**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 
| **ý**                                              | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
|                                                    | ** ** | ** **                                                                                              |
| **FOR THE QUARTERLY PERIOD ENDED MARCH 31,  2005** |
| ** **                                              |
| **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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**VIA NET.WORKS, INC.**

(Exact name of registrant as specified in itscharter)

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

 

**H. Walaardt Sacrestraat 401-403**

**1117 BM Schiphol**

**The Netherlands**

(Address of principal executive offices)

 

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

 

(Former name or former address, if changedsince last report)

 

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Indicate by check mark whether the registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such report) and (2) hasbeen subject to such filing requirements for the past90 days. Yes ý  No o

 

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

 

As of May 20, 2005, there were outstanding 56,053,988 shares ofthe registrant’s common stock and 5,050,000 shares of the registrant’snon-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, 2004 and March 31, 2005              |   |
|                                | Condensed Consolidated Statements of  Operations for the three months ended March 31, 2004 and 2005 |   |
|                                | Condensed Consolidated Statements of Cash  Flows for the three months ended March 31, 2004 and 2005 |   |
|                                | 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                  |                                                                                                     |
| 302 CERTIFICATIONS                  |                                                                                                     |

 

2

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**PART I**

 

**ITEM 1.** FINANCIALSTATEMENTS

** **

**VIA NET.WORKS, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

 
| ** **                                                                                                           | ** ** | **December 31,  2004** | ** ** | **March 31,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| ** **                                                                                                           | ** ** | ** **                  | ** ** | **(Unaudited)**          | ** ** |
| **ASSETS**                                                                                                           |       |                        |       |                     |       |
| Current assets:                                                                                                      |       |                        |       |                     |       |
| Cash and cash equivalents                                                                                            |       | $                           | 15,497     |                     | $          | 7,797 |   |
| Restricted cash                                                                                                      |       | 5,100                       |       | 4,055                    |       |
| Trade and other accounts receivable, net of  allowance of $2,966 and $3,203 respectively                             |       | 13,909                      |       | 11,666                   |       |
| Other current assets                                                                                                 |       | 6,972                       |       | 6,596                    |       |
|                                                                                                                 |       |                        |       |                     |       |
| Total current assets                                                                                                 |       | 41,478                      |       | 30,114                   |       |
| Property and equipment, net                                                                                          |       | 13,065                      |       | 11,146                   |       |
| Goodwill                                                                                                             |       | 42,466                      |       | 40,594                   |       |
| Intangible assets, net                                                                                               |       | 8,695                       |       | 7,038                    |       |
| Other non-current assets                                                                                             |       | 444                         |       | 503                      |       |
| Deferred tax asset                                                                                                   |       | 14,305                      |       | 14,326                   |       |
| Assets of businesses held for sale (Note 2)                                                                          |       | —                      |       | 3,026                    |       |
|                                                                                                                 |       |                        |       |                     |       |
| Total assets                                                                                                         |       | $                           | 120,453    |                     | $          | 106,747 |   |
|                                                                                                                 |       |                        |       |                     |       |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                       |       |                        |       |                     |       |
| Current liabilities:                                                                                                 |       |                        |       |                     |       |
| Accounts payable                                                                                                     |       | $                           | 16,899     |                     | $          | 16,556 |   |
| VAT and other taxes payable                                                                                          |       | 1,083                       |       | 710                      |       |
| Current portion of capital lease  obligations and long-term payables                                                 |       | 9,325                       |       | 8,811                    |       |
| Deferred revenue                                                                                                     |       | 15,591                      |       | 12,965                   |       |
| Accrued expenses                                                                                                     |       | 24,451                      |       | 21,709                   |       |
| Deferred tax liability                                                                                               |       | 13,772                      |       | 14,515                   |       |
| Other current liabilities                                                                                            |       | 3,744                       |       | 3,152                    |       |
|                                                                                                                 |       |                        |       |                     |       |
| Total current liabilities                                                                                            |       | 84,865                      |       | 78,418                   |       |
| Capital lease obligations and long-term  payables, less current portion                                              |       | 344                         |       | 256                      |       |
| Deferred tax liability                                                                                               |       | 2,639                       |       | 1,753                    |       |
| Liabilities of businesses held for sale (Note  2)                                                                    |       | —                      |       | 2,803                    |       |
|                                                                                                                 |       |                        |       |                     |       |
| Total liabilities                                                                                                    |       | 87,848                      |       | 83,230                   |       |
|                                                                                                                 |       |                        |       |                     |       |
| Commitments and contingencies (Note 11)                                                                              |       |                        |       |                     |       |
|                                                                                                                 |       |                        |       |                     |       |
| Stockholders’ equity:                                                                                           |       |                        |       |                     |       |
| Preferred stock, $.001 par value;  10,000,000 shares authorized; no shares issued                                    |       | —                      |       | —                   |       |
| Common stock, $.001 par value; 132,500,000  shares authorized; 62,624,777 and 62,624,777 shares issued, respectively |       | 63                          |       | 63                       |       |
| Additional paid-in capital                                                                                           |       | 557,907                     |       | 557,907                  |       |
| Treasury stock, 1,520,789 shares                                                                                |       | (1,521                      | )          | (1,521                   | )          |
| Accumulated deficit                                                                                                  |       | (488,880                    | )          | (500,296                 | )          |
| Accumulated other comprehensive loss                                                                                 |       | (34,964                     | )          | (32,636                  | )          |
|                                                                                                                 |       |                        |       |                     |       |
| Total stockholders’ equity                                                                                      |       | 32,605                      |       | 23,517                   |       |
|                                                                                                                 |       |                        |       |                     |       |
| Total liabilities and stockholders’ equity                                                                      |       | $                           | 120,453    |                     | $          | 106,747 |   |

 

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

 

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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 March 31,** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                 | ** ** | **2004**                                      | ** ** | **2005** | ** ** |
| Revenue                                                    |       | $                                             | 10,396     |   | $ | 24,089 |   |
|                                                       |       |                                          |       |   |   |
| Operating costs and expenses:                              |       |                                          |       |   |   |
| Internet services                                          |       | 5,346                                         |       | 12,189 |   |
| Selling, general and administrative                        |       | 13,264                                        |       | 19,460 |   |
| Impairment and restructuring charges                       |       | 300                                           |       | 3,453 |   |
| Depreciation and amortization                              |       | 1,838                                         |       | 2,114 |   |
|                                                       |       |                                          |       |   |   |
| Total operating costs and expenses                         |       | 20,748                                        |       | 37,216 |   |
|                                                       |       |                                          |       |   |   |
| Operating loss from continuing operations                  |       | (10,352                                       | )          | (13,127 | ) |
|                                                       |       |                                          |       |   |   |
| Interest income                                            |       | 106                                           |       | 12 |   |
| Interest expense                                           |       | (18                                           | )          | (172 | ) |
| Other income, net                                          |       | 34                                            |       | 404 |   |
| Foreign currency losses, net                               |       | (3,326                                        | )          | (1,702 | ) |
| Loss from continuing operations before  income taxes       |       | (13,556                                       | )          | (14,585 | ) |
| Income tax benefit (expense)                               |       | 7                                             |       | (30 | ) |
|                                                       |       |                                          |       |   |   |
| Net loss from continuing operations                        |       | (13,549                                       | )          | (14,615 | ) |
|                                                       |       |                                          |       |   |   |
| Discontinued operations:                                   |       |                                          |       |   |   |
| Gain (loss) from discontinued operations                   |       | 3,732                                         |       | (24 | ) |
| Gain on disposal of discontinued operations                |       | —                                        |       | 3,223 |   |
|                                                       |       |                                          |       |   |   |
| Net loss                                                   |       | $                                             | (9,817     | ) | $ | (11,416 | ) |
|                                                       |       |                                          |       |   |   |
| Basic and diluted loss per share:                          |       |                                          |       |   |   |
| Continuing operations                                      |       | $                                             | (0.22      | ) | $ | (0.24 | ) |
| Discontinued operations                                    |       | 0.06                                          |       | 0.05 |   |
|                                                       |       |                                          |       |   |   |
| Net loss per share—basic and diluted                  |       | $                                             | (0.16      | ) | $ | (0.19 | ) |
|                                                       |       |                                          |       |   |   |
| Shares used in computing basic and diluted  loss per share |       | 60,708,602                                    |       | 61,103,988 |   |

 

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

 

4

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**VIA NET.WORKS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

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

**(Unaudited)**

 
| ** **                                                                                              | ** ** | **For the three months ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                                              | ** ** | **2004**                                       | ** ** | **2005** | ** ** |
| Cash flows from operating activities:                                                                   |       |                                           |       |   |   |
| Net loss from continuing operations                                                                     |       | $                                              | (13,549    | ) | $ | (11,416 | ) |
| Adjustments to reconcile net loss from  continuing operations to net cash used in operating activities: |       |                                           |       |   |   |
| Depreciation and amortization                                                                           |       | 1,838                                          |       | 2,114 |   |
| Impairment charges                                                                                      |       | —                                         |       | 2,367 |   |
| Provision for doubtful accounts receivable                                                              |       | 337                                            |       | 572 |   |
| Unrealized foreign currency transaction  losses                                                         |       | 2,510                                          |       | 1,674 |   |
| Deferred tax                                                                                            |       | 28                                             |       | 93 |   |
| Stock compensation                                                                                      |       | 80                                             |       | — |   |
| Changes in assets and liabilities, net of  acquisitions:                                                |       |                                           |       |   |   |
| Trade accounts receivable                                                                               |       | (517                                           | )          | (1,943 | ) |
| Other current assets                                                                                    |       | (398                                           | )          | 1,059 |   |
| Other non-current assets                                                                                |       | (2                                             | )          | — |   |
| Accounts payable                                                                                        |       | (967                                           | )          | 814 |   |
| VAT and other taxes payable                                                                             |       | 605                                            |       | (242 | ) |
| Accrued expenses                                                                                        |       | 1,634                                          |       | (1,487 | ) |
| Other current liabilities                                                                               |       | 192                                            |       | 1,139 |   |
| Deferred revenue                                                                                        |       | 444                                            |       | (16 | ) |
| Net cash used in operating activities by  discontinued operations                                       |       | (994                                           | )          | (1,759 | ) |
| Net cash used in operating activities                                                                   |       | (8,759                                         | )          | (7,031 | ) |
| Cash flows from investing activities:                                                                   |       |                                           |       |   |   |
| (Increase) decrease in restricted cash                                                                  |       | (51                                            | )          | 1,045 |   |
| Acquisition of subsidiaries (net of cash  acquired)                                                     |       | (7,735                                         | )          | (1,317 | ) |
| Purchases of property, equipment and other  assets                                                      |       | (1,658                                         | )          | (1,044 | ) |
| Proceeds from disposition of subsidiaries                                                               |       | —                                         |       | 1,344 |   |
| Net cash used in investing activities by  discontinued operations                                       |       | (241                                           | )          | (19 | ) |
| Net cash used in investing activities                                                                   |       | (9,685                                         | )          | 9 |   |
| Cash flows from financing activities:                                                                   |       |                                           |       |   |   |
| Repayment of debt and principal payments on  capital lease obligations                                  |       | (48                                            | )          | (541 | ) |
| Proceeds from issuance of common stock, net                                                             |       | 311                                            |       | — |   |
| Net cash used in financing activities by  discontinued operations                                       |       | (2                                             | )          | — |   |
| Net cash (used in) received from financing  activities                                                  |       | 261                                            |       | (541 | ) |
| Effect of currency exchange rate changes on  cash                                                       |       | (679                                           | )          | (137 | ) |
| Net decrease in cash and cash equivalents                                                               |       | (18,862                                        | )          | (7,700 | ) |
| Cash and cash equivalents, beginning of  period                                                         |       | 65,803                                         |       | 15,497 |   |
| Cash and cash equivalents, end of period                                                                |       | $                                              | 46,941     |   | $ | 7,797 |   |

 

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

 

5

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**VIA NET.WORKS, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**(Unaudited)**

 

**1.****             Basisof Presentation**

 

These condensedconsolidated financial statements as of March 31, 2005 and for the threemonth periods ended March 31, 2004 and 2005 and the related footnoteinformation are unaudited and have been prepared on a basis substantiallyconsistent with the audited consolidated financial statements of VIA NET.WORKS, Inc.(“VIA” or “the Company”) as of and for the year ended December 31, 2004,included in VIA’s Annual Report on Form 10-K as filed with the Securitiesand Exchange Commission (“2004 Annual Report”). These condensed consolidatedfinancial statements should be read in conjunction with the auditedconsolidated financial statements and the related notes to the financialstatements included in the 2004 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 March 31, 2005 and the results of its operations and its cash flowsfor the three month periods ended March 31, 2004 and 2005. The results ofoperations for the three-month period ended March 31, 2005 may not beindicative of the results expected for any succeeding quarter or for the yearending December 31, 2005. Certain prior period amounts have beenreclassified to conform to the current period presentation. Reclassificationshave been made to prior period amounts to account for discontinued operations.

 

The preparation of financial statements in conformity with generallyaccepted accounting principles requires VIA to make estimates and assumptionsthat affect 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.

 

**Going concern:**

** **

For the three months ended March 31, 2005, the Company had netlosses from continuing operations of $14.6 million and net decrease ofcash and cash equivalents for the period of $7.7 million.

 

As of March 31, 2005, the Company had $7.8 million in cashand cash equivalents and $4.1 million in restricted cash. 

 

On March 17, 2005, theCompany announced that a combination of factors including unanticipated revenueshortfalls in certain of its legacy VIA companies and its new VIA Expressbusiness would leave the Company with insufficient cash reserves to continuethe operations of the group parent, VIA NET.WORKS, Inc., in early April 2005,and that it was working with its professional advisors to obtain new financingto address the issue. With the support of its advisors, the Company pursued twoparallel processes to maximize its strategic alternatives and optimize thevalue that is inherent in the VIA businesses. In the first of the processes, the Company engaged in discussions with anumber of parties with a view to selling all or parts of its businesses. In thesecond of the two processes, the Company sought potential investors to providefunds sufficient to enable the Company to continue as a going concern.  

 

OnApril 1, 2005, the Company announced the sale of two of its Swisscompanies — VIA NET.WORKS (Schweiz) AG and VIA NET.WORKS Services AG — toformer managers and owners of the business, for a purchase price of CHF 3.5million ($3.1 million). The net proceeds of the sale provided VIA withadditional liquidity to continue its discussions for refinancing and saletransactions.

 

On April 30,2005, VIA NET.WORKS, Inc. entered into a sale and purchase agreement, orSale Agreement, with Claranet Group Limited (Claranet), a privately-heldEuropean Internet services provider based in the United Kingdom, to sell all ofthe Company’s remaining business operations in Europe and the United States(the Asset Sale).  The agreement followedon the letter of intent entered into between Claranet and VIA on April 10,2005. The following discussion is a summary of the material provisions of theSale Agreement. This summary is qualified in its entirety by reference to theSale Agreement, a copy of which is attached as Exhibit 99.1 to the CurrentReport on Form 8-K filed by VIA on May 3, 2005 with the Securitiesand Exchange Commission reporting the execution of the sale and purchaseagreement. 

 

The material provisions of the Sale Agreement are as follows:

 

Assets to be Sold Pursuant to the Sale Agreement

 

•      VIA would sellto Claranet all of its business operations in Europe and the U.S, whichincludes all of our subsidiary companies other than VIA NET.WORKS NY Corp, VIANET.WORKS Holdco, Inc., Surftrade U.S.A. Inc. and our parent company, VIANET.WORKS, Inc. The assets to be sold to Claranet consist of substantiallyall of the Company’s assets, properties and rights. Claranet would acquirecertain assets and liabilities pertaining to the Company’s centralized backoffice

 

6

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financial andtechnical support systems that are owned by the Company’s group parent company,VIA NET.WORKS, Inc. The Company would transfer employment contracts ofcertain headquarters personnel who are responsible for supporting the backoffice and technical support systems to appropriate VIA operating companies orClaranet will offer employment to such persons.

 

Treatment of Liabilities

 

•      Claranet would assumecertain liabilities of our parent company, VIA NET.WORKS, Inc., includingliabilities and obligations relating to the business operations being sold andemployee contracts of certain headquarters personnel. Claranet would not assumeother liabilities, such as severance costs for other employees at the corporateheadquarters, lease payments, outstanding liabilities from previousacquisitions, vendor bills relating to costs of being a public company andongoing operating costs associated with winding down the corporateheadquarters.

 

•      VIA wouldretain all other debts and liabilities of VIA’s parent company, including butnot limited to expenses relating to the headquarters office lease inSchiphol-Oost, VIA senior executives and all other headquarters staff,corporate vendors and professional advisors, and remaining payment obligationsto sellers of the PSINet Europe group and the Amen group.

 

Purchase Price

 

•      Under theagreement, Claranet would pay VIA $26.4 million, less certain adjustments. Inparticular, the purchase price will be reduced by the amounts advanced to theCompany by the Purchaser under the Euro 5.4 million ($7.0 million) workingcapital facility established by Claranet when the Sale Agreement was signed. Underthis agreement VIA is obliged to monitor the level of working capital duringthe period between signing and the closing of the transaction as describedbelow under “Termination of the Sale Agreement”. A schedule for advancesunder the facility is described below. The purchase price will also be adjustedfor any funds withdrawn from or payments made by the subsidiaries being sold byor to our parent company or any other subsidiaries not being sold.

 

•      Concurrent withthe execution of the April 10, 2005 letter of intent, Claranet delivered adeposit of $3,000,000 to VIA in order to secure the rights to negotiateexclusively with the Company until April 30, 2005. The deposit waspartially funded by the release of £1.0 million ($1.9 million) from the escrowestablished by Claranet in favor of VIA in connection with the purchase in September 2004by Claranet of the Company’s legacy operations in the United Kingdom. Thedeposit will be forfeited by Claranet if the transaction does not close otherthan for VIA’s default or certain other conditions. Otherwise, the portion ofthe deposit in excess of the £1.0 million ($1.9 million) will be credited tothe purchase price at closing.

 

Survivalof Warranties and Other Claims; Limitations on Liability

 

•     TheCompany has made certain customary warranties in the Sale Agreement thatgenerally survive for three months following closing, with certain exceptionsfor matters relating to tax and title to properties. VIA would not be liablefor any breaches of warranties until the aggregate amount of all claims exceeds$1,000,000, and the Company’s maximum liability for all breaches would belimited to 33% of the purchase price (approximately $8.8 million).

 

Closing

 

•      The Asset Saleis conditioned upon the approval by the Company’s shareholders. In addition,the agreement contains customary pre-closing conditions relating to, amongother things, accuracy of warranties and the Company’s compliance with theprovisions of the Sale Agreement, including the conduct of the business pendingthe closing.  

 

•      If the AssetSale is approved and adopted by VIA’s shareholders, the closing will take placeshortly after the shareholder meeting. On May 9, 2005, the Company filed its preliminary proxy statementwith the Securities and Exchange Commission, or SEC.  On May 18, 2005, the SEC staff informed theCompany that it was preparing comments on the preliminary proxy statement.  Although the Company has not yet receivedformal written comments, based on conversations between the Company’s managementand SEC staff regarding the comments, the Company believes it will be in aposition to file its definitive proxy statement before the end of May2005.  In such case, the Companyanticipates that the closing would occur during the first week of July,2005.  Otherwise, the Company anticipatesthat the closing will take place during the first week of August, 2005.

 

Competing Offers

 

•      The SaleAgreement prohibits the Company from approaching or negotiating with any otherpotential purchaser, provided that the Company’s board may negotiate with athird party regarding an alternative offer if refusing to do so would, in thereasonable determination of our board upon advice of counsel, be reasonablylikely to constitute a breach of fiduciary duties to the Company’sshareholders.

 

Termination of the Sale Agreement

 

•      Claranet isentitled, prior to the closing, to terminate the Sale Agreement in the event of

 

7

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•      claimsagainst VIA or one of the companies being purchased in excess of $50,000, whichhad not been disclosed on or before April 7, 2005, and which exceed$1,000,000 in the aggregate

•      anyincrease in cash outflow of the companies being purchased as a whole, measuredover the period from May 1, 2005 to the end of the most recently completedcalendar month, as compared to the amounts in VIA’s working capital projectionsfor such period of more than $1,250,000 

•      lossor cancellation of customers contracts with annualized value in excess of$50,000 in an amount exceeding $1,800,000, net of new customer contract gains

•      bankruptcyof the parent company or any member of the VIA Group

•      breachof an undertaking in the Sales Agreement or warranty where the losses toClaranet are likely to exceed $1,000,000; or a 

•      materialbreach of the working capital facility agreement

 

Effect of Termination

** **

•      In the eventClaranet terminates the Sale Agreement in connection with any of the itemslisted above or if the Company terminates the Sale Agreement because it acceptsa competing offer, the Company must (a) reimburse the $3.0 million depositto Claranet together with accrued interest on the deposit at a rate of 8% perannum, (b) pay a break fee of $500,000, (c) reimburse the costs andexpenses incurred by Claranet in connection with the transaction up to$250,000, (d) pay back the amounts drawn against the financing facility,and (e) pay a $400,000 finance arrangement fee.

 

Terms of Financing Agreement

 

•      Concurrentlywith entering into the Sale Agreement, the Company entered into a FacilityAgreement with Claranet under which it is permitted to borrow up to Euro 5.4million ($7.0 million) for working capital requirements. The facility is statedin Euro funds and will be made available according to the following schedule,stated in USD equivalent on the basis of a Euro to USD exchange rate of $1.303per Euro:

 
| **Date**                                                | ** ** | **Amount of aggregate funds available,  including prior borrowings:** | ** ** |
|---------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| June 10, 2005 to June 23, 2005  (inclusive):  |       | $                                                                                                   | 1,200,000  |   |
| June 24, 2005 to July 9, 2005  (inclusive):   |       | 2,500,000                                                                                           |       |
| July 10, 2005 to July 23, 2005  (inclusive):  |       | 4,200,000                                                                                           |       |
| July 24, 2005 to August 9, 2005  (inclusive): |       | 5,700,000                                                                                           |       |
| August 10, 2005 to termination  (inclusive):       |       | 7,000,000                                                                                           |       |
|                                                         |            |                                                                                                     |            |  |

 

•      The amount offunds made available to us and for which we will have to repay Claranet upon aclosing may materially differ depending on the currency exchange rate movementsprior to the closing.

 

•      As permittedunder the Facility Agreement, the Company has delivered a request to Claranetto accelerate the first draw to June 1, 2005.  Funds advanced under this facility aresecured by our pledge of all of our ownership interest in certain of our Dutch,French, Belgian and German subsidiaries. Funds advanced bear interest at a rateof 8% per annum, compounded daily. All amounts outstanding under the facilitywill be deducted from the purchase price payable by Claranet at the closing.

 

•      If the closinghas not occurred by the earlier of September 9, 2005 or the date the SaleAgreement is terminated in accordance with its terms, the Company will berequired to pay Claranet an arrangement fee of $400,000. Following atermination of the Sale Agreement, Claranet may immediately cancel the facilityand all amounts there under come due upon 20 or 40 days notice to VIA,depending on the circumstances of the termination.

 

In the proxy statement the Company intends to deliver to its shareholders, the Company will request approval of, among other things, the Asset Sale and a plan of complete dissolution and liquidation of the Company.  If the Company receives approval from its shareholders, the Company will seek to close the transaction shortly after the shareholder’s meeting and use the net proceeds to pay off the remaining liabilities of the Company and shut down its corporate headquarters and terminate the remaining employees.  Remaining funds will then be distributed to the Company’s shareholders in accordance with Delaware law. An estimate of the net remaining funds available for distribution to the Company’s shareholders if the Asset Sale is closed will be included within the proxy statement to be distributed to the Company’s shareholders in connection with the proposed shareholder meeting.  The closing of the Asset Sale is subject to a number of conditions, which might not be satisfied.  

 

The Sale Agreement is conditioned on receiving the approval of theCompany’s shareholders. If , for whatever reason, the Company’s shareholderswere to reject the transaction, there can be no assurance that VIA will be ableto find alternative solution to its liquidity issue and in that event, wouldhave insufficient funds to continue to operate the Company as a going concern.

 

8

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**2.****             DiscontinuedOperations**

 

As each of the United Kingdom, Brazilian, Portuguese, Cayman Islandsand Swiss operations represented a component of an entity as defined by Statementof Financial Accounting Standards No. 144 (“SFAS 144”).  *“Accounting for theImpairment or Disposal of Long-Lived Assets”*, the Company hasclassified each operation as a discontinued operation for all periodspresented.

 

2004

 

VIA NET.WORKS UK Ltd.

 

On September 28, 2004, the Company sold 100% of the shares of VIANET.WORKS UK Limited, which was part of the Solutions segment, to ClaranetLimited, a UK-based Internet service provider. VIA NET.WORKS UK Limitedresults would have been reported in our Solutions segment. Claranet agreed to pay total considerationfor the shares of VIA NET.WORKS UK Limited in the aggregate amount of GBP 7.3million ($13.1 million), subject to certain working capital and otheradjustments. The Company received GBP 5.3 million ($9.4 million) in cash oncompletion. The GBP 2.0 million ($3.8 million) balance was payable, subject tothe working capital and other adjustments, as follows: GBP 1.0 million ($1.9million) in cash six months after completion and GBP 1.0 million ($1.9 million)in cash one year after completion. 

 

OnMarch 21, 2005, the Company resolved all contingencies surrounding thefirst escrow payment, and received a payment from Claranet of GBP 0.7 million($1.3 million) plus accrued interest. The GBP 0.7 million ($1.3 million)consideration has been recognized as gain on disposal from discontinuedoperations in the three months ended March 31, 2005. 

 

Theremaining consideration of GBP 1.0 million ($1.9 million) was scheduled to bereleased from escrow, subject to warranty claims of Claranet against theCompany, at the end of September 2005. On April 10, 2005, the Companyand Claranet entered into a letter of intent for purchase of the remainingbusiness operations. Upon execution of the letter of intent, Claranet delivereda deposit of $3.0 million for the rights to negotiate on an exclusive basisdefinitive agreements toward the sale of the Company’s businessoperations.  The deposit was partiallypaid by the release of the remaining GBP 1.0 million ($1.9 million) inescrow.  As all material contingenciessurrounding the second escrow payment were resolved as at March 31, 2005,the GBP 1.0 million ($1.9 million) consideration has also been recognized asgain on disposal from discontinued operations in the three months ended March 31,2005.

 

Revenues related to VIA NET.WORKS UK Limited were approximately $5.6million for the three months ended March 31, 2004 and nil million for thethree months ended March 31, 2005. The gain, excluding accounting for thesale transaction, related to VIA NET.WORKS UK Limited was approximately $3.8million for the three months ended March 31, 2004 and nil million for thethree months ended March 31, 2005.

 

SURF COMPANIES

 

During the year ended December 31, 2004, Surftrade Ltda.,  Surftrade Portugal and VIA NET.WORKS HoldingsCayman were liquidated.  The results ofthe liquidated companies, which have been recorded during the three monthsended March 31, 2004 are nil for Surftrade Ltda., Surftrade Portugal andVIA NET.WORKS Holdings Cayman. Surftrade Ltda., Surftrade Portugal andVIA NET.WORKS Holdings Cayman results would have been reported inCorporate entity.

 

2005

 

VIANET.WORKS SWITZERLAND

 

OnApril 1, 2005, the Company announced the sale of two of its Swisscompanies — VIA NET.WORKS (Schweiz) AG and VIA NET.WORKS Services AG — toformer managers and owners of the business, for a purchase price of CHF 3.5million ($3.1 million). VIA NET.WORKS (Schweiz) AG and VIA NET.WORKS ServicesAG results would have been reported in our Solutions segment. TheCompany sold the Swiss operations due to working capital shortfalls. The netproceeds of the sale provided VIA with additional liquidity to continue itsoperations, while the Company continued discussions for refinancing and saletransactions.

 

As of March 31, 2005 assets and liabilities held for saleconsisted of:

 
| **In thousands of U.S. dollars** |   |   |   |
|----------------------------------|--------|--------|--------|
| Current assets                   |   | 2,214  |   |
| Property, plant and  equipment   |   | 324    |   |
| Intangible assets                |   | 488    |   |
| Goodwill (Solutions  segment)    |   | — |   |
| Total assets                     |   | 3,026  |   |
|                             |   |   |   |
| Accounts payable                 |   | 608    |   |
| Deferred revenue                 |   | 1,557  |   |
| Other current liabilities        |   | 638    |   |
| Total liabilities                |   |   | 2,803  |   |
|                                  |        |        |        |  |

 

9

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Revenues related to VIA NET.WORKS (Schweiz) AG and VIA NET.WORKSServices AG were approximately $2.3 million for the three months ended March 31,2004 and $2.2 million for the three months ended March 31, 2005. The lossexcluding accounting for the sale transaction, related to VIA NET.WORKS (Schweiz) AG and VIA NET.WORKSServices AG was approximately $0.1 million for the three months ended March 31,2004 and $24,000 for the three months ended March 31, 2005.

 

The balance sheet for the three months ended March 31, 2005 hasbeen reclassified to show the assets and liabilities for VIA NET.WORKS(Schweiz) AG and VIA NET.WORKS Services AG separately as businesses heldfor sale. Foreign currency translation adjustments of $1.0 million will bereclassified into the statement of operations upon disposal in the three monthsending June 30, 2005. The comparative balance sheet as at December 31,2004 has not been reclassified to show separately amounts related todiscontinued operations.

 

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

 

*Impairment charges:*

 
| ** **                         | ** ** | **Three months ended  March 31,** | ** ** |
|------------------------------------|------------|----------------------------------------|------------|
| **In thousands of U.S. dollars**   | ** ** | **2004**                               | ** ** | **2005** | ** ** |
| Fixed assets and intangible assets |       | $                                      | —     |   | $ | 1,850 |   |
| Goodwill                           |       | —                                 |       | 517 |   |
|                               |       |                                   |       |   |   |
| Total impairment charges           |       | $                                      | —     |   | $ | 2,367 |   |

 

2004

 

There were noimpairment charges for the three months ended March 31, 2004.

 

2005

 

AtMarch 31, 2005, upon completion of an impairment analysis, in accordancewith SFAS 144, the Company recorded an intangible fixed asset impairment chargeof $0.8 million and a tangible fixed asset impairment charge of $1.1million,mainly related to the Solutions and Amen segments. For definitions of thesegments, please refer to Note 11 segment reporting. The fair value ofthe assets groups, calculated as of March 31, 2005 was based on a discountedcash flow model with appropriate market and business risk factored in for theperiod up until the first week of July, 2005, the estimated date of completionof the Claranet Sale, the estimated sale proceeds of $26.4 million as agreed inthe sale and purchase agreement with Claranet and the projected working capitalposition at June 30, 2005.

 

The triggering event for the impairment was a combination of factorsincluding unanticipated revenue shortfalls in certain of our legacy VIAcompanies and our new Express business in the quarter ended December 31,2004, during which the Company recorded an intangible fixed asset impairmentcharge of $0.1 million and a tangible fixed asset impairment charge of $1.8million, and the quarter ended March 31, 2005, which left the Company withinsufficient cash reserves to continue the operations, and resulted in thesigning of the sale and purchase agreement on April 30, 2005 to sell thebusinesses of VIA NET.WORKS to Claranet. Additionally, the sale and purchaseagreement calls for estimated sale proceeds of $26.4 million, as opposed to$27.0 million utilized in the Company’s calculation as of December 31,2004, based on the letter of intent dated April 10, 2005.

 

Based on the impairment of tangible and intangible fixed assets, at March 31,2005, the Company determined a triggering event had occurred which required theCompany to perform an impairment test on the carrying value of goodwill inaccordance with SFAS 142. As a result, the Company recorded an impairment of$0.5million to the goodwill related to its Amen segment.

 

The fair value of the reporting units calculated as of March 31,2005 was based on a discounted cash flow model with appropriate market andbusiness risk factored in for the period until the first week of July, 2005,the estimated date of completion of the transaction with Claranet, in additionto the estimated sale proceeds of $26.4 million as agreed in the sale andpurchase agreement with Claranet and the projected working capital position at June 30,2005.  Upon completion of the Asset Sale,the Company expects to record a loss in the statement of operations for thethree months ending September 30, 2005 relating to amounts previously recordedin accumulated other comprehensive loss. As of March 31, 2005, the Company has$31.6 million of cumulative translation losses recorded in respect of thesebusinesses.

 

As a part of the process of creating the discounted cash flow model,the Company’s management was required to make estimates and assumptions regardingfuture revenues, costs and cash flows. In addition, the use of a discountedcash flow model requires

 

10

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management to make estimates and assumptions about the discount factor,timing of cash flows, terminal values and future growth rates. The assumptionsmade in calculating the impairment charges represent management’s bestestimates based on currently available information. Changes to any of theseassumptions can have a material impact on the discounted cash flows and theoutcome of the impairment review.

 

Management hasbased their assessment of fair value on the estimated sale proceeds of thebusiness of $26.4 million and the projected working capital position at June 30,2005. The closing of the sale is subject to a number of conditions, including shareholderapproval and the non-occurrence of a material adverse change in the businesses;and the estimated date of closing is based on an assumption that the review ofthe preliminary proxy statement by the Securities and Exchange Commission willnot cause any material delays in the distribution of the definitive proxystatement to the Company’s shareholder. Also, the estimated final salesconsideration is based in part on the amount of working capital that will be usedby VIA during the period prior to closing, and the actual working capital usedmay differ significantly from what was forecasted. If one or more of theserisks materialize, the actual impairment may materially differ from the currentcalculation.

*Restructuring charges:*

 
| **In  thousands of U.S. dollars**  | ** ** | **Balance at  December 31,  2003** | ** ** | **Additions** | ** ** | **Cash  utilized** | ** ** | **Foreign  exchange** | ** ** | **Balance at  March 31,  2004** | ** ** |
|------------------------------------|------------|-----------------------------------------|------------|---------------|------------|--------------------|------------|-----------------------|------------|--------------------------------------|------------|
|                               |       |                                    |       |          |       |               |       |                  |       |                                 |       |
| Employee termination payments      |       | 243                                     |       | 151           |       | (200               | )          | 1                     |       | 195                                  |       |
| Future operating lease obligations |       | 276                                     |       | —        |       | (65                | )          | —                |       | 211                                  |       |
| Other                              |       | 121                                     |       | 149           |       | (114               | )          | —                |       | 156                                  |       |
|                               |       |                                    |       |          |       |               |       |                  |       |                                 |       |
| Total restructuring charges        |       | $                                       | 640        |          | $          | 300                |       | $                     | (379       | )                                    | $          | 1 |   | $ | 562 |   |
|                                    |            |                                         |            |               |            |                    |            |                       |            |                                      |            |  |  |  |  |  |

 

 
| **In  thousands of U.S. dollars**  | ** ** | **Balance at  December 31,  2004** | ** ** | **Additions/  Releases** | ** ** | **Cash  utilized** | ** ** | **Foreign  exchange** | ** ** | **Balance at  March 31,  2005** | ** ** |
|------------------------------------|------------|-----------------------------------------|------------|--------------------------|------------|--------------------|------------|-----------------------|------------|--------------------------------------|------------|
|                               |       |                                    |       |                     |       |               |       |                  |       |                                 |       |
| Employee termination payments      |       | 348                                     |       | 190                      |       | (323               | )          | (16                   | )          | 199                                  |       |
| Future operating lease obligations |       | 164                                     |       | 720                      |       | (70                | )          | (16                   | )     | 798                                  |       |
| Other                              |       | 484                                     |       | 176                      |       | (174               | )          | (16                   | )     | 470                                  |       |
|                               |       |                                    |       |                     |       |               |       |                  |       |                                 |       |
| Total restructuring charges        |       | $                                       | 996        |                     | $          | 1,086              |       | $                     | (567       | )                                    | $          | (48 | ) | $ | 1,467 |   |
|                                    |            |                                         |            |                          |            |                    |            |                       |            |                                      |            |  |  |  |  |  |

 

2004

 

TheCompany recorded restructuring charges of $0.3 million during the three monthsended March 31, 2004 related to severance payments at the corporateheadquarters and transition implementation costs for back-office andadministrative outsourcing initiatives. Cash payments for severance andbenefits of $0.2 million were made in the first quarter of 2004 by the Europeanoperations ($0.1 million) and Corporate ($0.1 million). The employeetermination costs of $0.2 million for the three months ended March 31,2004 relate to five employees in finance at the corporate headquarters. Theresulting accrual of $0.2 million at March 31, 2004 relates to fiveemployees in finance at the corporate headquarters.

 

The accrual for future operating lease obligations, relating mainly tothe Reston office, has been drawn down by the monthly payments on the officelease, which continued through to February 2005, less the income from asublease of the space.

 

2005

 

During the threemonths ended March 31, 2005, the Company recorded restructuring charges of$1.1million. The restructuring charge for the three months ended March 31,2005 related to severance payments at the corporate headquarters and at theNetherlands operation, costs for future operating lease obligations at ourNetherlands operation and transition implementation costs for back-office integrationinitiatives.

 

The employee terminationcosts of $0.2 million for the three months ended March 31, 2005 relate to oneemployee at the corporate headquarters and one employee at our Netherlands operation.Cash payments for severance and benefits of $0.3 million were made in the threemonths ended March 31, 2005 by our European operations. The remainingaccrual of $0.2 million at March 31,

 

11

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2005relates to one employee at the German operation and one employee at thecorporate headquarters. It is not anticipated that any of theseterminations will adversely impact the Company’s ability to generate revenue.

 

The accrual for futureoperating lease obligations, relate to the Reston office and future leaseobligations in the German and Netherlands operations. The expenses for futureoperating lease obligations of $0.7 million for the three months ended March 31,2005 relate to an addition in future operating lease obligations in theNetherlands operation. The accrual for the future operating lease obligationsof the Reston office and the German operation have been drawn down by themonthly payments on the office lease. $40,000 of the accrual for the futureoperating lease obligations has been released to the statement of operationsfor the three months ended March 31, 2005 after the Reston operating leaseobligation was terminated in February 2005.

 

Other chargesincurred in the three months ended March 31, 2005, relate to theimplementation costs for back-office integration initiatives. Theremaining accrual of $0.5 million at March 31, 2005 relates to $0.2million implementation costs for back-office integration initiatives, $0.2million for the termination of a reseller agreement in the French operation and$0.1 million for costs associated with integrating the PSINet Europe operationsand related system migration costs. 

 

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

 

The provision for taxesbased on income for the three months ended March 31, 2004 and 2005 wascomputed in accordance with Interpretation No. 18 of Accounting PrinciplesBoard Opinion No. 28 on reporting taxes for interim periods and was basedon management’s expectation of an effective income tax rate of 0% for the yearending December 31, 2005.

 

**5.****             ComprehensiveLoss**

 

Comprehensive loss for the three months ended March 31, 2004 and2005 was as follows:

 

| ** **                                     | ** ** | **Three months ended  March 31,** | ** ** |
|------------------------------------------------|------------|----------------------------------------|------------|
| **In  thousands of U.S. dollars**              | ** ** | **2004**                               | ** ** | **2005** | ** ** |
| Net loss                                       |       | $                                      | (9,817     | ) | $ | (11,416 | ) |
| Foreign currency translation adjustment  gains |       | 1,926                                  |       | 2,328 |   |
|                                           |       |                                   |       |   |   |
| Comprehensive loss                             |       | $                                      | (7,891     | ) | $ | (9,088 | ) |

 

**6.****             Propertyand Equipment, net**

 

Property and equipment consisted of the following:

 
| **In  thousands of U.S. dollars** | ** ** | **December 31, 2004** | ** ** | **March 31, 2005** | ** ** |
|-----------------------------------|------------|----------------------------|------------|-------------------------|------------|
| Hardware and other equipment      |       | $                          | 19,586     |                    | $          | 17,061 |   |
| Network and data center assets    |       | 8,330                      |       | 9,088                   |       |
| Software                          |       | 17,237                     |       | 17,109                  |       |
| Furniture and fixtures            |       | 1,186                      |       | 916                     |       |
|                              |       |                       |       |                    |       |
|                              |       | 46,339                     |       | 44,174                  |       |
| Accumulated depreciation          |       | (33,274                    | )          | (33,028                 | )          |
|                              |       |                       |       |                    |       |
| Property and equipment, net       |       | $                          | 13,065     |                    | $          | 11,146 |   |

 

Depreciation expense was $1.6 million and $2.0 million forthe three months ended March 31, 2004 and 2005, respectively. The Companyrecorded an asset impairment charge of $1.8 million and $1.1 million for theyear ended December 31, 2004 and the three months ended March 31,2005, respectively. The table above shows the balances net after the effect ofthe impairment charges. The fixed asset impairment charge related to Hardwareand other equipment. (See Note 3 for further information.)

 

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**7.****             Goodwill**

 

The changes in the carrying amount of goodwill during the three monthsended March 31, 2005, are as follows:

 
| **In thousands of U.S. dollars**                     | ** ** | **Total** | ** ** | **Solutions** | ** ** | **Amen** | ** ** | **Express** | ** ** |
|------------------------------------------------------|------------|-----------|------------|---------------|------------|----------|------------|-------------|------------|
| Balance as of December 31, 2004                 |       | $         | 42,466     |          | $          | 30,830   |       | $           | 10,490     |   | $ | 1,146 |   |
| Impairment charges related to continuing  operations |       | (517      | )          | —        |       | (517     | )          | —      |       |
| Foreign exchange adjustment                          |       | (1,355    | )          | (1,607        | )          | 252      |       | —      |       |
|                                                 |       |      |       |          |       |     |       |        |       |
| Balance as of March 31, 2005                    |       | $         | 40,594     |          | $          | 29,223   |       | $           | 10,225     |   | $ | 1,146 |   |

 

Impairments are discussed in greater detail within Note 3 of theseconsolidated financial statements. 

 

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**8.****             Intangible Assets, net**

 

Intangible assets consisted of the following:

 
| **In  thousands of U.S. dollars** | ** ** | **December 31, 2004** | ** ** | **March 31, 2005** | ** ** |
|-----------------------------------|------------|----------------------------|------------|-------------------------|------------|
| Customer lists                    |       | $                          | 6,580      |                    | $          | 6,229 |   |
| Software                          |       | 2,183                      |       | 2,067                   |       |
| Tradename                         |       | 1,062                      |       | 1,004                   |       |
| Accumulated amortization          |       | (1,130                     | )          | (2,262                  | )          |
|                              |       |                       |       |                    |       |
| Intangible assets , net           |       | $                          | 8,695      |                    | $          | 7,038 |   |

 

The amortization expense for thethree-month periods ended March 31, 2004 and 2005 was $0.2 and $0.1million, respectively.  The Companyamortizes customer lists, software and trade names over three to seven years,five years and ten years respectively. The Company recorded an asset impairmentcharge of $0.1 million and $0.8 million for the year ended December 31,2004 and the three months ended March 31, 2005, respectively. The tableabove shows the balances net after the effect of the impairment charges. (SeeNote 3 for further information.)

 

**9.****             Stock-Based Compensation**

 

SFAS No. 123, “*Accounting forStock-Based Compensation*,” encourages, but does not requirecompanies to record compensation cost for stock-based employee compensationplans at fair value. The Company has chosen to account for stock-basedcompensation using the intrinsic value method prescribed in AccountingPrinciples Board Opinion (“APB”) No. 25, “*Accountingfor Stock Issued to Employees*,” and related Interpretations.Accordingly, compensation cost for stock options is measured as the excess, ifany, of the estimated fair value of the Company’s stock at the date of thegrant over the amount an employee must pay to acquire the stock.

 

The Company has adopted the “disclosure only” alternative described inSFAS No. 123, which requires pro forma disclosures of net income andearnings per share as if the fair value method of accounting has been applied.The following table illustrates the effect on net income and earnings per shareas if the Company had applied the fair value recognition provisions of SFAS No. 123to stock-based employee compensation:

 

| ** **                                                                                                                     | ** ** | **For the three months ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| **In  thousands of U.S. dollars**                                                                                              | ** ** | **2004**                                       | ** ** | **2005** | ** ** |
|                                                                                                                           |       |                                           |       |   |   |
| Net loss (as reported)                                                                                                         |       | $                                              | (9,817     | ) | $ | (11,416 | ) |
| Add back: Total stock-based employee  compensation expense determined under intrinsic value method                             |       | 80                                             |       | — |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method, net of related  tax effects |       | (609                                           | )          | (317 | ) |
| Pro Forma  net loss                                                                                                            |       | $                                              | (10,346    | ) | $ | (11,733 | ) |
|                                                                                                                           |       |                                           |       |   |   |
| Net loss per share, basic and diluted (as  reported)                                                                           |       | $                                              | (0.16      | ) | $ | (0.19 | ) |
| Net loss per share, basic and diluted (Pro  Forma)                                                                             |       | $                                              | (0.17      | ) | $ | (0.19 | ) |

 

During the three months ended March 31, 2004, a total of 37,500shares of the Company’s common stock were issued to two directors pursuant tothe Company’s director compensation program. The market value of the stock asissued on the date of grant was $2.13 per share. This cost to the Company hasbeen expensed in the condensed consolidated statement of operations for thethree months ended March 31, 2004.

 

**10.****          Contingencies**

 

*Legal Proceedings*

 

OnNovember 5, 2001, the Company was named as a defendant in a class actionlawsuit in the District Court for the Southern District of New York against VIANET.WORKS, Inc., certain of the underwriters who supported our initialpublic offering (“IPO”) and certain of our officers, under the title O’Leary v.Via Net.works [sic] et al [01-CV-9720] (the “Complaint”). An amended complaintwas filed in April 2002. The Complaint alleges that the prospectus wefiled with our registration statement in connection with our IPO was materiallyfalse and misleading because it failed to disclose, among other things, that: (i) thenamed underwriters had solicited and received excessive and undisclosedcommissions from certain investors in exchange for the right to purchase largeblocks of VIA IPO shares; and (ii) the named Underwriters had entered intoagreements with certain of their customers to allocate VIA IPO shares inexchange for which the customers agreed to purchase additional VIA shares inthe aftermarket at pre-determined prices (“Tie-in Arrangements”), therebyartificially inflating the Company’s stock price. The Complaint further allegesviolations of

 

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Sections11, 12 (a)(2) and 15 of the Securities Act of 1933 and Section 10(b) ofthe Securities Exchange Act of 1934 and Rule 10b-5 promulgated there underarising out of the alleged failure to disclose and the alleged materiallymisleading disclosures made with respect to the commissions and the Tie-in Arrangementsin the prospectus. The plaintiffs in this action seek monetary damages in anunspecified amount. Approximately 300 other issuers and their underwriters havehad similar suits filed against them, all of which are included in a singlecoordinated proceeding in the Southern District of New York (the “IPOLitigation”). On June 30, 2003, the special litigation committee of theboard of directors of the Company conditionally approved the global settlementbetween all plaintiffs and issuers in the IPO Litigations.  The speciallitigation committee agreed to approve the settlement subject to a number ofconditions, including the participation of a substantial number of otherdefendants in the proposed settlement, the consent of the Company’s insurers tothe settlement, and the completion of acceptable final settlementdocumentation.  The settlement would provide, among other things, arelease of the Company and of the individual defendants for the conduct allegedin the action to be wrongful by the plaintiffs.  Under the proposedsettlement, the Company would agree to undertake other responsibilities underthe partial settlement, including agreeing to assign away, not assert, orrelease certain potential claims the Company may have against its underwriters. In June 2004, a motion for preliminary approval of the settlement wasfiled with the Court. The underwriters filed a memorandum with the Courtopposing preliminary approval of the settlement.  The court granted thepreliminary approval on February 15, 2005, subject to certainmodifications.  If the parties are able to agree upon the requiredmodifications, and such modifications are acceptable to the court, notice willbe given to all class members of the settlement, a “fairness” hearing will beheld and if the Court determines that the settlement is fair to the classmembers, the settlement will be approved.  Any direct financial impact ofthe proposed settlement is expected to be borne by our insurers.

 

PSINet Belgium, an indirectwholly-owned subsidiary of the Company, is a defendant in a lawsuit filed byPerceval Technologies N.V. regarding a commercial agreement entered into forthe provision by Perceval of a DSL network in Belgium, Luxembourg andFrance.  The agreement of 15 March 2004,entered into prior to VIA’s acquisition of PSINet Belgium, was for the benefitof a customer of PSINet Belgium, and provided for a three-year term uponcompletion of a test phase. The customer was not satisfied with the results ofthe project and decided to stop the project, whereupon PSINet Belgiumterminated the agreement with Perceval Technologies.  On February 28, 2005, Perceval brought acivil action before the commercial court of Brussels for the early terminationof the contract and claims damage in the amount of €1.4 million plus €250,000moral damages, plus interests, costs and attorneys’ fees. The Company  believes PSINet Belgium was entitled toterminate the agreement under the circumstances and that the allegations arewithout merit and have engaged counsel to defend the action.  If PSINet Belgium is determined to be liableor if the Company  concludes that asettlement is in its best interests, that subsidiary may incur substantialcosts.

 

*Guarantees*

 

From time to time, the Company enters into indemnification agreementswith certain contractual parties in the ordinary course of business, includingagreements with lenders, lessors, service providers and certain vendors. All suchindemnification agreements are entered into in the context of the particularagreements and are provided in an attempt to properly allocate risk of loss inconnection with the consummation of the underlying contractual arrangements.Although the maximum amount of future payments that the Company could berequired to make under these indemnification agreements is unlimited,management believes that historically, costs incurred to settle claims relatedto these indemnifications have not been material to the Company’s financialposition, results of operations or cash flows and that this is the expectationfor the future. Additionally, the fair value of the indemnifications that theCompany issued during the year ended December 31, 2004 and the threemonths ended March 31, 2005, respectively, were not material to theCompany’s financial position, results of operations or cash flows.

 

*Other*

 

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

 

**11.****          SegmentReporting**

 

VIA offers a variety of Internet access, managed bandwidth,web-hosting, Internet security and related services to businesses and consumersin Europe and the Americas. As of March 31, 2005, the Company served primarymarkets in nine countries. These country operations generate Internet-relatedrevenues from leased lines, dial-up Internet access, web-hosting and design,Internet security and consulting services, and sale of third-party hardware andsoftware.

 

In prior reporting periods, the Company’s internal management reportingstructure was based on country operations and therefore the Company hadprovided segment information based on geographic regions.

 

Within the last quarter of 2004, management re-evaluated and amendedits internal reporting structure and therefore changed its reportable segmentsand grouped all of the VIA legacy operating companies, except the US operation,and the newly acquired PSINet Europe operating companies into one operatingsegment – “Solutions”. The Company grouped its start-up VIA Express channel

 

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operations together with the legacy VIA US operations into oneoperating segment – “Express”. The Company grouped all of the Amen operatingcompanies into one operating segment – “Amen”. The Company and its ChiefOperating Decision Maker (“CODM”) evaluates the performance of its segmentsbased on revenue and EBITDA before restructuring (“Adjusted EBITDA”). TheCompany’s CODM have been the Chief Executive Officer and the Chief FinancialOfficer throughout the year. Corporate expenses, which also include theregional companies holding Indefeasible Rights of Use (“IRU’s), are shown toreconcile to the total consolidated figures. Prior period amounts have beenreclassified to conform to the current period presentation.

 

The table below presents information about the reported revenue, adjustedEBITDA, impairment and restructuring charges and assets from continuingoperations of the Company’s operating segments for the three months ended March 31,2004 and March 31, 2005. Total segment assets, as presented in the tablebelow, are total assets net of intercompany funding amounts.

 

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| **In thousands of U.S. dollars**          | ** ** | **Solutions** | ** ** | **Express** | ** ** | **Amen** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|---------------|------------|-------------|------------|----------|------------|---------------|------------|-----------|------------|
| Total assets as of December 31, 2004 |       | $             | 67,145     |        | $          | 3,711    |       | $             | 21,808     |      | $          | 27,789 |   | 120,453 |   |
| Total assets as of March 31, 2005    |       | 60,556        |       | 3,519       |       | 19,158   |       | 23,514        |       | 106,747   |       |
| Three months ended March 31, 2004:   |       |          |       |        |       |     |       |          |       |      |       |
| Revenue                                   |       | 7,998         |       | 915         |       | 1,483    |       | —        |       | 10,396    |       |
| Adjusted EBITDA                           |       | (1,769        | )          | (265        | )          | 411      |       | (6,591        | )          | (8,214    | )          |
| Impairment and restructuring charges      |       | —        |       | —      |       | —   |       | (300          | )          | (300      | )          |
| Three months ended March 31, 2005:   |       |          |       |        |       |     |       |          |       |      |       |
| Revenue                                   |       | 20,009        |       | 1,124       |       | 2,934    |       | 22            |       | 24,089    |       |
| Adjusted EBITDA                           |       | (1,945        | )          | (401        | )          | 442      |       | (5,656        | )          | (7,560    | )          |
| Impairment and restructuring charges      |       | (1,588        | )          | —      |       | (1,180   | )          | (685          | )          | (3,453    | )          |
|                                           |            |               |            |             |            |          |            |               |            |           |            |  |  |  |  |

 

Total assets include assets relating to VIA NET.WORKS (Schweiz) AG andVIA NET.WORKS Services AG which have been classified as businesses held forsale as of March 31, 2005. Total assets relating to these entities, $1.8million, have been included within the Solutions segment above.

 

The reconciliation between Adjusted EBITDA to net loss for continuingoperations is as follows:

 
| **Three  months ended March 31, 2004**                                                                                    |    |   |
|--------------------------------------------------------------------------------------------------------------------------------|---------|--------|
| Adjusted  EBITDA                                                                                                               | (8,214  | )      |
| Impairment  and restructuring charges                                                                                          | (300    | )      |
| Depreciation  and amortization                                                                                                 | (1,838  | )      |
| Interest  income                                                                                                               | 106     |   |
| Interest  expense                                                                                                              | (18     | )      |
| Other  income, net                                                                                                        | 34      |   |
| Foreign  currency losses, net                                                                                                  | (3,326  | )      |
| Income tax  benefit                                                                                                            | 7       |   |
| Net loss  from continuing operations                | (13,549 | )      |
|                                                                                                                           |    |   |
| **Three  months ended March 31, 2005**                                                                                    |    |   |
| Adjusted  EBITDA                                                                                                               | (7,560  | )      |
| Impairment  and restructuring charges                                                                                          | (3,453  | )      |
| Depreciation  and amortization                                                                                                 | (2,114  | )      |
| Interest  income                                                                                                               | 12      |   |
| Interest  expense                                                                                                              | (172    | )      |
| Other  income, net                                                                                                        | 404     |   |
| Foreign  currency losses, net                                                                                                  | (1,702  | )      |
| Income tax  expense                                                                                                            | (30     | )      |
| Net loss  from continuing operations                | (14,615 | )      |

 

**12.****          Subsequentevents**

** **

On April 1, 2005, the Company sold its Swiss companies — VIANET.WORKS (Schweiz) AG and VIA NET.WORKS Services AG — to former managers andowners of the business, for a purchase price of CHF 3.5 million (approximately$3.1million).  

 

On April 10, 2005, VIA NET.WORKS, Inc. entered into a letter of intent with Claranet Group Limited, a privately-held European Internet services provider based in the United Kingdom, to sell all of the Company’s remaining business operations in Europe and the United States.

 

On April 11, 2005, the Company announced the Claranet Sale offer.In reaction to the announcement, a number of managers and employees of theCompany’s Amen group formed a strike against Amen, seeking employment securityguarantees from Claranet, amongst other things. The Company has obtained thesupport of staff from other members of the VIA group to fill in for thestriking workers to ensure the continuation of technical and customer support.We believe that we will be able to resolve the matter satisfactorily withoutundue cost or impairment to the Amen business.

 

On April 30, 2005, VIA NET.WORKS, Inc. entered into a saleand purchase agreement, or Sale Agreement, with Claranet Group Limited(Claranet), a privately-held European Internet services provider based in theUnited Kingdom, to sell all of the Company’sremaining  business operations in Europe and the UnitedStates (the Asset Sale).  The agreementfollowed on the letter of

 

17

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intent entered into between Claranet and VIA on April 10, 2005.The key terms of the proposed transaction, or the Claranet Sale, are disclosedwithin Note 1 of these consolidated financial statements.

 

OnMay 9, 2005, the Company filed a preliminary proxy statement with theSecurities and Exchange Commission in respect of the Claranet Sale Agreementand the Asset Sale, a plan of complete dissolution and liquidation, a proposalfor amendments to the Certificate of Incorporation to effect a reverse stocksplit, and the election of directors. On May 18, 2005, the SEC staff informedthe Company that it was preparing comments on the preliminary proxystatement.  Although the Company has notyet received formal written comments, based on conversations between theCompany’s management and SEC staff regarding the comments, the Company believesit will be in a position to file its definitive proxy statement before the end ofMay 2005.  In such case, the Company anticipatesthat the Closing will occur during the first week of July 2005. Otherwise,the Company anticipates that the Closing will take place during the first weekof August 2005.

 

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**ITEM. 2.MANAGEMENT’S DISCUSSION****AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussionand analysis should be read in conjunction with the condensed consolidatedfinancial statements and related notes included in Item 1 of this Form 10-Q.This discussion and the discussion in Item 1, Note 1, containforward-looking statements, or statements that relate to future events or ourfuture performance. These statements include, but are not limited to thoserelating to but are not limited to those relating to the agreement entered intoby the Company to sell all of its businesses to Claranet Group Limited, thetiming of that potential transaction and the anticipated net proceeds toshareholders arising out of that potential transaction.. These statements areonly predictions or planned actions that are subject to a number of risks,uncertainties and other factors. Actual events or results may differmaterially. Information regarding the risks, uncertainties and other factorsthat could cause actual results to differ from the results in theseforward-looking statements are discussed in the “Risk Factors” described in Exhibit 99.1on this Form 10-Q, as well as those described in the “Risk Factors” section ofVIA’s 2004 Annual Report. You are urged to carefully consider these factors, aswell as other information contained in this Form 10-Q and in our otherperiodic reports and documents filed with the Securities and ExchangeCommission.

 

**Overview**

** **

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

 

**Proposed Sale of the Businesses;Interim Funding Arrangements**

** **

On April 30,2005, VIA NET.WORKS, Inc. entered into a sale and purchase agreement, orSale Agreement, with Claranet Group Limited (Claranet), a privately-heldEuropean Internet services provider based in the United Kingdom, to sell all ofour business operations in Europe and the United States (the Asset Sale).  The agreement followed on the letter ofintent entered into between Claranet and VIA on April 10, 2005. Thefollowing discussion is a summary of the material provisions of the SaleAgreement. This summary is qualified in its entirety by reference to the SaleAgreement, a copy of which is attached as Exhibit 99.1 to the CurrentReport on Form 8-K filed by VIA on May 3, 2005 with the Securitiesand Exchange Commission reporting the execution of the sale and purchaseagreement. 

 

The material provisions of the Sale Agreement are as follows:

 

Assets to be Sold Pursuant to the Sale Agreement

 

•      VIA would sellto Claranet all of our business operations in Europe and the U.S, whichincludes all of our subsidiary companies other than VIA NET.WORKS NY Corp, VIANET.WORKS Holdco, Inc., Surftrade U.S.A. Inc. and our parent company, VIANET.WORKS, Inc. The assets to be sold to Claranet consist of substantiallyall of our assets, properties and rights. Claranet would acquire certain assetsand liabilities pertaining to our centralized back office financial andtechnical support systems that are owned by our group parent company, VIANET.WORKS, Inc.  We would transferemployment contracts of certain headquarters personnel who are responsible forsupporting the back office and technical support systems to appropriate VIAoperating companies or Claranet will offer employment to such persons.

 

Treatment of Liabilities

 

•      Claranet wouldassume certain liabilities of our parent company, VIA NET.WORKS, Inc.,including liabilities and obligations relating to the business operations beingsold and employee contracts of certain headquarters personnel.  Claranet would not assume other liabilities,such as severance costs for other employees at the corporate headquarters,lease payments, outstanding liabilities from previous acquisitions, vendorbills relating to costs of being a public company and ongoing operating costsassociated with winding down the corporate headquarters.

 

•      VIA wouldretain all other debts and liabilities of the group parent company, includingbut not limited to expenses relating to the headquarters office lease inSchiphol-Oost, VIA senior executives and all other headquarters staff,corporate vendors and professional advisors, and remaining payment obligationsto sellers of the PSINet Europe group and the Amen group.

 

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Purchase Price

 

•      Under theagreement, Claranet would pay VIA $26.4 million, less certain adjustments. Inparticular, the purchase price will be reduced by the amounts advanced to us bythe Purchaser under the Euro 5.4 million ($7.0 million) working capitalfacility established by Claranet when the Sale Agreement was signed. Under thisagreement we are obliged to monitor the level of working capital during theperiod between signing and the closing of the transaction as described belowunder “Termination of the Sale Agreement”. A schedule for advances underthe facility is described below. The purchase price will also be adjusted forany funds withdrawn from or payments made by the subsidiaries being sold by orto our parent company or any subsidiaries not being sold.

 

•      Concurrent withthe execution of the April 10, 2005 letter of intent, Claranet delivered adeposit of $3,000,000 to VIA in order to secure the rights to negotiateexclusively with us until April 30, 2005. The deposit was partially fundedby the release of £1.0 million ($1.9 million) from the escrow established byClaranet in favor of VIA in connection with the purchase in September 2004by Claranet of our legacy operations in the United Kingdom. The deposit will beforfeited by Claranet if the transaction does not close other than for ourdefault or certain other conditions. Otherwise, the portion of the deposit inexcess of the £1.0 million ($1.9 million) will be credited to the purchaseprice at closing.

 

Survival ofWarranties and Other Claims; Limitations on Liability

 

•     Wehave made certain customary warranties in the Sale Agreement that generallysurvive for three months following closing, with certain exceptions for mattersrelating to tax and title to properties. VIA would not be liable for anybreaches of warranties until the aggregate amount of all claims exceeds$1,000,000, and our maximum liability for all breaches would be limited to 33%of the purchase price (approximately $8.8 million).

 

Closing

 

•      The Asset Saleis conditioned upon the approval by our shareholders. In addition, theagreement contains customary pre-closing conditions relating to, among otherthings, accuracy of warranties and our compliance with the provisions of theSale Agreement, including the conduct of the business pending the closing.  

 

•      If the AssetSale is approved and adopted by our shareholders, the closing will take placeshortly after the shareholder meeting. On May 9, 2005, we have filed our preliminary proxy statement withthe Securities and Exchange Commission, or SEC. On May 18, 2005, the SEC staff informed the Company that it waspreparing comments on the preliminary proxy statement.  Although we have not yet received formalwritten comments, based on conversations between the our management and SECstaff regarding the comments we believe we will be in a position to file ourdefinitive proxy statement before the end of May 2005. In such case, weanticipate that the closing would occur during the first week of July,2005.  Otherwise, we would anticipatethat the closing would take place during the first week of August, 2005.

 

Competing Offers

 

•      The SaleAgreement prohibits us from approaching or negotiating with any other potentialpurchaser, provided that our board may negotiate with a third party regardingan alternative offer if refusing to do so would, in the reasonabledetermination of our board upon advice of counsel, be reasonably likely toconstitute a breach of fiduciary duties to our shareholders.

 

Termination of the Sale Agreement

 

•      Claranet isentitled, prior to the closing, to terminate the Sale Agreement in the event of

 

•      claimsagainst VIA or a one of the companies being purchased in excess of $50,000,which had not been disclosed on or before April 7, 2005, and which exceed$1,000,000 in the aggregate

•      anyincrease in cash outflow of the companies being purchased as a whole, measuredover the period from May 1, 2005 to the end of the most recently completedcalendar month, as compared to the amounts in VIA’s working capital projectionsfor such period of more than $1,250,000 

•      lossor cancellation of customers contracts with annualized value in excess of$50,000 in an amount exceeding $1,800,000, net of new customer contract gains

•      bankruptcyof the parent company or any member of the VIA group

•      breachof an undertaking in the Sales Agreement or warranty where the losses toClaranet are likely to exceed $1,000,000; or a 

•      materialbreach of the working capital facility agreement

 

Effect of Termination

** **

•      In the eventClaranet terminates the Sales Agreement in connection with any of the itemslisted above or if we terminate the Sales Agreement because we accept acompeting offer, we must (a) reimburse the $3.0 million deposit toClaranet together with accrued interest on the deposit at a rate of 8% perannum, (b) pay a break fee of $500,000, (c) reimburse the costs andexpenses incurred by Claranet in connection with the transaction up to$250,000, (d) pay back the amounts drawn against the financing

 

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facility, and (e) paya $400,000 finance arrangement fee.

 

Terms of Financing Agreement

 

•      Concurrentlywith entering into the Sale Agreement, we entered into a Facility Agreementwith Claranet under which it is permitted to borrow up to Euro 5.4 million($7.0 million) for working capital requirements. The facility is stated in Eurofunds and will be made available according to the following schedule, stated inUSD equivalent on the basis of a Euro to USD exchange rate of $1.303 per Euro:

 
| **Date**                                                | ** ** | **Amount of aggregate funds available,  including prior borrowings:** | ** ** |
|---------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| June 10, 2005 to June 23, 2005  (inclusive):  |       | $                                                                                                   | 1,200,000  |   |
| June 24, 2005 to July 9, 2005  (inclusive):   |       | 2,500,000                                                                                           |       |
| July 10, 2005 to July 23, 2005  (inclusive):  |       | 4,200,000                                                                                           |       |
| July 24, 2005 to August 9, 2005  (inclusive): |       | 5,700,000                                                                                           |       |
| August 10, 2005 to termination  (inclusive):       |       | 7,000,000                                                                                           |       |
|                                                         |            |                                                                                                     |            |  |

 

•      The amount offunds made available to us and for which we will have to repay Claranet upon aclosing may materially differ depending on the currency exchange rate movementsprior to the closing.

 

As permittedunder the Facility Agreement, we have delivered a request to Claranet to acceleratethe first draw to June 1, 2005. Funds advanced under this facility are secured by our pledge of all ofour ownership interest in certain of our Dutch, French, Belgian and Germansubsidiaries. Funds advanced bear interest at a rate of 8% per annum, compoundeddaily. All amounts outstanding under the facility will be deducted from thepurchase price payable by Claranet at the closing.

 

•      If the closinghas not occurred by the earlier of September 9, 2005 or the date the SaleAgreement is terminated in accordance with its terms, we will be required topay Claranet an arrangement fee of $400,000. Following a termination of theSale Agreement, Claranet may immediately cancel the facility and all amountsthere under come due upon 20 or 40 days notice to VIA, depending on thecircumstances of the termination.

 

In the proxy statement we intend to deliver to our shareholders, we will request approval of, among other things, the Asset Sale and a plan of complete dissolution and liquidation of the Company.  If we receive approval from our shareholders, we will seek to close the transaction shortly after the shareholder’s meeting and use the net proceeds to pay off the remaining liabilities of the Company and shut down our corporate headquarters and terminate the remaining employees.  Remaining funds will then be distributed to our shareholders. An analysis of the estimated net remaining funds available for distribution to our shareholders if the Asset Sale is closed will be included in the proxy statement to be distributed to our shareholders in connection with the proposed shareholder meeting.  The closing of the Asset Sale is subject to a number of conditions, which might not be satisfied.  Please see the risk factors noted in the attached Exhibit 99.1 to this Form 10-Q for a discussion of possible outcomes if the Asset Sale does not occur.

 

During and subsequent to theend of the quarter ended March 31, 2005, we have engaged in discussionswith the former owners of the PSINet Europe companies with a view toward renegotiatingthe Euro 6.0 million zero coupon convertible note obligation we entered into inconnection with our acquisition of the five PSINet Europe companies on August 20,2004.  The unsecured zero couponconvertible note of Euro 6.0 million ($7.8 million) is due in full November 20,2005, subject to offset for any claims we might have at that date for anybreach of warranties or for any indemnification obligations the sellers haveundertaken in connection with the sale transaction. Taking into account VIA’scurrent financial position, among other things, the sellers have agreed inprincipal to compromise the payment to be due under the note. Under theproposed settlement, VIA would make a cash payment of approximately$2.0 million and issue 6,713,980 of common shares to the holder of thenote at or immediately after the closing of the Asset Sale; the cash paymentand share issuance would be in full satisfaction of the note.  In exchange for the compromise of the noteobligation, VIA would release the sellers of all present and future claims wenow or in the future may have under the purchase agreement under which weacquired the PSINet Europe companies, including any warranty or indemnificationclaims.  All current and futurethird party claims that would have been subject to such indemnification orwarranty protection would then be for our account.  This settlement and release has not yet beenset forth in a binding agreement and may not occur on the expected terms or atall.

 

Uponcompletion of the Asset Sale, we expect to record a loss in the statement ofoperations for the three months ending September 30, 2005 of $31.6million, relating to amounts previously recorded in accumulated othercomprehensive loss.  As of March 31,2005, we have $31.6 million of cumulative translation losses recorded inrespect of these businesses. 

 

On April 1, 2005, the Company sold its Swiss companies — VIANET.WORKS (Schweiz) AG and VIA NET.WORKS Services AG — to former managers andowners of the business, for a purchase price of CHF3.5 million(approximately  $3.1million). Uponcompletion of the VIA NET.WORKS (Schweiz) AG and VIA NET.WORKS Services AGsale, we expect to record a loss in the statement of operations for the threemonths ending June 30, 2005, relating to amounts previously recorded inaccumulated other comprehensive loss.  

 

In reaction tothe April 11, 2005 announcement of the proposed Asset Sale, a number ofmanagers and employees of VIA’s

 

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Amen group formed a strike against Amen, seeking employment securityguarantees from Claranet, among other things.  VIA has obtained thesupport of staff from other members of the VIA group to fill in for thestriking workers to ensure the continuation of technical and customersupport.  As of May 20, 2005, the strike has continued.  We believe that we will be able to resolvethe matter satisfactorily without undue cost or impairment to the Amenbusiness.

 

**Recent Changes in OurOperations**

 

In the third quarter of 2004, we sold VIA NET.WORKS UK Ltd. and duringthe year ended December 31, 2004, we liquidated Surftrade Ltda., SurftradePortugal and VIA NET.WORKS Holding Cayman. On April 1, 2005, weannounced the sale of two of our Swiss companies — VIA NET.WORKS (Schweiz) AGand VIA NET.WORKS Services AG — to former managers and owners of the business. Theseoperations are accounted for as discontinued operations and have been excludedfrom the financial results from continuing operations, as well as the financialresults for the comparative prior period. We acquired Amen in January 2004which has operations in France, the United Kingdom, Spain, and Italy. Inaddition, in August 2004 we acquired certain PSINet Europe operations, inBelgium, Germany, the Netherlands, Switzerland and France. The following tableshows the revenue contribution from each of our continuing operations in theCompany’s countries of domicile (origin). As of March 31, 2005 we owned100% of all our operations.

 

**Revenues by Countryof Origin**

 
| **Country**     | ** ** | **Percentages of  Total Revenue from  continuing operations  for the Three Months  Ended  March 31, 2004** | ** ** | **Percentages of  Total Revenue from  continuing operations  for the Three Months  Ended  March 31, 2005** | ** ** |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|
|            |       |                                                                                                            |       |                                                                                                            |       |
| France          |       | 28                                                                                                              | %          | 19                                                                                                              | %          |
| Germany         |       | 19                                                                                                              | %          | 25                                                                                                              | %          |
| The Netherlands |       | 22                                                                                                              | %          | 25                                                                                                              | %          |
| Portugal        |       | 15                                                                                                              | %          | 8                                                                                                               | %          |
| Spain           |       | 5                                                                                                               | %          | 3                                                                                                               | %          |
| Switzerland     |       | 0                                                                                                               | %          | 9                                                                                                               | %          |
| United Kingdom  |       | 2                                                                                                               | %          | 1                                                                                                               | %          |
| United States   |       | 9                                                                                                               | %          | 4                                                                                                               | %          |
| Belgium         | * *   | 0                                                                                                               | %          | 6                                                                                                               | %          |

 

**RESULTS OF OPERATIONS**

 

**Threemonths ended March 31, 2004 compared with the three months ended March 31,2005**

** **

*Foreign Currency Impact*

 

Foreign exchange rates can vary significantly and impact our results ofoperations, which are reported in U.S. dollars. As a percentage of consolidatedrevenues, we had continuing operations conducting business in the followingunderlying currencies:

 

| ** **     | ** ** | **Three months ended**   | ** ** |
|----------------|------------|--------------------------|------------|
| ** **     | ** ** | **March 31,  2004** | ** ** | **March 31,  2005** | ** ** |
|           |       |                     |       |   |   |
| Euro           |       | 89                       | %          | 86 | % |
| British pounds |       | 2                        | %          | 1 | % |
| Swiss Francs   |       | 0                        | %          | 9 | % |
| U.S. Dollars   |       | 9                        | %          | 4 | % |
|           |       |                     |       |   |   |
|           |       | 100                      | %          | 100 | % |

 

TheEuro varied by approximately 7% in relation to the U.S. dollar in the threemonths ended March 31, 2005 and by approximately 7% in the three monthsended March 31, 2004. The Swiss Franc varied by approximately 9% inrelation to the U.S. dollar in the three months ended March 31, 2005 andby approximately 8% in the three months ended March 31, 2004. The Britishpound varied by approximately 5% in relation to the U.S. dollar in the threemonths ended March 31, 2005 and by approximately 8% in the three monthsended March 31, 2004. These exchange rate fluctuations have a significantimpact on our reported results of operations, including

 

22

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revenue,expenses and net loss.

 

Theaverage Euro-to-U.S. dollar foreign exchange rate for the three months ended March 31,2005 was 5% higher than the average Euro-to-U.S. dollar foreign exchange ratefor three months ended March 31, 2004. The average Swiss Franc-to-U.S.dollar foreign exchange rate for the three months ended March 31, 2005 was6% higher than the average Swiss Franc-to-U.S. dollar foreign exchange rate forthree months ended March 31, 2004. The average British pound-to-U.S.dollar foreign exchange rate for the three months ended March 31, 2005 was3% higher than the average British pound-to-U.S. dollar foreign exchange ratefor the three months ended March 31, 2004. The effect of the weakening of the U.S. dollar is that revenues,operating costs and expenses and operating profits and losses in operationswith a functional currency other than U.S. dollars translate into larger U.S.dollar amounts than would have been the case had foreign exchange ratesremained unchanged.

 

23

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*Revenue:*

 

| ** ** | ** ** | **Three months ended**              | ** ** | ** **               | ** ** |
|------------|------------|-------------------------------------|------------|--------------------------|------------|
| ** ** | ** ** | **March 31,  2004**            | ** ** | **March 31,  2005** | ** ** | **% Increase/  (Decrease)** | ** ** |
| ** ** | ** ** | **(in thousands of U.S. dollars )** | ** ** | ** **               | ** ** |
| Revenue    |       | 10,396                              |       | 24,089                   |       | 132 | % |

 

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

 

Revenue for the three months ended March 31, 2005 was $24.1 millionas compared to $10.4 million for the three months ended March 31, 2004.The increase in revenues quarter over quarter is mostly attributable to therevenues we recorded in the first quarter of 2005 that are attributable to the PSINetEurope business, which we acquired in August 2004 (impact of $11.2million). In addition, the average Euro to U.S. dollar foreign exchange rateand Swiss Franc to U.S. dollar foreign exchange rate for the three months endedMarch 31, 2005 have strengthened by approximately 5% and 6% respectivelywhen compared to the same period last year positively impacting revenues duringthe first quarter of 2005 by approximately $0.6 million. The remainder of theincrease in revenues is explained by the increase of underlying revenues forthe three months ended March 31, 2005 as compared to the three monthsended March 31, 2004, notably in the Amen business, which we acquired atthe end of January 2004, and from increases in revenues in Portugal andthe Netherlands, offset by decreases in underlying revenues in Germany and France.

 

Amen revenues, excluding the impact of foreign exchange, increased by $1.6million in the three months ended March 31, 2005 compared to the threemonths ended March 31, 2004. $0.9 million of the increase of the Amen revenueis explained by the three months of revenues which we recorded during thequarter ended March 31, 2005 as compared to two months of revenues which werecorded during the quarter ended March 31, 2004. The remainder of theincrease of the Amen revenues of $0.7 million is explained by the growth ofcustomer total and the broadening of its product offering. Portugal revenues,excluding the impact of foreign exchange, increased by 15%, or $0.3 million inthe three months ended March 31, 2005 compared to the three months ended March 31,2004, due to an increase of the sale of internet subscriptions, web hostingproducts and leased lines. Netherlands revenues, excluding the impact offoreign exchange, increased by 12%, or $0.3 million in the three months ended March 31,2005 compared to the three months ended March 31, 2004, due to the resultsof marketing campaigns and reduced levels of credit notes issued as a result ofprocess improvements.

 

German revenues, excluding the impact of foreign exchange, decreased by4%, or $0.1 million in the three months ended March 31, 2005 comparedto the three months ended March 31, 2004. This revenue reduction is due tocustomer cancellations and price erosion. French revenues, excluding the impactof foreign exchange and the acquisition of Amen’s French business, decreased by11%, or $0.2 million in the three months ended March 31, 2005 compared tothe three months ended March 31, 2004, due to customer churn and fewerhardware and software sales. 

 

*OPERATING COSTS AND EXPENSES:*

 

*Internet services:*

 

| ** **         | ** ** | **Three months ended**             | ** ** | ** **               | ** ** |
|--------------------|------------|------------------------------------|------------|--------------------------|------------|
| ** **         | ** ** | **March 31,  2004**           | ** ** | **March 31,  2005** | ** ** | **% Increase/  (Decrease)** | ** ** |
| ** **         | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **               | ** ** |
| Internet services  |       | 5,346                              |       | 12,189                   |       | 128 | % |
| % of Total Revenue |       | 51                                 | %          | 51                       | %          |   |   |

 

Our Internet services operating costs are the costs we incur to carrycustomer traffic to and over the Internet. We lease lines that connect our 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

 

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personnel costs, including the cost of the local telephone lines ourcustomers use to reach our PoPs and access our services, and costs related tocustomer support and care.

 

Our Internet services costs were $12.2 million or 51% of revenuesfor the three months ended March 31, 2005 as compared to $5.3 millionor 51% of Internet service costs for the three months ended March 31, 2004.The increase in Internet services costs is mostly attributable to the Internetservices costs of the PSINet Europe business acquired in August 2004(impact of $5.6 million) and also to the translation impact of foreign currencymovements. Excluding PSINet Europe’s Internet services costs and the adverseimpact of the strengthening Euro and Swiss Franc to U.S. dollar foreigncurrency exchange rates of $0.3 million, Internet services costs have increasedfor the three months ended March 31, 2005 from the three months ended March 31,2004 primarily due to Amen Internet service costs, which, excluding the impactof foreign exchange, increased by $0.7 million in the three months ended March 31,2005 compared to the three months ended March 31, 2004. $0.3 million ofthe increase of the Amen Internet service costs increase is explained by thethree months of Internet service costs which we recorded during the quarterended March 31, 2005 as compared to two months of Internet service costs whichwe recorded during the quarter ended March 31, 2004. In addition, theremainder of the increase of Internet service costs is explained by higher customernetwork usage in our Portugal and Netherlands operations.

 

*Selling, general and administrative:*

 

| ** **                                 | ** ** | **Three months ended**             | ** ** | ** **               | ** ** |
|--------------------------------------------|------------|------------------------------------|------------|--------------------------|------------|
| ** **                                 | ** ** | **March 31,  2004**           | ** ** | **March 31,  2005** | ** ** | **% Increase/  (Decrease)** | ** ** |
| ** **                                 | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **               | ** ** |
| Selling, general & administrative |       | 13,264                             |       | 19,460                   |       | 47 | % |
| % of Total Revenue                         |       | 128                                | %          | 81                       | %          |   |   |

 

Our largest selling, general and administrative (SG&A) expenses arecompensation costs, the costs associated with marketing our products andservices, and professional fees paid to outside consultants. Compensation costsinclude salaries and related benefits, commissions, bonuses and costsassociated with staff reductions in the normal course of business. In many ofour 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&A expenses of $19.5 million for the threemonths ended March 31, 2005, a 47% increase from the $13.3 million weincurred for the three months ended March 31, 2004. The increase inSG&A expenses quarter over quarter is mostly attributable to the expensesassociated with the PSINet Europe business that we acquired in August 2004(impact of $7.3 million) and partly due to the strengthening of the Euro andBritish pound to U.S. dollar foreign currency exchange rates of approximately $0.2million. The balance of the difference, quarter over quarter, is attributableto a decrease in compensation and marketing expenses, partially offset by an increasein professional fees.

 

Compensation expense, which accounted for approximately 54% and 48% oftotal SG&A costs, or $10.5 million and $6.4 million, for the three monthsended March 31, 2005 and 2004, respectively, increased by approximately 64%due to the PSINet Europe acquisition, an increase of Amen compensationexpenses, explained by the three months of compensation expense which werecorded during the quarter ended March 31, 2005 as compared to two monthsof compensation expense which we recorded during the quarter ended March 31,2004 and the strengthening of the Euro and British pound to U.S. dollar foreigncurrency exchange rates. Excluding these factors, compensation expense hasdecreased by approximately 17% primarily due to head count reductions.Headcount (excluding PSINet Europe and the discontinued VIA Switzerlandoperations) decreased by approximately 18% from March 31, 2004 to March 31,2005. Compensation expense did not reduce by the same percentage due to higherone-off severance payments made in the three months ended March 31, 2005.

 

Professionalfees, related to legal, audit, outsourcing and other consulting fees, accountedfor approximately 18% of total SG&A for the three months ended March 31,2005 and for approximately 13% of total SG&A for the three months ended March 31,2004. The increase in professional fees of 96% for the three months ended March 31,2005, compared to the three months ended March 31, 2004 relates to professionalfees of $0.5 million associated with the PSINet Europe business, thestrengthening of the Euro and British pound to U.S. dollar foreign currencyexchange rates of $0.1 million andconsulting fees of $1.0 million at the corporate headquarters in relation toobtain new financing to address an urgent liquidity problem.

 

Inthe three months ended March 31, 2005, marketing expenses, excludingPSINet Europe marketing expenses of $0.1 million, decreased by approximately $0.4 million, or 42%, from the three monthsended March 31, 2004, due to the decreased number of marketing campaignsduring the three months ended March 31, 2005.

 

25

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*Impairment and restructuring charges:*

 

| ** **                           | ** ** | **Three months ended**             | ** ** | ** **               | ** ** |
|--------------------------------------|------------|------------------------------------|------------|--------------------------|------------|
| ** **                           | ** ** | **March 31,  2004**           | ** ** | **March 31,  2005** | ** ** | **% Increase/  (Decrease)** | ** ** |
| ** **                           | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **               | ** ** |
| Impairment and restructuring charges |       | 300                                |       | 3,453                    |       | 1,051 | % |
| % of Total Revenue                   |       | 3                                  | %          | 14                       | %          |   |   |

 

During the three months ended March 31, 2005, we recordedrestructuring and impairment charges of $3.5 million. Restructuring charges of$1.1 million for the three months ended March 31, 2005, related toseverance payments at our corporate headquarters and our Netherlands operation,costs for future operating lease obligations in or Netherlands operation and transitionimplementation costs for back-office initiatives. During the first quarter of2005, management concluded that an impairment had occurred in our Solutions andAmen operating units. As a result, we recorded an impairment charge of $0.5million related to the goodwill in the Amen operating unit and an intangiblefixed asset impairment charge of $0.8 million and a tangible fixed assetimpairment charge of $1.1 million. $0.3 million of the intangible fixed assetimpairment charge and $0.9 million of the tangible fixed asset impairmentcharge relate to the Solutions channel and $0.5 million of the intangible fixedasset impairment charge and $0.2 million of the tangible fixed asset impairmentcharge relate to the Amen Channel.  

 

During the three months ended March 31, 2004, we recordedrestructuring charges of $0.3 million, relating to severance payments atcorporate headquarters and transition implementation costs for back-office integrationinitiatives.

 

*Depreciation and amortization:*

 

| ** **                    | ** ** | **Three months ended**             | ** ** | ** **               | ** ** |
|-------------------------------|------------|------------------------------------|------------|--------------------------|------------|
| ** **                    | ** ** | **March 31,  2004**           | ** ** | **March 31,  2005** | ** ** | **% Increase/  (Decrease)** | ** ** |
| ** **                    | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **               | ** ** |
| Depreciation and amortization |       | 1,838                              |       | 2,114                    |       | 15 | % |
| % of Total Revenue            |       | 18                                 | %          | 9                        | %          |   |   |

 

We recognize depreciation expense primarily related totelecommunications equipment, computers and network infrastructure. Wedepreciate telecommunications equipment and computers over their useful lives,ranging from three to five years. The cost of network infrastructure, net ofimpairment charges, purchased under indefeasible right of use agreements, orIRUs, is being amortized over the lesser of the estimated useful life or termof the agreement, 1 to 25 years. We amortize customer lists, software andtrade names over seven years, five years and ten years respectively.

 

Our depreciation and amortization expense was $2.1 million for thethree months ended March 31, 2005, up from $1.8 million for the threemonths ended March 31, 2004. For the three months ended March 31, 2005,$2.0 million related to the depreciation of fixed assets and $0.1 millionrelated to the amortization of intangible assets. For the three months ended March 31,2004, $1.6 million related to the depreciation of fixed assets and $0.2 millionrelated to the amortization of intangible assets. The increase in totaldepreciation and amortization expense is primarily due to the acquisition of PSINetEurope, resulting in amortization of identified intangible assets anddepreciation of tangible fixed assets totaling $0.7 million. Excluding PSINetand Amen, the depreciation and amortization expense decreased during the threemonths ended March 31, 2005 compared to the three months ended March 31,2004 due to a lower asset base.

 

*Interest income (expense), net:*

 

| ** **                     | ** ** | **Three months ended**             | ** ** | ** **               | ** ** |
|--------------------------------|------------|------------------------------------|------------|--------------------------|------------|
| ** **                     | ** ** | **March 31,  2004**           | ** ** | **March 31,  2005** | ** ** | **% Increase/  (Decrease)** | ** ** |
| ** **                     | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **               | ** ** |
|                           |       |                               |       |                     |       |   |   |
| Interest income (expense), net |       | 88                                 |       | (160                     | )     | (281 | )% |
| % of Total Revenue             |       | 1                                  | %          | (1                       | )%    |   |   |

 

For the three months ended March 31, 2005, we earned $12,000 ininterest income, compared to interest income of $0.1 million for the threemonths ended March 31, 2004. Interest income was generated from investingfunds received from our initial public offering in February 2000, untilthose funds were used for acquisitions, operating expenses or capitalexpenditures. Net proceeds from the public offering were $333.0 million.The decrease in interest income is the result of the decrease in the availablecash for investing. We also incurred $0.2 million of interest expense for thethree months ended March 31, 2005, as compared to $18,000 of interestexpense incurred in the three months ended March 31, 2004. Interestexpense of $0.1 million incurred in the three months ended March 31, 2005relates primarily to the imputed interest of 5.27% associated with the Euro 6million zero coupon

 

26

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convertiblenote issued in connection with the acquisition of the PSINet Europe companies.In addition, $0.1 million of interest expense relates to the imputed interestof 7.38% associated with a long term IRU obligation. 

 

*Other income, net:*

 

| ** **         | ** ** | **Three months ended**             | ** ** | ** **               | ** ** |
|--------------------|------------|------------------------------------|------------|--------------------------|------------|
| ** **         | ** ** | **March 31,  2004**           | ** ** | **March 31,  2005** | ** ** | **% Increase/  (Decrease)** | ** ** |
| ** **         | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **               | ** ** |
| Other income, net  |       | 34                                 |       | 404                      |       | 1,088 | % |
| % of Total Revenue |       | 0                                  | %          | 2                        | %          |   |   |

 

For the three months ended March 31, 2005, we earned other income,net in the amount of $0.4 million related to the proceeds from the sale ofa customer list of $0.2 million in our Portugal operation and a number ofsmaller amounts in our other operations. For the three months ended March 31,2004, we earned other income, net of $34,000.

 

*Foreign currency losses, net:*

 

| ** **                   | ** ** | **Three months ended**             | ** ** | ** **               | ** ** |
|------------------------------|------------|------------------------------------|------------|--------------------------|------------|
| ** **                   | ** ** | **March 31,  2004**           | ** ** | **March 31,  2005** | ** ** | **% Increase/  (Decrease)** | ** ** |
| ** **                   | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **               | ** ** |
| Foreign currency losses, net |       | (3,326                             | )     | (1,702                   | )          | (49 | )% |
| % of Total Revenue           |       | (32                                | )%         | (7                       | )%         |   |   |

 

We recognized a $1.7 million foreign currency loss for the threemonths ended March 31, 2005, as compared to a loss of $3.3 millionfor the three months ended March 31, 2004. The change from period toperiod was primarily due to the fluctuation in the exchange rate of the Euroand Swiss Franc as compared to the U.S. dollar and its impact on the revaluationof our Euro and Swiss Franc denominated intercompany balances held by theparent company and on our Euro denominated cash accounts. See ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK *Foreign Currency Exchange Risks* for moreinformation.

 

We established the Euro denominated cash accounts in connection withour initial public offering in February 2000, in which we sold shares ofour common stock for both U.S. dollars and Euros. At March 31, 2005, theparent company maintained a Euro cash reserve of Euro 0.2 million ($0.3million).

 

*Income tax benefit:*

 

| ** **                   | ** ** | **Three months ended**             | ** ** |
|------------------------------|------------|------------------------------------|------------|
| ** **                   | ** ** | **March 31,  2004**           | ** ** | **March 31,  2005** | ** ** | **% Increase/  (Decrease)** | ** ** |
| ** **                   | ** ** | **(in thousands of U.S. dollars)** | ** ** |
| Income tax benefit (expense) |       | 7                                  |       | (30 | ) | (530 | )% |
| % of Total Revenue           |       | 0                                  | %          | 0 | % |   |   |

 

During the three months ended March 31, 2005, we incurred $30,000 oftax expense, as compared to $7,000 of income tax benefits during the threemonths ended March 31, 2004. The effective tax rate for the Company is 0%.This is primarily caused by net operating losses for the current year and prioryears arising in the U.S. and international subsidiaries.

 

*Liquidity and Capital Resources*

 

Liquidity

 

**Negative Total Cash Flow, Urgent LiquidityNeeds, Proposed Sale.**VIA began 2005 with$15.5 million in cash and cash equivalents and $5.1 million inrestricted cash. We had a net decrease in cash and cash equivalents over thethree months ended March 31, 2005 of $7.7 million, comprisedprimarily of $7.0 million of net cash used in operating activities, leaving uswith $7.8 million in cash and cash equivalents and $4.1 million inrestricted cash at March 31, 2005. Of the $7.8 million in cash and cashequivalents, $1.8 million was held at the group parent company. This comparesto a net decrease in cash and cash equivalents over the three months ended March 31,2004 of $18.9 million, comprised primarily of $8.8 million of net cashused in operating activities and $9.7 million of net cash used in investingactivities. 

 

Restricted cash of $4.1 million and $5.1 million at March 31, 2005and March 31, 2004 respectively represents amounts held on deposit withbanking institutions as security for operating leases, leased properties, keysuppliers and a bank guarantee for the earn-out payments to the former shareholdersof Amen. 

 

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During 2004, we stated our expectations that we would reach the pointof positive cash flows by mid-2005, conditioned on the achievement of new andincremental revenues, which we anticipated generating from our new sales andproduct strategy, and further reductions in expenses.  However, as VIA’s cash reserves began to runout, we did not have the ability to implement the additional sales andmarketing efforts we had planned or the expected restructuring that wouldreduce expenses. Accordingly, VIA has not been able to make progress towardspositive cash flow that had been anticipated.

 

We announced on March 17, 2005, a combination of factorsincluding unanticipated revenue shortfalls in certain of our legacy VIAcompanies and our new VIA Express business would leave the Company withinsufficient cash reserves in early April 2005 to fund our ongoing expendituresand continue the Company as a going concern. We also announced that we were workingwith our professional advisors to obtain new financing to address the issue. SeeITEM 1, Note 1 to the condensed consolidated financial statements and ITEM****2, MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS.  

 

On April 1, 2005, theCompany announced the sale of two of its Swiss companies — VIA NET.WORKS(Schweiz) AG and VIA NET.WORKS Services AG — to former managers and owners ofthe business, for a purchase price of CHF 3.5 million ($3.1 million).  The net proceeds of the sale provided VIAwith additional liquidity to continue its discussions for refinancing and saletransactions.  

 

On April 30,2005, VIA NET.WORKS, Inc. entered into a sale and purchase agreement, orSale Agreement, with Claranet Group Limited (Claranet), a privately-heldEuropean Internet services provider based in the United Kingdom, to sell all ofour business operations in Europe and the United States (the Asset Sale).  The agreement followed on the letter ofintent entered into between Claranet and VIA on April 10, 2005. See ITEM****2, MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS for the key terms of the Claranet Sale.Concurrent with the execution of the April 10, 2005 letter of intent,Claranet delivered a deposit of $3,000,000 to VIA in order to secure the rightsto negotiate exclusively with us until April 30, 2005. The deposit waspartially funded by the release of £1.0 million ($1.9 million) from the escrowestablished by Claranet in favor of VIA in connection with the purchase in September 2004by Claranet of our legacy operations in the United Kingdom. The deposit will beforfeited by Claranet if the transaction does not close other than for ourdefault or certain other conditions. Otherwise, the portion of the deposit inexcess of the £1.0 million ($1.9 million) will be credited to the purchaseprice at closing. 

 

The purchaseprice under the Claranet agreement is $26.4 million, less certain adjustments.In particular, the purchase price will be reduced by the amounts advanced to usby the Purchaser under the $7.0 million working capital facility established byClaranet when the Sale Agreement was signed. All or a substantial portion ofthe deposit and working capital facility may be utilized to maintain day to dayoperations of the Company through the closing of the transaction, dependingupon the timing of closing. We expect to begin drawing funds under the workingcapital facility in early June.

 

The Asset Saleis conditional upon approval by our shareholders. If the Asset Sale is approvedand adopted by our shareholders, the closing will take place shortly after theshareholder meeting. On May 9, 2005, we have filed our preliminary proxystatement with the Securities and Exchange Commission, or SEC.  On May 18, 2005, the SEC staff informed theCompany that it was preparing comments on the preliminary proxy statement.  Although we have not yet received formalwritten comments, based on conversations between the our management and SECstaff regarding the comments we believe we will be in a position to file ourdefinitive proxy statement before the end of May 2005.  In such case, we anticipate that the closingwould occur during the first week of July, 2005.  Otherwise, we would anticipate that theclosing would take place during the first week of August, 2005. If we received approval from our shareholders, we would close thetransaction and use the net proceeds to pay off the remaining liabilities ofthe Company and shut down our corporate headquarters and terminate theremaining employees.  Remaining fundswould then be distributed to our shareholders in accordance with Delaware law.A more detailed explanation of the process of liquidation and dissolution ofthe Company will be provided in the definitive proxy statement to bedistributed to the shareholders of the Company. 

If the Claranet Sale does not receive approval of our shareholders, wewould look to other alternative solutions to our liquidity issues, including  seeking a new buyer of all or some of our businessesor the Company as a whole or new financing to enable the Company to reach thepoint of generating positive cash flows and self-sustainability.  In order for us to achieve consolidatedpositive cash flow, and in light of reduced expectations in revenue generationfrom our VIA Express channel, we would be required to substantially reduce ouroperating expenses through a further elimination of headcount in certainoperations and in our headquarters staff. However, reduction of staff would requireVIA to make employment termination payments of material amounts and wecurrently do not have the cash resources to implement this cost savingsplan.  We would seek to raise new equityor debt financing in a short period of time, which may not be available to us.Without new capital in the short term, we would not be able to continue tooperate as a going concern.

 

During and subsequent to the end of the quarter ended March 31,2005, we have engaged in discussions with the former owners of the PSINet Europecompanies with a view toward renegotiating the Euro 6.0 million ($7.8 million) zerocoupon convertible note obligation. Taking into account VIA’s current financial position, among otherthings, the sellers have agreed in principal to compromise the payment to bedue under the note. Under the proposed settlement, VIA would make a cashpayment of approximately $2.0 million and issue 6,713,980 of common sharesto the holder of the note at or immediately after the closing of the AssetSale; the cash payment and share issuance would be in full satisfaction of thenote.  In exchange for the compromise ofthe note obligation, VIA

 

28

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would release the sellers of all present and future claims we now or inthe may have future have under the purchase agreement under which we acquiredthe PSINet Europe companies, including any warranty or indemnificationclaims.  If the note renegotiation iscompleted as currently proposed, the contractual indemnifications and warrantiesprovided by the sellers of the PSINet Europe companies under the purchaseagreement would be waived and released and any third party claims that wouldhave been subject to such indemnification or warranty protection would then befor our account.

 

**Uses and Sources of Cash.**Cash used in operating activities was $7.0 million for the three monthsended March 31, 2005 and $8.8 million for the three months ended March 31,2004. Cash flows from operating activities can vary significantly from periodto period depending on the timing of operating cash receipts and payments andother working capital changes, especially accounts receivable, other currentassets, accounts payable, accrued expenses and other current liabilities. Inboth periods, our net losses were the primary component of cash used inoperating activities, these losses include some significant non-cash items suchas depreciation, amortization, provision for doubtful accounts receivable,impairment and unrealized foreign currency transaction gains.

 

Cash used in investing activities was $9,000 for the three months endedMarch 31, 2005 and $9.7 million for the three months ended March 31,2004. For the three months ended March 31, 2005, we used $1.3 million ofcash in relation to the finalization of the working capital balance for theacquisition of PSINet Europe during 2004, used cash of $1.0 million to purchasetangible fixed assets and received cash of $1.3 million from the sale of VIANET.WORKS, Inc. after resolution of a working capital contingency. For thethree months ended March 31, 2004, we used cash of $7.7 million to acquire100% of the issued and outstanding shares of the Amen Group and used cash of$1.7 million to purchase tangible fixed assets. 

 

We used cash from financing activities of $0.5 million for thethree months ended March 31, 2005. We received cash in financingactivities of $0.3 million for the three months ended March 31, 2004. Forthe three months ended March 31, 2005, $0.5 million was used forrepayments of debt and capital lease obligations. In the three months ended March 31,2004, cash was received primarily from the issuance of common stock.  

 

The foregoing statements regarding our liquidity and possible need foradditional capital resources are forward-looking statements based on ourcurrent expectations, which involve certain risks and uncertainties. Actualresults and the timing of these events could differ materially from theseforward-looking statements depending upon certain factors that we cannotpredict, including the nature, size and timing of future acquisitions anddispositions, if any, our future net income and our success in executing ourStrategic Plan as well as other factors discussed in “Risk Factors” describedin Exhibit 99-1 on this Form 10-Q, as well as those described in the “RiskFactors” section of our 2004 Annual Report.

 

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**ITEM 3.QUANTITATIVE AND**QUALITATIVE DISCLOSURES ABOUT MARKET RISK

** **

The following discussion relates to any changes in our exposure tomarket risk, related to changes in interest rates and changes in foreignexchange rates from that disclosed in our 2004 Annual Report. This discussioncontains forward-looking statements that are subject to risks anduncertainties. Actual results could differ materially due to a number offactors, as set forth in the “Risk Factors” included as Exhibit 99.1 onthis Form 10-Q and included in the “Risk Factors” section of our 2004Annual Report.

 

***ForeignCurrency Exchange Risks***

 

Transaction risks

 

The parent company’s cash balances consist of Euros, Swiss Francs,British Pounds and U.S. dollars. The Euro, Swiss Franc bank account is revaluedeach month and the resultant gain or loss is reflected in the condensedconsolidated statements of operations as “Foreign currency gains/(losses), net.”This exposes the Company to foreign currency exchange rate risk in theStatement of Operations. For example, as of March 31, 2005, a 10% increaseor decrease in the level of the Euro exchange rate against the U.S. dollar withall other variables held constant would result in a realized gain or loss ofapproximately $6.6 million. The change in exposure from period to periodis related to the change in the balance of the Euro cash and intercompanyaccounts. At March 31, 2005, the Company held approximately Euro 7.0 millionin the Euro cash account, CHF 1.8 million in the Swiss Franc cash account andGBP 0.7 million in the GBP cash account and remains exposed to changes in theforeign currency rate. However, such rate fluctuations should have a smallerimpact in future as the balances have continued to reduce.

 

The fluctuation in the exchange rates resulted in foreign currencylosses reflected in the consolidated statements of operations as “Foreigncurrency gains losses, net” of $3.3 million and $1.7 million for thethree months ended March 31, 2004 and 2005 respectively.

 

Translation risks

 

The financial statements of the Company’s local operating subsidiarieswith a functional currency other than U.S. dollars are translated into U.S.dollars using the current rate method. Accordingly, assets and liabilities aretranslated at period-end exchange rates while revenue and expenses aretranslated at the period’s average exchange rates. Adjustments resulting fromthese translations are accumulated and reported as a component of accumulatedother comprehensive loss in stockholders’ equity. Foreign currency translationadjustments are reclassified into the statement of operations when theunderlying investment is sold or substantially liquidated. Upon completion ofthe VIA NET.WORKS (Schweiz) AG and VIA NET.WORKS Services AG sale, we expect torecord a loss in the statement of operations for the three months ending June 30,2005, relating to amounts previously recorded in accumulated othercomprehensive loss. Similarly, in the three months ending September 30,2005, we anticipate a loss of $31.6 million upon completion of the Claranetsale. 

 

The fluctuation in the exchange rates resulted in foreign currencytranslation gains reflected as a component of accumulated other comprehensivegain in stockholders’ equity, net of $1.9 million and $ 2.3 million forthe three months ended March 31, 2004 and 2005 respectively.

 

Exchange rates can vary significantly. The Euro high and low rates variedby approximately 7% in relation to the U.S. dollar during the three months endedMarch 31, 2005. The Swiss Franc high and low rates varied by approximately9% in relation to the U.S. dollar during the three months ended March 31,2005. This variation affects the average exchange rates used to translate theincome statements of our operating companies whose functional currency is notU.S. dollars. At March 31, 2005, the Euro to U.S. dollar exchange rate wasapproximately 6% above where it was at March 31, 2004 and the Swiss Francto U.S. dollar exchange rate was approximately 7% above where it was at March 31,2004. 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 and SwissFranc could have a material impact on our financial position and results ofoperations. We also experienced fluctuations in other exchange rates.

 

Hedging against foreign exchange risks

 

For the three months ended March 31, 2005 we did not activelymanage our exposure to foreign currency translation risks that affect ourreported results, which result in no cash impact unless the operation is sold.We have in the past considered insurance and financial risk products to managethis risk, but determined such products to be prohibitively expensive. Wecurrently have no hedging arrangements or derivatives in place to address thisform of translation risk.

 

The parent company maintains an Euro cash balance, a Swiss Franc cashbalance and a British Pound balance to meet the working capital requirements ofthe operating subsidiaries with a Euro, Swiss Franc or British Pound functionalcurrency. The parent company maintains its remaining cash resources in U.S.dollars.

 

30

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**ITEM 4.CONTROLS AND PROCEDURES**

 

Ourmanagement and the Audit Committee of the board of directors has engaged inregular evaluations of our internal controls, as well as the processes wemaintain to ensure that all material information relating to us and oursubsidiaries is recorded, processed, summarized, evaluated and reported withinthe time periods specified by rules established by the Securities andExchange Commission.  These latterprocesses are known as Disclosure Controls and Procedures.  Disclosure Controls and Procedures are alsodesigned to ensure that all such information is communicated to our management,including our CEO and CFO, in such a manner as to allow timely decisions to bemade regarding required disclosures.

 

Wehave evaluated, with the oversight of our CEO and CFO, the effectiveness of ourDisclosure Controls and Procedures as of March 31, 2005.  In designing and evaluating the DisclosureControls and Procedures, our management necessarily was required to apply itsjudgment in evaluating the costs and benefits of possible controls andprocedures.  In addition, we recognizethat Disclosure Controls and Procedures by their nature can provide only reasonableassurance that our information flow objectives are met. As of March 31,2005 our CEO and CFO have concluded that our Disclosure Controls and Proceduresare effective in all material respects.

 

Duringthe year ended December 31, 2004, we acquired the Amen group of companiesand the operations of PSINet Europe in Switzerland, Germany, The Netherlands,Belgium and France, and we have disposed of our subsidiary VIA NET.WORKS (UK)Ltd.  Post acquisition, we have conductedan initial assessment of the internal control environments and DisclosureControls and Procedures of both the Amen group and the acquired PSINetbusinesses.  Based on this assessment, weconcluded that these additions and the disposal of the UK business had neithermaterially affected, nor were reasonably likely to materially affect, ourinternal control over financial reporting.

 

Wehave completed the back-office systems implementation for our newly acquiredPSINet businesses during the three months ended March 31, 2005. Theremaining VIA legacy business in Switzerland was subsequently sold on April 1,2005 back to the former owners and is therefore now outside the scope of theback office systems migration project.  

 

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

 

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**PART II**

 

**Item 1.****Legal Proceedings**

 

There have been no significant developments regarding legal proceedingssince the filing of VIA’s Form 10-K on April 26, 2005. See note 11 tothe condensed consolidated financial statements for further information.

 

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

 

*Changes in Securities:*

 

None.

 

*Use of InitialPublic Offering Proceeds:*

 

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

 

The net offering proceeds after deducting the expenses and underwritingdiscounts and commissions was approximately $333.0 million. From theeffective date of the initial public offering through March 31, 2005, wehave used $110.7 million for acquisitions of other businesses, includingthe repayment of debt for acquisitions we made in 1999, increases in ourinvestment in various partially owned subsidiaries, $60.7 million forcapital expenditures and approximately $167.8 million to fund operatinglosses.

 

**Item 3.****Defaults Upon Senior Securities**

 

None.

 

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

 

None.

 

**Item 5.****Other Information**

 

None.

 

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

 

**a) Exhibits**

 
| **Exhibits**      | ** ** | ** **                                                                                                                                |
|-------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit 31.1 |       | Section 302 Certification – Chief Executive Officer                                                                             |
| Exhibit 31.2 |       | Section 302 Certification – 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) Reports on Form 8-K**

 

We filed four reports on Form 8-K during the three months ended March 31,2005. On January 31, 2005, we filed a Form 8-K announcing that our Board of Directors appointedRaymond Walsh as Chief Executive Officer of the Company. On February 3,2005, we filed a Form 8-K announcing that Erik M. Torgerson submitted hisresignation and stepped down from the Board of Directors of the Company.  On March 15, 2005, we filed a Form 8-Kannouncing that the Company entered into an employment agreement with RaymondWalsh.  On March 18, 2005, we fileda Form 8-K announcing that the Company issued a press release to announcethat it is working with its professional advisors to obtain new financing toaddress an urgent liquidity problem and that it also is considering the sale ofpart or all of its business, among other alternatives.

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,VIA NET.WORKS, Inc. has duly caused this report to be signed on its behalfby the undersigned, thereunto duly authorized

 
|     | VIA NET.WORKS, INC.     |
|----------|-------------------------|
|     |                    |   |
|     |                    |   |
|     | Date: May 20, 2005 | By: | /s/ Ray Walsh |
| * * | * *                | *Chief Executive Officer (Principal  Executive Officer)* |
| * * | * *                | * * |
| * * | * *                | * * |
|     | Date: May 20, 2005 | By: | /s/ Cameron Mackenzie |
| * * | * *                | *Chief Financial Officer  (Principal Financial and Accounting Officer)* |

 

33

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**EXHIBIT INDEX**

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

 

34

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