**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 
| **(Mark One)**                                        |
|-------------------------------------------------------|
| ý                                                | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
| **For the fiscal year ended December 31,  2004** |
| **OR**                                                |
| o                                                     | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
| **For the transition period fromto**                  |

 

**Commission file number: 000-29391**

** **

**VIANET.WORKS, INC.**

(Exact name of registrant as specified in itscharter)

 
| **Delaware**                  | ** ** | **84-1412512**                       |
|-------------------------------|------------|--------------------------------------|
| (State or other jurisdiction) | ** ** | (I.R.S. Employer Identification No.) |

 

**H. Walaardt Sacrestraat 401-403**

**1117 BM Schiphol**

**Amsterdam, The Netherlands**

(Address of principal executive offices)

 

Registrant’s telephone number, including areacode: **+31 20 502 0000**

 

Securities registered pursuant to Section 12(b) ofthe Act:

**None**

 

Securities registered pursuant to Section 12(g) ofthe Act:

**Common stock par value $.001 per share**

 

Indicate by check mark whether theregistrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter periods that the registrant was required tofile such report(s)) and (2) has been subject to such filing requirementsfor the past 90 days. Yes ý  No o

 

Indicate by check mark if disclosure ofdelinquent filers pursuant to Item 405 of Regulation S-K is not containedherein, and will not be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in Part IIIof this Form 10-K or any amendment to this Form 10-K. o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Act). Yes o  No ý

 

As of April 19, 2005, non-affiliates of VIA NET.WORKS, Inc.held an aggregate of 40,031,062 shares of common stock. (For this computation,we have excluded all outstanding shares of our common stock reported asbeneficially owned by executive officers and directors of VIA and certain otherstockholders; such exclusion shall not be deemed to constitute an admissionthat any such person is an “affiliate” of VIA.) These shares were worth $32,024,849on June 30, 2004, based on the closing sale price $0.80 of our commonstock as reported on the NASDAQ SmallCap Market on that date, and were worth $8,006,212on April 19, 2005, based on the closing sale price ($0.20) of our commonstock on that date. As of April 19,2005, there were outstanding 61,103,988shares of our common stock, which is comprised of 56,053,988 shares of votingand 5,050,000 shares of non-voting common stock.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

NONE

 

 

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**VIA NET.WORKS, INC.**

 

**TABLE OF CONTENTS**

 
|                                                             | Cautionary Note Regarding Forward Looking Statements                                                 |   |
|------------------------------------------------------------------|------------------------------------------------------------------------------------------------------|--------|
|                                                             |                                                                                                 |   |
| **PART I**                                                  |                                                                                                 |   |
| Item 1.                                                          | Business                                                                                             |   |
|                                                             | Risk Factors                                                                                         |   |
| Item 2.                                                          | Properties                                                                                           |   |
| Item 3.                                                          | Legal  Proceedings                                                                                   |   |
| Item 4.                                                          | Submission  of Matters to a Vote of Security Holders                                                 |   |
|                                                             |                                                                                                 |   |
| **PART II**                                                 |                                                                                                 |   |
| Item 5.                                                          | Market  for Registrant’s Common Stock and Related Stockholder Matters                           |   |
| Item 6.                                                          | Selected  Financial Data                                                                             |   |
| Item 7.                                                          | Management’s Discussion and Analysis of  Results of Operations and Financial Condition     |   |
| Item 7A                                                          | Quantitative and Qualitative Disclosures  About Market Risk                                          |   |
| Item 8.                                                          | Financial Statements and Supplementary Data                                                          |   |
| Item 9.                                                          | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure           |   |
| Item 9A.                                                         | Controls and Procedures                                                                              |   |
|                                                             |                                                                                                 |   |
| **PART III**                                                |                                                                                                 |   |
| Item 10.                                                         | Directors and Executive Officers of the  Registrant                                                  |   |
| Item 11.                                                         | Executive Compensation                                                                               |   |
| Item 12.                                                         | Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters |   |
| Item 13.                                                         | Certain Relationships and Related  Transactions                                                      |   |
| Item 14.                                                         | Principal Accounting Fees and Services                                                               |   |
|                                                             |                                                                                                 |   |
| **PART IV**                                                 |                                                                                                 |   |
| Item 15.                                                         | Exhibits, Financial Statements, Schedules  and Reports on Form 8-K                              |   |
| SIGNATURES                                                       |                                                                                                 |
| Exhibit Index                                               |                                                                                                 |
| Index to Financial Statements and Financial  Statement Schedules |                                                                                                 |
| Certifications                                                   |                                                                                                 |

 

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**Cautionary Note Regarding****Forward-Looking Statements**

 

SOME OF THE INFORMATION CONTAINED IN THIS FORM 10-K,INCLUDING UNDER MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS UNDER PART II, ITEM 7 OF THIS FORM 10-K,CONTAINS FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS RELATE TOFUTURE EVENTS OR OUR FUTURE PERFORMANCE. THESE STATEMENTS INCLUDE BUT ARE NOTLIMITED TO THOSE RELATING TO THE LETTER OF INTENT ENTERED INTO BY THE COMPANYTO SELL ALL OF ITS BUSINESSES TO CLARANET GROUP LIMITED, THE TIMING OF THATPOTENTIAL TRANSACTION AND THE ANTICIPATED NET PROCEEDS TO SHAREHOLDERS ARISINGOUT OF THAT POTENTIAL TRANSACTION. ACTUAL EVENTS OR RESULTS MAY DIFFERMATERIALLY FROM THESE PROJECTIONS. INFORMATION REGARDING THE RISKS,UNCERTAINTIES AND OTHER FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER FROMTHE RESULTS IN THESE FORWARD-LOOKING STATEMENTS ARE DISCUSSED UNDER “RISKFACTORS” BEGINNING ON PAGE 17 OF THIS FORM 10-K. PLEASE CAREFULLYCONSIDER THESE FACTORS, AS WELL AS OTHER INFORMATION CONTAINED IN THIS FORM 10-KAND IN OUR OTHER PERIODIC REPORTS AND DOCUMENTS FILED WITH THE SECURITIES ANDEXCHANGE COMMISSION. THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-KARE MADE ONLY AS OF THE DATE OF THIS REPORT. WE DO NOT UNDERTAKE ANY OBLIGATIONTO UPDATE OR SUPPLEMENT ANY FORWARD-LOOKING STATEMENTS TO REFLECT SUBSEQUENTEVENTS OR CIRCUMSTANCES.

 

Unless the context otherwise requires, as used in this Form 10-K,the terms “VIA,” “our,” “the Company” or “we” refer to VIA NET.WORKS, Inc.and its subsidiaries.

 

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**PART I**

 

**ITEM 1****  BUSINESS**

 

**Overview**

 

VIA NET.WORKS, Inc. isa leading provider of business communication solutions to small- andmedium-sized enterprises, or SMEs, in Europe and the United States.  Through our three brands, VIA NET.WORKS, AMENand PSINet Europe, we offer a comprehensive portfolio of businesscommunications services, including web hosting, security, connectivity,networks, voice and professional services. Our headquarters are in Amsterdam and we have operations in Belgium,France, Germany, Italy, the Netherlands, Portugal, Spain, Switzerland, theUnited Kingdom and the United States.

 

Through our brands, weprovide a full suite of services to our targeted customer base:

 

•                  Our “VIA NET.WORKS” brand is targeted at SMEsthat need shared and dedicated hosting services; managed security services;connectivity through DSL; leased lines; dial-up and virtual privatenetworks, or VPN, and low-cost voice services.

 

•                  Our “Amen” brand provides self-managed,value-based hosting products and services to SMEs, such as low-costautomated shared and dedicated hosting services, including domain nameregistration and website creation and management tools.

 

•                  Our “PSINet Europe” brand is targeted atlarger SMEs, providing high-end hosting, IT outsourcing,e-business infrastructure, collocation and managed security solutions, as wellas comprehensive data center services. Our PSINet Europe offices also offer sophisticated VPN, frame-relay,leased-line services to provide a full suite of communication services.

 

Our sales operations are organized into the following channels:

 

•                  Amen &VIA Express channels:  Through thesechannels, we sell our more basic, lower-cost services to small businesses,resellers and IT developers by direct mail and by advertising in a variety ofprint, online media and direct marketing publications.  These marketing tools are designed to steercustomers to our telephone-based sales and Internet stores.

 

•                  OurIndustry Solutions channel, which comprises the PSINet Europe companiesactivities as well as most of the VIA legacy businesses, includes all of our direct sales forceprofessionals.  It is designed to marketand sell a higher-value portfolio of bundled services, such as virtual privatenetworks and security products. Industry Solutions tailors products to targetedmarkets where overall value is the key difference between competitors ratherthan the price of each individual service.

 

**Recent Events and Potential Saleof the Businesses**

 

OnMarch 17, 2005, we announced that a combination of factors includingunanticipated revenue shortfalls in certain of our legacy VIA companies and ournew VIA Express Microsoft® web-hosting product line would leave theCompany with insufficient cash reserves to continue the overall operations ofthe Companyand that it was working with professional advisors to obtain new financing toaddress the issue. We also noted that with the support of our advisors, we werepursuing two parallel processes to maximize our strategic alternatives andoptimize the value that is inherent in the VIA businesses.  In the first of the processes, we engaged indiscussions with a number of parties with a view to selling all or parts of ourbusiness operations. In the second of the two processes, we sought potentialinvestors to provide funds sufficient to enable the Company to continue as agoing concern.

 

OnApril 1, 2005, we announced the sale of two of our Swiss companies — VIANET.WORKS (Schweiz) AG and VIA NET.WORKS Services AG — to former managers andowners of the business, for a purchase price of CHF 3.5 million, orapproximately US$3.1 million.  The netproceeds of the sale provided VIA with additional liquidity to continue itsdiscussions for refinancing and sale transactions.

 

On April 10, 2005, VIA NET.WORKS, Inc. entered into a letter of intent, or Letter, with Claranet Group Limited (Claranet), a privately-held European Internet services provider based in the United Kingdom, to sell all of our business operations in Europe and the United States.  The key terms of the proposed transaction, or the Claranet Sale, are as follows:

 

•      Claranet would acquire the shares of our European and U.S. operating subsidiaries and certain assets and liabilities pertaining to our centralized back office financial and technical support systems that are owned by the group parent company, VIA NET.WORKS, Inc.

 

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•                  VIA would transfer employment contracts of certain headquarters personnel who are responsible for supporting the back office and technical support systems to appropriate VIA operating companies or Claranet would offer employment to such persons.

 

•                  VIA would retain all other debts and liabilities of the group parent company, including but not limited to expenses relating to the headquarters office lease in Schiphol-Oost, VIA senior executives and all other headquarters staff, corporate vendors and professional advisors, and remaining payment obligations to sellers of the PSINet Europe group and the Amen group.

 

•      Claranet made a deposit of $3,000,000 against the purchase price in order to secure the rights to negotiate exclusively with the Company until 30 April 2005:

 

•                  The deposit was partially funded by the release of £1.0 million from the escrow established by Claranet in favour of VIA in connection with the purchase by Claranet in September 2004 of VIA NET.WORKS UK Limited, our legacy operations in the United Kingdom.

 

•                  The deposit would be forfeited by Claranet and it would pay VIA a $500,000 break fee if:

 

•                  definitive agreements for the contemplated transactions have not been executed by the parties by April 30, 2005, or

 

•                  Claranet determines not to proceed with the transaction, or breaches the definitive agreements prior to the closing.

 

Otherwise, approximately $1.1 million, the portion of the deposit in excess of the £1.0 million escrow, would be credited to Claranet as payment against the purchase price at closing.

 

•                  The deposit and interest thereon shall be returned to Claranet unless

 

•                  forfeited by Claranet as noted above,

 

•                  the deposit has been credited to Claranet at the closing, or

 

•                  closing of the transaction does not occur on or before 120 days after the date of execution of the definitive acquisition agreements, referred to below as the Back-Stop Date, or

 

•                  there is a VIA Break Trigger, which is described below.

 

•      If there is a VIA Break Trigger, VIA would be required to return the $3 million deposit and pay Claranet a $500,000 break fee plus professional fees up to a maximum $250,000.  A VIA Break Trigger includes any of the following events:

 

•                  VIA’s Board of Directors determines not to enter into the Claranet Sale transaction or accepts a competing offer

 

•                  VIA enters into a legal binding agreement for a competing proposal

 

•                  the Board of Directors does not recommend the Claranet Sale transaction to VIA’s shareholders

 

•                  VIA’s shareholders fail to approve the Claranet Sale transaction before the Back Stop Date

 

•                  the Board of Directors fail to act in good faith in respect of the negotiations toward definitive agreements, or

 

•                  there is a material adverse change in VIA’s business between the date of the Letter and the targeted date for signing of a definitive purchase agreement.  A material adverse change includes, among other things, a material change in cash flow projections, litigation and other claims against the Company, and significant incidents of non-renewal or cancellation of customer contracts.

 

•      The proposed transaction would be subject to approval by the Company’s shareholders; a proxy statement would be distributed as soon as possible after signing of definitive agreements and review by the Securities and Exchange Commission.

 

•      For the period between the signing of the definitive purchase agreement and closing of the transaction, Claranet would provide an interim working capital facility of up to $6 million bearing interest at 8.0% per annum.

 

•                  VIA will pay a $400,000 arrangement fee for the facility, which would be waived at Closing, assuming the parties complete the transactions.

 

•                  The facility would be secured by pledges by VIA of shares in certain of its European subsidiaries.

 

•                  The purchase price would be reduced by the amount that VIA drew down on this facility.

 

We are in the process of negotiating definitive purchase, interim working capital financing and other agreements pertaining to the proposed Claranet Sale, with a view towards execution of the agreements by April 30, 2005.  The definitive agreements would be subject to various conditions to completion, including absence of material adverse change in VIA’s business. There can be no assurance that VIA will be successful in negotiating the definitive agreements or achieving completion of the proposed transaction. If the agreements are successfully concluded, we would expect to convene a meeting of our shareholders within the next two or three months to consider the Claranet Sale for approval. If we received approval from our shareholders, we would seek to close the transaction shortly after the shareholder’s meeting and use the net proceeds to pay off the remaining liabilities of the Company and shut down our corporate headquarters and terminate the remaining employees.  Remaining funds would then be distributed to our 

 

 

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shareholders. We are currently preparing an analysis of the potential return or range of returns to our shareholders if the Claranet Sale is closed on the terms described in the Letter, which is expected to be included in the proxy statement to be distributed to our shareholders in connection with the proposed shareholder meeting.

 

# **Our Current Business Model**

# ** **

Our business modelhistorically focused on providing primarily dial-up and leased-line Internetaccess services to small to mid-sized enterprises.  With the acquisition of the Amen and PSINetbusinesses and sale of VIA NET.WORKS UK Ltd. in 2004, we now focus primarily onoffering web-hosting and Internet security services that we can deliver on ourown product platforms.  By the termplatform, we mean the mechanism through which we deliver services to ourcustomers, including our internally owned or substantially ownedinfrastructure, software, hardware and connections.  These services have more attractive marginlevels than dial-up and access services. We have re-positioned our business to deliver web-hosting and Internetsecurity services on our own platforms, as delivery of these services is morelikely to be profitable for us than delivering services that require relianceon third party platforms.  We do stilloffer access services through dial-up, leased-line and DSL Internettechnologies, primarily acting as a reseller of third party accessproviders.  Our sales force generallyoffers these services bundled with higher margin hosting or securityservices.  However, we do offer DSLservices on a stand-alone basis through our automated on-line platforms.

 

**Web-hosting Services**

 

Web site hosting offersbusiness customers a presence on the Internet, providing them with enhancedmarketing and customer service capabilities, as well as opportunities toincrease productivity and eliminate costs. Our web hosting services are complementedby web site authoring,  and managementservices. Additionally, our advanced hosting services offer more sophisticatedapplications such as intranets, extranets and business productivitycapabilities, along with mirroring, caching, and clustering services. We alsoprovide domain registration services and search optimization services tofurther assist our customers to establish and expand their on-line presence.

 

During 2004, we supportedour business model shift by completing two strategic acquisitions:

 

•                  In January 2004, we purchased 100% ofthe issued and outstanding shares of Agence Des Medias Numériques S.A.S.(Amen France), Agencia De Média NumericaEspaña, S.L. (Amen Spain) and Amen Limited (Amen UK) (collectively “Amen”), agroup of European web hosting companies based in Paris, France, with additionaloperations in Spain, Italy and the UK.  We acquired Amen to strengthen ouroperations by leveraging Amen’s shared web hosting operating platform andservice offerings.  To date, Amen’s performancehas been consistent with our expectations, both financially and operationally.Since the acquisition and through December 31, 2004, Amen has contributedapproximately $3.7 million of positive total cash flows.  The Amen groupnow represents approximately 12% of VIA’s consolidated revenues.

 

•                  On August 20, 2004, we completed theacquisition of PSINet Europe’s operations in Belgium, France, Germany, theNetherlands and Switzerland. These operations provide managed hosting, managednetworks and monitored access services to more than 3,700 customers in mainlandEurope. We acquired the PSINet Europe group to increase our revenues generatedfrom hosting services and to support the development of our Industry Solutionschannel. In the period up to December 31, 2004, the PSINet Europe group’sperformance has been consistent with our expectations both financially andoperationally. Since the acquisition and through December 31, 2004, thegroup has contributed revenues of approximately $15.7 million representing 23%of VIA’s consolidated revenues.

 

On the web-hosting side, theAmen acquisition provided us with a model for addressing the self-serviceweb-hosting market.  Through our Amen andVIA Express channels we employ a highly automated web-sales platform to allowcustomers to establish, maintain, and upgrade their accounts, and also receivecustomer service and technical information online.

 

One of the key elements ofthe Amen acquisition was its technology and infrastructure, which automates thesales, payment and domain name and hosting package account set-up processes.Accordingly, we have used the Amen infrastructure as a core element of ourapproach to this market. The automation of these functions in VIA operationshas enabled us to reduce the administrative and support costs associated withlower-priced web-hosting services.

 

The PSINet Europeacquisition, meanwhile, also has contributed significantly to our efforts inemphasizing web-hosting services.  Forinstance the PSINet Europe group provides a proven and scaleable business modelfor delivering high-end managed hosting services with a 24 by 7 multi-skilledand multi-lingual support operation based in the Geneva datacenter. Theseservices and associated committed service levels address the requirements ofmid-sized European organizations that have important business and missioncritical dependent on their hosted solutions. Furthermore, our PSINet Europegroup provides a team of technical consultants 

 

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that are expert in tailoring customersolutions and providing services that address the specific informationtechnology needs of the mid-sized organization.

 

## ***SecurityServices***

## *** ***

The security market has expanded significantly overthe past several years as continued threats are highlighted by news reports andincreased public awareness. Large business enterprises have the ability toimplement security services and the latest protection software, while SMEs andSOHOs have fewer resources and generally have been less responsive to thesethreats. SMEs and SOHOs often cannot or do not wish to dedicate resources toupdating software and systems on an ongoing basis, and seek to obtain securityprotection from third party providers.

 

Our security solutions allowcustomers to protect their data and intellectual and commercial assets bylimiting unauthorized users from accessing their internal network,authenticating users seeking access to proprietary or confidential information,identifying and resolving network vulnerabilities, increasing security forcompany data transmitted through the Internet and filtering viruses,unsolicited bulk-email and other selected items from business communications.

 

We have offered managedsecurity solutions to our customers since 1999. Our security portfolio includesmanaged firewall solutions, including intrusion detection, and anti-virus andanti-spam services.

 

Since 1999, we have offered a range of securitysolutions, predominately all of which have been centrally managed in our securitynetwork operating center, or SecNOC, formerly located in Paris France. TheSecNOC is fully equipped and staffed to manage thousands of securityappliances, or firewalls, remotely around-the-clock.  In 2004, we enhanced our customer servicecapabilities through the introduction of new security technologies such asintrusion detection and prevention, security auditing, content security(including anti-virus, anti-spam, and website blocking) data encryption andauthentication.

 

Through the acquisition ofPSINet Europe, we acquired a high-end security platform that targeted themid-sized organization market. Because of its capabilities and capacity, duringthe first quarter of 2005, we migrated and consolidated the SecNOC from Paristo the PSINet Europe security network operating center located in Geneva,Switzerland. This has enabled us to provide one centrally managed service forall of our customers.

 

**Revenue Mix Dynamics**

 

Reflecting theseacquisitions, and other actions we have taken, our revenue mix at year-end 2004was as follows as compared with the year earlier:

 
| ** **                 | ** ** | **2003** | ** ** | **2004** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|
| Access                     |       | 62       | %          | 52       | %          |
| Hosting                    |       | 20       | %          | 33       | %          |
| Internet security services |       | 6        | %          | 6        | %          |
| Other revenue              |       | 12       | %          | 9        | %          |
| Total                      |       | 100      | %          | 100      | %          |

 

This comparison demonstratesour progress in shifting to high-margin hosting services and away from thelower-margin connectivity services. This shift represented a key part of ourstrategy to generate recurring positive cash flow from our consolidatedoperations.

 

Our strategy for selling thehigh-growth services is as follows:

 

•                  Provide incentives for our direct sales forceto sell higher margin services such as managed hosting and managed securityservices that can be delivered on our own platforms.

•                  Combine competencies and cross-train directsales teams to develop the technical knowledge and consultative sales skillsnecessary to succeed in selling higher margin services.

•                  Pursue value added partner resource andreferral programs.

•                  Participate in value added partner events andforums.

 

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•                  Sell stand-alone connectivity and other lowmargin commodity services only through lower cost channels.

 

**Integration and Development ofOur Strategic Acquisitions in 2004**

 

Amen

 

At the time of our January 2004acquisition, Amen delivered automated web hosting services in France, theUnited Kingdom, Spain and Italy. Following the acquisition, we undertook three strategic initiatives:

 

•                  Grow Amen’s market area. During the year, Amen launched operations in two new markets, Portugaland the Netherlands, adding to its existing operations.  Amen’s business model provided us with anopportunity to launch the Amen brand into these new markets without taking onsignificant platform or implementation costs.

 

•                  Expand Amen’s customer base.  Atyear-end 2004, Amen’s customer total had grown to more than 95,000, up 11% fromthe 86,000 customers recorded at the time of the acquisition in January 2004,and as of year end, Amen had a total of 164,000 active registered domains,compared with 130,000 at the time of the acquisition.   

 

•                  Broaden Amen’s product offering.  Amenintroduced two new products in 2004.  InJune, Amen launched a low-cost dedicated server offering, further strengtheningits market leadership in the value-priced hosting market in the Europeancountries in which it operates.  Atyear-end 2004, Amen had nearly 1,800 active dedicated servers. In a jointinitiative with Microsoft in July, Amen introduced a Microsoft Windows-basedhosting offering designed to complement its range of Linux-based services.  In just the first two months afterintroduction, the Microsoft Windows-based offering already comprised 20% ofAmen’s total new dedicated server sales.

 

PSINet Europe

 

With respect to the PSINetEurope companies, our integration efforts through year-end 2004 have includedseveral marketing, operational, administrative and financial initiatives. Aspart of the integration, moreover, we adopted the PSINet Europe brand for theVIA Industry Solutions business in five of our country operations. We have alsobegun the rationalization and integration of our combined network andinfrastructure as well as combining certain administrative functions. Themigration of the PSINet entities on to the VIA back office systems was completedduring the first quarter of 2005.

 

Specific achievements relating to theintegration effort include the following:

 

•                  Revenue achievement.  Inthe last four months of 2004, the five PSINet Europe operations producedrevenues at an annualized run rate consistent with the $42 million annualizedrun rate anticipated in our pre-acquisition planning.

 

•                  Product integration.  Thejoint VIA-PSINet Europe teams quickly completed the initial evaluation of thecombined company’s product portfolio — both from feature/function andgeographic standpoints.  Rationalizationactivities immediately began, as did efforts to identify cost-effective ways ofcombining products and/or migrating customers to common service platforms.  Cross-selling opportunities were implementedand the VIA and PSINet Europe teams have partnered on new businessopportunities.

 

•                  Organizational structure.  Areview of management was conducted in each of the countries in which VIA andPSINet Europe both had a presence and a single senior executive was appointedas country manager for the combined country operations in Germany, theNetherlands and France. In Germany and France, management and administrativefunctions were consolidated during the fourth quarter of 2004. The VIAoperation in Switzerland was subsequently sold back to the former owners on April 1,2005.   

 

**Sales Strategy**

 

In January 2004, we announced thereorganization of our sales channels into two groups: Industry Solutions andVIA Express.  During the year, theprofile of Industry Solutions and VIA Express varied country-by-countrydepending on the maturity of the market, the product and service portfolio thecountry operation offered, the available partners within a country, and thescope and size of the operation.  Asdiscussed above, the acquisitions of Amen and the PSINet Europe operations alsoaffected the profiles.

 

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### **IndustrySolutions**

### ** **

OurIndustry Solutions channel encompasses the sale and marketing of a higher-valueportfolio of bundled services such as virtual private networks and securityproducts. Industry Solutions seeks to tailor products to specific markets whereoverall value is the key difference between competitors rather than the priceof each individual service.  Today, ourIndustry Solutions channel is comprised of VIA’s legacy business in France,Germany and the Netherlands and the five PSINet Europe country operations inFrance, Germany, the Netherlands, Switzerland and Belgium.

 

Our Industry Solutions channel is marked by several strategicstrengths, including PSINet Europe’s brand recognition, our “showcase” datacenters, professional and centralized network management, strong security andcustomer and technical care, and our local sales and support teams.  All of our direct sales force professionalsare included in Industry Solutions and have been organized into two subgroups:those who actively pursue new customers and those who support existing customerrelationships including up-selling and enhancing services based upon customerneeds.

 

Each of our local operatingcompanies has a direct sales force. During 2004, we also established a morestructured indirect sales force in each of the countries in which we operate.We focused our indirect sales on:

 

•                  resellers, who distribute our morecommoditized products, including access and shared web-hosting services,

 

•                  lead referrers, who are rewarded forreferring new business leads to us, and

 

•                  value-added partners, who enable us todevelop value-added bundles in the industry markets we are targeting.

 

Our partner effort isintended to establish and grow a network of complimentary businessrelationships that will enhance and increase our market exposure resulting inimproved market reach and allowing us to further focus on and develop our corebusiness.

 

#### **Amen & VIAExpress channels**

#### ** **

Our Amen and VIA Express channels markets Internet access, hosting, VPNand voice products and services to small businesses, resellers and ITdevelopers primarily by advertising in a variety of print and online media andby mailing a broad range of direct marketing publications, such as promotionalpieces, catalogs and customer newsletters. We seek to use these marketingactivities to drive customers to our telephone-based sales and Internet storesat an efficient cost.

 

In 2004, we acquired the Amen group and its automated Linux-basedplatform. This channel performed well in 2004 as noted above under the headingIntegration and Development of Our Strategic Acquisitions in 2004.

 

In 2004 we also invested in and developed a new Microsoft-based websales infrastructure integrated in our websites to handle online sales.  This is our VIA Express channel.  The web interface of our billing system givesus the ability to automate sales, billing and provisioning online. During 2004,our start-up VIA Express channel underperformed expectations for sales ofweb-hosting products.  We recognize thatour marketing efforts, which were designed to drive customer demand to thechannel, did not deliver as expected. Our aggressive use of free promotions attracted a wide customer base,but the customer base ultimately was largely inactive.  Moreover, our advertising focus was too broadand we have now refocused our efforts to niche segments.  VIA Express’ underperformance in 2004adversely impacted our revenue and cash generation expectations for 2005.  During our planning for 2005, we concludedthat significant expenditures in marketing would be required to build brandrecognition and customer acceptance.  Inlatter part of 2004 and during the first quarter of 2005, we shifted the focusof our VIA Express channel to reduce the dependency of this channel on thesignificant marketing expenditures that were required to drive retail sales(including online sales, telesales and field sales).  Instead, we have focused establishing awholesale channel for the automated hosting platform that we have developed.These partners will sell the VIA Express hosting portfolio under their own brandsinto their own customer base. As the hosting platform has been built utilizinga highly secure and scaleable architecture, we have been able to attractcertain partners that are interested in rapid market penetration and at thesame time avoiding the cost and expense of developing and owning their ownMicrosoft-based hosting platform.  Wehave already signed up a small number of partners and we are working with aGerman-based Microsoft partner to deploy a nationwide hosting exchange trialprogram. This initiative was launched at the recent 2005 CeBit Exhibition.

 

#### **One-Stop CommunicationsService Offerings**

#### ** **

Including the web-hostingand security services mentioned earlier, we offer a portfolio of communicationsservices created for the business customer that we sell on either a bundled orstand-alone basis. These services are designed, constructed and delivered togive businesses more productive, cost-effective ways to communicate and sharecritical information. As businesses increase the use of the Internet as abusiness tool and integrate web-based products and services into their businessprocesses, our services are designed to

 

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enhance our customers’ profits and reducerisk.

 

We package ourcommunications services for businesses that need to establish an Internetpresence for efficient, effective and secure communications, and we provide for“one-stop” communication service by enabling customers to bundle our voiceservices product with their services. We also provide services to address more sophisticatedInternet requirements. Today, we do not currently offer all of our services ineach of our markets. The specific products offered in each market aredetermined by the needs of the market, competition and local regulations.

 

ConnectivityServices

 

We provide Internet accessthrough dial-up, dedicated line and other technologies, including integratedservices digital network, or ISDN, and DSL. We offer customized connectivityservices on a stand-alone basis or bundled with our other products.

 

NetworkingServices

 

We offer an extendedportfolio of virtual private networks, or VPNs, solutions designed to meet thenetworking needs of SMEs across Europe. The portfolio includes three keyofferings:

 

•                  IP VPN, connects branch offices, partnerextranets and remote workers, with security delivered through managed firewalls.

 

•                  DSL VPN, provides a cost-effective solutionfor connecting a large number of sites to a central office using low-costbroadband as the primary form of connectivity over a private network.

 

•                  MPLS VPN, utilizes multiprotocol labelswitching technology to enable customers to prioritize different types oftraffic for business critical applications, such as enterprise resourceplanning or customer relationship management systems.

 

Internet-based VPNs canreduce the cost of existing wide area networks by enabling the secure andencrypted transmission of private traffic through the public Internet. Ourexperts design, provision and manage these solutions for customers, eliminatingor reducing the costs of internal network and technical security staff.

 

We have bundled the VPNproduct portfolio with a real-time monitoring application, providing thecapability to monitor the availability and performance of a virtual privatenetwork and its individual connections and nodes.

 

As our networking portfoliodraws upon products and services offered by multiple vendors, we are able tooffer different technologies to one single customer. For example, a customercould connect its VPN to a small site through the use of a DSL VPN, whileensuring that its foreign headquarters could connect via a high performanceMPLS solution. Remote offices could connect to the customer’s VPN though use ofour Internet VPN, which relies upon a local Internet connection and a firewallapplication, ensuring secure communications. We believe that this hybridapproach to establishing networking solutions is a key element in our abilityto sell these services.

 

VoiceServices

 

In 2003, we completed theintroduction of our resold voice services in certain of our markets to furthersupport our position as a business communications provider to the SME market.We offer these services through contractual arrangements that we have withtelecommunications services providers operating in these markets. There arecertain differences in the voice services that we provide compared withincumbent telecommunications services providers. Our voice service includesdedicated account management and does not require additional equipment. We alsooffer online service management tools for displaying and managing call costsand central billing for customers with multiple operations using the service.

 

We offer our customers a single bill for data and voice solutions. Werecently deployed our customer portal that has enabled our voice customers togenerate a wide range of reports, view their call statistics and billingdetails and configure fraud alerts (including notification by text message oremail). This portal, which was launched and made available to our voicecustomers in 2004 has enhanced our value proposition and further differentiatesour resold voice services from many of our competitors.

 

**Our Target Markets**

 

We specialize in serving theneeds of SMEs, which often do not have the resources to keep up with rapidlychanging technologies, create and update content and secure theircommunications. We believe that there will be a continuing demand by SMEs tooutsource network security, virtual private networking, collaborative andcustomer relationship applications, as well as sophisticated

 

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enterprise-wide applications includingintranets, extranets, network management systems and enterprise resourceplanning systems. As discussed elsewhere in this section, we have particularlyfocused efforts to sell our bundled, higher-end products on marketing bundledservices targeted to these markets. At the other end of the market, we arefocusing on SMEs who are comfortable with a self-service approach and who areseeking a lower-priced dependable Internet-based communications service.

 

Small and home officecustomers

 

Many small and home office customers, or SOHOs, rely on websites andemail to keep them connected to their employer, parent company, customers andsuppliers and to serve as their main communication base from which they conducttheir business. These customers seek a cost-effective, stable and reliableweb-hosting platform; and they generally do not have the resources to acquire adedicated hosting facility. We believe that we can acquire these customers costeffectively through VIA Express & Amen channels and deliver thedesired reliability and functionality through our Linux- and Microsoft-basedplatforms.

 

SME customers

 

While many SME customers are larger than SOHOs, theyalso often wish to avoid the cost of dedicated hosting facilities deployed bylarger business enterprises. Yet, many SMEs have more complex needs, includingregular email, file and data back-up. In addition, we believe that as an SMEgrows, its technology and infrastructure spending remains limited, but itsoutsourcing spending continues to increase. We believe this creates demand forVIA Express & Amen channels to sell our web-hosting services tosmaller SMEs and for our Industry Solutions channel to target larger SME withmore complex higher-end solutions.

 

Smaller hosting providers

 

Smaller hosting providers currently compete in ahighly fragmented industry. These smaller players often do not have the scaleto manage effectively their own hosting infrastructure or to compete on priceand feature functionality. We believe the automated reseller features of theweb-hosting platform we have deployed in our hosting-centric U.S. operation,and the ability to create a private label product with the VIA Express hostingplatform offer these companies cost savings and business improvements throughutilizing our platform on a reseller or wholesale basis.

 

Managed dedicated andself-managed dedicated solutions

 

As a business evolves andgrows, companies often seek increased functionality and security that can beoffered with dedicated servers that are physically separated from data fromother companies. SMEs continue to adopt web-centric applications, launchinge-commerce initiatives and using the web in mission critical businessprocesses. These customers may require managed dedicated or self-manageddedicated hosting solutions. Managed dedicated hosting represents an amount ofdedicated server or server space, managed on a constant basis by our employeesto ensure constant operability. Self-managed dedicated hosting representsdedicated servers or server space that is customer monitored to ensure constantoperability.

 

**Our Competition**

 

Over the past years, we haveseen significant shifts in the composition of our competition due to changes inour own business through both dispositions and acquisitions and due to thecontinuing consolidation in the marketplace.

 

We see our competitorsgrouped into two distinct segments largely in line with the split between ourIndustry Solutions and Express channels. The Industry Solutions channel uses the brands VIA NET.WORKS & PSINetEurope, and our Express channel principally uses the brands Amen and VIANET.WORKS.

 

TheSolutions Competitive Landscape

 

Our Industry Solutionschannel is comprised of two brands namely VIA NET.WORKS and PSINet, both ofwhich are focused on selling a range of managed services (access, hosting, andsecurity) to the larger SME and corporate customer in a number of key markets, namely,Germany, Switzerland, Netherlands, France and Belgium.  Our principal competitors depend on theactual service sold and tend to either be small localized service and ITcompanies or larger pan-national, European or global telecom or systemsintegration businesses.

 

•      Localcompetitors

In each country where wehave an Industry Solutions presence there are small local domestic players thatmay have 

 

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competitive advantage in the local market dueto customer proximity, price or other services sold such as hardware orsoftware.  Such companies take the formof small independent IT Services companies, systems integrators or local ISPsthat have may have both a managed hosting or security service option.

 

•      Internationalor Pan-European competitors

In the managed accessproduct range (e.g. leased lines, DSL and VPN products), we primarily competeagainst either local in-country incumbents such as KPN, Deutsche Telecom,France Telecom, Swisscom or Belgacom or Pan-European alternative carriers suchas Colt, Versatel, and Easynet who also tend to be present in the markets inwhich we are present.  While thesecompanies have been identified as traditional telecommunications companies,they are moving more and more to a portfolio of managed services includingsecurity and hosting offers. We see these companies in the access and managedsecurity product ranges, but less on the higher-end managed hosted market.

 

In the higher-end managedhosting market we primarily compete against more specialized small or large ITcompanies with a focused offering on managed applications.  In this product range, we typically competeagainst companies such as IBM Global Services, EDS, and HP.

 

Amen/VIAExpress Competitive Landscape

 

Both our Amen and VIAExpress hosting channels are positioned to sell into the high volume,self-service customer bases such as residential customers, SME’s and websitedevelopers (both professional and hobby interest groups). In these segments, wemostly face competition from local internet service providers, dedicatedhosting companies and national telecommunications providers. Web hosting is aservice add-on for connectivity focused service providers, especially so inresidential markets where we face severe competition from providers that takeadvantage of the demand for broadband services. In addition to nationalcompetitors, we face competition in most countries from establishedinternational players including United Internet, Strato, Tiscali and HostEurope.A combination of aggressive marketing, mature and feature rich portfolios haveattracted the more sophisticated customer. Many users have deployed personal orbusiness-orientated web sites for some years and are experienced buyers.

 

The VIA Express channel hasfaced challenges in the direct retail sale of hosting plans. As noted above, wehave shifted the focus of the VIA Express channel to emphasize the “white label”or wholesale market. Competition in this market is very different than in theretail segment as buying decisions are based on make or buy determinations.There are no pan-European providers in the wholesale market space for MicrosoftWindows-based hosting services. However, certain U.S.-based providers such asVerio and Interland address the wholesale hosting platform market in Europe.

 

**Our Network**

 

Our network consists of a number of international Points of Presence(POPs) located in the countries of our commercial operations. Each POP isphysically located in leased space in high specification Telehouse orco-location facilities, which provide a resilient power, air-conditioning andfire protection environment. These POPs are in physically secure locations andoperated by major collocation services providers. These POPS contain our company-ownedand managed Internet Protocol (IP) routers, switches and othertelecommunications equipment.

 

Our network POPs areinterconnected by a number of dedicated leased lines, which are leased frominfrastructure providers using multiple underlying carriers. These leased linesprovide an international high-speed, typically 155Mbit/s, backbone network. Theinternational backbone connects to a similar national network infrastructure ofleased lines connecting IP routers, switches and other telecommunicationsequipment.

 

Within each country ofoperation we have implemented local private and public peering arrangementswith local Carriers, Service Providers and Internet Exchange Points. In peeringrelationships, Internet Services Providers (ISPs) agree to carry each other’straffic on their networks to improve performance and reduce congestion andcosts. Peering relationships can take the form of either public peering orprivate peering. Public peering takes place at a physical location, usually anetwork access point, designed for the exchange of Internet traffic betweenprivate ISPs. Private peering involves an agreement between two ISPs allowingtraffic to pass between each other’s networks at private connection pointswithout having to traverse the public Internet and public peering points. Anumber of our operating companies have established peering relationships withother local or regional ISPs. Our network is interconnected at the followingInternet Exchanges: LINX (London), DECIX (Frankfurt), INXS (Munich), AMSIX(Amsterdam), FreeIX (Paris), CIXP (Geneva), ZIX (Zurich), and GIGAPIX (Lisbon).

 

Our network also connects toInternet transit providers providing high-quality upstream Internet access atlocations in London, Frankfurt, Paris, Amsterdam, Madrid, Zurich, and Geneva.

 

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In August 2004, weacquired the network assets of PSINet Europe in The Netherlands, Belgium,Switzerland, Germany and France. These networks consist of similar POPs inphysically secure locations and operated by major co-location servicesproviders. These POPs contain our company-owned and managed Internet Protocol(IP) routers, Frame Relay and ATM switches and other telecommunicationsequipment. These POPs are also interconnected by a number of dedicated leasedlines, which are leased from infrastructure providers using multiple underlyingcarriers. The PSINet network infrastructure also uses virtualised datatransport services from Packet Exchange and Deutsche Telekom.

 

The PSINet network alsoinclude a company-owned dark fibre national network infrastructure inSwitzerland equipped with transmission equipment configured for data rates of622Mbit/s.

 

In September 2004, westarted the merger and integration of the VIA and PSINet network infrastructures.These networks are now merged with interconnections in London, Amsterdam,Paris, Frankfurt and Geneva.

 

The network elements of thecombined network infrastructure are monitored and managed through the systemsand services of an outsourced network management partner in conjunction withour Geneva-based, 7 x 24, European Customer Operations (ECO) center. Our ECOCustomer Service, Network Operations and Technical Support staff provides 7 x24 individual customer support, incident management and network and systems’management of our customers’ business-critical Internet solutions and services.

 

***OurEmployees***

 

At March 31, 2005, we employed 404 people on a full-timeequivalent basis. Our headquarters staff is comprised of 48 employees and 356 ofour employees are located in our local operations. Of our total employees, 133are involved in sales and marketing, 99 are employed in customer care, 89 areinvolved in technical and engineering functions and the remaining 83 aredevoted to finance, legal, strategic planning and other administrativefunctions. Some of our operating companies are parties to collective bargainingagreements.

 

We believe our employee relations aregenerally satisfactory.  In reaction tothe April 11, 2005 announcement of the proposed Claranet Sale, a number ofmanagers and employees of VIA’s Amen group formed a strike against Amen,seeking employment security guarantees from Claranet, among other things.  VIA has obtained the support of staff fromother members of the VIA group to fill in for the striking workers to ensurethe continuation of technical and customer support.  We believe that we will be able to resolvethe matter satisfactorily without undue cost or impairment to the Amen business.

 

**Legal and Regulatory Issues**

 

# **General**

# ** **

# ***IntellectualProperty and Proprietary Rights***

# ** **

We rely on trademarkand copyright law, laws restricting unfair trade practices, laws relating totrade secret protection and confidentiality or license agreements with ouremployees, customers, partners and others to protect our intellectual propertyrights. All of the countries in which we operate are signatories tointernational treaties relating to the protection of intellectual property.

 

In Europe and in the United States, we pursue the registration oftrademarks for marks that we believe are particularly unique and that will beused in our business over a long period of time. We have registered andunregistered trademarks in the United States and Europe for the former VIANET.WORKS name and logo.  We have not yet applied for trademarkprotection of our new logo, which we began to exploit in the fall of 2004.  We have registered trademarks in France andSpain for certain Amen marks.  As a partof our acquisition of the PSINet Europe entities, we acquired the rights to usecertain PSINet Europe trademarks, and we mutually agreed with Telstra UK, thepurchaser of PSINet UK, not to use the PSINet Europe logos or names in eachothers’ territories.  We have begun topursue trademark registrations for the PSINet Europe logo and name inadditional countries in which we provide services. To the extent we are unableto receive registration status pursuant to in-country registrations, we may berestricted in our use of certain Amen and PSINet trademarks in certain of ourcountries.

 

Except as noted above, we have not pursued registrations for ourtrademarks. Consequently, a competitor with senior rights in a mark similar toours may be able to argue successfully that we should be barred from continuingto use our mark, or our competitors may adopt product or service names similarto ours, thereby impeding our ability to build brand identity and possiblyleading to customer confusion. Defending trademark infringement litigation andpolicing unauthorized use of our marks is also difficult and expensive. Formore information regarding difficulties we may have in protecting our brandnames, please see RISK FACTORS later in ITEM 1 of this Form 10-K.

 

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We intend to protect thesemarks against similar and confusing marks of third parties, filing oppositionsto third parties’ applications for trademarks and if necessary, bringinglawsuits against infringing parties. We also continue to assess the strength ofour marks and brands as a part of our overall marketing strategy.

 

As a part of our acquisitionof Amen, we acquired the rights to a fully automated operating platform used tosupport Amen’s customers. Certain components of this platform were developed byAmen or Amen employees and as such are proprietary to Amen. No materialresearch has been conducted to determine whether any such intellectual propertyinfringes the rights of third parties and as such third parties could challengeAmen’s rights in these components. To the extent a third party successfullyclaimed that VIA did not have the legal right to use of all or part of theplatform, VIA would incur significant costs to either acquire the rights to usethe infringing components or to replace the infringing components withalternative components, either through licensing from a third party orindependently developed by VIA, its subsidiaries or each of their agents,please see RISK FACTORS later in ITEM 1 of this Form 10-K.

 

# ***RegulatoryMatters***

# ** **

No uniform body of law specificto the regulation of Internet services or Internet services providers exists inEurope or the United States. However, many local laws, which are not specificto Internet services and uses of the Internet, apply to the provision of ourservices. As a result of the ever-increasing use of the Internet by consumersand businesses, laws and regulations affecting our industry continue to beintroduced in all of the jurisdictions in which we operate.  Although many of the recently enacted lawsprovide greater clarification for obligations of Internet and hosting serviceproviders, there are often conflicting provisions with other laws.Consequently, we cannot predict what impact future judicial, legislative orregulatory changes will have on the industry in general or our operatingresults specifically, or whether local regulatory bodies will question ourcompliance with applicable laws and regulations.

 

Due to the nature of ourbusiness, we are often subject to the laws and regulations of multiple jurisdictions.  The equipment and software that we use toprovide our services is based in Europe and the United States. Although thetransmission of content through the Internet by our users and us wouldoriginate primarily in these regions, the governments of countries in otherregions might attempt to regulate the content hosted on transmitted through useof our services or prosecute us for violations of their laws. As contentproduced by our users or us is available over the Internet in countries allaround the world, these countries may also claim that we are required toqualify to do business in their jurisdictions. Any application of existing lawsand regulations from jurisdictions in which we currently do not conductbusiness, or the application of existing laws and regulations to the Internetand other on-line services, could have a material adverse effect on ourbusiness, results of operations and financial condition. Similarly, as weconsolidate certain of our operations within Europe to reduce operating costs,different European countries in which we operate may have legislation inconflict with each other that may require us to run separate systems or acquireadditional functionality to meet the legal requirements of multiplejurisdictions.

 

Further, future regulatorydevelopments might impede the growth of the Internet, impose taxes or othercostly technical requirements, create uncertainty in the market or in someother manner have a material adverse effect on our business, financialconditions or results of operations.

 

## ***European Regulatory Framework***

 

*Overview*

 

All of our Europeanoperations, except our Swiss operations, are located in member countries of theEuropean Union. Within the European Union, legislation is enacted by way ofdecisions or regulations that are enforceable directly in each of the memberstates. More commonly, it adopts directives that require member states to enactlaws within their own countries by implementing the principles and rules establishedin the directive. Although the directives’ legal mandates are binding on memberstates, member states have discretion as to the method of implementation. As aresult, the European regulatory environment is sometimes characterized bydiffering and conflicting rules and regulations at the local levelregarding licensing, electronic commerce, data protection, data interceptionand other areas. However, in many cases the European regulatory frameworkprovides us with consistent legislation throughout our European market.

 

*New Regulatory Framework*

 

The European Union adopted a new package of five communicationsdirectives on February 14, 2002, or the “New Regulatory Framework”. TheNew Regulatory Framework replaced the existing regulatory framework with lessdetailed rules aligned more closely to general competition law.

 

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The Netherlands enacted the Telecommunications Act on May 19, 2004to implement the New Regulatory Framework. The Dutch Telecommunications Act provided clarification on issues relatedto electronic communications. General competition regulations will play a moreimportant part, recognizing the trend towards more competitive markets forelectronic communications. The regulatory authority, OPTA, will periodicallyreview relevant markets for electronic communications for the existence ofparties with significant market power and the need for market specific measuresto ensure competition in certain markets.

 

Similar to The Netherlands, Germany has implemented the frameworkthrough a single piece of legislation, the Telecommunications Act, which wasenacted on June 26, 2004. The Act is supposed to reduce the generalregulatory rules on telecommunications services with a view to focus onthe general concepts of competition law.

 

France implemented the framework through a series of separatelegislative acts, most notably in Law no 2004-575, the “LCEN”and Law no 2004-669, which pertains to electroniccommunications.

 

*Data Protection*

 

In October 1995, the European Union adopted the“directive on the protection of individuals with regard to the processing ofpersonal data and the free movement of such data”. This directive imposesrestrictions on the use and processing of personal data and gives EuropeanUnion citizens rights regarding their personal data. All countries in which weoperate within the European Union have enacted the directive withoutsubstantial deviations.

 

The data protectiondirective affects companies like us that collect information from individualsin European Union member states. In particular, companies with facilitieslocated in member states or that have equipment in member states for thepurpose of processing data will not be allowed to send personal information tocountries outside of the European Economic Area that do not maintain adequatestandards of privacy and data protection. The directive does not define whatstandards of privacy are “adequate.” The European Commission has determinedthat Switzerland maintains adequate standards of data protection. Based on negotiationsconcluded in 2000, the Commission determined that the self-regulatoryarrangement established by the U.S. Department of Commerce known as the “safe-harborprinciples” provided “adequate protection,” but only for data transferred tothose companies that voluntarily agree to adhere to those principles. VIA hasnot adopted the safe-harbor principles. VIA provides adequate safeguards invarious other manners, including the use of contractual relationships in whichconsent to use data is obtained.

 

The “Privacy and Electronic Communications Directive”concerns the processing of personal data and the protection of privacy in theelectronic communications sector. This Directive contains provisions concerningsecurity and confidentiality of electronic communications, use of traffic data,and unsolicited commercial communications (including spam), and providesgreater clarification for VIA and other service providers such as VIA withinthe European Union specifically regarding the use of personal data. As implementedin our major markets, the Directive has offered greater clarity oncommunicating through electronic means, which provides assistance to Internetand hosting service providers.

 

*Content Regulation andLiability*

 

The European Union adopted the Electronic CommerceDirective, which provides that an Internet service provider will not be liablefor information it hosts unless the provider has actual knowledge that theinformation or activity is illegal, or is aware of facts or circumstances fromwhich the illegal information or activity is apparent, so long as the Internetservice provider acts promptly to remove or disable access to the informationupon becoming aware that it is illegal. In addition, an Internet serviceprovider providing access to networks or transmitting information over anetwork that is provided by its customers will not be liable for thatinformation provided that the Internet services provider does not initiate thetransmission, select the recipient of the transmission or select or modify thetransmitted information. Subject to certain conditions, Internet serviceproviders will also not be held liable for the automatic, intermediate andtemporary storage of that information, also known as caching. The Directiveprovides that member states shall not impose a general obligation on theabove-mentioned providers to (a) monitor the information that theytransmit or store or (b) seek facts or circumstances indicating illegalactivity. However, member states may establish monitoring obligations incertain specific cases in order to detect and prevent certain types of illegalactivities. There have not been material deviations in the implementation ofthis Directive by member states in our major markets and we are seeing greatclarity in France, Germany and The Netherlands regarding what action isrequired by Internet service providers regarding illegal information that theyhost. Several court decisions have been decided to offer further guidance toInternet service providers related to the hosting or transmission of illegalcontent. In The Netherlands, a decision from the appeals court provides furtherclarification to Internet service providers on when they must take down illegalinformation after receiving notice from a third party. The Dutch Supreme Courtis currently considering a case regarding whether Internet service providersshould provide the personal data of its customers to third parties wanting totake action against the customer, which also raises data protection issues.

 

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*Access to Content*

 

Various countries in whichwe operate have enacted legislation, or are considering the implementation oflegislation, that would provide rights to government and law enforcementagencies to request, monitor or intercept content that is hosted or transmittedby Internet and hosting service providers.

 

Germany and The Netherlands have enacted legislationthat would require certain Internet services providers to establish technicalmeans to permit authorities to intercept data traffic of identified customers.VIA has generally not implemented these technical means and may be subject to arequirement to expend significant sums to comply with these requirements.

 

In The Netherlands, changesto the Criminal Code based on the Cyber crime treaty are partially implementedand pending. The proposed changes provide an increase in the scope of the datathat can be requested for criminal investigations and governmental rights torequest various data related to network traffic. It is expected that uponacceptance and implementation of these proposed changes that Internet serviceproviders will have to store and disclose more information on network trafficfor criminal investigation purposes. However, the scope of data preservationand data retention is still currently under discussion.

 

In France, pursuant torecently enacted legislation, telecommunications operators (including Internetservice providers) could be required to retain certain technical informationfor the purpose of providing such data to judicial authorities in connectionwith the investigation and prosecution of criminal offences. Separatelegislation could require Internet service providers and hosting serviceproviders to retain certain information to assist judicial authorities toidentify those individuals who developed the content and information hosted ortransmitted by the service providers. The exact categories of retained data andduration of its retention will be specified in future decrees.

 

*Online Contracting*

 

The Electronic CommerceDirective also required member states to enact legislation providing greaterclarification for the enforceability of online transactions. This Directive andsimilar legislation, Electronic Signatures Act, should increase confidence inusing online transactions.

 

### ***Licensing Requirements***

### ** **

The New Regulatory Frameworkenacted by the European Union has now removed the requirement to license theprovision of communications services and networks. The conditions in all suchlicenses have been replaced by regulations and guidelines that are applicableto VIA and all industry players. There is no need to obtain a license, althoughsome reporting continues to be required, for example on revenue and otherfigures.

 

VIA provides resold voiceservices in France, Germany, the Netherlands, Portugal, Spain, and Switzerland.France does not require VIA to obtain a license or register with any regulatoryagency in order to provide the VIA resold voice services. The remaining countrieseither require a license to resell the voice services currently provided by VIAor registration with applicable regulatory agencies of VIA’s intent to providethese services. In Germany, the Netherlands, Portugal, Spain, and Switzerland,VIA has either obtained the relevant licenses required to provide resold voiceservices in these countries or where registration is required instead ofobtaining a license, it has registered with the relevant regulatory agency,stating its intention to sell resold voice services.

 

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**RISK FACTORS**

 

In connection with the safe harbor provisions of the Private SecuritiesLitigation Reform Act of 1995, set forth below are cautionary statementsidentifying important factors that could cause actual events or results todiffer materially from any forward-looking statements made by or on behalf ofus, whether oral or written. We wish to ensure that any forward-lookingstatements are accompanied by meaningful cautionary statements. Accordingly,any such statements are qualified in their entirety by reference to, and areaccompanied by, the following important factors that could cause actual eventsor results to differ materially from our forward-looking statements. Pleaserefer also to “Cautionary Note Regarding Forward-Looking Statements” on page 3of this annual report on Form 10-K.

 

**A. RISKFACTORS RELATED TO THE CLARANET SALE TRANSACTION**

 

***THE CLARANET SALETRANSACTION MAY NOT CLOSE AND WE MAY NOT BE ABLE TO FIND ANALTERNATIVE SOLUTION***

 

We have pursued two separate but parallel tracks to address ourannounced liquidity issue:  a search fornew financing through an equity or debt placement and the sale of all or partof our businesses. While we received interest from other parties to purchasethe Company or provide debt/equity investments in the Company, our Board ofDirectors concluded that it would be in the best interest of the shareholdersof the Company to pursue the Claranet Sale offer.  If the Claranet Sale is not consummated,there can be no assurance that we can obtain an alternative solution to VIA’sliquidity issues.  In that event, andunless we could find such an alternative solution, we would have insufficientfunds to continue to operate the Company as a consolidated group as a goingconcern.  In such case, shareholderscould lose their entire investment in shares of the Company.

 

***THERE MAY OCCURCIRCUMSTANCES OUTSIDE OF OUR CONTROL THAT MAY PREVENT COMPLETION***

 

The Claranet Sale transaction is at an early stage.  Only a letter of intent (Letter) has beenexecuted by the parties. Claranet has provided a $3 million deposit against thepurchase price if it withdraws from the transaction.  However, under the terms of the Letter, Claranetmay withdraw from the transaction and receive a refund of its deposit of $3million if, among other things, there is a material adverse change in VIA’sbusiness between the date of the Letter and the targeted date for signing of adefinitive purchase agreement.  Under theterms the of the Letter, a material adverse change includes, among otherthings, a material change in cash flow projections, litigation and other claimsagainst the Company, and significant incidents of non-renewal or cancellationof customer contracts. If any one of these events occurs, Claranet may withdrawfrom the transaction and we would be required to pay its costs and a breakfee.  We may not be able to control thecircumstances that could lead to any one of these material adverse changes, andif any one of them should occur, and Claranet decides to withdraw, our abilityto provide a return to our shareholders may be severely impacted.

 

The Claranet Sale is conditioned on receiving the approval of ourshareholders.  If we reach agreement ondefinitive purchase and finance agreements, we will solicit votes from ourshareholders through a proxy statement that will describe the circumstances andrationale for the Claranet Sale.  If, forwhatever reason, our shareholders were to reject the transaction, there can beno assurances that we will be able to find an alternative solution to ourliquidity issue and in that event, the Company would have insufficient funds topay its debts in the normal course of business and to continue to operate theCompany as a going concern.

 

The Claranet Sale transaction contemplates that Claranet provide VIAwith a $6 million financing facility, secured by pledges on certain of ourEuropean operations, including Amen France. If the transaction does not close and an alternative transaction is notimmediately available, we would have to repay to Claranet all amounts that weborrowed under the facility, together with a break fee for the transaction anda $400,000 arrangement fee for the finance facility.  Under our current circumstances, we would nothave the ability to repay the amounts and Claranet would be entitled toexercise their rights to foreclose against the security interests in thepledged operations.  In such event, ourability to continue to operate the Company as a going concern would be severelyimpacted and it is possible that shareholders could lose their entireinvestment in shares of the Company.

 

***THE CLARANET SALETRANSACTION MAY IMPACT OUR ABILITY TO RETAIN KEY PERSONNEL AND MOTIVATEOUR STAFF***

 

TheClaranet Sale transaction would represent the second time in less than twoyears that the ownership of the PSINet Europe group of companies and the Amengroup of companies has changed.  Inaddition, the transaction will likely lead to the loss of employment for anumber of our executives and staff at our headquarters office.  Our success in this transaction depends uponour maintaining key personnel in these organizations through the date of closeto ensure continuity in key operational and management functions and revenuegeneration capabilities.  If weexperience the loss of any key personnel at the operations or at theheadquarter office, we may experience revenue loss or operational impacts thatcould lead to a material adverse change in the business, thereby permittingClaranet to withdraw from the transaction, and we would berequired to pay its costs and a break fee. If Claranet withdraws from the transaction, and an alternative financingor sale transaction is not immediately available, our ability to provide anyreturn to our shareholders may be severely impacted.

 

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***THE ULTIMATE RETURNTO SHAREHOLDERS WILL DEPEND UPON THE TIMING OF THE TRANSACTION CLOSE AND OTHERFACTORS***

 

If we areable successfully to negotiate definitive transaction agreements for theClaranet Sale transaction, the return to shareholders will depend on a numberof factors, including the time to close, our ability successfully to negotiatevendor and creditor obligations, and any legal opposition that might be broughtto the transaction or as claims against VIA.

 

***Through the date of closing and a finaldistribution to shareholders, VIA will likely continue to experience negativecash flow and any delay in that process will lessen the net funds available fordistribution to shareholders***

 

VIA continues to experience negative cash flows from its consolidatedoperations.  Without sufficient funds tomake termination payments, we cannot engage in significant restructuringactivities to reduce further the operating expenses and negative cashflow.  On a consolidated basis, VIA iscurrently using approximately $2 million per month in negative cash flow andexpects to continue that trend through a closing of the Claranet Sale.  We anticipate that the closing would occur betweenmid June and the end of July.  Ifthe closing occurs towards the end of that period, we would likely use all or aportion of the $6 million working capital facility to be provided by Claranet,thereby reducing the $26.5-27 million purchase price on a dollar for dollarbasis.  We also expect to utilize the $3million deposit for working capital purposes during this period and that amountwill also reduce the net proceeds at a closing.

 

We are in the process of negotiating definitive agreements relating tothe Claranet sale. It is possible that if there is a material adverse change inthe business, the purchase price will be re-negotiated.

 

We will be preparing a proxy statement to our shareholders describingthe merits of the Claranet Sale.  Beforewe can distribute the proxy statement to our shareholders, we must submit thedocument for review to the Securities and Exchange Commission.   The review generally takes between 30 and 45days, but the review period for our proxy could be as short as 10 days orlonger than 45 days.  The longer thisperiod of review, the less net proceeds from the sale will be available todistribute to shareholders.

 

***The amount of net proceeds available toshareholders will depend on negotiations with creditors and vendors and thelack of unanticipated creditor claims***

 

Assuming we close the Claranet Sale, the net purchase proceeds willfirst be used to satisfy the debts and obligations of the Company.  Those obligations include but are not limitedto termination payments to headquarters employees who are not offered positionswith Claranet, payment toward the accrued liabilities of the Company, thetransaction costs of the Claranet Sale, which includes professional fees thathave not been paid on a current basis out of working capital, termination costsfor cancellation of the headquarters’ leased premises and the satisfaction ofour debt to the sellers of the PSINet Europe companies and the Amen group.  The net proceeds that will be available fordistribution to shareholders will depend on the amounts that are ultimatelypaid to satisfy these obligations.

 

We have assumed there will be no legal actions raised to challenge thetransaction or suits by creditors or other persons for claims that have notbeen raised to date.  If any such actionsare initiated, the cost of defending any such lawsuit and any damage claimassessed against the Company would diminish the net proceeds available toshareholders.

 

***IF THE CLARANET SALETRANSACTION IS COMPLETED, SHAREHOLDERS WILL CEASE TO HAVE ANY INTEREST IN THEVIA BUSINESSES***

 

The proposed Claranet Sale is for cash, and Claranet is a privatelyheld company.  If the transaction isconsummated, Claranet will be the sole beneficiary of any future growth inearnings or improvements in the business.

 

**B. RISKFACTORS RELATED TO OUR BUSINESS**

 

***WE HAVE A HISTORY OFNEGATIVE CASH FLOW AND WE MAY NEVER ACHIEVE POSITIVE CASH FLOW***

 

For the year ended December 31, 2004, we experienced a net lossfrom continuing operations of $34.3 million. While we have significantlyreduced our expenses as a percentage of revenues, we will not be able tocontinue to support our operations, deliver quality customer service, orprovide our headquarters’ functions without a material increases in revenuesthat will permit us to generate recurring and positive cash flows on aconsolidated basis.  Specifically, during2004, we did not increase our revenues from the legacy VIA business or from thenewly-launched VIA Express unit as originally projected.  If we do not complete the Claranet Sale, wewould be required to

 

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raise financing within a very short time frame in order to continue ouroperations as a going concern, and will need to substantially increase ourrevenues or otherwise materially reduce our costs and investment expendituresto achieve positive cash flow on a sustainable basis.

 

***RESTRUCTURING OF OURORGANIZATION, CONSOLIDATION OF EXISTING FUNCTIONS AND ADDITIONAL EMPLOYEERESPONSIBILITIES MAY RESULT IN OUR INABILITY TO RETAIN OR RECRUIT KEYPERSONNEL***

 

In 2005, we must continue our efforts to reduce costs in order toaddress our continuing negative cash flows. These efforts will include continuing to enhance our automated platformsand replacing non-performing personnel with automated platform marketingefforts through our Amen and VIA Express product platforms, and eliminatingadditional headcount from our headquarters. Our ability to reduce our personnelexpense is dependent on obtaining new financing to be able to make thetermination payments required by contract or law. In 2005, we have to date beenunable to reduce our personnel expenses because of insufficient funds to makethe payments.  In addition, thesemeasures often require employees to take on additional responsibilities and mayresult in greater organizational uncertainty, low morale and a higher thananticipated employee turnover. There can be no assurances that our operationswill not suffer from unanticipated employee departures or from our inability tofinance the termination payments required to engage in further expenserestructuring.

 

***WE HAVE BEENIMPLEMENTING A NEW BUSINESS PLAN, WHICH MAY NOT BE SUCCESSFUL***

 

In March 2003, we adopted a new business plan for 2003-2005. Asa part of the implementation of our Strategic Plan we have, among other things,initiated a shift in our business model from a focus on dial-up and leased lineInternet access services to web-hosting and Internet security services. We alsohave shifted from relying on the resale of services that other parties provideto developing and focusing on our own product platforms and technologies. Theimplementation of our Strategic Plan has also led to the outsourcing of anumber of finance and network administrative functions. As a result of our cashshortfall as noted above, The Strategic Plan will not succeed without furtherfunding to execute additional cost cutting.

 

***We have outsourcedcertain functions, and our providers may not deliver the anticipated level ofservice and functionality.***

 

We have outsourced certain key network, IT, finance and administrationsystems and processes to third-party vendors. We cannot be assured that thesethird parties will be able to deliver the anticipated and desired results.These third parties may not provide the anticipated level of service andfunctionality. This may negatively affect our results of operations. We have onoccasions experienced certain quality issues with certain of the outsourceproviders. Our use of these outsource providers requires us to rely on thecontractual relationships we maintain with them and we will not be able tocontrol directly their quality of service or level of cooperation. As a result,we have lost a certain degree of day-to-day control over the outsourcedfunctions and we are dependent on continued adherence to contractual servicedescriptions and service level agreements. We have and may continue toexperience disputes with outsourcing providers relating to service issues.These issues may affect negatively our ability to deliver quality service toour customers and deliver accurate financial reporting on our operations.

 

***The success of ourproduct development plans depends on our ability to identify vendors and otherswho can provide quality and dependable service and to successfully negotiateagreements with these vendors and providers so that we can deliver the productsand services profitably to our customers.***

 

Our product development plans (which are a key element of our refocusedbusiness model) call for the introduction of more sophisticated products andservices as well as products that will enhance our ability to serve as a single-sourceprovider of communications solutions. When we launch new products and services,we typically partner with technology vendors and other third party providers.The development and success of our new products and services depends on ourability to identify vendors and providers who can provide quality anddependable service. In addition, we must successfully negotiate satisfactory agreementswith these vendors and providers so that we can deliver the products andservices profitably to our customers. Our success with new products andservices and existing products and services also depends on our ability tointegrate sale, provisioning and billing for these products and services intoour sales force training and into our other systems and processes. Our goal ofgenerating recurring and positive cash flows on a consolidated basis depends,in part, on successfully introducing new products and services, such as Amen’slow cost dedicated server product and VIA Express units’ suite of low-costweb-hosting, security and DSL products. Once products and services are launchedwe must aggressively build market share in order to achieve the anticipatedrevenue forecasted for the new products and services. If we are unsuccessful inour marketing efforts, encounter any significant delays in introducing newproducts and services, or are unable to successfully sell new products andservices once they have been introduced, our financial performance will benegatively impacted.

 

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***Our sales forcereorganization into VIA Express and Industry Solutions requires us to upgradeour direct sales force, recruit reseller candidates and provide them withnecessary back-office solutions, and build or acquire end-to-end automatedcustomer acquisition, order entry, provisioning and billing solutions.***

 

Our new sales strategy requires that we focus our direct sales force onselling more sophisticated, higher margin, value-added services and channel ourmore basic products such as access and shared web-hosting to indirect andweb-based sales. As a part of the new emphasis on our VIA Express channel, wehave reduced our direct sales force in certain country operations. As wereorganize our sales force, we may experience higher turnover and the loss ofmore key salespersons than anticipated. Our sales strategy also calls forenhancing our indirect and automated web sales capabilities. This component ofour strategy depends on successfully identifying and recruiting capablereseller candidates and delivering back-office solutions enabling them tomaximize sales opportunities, as well as address customer support issues. Forweb-based sales, our strategy depends on building or acquiring end-to-endautomated customer acquisition, order entry, provisioning and billingsolutions. If we fail to successfully implement and execute any one or more ofthese components, our sales strategy may not succeed and our operating resultswill be negatively impacted.

 

***We may not be ableto keep up with rapid technological and other competitive changes affecting ourindustry.***

 

The markets in which we compete are characterized by rapidconsolidation of competitors, changing technology, evolving industry standards,frequent enhancements to existing services and products, the introduction ofnew services and products and changing customer demands. These marketcharacteristics are heightened by the emerging nature of the Internet and thetrend for companies from many industries to offer Internet-based products andservices. In addition, the widespread adoption of new Internet, networking, ortelecommunications technologies or other technological changes could require usto incur substantial expenditures to modify or adapt our services orinfrastructure. Our future success will depend on our ability to respond tochanging technologies on a timely and cost-effective basis. Our operatingresults may be adversely affected if we cannot successfully develop, introduce,or market new services and products. In addition, if we fail to anticipate orrespond adequately to changes in technology and customer preferences, or anysignificant delays in other product development efforts, such failure couldhave a material adverse effect on our business, financial condition andoperating results.

 

***WE CANNOT ASSURE YOU OF THE CONTINUED LISTING OF OUR COMMON STOCK ONTHE NASDAQ MARKET***

 

On June 15, 2004 we received a letter from The Nasdaq Stock Market, Inc.indicating that our common stock had failed to meet Nasdaq’s continued listingrequirement that the common stock trade above $1.00 per share because it tradedbelow $1.00 per share for the preceding 30 consecutive trading days. Nasdaqinformed us that, if the bid price of shares of our common stock did not closeat or above $1.00 for at least 10 consecutive trading days prior to December 13,2004, we would be notified that our common stock would be delisted from theNasdaq SmallCap Market. On December 15, 2004, VIA announced that that itreceived a letter from the Nasdaq Stock Market granting the company a second 180-dayextension, to June 10, 2005, to regain compliance with Nasdaq’s minimumbid price requirement. In granting the extension, Nasdaq noted that VIA met allother Nasdaq SmallCap Market listing standards.

 

In order to maintain its listing on the Nasdaq SmallCap Market, VIAmust maintain compliance with the continuing listing standards for the SmallCapMarket, which include: minimum stockholders’ equity of $2.5 million, apublic float of 500,000 shares, market value of publicly held shares of$1 million, at least two market makers and a minimum bid price of at least$1.00 per share.

 

On April 19, 2005, we received a letter from The Nasdaq StockMarket indicating that we were not in compliance with Marketplace Rule 4310(c)(14)for failure to file our Form 10-K for the period ended December 31,2004 and that as a result, VIA’s common stock would be delisted from the NasdaqStock Market at the opening of business on April 28, 2005, unless werequest a hearing.  With the filing ofthis Form 10-K, we have requested that the Nasdaq Stock Market rescind itsnotice of delisting.  If the notice isnot rescinded, we anticipate requesting a hearing in accordance with Nasdaqrules.  There can be no assurance that,if Nasdaq does not rescind its delisting notice, we will be successful in anappeal of the determination.

 

Further,there can be no assurance that VIA’s common stock will come into compliancewith Nasdaq’s minimum bid price requirement before June 10, 2005. Althoughwe are considering seeking stockholder approval for a reverse stock split toregain compliance with the minimum bid price requirement, we cannot assure youthat our stockholders would approve a reverse split or that our boardultimately would implement one.  If ourcommon stock is delisted from the Nasdaq SmallCap Market, we could trade on theOTC Bulletin Board, which is substantially less liquid than the SmallCap Market.If VIA’s common stock is delisted from the Nasdaq markets, the trading marketfor our common stock could be disrupted, which could make it difficult forinvestors to trade in our common stock and may result in a reduction in themarket price of shares of our common stock.

 

***FAILURE TO RETAINKEY EMPLOYEES MAY ADVERSELY AFFECT OUR ABILITY TO CONDUCT OUR BUSINESS***

 

Our future success depends on the continued service and performance ofkey employees. In the past, we have been dependent on certain specializedsystems personnel to operate, maintain and upgrade our systems. In an effort toreduce our costs, we have outsourced many of these responsibilities to outsidepersonnel, who may be less experienced and less knowledgeable than our formeremployees. In the past we have made significant headcount reductions and expectto make further reductions in the future. Our inability to retain key employeescould adversely affect our business, financial condition and operating results.

 

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***IF DEMAND FOR OURPRODUCTS AND SERVICES DOES NOT INCREASE AS WE EXPECT, OUR ABILITY TO INCREASEOUR REVENUES WILL BE NEGATIVELY AFFECTED***

 

If the demand for our current and planned Internet services fails todevelop, or develops more slowly than we anticipate, we may not be able toincrease our revenues at the rate we have projected. Obstacles to demand forour products and services include:

 

•                                          publicconcern about the economic viability of Internet services providers and theInternet industry in general;

 

•                                          failureof regulators to take adequate steps to prevent incumbent and largertelecommunications providers from monopolizing the market;

 

•                                          lackof developed infrastructure to support Internet applications and access tobroadband services, and

 

•                                          limitedaccess to Internet services.

 

In particular, we depend on increasing demand for Internet services bySMEs. Demand by SMEs is dependent on the extent to which they and theircustomers and suppliers adopt the Internet as a means of doing business, andthey utilize Internet technologies to deal with internal business processes.Demand will also depend on whether there is a continuing economic downturn,which may result in reduced spending by SMEs on Internet products and services.Furthermore, as competition reduces prices for Internet access in many of ourmarkets, we are increasingly dependent on our ability to sell higher profitmargin services such as security services, web-hosting, and e-commercesolutions. Finally, an increasing number of Internet services providers aregoing out of business in our key markets. This results in customer reluctanceto rely on businesses such as ours for critical business functions.

 

***COMPETITION FORCUSTOMERS IN OUR MARKETS MAY CAUSE US TO REDUCE OUR PRICES OR INCREASESPENDING, WHICH MAY NEGATIVELY AFFECT OUR REVENUES AND OPERATING RESULTS***

 

Some of our competitors have greater market presence, brand recognitionand financial, technical and personnel resources than we have. Although ourcompetitors and their resources vary depending on the market and the country,these competitors may include local and regional Internet services providers,telecommunications companies and cable companies. Some of our competitors, inparticular the telecommunications companies, have large existing networks andcustomer bases. Increasing competition may create pressure to reduce our priceswhile at the same time improving our products and services. There is noassurance that the price and performance of our services and products will besuperior relative to the services and products of our competitors. As a result,we may experience a loss of competitive position that could result in lowerprices, fewer customer orders, reduced revenues, reduced profit margins andloss of market share.

 

***OUR BRAND NAMES ANDTRADEMARKS ARE DIFFICULT AND COSTLY TO PROTECT AND AS A RESULT WE MAY BECOMEINVOLVED IN TRADEMARK INFRINGEMENT LITIGATION***

 

We are aware of other companies using or claiming to have rights to usetrademarks that are similar to our marks and variations of those marks,including the VIA NET.WORKS mark. The protective steps we have taken may beinadequate to deter misappropriation of our proprietary information. We may beunable to detect the unauthorized use of, or take appropriate steps to enforce,our intellectual property rights. The users of these or similar marks may befound to have senior rights if they were ever to assert a claim against us fortrademark infringement. If an infringement suit were instituted against us, evenif groundless, it could result in substantial litigation expenses. Failure toprotect our intellectual property adequately could harm our brand and affectour ability to compete effectively. Further, defending our intellectualproperty rights could result in the expenditure of significant financial andmanagerial resources, which could adversely affect our business, financialcondition and operating results.

 

We are currently engaged in litigation with a third partytelecommunications provider in Spain, who opposed the Spanish Trademarks andPatents Official Agency’s granting the Spanish Amen Group company the trademark“Amen.” The Spanish Trademarks and Patents Official Agency granted andauthorized the Spanish Amen Group company the use of the trademark “Amen”within Spain. Nevertheless, the third-party telecommunications provider hasappealed this decision. If this appeal were to be successful, we could beforced to cease using the Amen mark and may be required to pay damages,although we believe that any such damages would be immaterial.

 

Inconnection with our acquisition of five PSINet Europe companies, we receivedrights to use the “PSINet” name in Belgium, France, The Netherlands,Switzerland and Germany. These rights were limited to the limited licenserights held by the seller, PSINet Europe B.V., which it received from theparent company, PSINet Inc., as a part of the seller’s original acquisition ofthe PSINet Europe companies from PSINet Inc. in the U.S. bankruptcyproceedings. The PSINet brand and domain name is used in the U.S. by CogentCommunications. The brand is also used in the UK by Telstra Corporation inconnection with its purchase of PSINet UK from PSINet

 

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EuropeB.V. As a part of our acquisition, we entered into an agreement with Telstraunder which Telstra agreed not to use the brand in our PSINet Europeanterritories and we agreed not to use the brand in the United Kingdom.  The legitimate use of the brand by otherparties will tend to diminish the value of the brand to VIA and could lead toconfusion in the marketplace.  As aresult, we may have to incur additional costs in order to effectively leveragethe brand in our territories.

 

***FLUCTUATIONS IN THEEXCHANGE RATE BETWEEN THE U.S. DOLLAR AND THE VARIOUS CURRENCIES IN WHICH WECONDUCT BUSINESS MAY AFFECT OUR OPERATING RESULTS***

 

We record the revenues and expenses of our local operations in theirlocal currencies and translate these amounts into U.S. dollars for purposes ofreporting our consolidated results. As a result, fluctuations in foreigncurrency exchange rates may adversely affect our revenues, expenses and resultsof operations as well as the value of our assets and liabilities. Fluctuationsin foreign currency exchange rates may also adversely affect the comparabilityof period-to-period results. For example, if the average value of the Euroincreases in relation to the U.S dollar during a quarterly period as comparedto the prior period, each Euro will convert to more U.S dollars during thatquarterly period than the prior period and we will report higher revenue growththan what would have been calculated in local currencies for that period. Inaddition, we hold foreign currency balances that will create foreign exchange gainsor losses, depending upon the relative values of the foreign currency at thebeginning and end of the reporting period, affecting our net income andearnings per share. In projecting future operating results, we make certainassumptions about the fluctuation of the home currencies of our operations. Ifthese assumptions turn out to be materially inaccurate, our actual operatingresults may be materially different from our projections.

 

***REGULATORY ANDECONOMIC CONDITIONS IN THE COUNTRIES WHERE WE OPERATE ARE UNCERTAIN, AND MAY DECREASEDEMAND FOR OUR SERVICES, INCREASE OUR COSTS, OR OTHERWISE REDUCE OUR BUSINESSPROSPECTS***

 

Our operating companies are located in countries with rapidly changingregulatory and economic conditions that may affect the Internet servicesindustry. New laws or regulations pertaining to the Internet ortelecommunications, or the application or interpretation of existing laws andregulations, could decrease demand for our services, increase our costs, orotherwise reduce our profitability or business prospects. Examples of the typesof laws and regulations that could adversely affect us include laws that:

 

•                                          imposetaxes on transactions made over the Internet;

 

•                                          imposetelecommunications access fees on Internet services providers or otherincreases in access, transit or general telecommunications costs;

 

•                                          prohibitthe transmission of various types of information and content over the Internet;

 

•                                          imposerequirements that Internet services providers protect users’ privacy, monitorcontent, or permit government interception of data traffic, and

 

•                                          increasethe likelihood or scope of competition from telecommunications or cablecompanies.

 

For example, a number of European countries have enacted legislationthat requires Internet services providers to establish technical means topermit national authorities to intercept data traffic of identified customers.The application of these laws to Internet services providers has been subjectto significant opposition from Internet services providers industry groups inGermany and the Netherlands, among others, because of the substantial costInternet services providers would incur in order to comply with these laws.Ultimately, these requirements may impose significant costs on our operationsin these countries, which would negatively impact our operating results. Theselaws could also increase our competition or change our competitive environmentso that customer demand for our products and services is affected adversely.

 

In addition to risks we face from new laws or regulations, we faceuncertainties in connection with the application of existing laws to theInternet. It may take years to determine the manner in which existing lawsgoverning issues like property ownership, libel, negligence and personalprivacy will be applied to communications and commerce over the Internet.

 

***WE RELY ONTELECOMMUNICATIONS PROVIDERS IN OUR MARKETS TO PROVIDE OUR CUSTOMERS WITHRELIABLE ACCESS TO OUR SERVICES, AND FAILURES OR DELAYS IN PROVIDING ACCESSCOULD LIMIT OUR ABILITY TO SERVICE OUR CUSTOMERS AND IMPACT OUR REVENUES ANDOPERATING RESULTS***

 

Our customers typically access our services either through their normaltelephone lines or dedicated lines provided by local telecommunicationsproviders specifically for the purposes of accessing and utilizing theInternet. Our customers are usually required to maintain their telephone lineto utilize certain of our resold voice services or must have a pre-existingvoice service prior to switching to

 

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our voice service, depending on the resold voice service we offer. Insome of our markets, we experience delays in delivery of new telephone ordedicated lines that prevent our customers from utilizing our services. Thesedelays result in lost revenues. Additionally, some local telecommunicationsproviders that provide Internet services provide delivery of telephone ordedicated lines to their own Internet customers on a preferential basis, whichmay cause us to lose current and potential customers. We also lease networkcapacity and VPNs from telecommunications providers and rely on the quality andavailability of their service. These companies may experience disruptions ofservice, which could disrupt our services to, or limit Internet access for, ourcustomers. We may not be able to replace or supplement these services on atimely basis or in a cost-effective manner, which may result in customerdissatisfaction and lost revenues. In addition, to the extent that alternativelocal access providers fail in any particular market, the incumbenttelecommunications providers will experience less competitive price pressurefor access, which could increase our cost structures and impair our profitmargins.

 

***WE DEPEND ON THERELIABILITY OF OUR NETWORK AND SYSTEMS, AND A FAILURE OR A BREACH OF OURSECURITY MEASURES COULD RESULT IN A LOSS OF CUSTOMERS AND REDUCED REVENUES***

 

We are able to deliver services only to the extent that our network andsystems are protected against damages from technical, network or systemfailures, computer viruses, natural disasters and unauthorized access orintentional acts or omissions caused by third parties. Any failure, accident orsecurity breach that causes interruptions in our operations could impair our abilityto provide services to our customers and negatively impact our revenues andresults of operations. To the extent that any disruption or security breachresults in a loss or damage to our customers’ data or applications, orinappropriate disclosure of confidential information, we may incur liability asa result. In addition, we may incur additional costs to remedy the damagescaused by these disruptions or security breaches. Although we currently possesserrors and omissions insurance and business interruption insurance, thesepolicies may not provide effective coverage upon the occurrence of a materialevent or a combination of events.

 

***WE MAY BELIABLE FOR INFORMATION DISSEMINATED OVER OUR NETWORK***

 

We may face liability for information carried on or disseminatedthrough our network. Alternatively, we may incur costs associated with effortsto prevent access to certain information from our network as required bygovernmental authorities. The laws governing these matters vary fromjurisdiction to jurisdiction. Some types of laws that may result in ourliability for information disseminated over our network include:

 

•                                          lawsdesigned to protect intellectual property, including trademark and copyrightlaws;

 

•                                          lawsrelating to publicity and privacy rights and laws prohibiting defamation;

 

•                                          lawsrestricting the collection, use and processing of personal data, and

 

•                                          lawsprohibiting the sale, dissemination or possession of offensive or pornographicmaterial.

 

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**ITEM2****  PROPERTIES**

 

Our headquarters and principal executive offices are located in leasedfacilities at Schiphol-Oost (near Amsterdam), the Netherlands. This leaseexpires in November 2009. Additionally, we lease space in our operatingmarkets for support facilities, local offices, network operations centers, datacenters and points of presence.

 

As part of the acquisition of the PSINetEurope Group, we now have a first-class datacenter located in Geneva.  The lease for the Geneva datacenter expires inFebruary 2014.

 

We believe that our present facilities are in good condition and aregenerally suitable for our business needs.

 

**ITEM3****  LEGAL PROCEEDINGS**

 

OnNovember 5, 2001, we were named as a defendant in a class action lawsuitin the District Court for the Southern District of New York against VIANET.WORKS, Inc., certain of the underwriters who supported our initialpublic offering (“IPO”) and certain of our officers, under the title O’Leary v.Via Net.works [sic] et al [01-CV-9720] (the “Complaint”). An amended complaintwas filed in April 2002. The Complaint alleges that the prospectus wefiled with our registration statement in connection with our IPO was materiallyfalse and misleading because it failed to disclose, among other things, that: (i) thenamed underwriters had solicited and received excessive and undisclosedcommissions from certain investors in exchange for the right to purchase largeblocks of VIA IPO shares; and (ii) the named Underwriters had entered intoagreements with certain of their customers to allocate VIA IPO shares inexchange for which the customers agreed to purchase additional VIA shares inthe aftermarket at pre-determined prices (“Tie-in Arrangements”), therebyartificially inflating the Company’s stock price. The Complaint further allegesviolations of Sections 11, 12 (a)(2) and 15 of the Securities Act of 1933and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5promulgated thereunder arising out of the alleged failure to disclose and thealleged materially misleading disclosures made with respect to the commissionsand the Tie-in Arrangements in the prospectus. The plaintiffs in this actionseek monetary damages in an unspecified amount. Approximately 300 other issuersand their underwriters have had similar suits filed against them, all of whichare included in a single coordinated proceeding in the Southern District of NewYork (the “IPO Litigation”). On June 30, 2003, the special litigationcommittee of the board of directors of the Company conditionally approved theglobal settlement between all plaintiffs and issuers in the IPOLitigations.  The special litigation committee agreed to approve thesettlement subject to a number of conditions, including the participation of asubstantial number of other defendants in the proposed settlement, the consentof the Company’s insurers to the settlement, and the completion of acceptablefinal settlement documentation.  The settlement would provide, among otherthings, a release of the Company and of the individual defendants for theconduct alleged in the action to be wrongful by the plaintiffs.  Under theproposed settlement, the Company would agree to undertake otherresponsibilities under the partial settlement, including agreeing to assignaway, not assert, or release certain potential claims the Company may haveagainst its underwriters.  In June 2004, a motion for preliminaryapproval of the settlement was filed with the Court. The underwriters filed amemorandum with the Court opposing preliminary approval of thesettlement.  The court granted the preliminary approval on February 15,2005, subject to certain modifications.  If the parties are able to agreeupon the required modifications, and such modifications are acceptable to thecourt, notice will be given to all class members of the settlement, a “fairness”hearing will be held and if the Court determines that the settlement is fair tothe class members, the settlement will be approved.  Any direct financialimpact of the proposed settlement is expected to be borne by our insurers.

 

PSINetBelgium, an indirect wholly-owned subsidiary of the Company, is a defendant ina lawsuit filed by Perceval Technologies N.V. regarding a commercial agreemententered into for the provision by Perceval of a DSL network in Belgium,Luxembourg and France.  The agreement of15 March 2004, entered into prior to VIA’s acquisition of PSINet Belgium,was for the benefit of a customer of PSINet Belgium, and provided for athree-year term upon completion of a test phase. The customer was not satisfiedwith the results of the project and decided to stop the project, whereuponPSINet Belgium terminated the agreement with Perceval Technologies.  On February 28, 2005, Perceval brought acivil action before the commercial court of Brussels for the early terminationof the contract and claims damage in the amount of €1.4 million ($1.9 million) plus€250,000 ($0.3 million) moral damages, plus interests, costs and attorneys’fees. We believe PSINet Belgium was entitled to terminate the agreement underthe circumstances and that the allegations are without merit and have engagedcounsel to defend the action.  If PSINetBelgium is determined to be liable or if we conclude that a settlement is inits best interests, that subsidiary may incur substantial costs.

 

**ITEM4****  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

During the three months ended December 31, 2004, we did not submitany matters to a vote of our stockholders.

 

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**PART II**

 

**ITEM 5****  MARKET FORREGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

***Marketfor our Common Stock***

 

On February 11, 2000, we completed our initial public offering ofshares of common stock, par value $.001 per share. Our common stock is tradedon both the NASDAQ SmallCap Market in the United States and the EuronextAmsterdam exchange under the symbol VNWI. Due to our delinquency in filing this Reporton Form 10-K, a “E” has been appended to our trading symbol as “VNWIE,” to noteour delinquency. Until June 27, 2002, our common stock traded on theNASDAQ National Market under this symbol. The table below sets forth, for theperiods indicated, the high and low sales prices per share of the common stockas reported on the NASDAQ National Market for the periods prior to June 27,2002, and on the NASDAQ SmallCap Market for the periods on or after June 27,2002:

 
| ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| 2004:          |       |     |       |    |       |
| First quarter  |       | $        | 2.37       |    | $          | 1.16 |   |
| Second quarter |       | $        | 1.28       |    | $          | 0.73 |   |
| Third quarter  |       | $        | 0.85       |    | $          | 0.50 |   |
| Fourth quarter |       | $        | 1.02       |    | $          | 0.58 |   |

 
| ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| 2003:          |       |     |       |    |       |
| First quarter  |       | $        | 0.87       |    | $          | 0.60 |   |
| Second quarter |       | $        | 1.22       |    | $          | 0.66 |   |
| Third quarter  |       | $        | 1.66       |    | $          | 0.98 |   |
| Fourth quarter |       | $        | 1.81       |    | $          | 1.36 |   |

 

As of April 1, 2005, there were approximately 7,226 beneficialowners of the Company’s common stock. The closing stock price as at April 19,2005 was $0.20.

 

We have neverdeclared or paid any dividends on our common stock. Please also refer to the discussionin Item 1: Business “Recent Events and Potential Sale of the Businesses”.

 

***Useof Initial Public Offering Proceeds***

 

On February 11, 2000, we completed our initial public offering ofshares of common stock, par value $.001 per share. Our initial public offeringwas made pursuant to a prospectus dated February 11, 2000, which was filedwith the SEC as part of a registration statement, file No. 333-91615 thatwas declared effective by the SEC on February 10, 2000.

 

The net offering proceeds after deducting the expenses and underwritingdiscounts and commissions was approximately $333.0 million. From theeffective date of the initial public offering through December 31, 2004,we have used $110.7 million for acquisitions of other businesses,including the repayment of debt for acquisitions we made in 1999, increases inour investment in various partially owned subsidiaries, $59.7 million forcapital expenditures and approximately $160.8 million to fund operatinglosses.

 

***Purchaseof Equity Securities by the Issuer***

 

We made no purchases of our common stock during the fourth quarter of2004.

 

25

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**ITEM6****  SELECTED FINANCIAL DATA**

 

The following is a summary of selected consolidated financial data ofthe Company from January 1, 2000 to December 31, 2004. This datashould be read together with our audited consolidated financial statements andaccompanying notes, and MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS, which are included elsewhere in this Form 10-K.Prior year amounts have been adjusted for the effects of discontinuedoperations. Details of these adjustments are described in ITEM 7 MANAGEMENT’SDISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION. Theresults of operations for any year are not necessarily indicative of theresults of operations for any future period.

 

 
| ** **                                                                 | ** ** | **Year Ended December 31,  2000**                           | ** ** | **Year Ended December 31  2001** | ** ** | **Year Ended December 31,  2002** | ** ** | **Year Ended December 31  2003** | ** ** | **Year Ended December 31  2004** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|---------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
|                                                                       |       | **(U.S. dollars in thousands, except share and per share data)** |       |
| Statement of Operations Data:                                              |       |                                                             |       |                                  |       |                                   |       |                                  |       |                                  |       |
| Revenue                                                                    |       | $                                                                | 36,302     |                                  | $          | 40,144                                 |       | $                                     | 42,576     |                                  | $          | 44,788 |   | $ | 69,684 |   |
| Operating costs and expenses:                                              |       |                                                             |       |                                  |       |                                   |       |                                  |       |                                  |       |
| Internet services                                                          |       | 20,948                                                           |       | 24,876                                |       | 24,261                                 |       | 24,370                                |       | 34,451                                |       |
| Selling, general and administrative                                        |       | 43,273                                                           |       | 55,680                                |       | 47,763                                 |       | 43,336                                |       | 64,876                                |       |
| Impairment and restructuring charges (1)                                   |       | —                                                           |       | 82,649                                |       | 1,153                                  |       | 8,723                                 |       | 12,247                                |       |
| Depreciation and amortization                                              |       | 18,778                                                           |       | 30,653                                |       | 7,526                                  |       | 6,179                                 |       | 8,169                                 |       |
|                                                                       |       |                                                             |       |                                  |       |                                   |       |                                  |       |                                  |       |
| Total operating costs and expenses                                         |       | 82,999                                                           |       | 193,858                               |       | 80,703                                 |       | 82,608                                |       | 119,743                               |       |
|                                                                       |       |                                                             |       |                                  |       |                                   |       |                                  |       |                                  |       |
| Operating loss from continuing operations                                  |       | (46,696                                                          | )          | (153,715                              | )          | (38,127                                | )          | (37,820                               | )          | (50,059                               | )          |
| Interest income, net                                                       |       | 11,511                                                           |       | 6,985                                 |       | 2,090                                  |       | 1,087                                 |       | 164                                   |       |
| Other (expense) income, net                                                |       | (2,405                                                           | )          | 2,230                                 |       | 231                                    |       | (323                                  | )          | 431                                   |       |
| Foreign currency gains (losses), net                                       |       | (4,355                                                           | )          | (5,629                                | )          | 13,550                                 |       | 16,299                                |       | 5,446                                 |       |
|                                                                       |       |                                                             |       |                                  |       |                                   |       |                                  |       |                                  |       |
| Loss from continuing operations before  minority interest and income taxes |       | (41,946                                                          | )          | (150,128                              | )          | (22,256                                | )          | (20,757                               | )          | (44,018                               | )          |
| Income tax (expense) benefit                                               |       | (995                                                             | )          | 292                                   |       | 51                                     |       | (165                                  | )          | 300                                   |       |
| Minority interest in loss of consolidated  subsidiary                      |       | 2,350                                                            |       | 73                                    |       | —                                 |       | —                                |       | —                                |       |
|                                                                       |       |                                                             |       |                                  |       |                                   |       |                                  |       |                                  |       |
| Net loss from continuing operations                                        |       | $                                                                | (40,591    | )                                     | $          | (149,763                               | )          | $                                     | (22,205    | )                                     | $          | (20,922 | ) | $ | (43,718 | ) |
|                                                                       |       |                                                             |       |                                  |       |                                   |       |                                  |       |                                  |       |
| Discontinued operations (2):                                               |       |                                                             |       |                                  |       |                                   |       |                                  |       |                                  |       |
| (Loss) / gain from discontinued operations                                 |       | (36,444                                                          | )          | (121,165                              | )          | (22,654                                | )          | (3,822                                | )          | 6,581                                 |       |
| Gain on disposal of discontinued operations                                |       | —                                                           |       | —                                |       | 1,906                                  |       | 164                                   |       | 411                                   |       |
|                                                                       |       |                                                             |       |                                  |       |                                   |       |                                  |       |                                  |       |
| Net loss                                                                   |       | $                                                                | (77,035    | )                                     | $          | (270,928                               | )          | $                                     | (42,953    | )                                     | $          | (24,580 | ) | $ | (36,726 | ) |
|                                                                       |       |                                                             |       |                                  |       |                                   |       |                                  |       |                                  |       |
| Basic and diluted loss per share                                           |       |                                                             |       |                                  |       |                                   |       |                                  |       |                                  |       |
| Continuing operations                                                      |       | $                                                                | (0.77      | )                                     | $          | (2.47                                  | )          | $                                     | (0.37      | )                                     | $          | (0.34 | ) | $ | (0.72 | ) |
| Discontinued operations                                                    |       | (0.69                                                            | )          | (2.00                                 | )          | (0.34                                  | )          | (0.06                                 | )          | 0.11                                  |       |
|                                                                       |       |                                                             |       |                                  |       |                                   |       |                                  |       |                                  |       |
| Net loss per share — basic and diluted                                |       | $                                                                | (1.46      | )                                     | $          | (4.47                                  | )          | $                                     | (0.71      | )                                     | $          | (0.40 | ) | $ | (0.61 | ) |
|                                                                       |       |                                                             |       |                                  |       |                                   |       |                                  |       |                                  |       |
| Shares used in computing basic and diluted  loss per share                 |       | 52,892,772                                                       |       | 60,638,960                            |       | 60,147,704                             |       | 61,135,959                            |       | 61,001,620                            |       |

 

26

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| ** **                                                                                                | ** ** | **As of December 31,**     | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                | ** ** | **2000**                        | ** ** | **2001** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|                                                                                                      |       | **(U.S. dollars in thousands)** |       |
|                                                                                                      |       |                            |       |   |   |   |   |   |   |   |   |
| Balance Sheet Data (3):                                                                                   |       |                            |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                                                 |       | $                               | 237,839    |   | $ | 137,854 |   | $ | 97,813 |   | $ | 65,803 |   | $ | 15,497 |   |
| Restricted cash                                                                                           |       | —                          |       | — |   | 895 |   | 1,391 |   | 5,100 |   |
| Goodwill and other acquired intangible  assets, net                                                       |       | 181,082                         |       | 18,884 |   | 9,189 |   | 3,842 |   | 51,161 |   |
| Other assets                                                                                              |       | 62,227                          |       | 41,963 |   | 37,924 |   | 39,652 |   | 48,695 |   |
|                                                                                                      |       |                            |       |   |   |   |   |   |   |   |   |
| Total assets                                                                                              |       | $                               | 481,148    |   | $ | 198,701 |   | $ | 145,821 |   | $ | 110,688 |   | 120,453 |   |
|                                                                                                      |       |                            |       |   |   |   |   |   |   |   |   |
| Short-term notes and current portion of  long-term debt, capital lease obligations and long-term payables |       | 3,265                           |       | 1,632 |   | 63 |   | 173 |   | 9,325 |   |
| Long-term debt, capital lease obligations  and long-term payables, less current portion                   |       | 1,894                           |       | 241 |   | 46 |   | 328 |   | 344 |   |
| Other liabilities                                                                                         |       | 50,410                          |       | 40,587 |   | 41,132 |   | 42,021 |   | 78,179 |   |
| Minority interest in consolidated  subsidiaries                                                           |       | 597                             |       | — |   | — |   | — |   | — |   |
| Total stockholders’ equity                                                                           |       | 424,982                         |       | 156,241 |   | 104,580 |   | 68,166 |   | 32,605 |   |
|                                                                                                      |       |                            |       |   |   |   |   |   |   |   |   |
| Total liabilities, minority interest and  stockholders’ equity                                       |       | $                               | 481,148    |   | $ | 198,701 |   | $ | 145,821 |   | $ | 110,688 |   | 120,453 |   |
|                                                                                                           |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)                                  Referto Note 3 to the consolidated financial statements for impairment andrestructuring charges taken in 2002, 2003 and 2004.

 

(2)                                  Referto Note 2 to the consolidated financial statements for discontinuedoperations in 2002, 2003 and 2004.

 

(3)                                  Thecomparative balance sheets have not been reclassified to show separatelyamounts related to discontinued operations.

 
| **ITEM 7** | ** ** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF  RESULTS OF OPERATIONS AND FINANCIAL CONDITION** |
|------------|------------|-------------------------------------------------------------------------------------------------|

 

Some of the information contained in thisITEM 7 contains forward-looking statements, or statements that relate to futureevents or our future performance. These statements include, but are not limitedto those relating to the Company’s Strategic Plan, projections regardingfinancial impacts from planned organizational re-alignment, outsourcingprojects, new product roll-out and cost reductions in general. These statementsare only predictions or planned actions that are subject to a number of risks,uncertainties and other factors. Actual events or results may differmaterially. Information regarding the risks, uncertainties and other factorsthat could cause actual results to differ from the results in these forward-lookingstatements are discussed under the heading RISK FACTORS beginning on page 17of this Form 10-K. Please carefully consider these factors, as well asother information contained in this Form 10-K and in our other periodicreports and documents filed with the Securities and Exchange Commission.

 

The following discussion and analysis shouldbe read in conjunction with our consolidated financial statements and therelated notes beginning on page F-1 of this annual report on Form 10-K,ITEM 6. SELECTED FINANCIAL DATA and PART I, ITEM 1 BUSINESS.

 

27

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***Overview***

 

VIA is a provider of Internet-protocol (IP)based business communication solutions to small and medium sized enterprises,or SMEs, in Europe and the United States. We deliver Internet products andservices that enhance the productivity of our customers, including web-hosting,Internet access (through dial-up, DSL, or ISDN and leased line connectivity),virtual private networks (VPNs), and Internet and network security services.Because we also offer a voice communications product, we are able to serve ourcustomers as the single source for all of their communications requirements. Wehave operations in France, Germany, Italy, the Netherlands, Portugal, Spain,Switzerland, Belgium, the United Kingdom and the United States.

 

On March 17, 2005, we announced that acombination of factors including unanticipated revenue shortfalls in certain ofour legacy VIA companies and our new VIA Express business would leave theCompany with insufficient cash reserves to continue the operations of the groupparent, VIA NET.WORKS, Inc., in early April 2005, and that we wereworking with professional advisors to obtain new financing to address theissue. We also noted that with the support of our advisors, we were pursuingtwo parallel processes to maximize our strategic alternatives and optimize thevalue that is inherent in the VIA businesses. In the first of the processes, we engaged in discussions with a numberof parties with a view to selling all or parts of its businesses. In the secondof the two processes, we sought potential investors to provide funds sufficientto enable the Company to continue as a going concern.

 

On April 1, 2005, the Company announcedthe sale of two of its Swiss companies — VIA NET.WORKS (Schweiz) AG and VIANET.WORKS Services AG – to the former managers and owners of the business.  The net proceeds received by VIA provided uswith additional liquidity to continue its discussions for refinancing and saletransactions. Foreign currency translation adjustment of $0.9 million will bereclassified into the statement of operations upon disposal in quarterending June 30, 2005.

 

On April 10, 2005, VIA NET.WORKS, Inc.entered into a letter of intent with Claranet Group Limited, a privately-heldEuropean Internet services provider based in the United Kingdom, to sell all ofour business operations in Europe and the United States.  Foreign currency translation adjustments of$34.1 million will be reclassified into the statement of operations upon disposalin the year 2005.  The key terms of the Claranet Sale aredescribed in ITEM I BUSINESS, **Recent Events andPotential Sale of the Businesses.**

 

We are in the process of negotiatingdefinitive purchase, interim working capital financing and other agreementspertaining to the proposed Claranet Sale. The definitive agreements would be subject to various conditions tocompletion, including absence of material adverse change in VIA’s business.There can be no assurance that VIA will be successful in negotiating thedefinitive agreements or achieving completion of the proposed transaction. Ifthe agreements are successfully concluded, we would expect to convene a meetingof our shareholders within the next two or three months to consider theClaranet Sale for approval. If we received approval from our shareholders, wewould close the transaction and use the net proceeds to pay off the remainingliabilities of the Company and shut down our corporate headquarters andterminate the remaining employees. Remaining funds would then be distributed to our shareholders.

 

Outside of completing the Claranet Sale, ourgoal is to generate positive operating cash flows on a sustainable basis.  In order to achieve this in 2005, we wouldneed to obtain additional financing in order to further eliminate costs fromthe organization primarily through headcount reductions.  Achieving this goal is also dependent upongenerating new and incremental revenues from our PSINet Europe group ofcompanies and our VIA Express channel. In 2004, our legacy VIA companiesunderperformed revenue expectations, primarily as a result of the continuingcompetition and price pressure of the access market, and our start-up VIAExpress channel underperformed revenue expectations due to a number of factors,including a delay of the commercial launch for technical issues and the fullimplementation of the billing platform integration into the product platform aswell as initial mistakes in the product marketing focus.  The product platform is now generally fullyoperational and integrated into the billing system and there has been an overallresetting of the product marketing focus for the unit.  However, in light of the current liquidityissues of the Company and the announced Claranet Sale, our revenueopportunities in all our channels may be impacted by the financial andoperational uncertainty of the Company’s future.  If we are unable to complete the ClaranetSale transaction, as contemplated or find an alternative solution, should thattransaction not close, there is substantial doubt as to our ability to continuethe Company as a going concern.

 

As a result of the sale of our two VIA Switzerlandoperations on April 1, 2005 and the announcement of the Claranet Sale on April 10,2005, management has evaluated whether, as a result of these events, thecarrying value of our assets as at December 31, 2004 has beenimpaired. As further described below under *Valuation of long-lived assets and goodwill*, management hasdetermined that an impairment has occurred in VIA France, our PSINet reportingunit and our Amen reporting unit.

 

For more information on this product andsales channel shift see PART I, BUSINESS, of this Form 10-K. Thereare significant risks and dependencies inherent in our ability to execute onour plan. These risks and dependencies, as well as other risks that pertaingenerally to our business are described above under RISK FACTORS in ITEM 1.

 

**Discontinued Operations**

 

In July 2003 VIA NET.WORKS Italia, whichhas been included in the European segment was sold for nominal consideration tothe then-current management team. VIA also sold its operations in Brazil andMexico in 2002, but because of the method by which these transactions werestructured, these operations were not treated as discontinued operations in2002 but rather classified as businesses

 

28

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transferred under contractual agreements. The Company eliminated allcontinuing involvement in these operations in 2003 and both are now treated asdiscontinued operations for all periods presented. On September 24,2004, VIA sold 100% of the shares of VIA NET.WORKS UK Ltd. to Claranet Limited,a UK-based Internet services provider.

 

As each of the Argentine, Austrian, Irish,Italian, Brazilian, Mexican and United Kingdom operations represented acomponent of an entity as defined by Statement of Financial Accounting StandardsNo. 144 *“Accounting for the Impairmentor Disposal of Long-lived Assets”* (“SFAS 144”), the Company hasclassified each operation as a discontinued operation for all periodspresented. Revenues related to discontinued operations were approximately $24.5 millionand $16.1million for the years ended December 31, 2003 and 2004,respectively. The loss from discontinued operations was ($3,8) million for theyear ended December 31, 2003 and a gain of $6.6 million for the year endedDecember 31, 2004.

 

29

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***Reportable Segment Financial Information***

 

VIA offers a variety of Internet access,managed bandwidth, web-hosting, Internet security and related services tobusinesses and consumers in Europe and the Americas. As of December 31,2004, VIA served primary markets in nine countries. These country operationsgenerate Internet-related revenues from leased lines, dial-up Internet access,web-hosting and design, Internet security and consulting services, and sale ofthird-party hardware and software.

 

In prior reporting periods, the Company’sinternal management reporting structure was based on country operations andtherefore the Company had provided segment information based on geographicregions.

 

Within the last quarter of 2004, managementreevaluated and amended its internal reporting structure and therefore changedits reportable segments and grouped all of the VIA legacy operating companies,except the US operation, and the newly acquired PSINet Europe operating companiesinto one operating segment – “Solutions”. The Company grouped its start-up VIAExpress channel operations together with the legacy VIA US operations into oneoperating segment – “Express”. The Company grouped all of the Amen operatingcompanies into one operating – “Amen”. The Company and its Chief OperatingDecision Maker (“CODM”) evaluates the performance of its segments based onrevenue and EBITDA before restructuring (“Adjusted EBITDA”). The Company’s CODMhave been the Chief Executive Officer and the Chief Financial Officerthroughout the year. Corporate expenses, which also include the regionalcompanies holding Indefeasible Rights of Use (“IRU’s), are shown to reconcileto the total consolidated figures. Prior period amounts have been reclassifiedto conform to the current period presentation.

 

Total segment assets, as presented in thetable below, are total assets net of intercompany funding amounts. Certainprior year data has been reclassified to conform to the current regionalgroupings. The following table presents information about our three marketsegments and our corporate activities, individually and on a consolidatedbasis. In the table below, Corporate, which also includes the cost of ourEuropean regional backbone network, is shown to reconcile to the totalconsolidated figures. Total segment assets, as presented in the table below,are total assets net of intercompany funding amounts.

 

 
| **In thousands of U.S. dollars**                               | ** ** | **Solutions** | ** ** | **Express** | ** ** | **Amen** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------|------------|---------------|------------|-------------|------------|----------|------------|---------------|------------|-----------|------------|
|                                                           |       |          |       |        |       |     |       |          |       |      |       |
| Total assets as of December 31, 2002                      |       | $             | 11,722     |        | $          | 6,422    |       | —        |       | $         | 101,955    |   | $ | 120,099 |   |
| Total assets as of December 31, 2003                      |       | $             | 17,571     |        | $          | 2,443    |       | —        |       | $         | 76,805     |   | $ | 96,819 |   |
| Total assets as of December 31, 2004                      |       | $             | 67,145     |        | $          | 3,711    |       | $             | 21,808     |      | $          | 27,789 |   | $ | 120,453 |   |
|                                                           |       |          |       |        |       |     |       |          |       |      |       |
| Total long-lived asset additions as of  December 31, 2002 |       | $             | 1,337      |        | $          | 346      |       | —        |       | $         | 270        |   | $ | 1,953 |   |
| Total long-lived asset additions as of  December 31, 2003 |       | $             | 1,914      |        | $          | 897      |       | —        |       | $         | 3,195      |   | $ | 6,006 |   |
| Total long-lived asset additions as of  December 31, 2004 |       | $             | 41,105     |        | $          | 1,334    |       | $             | 19,288     |      | $          | 2,995 |   | $ | 64,722 |   |
|                                                           |       |          |       |        |       |     |       |          |       |      |       |
| The year ended December 31, 2002:                         |       |          |       |        |       |     |       |          |       |      |       |
| Revenue                                                        |       | $             | 38,786     |        | $          | 3,790    |       | —        |       | $         | —     |   | $ | 42,576 |   |
| Adjusted EBITDA                                                |       | (3,269        | )          | (116        | )          | —   |       | (26,063       | )          | (29,448   | )          |
| Impairment and restructuring charges                           |       | (215          | )          | —      |       | —   |       | (938          | )          | (1,153    | )          |
|                                                           |       |          |       |        |       |     |       |          |       |      |       |
| The year ended December 31, 2003:                         |       |          |       |        |       |     |       |          |       |      |       |
| Revenue                                                        |       | $             | 40,864     |        | $          | 3,924    |       | —        |       | $         | —     |   | $ | 44,788 |   |
| Adjusted EBITDA                                                |       | (1,868        | )          | (394        | )          | —   |       | (20,656       | )          | (22,918   | )          |
| Impairment and restructuring charges                           |       | (5,903        | )          | (1,016      | )          | —   |       | (1,804        | )          | (8,723    | )          |
|                                                           |       |          |       |        |       |     |       |          |       |      |       |
| The year ended December 31, 2004:                         |       |          |       |        |       |     |       |          |       |      |       |
| Revenue                                                        |       | $             | 57,329     |        | $          | 4,001    |       | $             | 8,316      |      | $          | 38 |   | $ | 69,684 |   |
| Adjusted EBITDA                                                |       | (4,736        | )          | (3,148      | )          | 1,091    |       | (22,850       | )          | (29,643   | )          |
| Impairment and restructuring charges                           |       | ($6,951       | )          | —      |       | ($3,083  | )          | ($2,213       | )          | ($12,247  | )          |

 

At December 31, 2004, goodwill for theoperating segments Solutions, Express and Amen was $30.8 million, $1.1million and $10.5 million, respectively. All discontinued operations forthe period related to the Solutions segment (see Note 2).

 

The reconciliation between Adjusted EBITDA to net loss from continuedoperations is as follows:

** **

30

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** **
| **In thousands of U.S. dollars**       | ** ** | **Solutions** | ** ** | **Express** | ** ** | **Amen**   | ** ** | **Corporate** | ** ** | **Total**  | ** ** |
|----------------------------------------|------------|---------------|------------|-------------|------------|------------|------------|---------------|------------|------------|------------|
| ** **                             | ** ** | ** **    | ** ** | ** **  | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** |
| The year ended December 31, 2002: |       |          |       |        |       |       |       |          |       |       |       |
| Adjusted EBITDA                        |       | (3,269        | )          | (116        | )          | —     |       | (26,063       | )          | (29,448    | )          |
| Impairment and restructuring charges   |       | (215          | )          | —      |       | —     |       | (938          | )          | (1,153     | )          |
| Depreciation and amortization          |       | (2,182        | )          | (859        | )          | —     |       | (4,485        | )          | (7,526     | )          |
| Interest income                        |       | 29            |       | —      |       | —     |       | 2,138         |       | 2,167      |       |
| Interest expense                       |       | (33           | )          | (4          | )          | —     |       | (40           | )          | (77        | )          |
| Other income (expense), net            |       | (1,857        | )          | (64         | )          | —     |       | 2,152         |       | 231        |       |
| Foreign currency (losses) gains, net   |       | (11           | )          | (4          | )          | —     |       | 13,565        |       | 13,550     |       |
| Income tax benefit (expense)           |       | 12            |       | 39          |       | —     |       | 0             |       | 51         |       |
| Net loss from continuing operations    |       | (7,526        | )          | (1,008      | )          | —     |       | (13,671       | )          | (22,205    | )          |
|                                   |       |          |       |        |       |       |       |          |       |       |       |
| The year ended December 31, 2003: |       |          |       |        |       |       |       |          |       |       |       |
| Adjusted EBITDA                        |       | (1,868        | )          | (394        | )          | —     |       | (20,655       | )          | (22,918    | )          |
| Impairment and restructuring charges   |       | (5,903        | )          | (1,016      | )          | —     |       | (1,804        | )          | (8,723     | )          |
| Depreciation and amortization          |       | (2,018        | )          | (574        | )          | —     |       | (3,588        | )          | (6,179     | )          |
| Interest income                        |       | 27            |       | —      |       | —     |       | 1,073         |       | 1,100      |       |
| Interest expense                       |       | (15           | )          | —      |       | —     |       | —        |       | (15        | )          |
| Other income (expense), net            |       | (2,060        | )          | (74         | )          | —     |       | 1,811         |       | (323       | )          |
| Foreign currency (losses) gains, net   |       | (8            | )          | —      |       | —     |       | 16,306        |       | 16,298     |       |
| Income tax benefit (expense)           |       | (19           | )          | —      |       | —     |       | (146          | )          | (165       | )          |
| Net loss from continuing operations    |       | (11,863       | )          | (2,059      | )          | —     |       | (7,003        | )          | (20,925    | )          |
|                                   |       |          |       |        |       |       |       |          |       |       |       |
| The year ended December 31, 2004: |       |          |       |        |       |       |       |          |       |       |       |
| Adjusted EBITDA                        |       | (4,736        | )          | (3,148      | )          | 1,091      |       | (22,850       | )          | (29,643    | )          |
| Impairment and restructuring charges   |       | (6,951        | )          | —      |       | (3,083     | )          | (2,213        | )          | (12,247    | )          |
| Depreciation and amortization          |       | (3,233        | )          | (653        | )          | (1,560     | )          | (2,723        | )          | (8,169     | )          |
| Interest income                        |       | 20            |       | 2           |       | 6          |       | 477           |       | 506        |       |
| Interest expense                       |       | (169          | )          | (7          | )          | (22        | )          | (143          | )          | (342       | )          |
| Other income (expense), net            |       | (1,687        | )          | (1,157      | )          | (1,611     | )          | 4,886         |       | 431        |       |
| Foreign currency (losses) gains, net   |       | 2,665         |       | 46          |       | (2         | )          | 2,736         |       | 5,446      |       |
| Income tax benefit (expense)           |       | 71            |       | 35          |       | 194        |       | —        |       | 301        |       |
| Net loss from continuing operations    |       | (14,020       | )          | (4,881      | )          | (4,986     | )          | (19,380       | )          | (43,717    | )          |

 

Solutions:

 

The reportedincrease in revenue for the year ended December 31, 2004 as compared to December 31,2003 is due to the PSINet Europe operations acquired in August 2004(impact of approximately $15.7 million) and the strengthening of theEuro and the Swiss Franc to U.S. dollar foreign exchange rates (positivelyimpacting revenues by approximately $3.6 million), which offset a decreasein overall revenue primarily attributable to Germany, France, Netherlands, Switzerland and Spain. Theincrease in Adjusted EBITDA for the same period is primarily attributable tothe PSINet Europe operations acquiredin August 2004.

 

See RESULTS OF OPERATIONS in this section,for further analysis of revenues and impairment and restructuring charges.

 

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Express:

 

Total revenue has remained consistent fromthe year ended December 31, 2003 to December 31, 2004. The decreasein Adjusted EBITDA for the year ended December 31, 2004 relates to a $ 2.8million investment in the Express channel in infrastructure, headcount andmarketing activities.

 

Total revenue in the year ended December 31,2003 was consistent with the year ended December 31, 2002. The operatingloss from continuing operations and the impairment and restructuring chargesfor the year ended December 31, 2002 relates to goodwill impairment in2002.

 

See ITEM 7, MANAGEMENT DISCUSSION ANDANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—RESULTS OF OPERATIONSfor a discussion of the impairment and restructuring charges.

 

Amen:

 

Revenue for the year ended December 31,2004 was $8.3 million as compared to nil for the year ended December 31,2003, attributable to revenues recorded by the Amen business, which weacquired in January 2004.

 

See ITEM 7, MANAGEMENT DISCUSSION ANDANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—RESULTS OF OPERATIONSfor a discussion of the impairment and restructuring charges.

 

Corporate:

 

The increase in the loss from continuingoperations for the year ended December 31, 2004 as compared to December 31,2003 is primarily due to an increase in selling, general and administrativeexpenses.

 

The decrease in the loss from continuingoperations for the year ended December 31, 2003 as compared to December 31,2002 is primarily due to a decrease in selling, general and administrativeexpenses ($3.0 million).

 

See ITEM 7, MANAGEMENT DISCUSSION ANDANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—RESULTS OF OPERATIONSfor further analysis.

 

***Critical Accounting Policies***

 

Our critical accounting policies are asfollows:

 

•                                          Recognitionof revenue;

 

•                                          Estimationof valuation allowances and accrued liabilities;

 

•                                          Valuationof long-lived assets and goodwill;

 

•                                          Purchaseprice allocation; and

 

•                                          Goingconcern basis.

 

*Recognition ofrevenue:*

 

We derive our revenue from the sale ofInternet-related goods and services, specifically third party hardware andsoftware and Internet connectivity services, other Internet value-addedservices, such as hosting, security and IP VPN, and voice services. Asdescribed below, management judgments and estimates must be made in connectionwith the revenue recognized in any accounting period. Material differencesmight result in the amount and timing of our revenue for any period if ourmanagement made different judgments or utilized different estimates, primarilywith respect to our collectibility assessment.

 

At the time of the transaction, we assesscollectibility based on a number of factors, including past transaction historywith the

 

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customer and the credit-worthiness of the customer. If we determinethat collection of a fee is not reasonably assured, the revenue is recognizedupon the receipt of cash, provided other revenue recognition criteria have beensatisfied.

 

Our practices regarding the evidence of anarrangement vary from country to country. Generally, for sales, other thanthose completed over the Internet, we use either a purchase order or a customeragreement as evidence of an arrangement. For sales over the Internet, wegenerally use a credit card authorization as evidence of an arrangement.

 

Our Internet connectivity services, otherInternet value-added services, and voice revenue are recognized as it is earnedover the term of the customer relationship. When our services are bundled in acustomer sale agreement, the aggregate fee is allocated to the elements of thearrangement based on objective evidence of fair value such as internal pricelists for stand-alone products and services and competitors’ prices for similarproducts and services. Revenue from installation, training and consulting isrecognized as the related services are rendered, although such amounts have notbeen material. The typical customer relationship for connectivity services isfrom one to two years.

 

*Estimation ofvaluation allowances and accrued liabilities:*

 

Our management must make estimates of thecollectibility of our accounts receivables and the amount of our accruedtelecommunications and restructuring costs. Management considers currenteconomic trends, historical bad debts, accuracy of billing data, customercredit-worthiness and changes in customer payment patterns when analyzingspecific accounts receivable balances to determine the adequacy of theallowance for doubtful accounts. At least quarterly, our management performs adetailed review of the accounts receivable balance to ensure that ourconsolidated allowance for doubtful accounts is sufficient to coveruncollectible amounts.

 

This assessment has a material effect on thefinancial statements of the Company. At December 31, 2004, accountsreceivables totaled $13.9 million net of allowances of $3.0 million (December 31,2003 $14.3 million and $1.9 million respectively). Amounts releasedfrom our allowance for doubtful accounts to the statement of operations forcontinuing operations totaled $1.8 million for the year ended December 31,2003, compared to a charge of $1.0 million for the year ended December 31,2004.

 

As stated above, management estimates theamount of telecommunications expense to accrue in each reporting period. We payother network providers for transit, which allows us to transmit our customers’information to or from the Internet over their networks. We also pay otherrecurring telecommunications costs, including the cost of the local telephonelines our leased line customers use to reach our points of presence, or PoPsand access our services. As network providers often bill on a semi-annual orlonger basis and such invoices have historically been subject to dispute whenreceived, management must make estimates of the total amount due to eachprovider at the end of each reporting period based on internal documentationand historical trends. To date our estimates have not materially differed fromamounts ultimately due.

 

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*Valuation of long-lived assets and goodwill:*

 

On a quarterly basis, management reviews thecarrying value of the investment in our operations to determine if an event hasoccurred, with respect to any operation, which could result in an impairment oflong-lived assets. In its review, management considers the following:

 

•                                          marketand competitive factors, including trends within the telecommunicationsindustry broadly and the market for our products and services generally andInternet access specifically, as well as general economic trends;

 

•                                          operatingand financial trends, including significant underperformance relative toexpected historical or projected operating results; and

 

•                                          businessoutlook for each operation, including changes in the expected revenues and cashflows for each of our operations, changes in our customers and the servicesthat they require and our future plans for each business.

 

*Long-lived assets*

 

The carrying amounts of acquired intangibleassets, other than goodwill, and tangible long-lived assets are reviewed iffacts or changes in circumstances suggest that they may be impaired. If thisreview indicates the carrying amounts of long-lived assets will not berecoverable, as determined based on estimated undiscounted future cash flows ofthe assets, the carrying amounts of the long-lived assets are reduced to theirestimated fair value, as required under SFAS 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*. As at December 31,2004 the carrying amounts of intangible assets, other than goodwill, andtangible long lived assets was $8.7 million and $13.1 million respectively.

 

In the last quarter of 2004, the Companyrecorded an impairment charge of $0.1 million and $1.8 million in respectof intangible assets, other than goodwill, and tangible assets, respectively.(See Note 3 to the consolidated financial statements for furtherinformation). The triggering event for the impairment was a combination offactors including unanticipated revenue shortfalls in certain of our legacy VIAcompanies and our new Express business in the quarter ended December 31,2004, which left the Company with insufficient cash reserves to continueoperations, and resulted in the signing of the letter of intent on April 11,2005 to sell the businesses of VIA NET.WORKS to Claranet.

 

For assessing fair value of the long-livedassets, the Company used a discounted cash flow model with appropriate marketand business risk factored in for the period until June 30, 2005, the expecteddate of completion of the transaction with Claranet, in addition to theexpected sale proceeds of $27.0 million to be received as agreed in the letterof intent with Claranet and the forecasted working capital requirements at June 30,2005. The long-lived asset impairment test analysed the Company’s countryoperations to determine impairment on the lowest level possible.

 

As part of the process of creating thediscounted cash flow model, the Company’s management was required to makeestimates and assumptions that affect the amounts of future revenues, costs andcash flows.  The discount rate used inthe calculations was 5.27%, which is equal to the imputed interest rate on theconvertible debt to the former owners of PSINet Europe. In addition, managementfactored in the amount which they felt the assets could be sold at based on theexpected sale proceeds of the business to Claranet of $27.0 million and theforecasted working capital position at June 30, 2005. It is possible thatthe Claranet sale will not be completed and that the Company may not be able tofind another party who will be willing to purchase the business for $27million.  There is also a risk that theexpected sales proceeds may be less than the expected $27 million if theforecasted working capital position is different from that forecasted or otherchanges arising during the finalization of the terms of the transaction.  If one or more of these risks materialize,there may be a need for a further impairment write-down in future accountingperiods.

 

Management has considered these risks intheir analysis and the assumptions made in calculating the impairment chargesrepresent management’s best estimates based on currently available information.

 

In the first quarter of 2003, an impairmentcharge of $0.1 million was recorded in respect of the fixtures andfittings of the former headquarters office in Reston. (See Note 3 to theconsolidated financial statements for further information).  This impairment charge was a result of theassets being abandoned by the Company.

 

*Goodwill*

 

The Company tests the goodwill of itsreporting units for impairment on an annual basis, on December 31, andbetween annual tests if an event occurs or circumstances change that would morelikely than not reduce the fair value of a reporting unit below its carryingamount.  The total goodwill balance at December 31,2003 and 2004 was $3.1 million and $42.5 million, respectively.

At December 31, 2004, upon completion of its annual review, theCompany impaired $4.2 million of the goodwill related to the Solutions

 

34

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segment and impaired $3.1 million of the goodwill related to the Amensegment. The triggering event for the impairment charge in the quarter ended December 31,2004, was a combination of factors including unanticipated revenue shortfallsin certain of our legacy VIA companies and our new Express business in thequarter ended December 31, 2004, which left the Company with insufficientcash reserves to continue the operations, and resulted in the signing of theletter of intent on April 10, 2005 to sell the businesses of the Companyto Claranet.

 

Management estimated the fair values of thereporting units as of December 31, 2004 based on a discounted cash flowmodel with appropriate market and business risk factored in for the perioduntil June 30, 2005, the expected date of completion of the transactionwith Claranet, in addition to the expected sale proceeds of $27.0 million to bereceived as agreed in the letter of intent with Claranet and the forecastedworking capital requirements at June 30, 2005.  As a part of the process of creating theforecasts, the Company’s management was required to make estimates andassumptions that affect the amounts of future revenues, costs and cash flows.The discount rate used in the calculations is 5.27%, which is equal to theimputed interest rate on the convertible debt to the former owners of PSINetEurope. In addition, management factored in the forecasted working capital positionat June 30, 2005. It is possible that the Claranet sale will not becompleted by June 30, 2005 or at all and that the Company may not be ableto find another party willing to purchase the business at $27.0 million.  There is also a risk that the expected salesconsideration may be less than $27.0 million if the forecasted working capitalposition is different from that forecasted or other matters arising duringcompletion of the potential transaction. If one or more of these risks materialize, an additional impairment maybe necessary in the future.

 

At December 31, 2003, upon completion ofits annual review, the Company impaired $4.5 million of goodwill relatedto the Solutions segment and impaired $1.0 million of goodwill related to theExpress segment. The triggering event for the impairment was revenue under-performanceagainst forecast for 2003 of these operations and the consequential adjustmentto future revenue estimates. The fair value calculated as of December 31,2003 was based on a discounted cash flow model with appropriate market andbusiness risk factored in. The discounted cash flow model for each reportingunit was based on forecasts for 2004 to 2006, and constant annual growth ratesthereafter. As a part of the process of creating the forecasts, the Company’smanagement was required to make estimates and assumptions that affect theamounts of future revenues, costs and cash flows.

 

The use of a discounted cash flow modelrequires management to make estimates and assumptions about the discountfactor, timing of cash flows, terminal values and future growth rates. Noadjustments have been made to the fair value of net assets or the recognitionof previously unrecognized intangible assets in calculating the implied fairvalue of goodwill. Changes to these assumptions can have a material impact onthe discounted cash flows and the outcome of the impairment review.

 

*Purchase price allocation*

 

All acquisitions areaccounted for under the SFAS 141, *Business Combinations,*which requires us to allocate the total purchase consideration paid forthe acquired businesses to the assets and liabilities based upon theirestimated fair values. The Company engaged an independent appraiser for theacquisition of Amen in January 2004 and PSINet Europe in August 2004,to assist in the allocation of the purchase consideration and in determiningthe fair market value of its property and equipment and intangible assets. Any excess ofpurchase price (total acquisition cost) over the net assets acquired isrecorded as goodwill, which we do not amortize in accordance to SFAS 142.  In connection with these acquisitions the Companyrecorded intangible assets of $8.3 million in respect of tradenames, softwareand customer lists. The determination of the fair value of such assets requiredmanagement to make estimates of the future cash flows to be generated by eachasset identified. Any changes in such estimate would increase or decrease thefair value of the net assets with a corresponding change to the amount ofgoodwill recognized.

 

As provided by the accounting rules, we used a one-year period followingthe acquisition date of the transactions to finalize the allocation of thepurchase consideration to our assets and liabilities. During the one-yearallocation period, we adjusted the purchase consideration among assets as wellas between assets and liabilities as a result of additional information during2004.

 

*Going Concern basis*

 

The application of the going concern basis ofaccounting involves a range of subjective judgments, principally in relation toour ability to service existing contractual commitments and payment of interestdue and the sufficiency of resources to allow the Group to continue to operatein the ordinary course and thereby realize its assets and discharge itsliabilities in the normal course of business for a period of 12 monthsfollowing the date of approval of the attached financial statements (April 25,2005). These judgments are discussed in more detail in “Risk Factors” and “Liquidityand Capital Resources” and Note 1 of our Consolidated Financial Statements.

 

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**RESULTS OF OPERATIONS**

 

**Year ended December 31, 2004 comparedwith the year ended December 31, 2003**

 

*Foreign Currency Impact*

 

Foreign exchange rates can vary significantlyand impact our results of operations, which are reported in U.S. dollars. As apercentage of consolidated revenues, we had operations conducting business inthe following underlying currencies:

 
| ** **           | ** ** | **Twelve months ended**    | ** ** |
|----------------------|------------|----------------------------|------------|
| ** **           | ** ** | **December 31, 2003** | ** ** | **December 31, 2004** | ** ** |
|                 |       |                       |       |   |   |
| Euro                 |       | 72                         | %          | 74 | % |
| Great British pounds |       | 0                          |       | 2 |   |
| Swiss Francs         |       | 19                         |       | 18 |   |
| U.S. Dollars         |       | 9                          |       | 6 |   |
|                 |       |                       |       |   |   |
|                 |       | 100                        | %          | 100 | % |

 

The Euro varied by approximately 16% in relation tothe U.S. dollar in 2004 and by approximately 22% in 2003. The Swiss Francvaried by approximately 17% in relation to the U.S. dollar in  2004 and by approximately 15% in 2003. TheGreat British pound varied by approximately 12% in relation to the U.S. dollarin 2004 and by approximately 15% in 2003. These exchange rate fluctuations havea significant impact on our reported results of operations, including revenue,expenses and net loss.

 

The average Euro-to-U.S. dollar foreign exchangerate for 2004 was 9% higher than the average Euro-to-U.S. dollar foreignexchange rate for 2003. The average Swiss Franc-to-U.S. dollar foreign exchangerate for 2004 was 8% higher than the average Swiss Franc-to-U.S. dollar foreignexchange rate for 2003. The average Great British pound-to-U.S. dollar foreign exchangerate for 2004 was 11% higher than the average Great British pound-to-U.S.dollar foreign exchange rate for 2003. The effect of the weakening of the U.S. dollar is that revenues,operating costs and expenses and operating profits and losses in operationswith a functional currency other than U.S. dollars translate into larger U.S.dollar amounts than would have been the case had foreign exchange ratesremained unchanged.

 

*Revenue:*

 
| ** ** | ** ** | **Twelve months ended**       | ** ** |
|------------|------------|-------------------------------|------------|
| ** ** | ** ** | **December 31,  2003**   | ** ** | **December 31, 2004** | ** ** | **% Increase/  (Decrease)** | ** ** |
| ** ** | ** ** | **(in thousands of dollars)** | ** ** |
|       |       |                          |       |   |   |   |   |
| Revenue    |       | 44,788                        |       | 69,684 |   | 56 | % |

 

We derive our revenue from the sale of Internet-relatedgoods and services, specifically third party hardware and software and Internetconnectivity services, other Internet value-added services, such as hosting,security and IP VPN, and voice services.

 

Revenue for the year ended December 31,2004 was $69.7 million as compared to $44.8 million for the yearended December 31, 2003. The increase in revenues is partlyattributable to revenues recorded by the Amen business, which we acquired in January 2004(impact of approximately $8.3 million), and by the PSINet Europe operationsacquired in August 2004 (impact of approximately $15.7 million). Inaddition, the average Euro-to-U.S. dollar and the Swiss Franc-to-U.S. dollarforeign exchange rate for the year ended December 31, 2004 strengthened byapproximately 9% and 8%, respectively, when compared with the correspondingperiod last year, thus having a positive impact on revenues during 2004 ofapproximately $3.6 million. That positive impact offset the decrease inunderlying revenue (in all legacy VIA operations except for Portugal, andnotably in Germany, France, The Netherlands, Switzerland and Spain) for theyear ended December 31, 2004, compared to the year ended December 31,2003.

 

German revenues, excluding the impact of foreignexchange and the acquisition of PSINet Europe’s German business, decreased by11% (approximately $1.0 million) in the year ended December 31, 2004compared with the corresponding period in 2003. This decline in revenue is dueto customer cancellations and price erosion. French revenues, excluding theimpact of foreign exchange and the acquisition of Amen’s and PSINet’s Frenchbusinesses, decreased by 12% (approximately $1.0 million) in the year ended December 31,2004 compared with the corresponding period in 2003. This decline in revenue isdue to customer churn and fewer hardware and software sales. Netherlandsrevenues, excluding the impact of foreign exchange and the acquisition ofPSINet Europe’s Netherlands businesses, decreased by 10% (approximately $1.1million) in the year ended December 31, 2004, compared with thecorresponding period in 2003. This decline is due to decreases in Internetaccess services revenues during 2004. Spanish revenues, excluding the impact offoreign exchange and the acquisition of Amen’s Spanish businesses, decreased by20% (approximately $0.4 million) in the year ended December 31, 2004compared with the year ended December 31, 2003. This decline is****due to decreased Internet access revenues due to thestrategic change in sales focus. Swiss revenues, excluding the impact offoreign exchange and the acquisition of PSINet Europe’s Swiss business,decreased by 2% (approximately $0.2 million) in the year ended December 31,2004 compared with the year ended December 31, 2003. This decrease is dueto general market price erosion and churn.

 

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The percentage of our revenuesin 2004 derived from the various services that we offer is detailed in thefollowing table.

 
| ** **                 | ** ** | **2003** | ** ** | **2004** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|
| Access                     |       | 62       | %          | 52       | %          |
| Hosting                    |       | 20       | %          | 33       | %          |
| Internet security services |       | 6        | %          | 6        | %          |
| Other revenue              |       | 12       | %          | 9        | %          |
| Total                      |       | 100      | %          | 100      | %          |

 

The percentage of ourrevenue from Internet access services has continued to decline compared with the level wereported in our Form 10-Q for the third quarter as a result of the sale ofVIA UK.

 

Operating costs and expenses

 

*Internet services:*

 
| ** **         | ** ** | **Twelve months ended**             | ** ** |
|--------------------|------------|-------------------------------------|------------|
| ** **         | ** ** | **December 31,  2003**         | ** ** | **December 31,  2004** | ** ** | **% Increase/  (Decrease)** | ** ** |
|               |       | **(in  thousands of U.S. dollars)** |       |
|               |       |                                |       |   |   |   |   |
| Internet services  |       | 24,370                              |       | 34,450 |   | 41 | % |
| % of Total Revenue |       | 54                                  | %          | 49 | % |   |   |

 

Our Internet services operating costs are thecosts we incur to carry customer traffic to and over the Internet. We leaselines that connect our PoPs, either to our own network or to other networkproviders. We pay other network providers for transit, which allows us totransmit our customers’ information to or from the Internet over theirnetworks. We also pay other recurring telecommunications costs and personnelcosts, including the cost of the local telephone lines our customers use toreach our PoPs and access our services, and costs related to customer supportand care.

 

Our Internet services operating costs were$34.5 million or 49% of revenues for the year ended December 31, 2004as compared to $24.4 million or 54% of revenues for the year ended December 31,2003. The increase in Internet services expense is partly attributableto the Internet services costs of the Amen business acquired in January 2004(impact of approximately $1.4 million for the year ended December 31,2004), the PSINet Europe operations acquired in August 2004 (impact ofapproximately $6.9 million for the year ended December 31, 2004) and theInternet service costs of Express (impact of approximately $0.3 million for theyear ended December 31, 2004). In addition, the increase in Internetservices expense is partly due to translation impact of foreign currencymovements (impact of approximately $2.1 million for the year ended December 31,2004). Excluding Amen’s Internet services costs, PSINet’s Internet servicescosts, and the adverse impact of the strengthening Euro-to-U.S. dollar andSwiss Franc-to-U.S. dollar****foreigncurrency exchange rates, Internet services costs decreased by approximately 4%for the year ended December 31, 2004, from the year ended December 31,2003.

 

*Selling, general andadministrative:*

 
| ** **                                        | ** ** | **Twelve months ended**             | ** ** |
|---------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                        | ** ** | **December 31, 2003**          | ** ** | **December 31, 2004** | ** ** | **% Increase/ (Decrease)** | ** ** |
|                                              |       | **(in  thousands of U.S. dollars)** |       |
|                                              |       |                                |       |   |   |   |   |
| Selling, general & administrative  costs |       | 43,336                              |       | 64,876 |   | 50 | % |
| % of Total Revenue                                |       | 97                                  | %          | 93 | % |   |   |

 

Our largest selling, general andadministrative (SG&A) expenses are compensation costs, the costs associatedwith marketing our products and services, and professional fees paid to outsideconsultants. Compensation costs include salaries and related benefits,commissions, bonuses and costs associated with staff reductions in the normalcourse of business. In many of our markets, we are required to make significantmandatory payments for government-sponsored social welfare programs and we havelittle control over these costs. Our marketing expenses include the costs of directmail and other mass marketing programs, advertising, customer communications,trade show participation, web site management and other promotional costs.Other SG&A expenses include the costs of travel, rent, utilities, insuranceand bad debt expense.

 

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We incurred SG&A expenses of$64.9 million for the year ended December 31, 2004, a 50% increasefrom the $43.3 million we incurred for the year ended December 31,2003. The increase in SG&A expenses is partly attributable toexpenses associated with the Amen business acquired in January 2004(impact of approximately $5.8 million), the PSINet Europe operations acquiredin August 2004 (impact of approximately $9.1 million) and expensesassociated with our new Express services (impact of approximately $2.5million). In addition, the increase in SG&A expenses is partly due to thestrengthening of the Euro-to-U.S. dollar and Swiss Franc-to-U.S. dollar foreigncurrency exchange rates of approximately $1.8 million. Excluding Amen’s, PSINetEurope’s and Express SG&A expenses and the adverse impact of the foreigncurrency exchange rate, SG&A expenses increased by approximately 3%, or$1.3 million, for the year ended December 31, 2004, compared with the yearended December 31, 2003 due to an increase in compensation expenses,marketing expenses, professional fees and bad debt expenses.

 

As noted below under the section entitled *Impairment and Restructuring*, we have undertaken theintegration of the acquired PSINet Europe companies with the existing VIAoperations and in doing so have incurred restructuring expenses during the yearended December 31, 2004. As a part of these integration efforts, we arefocusing, in part, on the rationalization of staffing and other resourcesbetween the existing VIA operations and the PSINet Europe operations, with thegoal of substantially reducing the Company’s overall cost structure.

 

Compensation expense accounted for approximately 58%($37.0 million) of total SG&A costs for the year ended December 31,2004, compared with 59% of total SG&A costs ($25.7 million) for the yearended December 30, 2003. The increase in compensation expense of  44% for the year ended December 31, 2004compared to the year ended December 31, 2003 is due to the Amen and PSINetEurope acquisitions and the strengthening of the Euro-to-U.S. dollar foreigncurrency exchange rate. Excluding these factors, compensation expense decreasedapproximately 1% in the year ended December 31, 2004 compared with theyear ended December 31, 2003, primarily due to head count reductions. Theaverage headcount (excluding Amen and PSINet Europe) for the year ended December 31,2004 decreased by approximately 1% from the average headcount for the yearended December 31, 2003.

 

As noted above, we are engaged in integrating thePSINet Europe operations with the VIA operations. A part of these integration activitiesinvolves rationalization and reduction of staffing of the combined operations.

 

In the year ended December 31, 2004, marketingexpenses increased by approximately $3.1, or 338%, from the year ended December 31,2003. For the year ended December 31, 2004, $2.5 million of the increasein marketing expenses is attributable to the Amen, PSINet Europe and theExpress business and the impact of foreign exchange. The remaining increase isdue to the increased number of marketing campaigns during the year ended December 31,2004.

 

Professional fees, related to legal, audit,outsourcing and other consulting fees, accounted for approximately 10% of totalSG&A for the year ended December 31, 2004 and for approximately 13% oftotal SG&A for the year ended December 31, 2003. The increase inprofessional fees of  18% for the yearended December 31, 2004, compared to the year ended December 31, 2003relates to Amen management fees, PSINet Europe, expenses for outsourcingcertain finance and accounting services, and increased consulting fees in oneof our local operations and the corporate headquarters.

 

Bad debt expense(benefit) in the year ended December 31, 2004 was $0.9 million comparedwith $0.1 million for the year ended December 31, 2003. The increase in bad debt expense in the yearended December 31, 2004 compared with the year ended December 31,2003 is primarily due to a significantbenefit in one of our European operations in the year ended December 31,2003 and an increase in bad debt charges in our European operations.

 

*Impairment andrestructuring charges:*

 
| ** **                           | ** ** | **Twelve months ended**             | ** ** |
|--------------------------------------|------------|-------------------------------------|------------|
| ** **                           | ** ** | **December 31, 2003**          | ** ** | **December 31, 2004** | ** ** | **% Increase/ (Decrease)** | ** ** |
|                                 |       | **(in  thousands of U.S. dollars)** |       |
|                                 |       |                                |       |   |   |   |   |
| Impairment and restructuring charges |       | 8,723                               |       | 12,247 |   | 40 | % |
| % of Total Revenue                   |       | 19                                  | %          | 18 | % |   |   |

 

During the year ended December 31, 2004, werecorded restructuring and impairment charges of $12.2 million. Therestructuring charge for the year ended December 31, 2004, related toseverance payments for seventy seven staff in our European operations andcorporate headquarters, transition implementation costs for back-office andadministrative outsourcing initiatives, costs associated with integrating thePSINet Europe operations recently acquired and charges for future leaseobligations at the German operation and the Reston office. In the fourthquarter of 2004, management concluded that an impairment had occurred in ourSolutions and Amen operating units. As a result, we recorded an impairmentcharge of $4.2 million related to the goodwill in the Solutions operating unit

 

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andan impairment charge of $3.1 million related to the goodwill in the Amenoperating unit. In addition, the Company recorded an intangible fixed assetimpairment charge of $0.1 million and a tangible fixed asset impairment chargeof $1.8 million mainly in our Solutions channel. See the Critical Accounting Policysection for further information.

 

During the yearended December 31, 2003, we recorded restructuring and impairment chargesof $8.7 million. The restructuring charge of $3.1 million for the year ended December 31,2003 related to severance payments at five of our European operations and atour corporate headquarters, transition implementation costs for back-office andadministrative outsourcing initiatives and for future lease obligations for theclosure of the Reston, Virginia office and on vacant office space in Germany.During 2003, management concluded that an impairment had occurred in ourSolutions segment. As a result, we recorded an impairment charge of $5.5million related to the goodwill in the Netherlands, France, Germany, Spain,Switzerland and the US. In addition, the company recorded a fixed assetimpairment charge of $0.1 million for fixed asset fixtures and fittings thatwere written down to net realizable value as a result of the closure of theReston office in March 2003.

 

We expect that thetotal restructuring charges in connection with the PSINet Europe acquisitionwill amount to approximately $6.0 million of which $2.5 million was incurredover the fourth quarter of 2004.

 

For furtherinformation see Note 3 to the Consolidated Financial Statements.

 

*Depreciation andamortization:*

 
| ** **                    | ** ** | **Twelve months ended**             | ** ** |
|-------------------------------|------------|-------------------------------------|------------|
| ** **                    | ** ** | **December 31, 2003**          | ** ** | **December 31, 2004** | ** ** | **% Increase/ (Decrease)** | ** ** |
|                          |       | **(in  thousands of U.S. dollars)** |       |
|                          |       |                                |       |   |   |   |   |
| Depreciation and amortization |       | 6,179                               |       | 8,169 |   | 32 | % |
| % of Total Revenue            |       | 14                                  | %          | 12 | % |   |   |

 

We recognize depreciation expense primarilyrelated to telecommunications equipment, computers and network infrastructure.We depreciate telecommunications equipment and computers over their usefullives, ranging from three to five years. The cost of network infrastructure,net of impairment charges, purchased under indefeasible right of useagreements, or IRUs, is being amortized over the lesser of the estimated usefullife or term of the agreement, 1 to 25 years. We amortize customer lists,software and a trade name over three to seven years, five years and ten yearsrespectively.

 

Our depreciation and amortization expense was$8.2 million for the year ended December 31, 2004, compared with $6.2million for the year ended December 31, 2003. For the year ended December 31,2004, $6.9 million related to the depreciation of fixed assets and$1.3 million related to the amortization of intangible assets. For theyear ended December 31, 2003, all of our depreciation and amortizationexpense was related to the depreciation of fixed assets. The increase in totaldepreciation and amortization expense is primarily due to the acquisitions ofAmen and the PSINet Europe companies and the development of the Express channelproducts, resulting in amortization of identified intangible assets anddepreciation of tangible fixed assets totaling to approximately $1.4 millionfor the year ended December 31, 2004. Excluding Amen and the PSINet Europecompanies, the depreciation and amortization expense decreased slightly duringthe year ended December 31, 2004 compared with the year ended December 31,2003 due to a decreased asset base.

 

*Interest income,net:*

 
| ** **           | ** ** | **Twelve months ended**             | ** ** |
|----------------------|------------|-------------------------------------|------------|
| ** **           | ** ** | **December 31, 2003**          | ** ** | **December 31, 2004** | ** ** | **% Increase/ (Decrease)** | ** ** |
|                 |       | **(in  thousands of U.S. dollars)** |       |
|                 |       |                                |       |   |   |   |   |
| Interest income, net |       | 1,087                               |       | 164 |   | (85% | ) |
| % of Total Revenue   |       | 2                                   | %          | 0 | % |   |   |

 

For the year ended December 31, 2004, we earned$0.5 million in net interest income, compared with $1.1 million for the year endedDecember 31, 2003. Interest income was generated from investing fundsreceived from our initial public offering in February 2000, until thosefunds were used for acquisitions, operating expenses or capital expenditures.Net proceeds from the public offering were $333.0 million. The decrease ininterest income is primarily due to the decrease in the available cash forinvesting. Notably, we spent $23.4

 

39

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millionin cash to acquire Amen and the PSINet Europe companies during 2004 andreceived $7.7 million net cash on the completion of the sale of VIA NET.WORKSUK Ltd. We also incurred $0.3 million of interest expense for the year ended December 31,2004, compared with $14,000 of interest expense incurred in the year ended December 31,2003. Interest expense of $0.1 million incurred in the third and fourth quarterof 2004 relates primarily to the imputed interest of 5.27% associated with theEuro 6 million zero coupon convertible note issued in connection with theacquisition of the PSINet Europe companies (see Note 11 to the ConsolidatedFinancial Statements).

 

*Other (expense)income, net:*

 
| ** **                  | ** ** | **Twelve months ended**             | ** ** |
|-----------------------------|------------|-------------------------------------|------------|
| ** **                  | ** ** | **December 31, 2003**          | ** ** | **December 31, 2004** | ** ** | **% Increase/ (Decrease)** | ** ** |
|                        |       | **(in  thousands of U.S. dollars)** |       |
|                        |       |                                |       |   |   |   |   |
| Other (expense) income, net |       | (323                                | )          | 431 |   | (233% | ) |
| % of Total Revenue          |       | (1%                                 | )          | 1 | % |   |   |

 

For the year ended December 31, 2004, weincurred other expenses, net of $0.4 million related to receipts from thesettlement of a legal claim. For the year ended December 31, 2003, weincurred other expense, net of $0.3 million relating mainly to losses onequipment disposals.

 

40

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*Foreign currency gains, net:*

 
| ** **                  | ** ** | **Twelve months ended**             | ** ** |
|-----------------------------|------------|-------------------------------------|------------|
| ** **                  | ** ** | **December 31, 2003**          | ** ** | **December 31, 2004** | ** ** | **% Increase/ (Decrease)** | ** ** |
|                        |       | **(in  thousands of U.S. dollars)** |       |
|                        |       |                                |       |   |   |   |   |
| Foreign currency gains, net |       | 16,299                              |       | 5,446 |   | (67% | ) |
| % of Total Revenue          |       | 36                                  | %          | 8 | % |   |   |

 

We recognized a $5.4 million foreigncurrency gain for the year ended December 31, 2004, as compared to a gainof $16.3 million for the year ended December 31, 2003. The changefrom period to period was primarily due to the fluctuation in the exchange rateof the Euro and Swiss Franc as compared to the U.S. dollar and its impact onthe revaluation of our Euro and Swiss Franc denominated intercompany balancesheld by the parent company and on our Euro denominated cash accounts. See the *Foreign Currency Exchange Risks* section belowfor more information.

 

*Income tax benefit(expense):*

 
| ** **                   | ** ** | **Twelve months ended**            | ** ** |
|------------------------------|------------|------------------------------------|------------|
| ** **                   | ** ** | **December 31, 2003**         | ** ** | **December 31, 2004** | ** ** | **% Increase/ (Decrease)** | ** ** |
|                         |       | **(in thousands of U.S. dollars)** |       |
|                         |       |                               |       |   |   |   |   |
| Income tax benefit (expense) |       | (165                               | )          | 301 |   | (282% | ) |
| % of Total Revenue           |       | 0                                  | %          | 0 | % |   |   |

 

During the year ended December 31, 2004VIA incurred net tax benefits of $0.3 million. During the year ended December 31,2004 VIA incurred $0.2 million of tax expense principally due towithholding tax on intercompany interest paid by the Portugal operation. Theeffective tax rate for the Company is 0%. This is primarily caused by netoperating losses for the current year and prior years arising in the U.S. andinternational subsidiaries.

 

***Year ended December 31, 2003 comparedwith the year ended December 31, 2002***

 

*Foreign CurrencyImpact*

 

Foreign exchange rates can vary significantlyand impact our results of operations, which are reported in U.S. dollars. As apercentage of consolidated revenues we had operations conducting business inthe following underlying currencies:

 
| ** **   | ** ** | **Twelve months ended**    | ** ** |
|--------------|------------|----------------------------|------------|
| ** **   | ** ** | **December 31, 2002** | ** ** | **December 31, 2003** | ** ** |
|         |       |                       |       |   |   |
| Euro         |       | 74                         | %          | 72 | % |
| Swiss Francs |       | 17                         |       | 19 |   |
| U.S. Dollars |       | 9                          |       | 9 |   |
|         |       |                       |       |   |   |
|         |       | 100                        | %          | 100 | % |

 

41

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The Eurovaried by approximately 22% in relation to the U.S. dollar during 2003 and byapproximately 23% in 2002. The Swiss Franc varied by approximately 15% inrelation to the U.S. dollar during 2003 and by approximately 25% in 2002. Theseexchange rate fluctuations have a significant impact on our results of operations,including revenue, expenses and net loss.

 

The average Euro to U.S. dollar foreignexchange rate for 2003 was 20% higher than the average Euro to U.S. dollarforeign exchange rate for 2002. The average Swiss Franc to U.S. dollar foreignexchange rate for 2003 was 13% higher than the average Swiss Franc to U.S.dollar foreign exchange rate for 2002. In the period since January 1, 2002the dollar has declined in value as compared to the currencies in which weconduct most of our business. The effect of the weakening of the U.S. dollar isthat revenues, operating costs and expenses and operating profits and losses inoperations with a functional currency other than U.S. dollars translate intolarger U.S. dollar amounts than would have been the case had foreign exchangerates remained unchanged.

 

*Revenue:*

 
| ** ** | ** ** | **Twelve months ended**        | ** ** |
|------------|------------|--------------------------------|------------|
| ** ** | ** ** | **December 31, 2002**     | ** ** | **December 31, 2003** | ** ** | **% Increase/ (Decrease)** | ** ** |
|       |       | **(in  thousands of dollars)** |       |
|       |       |                           |       |   |   |   |   |
| Revenue    |       | 42,576                         |       | 44,788 |   | 5 | % |

 

Revenue for the year ended December 31,2003 was $44.8 million as compared to $42.6 million for the yearended December 31, 2002. The average Euro to U.S. dollar foreign exchangerate for the year ended December 31, 2003 have strengthened byapproximately 20% when compared to the same period last year positivelyimpacting revenues during 2003 by approximately $6.3 million. On a yearover year comparison, the foreign exchange rate positive impact in 2003 largelyoffset the decrease in underlying revenue from 2002 to 2003, notably in Germanyand France.

 

German revenues, excluding the impact offoreign exchange, reflect a 35% decrease (approximately $4.4 million) from2003 to 2004. This revenue reduction is primarily a result of actionsundertaken in the fourth quarter of 2002 to eliminate certain unprofitablebusiness in order to reduce operating losses. French revenues, excluding theimpact of foreign exchange, reflect a 19% decrease (approximately$1.8 million). This revenue reduction is primarily a result of increasedcompetition, price erosion and fewer hardware and software sales.

 

Throughout 2003, VIA has taken significantactions in implementing its 2003-2005 Strategic Plan, including replacing manyof its direct sales professionals and sales managers with higher caliberprofessionals. We have continued to rationalize our product portfolio and areactively recruiting resellers and other value-added partners. As expected,these and other back office systems and financial services outsourcinginitiatives we have undertaken through the implementation of our StrategicPlan, have had a short-term adverse effect on our revenues.

 

As a result of our continuous assessment ofour operating results and prospected future revenues, by the end of the fourthquarter 2003, management concluded that increased competition and price erosionwould significantly impact our future ability to grow our core business ofselling Internet access services, particularly through our labor-intensivesales channels. As a result, we began a strategic shift of our sales andchannel focus toward web-hosting and Internet Security services to be soldthrough our new VIA Express channel. This shift is intended to increase ouropportunities for profitable revenue growth.

 

Operating costs and expenses

 

*Internet services:*

 
| ** **         | ** ** | **Twelve months ended**            | ** ** |
|--------------------|------------|------------------------------------|------------|
| ** **         | ** ** | **December 31, 2002**         | ** ** | **December 31, 2003** | ** ** | **% Increase/ (Decrease)** | ** ** |
|               |       | **(in thousands of U.S. dollars)** |       |
|               |       |                               |       |   |   |   |   |
| Internet services  |       | 24,261                             |       | 24,370 |   | — | % |
| % of Total Revenue |       | 57                                 | %          | 54 | % |   |   |

 

Our Internet services operating costs were$24.4 million or 54% of revenues for the year ended December 31, 2003as compared to $24.3 million or 57% of revenues for the year ended December 31,2002. Despite the adverse impact of the strengthening Euro to U.S. dollarforeign currency exchange rate, Internet services costs have stabilized for theyear ended December 31, 2003 from the year ended December 31, 2002primarily due to the full period benefit of the renegotiation of network accesscosts in mid-2002 made possible by

 

42

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decreasing market rates for network bandwidth. Total Internet servicecosts for the year ended December 31, 2003 also benefited from the releaseof a telecommunication cost accrual in respect of disputed charges and linecancellation credits in one operation in the Solutions segment of$0.6 million in June. These credits are not expected to reoccur in futureyears. Management considers the likelihood that VIA will ultimately be requiredto pay the amount as remote.

 

*Selling, general andadministrative:*

 
| ** **                                        | ** ** | **Twelve months ended**             | ** ** |
|---------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                        | ** ** | **December 31, 2002**          | ** ** | **December 31, 2003** | ** ** | **% Increase/ (Decrease)** | ** ** |
|                                              |       | **(in  thousands of U.S. dollars)** |       |
|                                              |       |                                |       |   |   |   |   |
| Selling, general & administrative  costs |       | 47,763                              |       | 43,336 |   | (9% | ) |
| % of Total Revenue                                |       | 112                                 | %          | 97 | % |   |   |

 

We incurred SG&A expenses of$43.3 million for the year ended December 31, 2003, a 9% decreasefrom the $47.8 million we incurred for the year ended December 31,2002. We achieved this cost reduction despite the adverse effect of thestrengthening Euro to U.S. dollar foreign exchange rate, and the adverse changein bad debt expense between the periods. The fluctuation of foreign exchangerates has adversely impacted SG&A for the year ended December 31, 2003over the year ended December 31, 2002 by approximately $3.5 million.The cost reduction is principally due to a decrease in compensation expense andprofessional fees.

 

Compensation expense, which accounted forapproximately 59% and 58% of total SG&A costs for the years ended December 31,2003 and 2002 respectively, reduced by approximately 6% (excluding the effectof foreign exchange rates) from last year primarily due to the headcountreductions during 2003. SG&A expenses for the year ended December 31,2002 were benefited by a release from our bad debt provision of $0.6 million.The release in 2002 was due to billing system and process improvements madeduring 2002, combined with our intensified focus on cash collection, whichresulted in the collection of accounts receivable previously provided against.

 

Professional fees, related to legal, auditand other consulting fees, accounted for approximately 10% and 17% of totalSG&A for the years ended December 31, 2003 and 2002 respectively. Thedecrease from 2002 is primarily due to a decrease in consulting fees.

 

Our SG&A expenses include theamortization of deferred compensation. In March 2002, we recordedforfeitures of unvested stock options in the amount of $1.8 million, whichreduced the deferred compensation balance to zero with a correspondingadjustment to additional paid in capital. As a result, we did not record anydeferred compensation expense in year ended December 31, 2003. Thedeferred compensation amortization for the year ended December 31, 2002was $0.5 million.

 

*Impairment andrestructuring charges:*

 
| ** **                           | ** ** | **Twelve months ended**            | ** ** |
|--------------------------------------|------------|------------------------------------|------------|
| ** **                           | ** ** | **December 31, 2002**         | ** ** | **December 31, 2003** | ** ** | **% Increase/ (Decrease)** | ** ** |
|                                 |       | **(in thousands of U.S. dollars)** |       |
|                                 |       |                               |       |   |   |   |   |
| Impairment and restructuring charges |       | 1,153                              |       | 8,723 |   | 657 | % |
| % of Total Revenue                   |       | 3                                  | %          | 19 | % |   |   |

 

During 2003, management concluded that animpairment of our goodwill had occurred in our Europe and Americas segments. Asa result, we recorded an impairment charge of $5.5 million related togoodwill in the Netherlands, France, Germany, Spain, Switzerland and the U.S.In addition, the Company recorded a fixed asset impairment charge of$0.1 million for fixed asset fixtures and fittings that were written downto net realizable value as a result of the closure of the Reston office in March 2003.Also during 2003, the Company recorded restructuring charges related to theimplementation of its strategic plan of $3.1 million. This related toseverance payments at six of our European operations, at our US operation andat the corporate headquarters; the cost of vacant office space and transitionimplementation costs for back-office and administrative outsourcinginitiatives.

 

As a part of our focus on Europe as ourcore-operating region, we moved our principal headquarter functions fromReston, Virginia to Europe. In conjunction with this relocation, we recorded arestructuring charge of $1.0 million during the third quarter of 2002.Additionally, during the fourth quarter of 2002 we recorded a restructuringcharge of $0.1 million related to severance and other payments made at ourSpanish operation. (See Note 3 to the consolidated financial statementsfor further information.)

 

43

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*Depreciation andamortization:*

 
| ** **                    | ** ** | **Twelve months ended**             | ** ** |
|-------------------------------|------------|-------------------------------------|------------|
| ** **                    | ** ** | **December 31, 2002**          | ** ** | **December 31, 2003** | ** ** | **% Increase/ (Decrease)** | ** ** |
|                          |       | **(in  thousands of U.S. dollars)** |       |
|                          |       | ** **                          |       |   |   |   |   |
| Depreciation and amortization |       | 7,526                               |       | 6,179 |   | (18% | ) |
| % of Total Revenue            |       | 18                                  | %          | 14 | % |   |   |

 

Our depreciation and amortization expense was$6.2 million for the year ended December 31, 2003, down from$7.5 million for the year ended December 31, 2002. For the year endedDecember 31, 2003, $6.1 million related to the depreciation of fixedassets and $0.1 million related to the amortization of intangible assets.For the year ended December 31, 2002, $6.3 million of ourdepreciation and amortization expense was related to the depreciation of fixedassets and $1.3 million was related to amortization of intangible assets.The decrease in total depreciation and amortization expense is primarily due toa lower depreciable asset base due to asset impairments in 2002 and the firstquarter of 2003 and to the fact that intangible assets had been fully amortizedby the end of 2002.

 

*Interest income,net:*

 
| ** **           | ** ** | **Twelve months ended**             | ** ** |
|----------------------|------------|-------------------------------------|------------|
| ** **           | ** ** | **December 31, 2002**          | ** ** | **December 31, 2003** | ** ** | **% Increase/ (Decrease)** | ** ** |
|                 |       | **(in  thousands of U.S. dollars)** |       |
|                 |       |                                |       |   |   |   |   |
| Interest income, net |       | 2,090                               |       | 1,087 |   | (48% | ) |
| % of Total Revenue   |       | 5                                   | %          | 2 | % |   |   |

 

For the year ended December 31, 2003, weearned $1.1 million in interest income, compared to $2.2 million weearned for the year ended December 31, 2002. Interest income was generatedfrom investing funds received from our initial public offering in February 2000,until those funds were used for acquisitions, operating expenses or capitalexpenditures. Net proceeds from the public offering were $333.0 million.The decrease in interest income is the combined result of the decrease in theavailable cash for investing and the decrease in interest rates. We alsoincurred $14,000 of interest expense for the year ended December 31, 2003,as compared to $0.1 million of interest expense incurred in the year endedDecember 31, 2002. Interest expense relates to vendor financing at boththe subsidiary and corporate levels.

 

*Other income(expense), net:*

 
| ** **                  | ** ** | **Twelve months ended**             | ** ** |
|-----------------------------|------------|-------------------------------------|------------|
| ** **                  | ** ** | **December 31, 2002**          | ** ** | **December 31, 2003** | ** ** | **% Increase/ (Decrease)** | ** ** |
|                        |       | **(in  thousands of U.S. dollars)** |       |
|                        |       |                                |       |   |   |   |   |
| Other income (expense), net |       | 231                                 |       | (323 | ) | (240% | ) |
| % of Total Revenue          |       | 0                                   | %          | (0% | ) |   |   |

 

For the year ended December 31, 2003, weincurred other expense, net in the amount of $0.3 million related mainlyto losses on equipment disposals. For the year ended December 31, 2002, weincurred other income, net of $0.2 million.

 

*Foreign currency(losses) gains, net:*

 
| ** **                           | ** ** | **Twelve months ended**             | ** ** |
|--------------------------------------|------------|-------------------------------------|------------|
| ** **                           | ** ** | **December 31, 2002**          | ** ** | **December 31, 2003** | ** ** | **% Increase/ (Decrease)** | ** ** |
|                                 |       | **(in  thousands of U.S. dollars)** |       |
|                                 |       |                                |       |   |   |   |   |
| Foreign currency (losses) gains, net |       | 13,550                              |       | 16,299 |   | 20 | % |
| % of Total Revenue                   |       | 32                                  | %          | 36 | % |   |   |

 

We recognized a $16.3 million foreigncurrency gain for the year ended December 31, 2003, as compared to a gainof $13.3 million for the year ended December 31, 2002. The changefrom period to period was primarily due to the fluctuation in the exchange rateof the Euro as compared to the U.S. dollar and its impact on the revaluation ofour Euro denominated intercompany balances

 

44

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held by the parent company and on our Euro denominated cash accounts.We established the Euro denominated cash accounts in connection with ourinitial public offering in February 2000, in which we sold shares of ourcommon stock for both U.S. dollars and Euros. See the *Foreign Currency Exchange Risks* section belowfor more information.

 

*Income tax benefit:*

 
| ** **                   | ** ** | **Twelve months ended**             | ** ** |
|------------------------------|------------|-------------------------------------|------------|
| ** **                   | ** ** | **December 31, 2002**          | ** ** | **December 31, 2003** | ** ** | **% Increase/ (Decrease)** | ** ** |
|                         |       | **(in  thousands of U.S. dollars)** |       |
|                         |       |                                |       |   |   |   |   |
| Income tax benefit (expense) |       | 51                                  |       | (165 | ) | (424% | ) |
| % of Total Revenue           |       | 0                                   | %          | 0 | % |   |   |

 

During the year ended December 31, 2003VIA incurred $0.2 million of tax expense principally due to withholdingtax on intercompany interest paid by the Portugal operation. The effective taxrate for the Company is 0%. This is primarily caused by net operating lossesfor the current year and prior years arising in the U.S. and internationalsubsidiaries.

 

***Quarterly Results of Operations***

 

The information below has been derived fromour unaudited consolidated financial statements. In the opinion of ourmanagement, our unaudited consolidated financial statements have been preparedon the same basis as our audited consolidated financial statements, whichappear elsewhere on this Form 10-K, and include all adjustments,consisting only of normal recurring adjustments, that we consider necessary tofairly present this information. The results of operations for any quarter arenot necessarily indicative of the results of operations for any future period.Prior period amounts have been adjusted for the effects of discontinuedoperations and therefore differ from those previously reported.

 
| ** **                                    | ** ** | **For the three months ended**                  | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                    | ** ** | **Mar 31, 2003**                                | ** ** | **June 30, 2003** | ** ** | **Sept. 30, 2003** | ** ** | **Dec. 31, 2003** | ** ** | **Mar 31, 2004** | ** ** | **June 30, 2004** | ** ** | **Sept. 30, 2004** | ** ** | **Dec. 31, 2004** | ** ** |
|                                          |       | **(In  thousands of U.S. Dollars) (unaudited)** |       |
|                                          |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue                                       |       | $                                               | 11,420     |   | $ | 10,859 |   | $ | 10,681 |   | $ | 11,828 |   | $ | 12,647 |   | $ | 13,121 |   | $ | 18,156 |   | $ | 25,760 |   |
| Operating costs and expenses                  |       | 18,137                                          |       | 18,290 |   | 17,846 |   | 19,612 |   | 22,787 |   | 23,371 |   | 25,106 |   | 36,232 |   |
| Impairment and restructuring charges(1)       |       | 579                                             |       | 1,080 |   | 850 |   | 6,214 |   | 300 |   | 195 |   | 1,293 |   | 10,459 |   |
|                                          |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total operating costs and expenses            |       | 18,716                                          |       | 19,370 |   | 18,696 |   | 25,826 |   | 23,087 |   | 23,566 |   | 26,399 |   | 46,691 |   |
|                                          |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating loss from continuing  operations(2) |       | $                                               | (7,297     | ) | $ | (8,511 | ) | $ | (8,014 | ) | $ | (13,998 | ) | $ | (10,440 | ) | $ | (10,445 | ) | $ | (8,243 | ) | $ | (20,931 | ) |
|                                          |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss) from continuing  operations |       | $                                               | (4,390     | ) | $ | (3,664 | ) | $ | (6,313 | ) | $ | (6,555 | ) | $ | (13,662 | ) | $ | (11,123 | ) | $ | (5,980 | ) | $ | (12,953 | ) |
|                                          |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic and diluted income (loss) per share     |       | $                                               | (0.07      | ) | $ | (0.06 | ) | $ | (0.11 | ) | $ | (0.10 | ) | $ | (0.23 | ) | $ | (0.18 | ) | $ | (0.10 | ) | $ | (0.21 | ) |

----

(1)                                  Referto Note 3 to the consolidated financial statements for impairment andrestructuring charges taken

 

(2)                                  Referto Note 2 to the consolidated financial statements for a discussion ofdiscontinued operations

 

45

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*Liquidity andCapital Resources*

 

Liquidity

 

**Negative Total Cash Flow, Urgent LiquidityNeeds, Proposed Sale.**VIA began 2004 with$65.8 million in cash and cash equivalents and $1.4 million inrestricted cash. We had negative cash flow from operations, investing andfinancing activities of $50.3 million for the year ended December 31,2004, leaving us with $15.5 million in cash and cash equivalents and$5.1 million in restricted cash at December 31, 2004. This comparesto negative cash flow for 2003 of $32.0 million. Restricted cash of $1.4million at December 31, 2003 represents amounts held on deposit withbanking institutions as security for operating leases. Restricted cash of $5.1million as at December 31, 2004 represents amounts held on deposit withbanking institutions as security for operating leases, leased properties, keytelecom suppliers and a bank guarantee for the earn-out payments to the formershareholders of Amen. During 2004, we stated our expectations that we wouldreach the point of positive cash flows by mid-2005, conditioned on theachievement of new and incremental revenues, which we anticipated generatingfrom our new sales and product strategy. However, as we announced on March 17,2005, a combination of factors including unanticipated revenue shortfalls incertain of our legacy VIA companies and our new VIA Express business wouldleave the Company with insufficient cash reserves to fund our expenditures andcontinue the Company as a going concern. In early April 2005, and that itwas working with our professional advisors to obtain new financing to addressthe issue.  See ITEM 1, BUSINESS, RecentEvents and Potential Sale of the Businesses for further discussion of the stepswe have taken since this announcement.

 

OnApril 1, 2005, the Company announced the sale of two of its Swisscompanies — VIA NET.WORKS (Schweiz) AG and VIA NET.WORKS Services AG — toformer managers and owners of the business, for a purchase price of CHF 3.5million, or approximately US$3.1 million. The net proceeds of the sale provided VIA with additional liquidity tocontinue its discussions for refinancing and sale transactions.

 

On April 10, 2005, VIA NET.WORKS, Inc. entered into a letter of intent with Claranet Group Limited, a privately-held European Internet services provider based in the United Kingdom, to sell all of our business operations in Europe and the United States.  See ITEM 1, BUSINESS, Recent Events and Potential Sale of the Businesses for the key terms of the Claranet Sale.  As a condition to VIA’s agreement to the letter of intent, Claranet made a deposit of $3.0 million against the purchase price in order to secure the rights to negotiate exclusively with the Company until 30 April 2005.  The Claranet Sale also contemplates that for the period between the signing of the definitive purchase agreement and closing of the transaction, Claranet would provide an interim working capital facility up to $6.0 million, and any draws under this facility would reduce the purchase price paid at completion.  If the Claranet Sale is concluded as contemplated under the letter of intent, we anticipate that all or a substantial portion of the deposit and working capital facility would be utilized to maintain day to day operations of the Company.

 

We are in the process of negotiating definitive purchase, interimworking capital financing and other agreements pertaining to the proposedClaranet Sale.  The definitive agreementswould be subject to various conditions to completion, including absence ofmaterial adverse change in VIA’s business. There can be no assurance that VIAwill be successful in negotiating the definitive agreements or achievingcompletion of the proposed transaction. If the agreements are successfullyconcluded, we would expect to convene a meeting of our shareholders within thenext two or three months to consider the Claranet Sale for approval. If wereceived approval from our shareholders, we would close the transaction and usethe net proceeds to pay off the remaining liabilities of the Company and shutdown our corporate headquarters and terminate the remaining employees.  Remaining funds would then be distributed toour shareholders.

 

If the Claranet Sale is not completed, wewould seek seek a new buyer of the businesses. In order for us to achieve consolidated positive cash flow, and in lightof reduced expectations in revenue generation from our VIA Express channel, wewould be required to substantially reduce our operating expenses through afurther elimination of headcount in certain operations and in our headquartersstaff. However, reduction of staff would require VIA to make employmenttermination payments of material amounts and we currently do not have the cashresources to implement this cost savings plan. We would seek to raise new equity or debt financing in a short period oftime, which may not be available to us. Without new capital in the short term,we would not be able to continue to operate as a going concern.

 

**LiquidityMatters Relating to Acquired Companies.** In January 2004,we acquired the Amen Group of companies. In connection with this acquisition,we spent $7.4 million cash and issued common stock having a total value of$1.2 million. Based on the earn-out arrangements with the former owners,the Company anticipates making a further earn-out payment to the sellers ofEuro 238,000 ($0.3 million) (of which Euro 200,000 ($0.3 million) was paid inthe first quarter of 2005), and Euro 469,000 ($0.6 million) in common stock ofthe Company. Amen contributed positive cash flow in 2004 of $3.7 million.In August 2004, we acquired 100% of the issued and outstanding shares ofthe PSINet Europe B.V. operations in Belgium, France, Germany, the Netherlandsand Switzerland. The Company paid total consideration for the shares andinter-company debt as follows: Euro 10.0 million in cash ($12.3 million) atclosing; Euro 1.0 million ($1.4 million) paid in January 2005 afterresolution of the working capital contingency; The balance of the considerationoutstanding amount to Euro 6.0 million ($7.4 million) and is payable in cashor, at the option of

 

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the seller, 4.5 million shares of VIA common stock, 15 months afterclosing, subject to any final adjustment for warranty claims, if any. We are indiscussions with the holders of the Euro 6.0 million ($7.4 million) note to paya lesser amount in cash and a portion in our common stock.

 

**Cashflows.** Cash used in operating activities was $27.8 millionfor the year ended December 31, 2004 and $24.2 million for the yearended December 31, 2003. Cash flows from operating activities can varysignificantly from period to period depending on the timing of operating cashreceipts and payments and other working capital changes, especially accountsreceivable, other current assets, accounts payable, accrued expenses and othercurrent liabilities. In both periods, our net losses were the primary componentof cash used in operating activities, these losses include some significantnon-cash items such as depreciation, amortization, provision for doubtfulaccounts receivable, impairment and unrealized foreign currency transactiongains.

 

Cash used in investing activities was$26.6 million for the year ended December 31, 2004 and$6.6 million for the same period in 2003. For the year ended December 31, 2004 we used $23.4 million of cash to acquire the Amen Group of companiesand to acquire 100% of the issued and outstanding shares of the PSINet EuropeB.V. operations in Belgium, France, Germany, the Netherlands and Switzerland.We used $7.2 million cash to purchase tangible fixed assets. We received $7.7million of cash resulting from the sale of 100% of the shares of VIANET.WORKS UK Ltd. For the year ended December 31, 2003, we usedcash to primarily purchase tangible fixed assets. At the end of September 2003,our Swiss subsidiary acquired a customer list from a Swiss web-design andhosting company for cash in the amount of $0.8 million.

 

We received cash from financing activities of$0.1 million for year ended December 31, 2004. We used cash infinancing activities of $0.4 million for the year ended December 31, 2003.For the year ended December 31, 2004, $0.4 million cash was received fromthe issuance of common stock and $0.3 million was used for repayments of debtand capital lease obligations. In the year ended December 31, 2003, cashwas used primarily to purchase treasury stock.

 

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Payment Obligations and Contingencies

 

We lease office space, equipment and vehiclesunder non-cancelable operating leases. The following summarizes our contractualobligations at December 31, 2004, and the effect such obligations areexpected to have on our liquidity and cash flows in future periods: (inthousands of U.S. dollars):

 
| **USD in thousands Contractual  Obligations (1)**                                      | ** ** | **Total** | ** ** | **Less than 1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------|------------|----------------------|------------|---------------|------------|---------------|------------|------------------------|------------|
|                                                                                   |       |      |       |                 |       |          |       |          |       |                   |       |
| Operating Leases (including operations and  maintenance payments under IRU agreements) |       | 52,747    |       | 9,388                |       | 20,107        |       | 8,376         |       | 14,876                 |       |
| Capital lease obligations and long -term  payables (2)                                 |       | 10,038    |       | 9,695                |       | 343           |       | —        |       | —                 |       |
| Purchase commitment obligations                                                        |       | 2,186     |       | 1,103                |       | 1,083         |       | —        |       | —                 |       |
|                                                                                   |       |      |       |                 |       |          |       |          |       |                   |       |
| Total                                                                                  |       | $         | 64,971     |                 | $          | 20,186        |       | $             | 21,533     |                   | $          | 8,376 |   | $ | 14,876 |   |
|                                                                                        |            |           |            |                      |            |               |            |               |            |                        |            |  |  |  |  |  |

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(1)          This table does not include accounts payableof $16.9 million and taxes payable, accrued expenses and other currentliabilities of $29.3 million, which are recorded on our December 31,2004 consolidated balance sheet. In addition, this table does not includeestimated future capital expenditures that are not yet contracted for.

 

(2)          Capital lease obligations and long-termpayables include an unsecured zero coupon convertible note, which was issued in connectionwith the acquisition of the PSINet Europe companies, in August 2004 theCompany issued. The note is due in November 2005 and is convertible into4.5 million of VIA common stock at the option of the holder. The face value ofthe note is Euro 6 million (approximately $8.2 million), subject to any final adjustments forwarranty claims if any, and theeffective interest rate is 5.27%. Based on this effective interest rate, thepresent value of the unsecured zero coupon convertible note is Euro 5.6 million(approximately $7.6 million). The discount of Euro 0.4 million (approximately$0.6 million) is being amortized as interest expense over the duration of thenote. (see Note 10 to the Financial Statements)

 

The operating leases and purchase commitmentobligations are off-balance sheet commitments. The purchase commitmentobligations relate to our outsourcing agreements for network management,billing and back-office transaction processing.

 

Capital Resources

 

Since inception, we have financed ouroperations primarily through the sale of equity securities. We raisedapproximately $181.0 million in aggregate through three private preferredstock offerings between August 1997 and April 1999. Through ourinitial public offering of common stock in February 2000, we raisedapproximately $333.0 million, net of underwriting discounts andcommissions.

 

The foregoing statements regarding ourliquidity and possible need for additional capital resources are forward-lookingstatements based on our current expectations, which involve certain risks anduncertainties. Actual results and the timing of these events could differmaterially from these forward-looking statements depending upon certain factorsthat we cannot predict, including the factors discussed in RISK FACTORSincluded in this Form 10-K.

 

*Recent Issued Accounting Pronouncements NotYet Adopted*

 

InDecember 2004, the Financial Accounting Standards Board issued Statementof Financial Accounting Standards 153, “Exchanges of Nonmonetary Assets - anamendment of APB Opinion 29” (“SFAS 153”), which amends Accounting PrinciplesBoard Opinion 29, “Accounting for Nonmonetary Transactions” to eliminate theexception for nonmonetary exchanges of similar productive assets and replacesit with a general exception for exchanges of nonmonetary assets that do nothave commercial substance. SFAS 153 is effective for nonmonetary assetsexchanges occurring in fiscal periods beginning after June 15, 2005. TheCompany does not anticipate that the adoption of this statement will have amaterial effect on our financial position or results of operations.

 

InDecember 2004, the FASB issued Statement of Financial Accounting Standards(“SFAS”) 123 (revised 2004), “Share-Based Payments” or SFAS 123R. Thisstatement eliminates the option to apply the intrinsic value measurementprovisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accountingfor Stock Issued to Employees” to stock compensation awards issued toemployees. Rather, SFAS 123R requires companies to measure the cost of employeeservices received in exchange for an 

 

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awardof equity instruments based on the grant-date fair value of the award. Thatcost will be recognized over the period during which an employee is required toprovide services in exchange for the award—the requisite service period(usually the vesting period). SFAS 123R applies to all awards granted after therequired effective date and to awards modified, repurchased, or cancelled afterthat date.  SFAS 123R is effective fiscalyear beginning after June 15, 2005. The company has not yet quantified theeffect of the future adoption of SFAS 123R on a going forward basis.

 

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**ITEM7A****  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

The following discussion relates to ourexposure to market risk, related to changes in interest rates and changes inforeign exchange rates. This discussion contains forward-looking statementsthat are subject to risks and uncertainties. Actual results could differmaterially due to a number of factors, as set forth in the RISK FACTORS section inItem 1 of this Form 10-K.

 

***Interest Rate Risks***

 

VIA has exposure to changes in interestrates. At December 31, 2003 and 2004, VIA’s financial instrumentsconsisted of short-term investments and fixed rate debt related to acquisitionsand network purchases. Our investments are generally fixed rate short-terminvestment grade and government securities denominated in U.S. dollars. At December 31,2003 and 2004 all of our investments were due to mature within three months andthe carrying value of such investments approximates fair value. The majority ofour debt obligations had fixed rates of interest and was due within one year ofthe balance sheet date.

 

***Foreign Currency Exchange Risks***

 

VIA is an international company that at theend of December 2004 had operations in ten countries. Only one operationand the parent company have a functional currency of U.S. dollars. Havingoperations in foreign currencies exposes VIA to foreign currency exchangerisks.

 

There are principally two types of foreignexchange risk: transaction risks and translation risks. Transaction risks mayimpact the results of operations and translation risks may impact comprehensiveincome. These are discussed more fully below.

 

Transaction risks

 

Transactions in currencies other than thefunctional currency are translated at either the exchange rate in effect at theend of the month in which the transaction occurs or in some cases the rate ineffect at the date of the transaction. Differences in exchange rates during theperiod between the date a transaction denominated in a foreign currency isconsummated and the date on which it is settled or translated, are recognizedin the consolidated statements of operations as “Foreign currency gains(losses), net.”

 

Our local operations transact business intheir local currencies. They do not have significant assets, liabilities orother accounts denominated in currencies other than their local currency, andtherefore are not subject to significant exchange rate risk with respect totheir normal operations. Foreign currency exchange fluctuations currently havelittle or no impact on the price of our products and our competitiveness invarious markets primarily for two reasons. First, the Company’s revenue streamis solely derived from the local operating subsidiaries. These subsidiariestransact with customers in the same country and the supporting agreements aredenominated in the same local currency. There are no significant cross bordercustomers served by VIA. Second, the local operating subsidiaries cost base isalmost entirely denominated in the local functional currency. The majority ofunderlying agreements with backbone and bandwidth suppliers, and salary costs,which comprise the majority of our expenses, are also denominated in the samecurrency as the local revenue stream.

 

The parent company’s foreign exchangetransaction risk is primarily derived from the revaluation of current assetsand liabilities that are denominated in a currency other than U.S. dollars.These are comprised principally of Euro cash balances held to meet the workingcapital requirements of the five local operating subsidiaries with a Eurofunctional currency and inter-company balances denominated in the localoperating subsidiaries’ functional currency (Great British Pounds, Swiss Francsand Euros).

 

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When requiredthe parent company funds the local operating subsidiaries in their functionalcurrency supported with a corresponding intercompany receivable denominated inthe local operating subsidiary’s functional currency. In addition, inter-companycharges between the parent company and the local operating subsidiaries aretransacted in the functional currency of the operating entity. Thus, the parentcompany’s intercompany balances are held in the operating subsidiaries localfunctional currency and consequently are revalued on a monthly basis. Theresultant foreign exchange gain or loss is reflected in the consolidatedstatements of operations as “Foreign currency gains (losses), net.”

 

The parent company’s cash balances consist ofEuros and U.S. dollars. The Euro bank account is revalued each month and theresultant gain or loss is reflected in the consolidated statements ofoperations as “Foreign currency gains/(losses), net.” This exposes the Companyto foreign currency exchange rate risk in the Statement of Operations. Forexample, at December 31, 2003, a 10% increase or decrease in the level ofthe Euro exchange rate against the dollar with all other variables heldconstant would have resulted in a realized gain or loss of $9.0 million.As of December 31, 2004, a 10% increase or decrease in the level of theEuro exchange rate against the U.S. dollar with all other variables heldconstant would result in a realized gain or loss of $7.3 million. Thechange in exposure from year to year is related to the change in the balance ofthe Euro cash and intercompany accounts. At December 31, 2004, the Companyheld approximately €9.9 million in the Euro cash account, CHF 4.2 millionin the Swiss Franc cash account and GBP 0.6 million in the GBP cash account andremains exposed to changes in the foreign currency rate. However, such ratefluctuations should have a smaller impact in future as the balances havecontinued to reduce.

 

The fluctuation in the exchange ratesresulted in foreign currency gains reflected in the consolidated statements ofoperations as “Foreign currency (losses) gains, net” of $16.3 million and$5.4 million for the years ended December 31, 2003 and December 31,2004, respectively.

 

Translation risks

 

The financial statements of the Company’s localoperating subsidiaries with a functional currency other than U.S. dollars aretranslated into U.S. dollars using the current rate method. Accordingly, assetsand liabilities are translated at period-end exchange rates while revenue andexpenses are translated at the period’s average exchange rates. Adjustmentsresulting from these translations are accumulated and reported as a componentof accumulated other comprehensive loss in stockholders’ equity. Foreign currencytranslation adjustments are reclassified into the Statement of Operations whenthe underlying investment is sold or substantially liquidated.

 

The fluctuation in the exchange ratesresulted in a foreign currency loss reflected as a component of accumulatedother comprehensive loss in stockholders’ equity, net of $11.9 million and$0.6 million for years ended December 31, 2003 and December 31,2004, respectively.

 

Exchange rates can vary significantly. TheEuro high and low rates varied by approximately16% in relation to the U.S.dollar during the year ended December 31, 2004. The Swiss Franc high andlow rates varied by approximately 17% in relation to the U.S. dollar during theyear ended December 31, 2004. This variation affects the average exchangerates used to translate the income statements of our operating companies whosefunctional currency is not U.S. dollars. At December 31, 2004, the Euro toU.S. dollar exchange rate was approximately 10% above where it was at thebeginning of the year and the Swiss Franc to U.S. dollar exchange rate wasapproximately 11% above where it was at the beginning of the year. Thisvariation affects the ending exchange rates used to translate amounts on thebalance sheet of our operating companies whose functional currency is not U.S.dollars. Future changes in the value of the Euro and Swiss Franc could have amaterial impact on our financial position and results of operations. We alsoexperienced fluctuations in other exchange rates.

 

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Hedging against foreign exchange risks

 

For the year ended December 31, 2004 wedid not actively manage our exposure to foreign currency translation risks thataffect our reported results, which result in no cash impact unless theoperation is sold. We have in the past considered insurance and financial riskproducts to manage this risk, but determined such products to be prohibitivelyexpensive. We currently have no hedging arrangements or derivatives in place toaddress this form of translation risk.

 

The parent company maintains an Euro cashbalance, a Swiss Franc cash balance and a Great British Pound balance to meetthe working capital requirements of the operating subsidiaries with a Euro,Swiss Franc or Great British Pound functional currency. The parent companymaintains its remaining cash resources in U.S. dollars.

 

In the future, we may enter into derivativefinancial instruments to manage our foreign currency exchange risk based onmateriality of any USD transactions.

 

**ITEM 8****  FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

See **Indexto Consolidated Financial Statements** on page F-1

 

All financial statement schedules are omittedbecause they are not required, are not applicable or the information isincluded in the consolidated financial statements or notes thereto.

 
| **ITEM 9** | ** ** | **CHANGES IN AND DISAGREEMENTS WITH  ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE** |
|------------|------------|-------------------------------------------------------------------------------------------|

 

On September 20, 2002, we dismissedPricewaterhouseCoopers LLP as our independent public accountants. Our AuditCommittee, with the full authority of the Board of Directors, participated inand approved the decision to change independent accountants. Effective September 26,2002, the Audit Committee engaged Deloitte & Touche to serve as ourindependent auditors for the remainder of 2002 and to conduct the audit of ourconsolidated financial statements for the year ending December 31, 2002.On August 1, 2003, the Company’s auditor Deloitte & Touchetransferred its business to a limited liability partnership and the Board ofDirectors approved the extension of the auditor appointment to Deloitte &Touche LLP. For additional information refer to our report on Form 8-Ksubmitted on September 26, 2002.

 

**ITEM9A****  CONTROLS AND PROCEDURES**

 

Our management and the Audit Committee of the boardof directors has engaged in regular evaluations of our internal controls, aswell as the processes we maintain to ensure that all material informationrelating to us and our subsidiaries is recorded, processed, summarized,evaluated and reported within the time periods specified by rules establishedby the Securities and Exchange Commission. These latter processes are known as Disclosure Controls andProcedures.  Disclosure Controls andProcedures are also designed to ensure that all such information iscommunicated to our management, including our CEO and CFO, in such a manner asto allow timely decisions to be made regarding required disclosures.

 

We have evaluated, with the oversight of our CEO andCFO, the effectiveness of our Disclosure Controls and Procedures as of December 31,2004.  In designing and evaluating theDisclosure Controls and Procedures, our management necessarily was required toapply its judgment in evaluating the costs and benefits of possible controlsand procedures.  In addition, werecognize that Disclosure Controls and Procedures by their nature can provideonly reasonable assurance that our information flow objectives are met. As of December 31,2004 our CEO and CFO have concluded that our Disclosure Controls and Proceduresare effective in all material respects.

 

During the year ended December 31, 2004, wehave acquired the Amen group of companies and the operations of PSINet Europein Switzerland, Germany, The Netherlands, Belgium and France, and we havedisposed of our subsidiary VIA NET.WORKS UK Ltd.  Post acquisition, we have conducted aninitial assessment of the internal control environments and Disclosure Controlsand Procedures of both the Amen group and the acquired PSINet businesses.  Based on this assessment, we concluded thatthese additions and the disposal of the UK business had neither materiallyaffected, nor were reasonably likely to materially affect, our internal controlover financial reporting.

 

We have continued to work during 2004 to improve ourinternal controls and Disclosure Controls and Procedures, specifically throughthe continuation of our program to standardize and automate back-officeprocesses, and to outsource certain finance functions such as general ledgeraccounting, accounts payable and accounts receivable.  This phased implementation is now at anadvanced stage.  At the end of December 2004,the new back-office systems were fully implemented, as planned for all but oneof our legacy VIA operations.  Thefinance function outsourcing was also completed, as planned.  We have completed the back-office systemsimplementation and the finance

 

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outsourcingproject for our newly acquired PSINet businesses during Q1 of 2005. Theremaining VIA legacy business in Switzerland was subsequently sold on April 1,2005 back to the former owners and is therefore now outside the scope of theback office systems migration project. We have, in addition, completed the migration of  all of our newly acquired businesses on toour standard financial accounting and reporting system for the purposes of  2004 year end reporting.

 

Webelieve that our current controls and procedures enable us to present ourfinancial results fairly in all material respects, as required by U.S.generally accepted accounting principles.

 

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**PART III**

 

**ITEM10****  DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT**

 

*Information regarding our Directors andExecutive Officers*

 

The following table shows information about each of our executive officersas of March 31, 2005.

 
| **Name**           | ** ** | **Age** | ** ** | **Position**                                          |
|--------------------|------------|---------|------------|-------------------------------------------------------|
| Raymond  Walsh     |       | 39      |       | Chief  Executive Officer                              |
| Cameron  Mackenzie |       | 51      |       | Chief  Financial Officer                              |
| Rebecca  Markovits |       | 42      |       | Vice  President, Human Resources                      |
| Matt S.  Nydell    |       | 45      |       | Senior Vice  President, General Counsel and Secretary |
| Dick  Theunissen   |       | 36      |       | Vice  President and President, Amen S.A.S.            |

 

**Raymond Walsh**was appointed CEO of VIA in January2005.  He served as VIA’s Head ofOperations from June 2002 until his appointment as CEO.  Prior to joining VIA, Mr. Walsh served asSenior Vice President of Operations and CIO at KPNQwest from February 1999 toJune 2002.  In addition, Mr. Walsh servedin various technology and operational management positions at Qwest, LCIInternational and WilTel. Mr. Walsh holds a B.S. in Management Science andComputer Systems from Oklahoma State University.

 

**Cameron Mackenzie**was appointed VIA’s Chief Financial Officer in April 2004. He has over 15years’ experience in senior finance positions with European and internationalcompanies in the IT and telecommunications services and manufacturing sectors.His record of achievement includes the successful flotation of wirelessInternet services provider, MobileFuture PLC, on the London Stock Exchange AIM.Prior to MobileFuture PLC, he held progressively senior financial managementpositions with Otis Plc the UK elevator subsidiary of United TechnologiesCorporation, the Private Mobile Radio division of Philips Electronics UKlimited and the Mail and Messaging division of the Bell & Howell Company.Mr. Mackenzie is a member of the Institute of Chartered Accountants ofScotland.

 

**Rebecca Markovits** joined VIAin June 2002 as Vice President, Human Resources. Prior to joining VIA,Ms. Markovits headed up the global human resources group at KPNQwest fromFebruary 1998 through May 2002. Previously Ms. Markovits servedin Human Resource management positions at ITT World Directories.

 

**Matt Nydell** has been with VIA sinceAugust 1998. He has served as VIA’s Senior Vice President, General Counseland Secretary since April 2002. From August 1998 to April 2002,he served as VIA’s Vice President, General Counsel and Secretary. FromNovember 1996 to August 1998, he was Director, Ventures and Alliancesfor MCI Communications Corporation where he oversaw MCI’s interest in ConcertCommunications Company, an international telecommunications joint venture withBritish Telecommunications.  FromJune 1994 to November 1996, he was Senior Counsel in MCI’s MassMarket’s legal group.  Prior to joiningMCI, Mr. Nydell was an attorney with the Washington office of law firmDonovan Leisure Newton and Irvine. Mr. Nydell received a J.D./M.A.,foreign affairs, from the University of Virginia, and a B.A., with honors, inPhilosophy from Bucknell University.

 

**Dick Theunissen** joined VIA in December 2002 as itsVice President, Product Marketing and Management. With the acquisition of theAmen group in January 2004, Mr. Theunissen became President Amen SAS;he remains a Vice President of VIA. Prior to joining VIA, Mr. Theunissenserved as Vice President Product Management at KPNQwest from 1999 to 2002.Previously. Mr. Theunissen held several positions with KPN.  Mr. Theunissen holds a Master of Sciencedegree in Economics for the Erasmus University Rotterdam, The Netherlands. 

The following table shows information about each of our Board Members asof March 31, 2005. 

 
| **Board  Member** | ** ** | **Term  Expiring** | ** ** | **Audit** | ** ** | **Compensation** | ** ** | **Nominating/  Corporate  Governance** | ** ** |
|-------------------|------------|--------------------|------------|-----------|------------|------------------|------------|----------------------------------------|------------|
| Malcolm Bell      |       | 2005               |       | C         |       |             |       |                                   |       |
| Jan Gesmar-Larsen |       | 2005               |       |      |       | M                |       | M                                      |       |
| Michael McTighe   |       | 2007               |       | M         |       |             |       | M                                      |       |
| Karen Slatford    |       | 2006               |       | M         |       | M                |       |                                   |       |
| John Steele       |       | 2006               |       |      |       | C                |       | C                                      |       |

 

C = Chair

 

M = Member

 

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**Malcolm Bell,** 61, joined VIA in May 2003. Priorto 2000, Mr. Bell held positions with Deloitte & Co.,Coopers & Lybrand and PricewaterhouseCoopers in the UK and mainlandEurope.  He has obtained over25 years senior level experience in audit, accounting and financialmanagement.  Mr. Bell has served asa member of the governing council of The Mission to Seafarers sinceMarch 2001 and as a director of the Three Counties Agricultural Society,where he chairs the audit committee. Mr. Bell also served as a consultant with Telos Partners Ltd.,a UK-based business consultancy firm from November 2000 to May 2003.  Mr. Bell currently serves as the chairof VIA’s audit committee.

 

**Jan Gesmar-Larsen,** 44, has heldsenior executive positions in the personal computer industry at Compaq, Appleand Dell. Most recently, he was President, Dell Computer, Europe and MiddleEast and Africa (EMEA) from 1997 through 2000. Before Dell, he was EMEA President of Apple Computer from 1995 to1997.  Jan also held positions withCompaq Computer International.  He hasbeen a member of the board of directors of Bang & Olufsen, Capital OneFinancial Services Inc., Interse AS and HAL Knowledge Solutions.  Mr. Gesmar-Larsen joined the VIA board inOctober 2003. 

**Michael McTighe,** 51, joined VIA in June 2002 and waselected as chairman in October 2002. Prior to joining VIA, Mr. McTighe was chief executive officer ofCarrier1 from October 2001 to February 2002.  Before Carrier1, Mr. McTighe served asexecutive director and chief executive, Global Operations for Cable &Wireless plc from May 1999 to September 2001.  He has also served as president and chiefexecutive officer of Philips Consumer Communications LLP, spent five years withMotorola with responsibilities for Europe and Asia and worked for 10 yearswith General Electric in various European markets.  Mr. McTighe serves on the board ofdirectors of Alliance & Leicester plc and Pace Micro Technology plc,both of which are publicly traded companies. Mr. McTighe also serves on the board of directors for London MetalsExchange Holdings Ltd., Red M Communications Ltd., Frontier Silicon Holding Ltd,Phyworks Ltd., and Corvil Networks Ltd., all of which areprivately-held companies. Mr. McTighe holds a B.S. in ElectronicEngineering from University College in London.

 

**Karen Slatford,** 49, consults frequently for hightechnology companies on sales and business strategy, and is a director of  TheListening Company, HAL Knowledge Solutions, a leading provider of ApplicationPortfolio Management solutions and Board of Portwise AB.  Ms. Slatford joined the board inOctober 2003.  She served in varioussenior level sales positions with Hewlett Packard from 1994 to 2001. In 1999,Karen was promoted to Vice President Worldwide Sales and continued in that roleuntil she left Hewlett Packard in 2001. From 1994 to 1997, she was responsible for Hewlett Packard’s enterprisesales force in the United Kingdom before being promoted to lead enterprisesales across the EMEA region.

 

**John C. Steele,** 63, joined VIA’s board in October of2002 and serves as chairman of the compensation and nominating and corporategovernance committees.  Mr. Steeleis also a council member of the Arbitration and Conciliation Service in theUnited Kingdom.  Mr. Steele workedwith British Telecommunications Plc from 1989 through 2002 where he served asgroup personnel director and a member of the company’s executive committee.

 

There are no family relationships among any of our directors or executiveofficers.

 

Since VIA’s 2004 annualmeeting of shareholders two directors have resigned from VIA’s board ofdirectors.  Mr. Rhett Williams steppeddown as a Class I director effective January 25, 2005 and Erik M.Torgerson resigned as a Class II director effective January 28, 2005.

 

*Section 16(a) Beneficial OwnershipReporting Compliance:*

 

Section 16(a) of theSecurities Exchange Act of 1934 requires our directors, executive officers andcertain shareholders to file reports with the SEC on Forms 3, 4 and 5 for thepurpose of reporting their ownership of and transactions in oursecurities.  We believe that all of ourcurrent and former directors and executive officers reported on a timely basisall transactions required to be reported by Section 16(a) during fiscal2004, except that an initial report on Form 3 and a report of twotransactions on Form 4 for Fred Seibl, formerly our Senior Vice Presidentfor VIA Express, were filed late.

 

*Information regarding our code of ethics*

 

VIAhas adopted a Code of Ethics that applies to our Chief Executive Officer,Interim Chief Financial Officer and Controller, as well as other VIA GroupCompany financial directors. We have also adopted a Business Conduct and EthicsPolicy that applies to

 

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allCompany personnel and our board of directors. Both the Code and the Policy require that all VIA persons conductthemselves with integrity and endeavor to accomplish the work of VIA whilstfollowing the highest legal and ethical standards.  If we make any substantive amendments to theCode of Ethics or grant any waiver, including any implicit waiver, from aprovision of the Code to our principal executive or principal financial andaccounting officer, we will disclose the nature of such amendment or waiver onour website and in a report on Form 8-K.

 

The code of ethics is published on our website located at http://www.vianetworks.com under the Investor Relations Governance pages.

 

*Audit Committee Financial Expert:*

 

The audit committee is comprised solely of directors who meet independencestandards required under the Sarbanes-Oxley Act of 2002 and the Nasdaq listingrequirements.  The board has determinedthat chairman Bell is an “audit committee financial expert” as defined byapplicable SEC rules adopting the Sarbanes-Oxley Act of 2002.  The audit committee appoints independentauditors and monitors the independence and performance of the independentauditors.  The audit committee alsoassists the board by monitoring the integrity of our financial statements andreviewing our compliance with legal and regulatory requirements and overseeingour internal control practices.  Theaudit committee met on 10 occasions during 2004.

 

**ITEM11****  EXECUTIVE COMPENSATION**

 

The following table presents a summary of compensation paid with respectto the past three fiscal years to our chief executive officer during 2004 andthe four executives most highly compensated during 2004, all of whom we refer toas our named executive officers.

 

**Summary Compensation Table**

 
| ** **                       | ** ** | ** **              | ** ** | ** **       | ** ** | ** **     | ** ** | ** **       | ** ** | **Long Term**    | ** ** | ** **       | ** ** |
|----------------------------------|------------|-------------------------|------------|------------------|------------|----------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                       | ** ** | ** **              | ** ** | ** **       | ** ** | ** **     | ** ** | ** **       | ** ** | **Compensation** | ** ** | ** **       | ** ** |
| ** **                       | ** ** | ** **              | ** ** | ** **       | ** ** | ** **     | ** ** | ** **       | ** ** | **Securities**   | ** ** | ** **       | ** ** |
| ** **                       | ** ** | **Annual Compensation** | ** ** | **Other Annual** | ** ** | **Underlying** | ** ** | **All Other**    | ** ** |
| **Name  and Principal Position** | ** ** | **Year**                | ** ** | **Salary**       | ** ** | **Bonus**      | ** ** | **Compensation** | ** ** | **Options**      | ** ** | **Compensation** | ** ** |
| Rhett Williams (1)               |       | 2004                    |       | $                | 561,565    |           | $          | 12,538           |       | $                | 105,771    | (2)         | 0          |   | 0 |   |
| Chief Executive Officer          |       | 2003                    |       | $                | 484,983    |           | $          | 0                |       | $                | 62,218 94  | (3)              | 490,000    |   | $ | 0 |   |
|                             |       | 2002                    |       | $                | 72,333     |           | $          | 0                |       | $                | 94         | (4)              | 1,000,000  |   | $ | 0 |   |
|                             |       |                    |       |             |       |           |       |             |       |             |       |             |       |
| Raymond Walsh (5)                |       | 2004                    |       | $                | 225,000    |           | $          | 8,055            |       | $                | 0          |             | 0          |   | $ | 111,001 | (6) |
| Senior Vice President,           |       | 2003                    |       | $                | 225,000    |           | $          | 0                |       | $                | 0          |             | 225,342    |   | $ | 101,647 | (7) |
| Technology and Operations        |       | 2002                    |       | $                | 113,788    |           | $          | 63,984           |       | $                | 0          |             | 250,000    |   | $ | 51,458 | (8) |
|                             |       |                    |       |             |       |           |       |             |       |             |       |             |       |
| Cameron Mackenzie (9)            |       | 2004                    |       | $                | 255,067    |           | $          | 0                |       | $                | 0          |             | 0          |   | $ | 3,747 | (10) |
| Chief Financial Officer          |       |                    |       |             |       |           |       |             |       |             |       |             |       |
|                             |       |                    |       |             |       |           |       |             |       |             |       |             |       |
| Dick Theunissen (11)             |       | 2004                    |       | $                | 211,458    |           | $          | 64,801           |       | $                | 16,917     |             | 0          |   | $ | 24,761 | (12) |
| Vice President, Marketing        |       | 2003                    |       | $                | 189,848    |           | $          | 6,049            |       | $                | 15,188     |             | 267,963    |   | $ | 24,761 | (13) |
|                             |       | 2002                    |       | $                | 14,512     |           | $          | 0                |       | $                | 1,075      |             | 0          |   | $ | 2,064 | (14) |
|                             |       |                    |       |             |       |           |       |             |       |             |       |             |       |
| Matt S. Nydell                   |       | 2004                    |       | $                | 225,000    |           | $          | 8,055            |       | $                | 0          |             | 0          |   | $ | 138,843 | (15) |
| Senior Vice President,           |       | 2003                    |       | $                | 225,000    |           | $          | 0                |       | $                | 0          |             | 225,342    |   | $ | 129,825 | (16) |
| General Counsel and              |       | 2002                    |       | $                | 221,355    |           | $          | 109,688          |       | $                | 0          |             | 150,000    |   | $ | 3,902 | (17) |
| Secretary                        |       |                    |       |             |       |           |       |             |       |             |       |             |       |
|                             |       |                    |       |             |       |           |       |             |       |             |       |             |       |
| Rebecca Markovits (18)           |       | 2004                    |       | $                | 199,019    |           | $          | 0                |       | $                | 15,922     |             | 0          |   | $ | 24,778 | (19) |
| Vice President, Human            |       | 2003                    |       | $                | 199,019    |           | $          | 41,055           |       | $                | 15,922     |             | 190,417    |   | $ | 24,778 | (20) |
| Resources                        |       | 2002                    |       | $                | 107,802    | ** **     | $          | 0                | ** ** | $                | 8,624      |             | 100,000    |   | $ | 13,422 | (21) |

 

56

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----

| (1)    | Mr.  Williams left VIA as of January 25, 2005.                                                                                                                                                                                                                                                        |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                  |
| (2)    | In  2004 it represents, $44,881 for housing allowance, $1,878 for life insurance,  $3,924 for Company matching funds in a 401(k) plan, $31,206 for Dutch pension  contribution and $23,882 for car allowance.                                                                                         |
|   |                                                                                                                                                                                                                                                                                                  |
| (3)    | In  2003 it represents, $54,340 for housing allowance, $1,878 for life insurance  and $6,000 Company matching funds in a 401(k) plan in 2003.                                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                  |
| (4)    | This  amount represents a payment of $94 made in 2002 on behalf of  Mr. Williams for life insurance.                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                  |
| (5)    | Mr.  Walsh became Chief Executive Officer on January 25, 2005.                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                  |
| (6)    | This  amount represents a payment of $10,175 made on behalf of Mr. Walsh for health  insurance, $5,826 for Company matching funds in a 401(k) plan in 2004 and  $95,000 for foreign service allowance under the Company’s international  assignment policy in 2003.                              |
|   |                                                                                                                                                                                                                                                                                                  |
| (7)    | This  amount represents payments of $647 made on behalf of Mr. Walsh for life  insurance, $6,000 for Company matching funds in a 401(k) plan and $95,000 for  foreign service allowance under the Company’s international assignment policy  in 2003.                                       |
|   |                                                                                                                                                                                                                                                                                                  |
| (8)    | This  amount represents payments made on behalf of Mr. Walsh for foreign  service allowance under the Company’s foreign assignment policy.                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                  |
| (9)    | Mr.  Mackenzie joined VIA in April 2004 as Interim Chief Financial Officer and  became Chief Financial Officer on November 9, 2004.                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                  |
| (10)   | This  amount represents payments of $3,747 for car allowance in 2004.                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                  |
| (11)   | Mr. Theunissen  joined VIA in December of 2002 as Vice President of Marketing. During 2004 he  also became President of Amen.                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                  |
| (12)   | This  amount represents a payment of $2,371 for health insurance and $22,390 for  car allowance during 2004.                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                  |
| (13)   | This  amount represents a payment of $2,371 for health insurance and $22,390 for  car allowance during 2003.                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                  |
| (14)   | This  amount represents a payment of $198 for health insurance and $1,866 for car  allowance during 2002.                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                  |
| (15)   | This  amount represents a payments of $719 made on behalf of Mr. Nydell for  life insurance, $9,507 for health insurance, $3,617 for Company matching  funds in a 401(k) plan and $125,000 for foreign service allowance under the  Company’s international assignment policy in 2004. |
|   |                                                                                                                                                                                                                                                                                                  |
| (16)   | This  amount represents a payment of $719 made on behalf of Mr. Nydell for  life insurance, $4,106 for Company matching funds in a 401(k) plan and  $125,000 for foreign service allowance under the Company’s international  assignment policy in 2003.                                    |
|   |                                                                                                                                                                                                                                                                                                  |
| (17)   | This  amount represents payments of $698 made on behalf of Mr. Nydell for life  insurance and $3,204 for Company matching funds in a 401(k) plan in 2002.                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                  |
| (18)   | Mrs.  Markovits joined VIA in June of 2002 as Vice President of Human Resources.                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                  |
| (19)   | This  amount represents a payment of $2,388 for health insurance and $22,390 for  car allowance during 2004.                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                  |
| (20)   | This  amount represents a payment of $2,388 for health insurance and $22,390 for  car allowance during 2003.                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                  |
| (21)   | This  amount represents a payment of $1,294 for health insurance and $12,128 for  car allowance during 2002.                                                                                                                                                                                          |

 

The following tableprovides information relating to options to purchase common stock we grantedour named executive officers during the year ended December 31, 2004.  The percentages in the table below are basedon the options to purchase shares of our common stock we granted under our 1998Option Plan in the year ended December 31, 2004.  Except as noted, the options described in thetable below become exercisable over periods of from one to four years and havea term of ten years.  Potentialrealizable values are net of exercise price before taxes and are based on theassumption that our common stock appreciates at the annual rates shown,compounded

 

57

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annually, from the date of grant until the expiration ofthe relevant term.  These numbers arecalculated based on the requirements of the Securities and Exchange Commissionand do not reflect our estimates of future stock price growth.

 

**Options Grants in Last Fiscal Year**

** **
| ** **        | ** ** | **Individual Grants** | ** ** | ** **     | ** ** | ** **    | ** ** | ** **     | ** ** |
|-------------------|------------|-----------------------|------------|----------------|------------|---------------|------------|----------------|------------|
| ** **        | ** ** | ** **            | ** ** | **Percent of** | ** ** | ** **    | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **        | ** ** | ** **            | ** ** | **Total**      | ** ** | ** **    | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **        | ** ** | **Number of**         | ** ** | **Options**    | ** ** | ** **    | ** ** | ** **     | ** ** | **Potential Realizable Value at** | ** ** |
| ** **        | ** ** | **Securities**        | ** ** | **Granted to** | ** ** | ** **    | ** ** | ** **     | ** ** | **Assumed Annual Rates of** | ** ** |
| ** **        | ** ** | **Underlying**        | ** ** | **Employees**  | ** ** | **Exercise**  | ** ** | ** **     | ** ** | **Share Price Appreciation for** | ** ** |
| ** **        | ** ** | **Options**           | ** ** | **in Fiscal**  | ** ** | **Price**     | ** ** | **Expiration** | ** ** | **Option Term** | ** ** |
| **Name**          | ** ** | **Granted**           | ** ** | **Year**       | ** ** | **Per Share** | ** ** | **Date**       | ** ** | **5%** | ** ** | **10%** | ** ** |
| Rhett Williams    |       | 0                     |       | —         |       | —        |       | —         |       | — |   | — |   |
| Cameron Mackenzie |       | 150,000               |       | 25.8           | %          | $             | 0.61       |           | 9/29/2014  |   | 91,245 |   | 95,715 |   |
| Rebecca Markovits |       | 0                     |       | —         |       | —        |       | —         |       | — |   | — |   |
| Matt S. Nydell    |       | 0                     |       | —         |       | —        |       | —         |       | — |   | — |   |
| Raymond Walsh     |       | 0                     |       | —         |       | —        |       | —         |       | — |   | — |   |
| Dick Theunissen   |       | 0                     |       | —         |       | —        |       | —         |       | — |   | — |   |
|                   |            |                       |            |                |            |               |            |                |            |  |  |  |  |  |

 

**OptionExercises and Fiscal Year-End Option Values**

 

None of our named executive officers exercised any stock options during2004.  The following table presentssummary information with respect to stock options owned by our named executiveofficers at December 31, 2004.  Wehave calculated the value of unexercised in-the-money options based on theclosing price of the stock on the Nasdaq SmallCap Market® on December 31,2004 of $0.85 per share.  The actualvalue of the stock options will depend upon the market value of the shares thatcan be purchased under the option at a future date.

 

Aggregated Option Exercises inLast Fiscal Year and Fiscal Year-End Option Values 

 
| ** **        | ** ** | **Number of**   | ** ** | ** **      | ** ** | **Number of securities underlying** | ** ** | ** **                                 | ** ** | ** **      | ** ** |
|-------------------|------------|-----------------|------------|-----------------|------------|-------------------------------------|------------|--------------------------------------------|------------|-----------------|------------|
| ** **        | ** ** | **shares**      | ** ** | ** **      | ** ** | **unexercised options at**          | ** ** | **Value of unexercised in-the-money**      | ** ** |
| ** **        | ** ** | **acquired on** | ** ** | **Value**       | ** ** | **December 31, 2004**     | ** ** | **options at December 31, 2004** | ** ** |
| **Name**          | ** ** | **exercise**    | ** ** | **Realized($)** | ** ** | **Exercisable**                     | ** ** | **Unexercisable**                          | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
| Rhett Williams    |       | —          |       | —          |       | 756,563                             |       | 733,437                                    |       | 178,389         |       | 170,311 |   |
| Cameron Mackenzie |       | —          |       | —          |       |                                |       | 150,000                                    |       |            |       | 36,000 |   |
| Rebecca Markovits |       | —          |       | —          |       | 152,917                             |       | 137,500                                    |       | 4,375           |       | 2,625 |   |
| Matt Nydell       |       | —          |       | —          |       | 738,050                             |       | 139,584                                    |       | 43,500          |       |   |   |
| Raymond Walsh     |       | —          |       | —          |       | 264,925                             |       | 210,417                                    |       | 34,375          |       | 20,625 |   |
| Dick Theunnissen  |       | —          |       | —          |       | 132,525                             |       | 135,418                                    |       | 9,583           |       | 10,417 |   |

 

*1998 Stock Option and Restricted Stock Plan.*    In1998 we adopted the Amended and Restated 1998 Stock Option and Restricted StockPlan (the “1998 Option Plan”), which allows us to issue restricted shares ofour common stock or options to purchase shares of our common stock.  The total number of shares of our commonstock available for issuance under the 1998 Option Plan is 9,200,000, no morethan 125,000 of which may be issued in the form of restricted commonstock.  No person may be granted morethan 125,000 shares of restricted stock or options to purchase more than1,000,000 shares of stock in any calendar year.

 

The 1998 Option Plan is administered by the compensation committee.  Except as described in the plan, ourcompensation committee determines the grantees, the type of grant, number ofshares subject to each grant, and the term, exercise price, and vestingschedules for each grant.  All of ouremployees are eligible to participate under the 1998 Option Plan.  The maximum term of options granted under the1998 Option Plan is ten years plus one month.

 

Options to purchase 7,444,133 shares of common stock wereissued and outstanding under the 1998 Option Plan as of March 1, 2005.

 

58

----

 

All of theseoptions are subject to vesting requirements based on continued employment,typically vesting over four years. Option agreements governing options granted to VIA employees generallyprovide for the acceleration of the vesting period if there is a change ofcontrol of VIA in which we are not the surviving company, except if thesurviving company assumes the obligations under existing option grants, anequivalent and substitute option in stock in the surviving company is provided,or VIA’s board of directors determines that the change of control will nottrigger accelerations of the options. Options granted prior to our initial public offering onFebruary 11, 2000 have an exercise price equal to what the board ofdirectors determined the fair market value of the common stock to be on thedate of the grant.  Options granted afterthe date of our initial public offering have an exercise price equal to theclosing price for our stock on the Nasdaq Small Cap Market® on the last tradingday immediately prior to the date of grant. 732,500 option awards were made underthe 1998 plan in 2004.

 

*Amended and Restated Key Employee Equity Plan.*    During1998, the Company adopted the V-I-A Internet Inc.  Key Employee Equity Plan (the “KEEP”), anincentive plan to attract and retain qualified officers, key employees,directors and other persons at VIA and our operating companies.  The KEEP provides for the granting of stockoptions to key employees of VIA.  Rightsare granted with an exercise price as determined by the Company’s board ofdirectors.  As of December 31, 2000,the Company had reserved 800,000 common shares for issuance under theKEEP.  On August 9, 2001, VIAamended the KEEP to permit, among other things, grants of non-incentive stockoptions to employees, consultants or advisors, other than to directors andofficers, of VIA.  Options granted underthe amended KEEP will vest over such periods as may be determined by the boardof directors and will generally have an exercise price equal to the closingprice for our stock on the Nasdaq Small Cap Market® on the last trading dayimmediately prior to the date of grant. As of December 31, 2002, the Company had reserved 214,517 commonshares for issuance under the amended KEEP. No options awards were made under the amended KEEP in 2004.

 

Our compensation committee, which administers the amended KEEP, has fullpower and final authority to designate the grantees, to determine the number ofpurchase options awarded and to determine the terms and conditions relating tothe vesting, exercise, transfer or forfeiture of the grant, including the exerciseprice.

 

**EmploymentAgreements and Terminations of Employment and Change-in-Control Arrangements**

 

In connection with his appointment as President and ChiefExecutive Officer, VIA entered into an employment agreement with Mr. Walsheffective as of January 25, 2005.  Underthe terms of the agreement, Mr. Walsh is entitled to an annual base salary ofnot less than $300,000 and is eligible to an annual discretionary bonus of upto 100% of his base salary.  In addition,Mr. Walsh is entitled to an annual net payment of $95,000 and tax equalizationbenefits as an expatriate under VIA’s International Assignment Policy.  The agreement provides that VIA may terminateMr. Walsh’s employment at any time without notice.  If VIA terminates his employment withoutcause, Mr. Walsh will be entitled to a severance payment equal to twelve monthsof his base salary at the time of such termination.

 

In connection with his appointment as Chief Financial Officer, VIA enteredinto an employment agreement with Mr. Mackenzie effective as of November 1,2004.  Under the terms of the agreement,Mr. Mackenzie is entitled to an annual base salary of not less than poundssterling 130,000 and, in line with VIA’s corporate bonus policy, an annualdiscretionary performance bonus of up to 50% of his base salary.  The agreement provides that until June 1,2005 VIA may terminate Mr. Mackenzie’s employment on three months’ notice.  After June 1, 2005, provided thatsatisfactory performance has been achieved and is confirmed by the CEO and theBoard of Directors, the notice period will be increased to six months. Mr. Mackenzie may terminate his employment at any time on three months’ notice.

 

In connection with his continued employment with VIA as Senior VicePresident, General Counsel and Secretary, VIA entered into an employmentagreement with Mr. Nydell effective as of April 24, 2002, or the 2002Agreement.  Under terms of the 2002Agreement, Mr. Nydell is entitled to an annual base salary of not lessthan $225,000 and he is eligible to participate in all bonus programsapplicable to senior executives of the Company. The agreement provides that if Mr. Nydell is terminated withoutcause or if, after October 31, 2002, Mr. Nydell terminates hisemployment with VIA, he will be entitled to severance benefits consisting of:(a) one-year of his base salary, (b) continuation of health, dental,life accidental death and disability, and long- and short-term disabilityinsurance for one-year or a lump sum payment in lieu of the coverage, and (c) apro-rated bonus applicable to the calendar year when he is terminated. Inaddition, should Mr. Nydell be terminated by VIA without cause or shouldhe terminate his employment with good reason, all stock options previouslygranted to Mr. Nydell shall be deemed fully vested on his termination dateand the exercise period shall be extended to one year from the terminationdate.

 

On February 11, 2005, Mr. Nydell and VIA entered into an agreement tomodify the 2002 Agreement.  Under theterms of the modification, Mr. Nydell agreed to forgo the severance benefitsnoted under (a) and (b) in the preceding paragraph in exchange for a payment byVIA of $245,000 representing the value of (a) and (b) in total.  Under the modification, VIA and Mr. Nydellreleased each other of any claims either may have had against each other as ofthat date.  On February 11, 2005, Mr.Nydell and VIA also entered into a further letter agreement to clarify certainterms of the 2002 Agreement.  Under thisagreement, Mr. Nydell agreed to remain in the employment of VIA through May 31,2005.  In exchange for his agreement, VIAagreed to pay Mr. Nydell a retention bonus equal to 43% of his annual bonuseligibility, in lieu of any normal annual bonus eligibility for the same periodof time.

 

59

----

 

Under his original engagement with the Company in 2002, VIA entered intoan employment agreement with Dick Theunissen on December 1, 2002 for anindefinite period term.  The agreementprovides that the Company may terminate his employment by delivering therequisite statutory notice under Dutch law. Mr. Theunissen has since been promoted to Vice President &President, Amen S.A.S. with the Company’s acquisition of the Amen groupcompanies. Under this agreement and amendments thereto, Mr. Theunissen isentitled to a salary at an annualized rate of Euro 170,000 and an annualdiscretionary performance bonus of up to 50% of his base salary, based in equalparts of achieving individual and corporate goals.

 

Consistent with prior practice for specified senior officers, all optionagreements governing options granted to the chief executive officer and to eachvice president reporting to the chief executive officer provide for theacceleration of the vesting period of the options if there is a “change ofcontrol” (as defined in the agreements) in which VIA is not the survivingcompany.  However, the option agreementsfurther provide that no acceleration of vesting will occur if the optioneecontinues with the surviving company in an equivalent position or role for aperiod of not less than one year.

 

**Compensationof Directors**

 

In January of 2004, the board of directors adopted a new compensationpolicy for members of our board of directors. The compensation policy provides that each non-executive member of theboard shall be compensated for services on the board as follows:

 

Chairman: The chairman of the board of directors shall be paid a cashretainer of pounds sterling 60,000 for all services rendered in that capacityas well as services on all committees of the board on which he or she serves.

 

Non-executive members: Upon initially joining the board, eachnon-executive member shall be entitled to receive a grant of options for theright to purchase 100,000 shares of common stock of the Company, par value($.001) at an exercise price equal to closing price of the stock on the NasdaqSmallCap market as of the day immediately prior to the date of grant, andsubject to a three year vesting period, with the first 1/3 of theoptions subject to the grant vesting as of the expiration of twelve months fromthe first day of the month of the grant and the remainder of the optionsvesting in equal portions over the remaining twenty-four month period.

 

Annually, each non-executive member (including our non-executive chairman)shall be entitled to receive (a) a cash retainer in the amount of poundssterling 25,000 payable for continuous service in each 12 month calendarperiod; plus (b) an option to purchase 25,000 shares of stock to be grantedprior to the end of the first calendar quarter, at an exercise price equal tothe market price of the stock, and subject to a three year vesting period, withthe first 1/3 of the options subject to the grant vesting as of theexpiration of twelve months from the first day of the month of the grant andthe remainder of the options vesting in equal portions over the remainingtwenty-four month period.

 

In addition, the chairman of the audit committee of the board of directorsshall be entitled to receive a further cash stipend in the amount of poundssterling 5,000.  The chairman of thecompensation committee shall be entitled to receive an additional grant of5,000 stock options.

 

No options have been granted to the board of directors for the year todate 2005.

 

**COMPENSATION COMMITTEE INTERLOCKS ANDINSIDER PARTICIPATION**

** **

Nomember of our compensation committee has been employed by or served as anofficer of VIA or our subsidiaries, or has had any relationship requiringdisclosure in “Related Transactions.”

 

**ITEM 12****       SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND RELATED STOCKHOLDER MATTERS**

 

The following table shows the number and percentage of outstanding sharesof our common stock that were owned as of March 31, 2005 by:

 

•                                          each person who we know to be the beneficialowner of more than 5% of our outstanding common stock

 

•                                          each of our directors and named executiveofficers, and

 

•                                          all of our directors and executive officersas a group.

 

60

----

 

As of March 31, 2005, there were 56,053,988 shares of voting common stockand 5,050,000 shares of non-voting common stock outstanding.

 

The total number of shares of common stock outstanding used in calculatingthe percentage owned by each person includes the shares of common stockissuable upon conversion of our non-voting common stock or upon the exercise ofoptions held by that person that are exercisable as of May 31, 2005.

 

Unless indicated otherwise below, the address for our directors andofficers is c/o VIA NET.WORKS, Inc., H. Walaardt Sacréstraat 401 1117 BMSchiphol, The Netherlands.  Except asindicated below, the persons named in the table have sole voting and investmentpower with respect to all shares of common stock beneficially owned by them. 

 
| **Name**                                                                   | ** ** | **Number of Shares  Beneficially Owned** | ** ** | **Percentage of Shares  Beneficially Owned** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------------|------------|----------------------------------------------|------------|
| Norwest  Equity Capital, LLC and related entity(1)                         |       | 6,978,644                                |       | 12.45                                        | %          |
| John E. Lindahl, George J. Still, Jr. and  John P. Whaley(1)               |       | 6,978,644                                |       | 12.45                                        | %          |
| HarbourVest International Private Equity  Partners III-Direct Fund L.P.(2) |       | 3,833,334                                |       | 6.84                                         | %          |
| Raymond Walsh (3)                                                          |       | 315,272                                  |       | *                                            |       |
| Cameron Mackenzie (4)                                                      |       | 0                                        |       | *                                            |       |
| Matt S. Nydell (5)                                                         |       | 805,704                                  |       | *                                            |       |
| Rebecca Markovits (6)                                                      |       | 184,167                                  |       | *                                            |       |
| Dick Theunissen (7)                                                        |       | 160,305                                  |       | *                                            |       |
| Michael McTighe(8)                                                         |       | 394,580                                  |       | *                                            |       |
| Malcolm Bell (9)                                                           |       | 75,000                                   |       | *                                            |       |
| Jan Gesmar-Larsen (10)                                                     |       | 163,889                                  |       | *                                            |       |
| Karen Slatford (11)                                                        |       | 63,889                                   |       | *                                            |       |
| John Steele (12)                                                           |       | 118,194                                  |       | *                                            |       |
| Rhett Williams (13)                                                        |       | 1,001,304                                |       | *                                            |       |
| All directors and executive officers as a  group (11 persons) (14)    |       | 3,282,304                                |       | 5.86                                         | %          |

 

----

*Less than 1%.

 

(1)          This amount consists of 5,050,000 shares of common stock issuable uponthe conversion of shares of non-voting common stock held by Norwest EquityCapital, LLC, 1,842,751 shares of common stock held by Norwest Equity Capitaland 291,928 shares of common stock held by Norwest Venture Partners VI, L.P. Asthe managing member of Norwest Equity Capital, LLC, Itasca NEC, LLC has votingand investment power over the shares of stock held by Norwest Equity Capitaland may therefore be deemed to be the beneficial owner of these shares.Messrs. Lindahl, Still and Whaley share voting and investment power overshares held by Norwest Equity Capital and may also therefore be deemed tobeneficially own these shares. Itasca and each of Messrs. Lindahl, Stilland Whaley disclaim beneficial ownership of these shares except to the extentof its or his pecuniary interest in them. In addition, Messrs. Still andWhaley share voting and investment power over shares beneficially owned byNorwest Venture Partners VI, and each disclaims beneficial ownership of theseshares except to the extent of his pecuniary interest in them.Mr. Torgerson does not have voting or investment power over any of theseshares. The address for each of Norwest Equity Capital, Itasca, andMessrs. Lindahl and Whaley is 3600 IDS Center, 80 South 8th St.,Minneapolis, Minnesota 55402. The address for Mr. Still is525 University Avenue, Suite 800, Palo Alto, California 94301.

 

(2)          Voting and investment power over these shares is held jointly byMr. Edward Kane and Mr. Brooks Zug, the managing members ofHarbourVest Partners, LLC, which is the managing member of HIPEP III—DirectAssociates LLC, which in turn is the general partner of HarbourVest InternationalPrivate Equity Partners III-Direct Fund L.P. Each of Messrs. Kane and Zugdisclaims beneficial ownership of these shares except to the extent of hispecuniary interest in them. The address of HarbourVest International PrivateEquity Partners III and of Messrs. Kane and Zug is c/o HarbourVestPartners, LLC, One Financial Center, 44th Floor, Boston, Massachusetts 02111.

 

(3)          Includes 315,272 shares of common stock issuable upon the exercise ofoptions held by Mr. Walsh that will be exercisable as of May 31, 2005.

 

(4)          Includes 0 shares of common stock issuable upon the exercise of optionsheld by Mr. Mackenzie that will be exercisable as of May 31, 2005.

 

(5)          Includes 78,742 shares of common stock held by Mr. Nydell and726,962 shares of common stock issuable upon the exercise of options held byMr. Nydell that will be exercisable as of May 31, 2005.

 

61

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(6)          Includes 184,167 shares of common stock issuable upon the exercise ofoptions held by Ms. Markovits that will be exercisable as of May 31, 2005.

 

(7)          Includes 160,305 shares of common stock issuable upon the exercise ofoptions held by Mr. Theunissen that will be exercisable as of May 31,2005.

 

(8)          Includes 71,776 shares of common stock held by Mr. McTighe and 322,804shares of common stock issuable upon the exercise of options held byMr. McTighe that will be exercisable as of May 31, 2005.

 

(9)          Includes 75,000 shares of common stock issuable upon the exercise ofoptions held by Mr. Bell that will be exercisable as of May 31, 2005.

 

(10)    Includes 100,000 shares of common stock held by Mr. Gesmar-Larsen and63,889 shares of common stock issuable upon the exercise of options held byMr. Gesmar-Larsen that will be exercisable as of May 31, 2005.

 

(11)    Includes 63,889 shares of common stock issuable upon the exercise ofoptions held by Ms. Slatford that will be exercisable as of May 31, 2005.

 

(12)    Includes 118,194 shares of common stock issuable upon the exercise ofoptions held by Mr. Steele that will be exercisable as of May 31, 2005.

 

(13)    Includes 90,400 shares of common stock held by Mr. Williams and 910,904shares of common stock issuable upon the exercise of options held by Mr.Williams that will be exercisable as of May 31, 2005.

 

(14)    Includes 3,282,304 shares of common stock currently held and issuableupon the exercise of options as of May 31, 2005 by our directors and executiveofficers.

 

*Information regarding our equity compensationplans as of December 31, 2004*

 

**Equity Compensation Plan Information**

 

The following table provides information regarding our equity compensationplans as of December 31, 2004. 

 
| **Equity Compensation Plan Information**               | ** ** |
|-------------------------------------------------------------|------------|
| **Plan  category**                                          | ** ** | **Number of securities to  be issued upon exercise  of outstanding options,  warrants and rights  (a)** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights  (b)** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected in  column (a))  (c)** | ** ** |
| Equity compensation plans approved by  security holders     |       | 7,668,435 |   | 2.63 |   | 1,531,565 |   |
| Equity compensation plans not approved by  security holders |       | — |   | — |   | 214,517 |   |
| Total                                                       |       | 7,668,435 |   |   |   | 1,746,082 |   |

 

During 1998, the Company adopted the V-I-AInternet Inc.  Key Employee EquityPlan (the “KEEP”), an incentive plan to attract and retain qualifiedofficers, key employees, directors and other persons at VIA and our operatingcompanies.  The KEEP provides for thegranting of stock options to key employees of VIA.  Rights are granted with an exercise price asdetermined by the Company’s board of directors. On August 9, 2001, VIA amended the KEEP to permit, among otherthings, grants of non-incentive stock options to employees, consultants oradvisors, other than to directors and officers, of VIA.  Options granted under the amended KEEP willvest over such periods as may be determined by the board of directors and willgenerally have exercise price equal to the closing price for our stock on theNASDAQ Small Cap Market® on the last trading day immediately prior to the dateof grant.  As of December 31, 2004,the Company had reserved 214,517 common shares for issuance under the amendedKEEP. No options awards were made under the amended KEEP in 2004.

 

62

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**ITEM13****  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

 

*Information regarding certain relationshipsand related transactions*

 

None

 

**ITEM14****  PRINCIPAL ACCOUNTING FEES AND SERVICES**

 

*Information regarding principal accountingfees and services*

 

Aggregate fees paid by the Company for the fiscal years endedDecember 31, 2003, and 2004 to the Company’s principal accounting firm,Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu,and their respective affiliates (collectively, “Deloitte & Touche”): 
| **Fees  Paid to Deloitte & Touche** | ** ** | **2003** | ** ** | **2004** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
| Audit Fees                              |       | $        | 1,349,000  |     | $          | 1,508,000 |   |
| Audit-related services                  |       | 0        |       | $        | 5,000      |   |
| Tax Fees                                |       | $        | 244,000    |     | $          | 267,000 |   |
| Other                                   |       | $        | 28,000     |     | $          | 12,000 |   |

 

The amounts shown above include out-of-pocket expenses incurred byDeloitte & Touche LLP in connection with the provision of suchservices.

 

*Audit Fees*

 

Consists of professional services rendered for the audits of theconsolidated financial statements of the Company, quarterly reviews, statutoryaudits, issuance of comfort letters, consents, income tax provision procedures,and assistance with and review of documents filed with the SEC.

 

*Tax Fees*

 

Tax Fees relate to tax planning and advice in the U.S.  and the Europe, including assistance with taxaudits and appeals and the review of filings with the federal and certainstate, provincial or other applicable governments.

 

*Other Fees*

All Other Fees in 2003 related to primarily to assistance with outsourcingplanning.

 

**Pre-approvalProcedures for Services**

 

Theaudit committee approves all audit and non-audit related services.  On an annual basis the audit committeereviews and approves prior to its commencement, any audit work conducted by itsauditors as a part of the annual consolidated financial statements of theCompany.  Generally, the audit committeeand the Company prohibit its auditors from conducting any non-audit relatedservices and instead engage a third-party accounting firm to conduct anynon-audit related work.

 

63

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**PART IV**

 

**ITEM15****  EXHIBITS, FINANCIAL STATEMENT SCHEDULES ANDREPORTS ON FORM 8-K**

 

a.                                       Documents filedas a part of this report.

 

1.             FINANCIALSTATEMENTS

 

See Index to Consolidated Financial Statements on page F-1, which isincorporated herein by reference.

 

2.             EXHIBITS

 

See Index to Exhibits on page E-1, which is incorporated herein byreference.

 

b.                                      Reports onForm 8-K.

 

VIA filed four reports on Form 8-K during the three months endedDecember 31, 2004. On October 1, 2004, we filed a Form 8-Kannouncing that, on September 28, 2004, we sold 100% of the shares of VIANET.WORKS UK Ltd, which was part of the European segment, to Claranet Limited.On October 14, 2004, we filed an amended Form 8-K to correct an error in thecalculation of the estimated gain on disposal of the shares of VIA NET.WORKS UKLtd to Claranet Limited and to exclude the estimated gain on the disposal fromthe pro forma consolidated statement of operations. On November 12, 2004, wefiled a Form 8-K regarding the official appointment of the interim ChiefFinancial Officer as Chief Financial Officer. On December 17, 2004, we filed aForm 8-K announcing the receipt of a letter from the NASDAQ Stock Marketgranting VIA a second 180-day extension, to June 10, 2005, to regain compliancewith NASDAQ’s minimum price bid requirement.

 

64

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, VIA NET.WORKS, Inc. has duly caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|                 | VIA NET.WORKS, INC. |
|----------------------|---------------------|
|                 |                |
|                 |                |
|                 | By:                 | /s/ RAY WALSH |   |
| ** **           |                | **Ray Walsh** |   |
| Date: April 25, 2005 |                | **Chief Executive Officer** |   |

 

Pursuant to the requirement of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of VIANET.WORKS, Inc. and in the capacities indicated as of April 25, 2005,unless otherwise stated.

 
| /s/ RAY WALSH          |   | Chief Executive Officer (Principal Executive Officer) (appointed as  of                |
|------------------------|--------|----------------------------------------------------------------------------------------|
| **Ray Walsh**          |   | January 25, 2005)                                                                      |
| ** **             |   |                                                                                   |
| /s/ CAMERON MACKENZIE  |   | Chief Financial Officer (Principal Financial and Accounting Officer)  (appointed as of |
| **Cameron Mackenzie**  |   | November 9, 2004)                                                                      |
| ** **             |   |                                                                                   |
| /s/ MICHAEL MCTIGHE    |   | Chairman of the Board of Directors                                                     |
| **Michael McTighe**    |   |                                                                                   |
| ** **             |   |                                                                                   |
| /s/ JOHN STEELE        |   | Director                                                                               |
| **John Steele**        |   |                                                                                   |
| ** **             |   |                                                                                   |
| /s/ KAREN SLATFORD     |   | Director                                                                               |
| **Karen  Slatford**    |   |                                                                                   |
| ** **             |   |                                                                                   |
| /s/ MALCOLM  BELL      |   | Director                                                                               |
| **Malcolm Bell**       |   |                                                                                   |
| ** **             |   |                                                                                   |
| /s/ JAN GESMAR-LARSEN  |   | Director                                                                               |
| **Jan  Gesmar-Larsen** |   |                                                                                   |

 

65

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**EXHIBIT INDEX**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                               |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                     |
| 3.1         |       | Amended and Restated Certificate of Incorporation of VIA  NET.WORKS, Inc. (1)                                                                                                  |
| 3.2         |       | Amended and Restated Bylaws of the VIA NET.WORKS, Inc. (2)                                                                                                                     |
| 10.1*       |       | Amended and Restated 1998 Stock Option and Restricted Stock  Plan (2)                                                                                                               |
| 10.2*       |       | Form of 1998 Stock Option and Restricted Stock Plan Incentive Stock  Option Agreement for Executive employee (4)                                                                    |
| 10.3*       |       | Form of 1998 Stock Option and Restricted Stock Plan Incentive Stock  Option Agreement for non-executive employee (4)                                                                |
| 10.4*       |       | Key Employee Equity Plan, as amended (5)                                                                                                                                            |
| 10.5*       |       | Amendment No. 2 to Key Employee Equity Plan (2)                                                                                                                                     |
| 10.6        |       | Form of Purchase Agreement by and between VIA and its preferred  stockholders (3)                                                                                                   |
| 10.7**      |       | Indefeasible Right of Use Agreement in Inland Capacity (United  Kingdom), dated as of June 21, 1999, by and between GT U.K. Ltd. and VIA  NET.WORKS Europe Holding B.V. (5)    |
| 10.8**      |       | Indefeasible Right of Use Agreement in Inland Capacity (United  States), dated as of June 21, 1999, by and between GT Landing Corp. and  VIA NET.WORKS Europe Holding B.V. (5) |
| 10.9**      |       | Capacity Purchase Agreement, dated as of June 21, 1999, by and  between Atlantic Crossing Ltd. And VIA NET.WORKS Europe Holding B.V. (5)                                            |
| 10.10**     |       | Customer Agreement for an IRU Capacity, dated as of July 21, 1999, by  and between iaxis Limited and VIA NET.WORKS, Europe Holding B.V. (5)                                         |
| 10.11**     |       | Software License and Support Agreement by and between Portal  Software, Inc. and VIA Net Works, U.K. Limited, dated as of October 29,  1999 (5)                                |
| 10.12       |       | Distribution and Revenue Sharing Agreement, dated as of June 30,  1999, by and between Trellix Corporation and VIA  NET.WORKS, Inc. (5)                                        |
| 10.13       |       | Amended and Restated Stockholders Agreement by and among VIA  NET.WORKS, Inc. and the additional parties named therein, dated as of  April 20, 1999 (5)                        |
| 10.14       |       | Registration Rights Agreement by and among VIA NET.WORKS, Inc.  and the stockholders named therein (4)                                                                         |
| 10.15       |       | Transit Service Agreement, dated as of August 1, 1999, between  Verio Inc. and VIA NET.WORKS, Inc. (5)                                                                    |
| 10.16*      |       | Employee Letter Agreement between VIA and Antonio Tavares (4)                                                                                                                       |
| 10.17*      |       | Employee Confidentiality Agreement between VIA and Antonio  Tavares (4)                                                                                                             |
| 10.18*      |       | Retention Agreement by and between Dialdata and Antonio  Tavares (4)                                                                                                                |
| 10.19*      |       | Termination Agreement by and between Dialdata and Antonio  Tavares (4)                                                                                                              |
| 10.20*      |       | Form of Indemnification Agreement by and between VIA and its officers  and directors (2)                                                                                            |
| 10.21*      |       | Compromise Agreement dated November 19, 2001 between VIA  NET.WORKS, Inc. et al and Peter Shephard (6)                                                                         |
| 10.22*      |       | Employment Separation Agreement and Mutual Release between VIA  NET.WORKS, Inc. and David M. D’Ottavio (6)                                                           |
| 10.23*      |       | Letter Agreement dated January 18, 2002 between VIA  NET.WORKS, Inc. and Karl Maier (6)                                                                                        |
| 10.24*      |       | Employment Separation Agreement and Mutual Release between VIA  NET.WORKS, Inc. and Michael J. Simmons (6)                                                                |

 

66

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| **Exhibit** | ** ** | ** **                                                                                                                                          |
|-------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                |
| 10.25*      |       | Employment Separation Agreement and Mutual Release between VIA  NET.WORKS, Inc. and Catherine A. Graham (6)                          |
| 10.26*      |       | Employment Agreement dated April 24, 2002 between VIA  NET.WORKS, Inc. and Matt S. Nydell (7)                                        |
| 10.27*      |       | Employment Agreement dated April 24, 2002 between VIA  NET.WORKS, Inc. and Karl Maier (7)                                            |
| 10.28*      |       | Employment Agreement dated March 28, 2002 between VIA NET.WORKS, Inc.  and Ben Buttolph (8)                                          |
| 10.29*      |       | Employment Agreement dated October 30, 2002 between VIA  NET.WORKS, Inc. and Rhett S. Williams (8)                                   |
| 10.30*      |       | Employment Agreement dated January 7, 2003 between VIA  NET.WORKS, Inc. and Fraser Park (8)                                               |
| 10.31*      |       | Separation and Release Agreement dated February 21, 2003 between VIA  NET.WORKS, Inc. and Karl Maier (8)                                  |
| 10.32*      |       | Consultant Agreement dated September 12, 2002 between VIA  NET.WORKS, Inc. and Mike McTighe (8)                                           |
| 10.33**     |       | Master Services Agreement between Dimension Data Network Services  Limited and VIA NET.WORKS Europe Holding B.V. effective as of May 13,  2003 |
| 10.34**     |       | Software License Agreement between Inovaware Corporation and VIA  NET.WORKS, Inc. effective as of May 14, 2003 (9)                   |
| 10.35**     |       | Master Services Agreement between Accenture and VIA NET.WORKS, Inc.  effective as of July 30, 2003 (10)                                   |
| 10.36*      |       | Employment Agreement dated November 9, 2004 between VIA NET.WORKS,  Inc. and Cameron Mackenzie (11)                                                 |
| 10.37*      |       | Employment agreement dated February 11, 2005 between VIA NET.WORKS,  Inc. and Matt S. Nydell                                                        |
| 10.38*      |       | Agreement and release of claims dated  April 22, 2005 between VIA NET.WORKS, Inc. and Matt S.  Nydell                                               |
| 21.1        |       | List of Subsidiaries                                                                                                                                |
| 23.1        |       | Consent of the Independent Registered Public Accounting Firm                                                                                        |
| 31.1        |       | Certification of Chief Executive Officer pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002                                                 |
| 31.2        |       | Certification of Interim Chief Financial Officer pursuant to Section  302 of the Sarbanes-Oxley Act of 2002.                                        |
| 32          |       | Written Statement of Chief Executive Officer and Chief Financial Officer  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                 |

 

----

(1)                                  Incorporated byreference to VIA’s annual report on Form 10-K for the period endedDecember 31, 1999.

 

(2)                                  Incorporated byreference to VIA’s registration statement on Form S-1, FileNo. 333-91615, as filed with the SEC on January 19, 2000.

 

(3)                                  Incorporated byreference to VIA’s registration statement on Form S-1, FileNo. 333-91615, as filed with the SEC on February 8, 2000.

 

(4)                                  Incorporated byreference to VIA’s registration statement on Form S-1, FileNo. 333-91615, as filed with the SEC on January 3, 2000.

 

(5)                                  Incorporated byreference to VIA’s registration statement on Form S-1, FileNo. 333-91615, as filed with the SEC on November 24, 1999.

 

(6)                                  Incorporated byreference to VIA’s annual report on Form 10-K for the period endedDecember 31, 2001.

 

(7)                                  Incorporated byreference to VIA’s quarterly report on Form 10-Q for the period endedJune 30, 2002.

 

(8)                                  Incorporated byreference to VIA’s annual report on Form 10-K for the period endedDecember 31, 2002.

 

67

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(9)                                  Incorporated byreference to VIA’s quarterly report on Form 10-Q for the period endedJune 30, 2003.

 

(10)                            Incorporated by referenceto VIA’s quarterly report on Form 10-Q for the period endedSeptember 30, 2003.

 

(11)                            Incorporated by referenceto VIA’s current report on Form 8-K as of date November 12, 2004.

 

*                                         Management orcompensatory contract or plan.

 

**                                  Confidentialtreatment has been granted for portions of this exhibit.

 

68

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**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| Report of the Independent Registered Public  Accounting Firm                                                    |   |
|-----------------------------------------------------------------------------------------------------------------|--------|
| Consolidated Financial Statements:                                                                              |   |
| Consolidated Balance Sheets as of December 31, 2003 and 2004                                                    |   |
| Consolidated Statements of Operations for  the years ended December 31, 2002, 2003 and 2004                |   |
| Consolidated Statements of Stockholders’  Equity for the years ended December 31, 2002, 2003 and 2004 |   |
| Consolidated Statements of Cash Flows for  the years ended December 31, 2002, 2003 and 2004                |   |
| Notes to the Consolidated Financial  Statements                                                                 |   |

 

All financial statement schedules are omitted because they are notrequired, are not applicable or the information is included in the consolidatedfinancial statements or notes thereto.

 

F-1

----

 

REPORT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM

 

To the Board of Directors and Stockholders ofVIA NET.WORKS, IncSchiphol, The Netherlands

 

We have audited the accompanying consolidated balancesheets of VIA NET.WORKS, Inc and subsidiaries ( the “Company”) as of December31, 2004 and 2003, and the related consolidated statements of operations,stockholders’ equity, and cash flows for each of the three years in the periodended December 31, 2004.  These financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.

 

We conducted our audits in accordance with standardsof the Public Company Accounting Oversight Board (United States).  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  The Company is not required to have, nor were we engaged toperform, an audit of its internal control over financial reporting. Our auditsincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includes assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation.  We believe that our audits providea reasonable basis for our opinion.

 

In our opinion, such consolidated financialstatements present fairly, in all material respects, the financial position ofthe Company as of December 31, 2004 and 2003, and the results of its operationsand its cash flows for each of the three years in the period ended December 31,2004, in conformity with accounting principles generally accepted in the UnitedStates of America.

 

The accompanying consolidated financial statements forthe year ended December 31, 2004 have been prepared assuming that the Companywill continue as a going concern. * *As discussed in Note 1 to the financial statements, the Company’srecurring losses from operations as well as its difficulty in generatingsufficient cash flow to meet its obligations and sustain operations**raise substantial doubt about itsability to continue as a going concern. Management’s plans concerning these matters are also described in Note1.  The consolidated financial statementsdo not include any adjustments that might result from the outcome of thisuncertainty.

 

DELOITTE & TOUCHE LLP

London, England

 

April25, 2005

 

F-2

----

 

**VIA NET.WORKS, INC.**

**CONSOLIDATED BALANCE SHEETS**

**(In thousands of U.S. dollars, except sharedata)**

 
| ** **                                                                                                           | ** ** | **December 31,  2003** | ** ** | **December 31,  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
|                                                                                                                 |       |                        |       |                        |       |
| **ASSETS**                                                                                                           |       |                        |       |                        |       |
| Current assets:                                                                                                      |       |                        |       |                        |       |
| Cash and cash equivalents                                                                                            |       | $                           | 65,803     |                        | $          | 15,497 |   |
| Restricted cash                                                                                                      |       | 1,391                       |       | 5,100                       |       |
| Trade and other accounts receivable, net of  allowance of $1,911 and $2,966 respectively                             |       | 14,295                      |       | 13,909                      |       |
| Other current assets                                                                                                 |       | 4,542                       |       | 6,972                       |       |
|                                                                                                                 |       |                        |       |                        |       |
| Total current assets                                                                                                 |       | 86,031                      |       | 41,478                      |       |
| Property and equipment, net                                                                                          |       | 12,003                      |       | 13,065                      |       |
| Goodwill                                                                                                             |       | 3,111                       |       | 42,466                      |       |
| Intangible assets, net                                                                                               |       | 731                         |       | 8,695                       |       |
| Other non-current assets                                                                                             |       | 884                         |       | 444                         |       |
| Deferred tax asset                                                                                                   |       | 7,928                       |       | 14,305                      |       |
|                                                                                                                 |       |                        |       |                        |       |
| Total assets                                                                                                         |       | $                           | 110,688    |                        | $          | 120,453 |   |
|                                                                                                                 |       |                        |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                        |       |                        |       |                        |       |
| Current liabilities:                                                                                                 |       |                        |       |                        |       |
| Accounts payable                                                                                                     |       | $                           | 10,021     |                        | $          | 16,899 |   |
| VAT and other taxes payable                                                                                          |       | 1,303                       |       | 1,083                       |       |
| Current portion of capital lease  obligations and long-term payables                                                 |       | 173                         |       | 9,325                       |       |
| Deferred revenue                                                                                                     |       | 13,264                      |       | 15,591                      |       |
| Accrued expenses                                                                                                     |       | 7,659                       |       | 24,451                      |       |
| Deferred tax liability                                                                                               |       | 7,928                       |       | 13,772                      |       |
| Other current liabilities                                                                                            |       | 1,848                       |       | 3,744                       |       |
|                                                                                                                 |       |                        |       |                        |       |
| Total current liabilities                                                                                            |       | 42,196                      |       | 84,865                      |       |
| Capital lease obligations and long-term  payables, less current portion                                              |       | 328                         |       | 344                         |       |
| Deferred tax liability                                                                                               |       | —                      |       | 2,639                       |       |
|                                                                                                                 |       |                        |       |                        |       |
| Total liabilities                                                                                                    |       | 42,524                      |       | 87,848                      |       |
|                                                                                                                 |       |                        |       |                        |       |
| Commitments and contingencies (Note 13)                                                                              |       |                        |       |                        |       |
| Stockholders’ equity:                                                                                           |       |                        |       |                        |       |
| Common stock, $.001 par value; 132,500,000  shares authorized; 61,507,694 and 62,624,777 shares issued, respectively |       | 62                          |       | 63                          |       |
| Additional paid-in capital                                                                                           |       | 556,112                     |       | 557,907                     |       |
| Treasury stock, 1,520,789 and 1,520,789  shares, respectively                                                        |       | (1,521                      | )          | (1,521                      | )          |
| Accumulated deficit                                                                                                  |       | (452,154                    | )          | (488,880                    | )          |
| Accumulated other comprehensive loss                                                                                 |       | (34,335                     | )          | (34,964                     | )          |
|                                                                                                                 |       |                        |       |                        |       |
| Total stockholders’ equity                                                                                      |       | 68,164                      |       | 32,605                      |       |
|                                                                                                                 |       |                        |       |                        |       |
| Total liabilities and stockholders’ equity                                                                      |       | $                           | 110,688    |                        | $          | 120,453 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

F-3

----

 

**VIA NET.WORKS, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(in thousands of U.S. Dollars, except shareand per share data)**

 
| ** **                                                                 | ** ** | **For the years ended December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                 | ** ** | **2002**                                  | ** ** | **2003** | ** ** | **2004** | ** ** |
| Revenue                                                                    |       | $                                         | 42,576     |   | $ | 44,788 |   | $ | 69,684 |   |
| Operating costs and expenses:                                              |       |                                      |       |   |   |   |   |
| Internet services                                                          |       | 24,261                                    |       | 24,370 |   | 34,451 |   |
| Selling, general and administrative                                        |       | 47,763                                    |       | 43,336 |   | 64,876 |   |
| Impairment and restructuring charges                                       |       | 1,153                                     |       | 8,723 |   | 12,247 |   |
| Depreciation and amortization                                              |       | 7,526                                     |       | 6,179 |   | 8,169 |   |
|                                                                       |       |                                      |       |   |   |   |   |
| Total operating costs and expenses                                         |       | 80,703                                    |       | 82,608 |   | 119,743 |   |
|                                                                       |       |                                      |       |   |   |   |   |
| Operating loss from continuing operations                                  |       | (38,127                                   | )          | (37,820 | ) | (50,059 | ) |
|                                                                       |       |                                      |       |   |   |   |   |
| Interest income                                                            |       | 2,167                                     |       | 1,101 |   | 506 |   |
| Interest expense                                                           |       | (77                                       | )          | (14 | ) | (342 | ) |
| Other income (expense), net                                                |       | 231                                       |       | (323 | ) | 431 |   |
| Foreign currency (losses) gains, net                                       |       | 13,550                                    |       | 16,299 |   | 5,446 |   |
|                                                                       |       |                                      |       |   |   |   |   |
| Loss from continuing operations before  minority interest and income taxes |       | (22,256                                   | )          | (20,757 | ) | (44,018 | ) |
| Income tax benefit (expense)                                               |       | 51                                        |       | (165 | ) | 300 |   |
|                                                                       |       |                                      |       |   |   |   |   |
| Net loss from continuing operations                                        |       | (22,205                                   | )          | (20,922 | ) | (43,718 | ) |
|                                                                       |       |                                      |       |   |   |   |   |
| Discontinued operations:                                                   |       |                                      |       |   |   |   |   |
| (Loss) gain from discontinued operations                                   |       | (22,654                                   | )          | (3,822 | ) | 6,581 |   |
| Gain on disposal of discontinued operations                                |       | 1,906                                     |       | 164 |   | 411 |   |
|                                                                       |       |                                      |       |   |   |   |   |
| Net loss                                                                   |       | $                                         | (42,953    | ) | $ | (24,580 | ) | $ | (36,726 | ) |
|                                                                       |       |                                      |       |   |   |   |   |
| Basic and diluted (loss) gain per share:                                   |       |                                      |       |   |   |   |   |
| Continuing operations                                                      |       | $                                         | (0.37      | ) | $ | (0.34 | ) | $ | (0.72 | ) |
| Discontinued operations                                                    |       | (0.34                                     | )          | (0.06 | ) | 0.11 |   |
|                                                                       |       |                                      |       |   |   |   |   |
| Net loss per share – basic and diluted                                |       | $                                         | (0.71      | ) | $ | (0.40 | ) | $ | (0.61 | ) |
|                                                                       |       |                                      |       |   |   |   |   |
| Shares used in computing basic and diluted  loss per share                 |       | 60,147,704                                |       | 61,135,959 |   | 61,001,620 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

F-5

----

 

**VIA NET.WORKS, INC.**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’EQUIT****Y**

**(in thousands of U.S. Dollars, except sharedata)**

 
| ** **                                                               | ** ** | ** **       | ** ** | ** **           | ** ** | ** **   | ** ** | ** **      | ** ** | ** **   | ** ** | ** **        | ** ** | **Accumulated**   | ** ** | ** **             | ** ** |
|--------------------------------------------------------------------------|------------|------------------|------------|----------------------|------------|--------------|------------|-----------------|------------|--------------|------------|-------------------|------------|-------------------|------------|------------------------|------------|
| ** **                                                               | ** ** | ** **       | ** ** | ** **           | ** ** | ** **   | ** ** | ** **      | ** ** | ** **   | ** ** | ** **        | ** ** | **other**         | ** ** | ** **             | ** ** |
| ** **                                                               | ** ** | ** **       | ** ** | ** **           | ** ** | ** **   | ** ** | ** **      | ** ** | ** **   | ** ** | ** **        | ** ** | **comprehensive** | ** ** | ** **             | ** ** |
| ** **                                                               | ** ** | ** **       | ** ** | ** **           | ** ** | ** **   | ** ** | ** **      | ** ** | ** **   | ** ** | ** **        | ** ** | **loss of**       | ** ** | ** **             | ** ** |
| ** **                                                               | ** ** | ** **       | ** ** | ** **           | ** ** | ** **   | ** ** | ** **      | ** ** | ** **   | ** ** | ** **        | ** ** | **businesses**    | ** ** | ** **             | ** ** |
| ** **                                                               | ** ** | ** **       | ** ** | ** **           | ** ** | ** **   | ** ** | ** **      | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | **transferred**   | ** ** | ** **             | ** ** |
| ** **                                                               | ** ** | ** **       | ** ** | **Additional ** | ** ** | ** **   | ** ** | ** **      | ** ** | ** **   | ** ** | **Other**         | ** ** | **under**         | ** ** | **Total**              | ** ** |
| ** **                                                               | ** ** | **Common Stock** | ** ** | **Paid-in**          | ** ** | **Treasury** | ** ** | **Accumulated** | ** ** | **Deferred** | ** ** | **Comprehensive** | ** ** | **contractual**   | ** ** | **Stockholders’** | ** ** |
| ** **                                                               | ** ** | **Shares**       | ** ** | **Amounts**          | ** ** | **Capital**  | ** ** | **Stock**       | ** ** | **Deficit**  | ** ** | **Compensation**  | ** ** | **Loss**          | ** ** | **arrangement**        | ** ** | **Equity** | ** ** |
| Balance at  January 1, 2002                                              |       | 60,844,900       |       | 61                   |       | 557,358      |       | (733            | )          | (384,621     | )          | (2,311            | )          | (13,513           | )          | —                 |       | 156,241 |   |
| Comprehensive  loss:                                                     |       | —           |       |                 |       |         |       |            |       |         |       |              |       |              |       |                   |       |   |   |
| Net loss                                                                 |       | —           |       | —               |       | —       |       | —          |       | (42,953      | )          | —            |       | —            |       | —                 |       | (42,953 | ) |
| Businesses  transferred under contractual arrangement                    |       | —           |       | —               |       | —       |       | —          |       | —       |       | —            |       | 285               |       | (285                   | )          | — |   |
| Foreign currency  translation adjustment                                 |       | —           |       | —               |       | —       |       | —          |       | —       |       | —            |       | (9,235            | )          | —                 |       | (9,235 | ) |
|                                                                     |       |             |       |                 |       |         |       |            |       |         |       |              |       |              |       |                   |       |   |   |
| Total  comprehensive loss                                                |       | —           |       | —               |       | —       |       | —          |       | —       |       | —            |       | —            |       | —                 |       | (52,188 | ) |
| Amortization of  deferred compensation                                   |       | —           |       | —               |       | —       |       | —          |       | —       |       | 527               |       | —            |       | —                 |       | 527 |   |
| Stock option  forfeitures                                                |       | —           |       | —               |       | (1,784       | )          | —          |       | —       |       | 1,784             |       | —            |       | —                 |       | — |   |
|                                                                     |       |             |       |                 |       |         |       |            |       |         |       |              |       |              |       |                   |       |   |   |
| Balance at  December 31, 2002                                            |       | 60,844,900       |       | 61                   |       | 555,574      |       | (733            | )          | (427,574     | )          | —            |       | (22,463           | )          | (285                   | )          | 104,580 |   |
| Comprehensive  loss:                                                     |       |             |       |                 |       |         |       |            |       |         |       |              |       |              |       |                   |       |   |   |
| Net loss                                                                 |       | —           |       | —               |       | —       |       | —          |       | (24,580      | )          | —            |       | —            |       | —                 |       | (24,580 | ) |
| Businesses  transferred under contractual arrangement                    |       | —           |       | —               |       | —       |       | —          |       | —       |       | —            |       | —            |       | 285                    |       | 285 |   |
| Foreign currency  translation adjustment                                 |       | —           |       | —               |       | —       |       | —          |       | —       |       | —            |       | (11,872           | )          | —                 |       | (11,872 | ) |
|                                                                     |       |             |       |                 |       |         |       |            |       |         |       |              |       |              |       |                   |       |   |   |
| Total  comprehensive loss                                                |       | —           |       | —               |       | —       |       | —          |       | —       |       | —            |       | —            |       | —                 |       | (36,167 | ) |
| Purchase of  treasury shares                                             |       | —           |       | —               |       | —       |       | (788            | )          | —       |       | —            |       | —            |       | —                 |       | (788 | ) |
| Issuance of  common stock for exercise of stock options                  |       | 662,794          |       | 1                    |       | 538          |       | —          |       | —       |       | —            |       | —            |       | —                 |       | 539 |   |
|                                                                     |       |             |       |                 |       |         |       |            |       |         |       |              |       |              |       |                   |       |   |   |
| Balance at  December 31, 2003                                            |       | 61,507,694       |       | 62                   |       | 556,112      |       | (1,521          | )          | (452,154     | )          | —            |       | (34,335           | )          | —                 |       | 68,164 |   |
| Comprehensive  loss:                                                     |       |             |       |                 |       |         |       |            |       |         |       |              |       |              |       |                   |       |   |   |
| Net loss                                                                 |       | —           |       | —               |       | —       |       | —          |       | (36,726      | )          | —            |       | —            |       | —                 |       | (36,726 | ) |
| Foreign currency  translation adjustment                                 |       | —           |       | —               |       | —       |       | —          |       | —       |       | —            |       | (629              | )          | —                 |       | (629 | ) |
|                                                                     |       |             |       |                 |       |         |       |            |       |         |       |              |       |              |       |                   |       |   |   |
| Total  comprehensive loss                                                |       | —           |       | —               |       | —       |       | —          |       | —       |       | —            |       | —            |       | —                 |       | (37,355 | ) |
| Issuance of  common stock for exercise of stock options and acquisitions |       | 1,117,083        |       | 1                    |       | 1,795        |       | —          |       | —       |       | —            |       | —            |       | —                 |       | 1,796 |   |
|                                                                     |       |             |       |                 |       |         |       |            |       |         |       |              |       |              |       |                   |       |   |   |
| Balance at  December 31, 2004                                            |       | 62,624,777       |       | 63                   |       | 557,907      |       | (1,521          | )          | (488,880     | )          | —            |       | (34,964           | )          |                   |       | 32,605 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

F-6

----

 

**VIA NET.WORKS, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS****(UNAUDITED)**

**(in thousands of U.S. Dollars)**

 
| ** **                                                                                                   | ** ** | **For the years ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                   | ** ** | **2002**                                  | ** ** | **2003** | ** ** | **2004** | ** ** |
| Cash flows from operating activities:                                                                        |       |                                      |       |   |   |   |   |
| Net loss from continuing operations                                                                          |       | $                                         | (22,205    | ) | $ | (20,922 | ) | $ | (43,718 | ) |
| Adjustments to reconcile net loss from  continuing operations to net cash used in operating activities: |       |                                      |       |   |   |   |   |
| Depreciation and amortization                                                                                |       | 7,526                                     |       | 6,179 |   | 8,169 |   |
| Impairment charges                                                                                           |       | —                                    |       | 5,646 |   | 9,200 |   |
| Employee stock compensation                                                                                  |       | 527                                       |       | — |   | — |   |
| Provision (benefit) for doubtful accounts  receivable                                                        |       | (3,669                                    | )          | 1,380 |   | 938 |   |
| Unrealized foreign currency transaction  losses (gains)                                                      |       | (7,102                                    | )          | (13,761 | ) | (6,091 | ) |
| Write-off of note receivable from related  party                                                             |       | 292                                       |       | — |   | — |   |
| Changes in assets and liabilities, net of  acquisitions:                                                     |       |                                      |       |   |   |   |   |
| Trade accounts receivable                                                                                    |       | 4,524                                     |       | — |   | 836 |   |
| Other current assets                                                                                         |       | (999                                      | )          | (1,490 | ) | 2,022 |   |
| Other non-current assets                                                                                     |       | (78                                       | )          | (552 | ) | — |   |
| Accounts payable                                                                                             |       | (690                                      | )          | 1,117 |   | 274 |   |
| VAT and other taxes payable                                                                                  |       | (81                                       | )          | 368 |   | (2,481 | ) |
| Accrued expenses                                                                                             |       | (3,090                                    | )          | (953 | ) | 7,326 |   |
| Other current liabilities                                                                                    |       | (74                                       | )          | (372 | ) | (2,710 | ) |
| Deferred revenue                                                                                             |       | 619                                       |       | (795 | ) | (1,547 | ) |
|                                                                                                         |       |                                      |       |   |   |   |   |
| Net cash used in operating activities                                                                        |       | (24,500                                   | )          | (24,155 | ) | (27,782 | ) |
|                                                                                                         |       |                                      |       |   |   |   |   |
| Cash flows from investing activities:                                                                        |       |                                      |       |   |   |   |   |
| Acquisitions, net of cash acquired                                                                           |       | —                                    |       | — |   | (23,432 | ) |
| Increase in restricted cash                                                                                  |       | (895                                      | )          | (496 | ) | (3,708 | ) |
| Proceeds from the disposition of operating  subsidiaries (net of cash paid)                                  |       | 152                                       |       | (471 | ) | 7,741 |   |
| Proceeds from business transferred under  contractual obligations                                            |       | —                                    |       | 460 |   | — |   |
| Purchases of property, equipment and other  assets                                                           |       | (1,953                                    | )          | (6,044 | ) | (7,199 | ) |
| Note receivable from related party                                                                           |       | (1,000                                    | )          | — |   | — |   |
| Repayment of note receivable from related  party                                                             |       | 708                                       |       | — |   | — |   |
|                                                                                                         |       |                                      |       |   |   |   |   |
| Net cash used in investing activities                                                                        |       | (2,988                                    | )          | (6,551 | ) | (26,598 | ) |
|                                                                                                         |       |                                      |       |   |   |   |   |
| Cash flows from financing activities:                                                                        |       |                                      |       |   |   |   |   |
| Repayment of debt and principal payments on  capital lease obligations                                       |       | (1,594                                    | )          | (127 | ) | (285 | ) |
| Proceeds from issuance of common stock, net                                                                  |       | —                                    |       | 539 |   | 369 |   |
| Purchase of treasury stock                                                                                   |       | —                                    |       | (788 | ) | — |   |
|                                                                                                         |       |                                      |       |   |   |   |   |
| Net cash used in financing activities                                                                        |       | (1,594                                    | )          | (376 | ) | 84 |   |
|                                                                                                         |       |                                      |       |   |   |   |   |
| Cash flows used by discontinued operations                                                                   |       | (5,928                                    | )          | (1,875 | ) | 2,859 |   |
| Effect of currency exchange rate changes on  cash                                                            |       | (5,031                                    | )          | 947 |   | 1,131 |   |
|                                                                                                         |       |                                      |       |   |   |   |   |
| Net decrease in cash and cash equivalents                                                                    |       | (40,041                                   | )          | (32,010 | ) | (50,306 | ) |
| Cash and cash equivalents, beginning of  period                                                              |       | 137,854                                   |       | 97,813 |   | 65,803 |   |
|                                                                                                         |       |                                      |       |   |   |   |   |
| Cash and cash equivalents, end of period                                                                     |       | $                                         | 97,813     |   | $ | 65,803 |   | $ | 15,497 |   |
|                                                                                                         |       |                                      |       |   |   |   |   |
| Supplemental disclosure of cash flow  information:                                                           |       |                                      |       |   |   |   |   |
| Cash paid for interest                                                                                       |       | $                                         | 50         |   | $ | 15 |   | $ | 44 |   |
|                                                                                                         |       |                                      |       |   |   |   |   |
| Income taxes paid                                                                                            |       | $                                         | 305        |   | $ | 144 |   | $ | 110 |   |
|                                                                                                         |       |                                      |       |   |   |   |   |
| Non-cash investing and financing  transactions:                                                              |       |                                      |       |   |   |   |   |
| Non-cash relief of acquisition debt                                                                          |       | $                                         | —     |   | $ | — |   | $ | — |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

F-7

----

 

**VIA NET.WORKS, INC.**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

**(in thousands of U.S. Dollars, except shareand per share data)**

 

**1.             Organizationand Going concern**

 

**Organization and Nature of Operations:**

 

VIA NET.WORKS, Inc. (the “Company” or “VIA”) was founded onJune 13, 1997 for the purpose of acquiring existing Internet serviceproviders around the world. The focus of the Company is to be a premierprovider of managed IP solutions, including web-hosting, ecommerce, Internetsecurity and other services, primarily to the small and mid-sized businessmarket. In 1999, the Company amended its Certificate of Incorporation to changethe Company’s name from V-I-A Internet, Inc. to VIA NET.WORKS, Inc.VIA is headquartered in Schiphol-Oost, the Netherlands and has continuingoperations in Belgium, France, Germany, the Netherlands, Portugal, Spain, Italy,  Switzerland, the United Kingdom and theUnited States (U.S.).

 

**Going concern:**

 

For the year ended December 31, 2004, the Company had net lossesfrom continuing operations of $43.7 million and cash used by continuingoperations of $53.2 million. If the Company is unable to increase therevenue or scale down the costs and investment expenditures, it will continueto experience negative cash flow.

 

As of December 31, 2004, the Company had $15.5 million incash and cash equivalents and $5.1 million in restricted cash.

 

OnMarch 17, 2005, the Company announced that a combination of factors includingunanticipated revenue shortfalls in certain of its legacy VIA companies and itsnew VIA Express business would leave the Company with insufficient cashreserves to continue the operations of the group parent, VIA NET.WORKS, Inc.,in early April 2005, and that it was working with its advisors to obtain newfinancing to address the issue. The Company also noted that with the support ofits advisors, the Company pursued two parallel processes to maximize its strategicalternatives and optimize the value that is inherent in the VIAbusinesses.  In the first of theprocesses, the Company engaged in discussions with a number of parties with aview to selling all or parts of its businesses. In the second of the twoprocesses, the Company sought potential investors to provide funds sufficientto enable the Company to continue as a going concern.

 

OnApril 1, 2005, the Company announced the sale of two of its Swiss companies — VIANET.WORKS (Schweiz) AG and VIA NET.WORKS Services AG — to former managers andowners of the business, for a purchase price of CHF 3.5 million, or US$3.1million.  The net proceeds of the saleprovided VIA with additional liquidity to continue its discussions forrefinancing and sale transactions.

 

On April 10, 2005, the Company entered into a letter of intent, or Letter, with Claranet Group Limited (Claranet), a privately-held European Internet services provider based in the United Kingdom, to sell all of its business operations in Europe and the United States.  The key terms of the proposed transaction, or the Claranet Sale, are as follows:

 

•      Claranet would acquire certain assets and liabilities pertaining to VIA’s centralized back office financial and technical support systems that are owned by the group parent company, VIA NET.WORKS, Inc., but all other assets and liabilities of VIA NET.WORKS, Inc. would not be assumed.

 

•                  VIA would transfer employment contracts of certain headquarters personnel who are responsible for supporting the back office and technical support systems to appropriate VIA operating companies or Claranet would offer employment to such persons.

•                  VIA would retain all other debts and liabilities of the group parent company, including but not limited to expenses relating to the headquarters office lease in Schiphol-Oost, VIA senior executives and all other headquarters staff, corporate vendors and professional advisors, and remaining payment obligations to sellers of the PSINet Europe group and the Amen group.

 

•      Claranet made a deposit of $3,000,000 against the purchase price in order to secure the rights to negotiate exclusively with the Company until 30 April 2005:

 

•                  The deposit was partially funded by the release of £1.0 million from the escrow established by Claranet in favour of VIA in connection with the purchase by Claranet in September 2004 of VIA NET.WORKS UK Limited, its legacy operations in the United Kingdom.

•                  The deposit would be forfeited by Claranet and it would pay VIA a $500,000 break fee if

 

F-8

----

 

•                  definitive agreements for the contemplated transactions have not been executed by the parties by April 30, 2005, or

•                  Claranet determines not to proceed with the transaction, or breaches the definitive agreements prior to the closing. .

Otherwise, approximately $1.1 million, the portion of the deposit in excess of the £1.0 million escrow, would be credited to Claranet as payment against the purchase price at closing.

•                  The deposit and interest thereon shall be returned to Claranet unless

•                  forfeited by Claranet as noted above,

•                  the deposit has been credited to Claranet at the closing, or

•                  closing of the transaction does not occur on or before 120 days after the date of execution of the definitive acquisition agreements, referred to below as the Back-Stop Date, or

•                  there is a VIA Break Trigger, which is described below.

•      If there is a VIA Break Trigger, VIA would be required to return the $3 million deposit and pay Claranet a $500,000 break fee plus professional fees up to a maximum $250,000.  A VIA Break Trigger includes any of the following events:

•                  VIA’s Board of Directors determines not to enter into the Claranet Sale transaction or accepts a competing offer

•                  VIA enters into a legal binding agreement for a competing proposal

•                  the Board of Directors does not recommend the Claranet Sale transaction to VIA’s shareholders

•                  VIA’s shareholders fail to approve the Claranet Sale transaction before the Back Stop Date

•                  the Board of Directors fail to act in good faith in respect of the negotiations toward definitive agreements, or

•                  there is a material adverse change in VIA’s business between the date of the Letter and the targeted date for signing of a definitive purchase agreement.  A material adverse change includes, among other things, a material change in cash flow projections, litigation and other claims against the Company, and significant incidents of non-renewal or cancellation of customer contracts.

 

•      The proposed transaction would be subject to approval by the Company’s shareholders; a proxy statement would be distributed as soon as possible after signing of definitive agreements and review by the Securities and Exchange Commission.

 

•      For the period between the signing of the definitive purchase agreement and closing of the transaction, Claranet would provide an interim working capital facility of up to $6 million bearing interest at 8.0% per annum.

 

•                  VIA will pay a $400,000 arrangement fee for the facility, which would be waived at Closing, assuming the parties complete the transactions.

•                  The facility would be secured by pledges by VIA of shares in certain of its European subsidiaries.

•                  The purchase price would be reduced by the amount that VIA drew down on this facility.

 

The Company is in the process of negotiating definitive purchase, interim working capital financing and other agreements pertaining to the proposed Claranet Sale, with a view towards execution of the agreements by April 30, 2005.  The definitive agreements would be subject to various conditions to completion, including absence of material adverse change in VIA’s business. There can be no assurance that VIA will be successful in negotiating the definitive agreements or achieving completion of the proposed transaction. If the agreements are successfully concluded, the Company expects to convene a meeting of our shareholders within the next two or three months to consider the Claranet Sale for approval. If the Company receives approval from its shareholders, it would seek to close the transaction shortly after the shareholder’s meeting and use the net proceeds to pay off the remaining liabilities of the Company and shut down our corporate headquarters and terminate the remaining employees.  Remaining funds would then be distributed to the Company’s shareholders. The Company is currently preparing an analysis of the potential return or range of returns to its shareholders if the Claranet Sale is closed on the terms described in the Letter.  The analysis will be released and published in the proxy statement to the Company’s shareholders describing in detail the proposed transaction as well as the potential return or range of returns.

 

The Company has pursued two separate but parallel tracks to address itsannounced liquidity issue: a search for new financing through an equity or debtplacement and the sale of all or part of its businesses.  Both tracks were progressedsimultaneously.  While the Companyreceived interest from third parties to provide debt/equity investments in theCompany, VIA’s Board of Directors concluded that the terms on which theinvestments were proposed would not be as advantageous to the shareholders ofthe Company as the terms of the Claranet Sale offer.  If the Claranet Sale is not consummated,there can be no assurance that the Company can obtain an alternative solutionto VIA’s liquidity issues.  In thatevent, and unless the Company could find such an alternative solution, VIA,would have insufficient funds to continue to operate the Company as a goingconcern.

 

The Claranet Sale transaction is at an early stage.  Only a letter of intent  has been executed by the parties. Claranethas provided a $3 million deposit against the purchase price if it withdrawsfrom the transaction.  However, under theterms of the Letter, Claranet may

 

F-9

----

 

withdraw from the transaction and receive a refund of its deposit of $3million if, among other things, there is a material adverse change in VIA’sbusiness between the date of the Letter and the targeted date for signing of adefinitive purchase agreement.  Under theterms the of the Letter, a material adverse change includes, among otherthings, a material change in cash flow projections, litigation and other claimsagainst the Company, and significant incidents of non-renewal or cancellationof customer contracts. If any one of these events occurs, Claranet may withdrawfrom the transaction and the Company would be required to pay its costs and abreak fee.  The Company may not be ableto control the circumstances that could lead to any one of these materialadverse changes, and if any one of them should occur, and Claranet decides towithdraw, its ability to provide a return to its shareholders may be severelyimpacted.

 

The Claranet Sale is conditioned on receiving the approval of theCompany’s shareholders.  If the Companyreach agreement on definitive purchase and finance agreements, VIA will solicitvotes from its shareholders through a proxy statement that will describe thecircumstances and rationale for the Claranet Sale.  If, for whatever reason, the Company’sshareholders were to reject the transaction, there can be no assurances that VIAwill be able to find an alternative solution to its liquidity issue and in thatevent, would have insufficient funds to continue to operate the Company as agoing concern.

 

**2.             SignificantAccounting Policies:**

 

*Principles of Consolidation:*

 

The accompanying consolidated financial statements include the accountsof the Company and its majority-owned and controlled subsidiaries. As ofDecember 31, 2003 and 2004, the company owned 100% of all of itssubsidiaries. All significant intercompany accounts and transactions have beeneliminated in consolidation.

 

*Use of Estimates:*

 

The preparation of financial statements in conformity with generallyaccepted accounting principles requires the Company to make estimates andassumptions that affect the reported amounts of assets, liabilities, revenueand expenses, together with amounts disclosed in the related notes to theconsolidated financial statements. Actual results could differ from therecorded estimates.

 

*Cash and Cash Equivalents:*

 

The Company considers all highly liquid investments with originalmaturities of three months or less to be cash equivalents. Our investments aregenerally fixed rate short-term investment grade and government securitiesdenominated in U.S. dollars or Euros. Restricted cash of $1.4 million atDecember 31, 2003 represents amounts held on deposit with banking institutionsas security for operating leases. Restricted cash of $5.1 million as atDecember 31, 2004 represents amounts held on deposit with banking institutionsas security for operating leases, leased properties, key telecom suppliers anda bank guarantee for earn-out payments to the former shareholders of Amen.

 

*Concentration of Credit Risk:*

 

Financial assets that potentially subject the Company to aconcentration of credit risk consist of cash and cash equivalents, and accountsreceivable. The Company’s cash and investment policies limit investments toshort-term, investment grade instruments. Concentration of credit risk, withrespect to accounts receivable, is limited due to the large number andgeographic dispersion of customers comprising the Company’s customer base.

 

*Property and Equipment:*

 

Property and equipment are recorded at cost less accumulateddepreciation, which is provided on the straight-line method over the estimateduseful lives of the assets, generally three to five years. The Company haspurchased software to facilitate its global information processing, financialreporting and access needs. These costs and related software implementationcosts are capitalized, in accordance with Statement of Position No. 98-1, *“Accounting for the Cost of Internal Use Software,”*and amortized over the estimated useful life, generally three years. The costof network infrastructure purchased under indefeasible right of use agreements(IRU) is capitalized and amortized over the lesser of the estimated useful lifeor term of the agreement, generally 1 to 25 years. Cost includes majorexpenditures for improvements and replacements, which extend useful lives orincrease capacity of the assets. Expenditures for maintenance and repairs areexpensed as incurred.

 

*Impairment or Disposal of Long-lived Assets:*

 

Long-lived assets include acquired intangible (principally customerlists and trade names) and tangible assets. On a quarterly basis, managementreviews the carrying value of the investment in its operations to determine ifan event has occurred, with respect to any operation, which could result in animpairment of long-lived assets. In its review, management considers thefollowing:

 

F-10

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•                                          market and competitive factors, includingtrends within the telecommunications industry broadly and the market forInternet access specifically, as well as general economic trends;

 

•                                          operating and financial trends, includingsignificant underperformance relative to expected historical or projectedoperating results; and,

 

•                                          business outlook for each operation,including changes in the expected revenues and cash flows for each of ouroperations, changes in our customers and the services that they require and ourStrategic Plans for each operation.

 

The carrying amounts of long-lived assets are reviewed if facts orchanges in circumstances suggest that they may be impaired. If this reviewindicates the carrying amounts of long-lived assets will not be recoverable, asdetermined based on estimated undiscounted future cash flows of the assets, thecarrying amounts are reduced to their estimated fair value. The asset groupsand lowest level of cash flows are based on geographic operations. The Companyrecorded impairment charges of nil, $0.1 million and  $1.9 million in the years endedDecember 31, 2002, 2003, and 2004, respectively.

 

Long-lived assets are classified as held-for-sale when certain criteriaare met, which include: management commitment to a plan to sell the assets; theavailability of the assets for immediate sale in their present condition;whether an active program to locate buyers and other actions to sell the assetshas been initiated; whether the sale of the assets is probable and their transferis expected to qualify for recognition as a completed sale within one year;whether the assets are being marketed at reasonable prices in relation to theirfair value; and how unlikely it is that significant changes will be made to theplan to sell the assets. The Company measures long-lived assets to be disposedof by sale at the lower of carrying amount and fair value less cost to sell.Fair value is determined using the amount at which the reporting unit as awhole could be bought or sold in a current transaction between willing buyers,or the anticipated cash flows discounted at a rate commensurate with the riskinvolved.

 

The Company classifies an asset or asset group that will be disposed ofother than by sale as held and used until the disposal transaction occurs. Theasset or asset group continues to be depreciated based on revisions to itsestimated useful life until the date of disposal or abandonment.

 

*Goodwill:*

 

The Company has recorded goodwill related to its acquisitions. As atDecember 31, 2004, $42.5 million of goodwill are recorded within thescope of Statement of Financial Accounting Standards (“SFAS”) 142. Goodwill andOther Intangible Assets.

 

The Company reviews goodwill to assess recoverability on an annualbasis or when changes in circumstances at each operation warrant a review. TheCompany elected December 31 as its annual goodwill impairment review date forall reporting units. In accordance with SFAS 142, if the carrying amount of thereporting unit exceeds its estimated fair value, its associated goodwill iswritten down to its implied fair value using a hypothetical purchase priceallocation. Any impairment loss is recorded in the consolidated statement ofoperations. Measurement of the fair value of a asset group is based on a discountedfuture cash flows model derived from the Company’s Strategic Plan or the amountat which the asset group as a whole could be bought or sold in a currenttransaction between willing buyers.

 

During the years ended December 31, 2002, 2003 and 2004, theCompany recorded goodwill impairment charges of nil, $5.5 million and $7.3million, respectively.

 

*Business combinations*

 

The Company accountsfor acquisitions under SFAS 141, *Business Combinations.*The acquisition date is determined by the date on which transfer of effectivecontrol has taken place.  In general, itis the date the Company has assumed all economic consequences of ownership (thedate that assets are received and consideration is given) and has the authorityto make unilateral decisions regarding the conduct of the acquiredcompany.  The total purchase priceconsists of the direct costs incurred by the Company in connection with thetransaction and the purchase consideration. Any excess of purchase price (total acquisition cost) over the netassets acquired is recorded as goodwill.

 

Where a purchase agreementcontains additional contingent consideration based on future earnings orcontingent consideration based on security prices, the contingent considerationis recorded when the contingency is resolved and the consideration is issued orbecomes issuable.

 

The allocation period is theperiod that is required to identify and quantify the assets acquired and theliabilities assumed.  

 

F-11

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Although the time required will vary withcircumstances, the “allocation period” usually does not exceed one year fromthe date of acquisition.  In most cases,the Company may not be able to obtain some of the data required to complete theallocation of the purchase price for inclusion in its next external financialreporting period. As such, a tentative allocation is made using the values thathave been determined and preliminary estimates of the values that have not yetbeen determined. See Note 4 these consolidated financial statements for furtherinformation.

 

*Loss PerShare:*

 

Basic loss per share is computed using the weighted-average number ofshares of common stock outstanding during the year. Diluted loss per share iscomputed using the weighted-average number of shares of common stock adjustedfor the dilutive effect of common stock equivalents, such as convertiblepreferred stock, stock options, warrants and contingently issuable shares ofcommon stock. Common stock equivalent shares are calculated using the “if-converted”method or the treasury stock method, as applicable. Due to losses by theCompany, the following securities that were outstanding for each of the yearspresented have been excluded from the computation of diluted loss per share, astheir effect would be antidilutive:

 
| ** **        | ** ** | **Stock Options** | ** ** | **Stock Warrants** | ** ** |
|-------------------|------------|-------------------|------------|--------------------|------------|
|              |       |              |       |               |       |
| December 31, 2002 |       | 7,329,574         |       | 100,000            |       |
| December 31, 2003 |       | 7,668,435         |       | —             |       |
| December 31, 2004 |       | 7,444,133         |       | —             |       |

 

There is no difference between basic and diluted loss per share foreach of the periods presented.

 

*OtherComprehensive Loss:*

 

Comprehensive loss consists of net loss and foreign currencytranslation adjustments as presented in the consolidated statements ofstockholders’ equity. No tax is provided on the foreign currency translationsadjustment.  Foreign currency translationadjustments are reclassified into the statement of operations when theunderlying investment is sold or substantially liquidated.

 

*Recognitionof revenue:*

 

The Company derives its revenue from the sale of Internet-related goodsand services, specifically sale of third party hardware and software andInternet connectivity services; other Internet value-added services, such ashosting, security and IP VPN; and voice services.

 

The Company applies the provisions of Staff Accounting BulletinNo. 104, *“Revenue Recognition.”*The Company recognizes revenue from the sale of Internet goods and serviceswhen persuasive evidence of an arrangement exists, delivery has occurred orservices have been rendered, the fee is fixed or determinable and collection ofthe resulting receivable is reasonably assured. At the time of the transaction,the Company assesses collectibility based on a number of factors, includingpast transaction history with the customer and the credit-worthiness of thecustomer. The Company generally does not perform credit checks on potentialcustomers before providing services. If the Company determines that collectionof a fee is not reasonably assured, the revenue is recognized upon the receiptof cash, provided other revenue recognition criteria have been satisfied.

 

The Company’s practices regarding the evidence of an arrangement varyfrom country to country. Generally, for sales, other than those completed overthe Internet, the Company uses either a purchase order or a customer agreementas evidence of an arrangement. For sales over the Internet, the Companygenerally uses a credit card authorization as evidence of an arrangement.

 

Service revenue

 

The Company’s Internet connectivity services, other Internet value-addedservices, and voice revenue are recognized as it is earned over the customerrelationship period. When the Company’s services are bundled in a customer arrangement,then the related fee is allocated to the multiple elements of the arrangementbased on objective evidence of fair value. Revenue from installation, trainingand consulting is recognized as the related services are rendered, althoughsuch amounts have not been material. The typical service period for connectivityservices is from one to two years.

 

When the customer arrangement dictates that payments are made prior toservice delivery, the Company records the advance receipt of payment as acredit to the balance sheet within the deferred revenue account. The feesreceived by the Company are non-refundable. There are no terms in the agreementwith the customer that allow them to cancel or terminate the agreement andobtain refunds of the amounts advanced. As the service is provided the Companyrecognizes the revenue ratably over the expected customer relationship inaccordance with the revenue recognition policies described above. When acustomer pays a non-refundable fee in advance and

 

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subsequentlycancels service before the end of the contract term, the Company recognizes theremaining deferred revenue as revenue with the statement of operations at thetime the service is terminated.

 

Product revenue

 

In general, revenue fromhardware sales is recognized gross upon delivery or installation of theproducts, depending on the terms of the arrangement, provided other revenuerecognition criteria have been satisfied.

 

In accordance with EITF 99-19 “*ReportingRevenue Gross as a Principal versus Net as an Agent”,* revenue fromhardware and third-party software sales is recognized gross upon delivery orinstallation of the products, depending on the terms of the arrangement,provided other revenue recognition criteria have been satisfied. The Company’shardware and software sales are arrangements negotiated and agreed upondirectly with its customers. The Company does not act as an agent or a brokerfor its vendors nor does it receive compensation, commissions or fees from itsvendors. The Company also maintains the freedom and discretion in selecting theappropriate vendor to support its various hardware and software arrangements.

 

*AdvertisingCosts:*

 

Costs related to advertising and service promotion are charged tooperating expense as incurred. Advertising expense was $0.4 million, $0.3 millionand $1.7 million for the years ended December 31, 2002, 2003 and 2004,respectively.

 

*IncomeTaxes:*

 

The Company accounts for income taxes under the asset and liabilitymethod, which requires the recognition of deferred tax assets and liabilitiesfor the expected future tax consequences of temporary differences between thecarrying amounts and tax bases of assets and liabilities. The Company providesa valuation allowance on deferred tax assets when it is more likely than notthat such assets will not be realized. In conjunction with businessacquisitions, the Company records acquired deferred tax assets and liabilities.Future reversals of the valuation allowance on acquired deferred tax assetswill first be applied against goodwill and other intangible assets beforerecognition of a benefit in the consolidated statements of operations.

 

*Stock-BasedCompensation:*

 

SFAS 123, “*Accounting for Stock-BasedCompensation*,” encourages, but does not require companies to recordcompensation cost for stock-based employee compensation plans at fair value.The Company has chosen to account for stock-based compensation using theintrinsic value method prescribed in APB Opinion 25, *“Accounting for Stock Issued to Employees,”* and relatedInterpretations. Accordingly, compensation cost for stock options is measuredas the excess, if any, of the estimated fair value of the Company’s stock atthe date of the grant over the amount an employee must pay to acquire thestock. The Company recognized an expense of $0.5 million, nil and nil forthe years ended December 31, 2002, 2003 and 2004, respectively.

 

The Company has adopted the “disclosure only” alternative described inSFAS 123, which requires pro forma disclosures of net loss and loss pershare as if the fair value method of accounting has been applied.SFAS 148, *“Accounting for Stock-BasedCompensation*—*Transition andDisclosure of Amendment of FASB Statement No. 123,”* amends thedisclosure requirements of SFAS 123, to require more prominent disclosuresin both annual and interim financial statements regarding the method ofaccounting for stock-based employee compensation and the effect of the methodused on reported results.

 

The following table illustrates the effect on net loss and loss pershare if the Company had applied the fair value recognition provisions ofSFAS 123 to stock-based employee compensation:

 
| ** **                                                                                                                     | ** ** | **For the Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **In  thousands of U.S. dollars**                                                                                              | ** ** | **2002**                                  | ** ** | **2003** | ** ** | **2004** | ** ** |
|                                                                                                                           |       |                                      |       |   |   |   |   |
| Net loss (as reported)                                                                                                         |       | $                                         | (42,953    | ) | $ | (24,580 | ) | (36,726 | ) |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method, net of related  tax effects |       | (5,713                                    | )          | (2,383 | ) | (2,265 | ) |
| Add back: Total stock-based employee  compensation expense determined under APB 25                                             |       | 527                                       |       | — |   | — |   |
|                                                                                                                           |       |                                      |       |   |   |   |   |
| Pro forma net loss                                                                                                             |       | $                                         | (48,139    | ) | $ | (26,963 | ) | (38,991 | ) |
|                                                                                                                           |       |                                      |       |   |   |   |   |
| Net loss per share (as reported)                                                                                               |       | $                                         | (0.71      | ) | $ | (0.40 | ) | $ | (0.61 | ) |
| Net loss per share (pro forma)                                                                                                 |       | $                                         | (0.80      | ) | $ | (0.44 | ) | $ | (0.64 | ) |

 

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See Note 11 for further details on the number of options grantedand the assumptions used to estimate the fair value of options granted.

 

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*Foreign Currency:*

 

The functional currency for the Company’s international subsidiaries isthe applicable local currency. Transactions in currencies other than thefunctional currency are translated at the exchange rate in effect at the dateof each transaction. Differences in exchange rates during the period betweenthe date a transaction denominated in a foreign currency is consummated and thedate on which it is settled or translated, are recognized in the consolidatedstatements of operations as “Foreign currency gains (losses), net.”

 

The financial statements of the Company’s international subsidiariesare translated into U.S. dollars using the current rate method. Accordingly,assets and liabilities are translated at year-end exchange rates while revenueand expenses are translated at the average exchange rates. Adjustmentsresulting from these translations are accumulated and reported as a componentof accumulated other comprehensive loss in stockholders’ equity. No tax isprovided on this foreign currency translation adjustment.

 

*DefinedContribution Plan*

 

The Company contributes to personal defined contribution plans ofemployees in certain of its operations. Company contributions to the definedcontribution plans totaled $0.3 million and $0.6 million for theyears ended December 31, 2003 and 2004 respectively, and were charged tothe consolidated statements of operation as they became payable.

 

*Fair Valueof Financial Instruments:*

 

Carrying amounts of certain of the Company’s financial instruments,including cash and cash equivalents, restricted cash, accounts receivable,accounts payable, accrued expenses and other liabilities approximate fair valuedue to their short maturities. Based upon borrowing rates currently availableto the Company for loans with similar terms, the carrying value of debt andcapital lease obligations approximate their fair value.

 

*SegmentReporting:*

 

The Company discloses its segments using the “management” approach inaccordance with SFAS 131, *“Disclosures AboutSegments of an Enterprise and Related Information.”* The managementapproach designates the internal organization that is used by management forallocating resources and assessing performance as the source of the Company’s operatingsegments.

 

In prior reporting periods,the Company’s internal management reporting structure was based on countryoperations and therefore had provided segment information based on geographicregions.

 

Within the last quarter of 2004, management reevaluated and amended itsinternal reporting structure and therefore changed its reportable segments andgrouped all of the VIA legacy operating companies and the newly acquired PSINetoperating companies into one operating segment — “Solutions”, except for the USoperations which is reported as an operating segment — “Express”. The Companygrouped all of the Amen operating companies into one operating — “Amen”. TheCompany and its Chief Operating Decision Maker (“CODM”) evaluates theperformance of its segments based on revenue and Adjusted EBITDA. The Company’sCODM have been the Chief Executive Officer and the Chief Financial Officerthroughout the year. Corporate expenses, which also include the regionalcompanies holding Indefeasible Rights of Use (“IRU’s), are shown to reconcileto the total consolidated figures. Prior period amounts have been reclassifiedto conform to the current period presentation.

 

*Reclassifications:*

 

Certain prior year amounts have been reclassified to conform to thecurrent year presentation. Reclassifications have been made to prior yearamounts to account for discontinued operations.

 

 

**RecentIssued Accounting Pronouncements Not Yet Adopted:**

 

In December 2004, theFinancial Accounting Standards Board issued Statement of Financial AccountingStandards 153, “Exchanges of Nonmonetary Assets - an amendment of APB Opinion29” (“SFAS 153”), which amends Accounting Principles Board Opinion 29, “Accountingfor Nonmonetary Transactions” to eliminate the exception for nonmonetaryexchanges of similar productive assets and replaces it with a general exceptionfor exchanges of nonmonetary assets that do not have commercial substance. SFAS153 is effective for nonmonetary assets exchanges occurring in fiscal periodsbeginning after June 15, 2005. The Company does not anticipate that theadoption of this statement will have a material effect on our financialposition or results of operations.

 

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In December 2004, the FASBissued Statement of Financial Accounting Standards (“SFAS”) 123 (revised 2004),“Share-Based Payments” or SFAS 123R. This statement eliminates the option toapply the intrinsic value measurement provisions of Accounting Principles Board(“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” to stockcompensation awards issued to employees. Rather, SFAS 123R requires companiesto measure the cost of employee services received in exchange for an award ofequity instruments based on the grant-date fair value of the award. That costwill be recognized over the period during which an employee is required to provideservices in exchange for the award—the requisite service period (usually thevesting period). SFAS 123R applies to all awards granted after the requiredeffective date and to awards modified, repurchased, or cancelled after thatdate.  SFAS 123R is effective fiscal yearbeginning after June 15, 2005. The company has not yet quantified the effect ofthe future adoption of SFAS 123R on a going forward basis.

 

**3.             Discontinued Operations**

 

The Company sold its operations in Brazil and Mexico in the year ended December31, 2002, but because of the method by which these transactions werestructured, these operations were not treated as discontinued operations in2002 but rather classified as businesses transferred under contractualagreements. The Company has eliminated all continuing involvement in theseoperations in the year ended December 31, 2003 and they are accounted for asdiscontinued operations for all periods presented. In September 24, 2004, VIAsold its operations in the United Kingdom.

 

As each of the Italian, Brazilian, Mexicanand United Kingdom operations represented a component of an entity as definedby SFAS 144, *“Accounting for theImpairment or Disposal of Long-Lived Assets”*, the Company hasclassified each operation as a discontinued operation for all periodspresented. Revenues related to discontinued operations were approximately $34,5 million,$24.5 million and $16.1 million for the years ended December 31,2002, 2003 and 2004, respectively. The loss from discontinued operations was ($22.7)million, ($3.8) million and a gain of $6.6 million for the year endedDecember 31, 2002, 2003 and 2004, respectively.

 

VIA NET.WORKS Brazil S.A.

 

In May 2002, VIA closed a transaction for the sale of itsBrazilian operation, VIA NET.WORKS Brazil S.A. (“VIA Brazil”), to thethen-current management team for $0.4 million, of which $30,000 was paidin cash at closing and the balance by delivery of a promissory note payableover 18 months. The note was secured by a pledge of 93% of the outstandingshares in VIA Brazil, subject to reduction on a pro-rata basis for paymentsmade under the note. The collateralization of the outstanding shares permittedVIA to reacquire, at its option, a controlling interest in VIA Brazil if thepurchasers defaulted on the obligations under the promissory note.

 

Consistent with the accounting treatment prescribed under StaffAccounting Bulletin (SAB) Topic 5E, VIA did not treat the Brazilian operationas a discontinued operation from May 2002 onwards. VIA has notconsolidated any results of this Brazilian operation from May 2002. Forthe year ended December 31, 2002, the total assets, liabilities, and$2.6 million cumulative translation adjustment loss related to theBrazilian operation are shown on the consolidated balance sheet under thecaptions assets, liabilities and accumulated other comprehensive loss ofbusinesses transferred under contractual arrangement.

 

From the outset of the transaction, VIA expected the funds for paymentof the note to come from the individual buyers. Because VIA did not havereasonable assurances that the note would be paid in full, the Company fullyreserved against the note receivable at June 30, 2002. Management did notconsider the shares held in VIA Brazil as collateral to have significant economicvalue. As of March 31, 2003 the buyers were in default on their paymentobligations under the note as they had made no payments under the note.

 

On July 8, 2003, in recognition of the continuing economicdifficulties of the Brazilian operation and the limited resources of thebuyers, VIA agreed to settle the outstanding amounts owing for an aggregatepayment by the buyers in the amount of $0.1 million. As a part of thissettlement, VIA agreed to release the buyers and VIA Brazil from theobligations under the note and the pledge agreement. VIA received the fullsettlement amount as of August 8, 2003.

 

With the release of the pledge agreement, VIA no longer had acontinuing involvement in the Brazil operation and is able to complete theaccounting treatment under SAB Topic 5E. VIA therefore recognized a$2.5 million loss in the statement of operations in the year endedDecember 31, 2003 principally related to the release of cumulative foreigncurrency translation adjustments that had been deferred in other comprehensiveincome until the date of sale. In addition, VIA Brazil has now been classifiedas a discontinued operation.

 

VIANET.WORKS Mexico S.A. de C.V.

 

In September 2002, VIA closed a transaction for the sale of 100%of the outstanding capital stock of its subsidiary, VIA NET.WORKS Mexico S.A.de C.V. (“VIA Mexico”) to a group of buyers led by the then-current managementof VIA Mexico. As a part of the sale transaction, the parties also entered intoa convertible credit agreement under which VIA agreed to loan VIA Mexico a sumof

 

F-16

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$2.2 million.Under the convertible credit agreement, all outstanding loan amounts togetherwith accrued interest become due and payable on September 4, 2004. Thisconvertible credit agreement provided that upon a change of control of VIAMexico (which is defined to include a change of greater than 33% of the currentequity holding of the company), VIA could elect to convert the outstanding loanamounts into a 19% equity interest of VIA Mexico or accept a cash payment of$0.6 million as payment in full.

 

Consistent with the accounting treatment prescribed under StaffAccounting Bulletin (SAB) Topic 5E, VIA neither treated the Mexican operationas a discontinued operation nor consolidated any future results of this Mexicanoperation from September 2002 onwards. For the year endedDecember 31, 2002, the total assets, liabilities and $2.3 millioncumulative translation adjustment gain related to the Mexican operation areshown on the consolidated balance sheet under the captions assets, liabilitiesand accumulated other comprehensive loss of businesses transferred undercontractual arrangement.

 

At the time the transaction was closed, VIA expected the funds forrepayment of the loan to come exclusively from future operations of VIA Mexico.Management believed that VIA Mexico’s history of past operating losses combinedwith the difficult economic conditions in the telecommunications

 

F-17

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industry in the region made recovery of theloan uncertain. Accordingly, VIA fully provided against the whole amounts underthe loan in its results of operations during the third quarter of 2002.

 

In September 2003, in recognition of the continuing economicdifficulties of the Mexican operation, VIA agreed to settle the outstandingamounts owing under the convertible credit agreement for an accelerated cashpayment by the buyers in the amount of $0.4 million. In exchange for theaccelerated payment, VIA agreed to release and waive the buyers and VIA Mexicofrom their obligations under the convertible credit agreement. VIA has receivedthe entire settlement amount except for $40,000, which is expected to bereceived during the remainder of 2005.

 

By waiving the convertible credit agreement, VIA no longer had acontinuing involvement in the Mexico operation and is able to complete theaccounting treatment under SAB Topic 5E. VIA therefore recognized a$2.9 million gain in the statement of operations in the year endedDecember 31, 2003 principally related to the release of cumulative foreigncurrency translation adjustments that had been deferred in other comprehensiveincome until the date of sale. In addition, VIA Mexico has now been classifiedas a discontinued operation.

 

VIA NET.WORKS Italia

 

In July 2003, VIA sold its Italian operation, VIA NET.WORKSItalia, which has been included in the European segment. The Italian operationwas sold for nominal consideration. As part of the transaction, VIA providedcash funding in the form of a loan to the buyers of Euro 0.4 million ($0.5million)**,** which was waived atclosing. VIA also assumed certain real estate lease obligations of the Italianoperation, for which the total potential liability is Euro 0.3 million($0.3 million). In connection with the sale, both parties waived alloutstanding intercompany debt existing at the date of sale. VIA recognized a$0.3 million loss in the statement of operations in the year endedDecember 31, 2003.

 

VIANET.WORKS UK Ltd.

 

As a part of our corporatedevelopment strategy, we continuously evaluate our operating units to ensuretheir ongoing fit to our operating and financial strategy. We are committed toacting upon these evaluations in a meaningful and expeditious manner. Based onthe analysis of our operations during the year ended December 31, 2004, weengaged in the sale of VIA NET.WORKS UK Ltd.

 

On September 24, 2004, VIAsold 100% of the shares of VIA NET.WORKS UK Ltd. to Claranet Limited, aUK-based Internet services provider. Claranet agreed to pay total considerationfor the shares of VIA NET.WORKS UK Ltd. in the aggregate amount of GBP 7.3million ($13.1 million), subject to certain working capital and otheradjustments. The Company received GBP 5.3 million in cash ($9.4 million) oncompletion. The GBP 2.0 million ($3,6 million) balance is payable, subject tothe working capital and other adjustments, as follows: GBP 1.0 million ($1.8million) in cash six months after completion and GBP 1.0 million ($1.8 million)in cash one year after completion.

 

During the year endedDecember 31, 2004, the Company recorded a gain on the sale of VIA NET.WORKS UKLtd. of $0.4 million, which is disclosed in the result from discontinuedoperations. VIA NET.WORKS UK Ltd. results would have been reported in ourSolutions segment.

 

On March 21, 2005, theCompany agreed with Claranet a sum of GBP 0.7 million ($1.3 million) plusaccrued interest to be paid to the Company as a part of the first six monthescrow release, representing the GBP 1.0 million ($1.8 million) escrow fundsless a working capital adjustment and resolution on two warranty claims. Theremaining consideration of GBP 1.0 million ($1.8 million) would have beenreleased, subject to warranty claims of Claranet against the Company, at theend of September 2005.  The considerationreceived on March 21, 2005 will be recognized as result of discontinuedoperations in the year ending December 31, 2005.  See Note 1 Going Concern for furtherdiscussion of the remaining escrow funds.

 

SURF TRADE COMPANIES

 

During the year endedDecember 31, 2004, Surf Trade Brazil, Surf Trade Portugal and VIA NET.WORKS HoldingsCayman were liquidated.  The results onliquidation which have been recorded during the year ended December 31, 2004are a gain of $1.9 million, $0.3 and $0.2 million for Surf Trade Brazil, Surf TradePortugal and VIA NET.WORKS Holdings Cayman respectively, which are disclosed inthe result from discontinued operations. Surf Trade Brazil, Surf Trade Portugaland VIA NET.WORKS Holdings Cayman results would have been reported in the CorporateEntity.

 

F-18

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The Company has not includedwithin discontinued operations any of the operations sold, or being marketed asdescribed within Note 1 to these consolidated financial statements. The Companymade the determination to sell these operations subsequent to December 31,2004, and therefore has not met the criteria for discontinued operationsdisclosure as set out within SFAS 144.

 

The comparative balancesheet as at December 31, 2003 has not been reclassified to show separatelyamounts related to discontinued operations.

 

**4.             Impairment and RestructuringCharges**

 

***Impairment charges:***

 
| **In  thousands of U.S. dollar*s*** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                |       |     |       |     |       |     |       |
| Fixed assets and intangible assets  |       | $        | —     |     | $          | 131      |       | $ | 1,894 |   |
| Goodwill                            |       | —   |       | 5,515    |       | 7,306    |       |
|                                |       |     |       |     |       |     |       |
| Total impairment charges            |       | $        | —     |     | $          | 5,646    |       | $ | 9,200 |   |

 

**2003**

 

At December 31, 2003, upon completion of its annual review, theCompany impaired $4.5 million of the goodwill related to its Solutionssegment and $1.0 million of the goodwill related to its Express segment. Thetriggering event for the impairment was the underperformance of thesebusinesses compared to forecast and subsequent revisions to future revenue andcost estimates following the completion of the business forecast. The fairvalue calculated as of December 31, 2003 was based on a discounted cashflow model with appropriate market and business risk factored in. Thediscounted cash flow model for each reporting unit was based on the three yearmodel ending December 31, 2006, and constant annual growth ratesthereafter. As a part of the process of creating the three-year model, theCompany’s management was required to make estimates and assumptions that affectthe amounts of future revenues, costs and cash flows. In addition, the use of adiscounted cash flow model requires management to make estimates andassumptions about the discount factor, timing of cash flows, terminal valuesand future growth rates. Changes to any of these assumptions can have amaterial impact on the discounted cash flows and the outcome of the impairmentreview. The assumptions made in calculating the impairment charges representmanagement’s best estimates based on currently available information

 

During the year endedDecember 31, 2003, the Company recorded a fixed asset impairment charge of$0.1 million for fixed asset fixtures and fittings that were written downto net realizable value as a result of the closure of the Reston office inMarch 2003.

 

**2004**

 

At December 31, 2004, upon completion of an impairment analysis,  in accordance with SFAS 144, the Companyrecorded an intangible fixed asset impairment charge of $0.1 million and atangible fixed asset impairment charge of $1.8 million, mainly related to theSolutions segment.  The fair value of theasset groups, calculated as of December 31, 2004, was based on a discountedcash flow model with appropriate market and business risk factored in for theperiod up until June 30, 2005, the expected date of completion for the theClaranet Sale, the expected sales proceeds of $27.0 million as agreed in theletter of intent with Claranet and the forecasted working capital requirementat June 30, 2005.

 

The triggering event for theimpairment was a combination of factors including unanticipated revenueshortfalls in certain of our legacy VIA companies and our new Express businessin the quarter ended December 31, 2004, which left the Company withinsufficient cash reserves to continue the operations, and resulted in thesigning of the letter of intent on April 11, 2005 to sell the businesses of VIANET.WORKS to Claranet.

 

In addition, atDecember 31, 2004, upon completion of its annual review in accordance withSFAS 142, the Company impaired $4.3 million of the goodwill related to itsIndustry Solutions segment and $3.0 million of the goodwill related to its Amensegment.

 

The fair value of thereporting units calculated as of December 31, 2004 was based on adiscounted cash flow model with appropriate market and business risk factoredin for the period until June 30, 2005, the expected date of completion of thetransaction with Claranet, in addition to the expected sale proceeds of $27.0million to be received as agreed in the letter of intent with Claranet and theforecasted working capital requirements at June 30, 2005. For further detailsof the proposed transaction, see Note 1.

 

As a part of the process ofcreating the discounted cash flow model, the Company’s management was requiredto make estimates

 

F-19

----

 

and assumptions that affect the amounts offuture revenues, costs and cash flows. In addition, the use of a discountedcash flow model requires management to make estimates and assumptions about thediscount factor, timing of cash flows, terminal values and future growth rates.Changes to any of these assumptions can have a material impact on thediscounted cash flows and the outcome of the impairment review. The assumptionsmade in calculating the impairment charges represent management’s bestestimates based on currently available information.

 

Management has based theirassessment of fair value on the expected sale proceeds of the business of $27.0million and the forecasted working capital requirements at the expected date ofcompletion of the transaction. There is a risk that this sale will not becompleted. Also, the expected final sales consideration is based in part on theamount of working capital used by VIA over the period prior to completion, andthe actual working capital used may differ significantly from what wasforecasted. If one or more of these risks materialize, the outcome of theimpairment review may materially differ from the current calculation.

 

***Restructuring charges:***

 
| **In  thousands of U.S. dollars**  | ** ** | **Balance at December 31, 2002** | ** ** | **Additions** | ** ** | **Reserves  utilized** | ** ** | **Foreign  exchange** | ** ** | **Balance at December 31, 2003** | ** ** |
|------------------------------------|------------|----------------------------------|------------|---------------|------------|------------------------|------------|-----------------------|------------|----------------------------------|------------|
|                               |       |                             |       |          |       |                   |       |                  |       |                             |       |
| Employee termination payments      |       | 415                              |       | 1,836         |       | (2,024                 | )          | 16                    |       | 243                              |       |
| Future operating lease obligations |       | 456                              |       | 187           |       | (369                   | )          | 2                     |       | 276                              |       |
| Other                              |       | —                           |       | 1,054         |       | (933                   | )          | —                |       | 121                              |       |
|                               |       |                             |       |          |       |                   |       |                  |       |                             |       |
| Total                              |       | $                                | 871        |          | $          | 3,077                  |       | $                     | (3,326     | )                                | $          | 18 |   | $ | 640 |   |
|                                    |            |                                  |            |               |            |                        |            |                       |            |                                  |            |  |  |  |  |  |

 
| **In  thousands of U.S. dollar*s*** | ** ** | **Balance at December 31, 2003** | ** ** | **Additions** | ** ** | **Reserves  utilized** | ** ** | **Foreign  exchange** | ** ** | **Balance at December 31, 2004** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|---------------|------------|------------------------|------------|-----------------------|------------|----------------------------------|------------|
|                                |       |                             |       |          |       |                   |       |                  |       |                             |       |
| Employee termination payments       |       | 243                              |       | 1,699         |       | (1,652                 | )          | 70                    |       | 360                              |       |
| Future operating lease obligations  |       | 276                              |       | 92            |       | (214                   | )          | 10                    |       | 164                              |       |
| Other                               |       | 121                              |       | 1,256         |       | (909                   | )          | 16                    |       | 484                              |       |
|                                |       |                             |       |          |       |                   |       |                  |       |                             |       |
| Total                               |       | $                                | 640        |          | $          | 3,047                  |       | $                     | (2,775     | )                                | $          | 96 |   | $ | 1008 |   |
|                                     |            |                                  |            |               |            |                        |            |                       |            |                                  |            |  |  |  |  |  |

 

**2003**

                

During the year ended December 31, 2003, the Company recordedrestructuring charges related to the implementation of its strategic plan of $3.1 million.The restructuring charge for the year ended December 31, 2003 related toseverance payments at five of its operations, at its US operation and at thecorporate headquarters; the cost of vacant office space and transitionimplementation costs for back-office and administrative outsourcinginitiatives.

 

Headcount for sales, information technology, marketing, finance andother various administrative roles has been reduced as part of the Company’sstrategic plan. The employee termination costs of $1.8 million relate tothe severance and benefits for thirty nine employees at five Europeanoperations, four employees at its US operation and seven employees at thecorporate headquarters. The employee termination costs accrual of $0.2 millioncarried forward at December 31, 2003 comprised $0.1 million inrespect of three European operations and $0.1 million at the corporateheadquarters. These amounts, which relate to 16 employees, have been paid inthe period ended June 30, 2004.

 

The future operating lease obligations charge for the year endedDecember 31, 2003 of $0.3 million comprised $0.1 million inrespect of the former corporate headquarters office in Reston, Virginia, USA,$0.1 million for vacant office in Switzerland and $0.1 million forvacant space in the German operation office. The accrual of $0.3 millionat December 31, 2003 reflects the net of the future lease obligations onthe Reston office, which continues through February 2005, less the incomefrom a sublease of the space.

 

The Other charges of $1.1 million related to the implementationcosts for back-office and administrative outsourcing initiatives at thecorporate headquarters. The remainder of the costs have been paid in thequarter ended March 31, 2004.

 

**2004**

 

During the year endedDecember 31, 2004, the Company recorded restructuring charges of $3.0million. The restructuring charge for the year ended December 31, 2004 relatedto severance payments at the corporate headquarters and at six of the Company’s

 

F-20

----

 

European operations, costs associated withintegrating the PSINet Europe operations recently acquired, transitionimplementation costs for back-office and administrative outsourcing activitiesand charges for future lease obligations at the German operation and the Restonoffice.

 

The employee terminationcosts of $1.7 million for the year ended December 31, 2004 relate to twelveemployees at the corporate headquarters and sixty five employees at ourEuropean operations, most notably thirty-four in Germany, thirteen in Spain andeight in France. Cash payments for severance and benefits of $1.7 million weremade in 2004 by our European operations ($1.1 million) and Corporate ($0.6million). The remaining accrual of $0.4 million at December 31, 2004 relates toseventeen employees at the European operations and one employee at thecorporate headquarters. It is not anticipated that any of these terminationswill adversely impact the Company’s ability to generate revenue.

 

The accrual for futureoperating lease obligations, relating to the Reston office, has been drawn downby the monthly payments on the office lease, which continues through February2005, less the income from a sublease of the space. During the year endedDecember 31, 2004, an additional accrual of $0.1 million has been made forfuture lease obligations in the German operation.

 

 Other charges incurred in the year endedDecember 31, 2004  relate to theimplementation costs for back-office and administrative outsourcinginitiatives. In addition, other charges include $0.5 million for the year endedDecember 31, 2004 relating to costs associated with integrating the PSINetEurope operations recently acquired (see Note 5) and related system migrationcosts. Restructuring charges of $0.2 million, booked in the year ended December31, 2004 relate to the termination of a reseller agreement in the Frenchoperation.  Certain of the actions VIAmight take as part of its strategic plan may lead to additional impairment orrestructuring charges in future periods and such amounts may be material.

 

 

**5.             Acquisitions of Certain Businesses**

 

*PSINet Entities:*

 

On August 20, 2004,VIA acquired 100% of the issued and outstanding shares of the PSINet EuropeB.V. operations in Belgium, France, Germany, the Netherlands and Switzerland. TheCompany acquired PSINet Europe to increase its revenue streams generated fromhosting services and to support the development of our Industry Solutionschannel. These operations provide managed hosting, managed networks andmonitored access services to 3,700 customers in mainland Europe. The Companypaid total consideration for the shares and inter-company debt of the PSINetEurope companies as follows: Euro 10.0 million in cash (approximately $12.3million) at closing; Euro 1.0 million (approximately $1.4 million) in January2005 after the resolution of the adjustments for the deficit in the agreedworking capital balance. The total acquisition costs spent are $2.2 million; TheCompany additionally has a undiscounted liability of Euro 6.0 million(approximately $8.2 million) in cash or, at the option of the sellers, 4.5million shares of VIA common stock, 15 months after closing, subject to anyfinal adjustments for warranty claims, if any. The payments in January 2005 tothe former shareholders in relation to the finalization of the working capitalbalance at acquisition resulted in a corresponding increase in the amount ofgoodwill recognized in the year ended December 31, 2004. The Company is indiscussions with the holders of the note to pay a lesser amount in cash and aportion in common stock of the Company.

 

The purchase priceallocation is as follows:

 
| **In  thousands of U.S. dollars**                    | *** *** | *** *** | *** *** |
|------------------------------------------------------|--------------|--------------|--------------|
| Current  assets                                      |         | 9,373        |         |
| Property,  plant and equipment                       |         | 3,281        |         |
| Intangible  assets                                   |         | 4,309        |         |
| Goodwill  (Solutions segment)                        |         | 31,648       |         |
| Total assets  acquired                               |         | 48,611       |         |
| Current  liabilities                                 |         | (25,743      | )            |
| Purchase  consideration, including acquisition costs |         | $            | 22,868       |   |
|                                                      |              |              |              |  |

 

At acquisition,the Company identified intangible assets regarding customer lists and atradename and allocated part of the consideration paid to value theseintangible assets. The Company engaged a third party expert to identify andvalue the intangible assets with the purpose to allocate the fair value of thepurchase price to the appropriate asset classes.

 

F-21

----

 

The customer lists have been valued using the excess earnings method,which examines the economic returns contributed by the identified tangible andintangible assets of the acquired company, then isolating the excess returnwhich is attributable to the customer lists being valued. The tradename hasbeen valued using the royalty savings method. Under this method, the value ofthe tradename is a function of the projected revenues attributable to theproducts utilizing those assets, the royalty rate that would hypothetically becharged by a licensor of the trademark to a licensee, and an appropriatediscount rate to reflect the inherent risk of the projected cash flows.

 

The customer lists and the tradename “PSINet Europe”, are being amortizedover 5 and 10 years respectively. The results of the PSINet Europecompanies have been included from August 20, 2004, the acquisition date. TheCompany recorded $0.2 million of amortization on these acquired intangiblefixed assets in the year ended December 31, 2004.  The allocation of purchase consideration ispreliminary and may change once the Company completes its valuation of theassets and liabilities acquired. The Company is still working through theintegration of PSINet, and may record additional amounts to adjust the purchaseprice allocation in future periods.

 

The followingunaudited pro forma results of operations of the PSINet operations acquired arepresented assuming the acquisition had been completed on January 1, 2003:

 
| ** **                                                    | ** ** | **For the year  ended  December 31, 2003** | ** ** | **For the year  ended  December 31, 2004** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| Revenue                                                       |       | $                                          | 43,853     |                                       | $          | 41,826 |   |
| Net loss from continuing operations                           |       | (13,313                                    | )          | (6,731                                     | )          |
| Basic and diluted loss per share, from  continuing operations |       | $                                          | (0.22      | )                                          | $          | (0.11 | ) |

 

The unaudited pro formaamounts are not necessarily indicative of the results that would have beenachieved if the acquisition had been consummated on January 1, 2003, nor arethe results indicative of VIA’s expected future results.

 

*Amen:*

 

In January 2004, the Company purchased 100% of the issued andoutstanding shares of Amen SAS, Amen Srl and Amen Limited (collectively “Amen”),a European web-hosting company based in Paris, France. Amen has operations inFrance, the United Kingdom, Spain and Italy. The Company acquired Amen tostrengthen its operations and benefit from Amen’s operating platform andservice offerings. The Company paid $7.5 million in cash and issued673,652 shares of its common stock, which had a market value of $2 per share onthe date of acquisition having a total value of approximately $1.3 millionfor Amen common stock. The total acquisition costs spent are $1.2 million. Basedon the earn-out arrangement with the former shareholders, the Company hasrecorded a liability to the former shareholders of $1.3 million in cashand $0.6 million in shares of the Company’s common stock, as of December 31,2004. The purchase consideration calculated below includes the additionalconsideration, which is currently determinable. If any further amounts are paidto the former shareholders, this will result in a corresponding increase in theamount of goodwill recognized.

 

The purchase priceallocation is as follows:

 
| **In  thousands of U.S. dollars**                    | *** *** | *** *** | *** *** |
|------------------------------------------------------|--------------|--------------|--------------|
| Current  assets                                      |         | $            | 3,310        |   |
| Propert,  plant and equipment                        |         | 1,059        |         |
| Intangible  assets                                   |         | 3,968        |         |
| Goodwill  (Amen segment)                             |         | 13,299       |         |
| Total assets  acquired                               |         | 21,636       |         |
| Current  liabilities                                 |         | (9,823       | )            |
| Purchase  consideration, including acquisition costs |         | $            | 11,813       |   |

 

At acquisition, the Company identified intangible assets regarding customerlists, a tradename and software and allocated part of the consideration paid tovalue these intangible assets. The software relates to an internally developedfully-automated and scaleable end-to-end operating platform which automates thesales, payment, domain name and hosting packages account set-up process. TheCompany engaged a third party expert to identify and value the intangibleassets with the purpose to allocate the fair value of the purchase price to theappropriate asset classes.

 

F-22

----

 

The customer lists have been valued using the average outcomes of theincome approach, the market approach and the cost approach. Under the marketapproach, the fair value of an asset reflects the price at which comparableassets can be purchased under similar circumstances. The income approach ispredicated upon the value of the future cash flows that an asset will generateover its remaining useful life. The cost approach determines the value of anasset as an estimate of the current cost to purchase or replace the asset. Thetrade name has been valued using the royalty savings method. Under this method,the value of the trade name is a function of the projected revenuesattributable to the products utilizing those assets, the royalty rate thatwould hypothetically be charged by a licensor of the trademark to a licensee,and an appropriate discount rate to reflect the inherent risk of the projectedcash flows. The software has been valued using the cost approach.

 

The intangible assets are being amortized over 3-10 years. The Company recorded $0.7 million ofamortization on these acquired intangible fixed assets in the year endedDecember 31, 2004. The results of Amen have been included from January 28,2004, the acquisition date. The allocation of purchase consideration wasamended throughout the year ended December 31, 2004.

 

The actual results ofoperations for the year ended December 31, 2004 did not differ materially fromthe pro forma results of operations computed under the assumption that theacquisition was consummated effective January 1, 2004.

 

**6.             Accounts Receivable, net**

 

Trade receivables are stated net of allowance for doubtful accounts of$1.9 million and $3.0 million as at December 31, 2003 and 2004.

 
| **In  thousands of U.S. dollars** | ** ** | **December  31, 2003** | ** ** | **December  31, 2004** | ** ** |
|-----------------------------------|------------|------------------------|------------|------------------------|------------|
|                              |       |                   |       |                   |       |
| Trade receivables, net            |       | $                      | 10,690     |                   | $          | 11,412 |   |
| Other receivables                 |       | 3,605                  |       | 2,497                  |       |
|                              |       |                   |       |                   |       |
| As at December 31                 |       | $                      | 14,295     |                   | $          | 13,909 |   |
|                                   |            |                        |            |                        |            |  |  |  |  |

 

Other receivables relate to VAT receivable and the recovery of certainpreviously paid legal invoices.

 

Further analysis of the allowance for doubtful accounts is presentedbelow.

 
| **In  thousands of U.S. dollars** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                              |       |     |       |     |       |     |       |
| Allowance for doubtful accounts:  |       |     |       |     |       |     |       |
| As at January 1                   |       | $        | 3,623      |     | $          | 4,529    |       | $ | 1,911 |   |
| Foreign exchange adjustment       |       | (165     | )          | 688      |       | 301      |       |
| Bad debt expenses                 |       | 8,029    |       | 289      |       | 1,026    |       |
| Write off of bad debts            |       | (3,094   | )          | (3,005   | )          | (778     | )          |
| Other movements(1)                |       | —   |       | (590     | )          | 506      |       |
|                              |       |     |       |     |       |     |       |
| As at December 31                 |       | $        | 8,393      |     | $          | 1,911    |       | $ | 2,966 |   |

----

(1)                                  Amounts represent the write off ofuncollectible accounts receivable balances and the balance of operationsacquired or sold during the year ended December 31, 2003 and 2004.

 

**7.             Property and Equipment, net**

 

Property and equipment consisted of the following:

 
| ** **                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|------------------|------------|
| **In  thousands of U.S. dollars**         | ** ** | **2003**         | ** ** | **2004** | ** ** |
|                                      |       |             |       |   |   |
| Hardware and other equipment              |       | $                | 16,393     |   | $ | 19,586 |   |
| Network and data center assets            |       | 11,914           |       | 8,330 |   |
| Software                                  |       | 14,471           |       | 17,237 |   |
| Furniture and fixtures                    |       | 1,105            |       | 1,186 |   |
|                                      |       |             |       |   |   |
|                                      |       | 43,883           |       | 46,339 |   |
| Accumulated depreciation and amortization |       | (31,880          | )          | (33,274 | ) |
|                                      |       |             |       |   |   |
| Property and equipment, net               |       | $                | 12,003     |   | $ | 13,065 |   |

 

F-23

----

 

Total depreciation expense was $9.8 million, $8.0 million and$6.7 million in 2002, 2003 and 2004, respectively. As of December 31,2003 and 2004, the Company held $9.8 million and $6.6 million ofcapitalized network infrastructure under capital lease/IRU arrangements. Therelated accumulated depreciation was $7.9 million and $5.5 million. As ofDecember 31, 2003 and 2004, the Company held $14.5 million and $17.8 millionof capitalized internal use software with related accumulated depreciation of $10.1 millionand $12.8 million.

 

The Company recorded an asset impairment charge of $1.8 million and  $0.1 million for the year ended December31, 2004 and the year ended December 31, 2003 respectively. The tableabove shows the balances net after the effect of the impairment charges. Thefixed asset impairment charge related to Hardware and other equipment. (SeeNote 4 for further information.)

 

**8.             Goodwill**

 

The changes in the carrying amount of goodwill during the years endedDecember 31, 2002 and 2003 are as follows:

 
| **In  thousands of U.S. dollars**                        | ** ** | **Total** | ** ** | **Solutions** | ** ** | **Amen** | ** ** | **Express** | ** ** |
|----------------------------------------------------------|------------|-----------|------------|---------------|------------|----------|------------|-------------|------------|
|                                                     |       |      |       |          |       |     |       |        |       |
| Balance as of December 31, 2002                          |       | $         | 9,189      |          | $          | 7,027    |       | —      |       | $ | 2,162 |   |
| Impairment charges related to continuing  operations     |       | (5,515    | )          | (4,499        | )          | —   |       | (1,016      | )          |
| Impairment charges related to discontinued  operations   |       | (1,752    | )          | (1,752        | )          | —   |       | —      |       |
| Foreign exchange adjustment                              |       | 1,189     |       | 1,189         |       | —   |       | —      |       |
|                                                     |       |      |       |          |       |     |       |        |       |
| Balance as of December 31, 2003                          |       | $         | 3,111      |          | $          | 1,965    |       | —      |       | $ | 1,146 |   |
|                                                     |       |      |       |          |       |     |       |        |       |
| Acquisitions                                             |       | 44,947    |       | 31,648        |       | 13,299   |       | —      |       |
| Impairment charges related to continuing  operations     |       | (7,306    | )          | (4,252        | )          | (3,054   | )          | —      |       |
| Disposal of goodwill related to  discontinued operations |       | (1,965    | )          | (1,965        | )          | —   |       | —      |       |
| Foreign exchange adjustment                              |       | 3,679     |       | 3,434         |       | 245      |       | —      |       |
|                                                     |       |      |       |          |       |     |       |        |       |
| Balance as of December 31, 2004                          |       | $         | 42,466     |          | $          | 30,830   |       | $           | 10,490     |   | $ | 1,146 |   |
|                                                          |            |           |            |               |            |          |            |             |            |  |  |  |  |

 

Impairments are discussed in greater detailwithin Note 4 of these consolidated financial statements.

 

**9.             Intangible Assets, net**

 

The Company’s intangible assets, consisting of acquired customer lists,are as follows:

 
| **In  thousands of U.S. dollars** | ** ** | **December 31,  2003** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
|                              |       |                        |       |                        |       |
| Customer lists                    |       | $                           | 794        |                        | $          | 5,343 |   |
| Software                          |       | —                      |       | 2,183                       |       |
| Tradename                         |       | —                      |       | 1,062                       |       |
| Accumulated amortization          |       | (63                         | )          | (652                        | )          |
|                              |       |                        |       |                        |       |
| Intangible assets, net            |       | $                           | 731        |                        | $          | 8,695 |   |

 

The amortization expense for the years ended December 31, 2002, 2003and 2004 was $1.3 million, $0.1 million and $1.4 million respectively.

 

F-24

----

 

At the end ofSeptember 2003, the Swiss subsidiary acquired a customer list from a Swissweb-design and hosting company for the amount of $0.8 million. Theacquisition cost is amortized over three years.

 

See Note 5 of these consolidatedfinancial statements for intangible asset additions from the acquisition of Amenand the PSINet Europe companies. The Company amortizes customer lists, softwareand trade names over three to seven years, five years and ten yearsrespectively.

 

The amortization charge for the next fiveyears is as follows:

 
| **In  thousands of U.S. dollars** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|------------|------------|
|                              |       |       |       |
| 2005                              |       | $          | 2,214      |   |
| 2006                              |       | 2,144      |       |
| 2007                              |       | 1,376      |       |
| 2008                              |       | 1,325      |       |
| 2009                              |       | 666        |       |
| Thereafter                        |       | 474        |       |
| Total                             |       | $          | 8,199      |   |

 

**10.          Capital Lease Obligations, Long-TermPayables and Notes Payable**

 

Capital lease obligations, long-term payables and notes payable consistedof the following:

 
| ** **                                                                          | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------|------------|
| **In  thousands of U.S. dollars**                                                   | ** ** | **2003**         | ** ** | **2004** | ** ** |
|                                                                                |       |             |       |   |   |
| Capital lease obligations at interest rates  ranging from 7.8% to 8.0%, due monthly |       | $                | —     |   | $ | 226 |   |
| Long-term payables                                                                  |       | 501              |       | 1,626 |   |
| Notes payable                                                                       |       | —           |       | 7,817 |   |
|                                                                                |       |             |       |   |   |
|                                                                                |       | 501              |       | 9,669 |   |
| Less current portion                                                                |       | (173             | )          | (9,325 | ) |
|                                                                                |       |             |       |   |   |
| Long-term portion                                                                   |       | $                | 328        |   | $ | 344 |   |

 

The scheduled maturities of amounts payable outstanding atDecember 31, 2004 are summarized as follows:

 
| 2005           |   | $     | 9,694  |   |
|----------------|--------|-------|--------|--------|
| 2006           |   | 277   |   |
| 2007           |   | 67    |   |
|           |   | $     | 10,038 |   |
| Less: interest |   | (369  | )      |
|           |   | 9,669 |   |

 

Inconnection with the acquisition of the PSINet Europe companies (see Note 4), inAugust 2004 the Company issued an unsecured zero coupon convertible note. Thenote is due in November 2005 and is convertible into 4.5 million of VIA commonstock at the option of the holder. The face value of the note is Euro 6 million(approximately $8.2 million),subject to any final adjustments for warranty claims if any, and the effective interest rate is 5.27%.Based on this effective interest rate, the present value of the unsecured zerocoupon convertible note is Euro 5.6 million (approximately $7.6 million). Thediscount of Euro 0.4 million (approximately $0.6 million) is being amortized asinterest expense over the duration of the note.

 

 

F-25

----

 

**11.          Stock Compensation and RetirementPlans**

 

*Stock Option Plan:*

 

In 2000, the Company adopted the Amended and Restated 1998 Stock Optionand Restricted Stock Plan (the “Option Plan”). The Option Plan allows theCompany to issue employees either incentive or non-qualified options, whichvest over such periods as may be determined by the Board of Directors,generally two to four years. The options expire no later than ten years and onemonth after grant date. The Option Plan allows for grants that would allow thegrantees to exercise their options prior to vesting in exchange for restrictedcommon stock or restricted stock units, however, no such grants have been made.Options granted prior to our initial public offering in February 2000 havean exercise price equal to the estimated value of the common stock at the dateof grant as determined by the Company’s Board of Directors. Options grantedafter the date of our initial public offering have an exercise price equal tothe closing price for our stock on the NASDAQ SmallCap Market on the lasttrading day immediately prior to the date of grant. As of December 31, 2003and 2004 the Company has reserved 9,200,000 common shares for issuance underthe Option Plan.

 

*Warrants for Common Stock:*

 

In April 1998, the Company issued warrants to purchase 100,000shares of common stock at an exercise price of $2.40, to a non-employee memberof the Board of Directors. These warrants expired during the year endedDecember 31, 2003.

 

*Fair Value of Stock Options and Warrants:*

 

                Fordisclosure purposes under SFAS 123, the fair value of each stock optionand warrant granted is estimated on the date of grant using the Black Scholesoption-pricing model with the following weighted-average assumptions:

 
| ** **              | ** ** | **2002**         | ** ** | **2003**         | ** ** | **2004**         | ** ** |
|-------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **              | ** ** | **Option  Plan** | ** ** | **Option  Plan** | ** ** | **Option  Plan** | ** ** |
|                    |       |             |       |             |       |             |       |
| Expected life in months |       | 12-120           |       | 72               |       | 112              |       |
| Risk-free interest rate |       | 4.61             | %          | 4.01             | %          | 4.27             | %          |
| Volatility              |       | 90               | %          | 82               | %          | 77               | %          |
| Dividend yield          |       | 0                | %          | 0                | %          | 0                | %          |

 

Utilizing these assumptions, the weighted-average fair value of thestock options granted was as follows:

 
| ** **  | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|-------------|------------|----------|------------|----------|------------|----------|------------|
|        |       |     |       |     |       |     |       |
| Option Plan |       | $        | 0.55       |     | $          | 0.93     |       | $ | 0.83 |   |
|             |            |          |            |          |            |          |            |  |  |  |

 

Under the above model, the total fair value of stock options grantedwas approximately $1,8 million, $3,1 million and $0.6 million in 2002, 2003 and2004, respectively, which would be amortized on a pro forma basis over theoption-vesting period. The weighted average grant date fair value of optionsgranted during each year was approximately $0.55, $0.81 and $0.83 respectively,for the fiscal years ended December 31, 2002, 2003 and 2004.

 

F-26

----

 

Following is a summary of the Company’s stock option and warrant activitythrough December 31, 2004:

 
| ** **                     | ** ** | **Number of Shares of  Common Stock** | ** ** | ** **   | ** ** | **Weighted**  | ** ** |
|--------------------------------|------------|---------------------------------------|------------|--------------|------------|---------------|------------|
| ** **                     | ** ** | **Option**                            | ** ** | ** **   | ** ** | **Price Per** | ** ** | **Average** | ** ** |
| ** **                     | ** ** | **Plan**                              | ** ** | **Warrants** | ** ** | **Share**     | ** ** | **Exercise Price** | ** ** |
|                           |       |                                  |       |         |       |          |       |   |   |
| Balance at December 31, 2001   |       | 8,529,773                             |       | 100,000      |       | $0.86-$21.63  |       | $ | 8.61 |   |
| Granted                        |       | 3,370,000                             |       | —       |       | $0.54-$1.01   |       | $ | 0.66 |   |
| Exercised                      |       | —                                |       | —       |       | $             | —     |   | $ | — |   |
| Forfeited                      |       | (4,570,199                            | )          | —       |       | $0.86-$21.63  |       | $ | 9.55 |   |
|                           |       |                                  |       |         |       |          |       |   |   |
| Balance at December 31, 2002   |       | 7,329,574                             |       | 100,000      |       | $0.54-$19.00  |       | $ | 4.34 |   |
|                           |       |                                  |       |         |       |          |       |   |   |
| Granted                        |       | 3,748,895                             |       | —       |       | $0.65-$1.74   |       | $ | 1.21 |   |
| Exercised                      |       | (660,005                              | )          | —       |       | $0.59-$0.99   |       | $ | 0.81 |   |
| Forfeited                      |       | (2,750,029                            | )          | (100,000     | )          | $0.65-$19.00  |       | $ | 5.76 |   |
|                           |       |                                  |       |         |       |          |       |   |   |
| Balance at December 31, 2003   |       | 7,668,435                             |       | —       |       | $0.54-$19.00  |       | $ | 2.63 |   |
|                           |       |                                  |       |         |       |          |       |   |   |
| Granted                        |       | 732,500                               |       | —       |       | $0.61-$2.00   |       | $ | 1.03 |   |
| Exercise                       |       | (105,932                              | )          | —       |       | $0.60-$0.86   |       | $ | 1.01 |   |
| Forfeited                      |       | (850,870                              | )          | —       |       | $0.60-$19.00  |       | $ | 4.38 |   |
|                           |       |                                  |       |         |       |          |       |   |   |
| Balance at December 31, 2004   |       | 7,444,133                             |       | —       |       | $0.54-$19.00  |       | $ | 2.31 |   |
|                           |       |                                  |       |         |       |          |       |   |   |
| Exercisable, December 31, 2002 |       | 3,761,134                             |       | 100,000      |       | $0.56-$19.00  |       | $ | 6.21 |   |
|                           |       |                                  |       |         |       |          |       |   |   |
| Exercisable, December 31, 2003 |       | 2,727,281                             |       | —       |       | $0.54-$19.00  |       | $ | 5.12 |   |
|                           |       |                                  |       |         |       |          |       |   |   |
| Exercisable, December 31, 2004 |       | 4,425,002                             |       | —       |       | $0.54-$19.00  |       | $ | 3.18 |   |
|                                |            |                                       |            |              |            |               |            |  |  |  |  |

 

F-27

----

 

The following table summarizes information about the outstanding andexercisable options and warrants at December 31, 2004:

 
| **Exercise Price** | ** ** | **Outstanding  Number of Shares** | ** ** | **Weighted-Average Remaining  Contractual Life (Months)** | ** ** | **Exercisable  Number of Shares** | ** ** |
|--------------------|------------|-----------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------|------------|
|               |       |                              |       |                                                      |       |                              |       |
| $                  | 0.54       |                              | 1,000,000  |                                                      | 94.1       |                              | 520,833    |   |
| $                  | 0.56       |                              | 150,000    |                                                      | 94.0       |                              | 150,000    |   |
| $                  | 0.59       |                              | 100,000    |                                                      | 93.5       |                              | 72,222     |   |
| $                  | 0.61       |                              | 300,000    |                                                      | 117.0      |                              | —     |   |
| $                  | 0.63       |                              | 250,000    |                                                      | 89.0       |                              | 156,250    |   |
| $                  | 0.65       |                              | 827,084    |                                                      | 94.7       |                              | 519,398    |   |
| $                  | 0.67       |                              | 215,000    |                                                      | 98.6       |                              | 94,063     |   |
| $                  | 0.72       |                              | 110,000    |                                                      | 97.2       |                              | 67,220     |   |
| $                  | 0.78       |                              | 200,000    |                                                      | 89.7       |                              | 145,833    |   |
| $                  | 0.82       |                              | 50,104     |                                                      | 87.0       |                              | 33,403     |   |
| $                  | 0.86       |                              | 193,609    |                                                      | 81.0       |                              | 153,273    |   |
| $                  | 0.95       |                              | 277,500    |                                                      | 112.2      |                              | —     |   |
| $                  | 0.97       |                              | 262,300    |                                                      | 101.4      |                              | 110,863    |   |
| $                  | 1.00       |                              | 300,000    |                                                      | 39.4       |                              | 300,000    |   |
| $                  | 1.18       |                              | 1,000      |                                                      | 79.2       |                              | 833        |   |
| $                  | 1.38       |                              | 200,000    |                                                      | 106.0      |                              | 77,778     |   |
| $                  | 1.62       |                              | 1,195,000  |                                                      | 107.6      |                              | 379,999    |   |
| $                  | 1.74       |                              | 445,144    |                                                      | 107.3      |                              | 436,485    |   |
| $                  | 2.00       |                              | 155,000    |                                                      | 108.3      |                              | —     |   |
| $                  | 2.05       |                              | 49,100     |                                                      | 76.7       |                              | 43,987     |   |
| $                  | 2.40       |                              | 71,042     |                                                      | 43.3       |                              | 71,042     |   |
| $                  | 4.00       |                              | 295,000    |                                                      | 51.9       |                              | 295,000    |   |
| $                  | 6.13       |                              | 114,000    |                                                      | 67.9       |                              | 113,270    |   |
| $                  | 8.25       |                              | 34,500     |                                                      | 56.5       |                              | 34,500     |   |
| $                  | 9.00       |                              | 340,750    |                                                      | 60.7       |                              | 340,750    |   |
| $                  | 9.75       |                              | 9,500      |                                                      | 59.0       |                              | 9,500      |   |
| $                  | 12.94      |                              | 4,000      |                                                      | 68.0       |                              | 4,000      |   |
| $                  | 14.88      |                              | 10,000     |                                                      | 67.9       |                              | 10,000     |   |
| $                  | 16.00      |                              | 75,000     |                                                      | 60.5       |                              | 75,000     |   |
| $                  | 18.69      |                              | 51,500     |                                                      | 65.8       |                              | 51,500     |   |
| $                  | 19.00      |                              | 158,000    |                                                      | 63.1       |                              | 158,000    |   |
|               |       |                              |       |                                                      |       |                              |       |
|               |       | 7,444,133                         |       | 89.6                                                      |       | 4,425,002                         |       |

 

**12.          Stockholders’ Equity**

 

In June 2001, the Company announced a stock repurchase plan thatwill allow the Company to spend up to $10 million to repurchase shares ofits common stock. Under the plan, the Company may repurchase shares of itscommon stock from time to time, subject to market conditions, applicable legalrequirements and other factors. This plan does not require that the Companypurchase any specific number of shares and the plan may be suspended at anytime. The Company’s repurchase of shares of common stock are recorded as “TreasuryStock” and result in a reduction of “Stockholders’ Equity”. In April 2003,VIA announced the restarting of its previously authorized stock repurchase planto acquire up to $10 million worth of VIA stock. In the second quarter of2003, VIA purchased 823,593 shares of its common stock at a total cost of$0.8 million. In the third and fourth quarters of 2003 and in 2004 noshares were repurchased. This plan can be suspended by VIA at any time.

 

F-28

----

 

**13.          Income Taxes**

 

The differences between the U.S. federal statutory tax rate and theCompany’s effective tax rate are as follows:

 
| ** **                             | ** ** | **For the Years Ended  December 31,** | ** ** |
|----------------------------------------|------------|---------------------------------------|------------|
| ** **                             | ** ** | **2002**                              | ** ** | **2003** | ** ** | **2004** | ** ** |
|                                   |       |                                  |       |   |   |   |   |
| Statutory U.S. federal income tax rate |       | 34                                    | %          | 34 | % | 34 | % |
| State income taxes, net                |       | 2                                     |       | 1 |   | 0 |   |
| Intangibles amortization               |       | (1                                    | )          | — |   | (1 | ) |
| Goodwill impairment charges            |       | (8                                    | )          | (9 | ) | (7 | ) |
| Change in valuation allowance          |       | (35                                   | )          | (21 | ) | (26 | ) |
| Foreign tax differential               |       | 13                                    |       | (5 | ) | 0 |   |
|                                   |       |                                  |       |   |   |   |   |
| Effective income tax rate              |       | 0                                     | %          | 0 | % | 0 | % |

 

The (benefit from) expense for income taxes from continuing operationsis summarized below:

 
| ** **                                     | ** ** | **For the Years Ended December 31,** | ** ** |
|------------------------------------------------|------------|--------------------------------------|------------|
| **In  thousands of U.S. dollars**              | ** ** | **2002**                             | ** ** | **2003** | ** ** | **2004** | ** ** |
|                                           |       |                                 |       |   |   |   |   |
| Current income taxes:                          |       |                                 |       |   |   |   |   |
| International                                  |       | $                                    | (12        | ) | $ | 161 |   | $ | 335 |   |
| Federal                                        |       | —                               |       | — |   | — |   |
| State                                          |       | (39                                  | )          | 4 |   | (35 | ) |
|                                           |       |                                 |       |   |   |   |   |
|                                           |       | $                                    | (51        | ) | $ | 165 |   | $ | 300 |   |
| Deferred income taxes:                         |       |                                 |       |   |   |   |   |
| International                                  |       | —                               |       | — |   | — |   |
|                                           |       |                                 |       |   |   |   |   |
| Total deferred income taxes                    |       | —                               |       | — |   | — |   |
|                                           |       |                                 |       |   |   |   |   |
| Total (benefit from) expense for income  taxes |       | $                                    | (51        | ) | $ | 165 |   | $ | 300 |   |

 

The components of loss from continuing operations before income taxesand minority interest are as follows:

 
| ** **                        | ** ** | **For the Years Ended December 31,** | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|
| **In  thousands of U.S. dollars** | ** ** | **2002**                             | ** ** | **2003** | ** ** | **2004** | ** ** |
|                              |       |                                 |       |   |   |   |   |
| U.S operations                    |       | $                                    | (37,400    | ) | $ | (9,354 | ) | $ | (21,264 | ) |
| Non-U.S. operations               |       | 15,144                               |       | (11,403 | ) | (22,754 | ) |
|                              |       |                                 |       |   |   |   |   |
|                              |       | $                                    | (22,256    | ) | $ | (20,757 | ) | $ | (44,018 | ) |
|                                   |            |                                      |            |  |  |  |  |  |  |  |  |  |  |

 

F-29

----

 

There have been no tax amounts allocated to our discontinuedoperations. Deferred tax assets and liabilities were comprised of thefollowing:

 
| **In  thousands of U.S. dollars**                           | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                        |       |     |       |     |       |     |       |
| Deferred tax assets:                                        |       |     |       |     |       |     |       |
| Federal net operating loss carryforward                     |       | $        | 74,088     |     | $          | 80,282   |       | $ | 95,072 |   |
| Start-up costs                                              |       | 46       |       | —   |       | —   |       |
| Cash to accrual adjustment at U.S. subsidiary               |       | 9        |       | —   |       | —   |       |
| Deferred compensation                                       |       | 4,214    |       | 514      |       | 514      |       |
| Other International                                         |       | 9,127    |       | 4,671    |       | (790     | )          |
| Other                                                       |       | 3,641    |       | 4,848    |       | 5,965    |       |
| International subsidiaries net operating  loss carryforward |       | 23,145   |       | 29,734   |       | 64,756   |       |
|                                                        |       |     |       |     |       |     |       |
| Gross deferred tax assets                                   |       | 114,270  |       | 120,049  |       | 165,517  |       |
| Valuation allowance                                         |       | (110,756 | )          | (111,739 | )          | (151,212 | )          |
|                                                        |       |     |       |     |       |     |       |
| Net deferred tax assets                                     |       | 3,625    |       | 8,310    |       | 14,305   |       |
|                                                        |       |     |       |     |       |     |       |
| Deferred tax liabilities:                                   |       |     |       |     |       |     |       |
| Unrealized foreign currency gain                            |       | (3,515   | )          | (7,999   | )          | (13,772  | )          |
| Fixed assets                                                |       | (110     | )          | (311     | )          | —   |       |
| Intangible fixed assets                                     |       | —   |       | —   |       | (2,639   | )          |
|                                                        |       |     |       |     |       |     |       |
| Gross deferred tax liabilities                              |       | (3,625   | )          | (8,310   | )          | (16,411  | )          |
|                                                        |       |     |       |     |       |     |       |
| Net deferred tax asset (liability)                          |       | $        | —     |     | $          | —   |       | $ | (2,106 | ) |

 

The amounts of deferred tax asset and liability for the years ended December31, 2002, December 31, 2003 and December 31, 2004 presented above areexclusive of any amounts pertaining to discontinued operations.

 

The net deferred tax assets have been reduced by a valuation allowancesince management has determined that currently it is more likely than not thatthese benefits will not be realized. The change in the valuation allowance wasan increase of $39.5 million in 2004, which is primarily related toadditional operating losses in the U.S. and foreign jurisdictions and amountsattributable to the decrease of both U.S. and foreign fixed assets andpurchased intangible assets other than goodwill for the foreign subsidiaries.The Company establishes valuation allowances in accordance with the provisionsof SFAS No. 109. The Company continually reviews the adequacy of thesevaluation allowances.

 

At December 31, 2002, 2003 and 2004, the Company had U.S. netoperating loss carry forwards of approximately $195.0 million, $211.3 millionand $250.4 million respectively, which may be used to offset futuretaxable income. These carry forwards begin to expire in 2018. Further, theInternal Revenue Code places certain limitations on the annual amount of netoperating loss carry forwards that can be utilized if certain changes in theCompany’s ownership occur.

 

At December 31, 2002, 2003 and 2004, the Company had net operatingloss carry forwards from continuing operations generated by its foreignsubsidiaries of approximately $60.1 million, $79.0 million and $219.9 millionrespectively, of which $46.0 million expires between 2005 and 2019 and $173.8 millionhas an indefinite carry forward period. It is expected that all earningsgenerated from foreign subsidiaries will be permanently reinvested in thosesubsidiaries. Determination of the amount of the potential unrecognizeddeferred tax liability is not practicable.

 

F-30

----

 

 

**14.          Commitments and Contingencies**

 

(a)                                  Lease commitments

 

The Company leases office space and equipment under non-cancelableoperating leases expiring on various dates through 2013. In addition, theCompany is required to make quarterly payments for certain operations andmaintenance services over the life of the IRU arrangements ranging from1-25 years. Rent expense for the years ended December 31, 2002, 2003and 2004 was $2,4 million, $2,4 million and $8.4 million, respectively.

 

Future minimum lease payments under non-cancelable operating leases(including operations and maintenance payments under IRU agreements) atDecember 31, 2004 are as follows:

 
| **In  thousands of U.S. dollars** |   |   |   |
|-----------------------------------|--------|--------|--------|
|                              |   |   |   |
| 2005                              |   | $      | 9,388  |   |
| 2006                              |   | 8,169  |   |
| 2007                              |   | 6,418  |   |
| 2008                              |   | 5,520  |   |
| 2009                              |   | 5,124  |   |
| 2010 and thereafter               |   | 18,128 |   |
|                              |   |   |   |
|                              |   | $      | 52,747 |   |

 

(b)                                 Other commitments

 

The Company has entered into agreements for the outsourcing of itsnetwork management, billing and back-office transaction processing. Futurepayments under these commitments are as follows:

 
| **In thousands of U.S. dollars** | *** *** | *** *** | *** *** |
|----------------------------------|--------------|--------------|--------------|
|                             |         |         |         |
| 2005                             |         | $            | 1,103        |   |
| 2006                             |         | 1,083        |         |
|                             |         |         |         |
|                             |         | $            | 2,186        |   |

 

(c)                                  Legal proceedings

 

On November 5, 2001, we were named as a defendant in a class actionlawsuit in the District Court for the Southern District of New York against VIANET.WORKS, Inc., certain of the underwriters who supported our initial publicoffering (“IPO”) and certain of our officers, under the title O’Leary v. ViaNet.works [sic] et al [01-CV-9720] (the “Complaint”). An amended complaint wasfiled in April 2002. The Complaint alleges that the prospectus we filed withour registration statement in connection with our IPO was materially false andmisleading because it failed to disclose, among other things, that: (i) thenamed underwriters had solicited and received excessive and undisclosedcommissions from certain investors in exchange for the right to purchase largeblocks of VIA IPO shares; and (ii) the named Underwriters had entered intoagreements with certain of their customers to allocate VIA IPO shares inexchange for which the customers agreed to purchase additional VIA shares inthe aftermarket at pre-determined prices (“Tie-in Arrangements”), therebyartificially inflating the Company’s stock price. The Complaint further allegesviolations of Sections 11, 12 (a)(2) and 15 of the Securities Act of 1933 andSection 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgatedthereunder arising out of the alleged failure to disclose and the allegedmaterially misleading disclosures made with respect to the commissions and theTie-in Arrangements in the prospectus. The plaintiffs in this action seekmonetary damages in an unspecified amount. Approximately 300 other issuers andtheir underwriters have had similar suits filed against them, all of which areincluded in a single coordinated proceeding in the Southern District of NewYork (the “IPO Litigation”). On June 30, 2003, the special litigation committeeof the board of directors of the Company conditionally approved the globalsettlement between all plaintiffs and issuers in the IPO Litigations.  Thespecial litigation committee agreed to approve the settlement subject to anumber of conditions, including the participation of a substantial number ofother defendants in the proposed settlement, the consent of the Company’sinsurers to the settlement, and the completion of acceptable final settlementdocumentation.  The settlement would provide, among other things, arelease of the Company and of the individual defendants for the conduct allegedin the action to be wrongful by the plaintiffs.  Under the proposedsettlement, the Company would agree to undertake other responsibilities underthe partial settlement, including agreeing to assign away, not assert, orrelease certain potential claims the Company may have against its underwriters. In June 2004, a motion for preliminary approval of the settlement was filedwith the Court. The underwriters filed a memorandum with the Court opposing 

 

F-31

----

 

preliminaryapproval of the settlement.  The court granted the preliminary approval onFebruary 15, 2005, subject to certain modifications.  If the parties areable to agree upon the required modifications, and such modifications areacceptable to the court, notice will be given to all class members of thesettlement, a “fairness” hearing will be held and if the Court determines thatthe settlement is fair to the class members, the settlement will beapproved.  Any direct financial impact of the proposed settlement isexpected to be borne by our insurers.

 

PSINet Belgium, an indirectwholly-owned subsidiary of the Company, is a defendant in a lawsuit filed byPerceval Technologies N.V. regarding a commercial agreement entered into forthe provision by Perceval of a DSL network in Belgium, Luxembourg and France.  The agreement of 15 March 2004, entered intoprior to VIA’s acquisition of PSINet Belgium, was for the benefit of a customerof PSINet Belgium, and provided for a three-year term upon completion of a testphase. The customer was not satisfied with the results of the project anddecided to stop the project, whereupon PSINet Belgium terminated the agreementwith Perceval Technologies.  On February28, 2005, Perceval brought a civil action before the commercial court ofBrussels for the early termination of the contract and claims damage in theamount of €1.4 million ($1.9 million) plus €250,000 ($0.3 million) moraldamages, plus interests, costs and attorneys’ fees. We believe PSINet Belgiumwas entitled to terminate the agreement under the circumstances and that theallegations are without merit and have engaged counsel to defend theaction.  If PSINet Belgium is determinedto be liable or if we conclude that a settlement is in its best interests, thatsubsidiary may incur substantial costs.

 

The Company is subject to claims and legal proceedings that arise inthe ordinary course of its business operations. Each of these matters issubject to various uncertainties, and it is possible that some of these mattersmay be decided unfavorably to the Company. The Company does not believe thatany of these matters will have a material adverse affect on its business,assets or operations.

 

(d)                                 Guarantees

 

From time to time, the Company enters into indemnification agreementswith certain contractual parties in the ordinary course of business, includingagreements with lenders, lessors, service providers and certain vendors. Allsuch indemnification agreements are entered into in the context of theparticular agreements and are provided in an attempt to properly allocate risk ofloss in connection with the consummation of the underlying contractualarrangements. Although the maximum amount of future payments that the Companycould be required to make under these indemnification agreements is unlimited,management believes that historically, costs incurred to settle claims relatedto these indemnifications have not been material to the Company’s financialposition, results of operations or cash flows and that this is the expectationfor the future. Additionally, the fair value of the indemnifications that theCompany issued during the years ended December 31, 2003 and 2004respectively were not material to the Company’s financial position, results ofoperations or cash flows.

 

**15.          Segment Reporting**

 

VIA offers a variety of Internet access, managed bandwidth,web-hosting, Internet security and related services to businesses and consumersin Europe and the Americas. As of December 31, 2004, VIA served primarymarkets in nine countries. These country operations generate Internet-relatedrevenues from leased lines, dial-up Internet access, web-hosting and design,Internet security and consulting services, and sale of third-party hardware andsoftware.

 

In prior reporting periods,the Company’s internal management reporting structure was based on countryoperations and therefore the Company had provided segment information based ongeographic regions.

 

Within the last quarter of 2004, management reevaluated and amended itsinternal reporting structure and therefore changed its reportable segments andgrouped all of the VIAlegacy operating companies, except the US operation, and the newly acquiredPSINet Europe operating companies into one operating segment – “Solutions”. TheCompany grouped its start-up VIA Express channel operations together with thelegacy VIA US operations into one operating segment – “Express”. The Companygrouped all of the Amen operating companies into one operating – “Amen”. TheCompany and its Chief Operating Decision Maker (“CODM”) evaluates theperformance of its segments based on revenue and EBITDA before restructuring (“AdjustedEBITDA”). The Company’s CODM have been the Chief Executive Officer and theChief Financial Officer throughout the year. Corporate expenses, which alsoinclude the regional companies holding Indefeasible Rights of Use (“IRU’s), areshown to reconcile to the total consolidated figures. Prior period amounts havebeen reclassified to conform to the current period presentation.

 

The table below presents information about the reported revenue, AdjustedEBITDA from continuing activities, impairment and restructuring charges andassets from continuing operations of the Company’s operating segments for yearsended December 31, 2002, 2003 and 2004. Total segment assets, as presentedin the table below, are total assets net of intercompany funding amounts.

 

F-32

----

 
| **In  thousands of U.S. dollars**                         | ** ** | **Solutions** | ** ** | **Express** | ** ** | **Amen** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------|------------|---------------|------------|-------------|------------|----------|------------|---------------|------------|-----------|------------|
|                                                      |       |          |       |        |       |     |       |          |       |      |       |
| Total assets as of December 31, 2002                      |       | $             | 11,722     |        | $          | 6,422    |       | —        |       | $         | 101,955    |   | $ | 120,099 |   |
| Total assets as of December 31, 2003                      |       | $             | 17,571     |        | $          | 2,443    |       | —        |       | $         | 76,805     |   | $ | 96,819 |   |
| Total assets as of December 31, 2004                      |       | $             | 67,145     |        | $          | 3,711    |       | $             | 21,808     |      | $          | 27,789 |   | $ | 120,453 |   |
|                                                      |       |          |       |        |       |     |       |          |       |      |       |
| Total long-lived asset additions as of  December 31, 2002 |       | $             | 1,337      |        | $          | 346      |       | —        |       | $         | 270        |   | $ | 1,953 |   |
| Total long-lived asset additions as of  December 31, 2003 |       | $             | 1,914      |        | $          | 897      |       | —        |       | $         | 3,195      |   | $ | 6,006 |   |
| Total long-lived asset additions as of  December 31, 2004 |       | $             | 41,105     |        | $          | 1,334    |       | $             | 19,288     |      | $          | 2,995 |   | $ | 64,722 |   |
|                                                      |       |          |       |        |       |     |       |          |       |      |       |
| The year ended December 31, 2002:                         |       |          |       |        |       |     |       |          |       |      |       |
| Revenue                                                   |       | $             | 38,786     |        | $          | 3,790    |       | —        |       | $         | —     |   | $ | 42,576 |   |
| Adjusted EBITDA                                           |       | (3,269        | )          | (116        | )          | —   |       | (26,063       | )          | (29,448   | )          |
| Impairment and restructuring charges                      |       | (215          | )          | —      |       | —   |       | (938          | )          | (1,153    | )          |
|                                                      |       |          |       |        |       |     |       |          |       |      |       |
| The year ended December 31, 2003:                         |       |          |       |        |       |     |       |          |       |      |       |
| Revenue                                                   |       | $             | 40,864     |        | $          | 3,924    |       | —        |       | $         | —     |   | $ | 44,788 |   |
| Adjusted EBITDA                                           |       | (1,868        | )          | (394        | )          | —   |       | (20,656       | )          | (22,918   | )          |
| Impairment and restructuring charges                      |       | (5,903        | )          | (1,016      | )          | —   |       | (1,804        | )          | (8,723    | )          |
|                                                      |       |          |       |        |       |     |       |          |       |      |       |
| The year ended December 31, 2004:                         |       |          |       |        |       |     |       |          |       |      |       |
| Revenue                                                   |       | $             | 57,329     |        | $          | 4,001    |       | $             | 8,316      |      | $          | 38 |   | $ | 69,684 |   |
| Adjusted EBITDA                                           |       | (4,736        | )          | (3,148      | )          | 1,091    |       | (22,850       | )          | (29,643   | )          |
| Impairment and restructuring charges                      |       | ($6,951       | )          | —      |       | ($3,083  | )          | ($2,213       | )          | ($12,247  | )          |

 

At December 31, 2004, goodwill for the Operating Segments Solutions,Express and Amen was $30.8 million, $1.1 million and $10.5 million,respectively. All discontinued operations for the period related to theSolutions segment (see Note 3).

 

The reconciliation between Adjusted EBITDA to net loss from continuing operationsis as follows:

 
| **In  thousands of U.S. dollars**    | ** ** | **Solutions** | ** ** | **Express** | ** ** | **Amen**   | ** ** | **Corporate** | ** ** | **Total**  | ** ** |
|--------------------------------------|------------|---------------|------------|-------------|------------|------------|------------|---------------|------------|------------|------------|
| ** **                           | ** ** | ** **    | ** ** | ** **  | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** |
| The year ended December 31, 2002:    |       |          |       |        |       |       |       |          |       |       |       |
| Adjusted EBITDA                      |       | (3,269        | )          | (116        | )          | —     |       | (26,063       | )          | (29,448    | )          |
| Impairment and restructuring charges |       | (215          | )          | —      |       | —     |       | (938          | )          | (1,153     | )          |
| Depreciation and amortization        |       | (2,182        | )          | (859        | )          | —     |       | (4,485        | )          | (7,526     | )          |
| Interest income                      |       | 29            |       | —      |       | —     |       | 2,138         |       | 2,167      |       |
| Interest expense                     |       | (33           | )          | (4          | )          | —     |       | (40           | )          | (77        | )          |
| Other income (expense), net          |       | (1,857        | )          | (64         | )          | —     |       | 2,152         |       | 231        |       |
| Foreign currency (losses) gains, net |       | (11           | )          | (4          | )          | —     |       | 13,565        |       | 13550      |       |
| Income tax benefit (expense)         |       | 12            |       | 39          |       | —     |       | 0             |       | 51         |       |
| Net loss from continuing operations  |       | (7,526        | )          | (1,008      | )          | —     |       | (13,671       | )          | (22,205    | )          |
|                                 |       |          |       |        |       |       |       |          |       |       |       |
| The year ended December 31, 2003:    |       |          |       |        |       |       |       |          |       |       |       |
| Adjusted EBITDA                      |       | (1,868        | )          | (394        | )          | —     |       | (20,655       | )          | (22,918    | )          |
| Impairment and restructuring charges |       | (5,903        | )          | (1,016      | )          | —     |       | (1,804        | )          | (8,723     | )          |
| Depreciation and amortization        |       | (2,018        | )          | (574        | )          | —     |       | (3,588        | )          | (6,179     | )          |
| Interest income                      |       | 27            |       | —      |       | —     |       | 1,073         |       | 1,100      |       |
| Interest expense                     |       | (15           | )          | —      |       | —     |       | —        |       | (15        | )          |
| Other income (expense), net          |       | (2,060        | )          | (74         | )          | —     |       | 1,811         |       | (323       | )          |
| Foreign currency (losses) gains, net |       | (8            | )          | —      |       | —     |       | 16,306        |       | 16,298     |       |
| Income tax benefit (expense)         |       | (19           | )          | —      |       | —     |       | (146          | )          | (165       | )          |
| Net loss from continuing operations  |       | (11,863       | )          | (2,059      | )          | —     |       | (7,003        | )          | (20,925    | )          |
|                                 |       |          |       |        |       |       |       |          |       |       |       |
| The year ended December 31, 2004:    |       |          |       |        |       |       |       |          |       |       |       |
| Adjusted EBITDA                      |       | (4,736        | )          | (3,148      | )          | 1,091      |       | (22,850       | )          | (29,643    | )          |
| Impairment and restructuring charges |       | (6,951        | )          | —      |       | (3,083     | )          | (2,213        | )          | (12,247    | )          |
| Depreciation and amortization        |       | (3,233        | )          | (653        | )          | (1,560     | )          | (2,723        | )          | (8,169     | )          |
| Interest income                      |       | 20            |       | 2           |       | 6          |       | 477           |       | 506        |       |
| Interest expense                     |       | (169          | )          | (7          | )          | (22        | )          | (143          | )          | (342       | )          |
| Other income (expense), net          |       | (1,687        | )          | (1,157      | )          | (1,611     | )          | 4,886         |       | 431        |       |
| Foreign currency (losses) gains, net |       | 2,665         |       | 46          |       | (2         | )          | 2,736         |       | 5,446      |       |
| Income tax benefit (expense)         |       | 71            |       | 35          |       | 194        |       | —        |       | 301        |       |
| Net loss from continuing operations  |       | (14,020       | )          | (4,881      | )          | (4,986     | )          | (19,380       | )          | (43,717    | )          |

 

F-33

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A summary of the revenues and long-lived assets relating to theCompany’s countries of domicile (origin) is as follows:

 
| ** **                        | ** ** | **For the  years ended December 31,** | ** ** |
|-----------------------------------|------------|---------------------------------------|------------|
| **In  thousands of U.S. dollars** | ** ** | **2002**                              | ** ** | **2003** | ** ** | **2004** | ** ** |
|                              |       |                                  |       |   |   |   |   |
| Revenues:                         |       |                                  |       |   |   |   |   |
|                              |       |                                  |       |   |   |   |   |
| Germany                           |       | 10,521                                |       | 7,633 |   | 13,350 |   |
| France                            |       | 7,676                                 |       | 7,238 |   | 14,287 |   |
| The Netherlands                   |       | 6,800                                 |       | 9,628 |   | 13,178 |   |
| Switzerland                       |       | 7,372                                 |       | 8,761 |   | 12,743 |   |
| Portugal                          |       | 4,613                                 |       | 5,832 |   | 6,557 |   |
| Spain                             |       | 1,804                                 |       | 1,772 |   | 2,501 |   |
| Belgium                           |       | —                                |       | — |   | 1,898 |   |
| U.S.A.                            |       |                                       | 3,790      |   |  | 3,924 |   | 3,912 |   |
| United Kingdom                    |       | —                                |       | — |   | 1,128 |   |
| Italy                             |       | —                                |       | — |   | 92 |   |
| Corporate                         |       | —                                |       | — |   | 38 |   |
|                              |       |                                  |       |   |   |   |   |
| Total                             |       | $                                     | 42,576     |   | $ | 44,788 |   | $ | 69,684 |   |
|                                   |            |                                       |            |  |  |  |  |  |  |  |

 
| ** **                        | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|------------------|------------|
| **In  thousands of U.S. dollars** | ** ** | **2002**         | ** ** | **2003** | ** ** | **2004** | ** ** |
|                              |       |             |       |   |   |   |   |
| Long-lived Assets:                |       |             |       |   |   |   |   |
| Germany                           |       | 621              |       | 703 |   | 17,551 |   |
| France                            |       | 1,583            |       | 785 |   | 17,952 |   |
| The Netherlands                   |       | 4,127            |       | 1,238 |   | 12,568 |   |
| Switzerland                       |       | 720              |       | 1,131 |   | 4,412 |   |
| Portugal                          |       | 104              |       | 362 |   | 389 |   |
| Spain                             |       | 433              |       | 381 |   | 627 |   |
| Belgium                           |       | —           |       | — |   | 5,589 |   |
| U.S.A.                            |       | 2,833            |       | 2,139 |   | 2,075 |   |
| United Kingdom                    |       | —           |       | — |   | 422 |   |
| Italy                             |       | —           |       | — |   | 58 |   |
| Corporate                         |       | 5,228            |       | 5,146 |   | 14,039 |   |
|                              |       |             |       |   |   |   |   |
| Total                             |       | $                | 15,649     |   | $ | 11,885 |   | $ | 75,834 |   |
|                                   |            |                  |            |  |  |  |  |  |  |  |

 

A summary relating to the Company’s productsand services from external customers is as follows:

 
| ** **                          | ** ** | **Year-end  2003** | ** ** | **Year-end  2004** | ** ** |
|-------------------------------------|------------|--------------------|------------|--------------------|------------|
|                                |       |               |       |               |       |
| Access (including DSL connectivity) |       | $                  | 27,741     |               | $          | 36,352 |   |
| Hosting                             |       | 9,115              |       | $                  | 23,120     |   |
| Intrnet security services           |       | 2,670              |       | 3,847              |       |
| Other                               |       | 5,262              |       | 6,365              |       |
|                                |       |               |       |               |       |
| Total                               |       | $                  | 44,788     |               | $          | 69,684 |   |

 

Because of the systematic errors and limitations the Companyexperienced in the past with its legacy billing platforms, the Company is notable to provide an accurate breakdown of the revenues for the year endedDecember 31, 2002.

 

**16.          Related Party Transaction**

 

During the first quarter of 2002, VIA NET.WORKS Europe Holding, B.V.(“VIA Europe”), a wholly-owned indirect subsidiary

 

F-34

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ofVIA, entered into a loan agreement with MERCUR EinhundertsechzehnteVermögensverwaltung GmbH (“Mercur”) under which VIA Europe agreed to lendMercur $1 million. Mercur is a wholly-owned indirect subsidiary of NorwestEquity Partners VII LP (“NEP VII”), which is an affiliated fund of NorwestVenture Capital Management (“NVCM”). Norwest Equity Capital and Norwest VenturePartners VI L.P., affiliates of NVCM, hold over 5% of VIA’s common stock. ErikTorgerson, a General Partner of Norwest Equity Partners and an officer of NVCMand a member of Norwest Equity Capital, is a member of VIA’s board of directorsand chairman of its audit committee. The loan by VIA was part of an aggregate$2.9 million lending facility provided to Mercur by VIA, NEP VII and J.P.Morgan International Capital Corporation. The purpose of the facility was toenable Mercur to lend an equivalent amount to riodata GmbH, a German Internetvirtual private network and data services provider (“riodata”). The loan toriodata, which was secured by a lien on its accounts receivable, was intendedto provide riodata a period of time of approximately three weeks to pay itsobligations and avoid being required to file for insolvency under German law.As a part of the loan transaction, riodata agreed to provide VIA, NEP VII andJ.P. Morgan exclusive rights to conduct commercial, financial and legal duediligence of riodata for the purposes of a possible investment in riodata.Currently, NEP VII and J.P. Morgan are minority investors in riodata. VIA’sloan participation was discussed and approved by its board of directors.Subsequent to the funding of the loan, VIA determined that, based on itsdiligence of riodata, it would not proceed with an investment in riodata.riodata has subsequently filed for insolvency under German law. VIA receivedfrom Mercur payment of $0.7 million on the loan amounts. A loss of$0.3 million was recorded as other expense in VIA’s statement ofoperations for the year ended December 31, 2002.

 

In connection with and concurrent to his appointment as chairman of theboard of directors, VIA entered into a letter agreement with Michael McTighe,effective as of September 1, 2002. Under the terms of the letteragreement, Mr. McTighe agreed to assume the role of chairman of the boardof directors and also provide certain consultancy services to the VIA and itsgroup companies, including providing strategic guidance and direction andoperational advice and consultation to VIA’s senior management team. The letteragreement provides for VIA to pay Mr. McTighe a total of $0.1 millionper annum, of which approximately $76,000 per annum is payable toMr. McTighe in consideration for his advisory services. Under the letteragreement, Mr. McTighe was also entitled to a one-time option grant topurchase up to 250,000 shares of VIA common stock, which options will vest overthree years. The agreement provides that either party may terminate theconsultancy agreement by giving no less than one month’s written notice to theother. The compensation payable to Mr. McTighe under the letter agreementis in lieu of payment to him of any cash fees payable to other VIA directorsunder the director compensation policy. This agreement was terminated atDecember 31, 2003.

 

In January of 2004, the board of directors adopted a new compensationpolicy. Under this policy, Mr. McTighe shall be paid a cash retainer of$0.1 million for all services rendered in his capacity as chairman of theboard as well as services on all committees of the board on which he serves.This is in addition to cash fees payable and options granted to all VIAdirectors under the director compensation policy.

 

**17.          Subsequent Events**

 

On January 26, 2005, the board of directors removed Rhett Williams fromhis position as a member of the board of director and as chief executiveofficer of the Company.  The vacancy onthe board of directors has remained unfilled. Ray Walsh was appointed as the replacement chief executive officer.  Mr. Walsh was formerly VIA’s Senior VicePresident, Technology & Operations.

 

On January 28,2005, Erik M. Torgerson submitted his resignation and stepped down from theBoard of Directors of the Company.  In stepping down, Mr. Torgerson citedtime constraints.  Prior to his resignation, Mr. Torgerson, who has servedas a director of VIA since May 1999, was its longest serving director. Mr.Torgerson served as chairman of VIA’s audit committee from October 1999 untilAugust 2003. Erik is a general partner of Norwest Equity Partners, a privateequity firm, which has over $2 billion in capital under management.

 

On April 1, 2005, the Company sold its Swiss companies – VIA NET.WORKS(Schweiz) AG and VIA NET.WORKS Services AG – to former managers and owners ofthe business, for a purchase price of CHF3.5 million ($3.1 million).  Foreign currency translationadjustments of $0.9 million will be reclassified into the statement ofoperations upon disposal in fiscal year 2005.

 

On April 10, 2005,  VIA NET.WORKS, Inc. entered into a letter of intent with Claranet Group Limited, a privately-held European Internet services provider based in the United Kingdom, to sell all of our business operations in Europe and the United States.  The key terms of the proposed transaction, or the Claranet Sale, are disclosed within Note 1 of these consolidated financial statements.  Foreign currency translation adjustments of $34.1 million will be reclassified into the statement of operations upon disposal in fiscal year 2005.

 

On April 11, 2005, theCompany announced the Claranet Sale offer. In reaction to the announcement, anumber of managers and employees of the Company’s Amen group formed a strikeagainst Amen, seeking employment security guarantees from Claranet, amongstother things. The Company has obtained the support of staff from other membersof the VIA group to fill in for the striking workers to ensure the continuationof technical and customer support. The Company believes that it will be able toresolve the matter satisfactorily without undue cost or impairment to the Amenbusiness.

 

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