**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM10-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, 2003** |
|                                                   |                                                                                          |
| **OR**                                                 |
|                                                   |                                                                                          |
| **o**                                                  | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commission file number: 000-29391**

 

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**VIANET.WORKS, INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                                      |   | **84-1412512**                       |
|-----------------------------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction)                                                     |   | (I.R.S. Employer Identification No.) |
|                                                                              |   |                                 |
| **H. Walaardt Sacrestraat 401-403  1117 BM Schiphol  Amsterdam, The Netherlands** |
| (Address of principal executive offices)                                          |
|                                                                              |   |                                 |
| Registrant’s telephone number, including area code: **+31 203 483800**       |

 

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Indicate bycheck mark whether the registrant: (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such report) and (2) has been subject to suchfiling requirements for the past 90 days. Yes ý  No o

 

Indicate bycheck mark whether the registrant is: an accelerated filer (as defined inRule 12b-2 of the Exchange Act). Yes o  No ý

 

As of November1, 2003, there were outstanding 56,383,173 shares of the registrant’s commonstock and 5,050,000 shares of the registrant’s non-voting common stock.

 

 

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**VIA NET.WORKS, INC.**

 

**TABLE OF CONTENTS**

 
| PART I FINANCIAL INFORMATION |
|------------------------------|
| Item 1.                      | Financial Statements: |
|                         | Condensed Consolidated  Balance Sheets as of December 31, 2002 and September 30, 2003 |
|                         | Condensed Consolidated  Statements of Operations for the three and nine months ended September 30,  2002 and 2003 |
|                         | Condensed Consolidated Statements of Cash  Flows for the nine months ended September 30, 2002 and 2003 |
|                         | 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               |

 

1

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**PART I**

**Item1. Financial Statements**

**VIA NET.WORKS, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

 
|                                                                                                                                  |   | **December  31,  2002** |    | **September  30,  2003** |   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|--------------------------|--------|
|                                                                                                                                  |   |                    |    | **(Unaudited)**          |   |
| **ASSETS**                                                                                                                            |   |                    |    |                     |   |
| Current assets:                                                                                                                       |   |                    |    |                     |   |
| Cash and cash equivalents                                                                                                             |   | $                       | 97,813  |                     | $      | 73,062 |   |
| Restricted cash                                                                                                                       |   | 895                     |    | 955                      |   |
| Trade and other accounts receivable, net of  allowance of $4,529 and $1,708 respectively                                              |   | 13,037                  |    | 10,382                   |   |
| Other current assets                                                                                                                  |   | 3,900                   |    | 4,624                    |   |
| Total current assets                                                                                                                  |   | 115,645                 |    | 89,023                   |   |
| Property and equipment, net                                                                                                           |   | 13,696                  |    | 11,752                   |   |
| Goodwill, net                                                                                                                         |   | 9,189                   |    | 9,698                    |   |
| Intangible assets                                                                                                                     |   | —                  |    | 662                      |   |
| Other non-current assets                                                                                                              |   | 762                     |    | 794                      |   |
| Deferred tax asset                                                                                                                    |   | 3,387                   |    | 3,387                    |   |
| Assets of businesses transferred under  contractual arrangement (Note 2)                                                              |   | 3,142                   |    | —                   |   |
| Total assets                                                                                                                          |   | $                       | 145,821 |                     | $      | 115,316 |   |
|                                                                                                                                  |   |                    |    |                     |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                         |   |                    |    |                     |   |
| Current liabilities:                                                                                                                  |   |                    |    |                     |   |
| Accounts payable                                                                                                                      |   | $                       | 7,897   |                     | $      | 8,353 |   |
| VAT and other taxes payable                                                                                                           |   | 922                     |    | 927                      |   |
| Short-term notes, current portion of  long-term debt and capital lease obligations                                                    |   | 63                      |    | 194                      |   |
| Deferred revenue                                                                                                                      |   | 13,516                  |    | 12,769                   |   |
| Accrued expenses                                                                                                                      |   | 9,922                   |    | 8,234                    |   |
| Deferred tax liability                                                                                                                |   | 3,387                   |    | 3,387                    |   |
| Other current liabilities                                                                                                             |   | 2,092                   |    | 1,632                    |   |
| Total current liabilities                                                                                                             |   | 37,799                  |    | 35,496                   |   |
| Long-term debt and capital lease  obligations, less current portion                                                                   |   | 46                      |    | 388                      |   |
| Liabilities of businesses transferred under  contractual arrangement (Note 2)                                                         |   | 3,396                   |    | —                   |   |
| Total liabilities                                                                                                                     |   | 41,241                  |    | 35,884                   |   |
|                                                                                                                                  |   |                    |    |                     |   |
| Commitments and contingencies                                                                                                         |   |                    |    |                     |   |
| 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; 60,844,900 and 61,414,475 shares issued and outstanding;  respectively |   | 61                      |    | 61                       |   |
| Additional paid-in capital                                                                                                            |   | 555,574                 |    | 556,046                  |   |
| Treasury stock, 697,196 and 1,520,789  shares; respectively                                                                           |   | (733                    | )       | (1,521                   | )      |
| Accumulated deficit                                                                                                                   |   | (427,574                | )       | (446,313                 | )      |
| Accumulated other comprehensive loss                                                                                                  |   | (22,463                 | )       | (28,841                  | )      |
| Accumulated other comprehensive loss of  businesses transferred under contractual arrangements (Note 2)                               |   | (285                    | )       | —                   |   |
| Total stockholders’ equity                                                                                                       |   | 104,580                 |    | 79,432                   |   |
| Total liabilities and stockholders’ equity                                                                                       |   | $                       | 145,821 |                     | $      | 115,316 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

2

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**VIA NET.WORKS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**(In thousands of U.S. dollars, except shareand per share data)**

**(Unaudited)**

 
|                                                                        |   | **For the  three months  ended September 30,** |       | **For the  nine months ended  September 30,** |       |
|-----------------------------------------------------------------------------|--------|------------------------------------------------|------------|-----------------------------------------------|------------|
|                                                                        |   | **2002**                                       |       | **2003**                                      |       | **2002** |   | **2003** |   |
|                                                                        |   |                                           | ** ** |                                          | ** ** |   | ** ** |   | ** ** |
| Revenue                                                                     |   | 18,142                                         |       | 16,586                                        |       | 48,853 |   | 50,964 |   |
| Operating costs and expenses:                                               |   |                                           |       |                                          |       |   |   |   |   |
| Internet services                                                           |   | 8,752                                          |       | 7,992                                         |       | 26,324 |   | 24,342 |   |
| Selling, general and administrative                                         |   | 13,376                                         |       | 14,322                                        |       | 46,656 |   | 44,732 |   |
| Restructuring and impairment charges                                        |   | 1,027                                          |       | 1,458                                         |       | 1,027 |   | 3,740 |   |
| Depreciation and amortization                                               |   | 2,725                                          |       | 2,172                                         |       | 8,524 |   | 6,019 |   |
| Total operating costs and expenses                                          |   | 25,880                                         |       | 25,944                                        |       | 82,531 |   | 78,833 |   |
| Operating loss from continuing operations                                   |   | (7,738                                         | )          | (9,358                                        | )          | (33,678 | ) | (27,869 | ) |
| Interest income                                                             |   | 632                                            |       | 225                                           |       | 2,663 |   | 945 |   |
| Interest expense                                                            |   | (7                                             | )          | (2                                            | )          | (59 | ) | (12 | ) |
| Other expense, net                                                          |   | (2,002                                         | )          | (124                                          | )          | (2,331 | ) | (267 | ) |
| Foreign currency (losses)/gains, net                                        |   | (1,089                                         | )          | 1,545                                         |       | 8,449 |   | 8,805 |   |
| Loss from continuing operations before  income taxes                        |   | (10,204                                        | )          | (7,714                                        | )          | (24,956 | ) | (18,398 | ) |
| Income tax                                                                  |   | —                                         |       | —                                        |       | — |   | — |   |
| Net loss from continuing operations                                         |   | (10,204                                        | )          | (7,714                                        | )          | (24,956 | ) | (18,398 | ) |
| Discontinued operations:                                                    |   |                                           |       |                                          |       |   |   |   |   |
| Loss from discontinued operations                                           |   | (989                                           | )          | —                                        |       | (8,543 | ) | (505 | ) |
| (Loss)/gain on disposal of discontinued  operations, less transaction costs |   | (527                                           | )          | 164                                           |       | 1,907 |   | 164 |   |
| Net loss                                                                    |   | (11,720                                        | )          | (7,550                                        | )          | (31,592 | ) | (18,739 | ) |
| Basic and diluted loss per share:                                           |   |                                           |       |                                          |       |   |   |   |   |
| Continuing operations                                                       |   | (0.17                                          | )          | (0.13                                         | )          | (0.42 | ) | (0.30 | ) |
| Discontinued operations                                                     |   | (0.03                                          | )          | —                                        |       | (0.11 | ) | (0.01 | ) |
| Net loss per share—basic and diluted                                   |   | (0.20                                          | )          | (0.13                                         | )          | (0.53 | ) | (0.31 | ) |
|                                                                        |   |                                           |       |                                          |       |   |   |   |   |
| Shares used in computing basic and diluted  loss per share                  |   | 60,147,704                                     |       | 59,893,686                                    |       | 60,147,704 |   | 59,893,686 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

3

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**VIA NET.WORKS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

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

**(Unaudited)**

 
|                                                                                                    |   | **For the nine  months  ended September 30,** |    |
|---------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|---------|
|                                                                                                    |   | **2002**                                      |    | **2003** |   |
| Cash flows from operating activities:                                                                   |   |                                          |    |   |   |
| Net loss from continuing operations                                                                     |   | (24,956                                       | )  | (18,398 | )  |
| Adjustments to reconcile net loss from  continuing operations to net cash used in operating activities: |   |                                          |    |   |   |
| Depreciation and amortization                                                                           |   | 8,524                                         |    | 6,019 |   |
| Impairment of fixed assets                                                                              |   | —                                        |    | 134 |   |
| Employee stock compensation                                                                             |   | 527                                           |    | — |   |
| (Benefit)/provision for doubtful accounts  receivable                                                   |   | (2,884                                        | )       | 633 |   |
| Unrealized foreign currency transaction  gains                                                          |   | (6,738                                        | )       | (7,240 | ) |
| Write-off of note receivable from related  party                                                        |   | 292                                           |    | — |   |
| Changes in assets and liabilities, net of  acquisitions:                                                |   |                                          |    |   |   |
| Trade accounts receivable                                                                               |   | 5,204                                         |    | 2,947 |   |
| Other current assets                                                                                    |   | (306                                          | )       | (1,251 | ) |
| Other non-current assets                                                                                |   | (76                                           | )       | 14 |   |
| Accounts payable                                                                                        |   | 1,365                                         |    | 168 |   |
| VAT and other taxes payable                                                                             |   | (965                                          | )       | (99 | ) |
| Accrued expenses                                                                                        |   | (3,157                                        | )       | (1,285 | ) |
| Other current liabilities                                                                               |   | (328                                          | )       | (415 | ) |
| Deferred revenue                                                                                        |   | 255                                           |    | (1,162 | ) |
| Net cash used in operating activities                                                                   |   | (23,243                                       | )       | (19,935 | ) |
| Cash flows from investing activities:                                                                   |   |                                          |    |   |   |
| Increase in restricted cash                                                                             |   | (884                                          | )       | (60 | ) |
| Proceeds from the disposition of operating  subsidiaries (net of cash paid)                             |   | 152                                           |    | (471 | ) |
| Proceeds from businesses transferred under  contractual obligations                                     |   | —                                        |    | 310 |   |
| Purchases of property, equipment and  intangible assets                                                 |   | (1,279                                        | )       | (3,827 | ) |
| Note receivable from related party                                                                      |   | (1,000                                        | )       | — |   |
| Repayment of note receivable from related  party                                                        |   | 708                                           |    | — |   |
| Net cash used in investing activities                                                                   |   | (2,303                                        | )       | (4,048 | ) |
| Cash flows from financing activities:                                                                   |   |                                          |    |   |   |
| Repayment of debt and principal payments on  capital lease obligations                                  |   | (1,564                                        | )       | (102 | ) |
| Purchase of treasury stock                                                                              |   | —                                        |    | (788 | ) |
| Proceeds of issuance of common stock, net                                                               |   | —                                        |    | 472 |   |
| Net cash used in financing activities                                                                   |   | (1,564                                        | )       | (418 | ) |
| Cash flows used by discontinued operations                                                              |   | (1,304                                        | )       | (30 | ) |
| Effect of currency exchange rate changes on  cash                                                       |   | (5,258                                        | )       | (320 | ) |
| Net decrease in cash and cash equivalents                                                               |   | (33,672                                       | )       | (24,751 | ) |
| Cash and cash equivalents, beginning of  period                                                         |   | 137,854                                       |    | 97,813 |   |
| Cash and cash equivalents, end of period                                                                |   | 104,182                                       |    | 73,062 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

4

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**VIA NET.WORKS, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**(Unaudited)**

 

**1.**                                      **Basis of Presentation and Recent Pronouncements**

 

Thesecondensed consolidated financial statements as of September 30, 2003 and forthe three and nine month periods ended September 30, 2002 and 2003 and therelated footnote information are unaudited and have been prepared on a basissubstantially consistent with the audited consolidated financial statements ofVIA NET.WORKS, Inc. (“VIA” or “the Company”) as of and for the year endedDecember 31, 2002, included in VIA’s Annual Report on Form 10-K asfiled with the Securities and Exchange Commission (“2002 Annual Report”). Thesecondensed consolidated financial statements should be read in conjunction withthe audited consolidated financial statements and the related notes to the financialstatements included in the 2002 Annual Report. In the opinion of management,the accompanying unaudited condensed consolidated financial statements containall adjustments (consisting of normal recurring adjustments) that managementconsiders necessary to present fairly the consolidated financial position ofVIA at September 30, 2003 and the results of its operations and its cash flowsfor the three and nine month periods ended September 30, 2002 and September 30,2003. The results of operations for the three and nine month periods endedSeptember 30, 2003 may not be indicative of the results expected for anysucceeding quarter or for the year ending December 31, 2003. Certain priorperiod amounts have been reclassified to conform to the current period presentation.

 

Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires VIA to make estimates and assumptions thataffect the reported amounts of assets, liabilities, revenue and expenses,together with amounts disclosed in the related notes to the consolidatedfinancial statements. Actual results could differ from the recorded estimates.

 

InJanuary 2003, the Financial Accounting Standards Board (FASB) issued FASBInterpretation No. 46 (FIN 46),*Consolidation of Variable Interest Entities—an interpretation of ARBNo. 51.* FIN 46 clarifies the application of Accounting ResearchBulletin No. 51, *Consolidated FinancialStatements,* to certain entities in which equity investors do nothave the characteristics of a controlling financial interest or do not havesufficient equity at risk for the entity to finance its activities withoutadditional subordinated financial support from other parties. FIN 46 explainshow to identify variable interest entities and how an enterprise assesses itsinterests in a variable interest entity to decide whether to consolidate thatentity. It requires existing unconsolidated variable interest entities to beconsolidated by their primary beneficiaries if the entities do not effectivelydisperse risks among parties involved. It also requires certain disclosures bythe primary beneficiary of a variable interest entity and by an enterprise thatholds significant variable interests in a variable interest entity where theenterprise is not the primary beneficiary. FIN 46 is effective immediately tovariable interest entities created after January 31, 2003 and to variableinterest entities in which an enterprise obtains an interest after that date,and effective for the first fiscal year or interim period beginning afterDecember 15, 2003 to variable interest entities in which an enterprise holds avariable interest that it acquired before February 1, 2003. The Company orits wholly-owned subsidiaries owns 100% of all its equity investments and all ofsuch investments are consolidated into the financial statements of the Company.Consequently the Company does not currently believe that there will be anymaterial impact to the consolidated financial statements following its adoptionof FIN 46.

 

**2.**                                      **Discontinued Operations**

 

During 2002,VIA sold its operations in Argentina, Austria and Ireland.  The operation in Argentina, which had beenincluded in the Americas region for segment reporting, was sold onJune 11, 2002 to an unrelated third party purchaser. The Austrianoperation, which had been included in the European segment, was sold to thethen-current management team on May 29, 2002. The Irish operation, whichhad been included in the European segment, was sold on August 12, 2002 toa former shareholder and managing director of the Irish operation.  Each of these operations have been treatedas discontinued operations since the date of their respective dispositions in2002.  As noted below, VIA

 

5

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also sold its operations inBrazil and Mexico in 2002, but because of the method by which thesetransactions were structured, these operations were not treated as discontinuedoperations in 2002 but rather classified as businesses held under contractualagreements.  

 

VIA NET.WORKSBrasil S.A.

 

InMay 2002, VIA closed a transaction for the sale of its Brazilianoperation, VIA NET.WORKS Brasil S.A. (“VIA Brasil”), to the then-currentmanagement team for $0.4 million, of which $30,000 was paid in cash at closingand the balance by delivery of a promissory note payable over 18 months.The note was secured by a pledge of 93% of the outstanding shares in VIABrasil, subject to reduction on a pro-rata basis for payments made under thenote. The collateralization of the outstanding shares permitted VIA toreacquire, at its option, a controlling interest in VIA Brasil if thepurchasers defaulted on the obligations under the promissory note. 

 

Consistent with theaccounting treatment prescribed under Staff Accounting Bulletin (SAB) Topic 5E,VIA did not treat the Brazilian operation as a discontinued operation from May2002 onwards. VIA has not consolidated any results of this Brazilian operationfrom May 2002.

 

Fromthe outset of the transaction, VIA expected the funds for payment of the noteto come from the individual buyers. Because VIA did not have reasonableassurances that the note would be paid in full, the Company fully reservedagainst the note receivable at June 30, 2002. Management did not considerthe shares held in VIA Brasil as collateral to have significant economic value.As of March 31, 2003 the buyers were in default on their payment obligationsunder the note and through June 30, 2003, the buyers had made no payments underthe note.  

 

OnJuly 8, 2003, in recognition of the continuing economic difficulties of theBrazilian operation and the limited resources of the buyers, VIA agreed tosettle the outstanding amounts owing for an aggregate payment by the buyers inthe amount of $0.1 million.  As a partof this settlement, VIA agreed to release the buyers and VIA Brasil from theobligations under the note and the pledge agreement.  VIA received the full settlement amount as of August 8, 2003. 

 

Withthe release of the pledge agreement, VIA no longer had a continuing involvementin the Brasil operation and is able to complete the accounting treatment underSAB Topic 5E. VIA therefore recognized a $2.5 million loss in thestatement of operations in the three month period ended 30 September, 2003. Inaddition, VIA Brasil has now been classified as a discontinued operation.

 

VIA NET.WORKSMéxico S.A. de C.V.

 

InSeptember 2002, VIA closed a transaction for the sale of 100% of theoutstanding capital stock of its subsidiary, VIA NET.WORKS México S.A. de C.V.(“VIA Mexico”) to a group of buyers led by the then-current management of VIAMexico. As a part of the sale transaction, the parties also entered into aconvertible credit agreement under which VIA agreed to loan VIA Mexico a sum of$2.2 million. Under the convertible credit agreement, all outstanding loanamounts together with accrued interest become due and payable onSeptember 4, 2004. This convertible credit agreement provided that upon achange of control of VIA Mexico (which is defined to include a change ofgreater than 33% of the current equity holding of the company), VIA could electto convert the outstanding loan amounts into a 19% equity interest of VIAMexico or accept a cash payment of $0.6 million as payment in full.

 

Consistentwith the accounting treatment prescribed under Staff Accounting Bulletin (SAB)Topic 5E, VIA neither treated the Mexican operation as a discontinued operationnor consolidated any future results of this Mexican operation from September2002 onwards.

 

Atthe time the transaction was closed, VIA expected the funds for repayment ofthe loan to come exclusively from future operations of VIA Mexico. Managementbelieved that VIA Mexico’s history of past operating losses combined with thedifficult economic conditions in the telecommunications industry in the regionmade recovery of the loan uncertain. Accordingly, VIA fully provided againstthe whole amounts under the loan in its results of operations during the thirdquarter of 2002.

 

6

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In September2003, in recognition of the continuing economic difficulties of the Mexicanoperation, VIA agreed to settle the outstanding amounts owing under theconvertible credit agreement for an accelerated cash payment by the buyers inthe amount of $0.4 million.  In exchangefor the accelerated payment, VIA agreed to release and waive the buyers and VIAMexico from its obligations under the convertible credit agreement.  VIA has received all of the settlementamount except for $60,000 which is expected to be received during November2003.

 

By waiving theconvertible credit agreement, VIA no longer had a continuing involvement in theMexico operation and is able to complete the accounting treatment under SABTopic 5E. VIA therefore recognized a $2.9 million gainin the statement of operations in the three month period ended September 30,2003. In addition, VIA Mexico has now been classified as a discontinuedoperation.

 

VIA NET.WORKSItalia

 

In July 2003,VIA sold its Italian operation, VIA NET.WORKS Italia, which has been includedin the European segment. The Italian operation was sold for nominalconsideration. As part of the transaction VIA provided cash funding in the formof****a loan to the buyers of Euros0.4 million**,** which was waived atclosing. VIA also assumed certain real estate lease obligations of the Italianoperation, for which the total potential****liabilityis Euros 0.3 million.  In connectionwith the sale, both parties****waivedall outstanding intercompany debt existing at the date of sale. VIA recognizeda $0.3 million loss in the statement of operations in the three month periodended September 30, 2003. 

 

Aseach of the Argentine, Austrian, Irish, Italian, Brazilian and Mexicanoperations represented a component of an entity as defined by SFAS 144,the Company has classified each operation as a discontinued operation for thefour periods presented. Revenues related to discontinued operations wereapproximately $1.6 million and $10.3 million for the three and ninemonths ended September 30, 2002 and were approximately nil and$0.6 million for the three and nine months ended September 30, 2003. Theloss from discontinued operations was $1.0 million and $8.5 millionfor the three and nine months ended September 30, 2002 and nil and$0.5 million for the three and nine months ended September 30, 2003.

 

**3.**                                      **Restructuring and Impairment Charges**

 

Restructuring

 

During thethree and nine months ended September 30, 2003, the Company recordedrestructuring charges related to the implementation of its strategic plan of$1.5 million and $3.6 million respectively. The restructuring charge for the three months ended September 30, 2003related to severance payments at four of its European operations and at thecorporate headquarters and transition implementation costs for back-office andadministrative outsourcing initiatives. Restructuring charges in the nine months ended September 30, 2002related to the closure of the former head office in Reston, Virginia.  Changes in the restructuring provision inthe nine months ended September 30, 2003 were as follows (in thousands of U.S.dollars):

 
|                             |   | **Future  operating  lease  obligations** |   | **Employee  termination  payments** |   | **Other** |    | **Total** |   |
|----------------------------------|--------|-------------------------------------------|--------|-------------------------------------|--------|-----------|---------|-----------|--------|
| Balance as of June 30, 2002      |   | —                                    |   | —                              |   | —    |    | —    |   |
| Costs incurred                   |   | 527                                       |   | 415                                 |   | 85        |    | 1,027     |   |
| Amounts paid                     |   | —                                    |   | —                              |   | (85       | )       | (85       | )      |
| Balance as of September 30, 2002 |   | 527                                       |   | 415                                 |   | —    |    | 942       |   |
| Amounts paid                     |   | (71                                       | )      | —                              |   | —    |    | (71       | )      |
| Balance as of December 31, 2002  |   | 456                                       |   | 415                                 |   | —    |    | 871       |   |
| Costs incurred                   |   | 57                                        |   | 676                                 |   | —    |    | 733       |   |
| Amounts paid                     |   | (73                                       | )      | (610                                | )      | —    |    | (683      | )      |
| Balance as of March 31, 2003     |   | 440                                       |   | 481                                 |   | —    |    | 921       |   |
| Costs incurred                   |   | 92                                        |   | 883                                 |   | 440       |    | 1,415     |   |
| Amounts paid                     |   | (66                                       | )      | (901                                | )      | (99       | )  | (1,066    | )      |
| Foreign exchange translation     |   | —                                    |   | 10                                  |   | —    |    | 10        |   |
| Balance as of June 30, 2003      |   | 466                                       |   | 473                                 |   | 341       |    | 1,280     |   |
| Costs incurred                   |   | —                                    |   | 1,140                               |   | 318       |    | 1,458     |   |
| Amounts paid                     |   | (111                                      | )      | (1,082                              | )      | (399      | )       | (1,592    | )      |
| Foreign exchange translation     |   | 1                                         |   | 7                                   |   | —    |    | 8         |   |
| Balance as of September 30, 2003 |   | 356                                       |   | 538                                 |   | 260       |    | 1,154     |   |

 

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The futureoperating lease obligations balance at September 30, 2003, comprised of $0.4million related to the former corporate headquarters office in Reston,Virginia, USA and $0.1 million related to vacant space in the German operationoffice. The Reston office accrual reflects the net of the future leaseobligations, which continues through February 2005, less the income from asublease of the space. The German office lease accrual reflects the fair valueof the future lease obligations on vacant office space, which continue throughDecember 31, 2003. The Reston and German accruals have been drawn down duringthe year by the monthly payments on the office lease for the remainder of theterm.

 

Headcount forsales, information technology, marketing and various administrative roles hasbeen reduced as part of the Company’s strategic plan. 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 ($0.4million by European operations and $0.1 million by Corporate). The employeetermination costs incurred in the three months ended September 30, 2003, of$1.1 million relate to the severance and benefits for 37 employees at fourEuropean operations and two employees at the corporate headquarters. Cashpayments of $0.6 million were made in the period in respect of these accruals($0.6 million by European operations and nil by Corporate). It is anticipatedthat the remainder will be paid in the quarter ending December 31, 2003. It isnot anticipated that any of these terminations will adversely impact theCompany’s ability to generate revenue.

 

The Othercharges accrual of $0.3 million brought forward at June 30, 2003 related to theimplementation costs for back-office and administrative outsourcing initiativesat the corporate headquarters. Cash payments of $0.3 million were made in thequarter ended September 30, 2003 in respect of this brought forward balance.Other charges of $0.3 million incurred in the three months ended September 30,2003 also related to implementation costs for back-office and administrativeoutsourcing initiatives. Cash payments of $0.1 million were made in the periodin respect of these accruals. It is anticipated that the remainder of the costswill be paid in the quarter ending December 31, 2003.

 

Impairment

 

During thenine months ended September 30, 2003, the Company recorded a fixed assetimpairment charge of $0.1 million for fixed asset fixtures and fittings thatwere written down to net realizable value as a result of the closure of theReston office in March 2003. There were no impairment charges in the three andnine months ended September 30, 2002 or in the quarter ended September 30,2003.

 

Other than thematters referred to in note three, management has no other commitments thatwould significantly affect the carrying value of VIA’s existing assets orliabilities.

 

On a periodicbasis, management reviews the carrying value of the investment in ouroperations to determine if an event has occurred, with respect to anyoperation, which could result in an impairment of long-lived assets. In itsreview, management considers the following:

 

•                                          marketand competitive factors, including trends within the telecommunicationsindustry broadly and the market for internet access specifically, as well asgeneral economic trends;

 

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

 

•                                          businessoutlook for each operation, including changes in the expected revenues and cashflows, changes in customers and the services that they require; and 

 

•                                          howeach operation is potentially impacted by our Strategic Plan.

 

If the Companyfails to achieve the financial benefits envisaged to arise from theimplementation of its Strategic Plan further impairment may arise.

** **

**4.**                                      **Income Tax**

 

The provisionfor taxes based on income for the 2003 and 2002 interim periods was computed inaccordance with Interpretation No. 18 of Accounting Principles Board OpinionNo. 28 on reporting taxes for interim periods and was based on management’sexpectations of tax expense for the year being nil. There will be no tax impactarising from the disposal of the Italian, Brazilian and Mexican operationsdiscussed in Note 2.

 

**5.**                                      **Comprehensive Loss**

 

Comprehensiveloss for the three months and nine months ended September 30, 2002 and 2003 wasas follows (in thousands of U.S. dollars):

 
|                                     |   | **Three  months ended  September 30,** |    | **Nine  months ended  September 30,** |   |
|------------------------------------------|--------|----------------------------------------|---------|---------------------------------------|--------|
|                                     |   | **2002**                               |    | **2003**                              |   | **2002** |   | **2003** |   |
| Net loss                                 |   | $                                      | (11,720 | )                                     | $      | (7,550 | ) | $ | (31,592 | ) | $ | (18,739 | ) |
| Foreign currency translation adjustments |   | 1,099                                  |    | (717                                  | )      | (4,986 | ) | (6,093 | ) |
| Comprehensive loss                       |   | $                                      | (10,621 | )                                     | $      | (8,267 | ) | $ | (36,578 | ) | $ | (24,832 | ) |

 

The financialstatements of the Company’s local operating subsidiaries with a functionalcurrency other than U.S. dollars are translated into U.S. dollars using thecurrent rate method. The resultant foreign currency translation adjustments areaccumulated and reported as a component of accumulated other comprehensive lossin stockholders’ equity. 

 

**6.**                                      **Property and Equipment**

 

Property andequipment consisted of the following (in thousands of U.S. dollars):

 
|                           |   | **December  31,  2002** |   | **September  30, 2003** |   |
|--------------------------------|--------|-------------------------|--------|-------------------------|--------|
| Hardware and other equipment   |   | $                       | 17,266 |                    | $      | 16,468 |   |
| Network and data center assets |   | 13,810                  |   | 11,447                  |   |
| Software                       |   | 11,843                  |   | 13,227                  |   |
| Furniture and fixtures         |   | 2,041                   |   | 1,203                   |   |
|                           |   | 44,960                  |   | 42,345                  |   |
| Accumulated depreciation       |   | (31,264                 | )      | (30,593                 | )      |
| Property and equipment, net    |   | $                       | 13,696 |                    | $      | 11,752 |   |

 

Depreciationexpense was $2.7 million and $2.2 million for the three months ended September30, 2002 and 2003, respectively. Depreciation expense was $8.5 million and$6.0 million for the nine months ended September 30, 2002 and 2003,respectively. As disclosed above in note 3, a fixed asset impairment charge of$0.1 million was recorded in restructuring charges for the nine months endedSeptember 30, 2003 in respect of the fixtures and fittings of the formerheadquarters office in Reston.

 

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**7.**                                      **Goodwill and Acquired Intangible Assets**

 

The changes inthe carrying amount of goodwill during the nine months ended September 30, 2003are as follows (in thousands of U.S. dollars):

 

|                             |   | **Total** |   | **Europe** |   | **Americas** |   |
|----------------------------------|--------|-----------|--------|------------|--------|--------------|--------|
| Balance as of December 31, 2002  |   | $         | 9,189  |       | $      | 7,027        |   | $ | 2,162 |   |
| Foreign exchange adjustment      |   | 509       |   | 509        |   | —       |   |
| Balance as of September 30, 2003 |   | $         | 9,698  |       | $      | 7,536        |   | $ | 2,162 |   |

 

The Company’s intangible assets are asfollows (in thousands of U.S. dollars): 

 
|                     |   | **December  31,  2002** |   | **September  30,  2003** |   |
|--------------------------|--------|-------------------------|--------|--------------------------|--------|
| Customer list            |   | —                  |   | $                        | 662    |   |
| Accumulated amortization |   | —                  |   | —                   |   |
| Intangible assets, net   |   | —                  |   | $                        | 662    |   |

 

Atthe end of September 2003, our Swiss subsidiary acquired a customer list from aSwiss web-design and hosting company for the amount of $0.7 million. Theacquisition cost will be amortized over three years. There was no acquiredintangible asset amortization expense for the three and nine month periodsended September 30, 2003. The acquired intangible asset amortization expensefor the three and nine month periods ended September 30, 2002 was  $0.2 million and $0.7 million respectively.The acquired intangible assets held at September 30, 2002 were fully amortizedby December 31, 2002.

 

**8.**                                      **Stock-Based Compensation**

 

SFASNo. 123, *Accounting for Stock-BasedCompensation,* encourages, but does not require companies to recordcompensation cost for stock-based employee compensation plans at fair value.The Company has chosen to account for stock-based compensation using theintrinsic value method prescribed in Accounting Principles Board Opinion(“APB”) No. 25, *Accounting for StockIssued to Employees,* and related Interpretations. Accordingly,compensation cost for stock options is measured as the excess, if any, of theestimated fair value of the Company’s stock at the date of the grant over theamount an employee must pay to acquire the stock. During 2000, prior to theinitial public offering, the Company determined that the fair value of theunderlying common stock exceeded the exercise price of certain stock optiongrants by $0.6 million. Such amounts, net of forfeitures, were being amortizedover the vesting period. During the nine months ended September 30, 2002, VIArecorded stock option forfeitures of $1.8 million, which reduced the deferredcompensation balance to zero with the corresponding adjustment to additional paid-incapital. The Company recognized an expense of $0.5 million in the nine monthsended September 30, 2002. No amounts have been recorded in the three and ninemonths ended September 30, 2003.

 

The Companyhas adopted the “disclosure only” alternative described in SFAS No. 123,which requires pro forma disclosures of net income and earnings per share as ifthe fair value method of accounting has been applied.

 

The followingtable illustrates the effect on net income and earnings per share as if theCompany had applied the fair value recognition provisions of SFAS No. 123to stock-based employee compensation (in thousands of U.S. dollars except forper share data):

 

|                                                                                                                           |   | **For the  three months  ended  September 30** |    | **For the  nine months  ended  September 30** |   |
|--------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|---------|-----------------------------------------------|--------|
|                                                                                                                           |   | **2002**                                       |    | **2003**                                      |   | **2002** |   | **2003** |   |
|                                                                                                                           |   |                                           |    |                                          |   |   |   |   |   |
| Net loss (as reported)                                                                                                         |   | $                                              | (11,720 | )                                             | $      | (7,550 | ) | $ | (31,592 | ) | $ | (18,739 | ) |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method, net of related  tax effects |   | (17                                            | )       | (726                                          | )      | (4,909 | ) | (2,649 | ) |
| Add back: Total stock-based employee  compensation expense determined under APB 25                                             |   | —                                         |    | —                                        |   | 527 |   | — |   |
| Proforma net loss                                                                                                              |   | $                                              | (11,737 | )                                             | $      | (8,276 | ) | $ | (35,974 | ) | $ | (21,388 | ) |
|                                                                                                                           |   |                                           |    |                                          |   |   |   |   |   |
| Net loss per share, basic and diluted (as  reported)                                                                           |   | $                                              | (0.20   | )                                             | $      | (0.13 | ) | $ | (0.53 | ) | $ | (0.31 | ) |
| Net loss per share, basic and diluted  (proforma)                                                                              |   | $                                              | (0.20   | )                                             | $      | (0.14 | ) | $ | (0.60 | ) | $ | (0.36 | ) |

 

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**9.**                                      **Contingencies**

 

OnNovember 5, 2001 a class action lawsuit was filed in the District Court forthe Southern District of New York against VIA NET.WORKS, Inc., certain ofthe underwriters who supported its initial public offering (“IPO”) and certainof its officers, under the title O’Leary v. Via Net.works [sic], et al[01-CV-9720] (the “Complaint”). An amended complaint was filed inApril 2002. The Complaint alleges that the prospectus the Company filedwith its registration statement in connection with its IPO was materially falseand misleading because it failed to disclose, among other things, that:(i) the named underwriters had solicited and received excessive andundisclosed commissions from certain investors in exchange for the right topurchase large blocks of VIA IPO shares; and (ii) the named underwritershad entered into agreements with certain of their customers to allocate VIA IPOshares in exchange for which the customers agreed to purchase additional VIAshares in the aftermarket at pre-determined prices (“Tie-in Arrangements”),thereby artificially inflating the Company’s stock price. The Complaint furtheralleges violations of Sections 11, 12(a)(2) and 15 of the Securities Act of1933 and Section 10(b) of the Securities Exchange Act of 1934 andRule 10b-5 promulgated thereunder arising out of the alleged failure todisclose and the alleged materially misleading disclosures made with respect tothe commissions and the Tie-in Arrangements in the prospectus. The plaintiffsin this action seek monetary damages in an unspecified amount. This Complaintis one of over 300 similar suits filed to date against underwriters, issuersand their officers alleging similar activities, known as “laddering,” all ofwhich are included in a single coordinated proceeding in the Southern Districtof New York, or the IPO Litigation.

 

OnJuly 1, 2002, the underwriter defendants in the consolidated actions movedto dismiss all of the IPO Litigations, including the action involving theCompany. On July 15, 2002 the Company, along with other non-underwriterdefendants in the coordinated cases also moved to dismiss the litigation. OnFebruary 19, 2003, the court ruled on the motions. The Court granted theCompany’s motion to dismiss the claims against it under Rule 10b-5 forlack of the required specificity, yet granted plaintiffs leave to replead theirRule 10b-5 claims. Plaintiffs have informed our counsel of their intent toreplead these claims against the Company. The motions to dismiss the claimsunder Section 11 of the Securities Act were denied as to virtually all ofthe defendants in the consolidated cases, including the Company. The individualdefendants in the IPO Litigation signed a tolling agreement and were dismissedfrom the action without prejudice on October 9, 2002.

 

On June 30,2003, the special litigation committee of the board of directors of the Companyconditionally approved the global settlement between all plaintiffs and issuersin the IPO Litigations. The Company is in the process of completing a settlementwith the plaintiffs in the case.  Thesettlement would provide, among other things, a release of the Company and ofthe individual defendants for the conduct alleged in the action to be wrongfulby the plaintiffs. Under the proposed settlement, the Company would agree toundertake other responsibilities under the partial settlement, includingagreeing to assign away, not assert, or release certain potential claims theCompany may have against its underwriters. Any direct financial impact of the proposed settlement is expected to beborne by the Company’s insurers.   Thespecial litigation committee agreed to approve the settlement subject to anumber of conditions, including the participation of a substantial number ofother defendants in the proposed settlement, the consent of the Company’sinsurers to the settlement, and the completion of acceptable final settlementdocumentation.  Furthermore, thesettlement is subject to a hearing on fairness and approval by the Courtoverseeing the IPO Litigations.  Wecontinue to progress toward settlement and await approval of settlement by allparties involved.

 

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From time to time, theCompany enters into indemnification agreements with certain contractual partiesin the ordinary course of business, including agreements with lenders, lessors,and certain vendors. All such indemnification agreements are entered into inthe context of the particular agreements and are provided in an attempt toproperly 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 tothe Company’s financial position, results of operations or cash flows and thatthis is the expectation for the future. Additionally, the fair value of the indemnifications that the Companyissued during the nine months ended September 30, 2003 was not material to theCompany’s financial position, results of operations or cash flows.

 

The Company is subject toclaims and legal proceedings that arise in the ordinary course of its businessoperations. Each of these matters is subject to various uncertainties, and itis possible that some of these matters may be decided unfavorably to theCompany. The Company does not believe that any of these matters will have amaterial adverse affect on its business, assets or operations.

 

**10.****                               SegmentReporting**

 

VIA offers a variety ofInternet access, managed bandwidth, web hosting, e-commerce, Internet securityand related services to businesses and consumers in Europe and the UnitedStates. As of September 30, 2003, VIA served primary markets in eight countries.These country operations generate Internet-related revenues from leased lines,dial-up Internet access, web hosting and design, Internet security andconsulting services, and sale of third-party hardware and software. Because ofthe limitations the Company has experienced with its legacy billing platformsand its ongoing projects to address these limitations, the Company is notcurrently able to provide an accurate breakdown of revenue by product. TheCompany anticipates that when it has completed its various systems and processremediation efforts, it will again report revenue by certain productcategories.

 

The Company evaluates theperformance of its operating segments primarily based on revenue and netincome/loss from continuing operations.  In the table below, Corporate, which also includes the cost of theregional backbone network, is shown to reconcile to the total consolidatedfigures. Total segment assets, as presented in the table below, are totalassets net of intercompany funding amounts. 

 

The table below presentsinformation about the reported revenue and net loss from continuing operationsof the Company’s segments for the three and nine month periods ending September30, 2002 and 2003 and assets from continuing operations of the Company’ssegments at September 30, 2002 and 2003 (in thousands of U.S. dollars).

 
|                                      |   | **Europe** |   | **Americas** |   | **Corporate** |   | **Total** |   |
|-------------------------------------------|--------|------------|--------|--------------|--------|---------------|--------|-----------|--------|
| Total assets as of September 30, 2002     |   | 44,208     |   | 3,298        |   | 106,592       |   | 154,098   |   |
| Total assets as of September 30, 2003     |   | 33,097     |   | 3,254        |   | 78,965        |   | 115,316   |   |
| Three months ended September 30, 2002:    |   |       |   |         |   |          |   |      |   |
| Revenue                                   |   | 17,204     |   | 938          |   | —        |   | 18,142    |   |
| Operating loss from continuing operations |   | (462       | )      | (295         | )      | (6,981        | )      | (7,738    | )      |
| Three months ended September 30, 2003:    |   |       |   |         |   |          |   |      |   |
| Revenue                                   |   | 15,611     |   | 975          |   | —        |   | 16,586    |   |
| Operating loss from continuing operations |   | (2,426     | )      | (296         | )      | (6,636        | )      | (9,358    | )      |
| Nine months ended September 30, 2002:     |   |       |   |         |   |          |   |      |   |
| Revenue                                   |   | 45,967     |   | 2,886        |   | —        |   | 48,853    |   |
| Operating loss from continuing operations |   | (8,305     | )      | (855         | )      | (24,518       | )      | (33,678   | )      |
| Nine months ended September 30, 2003:     |   |       |   |         |   |          |   |      |   |
| Revenue                                   |   | 48,011     |   | 2,953        |   | —        |   | 50,964    |   |
| Operating loss from continuing operations |   | (7,499     | )      | (639         | )      | (19,731       | )      | (27,869   | )      |

 

At September30, 2003, goodwill for Europe and the Americas was $7.5 million and $2.2million respectively. During the second quarter of 2002, VIA sold itsoperations in Argentina and Austria. During this quarter, VIA also entered into a contractual agreement totransfer ownership of its operation in Brazil. During the third quarter of2002, VIA sold its operations in Ireland and entered into

 

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a contractual agreement totransfer ownership of its operation in Mexico. During the third quarter of2003, VIA sold its operation in Italy and completed the conditional sales ofits Brazilian and Mexican operations. Our operations in Argentina, Austria,Ireland, Italy, Brazil and Mexico are considered discontinued operations. TheArgentine, Brazilian and Mexican operations were previously reported in theAmericas segment and the Austrian, Irish, and Italian operations werepreviously reported in the Europe segment. See Note 2.

 

**Item 2. Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

The followingdiscussion and analysis should be read in conjunction with the condensedconsolidated financial statements and related notes included in Item 1 of thisForm 10-Q. This discussion and the discussion in Item 1, Note 1,contain 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, projections regarding financialimpacts from planned organizational re-alignment, outsourcing projects, newproduct roll-out, sales organization improvement plans, cost reductions ingeneral and statements relating to profitability. These statements are onlypredictions 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 theseforward-looking statements are discussed in the “Risk Factors” described inExhibit 99.1 on this Form 10-Q, as well as those described in the“Risk Factors” section of VIA’s 2002 Annual Report. You are urged to carefullyconsider these factors, as well as other information contained in thisForm 10-Q and in our other periodic reports and documents filed with theSecurities and Exchange Commission.

 

***Overview and Strategic Plan***

 

VIA is aprovider of business communication solutions to small and medium sizedbusinesses. VIA is headquartered in Europe and has operations in France,Germany, the Netherlands, Portugal, Spain, Switzerland, the United Kingdom andthe United States. VIA was formed in 1997 and has grown principally through theacquisition of independent Internet services providers.  We offer a portfolio of flexible andreliable business communication services including Internet access, digitalsubscriber line (ADSL and SDSL) services and lease line connectivity, virtualprivate networks (VPNs), hosting, Internet and network security services andvoice services. 

 

Todate, we have not been profitable.  Weare currently implementing a Strategic Plan for 2003 – 2005 and expect our netcashflow (defined as movement in cash and cash equivalents) to achievebreak-even, to reach a position of profitability, and further be recognized byour customers and the market as the business communications supplier of choicein key industry sectors.  Our StrategicPlan has two key components:  improvingoperational performance and growing revenues profitably.  Throughout the first nine months of 2003, wehave focused on improving operational performance, while also taking earlysteps to position the company for profitable revenue growth. 

 

VIA developsits products and services to meet the needs of small to medium sizedbusinesses, with a focus on providing product bundles and solutions forspecific industry segments that include retail, IT, manufacturing, media andbusiness services sectors, as well as other niche markets in our targetterritories.  We compete primarilyagainst the local incumbent telecommunications service providers, regionalInternet service providers, and small locally focused Internet serviceproviders and systems integrators. Unlike most of our competitors, VIA focusesspecifically on the small to medium sized businesses.   

 

***Current Developments and Progress toward the Strategic Plan***

 

During the three monthsended September 30, 2003, we continued to execute and make significant progressagainst the key elements of the Strategic Plan.

 

## *Improving Operational Performance*

 

•                  Wehave completed the migration of key network management functions to DimensionData.

 

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•                  Wecontinue to progress the phased introduction of the Inovaware billing andcustomer care platform according to schedule.

 

•                  Webegan the migration of certain accounting, billing, credit and collections, andcertain other financial back-office services to Accenture. 

 

•                  Wehave continued to replace non-performing managers and sales staff with moreexperienced professional staff.

 

In June 2003, we completeda strategic deal with Dimension Data Holdings plc for the outsourcing of VIA’snetwork management and monitoring infrastructure. Upon completion, thisarrangement will provide VIA with significantly better network managementcapabilities, scope and scale. Also in June 2003, we completed a software license and implementationarrangement with Inovaware Corporation, a leading provider of billing andcustomer management software. We have begun a phased roll-out of the new systembeginning in our German and Netherlands operations. We expect that all of ouroperations will have been migrated to the new billing and customer care systemby the end of the first quarter of 2004.

 

In July 2003, VIAcompleted a significant outsourcing arrangement with Accenture LLP under whichVIA will use Accenture’s financial shared service center in Prague, CzechRepublic to perform back-office transaction processing and certain otherfinance and administrative functions. During the third quarter of 2003, VIA and Accenture started workingtogether to transition these functions to Accenture’s financial shared servicecenter. We are substantially on track to complete the transition within thefirst quarter of 2004. We expect that centralization and outsourcing of thesefunctions will significantly improve the internal financial information flowsand the efficiency and scaleability of our finance operations.  

 

Together with the newbilling and customer care system, the implementation of the financial sharedservice center will provide VIA’s management with greater visibility into ouroperations.   Both of thesedevelopments, together with our actions to implement further enhanced financialcontrols in our operations, will continue to drive improvements in our internalcontrol environment. While we have not yet realized the full benefits of theactions we have taken to date in implementing the Strategic Plan, we expectthat they will also lead to further reductions in SG&A costs in 2004.

 

*Growing Revenues Profitably*

 

As noted above, thesecond key component of our Strategic Plan is the generation of profitablerevenue growth.  In the third quarter,we have undertaken the following activities to support this:

 

•                  **Churn** - we have engaged in a number ofactivities to further control and reduce churn

 

•                  **Sales Productivity** – training and furtherreplacement of non-producing sales staff have increased the productivity acrossthe channels

 

•                  **Channel Mix** – we continue to expand ourweb/telesales channel and add new partners to improve our channel mix

 

•                  **Enhance VIA’s Value Proposition** - wecompleted our phased rollout of a voice resale product, ahead of schedule inOctober 2003

 

•                  **Industry focus** - In September of 2003, wepurchased certain assets and customer accounts of a Swiss web hosting business,which focused on the hotel and restaurant industry.

 

We are continuing ourefforts to control and further reduce churn and increase customer retention inrecognition of the significant impact that customer churn has had on ourrecurring revenue base. The introduction of a hunter/farmer sales model withdedicated account managers ‘farming’ our customer base has begun to showpositive impact through a decrease in the number of customers leaving us at theexpiration of their contract. In July, to better understand the specific needsof our customers and their experience with VIA, we conducted a customersurvey.  Since then, we have

 

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improved the quality and frequency of ourcommunications with customers and have taken significant steps to address thekey requests of our customers. 

 

Earlier this year, we beganefforts to improve the overall quality of our sales force by replacingnon-performing sales professionals with more experienced professionals, establishingrobust sales management and highly leveraged compensation plans and institutingtalent development and training programs. These efforts have continued through the quarter ended September 30,2003.  The ongoing transformation of oursales organization has temporarily adversely impacted our sales performance, aswe had anticipated, through the first nine months of 2003. 

 

We have further expanded ourweb sales activities in order to increase the efficiency of sales of our baseproduct set and to more effectively reach a broad potential customer base andto provide a low-cost sales and order-entry channel for all ouroperations.  The web salessoftware platform, which will be fully deployed across all our operations inthe course of the fourth quarter of 2003, allows customers to select and ordera product through the web, and enables VIA to automate and standardize theprocess for managing products, pricing, orders, and other system data.  Aweb sales website in each country with a similar look and feel and with thesame back office management tools enables us to better standardize products andservices.  During the fourth quarter of2003, all of our operations will have deployed the automated web sales site.

 

The Companyrecently completed the introduction of its voice product in all Europeanmarkets ahead of schedule to further support VIA’s positioning as a businesscommunications provider to the small and mid sized enterprize market. TheCompany believes that voice is a key part of the communications bundles thatthis market segment is demanding. VIA has also continued its efforts to focusthe sales and marketing teams on specific targeted industry segments withtailored bundles of products and services. The Company has started to see earlyresults from that refocusing through certain bundled product sales in ouroperations to major retail chains. 

 

In September of 2003, ourSwiss subsidiary acquired over 400 customer accounts from a Swiss web-designand hosting company, specializing in the Swiss hotel and restaurantmarket.  This acquisition is expected toallow the Company to expand its reach into a key vertical market inSwitzerland, opening the opportunity to deliver VIA’s existing productportfolio, including DSL, VPN, security and voice solutions.  We also believe the acquisition enables theCompany to leverage and expand its market expertise in the hospitality marketto its other VIA operations.

 

Despite the challenges ofpursuing revenue growth while making significant operational improvements, wecontinue to be committed to the goal of achieving cash flow break-even (definedas no change in cash and cash equivalents) during 2004.  For the full year 2003, we expect to reportrevenues of approximately $70 million, assuming no significant adverse movementsin foreign currency exchange rates, particularly the Euro to Dollar exchangerate. Our previous guidance of revenues for the full year 2003 was at the lowerend of the range of $70 to $75 million. 

 

For the full year 2003,we expect a modest revenue increase of approximately 5% over full year 2002figures.  This increase in 2003 revenuesover 2002 revenues will have been achieved in the face of the followingchallenges: a changeover of substantially all the senior management andexecutive team, the development and implementation of the Strategic Plan, areorganization of our country operations from a geographic orientation to afunctional matrix orientation, a reduction of approximately one-third of ourentire headcount and a significant turnover of our sales staff, theimplementation in all our operations of a new billing and customer care systemand the outsourcing of major portions of our back-office finance support.  These and other operational improvements arewell underway and will be substantially complete going into 2004.  

 

As noted above, we havesought to improve our sales force through new hires this year, sales managementand highly leveraged compensation plans and development and trainingprograms.  In addition, we have nowsuccessfully rolled out a new voice resale offering in all our Europeanoperations and expect to have completed the roll-out of a new IP VPN offering,both of which will contribute substantially to our 2004 results and enable VIAto reach its target of achieving cash flow break-even.  We believe all of these developments willgenerate positive revenue growth in 2004 and beyond.  This, together with the cost reductions we have taken in 2003 throughsignificant reduction of our headcount and outsourcing projects, are expectedto enable us to reach our target of cash flow breakeven during 2004. 

 

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We recognize that ourability to successfully execute our Strategic Plan to improve operationalperformance and generate meaningful and profitable revenue growth is subject toa number of risks and dependencies, which are not insignificant.  These risks and dependencies are furtherdiscussed in the “Risk Factors” described in Exhibit 99-1 on thisForm 10-Q, as well as those described in the “Risk Factors” section ofVIA’s 2002 Annual Report.

 

*Leveraging an improved operating platform throughacquisitions*

* *

Consistent withthe Strategic Plan, we have spent a significant part of 2003 focused onimproving our operational performance, specifically to deliver improvements toour systems and platforms, people and processes and controls.  With a substantially improved operationalplatform and a continuing strong cash position, VIA has now determined topursue strategic acquisitions and partnerships that will complement or enhanceour infrastructure, product offerings, channel strategies or customerbase.  We are in the process ofidentifying appropriate targets or partners. As the Internet and communications sector continues to consolidate, weintend to enhance our position in the market and our financial strength througha combination of organic and transactional growth.  Nonetheless, there can be no assurances that we will be able tosuccessfully identify appropriate target companies that will be willing topartner with VIA.

*** ***

***Our Operations***

 

During 2002, we sold ouroperations in Argentina, Austria, Brazil, Ireland and Mexico and, in 2003, wehave sold our operation in Italy. These operations are accounted for asdiscontinued operations and have been excluded from the financial results fromcontinuing operations, as well as the financial results from the comparativeprior periods. The following table shows the revenue contribution from each ofVIA’s continuing operations in the Europe and the Americas reporting segments.As of September 30, 2003 we owned 100% of all our operations.

 

**VIAOperations**

 
| **Country**     |   | **Percentages  of  Total Revenue from  continuing  operations for  the three months  ended  September 30, 2002** |   | **Percentages  of  Total Revenue from  continuing  operations for  the three months  ended  September 30, 2003** |   | **Percentages  of  Total Revenue from  continuing  operations for  the nine months  ended  September 30, 2002** |   | **Percentages  of  Total Revenue from  continuing  operations for  the nine months  ended  September 30, 2003** |   |
|-----------------|--------|------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------|--------|
| United Kingdom  |   | 36                                                                                                               | %      | 36                                                                                                               | %      | 36                                                                                                              | %      | 35                                                                                                              | %      |
| The Netherlands |   | 11                                                                                                               | %      | 15                                                                                                               | %      | 10                                                                                                              | %      | 14                                                                                                              | %      |
| Switzerland     |   | 16                                                                                                               | %      | 12                                                                                                               | %      | 10                                                                                                              | %      | 13                                                                                                              | %      |
| Germany         |   | 14                                                                                                               | %      | 11                                                                                                               | %      | 16                                                                                                              | %      | 11                                                                                                              | %      |
| France          |   | 9                                                                                                                | %      | 10                                                                                                               | %      | 12                                                                                                              | %      | 10                                                                                                              | %      |
| Portugal        |   | 6                                                                                                                | %      | 8                                                                                                                | %      | 7                                                                                                               | %      | 8                                                                                                               | %      |
| United States   |   | 5                                                                                                                | %      | 6                                                                                                                | %      | 6                                                                                                               | %      | 6                                                                                                               | %      |
| Spain           |   | 3                                                                                                                | %      | 2                                                                                                                | %      | 3                                                                                                               | %      | 3                                                                                                               | %      |

 

Ourcustomers generally transact business with only one of our operations, which islocated in the same country as the customer. Consequently, the same operatingunit manages the client relationship, including delivery of service, invoicingand collections. This being the case, revenue for a country operation primarilyrelates directly to invoices delivered in respect of services such operationprovides. When, in the small number of instances that a customer receivesservices across several VIA operations, one of the operations will act as leadsupplier to that customer and the other operation or operations will raiseinvoices to the lead operation as if it were a non-related third party.

 

**RESULTS OFOPERATIONS**

 

#### *Foreign Currency Impact*

** **

Foreign exchangerates can vary significantly and impact our results of operations, which arereported in U.S. dollars. During the nine months ended September 30, 2003, onlyour U.S. operation, which represented approximately 6% of our consolidatedrevenues from continuing operations during this period, conducted business inU.S. dollars.

 

16

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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 to September 30,2003. These exchange rate fluctuations have a significant impact on our resultsof operations, including revenue, expenses and net loss. 

 

The averageEuro to U.S. dollar foreign exchange rates for the three and nine month periodsended  September 30, 2003 were 15% and 20% higher respectively than theaverage Euro to U.S. dollar foreign exchange rates for the same periods in2002. In the period since January 1, 2002 the dollar has declined in value ascompared to the currencies in which we conduct most of our business.  The effect of the weakening of the U.S.dollar is that revenues, operating costs and expenses and operating profits andlosses in operations with a functional currency other than U.S. dollarstranslate into larger U.S. dollar amounts than would have been the case hadforeign exchange rates remained unchanged.

 

***Three and ninemonths ended September 30, 2003 compared with the three and nine months ended September 30, 2002***

 

*REVENUE:*

 
|    |   | **Three  months ended**                   |   |                     |   | **Nine  months ended**                    |   |                     |   |
|---------|--------|-------------------------------------------|--------|--------------------------|--------|-------------------------------------------|--------|--------------------------|--------|
|    |   | **September  30,  2002**                  |   | **September  30,  2003** |   | **%  Increase/  (Decrease)**              |   | **September  30,  2002** |   | **September  30,  2003** |   | **%  Increase/  (Decrease)** |   |
|    |   | **(in  thousands of  U.S. dollars)** |   |                     |   | **(in  thousands of  U.S. dollars)** |   |                     |   |
| Revenue |   | $                                         | 18,142 |                     | $      | 16,586                                    |   | (9                       | )%     | $ | 48,853 |   | $ | 50,964 |   | 4 | % |
|         |        |                                           |        |                          |        |                                           |        |                          |        |  |  |  |  |  |  |  |  |

 

Wederive our revenue from the sale of Internet goods and services, specificallyInternet access and other Internet value added services, such as managedbandwidth, web and applications hosting.

 

For revenuetransactions we apply the provisions of SAB No. 101 *Revenue Recognition.* We recognize revenue from the sale ofInternet goods and services when persuasive evidence of an arrangement exists,delivery has occurred or services have been rendered, the fee is fixed ordeterminable and collection of the resulting receivable is reasonably assured.We assess collectibility based on a number of factors, including pasttransaction history with the customer and the credit-worthiness of thecustomer. We do not perform credit checks on all potential customers beforeproviding services. If we determine that collection of a fee is not reasonablyassured, the revenue is recognized upon the receipt of cash, provided otherrevenue recognition criteria have been satisfied.

 

Our practicesregarding the evidence of an arrangement vary from country to country. Forsales, other than those completed over the Internet, we use either a purchaseorder or a customer agreement as evidence of an arrangement. For sales over theInternet, we use a credit card authorization or direct debit mandate asevidence of an arrangement.

 

All of ouraccess revenue is recognized as it is earned over the period the services areprovided. Revenues from the sale of value added Internet services are alsorecognized over the period in which the services are provided. 

 

In accordancewith EITF 99-19 *Reporting Revenue Gross as aPrincipal versus Net as an Agent,* revenue from hardware andthird-party software sales is recognized gross upon delivery or installation ofthe products, depending on the terms of the arrangement, provided other revenuerecognition criteria have been satisfied. The Company’s hardware and softwaresales are arrangements negotiated and agreed upon directly with its customers.The Company does not act as an agent or a broker for its vendors nor does itreceive compensation, commissions or fees from its vendors. VIA also maintainsthe freedom and discretion in selecting the appropriate vendor to support itsvarious hardware and software arrangements.

 

Revenue forthe three months ended September 30, 2003 was $16.6 million as compared to$18.1 million for the three months ended September 30, 2002.  Approximately 6 per cent of our consolidatedrevenues for both periods arose from operations that conducted business in U.S.dollars. The average Euro to U.S. dollar foreign exchange rate for the threemonths ended September 30, 2003 has strengthened by approximately 15 per centwhen compared to the same period last year positively

 

17

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impacting revenues byapproximately $1.4 million. This has been more than offset by a 16% decrease inthe underlying revenue for the three months ended September 30, 2003 ascompared to the same period in 2002 notably in Switzerland, Germany and the UK.

 

Swissrevenues, excluding the impact of foreign exchange, reflect a 37% decrease(approximately $1.1 million). This reduction is primarily due to the loss inthe quarter of a significant number of the customers acquired via a customerlist purchase in the second quarter of 2002. German revenues, excluding theimpact of foreign exchange, reflect a 37% decrease (approximately $1.0million). This revenue reduction is primarily a result of actions undertaken inthe fourth quarter of 2002 to eliminate certain unprofitable business in orderto reduce operating losses and build a stronger base from which to grow thebusiness. UK revenues, excluding the impact of foreign exchange, reflect a 13%decrease (approximately $0.9 million). This revenue reduction is primarily aresult of increased competition and price erosion. 

 

Revenuefor the nine months ended September 30, 2003 was $51.0 million as compared to$48.9 million for the nine months ended September 30, 2002. Approximately6 per cent of our consolidated revenues for both periods arose from operationsthat conducted business in U.S. dollars. The average Euro to U.S. dollarforeign exchange rate for the nine months ended September 30, 2003 hasstrengthened by approximately 20 per cent when compared to the same period lastyear positively impacting revenues by approximately $6 million. This has beenlargely offset by a 9% decrease in the underlying revenue for the nine monthsended September 30, 2003 as compared to the same period in 2002, notably inGermany and France. 

 

Germanyrevenues, excluding the impact of foreign exchange, reflect a 33% decrease(approximately $2.6 million). This reduction, as discussed above, is primarilya result of the actions taken to reduce operating losses. France revenues, excluding theimpact of foreign exchange, reflect a 22% decrease (approximately $1.4million). This revenue reduction is primarily a result of increased competitionand price erosion.

 

Throughthe first nine months of 2003, VIA has taken significant actions inimplementing its 2003-2005 Strategic Plan, including replacing many of ourdirect sales professionals and sales managers with higher caliberprofessionals. We have continued to rationalize our product portfolio and areactively recruiting resellers and other value-added partners. As expected,these and other initiatives we have undertaken through the implementation ofour Strategic Plan, has had a short-term adverse effect on our revenues.Despite the challenges of pursuing growth while also making significantoperational improvements and organizational changes, we expect to generatemodest revenue growth over the six months ending December 31, 2003.Specifically, we expect to deliver revenues of approximately $70 million forthe full year 2003, assuming no significant adverse movements in foreigncurrency exchange rates, particularly the Euro to Dollar exchange rate. Thisexpectation is at the lower end of the previous guidance of revenues of between$70 to $75 million.  

 

In priorreporting periods, we have provided information on categories of revenues thatwe generate. Because of the systemic errors and limitations we have experiencedin and with our legacy billing platforms and our ongoing projects to addressthese and process issues, we are not currently able to provide an accuratebreakdown of our revenues. In 2004, we anticipate that we will have completedour various systems and process remediation efforts and we will begin again toreport certain revenue categories.

 

*OPERATING COSTS AND EXPENSES:*

 

*Internet services:*

 
|              |   | **Three  months ended**                   |   |                     |   | **Nine  months ended**       |    |                     |   |
|-------------------|--------|-------------------------------------------|--------|--------------------------|--------|------------------------------|---------|--------------------------|--------|
|              |   | **September  30,  2002**                  |   | **September  30,  2003** |   | **%  Increase/  (Decrease)** |    | **September  30,  2002** |   | **September  30,  2003** |   | **%  Increase/  (Decrease)** |   |
|              |   | **(in  thousands of  U.S. dollars)** |   |                     |   |                         |    |                     |   |   |   |
| Internet services |   | $                                         | (8,752 | )                        | $      | (7,992                       | )  | (9                       | )%     | $ | (26,324 | ) | $ | (24,342 | ) | (8 | )% |
| % of Total        |   | 48                                        | %      | 48                       | %      |                         |    | 54                       | %      | 48 | % |   |   |
|                   |        |                                           |        |                          |        |                              |         |                          |        |  |  |  |  |  |  |  |  |

 

18

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Revenue

 

Our Internet servicesoperating costs are the costs we incur to carry customer traffic to and overthe Internet. We lease lines that connect our points of presence, or “PoPs”,either to our own network or to other network providers. We pay other networkproviders for transit, which allows us to transmit our customers’ informationto or from the Internet over their networks. We also pay other recurringtelecommunications costs and personnel costs, including the cost of the localtelephone lines our customers use to reach our PoPs and access our services,and costs related to customer support and care.

 

Our Internet servicesoperating costs were $8.0 million or 48% of revenues for the three monthsended September 30, 2003 as compared to $8.8 million or 48% of revenuesfor the three months ended September 30, 2002. Despite the adverse impact ofthe strengthening Euro to U.S. dollar foreign currency exchange rate, Internetservices costs have fallen for the three month period ended September 30, 2003from the same period in 2002 primarily due to lower revenue levels.

 

Our Internet services operatingcosts were $24.3 million or 48% of revenues for the nine months endedSeptember 30, 2003 as compared to $26.3 million or 54% of revenues for thenine months ended September 30, 2002. Despite the adverse impact of thestrengthening Euro to U.S. dollar foreign currency exchange rate, Internetservices costs have fallen for the nine month period ended September 30, 2003from the same period in 2002 primarily due to the full period benefit of therenegotiation of network access costs in mid 2002. Total Internet service costsfor the nine month period ended September 30, 2003 also benefited from therelease of telecommunication cost accruals in June 2003 in respect of disputedcharges and line cancellation credits in two operations in the Europeanreporting segment of $0.6 million. Management considers the likelihood that VIAwill ultimately be required to pay these amounts as remote.

 

*Selling,general and administrative:*

* *
|                                  |   | **Three  months ended**                   |    |                     |   | **Nine  months ended**       |   |                     |   |
|---------------------------------------|--------|-------------------------------------------|---------|--------------------------|--------|------------------------------|--------|--------------------------|--------|
|                                  |   | **September  30,  2002**                  |    | **September  30,  2003** |   | **%  Increase/  (Decrease)** |   | **September  30,  2002** |   | **September  30,  2003** |   | **%  Increase/  (Decrease)** |   |
|                                  |   | **(in  thousands of  U.S. dollars)** |    |                     |   |                         |   |                     |   |   |   |
| Selling, general & administrative |   | $                                         | (13,376 | )                        | $      | (14,322                      | )      | 7                        | %      | $ | (46,656 | ) | $ | (44,732 | ) | (4 | )% |
| % of Total Revenue                    |   | 74                                        | %       | 86                       | %      |                         |   | 96                       | %      | 88 | % |   |   |
|                                       |        |                                           |         |                          |        |                              |        |                          |        |  |  |  |  |  |  |  |  |

 

Our largest selling, generaland administrative (SG&A) expenses are compensation costs, the costsassociated with marketing our products and services, and professional fees paidto outside consultants. Compensation costs include salaries and relatedbenefits, commissions, bonuses and costs associated with staff reductions. Inmany of our markets, we are required to make significant mandatory payments forgovernment-sponsored social welfare programs and we have little control overthese costs. Our marketing expenses include the costs of direct mail and othermass marketing programs, advertising, customer communications, trade showparticipation, web site management and other promotional costs. Other SG&Aexpenses include the costs of travel, rent, utilities, insurance and bad debtexpense.

 

We incurred SG&Aexpenses of $14.3 million for the three months ended September 30, 2003, a 7%increase from the $13.4 million we incurred for the three months endedSeptember 30, 2002. This increase in SG&A costs reflects the adverse impactof the 15 per cent increase in the average Euro to U.S. dollar foreign exchangerate period on period noted in the *Revenue*section above. The fluctuation of foreign exchange rates adverselyimpacted SG&A for the three months ended September 30, 2003 over the sameperiod in 2002 by approximately $0.7 million.  

 

Compensationexpense, which accounted for approximately 56% and 68% of total SG&A costsfor the three month periods ended September 30, 2003 and 2002 respectively,reduced by approximately 17% (excluding the effect of foreign exchange rates)from the same period last year due to headcount reductions from 578 atSeptember 30, 2002 to 463 at September 30, 2003. In addition,

 

19

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SG&A expenses for the three months endedSeptember 30, 2003 included a bad debt expense of $0.6 million. SG&Aexpenses for the three months ended September 30, 2002 included a release fromour bad debt provision of $1.0 million.

 

We incurred SG&Aexpenses of $44.7 million for the nine months ended September 30, 2003, a4% decrease from the $46.7 million we incurred for the nine months endedSeptember 30, 2002. We achieved this cost reduction despite the adverse effectof the strengthening Euro to U.S. dollar foreign exchange rate, and the changein bad debt expense between the periods. The fluctuation of foreignexchange rates has adversely impacted SG&A for the nine months endedSeptember 30, 2003 over the same period in 2002 by approximately $3.4 million. 

 

Compensationexpense, which accounted for approximately 61% and 62% of total SG&A costsfor the nine month periods ended September 30, 2003 and 2002 respectively,reduced by approximately 14% (excluding the effect of foreign exchange rates)from the same period last year primarily due to the headcount reductions notedabove. In addition, SG&A expenses for the nine months endedSeptember 30, 2003 included a bad debt expense of $1.3 million. SG&Aexpenses for the nine months ended September 30, 2002 included a release fromour bad debt provision of $2.9 million.

 

Our SG&A expensesinclude the amortization of deferred compensation. In March 2002, werecorded forfeitures of unvested stock options in the amount of$1.8 million, which reduced the deferred compensation balance to zero witha corresponding adjustment to additional paid in capital. As a result, we didnot record any deferred compensation expense in nine months ended September 30,2003. The deferred compensation amortization for the three and nine monthsended September 30, 2002 was nil and $0.5 million, respectively.

 

*Restructuring and impairment charges:*

 
|                                 |   | **Three  months ended**                   |   |                     |   | **Nine  months ended**                    |   |                     |   |
|--------------------------------------|--------|-------------------------------------------|--------|--------------------------|--------|-------------------------------------------|--------|--------------------------|--------|
|                                 |   | **September  30,  2002**                  |   | **September  30,  2003** |   | **%  Increase/  (Decrease)**              |   | **September  30,  2002** |   | **September  30,  2003** |   | **%  Increase/  (Decrease)** |   |
|                                 |   | **(in  thousands of  U.S. dollars)** |   |                     |   | **(in  thousands of  U.S. dollars)** |   |                     |   |
| Restructuring and Impairment charges |   | (1,027                                    | )      | $                        | (1,458 | )                                         | 42     | %                        | (1,027 | ) | $ | (3,740 | ) | 264 | % |
| % of Total Revenue                   |   | 6                                         | %      | 9                        | %      |                                      |   | 2                        | %      | 7 | % |   |   |
|                                      |        |                                           |        |                          |        |                                           |        |                          |        |  |  |  |  |  |  |

 

During the threeand nine months ended September 30, 2003 the Company recorded restructuring andimpairment charges related to the implementation of the Group’s strategic planof $1.5 million and $3.7 million, respectively. The restructuring charge forthe three months ended September 30, 2003 related to severance payments at fourof its European operations and at the corporate headquarters and implementationcosts for back-office and administrative outsourcing initiatives.  The restructuring charge for the first six monthsof 2003 related to severance payments of $1.5 million at six of its Europeanoperations and at the corporate headquarters, a charge of $0.1 million forfuture lease obligations for the closure of the Reston, Virginia office and onvacant office space in Germany, implementation costs of $0.3 million forback-office and administrative outsourcing initiatives and a fixed assetimpairment charge of $0.1 million for fixed asset fixtures and fittings thatwere written down to net realizable value as a result of the closure of theReston office in March 2003. Restructuring charges in the nine months endedSeptember 30, 2002 related to the closure of the former head office in Reston,Virginia. For further information see Note 3 to the Consolidated Financial Statements.

 

We anticipatethat we will incur further restructuring charges during the balance of 2003 andthe first quarter of 2004 as we execute on our Strategic Plan, specifically forthe costs of headcount reductions that will result from our organizationalfunctional realignment and from our outsourcing projects. By the end of the2003, we expect to further reduce VIA’s total headcount of 463 as of September30, 2003 to less than 400. If the Company fails to achieve the benefits assumedfrom its Strategic Plan, further goodwill and long-lived asset impairments mayarise.

 

20

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*Depreciation and amortization:*

 
|                          |   | **Three  months ended**                   |   |                     |   | **Nine  months ended**                    |   |                     |   |
|-------------------------------|--------|-------------------------------------------|--------|--------------------------|--------|-------------------------------------------|--------|--------------------------|--------|
|                          |   | **September  30,  2002**                  |   | **September  30,  2003** |   | **%  Increase/  (Decrease)**              |   | **September  30,  2002** |   | **September  30,  2003** |   | **%  Increase/  (Decrease)** |   |
|                          |   | **(in  thousands of  U.S. dollars)** |   |                     |   | **(in  thousands of  U.S. dollars)** |   |                     |   |
| Depreciation and amortization |   | $                                         | (2,725 | )                        | $      | (2,172                                    | )      | (20                      | )%     | $ | (8,524 | ) | $ | (6,019 | ) | (29 | )% |
| % of Total Revenue            |   | 15                                        | %      | 13                       | %      |                                      |   | 17                       | %      | 12 | % |   |   |
|                               |        |                                           |        |                          |        |                                           |        |                          |        |  |  |  |  |  |  |  |  |

 

We recognizedepreciation expense primarily related to telecommunications equipment,computers and network infrastructure. We depreciate telecommunicationsequipment and computers over their useful lives, ranging from three to fiveyears. The cost of network infrastructure, net of impairment charges, purchasedunder indefeasible right of use agreements, or IRU, is being amortized over thelesser of the estimated useful life or term of the agreement, 20 to25 years.

 

Our depreciationand amortization expense was $2.2 million and $6.0 million for the three andnine months ended September 30, 2003. The depreciation and amortization expensefor the three and nine months ended September 30, 2002 was $2.7 millionand $8.5 million, respectively. In the first quarter of 2002 $0.2 million ofthe charge related to amortization of intangible assets. The decrease in totaldepreciation and amortization expense is primarily due to a lower depreciableasset base due to asset impairments in 2002 and the first quarter of 2003 andto the fact that intangible assets had been fully amortized by the end of 2002.

 

*Interest income, net:*

 
|                 |   | **Three  months ended**                   |   |                     |   | **Nine  months ended**                    |   |                     |   |
|----------------------|--------|-------------------------------------------|--------|--------------------------|--------|-------------------------------------------|--------|--------------------------|--------|
|                 |   | **September  30,  2002**                  |   | **September  30,  2003** |   | **%  Increase/  (Decrease)**              |   | **September  30,  2002** |   | **September  30,  2003** |   | **%  Increase/  (Decrease)** |   |
|                 |   | **(in  thousands of  U.S. dollars)** |   |                     |   | **(in  thousands of  U.S. dollars)** |   |                     |   |
| Interest income, net |   | $                                         | 625    |                     | $      | 223                                       |   | (64                      | )%     | $ | 2,604 |   | $ | 933 |   | (64 | )% |
| % of Total Revenue   |   | 3                                         | %      | 1                        | %      |                                      |   | 5                        | %      | 2 | % |   |   |
|                      |        |                                           |        |                          |        |                                           |        |                          |        |  |  |  |  |  |  |  |  |

 

For the threeand nine months ended September 30, 2003, we earned $0.2 million and$0.9 million in interest income, compared to $0.6 million and$2.6 million we earned for the three and nine months ended September 30,2002. Interest income was generated from investing funds received from ourinitial public offering in February 2000, until those funds were used foracquisitions, operating expenses or capital expenditures. Net proceeds from thepublic offering were $333.0 million. The decrease in the interest incomeis the combined result of the decrease in the available cash for investing andthe decrease in the interest rates. We also incurred $3,000 and $12,000 ofinterest expense for the three and nine months ended September 30, 2003, ascompared to $7,000 and $59,000 of interest expense incurred in the sameperiods in 2002. Interest expense relates to vendor financing at both thesubsidiary and corporate levels.

 

*Other expense, net:*

 
|               |   | **Three  months ended**                   |   |                     |   | **Nine  months ended**                    |    |                     |   |
|--------------------|--------|-------------------------------------------|--------|--------------------------|--------|-------------------------------------------|---------|--------------------------|--------|
|               |   | **September  30,  2002**                  |   | **September  30,  2003** |   | **%  Increase/  (Decrease)**              |    | **September  30,  2002** |   | **September  30,  2003** |   | **%  Increase/  (Decrease)** |   |
|               |   | **(in  thousands of  U.S. dollars)** |   |                     |   | **(in  thousands of  U.S. dollars)** |    |                     |   |
| Other expense, net |   | $                                         | (2,002 | )                   | $      | (124                                      | )  | (94                      | )%     | $ | (2,331 | ) | $ | (267 | ) | (89 | )% |
| % of Total Revenue |   | 11                                        | %      | 1                        | %      |                                      |    | 5                        | %      | 1 | % |   |   |
|                    |        |                                           |        |                          |        |                                           |         |                          |        |  |  |  |  |  |  |  |  |

 

For the threeand nine months ended September 30, 2003, we incurred other expense of $0.1million and $0.3 million, as compared to $2.0 million and $2.3 million for thesame period in 2002. Other

 

21

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expense for the nine monthsended September 30, 2002 included a charge of $0.3 million in respect of thewrite off of the balance owing on a related party loan.

 

*Foreign currency (losses) gains, net:*

* *
|                                 |   | **Three  months ended**                   |   |                     |   | **Nine  months ended**                    |   |                     |   |
|--------------------------------------|--------|-------------------------------------------|--------|--------------------------|--------|-------------------------------------------|--------|--------------------------|--------|
|                                 |   | **September  30,  2002**                  |   | **September  30,  2003** |   | **%  Increase/  (Decrease)**              |   | **September  30,  2002** |   | **September  30,  2003** |   | **%  Increase/  (Decrease)** |   |
|                                 |   | **(in  thousands of  U.S. dollars)** |   |                     |   | **(in  thousands of  U.S. dollars)** |   |                     |   |
| Foreign currency (losses) gains, net |   | $                                         | (1,089 | )                   | $      | 1,545                                     |   | (242                     | )%     | $ | 8,449 |   | $ | 8,805 |   | 4 | % |
| % of Total Revenue                   |   | 6                                         | %      | 9                        | %      |                                      |   | 17                       | %      | 17 | % |   |   |
|                                      |        |                                           |        |                          |        |                                           |        |                          |        |  |  |  |  |  |  |  |  |

 

We recognizeda $1.5 million and $8.8 million foreign currency gain for the three andnine months ended September 30, 2003, as compared to a loss of $1.1 millionand a $8.4 million foreign currency gain for the three and nine months endedSeptember 30, 2002. The change from period to period was primarily due to thefluctuation in the exchange rate of the Euro as compared to the U.S. dollar andits impact on the revaluation of our Euro denominated intercompany balancesheld by the parent company and on our Euro denominated cash accounts. See the *Foreign Currency Exchange Risks* sectionbelow for more information.

 

We establishedthe Euro denominated cash accounts in connection with our initial publicoffering in February 2000, in which we sold shares of our common stock forboth U.S. dollars and Euros. To minimize our exposure to foreign currencyexchange rate risk on cash balances held in 2003, VIA purchased€15.0 million worth of U.S. dollars on March 10, 2003, thussubstantially reducing the balance in the Euro cash account. At September 30,2003, the parent company maintained a Euro cash reserve of €10 million.

 

*Liquidity and Capital Resources*

 

VIA began 2003with $97.8 million in cash and cash equivalents and $0.9 million in restrictedcash. We had negative cash flow of $24.8 million during the first nine monthsof 2003, leaving us with $73.1 million in cash and cash equivalents and $1.0million in restricted cash at September 30, 2003.

 

The executionof the Strategic Plan has increased capital expenditure from 2002 levels, andresulted in cash expenditures for restructuring and other non-recurring costs.Whilst we have increased our expenditures of cash in the short term, weanticipate that these up-front expenditures will result in less cash beingspent to fund operating losses as we approach a positive net cash flow positionand will accelerate our path toward profitability.  

 

Inaddition, in April 2003, VIA announced the restarting of its previouslyauthorized stock repurchase plan to acquire up to $10 million worth of VIAstock.  In the second quarter of 2003,VIA purchased 823,593 shares of its common stock at a total cost of $0.8million. In the third quarter of 2003 no shares were repurchased. This plan canbe suspended by VIA at any time.

 

Ascontemplated under our Strategic Plan, and as further noted above under subheading*Leveraging an improved operating platformthrough acquisitions* and heading *Current Developments and Progress toward the Strategic Plan*, we are pursuingthe identification of potential partners and strategic acquisitions.  If we are successful in these endeavors, wemay use a portion of our cash balances to finance all or a portion of thesepotential transactions.

 

We believethat our available cash will be sufficient to fund our expenditures under theStrategic Plan and our working capital and capital expenditure requirementsuntil we achieve positive net cash flow at which time we believe we will stillhave substantial cash reserves remaining, even as we pursue our acquisitionstrategy. However, in the event that, contrary to management’s expectations, weneed additional cash, we may not be able to obtain further financing unless thecapital markets improve in the interim.

 

22

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Sinceinception, we have financed our operations primarily through the sale of equitysecurities. We raised approximately $181.0 million in aggregate throughthree private preferred stock offerings between August 1997 andApril 1999. Through our initial public offering of common stock inFebruary 2000, we raised approximately $333.0 million, net ofunderwriting discounts and commissions. At September 30, 2003, we had cash andcash equivalents of $73.1 million and restricted cash of $1.0 million.

 

Cash used inoperating activities was $19.9 million****forthe nine months ended September 30, 2003 and $23.2 million for the nine monthsended September 30, 2002. Cash flows from operating activities can varysignificantly from period to period depending on the timing of operating cashreceipts and payments and other working capital changes, especially accountsreceivable, other current assets, accounts payable, accrued expenses and othercurrent liabilities. In both periods, our net losses were the primary componentof cash used in operating activities, offset by significant non-cash depreciation,amortization, provision for doubtful accounts receivable and unrealized foreigncurrency transaction gains and losses.

 

Cash used ininvesting activities was $4.0 million for the nine months ended September 30,2003 and $2.3 million for the same period in 2002. In nine months endedSeptember 30, 2003 and 2002, we used cash to primarily purchase tangible fixedassets and the Swiss customer list.

 

Cash used infinancing activities was $0.4 million for the nine months ended September 30,2003 and $1.6 million for the nine months ended September 30, 2002. In ninemonths ended September 30, 2003 cash was used primarily to purchase treasurystock and in 2002, cash was used primarily to repay capital lease obligations.

 

The foregoingstatements regarding our liquidity and possible need for additional capitalresources are forward-looking statements based on our current expectations,which involve certain risks and uncertainties. Actual results and the timing ofthese events could differ materially from these forward-looking statementsdepending upon certain factors that we cannot predict, including the nature,size and timing of future acquisitions and dispositions, if any, our future netincome and our success in executing our Strategic Plan as well as other factorsdiscussed in “Risk Factors” included on this Form 10-Q asExhibit 99.1, as well as those described in the “Risk Factors” section ofVIA’s 2002 Annual Report.

 

*Foreign Currency Exchange Risks*

 

VIA is aninternational company that at the end of September 2003 had operations in eightcountries. Only one operation and the parent company have a functional currencyof U.S. dollars. Having operations in foreign currencies exposes VIA to foreigncurrency exchange risks.

 

There areprincipally two types of foreign exchange risk that may impact the results ofoperations and comprehensive income, transaction and translation risks. Theseare discussed more fully below.

 

Transaction risks

 

Transactionsin currencies other than the functional currency are translated at either theexchange rate in effect at the end of the month in which the transaction occursor in some cases the rate in effect at the date of the transaction. Differencesin exchange rates during the period between the date a transaction denominatedin a foreign currency is consummated and the date on which it is settled ortranslated, are recognized in the consolidated statements of operations as“Foreign currency gains (losses), net.”

 

Our localoperations transact business in their local currencies. They do not havesignificant assets, liabilities or other accounts denominated in currenciesother than their local currency, and therefore are not subject to significantexchange rate risk with respect to their normal operations. Foreign currency exchangefluctuations currently have little or no impact on the price of our productsand our competitiveness in various markets primarily for two reasons.  First, the Company’s revenue stream issolely derived from the local operating subsidiaries. These subsidiariestransact with customers in the same country and the supporting agreements aredenominated in the same local

 

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currency. There are nosignificant cross border customers served by VIA. Second, the local operatingsubsidiaries cost base is entirely denominated in the local functionalcurrency. The majority of underlying agreements with backbone and bandwidthsuppliers, and salary costs, which comprise the majority of our expenses, arealso denominated in the same currency as the local revenue stream.

 

The parentcompany’s foreign exchange transaction risk is primarily derived from therevaluation of current assets and liabilities that are denominated in acurrency other than U.S. dollars. These are comprised principally of Euro cashbalances held to meet the working capital requirements of the five localoperating subsidiaries with a Euro functional currency and the intercompanybalances denominated in the local operating subsidiaries’ functional currency(Great British Pounds, Swiss Francs and Euros).

 

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

 

The parentcompany’s cash balances consist of Euros and U.S. dollars. The Euro bankaccount is revalued each month and the resultant gain or loss is reflected inthe consolidated statements of operations as “Foreign currency gains/(losses),net.”

 

Thefluctuation in the exchange rates resulted in a foreign currency gain reflectedin the consolidated statements of operations as “Foreign currency(losses)/gains, net” of $1.5 million and $8.8 million for the three andnine months ended September 30, 2003.

 

Translationrisks

 

The financialstatements of the Company’s local operating subsidiaries with a functionalcurrency other than U.S. dollars are translated into U.S. dollars using thecurrent rate method. Accordingly, assets and liabilities are translated atperiod-end exchange rates while revenue and expenses are translated at theperiod’s average exchange rates. Adjustments resulting from these translationsare accumulated and reported as a component of accumulated other comprehensiveloss in stockholders’ equity.

 

The fluctuationin the exchange rates resulted in a foreign currency loss reflected as acomponent of accumulated other comprehensive loss in stockholders’ equity, netof $0.7 million and $6.1 million for the three and nine months endedSeptember 30, 2003.

 

Exchange ratescan vary significantly. The Euro high and low rates varied by approximately 8%and 15% in relation to the U.S. dollar during the three and nine months endedSeptember 30, 2003. 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, 2003, the Euro to U.S. dollarexchange rate was approximately 10% above where it was at the beginning of theyear. 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.

 

Hedging againstforeign exchange risks

 

We do notactively manage our exposure to foreign currency translation risks that affectour reported results, which result in no cash impact unless the operation issold.  We have in the past consideredinsurance and financial risk products to manage this risk, but determined suchproducts to be prohibitively expensive. We currently have no hedgingarrangements or derivatives in place to address this form of translation risk.

 

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The parentcompany maintains a Euro cash balance to meet the working capital requirementsof the five local operating subsidiaries with a Euro functional currency. Theparent company maintains its remaining cash resources in U.S. dollars.

 

**Item 3****. Quantitative and Qualitative Disclosures AboutMarket Risk**

 

The followingdiscussion relates to our exposure to market risk, related to changes ininterest rates and changes in foreign exchange rates. This discussion containsforward-looking statements that are subject to risks and uncertainties. Actualresults could differ materially due to a number of factors, as set forth in the“Risk Factors” included as Exhibit 99.1 on this Form 10-Q and included in the“Risk Factors” section of VIA’s 2002 Annual Report.

 

VIA hasexposure to financial market risks, including changes in interest rates andforeign exchange rates. At September 30, 2003 VIA’s financial instrumentsconsisted of short-term investments. VIA’s investments are fixed rateshort-term investment grade and government securities denominated in U.S.dollars. At September 30, 2003 all of VIA’s investments were due to maturewithin three months and the carrying value of such investments approximatesfair value.

 

As mentionedpreviously in the “Foreign Currency Exchange Risks” section, VIA has a Eurodenominated cash account held by the parent company, which has a functionalcurrency of U.S. dollars. In addition the parent company has intercompanyaccounts with its operations that are denominated in currencies other than U.S.dollars. The translation of this bank balance and the intercompany accountsexposes the Company to foreign currency exchange rate risk in the Statement ofOperations. To minimize the Company’s exposure to foreign currency exchangerate risk in 2003, VIA purchased €15.0 million worth of U.S. dollars onMarch 10, 2003, thus substantially reducing the balance in the Euro cashaccount. At September 30, 2003, VIA maintained a cash reserve of€9.9 million. At September 30, 2003 a 10 percent increase or decreasein the level of the Euro exchange rate against the dollar with all othervariables held constant would have resulted in a realized gain or loss on theEuro cash account and intercompany accounts of approximately $7 million. 

 

VIA is alsosubject to translation risk from changes in foreign exchange rates for itsinternational operations, which use a foreign currency as their functionalcurrency and are translated into U.S. dollars. Adjustments resulting from thesetranslations are accumulated and reported as a component of accumulated othercomprehensive loss in stockholders’ equity. These risks have not been reducedthrough hedging arrangements.

 

A fulldiscussion of VIA’s exposure to foreign currency exchange risks is provided inthe “Foreign Currency Exchange Risks” section above.

 

**Item4****. Controls andProcedures**

 

The Companyand 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 VIA and its subsidiaries isrecorded, processed, summarized, evaluated and reported within the time periodsspecified by rules established by the Securities and Exchange Commission. Theselatter processes are known as Disclosure Controls and Procedures. DisclosureControls and Procedures are also designed to ensure that all such informationis communicated to VIA’s management, including our CEO and Interim CFO, in sucha manner as to allow timely decisions to be made regarding requireddisclosures.

 

We haveevaluated, with the oversight of our CEO and Interim CFO, the effectiveness ofour Disclosure Controls and Procedures as of September 30, 2003. In designingand evaluating the Disclosure Controls and Procedures, our managementnecessarily was required to apply its judgment in evaluating the costs andbenefits of possible controls and procedures. In addition, we recognize thatDisclosure Controls and Procedures by their nature can provide only reasonableassurance that our information flow objectives are met. As disclosed inprevious periodic filings during 2001, material weaknesses in the internalcontrol environment were identified. Management implemented a series ofmitigating controls and procedures that fully addressed these materialweaknesses in 2002. These procedures currently include additional and enhancedmanual processes, procedures and controls including expanded analyticalprocedures and increased frequency and breadth of management

 

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inquiries.  As of September 30, 2003 our CEO and InterimCFO have concluded that our Disclosure Controls and Procedures are effective inall material respects.

 

During thethree months ended September 30, 2003, there have been no significant changesin our internal controls that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting. Wecontinue to work to improve our internal controls and Disclosure Controls andProcedures.  Specifically, we arecurrently performing a phased implementation to standardize processes andoutsource back office functions that includes system automation andtechnology-enabled improvements associated with the general ledger accounting,accounts payable, accounts receivable, provisioning and billing administration,credit and collections and customer operations.  This phased implementation should be completed within the firstquarter of 2004.

 

We believethat our current controls and procedures enable us to present our financialresults fairly in all material respects, as required by U.S. generally acceptedaccounting principles.

 

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### **PART II**

 

**Item 1. Legal Proceedings**

 

OnNovember 5, 2001 a class action lawsuit was filed in the District Courtfor the Southern District of New York against VIA NET.WORKS, Inc., certainof the underwriters who supported its initial public offering (“IPO”) andcertain of its officers, under the title O’Leary v. Via Net.works [sic], et al[01-CV-9720] (the “Complaint”). An amended complaint was filed inApril 2002. The Complaint alleges that the prospectus the Company filedwith its registration statement in connection with its IPO was materially falseand misleading because it failed to disclose, among other things, that:(i) the named underwriters had solicited and received excessive andundisclosed commissions from certain investors in exchange for the right topurchase large blocks of VIA IPO shares; and (ii) the named Underwritershad entered into agreements with certain of their customers to allocate VIA IPOshares in exchange for which the customers agreed to purchase additional VIAshares in the aftermarket at pre-determined prices (“Tie-in Arrangements”),thereby artificially inflating the Company’s stock price. The Complaint furtheralleges violations of Sections 11, 12(a)(2) and 15 of the Securities Act of1933 and Section 10(b) of the Securities Exchange Act of 1934 andRule 10b-5 promulgated thereunder arising out of the alleged failure todisclose and the alleged materially misleading disclosures made with respect tothe commissions and the Tie-in Arrangements in the prospectus. The plaintiffsin this action seek monetary damages in an unspecified amount. This Complaintis one of over 300 similar suits filed to date against underwriters, issuersand their officers alleging similar activities, known as “laddering,” all ofwhich are included in a single coordinated proceeding in the Southern Districtof New York, or the IPO Litigation.

 

OnJuly 1, 2002, the underwriter defendants in the consolidated actions movedto dismiss all of the IPO Litigations, including the action involving theCompany. On July 15, 2002 the Company, along with other non-underwriterdefendants in the coordinated cases also moved to dismiss the litigation. OnFebruary 19, 2003, the court ruled on the motions. The Court granted theCompany’s motion to dismiss the claims against it under Rule 10b-5 forlack of the required specificity, yet granted plaintiffs leave to replead theirRule 10b-5 claims. Plaintiffs have informed our counsel of their intent toreplead these claims against the Company. The motions to dismiss the claimsunder Section 11 of the Securities Act were denied as to virtually all ofthe defendants in the consolidated cases, including the Company. The individualdefendants in the IPO Litigation signed a tolling agreement and were dismissedfrom the action without prejudice on October 9, 2002.

 

On June 30,2003, the special litigation committee of the board of directors of the Companyconditionally approved the global settlement between all plaintiffs and issuersin the IPO Litigations, the Company is in the process of completing asettlement with the plaintiffs in the 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 financial impact of the proposed settlement isexpected to be borne by the Company’s insurers.   The special litigation committee agreed to approve thesettlement subject to a number of conditions, including the participation of asubstantial number of other defendants in the proposed settlement, the consentof the Company’s insurers to the settlement, and the completion of acceptablefinal settlement documentation. Furthermore, the settlement is subject to a hearing on fairness andapproval by the Court overseeing the IPO Litigations.  We continue to progress toward settlement and await approval ofsettlement by all parties involved.

 

**Item 2. Changes in Securities and Useof Proceeds**

 

Changes in Securities:None.

 

**Useof Initial Public Offering Proceeds**

 

OnFebruary 16, 2000, VIA completed its initial public offering of shares ofcommon stock, par value $.001 per share. VIA’s initial public offering was madepursuant to a prospectus dated February 11, 2000, which was filed with theSEC as part of a registration statement, file No. 333-91615, that wasdeclared effective by the SEC on February 10, 2000.

 

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The netoffering proceeds to VIA after deducting the expenses and underwritingdiscounts and commissions was approximately $333.0 million. The principalcash outflows from the effective date of the initial public offering throughSeptember 30, 2003 are as follows, VIA has used approximately $87 millionfor acquisitions of other businesses, including the repayment of debt for 1999acquisitions and increases in VIA’s investment in various partially ownedsubsidiaries, approximately $50 million for capital expenditures andapproximately $127 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**

 

OnSeptember 5, 2003, Chief Financial Officer, Fraser Park resigned from VIA.  The Company has appointed an interim ChiefFinancial Officer, Matthew Gough. Matthew Gough joined VIA in September 2002 asthe Company’s Corporate Controller.

 

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

 

**a)      ****Exhibits**

 
| **Exhibits** |   |                                                                                                                                      |
|--------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit 10.1 |   | Master  Services Agreement between Accenture and VIA NET.WORKS Inc. effective as of  July 30, 2003.                                       |
| Exhibit 31.1 |   | Section 302  Certification – Chief Executive Officer                                                                                 |
| Exhibit 31.2 |   | Section 302 Certification – Interim 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)     Reportson Form 8-K**

 

VIA filed three reports onForm 8-K during the three months ended September 30, 2003. On July 18, 2003 VIA filed a Form 8-Kannouncing that it had regained compliance with Nasdaq SmallCap Market listingrequirements.On August 15, 2003, VIA filed a Form 8-K announcing our financialresults for the quarter ended June 30, 2003.On September 5, 2003 VIA filed a Form 8-Kannouncing a change in its management team.

 

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**SIGNATURES**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, VIANET.WORKS, Inc. has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized

 
|                     | VIA  NET.WORKS, INC. |
|--------------------------|----------------------|
|                     |                 |
|                     |                 |
|                     | By:                  | /s/ Rhett S. Williams |
|                     |                 | *Chief Executive Officer (Principal  Executive  Officer)  and Director* |
| Date:  November 10, 2003 |                 |   |
|                     |                 |   |
|                     | By:                  | /s/ Matthew W. Gough |
| Date:  November 10, 2003 |                 | *Interim Chief Financial Officer  (Principal Financial and Accounting Officer)* |

 

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**EXHIBITINDEX**

 
| **Exhibit** |   |                                                                                                                                              |
|-------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1        |   | Master  Services Agreement between Accenture and VIA NET.WORKS Inc. effective as of  July 30, 2003.                                               |
| 31.1        |   | Section 302 Certification – Chief Executive  Officer                                                                                         |
| 31.2        |   | Section 302 Certification – Interim Chief  Financial Officer                                                                                 |
| 32          |   | Written Statement of Chief Executive Officer and Interim Chief  Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 |
| 99.1        |   | Risk Factors                                                                                                                                      |

 

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