**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

**ý****                                ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**FOR THEQUARTERLY PERIOD ENDED SEPTEMBER 30, 2005**

** **

**OR**

 

**o****                                ****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Commissionfile number: 000-29391**

 

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**VIA NET.WORKS, INC.**

(Exact name of registrant asspecified in its charter)

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

 

**Siriusdreef 30 - 36**

**2132WT Hoofddorp**

**TheNetherlands**

(Address of principal executiveoffices)

 

Registrant’s telephone number,including area code: **+31 23 5699 842**

 

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

**H. Walaardt Sacrestraat 401-403**

**1117BM Schiphol**

**TheNetherlands**

 

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

 

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

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act). o Yes  ý  No

 

As of November 10, 2005, there wereoutstanding 108,268,803 shares of the registrant’s common stock.

 

 

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**VIANET.WORKS, INC.**

 

**TABLE OFCONTENTS**

 
| PART I.  FINANCIAL INFORMATION |                                                                                                                                        |
|-------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------|
| Item 1.                             | Financial  Statements:                                                                                                                      |   |
|                                | Condensed Consolidated Balance Sheets as of December 31, 2004  and September 30, 2005 (going concern basis)                       |   |
|                                | Condensed Consolidated Statement of Net Assets in Liquidation as of  September 30, 2005                                                |   |
|                                | Condensed Consolidated Statements of Operations for the three and  nine months ended September 30, 2004 and 2005 (going concern basis) |   |
|                                | Condensed  Consolidated Statements of Cash Flows for the nine months ended  September 30, 2004 and 2005 (going concern basis)          |   |
|                                | Notes to Condensed Consolidated Financial Statements                                                                                        |   |
| Item  2.                            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                 |   |
| Item  3.                            | Quantitative  and Qualitative Disclosures About Market Risk                                                                                 |   |
| Item  4.                            | Controls  and Procedures                                                                                                                    |   |
| PART II.  OTHER INFORMATION    |                                                                                                                                        |
| Item  1.                            | Legal Proceedings                                                                                                                           |   |
| Item  2.                            | Changes  in Securities and Use of Proceeds                                                                                                  |   |
| Item  3.                            | Defaults  Upon Senior Securities                                                                                                            |   |
| Item  4.                            | Submission  of Matters to a Vote of Security Holders                                                                                        |   |
| Item  5.                            | Other  Information                                                                                                                          |   |
| Item  6.                            | Exhibits                                                                                                                                    |   |
| SIGNATURES                          |                                                                                                                                        |
| EXHIBIT INDEX                  |                                                                                                                                        |

 

2

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**PART I**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

**VIANET.WORKS, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Going concernbasis)**

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

 
| ** **                                                                                                            | ** ** | **December 31, 2004** | ** ** | **September 30,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|------------------------------|------------|
| ** **                                                                                                            | ** ** | ** **                 | ** ** | **(Unaudited)**              | ** ** |
| **ASSETS**                                                                                                            |       |                       |       |                         |       |
| Current  assets:                                                                                                      |       |                       |       |                         |       |
| Cash and  cash equivalents                                                                                            |       | $                          | 15,497     |                         | $          | 3,959 |   |
| Restricted  cash                                                                                                      |       | 5,100                      |       | 2,794                        |       |
| Trade and other  accounts receivable, net of allowance of $2,966 and $1,644 respectively                              |       | 13,909                     |       | 5,131                        |       |
| Other  current assets                                                                                                 |       | 6,972                      |       | 3,929                        |       |
|                                                                                                                  |       |                       |       |                         |       |
| Total current assets                                                                                                  |       | 41,478                     |       | 15,813                       |       |
| Property and  equipment, net                                                                                          |       | 13,065                     |       | 5,040                        |       |
| Goodwill                                                                                                              |       | 42,466                     |       | 18,552                       |       |
| Intangible  assets, net                                                                                               |       | 8,695                      |       | 2,865                        |       |
| Other  non-current assets                                                                                             |       | 444                        |       | —                       |       |
| Deferred tax  asset                                                                                                   |       | 14,305                     |       | 13,771                       |       |
|                                                                                                                  |       |                       |       |                         |       |
| Total assets                                                                                                          |       | $                          | 120,453    |                         | $          | 56,041 |   |
|                                                                                                                  |       |                       |       |                         |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                        |       |                       |       |                         |       |
| Current  liabilities:                                                                                                 |       |                       |       |                         |       |
| Accounts  payable                                                                                                     |       | $                          | 16,899     |                         | $          | 8,767 |   |
| VAT and  other taxes payable                                                                                          |       | 1,083                      |       | 333                          |       |
| Current  portion of capital lease obligations and long-term payables                                                  |       | 9,325                      |       | 177                          |       |
| Deferred  revenue                                                                                                     |       | 15,591                     |       | 1,815                        |       |
| Accrued  expenses                                                                                                     |       | 24,451                     |       | 20,052                       |       |
| Deferred tax  liability                                                                                               |       | 13,772                     |       | 13,970                       |       |
| Other  current liabilities                                                                                            |       | 3,744                      |       | 1,841                        |       |
|                                                                                                                  |       |                       |       |                         |       |
| Total current liabilities                                                                                             |       | 84,865                     |       | 46,955                       |       |
| Capital  lease obligations and long-term payables, less current portion                                               |       | 344                        |       | 9                            |       |
| Deferred tax  liability                                                                                               |       | 2,639                      |       | 937                          |       |
|                                                                                                                  |       |                       |       |                         |       |
| Total liabilities                                                                                                     |       | 87,848                     |       | 47,901                       |       |
|                                                                                                                  |       |                       |       |                         |       |
| Commitments  and contingencies (Note 11)                                                                              |       |                       |       |                         |       |
|                                                                                                                  |       |                       |       |                         |       |
| Stockholders’ equity:                                                                                            |       |                       |       |                         |       |
| Preferred stock, $.001 par value;  10,000,000 shares authorized; 0 shares and 5,454,545 shares issued,  respectively  |       | —                     |       | 5                            |       |
| Common stock, $.001 par value; 132,500,000  shares authorized; 62,624,777 and 109,789,592 shares issued, respectively |       | 63                         |       | 110                          |       |
| Additional paid-in capital                                                                                            |       | 557,907                    |       | 563,839                      |       |
| Treasury stock, 1,520,789 shares                                                                                      |       | (1,521                     | )          | (1,521                       | )          |
| Accumulated deficit                                                                                                   |       | (488,880                   | )          | (543,482                     | )          |
| Accumulated other comprehensive loss                                                                                  |       | (34,964                    | )          | (10,811                      | )          |
|                                                                                                                  |       |                       |       |                         |       |
| Total stockholders’ equity                                                                                       |       | 32,605                     |       | 8,140                        |       |
|                                                                                                                  |       |                       |       |                         |       |
| Total liabilities and stockholders’ equity                                                                       |       | $                          | 120,453    |                         | $          | 56,041 |   |

 

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

 

3

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**VIANET.WORKS, INC.**

**CONDENSED STATEMENT OF NET ASSETS IN LIQUIDATION**

**(Liquidationbasis)**

**(Inthousands of U.S. dollars,)**

 
| ** **                                        | ** ** | **September 30,  2005** | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|
| ** **                                        | ** ** | **(Unaudited)**              | ** ** |
| **ASSETS**                                        |       |                         |       |
| Cash and  cash equivalents                        |       | $                            | 3,959      |   |
| Restricted  cash                                  |       | 2,794                        |       |
| Trade and  other accounts receivable              |       | 5,131                        |       |
| Other  current assets                             |       | 3,929                        |       |
| Property and  equipment, net                      |       | 5,292                        |       |
| Goodwill                                          |       | 19,482                       |       |
| Intangible  assets, net                           |       | 3,009                        |       |
| Deferred tax  asset                               |       | 13,771                       |       |
|                                              |       |                         |       |
| Total assets                                      |       | $                            | 57,367     |   |
|                                              |       |                         |       |
| **LIABILITIES**                                   |       |                         |       |
| Accounts  payable                                 |       | $                            | 8,767      |   |
| VAT and  other taxes payable                      |       | 333                          |       |
| Capital  lease obligations and long-term payables |       | 186                          |       |
| Deferred  revenue                                 |       | 1,815                        |       |
| Accrued  expenses                                 |       | 20,052                       |       |
| Deferred tax  liability                           |       | 14,907                       |       |
| Other  current liabilities                        |       | 1,841                        |       |
| Reserve for  estimated liquidation costs          |       | 754                          |       |
|                                              |       |                         |       |
| Total liabilities                                 |       | 48,655                       |       |
|                                              |       |                         |       |
| Net Assets in Liquidation                         |       | $                            | 8,712      |   |

 

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

 

4

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**VIANET.WORKS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Goingconcern basis)**

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

**(Unaudited)**

 
| ** **                                                 | ** ** | **For the three months ended  September 30,** | ** ** | **For the nine months ended September  30,** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                 | ** ** | **2004**                                           | ** ** | **2005**                                     | ** ** | **2004** | ** ** | **2005** | ** ** |
| Revenue                                                    |       | 8,394                                              |       | 13,621                                       |       | 16,636 |   | 43,207 |   |
|                                                       |       |                                               |       |                                         |       |   |   |   |   |
| Operating costs and expenses:                              |       |                                               |       |                                         |       |   |   |   |   |
| Internet services                                          |       | 4,390                                              |       | 6,023                                        |       | 9,134 |   | 21,481 |   |
| Selling, general and administrative                        |       | 9,628                                              |       | 4,982                                        |       | 28,661 |   | 33,548 |   |
| Impairment and restructuring charges                       |       | 1,293                                              |       | 609                                          |       | 1,788 |   | 12,455 |   |
| Depreciation and amortization                              |       | 1,069                                              |       | 1,366                                        |       | 3,064 |   | 4,277 |   |
| Total operating costs and expenses                         |       | 16,380                                             |       | 12,980                                       |       | 42,647 |   | 71,761 |   |
| Operating gain (loss) from continuing  operations          |       | (7,986                                             | )          | 641                                          |       | (26,011 | ) | (28,554 | ) |
| Interest income                                            |       | 161                                                |       | 12                                           |       | 440 |   | 72 |   |
| Interest expense                                           |       | (80                                                | )          | (155                                         | )          | (86 | ) | (488 | ) |
| Other (expense) income, net                                |       | (361                                               | )          | 340                                          |       | (263 | ) | 639 |   |
| Foreign currency gains (losses), net                       |       | 2,132                                              |       | (7,692                                       | )          | (1,735 | ) | (18,058 | ) |
| Loss from continuing operations before  income taxes       |       | (6,134                                             | )          | (6,854                                       | )          | (27,655 | ) | (46,389 | ) |
| Income tax benefit (expense)                               |       | 1                                                  |       | (23                                          | )          | — |   | (195 | ) |
|                                                       |       |                                               |       |                                         |       |   |   |   |   |
| Net loss from continuing operations                        |       | (6,133                                             | )          | (6,877                                       | )          | (27,655 | ) | (46,584 | ) |
| Discontinued operations:                                   |       |                                               |       |                                         |       |   |   |   |   |
| Gain (loss) from discontinued operations                   |       | 828                                                |       | (1,739                                       | )          | 1,056 |   | (12,667 | ) |
| Gain on disposal of discontinued operations                |       | 663                                                |       | 366                                          |       | 663 |   | 4,649 |   |
| Net loss                                                   |       | $                                                  | (4,642     | )                                            | $          | (8,250 | ) | $ | (25,936 | ) | $ | (54,602 | ) |
|                                                       |       |                                               |       |                                         |       |   |   |   |   |
| Basic and diluted income (loss) per share:                 |       |                                               |       |                                         |       |   |   |   |   |
| Continuing operations                                      |       | $                                                  | (0.10      | )                                            | $          | (0.08 | ) | $ | (0.45 | ) | $ | (0.66 | ) |
| Discontinued operations                                    |       | $                                                  | 0.02       |                                         | $          | (0.02 | ) | $ | 0.02 |   | $ | (0.11 | ) |
| Net income (loss) per share-basic and  diluted             |       | $                                                  | (0.08      | )                                            | $          | (0.10 | ) | $ | (0.43 | ) | $ | (0.77 | ) |
|                                                       |       |                                               |       |                                         |       |   |   |   |   |
| Shares used in computing basic and diluted  loss per share |       | 61,103,988                                         |       | 83,478,503                                   |       | 60,911,452 |   | 71,250,674 |   |

 

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

 

5

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**VIANET.WORKS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Goingconcern basis)**

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

**(Unaudited)**

 
| ** **                                                                                              | ** ** | **For the nine months ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                              | ** ** | **2004**                                          | ** ** | **2005** | ** ** |
| Cash flows from operating activities:                                                                   |       |                                              |       |   |   |
| Net loss from continuing operations                                                                     |       | $                                                 | (27,655    | ) | $ | (46,584 | ) |
| Adjustments to reconcile net loss from  continuing operations to net cash used in operating activities: |       |                                              |       |   |   |
| Depreciation and amortization                                                                           |       | 3,079                                             |       | 4,277 |   |
| Impairment charges                                                                                      |       | —                                            |       | 10,806 |   |
| Provision for doubtful accounts receivable                                                              |       | 725                                               |       | 176 |   |
| Unrealized foreign currency transaction  losses                                                         |       | 1,082                                             |       | 5,990 |   |
| Deferred tax                                                                                            |       | (25                                               | )          | 70 |   |
| Stock compensation                                                                                      |       | 80                                                |       | — |   |
| Changes in assets and liabilities, net of  acquisitions:                                                |       |                                              |       |   |   |
| Trade accounts receivable                                                                               |       | 1,209                                             |       | 523 |   |
| Other current assets                                                                                    |       | (742                                              | )          | 2,277 |   |
| Other non-current assets                                                                                |       | 1,103                                             |       | — |   |
| Accounts payable                                                                                        |       | 341                                               |       | (2,430 | ) |
| VAT and other taxes payable                                                                             |       | (1,310                                            | )          | (261 | ) |
| Accrued expenses                                                                                        |       | 956                                               |       | 1,720 |   |
| Other current liabilities                                                                               |       | (3,681                                            | )          | (13,778 | ) |
| Deferred revenue                                                                                        |       | (2,254                                            | )          | (1,085 | ) |
| Net cash provided by operating activities  by discontinued operations                                   |       | 7,488                                             |       | 8,133 |   |
| Net cash used in operating activities                                                                   |       | (19,604                                           | )          | (30,166 | ) |
| Cash flows from investing activities:                                                                   |       |                                              |       |   |   |
| (Increase) decrease in restricted cash                                                                  |       | (3,768                                            | )          | 2,306 |   |
| Acquisition of subsidiaries (net of cash  acquired)                                                     |       | (21,088                                           | )          | 1,155 |   |
| Purchases of property, equipment and other  assets                                                      |       | (2,856                                            | )          | (1,020 | ) |
| Proceeds from disposition of subsidiaries                                                               |       | 7,224                                             |       | 16,639 |   |
| Net cash used in investing activities by  discontinued operations                                       |       | (1,081                                            | )          | (97 | ) |
| Net cash received from (used in) investing  activities                                                  |       | (21,569                                           | )          | 18,984 |   |
| Cash flows from financing activities:                                                                   |       |                                              |       |   |   |
| Repayment of debt and principal payments on  capital lease obligations                                  |       | 39                                                |       | (2,699 | ) |
| Proceeds from issuance of common stock, net                                                             |       | 369                                               |       | 2,800 |   |
| Net cash used in financing activities by discontinued  operations                                       |       | (184                                              | )          | (138 | ) |
| Net cash received from (used in) financing  activities                                                  |       | 224                                               |       | (37 | ) |
| Effect of currency exchange rate changes on  cash                                                       |       | (912                                              | )          | (319 | ) |
| Net decrease in cash and cash equivalents                                                               |       | (41,861                                           | )          | (11,538 | ) |
| Cash and cash equivalents, beginning of  period                                                         |       | 65,803                                            |       | 15,497 |   |
| Cash and cash equivalents, end of period                                                                |       | $                                                 | 23,942     |   | 3,959 |   |
| Supplemental disclosure of cash flow  information                                                       |       |                                              |       |   |   |   |
| Cash paid for interest                                                                                  |       | $                                                 | 86         |   | $ | 488 |   |
| Cash paid for taxes                                                                                     |       | $                                                 | 1          |   | $ | 195 |   |

 

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

 

6

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**VIANET.WORKS, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**(Unaudited)**

 

**1.****             Basisof Presentation & Significant Accounting Policies**

 

On October 21, 2005 the Company announced that, at a special meeting held on that date, VIA’s shareholders had approved a plan providing for the voluntary dissolution of the Company (the “Plan of Liquidation”), to be implemented following the sale of VIA’s business that closed on that date. VIA filed a certificate of dissolution with the Delaware Secretary of State on November 4, 2005, or the date of Dissolution. Pursuant to the Plan of Liquidation, VIA will liquidate its remaining assets, satisfy or make reasonable provisions for its remaining obligations and make distributions to its shareholders of all remaining proceeds. The liquidation process is expected to take approximately six to eight months after the Date of Dissolution (the “Liquidation Period”) although it could take longer.

 

These condensedconsolidated financial statements as of September 30, 2005 and for thethree and nine month periods ended September 30, 2004 and 2005 and therelated footnote information are unaudited and have been prepared on a basissubstantially consistent with the audited consolidated financial statements ofVIA NET.WORKS, Inc. (“VIA” or “the Company”) as of and for the year ended December 31,2004, included in VIA’s Annual Report on Form 10-K as filed with theSecurities and Exchange Commission (“2004 Annual Report”). These condensedconsolidated financial statements should be read in conjunction with theaudited consolidated financial statements and the related notes to thefinancial statements included in the 2004 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 September 30, 2005 and the results of itsoperations and its cash flows for the nine month periods ended September 30,2004 and 2005. The results of operations for the three and nine month periodended September 30, 2005 may not be indicative of the results expected forany succeeding quarter or for the year ending December 31, 2005. Certainprior period amounts have been reclassified to conform to the current periodpresentation. Reclassifications have been made to prior period amounts toaccount for discontinued operations.

 

**Liquidation basis of accounting —**As a result of the adoption of the Plan of Liquidation and its approval by theCompany’s shareholders, the Company has adopted the liquidation basis ofaccounting for all periods beginning after September 30, 2005. On September 30,2005, in accordance with the liquidation basis of accounting, assets wereadjusted to estimated net realizable value and liabilities were adjusted toestimated settlement amounts, including estimated costs associated withcarrying out the Plan of Liquidation (see condensed statement of net assets inliquidation and notes 2 and 3).  Actualvalues realized for assets and settlement of liabilities may differ materiallyfrom the amounts estimated.

 

**Reclassifications** - Certainreclassifications have been made to prior year financial statements in order toconform with the current year presentation.

 

**Management Estimates** - The preparationof financial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates.

 

**2.****             Planof Liquidation and Dissolution:**

 

For the nine months ended September 30,2005, the Company had net losses from continuing operations of $46.6 millionand net decrease of cash and cash equivalents for the period of $11.5 million.

 

As of September 30, 2005, the Companyhad $4 million in cash and cash equivalents and $2.8 million inrestricted cash. Through September 30, 2005, the Company continued tosustain losses and net decreases of cash and cash equivalents from itscontinuing operations. As announced on March 17, 2005, the Company hasinsufficient cash reserves to continue operations of its group parent, VIANET.WORKS, Inc., without external financing. The Company sought, with thesupport of its professional advisors, to address this issue, by seeking newinvestments in the Company, new financing and opportunities to sell all or partof its business operations. Since

 

7

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Apri1 1, 2005, the Company financed its continuing operations throughthe sale of operating units of the Company and obtaining advances of funds inconnection with the sale of certain operating units.

 

On April 1, 2005, the Company announcedthe sale of two of its Swiss companies — VIA NET.WORKS (Schweiz) AG and VIANET.WORKS Services AG — to former managers and owners of the businesses, for acash consideration of CHF 3.5 million ($2.9 million). The net proceeds of thesale provided VIA with additional liquidity to continue its discussions withother parties to obtain new financing or enter into transactions for the saleof all or parts of its business.

 

On April 30, 2005, VIA NET.WORKS, Inc.entered into a sale and purchase agreement, or Sale Agreement, with ClaranetGroup Limited (Claranet), a privately-held European Internet services providerbased in the United Kingdom, to sell all of the Company’s remaining businessoperations in Europe and the United States (the “Asset Sale”). The agreementfollowed on the letter of intent entered into between Claranet and VIA on April 10,2005. The material provisions of the Sale Agreement were described in theCompany’s Quarterly Report on Form 10-Q for the three month period ended March 31,2005.

 

On June 29, 2005, the Company enteredinto a series of agreements (the “Sorbie Agreements”) relating to therenegotiation of VIA’s obligations related to the unsecured zero-couponconvertible note of €6.0 million (approximately $7.3 million) due on November 20,2005 issued to by Sorbie Europe B.V. (formerly PSINet Europe B.V.) (“Sorbie”)in connection with the Company’s acquisition of the PSINet Europe companies on August 9,2004. Under the Sorbie Agreements, VIA and the sellers of the PSINet Europecompanies mutually released all claims that either party had or may in thefuture have against the other party under the August 9, 2004 purchaseagreement. In consideration for the release, Sorbie agreed to cancel the noteagainst a payment to Sorbie, prior to August 31, 2005, of €1.5 million(approximately $1.8 million) in cash and the issuance to Sorbie of a number ofshares of common stock of VIA equal to 9.9% of the total outstanding shares ofthe Company as of June 29, 2005. Pursuant to the Sorbie Agreements, on August 29,2005, VIA paid approximately $1.8 million and issued 7,173,341 shares of commonstock (aggregate value of approximately $0.5 million) to Sorbie(collectively, the “Sorbie Settlement”). Upon completion of the SorbieSettlement, VIA recorded a gain of $4.9 million within “Other (expense)income, net” in the statement of operations in the three months ending September 30,2005.

 

On July 12, 2005, VIA and Claranetentered into an Amendment and Restatement Agreement relating to the SaleAgreement of April 30, 2005 (the “Amended Sale Agreement”).  Pursuant to the Amended Sale Agreement, theCompany sold its Amen group of businesses and its U.S., Dutch and Portuguese “VIANET.WORKS”-branded legacy operations to Claranet for $9.3 million, less aportion of the deposit already paid by Claranet in connection with theAsset Sale (plus interest on such amount), repayment to Claranet of the amountsowed by VIA under the loan facility established on April 30, 2005,including interest, and an amount held as a deferred payment (the “July 12thSale”). The sale excluded the PSINet Europe operations and VIA’s legacyoperations in France, Germany and Spain and certain assets pertaining to theCompany’s centralized back office and technical support systems, includingemployee contracts of certain headquarters personal (the “Remaining Assets”).No shareholder approval was necessary for the closing of the July 12thSale. Upon completion of the July 12th Sale, the Companyrecorded a loss in the statement of operations for the three months ending September 30,2005 of $7.6 million, relating to foreign exchange translation from thedisposed entities previously recorded in accumulated other comprehensive loss.

 

The Amended Sale Agreement contemplated thatthe Remaining Assets would be sold to Claranet for $17.1 million, subject tocertain adjustments, in a second closing that would be subject to shareholderapproval.  As a part of the July 12thSale, VIA and Claranet also entered into an Amendment and Restatement Agreementrelating to the Facility Agreement of April 30, 2005 (the “AmendedFacility Agreement”).  Under the AmendedFacility Agreement, Claranet agreed to extend to VIA a secured loan facility of$2.5 million, in replacement of the previous €5.3 million ($7.0 million) loanfacility established under the Facility Agreement of April 30, 2005. VIAsubsequently delivered to its shareholders a supplement to its proxy materialsdescribing, among other things, the July 12th Sale, the sale ofthe Remaining Assets and the approval being sought at the July 22, 2005scheduled shareholders’ meeting.  Theshareholders’ meeting was convened on July 22, 2005 and then adjourneduntil August 2, 2005 in order to provide the Company additional time tosecure the requisite majority vote.

 

On July 27, 2005, Claranet delivered aletter purporting to terminate the Amended Sale Agreement. Claranet alsodelivered a letter of termination that day regarding the Amended FacilityAgreement. In its letters of termination, Claranet alleged that certain eventshad occurred that permitted it to terminate the Amended Sale Agreement and theAmended Facility Agreement; specifically, that VIA’s cash flow exceeded thelevel of negative cash flow permitted by the Amended Sale Agreement, thatcertain alleged new liabilities have arisen and that Claranet did not consentto the Sorbie Agreements. The Company promptly delivered a notice to Claranetdisputing the assertions made by Claranet, disputing the right of Claranet toterminate the agreements and demanding that it fully perform the agreements.

 

While VIA believed that Claranet’s positionwas not supported by the facts or the terms of the agreements and that Claranetwas therefore in breach of the agreements, VIA’s management was also aware thatClaranet was not willing to proceed to complete the sale and provide financingon the terms of the agreements, and therefore VIA pursued a differenttransaction.

 

8

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On August 23, 2005, VIA entered into asettlement deed with Claranet regarding the termination of the Amended Sale andFacility Agreement (the “Settlement Deed”).Under theSettlement Deed, the Company and Claranet mutually released all claims thateither party had or may have had in the future against the other party underthe acquisition agreements and Claranet agreed to pay VIA the sum of $800,000,payable in two instalments, less deductions for certain operational expenses ofapproximately $135,000 incurred by Claranet on VIA’s behalf pursuant to atransition services agreement that will continue for a limited time.  Bothinstalments were subsequently paid.  Thetransition services agreement was entered into in connection with VIA’s sale toClaranet on July 12, 2005 of its Amen group of businesses and its U.S.,Dutch and Portuguese legacy operations, prior to the termination of theacquisition agreements which are the primary subject of the Settlement Deed.

 

On August 26, 2005, in connection withthe definitive agreements with Interoute Communications Holdings S.A. and certainof its affiliates (“Interoute”) for the sale of all the Company’s remaining operations,VIA entered into a Subscription Agreement with a subsidiary of Interoute (“InterouteSub’’) pursuant to which Interoute Sub purchased 10,810,811 shares of common stockand 5,454,545 shares of a newly created series of preferred stock of VIAdesignated Series A convertible preferred stock for an aggregate purchaseprice of $2.8 million. VIA also issued to another subsidiary of Interoute, inpayment of an aggregate of $925,000 in loan commitment and management fees,25,000,000 shares of common stock with a fair value of $1.8 million. The sharesheld by Interoute comprised approximately 46.5% of our outstanding voting stockas of September 30, 2005.

 

On October 21, 2005, VIA completed the sale of substantially allof its remaining assets to Interoute for $18.1 million, of which $5.0 millionwas advanced to the Company prior to the closing under an interim financingfacility.    See Note 16 for furtherdiscussion on this transaction

 

As discussed in Note 16, on October 21,2005, the Company’s shareholders approved a Complete Plan of Liquidation andDissolution providing for the voluntary dissolution of the Company.

 

**3.****             EstimatedLiquidation Costs**

 

Under the liquidation basis of accounting, the Company is required to estimate and record the costs associated with executing the plan of liquidation as a liability. These amounts can vary significantly due to, the timing and amounts associated with discharging known and contingent liabilities and the costs associated with cessation of the Company’s operations. These costs are estimates and are expected to be paid out over the Liquidation Period.  In addition, these costs do not include costs which have already been accrued and accounted for in the Consolidated Statement of Operations for the period ending September 30, 2005. The Company’s Reserve for Estimated Liquidation Costs as of September 30, 2005 is detailed as follows:

 
| ** **                          | ** ** | **September 30,  2005** | ** ** |
|-------------------------------------|------------|------------------------------|------------|
| ** **                          | ** ** | **(Unaudited)**              | ** ** |
|                                |       |                         |       |
| Payroll and  personnel costs        |       | $                            | 196        |   |
| Professional  fees                  |       | 120                          |       |
| Office and  administration expenses |       | 25                           |       |
| Unknown  litigants and creditors    |       | 400                          |       |
| Other                               |       | 13                           |       |
| Total                               |       | $                            | 754        |   |

 

**4.****             Netassets in liquidation**

 

The following is a reconciliation of Total Stockholders’ Equity underthe Going Concern basis of accounting to Net Assets in Liquidation under theLiquidation basis of accounting as of September 30, 2005:

 
| ** **                                                    | ** ** | **September 30,  2005** | ** ** |
|---------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                    | ** ** | **(Unaudited)**              | ** ** |
|                                                          |       |                         |       |
| Stockholders’  equity at September 30, 2005         |       | $                            | 8,140      |   |
|                                                          |       |                         |       |
| Reserve for  estimated costs during the period of liquidation |       | (754                         | )          |
| Fair value  adjustment to property, plant & equipment     |       | 252                          |       |
| Fair value  adjustment to goodwill                            |       | 930                          |       |
| Fair value  adjustment to intangible assets                   |       | 144                          |       |
|                                                          |       |                         |       |
| Net assets  in Liquidation at September 30,2005          |       | $                            | 8,712      |   |

 

The Companyexpects to record a trading loss of approximately $2.2 million, in quarter fourto account for the activity of the remaining trading businesses sold to Interoute,from October 1, 2005 to October 21, 2005. These losses will reduce the Company’s net assets in liquidation for theperiod ending December 31, 2005, to an estimated value of $6.5 million.

 

9

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**5.****             DiscontinuedOperations**

 

As each of the United Kingdom, Brazilian, Portuguese,Cayman Islands, Swiss, Netherlands, U.S., Spanish, French and Italianoperations represented a component of an entity as defined by Statement ofFinancial Accounting Standards No. 144 (“SFAS 144”), *“Accounting for the Impairment or Disposal of Long-LivedAssets”*, the Company has classified each operation as a discontinuedoperation for all periods presented.

 

2004

 

VIA NET.WORKS UK Limited.

 

On September 28, 2004, the Company sold100% of the shares of VIA NET.WORKS UK Limited, which was part of the Solutionssegment, to Claranet Limited, a UK-based Internet service provider. VIANET.WORKS UK Limited results would have been reported in our Solutions segment.Claranet agreed to pay total consideration for the shares of VIA NET.WORKS UKLimited in the aggregate amount of GBP 7.3 million ($13.1 million), subject tocertain working capital and other adjustments. The Company received GBP 5.3million ($9.4 million) in cash on completion. The GBP 2.0 million ($3.8million) balance was payable, subject to the working capital and otheradjustments, as follows: GBP 1.0 million ($1.9 million) in cash six monthsafter completion and GBP 1.0 million ($1.9 million) in cash one year aftercompletion.

 

On March 21, 2005, the Company resolvedall contingencies surrounding the first escrow payment, and received a paymentfrom Claranet of GBP 0.7 million ($1.3 million) plus accrued interest. The GBP0.7 million ($1.3 million) consideration has been recognized as gain ondisposal from discontinued operations in the three months ended March 31,2005.

 

The remaining consideration of GBP 1.0million ($1.9 million) was scheduled to be released from escrow, subject towarranty claims of Claranet against the Company, at the end of September 2005.On April 10, 2005, the Company and Claranet entered into a letter ofintent for purchase of the remaining business operations. Upon execution of theletter of intent, Claranet delivered a deposit of $3.0 million for the rightsto negotiate on an exclusive basis definitive agreements toward the sale of theCompany’s business operations.  Thedeposit was partially paid by the release of the remaining GBP 1.0 million($1.9 million) in escrow.  As allmaterial contingencies surrounding the second escrow payment were resolved asat March 31, 2005, the GBP 1.0 million ($1.9 million) consideration hasalso been recognized as gain on disposal from discontinued operations in thethree months ended March 31, 2005.

 

Revenues related to VIA NET.WORKS UK Limitedwere approximately $10.7 million for the nine months ended September 30,2004. The gain, excluding accounting for the sale transaction, related to VIANET.WORKS UK Limited was approximately $3.5 million for the nine months ended September 30,2004.

 

Although all of VIA’s trading entities weresold subsequent to the quarter end date, they are not treated as discontinuedoperations in the form 10-Q. Discontinued operations presentation is not appropriate as it shouldonly be used when the group is disposing of a component of its operations, it isnot appropriate when the business is disposing all of its operations.

 

SURF COMPANIES

 

During the year ended December 31, 2004,Surftrade Ltda., Surftrade Portugal and VIA NET.WORKS Holdings Cayman wereliquidated.  The results of theliquidated companies which have been recorded during the nine months ended September 30,2004 are nil for Surftrade Ltda., Surftrade Portugal and VIA NET.WORKS HoldingsCayman. Surftrade Ltda., Surftrade Portugal and VIA NET.WORKS Holdings Caymanresults would have been reported in Corporate entity.

 

2005

 

VIANET.WORKS SWITZERLAND

 

On April 1, 2005, the Company announcedthe sale of two of its Swiss companies — VIA NET.WORKS (Schweiz) AG and VIANET.WORKS Services AG — to former managers and owners of the businesses, for a cashconsideration of CHF 3.5 million ($2.9 million). VIA NET.WORKS (Schweiz) AG andVIA NET.WORKS Services AG results would have been reported in our Solutionssegment. The Company sold the Swiss operations due to working capitalshortfalls. The net proceeds of the sale provided VIA with additional liquidityto continue its operations, while the Company continued discussions forrefinancing and sale transactions.

 

Revenues related to VIA NET.WORKS (Schweiz)AG and VIA NET.WORKS Services AG were approximately $4.5 million for the ninemonths ended September 30, 2004 and $2.2 million for the nine months endedSeptember 30, 2005. The loss, excluding accounting for the saletransaction, related to VIA NET.WORKS (Schweiz) AG and VIA NET.WORKS ServicesAG was approximately $0.1 million for the nine months ended September 30,2004 and $24,000 for the nine months ended September 30, 2005. Uponcompletion of the VIA NET.WORKS (Schweiz) AG and VIA NET.WORKS Services AGsale, the Company recorded a loss of $ 1.0 million in the statement ofoperations in the three months ended September 30, 2005, relating toamounts previously recorded in accumulated other comprehensive loss fromforeign currency translation.

 

10

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AMEN GROUP AND LEGACY OPERATIONS IN THEUNITED STATES, THE NETHERLANDS AND PORTUGAL

 

Pursuant to the Amended Sale Agreement, on July 12,2005, the Company sold its Amen group of businesses and the U.S., Dutch andPortuguese VIA NET.WORKS branded legacy operations to Claranet Group Limited(the July 12th Sale). The Amen group of businesses resultswould have been reported in our Amen segment. The Dutch and Portuguese VIANET.WORKS branded legacy operations results would have been reported in ourSolutions segment and the U.S. VIA NET.WORKS branded legacy operation resultwould have been reported in our Express segment.

 

Revenues related to companies sold in the July 12thSale were approximately $13.0 million for the nine months ended September 30,2004 and $16.7 million for the nine months ended September 30, 2005. Theloss, excluding accounting for the sale transaction, related to the companiessold in the July 12th Sale was approximately $3.1 million forthe nine months ended September 30, 2004 and $10.9 million for the ninemonths ended September 30, 2005. Income tax benefits in connection withdeferred tax liabilities relating to intangible fixed assets recognized for theacquisition of the Amen group of companies were approximately $0.2 million forthe nine months ended September 30, 2004 and $0.2 million for the ninemonths ended September 30, 2005. Details of the impairment charges as wellas the reversal of previously recorded foreign currency translation balances recordedagainst the discontinued operations are set out in Note 6.

 

Although the Company was actively marketingits remaining trading entities as of September 30, 2005, the Company has notaccounted for the entities sold to Interoute on October 21, 2005 as adiscontinued operation.  Thispresentation is appropriate, as the Company is not disposing of a component ofits business, as defined within SFAS 144, but rather all of its continuingoperations.

 

**6.****                                      Impairmentand Restructuring Charges**

 

*Impairment charges:*

 
| ** **                          | ** ** | **Nine months ended  September 30,** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| **In thousands of U.S. dollars**    | ** ** | **2004**                                  | ** ** | **2005** | ** ** |
| Fixed assets  and intangible assets |       | $                                         | —     |   | $ | 1,382 |   |
| Goodwill                            |       | —                                    |       | 8,815 |   |
|                                |       |                                      |       |   |   |
| Total  impairment charges           |       | $                                         | —     |   | $ | 10,197 |   |

 

2004

 

There were no impairment charges for the nine months ended September 30,2004.

 

2005

 

At March 31,2005, upon completion of an impairment analysis, in accordance with SFAS 144,the Company recorded an intangible fixed asset impairment charge of $0.8million and a tangible fixed asset impairment charge of $1.1 million, mainlyrelated to the Solutions and Amen segments. The fair value of the assetsgroups, calculated as of March 31, 2005 was based on a discounted cash flowmodel with appropriate market and business risk factored in for the period upuntil the first week of July, 2005, the estimated date of completion of theClaranet Sale, the estimated sale proceeds of $26.4 million as agreed in thesale and purchase agreement with Claranet in place at that time and theprojected working capital position at June 30, 2005.

 

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

 

At June 30, 2005,upon completion of an impairment analysis, in accordance with SFAS 144, theCompany recorded an intangible fixed asset impairment charge of $0.3 millionand a tangible fixed asset impairment charge of $1.1million in relation to theRemaining Assets of the Group (mainly related to the Solutions segment). Fordefinitions of the segments, please refer to Note 12 Segment reporting.   At September 30, 2005, after completionof an updated impairment analysis, it was determined that no additionalimpairment charge was required for the quarter then ended.

 

The impairment review reflected the sale ofthe assets of the Company to Interoute on October 21, 2005.

 

Based on the sale proceeds from the disposalto Interoute, management concluded that no impairment was necessary for thethree months ended September 30, 2005.

 

Based on theimpairment of tangible and intangible fixed assets for the Remaining Assets, atJune 30, 2005, the Company determined a triggering event had occurredwhich required the Company to perform an impairment test on the carrying valueof goodwill in accordance with SFAS 142. As a result, the Company recorded animpairment of $8.7 million to the goodwill related to its Solutions segment andan impairment of $0.1 million to the goodwill related to VIA US operation,which was included in the Company’s Express segment. The impairment chargerelating to the goodwill of the VIA US operation, which was included in theExpress segment, has been classified within loss from discontinued operationsin the statement of operations for the nine months ended September 30,2005.  In addition to the impairmentcharges discussed above, the Company also recorded impairment charges of $5.9million for the three ended June 30, 2005, against assets classified asheld for sale under the Amended Sale Agreement with Claranet.

 

11

----

 

Restructuringcharges:

 
| **In thousands of U.S. dollars**    | ** ** | **Balance at  December 31,  2003** | ** ** | **Additions** | ** ** | **Cash  utilized** | ** ** | **Foreign  exchange** | ** ** | **Balance at  March 31,  2004** | ** ** |
|-------------------------------------|------------|-----------------------------------------|------------|---------------|------------|--------------------|------------|-----------------------|------------|--------------------------------------|------------|
|                                |       |                                    |       |          |       |               |       |                  |       |                                 |       |
| Employee  termination payments      |       | 201                                     |       | 151           |       | (159               | )          | 1                     |       | 194                                  |       |
| Future  operating lease obligations |       | 276                                     |       | —        |       | (41                | )          | —                |       | 235                                  |       |
| Other                               |       | 121                                     |       | 149           |       | (114               | )          | —                |       | 156                                  |       |
|                                |       |                                    |       |          |       |               |       |                  |       |                                 |       |
| Total  restructuring charges        |       | $                                       | 598        |          | $          | 300                |       | $                     | (314       | )                                    | $          | 1 |   | $ | 585 |   |
|                                     |            |                                         |            |               |            |                    |            |                       |            |                                      |            |  |  |  |  |  |

 
| **In thousands of U.S. dollars**    | ** ** | **Balance at  March 31,  2004** | ** ** | **Additions** | ** ** | **Cash  utilized** | ** ** | **Foreign  exchange** | ** ** | **Balance at  June 30,  2004** | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|---------------|------------|--------------------|------------|-----------------------|------------|-------------------------------------|------------|
|                                |       |                                 |       |          |       |               |       |                  |       |                                |       |
| Employee  termination payments      |       | 194                                  |       | 73            |       | (266               | )          | (1                    | )          | —                              |       |
| Future  operating lease obligations |       | 235                                  |       | —        |       | (83                | )          | —                |       | 152                                 |       |
| Other                               |       | 156                                  |       | 122           |       | (253               | )          | —                |       | 25                                  |       |
|                                |       |                                 |       |          |       |               |       |                  |       |                                |       |
| Total  restructuring charges        |       | $                                    | 585        |          | $          | 195                |       | $                     | (602       | )                                   | $          | (1 | ) | $ | 177 |   |
|                                     |            |                                      |            |               |            |                    |            |                       |            |                                     |            |  |  |  |  |  |

 
| **In thousands of U.S. dollars**    | ** ** | **Balance at  June 30,  2004** | ** ** | **Additions** | ** ** | **Cash  utilized** | ** ** | **Foreign  exchange** | ** ** | **Balance at  September 30,  2004** | ** ** |
|-------------------------------------|------------|-------------------------------------|------------|---------------|------------|--------------------|------------|-----------------------|------------|------------------------------------------|------------|
|                                |       |                                |       |          |       |               |       |                  |       |                                     |       |
| Employee  termination payments      |       | —                              |       | 898           |       | (14                | )          | (7                    | )          | 891                                      |       |
| Future  operating lease obligations |       | 152                                 |       | 91            |       | (32                | )          | —                |       | 211                                      |       |
| Other                               |       | 25                                  |       | 304           |       | (176               | )          | —                |       | 7                                        |       |
|                                |       |                                |       |          |       |               |       |                  |       |                                     |       |
| Total  restructuring charges        |       | $                                   | 177        |          | $          | 1,293              |       | $                     | (222       | )                                        | $          | (7 | ) | $ | 1,255 |   |
|                                     |            |                                     |            |               |            |                    |            |                       |            |                                          |            |  |  |  |  |  |

 
| **In thousands of U.S. dollars**    | ** ** | **Balance at  December 31,  2004** | ** ** | **Additions / releases** | ** ** | **Cash  utilized** | ** ** | **Foreign  exchange** | ** ** | **Balance at  March 31,  2005** | ** ** |
|-------------------------------------|------------|-----------------------------------------|------------|--------------------------|------------|--------------------|------------|-----------------------|------------|--------------------------------------|------------|
|                                |       |                                    |       |                     |       |               |       |                  |       |                                 |       |
| Employee  termination payments      |       | 319                                     |       | 106                      |       | (212               | )          | (14                   | )          | 199                                  |       |
| Future  operating lease obligations |       | 164                                     |       | (40                      | )          | (70                | )          | (4                    | )          | 50                                   |       |
| Other                               |       | 484                                     |       | 176                      |       | (174               | )          | (16                   | )          | 470                                  |       |
|                                |       |                                    |       |                     |       |               |       |                  |       |                                 |       |
| Total restructuring  charges        |       | $                                       | 967        |                     | $          | 242                |       | $                     | (456       | )                                    | $          | (34 | ) | $ | 719 |   |
|                                     |            |                                         |            |                          |            |                    |            |                       |            |                                      |            |  |  |  |  |  |

 
| **In thousands of U.S. dollars**    | ** ** | **Balance at  March 31,  2005** | ** ** | **Additions /  releases** | ** ** | **Cash  utilized** | ** ** | **Foreign  exchange** | ** ** | **Balance at  June 30,  2005** | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|---------------------------|------------|--------------------|------------|-----------------------|------------|-------------------------------------|------------|
|                                |       |                                 |       |                      |       |               |       |                  |       |                                |       |
| Employee  termination payments      |       | 199                                  |       | 1,407                     |       | (143               | )          | (69                   | )          | 1,394                               |       |
| Future  operating lease obligations |       | 50                                   |       | —                    |       | (45                | )          | (1                    | )          | 4                                   |       |
| Other                               |       | 470                                  |       | —                    |       | (97                | )          | (14                   | )          | 359                                 |       |
|                                |       |                                 |       |                      |       |               |       |                  |       |                                |       |
| Total  restructuring charges        |       | $                                    | 719        |                      | $          | 1,407              |       | $                     | (285       | )                                   | $          | (84 | ) | $ | 1,757 |   |
|                                     |            |                                      |            |                           |            |                    |            |                       |            |                                     |            |  |  |  |  |  |

 
| **In thousands of U.S. dollars**    | ** ** | **Balance at  June 30,  2005** | ** ** | **Additions /  releases** | ** ** | **Cash  utilized** | ** ** | **Foreign  exchange** | ** ** | **Balance at  September 30,  2005** | ** ** |
|-------------------------------------|------------|-------------------------------------|------------|---------------------------|------------|--------------------|------------|-----------------------|------------|------------------------------------------|------------|
|                                |       |                                |       |                      |       |               |       |                  |       |                                     |       |
| Employee  termination payments      |       | 1,394                               |       | 609                       |       | (1,317             | )          | (1                    | )          | 685                                      |       |
| Future  operating lease obligations |       | 4                                   |       | —                    |       | (4                 | )          | —                |       | —                                   |       |
| Other                               |       | 359                                 |       | —                    |       | —             |       | (1                    | )          | 358                                      |       |
|                                |       |                                |       |                      |       |               |       |                  |       |                                     |       |
| Total  restructuring charges        |       | $                                   | 1,757      |                      | $          | 609                |       | $                     | (1,321     | )                                        | $          | (2 | ) | $ | 1,043 |   |
|                                     |            |                                     |            |                           |            |                    |            |                       |            |                                          |            |  |  |  |  |  |

 

12

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2004

 

The Companyrecorded restructuring charges of $1.3 million and $1.8 million during thethree and nine months ended September 30, 2004 respectively. Therestructuring charge for the six months ended June 30, 2004 related toseverance payments at the corporate headquarters and transition implementationcosts for back-office and administrative outsourcing initiatives. Therestructuring charge for the three months ended September 30, 2004 relatedto severance payments at four of the Company’s European operations, costsassociated with integrating the PSINet Europe operations, transitionimplementation costs for back-office and administrative outsourcing activitiesand a charge for future lease obligations at the German operation.

 

The employee termination costs of $0.2million for the three months ended March 31, 2004 relate to five employeesin finance at the corporate headquarters. Cash payments for severance andbenefits of $0.2 million were made in the first quarter of 2004 by our Europeanoperations ($0.1 million) and Corporate ($0.1 million). The employeetermination costs of $0.1 million for the three months ended June 30, 2004relate to three employees at corporate headquarters. Cash payments of $0.3million were made in the quarter in respect of the March 31, 2004 accrualand all costs incurred in the second quarter. The employee termination costs of$0.9 million for the three months ended September 30, 2004 relate tothirty eight employees at our European operations, most notably thirty-four inGermany. Cash payments of $14,000 were made in the quarter in respect of thesethird quarter costs, relating to one employee at the operation in Spain. Theremaining accrual of $0.9 million at September 30, 2004 relates to 37employees at the European operations.

 

The accrual for future operating leaseobligations, relating to the Reston office, has been drawn down by the monthlypayments on the office lease, which continued through February 2005, lessthe income from a sublease of the space. During the three months ended September 30,2004 an additional accrual of $0.1 million has been made for future leaseobligations in the German operation. Other charges incurred in the three andnine months ended September 30, 2004 related to the implementation costsfor back-office and administrative outsourcing initiatives. In addition, othercharges include $0.2 million for the three months ended September 30, 2004relating to costs associated with integrating the PSINet Europe operationsrecently acquired (see Note 4) and related system migration costs.

 

2005

 

The Company recorded restructuring charges of$0.6 million and $2.3 million during the three and nine months ended September 30,2005 respectively. The restructuring charges related to severance payments atthe corporate headquarters and transition implementation costs for back-officeintegration initiatives.

 

The employee termination costs of $0.1million for the three months ended March 31, 2005 relate to one employeeat the corporate headquarters. The employee termination costs of $1.4 millionfor the three months ended June 30, 2005 relate to forty one employees atthe corporate headquarters. Cash payments for severance and benefits of $1.3million were made in the three months ended September 30, 2005 by thecorporate headquarters. The remaining accrual of $0.7 million at September 30,2005 relates to two employees at the corporate headquarters.

 

The accrual for future operating leaseobligations, relate to the Reston office and future lease obligations in theVIA Germany operation. As at September 30, 2005 the accrual for the futureoperating lease obligations of the Reston office and the VIA Germany operationhave been drawn down to nil by the monthly payments on the office leases.$40,000 of the accrual for the future operating lease obligations has beenreleased to the statement of operations for the three months ended March 31,2005 after the Reston operating lease obligation was terminated in February 2005.

 

Other charges incurred in the three monthsended March 31, 2005, relate to the implementation costs for back-officeintegration initiatives. The remaining accrual of $0.4 million at September 30,2005 relates to $0.2 million implementation costs for back-office integrationinitiatives and $0.2 million for the termination of a reseller agreement in thePSINet France operation.

 

**7.****            ****Income Tax**

 

The provision for taxesbased on loss for the nine months ended September 30, 2004 and 2005 wascomputed in accordance with Interpretation No. 18 of Accounting PrinciplesBoard Opinion No. 28 on reporting taxes for interim periods and was basedon management’s expectation of an effective income tax rate of 0% for the yearending December 31, 2005.

 

13

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**8.****             ComprehensiveGain (Loss)**

 

Comprehensive gain (loss) for the three andnine months ended September 30, 2004 and 2005 was as follows:

 
| ** **                                     | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **In thousands of U.S. dollars**               | ** ** | **2004**                                   | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2005** | ** ** |
| Net income (loss)                              |       | $                                          | (4,642     | )                                         | $          | (8,250 | ) | $ | (25,936 | ) | $ | (54,602 | ) |
| Foreign currency translation adjustment  gains |       | 5,866                                      |       | 11,855                                    |       | 8,399 |   | 24,153 |   |
|                                           |       |                                       |       |                                      |       |   |   |   |   |
| Comprehensive gain (loss)                      |       | $                                          | 1,224      |                                      | $          | 3,605 |   | $ | (17,537 | ) | $ | (30,449 | ) |
|                                                |            |                                            |            |                                           |            |  |  |  |  |  |  |  |  |  |

 

**9.****             Propertyand Equipment, net**

 

Property and equipment consisted of thefollowing:

 
| **In thousands of U.S. dollars** | ** ** | **December 31, 2004** | ** ** | **September 30, 2005** | ** ** |
|----------------------------------|------------|----------------------------|------------|-----------------------------|------------|
| Hardware and  other equipment    |       | $                          | 19,586     |                        | $          | 6,706 |   |
| Network and  data center assets  |       | 8,330                      |       | 2,783                       |       |
| Software                         |       | 17,237                     |       | 15,246                      |       |
| Furniture  and fixtures          |       | 1,186                      |       | 134                         |       |
|                             |       |                       |       |                        |       |
|                             |       | 46,339                     |       | 24,869                      |       |
| Accumulated  depreciation        |       | (33,274                    | )          | (19,829                     | )          |
|                             |       |                       |       |                        |       |
| Property and  equipment, net     |       | $                          | 13,065     |                        | $          | 5,040 |   |

 

Depreciation expense was $4.8 millionand $4.0 million for the nine months ended September 30, 2004 and2005, respectively and  $1.6 million and$1.35 million for three months ended September 30, 2004 and 2005,respectively. The Company recorded an asset impairment charge of $1.8 millionand $1.1 million for the year ended December 31, 2004 and the nine monthsended September 30, 2005, respectively. The table above shows the balances,net, after the effect of the impairment charges. The fixed asset impairmentcharge related to all property and equipment categories. (See Note 6 forfurther information.)

 

**10.****          Goodwill**

 

The changes in the carrying amount ofgoodwill during the nine months ended September 30, 2005 are as follows:

 
| **In thousands of U.S. dollars**                              | ** ** | **Total** | ** ** | **Solutions** | ** ** | **Amen** | ** ** | **Express** | ** ** |
|---------------------------------------------------------------|------------|-----------|------------|---------------|------------|----------|------------|-------------|------------|
|                                                          |       |      |       |          |       |     |       |        |       |
| Balance as of December 31, 2004                          |       | $         | 42,466     |          | $          | 30,830   |       | $           | 10,490     |   | $ | 1,146 |   |
| Impairment charges related to continuing  operations          |       | (517      | )          | —        |       | (517     | )          | —      |       |
| Foreign exchange adjustment                                   |       | (1,355    | )          | (1,607        | )          | 252      |       | —      |       |
|                                                          |       |      |       |          |       |     |       |        |       |
| Balance as of March 31, 2005                             |       | $         | 40,594     |          | $          | 29,223   |       | 10,225      |       | $ | 1,146 |   |
|                                                          |       |      |       |          |       |     |       |        |       |
| Impairment charges related to discontinued  operations        |       | (70       | )          | —        |       | —   |       | (70         | )          |
| Impairment charges related to continuing  operations          |       | (8,815    | )          | (8,815        | )          | —   |       | —      |       |
| Goodwill classified under assets of  businesses held for sale |       | (10,628   | )          | —        |       | (9,552   | )          | (1,076      | )          |
| Foreign exchange adjustment                                   |       | (2,247    | )          | (1,574        | )          | (673     | )          | —      |       |
|                                                          |       |      |       |          |       |     |       |        |       |
| Balance as of June 30, 2005                              |       | $         | 18,834     |          | $          | 18,834   |       | $           | —     |   | $ | — |   |
|                                                          |       |      |       |          |       |     |       |        |       |
| Foreign exchange adjustment                                   |       | (282      | )          | (282          | )          | —   |       | —      |       |
|                                                          |       |      |       |          |       |     |       |        |       |
| Balance as of September 30, 2005                         |       | $         | 18,552     |          | $          | 18,552   |       | $           | —     |   | $ | — |   |

 

Impairments are discussed in greater detailwithin Note 6 of these consolidated financial statements.

 

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**11.****          IntangibleAssets, net**

 

Intangible assets consisted of the following:

 
| **In thousands of U.S. dollars** | ** ** | **December 31, 2004** | ** ** | **September 30, 2005** | ** ** |
|----------------------------------|------------|----------------------------|------------|-----------------------------|------------|
| Customer  lists                  |       | $                          | 6,580      |                        | $          | 3,508 |   |
| Software                         |       | 2,183                      |       | —                      |       |
| Trade name                       |       | 1,062                      |       | 697                         |       |
| Accumulated  amortization        |       | (1,130                     | )          | (1,340                      | )          |
|                             |       |                       |       |                        |       |
| Intangible  assets, net          |       | $                          | 8,695      |                        | $          | 2,865 |   |

 

The amortization expense for the nine-month periods ended September 30,2004 and 2005 for continuing operations was $1.2 million and $0.2 million,respectively and 0.4 million and 0.15 million for three months ended September 30,2004 and 2005, respectively.. The Company amortizes customer lists, softwareand trade names over three to seven years, five years and ten yearsrespectively. The Company recorded an asset impairment charge of $0.1 millionand $0.3 million for the year ended December 31, 2004 and the nine monthsended September 30, 2005, respectively.

 

**12.****          Stock-BasedCompensation**

 

SFAS No. 123, “*Accounting for Stock-Based Compensation*,”as amended encourages, but does not require companies to record compensationcost for stock-based employee compensation plans at fair value. The Company haschosen to account for stock-based compensation using the intrinsic value methodprescribed in Accounting Principles Board Opinion (“APB”) No. 25, “*Accounting for Stock Issued to Employees*,”and related Interpretations. Accordingly, compensation cost for stock optionswas measured as the excess, if any, of the estimated fair value of the Company’sstock at the date of the grant over the amount an employee must pay to acquirethe stock.  Additionally, the Companycomplies with the stock-based employer compensation disclosure requirements ofSFAS No. 148 *“Accounting forStock-Based Compensation-Transition & Disclosure, an amendment of FASBStatement No. 123”.*

 

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

 
| ** **                                                                                                                      | ** ** | **For the three months ended  September 30,** | ** ** | **For the nine months ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| **In thousands of U.S. dollars**                                                                                                | ** ** | **2004**                                           | ** ** | **2005**                                          | ** ** | **2004** | ** ** | **2005** | ** ** |
| Net loss (as reported)                                                                                                          |       | $                                                  | (4,642     | )                                                 | $          | (8,250 | ) | $ | (25,936 | ) | $ | (54,602 | ) |
| Add back: Total stock-based employee  compensation expense determined under intrinsic value method, net of related  tax effects |       | —                                             |       | —                                            |       | 80 |   | — |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method, net of related  tax effects  |       | (301                                               | )          | (161                                              | )          | (1,418 | ) | (708 | ) |
| Pro forma  net loss                                                                                                             |       | $                                                  | (4,943     | )                                                 | $          | (8,411 | ) | $ | (27,274 | ) | $ | (54,310 | ) |
|                                                                                                                            |       |                                               |       |                                              |       |   |   |   |   |
| Net loss per share, basic and diluted (as  reported)                                                                            |       | $                                                  | (0.08      | )                                                 | $          | (0.10 | ) | $ | (0.43 | ) | $ | (0.77 | ) |
| Net loss per share, basic and diluted (pro  forma)                                                                              |       | $                                                  | (0.08      | )                                                 | $          | (0.10 | ) | $ | (0.45 | ) | $ | (0.77 | ) |
|                                                                                                                                 |            |                                                    |            |                                                   |            |  |  |  |  |  |  |  |  |  |  |  |

 

During the three monthsended March 31, 2004, a total of 37,500 shares of the Company’s commonstock were issued to two directors pursuant to the Company’s directorcompensation program. The market value of the stock as issued on the date ofgrant was $2.13 per share. This cost to the Company has been expensed in thecondensed consolidated statement of operations for the three months ended March 31,2004.

 

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**13.****          Non-cashtransactions**

 

On June 29, 2005, the Company enteredinto a series of agreements (the “Agreements”) relating to the renegotiation ofthe Company’s obligations related to the unsecured zero-coupon convertible noteof Euro 6.0 million ($7.2 million) due in full November 20, 2005 issued toSorbie Europe B.V. (formerly PSINet Europe B.V.) (“Sorbie”) in connection withthe Company’s acquisition of the PSINet Europe companies on August 9,2004. Pursuant to the Sorbie Agreements, on August 29, 2005, VIA paidapproximately $1.8 million and issued 7,173,341 shares of common stock(aggregate value of approximately $0.5 million) to Sorbie (collectively,the “Sorbie Settlement”). Upon completion of the Sorbie Settlement, VIArecorded a gain of $4.9 million in the statement of operations in thethree months ended September 30, 2005.

 

**14.****          Contingencies**

 

*Legal Proceedings*

 

On November 5, 2001,the Company was named as a defendant in a class action lawsuit in the DistrictCourt for the Southern District of New York against VIA NET.WORKS, Inc.,certain of the underwriters who supported our initial public offering (“IPO”)and certain of our officers, under the title O’Leary v. Via Net.works [sic] etal [01-CV-9720] (the “Complaint”). An amended complaint was filed in April 2002.The Complaint alleges that the prospectus we filed with our registrationstatement in connection with our IPO was materially false and misleadingbecause it failed to disclose, among other things, that: (i) the namedunderwriters had solicited and received excessive and undisclosed commissionsfrom certain investors in exchange for the right to purchase large blocks ofVIA IPO shares; and (ii) the named Underwriters had entered intoagreements with certain of their customers to allocate VIA IPO shares inexchange for which the customers agreed to purchase additional VIA shares inthe aftermarket at pre-determined prices (“Tie-in Arrangements”), therebyartificially inflating the Company’s stock price. The Complaint further allegesviolations of Sections 11, 12 (a)(2) and 15 of the Securities Act of 1933and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5promulgated there under arising out of the alleged failure to disclose and thealleged materially misleading disclosures made with respect to the commissionsand the Tie-in Arrangements in the prospectus. The plaintiffs in this actionseek monetary damages in an unspecified amount. Approximately 300 other issuersand their underwriters have had similar suits filed against them, all of whichare included in a single coordinated proceeding in the Southern District of NewYork (the “IPO Litigation”). On June 30, 2003, the special litigationcommittee of the board of directors of the Company conditionally approved theglobal settlement between all plaintiffs and issuers in the IPOLitigations.  The special litigation committee agreed to approve thesettlement subject to a number of conditions, including the participation of asubstantial number of other defendants in the proposed settlement, the consentof the Company’s insurers to the settlement, and the completion of acceptablefinal settlement documentation.  The settlement would provide, among otherthings, a release of the Company and of the individual defendants for the conductalleged in the action to be wrongful by the plaintiffs.

 

Under the proposed settlement, the Companywould agree to undertake other responsibilities under the partial settlement,including agreeing to assign away, not assert, or release certain potentialclaims the Company may have against its underwriters.  Thesettlement also includes the possibility of a payment on behalf of the settlingissuers; any direct financial impact of the proposed settlement is expected tobe borne by our insurers.

 

In June 2004,a motion for preliminary approval of the settlement was filed with the Court.The underwriters filed a memorandum with the Court opposing preliminaryapproval of the settlement.  The court grantedthe preliminary approval on February 15, 2005, subject to certainmodifications with which the settling parties have agreed. On August 31,2005 the court issued an order preliminarily approving the settlementstipulation, certifying the settlement classes and setting April 24, 2006for the date on which a “fairness” hearing will be held to consider thesettlement and any objections thereto. If at such time, the Court determinesthat the settlement is fair to the class members, the settlement will beapproved, subject to any appeals that may be filed.

 

The Company is engaged in a dispute with itsformer chief executive officer, Rhett Williams, regarding the termination ofhis employment agreement. VIA terminated the agreement for cause as of April 6,2005.  On May 24, 2005, Mr. Williamscaused an attachment to be placed on VIA’s bank accounts in the Netherlands. Insupport of his application for the attachment, Mr. Williams claimed thatunder his employment agreement he was entitled to notice of termination oftwelve months, an additional six months separation pay, reimbursement ofmoving expenses and his costs in the action, for a total claim of in excess of€950,000.  In June 2005, Mr. Williamsfiled an action for summary judgment and immediate payment of the claim.  In a ruling of the Dutch employment tribunal deliveredon July 5, 2005, the court denied his petition.  VIA secured the release of the attachmentagainst the bank accounts August 5, 2005. On August 8, 2005, Mr. Williamsserved the Company with a summons for a trial on the matter within a few days,he subsequently caused a new lien to be placed on the Company’s Dutch bankaccounts, immaterial amounts of cash are currently in these accounts.  VIA believes that the suit of Mr. Williamsis without merit, and there existed sufficient grounds to terminate theemployment agreement for cause.  VIA hasengaged counsel and intends to defend vigorously the action.  If the Company is determined to be liable orif we conclude that a settlement is in its best interests, the Company mayincur substantial costs.  The Companyis presently in discussions with Mr. Williams regarding a possiblesettlement of the matter.

 

In August 2004, VIA acquired PSINetBelgium as a part of its acquisition of five PSINet Europe companies.  PSINet Belgium

 

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is a defendant in a lawsuit filed in September 2002 by the formerVice President Europe Sales & Marketing of PSINet Europe, based on thetermination of her employment in February 2002.  In her suit filed in the Belgium employmenttribunal, the claimant alleges that that she was entitled to notice andtermination pay, reimbursement for expenses incurred and other damages in anamount in excess of €1.7 million.  In January 2003,after the tribunal delivered a ruling in favor of PSINet Belgium with regard tothe initial request of the former employee for holiday allowance, the claimantdid not prosecute the matter further; however the matter is still pending inthe Belgium employment tribunal and may be restarted at any time by the formeremployee.  In June 2005, through hercounsel, the claimant contacted PSINet Belgium and VIA’s chief executiveofficer to renew her demands for payment of her claims, which she now claims isin excess of €2.1 million. VIA communicated to the former employee itswillingness to discuss the matter with a view toward reaching an appropriatesettlement.  If PSINet Belgium isdetermined to be liable or if the Company concludes that a settlement is in itsbest interests, that subsidiary may incur substantial costs.  As part of the Sale Agreement with Interoute,the ultimate ownership of PSINet Belgium has transferred to interoute as partof the sale of Via’s remaining operations completed on October 21, 2005,together with all liabilities and contingencies associated with thatCompany.  Therefore, the Company expectsthat any future adverse outcome of these actions will have no impact on theCompany’s financial condition.

 

PSINet Belgium, is also a defendant in alawsuit filed by Perceval Technologies N.V. (“Perceval”) regarding a commercialagreement entered into for the provision by Perceval of a DSL network inBelgium, Luxembourg and France.  Theagreement of 15 March 2004, entered into prior to VIA’s acquisition ofPSINet Belgium, was for the benefit of a customer of PSINet Belgium, andprovided for a three-year term upon completion of a test phase. The customerwas not satisfied with the results of the project and decided to stop the project,whereupon PSINet Belgium terminated the agreement with Perceval.  On February 28, 2005, Perceval brought acivil action before the commercial court of Brussels for the early terminationof the contract and claims damage in the amount of €1.4 million plus €250,000moral damages, plus interests, costs and attorneys’ fees. The Company believesPSINet Belgium was entitled to terminate the agreement under the circumstancesand that the allegations are without merit and have engaged counsel to defendthe action.  If PSINet Belgium isdetermined to be liable or if the Company concludes that a settlement is in itsbest interests, that subsidiary may incur substantial costs.  The ultimate ownership of PSINet Belgium hastransferred to interoute as part of the sale of Via’s remaining operationscompleted on October 21, 2005, together with all liabilities and contingenciesassociated with that Company.  Therefore,the Company expects that any future adverse outcome of these actions will haveno impact on the Company’s financial condition.

 

On August 23, 2005, VIA entered into asettlement deed with Claranet regarding the termination of the acquisitionagreements between the parties pursuant to which Claranet agreed to acquire VIA’sassets and operations (the “Settlement Deed”).Under theSettlement Deed, the Company and Claranet mutually released all claims thateither party has or may in the future have against the other party under theacquisition agreements and Claranet agreed to pay VIA the sum of $800,000, payablein two instalments, less deductions for certain operational expenses ofapproximately $135,000 incurred by Claranet on VIA’s behalf pursuant to atransition services agreement that will continue for a limited time.  Bothinstalments were subsequently paid.  Thetransition services agreement was entered into in connection with VIA’s sale toClaranet on July 12, 2005 of its Amen group of businesses and its U.S.,Dutch and Portuguese legacy operations, prior to the termination of the acquisitionagreements which were the primary subject of the Settlement Deed.

 

On October 17, 2005, the Company andReachtown Limited (“Reachtown”) entered into a compromise deed and release (the“Settlement”) mutually releasing and settling all claims and disputes amongsteach other in connection with the Share Purchase Agreement of January 28, 2004, as amended, relatingto the sale by the Company of its Amengroup of companies (the “SPA”), the Management Services Agreements datedJanuary 28, 2004 and February 1, 2005 (the “MSAs”), and certainactions allegedly taken by Reachtown and the Company in connection with the SPAand the MSAs.

 

*Guarantees*

 

From time to time prior to the sale of itsbusiness, the Company entered into indemnification agreements with certaincontractual parties in the ordinary course of business, including agreementswith lenders, lessors, service providers and certain vendors. All suchindemnification agreements were entered into in the context of the particularagreements and were 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 have beenrequired to make under these indemnification agreements was unlimited,management believed 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. Additionally, the fair value ofthe indemnifications that the Company issued during the year ended December 31,2004 and the nine months ended September 30, 2005, respectively, were notmaterial to the Company’s financial position, results of operations or cashflows.

 

*Other*

 

Prior to the sale of its business, theCompany was subject to claims and legal proceedings that arise in the ordinarycourse of its business operations. Each of these matters were subject tovarious uncertainties, and could have been decided unfavorably to the Company.The Company did not believe that any of these matters will have a materialadverse affect on its business, assets or operations.

 

As part of its dissolution and winding up,the Company may be subject to claims and legal proceedings by parties seekingpayment prior to distribution of the Company’s remaining assets tostockholders.  Under Delaware law theCompany will need establish

 

17

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appropriate reserves for outstanding claims, and ultimately may need topetition the Delaware courts for resolution of the appropriate amounts of thesereserves so that remaining funds can be distributed to stockholders.

 

**15.****                             SegmentReporting**

 

Prior to the sale of its business,VIAedoffers a variety of Internet access, managed bandwidth, web-hosting, Internetsecurity and related services to businesses and consumers in Europe and theAmericas. As of September 30, 2005, the Company served primary markets insix countries. These country operations generate Internet-related revenues fromleased lines, dial-up Internet access, web-hosting and design, Internetsecurity and consulting services, and sale of third-party hardware andsoftware.

 

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

 

Within the last quarter of 2004, managementre-evaluated and amended its internal reporting structure and therefore changedits reportable segments and grouped all of the VIA legacy operating companies,except the US operation, and the newly acquired PSINet Europe operatingcompanies into one operating segment – “Solutions”. The Company grouped itsstart-up VIA Express channel operations together with the legacy VIA USoperations into one operating segment – “Express”. The Company grouped all ofthe Amen operating companies into one operating segment – “Amen”. The Companyand its Chief Operating Decision Makers (“CODM”) evaluates the performance ofits segments based on revenue and EBITDA before restructuring (“Adjusted EBITDA”).The Company’s CODM has been the Chief Executive Officer throughout the year.Corporate expenses, which also include the regional companies holdingIndefeasible Rights of Use (“IRU’s), are shown to reconcile to the totalconsolidated figures. Prior period amounts have been reclassified to conform tothe current period presentation.

 

The table below presents information aboutthe reported revenue, adjusted EBITDA and impairment and restructuring chargesfrom continuing operations of the Company’s operating segments for the threeand nine months ended September 30, 2004 and September 30, 2005.Total segment assets, as presented in the table below, are total assets net ofintercompany funding amounts and include assets relating to the Amen group ofbusinesses and the U.S., Dutch and Portuguese VIA NET.WORKS branded legacyoperations, which have been classified as businesses held for sale as of September 30,2005. Total assets relating to the Amen group of businesses, $13.7 million,have been included within the Amen segment above. Total assets relating to theDutch and Portuguese VIA NET.WORKS branded legacy operations, $4.3 million,have been included within the Solutions segment. Total assets relating to theU.S. VIA NET.WORKS branded legacy operation, $1.8 million, have been includedwithin the Express segment.

 
| **In thousands of U.S. dollars**            | ** ** | **Solutions** | ** ** | **Express** | ** ** | **Amen** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|---------------|------------|-------------|------------|----------|------------|---------------|------------|-----------|------------|
| Total assets as of September 30, 2004  |       | $             | 31,467     |        | $          | 2,475    |       | $             | 20,431     |      | $          | 51,170 |   | 105,543 |   |
| Total assets as of September 30, 2005  |       | 37,578        |       | —      |       | —   |       | 18,463        |       | 56,041    |       |
| Three months ended September 30, 2004: |       |          |       |        |       |     |       |          |       |      |       |
| Revenue                                     |       | 8,394         |       | —      |       | —   |       | —        |       | 8,394     |       |
| Adjusted EBITDA                             |       | (1,146        | )          | (117        | )          | —   |       | (4,361        | )          | (5,624    | )          |
| Impairment and restructuring charges        |       | —        |       | —      |       | —   |       | 1,293         |       | 1,293     |       |
| Three months ended September 30, 2005: |       |          |       |        |       |     |       |          |       |      |       |
| Revenue                                     |       | 13,619        |       | (3          | )          | —   |       | 5             |       | 13,621    |       |
| Adjusted EBITDA                             |       | 466           |       | (176        | )          | —   |       | 2,326         |       | 2,616     |       |
| Impairment and restructuring charges        |       | —        |       | —      |       | —   |       | 609           |       | 609       |       |
| Nine months ended September 30, 2004:  |       |          |       |        |       |     |       |          |       |      |       |
| Revenue                                     |       | 16,636        |       | —      |       | —   |       | —        |       | 16,636    |       |
| Adjusted EBITDA                             |       | (7,816        | )          | (117        | )          | —   |       | (13,226       | )          | (21,159   | )          |
| Impairment and restructuring charges        |       | —        |       | —      |       | —   |       | 1,788         |       | 1,788     |       |
| Nine months ended September 30, 2005:  |       |          |       |        |       |     |       |          |       |      |       |
| Revenue                                     |       | 43,045        |       | 43          |       | —   |       | 119           |       | 43,207    |       |
| Adjusted EBITDA                             |       | (688          | )          | (1,311      | )          | —   |       | (9,823        | )          | (11,822   | )          |
| Impairment and restructuring charges        |       | 9,822         |       | 197         |       | —   |       | 2,436         |       | 12,455    |       |
|                                             |            |               |            |             |            |          |            |               |            |           |            |  |  |  |  |

 

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The reconciliation between Adjusted EBITDA tonet loss from continuing operations is as follows:

 

| **Three  months ended September 30, 2004** |   |    |   |
|-------------------------------------------------|--------|---------|--------|
| Adjusted EBITDA                                 |   | (5,624  | )      |
| Impairment  and restructuring charges           |   | (1,293  | )      |
| Depreciation  and amortization                  |   | (1,069  | )      |
| Interest  income                                |   | 161     |   |
| Interest  expense                               |   | (80     | )      |
| Other  income, net                              |   | (361    | )      |
| Foreign  currency gains, net                    |   | 2,132   |   |
| Income tax  benefit                             |   | 1       |   |
| Net loss from  continuing operations            |   | (6,133  | )      |
|                                            |   |    |   |
| **Three  months ended September 30, 2005** |   |    |   |
| Adjusted  EBITDA                                |   | 2,616   |   |
| Impairment  and restructuring charges           |   | (609    | )      |
| Depreciation  and amortization                  |   | (1,366  | )      |
| Interest  income                                |   | 12      |   |
| Interest  expense                               |   | (155    | )      |
| Other income,  net                              |   | 340     |   |
| Foreign  currency loss, net                     |   | (7,692  | )      |
| Income tax  expense                             |   | (23     | )      |
| Net loss  from continuing operations            |   | (6,877  | )      |
|                                            |   |    |   |
| **Nine  months ended September 30, 2004**  |   |    |   |
| Adjusted  EBITDA                                |   | (21,159 | )      |
| Impairment  and restructuring charges           |   | (1,788  | )      |
| Depreciation  and amortization                  |   | (3,064  | )      |
| Interest  income                                |   | 440     |   |
| Interest  expense                               |   | (86     | )      |
| Other  income, net                              |   | (263    | )      |
| Foreign  currency gains, net                    |   | (1,735  | )      |
| Income tax  benefit                             |   | —  |   |
| Net loss  from continuing operations            |   | (27,655 | )      |
|                                            |   |    |   |
| **Nine  months ended September 30, 2005**  |   |    |   |
| Adjusted  EBITDA                                |   | (11,822 | )      |
| Impairment  and restructuring charges           |   | (12,455 | )      |
| Depreciation  and amortization                  |   | (4,277  | )      |
| Interest  income                                |   | 72      |   |
| Interest  expense                               |   | (488    | )      |
| Other income  (expense), net                    |   | 639     |   |
| Foreign  currency losses, net                   |   | (18,058 | )      |
| Income tax  expense                             |   | (195    | )      |
| Net loss  from continuing operations            |   | (46,584 | )      |

 

 

**16.****          Subsequentevents**

 

On October 17, 2005, the Company andReachtown Limited (“Reachtown”) entered into a compromise deed and release (the“Settlement”) mutually releasing and settling all claims and disputes amongsteach other in connection with the Share Purchase Agreement of January 28, 2004, as amended, relatingto the sale by the Company of its Amengroup of companies (the “SPA”), the Management Services Agreements datedJanuary 28, 2004 and February 1, 2005 (the “MSAs”), and certainactions allegedly taken by Reachtown and the Company in connection with the SPAand the MSAs.

 

 On October 21, 2005, VIA soldsubstantially all of its remaining assets to Interoute Communications HoldingsS.A. and certain of its affiliates (“Interoute”) for $18.1 million, of which$5.0 million was advanced to the Company prior to the closing under an interimfinancing facility.  In addition,Interoute assumed $2.2 million which Interoute advanced to subsidiaries of theCompany pursuant to the interim financing facility.  In the asset sale, Interoute acquired all ofthe Company’s remaining business operations, comprised of its PSINet Europeoperations in Germany, France, Belgium, Switzerland and the Netherlands and itsVIA NET.WORKS operations in France, Germany and Spain, as well as certainassets pertaining to its centralized back office and technical support systems,including employee contracts of certain headquarters personnel.  The Company retained all of its other debtsand liabilities, including expenses related to its headquarters lease in TheNetherlands, its senior executives and the remaining headquarters personnel,corporate vendors and professional advisors. The sale was consummated shortly after the Company’s special meeting ofits shareholders on October 21, 2005 in which the requisite shareholdervote was obtained to approve the asset sale. At the special

 

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meeting, holders of approximately 67% of the Company’s totaloutstanding voting shares voted in favor of the proposal regarding the assetsale to Interoute.

 

At the special meeting on October 21,2005, the Company’s shareholders also approved a Complete Plan of Liquidationand Dissolution providing for the voluntary dissolution of the Company.  The Company filed a certificate ofdissolution with the Delaware Secretary of State on November 4, 2005.  Pursuant to the plan of dissolution, theCompany will liquidate its remaining assets, satisfy or make reasonableprovisions for its remaining obligations and make distributions to theshareholders of the Company of any available liquidation proceeds.

 

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

 

The following discussionand analysis should be read in conjunction with the condensed consolidatedfinancial statements and related notes included in Item 1 of this Form 10-Q.This discussion contains forward-looking statements, or statements that relateto future events or our future performance. 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 in Exhibit 99.1on this Form 10-Q, as well as those described in the “Risk Factors” section ofVIA’s 2004 Annual Report. You are urged to carefully consider these factors, aswell as other information contained in this Form 10-Q and in our otherperiodic reports and documents filed with the Securities and ExchangeCommission.

 

**Overview**

** **

Following a sale of its business andoperations on October 21, 2005, VIA NET.WORKS, Inc. filed acertificate of dissolution with the Secretary of State of Delaware on November 4,2005 and is now classified is a dissolved corporation under Delaware law.  Prior to the sale, VIA was a provider ofbusiness communication solutions to small- and medium-sized enterprises, orSMEs, in Europe and the United States.

 

**Interim Funding Arrangements/Sale of Businessand Plan of Liquidation and Dissolution**

 

On April 1, 2005, we sold our Swisscompanies — VIA NET.WORKS (Schweiz) AG and VIA NET.WORKS Services AG — toformer managers and owners of the businesses, for a cash consideration of CHF3.5 million (approximately  $2.9million). Upon completion of the VIA NET.WORKS (Schweiz) AG and VIA NET.WORKSServices AG sale, we recorded a loss of $ 1.0 million in the statement ofoperations in the three months ended June 30, 2005, relating to amountspreviously recorded in accumulated other comprehensive loss.

 

On April 30, 2005, we entered into asale and purchase agreement, or Sale Agreement, with Claranet Group Limited(Claranet), a privately-held European Internet services provider based in theUnited Kingdom, to sell all of our remaining business operations in Europe andthe United States (the “Asset Sale”). The agreement followed on the letter ofintent we entered into with Claranet on April 10, 2005. The materialprovisions of the Sale Agreement were described in our Quarterly Report on Form 10-Qfor the three month period ended March 31, 2005.

 

The Asset Sale was conditioned upon theapproval by our shareholders. On or about June 3, 2005, we mailed ourdefinitive proxy statement on Form 14A to our shareholders of record as ofMay 25, 2005 and scheduled a Special and Annual Meeting of theShareholders to take place on June 29, 2005.  In the proxy statement we delivered to ourshareholders, we requested approval of, among other things, the Asset Sale anda plan of complete dissolution and liquidation of the Company. On June 28,2005, we announced the postponement of the shareholders’ meeting until July 22,2005 in order to provide us additional time to solicit proxies from ourshareholders sufficient to obtain the affirmative vote in respect of the SaleAgreement and the Asset Sale of a majority of the voting stock of ourCompany.  The closing of the Asset Salewas conditioned on receiving the requisite majority vote of the stockholders ofour Company.

 

On July 12, 2005, we entered into anAmendment and Restatement with Claranet relating to the Sale Agreement of April 30,2005 (the “Amended Sale Agreement”). Pursuant to the Amended Sale Agreement, we sold our Amen group ofbusinesses and our U.S., Dutch and Portuguese legacy operations to Claranet for$9.3 million, less a portion of the deposit already paid by Claranet inconnection with the Asset Sale (plus interest on such amount), repayment toClaranet of the amounts owed by us under the loan facility established on April 30,2005, including interest, and an amount held as a deferred payment (the “July 12thSale”). The sale excluded the PSINet Europe operations and VIA’s legacyoperations in France, Germany and Spain as well as certain assets pertaining toour Company’s centralized back office and technical support systems, includingemployee contracts of certain headquarters personal (the “Remaining Assets”).No shareholder approval was necessary for the closing of the July 12thSale. Upon completion of the July 12th Sale, we recorded a lossin the statement of operations for the three months ending September 30,2005 of $1.6 million, relating to amounts previously recorded in accumulatedother comprehensive loss.

 

In order to achieve an orderly transition ofthe ownership of the assets sold in the July 12th Sale, we,Claranet and certain of our subsidiaries entered into a transition servicesagreement pursuant to which the U.S., Dutch and Portuguese businesses sold toClaranet continue to have the right to use the VIA brand and to receive certainservices from the remaining VIA businesses for a period of time following thecompletion of the sale.  In return, we continue to have the right toreceive certain services from the sold businesses.

 

The Amended Sale Agreement contemplated thatthe Remaining Assets would be sold to Claranet in a second closing that

 

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would be subject to shareholder approval.  We promptly delivered to our shareholders asupplement to our proxy materials describing, among other things, the July 12thSale, the sale of the Remaining Assets and the approval being sought at the July 22ndshareholders’ meeting. The shareholders’ meeting was convened on July 22,2005 and then adjourned until August 2, 2005 in order to provide usadditional time to secure the requisite majority vote.

 

On July 27, 2005, Claranet delivered aletter purporting to terminate the Amended Sale Agreement. Claranet alsodelivered a letter of termination that day regarding the Amended FacilityAgreement. In its letters of termination, Claranet alleged that certain eventshad occurred that permit it to terminate the Amended Sale Agreement and theAmended Facility Agreement; specifically, that VIA’s cash flow exceeded thelevel of negative cash flow permitted by the Amended Sale Agreement, thatcertain alleged new liabilities have arisen and that Claranet did not consentto our recent transaction with Sorbie Europe B.V., as noted below. We promptlydelivered a notice to Claranet disputing the assertions made by Claranet,disputing the right of Claranet to terminate the agreements and demanding thatit fully perform the agreements.

 

While VIA believed that Claranet’s positionwas not supported by the facts or the terms of the agreements and that Claranetis therefore in breach of the agreements, VIA’s management was also aware thatClaranet was not willing to proceed to complete the sale and provide financingon the terms of the agreements, and therefore VIA pursued a differenttransaction.  On August 23,2005, VIA entered into a settlement deed with Claranet regarding thetermination of the acquisition agreements between the parties pursuant to whichClaranet agreed to acquire VIA’s assets and operations (the “Settlement Deed”).Under the Settlement Deed, the Company and Claranet mutually released allclaims that either party has or may in the future have against the other partyunder the acquisition agreements and Claranet agreed to pay VIA the sum of$800,000, payable in two instalments, less deductions for certain operationalexpenses of approximately $135,000 incurred by Claranet on VIA’sbehalf pursuant to a transition services agreement that will continue fora limited time.  Both instalments were subsequently paid.  The transition services agreement was enteredinto in connection with VIA’s sale to Claranet on July 12, 2005 of itsAmen group of businesses and its U.S., Dutch and Portuguese legacy operations,prior to the termination of the acquisition agreements which are the primarysubject of the Settlement Deed.

 

On June 13, 2005 we received a NasdaqStaff Determination indicating that VIA failed to comply with the $1.00 minimumbid price requirement for continued listing under Nasdaq’s Marketplace Rule 4310(c)(4) andthat therefore the Company’s common stock was subject to delisting from theNasdaq SmallCap Market. We requested a hearing before a Nasdaq ListingQualifications Panel to review the Staff Determination and to request furthertime to complete the sale of our Company or our businesses before our commonstock was delisted.  The hearing was heldon July 21, 2005. On August 11, 2005, Nasdaq notified VIA’s counselthat, in light of the termination of the Claranet transaction and the lack of aclear alternative for our liquidity problem at the current date, VIA’s stockwould be delisted as at August 15, 2005. VIA’s stock was delisted from the Nasdaq SmallCap Market on that date.

 

 On June 29,2005, we entered into a series of agreements with Sorbie Europe B.V. (“Sorbie”),formerly PSINet Europe B.V., (the “Sorbie Agreements”) relating to therenegotiation of the unsecured zero-coupon convertible note of Euro 6.0 million($7.2 million) due and payable to Sorbie in full November 20, 2005.  The note was issued to Sorbie in connectionwith our acquisition of the PSINet Europe companies on August 9,2004.  Under the Sorbie Agreements, eachof certain VIA group companies and the Sorbie related parties mutually releasedeach other from all claims under the August 9, 2004 PSINet Europe purchaseagreement. In consideration for the release, Sorbie agreed that it will cancelthe Note if VIA pays Sorbie, prior to August 31, 2005,  €1.5 million (approximately $1.8 million) incash and issues to Sorbie or its designee shares of common stock of VIA equalto 9.9% (7,173,341 shares) of the total outstanding shares of the Company as ofJune 29, 2005. Pursuant to the Sorbie Agreements, on August 29, 2005,VIA paid approximately $1.8 million and issued 7,173,341 shares of common stock(aggregate value of approximately $0.5 million) to Sorbie (collectively,the “Sorbie Settlement”). Upon completion of the Sorbie Settlement, VIA recordeda gain of $5.0 million in the statement of operations in the three monthsending September 30, 2005.

 

On October 21, 2005, we soldsubstantially all of our remaining assets to Interoute Communications HoldingsS.A. and certain of its affiliates (“Interoute”) for $18.1 million, of which$5.0 million was advanced to us prior to the closing under an interim financingfacility.  In addition, Interoute assumed$1.8 million which Interoute advanced to subsidiaries of the Company pursuantto the interim financing facility.  Inthe asset sale, Interoute acquired all of the Company’s remaining businessoperations, comprised of PSINet Europe operations in Germany, France, Belgium,Switzerland and the Netherlands and VIA NET.WORKS operations in France, Germanyand Spain, as well as certain assets pertaining to our centralized back officeand technical support systems, including employee contracts of certainheadquarters personnel.  We retained allother debts and liabilities, including expenses related to our headquarterslease in The Netherlands, our senior executives and the remaining headquarterspersonnel, corporate vendors and professional advisors.  The sale was consummated shortly after thespecial meeting of our shareholders on October 21, 2005 in which therequisite shareholder vote was obtained to approve the asset sale.  At the special meeting, holders ofapproximately 67% of the Company’s total outstanding voting shares voted infavor of the proposal regarding the asset sale to Interoute.

 

At the special meeting on October 21,2005, our shareholders also approved a Complete Plan of Liquidation andDissolution providing for the voluntary dissolution of the Company.  We filed a certificate of dissolution withthe Delaware Secretary of State on November 4, 2005.  Pursuant to the plan of dissolution, we willliquidate our remaining assets, satisfy or make reasonable provisions

 

22

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for our remaining obligations and make distributions to theshareholders of the Company of any available liquidation proceeds.

 

**RESULTS OF OPERATIONS**

 

**Three and nine months ended September 30,2004 compared with the three and nine months ended September 30, 2005**

 

*Foreign CurrencyImpact*

 

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

 
| ** **   | ** ** | **Three months ended**       | ** ** | **Nine months ended**    | ** ** |
|--------------|------------|------------------------------|------------|--------------------------|------------|
| ** **   | ** ** | **September 30,  2004** | ** ** | **September  30,  2005** | ** ** | **September  30,  2004** | ** ** | **September  30,  2005** | ** ** |
|         |       |                         |       |                     |       |   |   |   |   |
| Euro         |       | 85                           | %          | 87                       | %          | 92 | % | 86 | % |
| Swiss Francs |       | 15                           | %          | 13                       | %          | 8 | % | 14 | % |
| U.S. Dollars |       | 0                            | %          | 0                        | %          | 0 | % | 0 | % |
|         |       |                         |       |                     |       |   |   |   |   |
|         |       | 100                          | %          | 100                      | %          | 100 | % | 100 | % |

 

The Euro varied by approximately 6% inrelation to the U.S. dollar during the third quarter of 2005 and byapproximately 15% in the nine months ended September 30, 2005. The Eurovaried by approximately 4% in relation to the U.S. dollar during the thirdquarter of 2004 and by approximately 10% in the nine months ended September 30,2004. The Swiss Franc varied by approximately 7% in relation to the U.S. dollarduring the third quarter of 2005 and by approximately 9% in the nine monthsended September 30, 2005. The Swiss Franc varied by approximately 5% inrelation to the U.S. dollar during the third quarter of 2004 and byapproximately 9% in the nine months ended September 30, 2004. Theseexchange rate fluctuations have a significant impact on our reported results ofoperations, including revenue, expenses and net loss.

 

The average Euro-to-U.S. dollar foreignexchange rate for the three and nine months ended September 30, 2005 was0% and 3% higher respectively than the average Euro-to-U.S. dollar foreignexchange rate for the corresponding periods in 2004. The average SwissFranc-to-U.S. dollar foreign exchange rate for the three and nine months ended September 30,2005 was 1% lower and 3% higher respectively than the average SwissFranc-to-U.S. dollar foreign exchange rate for the corresponding periods in2004. The effect of the weakening of the U.S. dollar is that revenues,operating costs and expenses and operating profits and losses in operationswith a functional currency other than U.S. dollars translate into larger U.S.dollar amounts than would have been the case had foreign exchange ratesremained unchanged.

 

*Revenue:*

* *
| ** ** | ** ** | **Three months ended**             | ** ** | ** **             | ** ** | **Nine months ended**              | ** ** | ** **             | ** ** |
|------------|------------|------------------------------------|------------|------------------------|------------|------------------------------------|------------|------------------------|------------|
| ** ** | ** ** | **September 30,**             | ** ** | **September 30,** | ** ** | **% Increase/**                    | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **% Increase/** | ** ** |
| ** ** | ** ** | **2004**                           | ** ** | **2005**               | ** ** | **(Decrease)**                     | ** ** | **2004**               | ** ** | **2005** | ** ** | **(Decrease)** | ** ** |
| ** ** | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **             | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **             | ** ** |
| Revenue    |       | 8,394                              |       | 13,621                 |       | 62                                 | %          | 16,636                 |       | 43,207 |   | 160 | % |

 

Prior to the sale of our business, we derivedour revenue from the sale of Internet-related goods and services, specificallythird party hardware and software and Internet connectivity services, otherInternet value-added services, such as hosting, security and IP VPN, and voiceservices.

 

Revenue for the three months ended September 30,2005 was $13.6 million, up from $8.4 million for the three monthsended September 30, 2004. The increase in revenues of $5.2 million wasmainly attributable to revenues recorded in the third quarter of 2005 by thePSINet Europe business, which we acquired in August 2004 (impact of approximately$5.6 million). This offset the decrease in underlying revenue for the three months ended September 30, 2005as compared to the three months ended September 30, 2004, in our VIAFrance operation. French revenues, excluding the impact of foreign exchange,decreased by 18%, or $0.3 million in the three months ended September 30,2005 compared to the three months ended September 30, 2004, due tocustomer churn and fewer hardware and software sales.

 

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Revenue for the nine months ended September 30,2005 increased $26.6 million to $43.2 million, up from $16.6 millionfor the nine months ended September 30, 2004. The increase in revenues wasmainly attributable to revenues recorded in the first three quarters of 2005 bythe PSINet Europe business acquired in August 2004 (impact ofapproximately $27.1 million) discussed above. That positive impact offset thedecrease in underlying revenue for the nine months ended September 30,2005 compared to the nine months ended September 30, 2004 in our VIAFrance revenues, which, excluding the impact of foreign exchange, decreased by11% (approximately $0.6 million) in the nine months ended September 30,2005, compared with the corresponding period in 2004. This decline in revenueis due to customer churn and fewer hardware and software sales in the firstquarter.

 

*OPERATING COSTS AND EXPENSES:*

 

*Internet services:*

* *
| ** **          | ** ** | **Three months ended**             | ** ** | ** **             | ** ** | **Nine months ended**              | ** ** | ** **             | ** ** |
|---------------------|------------|------------------------------------|------------|------------------------|------------|------------------------------------|------------|------------------------|------------|
| ** **          | ** ** | **September 30,**             | ** ** | **September 30,** | ** ** | **% Increase/**                    | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **% Increase/** | ** ** |
| ** **          | ** ** | **2004**                           | ** ** | **2005**               | ** ** | **(Decrease)**                     | ** ** | **2004**               | ** ** | **2005** | ** ** | **(Decrease)** | ** ** |
| ** **          | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **             | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **             | ** ** |
| Internet  services  |       | 4,390                              |       | 6,023                  |       | 37                                 | %          | 9,134                  |       | 21,481 |   | 135 | % |
| % of Total  Revenue |       | 52                                 | %          | 44                     | %          |                               |       | 55                     | %          | 50 | % |   |   |

* *

Prior to the sale of our business, ourInternet services operating costs consisted of the costs we incurred to carrycustomer traffic to and over the Internet. We leased lines that connect ourPoPs, either to our own network or to other network providers. We paid othernetwork providers for transit, which allowed us to transmit our customers’information to or from the Internet over their networks. We also paid otherrecurring telecommunications costs and personnel costs, including the cost ofthe local telephone lines our customers use to reach our PoPs and access ourservices, and costs related to customer support and care.

 

Our Internet services operating costs were$6.0 million, or 44% of revenues, for the three months ended September 30,2005, down from $4.4 million, or 52% of revenues, for the three monthsended September 30, 2004. Our Internet services operating costs were$21.5 million, or 50% of revenues, for the nine months ended September 30,2005, compared with $9.1 million, or 55% of revenues, for the nine monthsended September 30, 2004. The increase in Internet services expenses wasmainly attributable to the Internet services costs of the PSINet Europebusinesses acquired in August 2004 (impact of approximately $1.5 millionand $11.2 million for the three and nine months ended September 30, 2005respectively) and partly attributable to the translation impact of foreigncurrency movements (impact of approximately $0.1 million and $0.2 million forthe three and nine months ended September 30, 2005 respectively).

 

*Selling, general and administrative:*

 
| ** **                                 | ** ** | **Three months ended**             | ** ** | ** **             | ** ** | **Nine months ended**              | ** ** | ** **             | ** ** |
|--------------------------------------------|------------|------------------------------------|------------|------------------------|------------|------------------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **September 30,**             | ** ** | **September 30,** | ** ** | **% Increase/**                    | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **% Increase/** | ** ** |
| ** **                                 | ** ** | **2004**                           | ** ** | **2005**               | ** ** | **(Decrease)**                     | ** ** | **2004**               | ** ** | **2005** | ** ** | **(Decrease)** | ** ** |
| ** **                                 | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **             | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **             | ** ** |
| Selling, general & administrative |       | 9,628                              |       | 4,982                  |       | -48                                | %          | 28,661                 |       | 33,548 |   | 17 | % |
| % of Total Revenue                         |       | 115                                | %          | 37                     | %          |                               |       | 135                    | %          | 55 | % |   |   |

 

Prior to the sale of our business, ourlargest selling, general and administrative (SG&A) expenses werecompensation costs, the costs associated with marketing our products andservices, and professional fees paid to outside consultants. Compensation costsincluded salaries and related benefits, commissions, bonuses and costsassociated with staff reductions in the normal course of business. In many ofour markets, we were required to make significant mandatory payments forgovernment-sponsored social welfare programs and we have had little controlover these costs. Our marketing expenses included the costs of direct mail andother mass marketing programs, advertising, customer communications, trade showparticipation, web site management and other promotional costs. Other SG&Aexpenses included the costs of travel, rent, utilities, insurance and bad debtexpense.

 

We incurred SG&A expenses of$5.0 million for the three months ended September 30, 2005, a 48%decrease from the $9.6 million we incurred for the three months ended September 30,2004. The increase in SG&A expenses quarter over quarter is partlyattributable to expenses associated with the PSINet Europe business acquired inAugust 2004 (impact of approximately $5.3 million) discussed above andpartly due to the strengthening of the Euro-to-U.S. dollar foreign currencyexchange rates of approximately $0.1 million. Excluding PSINet’s SG&Aexpenses and the adverse impact of the foreign currency exchange rates,SG&A expenses decreased by approximately 16%, or $0.8 million, for thethree months ended September 30, 2005, compared with the correspondingperiod in 2004. This was due to significant decreases in compensation costs asa result of the restructuring in previous quarters, offset by increases in

 

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marketing expenses and professional fees.

 

We incurred SG&A expenses of$33.5 million for the nine months ended September 30, 2005, a 17%increase from the $28.7 million we incurred for the nine months ended September 30,2004. The increase in SG&A expenses year over year was partly attributableto expenses associated with the PSINet Europe business acquired in August 2004(impact of approximately $12.7 million) discussed above and partly due to thestrengthening of the Euro-to-U.S. dollar foreign currency exchange rates ofapproximately $0.2 million. The balance of the difference, for the nine monthsended September 30, 2005 compared to the corresponding period in 2004, wasattributable to significant decreases in compensation costs as a result of therestructuring in previous quarters, offset by increases in marketing expensesand professional fees.

 

Compensation expense accounted forapproximately 55% ($7.3 million) of total SG&A costs for the three monthsended September 30, 2005, compared with 53% ($7.6 million) for the threemonths ended September 30, 2004. Compensation expense accounted forapproximately 52% ($15.0 million) of total SG&A costs for the nine monthsended September 30, 2005, compared with 54% of total SG&A costs ($23.4million) for the nine months ended September 30, 2004. The increase incompensation expense of 46% and 44% for the three and nine months ended September 30,2005 respectively compared to the same periods in 2004 was due to the PSINetEurope acquisition in August 2004 and the strengthening of theEuro-to-U.S. dollar foreign currency exchange rates. Excluding these factors,compensation expense decreased approximately 53% and 44%, respectively, in thethree and nine months ended September 30, 2005 compared with thecorresponding periods in 2004 primarily due to head count reductions. Headcount(excluding PSINet Europe) at September 30, 2005 decreased by approximately48% from September 30, 2004.

 

In the three and nine months ended September 30,2005, marketing expenses increased by approximately $0.3 million, or 195%, andby approximately $0.1 million, or 21%, respectively, from the correspondingperiods in 2004. For the three months ended September 30, 2004, $0.4million of the increase in marketing expenses was attributable to the PSINetEurope business and the impact of foreign exchange rates. For the nine monthsended September 30, 2004, $0.9 million of the increase in marketingexpenses was attributable to the PSINet Europe business and the impact offoreign exchange rates.

 

Professional fees, related to legal, audit,outsourcing and other consulting fees, accounted for approximately 24% and 23%of total SG&A for the three months ended September 30, 2005 and 2004respectively and for approximately 21% and 13% of total SG&A for the ninemonths ended September 30, 2005 and 2004 respectively. The increase inprofessional fees of 45% and 69% for the three and nine months ended September 30,2005 respectively compared with the corresponding periods in 2004 relates toincreased consulting and legal fees at the corporate headquarters in connectionwith the sale of our operations and increased professional fees due to thePSINet Europe acquisition in August 2004 and the strengthening of theEuro-to-U.S. dollar foreign currency exchange rates.

 

*Impairment and restructuring charges:*

 
| ** **                           | ** ** | **Three months ended**             | ** ** | ** **             | ** ** | **Nine months ended**              | ** ** | ** **             | ** ** |
|--------------------------------------|------------|------------------------------------|------------|------------------------|------------|------------------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **September 30,**             | ** ** | **September 30,** | ** ** | **% Increase/**                    | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **% Increase/** | ** ** |
| ** **                           | ** ** | **2004**                           | ** ** | **2005**               | ** ** | **(Decrease)**                     | ** ** | **2004**               | ** ** | **2005** | ** ** | **(Decrease)** | ** ** |
| ** **                           | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **             | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **             | ** ** |
| Impairment and restructuring charges |       | 1,293                              |       | 609                    |       | (53                                | )%         | 1,788                  |       | 12,455 |   | 597 | % |
| % of Total Revenue                   |       | 15                                 | %          | 4                      | %          |                               |       | 11                     | %          | 29 | % |   |   |

 

During thethree and nine months ended September 30, 2005, we recorded impairment andrestructuring charges of $0.6 million and $12.4 million respectively. Therestructuring charge of $0.6 million for the three months ended September 30,2005 related to severance payments for two staff at the corporate headquarters.The restructuring charge for the three months ended March 31, 2005 of $0.2million related to severance payments to one employee at the corporateheadquarters and transition implementation costs for back-office andadministrative outsourcing initiatives.

 

During thefirst quarter of 2005, management concluded that an impairment had occurred inour Solutions operating unit. As a result, we recorded an intangible fixedasset impairment charge of $0.3 million and a tangible fixed asset impairmentcharge of $0.9 million. During the second quarter of 2005, management concludedthat an impairment had occurred in our Solutions and Express operating unit. Asa result, we recorded a goodwill impairment charge of $8.8 million related tothe Solutions unit and a tangible fixed asset impairment charge of $0.2 millionrelated to the Express unit. Refer to Note 3 to the unaudited condensedconsolidated financial statements for further information.  No impairment charges were recorded in thethird quarter of 2005.

 

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

 

25

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severance payments for eight staff at the corporate headquarters andtransition implementation costs for back-office and administrative outsourcinginitiatives.

 

*Depreciation and amortization:*

 
| ** **                    | ** ** | **Three months ended**             | ** ** | ** **             | ** ** | **Nine months ended**              | ** ** | ** **             | ** ** |
|-------------------------------|------------|------------------------------------|------------|------------------------|------------|------------------------------------|------------|------------------------|------------|
| ** **                    | ** ** | **September 30,**             | ** ** | **September 30,** | ** ** | **% Increase/**                    | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **% Increase/** | ** ** |
| ** **                    | ** ** | **2004**                           | ** ** | **2005**               | ** ** | **(Decrease)**                     | ** ** | **2004**               | ** ** | **2005** | ** ** | **(Decrease)** | ** ** |
| ** **                    | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **             | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **             | ** ** |
| Depreciation and amortization |       | 1,069                              |       | 1,366                  |       | 28                                 | %          | 3,064                  |       | 4,277 |   | 40 | % |
| % of Total Revenue            |       | 13                                 | %          | 10                     | %          |                               |       | 18                     | %          | 10 | % |   |   |

 

We recognize depreciation expense primarilyrelated to telecommunications equipment, computers and network infrastructure.We depreciate telecommunications equipment and computers over their usefullives, ranging from three to five years. The cost of network infrastructure,net of impairment charges, purchased under indefeasible right of useagreements, or IRUs, is being amortized over the lesser of the estimated usefullife or term of the agreement, 1 to 25 years. We amortize customer lists,software and a trade name over 3 years, 5 years and 10 years respectively.

 

Our depreciation and amortization expense was$1.4 million for the three months ended September 30, 2005, up from$1.1 million for the three months ended September 30, 2004. Depreciationand amortization expense was $4.3 million for the nine months ended September 30,2005, up from $3.0 million for the nine months ended September 30, 2004.For the three months ended September 30, 2005, $1.3 million relatedto the depreciation of fixed assets and $0.1 million related to theamortization of intangible assets. For the nine months ended September 30,2005, $4.1 million related to the depreciation of fixed assets and$0.2 million related to the amortization of intangible assets. For thethree months ended September 30, 2004, $1.0 million related to thedepreciation of fixed assets and $0.1 million related to the amortizationof intangible assets. For the nine months ended September 30, 2004,$2.8 million related to the depreciation of fixed assets and$0.2 million related to the amortization of intangible assets. Theincrease in total depreciation and amortization expense was primarily due tothe acquisition of the PSINet Europe businesses in August 2004, resultingin amortization of identified intangible assets and depreciation of tangiblefixed assets totaling approximately $0.7 million and $1.6 million for the threeand nine months ended September 30, 2004 respectively. Excluding thePSINet Europe businesses, the depreciation expense decreased during the threeand nine months ended September 30, 2005 compared to the same period in2004 due to the impact of the impairment of tangible and intangible fixedassets in previous periods.

 

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*Interest income, net:*

 
| ** **           | ** ** | **Three months ended**             | ** ** | ** **             | ** ** | **Nine months ended**              | ** ** | ** **             | ** ** |
|----------------------|------------|------------------------------------|------------|------------------------|------------|------------------------------------|------------|------------------------|------------|
| ** **           | ** ** | **September 30,**             | ** ** | **September 30,** | ** ** | **% Increase/**                    | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **% Increase/** | ** ** |
| ** **           | ** ** | **2004**                           | ** ** | **2005**               | ** ** | **(Decrease)**                     | ** ** | **2004**               | ** ** | **2005** | ** ** | **(Decrease)** | ** ** |
| ** **           | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **             | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **             | ** ** |
| Interest income, net |       | 81                                 |       | (143                   | )          | (277                               | )%         | 354                    |       | (416 | ) | (218 | )% |
| % of Total Revenue   |       | 1                                  | %          | (1                     | )%         |                               |       | 2                      | %          | (1 | )% |   |   |

 

For the three and nine months ended September 30,2005, we incurred net interest expenses of $0.01 million and $0.04million, down from $0.2 million and $0.4 million of interest income forthe three and nine months ended September 30, 2004. Interest income wasgenerated from investing funds received from our initial public offering in February 2000,until those funds were used for acquisitions, operating expenses or capitalexpenditures. Net proceeds from the public offering were $333.0 million.The decrease in interest income was primarily due to the decrease in theavailable cash for investing.

 

*Other (expense) income, net:*

 
| ** **                  | ** ** | **Three months ended**             | ** ** | ** **             | ** ** | **Nine months ended**              | ** ** | ** **             | ** ** |
|-----------------------------|------------|------------------------------------|------------|------------------------|------------|------------------------------------|------------|------------------------|------------|
| ** **                  | ** ** | **September 30,**             | ** ** | **September 30,** | ** ** | **% Increase/**                    | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **% Increase/** | ** ** |
| ** **                  | ** ** | **2004**                           | ** ** | **2005**               | ** ** | **(Decrease)**                     | ** ** | **2004**               | ** ** | **2005** | ** ** | **(Decrease)** | ** ** |
| ** **                  | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **             | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **             | ** ** |
| Other (expense) income, net |       | (361                               | )          | 360                    |       | 194                                | %          | (263                   | )          | 639 |   | (343 | )% |
| % of Total Revenue          |       | (4                                 | )%         | 2                      | %          |                               |       | (-2                    | )%         | 4 | % |   |   |

 

For the three months and nine months ended September 30,2005, we recognized other income, net in the amounts of $0.4 million and $0.6million, respectively,.   For the threeand nine months ended September 30, 2004, we incurred other expense, netin the amounts of $0.4 million and $0.3 million, respectively.  

 

Pursuant to the Sorbie Agreements, on August29, 2005, VIA paid approximately $1.8 million and issued 7,173,341 shares ofcommon stock (aggregate value of approximately $0.5 million) to Sorbie(collectively, the “Sorbie Settlement”). Upon completion of the SorbieSettlement, VIA recorded a gain of $4.9 million within “Other (expense) income,net” in the statement of operations in the three months ending September 30,2005.

 

*Foreign currency gains (losses), net:*

 
| ** **                           | ** ** | **Three months ended**             | ** ** | ** **             | ** ** | **Nine months ended**              | ** ** | ** **             | ** ** |
|--------------------------------------|------------|------------------------------------|------------|------------------------|------------|------------------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **September 30,**             | ** ** | **September 30,** | ** ** | **% Increase/**                    | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **% Increase/** | ** ** |
| ** **                           | ** ** | **2004**                           | ** ** | **2005**               | ** ** | **(Decrease)**                     | ** ** | **2004**               | ** ** | **2005** | ** ** | **(Decrease)** | ** ** |
| ** **                           | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **             | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **             | ** ** |
| Foreign currency gains (losses), net |       | 2,132                              |       | (7,692                 | )          | (461                               | )%         | (1,735                 | )          | (18,058 | ) | (941 | )% |
| % of Total Revenue                   |       | 25                                 | %          | (56                    | )%         |                               |       | (10                    | )%         | (42 | )% |   |   |

 

We recognized a foreign currency loss of$7.7 million and $18.1 million for the three and nine months ended September 30,2005 respectively, as compared to a gain of $2.1 million and a loss of$1.7 million for the three and nine months ended September 30, 2004. Thechange from period to period was primarily due to the fluctuation in theexchange rate of the Euro, and Swiss Franc as compared to the U.S. dollar andits impact on the revaluation of our Euro and British pound denominatedintercompany balances held by the parent company and on our Euro denominated cashaccounts. See ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK *Foreign Currency Exchange Risks*for more information.

 

We established the Euro denominated cashaccounts in connection with our initial public offering in February 2000,in which we sold shares of our common stock for both U.S. dollars and Euros. AtSeptember 30, 2005, the parent company held approximately Euro5.1 million in the Euro cash account and remains exposed to changes in theforeign currency rate.

 

*Income tax expense:*

 
| ** **                         | ** ** | **Three months ended**             | ** ** | ** **             | ** ** | **Nine months ended**              | ** ** | ** **             | ** ** |
|------------------------------------|------------|------------------------------------|------------|------------------------|------------|------------------------------------|------------|------------------------|------------|
| ** **                         | ** ** | **September 30,**             | ** ** | **September 30,** | ** ** | **% Increase/**                    | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **% Increase/** | ** ** |
| ** **                         | ** ** | **2004**                           | ** ** | **2005**               | ** ** | **(Decrease)**                     | ** ** | **2004**               | ** ** | **2005** | ** ** | **(Decrease)** | ** ** |
| ** **                         | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **             | ** ** | **(in thousands of U.S. dollars)** | ** ** | ** **             | ** ** |
| Income tax  benefit (expense), net |       | 1                                  |       | (23                    | )          | (2413                              | )%         | 0                      |       | (195 | ) | (n/a | ) |
| % of Total  Revenue                |       | 0                                  | %          | 0                      | %          |                               |       | 0                      | %          | 0 | % |   |   |

 

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We recognized income tax expenses of $23thousand and $195 thousand for the three and nine months ended September 30,2005 respectively, as compared to income tax expenses of $1,000 for the threeand nine months ended September 30, 2004. Income tax expenses of $0.3million were recorded in the three months period ended September 30, 2005 inconnection with a ruling for the corporate headquarters with the Dutch taxauthorities, offset by an income tax benefit of $0.1 million in connection withdeferred tax liabilities relating to intangible fixed assets recognized for theacquisition of the PSINet Europe companies.

 

*Gain (loss) from discontinued operations:*

 

The gain from discontinued operations for thethree months ended September 30, 2005 was $1.1 million, up from again from discontinued operations of $0.8 million for the three months endedSeptember 30, 2004. The loss from discontinued operations for the ninemonths ended September 30, 2005 was $12.6 million, down from a lossfrom discontinued operations of $1.6 million for the nine months ended September 30,2004. We recorded impairment charges of $8.0 million for the three and ninemonths ended September 30, 2005, against assets classified within the gain(loss) from discontinued operations for the three and nine months ended September 30,2005.

 

*Liquidity and Capital Resources*

 

Liquidity

 

**Negative Total Cash Flow.**VIA began 2005 with $15.5 million in cash and cash equivalents and$5.1 million in restricted cash. We had a net decrease in cash and cashequivalents over the nine months ended September 30, 2005 of $11.5 million,leaving us with $40.0 million in cash and cash equivalents and$2.8 million in restricted cash at September 30, 2005. This comparedto a net decrease in cash and cash equivalents over the nine months ended September 30,2004 of $41.9 million, comprised primarily of $19.6 million of net cashused in operating activities and $21.6 million of net cash used in investingactivities.

 

Restricted cash of $2.8 million and $5.1million at September 30, 2005 and December 31, 2004, respectively,represented amounts held on deposit with banking institutions as security foroperating leases, leased properties and key suppliers.

 

Through September 30, 2005, we continuedto sustain losses and net decreases of cash and cash equivalents from ourcontinuing operations. As announced on March 17, 2005, we haveinsufficient cash reserves to continue operations of our group parent, VIANET.WORKS, Inc., without external financing. We sought  to address this issue by seeking newinvestments in the Company, new financing and opportunities to sell all or partof our business operations. Since Apri1 1, 2005, we financed our continuingoperations through the sale of operating units and obtaining advances of fundsin connection with the sale of certain operating units.

 

 On April 1,2005, we sold our Swiss companies — VIA NET.WORKS (Schweiz) AG and VIANET.WORKS Services AG — to former managers and owners of the businesses, for aconsideration of CHF 3.5 million (approximately $2.9 million).

 

On April 30, 2005, we entered into asale and purchase agreement, or Sale Agreement, with Claranet Group Limited(Claranet), a privately-held European Internet services provider based in theUnited Kingdom, to sell all of our remaining business operations in Europe andthe United States (the “Asset Sale”). The agreement followed on the letter ofintent we entered into with Claranet on April 10, 2005. The materialprovisions of the Sale Agreement were described in our Quarterly Report on Form 10-Qfor the three month period ended March 31, 2005.

 

The Asset Sale was conditioned upon theapproval by our shareholders. On or about June 3, 2005, we mailed ourdefinitive proxy statement on Form 14A to our shareholders of record as ofMay 25, 2005 and scheduled a Special and Annual Meeting of theShareholders to take place on June 29, 2005.  In the proxy statement we delivered to ourshareholders, we requested approval of, among other things, the Asset Sale anda plan of complete dissolution and liquidation of the Company. On June 28,2005, we announced the postponement of the shareholders’ meeting until July 22,2005 in order to provide us additional time to solicit proxies from ourshareholders sufficient to obtain the affirmative vote in respect of the SaleAgreement and the Asset Sale of a majority of the voting stock of ourCompany.  The closing of the Asset Salewas conditioned on receiving the requisite majority vote of the stockholders ofour Company.

 

On July 12, 2005, we entered into anAmendment and Restatement with Claranet relating to the Sale Agreement of April 30,2005 (the “Amended Sale Agreement”). Pursuant to the Amended Sale Agreement, we sold our Amen group ofbusinesses and our U.S., Dutch and Portuguese legacy operations to Claranet for$9.3 million, less a portion of the deposit already paid by Claranet inconnection with the Asset Sale (plus interest on such amount), repayment toClaranet of the amounts owed by us under the loan facility established on April 30,2005, including interest, and an amount held as a deferred payment (the “July 12thSale”). The sale excluded the PSINet Europe operations and VIA’s legacyoperations in France, Germany and Spain as well as certain assets pertaining toour

 

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Company’s centralized back office and technical support systems,including employee contracts of certain headquarters personal (the “RemainingAssets”).

 

On July 27,2005, we received a letter from Claranet purporting to terminate the AmendedSale Agreement, which include termination of the agreement by Claranet topurchase the Remaining Assets for a purchase price of $17.1 million, subject toshareholder approval. That same day we also received a letter of terminationregarding the Amended Facility Agreement, under which Claranet was to provide a$2.5 million secured loan facility to us. See discussion of termination lettersunder ITEM. 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS; Overview; Interim Funding Arrangements/Sale ofBusiness and Plan of Liquidation and Dissolution

 

On August 23, 2005, VIAentered into a settlement deed with Claranet regarding the termination of theacquisition agreements between the parties pursuant to which Claranet agreed toacquire VIA’s assets and operations (the “Settlement Deed”). Under theSettlement Deed, the Company and Claranet mutually released all claims thateither party has or may in the future have against the other party under theacquisition agreements and Claranet agreed to pay VIA the sum of $800,000,payable in two instalments, less deductions for certain operational expenses ofapproximately $135,000 incurred by Claranet on VIA’s behalf pursuant to atransition services agreement that will continue for a limited time.  Bothinstalments were subsequently paid.  Thetransition services agreement was entered into in connection with VIA’s sale toClaranet on July 12, 2005 of its Amen group of businesses and its U.S.,Dutch and Portuguese legacy operations, prior to the termination of theacquisition agreements which are the primary subject of the Settlement Deed.

 

On October 21, 2005, VIA soldsubstantially all of its assets to Interoute Communications Holdings S.A. andcertain of its affiliates (“Interoute” or the “Purchaser”) for $18.1 million,of which $5.0 million was advanced to the Company prior to the closing under aninterim financing facility.  VIA receivedapproximately $12.0 million in cash at closing, representing the $18.1 millionpurchase price, reduced by the $5.1 million interim financing draws andinterest, and a further holdback of $.1 million to secure VIA’s indemnificationto Interoute for any losses or liabilities arising out of the Company’sSchiphol lease agreements.  In the assetsale, Interoute acquired all of the Company’s remaining business operations, comprisedof its PSINet Europe operations in Germany, France, Belgium, Switzerland andthe Netherlands and its VIA NET.WORKS operations in France, Germany and Spain,as well as certain assets pertaining to its centralized back office andtechnical support systems, including employee contracts of certain headquarterspersonnel.  The Company retained all ofits other debts and liabilities, including expenses related to its headquarterslease in The Netherlands, its senior executives and the remaining headquarterspersonnel, corporate vendors and professional advisors.  The sale was consummated shortly after theCompany’s special meeting of its shareholders on October 21, 2005 in whichthe requisite shareholder vote was obtained to approve the asset sale.

 

At the special meeting on October 21,2005, the Company’s shareholders also approved a Complete Plan of Liquidationand Dissolution providing for the voluntary dissolution of the Company.  The Company filed a certificate ofdissolution with the Delaware Secretary of State on November 4, 2005.  Pursuant to the plan of dissolution, theCompany will liquidate its remaining assets, satisfy or make reasonableprovisions for its remaining obligations and make distributions to theshareholders of the Company of any available liquidation proceeds.

 

**Uses and Sources of Cash.**Cash used in operating activities was $30.2 million for the nine monthsended September 30, 2005 and $19.6 million for the nine months ended September 30,2004. Cash flows from operating activities can vary significantly from periodto period depending on the timing of operating cash receipts and payments andother working capital changes, especially accounts receivable, other currentassets, accounts payable, accrued expenses and other current liabilities. Inboth periods, our net losses were the primary component of cash used inoperating activities, these losses include some significant non-cash items suchas depreciation, amortization, provision for doubtful accounts receivable,impairment and unrealized foreign currency transaction gains.

 

Cash received from investing activities was $19.0million for the nine months ended September 30, 2005 and cash used ininvesting activities of $21.6 million for the nine months ended September 30,2004. For the nine months ended September 30, 2005, we used $1.3 millionof cash in relation to our agreement to acquire the PSINet Europe companiesduring 2004 and the completion of working capital adjustments and we used cashof $1.0 million to purchase tangible fixed assets. We received cash of $3.2million relating to final payments due to us from the sale of VIA NET.WORKS UKLtd., after resolution of a working capital contingency and we received $2.9million for the sale of VIA NET.WORKS (Schweiz) AG and VIA NET.WORKS ServicesAG. We received $2.3 million as a result of a decrease in restricted cash. Forthe nine months ended September 30, 2004, we received $5.3 million as theinitial payment from the sale of 100% of the shares of VIA NET.WORKS.UK Ltd.,we used cash of $7.5 million to acquire 100% of the issued and outstandingshares of the Amen Group, we used $12.3 million to acquire the PSINet Europeoperations in Belgium, France, Germany, the Netherlands and Switzerland, and used cash of $2.9 million topurchase tangible fixed assets.

 

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Statement of net assets in liquidation

 

As a result of the adoption of the Plan ofLiquidation and its approval by the Company’s shareholders, the Company hasadopted the liquidation basis of accounting for all periods beginning after September 30,2005. On September 30, 2005, in accordance with the liquidation basis ofaccounting, assets were adjusted to estimated net realizable value andliabilities were adjusted to estimated settlement amounts, including estimatedcosts associated with carrying out the Plan of Liquidation (see condensedstatement of net assets in liquidation and notes 2 and 3). Actual valuesrealized for assets and settlement of liabilities may differ materially fromthe amounts estimated.

 

Under the liquidation basis of accounting,the Company is required to estimate and record the costs associated withexecuting the plan of liquidation as a liability. These amounts can varysignificantly due to the timing and amounts associated with discharging knownand contingent liabilities and the costs associated with cessation of theCompany’s operations. Theses costs are estimates and are expected to be paidout over the Liquidation Period. In addition, these costs do not include costswhich have already been accrued and accounted for in the Condensed ConsolidatedStatement of Operations for the period ending September 30, 2005. TheCompany’s Reserve for Estimated Liquidation Costs as of September 30, 2005is detailed as follows:

 
| ** **                          | ** ** | **September 30,** | ** ** |
|-------------------------------------|------------|------------------------|------------|
| ** **                          | ** ** | **2005**               | ** ** |
|                                |       |                   |       |
| Payroll and  personnel costs        |       | $                      | 196        |   |
| Professional  fees                  |       | 120                    |       |
| Office and  administration expenses |       | 25                     |       |
| Unknown  litigants and creditors    |       | 400                    |       |
| Other                               |       | 13                     |       |
| Total                               |       | 754                    |       |
|                                     |            |                        |            |  |

 

The following is a reconciliation of Total Stockholders’ Equity underthe Going Concern basis of accounting to Net Assets in Liquidation under theLiquidation basis of accounting as of September 30, 2005:

 
| ** **                                                    | ** ** | **September 30,  2005** | ** ** |
|---------------------------------------------------------------|------------|------------------------------|------------|
|                                                          |       |                         |       |
| Stockholders’  equity at September 30, 2005         |       | $                            | 8,140      |   |
|                                                          |       |                         |       |
| Reserve for  estimated costs during the period of liquidation |       | (754                         | )          |
| Fair value  adjustment to property plant and equipment        |       | 252                          |       |
| Fair value  adjustment to goodwill                            |       | 930                          |       |
| Fair value  adjustment to intangible assets                   |       | 144                          |       |
| Net assets  in Liquidation at September 30, 2005         |       | $                            | 8,712      |   |

 

The companyexpects to record a trading loss of approximately $2.2 million in quarter fourto account for activity of the remaining trading businesses sold to Interoute,from October 1, 2005 to October 21, 2005. These losses will reduce the Company’snet assets in liquidation for the period ending December 31, 2005 to anestimated value of $6.5 million.

 

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Capital Resources

 

Since inception, we financed our operationsprimarily through the sale of equity securities. We raised approximately$181.0 million in aggregate through three private preferred stockofferings between August 1997 and April 1999. Through our initialpublic offering of common stock in February 2000, we raised approximately$333.0 million, net of underwriting discounts and commissions.

 

In connection with the acquisition of Amen inJanuary 2004, we issued 673,652 shares of common stock at a price of $2per share, having a total value of approximately $1.3 million on the dateof acquisition, for Amen common stock. On June 14, 2005, we issued4,180,663 shares of our common stock in satisfaction of an earn-out provisionset forth in the Share Purchase Agreement made for the acquisition of Amen. On June 29,2005, we entered into a series of agreements relating to the renegotiation ofour obligations related to the unsecured zero-coupon convertible note issued inconnection with the Company’s acquisition of the PSINet Europe companies on August 9,2004. Pursuant to these agreements, on August 29, 2005, we paidapproximately $1.8 million and issued 7,173,341 shares of common stock(aggregate value of approximately $0.5 million). On August 26, 2005,in connection with the sale of all the Company’s operations, we entered into aSubscription Agreement with Interoute pursuant to which Interoute Sub purchased10,810,811 shares of common stock and 5,454,545 shares of a newly createdseries of preferred stock of VIA designated Series A convertible preferredstock for an aggregate purchase price of $2.8 million. We also issued toanother subsidiary of Interoute, in payment of an aggregate of $925,000 in loancommitment and management fees, 25,000,000 shares of common stock with a fairvalue of $1.8 million. 

 

The foregoing statements regarding ourliquidity and possible need for additional capital resources are forward-lookingstatements based on our current expectations, which involve certain risks anduncertainties. Actual results and the timing of these events could differmaterially from these forward-looking statements depending upon certain factorsthat we cannot predict, including the nature, size and timing of futureacquisitions and dispositions, if any, our future net income and our success inexecuting our Strategic Plan as well as other factors discussed in “RiskFactors” described in Exhibit 99-1 on this Form 10-Q, as well asthose described in the “Risk Factors” section of our 2004 Annual Report.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

** **

The following discussion relates to anychanges in our exposure to market risk, related to changes in interest ratesand changes in foreign exchange rates from that disclosed in our 2004 AnnualReport. This discussion contains forward-looking statements that are subject torisks and uncertainties. Actual results could differ materially due to a numberof factors, as set forth in the “Risk Factors” included as Exhibit 99.1 onthis Form 10-Q and included in the “Risk Factors” section of our 2004Annual Report.

 

***Foreign Currency Exchange Risks***

 

Transaction risks

 

The parent company’s cash balances consistedof Euros and U.S. dollars. The Euro bank account was revalued each month andthe resultant gain or loss was reflected in the condensed consolidatedstatements of operations as “Foreign currency gains/(losses), net.” This exposedthe Company to foreign currency exchange rate risk in the Statement ofOperations. For example, as of September 30, 2005, a 10% increase ordecrease in the level of the Euro exchange rate against the U.S. dollar withall other variables held constant would have resulted in a realized gain orloss of approximately $6.6 million. The change in exposure from period toperiod was related to the change in the balance of the Euro cash and intercompanyaccounts. The parent company held approximately Euro 0.3 million in theEuro cash account, CHF 0.6 million in the Swiss Franc cash account and GBP 0.3million in the GBP cash account and remains exposed to changes in the foreigncurrency rate.

 

The fluctuation in the exchange ratesresulted in foreign currency gains (losses) reflected in the consolidatedstatements of operations as “Foreign currency gains (losses), net” of $(7.7) million and $(10.4) million for the three and nine months ended September 30,2005 respectively, and $2.1 million and ($1.7 million) for the same periods in2004.

 

Translation risks

 

The fluctuation in the exchange ratesresulted in foreign currency translation gains reflected as a component ofaccumulated other comprehensive loss in stockholders’ equity, net of$9.7 million and $12.0 million for the three and nine months ended September 30,2005 respectively, and $5.9 million and $8.4 million for the same periods in2004.

 

Exchange rates can vary significantly. TheEuro high and low rates varied by approximately 10% and 14% in relation to theU.S. dollar during the three and nine months ended September 30, 2005respectively. The Swiss Franc high and low rates varied by approximately 10%and 14% in relation to the U.S. dollar during the three and nine months ended September 30,2005 respectively. This variation affected the average exchange rates used totranslate the income statements of our operating companies whose functional

 

31

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currency was not U.S. dollars. At September 30, 2005, theEuro-to-U.S. dollar exchange rate was approximately 12% below where it was atthe beginning of the year and the Swiss Franc to U.S. dollar exchange rate wasapproximately 8% above where it was at the beginning of the year. Thisvariation affected the ending exchange rates used to translate amounts on thebalance sheet of our operating companies whose functional currency was not U.S.dollars. We also experienced fluctuations in other exchange rates.

 

Hedging against foreign exchange risks

 

For the nine months ended September 30,2005 we did not actively manage our exposure to foreign currency translationrisks that affect our reported results, which resulted in no cash impact unlessthe operation was sold. We had considered insurance and financial risk productsto manage this risk, but determined such products to be prohibitivelyexpensive. We currently have no hedging arrangements or derivatives in place.

 

The parent company maintained a Euro cashbalance, a Swiss Franc cash balance and a British Pound balance to meet theworking capital requirements of the operating subsidiaries with a Euro, SwissFranc or British Pound functional currency. Following the sale of our business,the parent company maintains its remaining cash resources in U.S. dollars.

 

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**ITEM 4.CONTROLS AND PROCEDURES**

 

Our management and the Audit Committee of theboard of directors has engaged in regular evaluations of our internal controls,as well as the processes we maintain to ensure that all material informationrelating to us and our subsidiaries was recorded, processed, summarized,evaluated and reported within the time periods specified by rules establishedby the Securities and Exchange Commission. These latter processes are known as Disclosure Controls andProcedures.  Disclosure Controls andProcedures are also designed to ensure that all such information wascommunicated to our management, including our Chief Executive Officer and PrincipalFinancial Officer, in such a manner as to allow timely decisions to be maderegarding required disclosures.

 

We have evaluated, with the oversight of ourChief Executive Officer and Principal Financial Officer, the effectiveness ofour Disclosure Controls and Procedures as of September 30, 2005.  In designing and evaluating the DisclosureControls and Procedures, our management necessarily was required to apply itsjudgment in evaluating the costs and benefits of possible controls andprocedures.  In addition, we recognizethat Disclosure Controls and Procedures by their nature can provide onlyreasonable assurance that our information flow objectives are met. As of September 30,2005 our Chief Executive Officer and Principal Financial Officer have concludedthat our Disclosure Controls and Procedures are effective in all materialrespects.

 

We believe that our controls and proceduresenabled us to present our financial results fairly in all material respects, asrequired by U.S. generally accepted accounting principles.

 

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**PART II**

 

**Item 1.Legal Proceedings**

 

As of the close of business on November 4,2005, following the sale of our business and operations on October 21,2005, we filed a certificate of dissolution with the Secretary of State ofDelaware, and ceased to conduct business. We are now in the process of satisfying our remaining debts andobligations. The net cash that will be available for distribution toshareholders will depend partially on the amounts that are ultimately paid tosatisfy these obligations. No legal actions to challenge the transaction orsuits by creditors or other persons for claims have been raised to date.   We are still subject to ongoing actionsagainst the Company that pre-date this filing. See note 11 to the condensed consolidated financial statements forfurther information.

 

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

 

*Changes inSecurities:*

 

As of theclose of business on November 4, 2005, upon the effectiveness of thefiling of the certificate of dissolution with the Secretary of State ofDelaware, we closed our stock transfer books and discontinued recordingtransfers of our common stock. We will not record any further transfers of ourcommon stock on our books except by will, intestate succession, or operation oflaw. Therefore, the ability of persons holding shares of our common stock afterNovember 4, 2005, may be restricted. All liquidating distributions from aliquidating trust, if any, or from us after the final record date will be madeonly to our shareholders of record on a pro rata basis according to theirrespective holdings of common stock as of the final record date.

 

On August 26, 2005, in connection withthe definitive agreements with Interoute for the sale of all the Company’soperations, VIA entered into a Subscription Agreement with a subsidiary ofInteroute (“Interoute Sub’’) pursuant to which Interoute Sub purchased10,810,811 shares of common stock and 5,454,545 shares of a newly created seriesof preferred stock of VIA designated Series A convertible preferred stockfor an aggregate purchase price of $2.8 million. VIA also issued to anothersubsidiary of Interoute, in payment of an aggregate of $925,000 in loancommitment and management fees, 25,000,000 shares of common stock. The sharesheld by Interoute comprised approximately 46.5% of our outstanding voting stockas of September 30, 2005.

 

Pursuant tothe Sorbie Agreements, on August 29, 2005, VIA paid approximately $1.8million and issued 7,173,341 shares of common stock (aggregate value ofapproximately $0.5 million) to Sorbie (collectively, the “SorbieSettlement”). See ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS; Interim Funding Arrangements/Sale ofBusiness and Plan of Liquidation and Dissolution.

 

**Item 3.Defaults Upon Senior Securities**

 

None.

 

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

 

On or about June 3, 2005, the Companymailed to all its shareholders of record as of May 25, 2005, a proxystatement setting forth four proposals, including the election of directors, tobe submitted to a vote of security holders of the Company at an Annual andSpecial Meeting of the Company to be held on June 29, 2005.  On June 28, 2005, the Company announcedthe postponement of the meeting until July 22, 2005, in order to providetime to solicit additional proxies from shareholders.  The meeting was convened, then adjourneduntil August 2, 2005 to provide further time to solicit proxies.  On July 27, 2005, Claranet notified VIAthat it was terminating the Amended Sale Agreement.  See discussion of termination letters under ITEM.2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS; Overview; Interim Funding Arrangements/Sale ofBusiness and Plan of Liquidation and Dissolution**. **While VIA immediately notifiedClaranet that it disputed Claranet’s right to terminate the Amended SaleAgreement, Claranet made it clear in discussions that it had no intent tocontinue the transaction in accordance with the terms of the agreement, therebymaking moot the proposals before the shareholders of the Company to considerfor approval the Amended Sale Agreement and the dissolution and plan ofdissolution of the Company.

 

On August 2, 2005, the Annual Meeting ofthe Company was convened for the purpose of voting on two proposals put forthby the Company:

 

(1)   the election of two Class IIdirectors, Jan Gesmar-Larsen and Malcolm Bell, to serve for a three-year term;and

 

(2)   the authorization for ourboard of directors to amend, at its discretion, our amended and restatedcertificate of incorporation by adopting one of two proposed amendments toeffect a reverse stock split, either a one-for-ten reverse stock split or aone-for-twenty reverse stock split, of all the issued and outstanding shares ofour common stock, par value $0.001 per share, without further approval of ourshareholders, upon a determination by our board that a reverse stock split isin the best interests of our

 

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Company and our shareholders.

 

At the meeting, for which proxieswere solicited pursuant to Regulation 14 under the 1934 Securities and ExchangeAct, all director nominees were elected.

 

The proposal to authorize the board ofdirectors to amend our amended and restated certificate of incorporation byadopting one of two proposed amendments to effect a reverse stock split wasapproved by a majority vote of those votes represented in person or by proxy atthe meeting as follows:

 
| Total voted shares |   | 44,539,852 |   |           |   |
|--------------------|--------|------------|--------|----------------|--------|
|               |   |       |   | % total  votes |   |
| Votes for          |   | 41,348,606 |   | 92.8           | %      |
| Votes  against     |   | 3,029,462  |   | 6.8            | %      |
| Votes  abstained   |   | 161,784    |   | 0.4            | %      |

 

On or about September 27, 2005, theCompany mailed to all its shareholders of record as of September 7, 2005,a proxy statement setting forth two proposals to be submitted to a vote ofsecurity holders of the Company at a Special Meeting of the Company to be heldon October 21, 2005.  On October 21,2005, the Special Meeting of the Company was convened for the purpose of votingon the two proposals put forth by the Company:

 

(1)   a proposal to approve andadopt (a) the Sale and Purchase Agreement dated as of August 26, 2005(the “Sale Agreement”) and (b) the sale of substantially all the assets ofthe Company to Interoute Communications Holdings S.A. (“Interoute” or the “Purchaser”),and the assumption by the Purchaser of certain related liabilities pursuant tothe Sale Agreement (the “Asset Sale’’);

 

(2)   a proposal to approve andadopt the dissolution (the “Dissolution”) and Plan of Complete Liquidation andDissolution of VIA (the “Plan of Dissolution”).

 

The proposal to approve and adopt (a) theSale Agreement and (b) the sale of substantially all the assets of theCompany to Interoute, and the assumption by the Purchaser of certain relatedliabilities pursuant to the Sale Agreement was approved by a majority vote of thosevotes represented in person or by proxy at the meeting as follows:

 
|             |   |       |   | % total  votes |   |
|------------------|--------|------------|--------|----------------|--------|
| Votes for        |   | 90,040,257 |   | 66.4           | %      |
| Votes  against   |   | 738,888    |   | 0.6            | %      |
| Votes  abstained |   | 315,236    |   | 0.2            | %      |

 

The proposal to approve and adopt thedissolution  and Plan of CompleteLiquidation and Dissolution of VIA was approved by a majority vote of thosevotes represented in person or by proxy at the meeting as follows:

 
|             |   |       |   | % total  votes |   |
|------------------|--------|------------|--------|----------------|--------|
| Votes for        |   | 90,040,257 |   | 65.6           | %      |
| Votes  against   |   | 1,833,113  |   | 1.4            | %      |
| Votes  abstained |   | 313,211    |   | 0.2            | %      |

 

**Item 5.Other Information**

 

None.

 

**Item 6.Exhibits**

 

**a) Exhibits**

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

 

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**SIGNATURES**

 

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

 
|                          | VIA NET.WORKS, INC. |                                                     |
|-------------------------------|---------------------|----------------------------------------------------------|
|                          |                |                                                     |   |
|                          |                |                                                     |   |
|                          | By:                 | /s/ RAY WALSH                                            | * * |
| * *                      | * *            | *Chief  Executive Officer (Principal Executive Officer)* | * * |
| Date:  November 10, 2005 |                |                                                     |   |
|                          |                |                                                     |   |
|                          |                |                                                     |   |
|                          | By:                 | /s/ HAN VAN LEEUWEN                                      |   |
| * *                      | * *            | *(Principal Financial Officer)*                          | * * |
| Date:  November 10, 2005 | * *            | * *                                                 | * * |

 

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**EXHIBIT INDEX**

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

 

37

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