currencies. These
obligations are a result of acquiring operating companies in various European
and Latin American countries. VIA is also subject to risk from changes in
foreign exchange rates for its international operations which use a foreign
currency as their functional currency and are translated into U.S. Dollars.
These risks cannot be reduced through hedging arrangements.
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PART II.
Item 1. Legal Proceedings
We are not a party to any material legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities.
Between April 1, 2000 and June 30, 2000, VIA sold and issued the following
unregistered securities:
(a) In April 2000, VIA sold 38,958 shares of common stock to one executive
officer for $109,999 upon his exercise of stock options. The sale was made in
reliance on Rule 701 under the Securities Act.
(b) In May 2000, VIA sold 1,750 shares of common stock to one employee for
$4,200 upon his exercise of stock options. These shares were issued in reliance
on Regulation S under the Securities Act.
(c) In June 2000, VIA issued 31,283 shares of common stock to a former
stockholder of ArtInternet in exchange for the remaining equity interests in
that company. These shares were valued at $632,855 and were issued in reliance
on Regulation S under the Securities Act.
Except where otherwise indicated, the sales and issuances of securities in the
transactions described above were exempt from registration under the Securities
Act by virtue of Section 4(2) of the Securities Act.
Appropriate legends are affixed to the stock certificates issued in the
aforementioned transactions. Similar legends were imposed in connection with any
subsequent sales of any such securities. All recipients received adequate
information about VIA or had access, through employment or other relationships,
to such information.
Use of Initial Public Offering Proceeds
On February 16 2000, VIA completed its initial public offering of shares of
common stock, par value $.001 per share. VIA's initial public offering was made
pursuant to a prospectus dated February 11, 2000, which was filed with the SEC
as part of a registration statement, file no. 333-91615, that was declared
effective by the SEC on February 10, 2000.
In total, VIA registered and sold an aggregate of 17,000,000 shares of common
stock in its initial public offering at an aggregate purchase price of $357
million. Of these shares, 16,300,000 were sold pursuant to the underwritten
portion of VIA's initial public offering, which was managed by Donaldson, Lufkin
& Jenfrette Securities Corporation, Morgan Stanley & Co. Incorporated, Salomon
Smith Barney Inc. and DLJdirect Inc. in the United States and by DLJ
International Securities, Morgan Stanley & Co. International Limited, Salomon
Brothers International Limited, Cazenove & Co. and MeesPierson N.V.
internationally. The remaining 700,000 shares were sold directly by VIA.
The estimated net offering proceeds to VIA after deducting the estimated
expenses described above and underwriting discounts and commissions was
approximately $333.0 million. From the effective date of the initial public
offering through June 30, 2000, VIA has used $31.3 million for acquisitions of
other businesses, including the repayment of debt for 1999 acquisitions and
increases in VIA's investment in various partially owned subsidiaries, $10.5 for
capital expenditures and $9.0 million to fund operating losses.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
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Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit
-------
27.1 Financial Data Schedule
b) Reports on Form 8-K
VIA filed no reports on Form 8-K during the three months ended June 30,
2000.
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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: By: /s/ David M. D'Ottavio
-------------------- ------------------------------
David M. D'Ottavio
Chief Executive Officer, Chairman
of the Board of Directors (Duly Authorized
Officer)
Date: 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
27.1 Financial Data Schedule
21
