**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

| **ý** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|-----------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                    |
| ** ** | **FOR THE  QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004**                                        |
| ** ** | ** **                                                                                    |
| ** ** | **OR         **                                  |
| ** ** | ** **                                                                                    |
| **o**      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commissionfile number: 000-29391**

 

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**VIA NET.WORKS, INC.**

(Exact name of registrant asspecified in its charter)

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

 

**H. Walaardt Sacrestraat 401-403**

**1117BM Schiphol**

**TheNetherlands**

(Address of principal executiveoffices)

 

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

 

(Former name or former address,if changed since last report)

 

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Indicate by check mark whether theregistrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant was requiredto file such report) and (2) has been subject to such filing requirementsfor the past 90 days. Yes ý  No o

 

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

 

As of November 9, 2004, there wereoutstanding 56,053,988 shares of the registrant’s common stock and 5,050,000shares of the registrant’s non-voting common stock.

 

 

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**VIANET.WORKS, INC.**

 

**TABLE OFCONTENTS**

 
| PART I.  FINANCIAL INFORMATION |                                                                                                             |
|--------------------------------|------------------------------------------------------------------------------------------------------------------|
| Item 1.                        | Financial Statements:                                                                                            |   |
|                           | Condensed Consolidated Balance Sheets as of  December 31, 2003 and September 30, 2004                       |   |
|                           | Condensed Consolidated Statements of  Operations for the three and nine months ended September 30, 2003 and 2004 |   |
|                           | Condensed Consolidated Statements of Cash  Flows for the nine months ended September 30, 2003 and 2004           |   |
|                           | Notes to Condensed Consolidated Financial  Statements                                                            |   |
| Item 2.                        | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                      |   |
| Item 3.                        | Quantitative and Qualitative Disclosures  About Market Risk                                                      |   |
| Item 4.                        | Controls and Procedures                                                                                          |   |
| PART II. OTHER INFORMATION     |                                                                                                             |
| Item 1.                        | Legal Proceedings                                                                                                |   |
| Item 2.                        | Changes in Securities and Use of Proceeds                                                                        |   |
| Item 3.                        | Defaults Upon Senior Securities                                                                                  |   |
| Item 4.                        | Submission of Matters to a Vote of Security  Holders                                                             |   |
| Item 5.                        | Other Information                                                                                                |   |
| Item 6.                        | Exhibits and Reports on Form 8-K                                                                                 |   |
| SIGNATURES                     |                                                                                                             |
| EXHIBIT INDEX                  |                                                                                                             |

 

2

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**PART I**

 

**ITEM 1.FINANCIAL STATEMENTS**

 

**VIANET.WORKS, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(Inthousands of U.S. dollars, except share data)**

 
| ** **                                                                                                           | ** ** | **December 31, 2003** | ** ** | **September 30,  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|
| ** **                                                                                                           | ** ** | ** **            | ** ** | **(Unaudited)**         | ** ** |
| **ASSETS**                                                                                                           |       |                  |       |                    |       |
| Current assets:                                                                                                      |       |                  |       |                    |       |
| Cash and cash equivalents                                                                                            |       | $                     | 65,803     |                    | $          | 23,942 |   |
| Restricted cash                                                                                                      |       | 1,391                 |       | 5,159                   |       |
| Trade and other accounts receivable, net of  allowance of $1,911 and $2,794 respectively                             |       | 14,295                |       | 12,842                  |       |
| Prepayments                                                                                                          |       | 3,610                 |       | 5,246                   |       |
| Other current assets                                                                                                 |       | 932                   |       | 969                     |       |
| Deferred tax assets                                                                                                  |       | —                |       | 1,655                   |       |
| Total current assets                                                                                                 |       | 86,031                |       | 49,813                  |       |
| Property and equipment, net                                                                                          |       | 12,003                |       | 14,807                  |       |
| Goodwill                                                                                                             |       | 3,111                 |       | 40,379                  |       |
| Intangible assets, net                                                                                               |       | 731                   |       | 8,764                   |       |
| Other non-current assets                                                                                             |       | 884                   |       | 451                     |       |
| Deferred tax asset                                                                                                   |       | 7,928                 |       | 7,928                   |       |
| Total assets                                                                                                         |       | $                     | 110,688    |                    | $          | 122,142 |   |
|                                                                                                                 |       |                  |       |                    |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                        |       |                  |       |                    |       |
| Current liabilities:                                                                                                 |       |                  |       |                    |       |
| Accounts payable                                                                                                     |       | $                     | 10,021     |                    | $          | 13,352 |   |
| VAT and other taxes payable                                                                                          |       | 1,303                 |       | 1,200                   |       |
| Current portion of capital lease  obligations and long-term payables                                                 |       | 173                   |       | 985                     |       |
| Deferred revenue                                                                                                     |       | 13,264                |       | 13,539                  |       |
| Accrued expenses                                                                                                     |       | 7,659                 |       | 20,029                  |       |
| Deferred tax liability                                                                                               |       | 7,928                 |       | 7,928                   |       |
| Other current liabilities                                                                                            |       | 1,848                 |       | 4,666                   |       |
| Total current liabilities                                                                                            |       | 42,196                |       | 61,699                  |       |
| Capital lease obligations and long-term  payables, less current portion                                              |       | 328                   |       | 7,385                   |       |
| Deferred tax liability                                                                                               |       | —                |       | 2,644                   |       |
| Total liabilities                                                                                                    |       | 42,524                |       | 71,728                  |       |
|                                                                                                                 |       |                  |       |                    |       |
| Commitments and contingencies (Note 12)                                                                              |       |                  |       |                    |       |
|                                                                                                                 |       |                  |       |                    |       |
| Stockholders’ equity:                                                                                           |       |                  |       |                    |       |
| Preferred stock, $.001 par value;  10,000,000 shares authorized; no shares issued and outstanding                    |       | —                |       | —                  |       |
| Common stock, $.001 par value; 132,500,000  shares authorized; 61,507,694 and 62,624,777 shares issued, respectively |       | 62                    |       | 62                      |       |
| Additional paid-in capital                                                                                           |       | 556,112               |       | 557,909                 |       |
| Treasury stock, 1,520,789 shares                                                                                     |       | (1,521                | )          | (1,521                  | )          |
| Accumulated deficit                                                                                                  |       | (452,154              | )          | (480,100                | )          |
| Accumulated other comprehensive loss                                                                                 |       | (34,335               | )          | (25,936                 | )          |
| Total stockholders’ equity                                                                                      |       | 68,164                |       | 50,414                  |       |
| Total liabilities and stockholders’ equity                                                                      |       | $                     | 110,688    |                    | $          | 122,142 |   |

 

The accompanying notes are anintegral part of these condensed consolidated financial statements.

 

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**VIANET.WORKS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(inthousands of U.S. dollars, except share and per share data)**

**(Unaudited)**

 
| ** **                                                 | ** ** | **For the three months ended  September 30,** | ** ** | **For the nine months ended  September 30,** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                 | ** ** | **2003**                                           | ** ** | **2004**                                          | ** ** | **2003** | ** ** | **2004** | ** ** |
| Revenue                                                    |       | $                                                  | 10,681     |                                              | $          | 18,156 |   | $ | 32,959 |   | $ | 43,924 |   |
|                                                       |       |                                               |       |                                              |       |   |   |   |   |
| Operating costs and expenses:                              |       |                                               |       |                                              |       |   |   |   |   |
| Internet services                                          |       | 5,783                                              |       | 8,809                                             |       | 17,487 |   | 22,005 |   |
| Selling, general and administrative                        |       | 10,518                                             |       | 14,252                                            |       | 32,374 |   | 43,269 |   |
| Impairment and restructuring charges                       |       | 850                                                |       | 1,293                                             |       | 2,643 |   | 1,788 |   |
| Depreciation and amortization                              |       | 1,545                                              |       | 2,045                                             |       | 4,278 |   | 5,990 |   |
| Total operating costs and expenses                         |       | 18,696                                             |       | 26,399                                            |       | 56,782 |   | 73,052 |   |
| Operating loss from continuing operations                  |       | (8,015                                             | )          | (8,243                                            | )          | (23,823 | ) | (29,128 | ) |
| Interest income                                            |       | 224                                                |       | 165                                               |       | 943 |   | 456 |   |
| Interest expense                                           |       | (2                                                 | )          | (82                                               | )          | (12 | ) | (100 | ) |
| Other (expense) income, net                                |       | (65                                                | )          | 81                                                |       | (286 | ) | (161 | ) |
| Foreign currency gains (losses), net                       |       | 1,545                                              |       | 2,140                                             |       | 8,809 |   | (1,734 | ) |
| Loss from continuing operations before income  taxes       |       | (6,313                                             | )          | (5,939                                            | )          | (14,369 | ) | (30,667 | ) |
| Income tax expense                                         |       | —                                             |       | (41                                               | )          | — |   | (98 | ) |
| Net loss from continuing operations                        |       | (6,313                                             | )          | (5,980                                            | )          | (14,369 | ) | (30,765 | ) |
| Discontinued operations:                                   |       |                                               |       |                                              |       |   |   |   |   |
| Gain (loss) from discontinued operations                   |       | (1,401                                             | )          | 675                                               |       | (4,534 | ) | 4,166 |   |
|                                                       |       |                                               |       |                                              |       |   |   |   |   |
| Gain on disposal of discontinued operations                |       | 164                                                |       | 663                                               |       | 164 |   | 663 |   |
| Net loss                                                   |       | $                                                  | (7,550     | )                                                 | $          | (4,642 | ) | $ | (18,739 | ) | $ | (25,936 | ) |
|                                                       |       |                                               |       |                                              |       |   |   |   |   |
| Basic and diluted loss per share:                          |       |                                               |       |                                              |       |   |   |   |   |
| Continuing operations                                      |       | $                                                  | (0.11      | )                                                 | $          | (0.10 | ) | $ | (0.24 | ) | $ | (0.51 | ) |
| Discontinued operations                                    |       | (0.02                                              | )          | 0.02                                              |       | (0.07 | ) | 0.08 |   |
| Net loss per share—basic and diluted                  |       | $                                                  | (0.13      | )                                                 | $          | (0.08 | ) | $ | (0.31 | ) | $ | (0.43 | ) |
|                                                       |       |                                               |       |                                              |       |   |   |   |   |   |   |   |   |
| Shares used in computing basic and diluted  loss per share |       | 59,820,950                                         |       | 61,103,988                                        |       | 60,005,479 |   | 60,911,452 |   |

 

The accompanying notes are anintegral part of these condensed consolidated financial statements.

 

4

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**VIANET.WORKS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(inthousands of U.S. dollars)**

**(Unaudited)**

 
| ** **                                                                                              | ** ** | **For the nine months ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                              | ** ** | **2003**                                     | ** ** | **2004** | ** ** |
| Cash flows from operating activities:                                                                   |       |                                         |       |   |   |
| Net loss from continuing operations                                                                     |       | $                                            | (14,369    | ) | $ | (30,765 | ) |
| Adjustments to reconcile net loss from continuing  operations to net cash used in operating activities: |       |                                         |       |   |   |
| Depreciation and amortization                                                                           |       | 4,278                                        |       | 5,990 |   |
| Impairment charges                                                                                      |       | 134                                          |       | — |   |
| (Benefit) / provision for doubtful accounts  receivable                                                 |       | (169                                         | )          | 725 |   |
| Unrealized foreign currency transaction  (gains) losses                                                 |       | (7,233                                       | )          | 1,082 |   |
| Deferred tax                                                                                            |       | —                                       |       | (437 | ) |
| Stock compensation                                                                                      |       | —                                       |       | 80 |   |
| Changes in assets and liabilities, net of  acquisitions:                                                |       |                                         |       |   |   |
| Trade accounts receivable                                                                               |       | 2,044                                        |       | 1,742 |   |
| Prepayments and other current assets                                                                    |       | (1,179                                       | )          | (484 | ) |
| Other non-current assets                                                                                |       | 14                                           |       | 806 |   |
| Accounts payable                                                                                        |       | (201                                         | )          | (1,115 | ) |
| VAT and other taxes payable                                                                             |       | 26                                           |       | (1,132 | ) |
| Accrued expenses                                                                                        |       | (365                                         | )          | 1,152 |   |
| Other current liabilities                                                                               |       | (415                                         | )          | 233 |   |
| Deferred revenue                                                                                        |       | (819                                         | )          | (1,486 | ) |
| Net cash used in operating activities                                                                   |       | (18,254                                      | )          | (23,609 | ) |
| Cash flows from investing activities:                                                                   |       |                                         |       |   |   |
| Increase in restricted cash                                                                             |       | (60                                          | )          | (3,768 | ) |
| Proceeds from the disposition of operating  subsidiaries (net of cash paid)                             |       | (471                                         | )          | 7,224 |   |
| Proceeds from businesses transferred under  contractual obligations                                     |       | 310                                          |       | — |   |
| Acquisition of subsidiaries (net of cash  acquired)                                                     |       | —                                       |       | (20,638 | ) |
| Purchases of property, equipment and other  assets                                                      |       | (3,753                                       | )          | (4,228 | ) |
| Net cash used in investing activities                                                                   |       | (3,974                                       | )          | (21,410 | ) |
| Cash flows from financing activities:                                                                   |       |                                         |       |   |   |
| Repayment of debt and principal payments on  capital lease obligations                                  |       | (96                                          | )          | (145 | ) |
| Purchase of treasury stock                                                                              |       | (788                                         | )          | — |   |
| Proceeds from issuance of common stock, net                                                             |       | 472                                          |       | 369 |   |
| Net cash (used in) received from financing  activities                                                  |       | (412                                         | )          | 224 |   |
| Cash flows (used by) received from  discontinued operations                                             |       | (1,696                                       | )          | 3,316 |   |
| Effect of currency exchange rate changes on  cash                                                       |       | (415                                         | )          | (382 | ) |
| Net decrease in cash and cash equivalents                                                               |       | (24,751                                      | )          | (41,861 | ) |
| Cash and cash equivalents, beginning of  period                                                         |       | 97,813                                       |       | 65,803 |   |
| Cash and cash equivalents, end of period                                                                |       | $                                            | 73,062     |   | $ | 23,942 |   |

 

The accompanying notes are anintegral part of these condensed consolidated financial statements.

 

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**VIANET.WORKS, INC.**

 

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**(Unaudited)**

 

**1.****                                      Basisof Presentation and Recent Pronouncements**

 

These condensed consolidated financial statements asof September 30, 2004 and for the three and nine month periods ended September30, 2003 and 2004 and the related footnote information are unaudited and havebeen prepared on a basis substantially consistent with the audited consolidatedfinancial statements of VIA NET.WORKS, Inc. (“VIA” or “the Company”) as ofand for the year ended December 31, 2003, included in VIA’s Annual Reporton Form 10-K as filed with the Securities and Exchange Commission (“2003Annual Report”). These condensed consolidated financial statements should beread in conjunction with the audited consolidated financial statements and therelated notes to the financial statements included in the 2003 Annual Report.In the opinion of management, the accompanying unaudited condensed consolidatedfinancial statements contain all adjustments (consisting of normal recurringadjustments) that management considers necessary to present fairly theconsolidated financial position of VIA at September 30, 2004 and the results ofits operations and its cash flows for the three and nine month periods endedSeptember 30, 2003 and 2004. The results of operations for the three and ninemonth periods ended September 30, 2004 may not be indicative of the resultsexpected for any succeeding quarter or for the year ending December 31,2004. Certain prior period amounts have been reclassified to conform to thecurrent period presentation. Reclassifications have been made to prior periodamounts to account for discontinued operations.

 

The preparation of financial statements in conformitywith generally accepted accounting principles requires VIA to make estimatesand assumptions that affect the reported amounts of assets, liabilities,revenue and expenses, together with amounts disclosed in the related notes tothe consolidated financial statements. Actual results could differ from therecorded estimates.

 

**2.****                                      DiscontinuedOperations**

 

2003

 

In July 2003 VIA NET.WORKS Italia, whichhad been included in the European segment, was sold for nominal considerationto the 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 transferred under contractualagreements. The Company eliminated all continuing involvement in theseoperations in 2003 and both are now treated as discontinued operations for allperiods presented. See Note 2 of the financial statements included in the 2003Annual Report for further details.

 

2004

 

On September 28, 2004, the Company sold 100%of the shares of VIA NET.WORKS UK Ltd., which was part of the European segment,to Claranet Limited, a UK-based Internet service provider. The considerationfor the shares of VIA NET.WORKS UK Ltd. is an aggregate sum of GBP 7.3 million(approximately $13.1 million), subject to certain working capital and otheradjustments. The Company received GBP 5.3 million in cash (approximately $9.4million) on completion. The balance is payable, subject to the working capitaland other adjustments, as follows: GBP 1.0 million in cash six months aftercompletion and GBP 1.0 million in cash one year after completion.

 

The gain on disposal of the UK operationamounted to $0.7 million. This gain is net of $5.5 million of cumulativeforeign currency translation losses that had been deferred in othercomprehensive income until the date of sale. The additional consideration thatmay be receivable of GBP 2.0 million (approximately $3.6 million) has not beenincluded in the determination of the gain because the amounts are not fixed anddeterminable at the date of this report. If any further amounts are receivable,this will result in a corresponding increase in the gain recognized.

 

As each of the United Kingdom, Italian,Brazilian and Mexican operations represented a component of an entity asdefined by SFAS 144, *“Accounting forthe Impairment 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 $5.9million and $18.6 million, respectively, for the three and nine monthsended September 30, 2003 and $5.1 million and $15.8 million, respectively, forthe three and nine months ended September 30, 2004. The gain (loss), excludingaccounting for the sale transaction, related to discontinued operations wasapproximately $(1.4) million and $(4.5) million, respectively, for the threeand nine months ended September 30, 2003, and $0.7 million and $4.2 million,respectively, for the three and nine months ended September 30, 2004. Thecomparative balance sheet as at December 31, 2003 has not been reclassified toshow separately amounts related to discontinued operations.

 

6

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**3.****                                      Impairmentand Restructuring Charges**

* *

*Impairment charges:*

 

Accruals regarding impairment and restructuring charges are accounted forin accordance with FAS 146 “Accounting for costs associated with exit ordisposal activities”.

 

There were noimpairment charges for the three and nine months ended September 30, 2004.During the first quarter of 2003, the Company recorded fixed asset impairmentcharges of $0.1 million for fixed asset fixtures and fittings that were writtendown to net realizable value as a result of the closure of the Reston office.

 

 

*Restructuring charges:*

* *
| **In thousands of U.S. dollars** | ** ** | **Employee termination  payments** | ** ** | **Future operating  lease obligations** | ** ** | **Other** | ** ** | **Total Restructuring  Charges** | ** ** |
|----------------------------------|------------|------------------------------------|------------|-----------------------------------------|------------|-----------|------------|----------------------------------|------------|
| Balance at December 31, 2002     |       | $                                  | 415        |                                    | $          | 456       |       | $                                | —     |   | $ | 871 |   |
| Additions                        |       | 422                                |       | 57                                      |       | —    |       | 479                              |       |
| Reserves utilized                |       | (356                               | )          | (73                                     | )          | —    |       | (429                             | )          |
| Balance at March 31, 2003        |       | $                                  | 481        |                                    | $          | 440       |       | $                                | —     |   | $ | 921 |   |
| Additions                        |       | 648                                |       | 92                                      |       | 440       |       | 1,180                            |       |
| Reserves utilized                |       | (666                               | )          | (66                                     | )          | (99       | )          | (831                             | )          |
| Foreign exchange                 |       | 10                                 |       | —                                  |       | —    |       | 10                               |       |
| Balance at June 30, 2003         |       | $                                  | 473        |                                    | $          | 466       |       | $                                | 341        |   | $ | 1,280 |   |
| Additions                        |       | 532                                |       | —                                  |       | 318       |       | 850                              |       |
| Reserves utilized                |       | (494                               | )          | (111                                    | )          | (399      | )          | (1,004                           | )          |
| Foreign exchange                 |       | 6                                  |       | 1                                       |       | —    |       | 7                                |       |
| Balance at September 30, 2003    |       | $                                  | 517        |                                    | $          | 356       |       | $                                | 260        |   | $ | 1,133 |   |

 
| **In thousands of U.S. dollars** | ** ** | **Employee termination  payments** | ** ** | **Future operating  lease obligations** | ** ** | **Other** | ** ** | **Total Restructuring  Charges** | ** ** |
|----------------------------------|------------|------------------------------------|------------|-----------------------------------------|------------|-----------|------------|----------------------------------|------------|
| Balance at December 31, 2003     |       | $                                  | 243        |                                    | $          | 276       |       | $                                | 121        |   | $ | 640 |   |
| Additions                        |       | 151                                |       | —                                  |       | 149       |       | 300                              |       |
| Reserves utilized                |       | (200                               | )          | (41                                     | )          | (114      | )          | (355                             | )          |
| Foreign exchange                 |       | (1                                 | )          | —                                  |       | —    |       | (1                               | )          |
| Balance at March 31, 2004        |       | $                                  | 193        |                                    | $          | 235       |       | $                                | 156        |   | $ | 584 |   |
| Additions                        |       | 73                                 |       | —                                  |       | 122       |       | 195                              |       |
| Reserves utilized                |       | (266                               | )          | (83                                     | )          | (253      | )          | (602                             | )          |
| Balance at June 30, 2004         |       | $                                  | —     |                                    | $          | 152       |       | $                                | 25         |   | $ | 177 |   |
| Additions                        |       | 898                                |       | 91                                      |       | 304       |       | 1,293                            |       |
| Reserves utilized                |       | (14                                | )          | (32                                     | )          | (176      | )          | (222                             | )          |
| Foreign exchange                 |       | 7                                  |       | —                                  |       | —    |       | 7                                |       |
| Balance at September 30, 2004    |       | $                                  | 891        |                                    | $          | 211       |       | $                                | 153        |   | $ | 1,255 |   |

 

2003

 

During the three and ninemonths ended September 30, 2003, the Company recorded restructuring chargesrelated to the implementation of its strategic plan of $0.9 million and $2.5million respectively.  The restructuringcharge for the three months ended March 31, 2003 related to severance paymentsat three of its European operations and an adjustment to the future leaseobligations for the closure of the Reston, Virginia office. The restructuringcharge for the three months ended June 30, 2003 related to severance paymentsat five of its European operations and at the corporate headquarters, futurelease obligations on vacant office space in Germany, and implementation costsfor back-office and administrative outsourcing initiatives.  The restructuring charge for the three monthsended September 30, 2003 related to severance payments at three of its Europeanoperations and at the corporate headquarters and transition implementationcosts for back-office and administrative outsourcing initiatives.

 

The employee terminationcosts accrual of $0.5 million carried forward at June 30, 2003 comprised $0.4million in respect of three European operations and $0.1 million at thecorporate headquarters. Cash payments of $0.5 million were made in the quarterended September 30, 2003 in respect of these brought forward balances ($0.4 millionby European operations and $0.1 million by Corporate). The employee terminationcosts incurred in the three months ended September 30, 2003, of $0.5 million,relate to the

 

7

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severance andbenefits for five employees at three European operations and two employees atthe corporate headquarters. No cash payments were made in the period in respectof these third quarter costs.

 

The future operating lease obligations balance at September 30, 2003,comprised of $0.3 million related to the former corporate headquarters officein Reston, Virginia, USA and $0.1 million related to vacant space in the Germanoperation office. The Reston office accrual reflects the net of the futurelease obligations, which continues through February 2005, less the income froma sublease of the space. The German office lease accrual reflects the fairvalue of the future lease obligations on vacant office space, which continuethrough December 31, 2003. The Reston and German accruals have been drawn downduring the year by the monthly payments on the office lease for the remainderof the term.

 

Other chargesof $0.4 million and $0.3 million, respectively, incurred in the three monthsended June 30, 2003 and September 30, 2003 related to the implementation costsfor back-office and administrative outsourcing initiatives. Cash payments of$0.1 million and $0.4 million were made in each quarter, respectively.

 

2004

 

The Company recordedrestructuring charges of $1.3 million and $1.8 million during the three andnine months ended September 30, 2004 respectively. The restructuring charge forthe six months ended June 30, 2004 related to severance payments at thecorporate headquarters and transition implementation costs for back-office andadministrative outsourcing initiatives. The restructuring charge for the threemonths ended September 30, 2004 related to severance payments at four of theCompany’s European operations, costs associated with integrating the PSINetEurope operations recently acquired, transition implementation costs forback-office and administrative outsourcing activities and a charge for futurelease obligations at the German operation.

 

The employee terminationcosts of $0.2 million for the three months ended March 31, 2004 relate to fiveemployees in finance at the corporate headquarters. Cash payments for severanceand benefits of $0.2 million were made in the first quarter of 2004 by ourEuropean operations ($0.1 million) and Corporate ($0.1 million). The employeetermination costs of $0.1 million for the three months ended June 30, 2004relate to three employees at corporate headquarters. Cash payments of $0.3million were made in the quarter in respect of the March 31, 2004 accrual andall costs incurred in the second quarter. The employee termination costs of$0.9 million for the three months ended September 30, 2004 relate to thirtyeight employees at our European operations, most notably thirty-four inGermany. Cash payments of $14,000 were made in the quarter in respect of thesethird quarter costs, relating to one employee at the operation in Spain. Theremaining accrual of $0.9 million at September 30, 2004 relates to 37 employeesat the European operations.

 

The accrual for future operating lease obligations, relating to theReston office, has been drawn down by the monthly payments on the office lease,which continues through February 2005, less the income from a sublease of thespace. During the three months ended September 30, 2004 an additional accrualof $0.1 million has been made for future lease obligations in the Germanoperation. Other charges incurred in the three and nine months ended September30, 2004 related to the implementation costs for back-office and administrativeoutsourcing initiatives. In addition, other charges include $0.2 million forthe three months ended September 30, 2004 relating to costs associated withintegrating the PSINet Europe operations recently acquired (see Note 4) andrelated system migration costs.

 

Certain of theactions VIA might take as part of its strategic plan may lead to additionalimpairment or restructuring charges in future periods and such amounts may bematerial.

 

**4.****                                     ****Acquisitions**

 

*PSINet Entities:*

 

On August 20, 2004, VIA acquired 100% of the issued and outstanding sharesof the PSINet Europe B.V. operations in Belgium, France, Germany, theNetherlands and Switzerland. These operations provide managed hosting, managednetworks and monitored access services to 3,700 customers in mainland Europe.The Company paid total consideration for the shares and inter-company debt ofthe PSINet Europe companies as follows: Euro 10.0 million in cash(approximately $12.3 million) at closing; Euro 2.0 million (approximately $2.5million), subject to adjustments for any deficit in the agreed working capitalbalance, to be paid in the fourth quarter of 2004; Euro 6.0 million(approximately $7.4 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. Any payments in the fourth quarter to the former shareholders inrelation to the finalization of the working capital balance at acquisition willresult in a corresponding increase in the amount of goodwill recognized.

 

8

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The purchase price allocation is as follows:

 
| **In thousands of U.S. dollars**                     | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|------------|------------|
| Goodwill  (Europe segment)                           |       | $          | 27,740     |   |
| Intangible  assets                                   |       | 4,551      |       |
| Other assets  and liabilities                        |       | (11,056    | )          |
| Purchase  consideration, including acquisition costs |       | $          | 21,235     |   |

 

The intangible assets, includingcustomer lists and the tradename “PSINet Europe”, are being amortized over 7 and 10 years respectively. The resultsof the PSINet Europe companies have been included from August 20, 2004, theacquisition date. The allocation of purchase consideration is preliminary andmay change once the Company completes its valuation of the assets andliabilities acquired..

 

The following unaudited pro forma results of operations of the PSINet operationsacquired are presented assuming the acquisition had been completed on January1, 2003:

 
| ** **                                                    | ** ** | **For the three months ended  September 30,** | ** ** | **For the nine months ended  September 30,** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                    | ** ** | **2003**                                           | ** ** | **2004**                                          | ** ** | **2003** | ** ** | **2004** | ** ** |
| Revenue                                                       |       | $                                                  | 10,265     |                                              | $          | 10,376 |   | $ | 32,777 |   | $ | 31,174 |   |
| Net loss from continuing operations                           |       | (337                                               | )          | (1,234                                            | )          | (4,109 | ) | (2,704 | ) |
| Basic and diluted loss per share, from  continuing operations |       | (0.01                                              | )          | (0.02                                             | )          | (0.07 | ) | (0.04 | ) |
|                                                               |            |                                                    |            |                                                   |            |  |  |  |  |  |  |  |  |

 

The unaudited pro forma amounts are not necessarily indicative of theresults that would have been achieved if the acquisition had been consummatedon January 1, 2003, nor are the results indicative of VIA’s expected futureresults.

 

*Amen:*

 

In January 2004, the Company purchased100% of the issued and outstanding shares of Amen SAS, Amen Srl and AmenLimited (collectively “Amen”), a European web-hosting company based in Paris,France. Amen has operations in France, the United Kingdom, Spain and Italy. TheCompany acquired Amen to strengthen its Europe segment and benefit from Amen’s operatingplatform and service offerings. The Company paid $7.5 million in cash andissued 673,652 shares of its common stock, which had a market value of $2 pershare on the date of acquisition having a total value of approximately$1.3 million for Amen common stock. The former shareholders will have theopportunity to receive further consideration expected to be between $1.2 and$1.8 million in cash and shares of the Company’s common stock, based onthe 2004 operating performance of Amen. The purchase consideration calculatedbelow includes $0.7 million of additional consideration, which is currentlydeterminable. If any further amounts are paid to the former shareholders, thiswill result in a corresponding increase in the amount of goodwill recognized.

 

The purchase price allocation is as follows:

 
| **In thousands of U.S. dollars**                     | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|------------|------------|
| Goodwill  (Europe segment)                           |       | $          | 11,279     |   |
| Intangible  assets                                   |       | 4,445      |       |
| Other assets  and liabilities                        |       | (5,006     | )          |
| Purchase  consideration, including acquisition costs |       | $          | 10,718     |   |

 

The intangibleassets are being amortized over 3-10 years. The results of Amenhave been included from January 28, 2004, the acquisition date. The allocationof purchase consideration was amended in the second quarter from thepreliminary allocation as a result of additional acquisition costs ($0.2million). The allocation of purchase consideration was amended in the thirdquarter from the preliminary allocations as a result of a reduction inacquisition costs ($0.1 million). It is anticipated that the final allocationof the purchase price will not differ materially from this amended allocation.

 

The actual results of operations for thethree and nine months ended September 30, 2004 did not differ materially fromthe pro forma results of operations computed under the assumption that theacquisition was consummated effective January 1, 2004.

 

9

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**5.****                                     ****Income Tax**

 

The provision for taxes based on income for the 2003and 2004 interim periods was computed in accordance with Interpretation No. 18of Accounting Principles Board Opinion No. 28 on reporting taxes for interimperiods and was based on management’s expectations of tax expense having aneffective income tax rate of 0%.

 

**6.****                                      ComprehensiveLoss**

 

Comprehensive loss for the three and ninemonths ended September 30, 2003 and 2004 was as follows:

 
| ** **                                              | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **In thousands of U.S. dollars**                        | ** ** | **2003**                                   | ** ** | **2004**                                  | ** ** | **2003** | ** ** | **2004** | ** ** |
| Net loss                                                |       | $                                          | (7,550     | )                                         | $          | (4,642 | ) | $ | (18,739 | ) | $ | (25,936 | ) |
| Foreign currency translation adjustment  (losses) gains |       | (717                                       | )          | 5,866                                     |       | (6,093 | ) | 8,399 |   |
| Comprehensive loss                                      |       | $                                          | (8,267     | )                                         | $          | 1,224 |   | $ | (24,832 | ) | $ | (17,537 | ) |

 

**7.             Propertyand Equipment, net**

 

Property and equipment consisted of thefollowing:

 
| **In thousands of U.S. dollars** | ** ** | **December 31, 2003** | ** ** | **September 30, 2004** | ** ** |
|----------------------------------|------------|-----------------------|------------|------------------------|------------|
| Hardware and other equipment     |       | $                     | 16,393     |                   | $          | 19,669 |   |
| Network and data center assets   |       | 11,914                |       | 9,018                  |       |
| Software                         |       | 14,471                |       | 17,241                 |       |
| Furniture and fixtures           |       | 1,105                 |       | 1,225                  |       |
|                             |       | 43,883                |       | 47,153                 |       |
| Accumulated depreciation         |       | (31,880               | )          | (32,346                | )          |
| Property and equipment, net      |       | $                     | 12,003     |                   | $          | 14,807 |   |

 

Depreciation expense was $1.5 millionand $1.6 million for the three months ended September 30, 2003 and2004, respectively. Depreciation expense was $4.3 million and$4.8 million for the nine months ended September 30, 2003 and 2004,respectively.

 

**8.****                                      Goodwill**

 

The changes in the carrying amount ofgoodwill during the three and nine months ended September 30, 2004 are asfollows:

 
| **In thousands of U.S. dollars** | ** ** | **Total** | ** ** | **Europe** | ** ** | **Americas** | ** ** |
|----------------------------------|------------|-----------|------------|------------|------------|--------------|------------|
| Balance as of December 31, 2003  |       | $         | 3,111      |       | $          | 1,965        |       | $ | 1,146 |   |
| Acquisition (see Note 4)         |       | 11,157    |       | 11,157     |       | —       |       |
| Foreign exchange adjustment      |       | (284      | )          | (284       | )          | —       |       |
| Balance as of March 31, 2004     |       | $         | 13,984     |       | $          | 12,838       |       | $ | 1,146 |   |
| Acquisition (see Note 4)         |       | 236       |       | 236        |       | —       |       |
| Foreign exchange adjustment      |       | (66       | )          | (66        | )          | —       |       |
| Balance as of June 30, 2004      |       | $         | 14,154     |       | $          | 13,008       |       | $ | 1,146 |   |
| Acquisition (see Note 4)         |       | 27,626    |       | 27,626     |       | —       |       |
| Divestiture (see Note 2)         |       | (1,957    | )          | (1,957     | )          | —       |       |
| Foreign exchange adjustment      |       | 556       |       | 556        |       | —       |       |
| Balance as of September 30, 2004 |       | $         | 40,379     |       | $          | 39,233       |       | $ | 1,146 |   |

 

10

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**9.****                                      IntangibleAssets, net**

 

Intangible assets consisted of the following:

 
| **In thousands of U.S. dollars** | ** ** | **December 31, 2003** | ** ** | **September 30, 2004** | ** ** |
|----------------------------------|------------|-----------------------|------------|------------------------|------------|
| Customer lists                   |       | $                     | 794        |                   | $          | 7,136 |   |
| Software                         |       | —                |       | 1,973                  |       |
| Tradename                        |       | —                |       | 922                    |       |
| Accumulated amortization         |       | (63                   | )          | (1,267                 | )          |
| Intangible assets, net           |       | $                     | 731        |                   | $          | 8,764 |   |

 

Amortization expensefor the three months ended September 30, 2003 and 2004 was nil and $0.4million, respectively. Amortization expense for the nine months ended September30, 2003 and 2004 was nil and $1.2 million, respectively. See Note 4 forintangible asset additions from the acquisition of Amen and the PSINet Europecompanies. We amortize customer lists, software and trade names over three toseven years, five years and ten years respectively.

 

**10.****                               Stock-BasedCompensation**

 

SFAS No. 123, “*Accounting for Stock-Based Compensation*,”encourages, but does not require companies to record compensation cost forstock-based employee compensation plans at fair value. The Company has chosento account for stock-based compensation using the intrinsic value methodprescribed in Accounting Principles Board Opinion (“APB”) No. 25, “*Accounting for Stock Issued to Employees*,”and related Interpretations. Accordingly, compensation cost for stock optionsis measured as the excess, if any, of the estimated fair value of the Company’sstock at the date of the grant over the amount an employee must pay to acquirethe stock.

 

The Company has adopted the “disclosure only”alternative described in SFAS No. 123, which requires pro formadisclosures of net income and earnings per share as if the fair value method ofaccounting has been applied. The following table illustrates the effect on netincome and earnings per share as if the Company had applied the fair valuerecognition provisions of SFAS No. 123 to stock-based employeecompensation:

 
| ** **                                                                                                                     | ** ** | **For the three months ended  September 30,** | ** ** | **For the nine months ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------|------------|
| **In thousands of U.S. dollars**                                                                                               | ** ** | **2003**                                      | ** ** | **2004**                                     | ** ** | **2003** | ** ** | **2004** | ** ** |
| Net loss (as reported)                                                                                                         |       | $                                             | (7,550     | )                                            | $          | (4,642 | ) | $ | (18,739 | ) | $ | (25,936 | ) |
| Add back: Total stock-based employee  compensation expense determined under intrinsic value method                             |       | —                                        |       | —                                       |       | — |   | 80 |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method, net of related  tax effects |       | (726                                          | )          | (301                                         | )          | (2,649 | ) | (1,418 | ) |
| Pro forma  net loss                                                                                                            |       | $                                             | (8,276     | )                                            | $          | (4,943 | ) | $ | (21,388 | ) | $ | (27,274 | ) |
|                                                                                                                           |       |                                          |       |                                         |       |   |   |   |   |
| Net loss per share, basic and diluted (as  reported)                                                                           |       | $                                             | (0.13      | )                                            | $          | (0.08 | ) | $ | (0.31 | ) | $ | (0.43 | ) |
| Net loss per share, basic and diluted (pro  forma)                                                                             |       | $                                             | (0.14      | )                                            | $          | (0.08 | ) | $ | (0.36 | ) | $ | (0.45 | ) |

 

During the three months ended March 31, 2004,a total of 37,500 shares of the Company’s common stock were issued to twodirectors pursuant to the Company’s director compensation program. The marketvalue of the stock as issued on the date of grant was $2.13 per share. Thiscost to the Company has been expensed in the condensed consolidated statementof operations for the nine months ended September 30, 2004.

 

**11.****                               Long-termdebt**

 

In connection with the acquisition of the PSINetEurope companies (see Note 4), in August 2004 the Company issued an unsecuredzero coupon convertible note. The note is due in November 2005 and isconvertible into 4.5 million of VIA common stock at the option of the holder.The face value of the note is Euro 6 million (approximately $7.4 million), subject toany final adjustments for warranty claims if any, and the effective interest rate is 5.27%. Based on this effectiveinterest rate, the present value of the unsecured zero coupon convertible noteis Euro 5.6 million (approximately $6.9 million). The discount of Euro 0.4million (approximately $0.5 million) is being amortized as interest expenseover the duration of the note.

 

11

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**12.****                               Contingencies**

 

*Legal Proceedings*

 

On November 5, 2001 a class actionlawsuit was filed in the District Court for the Southern District of New Yorkagainst VIA NET.WORKS, Inc., certain of the underwriters who supported itsinitial public offering (“IPO”) and certain of its officers, under the title O’Learyv. Via Net.works [sic], et al [01-CV-9720] (the “Complaint”). An amendedcomplaint was filed in April 2002. The Complaint alleges that theprospectus the Company filed with its registration statement in connection withits IPO was materially false and misleading because it failed to disclose,among other things, that: (i) the named underwriters had solicited andreceived excessive and undisclosed commissions from certain investors inexchange for the right to purchase large blocks of VIA IPO shares; and(ii) the named Underwriters had entered into agreements with certain oftheir customers to allocate VIA IPO shares in exchange for which the customersagreed to purchase additional VIA shares in the aftermarket at pre-determinedprices (“Tie-in Arrangements”), thereby artificially inflating the Company’sstock price. The Complaint further alleges violations of Sections 11, 12(a)(2)and 15 of the Securities Act of 1933 and Section 10(b) of the SecuritiesExchange Act of 1934 and Rule 10b-5 promulgated thereunder arising out ofthe alleged failure to disclose and the alleged materially misleadingdisclosures made with respect to the commissions and the Tie-in Arrangements inthe prospectus. The plaintiffs in this action seek monetary damages in anunspecified amount. Approximately 300 other issuers and their underwriters havehad similar suits filed against them, all of which are included in a singlecoordinated proceeding in the Southern District of New York (the “IPOLitigation”).

 

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 IPO Litigations;the Company is in the process of completing a settlement with the plaintiffs inthe case. The settlement would provide, among other things, a release of theCompany and of the individual defendants for the conduct alleged in the actionto be wrongful by the plaintiffs. Under the proposed settlement, the Companywould agree to undertake other responsibilities under the partial settlement,including agreeing to assign away, not assert, or release certain potentialclaims the Company may have against its underwriters. Any direct financialimpact of the proposed settlement is expected to be borne by the Company’sinsurers. The special litigation committee agreed to approve the settlementsubject to a number of conditions, including the participation of a substantialnumber of other defendants in the proposed settlement, the consent of theCompany’s insurers to the settlement, and the completion of acceptable finalsettlement documentation. Furthermore, the settlement is subject to a hearingon fairness and approval by the Court overseeing the IPO Litigations. TheCompany continues to progress toward settlement and awaits approval ofsettlement by all parties involved.

 

*Guarantees*

 

From time to time, the Company enters intoindemnification agreements with certain contractual parties in the ordinarycourse of business, including agreements with lenders, lessors, serviceproviders and certain vendors. All such indemnification agreements are enteredinto in the context of the particular agreements and are provided in an attemptto properly allocate risk of loss in connection with the consummation of theunderlying contractual arrangements. Although the maximum amount of futurepayments that the Company could be required to make under these indemnificationagreements is unlimited, management believes that historically, costs incurredto settle claims related to these indemnifications have not been material to theCompany’s financial position, results of operations or cash flows and that thisis the expectation for the future. Additionally, the fair value of theindemnifications that the Company issued during the three and nine months endedSeptember 30, 2003 and 2004 was not material to the Company’s financialposition, results of operations or cash flows.

 

*Other*

 

The Company is subject to claims and legalproceedings that arise in the ordinary course of its business operations. Eachof these matters is subject to various uncertainties, and it is possible thatsome of these matters may be decided unfavorably to the Company. The Companydoes not believe that any of these matters will have a material adverse affecton its business, assets or operations.

 

**13.****                               SegmentReporting**

 

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 September 30,2004, VIA served primary markets in ten countries. These country operationsgenerate Internet-related revenues from leased lines, dial-up Internet access,web-hosting and design, Internet security and consulting services, and sales ofthird-party hardware and software. All of the European operating companies aregrouped into one reportable segment (Europe). The Company’s U.S operatingcompany is reported as Americas. The Company is reorganizing its salesoperations into two channels, VIA Express and Industry Solutions, andintegrating the recently acquired PSINet Europe operations. As the channels andPSINet integration further develop, it is anticipated that the Company willbegin to manage its operations around these channels and will adapt its segmentreporting accordingly. The chief operating decision makers within the Companyare the Chief Executive Officer and the Chief Financial Officer.

 

The Company evaluates the performance of itssegments based on revenue and operating loss. Corporate expenses, which alsoinclude the regional IRU companies, are shown to reconcile to the totalconsolidated figures. Total segment assets, as presented in the table below,are total assets net of intercompany funding amounts. Prior period amounts havebeen reclassified to conform to the current period

 

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presentation to account fordiscontinued operations.

 

The table below presents the total assets byreportable segment as of September 30, 2003 and 2004. In addition, the tablepresents information about the reported revenue, operating loss from continuingactivities, and impairment and restructuring charges of the Company’s segmentsfor the three and nine months ended September 30, 2003 and 2004.

 
| **In thousands of U.S. dollars**          | ** ** | **Europe** | ** ** | **Americas** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|------------|------------|--------------|------------|---------------|------------|-----------|------------|
| Total assets as of September 30, 2003     |       | $          | 19,614     |         | $          | 3,254         |       | $         | 78,965     |   | $ | 101,833 |   |
| Total assets as of September 30, 2004     |       | $          | 84,530     |         | $          | 2,327         |       | $         | 35,285     |   | $ | 122,142 |   |
| Three months ended September 30, 2003:    |       |       |       |         |       |          |       |      |       |
| Revenue                                   |       | $          | 9,706      |         | $          | 975           |       | $         | —     |   | $ | 10,681 |   |
| Operating loss from continuing operations |       | (1,083     | )          | (296         | )          | (6,636        | )          | (8,015    | )          |
| Impairment and restructuring charges      |       | 346        |       | —       |       | 504           |       | 850       |       |
| Three months ended September 30, 2004:    |       |       |       |         |       |          |       |      |       |
| Revenue                                   |       | $          | 17,194     |         | $          | 962           |       | $         | —     |   | $ | 18,156 |   |
| Operating loss from continuing operations |       | (2,714     | )          | (134         | )          | (5,396        | )          | (8,244    | )          |
| Impairment and restructuring charges      |       | 989        |       | —       |       | 304           |       | 1,293     |       |
| Nine months ended September 30, 2003:     |       |       |       |         |       |          |       |      |       |
| Revenue                                   |       | $          | 30,006     |         | $          | 2,953         |       | $         | —     |   | $ | 32,959 |   |
| Operating loss from continuing operations |       | (3,453     | )          | (639         | )          | (19,731       | )          | (23,823   | )          |
| Impairment and restructuring charges      |       | 1,308      |       | —       |       | 1,335         |       | 2,643     |       |
| Nine months ended September 30, 2004:     |       |       |       |         |       |          |       |      |       |
| Revenue                                   |       | $          | 41,099     |         | $          | 2,825         |       | $         | —     |   | $ | 43,924 |   |
| Operating loss from continuing operations |       | (7,743     | )          | (745         | )          | (20,641       | )          | (29,129   | )          |
| Impairment and restructuring charges      |       | 989        |       | —       |       | 799           |       | 1,788     |       |

 

In the second and third quarters of 2003, VIAsold its operation in Italy previously reported in the Europe region andrecognized Brazil and Mexico as discontinued operations. In September 2004, VIAsold its UK operation previously reported in the Europe region. See Note 2for further details.

 

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**ITEM. 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS**

 

The following discussion and analysis shouldbe read in conjunction with the condensed consolidated financial statements andrelated notes included in Item 1 of this Form 10-Q. This discussioncontains forward-looking statements, or statements that relate to future eventsor our future performance. These statements include, but are not limited tothose relating to the Company’s strategic plan and business model changes,projections regarding financial impacts of the business model shift, newproduct roll-out, cost reductions in general, statements relating to reductionsin cash usage, and the benefits or cost savings we may achieve through theacquisition of the PSINet Europe companies we acquired during the quarter orthe disposition of our UK company, VIA NET.WORKS UK Ltd., or any otheracquisition or disposition activities in which we may engage. 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 in the “Risk Factors” described in Exhibit 99.1on this Form 10-Q, as well as those described in the “Risk Factors” section ofVIA’s 2003 Annual Report. You are urged to carefully consider these factors, aswell as other information contained in this Form 10-Q and in our otherperiodic reports and documents filed with the Securities and ExchangeCommission.

 

**Overview**

 

We are a provider of Internet-protocol, orIP, based business communication solutions to more than 135,000 ?businesses,primarily small- and medium-sized enterprises, or SMEs, in Europe and theUnited States. Through the VIA, AMEN and PSINet Europe brands, we offer acomprehensive portfolio of business communications services, includingweb-hosting, Internet and network security services, Internet access (throughdial-up, DSL, or ISDN, and leased-line connectivity), virtual private networks,voice and professional services.  We haveoperations in Belgium, France, Germany, Italy, the Netherlands, Portugal,Spain, Switzerland, the United Kingdom and the United States.

 

*Operating strategy*

 

Our operating strategy is to provide ourtarget market with a broad suite of business communications solutions, with afocus on selling high margin services such as web-hosting and Internet securityservices that we can deliver over our own scalable product platforms. Insupport of this strategy, we have completed and will continue to pursueactively strategic acquisitions, partnerships and divestments that complementor enhance our infrastructure, product offerings, channel strategies orcustomer base, and that allow us to leverage our core operational capabilitiesto realize higher margins from acquired revenue.  Since January of this year, we haveacquired the Amen group and five of the mainland Europe operations of PSINetEurope B.V., and we have sold our United Kingdom unit, VIA NET.WORKS UK Ltd.(see discussion below under “**Strategic Acquisitions andDivestments**”). Among other benefits, through each transaction wehave increased the proportion of our revenues attributable to high marginservices while, at the same time, decreasing the proportion of our revenuesattributable to Internet access services. These results also reflect our intent, announced earlier this year, toimprove VIA’s revenue base by focusing on high margin web-hosting and Internetsecurity services and becoming less dependant on revenues generated through theresale of access services.

 

The effect of the three transactions on ourrevenue mix is as follows:

 
| ** **      | ** ** | ** **        | ** ** | **2004**                       | ** ** | ** **                       | ** ** | ** **                    | ** ** |
|-----------------|------------|-------------------|------------|--------------------------------|------------|----------------------------------|------------|-------------------------------|------------|
| ** **      | ** ** | **Start of Year** | ** ** | **Post-Amen  Acquisition (1)** | ** ** | **Post-PSINet  Acquisition (2)** | ** ** | **Post  Sale  of VIA UK (3)** | ** ** |
| Hosting         |       | 21                | %          | 25                             | %          | 30                               | %          | 33                            | %          |
| Other  services |       | 14                |       | 15                             |       | 15                               |       | 15                            |       |
| Access          |       | 65                |       | 60                             |       | 55                               |       | 52                            |       |

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Notes:

(1).                               Asof February 2004

(2).                               Proforma, based on results as of 30 June 2004

(3).                               Basedon results as of 30 September 2004; includes PSINet Europe data; excludesVIA UK data

 

For the first time in its seven year historyVIA is well-positioned to achieve positive cash flow from consolidatedoperations, which we believe the Company will reach by mid-2005. We expect toreach this goal through the generation of new and incremental revenues and thecost savings and higher efficiency we can achieve through the effectiveintegration of the PSINet operations. We believe we are positioned to achievethis objective as we have successfully implemented a program to reduce ouroperating expenses, developed and begun implementing a refocused business modeldesigned to generate increased, and higher-margin, revenues, and

 

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acquired financially accretive business operations.

 

We recognize that our ability to successfullyexecute our strategy to improve operational performance and generate meaningfuland profitable revenue growth is subject to a number of risks and dependencies,which are not insignificant.  These risksand dependencies are further discussed in the “Risk Factors” described inExhibit 99-1 on this Form 10-Q, as well as those described in the “RiskFactors” section of our 2003 Annual Report.

 

**Strategic Acquisitions and Divestments**

 

As part of our corporate developmentstrategy, and consistent with our focus on high margin services, we continue toexplore and evaluate acquisition and divestment opportunities, as well aspartnerships, even as we remain committed to prudent cash management.  Our goal in pursuing these transactions is tocomplement or enhance our existing infrastructure, product offerings, channelstrategies or customer base. Our strategic plan calls for us to be flexible andopportunistic regarding acquisitions and as a result, if we find one or moreappropriate opportunities, we may decide to utilize a substantial portion ofour available cash to finance these acquisitions.

 

In 2004, we have identified, and acted upon,two acquisitions:

 

1.               In January 2004,we purchased 100% of the issued and outstanding shares of Amen SAS (France),Amen Srl (Italy) and Amen Limited (UK) (collectively “Amen”), a group ofEuropean web-hosting companies based in Paris, France, with additionaloperations in Spain, Italy and the UK. We acquired Amen to strengthen our operations by leveraging Amen’sshared web-hosting operating platform and service offerings. For thisacquisition, we paid $7.5 million in cash and issued 673,652 shares of ourcommon stock, which had a market value of $2 per share on the date ofacquisition of a total value of approximately $1.3 million. The formershareholders will have the opportunity to receive further consideration that weexpect will be between $1.2 and $1.8 million in cash and shares of VIAcommon stock, based on the 2004 operating performance of Amen. Informationrelated to our operational opportunities as a result of this acquisition aswell as other details and risks associated with the Amen business is describedin the “Risk Factors” in Exhibit 99.1 on this Form 10-Q and the “RiskFactors” section of our 2003 Annual Report. To date, Amen’s performancehas been consistent with our expectations, both financially and operationally.Since the acquisition and through September 30, 2004, Amen has contributedapproximately $2.4 million of positive cash flows.  The Amen group now represents approximately13% of VIA’s consolidated revenues.

 

2.               On August 20,2004, we completed the acquisition of PSINet Europe operations in Belgium,France, Germany, the Netherlands and Switzerland. These operations providemanaged hosting, managed networks and monitored access services to more than3,700 customers in mainland Europe. Under the terms of the transaction, we paid or will pay totalconsideration for the shares and inter-company debt of the PSINet Europecompanies as follows: Euro 10.0 million in cash (approximately $12.3 million)at closing; Euro 2.0 million (approximately $2.5 million), subject toadjustments for any deficit in the agreed working capital balance, to be paidin the fourth quarter of 2004; Euro 6.0 million (approximately $7.4 million) incash or, at the option of the sellers, 4.5 million shares of VIA common stock,15 months after closing, subject to any final adjustments for warranty claims,if any.

 

As a part of our corporate developmentstrategy, we continuously evaluate our operating units to ensure their ongoingfit to our operating and financial strategy. We are committed to acting uponthese evaluations in a meaningful and expeditious manner. Based on the analysisof our operations earlier this year, we engaged in the following sale activity:

 

On September 28, 2004, we sold 100% ofthe shares of VIA NET.WORKS UK Ltd. to Claranet Limited, a UK-based Internetservices provider. Claranet agreed to pay total consideration for the shares ofVIA NET.WORKS UK Ltd. in the aggregate amount of GBP 7.3 million (approximately$13.1 million), subject to certain working capital and other adjustments. Wereceived GBP 5.3 million in cash ($9.4 million) on completion. The GBP 2.0million balance is payable, subject to the working capital and otheradjustments, as follows: GBP 1.0 million in cash six months after completionand GBP 1.0 million in cash one year after completion.

 

In addition to increasing the share of ourrevenues generated by web-hosting services, our transactions were also drivenby other compelling strategic considerations:

 

•                  TheAmen transaction has positioned us as a leader in shared hosting and Amen’sfully automated and scaleable end-to-end operating platform will permit us togrow our shared web-hosting revenues cost effectively.  With this platform, we have the ability toenter new geographic markets with superior service offerings and lowincremental investment.  Since theacquisition of the Amen group in January of this year, we have introducedAmen into the Portuguese and Dutch markets, using the same operating platform,which remains in Paris. Finally, Amen has been immediately financiallyaccretive and provides us with a

 

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cash generating pre-paid business model.

 

•                  ThePSINet Europe acquisition enhances our geographic presence and revenue runrate, and the territorial overlap in some of the markets will providesignificant opportunities for operational, product and sales related synergies,including access to larger corporate customers.

 

•                  Thesale of VIA UK eliminated an operation whose revenue mix was off strategy andcost structure too high.  VIA UK derivedthe majority of its revenues from Internet access services, such as DSL,leased-line connectivity and dial-up. The access market in the UK had been subject to significant and ongoingprice erosion and competition among established larger and infrastructure-basedISPs and telecommunications companies, leading to lower revenues and lowermargins. Our ability to compete in the UK was limited by VIA UK’s coststructure as it does not have its own access infrastructure, depending insteadon reselling the access services of others.

 

We will continue to review appropriate newpotential acquisitions as the opportunities arise. We do not know whether wewill be successful in identifying further appropriate opportunities and, if weare successful, there is no assurance that such acquisitions or partnershipswill be executed and integrated efficiently. As noted above, our corporatedevelopment program also calls for us to examine from time to time each of ouroperations and business segments to ensure their overall strategic fit andpotential for contributing to shareholder value. To the extent that marketconditions permit, and anticipated future opportunities for the operation orsegment are not anticipated to contribute as required, we will seek to dispose,sell or otherwise discontinue that operation or segment.

 

*Integrationof PSINet Europe*

 

In addition to the enhancements in ourpresence, revenue run rate and revenue mix, the territorial overlap in some ofPSINet Europe’s markets provides significant opportunities for operational,product and sales related synergies.

 

We expect to realize cost-related synergiesof at least than $4 million annually, after completion of the integrationactivities, which are expected to be substantially complete by the firstquarter of 2005. The synergies would consist of savings through headcountreductions, network costs, selling, general and administrative expenses and thecombination of back-office functions.  Itis expected that the operational synergies will be implemented in the fourthquarter of 2004 and that the financial results will begin to be realized in thefirst quarter of 2005.

 

Our integration plan has focused immediatelyon the organizational structure of the combined corporation, as well as backoffice systems, network operations systems, web interfaces, product platforms,operational processes, and sales and marketing programs. During the integrationprocess, particular care is being taken to maintain the quality of serviceexpected by PSINet Europe customers, with a view to introducing furtherenhancements once integration is complete.

 

The PSINet Europe integration process hasallowed management to assess the strength of the PSINet Europe customer baseand, as a result, we are adopting the PSINet Europe brand for our IndustrySolutions channel in Belgium, the Netherlands, Germany, Switzerland and France– the five countries in which both companies operate.  We believe we can best develop the IndustrySolutions channel by leveraging the existing brand strength of PSINet Europe inthose markets.

 

**OurOperations**

 

In the second and third quarters of 2003, wesold VIA NET.WORKS Italy and recognized Brazil and Mexico as discontinuedoperations. In September 2004, we sold VIA NET.WORKS UK Ltd. Theseoperations are accounted for as discontinued operations and have been excludedfrom the financial results from continuing operations, as well as the financialresults for the comparative prior period. In January 2004, we acquiredAmen, which has operations in France, the United Kingdom, Spain, and Italy. Inaddition, in August 2004, we acquired certain PSINet Europe operations inBelgium, Germany, the Netherlands, Switzerland and France. The following tableshows the revenue contribution from each of our continuing operations in theEurope and the Americas reporting segments. As of September 30, 2004 weowned 100% of all our operations.

 
| **Country**              | ** ** | **Percentages of  Total Revenue from  continuing operations  for the Three Months Ended  September 30, 2003** | ** ** | **Percentages of  Total Revenue from  continuing operations  for the Three Months Ended  September 30, 2004** | ** ** | **Percentages of  Total Revenue from  continuing operations  for the nine Months Ended  September 30, 2003** | ** ** | **Percentages of  Total Revenue from  continuing operations  for the nine months ended  September 30, 2004** | ** ** |
|--------------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|
| VIA legacy business:     |       | 100                                                                                                                | %          | 62                                                                                                                 | %          | 100                                                                                                               | %          | 77                                                                                                                | %          |
| *France*                 | * *   | *15*                                                                                                               | *%*        | *9*                                                                                                                | *%*        | *16*                                                                                                              | *%*        | *12*                                                                                                              | *%*        |
| *Germany*                | * *   | *16*                                                                                                               | *%*        | *10*                                                                                                               | *%*        | *17*                                                                                                              | *%*        | *13*                                                                                                              | *%*        |
| *The Netherlands*        | * *   | *24*                                                                                                               | *%*        | *13*                                                                                                               | *%*        | *21*                                                                                                              | *%*        | *16*                                                                                                              | *%*        |
| *Portugal*               | * *   | *13*                                                                                                               | *%*        | *9*                                                                                                                | *%*        | *13*                                                                                                              | *%*        | *11*                                                                                                              | *%*        |
| *Spain*                  | * *   | *4*                                                                                                                | *%*        | *2*                                                                                                                | *%*        | *4*                                                                                                               | *%*        | *3*                                                                                                               | *%*        |
| *Switzerland*            | * *   | *19*                                                                                                               | *%*        | *14*                                                                                                               | *%*        | *20*                                                                                                              | *%*        | *16*                                                                                                              | *%*        |
| *United States*          | * *   | *9*                                                                                                                | *%*        | *5*                                                                                                                | *%*        | *9*                                                                                                               | *%*        | *6*                                                                                                               | *%*        |
| Amen:                    |       | —                                                                                                             | %          | 13                                                                                                                 | %          | —                                                                                                            | %          | 13                                                                                                                | %          |
| *Amen France*            | * *   | *—*                                                                                                           | *%*        | *10*                                                                                                               | *%*        | *—*                                                                                                          | *%*        | *10*                                                                                                              | *%*        |
| *Amen United Kingdom*    | * *   | *—*                                                                                                           | *%*        | *2*                                                                                                                | *%*        | *—*                                                                                                          | *%*        | *2*                                                                                                               | *%*        |
| *Amen Spain*             | * *   | *—*                                                                                                           | *%*        | *1*                                                                                                                | *%*        | *—*                                                                                                          | *%*        | *1*                                                                                                               | *%*        |
| *Amen Italy*             | * *   | *—*                                                                                                           | *%*        | *—*                                                                                                           | *%*        | *—*                                                                                                          | *%*        | *—*                                                                                                          | *%*        |
| PSINet Europe companies: |       | —                                                                                                             | %          | 25                                                                                                                 | %          | —                                                                                                            | %          | 10                                                                                                                | %          |
| *PSINet Switzerland*     | * *   | *—*                                                                                                           | *%*        | *7*                                                                                                                | *%*        | *—*                                                                                                          | *%*        | *3*                                                                                                               | *%*        |
| *PSINet Germany*         | * *   | *—*                                                                                                           | *%*        | *9*                                                                                                                | *%*        | *—*                                                                                                          | *%*        | *4*                                                                                                               | *%*        |
| *PSINet The Netherlands* | * *   | *—*                                                                                                           | *%*        | *5*                                                                                                                | *%*        | *—*                                                                                                          | *%*        | *2*                                                                                                               | *%*        |
| *PSINet France*          | * *   | *—*                                                                                                           | *%*        | *1*                                                                                                                | *%*        | *—*                                                                                                          | *%*        | *—*                                                                                                          | *%*        |
| *PSINet Belgium*         | * *   | *—*                                                                                                           | *%*        | *3*                                                                                                                | *%*        | *—*                                                                                                          | *%*        | *1*                                                                                                               | *%*        |

 

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**RESULTS OF OPERATIONS**

 

**Three and nine months ended September 30,2003 compared with the three and nine months ended September 30, 2004**

 

*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:

 
| ** **            | ** ** | **Three months ended**       | ** ** | **Nine months ended**        | ** ** |
|-----------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **            | ** ** | **September 30,  2003** | ** ** | **September 30,  2004** | ** ** | **September 30,  2003** | ** ** | **September 30,  2004** | ** ** |
| Euro                  |       | 72                           | %          | 72                           | %          | 71 | % | 73 | % |
| Great  British pounds |       | —                       | %          | 2                            | %          | — | % | 2 | % |
| Swiss Francs          |       | 19                           | %          | 21                           | %          | 20 | % | 19 | % |
| U.S. Dollars          |       | 9                            | %          | 5                            | %          | 9 | % | 6 | % |
|                  |       | 100                          | %          | 100                          | %          | 100 | % | 100 | % |

 

The Euro varied by approximately 4% inrelation to the U.S. dollar during the third quarter of 2004 and byapproximately 10% in the nine months ended September 30, 2004. The Eurovaried by approximately 8% in relation to the U.S. dollar during the thirdquarter of 2003 and by approximately 15% in the nine months ended September 30,2003. The Swiss Franc varied by approximately 5% in relation to the U.S. dollarduring the third quarter of 2004 and by approximately 9% in the nine monthsended September 30, 2004. The Swiss Franc varied by approximately 8% inrelation to the U.S. dollar during the third quarter of 2003 and byapproximately 12% in the nine months ended September 30, 2003. Theseexchange rate fluctuations have a significant impact on our reported results ofoperations, including revenue, expenses and net loss.

 

The average Euro-to-U.S. dollar foreignexchange rate for the three and nine months ended September 30, 2004 was8% and 9% higher respectively than the average Euro-to-U.S. dollar foreignexchange rate for the corresponding periods in 2003. The average SwissFranc-to-U.S. dollar foreign exchange rate for the three and nine months ended September 30,2004 was 8% and 7% higher respectively than the average Swiss Franc-to-U.S.dollar foreign exchange rate for the corresponding periods in 2003. The effectof the weakening of the U.S. dollar is that revenues, operating costs andexpenses and operating profits and losses in operations with a functionalcurrency other than U.S. dollars translate into larger U.S. dollar amounts thanwould have been the case had foreign exchange rates remained unchanged.

 

*Revenue:*

 
| ** ** | ** ** | **Three months ended**             | ** ** | ** **                   | ** ** | **Nine months ended**              | ** ** | ** **                   | ** ** |
|------------|------------|------------------------------------|------------|------------------------------|------------|------------------------------------|------------|------------------------------|------------|
| ** ** | ** ** | **September 30,  2003**       | ** ** | **September 30,  2004** | ** ** | **% Increase/  (Decrease)**        | ** ** | **September 30,  2003** | ** ** | **September 30,  2004** | ** ** | **% Increase/  (Decrease)** | ** ** |
| ** ** | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **                   | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **                   | ** ** |
| Revenue    |       | 10,681                             |       | 18,156                       |       | 70                                 | %          | 32,959                       |       | 43,924 |   | 33 | % |

 

We derive our revenue from the sale ofInternet-related goods and services, specifically third party hardware andsoftware and

 

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Internet connectivity services, other Internet value-added services,such as hosting, security and IP VPN, and voice services.

 

Revenue for the three months ended September 30,2004, was $18.2 million, up from $10.7 million for the three monthsended September 30, 2003. The increase in revenues quarter over quarter ispartly attributable to revenues recorded in the third quarter of 2004 by theAmen business, which we acquired in January 2004 (impact of approximately$2.3 million), and by the PSINet Europe operations acquired in August 2004(impact of approximately $4.7 million). In addition, both the averageEuro-to-U.S. dollar and the Swiss Franc-to-U.S. dollar foreign exchange ratestrengthened by approximately 8% when compared with the corresponding periodlast year, thus having a positive impact on revenues during the third quarterof 2004 of approximately $0.8 million. That positive impact offset thedecrease in underlying revenue (in all legacy VIA operations except Switzerlandand Portugal) for the three months ended September 30, 2004, compared tothe three months ended September 30, 2003. The decrease in underlyingrevenue is most significant in our Netherlands operations as discussed furtherbelow.

 

Revenue for the nine months ended September 30,2004 was $43.9 million, up from $33.0 million for the nine monthsended September 30, 2003. The increase in revenues is partly attributableto revenues recorded in the first nine months of 2004 by the Amen business,which we acquired in January 2004 (impact of approximately $5.9 million),and by the PSINet Europe operations acquired in August 2004 (impact ofapproximately $4.7 million). In addition, the average Euro-to-U.S. dollar andthe Swiss Franc-to-U.S. dollar foreign exchange rate for the nine months ended September 30,2004 strengthened by approximately 9% and 7%, respectively, when compared withthe corresponding period last year, thus having a positive impact on revenuesduring the first nine months of 2004 of approximately $2.7 million. Thatpositive impact offset the decrease in underlying revenue (in all legacy VIAoperations except for Portugal, and notably in Germany, France, Netherlands andSpain) for the nine months ended September 30, 2004, compared to the ninemonths ended September 30, 2003.

 

German revenues, excluding the impact offoreign exchange and the acquisition of PSINet Europe’s German business,decreased by 12% (approximately $0.8 million) in the nine months ended September 30,2004 compared with the corresponding period in 2003. This decline in revenue isdue to customer cancellations and price erosion. French revenues, excluding theimpact of foreign exchange and the acquisition of Amen’s and PSINet’s Frenchbusinesses, decreased by 9% (approximately $0.6 million) in the nine monthsended September 30, 2004 compared with the corresponding period in 2003.This decline in revenue is due to customer churn and fewer hardware andsoftware sales. Netherlands revenues, excluding the impact of foreign exchangeand the acquisition of PSINet Europe’s Netherlands businesses, decreased by 14%(approximately $0.4 million) and 10% (approximately $0.8 million),respectively, in the three and nine months ended September 30, 2004,compared with the corresponding period in 2003. This decline is due to decreasesin Internet access services revenues during 2004. Spain revenues, excluding theimpact of foreign exchange and the acquisition of Amen’s Spanish businesses,decreased by 23% (approximately $0.4 million) in the nine months ended September 30,2004 compared with the corresponding period in 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, increasedby 12% (approximately $0.3 million) in the three months ended September 30,2004 compared with the corresponding period in 2003. This increase is due tothe success of increasing marketing activities.

 

As discussed above under “**Overview**”, in the beginning of 2004 webegan a strategic shift of our sales and channel focus from Internet access toweb-hosting and Internet security services to be sold through our new VIAExpress channel and our Amen group of companies. This shift is intended toincrease our opportunities for profitable revenue growth and leverage our newautomated product and back office platforms. Reflecting the recent timing ofthis strategic change in sales focus, we have yet to realize the expectedpositive impact. We expect to begin to see profitable revenue growth from theVIA Express channel during 2005.

 

The percentage of our revenues in 2004derived from the various services that we offer is detailed in the followingtable. Because of the systemic errors and limitations we experienced in thepast with our legacy billing platforms, we are not able to provide an accuratebreakdown of our revenues for prior periods.

 
| ** **                  | ** ** | **Q1 2004** | ** ** | **Q2 2004** | ** ** | **Q3 2004** | ** ** |
|-----------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| Internet  access services   |       | 56          | %          | 53          | %          | 52          | %          |
| Web hosting                 |       | 29          | %          | 34          | %          | 33          | %          |
| Internet  security services |       | 5           | %          | 4           | %          | 6           | %          |
| Other  revenue              |       | 10          | %          | 9           | %          | 9           | %          |
| Total                       |       | 100         | %          | 100         | %          | 100         | %          |

 

The percentage of our revenue from Internetaccess services has declined compared with the level we reported in our Form10-Q for the second quarter as a result of the sale of VIA UK. We expect thatthe percentage of future revenues from Internet access services will decline aswe maintain our focus on growing our web hosting and managed security and otherservices.

 

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*OPERATING COSTS AND EXPENSES:*

 

*Internet services:*

 
| ** **          | ** ** | **Three months ended**             | ** ** | ** **                   | ** ** | **Nine months ended**              | ** ** | ** **                   | ** ** |
|---------------------|------------|------------------------------------|------------|------------------------------|------------|------------------------------------|------------|------------------------------|------------|
| ** **          | ** ** | **September 30,  2003**       | ** ** | **September 30,  2004** | ** ** | **% Increase/  (Decrease)**        | ** ** | **September 30,  2003** | ** ** | **September 30,  2004** | ** ** | **% Increase/  (Decrease)** | ** ** |
| ** **          | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **                   | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **                   | ** ** |
| Internet  services  | ** ** | 5,783                              |       | 8,809                        |       | 52                                 | %          | 17,487                       |       | 22,005 |   | 26 | % |
| % of Total  Revenue | ** ** | 54                                 | %          | 49                           | %          |                               |       | 53                           | %          | 50 | % | ** ** | ** ** |

 

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$8.8 million, or 49% of revenues, for the three months ended September 30,2004, up from $5.8 million, or 54% of revenues, for the three months endedSeptember 30, 2003. Our Internet services operating costs were$22.0 million, or 50% of revenues, for the nine months ended September 30,2004, compared with $17.5 million, or 53% of revenues, for the nine monthsended September 30, 2003. The increase in Internet services expense ispartly attributable to the Internet services costs of the Amen business acquiredin January 2004 (impact of approximately $0.5 million and $1.0 million,respectively, for the three and nine months ended September 30, 2004) andthe PSINet Europe operations acquired in August 2004 (impact ofapproximately $2.3 million for the three months ended September 30, 2004).In addition, the increase in Internet services expense is partly due totranslation impact of foreign currency movements (impact of approximately $0.4million and $1.5 million, respectively, for the three and nine months ended September 30,2004). 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 3%for the three months ended September 30, 2004 and decreased byapproximately 2% for the nine months ended September 30, 2004, from thecorresponding periods in 2003.

 

The decrease in Internet services operatingcosts in the third quarter of 2004, excluding Amen’s and PSINet Europe’sInternet services costs and the adverse impact of the strengtheningEuro-to-U.S. dollar foreign currency exchange rates, is attributable to adecrease of $0.3 million in Germany due to a reduction in the usage and marketrates of leased lines. The year-over-year decrease in Internet services costsin the nine months ended September 30, 2004, excluding Amen’s and PSINetEurope’s Internet services costs and the adverse impact of the strengtheningEuro-to-U.S. dollar foreign currency exchange rates, is primarily due to lowerrevenues from decreased customer network usage, decreasing market rates fornetwork bandwidth, and non-recurring benefits of $0.2 million in the firstquarter of 2004 following the resolution of Internet services cost disputes inour German operations.

 

*Selling, general and administrative:*

 
| ** **                             | ** ** | **Three months ended**             | ** ** | ** **                   | ** ** | **Nine months ended**              | ** ** | ** **                   | ** ** |
|----------------------------------------|------------|------------------------------------|------------|------------------------------|------------|------------------------------------|------------|------------------------------|------------|
| ** **                             | ** ** | **September 30,  2003**       | ** ** | **September 30,  2004** | ** ** | **% Increase/  (Decrease)**        | ** ** | **September 30,  2003** | ** ** | **September 30,  2004** | ** ** | **% Increase/  (Decrease)** | ** ** |
| ** **                             | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **                   | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **                   | ** ** |
| Selling,  general & administrative | ** ** | 10,518                             |       | 14,252                       |       | 36                                 | %          | 32,374                       |       | 43,269 |   | 34 | % |
| % of Total  Revenue                    | ** ** | 98                                 | %          | 78                           | %          |                               |       | 98                           | %          | 99 | % | ** ** | ** ** |

 

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 ofdirect mail and other mass marketing programs, advertising, customercommunications, trade show participation, web site management and otherpromotional costs. Other SG&A expenses include the costs of travel, rent, utilities,insurance and bad debt expense.

 

We incurred SG&A expenses of$14.3 million for the three months ended September 30, 2004, a 36%increase from the $10.5 million we incurred for the three months ended September 30,2003. The increase in SG&A expenses quarter over quarter is partlyattributable to expenses associated with the Amen business acquired in January 2004(impact of approximately $1.3 million) and the PSINet Europe operationsacquired in August 2004 (impact of approximately $2.6 million). In addition,the increase in SG&A expenses is

 

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partly due to the strengthening of the Euro-to-U.S. dollar and SwissFranc-to-U.S. dollar foreign currency exchange rates of approximately $0.4million. Excluding Amen’s and PSINet Europe’s SG&A expenses and the adverseimpact of the foreign currency exchange rate, SG&A expenses decreased byapproximately 5%, or $0.5 million, for the three months ended September 30,2004, compared with the corresponding period in 2003 due to a decrease incompensation 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 thisquarter.  As a part of these integrationefforts, we are focusing, in part, on the rationalization of staffing and otherresources between the existing VIA operations and the PSINet Europe operations,with the goal of substantially reducing the Company's overall coststructure.  We anticipate that, when theintegration activities are substantially complete, which we expect will occurby the end of the first quarter of 2005, we will have reduced our recurringconsolidated SG&A expenses by at least $4.3 million on an annual basis, asignificant portion of which will be in the form reduced compensation expensesas noted below.  Accordingly, over thenext two quarters, we expect to see significant reductions in quarterlySG&A expenses incurred by VIA as the full effect of the restructuring isachieved.

 

We incurred SG&A expenses of$43.3 million for the nine months ended September 30, 2004, a 34%increase from the $32.4 million we incurred for the nine months ended September 30,2003. The increase in SG&A expenses year over year is partly attributableto expenses associated with the Amen business acquired in January 2004(impact of approximately $3.4 million) and the PSINet operations acquired in August 2004(impact of approximately $2.6 million). In addition, the increase in SG&Aexpenses is partly due to the strengthening of the Euro-to-U.S. dollar andSwiss Franc-to-U.S. dollar foreign currency exchange rates of approximately$1.5 million. The balance of the difference, for the nine months ended September 30,2004 compared to the corresponding period in 2003, is attributable to anincrease in professional fees, marketing expenses and bad debt expenses,partially offset by a decrease in compensation expense, associated with thelegacy VIA operations.

 

Compensation expense accounted forapproximately 53% ($7.6 million) of total SG&A costs for the three monthsended September 30, 2004, compared with 54% ($5.7 million) for the threemonths ended September 30, 2003. Compensation expense accounted for approximately 54% ($23.4 million) oftotal SG&A costs for the nine months ended September 30, 2004,compared with 60% of total SG&A costs ($19.4 million) for the nine monthsended September 30, 2003. The increase in compensation expense of 33% and20%, respectively, for the three and nine months ended September 30, 2004compared to the same periods in 2003 is due to the Amen and PSINet Europeacquisitions and the strengthening of the Euro-to-U.S. dollar foreign currencyexchange rate. Excluding these factors, compensation expense decreasedapproximately 8% and 2%, respectively, in the three and nine months ended September 30,2004 compared with the corresponding periods in 2003, primarily due to headcount reductions. Headcount (excluding Amen and PSINet Europe) at September 30,2004 decreased by approximately 6% from September 30, 2003. Compensationexpense for the nine months ended September 30, 2004 did not decline bythe same percentage due to higher one-off severance payments and the relativesalary levels of the employees terminated.

 

As noted above, we are engaged in integratingthe PSINet Europe operations with the VIA operations.  A part of these integration activitiesinvolves rationalization and reduction of staffing of the combinedoperations.  We expect to reduce ouroverall consolidated compensation expense by at least $3.8 million on an annualbasis.  Accordingly, we expect to reduceour quarterly recurring compensation expense significantly over the next twoquarters as the full impact of the integration is achieved.

 

In the three and nine months ended September 30,2004, marketing expenses increased by approximately $0.7 million, or 272%, and$1.9 million, or 308%, respectively, from the corresponding periods in 2003.For the three months ended September 30, 2004, $0.4 million of theincrease in marketing expenses is attributable to the Amen and PSINet Europebusiness. For the nine months ended September 30, 2004, $0.9 million ofthe increase in marketing expenses is attributable to the Amen and PSINetEurope business and the impact of foreign exchange. The remaining increase isdue to the increased number of marketing campaigns during the nine months endedSeptember 30, 2004.

 

Professional fees, related to legal, audit,outsourcing and other consulting fees, accounted for approximately 12% and 8%,respectively, of total SG&A for the three months ended September 30,2004 and 2003 and for approximately 13% and 9%, respectively, of total SG&Afor the nine months ended September 30, 2004 and 2003. The increase inprofessional fees of 99% and 96%, respectively, for the three and nine monthsended September 30, 2004, compared to the corresponding periods in 2003relates to Amen management fees, PSINet Europe, expenses for outsourcing certainfinance and accounting services, and increased consulting fees in one of ourlocal operations and the corporate headquarters.

 

Bad debtexpense (benefit) in the three and nine months ended September 30, 2004was $22,000 and $0.7 million respectively compared with $0.1 million and $(0.2)million for the corresponding periods in 2003. The increase inbad debt expense in the nine months ended September 30, 2004 compared withthe corresponding period in 2003 isprimarily due to a significant benefit in one of our European operationsin the prior period and an increase in bad debt charges in our Europeanoperations.

 

*Impairment and restructuring charges:*

 
| ** **                            | ** ** | **Three months ended**             | ** ** | ** **                   | ** ** | **Nine months ended**              | ** ** | ** **                   | ** ** |
|---------------------------------------|------------|------------------------------------|------------|------------------------------|------------|------------------------------------|------------|------------------------------|------------|
| ** **                            | ** ** | **September 30,  2003**       | ** ** | **September 30,  2004** | ** ** | **% Increase/  (Decrease)**        | ** ** | **September 30,  2003** | ** ** | **September 30,  2004** | ** ** | **% Increase/  (Decrease)** | ** ** |
| ** **                            | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **                   | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **                   | ** ** |
| Impairment  and restructuring charges | ** ** | 850                                |       | 1,293                        |       | 52                                 | %          | 2,643                        |       | 1,788 |   | (32 | )% |
| % of Total  Revenue                   | ** ** | 8                                  | %          | 7                            | %          |                               |       | 8                            | %          | 4 | % |   |   |

 

During the three and nine months ended September 30,2004, we recorded impairment and restructuring charges of $1.3 million and $1.8million respectively. The restructuring charge for the three months ended September 30,2004 of $1.3 million related to severance payments for thirty eight staff inour European operations, transition implementation costs for back-office andadministrative outsourcing initiatives, costs associated with integrating thePSINet Europe operations recently acquired and a charge for future leaseobligations at the German operation. The restructuring charge for the firsthalf of 2004 of $0.5 million related to severance payments for eight staff atthe corporate headquarters and transition implementation costs for back-officeand

 

20

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administrative outsourcing initiatives.

 

During the three and nine months ended September 30, 2003, werecorded restructuring and impairment charges of $0.9 million and $2.6 million,respectively. The restructuring charge for the three months ended September 30,2003 related to severance payments at three of our European operations and atour corporate headquarters and transition implementation costs for back-officeand administrative outsourcing initiatives. The restructuring charge for the first six months of 2003 related toseverance payments of $1.1 million at five of our European operations and atour corporate headquarters; a charge of $0.1 million for future leaseobligations for the closure of the Reston, Virginia office and on vacant officespace in Germany; implementation costs of $0.3 million for back-office andadministrative outsourcing initiatives; and, a fixed asset impairment charge of$0.1 million for fixed asset fixtures and fittings that were written down tonet realizable value as a result of the closure of the Reston office in March 2003.

 

We expect that the total restructuring charges inconnection with the PSINet Europe acquisition will amount to approximately $6.0million of which we expect $4.2 million will be incurred over the fourthquarter of 2004 and the first quarter 2005.

 

For further information see Note 3 to the Consolidated FinancialStatements.

 

*Depreciation and amortization:*

 
| ** **                     | ** ** | **Three months ended**             | ** ** | ** **                   | ** ** | **Nine months ended**              | ** ** | ** **                   | ** ** |
|--------------------------------|------------|------------------------------------|------------|------------------------------|------------|------------------------------------|------------|------------------------------|------------|
| ** **                     | ** ** | **September 30,  2003**       | ** ** | **September 30,  2004** | ** ** | **% Increase/  (Decrease)**        | ** ** | **September 30,  2003** | ** ** | **September 30,  2004** | ** ** | **% Increase/  (Decrease)** | ** ** |
| ** **                     | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **                   | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **                   | ** ** |
| Depreciation  and amortization | ** ** | 1,545                              |       | 2,045                        |       | 32                                 | %          | 4,278                        |       | 5,990 |   | 40 | % |
| % of Total  Revenue            | ** ** | 14                                 | %          | 11                           | %          |                               |       | 13                           | %          | 14 | % | ** ** | ** ** |

 

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, one to twenty five years. We amortizecustomer lists, software and a trade name over three to seven years, five yearsand ten years respectively.

 

Our depreciation and amortization expense was$2.0 million for the three months ended September 30, 2004, up from$1.5 million for the three months ended September 30, 2003. Depreciationand amortization expense was $6.0 million for the nine months ended September 30,2004, up from $4.3 million for the nine months ended September 30, 2003.For the three months ended September 30, 2004, $1.6 million relatedto the depreciation of fixed assets and $0.4 million related to theamortization of intangible assets. For the nine months ended September 30,2004, $4.8 million related to the depreciation of fixed assets and$1.2 million related to the amortization of intangible assets. For thethree and nine months ended September 30, 2003, all of our depreciationand amortization expense was related to the depreciation of fixed assets. Theincrease in total depreciation and amortization expense is primarily due to theacquisitions of Amen and the PSINet Europe companies, resulting in amortizationof identified intangible assets and depreciation of tangible fixed assetstotaling approximately $0.7 million and $1.6 million, respectively, for thethree and nine months ended September 30, 2004. Excluding Amen and thePSINet Europe companies, the depreciation and amortization expense increasedslightly during the nine months ended September 30, 2004 compared with thesame period in 2003 due to the impact of foreign currency exchange rates(approximately $0.1 million).

 

*Interest income, net:*

 
| ** **            | ** ** | **Three months ended**             | ** ** | ** **                   | ** ** | **Nine months ended**              | ** ** | ** **                   | ** ** |
|-----------------------|------------|------------------------------------|------------|------------------------------|------------|------------------------------------|------------|------------------------------|------------|
| ** **            | ** ** | **September 30,  2003**       | ** ** | **September 30,  2004** | ** ** | **% Increase/  (Decrease)**        | ** ** | **September 30,  2003** | ** ** | **September 30,  2004** | ** ** | **% Increase/  (Decrease)** | ** ** |
| ** **            | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **                   | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **                   | ** ** |
| Interest  income, net | ** ** | 224                                |       | 165                          |       | (26                                | )%         | 943                          |       | 456 |   | (52 | )% |
| % of Total  Revenue   | ** ** | 2                                  | %          | 1                            | %          |                               |       | 3                            | %          | 1 | % |   |   |

 

For the three and nine months ended September 30,2004, we earned $0.2 million and $0.5million, respectively, in interest income,compared with $0.2 million and $0.9 million, respectively, for the threeand nine months ended September 30, 2003. 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 primarily due to the decrease in theavailable cash for investing. Notably, we spent $20.6 million in cash toacquire Amen and the PSINet Europe companies during 2004 and received $8.0million net cash on the completion of the sale of VIA NET.WORKS UK ltd. We alsoincurred $0.1 million of interest expense for the three and nine months ended September 30,2004, compared with $2,000 and $12,000 of interest expense incurred in the sameperiods in 2003. The interest expense incurred in the third quarter of 2004 relatesprimarily to the imputed interest of 5.27% associated with the Euro 6 millionzero coupon convertible note issued in connection with the acquisition of thePSINet Europe companies (see Note 11 to the Consolidated Financial Statements).

 

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*Other (expense) income, net:*

 
| ** **                   | ** ** | **Three months ended**             | ** ** | ** **                   | ** ** | **Nine months ended**              | ** ** | ** **                   | ** ** |
|------------------------------|------------|------------------------------------|------------|------------------------------|------------|------------------------------------|------------|------------------------------|------------|
| ** **                   | ** ** | **September 30,  2003**       | ** ** | **September 30,  2004** | ** ** | **% Increase/  (Decrease)**        | ** ** | **September 30,  2003** | ** ** | **September 30,  2004** | ** ** | **% Increase/  (Decrease)** | ** ** |
| ** **                   | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **                   | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **                   | ** ** |
| Other  (expense) income, net |       | (65                                | )          | 81                           |       | 225                                | %          | (286                         | )          | (161 | ) | 44 | % |
| % of Total  Revenue          |       | (1                                 | )%         | 0                            | %          |                               |       | (1                           | )%         | 0 | % |   |   |

 

For the three months ended September 30,2004, we earned other income, net of $0.1 million related to a number ofinsignificant amounts in our operations. For the nine months ended September 30,2003, we incurred other expense, net of $0.2 million related primarily to therecognition of a contingent liability in one of our European operations.

 

For the three and nine months ended September 30,2003, we incurred other expense, net of $0.1 million and $0.3 millionrespectively relating mainly to losses on equipment disposals.

 

*Foreign currency gains (losses), net:*

 
| ** **                            | ** ** | **Three months ended**             | ** ** | ** **                   | ** ** | **Nine months ended**              | ** ** | ** **                   | ** ** |
|---------------------------------------|------------|------------------------------------|------------|------------------------------|------------|------------------------------------|------------|------------------------------|------------|
| ** **                            | ** ** | **September 30,  2003**       | ** ** | **September 30,  2004** | ** ** | **% Increase/  (Decrease)**        | ** ** | **September 30,  2003** | ** ** | **September 30,  2004** | ** ** | **% Increase/  (Decrease)** | ** ** |
| ** **                            | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **                   | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **                   | ** ** |
| Foreign  currency gains (losses), net |       | 1,545                              |       | 2,140                        |       | 39                                 | %          | 8,809                        |       | (1,734 | ) | (120 | )% |
| % of Total  Revenue                   |       | 14                                 | %          | 12                           | %          |                               |       | 27                           | %          | (4 | )% |   |   |

 

We recognized a foreign currency gain of  $2.1 million and a foreign currency lossof $(1.7) million for the three and nine months ended September 30, 2004 respectively,as compared to a gain of $1.5 million and $8.8 million for the three andnine months ended September 30, 2003. The change from period to period wasprimarily due to the fluctuation in the exchange rate of the Euro, Swiss Franc,and British pound as compared to the U.S. dollar and its impact on therevaluation of our Euro and Swiss Franc denominated intercompany balances heldby the parent company and on our Euro and British pound denominated cashaccounts. See ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK *Foreign Currency Exchange Risks*for more information.

 

We established the Euro denominated cashaccounts in connection with our initial public offering in February 2000,in which we sold shares of our common stock for both U.S. dollars and Euros. AtSeptember 30, 2004, the parent company maintained a Euro cash reserve ofEuro 4.4 million. We established the British pound denominated cashaccounts in connection with the sale of the shares of VIA NET.WORKS UK Ltd. At September 30,2004, the parent company maintained a British pound cash reserve of GBP5.7 million.

 

*Liquidity and Capital Resources*

 

Liquidity

 

We began 2004 with $65.8 million in cash andcash equivalents and $1.4 million in restricted cash. In the first ninemonths of 2004, we used $20.6 million to acquire the Amen group and the fivePSINet Europe operations. We received $9.4 million cash from the sale of our UKoperation. Overall, including the net impact of the transactions, we hadnegative cash flow of $41.9 million for the nine months ended September 30,2004, leaving us with $23.9 million in cash and cash equivalents and$5.2 million in restricted cash at September 30, 2004. Our negativecash flow for the nine months ended September 30, 2004, widened by $17.1 millioncompared with our negative cash flow of $24.8 million for the nine months endedSeptember 30, 2003, primarily due to the cash used for the acquisitionsdiscussed below and an increase in purchases of tangible fixed assets.

 

In the first nine months of 2004, wecompleted the following three significant transactions:

 

•                  InJanuary 2004, we acquired Amen group. In connection with this acquisition,we spent approximately $7.5 million in cash and issued common stock havinga total value of approximately $1.3 million at the time of the purchase.The former shareholders will have the opportunity to receive furtherconsideration that we expect will be between $1.2 and $1.8 million  in cash and shares of VIA common stock, basedon the 2004 operating performance of Amen, payable in April 2005. Tosecure the earn-out payments, we have placed Euro 0.1 million into an escrowaccount for the benefit of the former shareholders on a monthly basis beginningin May 2004.  The total amount to beplaced in escrow will equal Euro 0.7

 

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million. Through September 30, 2004,Amen had contributed $2.4 million of positive cash flow since the date ofacquisition.

 

•                  In August 2004, we acquired thePSINet Europe operations in Belgium, France, Germany, the Netherlands andSwitzerland. Under the terms of the transaction, we have paid or will pay forthe shares and certain inter-company debt of the PSINet Europe companies asfollows:

 

•                  Euro 10 million in cash(approximately $12.3 million) at closing;

 

•                  Euro 2 million (approximately $2.5 million), subject to adjustments for anydeficit in the agreed working capital balance, to be paid in the fourth quarterof 2004;

 

•                  Euro6 million (approximately $7.4 million) in cash or, at the option of thesellers, 4.5 million shares of VIA common stock, 15 months after closing,subject to any final adjustments for warranty claims, if any. We issued anunsecured zero coupon convertible note on closing as consideration for thelatter payment with an effective interest rate of 5.27%, due in November 2005.

 

•                  OnSeptember 28, 2004, we sold 100% of the shares of VIA NET.WORKS UK Ltd.for an aggregate sum of GBP 7.3 million (approximately $13.1 million), subjectto certain working capital and other adjustments. We received GBP 5.3 millionin cash (approximately $9.4 million) at the closing of the transaction on September 28,2004. The balance is payable, subject to the working capital and otheradjustments, as follows: GBP 1.0 million (approximately $1.8 million) in cashsix months after completion and GBP 1.0 million (approximately $1.8 million) incash one year after completion.

 

We believe our available cash will besufficient to fund our expenditures under our strategic business plan and ourworking capital and capital expenditure requirements until we achieve positivenet cash flows. We expect to generate positive cash flows from operations bymid-2005. At that point, we expect to still have adequate cash reservesremaining to support our working capital and capital expenditure requirements.Our expectation for reaching positive cash flow from operations is dependant onour successful implementation of our operating strategy, the successfulintegration of the PSINet Europe operations, and the achievement of new and incrementalrevenues, which we anticipate generating from our refocused business model andsales and product strategy. There can be no assurances that we will besuccessful in these efforts. If, contrary to management’s expectations, we use allour available cash before reaching positive cash flow from operations, or if wereach such point without sufficient cash reserves remaining, we may not be ableto continue our operations unless we obtain other financing.

 

In order for us to achieve consolidatedpositive cash flow from operations, our business plan calls for substantialgrowth in revenues while continuing to control the costs associated with thatrevenue. Our estimates of the cash flows generated by the revenue growth andthe capital resources needed and available to generate such growth couldchange, and such change could differ materially from the estimates used toevaluate our ability to realize our plans. If operations do not generatesufficient cash flow to continue operating, we will need to find otherfinancing mechanisms, which may not be available to us.

 

We anticipate that our cash balance willtotal $16.5 million to $17.5 million (which is expected to include $4.5 millionof restricted cash) at the end of the year. We expect to incur totalrestructuring costs of approximately $6 million through the first quarter of2005 in connection with the PSINet Europe acquisition of which $1.8 million weincurred in this third quarter period. We expect our capital expenditurerequirements for the remainder of 2004 to total approximately $1.3 million,primarily to support new sales. Capital expenditure requirements beyond 2004will principally be related to supporting revenue growth.

 

Building on our successful Amen and PSINetEurope acquisitions, we continue to identify and evaluate additional potentialpartners and strategic acquisitions. If we conclude that a transaction meetsour acquisition criteria, we may use a portion of our cash balances to financeall or a portion of these potential transactions.  We may also seek to utilize the value of ourshare capital as consideration for any investment.  Further, we may consider other opportunitiesto finance attractive acquisitions, such as the sale of non-core assets orbusiness operations. Our expected year-end cash balance of $16.5 million to $17.5million excludes any amounts for strategic acquisitions or divestments.

 

In April 2003, we announced therestarting of our previously authorized stock repurchase plan to acquire up to$10 million worth of VIA stock. No shares have been purchased under thisplan since the second quarter of 2003, during which we purchased 823,593 sharesof our common stock at a total cost of $0.8 million. We can suspend this planat any time.

 

Cash used in operating activities was$23.6 million for the nine months ended September 30, 2004, up from$18.3 million for the nine months ended September 30, 2003. Cashflows from operating activities can vary significantly from period to perioddepending on the timing of operating cash receipts and payments and otherworking capital changes, especially accounts receivable, other current assets,accounts payable, accrued expenses and other current liabilities. In bothperiods, our net losses were the primary component of cash used in operatingactivities. These losses include some significant non-cash items such asdepreciation, amortization, provision for doubtful accounts receivable,impairment and unrealized foreign currency transaction gains and losses.

 

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Cash used in the three months ended September30, 2004, was also adversely affected by a negative working capital impact of$(8.0) million.  This compared withworking capital impacts of $5.2 million in year-earlier quarter and $(1.3)million and $(11.6), respectively, in the first two quarters of 2004.  We believe the negative working-capitalmovement in the third quarter is both temporary, given our historical pattern,and explained by some technical factors. Among other things, during this quarter we made certain withholding taxpayments and expect to have the funds refunded, in whole or in large part,before year end.  In addition, during thesecond quarter of 2004, we delayed the payment of certain vendor invoices in asignificant aggregate amount, all of which were paid in the third quarter.  Accordingly, we believe that the negativeworking-capital impact on our third quarter cash usage is not indicative ofexpected future movements of working capital and that the normalization weexpect to see in subsequent quarters will have significant positive impact onour quarterly cash usage.

 

Cash used in investing activities was$21.4 million for the nine months ended September 30, 2004, and$4.0 million for the corresponding period in 2003. In 2004, we used cashto purchase Amen ($7.5 million including acquisition costs and net of cashacquired), to purchase the PSINet Europe companies ($13.4 million includingacquisition costs), and to acquire tangible fixed assets ($4.2 million). Inaddition, in September 2004, we received net cash for the sale of our UKoperation ($7.2 million net of transaction costs). For the nine months ended September 30,2003, we used cash primarily to purchase tangible fixed assets.

 

Cash received from (used in) financingactivities was $0.2 million for the nine months ended September 30, 2004,and ($0.4 million) for the nine months ended September 30, 2003. Forthe nine months ended September 30, 2004, cash was received primarily fromstock option exercises ($0.4 million). For the nine months ended September 30,2003, cash was used primarily to purchase treasury stock ($0.8 million),partially offset by the cash received from stock option exercises ($0.5million).

 

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.

 

In connection with the acquisition of Amendescribed above, we issued 673,652 shares of common stock at a price of $2 pershare, having a total value of approximately $1.3 million on the date ofacquisition, for Amen common stock. In connection with the acquisition of thePSINet Europe companies described above, we issued an unsecured zero coupon Euro 6 millionconvertible note due on November 20, 2005. The note is payable in cash or,at the option of the sellers, 4.5 million shares of VIA common stock, subjectto any final adjustments for warranty claims, if any. The note has an effectiveinterest rate of 5.27%.

 

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 nature, size and timing of futureacquisitions and dispositions, if any, our future net income and our success inexecuting our Strategic Plan as well as other factors discussed in “RiskFactors” described in Exhibit 99-1 on this Form 10-Q, as well asthose described in the “Risk Factors” section of our 2003 Annual Report.

 

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**ITEM 3. QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The following discussion relates to anychanges in our exposure to market risk, related to changes in interest ratesand changes in foreign exchange rates from that disclosed in our 2003 AnnualReport. This discussion contains forward-looking statements that are subject torisks and uncertainties. Actual results could differ materially due to a numberof factors, as set forth in the “Risk Factors” included as Exhibit 99.1 on thisForm 10-Q and included in the “Risk Factors” section of our 2003 AnnualReport.

 

***Foreign Currency Exchange Risks***

 

Transaction risks

 

The parent company’s cash balances consist ofEuros, British pounds and U.S. dollars. The Euro and British pound bankaccounts are revalued each month and the resultant gain or loss is reflected inthe condensed consolidated statements of operations as “Foreign currencygains/(losses), net.” This exposes the Company to foreign currency exchangerate risk in the Statement of Operations. For example, as of September 30,2004, a 10% increase or decrease in the level of the Euro exchange rate againstthe U.S. dollar with all other variables held constant would result in arealized gain or loss of approximately $8.4 million. The change inexposure from period to period is related to the change in the balance of theEuro and British pound cash and intercompany accounts. The parent companycontinues to hold approximately Euro 4.4 million and GBP 5.7 million, andremains exposed to changes in the foreign currency rate.

 

The fluctuation in the exchange ratesresulted in foreign currency gains (losses) reflected in the consolidatedstatements of operations as “Foreign currency gains (losses), net” of $2.1 millionand ($1.7 million) for the three and nine months ended September 30,2004 respectively, and $1.5 million and $8.8 million for the same periods in2003.

 

Translation risks

 

The fluctuation in the exchange ratesresulted in foreign currency translation (losses) gains reflected as acomponent of accumulated other comprehensive loss in stockholders’ equity, netof $5.9 million and $8.4 million for the three and nine months ended September 30,2004 respectively, and ($0.7 million) and ($6.1 million) for the same periodsin 2003.

 

Exchange rates can vary significantly. TheEuro high and low rates varied by approximately 4% and 10% in relation to theU.S. dollar during the three and nine months ended September 30, 2004respectively. This variation affects the average exchange rates used totranslate the income statements of our operating companies whose functionalcurrency is not U.S. dollars. At September 30, 2004, the Euro-to-U.S.dollar exchange rate was approximately 2% below where it was at the beginningof the year. This variation affects the ending exchange rates used to translateamounts on the balance sheet of our operating companies whose functionalcurrency is not U.S. dollars. Future changes in the value of the Euro couldhave a material impact on our financial position and results of operations. Wealso experienced fluctuations in other exchange rates.

 

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**ITEM 4. CONTROLS AND PROCEDURES**

 

Our managementand the Audit Committee of the board of directors has engaged in regularevaluations of our internal controls, as well as the processes we maintain toensure that all material information relating to us and our subsidiaries isrecorded, processed, summarized, evaluated and reported within the time periodsspecified by rules established by the Securities and Exchange Commission.  These latter processes are known asDisclosure Controls and Procedures. Disclosure Controls and Procedures are also designed to ensure that allsuch information is communicated to our management, including our CEO and  CFO, in such a manner as to allow timelydecisions to be made regarding required disclosures.

 

We haveevaluated, with the oversight of our CEO and CFO, the effectiveness of ourDisclosure Controls and Procedures as of September 30, 2004.  In designing and evaluating the DisclosureControls and Procedures, our management necessarily was required to apply itsjudgment in evaluating the costs and benefits of possible controls andprocedures.  In addition, we recognizethat Disclosure Controls and Procedures by their nature can provide only reasonableassurance that our information flow objectives are met.  As of September 30, 2004 our CEO and CFOhave concluded that our Disclosure Controls and Procedures are effective in allmaterial respects.

 

During thenine months ended September 30, 2004, we have acquired the Amen group ofcompanies and the operations of PSINet Europe in Switzerland, Germany, TheNetherlands, Belgium and France, and we have disposed of our subsidiary VIANET.WORKS (UK) Ltd.  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 believe thatthese additions and the disposal of the UK business have neither materiallyaffected, nor are reasonably likely to materially affect, our internal controlover financial reporting.

 

We continue towork to improve our internal controls and Disclosure Controls and Procedures,specifically through the continuation of our program to standardize andautomate back-office processes, and to outsource certain finance functions suchas general ledger accounting, accounts payable and accounts receivable.  This phased implementation is progressingwell.  At the end of September 2004,the new back-office systems were fully implemented, as planned, in all but twoof our legacy business operations.  Thefinance function outsourcing was also completed, as planned, for all but one ofour legacy VIA operations.  We now expectto complete the back-office systems implementation and the finance outsourcingproject for our newly acquired PSINet businesses and remaining legacy VIAbusinesses by Q1 of 2005, and to migrate all of our newly acquired businessesto our standard financial accounting and reporting system by the end of 2004.

 

We believe thatour current controls and procedures enable us to present our financial resultsfairly in all material respects, as required by U.S. generally acceptedaccounting principles.

 

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**PART II**

 

**Item 1.Legal Proceedings**

 

There have been no significant developmentsregarding legal proceedings since the filing of VIA’s Form 10-K on March 29,2004. See note 11 to the condensed consolidated financial statements forfurther information.

 

**Item 2. Changes in Securities and Use of Proceeds**

 

*Changes in Securities:*

 

None.

 

*Use of InitialPublic Offering Proceeds:*

 

On February 11, 2000, we completed ourinitial public offering of shares of common stock, par value $.001 per share.Our initial public offering was made pursuant to a prospectus dated February 11,2000, which was filed with the SEC as part of a registration statement, fileNo. 333-91615, that was declared effective by the SEC on February 10,2000.

 

The net offering proceeds after deducting theexpenses and underwriting discounts and commissions was approximately$333.0 million. From the effective date of the initial public offeringthrough September 30, 2004, we have used $115.6 million foracquisitions of other businesses, including the repayment of debt foracquisitions we made in 1999, increases in our investment in various partiallyowned subsidiaries, $60.1 million for capital expenditures andapproximately $157.6 million to fund operating losses.

 

**Item 3. Defaults Upon Senior Securities**

 

None.

 

**Item 4. Submission of Matters to a Vote of Security Holders**

 

None.

 

**Item 5.Other Information**

 

None.

 

**Item 6. Exhibits and Reports on Form 8-K**

 

**a) Exhibits**

 
| **Exhibits** | ** ** | ** **                                                                                                                                |
|--------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit 31.1 |       | Section 302 Certification – Chief  Executive Officer                                                                            |
| Exhibit 31.2 |       | Section 302 Certification – Chief  Financial Officer                                                                            |
| Exhibit 32   |       | Written Statement of Chief Executive  Officer and Chief Financial Officer Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |
| Exhibit 99.1 |       | Risk Factors                                                                                                                              |

 

**b) Reports on Form 8-K**

 

We filed one report on Form 8-K duringthe three months ended September 30, 2004. On August 10, 2004, we filed a Form 8-Kannouncing that, on August 9, 2004, we entered into an agreement toacquire the continental European operations of PSINet Europe B.V.

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**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, VIA NET.WORKS, Inc. has duly caused thisreport to be signed on its behalf by the undersigned, thereunto duly authorized

 

 
|                         | VIA NET.WORKS, INC. |
|------------------------------|---------------------|
|                         |                |
|                         |                |
|                         | By:                 | /s/ Rhett S.  Williams |
|                         |                | *Chief  Executive Officer (Principal Executive Officer)  and Director* |
| Date: November 12, 2004 | * *            | * * |
|                         | * *            | * * |
|                         | * *            | * * |
|                         | By:                 | /s/ Cameron  Mackenzie |
| * *                     | * *            | *Chief Financial Officer  (Principal Financial and Accounting Officer)* |
| Date: November 12, 2004 | * *            | * * |

 

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**EXHIBIT INDEX**

 
| **Exhibit** | ** ** | ** **                                                                                                                                |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1        |       | Section 302 Certification – Chief  Executive Officer                                                                            |
| 31.2        |       | Section 302 Certification – Chief  Financial Officer                                                                            |
| 32          |       | Written  Statement of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002 |
| 99.1        |       | Risk Factors                                                                                                                              |

 

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