**SECURITIESAND 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, 2004** |
|                                                   |
| **OR**                                                 |
|                                                   |
| o                                                      |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commissionfile number: 000-29391**

 

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**VIANET.WORKS, INC.**

(Exact name of registrant as specified in itscharter)

 

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

 

**H. WalaardtSacrestraat 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 5th, 2004, there were outstanding 56,003,988 shares ofthe registrant’s common stock and 5,050,000 shares of the registrant’snon-voting common stock.

 

 

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**VIANET.WORKS, INC.**

 

**TABLEOF CONTENTS**

 
| PART I.  FINANCIAL INFORMATION |                                                                                                     |
|--------------------------------|----------------------------------------------------------------------------------------------------------|
| Item 1.                        | Financial Statements:                                                                                    | 3 |
|                           | Condensed Consolidated Balance Sheets as of  December 31, 2003 and March 31, 2004              | 3 |
|                           | Condensed Consolidated Statements of  Operations for the three months ended March 31, 2003 and 2004 | 4 |
|                           | Condensed Consolidated Statements of Cash  Flows for the three months ended March 31, 2003 and 2004 | 5 |
|                           | Notes to Condensed Consolidated Financial  Statements                                                    | 6 |
| Item 2.                        | Management’s Discussion and Analysis of  Financial Condition and Results of Operations              | 12 |
| Item 3.                        | Quantitative and Qualitative Disclosures  About Market Risk                                              | 21 |
| Item 4.                        | Controls and Procedures                                                                                  | 22 |
| PART  II. OTHER INFORMATION    | 23                                                                                                       |
| Item 1.                        | Legal Proceedings                                                                                        | 23 |
| Item 2.                        | Changes in Securities and Use of Proceeds                                                                | 23 |
| Item 3.                        | Defaults Upon Senior Securities                                                                          | 23 |
| Item 4.                        | Submission of Matters to a Vote of Security  Holders                                                     | 23 |
| Item 5.                        | Other Information                                                                                        | 23 |
| Item 6.                        | Exhibits and Reports on Form 8-K                                                                         | 23 |
| SIGNATURES                     | 24                                                                                                       |
| EXHIBIT  INDEX                 | 25                                                                                                       |
| 302 CERTIFICATIONS             |                                                                                                     |

 

2

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**PART I**

 

**ITEM 1. FINANCIAL STATEMENTS**

** **

**VIANET.WORKS, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

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

 
|                                                                                                                 |   | **December 31,  2003** |    | **March 31,  2004** |   |
|----------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|---------|--------------------------|--------|
|                                                                                                                 |   |                        |    | **(Unaudited)**          |   |
| **ASSETS**                                                                                                           |   |                        |    |                     |   |
| Current assets:                                                                                                      |   |                        |    |                     |   |
| Cash and cash equivalents                                                                                            |   | $                           | 65,803  |                     | $      | 46,941 |   |
| Restricted cash                                                                                                      |   | 1,391                       |    | 1,400                    |   |
| Trade and other accounts receivable, net of  allowance of $1,911 and $2,507 respectively                             |   | 14,295                      |    | 18,542                   |   |
| Other current assets                                                                                                 |   | 4,542                       |    | 5,685                    |   |
| Deferred tax assets                                                                                                  |   | —                      |    | 1,586                    |   |
|                                                                                                                 |   |                        |    |                     |   |
| Total current assets                                                                                                 |   | 86,031                      |    | 74,154                   |   |
| Property and equipment, net                                                                                          |   | 12,003                      |    | 12,534                   |   |
| Goodwill                                                                                                             |   | 3,111                       |    | 13,984                   |   |
| Intangible assets, net                                                                                               |   | 731                         |    | 4,979                    |   |
| Other non-current assets                                                                                             |   | 884                         |    | 1,119                    |   |
| Deferred tax asset                                                                                                   |   | 7,928                       |    | 7,928                    |   |
|                                                                                                                 |   |                        |    |                     |   |
| Total assets                                                                                                         |   | $                           | 110,688 |                     | $      | 114,698 |   |
|                                                                                                                 |   |                        |    |                     |   |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                       |   |                        |    |                     |   |
| Current liabilities:                                                                                                 |   |                        |    |                     |   |
| Accounts payable                                                                                                     |   | $                           | 10,021  |                     | $      | 11,479 |   |
| VAT and other taxes payable                                                                                          |   | 1,303                       |    | 2,010                    |   |
| Current portion of capital lease  obligations and long-term payables                                                 |   | 173                         |    | 444                      |   |
| Deferred revenue                                                                                                     |   | 13,264                      |    | 17,584                   |   |
| Accrued expenses                                                                                                     |   | 7,659                       |    | 9,530                    |   |
| Deferred tax liability                                                                                               |   | 7,928                       |    | 7,928                    |   |
| Other current liabilities                                                                                            |   | 1,848                       |    | 2,178                    |   |
|                                                                                                                 |   |                        |    |                     |   |
| Total current liabilities                                                                                            |   | 42,196                      |    | 51,153                   |   |
| Capital lease obligations and long-term  payables, less current portion                                              |   | 328                         |    | 278                      |   |
| Deferred tax liability                                                                                               |   | —                      |    | 1,254                    |   |
|                                                                                                                 |   |                        |    |                     |   |
| Total liabilities                                                                                                    |   | 42,524                      |    | 52,685                   |   |
|                                                                                                                 |   |                        |    |                     |   |
| Commitments and contingencies (Note 11)                                                                              |   |                        |    |                     |   |
|                                                                                                                 |   |                        |    |                     |   |
| Stockholders’ equity:                                                                                           |   |                        |    |                     |   |
| Preferred stock, $.001 par value;  10,000,000 shares authorized; no shares issued and outstanding                    |   | —                      |    | —                   |   |
| Common stock, $.001 par value; 132,500,000  shares authorized; 61,507,694 and 62,533,111 shares issued, respectively |   | 62                          |    | 63                       |   |
| Additional paid-in capital                                                                                           |   | 556,112                     |    | 557,851                  |   |
| Treasury stock, 1,520,789 shares                                                                                     |   | (1,521                      | )       | (1,521                   | )      |
| Accumulated deficit                                                                                                  |   | (452,154                    | )       | (461,971                 | )      |
| Accumulated other comprehensive loss                                                                                 |   | (34,335                     | )       | (32,409                  | )      |
|                                                                                                                 |   |                        |    |                     |   |
| Total stockholders’ equity                                                                                      |   | 68,164                      |    | 62,013                   |   |
|                                                                                                                 |   |                        |    |                     |   |
| Total liabilities and stockholders’ equity                                                                      |   | $                           | 110,688 |                     | $      | 114,698 |   |

 

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

 

3

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**VIANET.WORKS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(Unaudited)**

 
|                                                       |   | **For the  three months ended March 31,** |   |
|------------------------------------------------------------|--------|------------------------------------------------|--------|
|                                                       |   | **2003**                                       |   | **2004** |   |
| Revenue                                                    |   | $                                              | 17,766 |   | $ | 18,218 |   |
|                                                       |   |                                           |   |   |   |
| Operating costs and expenses:                              |   |                                           |   |   |   |
| Internet services                                          |   | 8,520                                          |   | 8,747 |   |
| Selling, general and administrative                        |   | 14,698                                         |   | 17,112 |   |
| Impairment and restructuring charges                       |   | 867                                            |   | 300 |   |
| Depreciation and amortization                              |   | 2,048                                          |   | 2,434 |   |
|                                                       |   |                                           |   |   |   |
| Total operating costs and expenses                         |   | 26,133                                         |   | 28,593 |   |
|                                                       |   |                                           |   |   |   |
| Operating loss from continuing operations                  |   | (8,367                                         | )      | (10,375 | ) |
|                                                       |   |                                           |   |   |   |
| Interest income                                            |   | 422                                            |   | 108 |   |
| Interest expense                                           |   | (4                                             | )      | (18 | ) |
| Other (expense) income, net                                |   | (42                                            | )      | 3,779 |   |
| Foreign currency gains (losses), net                       |   | 2,549                                          |   | (3,327 | ) |
| Loss from continuing operations before  income taxes       |   | (5,442                                         | )      | (9,833 | ) |
| Income tax benefit                                         |   | —                                         |   | 16 |   |
|                                                       |   |                                           |   |   |   |
| Net loss from continuing operations                        |   | (5,442                                         | )      | (9,817 | ) |
|                                                       |   |                                           |   |   |   |
| Discontinued operations:                                   |   |                                           |   |   |   |
| Loss from discontinued operations                          |   | (33                                            | )      | — |   |
|                                                       |   |                                           |   |   |   |
| Net loss                                                   |   | $                                              | (5,475 | ) | $ | (9,817 | ) |
|                                                       |   |                                           |   |   |   |
| Basic and diluted loss per share:                          |   |                                           |   |   |   |
| Continuing operations                                      |   | $                                              | (0.09  | ) | $ | (0.16 | ) |
| Discontinued operations                                    |   | —                                         |   | — |   |
|                                                       |   |                                           |   |   |   |
| Net loss per share—basic and diluted                  |   | $                                              | (0.09  | ) | $ | (0.16 | ) |
|                                                       |   |                                           |   |   |   |
| Shares used in computing basic and diluted  loss per share |   | 60,147,704                                     |   | 60,708,602 |   |

 

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

 

4

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**VIANET.WORKS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

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

**(Unaudited)**

 
|                                                                                                    |   | **For the  three months ended  March 31,** |   |
|---------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------|--------|
|                                                                                                    |   | **2003**                                        |   | **2004** |   |
| Cash flows from operating activities:                                                                   |   |                                            |   |   |   |
| Net loss from continuing operations                                                                     |   | $                                               | (5,442 | ) | $ | (9,817 | ) |
| Adjustments to reconcile net loss from  continuing operations to net cash used in operating activities: |   |                                            |   |   |   |
| Depreciation and amortization                                                                           |   | 2,048                                           |   | 2,434 |   |
| Impairment charges                                                                                      |   | 134                                             |   | — |   |
| Provision for doubtful accounts receivable                                                              |   | 263                                             |   | 337 |   |
| Unrealized foreign currency transaction  (gains) losses                                                 |   | (1,771                                          | )      | 2,510 |   |
| Deferred tax                                                                                            |   | —                                          |   | 28 |   |
| Stock compensation                                                                                      |   | —                                          |   | 80 |   |
| Changes in assets and liabilities, net of  acquisitions:                                                |   |                                            |   |   |   |
| Trade accounts receivable                                                                               |   | 2,324                                           |   | (620 | ) |
| Other current assets                                                                                    |   | (1,770                                          | )      | (4,431 | ) |
| Other non-current assets                                                                                |   | —                                          |   | (2 | ) |
| Accounts payable                                                                                        |   | (943                                            | )      | (230 | ) |
| VAT and other taxes payable                                                                             |   | (230                                            | )      | 320 |   |
| Accrued expenses                                                                                        |   | 566                                             |   | 671 |   |
| Other current liabilities                                                                               |   | 148                                             |   | 192 |   |
| Deferred revenue                                                                                        |   | (1,186                                          | )      | (675 | ) |
| Net cash used in operating activities                                                                   |   | (5,859                                          | )      | (9,203 | ) |
| Cash flows from investing activities:                                                                   |   |                                            |   |   |   |
| Increase in restricted cash                                                                             |   | (17                                             | )      | (51 | ) |
| Acquisition of subsidiaries (net of cash  acquired)                                                     |   | —                                          |   | (7,735 | ) |
| Purchases of property, equipment and other  assets                                                      |   | (541                                            | )      | (1,899 | ) |
| Net cash used in investing activities                                                                   |   | (558                                            | )      | (9,685 | ) |
| Cash flows from financing activities:                                                                   |   |                                            |   |   |   |
| Repayment of debt and principal payments on  capital lease obligations                                  |   | (32                                             | )      | (50 | ) |
| Proceeds from issuance of common stock, net                                                             |   | —                                          |   | 311 |   |
| Net cash (used in) received from financing  activities                                                  |   | (32                                             | )      | 261 |   |
| Cash flows used by discontinued operations                                                              |   | (307                                            | )      | — |   |
| Effect of currency exchange rate changes on  cash                                                       |   | 11                                              |   | (235 | ) |
| Net decrease in cash and cash equivalents                                                               |   | (6,745                                          | )      | (18,862 | ) |
| Cash and cash equivalents, beginning of  period                                                         |   | 97,813                                          |   | 65,803 |   |
| Cash and cash equivalents, end of period                                                                |   | $                                               | 91,068 |   | $ | 46,941 |   |

 

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

 

5

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**VIANET.WORKS, INC.**

 

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**(Unaudited)**

 

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

 

These condensedconsolidated financial statements as of March 31, 2004 and for the threemonth periods ended March 31, 2003 and 2004 and the related footnoteinformation are unaudited and have been prepared on a basis substantiallyconsistent with the audited consolidated financial statements of VIANET.WORKS, Inc. (“VIA” or “the Company”) as of and for the year endedDecember 31, 2003, included in VIA’s Annual Report on Form 10-K as filedwith the Securities and Exchange Commission (“2003 Annual Report”). Thesecondensed consolidated financial statements should be read in conjunction withthe audited consolidated financial statements and the related notes to thefinancial statements included in the 2003 Annual Report. In the opinion ofmanagement, the accompanying unaudited condensed consolidated financialstatements contain all adjustments (consisting of normal recurring adjustments)that management considers necessary to present fairly the consolidatedfinancial position of VIA at March 31, 2004 and the results of itsoperations and its cash flows for the three month periods ended March 31,2003 and 2004. The results of operations for the three-month period endedMarch 31, 2004 may not be indicative of the results expected for anysucceeding quarter or for the year ending December 31, 2004. Certain priorperiod amounts have been reclassified to conform to the current periodpresentation. Reclassifications have been made to prior period amounts toaccount 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.

 

**2.****                                      DiscontinuedOperations**

 

In July 2003 VIA NET.WORKS Italia, which had been included in theEuropean segment, was sold for nominal consideration to the then-currentmanagement team. VIA also sold its operations in Brazil and Mexico in 2002, butbecause of the method by which these transactions were structured, theseoperations were not treated as discontinued operations in 2002 but ratherclassified as businesses transferred under contractual agreements. The Companyeliminated all continuing involvement in these operations in 2003 and both arenow treated as discontinued operations for all periods presented. See note 2 ofthe financial statements included in the 2003 Annual Report for furtherdetails.

 

As each of the Italian, Brazilian and Mexican operations represented acomponent of an entity as defined by SFAS 144, *“Accounting for the Impairment or Disposal of Long-Lived Assets”*,the Company has classified each operation as a discontinued operation for allperiods presented. Revenues related to discontinued operations wereapproximately $0.3 million and nil for the three months endedMarch 31, 2003 and 2004, respectively. The loss from discontinuedoperations was ($33,000) and nil for the three months ended March 31, 2003and 2004, respectively.

 

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

 

*Impairment charges:*

 

There were noimpairment charges for the three months ended March 31, 2004. During thefirst quarter of 2003, the Company recorded fixed asset impairment charges of$0.1 million for fixed asset fixtures and fittings that were written down tonet realisable value as a result of the closure of the Reston office.

 

*Restructuring charges:*

 
| **In thousands of U.S. dollars**   |   | **Balance at  December 31,  2002** |   | **Additions** |   | **Reserves  utilized** |   | **Foreign  exchange** |   | **Balance at  March 31,  2003** |   |
|------------------------------------|--------|-----------------------------------------|--------|---------------|--------|------------------------|--------|-----------------------|--------|--------------------------------------|--------|
|                               |   |                                    |   |          |   |                   |   |                  |   |                                 |   |
| Employee termination payments      |   | 415                                     |   | 676           |   | (610                   | )      | —                |   | 481                                  |   |
| Future operating lease obligations |   | 456                                     |   | 57            |   | (73                    | )      | —                |   | 440                                  |   |
|                               |   |                                    |   |          |   |                   |   |                  |   |                                 |   |
| Total restructuring charges        |   | $                                       | 871    |          | $      | 733                    |   | $                     | (683   | )                                    | — |   | $ | 921 |   |
|                                    |        |                                         |        |               |        |                        |        |                       |        |                                      |        |  |  |  |  |

 

6

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| **In thousands of U.S. dollars**   |   | **Balance at  December 31,  2003** |   | **Additions** |   | **Reserves  utilized** |   | **Foreign  exchange** |   | **Balance at  March 31,  2004** |   |
|------------------------------------|--------|-----------------------------------------|--------|---------------|--------|------------------------|--------|-----------------------|--------|--------------------------------------|--------|
|                               |   |                                    |   |          |   |                   |   |                  |   |                                 |   |
| Employee termination payments      |   | 285                                     |   | 151           |   | (217                   | )      | 1                     |   | 220                                  |   |
| Future operating lease obligations |   | 276                                     |   | —        |   | (65                    | )      | —                |   | 211                                  |   |
| Other                              |   | 121                                     |   | 149           |   | (114                   | )      | —                |   | 156                                  |   |
|                               |   |                                    |   |          |   |                   |   |                  |   |                                 |   |
| Total restructuring charges        |   | $                                       | 682    |          | $      | 300                    |   | $                     | (396   | )                                    | $      | 1 |   | $ | 587 |   |
|                                    |        |                                         |        |               |        |                        |        |                       |        |                                      |        |  |  |  |  |  |

 

2003

 

Duringthe first quarter of 2003, the Company recorded restructuring charges of $0.7million related to severance payments at four of its operations and an adjustmentto the future lease obligations for the closure of the Reston, Virginiaoffice.  The employee termination costsincurred in the quarter of $0.7 million relate to the severance and benefitsfor twenty-seven employees at four European operations. Cash payments of $0.7million were made in the quarter ($0.4 million by European operations and $0.3million by Corporate).

 

The future operating lease obligations figure of $0.4million relates to the Reston office. The accrual has been drawn down by themonthly payments on the office lease, which continues throughFebruary 2005, and related legal fees.

 

2004

 

TheCompany recorded restructuring charges of $0.3 million during the three monthsended March 31, 2004 related to severance payments at the corporate headquartersand transition implementation costs for back-office and administrativeoutsourcing initiatives. Cash payments for severance and benefits of $0.2million were made in the first quarter of 2004 by the European operations ($0.1million) and Corporate ($0.1 million). The employee termination costs of $0.2million for the three months ended March 31, 2004 relate to five employeesin finance at the corporate headquarters. The resulting accrual of $0.2 millionat March 31, 2004 relates to six employees in finance (five at thecorporate headquarters and one at the European operations).

 

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

 

Certain of the actions VIA might take as part of itsstrategic plan may lead to additional impairment or restructuring charges infuture periods and such amounts may be material.

 

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

 

In January 2004, the Company purchased 100% of the issued andoutstanding shares of Amen SAS, Amen Srl and Amen Limited (collectively“Amen”), a European web-hosting company based in Paris, France. Amen hasoperations in France, the United Kingdom, Spain and Italy. The Company acquiredAmen to strengthen its Europe segment and benefit from Amen’s operatingplatform and service offerings. The Company paid $7.5 million in cash andissued 673,652 shares of its common stock, which had a market value of $2 pershare on the date of acquisition having a total value of approximately$1.3 million for Amen common stock. The former shareholders will have theopportunity to receive further consideration expected to be between$0.7—$2.2 million in cash and the Company’s common stock, based on the2004 operating performance of Amen. The purchase consideration calculated belowincludes $0.7 million of additional consideration, which is currentlydeterminable. If any further amounts are paid to the former shareholders, thiswill result in a corresponding increase in the amount of goodwill recognized.

 

The preliminary purchase price allocation is as follows:

 

| **In thousands of U.S. dollars**                     |   |   |   |
|------------------------------------------------------|--------|--------|--------|
| Goodwill  (Europe segment)                           |   | $      | 11,157 |   |
| Intangible  assets                                   |   | 4,522  |   |
| Other  assets and liabilities                        |   | (5,006 | )      |
|                                                 |   |   |   |
| Purchase  consideration, including acquisition costs |   | $      | 10,673 |   |

 

The intangible assets are beingamortized over 3-10 years. The results of Amen have been includedfrom January 28, 2004, the acquisition date. The allocation of purchaseconsideration is preliminary and may change once the Company completes itsvaluation of

 

7

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the assets and liabilities acquired. It is anticipated that the finalallocation of purchase price will not differ materially from the preliminaryallocation.

 

The actual results of operations for the three months endedMarch 31, 2004 did not differ materially from the pro forma results ofoperations computed under the assumption that the acquisition was consummatedeffective January 1, 2004.

 

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

 

The provision for taxesbased on income for the 2003 and 2004 interim periods was computed inaccordance with Interpretation No. 18 of Accounting Principles Board OpinionNo. 28 on reporting taxes for interim periods and was based on management’sexpectations of tax expense having an effective income tax rate of 0%.

 

**6.****                                      ComprehensiveLoss**

 

Comprehensive loss for the three months ended March 31, 2003 and2004 was as follows:

 

|                                                    |   | **Three  months ended  March 31,** |   |
|---------------------------------------------------------|--------|-----------------------------------------|--------|
| **In thousands of U.S. dollars**                        |   | **2003**                                |   | **2004** |   |
| Net loss                                                |   | $                                       | (5,475 | ) | $ | (9,817 | ) |
| Foreign currency translation adjustment  (losses) gains |   | (1,786                                  | )      | 1,926 |   |
|                                                    |   |                                    |   |   |   |
| Comprehensive loss                                      |   | $                                       | (7,261 | ) | $ | (7,891 | ) |

 

**7.****                                      Propertyand Equipment, net**

 

Property and equipment consisted of the following:

 
| **In thousands of U.S. dollars** |   | **December 31,  2003** |   | **March 31,  2004** |   |
|----------------------------------|--------|-----------------------------|--------|--------------------------|--------|
| Hardware and other equipment     |   | $                           | 16,393 |                     | $      | 17,156 |   |
| Network and data center assets   |   | 11,914                      |   | 13,205                   |   |
| Software                         |   | 14,471                      |   | 15,363                   |   |
| Furniture and fixtures           |   | 1,105                       |   | 1,079                    |   |
|                             |   |                        |   |                     |   |
|                             |   | 43,883                      |   | 46,803                   |   |
| Accumulated depreciation         |   | (31,880                     | )      | (34,269                  | )      |
|                             |   |                        |   |                     |   |
| Property and equipment, net      |   | $                           | 12,003 |                     | $      | 12,534 |   |

 

Depreciation expense was $2.0 million and $2.1 million forthe three months ended March 31, 2003 and 2004, respectively.

 

**8.****                                      Goodwill**

 

The changes in the carrying amount of goodwill during the three monthsended March 31, 2004 are as follows:

 
| **In thousands of U.S. dollars**     |   | **Total** |   | **Europe** |   | **Americas** |   |
|--------------------------------------|--------|-----------|--------|------------|--------|--------------|--------|
| Balance as of December 31, 2003 |   | $         | 3,111  |       | $      | 1,965        |   | $ | 1,146 |   |
| Acquisition (see Note 4)             |   | 11,157    |   | 11,157     |   | —       |   |
| Foreign exchange adjustment          |   | (284      | )      | (284       | )      | —       |   |
|                                 |   |      |   |       |   |         |   |
| Balance as of March 31, 2004    |   | $         | 13,984 |       | $      | 12,838       |   | $ | 1,146 |   |

 

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

 

Intangible assets consisted of the following:

 

8

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| **In thousands of U.S. dollars** |   | **December 31,  2003** |   | **March 31,  2004** |   |
|----------------------------------|--------|-----------------------------|--------|--------------------------|--------|
| Customer lists                   |   | $                           | 794    |                     | $      | 3,123 |   |
| Software                         |   | —                      |   | 1,948                    |   |
| Tradename                        |   | —                      |   | 244                      |   |
| Accumulated amortization         |   | (63                         | )      | (336                     | )      |
|                             |   |                        |   |                     |   |
| Intangible assets , net          |   | $                           | 731    |                     | $      | 4,979 |   |

 

The amortization expense for the three-month periodsended March 31, 2003 and 2004 was nil and $0.3 million, respectively. SeeNote 4 for intangible asset additions from the acquisition of Amen.

 

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

 

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**                                                                                               |   | **2003**                                        |   | **2004** |   |
|                                                                                                                           |   |                                            |   |   |   |
| Net loss (as reported)                                                                                                         |   | $                                               | (5,475 | ) | $ | (9,817 | ) |
| 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 |   | (1,184                                          | )      | (609 | ) |
| Proforma  net loss                                                                                                             |   | $                                               | (6,659 | ) | $ | (10,346 | ) |
|                                                                                                                           |   |                                            |   |   |   |
| Net loss per share, basic and diluted (as  reported)                                                                           |   | $                                               | (0.09  | ) | $ | (0.16 | ) |
| Net loss per share, basic and diluted  (proforma)                                                                              |   | $                                               | (0.11  | ) | $ | (0.17 | ) |

 

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.

 

**11.****                               Contingencies**

 

*Legal Proceedings*

 

On November 5, 2001 a class action lawsuit was filed in theDistrict Court for the Southern District of New York against VIANET.WORKS, Inc., certain of the underwriters who supported its initialpublic offering (“IPO”) and certain of its 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 theCompany filed with its registration statement in connection with its IPO wasmaterially false and misleading because it failed to disclose, among otherthings, that: (i) the named underwriters had solicited and receivedexcessive and undisclosed commissions from certain investors in exchange forthe right to purchase large blocks of VIA IPO shares; and (ii) the namedUnderwriters had entered into agreements with certain of their customers toallocate VIA IPO shares in exchange for which the customers agreed to purchaseadditional VIA shares in the aftermarket at pre-determined prices (“Tie-inArrangements”), thereby artificially inflating the Company’s stock price. TheComplaint further alleges violations of Sections 11, 12(a)(2) and 15 of theSecurities Act of 1933 and Section 10(b) of the Securities Exchange Act of1934 and Rule 10b-5 promulgated thereunder arising out of the allegedfailure to disclose

 

9

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and the alleged materially misleading disclosures made with respect tothe commissions and the Tie-in Arrangements in the prospectus. The plaintiffsin this action seek monetary damages in an unspecified amount. Approximately300 other issuers and their underwriters have had similar suits filed againstthem, all of which are included in a single coordinated proceeding in theSouthern District of New York (the “IPO Litigation”).

 

On June 30, 2003, the special litigation committee of the board ofdirectors of the Company conditionally approved the global settlement betweenall plaintiffs and issuers in the IPO Litigations; the Company is in theprocess of completing a settlement with the plaintiffs in the case. Thesettlement would provide, among other things, a release of the Company and ofthe individual defendants for the conduct alleged in the action to be wrongfulby the plaintiffs. Under the proposed settlement, the Company would agree toundertake other responsibilities under the partial settlement, includingagreeing to assign away, not assert, or release certain potential claims theCompany may have against its underwriters. Any direct financial impact of theproposed settlement is expected to be borne by the Company’s insurers. Thespecial litigation committee agreed to approve the settlement subject to anumber of conditions, including the participation of a substantial number ofother defendants in the proposed settlement, the consent of the Company’sinsurers to the settlement, and the completion of acceptable final settlementdocumentation. Furthermore, the settlement is subject to a hearing on fairnessand approval by the Court overseeing the IPO Litigations. The Company continuesto progress toward settlement and awaits approval of settlement by all partiesinvolved.

 

*Guarantees*

 

From time to time, the Company enters into indemnification agreementswith certain contractual parties in the ordinary course of business, includingagreements with lenders, lessors, service providers and certain vendors. Allsuch indemnification agreements are entered into in the context of 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 three-month period ended March 31, 2003 and 2004was not material to the Company’s financial position, results of operations orcash 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,assets or operations.

 

**12.****                               SegmentReporting**

 

VIA offers a variety of Internet access, managed bandwidth, web-hosting,Internet security and related services to businesses and consumers in Europeand the Americas. As of March 31, 2004, VIA served primary markets in ninecountries. These country operations generate Internet-related revenues fromleased lines, dial-up Internet access, web-hosting and design, Internetsecurity and consulting services, and sales of third-party hardware andsoftware. All of the European operating companies are grouped into onereportable segment (Europe). The Company’s U.S operating company is reported asAmericas. The Company is reorganizing its sales operations into two channels:VIA Express and Industry Solutions. As the channels further develop over 2004,it is anticipated that the Company will begin to manage its operations aroundthese channels and will adapt its segment reporting accordingly.

 

The Company evaluates the performance of its segments based on revenueand operating loss. Corporate expenses, which also include the regional IRUcompanies, are shown to reconcile to the total consolidated figures. Totalsegment assets, as presented in the table below, are total assets net ofintercompany funding amounts. Prior period amounts have been reclassified toconform to the current period presentation. In prior reporting periods, the Companyhas provided information on categories of revenues that it generates. Becauseof the limitations the Company has experienced with its legacy billingplatforms and its ongoing projects to address these limitations, the Company isnot currently able to provide an accurate breakdown of its revenues. TheCompany anticipates that when it has completed its various systems and processremediation efforts, it will begin again to report revenue categories.

 

The table below presents the total assets by reportable segment as ofMarch 31, 2003 and 2004. In addition, the table presents information aboutthe reported revenue, operating loss from continuing activities, and impairmentand restructuring charges of the Company’s segments for the three-month periodsended March 31, 2003 and 2004.

 

10

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| **In thousands of U.S. dollars**          |   | **Europe** |   | **Americas** |   | **Corporate** |   | **Total** |   |
|-------------------------------------------|--------|------------|--------|--------------|--------|---------------|--------|-----------|--------|
| Total assets as of March 31, 2003    |   | $          | 35,775 |         | $      | 6,096         |   | $         | 94,786 |   | $ | 136,657 |   |
| Total assets as of March 31, 2004    |   | $          | 53,608 |         | $      | 2,423         |   | $         | 58,667 |   | $ | 114,698 |   |
| Three months ended March 31, 2003:   |   |       |   |         |   |          |   |      |   |
| Revenue                                   |   | $          | 16,799 |         | $      | 967           |   | $         | — |   | $ | 17,766 |   |
| Operating loss from continuing operations |   | (2,113     | )      | (155         | )      | (6,099        | )      | (8,367    | )      |
| Impairment and restructuring charges      |   | 676        |   | —       |   | 191           |   | 867       |   |
| Three months ended March 31, 2004:   |   |       |   |         |   |          |   |      |   |
| Revenue                                   |   | $          | 17,303 |         | $      | 915           |   | $         | — |   | $ | 18,218 |   |
| Operating loss from continuing operations |   | (2,231     | )      | (391         | )      | (7,753        | )      | (10,375   | )      |
| Impairment and restructuring charges      |   | —     |   | —       |   | 300           |   | 300       |   |

 

In the third quarter of 2003, VIA sold its operation in Italypreviously reported in the Europe region and recognized Brazil and Mexico asdiscontinued operations (see Note 2).

 

11

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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 thisForm 10-Q. This discussion and the discussion in Item 1, Note 1,contain forward-looking statements, or statements that relate to future eventsor our future performance. These statements include, but are not limited tothose relating to the Company’s strategic plan and business model change,projections regarding financial impacts of the business model shift, plannedorganizational re-alignment and changes, outsourcing projects, new productroll-out, sales organization improvement plans, cost reductions in general andstatements relating to reductions in cash usage. These statements are onlypredictions or planned actions that are subject to a number of risks,uncertainties and other factors. Actual events or results may differmaterially. Information regarding the risks, uncertainties and other factorsthat could cause actual results to differ from the results in theseforward-looking statements are discussed in the “Risk Factors” described inExhibit 99.1 on this Form 10-Q, as well as those described in the“Risk Factors” section of VIA’s 2003 Annual Report. You are urged tocarefully consider these factors, as well as other information contained inthis Form 10-Q and in our other periodic reports and documents filed withthe Securities and Exchange Commission.

 

**Overview**

** **

We are a provider of Internet-protocol (IP) based businesscommunication solutions to small- and medium-sized enterprises, or SMEs, inEurope and the United States. We have operations in France, Germany, Italy, theNetherlands, Portugal, Spain, Switzerland, the United Kingdom and the UnitedStates.

 

Our goal is to be the leader in providing IP-based businesscommunications solutions to the rapidly growing SME market. We believe we haveidentified an attractive opportunity:

 

•                  The Internetpresents SME companies with the opportunity to reduce costs, increaseproductivity, and reach new markets.  Webelieve that, as an SME grows, its outsourcing spending will continue to groweven though its technology and infrastructure spending may be limited.

 

•                  We have a solidunderstanding of our SME customers’ needs and have developed a sales approach,and portfolio of key products and services, that is designed to meet their veryspecific requirements. This focus on and understanding of SME requirementsprovides us with a competitive advantage over other IP communicationsproviders.

 

•                  There currentlyis no clear leader in this particular market.

 

 Our products and servicesinclude web-hosting, Internet access (through dial-up, DSL, or ISDN andleased-line connectivity), virtual private networks (VPNs), and Internet andnetwork security services. We also offer a voice communications product; thus,we have an added competitive advantage of being able to serve our customers asthe single source for all of their communications requirements.

 

Our immediate goal is to generate recurring and positive cash flows ona consolidated basis. To this end, we have, over the past year-and-a-half,developed and begun implementing our Strategic Plan for 2003-2005.  The components of this Plan include thefollowing:

 

•                  Building asolid operational foundation on which to build a healthy organization andscalable business.  In 2003 andearly 2004, we took major steps to reduce costs and increase operatingefficiencies by outsourcing the systems and personnel of our network operationscenter and certain financial and accounting services, as well as introducingacross all our operations a standardized billing, provisioning and customercare platform. We moved certain financial and accounting services from ourlocal operations to a single third party shared service center in one location.This shared service center manages general ledger accounting, accounts payableand receivable, and credit and collections. We have begun to see the benefits ofthe financial shared service center with improved processes and a tangibleimprovement in information flows to management. We expect to see an annual netsavings of approximately $1.8 million from the financial shared servicecenter. We completed the finance-outsourcing project in January 2004 andexpect to complete the billing project by mid-2004. We expect continuedbenefits in terms of cost savings and operating efficiencies going forward.

 

•                  Re-examiningthe economics of our original business model and our legacy business.  We have recognized the strategic weakness inthe economics of our legacy business; i.e., that the percentage of revenues wewere generating from the sale of third-party access services was too high andthat growth opportunities in this business lacked sufficient margins.  Moreover, we concluded that we were toodependent on third party pricing and services, and that we were attempting tocompete in a commodity market without benefit of a necessary tool, our ownnetwork.  Although the first year ofimplementation of our Strategic Plan for 2003-2005 yielded significantimprovements in our operations, the rate of revenue growth we were expectingbeginning in late 2003 was lower than anticipated due to a number of factors,including unanticipated higher price erosion in some of our service offeringsand the slowness of certain of our operations in closing new product salesopportunities.

 

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Following this reexamination, we have concluded that we must refocusour business model to align it with the realities of our industry’s economics.Accordingly:

 

•                  We are shiftingthe focus of our business model from providing primarily dial-up and leasedline Internet access services to offering high margin web-hosting and Internetsecurity services that we can deliver on our own product platforms;

 

•                  We arerealigning our sales approach to drive this new focus: we are improving theefficiency of our sales efforts by re-organizing our sales operations into twochannels:

 

1.               VIA Express, which is designed to sellhigher-margin products and services by steering customers to ourtelephone-based sales and Internet stores, and

 

2.               Industry Solutions, which is designed tomarket and sell a higher-value portfolio of bundled services through theefforts of our direct sales force professionals

 

•                         We areactively pursuing strategic acquisitions and partnerships that would complementor enhance our infrastructure, product offerings, channel strategies orcustomer base and that will allow us to leverage our recently improvedoperational capabilities to realize higher margins from acquired revenue; and

 

•                         We arecontinuing to improve operational performance.

 

In previous reports, we have stated that, based upon our originalbusiness model, we had set a target of reaching positive recurring cash flowsby the end of 2004. Given the new business model being implemented, we believeit now is appropriate to set a new target date. We believe we can achieve,through our new business model, positive cash flow from our currentconsolidated operations by the second quarter of 2005. We expect this to beachieved through the generation of new and incremental revenues, which weanticipate generating from our new sales and product strategy.

 

We believe we are positioned to achieve this objective: We have a cashposition of $46.9 million; we have no material debt; we have successfullyimplemented a program to reduce our expenses; and we have developed and begunimplementing a new business model designed to generate increased, andhigher-margin, revenues.

 

We recognize that our ability to successfully execute our StrategicPlan to improve operational performance and generate meaningful and profitablerevenue growth is subject to a number of risks and dependencies, which are notinsignificant.  These risks anddependencies are further discussed in the “Risk Factors” described inExhibit 99-1 on this Form 10-Q, as well as those described in the“Risk Factors” section of our 2003 Annual Report.

 

**Strategic Acquisitions**

 

In January 2004, we purchased 100% of the issued and outstandingshares of Amen SAS, Amen Srl and Amen Limited (collectively “Amen”), a group ofEuropean web-hosting companies based in Paris, France. Amen has operations inFrance, the United Kingdom, Spain and Italy. Our goal in acquiring Amen is tostrengthen our Europe operation by leveraging Amen’s operating platform andservice offerings. For this acquisition, we paid $7.5 million in cash andissued 673,652 shares of our common stock, which had a market value of $2 pershare on the date of acquisition for a total value of approximately$1.3 million. The former shareholders will have the opportunity to receivefurther consideration that we expect will be between $0.7 - $2.2 millionin cash and our common stock, based on the 2004 operating performance of Amen.Information related to our operational opportunities as a result of thisacquisition as well as other details and risks associated with the Amenbusiness is described in the”Risk Factors” in Exhibit 99.1 on thisForm 10-Q and the “Risk Factors” section of our 2003 Annual Report.

 

Consistent with our goal of realizing higher margins from acquiredrevenues, we are actively pursuing strategic acquisitions and partnerships tocomplement or enhance our infrastructure, product offerings, channel strategiesor customer base. We do not know whether we will be successful in identifyingappropriate opportunities and, if we are successful, there is no assurance thatsuch acquisitions or partnerships will be executed and integrated efficiently.Our strategic plan calls for us to be flexible and opportunistic regardingacquisitions and as a result, if we find one or more opportunities we believeare very attractive, we may decide to spend a substantial portion of ouravailable cash to finance these acquisitions.

 

**Our Operations**

 

In the third quarter of 2003, we sold VIA NET.WORKS Italy andrecognized Brazil and Mexico as discontinued operations. These operations areaccounted for as discontinued operations and have been excluded from thefinancial results from continuing 

 

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operations, as well as the financial results for the comparative priorperiod. We acquired Amen in January 2004 which has operations in France,the United Kingdom, Spain, and Italy. The following table shows the revenuecontribution from each of our continuing operations in the Europe and theAmericas reporting segments. As of March 31, 2004 we owned 100% of all ouroperations.

 
| **Country**            |   | **Percentages  of  Total Revenue from  continuing operations  for the Three Months  Ended  March 31, 2003** |   | **Percentages  of  Total Revenue from  continuing operations  for the Three Months  Ended  March 31, 2004** |   |
|------------------------|--------|------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------|--------|
|                   |   |                                                                                                             |   |                                                                                                             |   |
| France                 |   | 11                                                                                                               | %      | 9                                                                                                                | %      |
| Germany                |   | 12                                                                                                               | %      | 11                                                                                                               | %      |
| The Netherlands        |   | 12                                                                                                               | %      | 13                                                                                                               | %      |
| Portugal               |   | 8                                                                                                                | %      | 9                                                                                                                | %      |
| Spain                  |   | 3                                                                                                                | %      | 2                                                                                                                | %      |
| Switzerland            |   | 13                                                                                                               | %      | 12                                                                                                               | %      |
| United Kingdom         |   | 36                                                                                                               | %      | 31                                                                                                               | %      |
| United States          |   | 5                                                                                                                | %      | 5                                                                                                                | %      |
| Amen:                  |   | —                                                                                                           | %      | 8                                                                                                                | %      |
| *Amen France*          |   | *—*                                                                                                         | *%*    | *6*                                                                                                              | *%*    |
| *Amen United  Kingdom* |   | *—*                                                                                                         | *%*    | *1*                                                                                                              | *%*    |
| *Amen Spain*           |   | *—*                                                                                                         | *%*    | *1*                                                                                                              | *%*    |
| *Amen Italy*           |   | *—*                                                                                                         | *%*    | *—*                                                                                                         | *%*    |

 

**RESULTS OF OPERATIONS**

 

**Three months endedMarch 31, 2003 compared with the three months ended March 31, 2004**

** **

*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 operations conducting business in the following underlyingcurrencies:

 

|                 |   | **Three  months ended**  |   |
|----------------------|--------|--------------------------|--------|
|                 |   | **March 31,  2003** |   | **March 31,  2004** |   |
|                 |   |                     |   |   |   |
| Euro                 |   | 46                       | %      | 52 | % |
| Great British pounds |   | 36                       | %      | 31 | % |
| Swiss Francs         |   | 13                       | %      | 12 | % |
| U.S. Dollars         |   | 5                        | %      | 5 | % |
|                 |   |                     |   |   |   |
|                 |   | 100                      | %      | 100 | % |

 

The Euro varied by approximately 7% in relation to the U.S. dollarduring both the three months ended March 31, 2004 and March 31, 2003.The British pound varied by approximately 8% in relation to the U.S. dollarduring the three months ended March 31, 2004 and by approximately 7%during the three months ended March 31, 2003. These exchange ratefluctuations have a significant impact on our reported results of operations,including revenue, expenses and net loss.

 

The average Euro to U.S. dollar foreign exchange rate for the threemonths ended March 31, 2004 was 16% higher than the average Euro to U.S.dollar foreign exchange rate for the three months ended March 31, 2003.The average British pound to U.S. dollar foreign exchange rate for the threemonths ended March 31, 2004 was 14% higher than the average British poundto U.S. dollar foreign exchange rate for the three months ended March 31,2003. The effect of the weakening of the U.S. dollar is that revenues,operating costs and expenses and operating profits and losses in operationswith a functional currency other than U.S. dollars translate into larger U.S.dollar amounts than would have been the case had foreign exchange ratesremained unchanged.

 

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*Revenue:*

 

|    |   | **Three  months ended**             |       |                     |       |
|---------|--------|-------------------------------------|------------|--------------------------|------------|
|    |   | **March 31,  2003**            |       | **March 31,  2004** |       | **%  Increase/  (Decrease)** |   |
|    |   | **(in thousands of U.S. dollars )** | ** ** |                     | ** ** |
| Revenue |   | 17,766                              |       | 18,218                   |       | 3 | % |

 

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, 2004 was$18.2 million as compared to $17.8 million for the three months endedMarch 31, 2003. The increase in revenues quarter over quarter is partlyattributable to the revenues we recorded in the first quarter of 2004 that areattributable to the Amen business, which we acquired in January 2004(impact of approximately $1.5 million) as discussed above. In addition, theaverage Euro to U.S. dollar foreign exchange rate and British pound to U.S.dollar foreign exchange rate for the three months ended March 31, 2004have strengthened by approximately 16% and 14% respectively when compared tothe same period last year positively impacting revenues during the firstquarter of 2004 by approximately $2 million. The foreign exchange ratepositive impact largely offset the decrease in underlying revenue for the threemonths ended March 31, 2004 as compared to the three months endedMarch 31, 2003 notably in the UK, Germany, France and Switzerland.

 

UK revenues, excluding the impact of foreign exchange and theacquisition of Amen’s UK business, decreased by 23% (approximately$1.7 million) in the three months ended March 31, 2004 compared tothe three months ended March 31, 2003. This revenue reduction is primarilythe result of customer churn and price erosion. German revenues, excluding theimpact of foreign exchange, decreased by 22% (approximately $0.6 million)in the three months ended March 31, 2004 compared to the three monthsended March 31, 2003. This revenue reduction is due to customercancellations and price erosion. French revenues, excluding the impact offoreign exchange and the acquisition of Amen’s French business, decreased by21% (approximately $0.5 million) due to customer churn and fewer hardware andsoftware sales. Swiss revenues, excluding the impact of foreign exchange,decreased by 12% (approximately $0.3 million) due to customer churn and priceerosion.

 

In 2003, we took significant actions in implementing our 2003-2005Strategic Plan, including replacing many of our direct sales professionals andsales managers with higher caliber professionals. We have continued torationalize our product portfolio and are actively recruiting resellers andother value-added partners.

 

As a result of our continuous assessment of our operating results and prospectedfuture revenues, by the end of the fourth quarter 2003, management concludedthat increased competition and price erosion would significantly impact ourfuture ability to grow our core business of selling Internet access services,particularly through our labor-intensive sales channels. As a result, we havebegun a strategic shift of our sales and channel focus from Internet access toweb-hosting and Internet security services to be sold through our new VIAExpress channel. This shift is intended to increase our opportunities forprofitable revenue growth. As this strategic change in sales focus isrelatively new, we have not realized any positive impact during the firstquarter of 2004.

 

In prior reporting periods, we provided information on categories ofrevenues that we generate. Because of the systemic errors and limitations weexperienced with our legacy billing platforms, we are not currently able toprovide an accurate breakdown of our revenues. We anticipate that when we havecompleted the implementation of our new billing platform, we will begin againto report certain revenue categories. The majority of our revenue is derivedfrom Internet access services.

 

*OPERATING COSTS ANDEXPENSES:*

 

*Internet services:*

 

|               |   | **Three  months ended**             |   |                     |   |
|--------------------|--------|-------------------------------------|--------|--------------------------|--------|
|               |   | **March 31,  2003**            |   | **March 31,  2004** |   | **%  Increase/  (Decrease)** |   |
|               |   | **(in  thousands of U.S. dollars)** |   |                     |   |
| Internet services  |   | 8,520                               |   | 8,747                    |   | 3 | % |
| % of Total Revenue |   | 48                                  | %      | 48                       | %      |   |   |

 

Our Internet services operating costs are the costs we incur to carrycustomer traffic to and over the Internet. We lease lines that connect ourPoPs, either to our own network or to other network providers. We pay othernetwork providers for transit, which allows us to transmit our customers’information to or from the Internet over their networks. We also pay otherrecurring telecommunications costs 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 operating costs were $8.7 million or 48% ofrevenues for the three months ended March 31, 2004 as compared to$8.5 million or 48% of revenues for the three months ended March 31,2003. The increase in Internet services expenses is partly attributable to theInternet services costs of the Amen business acquired in January 2004(impact of approximately $0.2 million) discussed above and partly attributableto the translation impact of foreign currency movements. Excluding Amen’sInternet services costs and the adverse impact of the strengthening Euro andBritish pound to U.S. dollar foreign currency exchange rates of approximately$1 million, Internet services costs have fallen for the three months ended March 31,2004 from the three months ended March 31, 2003 primarily due to lowerrevenues from decreased customer network usage (refer to discussion above),decreasing market rates for network bandwidth, and non-recurring benefits of$0.5 million following the resolution of a number of Internet services costdisputes.

 

*Selling, general and administrative:*

 

|                                  |   | **Three  months ended**             |   |                     |   |
|---------------------------------------|--------|-------------------------------------|--------|--------------------------|--------|
|                                  |   | **March 31,  2003**            |   | **March 31,  2004** |   | **%  Increase/  (Decrease)** |   |
|                                  |   | **(in  thousands of U.S. dollars)** |   |                     |   |
| Selling, general & administrative |   | 14,698                              |   | 17,112                   |   | 16 | % |
| % of Total Revenue                    |   | 83                                  | %      | 94                       | %      |   |   |

 

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 $17.1 million for the threemonths ended March 31, 2004, a 16% increase from the $14.7 million weincurred for the three months ended March 31, 2003. The increase inSG&A expenses quarter over quarter is partly attributable to the expensesassociated with the Amen business that we acquired in January 2004 (impactof approximately $0.8 million) discussed above and partly due to thestrengthening of the Euro and British pound to U.S. dollar foreign currencyexchange rates of approximately $1.2 million. The balance of the difference,quarter over quarter, is attributable to an increase in marketing expenses andprofessional fees, partially offset by a decrease in compensation expense.

 

Compensation expense, which accounted for approximately 58% and 64% oftotal SG&A costs, or $10.0 million and $9.4 million, for the three monthsended March 31, 2004 and 2003 respectively, increased by approximately 6%due to the Amen acquisition and the strengthening of the Euro and British poundto U.S. dollar foreign currency exchange rates. Excluding these factors,compensation expense has decreased by approximately 9% primarily due to headcount reductions. Headcount (excluding Amen and the discontinued Italianoperation) decreased by approximately 20% from March 31, 2003 toMarch 31, 2004. Compensation expense did not reduce by the same percentagedue to higher one-off severance payments made in the three months endedMarch 31, 2004 and the relatively lower salary levels of the employeesterminated.

 

During 2004, we anticipate that our planned shift of product andchannel focus to our VIA Express products and sales channel and away from ourdirect sales force will result in further headcount reductions and lowerrecurring compensation expenses, after termination costs are paid. Weanticipate that the resulting cost savings will be partially offset byincreased marketing expenditures associated with our shift toward the VIAExpress suite of services. For example, in April 2004 we announced thatour United Kingdom operation will be restructuring its organization, which mayresult in redundancies; approximately 40 positions have been identified aspotentially at risk of being redundant. During the three months endedMarch 31, 2004, marketing expenses increased by approximately $0.6 millionor 258% compared to the three months ended March 31, 2003. Approximately$0.3 million of this increase is attributable to the Amen business and theimpact of foreign exchange.

 

Professional fees, related to legal, audit, outsourcing and otherconsulting fees, accounted for approximately 10% and 8% of total SG&A forthe three months ended March 31, 2004 and 2003 respectively. The increasein professional fees relates to the Amen business, expenses for outsourcingcertain finance and accounting services, and increased consulting fees in oneof our local operations.

 

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*Impairment and restructuring charges:*

 

|                                 |   | **Three  months ended**             |   |                     |   |
|--------------------------------------|--------|-------------------------------------|--------|--------------------------|--------|
|                                 |   | **March 31,  2003**            |   | **March 31,  2004** |   | **%  Increase/  (Decrease)** |   |
|                                 |   | **(in  thousands of U.S. dollars)** |   |                     |   |
| Impairment and restructuring charges |   | 867                                 |   | 300                      |   | (65 | )% |
| % of Total Revenue                   |   | 5                                   | %      | 2                        | %      |   |   |

 

During the three months ended March 31, 2004, we incurredrestructuring costs of $0.3 million relating to severance payments at ourcorporate headquarters and transition implementation costs for back-office andadministrative outsourcing initiatives. The impairment and restructuringcharges of $0.9 million for the three months ended March 31, 2003 relatedto severance payments at four of our operations, and an adjustment to thefuture lease obligations and an impairment charge for fixtures and fittingsboth relating to the closure of the Reston, Virginia office. See Note 3 to thecondensed consolidated financial statements for further information.

 

We anticipate that we will incur further restructuring charges during2004 as we execute our planned shift of product and channel focus to our VIAExpress products and sales channel and away from our direct sales force,specifically for the costs of headcount reductions. In April 2004 weannounced that our United Kingdom operation will be restructuring itsorganization, which may result in redundancies; approximately 40 positions havebeen identified as potentially at risk of being redundant.

 

*Depreciation and amortization:*

 

|                          |   | **Three  months ended**             |   |                     |   |
|-------------------------------|--------|-------------------------------------|--------|--------------------------|--------|
|                          |   | **March 31,  2003**            |   | **March 31,  2004** |   | **%  Increase/  (Decrease)** |   |
|                          |   | **(in  thousands of U.S. dollars)** |   |                     |   |
| Depreciation and amortization |   | 2,048                               |   | 2,434                    |   | 19 | % |
| % of Total Revenue            |   | 12                                  | %      | 13                       | %      |   |   |

 

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 anda trade name over 3 years, 5 years and 10 years respectively.

 

Our depreciation and amortization expense was $2.4 million for thethree months ended March 31, 2004, up from $2.0 million for the threemonths ended March 31, 2003. For the three months ended March 31,2004, $2.1 million related to the depreciation of fixed assets and$0.3 million related to the amortization of intangible assets. For thethree months ended March 31, 2003, all of our depreciation andamortization expense was related to the depreciation of fixed assets. Theincrease in total depreciation and amortization expense is primarily due to theacquisition of Amen resulting in amortization of identified intangible assetsand depreciation of tangible fixed assets totaling approximately $0.3 million.Excluding Amen, the depreciation expense increased slightly during the threemonths ended March 31, 2004 compared to the three months endedMarch 31, 2003 due to the impact of foreign currency exchange rates(approximately $0.1 million).

 

*Interest income, net:*

 

|                 |   | **Three  months ended**             |   |                     |   |
|----------------------|--------|-------------------------------------|--------|--------------------------|--------|
|                 |   | **March 31,  2003**            |   | **March 31,  2004** |   | **%  Increase/  (Decrease)** |   |
|                 |   | **(in  thousands of U.S. dollars)** |   |                     |   |
|                 |   |                                |   |                     |   |   |   |
| Interest income, net |   | 418                                 |   | 90                       |   | (78 | )% |
| % of Total Revenue   |   | 2                                   | %      | —                   |   |   |   |

 

For the three months ended March 31, 2004, we earned$0.1 million in interest income, compared to $0.4 million for thethree months ended March 31, 2003. Interest income was generated frominvesting funds received from our initial public offering inFebruary 2000, until those funds were used for acquisitions, operatingexpenses or capital expenditures. Net proceeds from the public offering were$333.0 million. The decrease in interest income is the combined result ofthe decrease in the available cash for investing 

 

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and the decrease in interest rates. We also incurred $18,000 ofinterest expense for the three months ended March 31, 2004, as compared to$4,000 of interest expense incurred in the three months ended March 31,2003.

 

*Other (expense) income, net:*

 

|                        |   | **Three  months ended**             |   |                     |   |
|-----------------------------|--------|-------------------------------------|--------|--------------------------|--------|
|                        |   | **March 31,  2003**            |   | **March 31,  2004** |   | **%  Increase/  (Decrease)** |   |
|                        |   | **(in  thousands of U.S. dollars)** |   |                     |   |
| Other (expense) income, net |   | (42                                 | )      | 3,779                    |   | 9,098 | % |
| % of Total Revenue          |   | —                              |   | 21                       | %      |   |   |

 

For the three months ended March 31, 2004, we earned other income,net in the amount of $3.8 million related mainly to the settlement of acommercial litigation in our UK operation. An additional $2.2 million wasrecognized in the fourth quarter of 2003. We will receive cash of approximately$6 million for this settlement during the second quarter of 2004. For the threemonths ended March 31, 2003, we incurred other expense, net of $42,000relating mainly to losses on equipment disposals.

 

*Foreign currency gains (losses), net:*

 

|                                 |   | **Three  months ended**             |   |                     |   |
|--------------------------------------|--------|-------------------------------------|--------|--------------------------|--------|
|                                 |   | **March 31,  2003**            |   | **March 31,  2004** |   | **%  Increase/  (Decrease)** |   |
|                                 |   | **(in  thousands of U.S. dollars)** |   |                     |   |
| Foreign currency gains (losses), net |   | 2,549                               |   | (3,327                   | )      | (231 | )% |
| % of Total Revenue                   |   | 14                                  | %      | (18                      | )%     |   |   |

 

We recognized a $3.3 million foreign currency loss for the threemonths ended March 31, 2004, as compared to a gain of $2.5 millionfor the three months ended March 31, 2003. The change from period toperiod was primarily due to the fluctuation in the exchange rate of the Euroand British pound as compared to the U.S. dollar and its impact on therevaluation of our Euro and British Pound denominated intercompany balancesheld by the parent company and on our Euro denominated cash accounts. See ITEM3. 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, 2004, theparent company maintained a Euro cash reserve of €11.7 million.

 

*Liquidity andCapital Resources*

 

Liquidity

 

We began 2004 with $65.8 million in cash and cash equivalents and$1.4 million in restricted cash. We had negative cash flow of$18.9 million for three months ended March 31, 2004, leaving us with$46.9 million in cash and cash equivalents and $1.4 million inrestricted cash at March 31, 2004. Our negative cash flow for the threemonths ended March 31, 2004 increased by $12.2 million over ournegative cash flow for the three months ended March 31, 2003 of $6.7million primarily due to the Amen acquisition discussed below, an increase inpurchases of tangible fixed assets and an increase in cash used in operatingactivities. During 2003, we stated our expectations that we would reach thepoint of positive cash flows from operating activities and from investingactivities during 2004. As a result of greater than anticipated impacts on ourrevenue resulting from the disruptions caused by our Strategic Plan activities,price erosion and increased competition, and the impact of the business strategyshift we are undertaking, we have reset our expectations and now anticipatethat we will not reach the point of positive cash flows until at leastmid-2005, which is dependent upon the achievement of new and incrementalrevenues, which we anticipate generating from our new sales and productstrategy.

 

We believe that our available cash will be sufficient to fund ourexpenditures under our strategic business plans and our working capital andcapital expenditure requirements until we achieve positive net cash flows atwhich time we believe we expect to still have adequate cash reserves remainingto support our working capital and capital expenditure requirements, even as wepursue our acquisition strategy discussed below. Our expectations for reachingthe point of generating positive cash flows in our business is dependant on oursuccessful implementation of our Strategic Plan and the business focus shiftdescribed above. There can be no assurances we will be successful in theseefforts. If, contrary to management’s expectations, we use all our availablecash before reaching the point of positive

 

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cash flows, or if we reach such point without sufficient cash reservesremaining, we may not be able to continue our operations unless we obtain otherfinancing. In their current state, the capital markets do not present a viablesource of funds to us. We expect our capital requirements for the remainder of2004 to total approximately $6 million primarily to support the projectedgrowth in revenues. Capital requirements beyond 2004 will principally berelated to supporting revenue growth. We expect to use approximately $11 -$14 million in cash for the remaining nine months in 2004 (excluding cashused for potential partners and strategic acquisitions discussed below),leaving us with an expected cash balance at December 31, 2004 ofapproximately $33 - $36 million.

 

In order for us to achieve consolidated positive cash flow, ourbusiness plan calls for substantial growth in revenues while continuing tocontrol the costs associated with that revenue. Our estimates of the cash flowsgenerated by the revenue growth and the capital resources needed and availableto generate such growth could change, and such change could differ materiallyfrom the estimates used to evaluate our ability to realize our plans. Ifoperations do not generate sufficient cash flow to continue operating, we willneed to find other financing mechanisms, which may not be available to us.

 

We are pursuing the identification of potential partners and strategicacquisitions. If we are successful in these endeavors, we may use a portion ofour cash balances to finance all or a portion of these potential transactions.We also intend to seek to utilize the value of our share capital asconsideration for any investment and we may also consider other opportunitiesto finance attractive acquisitions such as the sale of non-core assets orbusiness operations. As part of this acquisition strategy, in January 2004,we acquired Amen. In connection with this acquisition, we spent approximately$7.5 million in cash and issued common stock having a total value ofapproximately $1.3 million. The former shareholders will have theopportunity to receive further consideration that we expect will be between$0.7 - $2.2 million in cash and our common stock, based on the 2004operating performance of Amen, payable in April 2005. On a monthly basisbeginning May 2004, we will place Euro 0.1 million into an escrow account forthe benefit of the former shareholders, limited to Euro 0.7 million, related tothis additional consideration, provided that Amen’s monthly operatingperformance meets or exceeds the targeted amount. We estimate that Amen willcontribute positive cash flow in the remainder of 2004 of approximately$1.5 million.

 

During the second quarter of 2004, we will receive an inflow of cash inthe amount of approximately $6 million for proceeds due to our U.K.operation arising out of the settlement of a litigated contractual dispute.This amount is recorded as a receivable in our balance sheet at March 31,2004.

 

In April 2003, we announced the restarting of our previouslyauthorized stock repurchase plan to acquire up to $10 million worth of VIAstock. The plan had not yet been restarted during the three months endedMarch 31, 2003. No shares were purchased in the three months endedMarch 31, 2004. We can suspend this plan at any time.

 

Cash used in operating activities was $9.2 million for the threemonths ended March 31, 2004 and $5.9 million for the three monthsended March 31, 2003. Cash flows from operating activities can varysignificantly from period to period depending on the timing of operating cashreceipts and payments and other working capital changes, especially accountsreceivable, other current assets, accounts payable, accrued expenses and othercurrent liabilities. In both periods, our net losses were the primary componentof cash used in operating activities. These losses include some significantnon-cash items such as depreciation, amortization, provision for doubtfulaccounts receivable, impairment and unrealized foreign currency transactiongains and losses.

 

Cash used in investing activities was $9.7 million for the threemonths ended March 31, 2004 and $0.6 million for the same period in2003. In the first quarter of 2004, we used cash to purchase Amen ($7.7 millionincluding acquisition costs and net of cash acquired) (discussed above) and toacquire tangible fixed assets ($1.9 million). For the three months endedMarch 31, 2003, we used cash primarily to purchase tangible fixed assets.

 

Cash received from (used in) financing activities was $0.3 million forthe three months ended March 31, 2004 and ($32,000) for the threemonths ended March 31, 2003. For the three months ended March 31,2004, cash was received primarily from stock option exercises ($0.3 million)and in 2003, cash was used primarily to repay capital lease obligations.

 

Capital Resources

 

Since inception, we have financed our operations primarily through thesale of equity securities. We raised approximately $181.0 million inaggregate through three private preferred stock offerings betweenAugust 1997 and April 1999. Through our initial public offering ofcommon stock in February 2000, we raised approximately$333.0 million, net of underwriting discounts and commissions.

 

In connection with the acquisition of Amen described above, we issued673,652 shares of common stock at a price of $2 per share, having a total valueof approximately $1.3 million for Amen 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. Actual resultsand the timing of these events

 

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could differ materially from these forward-looking statements dependingupon certain factors that we cannot predict, including the nature, size andtiming of future acquisitions and dispositions, if any, our future net incomeand our success in executing our Strategic Plan as well as other factorsdiscussed in “Risk Factors” described in Exhibit 99-1 on thisForm 10-Q, as well as those described in the “Risk Factors” section ofour 2003 Annual Report.

 

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**ITEM 3. QUANTITATIVE ANDQUALITATIVE 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 2003 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 on thisForm 10-Q and included in the “Risk Factors” section of our 2003 AnnualReport.

 

***ForeignCurrency Exchange Risks***

 

Transaction risks

 

The parent company’s cash balances consist of Euros and U.S. dollars.The Euro bank account is revalued each month and the resultant gain or loss isreflected in the condensed consolidated statements of operations as “Foreigncurrency gains/(losses), net.” This exposes the Company to foreign currencyexchange rate risk in the Statement of Operations. For example, as ofMarch 31, 2004, a 10% increase or decrease in the level of the Euroexchange rate against the U.S. dollar with all other variables held constantwould result in a realized gain or loss of approximately $9 million. Thechange in exposure from period to period is related to the change in thebalance of the Euro cash and intercompany accounts. The parent companycontinues to hold approximately €11.7 million in the Euro cash account andremains exposed to changes in the foreign currency rate.

 

The fluctuation in the exchange rates resulted in foreign currencygains (losses) reflected in the consolidated statements of operations as“Foreign currency gains (losses), net” of $2.5 million and ($3.3) millionfor the three months ended March 31, 2003 and 2004 respectively.

 

Translation risks

 

The fluctuation in the exchange rates resulted in foreign currencytranslation (losses) gains reflected as a component of accumulated othercomprehensive loss in stockholders’ equity, net of ($1.8) million and$1.9 million for the three months ended March 31, 2003 and 2004respectively.

 

Exchange rates can vary significantly. The Euro high and low ratesvaried by approximately 7% in relation to the U.S. dollar during the threemonths ended March 31, 2004. The British pound high and low rates variedby approximately 8% in relation to the U.S. dollar during the three monthsended March 31, 2004. This variation affects the average exchange ratesused to translate the income statements of our operating companies whosefunctional currency is not U.S. dollars. At March 31, 2004, the Euro toU.S. dollar exchange rate was approximately 3% below where it was at thebeginning of the year and the British pound to U.S. dollar exchange rate wasapproximately 3% above where it was at the beginning of the year. Thisvariation affects the ending exchange rates used to translate amounts on thebalance sheet of our operating companies whose functional currency is not U.S.dollars. Future changes in the value of the Euro and GBP could have a materialimpact on our financial position and results of operations. We also experiencedfluctuations in other exchange rates.

 

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**ITEM 4. CONTROLS AND PROCEDURES**

 

Our management and the Audit Committee of the board of directors hasengaged in regular evaluations of our internal controls, as well as theprocesses we maintain to ensure that all material information relating to usand our subsidiaries is recorded, processed, summarized, evaluated and reportedwithin the time periods specified by rules established by the Securities andExchange Commission. These latter processes are known as Disclosure Controlsand Procedures. Disclosure Controls and Procedures are also designed to ensurethat all such information is communicated to our management, including our CEOand Interim CFO, in such a manner as to allow timely decisions to be maderegarding required disclosures.

 

We have evaluated, with the oversight of our CEO and Interim CFO, theeffectiveness of our Disclosure Controls and Procedures as of March 31,2004. In designing and evaluating the Disclosure Controls and Procedures, ourmanagement necessarily was required to apply its judgment in evaluating thecosts and benefits of possible controls and procedures. In addition, werecognize that Disclosure Controls and Procedures by their nature can provideonly reasonable assurance that our information flow objectives are met. Asdisclosed in previous periodic filings during 2001, material weaknesses in theinternal control environment were identified. Management implemented a seriesof mitigating controls and procedures that fully addressed these materialweaknesses in 2002. These procedures currently include additional and enhancedmanual processes, procedures and controls including expanded analyticalprocedures and increased frequency and breadth of management inquiries. As ofMarch 31, 2004 our CEO and Interim CFO have concluded that our DisclosureControls and Procedures are effective in all material respects.

 

During the three months ended March 31, 2004, there have been nosignificant changes in our internal controls that have materially affected, orare reasonably likely to materially affect, our internal control over financialreporting. We continue to work to improve our internal controls and DisclosureControls and Procedures. Specifically, as previously disclosed we arecontinuing to perform a phased implementation to standardize processes and outsourceback office functions that includes system automation and technology-enabledimprovements associated with the general ledger accounting, accounts payable,accounts receivable, provisioning and billing administration, credit andcollections and customer operations. This phased implementation is progressingwell. We completed the finance outsourcing project in January of 2004 andexpect to complete the billing project by mid-2004.

 

We believe that our current controls and procedures enable us to presentour financial 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 March 29, 2004. See note 11 to thecondensed consolidated financial statements for further information.

 

**Item 2. Changes in Securities and Use ofProceeds**

 

*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, 2004, wehave used $94.6 million for acquisitions of other businesses, includingthe repayment of debt for acquisitions we made in 1999, increases in our investmentin various partially owned subsidiaries, $54.4 million for capitalexpenditures and approximately $142.0 million to fund operating losses.

 

**Item 3. Defaults Upon Senior Securities**

 

None.

 

**Item 4. Submission of Matters to a Vote ofSecurity 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 Interim 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 two reports on Form 8-K during the three months endedMarch 31, 2004. On February 3, 2004, we filed a Form 8-K announcing that our Board ofDirectors adopted a Stockholder Rights Plan. On February 19, 2004, wefiled a Form 8-K announcing that we mailed to stockholders of record onFebruary 12, 2004 a Summary of Stockholder Right Plan (“Summary”), andattaching the related cover letter and Summary as exhibits.

 

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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 13, 2004  | By: | /s/ Rhett S. Williams |
|   |                | *Chief Executive Officer (Principal Executive Officer and Director* |
|   |                |   |
|   |                |   |
|   | Date: May 13, 2004  | By: | /s/ Cameron Mackenzie |
|   |                | *Interim Chief Financial Officer  (Principal Financial and Accounting Officer)* |

 

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**EXHIBIT INDEX**

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

 

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