**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM10-Q**

 

| **ý**                                        | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                              |                                                                                          |
| **FOR THE QUARTERLY PERIOD ENDED  JUNE 30, 2003** |
|                                              |                                                                                          |
| **OR**                                            |
|                                              |                                                                                          |
| **o**                                             | **TRANSITION REPORT PURSUANT TO SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commissionfile number: 000-29391**

 

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**VIANET.WORKS, INC.**

(Exact name of registrantas specified in its charter)

 

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

 

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Indicate by checkmark whether the registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrantwas required to file such report) and (2) has been subject to such filingrequirements for the past 90 days. Yes ý  No o

 

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

 

As of August 1,2003, there were outstanding 55,965,577 shares of the registrant’s common stockand 5,050,000 shares of the registrant’s non-voting common stock.

 

 

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**VIANET.WORKS, INC.**

 

**TABLE OFCONTENTS**

 
| PART I  FINANCIAL INFORMATION |
|-------------------------------|
| Item 1.                       | Financial Statements: |
|                          | Condensed Consolidated  Balance Sheets as of December 31, 2002 and June 30, 2003 |
|                          | Condensed  Consolidated  Statements of Operations for the three and six months ended June 30, 2002 and  2003 |
|                          | Condensed  Consolidated  Statements of Cash Flows for the six months ended June 30, 2002 and 2003 |
|                          | Notes  to Condensed Consolidated Financial Statements |
| Item  2.                      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
| Item  3.                      | Quantitative  and Qualitative Disclosures About Market Risk |
| Item  4.                      | Controls  and Procedures |
| PART  II. OTHER INFORMATION   |
| Item 1.                       | Legal Proceedings |
| Item 2.                       | Changes in  Securities and Use of Proceeds |
| Item 3.                       | Defaults Upon Senior  Securities |
| Item  4.                      | Submission  of Matters to a Vote of Security Holders |
| Item 5.                       | Other Information |
| Item 6.                       | Exhibits and  Reports on Form 8-K |
| SIGNATURES                    |
| EXHIBIT INDEX                 |

 

1

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**PART I**

 

**Item 1. Financial Statements**

 

**VIANET.WORKS, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(In thousandsof U.S. dollars, except share data)**

 
|                                                                                                                                  |   | **December  31, 2002** |    | **June  30, 2003** |   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|---------|--------------------|--------|
|                                                                                                                                  |   |                   |    | **(Unaudited)**    |   |
| **ASSETS**                                                                                                                            |   |                   |    |               |   |
| Current assets:                                                                                                                       |   |                   |    |               |   |
| Cash and cash  equivalents                                                                                                            |   | $                      | 97,813  |               | $      | 82,819 |   |
| Restricted cash                                                                                                                       |   | 895                    |    | 940                |   |
| Trade and other  accounts receivable, net of allowance of $4,529 and $2,509 respectively                                              |   | 13,037                 |    | 12,754             |   |
| Assets of  operation held for sale (Note 2)                                                                                           |   | —                 |    | 867                |   |
| Assets of  business transferred under contractual arrangement (Note 3)                                                                |   | —                 |    | 424                |   |
| Other current  assets                                                                                                                 |   | 3,900                  |    | 5,668              |   |
| Total current  assets                                                                                                                 |   | 115,645                |    | 103,472            |   |
| Property and  equipment, net                                                                                                          |   | 13,696                 |    | 11,900             |   |
| Goodwill, net                                                                                                                         |   | 9,189                  |    | 9,608              |   |
| Other  non-current assets                                                                                                             |   | 762                    |    | 724                |   |
| Deferred tax  asset                                                                                                                   |   | 3,387                  |    | 3,387              |   |
| Assets of  business transferred under contractual arrangement (Note 3)                                                                |   | 3,142                  |    | 2,670              |   |
| Total assets                                                                                                                          |   | $                      | 145,821 |               | $      | 131,761 |   |
|                                                                                                                                  |   |                   |    |               |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                        |   |                   |    |               |   |
| Current  liabilities:                                                                                                                 |   |                   |    |               |   |
| Accounts payable                                                                                                                      |   | $                      | 7,897   |               | $      | 12,133 |   |
| VAT and other  taxes payable                                                                                                          |   | 922                    |    | 160                |   |
| Short-term  notes, current portion of long-term debt and capital lease obligations                                                    |   | 63                     |    | 11                 |   |
| Deferred revenue                                                                                                                      |   | 13,516                 |    | 13,199             |   |
| Accrued expenses                                                                                                                      |   | 9,922                  |    | 8,635              |   |
| Deferred tax  liability                                                                                                               |   | 3,387                  |    | 3,387              |   |
| Liabilities of  operation held for sale (Note 2)                                                                                      |   | —                 |    | 1,681              |   |
| Liabilities of  business transferred under contractual arrangement (Note 3)                                                           |   | —                 |    | 454                |   |
| Other current  liabilities                                                                                                            |   | 2,092                  |    | 1,830              |   |
| Total current  liabilities                                                                                                            |   | 37,799                 |    | 41,490             |   |
| Long-term debt  and capital lease obligations, less current portion                                                                   |   | 46                     |    | 20                 |   |
| Liabilities of  business transferred under contractual arrangement (Note 3)                                                           |   | 3,396                  |    | 2,890              |   |
| Total  liabilities                                                                                                                    |   | 41,241                 |    | 44,400             |   |
|                                                                                                                                  |   |                   |    |               |   |
| Commitments and  contingencies                                                                                                        |   |                   |    |               |   |
| Stockholders’  equity:                                                                                                           |   |                   |    |               |   |
| Preferred stock,  $.001 par value; 10,000,000 shares authorized; no shares issued and  outstanding                                    |   | —                 |    | —             |   |
| Common stock,  $.001 par value; 132,500,000 shares authorized; 60,844,900 and 61,015,577  shares issued and outstanding; respectively |   | 61                     |    | 61                 |   |
| Additional  paid-in capital                                                                                                           |   | 555,574                |    | 555,706            |   |
| Treasury stock,  697,196 and 1,520,789 shares; respectively                                                                           |   | (733                   | )       | (1,521             | )      |
| Accumulated  deficit                                                                                                                  |   | (427,574               | )       | (438,762           | )      |
| Accumulated  other comprehensive loss                                                                                                 |   | (22,463                | )       | (27,843            | )      |
| Accumulated  other comprehensive loss of businesses transferred under contractual  arrangements                                       |   | (285                   | )       | (280               | )      |
| Total  stockholders’ equity                                                                                                      |   | 104,580                |    | 87,361             |   |
| Total  liabilities and stockholders’ equity                                                                                      |   | $                      | 145,821 |               | $      | 131,761 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

2

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**VIANET.WORKS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(Unaudited)**

 
|                                                                        |   | **For the  three months ended June 30,** |       | **For the  six months ended June 30,** |       |
|-----------------------------------------------------------------------------|--------|------------------------------------------|------------|----------------------------------------|------------|
|                                                                        |   | **2002**                                 |       | **2003**                               |       | **2002** |   | **2003** |   |
|                                                                        |   |                                     | ** ** |                                   | ** ** |   | ** ** |   | ** ** |
| Revenue                                                                     |   | 19,036                                   |       | 16,612                                 |       | 37,030 |   | 34,378 |   |
| Operating costs  and expenses:                                              |   |                                     |       |                                   |       |   |   |   |   |
| Internet  services                                                          |   | 10,572                                   |       | 7,829                                  |       | 21,592 |   | 16,349 |   |
| Selling, general  and administrative                                        |   | 17,836                                   |       | 15,713                                 |       | 38,045 |   | 30,410 |   |
| Restructuring and  impairment charges                                       |   | —                                   |       | 1,415                                  |       | — |   | 2,282 |   |
| Depreciation and  amortization                                              |   | 3,034                                    |       | 1,799                                  |       | 5,814 |   | 3,848 |   |
| Total operating  costs and expenses                                         |   | 31,442                                   |       | 26,756                                 |       | 65,451 |   | 52,889 |   |
| Operating loss  from continuing operations                                  |   | (12,406                                  | )          | (10,144                                | )          | (28,421 | ) | (18,511 | ) |
| Interest income                                                             |   | 664                                      |       | 290                                    |       | 1,364 |   | 719 |   |
| Interest expense                                                            |   | (20                                      | )          | (3                                     | )          | (57 | ) | (7 | ) |
| Other expense,  net                                                         |   | (118                                     | )          | (96                                    | )          | (446 | ) | (144 | ) |
| Foreign currency  gains, net                                                |   | 11,046                                   |       | 4,711                                  |       | 8,555 |   | 7,260 |   |
| Loss from  continuing operations before income taxes                        |   | (834                                     | )          | (5,242                                 | )          | (19,005 | ) | (10,683 | ) |
| Income tax                                                                  |   | —                                   |       | —                                 |       | — |   | — |   |
| Net loss from  continuing operations                                        |   | (834                                     | )          | (5,242                                 | )          | (19,005 | ) | (10,683 | ) |
| Discontinued  operations:                                                   |   |                                     |       |                                   |       |   |   |   |   |
| Loss from  discontinued operations                                          |   | (1,915                                   | )          | (471                                   | )          | (3,301 | ) | (505 | ) |
| Gain on disposal  of discontinued operations, less $50 of transaction costs |   | 2,434                                    |       | —                                 |       | 2,434 |   | — |   |
| Net loss                                                                    |   | (315                                     | )          | (5,713                                 | )          | (19,872 | ) | (11,188 | ) |
| Basic and  diluted loss per share:                                          |   |                                     |       |                                   |       |   |   |   |   |
| Continuing  operations                                                      |   | (0.01                                    | )          | (0.09                                  | )          | (0.32 | ) | (0.18 | ) |
| Discontinued  operations                                                    |   | (0.00                                    | )          | (0.01                                  | )          | (0.01 | ) | (0.01 | ) |
| Net loss per  share—basic and diluted                                  |   | (0.01                                    | )          | (0.10                                  | )          | (0.33 | ) | (0.19 | ) |
|                                                                        |   |                                     |       |                                   |       |   |   |   |   |
| Shares used in  computing basic and diluted loss per share                  |   | 60,147,704                               |       | 59,494,788                             |       | 60,147,704 |   | 59,494,788 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

3

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**VIANET.WORKS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

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

**(Unaudited)**

 
|                                                                                                     |   | **For the  six months ended June 30,** |   |
|----------------------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|
|                                                                                                     |   | **2002**                               |   | **2003** |   |
| Cash flows from  operating activities:                                                                   |   |                                   |   |   |   |
| Net loss from  continuing operations                                                                     |   | (19,005                                | )      | (10,683 | ) |
| Adjustments to  reconcile net loss from continuing operations to net cash used in operating  activities: |   |                                   |   |   |   |
| Depreciation and  amortization                                                                           |   | 5,814                                  |   | 3,848 |   |
| Impairment of  fixed assets                                                                              |   | —                                 |   | 134 |   |
| Employee stock  compensation                                                                             |   | 527                                    |   | — |   |
| (Benefit)/provision  for doubtful accounts receivable                                                    |   | (1,923                                 | )      | 633 |   |
| Unrealized  foreign currency transaction gains                                                           |   | (6,466                                 | )      | (5,850 | ) |
| Write-off of  note receivable from related party                                                         |   | 292                                    |   | — |   |
| Changes in  assets and liabilities, net of acquisitions:                                                 |   |                                   |   |   |   |
| Trade accounts  receivable                                                                               |   | 4,630                                  |   | 717 |   |
| Other current  assets                                                                                    |   | (1,350                                 | )      | (1,989 | ) |
| Other  non-current assets                                                                                |   | (67                                    | )      | 14 |   |
| Accounts payable                                                                                         |   | 2,696                                  |   | 4,013 |   |
| VAT and other  taxes payable                                                                             |   | (556                                   | )      | (819 | ) |
| Accrued expenses                                                                                         |   | (4,385                                 | )      | (1,276 | ) |
| Other current  liabilities                                                                               |   | (299                                   | )      | (193 | ) |
| Deferred revenue                                                                                         |   | 136                                    |   | (651 | ) |
| Net cash used in  operating activities                                                                   |   | (19,956                                | )      | (12,102 | ) |
| Cash flows from  investing activities:                                                                   |   |                                   |   |   |   |
| Increase in  restricted cash                                                                             |   | (1,163                                 | )      | (45 | ) |
| Proceeds from  the disposition of operating subsidiaries                                                 |   | 31                                     |   | — |   |
| Purchases of  property, equipment and other assets                                                       |   | (1,539                                 | )      | (1,874 | ) |
| Note receivable  from related party                                                                      |   | (1,000                                 | )      | — |   |
| Repayment of  note receivable from related party                                                         |   | 708                                    |   | — |   |
| Net cash used in  investing activities                                                                   |   | (2,963                                 | )      | (1,919 | ) |
| Cash flows from  financing activities:                                                                   |   |                                   |   |   |   |
| Repayment of  debt and principal payments on capital lease obligations                                   |   | (1,527                                 | )      | (84 | ) |
| Purchase of  Treasury stock                                                                              |   | —                                 |   | (788 | ) |
| Proceeds of  issuance of common stock, net                                                               |   | —                                 |   | 133 |   |
| Net cash used in  financing activities                                                                   |   | (1,527                                 | )      | (739 | ) |
| Cash flows used  by discontinued operations                                                              |   | (827                                   | )      | (30 | ) |
| Effect of  currency exchange rate changes on cash                                                        |   | 524                                    |   | (204 | ) |
| Net decrease in  cash and cash equivalents                                                               |   | (24,749                                | )      | (14,994 | ) |
| Cash and cash  equivalents, beginning of period                                                          |   | 137,854                                |   | 97,813 |   |
| Cash and cash  equivalents, end of period                                                                |   | 113,105                                |   | 82,819 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

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**VIANET.WORKS, INC.**

 

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**(Unaudited)**

 

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

 

These condensedconsolidated financial statements as of June 30, 2003 and for the three and sixmonth periods ended June 30, 2002 and 2003 and the related footnote informationare unaudited and have been prepared on a basis substantially consistent withthe audited consolidated financial statements of VIA NET.WORKS, Inc.(“VIA” or “the Company”) as of and for the year ended December 31, 2002,included in VIA’s Annual Report on Form 10-K as filed with the Securitiesand Exchange Commission (“2002 Annual Report”). These condensed consolidatedfinancial statements should be read in conjunction with the auditedconsolidated financial statements and the related notes to the financialstatements included in the 2002 Annual Report. In the opinion of management,the accompanying unaudited condensed consolidated financial statements containall adjustments (consisting of normal recurring adjustments) that managementconsiders necessary to present fairly the consolidated financial position ofVIA at June 30, 2003 and the results of its operations and its cash flows forthe three and six month periods ended June 30, 2002 and June 30, 2003. Theresults of operations for the three and six month periods ended June 30, 2003may not be indicative of the results expected for any succeeding quarter or forthe year ending December 31, 2003. Certain prior period amounts have beenreclassified to conform to the current period presentation.

 

The preparation offinancial statements in conformity with generally accepted accountingprinciples requires VIA to make estimates and assumptions that affect thereported amounts of assets, liabilities, revenue and expenses, together withamounts disclosed in the related notes to the consolidated financialstatements. Actual results could differ from the recorded estimates.

 

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

 

In April 2003 the FASB issued Statement No. 149 (SFAS149), *Amendment of SFAS No. 133 onDerivative Instruments and Hedging Activities.* SFAS 149 amends andclarifies accounting for derivative instruments, including certain derivativeinstruments embedded in other contracts, and for hedging activities under SFAS133. In particular, it clarifies under what circumstances a contract with aninitial net investment meets the characteristic of a derivative as discussed inSFAS 133. In addition, it clarifies when a derivative contains a financingcomponent that warrants special reporting in the statement of cash flows. SFAS149 also amends certain other existing pronouncements. SFAS 149 is effectivefor contracts entered into or modified after June 30, 2003, except as statedbelow and for hedging relationships designated after June 30, 2003. The provisions of SFAS 149 that relate to SFAS 133implementation issues that have been effective for fiscal quarters that beganprior to June 15, 2003, should continue to be applied in accordance with theirrespective effective dates. In addition, certain provisions relating to forwardpurchases or sales of when-issued securities or other securities that do notyet exist, should be applied to existing contracts as well as new contractsentered into after June 30, 2003. SFAS 149 should be appliedprospectively. The Company will adopt the provisions of SFAS 149 on July 1,2003. However, the Company does not currently hold any derivative instrumentsnor does it have an active hedging program. Consequently, it does not expectthat the adoption of SFAS 149 will have a material impact on its results of operationsor financial position.

 

In May 2003 the FASB issued Statement No. 150(SFAS 150), *Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity*.SFAS 150 modifies the accounting for certain financial instruments that, underprevious guidance, issuers could account for as equity. SFAS 150 requires thatthose instruments be classified as liabilities. SFAS 150 also requiresdisclosures about alternative ways of settling those instruments and thecapital structure of entities, whose shares

 

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are all mandatorilyredeemable. SFAS 150 is effective for financial instruments entered into ormodified after May 31, 2003, and otherwise is effective at the beginningof the first interim period beginning after June 15, 2003. The Company iscurrently evaluating the impact of SFAS 150 on its financial position,cash flows and results of operations but because it is currently not partyto such financial instruments and does not currently have any intention toacquire such financial instruments it does not expect that the adoption of SFAS150 will have a material impact on its results of operations and financialposition.

 

**In November 2002, the EmergingIssues Task Force reached a final consensus related to Revenue Arrangementswith Multiple Deliverables (EITF 00-21). The Task Force agreed theeffective date for the consensus would be for all revenue arrangements enteredinto in fiscal periods beginning after June 15, 2003, with early adoptionpermitted. The Company will adopt EITF 00-21 for the reporting periodbeginning July 1, 2003. The Company currently applies SAB 101 together with theprinciples established by SOP 97-2 in allocating revenues on multiple elementarrangements. Consequently, the Company has evaluated the impact ofEITF 00-21 on its financial position, cash flows and results ofoperations and has concluded that the impact will not be material.**

 

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

 

As part of its2002 turnaround plan and its focus on substantially reducing its negative cashflow, VIA determined to cease funding certain country operations deemed to notmaterially contribute to its financial strength and operational strategy in thelong term. Consistent with this conclusion, during 2002 VIA sold its operationsin Argentina, Austria and Ireland.

 

The operation inArgentina, which had been included in the Americas region for segmentreporting, was sold on June 11, 2002 to an unrelated third partypurchaser. The Austrian operation, which had been included in the Europeansegment, was sold to the then-current management team on May 29, 2002. TheIrish operation, which had been included in the European segment, was sold onAugust 12, 2002 to a former shareholder and managing director of the Irishoperation.

 

As a part of the2003-2005 Strategic Plan adopted in early 2003, the Company has continued itsefforts to improve operational performance and progress toward profitability ona consolidated basis.  As a part of thatplan, VIA has continued to assess the contributions of each of its operationstoward those goals. On June 13, 2003, VIA entered into an agreement to sell itsItalian operation, VIA completed the sale of VIA NET.WORKS Italia on July 15,2003, which has been included in the European segment, to a group led by thethen current managing director of the company. As VIA was committed to the saleof this operation prior to June 30, 2003, the operation has been treated as anasset held for sale and included within discontinued operations in accordancewith Statement of Financial Accounting Standard No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets* (SFAS 144). The Italian operation was sold fornominal consideration. As part of the transaction VIA provided a loan to thebuyers of Euros 0.4 million which was waived at closing. VIA also retainedcertain real estate lease obligations of the Italian operation, for anaggregate liability of Euros 0.3 million. In connection with the sale, VIA also waived all outstandingintercompany loans existing at the date of sale. VIA will incur a loss as aresult of the disposal of approximately $6,000 that will be recognized in itsfinancial results for the three months ending September 30, 2003. The assets ofthe Italian operation held for sale are made up of current assets of $0.8million and property and equipment of $0.1 million. All liabilities ofoperations held for sale are current in nature.

 

As each of theArgentine, Austrian, Irish, and Italian operations represented a component ofan entity as defined by SFAS 144, we have classified each operation as adiscontinued operation for the four periods presented. Revenues related to thediscontinued operations were approximately $1.1 million and$2.4 million for the three and six months ended June 30, 2002 and wereapproximately $0.3 million and $0.6 million for the three and sixmonths ended June 30, 2003. The pre-tax loss, excluding accounting for the saletransaction, related to discontinued operations was approximately $1.9 millionand $3.3 million for the three and six months ended June 30, 2002 andapproximately $0.5 million and $0.5 million for the three and sixmonths ended June 30, 2003.

 

**3.**                                      **Businesses Transferred Under Contractual Arrangements**

 

Brazil

 

In May 2002,VIA closed a transaction for the sale of its Brazilian operation to thethen-current management team, which included Antonio Tavares, a formerexecutive officer of VIA. Under this transaction, VIA sold 100% of theoutstanding capital stock of VIA NET.WORKS Brasil S.A. (“VIA Brasil”) for $0.4million, of which $30,000 was paid in cash at closing and the balance bydelivery of a promissory note payable over 18 months. The note was securedby a pledge of 93% of the outstanding shares in VIA Brasil, subject to reductionon a pro-rata basis for payments made under the note. The collateralization ofthe outstanding shares permitted VIA to reacquire, at its option, a controllinginterest in VIA Brasil if the purchasers defaulted on the obligations under thepromissory note.

 

From the outset ofthe transaction, VIA expected the funds for payment of the note to come fromthe individual buyers. Because VIA did not have reasonable assurances that thenote would be paid in full, the Company fully reserved against the note receivableat June 30, 2002. Management did not consider the shares held in VIABrasil as collateral to have significant economic

 

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value. As of March 31,2003 the buyers were in default on their payment obligations under the note andthrough June 30, 2003, the buyers had made no payments under the note.  On July 8, 2003, in recognition of thecontinuing economic difficulties of the Brazilian operation and the limited resourcesof the buyers, VIA agreed to settle the outstanding amounts owing for anaggregate payment by the buyers in the amount of $0.1 million.  As a part of this settlement, VIA agreed torelease and waive the buyers and VIA Brasil from its obligations under the noteand the pledge agreement upon receipt of the full amount.  VIA received the full payment as of August8, 2003.

 

Consistentwith the accounting treatment prescribed under Staff Accounting Bulletin (SAB)Topic 5E, VIA has neither treated the Brazilian operation as a discontinuedoperation nor consolidated any future results of the Brazilian operation sincethe closing of the transaction in May 2002. Due to the settled payout of thenote and release of the lien on VIA Brasil shares, the sale will qualify as anaccounting divestiture under SAB Topic 5E in the three month period endingSeptember 30, 2003, VIA will recognize a $2.5 million net loss on thistransaction including a $2.6 million currency translation loss, related to VIABrasil’s accumulated translation adjustment, in the statement of operations forthat period. The Company will record and recognize the currency translationloss relating to the original sale transaction in its financial results for thethree months ending September 30, 2003 in reliance on the guidance of SFAS 52,under which an accumulated translation adjustment should only be realized uponsale or complete or substantial complete liquidation of an investment in aforeign entity.

 

The total assets and liabilities related to theBrazilian operation are shown on the consolidated balance sheet within currentassets and current liabilities under the captions assets and liabilities ofbusiness transferred under contractual arrangement. The results of VIA Brasilare included within the results from continuing operations for the three andsix months ended June 30, 2002 up to the date of sale in May 2002. Likewise,the cash flows for VIA Brasil for these periods are included in VIA’sconsolidated cash flows from continuing operations.

 

Mexico

 

InSeptember 2002, VIA closed a transaction for the sale of 100% of theoutstanding capital stock of its subsidiary, VIA NET.WORKS México S.A. de C.V.(“VIA Mexico”) to a group of buyers led by the then-current management of VIAMexico. This operation was sold for nominal consideration. As a part of thesale transaction, the parties also entered into a convertible credit agreementunder which VIA agreed to loan VIA Mexico a sum of $2.2 million. Under theconvertible credit agreement, all outstanding loan amounts together with accruedinterest become due and payable on September 4, 2004. This convertiblecredit agreement provided that upon a change of control of VIA Mexico (which isdefined to include a change of greater than 33% of the current equity holdingof the company), VIA may elect to convert the outstanding loan amounts into a19% equity interest of VIA Mexico or accept a cash payment of $0.6 million aspayment in full.

 

At the time thetransaction was closed, VIA expected the funds for repayment of the loan tocome exclusively from future operations of VIA Mexico. Management believes thatVIA Mexico’s history of past operating losses combined with the difficulteconomic conditions in the telecommunications industry in the region maderecovery of the loan uncertain. Accordingly, VIA fully provided against thewhole amounts under the loan in its results of operations during the thirdquarter of 2002.

 

Consistent withthe accounting treatment prescribed under Staff Accounting Bulletin (SAB) Topic5E, VIA has neither treated the Mexican operation as a discontinued operationnor consolidated any future results of this Mexican operation. However, oncethe sale qualifies as an accounting disposition under SAB Topic 5E, VIA willrecognize a $2.3 million gain related to the accumulated translationadjustment in the statement of operations. 

 

The total assetsand liabilities related to the Mexican operation are shown on the consolidatedbalance sheet within long term assets and liabilities under the captions assetsand liabilities of business transferred under contractual arrangement. Theresults of VIA Mexico are included within the results from continuingoperations for the three and six months ended June 30, 2002. Likewise, the cashflows for VIA Mexico for these periods are included in VIA’s consolidated cashflows from continuing operations.

 

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**4.**                                      **Restructuring and Impairment Charges**

 

Restructuring

 

During the threeand six months ended June 30, 2003, the Company recorded restructuring chargesrelated to the implementation of its strategic plan of $0.7 million and $2.1million respectively.  The restructuringcharge for the three months ended June 30, 2003 related to severance paymentsat six of its European operations and at the corporate headquarters, futurelease obligations on vacant office space in Germany and implementation costsfor back-office and administrative outsourcing initiatives.  The restructuring charge for the threemonths ended March 31, 2003 related to severance payments at four of itsEuropean operations and an adjustment to the future lease obligations for theclosure of the Reston, Virginia office. There were no restructuring charges inthe six months ended June 30, 2002. Changes in the restructuring provision in the six months ended June 30,2003 were as follows (in thousands of U.S. dollars):

 
|                                           |   | **Future  operating  lease obligations** |   | **Employee  termination  payments** |   | **Other** |    | **Total** |   |
|------------------------------------------------|--------|------------------------------------------|--------|-------------------------------------|--------|-----------|---------|-----------|--------|
| Balance as of  December 31, 2002               |   | 526                                      |   | 607                                 |   | 133       |    | 1,266     |   |
| Costs incurred                                 |   | 57                                       |   | 676                                 |   | —    |    | 733       |   |
| Amounts paid                                   |   | (107                                     | )      | (736                                | )      | (38       | )       | (881      | )      |
| Balance as of  March 31, 2003                  |   | 476                                      |   | 547                                 |   | 95        |    | 1,118     |   |
| Less costs  related to discontinued operations |   | (36                                      | )      | (66                                 | )      | (95       | )       | (197      | )      |
| Costs incurred                                 |   | 92                                       |   | 883                                 |   | 440       |    | 1,415     |   |
| Amounts paid                                   |   | (66                                      | )      | (901                                | )      | (99       | )  | (1,066    | )      |
| Foreign exchange  translation                  |   | —                                   |   | 10                                  |   | —    |    | 10        |   |
| Balance as of  June 30, 2003                   |   | 466                                      |   | 473                                 |   | 341       |    | 1,280     |   |

 

The futureoperating lease obligations balance at March 31, 2003, comprised of $0.4million related to the former corporate headquarters office in Reston,Virginia, USA and $36,000 related to the Italian office. The Reston officeaccrual reflects the net of the future lease obligations, which continuesthrough February 2005, less the income from a sublease of the space. Theaccrual has been drawn down by the monthly payments on the office lease for theremainder of the term. The German office lease accrual of $0.1 million incurredin the three months ended June 30, 2003, reflects the fair value of the futurelease obligations on vacant office space, which continue through December 31,2003.

 

Headcount forsales, information technology, marketing and various administrative roles hasbeen reduced as part of the Company’s strategic plan. The employee terminationcosts incurred in the three months ended March 31, 2003, of $0.7 million relateto the severance and benefits for employees at four European operations andthese specific terminations were completed by July 31, 2003.  Cash payments of $0.7 million were made inthe quarter ($0.4 million by European operations and $0.3 million byCorporate). The restructuring costs incurred in the three months ended June 30,2003 of $1.4 million included $0.7 million in respect of severance and benefitsfor 28 predominately sales staff at six European operations. Cash payments of$0.5 million were made in the period in respect of these accruals. It isanticipated that the remainder will be paid in the quarter ending September 30,2003. In addition employee termination costs of $0.2 million were incurred atthe corporate headquarters in respect of severance and benefits for twoemployees. This entire amount was paid in the three months ended June 30, 2003.It is not anticipated that any of these terminations will adversely impact theCompany’s ability to generate revenue.

 

The other expensebalance of $0.1 million at March 31, 2003, related to fees to cancel consultingcontracts and telecommunications contracts at the Italian operation. This hasbeen reclassified to discontinued operations. Other charges of $0.4 million incurred in the three months ended June30, 2003 related to the implementation costs for back-office and administrativeoutsourcing initiatives. Cash payments of $0.1 million were made in thequarter. It is anticipated that the remainder of the costs will be paid in thequarter ending September 30, 2003.

 

Impairment

 

During the sixmonths ended June 30, 2003, the Company recorded a fixed asset impairmentcharge of $0.1 million for fixed asset fixtures and fittings that were writtendown to net realizable value as a result of the closure of the Reston office inMarch 2003. There were no impairment charges in the three and six months endedJune 30, 2002.

 

Other than thematters referred to in notes two and three, management has no other commitmentsthat would significantly affect the carrying value of VIA’s existing assets orliabilities.

 

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

 

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

 

                •              operating and financial trends, including significantunderperformance relative to expected historical or projected operating resultsand

 

                •              business outlook for each operation, including changesin the expected revenues and cash flows for each of our operations, changes inour customers and the services that they require and our Strategic Plans foreach business.

 

                If the Companyfails to achieve the benefits assumed from its Strategic Plan furtherimpairment may arise.

** **

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

 

The provision fortaxes based on income for the 2003 and 2002 interim periods was computed inaccordance with Interpretation No. 18 of Accounting Principles Board OpinionNo. 28 on reporting taxes for interim periods and was based on management’sexpectations of tax expense for the year being $0. There will be no tax impactarising from the disposal of the Italian operation discussed in Note 2.

8

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**6.**                                      **Comprehensive Loss**

 

Comprehensive lossfor the three months and six months ended June 30, 2002 and 2003 was as follows(in thousands of U.S. dollars):

 
|                                      |   | **Three  months ended June 30,** |   | **Six  months ended June 30,** |   |
|-------------------------------------------|--------|---------------------------------------|--------|-------------------------------------|--------|
|                                      |   | **2002**                              |   | **2003**                            |   | **2002** |   | **2003** |   |
| Net  loss                                 |   | $                                     | (315   | )                                   | $      | (5,713 | ) | $ | (19,872 | ) | $ | (11,188 | ) |
| Foreign  currency translation adjustments |   | (8,074                                | )      | (3,589                              | )      | (6,085 | ) | (5,375 | ) |
| Comprehensive  loss                       |   | $                                     | (8,389 | )                                   | $      | (9,302 | ) | $ | (25,957 | ) | $ | (16,563 | ) |

 

The financial statements of the Company’s localoperating subsidiaries with a functional currency other than U.S. dollars aretranslated into U.S. dollars using the current rate method. The resultantforeign currency translation adjustments are accumulated and reported as acomponent of accumulated other comprehensive loss in stockholders’ equity. Formore information see the *Foreign CurrencyExchange Risks* section in the Results of Operations section below.

 

**7.**                                      **Property and Equipment**

 

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

 
|                            |   | **December  31, 2002** |   | **June  30, 2003** |   |
|---------------------------------|--------|------------------------|--------|--------------------|--------|
| Hardware and other  equipment   |   | $                      | 17,266 |               | $      | 17,997 |   |
| Network and data  center assets |   | 13,810                 |   | 14,936             |   |
| Software                        |   | 11,843                 |   | 12,177             |   |
| Furniture and  fixtures         |   | 2,041                  |   | 1,229              |   |
|                            |   | 44,960                 |   | 46,339             |   |
| Accumulated  depreciation       |   | (31,264                | )      | (34,439            | )      |
| Property and  equipment, net    |   | $                      | 13,696 |               | $      | 11,900 |   |

 

Depreciationexpense was $3.0 million and $1.8 million for the three months ended June 30,2002 and 2003, respectively. Depreciation expense was $5.8 million and$3.8 million for the six months ended June 30, 2002 and 2003, respectively. Asdisclosed above in note 4, a fixed asset impairment charge of $0.1 million wasrecorded in restructuring charges for the six months ended June 30, 2003 inrespect of the fixtures and fittings of the former headquarters office inReston.

 

**8.**                                      **Goodwill and Acquired Intangible Assets**

 

The changes in thecarrying amount of goodwill during the six months ended June 30, 2003 are asfollows (in thousands of U.S. dollars):

 

|                             |   | **Total** |   | **Europe** |   | **Americas** |   |
|----------------------------------|--------|-----------|--------|------------|--------|--------------|--------|
| Balance as of  December 31, 2002 |   | $         | 9,189  |       | $      | 7,027        |   | $ | 2,162 |   |
| Foreign exchange  adjustment     |   | 419       |   | 419        |   | —       |   |
| Balance as of  June 30, 2003     |   | $         | 9,608  |       | $      | 7,446        |   | $ | 2,162 |   |

 

The Company’sacquired intangible assets of $2.6 million, consisting of acquired customerlists, were fully amortized at December 31, 2002 and June 30, 2003.

 

The acquiredintangible asset amortization expense for the three month periods ended June30, 2002 and 2003 was $0.3 million and $0, respectively. The acquiredintangible asset amortization expense for the six month periods ended June 30, 2002and 2003 was $0.6 million and $0, respectively.

 

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

 

SFAS No. 123,*Accounting for Stock-Based Compensation,*encourages, but does not require companies to record compensation cost forstock-based employee compensation plans at fair value. The Company has chosento account for stock-based compensation using the intrinsic value methodprescribed in Accounting Principles Board Opinion (“APB”) No. 25, *Accounting for Stock Issued to Employees,*and related Interpretations. Accordingly, compensation cost for stock optionsis measured as the excess, if any, of the estimated fair value of the Company’sstock at the date of the grant over the amount an employee must pay to acquirethe stock. During 2000, prior to the initial public offering, the Companydetermined that the fair value of the underlying common stock

 

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exceeded the exerciseprice of certain stock option grants by $0.6 million. Such amounts, net offorfeitures, were being amortized over the vesting period. During the sixmonths ended June 30, 2002, VIA recorded stock option forfeitures of $1.8million, which reduced the deferred compensation balance to zero with thecorresponding adjustment to additional paid-in capital. The Company recognizedan expense of $0.5 million in the six months ended June 30, 2002.

 

The Company hasadopted the “disclosure only” alternative described in SFAS No. 123, whichrequires pro forma disclosures of net income and earnings per share as if thefair value method of accounting has been applied.

 

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

 

|                                                                                                                           |   | **For the  three months ended  June 30** |   | **For the  six months ended  June 30** |   |
|--------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|--------|----------------------------------------|--------|
|                                                                                                                           |   | **2002**                                 |   | **2003**                               |   | **2002** |   | **2003** |   |
|                                                                                                                           |   |                                     |   |                                   |   |   |   |   |   |
| Net loss (as  reported)                                                                                                        |   | $                                        | (315   | )                                      | $      | (5,713 | ) | $ | (19,872 | ) | $ | (11,188 | ) |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method, net of related tax effects |   | (2,510                                   | )      | (740                                   | )      | (4,892 | ) | (1,924 | ) |
| Add back: Total  stock-based employee compensation expense determined under APB 25                                             |   | 527                                      |   | —                                 |   | 527 |   | — |   |
| Proforma net loss                                                                                                              |   | $                                        | (2,298 | )                                      | $      | (6,453 | ) | $ | (24,237 | ) | $ | (13,112 | ) |
|                                                                                                                           |   |                                     |   |                                   |   |   |   |   |   |
| Net loss per  share, basic and diluted (as reported)                                                                           |   | $                                        | (0.01  | )                                      | $      | (0.10 | ) | $ | (0.33 | ) | $ | (0.19 | ) |
| Net loss per  share, basic and diluted (proforma)                                                                              |   | $                                        | (0.04  | )                                      | $      | (0.11 | ) | $ | (0.40 | ) | $ | (0.22 | ) |

 

**10.**                               **Contingencies**

 

OnNovember 5, 2001 a class action lawsuit was filed in the District Courtfor the Southern District of New York against VIA NET.WORKS, Inc., certainof the underwriters who supported its initial public offering (“IPO”) andcertain of its officers, under the title O’Leary v. Via Net.works [sic], et al[01-CV-9720] (the “Complaint”). An amended complaint was filed inApril 2002. The Complaint alleges that the prospectus the Company filedwith its registration statement in connection with its IPO was materially falseand misleading because it failed to disclose, among other things, that:(i) the named underwriters had solicited and received excessive andundisclosed commissions from certain investors in exchange for the right topurchase large blocks of VIA IPO shares; and (ii) the named Underwritershad entered into agreements with certain of their customers to allocate VIA IPOshares in exchange for which the customers agreed to purchase additional VIAshares in the aftermarket at pre-determined prices (“Tie-in Arrangements”),thereby artificially inflating the Company’s stock price. The Complaint furtheralleges violations of Sections 11, 12(a)(2) and 15 of the Securities Act of1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5promulgated thereunder 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. This Complaint is one of over300 similar suits filed to date against underwriters, issuers and theirofficers alleging similar activities, known as “laddering,” all of which areincluded in a single coordinated proceeding in the Southern District of NewYork, or the IPO Litigation.

 

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

 

On June 30, 2003,the special litigation committee of the board of directors of the Companyconditionally approved the global settlement between all plaintiffs and issuersin the IPO Litigations. The Company is in the process of completing a

 

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settlement with theplaintiffs in the case.  The settlementwould provide, among other things, a release of the Company and of theindividual defendants for the conduct alleged in the action to be wrongful bythe plaintiffs. Under the proposed settlement, the Company would agree toundertake other responsibilities under the partial settlement, includingagreeing to assign away, not assert, or release certain potential claims theCompany may have against its underwriters. Any direct financial impact of the proposed settlement is expected to beborne by the Company’s insurers.   Thespecial litigation committee agreed to approve the settlement subject to anumber of conditions, including the participation of a substantial number ofother defendants in the proposed settlement, the consent of the Company’sinsurers to the settlement, and the completion of acceptable final settlementdocumentation.  Furthermore, thesettlement is subject to a hearing on fairness and approval by the Courtoverseeing the IPO Litigations.

 

From time to time, the Company enters intoindemnification agreements with certain contractual parties in the ordinarycourse of business, including agreements with lenders, lessors, and certainvendors. All such indemnification agreements are entered into in the context ofthe particular agreements and are provided in an attempt to properly allocaterisk of loss in connection with the consummation of the underlying contractualarrangements. Although the maximum amount of future payments that the Companycould be required to make under these indemnification agreements is unlimited,management believes that historically, costs incurred to settle claims relatedto these indemnifications have not been material to the Company’s financialposition, results of operations or cash flows and that this is the expectationfor the future.  Additionally, the fairvalue of the indemnifications that the Company issued during the six monthsended June 30, 2003 was not material to the Company’s financial position,results of operations or cash flows.

 

The Company issubject to claims and legal proceedings that arise in the ordinary course ofits business operations. Each of these matters is subject to variousuncertainties, and it is possible that some of these matters may be decidedunfavorably to the Company. The Company does not believe that any of thesematters will have a material adverse affect on its business, assets oroperations.

 

**11.**                               **Segment Reporting**

 

VIA offers a varietyof Internet access, managed bandwidth, web hosting, e-commerce, Internetsecurity and related services to businesses and consumers in Europe and theUnited States. As of June 30, 2003, VIA served primary markets in eightcountries, excluding Italy. These country operations generate Internet-relatedrevenues from leased lines, dial-up Internet access, web hosting and design,Internet security and consulting services, and sale of third-party hardware andsoftware.

 

The Companyevaluates the performance of its operating segments primarily based on revenueand net income/loss from continuing operations.   In the table below, Corporate, which also includes the cost ofthe regional backbone network, is shown to reconcile to the total consolidatedfigures. Total segment assets, as presented in the table below, are totalassets net of intercompany funding amounts. Because of the limitations theCompany has experienced with its legacy billing platforms and its ongoingprojects to address these limitations, the Company is not currently able toprovide an accurate breakdown of revenue by product. The Company anticipatesthat when it has completed its various systems and process remediation efforts,it will again report revenue by certain product categories.

 

The table belowpresents information about the reported revenue and net loss from continuingoperations of the Company’s segments for the three and six month periods endingJune 30, 2002 and 2003 and assets from continuing operations of the Company’ssegments at June 30, 2002 and 2003 (in thousands of U.S. dollars).

 
|                                       |   | **Europe** |   | **Americas** |   | **Corporate** |   | **Total** |   |
|--------------------------------------------|--------|------------|--------|--------------|--------|---------------|--------|-----------|--------|
| Total assets as  of June 30, 2002          |   | 45,722     |   | 6,855        |   | 116,041       |   | 168,618   |   |
| Total assets as  of June 30, 2003          |   | 37,211     |   | 6,345        |   | 88,205        |   | 131,761   |   |
| Three months ended  June 30, 2002:         |   |       |   |         |   |          |   |      |   |
| Revenue                                    |   | 15,317     |   | 3,719        |   | —        |   | 19,036    |   |
| Operating loss  from continuing operations |   | 1,190      |   | 1,129        |   | 10,087        |   | 12,406    |   |
| Three months  ended June 30, 2003:         |   |       |   |         |   |          |   |      |   |
| Revenue                                    |   | 15,601     |   | 1,011        |   | —        |   | 16,612    |   |
| Operating loss  from continuing operations |   | 2,958      |   | 188          |   | 6,998         |   | 10,144    |   |
| Six months ended  June 30, 2002:           |   |       |   |         |   |          |   |      |   |
| Revenue                                    |   | 28,763     |   | 8,267        |   | —        |   | 37,030    |   |
| Operating loss  from continuing operations |   | 7,843      |   | 3,092        |   | 17,486        |   | 28,421    |   |
| Six months ended  June 30, 2003:           |   |       |   |         |   |          |   |      |   |
| Revenue                                    |   | 32,400     |   | 1,978        |   | —        |   | 34,378    |   |
| Operating loss  from continuing operations |   | 5,072      |   | 343          |   | 13,096        |   | 18,511    |   |

 

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At June 30, 2003,goodwill for Europe and the Americas was $7.5 million and $2.2 millionrespectively. During the second quarter of 2002, VIA sold its operations inArgentina and Austria.  During thisquarter, VIA also entered into a contractual agreement to transfer ownership ofits operation in Brazil. During the third quarter of 2002, VIA sold itsoperations in Ireland; similarly during this quarter, VIA entered into acontractual agreement to transfer ownership of its operation in Mexico. DuringJuly 2003, VIA sold its operation in Italy. Our operations in Argentina, Austria,Ireland and Italy are considered discontinued operations. The Argentineoperation was previously reported in the Americas segment and the Austrian,Irish, and Italian operations were previously reported in the Europe segment.Our operations in Brazil and Mexico are not treated as discontinuedoperations.  See Notes 2 and 3.

 

**12.**                               **Subsequent events**

 

Finance outsourcing agreement 

 

A financeoutsourcing agreement was signed with Accenture LLP on July 30, 2003. Under theterms of the agreement, VIA will outsource many of its transactional financefunctions to Accenture’s Financial Shared Service Centre. The contract is forthree years with an annual charge of approximately $1.3 million based onforecast staffing levels. The charge for each year will be based on actualstaffing levels and may be higher or lower than $1.3 million.

 

VIA NET.WORKS Italia

 

In July 2003 VIA sold VIA NET.WORKS Italia. As VIA wascommitted to the sale of this operation prior to June 30, 2003, the operationhas been treated as an asset held for sale and included within discontinuedoperations in accordance with Statement of Financial Accounting StandardNo. 144, *Accounting for the Impairmentor Disposal of Long-Lived Assets* (SFAS 144). Further information isprovided in Note 2.

 

VIA NET.WORKS Brasil S.A. 

 

In August 2003 VIA crystallized the sale of itsBrazilian operation. The Brazilian operation was conditionally sold in May2002. VIA agreed to waive all remaining rights in return for a payment of $0.1million. Further information is provided in Note 3.

 

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

 

The followingdiscussion and analysis should be read in conjunction with the consolidatedfinancial statements and related notes included in Item 1 of thisForm 10-Q. This discussion and the discussion in Item 1, Note 1,contain forward-looking statements, or statements that relate to future eventsor our future performance. These statements include, but are not limited tothose relating to the Company’s strategic plan, projections regarding financialimpacts from planned organizational re-alignment, outsourcing projects, newproduct roll-out, sales organization improvement plans, cost reductions ingeneral and statements relating to profitability. These statements are onlypredictions or planned actions that are subject to a number of risks,uncertainties and other factors. Actual events or results may differmaterially. Information regarding the risks, uncertainties and other factorsthat could cause actual results to differ from the results in theseforward-looking statements are discussed in the “Risk Factors” described inExhibit 99.1 on this Form 10-Q, as well as those described in the“Risk Factors” section of VIA’s 2002 Annual Report. You are urged to carefullyconsider these factors, as well as other information contained in thisForm 10-Q and in our other periodic reports and documents filed with theSecurities and Exchange Commission.

 

***Overview andStrategic Plan***

 

VIA is a provider of business communication solutionsto small and medium sized businesses. VIA is headquartered in Europe and hasoperations in France, Germany, the Netherlands, Portugal, Spain, Switzerland,the United Kingdom and the United States. VIA was formed in 1997 and has grownprincipally through the acquisition of independent Internet servicesproviders.  We offer a portfolio offlexible and reliable managed communication services including Internet access,digital subscriber line (DSL and ADSL) services and lease line connectivity,virtual private networks (VPNs), hosting, Internet and network securityservices and voice services. To date, we have not been profitable; however, weare currently implementing a Strategic Plan for 2003 – 2005. Under this Plan weexpect our net cashflow (defined as movement in cash and cash equivalents) toachieve break-even during the course of 2004, to reach a position ofprofitability, and further be recognized by our customers and the market as thebusiness communications supplier of choice in key industry sectors.

 

The first key component of our Strategic Plan is toimprove our operational performance. While our initial strategy of acquiring Internet service providerspermitted VIA to obtain a level of scale in a short period of time, it alsobrought us a company that was comprised of a collection of smallgeographically-diverse operations, each of which had different and generallynon-scaleable systems, processes and controls. Under our Strategic Plan, we arefundamentally transforming our operations from a collection of largelyindependent local organizations to a single, internationally oriented,sales-focused and functionally based organization. To do

 

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so, and as previouslyannounced, we have enhanced the management team, specifically in the salesfunction, re-aligned the management organization of VIA along functional lines,and have begun the process of standardizing across all of our operations acommon set of systems, processes and controls. As part of this transformation, VIA has signed agreements to outsourcesystems and processes associated with certain network management, IT, financeand administrative functions. We have planned a phased roll-out of each ofthese new initiatives into our current operations to permit an orderlytransition of services.  These projectsare intended to enable further cost cutting through headcount reductions,improve information flows between our operations, and processes and internalcontrols in each of our operations. We also intend these steps to help improveour overall operational efficiency and permit our sales and marketing groups tobetter focus on profitable revenue opportunities.

 

The second key component of our Strategic Plan is togenerate profitable revenue growth. This involves the reduction of undesiredcustomer churn improvement of the quality of our sales force, rationalizing ourexisting product portfolio and introducing new products, and making better useof and refocusing our direct and indirect sales channels.  We have taken steps to achieve this goal byinitiating a customer churn reduction program, continuing to recruit new andmore experienced sales professionals, establishing robust sales managementprocesses and introducing highly leveraged compensation plans. Furthermore, weare seeking to improve sales productivity by managing low-value customersthrough telesales or indirect channels. We have also continued a comprehensiverationalization of our product portfolio and plan on introducing new productsdesigned specifically for larger SMEs in clearly identified vertical industrysegments.

 

***CurrentDevelopments and Progress toward the Strategic Plan***

 

During the three months ended June 30, 2003, wecontinued to execute and make significant progress against the key elements ofthe Strategic Plan.

 

•                  Duringthe quarter, we have continued our personnel reductions, reducing our totalheadcount to 480 as compared to 539 at the beginning of the quarter.

•                  InJune, we completed a strategic deal with Dimension Data Holdings plc for theoutsourcing of VIA’s network management and monitoring infrastructure.   The transition to Dimension Data networkmanagement is expected to be completed by the end of 2003.  Upon completion, this arrangement willprovide VIA with significantly better network management capabilities, scopeand scale.

•                  InJune, we also completed a software license and implementation arrangement withInovaware Corporation, a leading provider of billing and customer management software.  We have begun a phased roll-out of the newsystem beginning in our German operation. We expect that all of our operationswill be on the new billing and customer care system by the first quarter of2004.

•                  Duringthe quarter, we introduced a resale voice product in the United Kingdom and theNetherlands with plans to expand the offering to our other key markets.  This new offering will allow us to offer amore complete solution for our customers’ communication needs.

•                  InJune, we signed an agreement for the sale of our loss-making Italian operation,and subsequently consummated this sale in July 2003.

•                  InJune, we introduced a state-of-the-art hosting platform based on SpheraCorporation’s Hosting Business Suite for our hosting customers in the U.S. withplans to roll-out the platform in other operations.  This platform provides VIA with a more robust and scaleablehosting platform for its shared hosting customers and resellers.

 

In July 2003, VIAcompleted a significant outsourcing arrangement with Accenture LLP under whichVIA will use Accenture’s financial shared service center in Prague, CzechRepublic to perform back-office transaction processing and certain otherfinance and administrative functions.  Overthe next several months, VIA and Accenture will work together to transitionthese functions to Accenture’s financial shared service center.  We expect that centralization andoutsourcing of these functions will significantly improve the internal financialinformation flows and the efficiency and scaleability of our financeoperations.  Moreover, together with thenew billing and customer care system, the implementation of the financialshared service center will provide VIA’s management with greater visibilityinto our operations.   Both of thesedevelopments, together with our actions to implement further and enhancedfinancial controls into the operations, will continue to drive improvements inour internal control environment.

 

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All of the actions we areundertaking in executing our Strategic Plan are also expected to contributesubstantially to medium-term improvements of our financial results.  During the quarter ended June 30, 2003, weexperienced continued improvement in our Internet service costs as a percentageto revenues when compared to the previous quarter and the same period in 2002as a consequence of centralizing procurement processes and renegotiating supplyagreements.  We saw a marginaldeterioration in Selling, General and Administrative (SG&A) costs whencompared with quarter one and with quarter two of 2002. This has resulted fromadverse currency movements, a material movement in bad debt expense whencompared with the prior year, termination costs for certain employees andassociated transition costs arising from significant headcount reductions.While it is too early in the implementation of the Strategic Plan to see thefull benefits of the actions we have taken to date, we expect that theheadcount reductions and other actions taken will lead to reduced SG&Acosts in 2004.

 

As noted above,the second key component of our Strategic Plan is the generation of profitablerevenue growth.  On that front, theintroduction of our voice product in selected markets and the introduction ofthe new web-hosting platform is expected to provide positive contribution toour revenues over time.  We have beenfocusing our sales and marketing teams on specific targeted industry segments.The Company has started to see certain early results from that refocusingthrough certain bundled product sales in our operations to major retail chains.Earlier this year, we began efforts to improve the overall quality of our salesforce by replacing non-performing sales professionals with more experienced professionals,establishing robust sales management and highly leveraged compensation plansand instituting talent development and training programs.  These efforts have continued through thequarter ended June 30, 2003.  Theongoing transformation of our sales organization has temporarily impacted oursales performance, as we had anticipated. We are also being impacted by higher than anticipated churn of ourcustomer base.  During this quarter, wehave been addressing this issue with a targeted customer churn reductionprogram led by senior management.

 

Despite the challenges ofpursuing revenue growth while making significant operational improvements, wecontinue to be committed to the goal of achieving cash flow break-even (definedas no change in cash and cash equivalents) during 2004.  In addition, we have previously providedguidance of delivering revenues of between $70 - $75 million for the full year2003.  We continue to expect that wewill be within that range, although at the lower end of the range, assuming nosignificant adverse movements in foreign currency exchange rates, particularlythe Euro to Dollar exchange rate.

 

We recognize thatour ability to execute successfully on our Strategic Plan to improveoperational performance and generate meaningful and profitable revenue growthis subject to a number of risks and dependencies, which are notinsignificant.  These risks anddependencies are further discussed in the “Risk Factors” described in Exhibit 99-1on this Form 10-Q, as well as those described in the “Risk Factors”section of VIA’s 2002 Annual Report.

 

***Our Operations***

 

During 2002, wesold our operations in Argentina, Austria, Brazil, Ireland and Mexico and, in2003, we have sold our operation in Italy. The operations in Argentina, Austria,Ireland, and Italy are accounted for as discontinued operations and have beenexcluded from the financial results from continuing operations, as well as thefinancial results from the comparative prior periods. Due to the terms of thesales agreements for Brazil and Mexico, these operations have not met therequirements to be accounted for as discontinued operations. Therefore, theresults of the Brazil and Mexico operations are included in the financialresults of continuing operations of VIA. (See Note 3 to the CondensedConsolidated Financial Statements.) The following table shows the revenuecontribution from each of VIA’s continuing operations in the Europe and theAmericas reporting segments. As of June 30, 2003 we owned 100% of all ouroperations.

 

**VIAOperations**

 
| **Country**     |   | **Percentages  of  Total Revenue from  continuing operations for  the three months ended  June 30, 2002** |   | **Percentages  of  Total Revenue from  continuing operations for  the three months ended  June 30, 2003** |   | **Percentages  of  Total Revenue from  continuing operations for  the six months ended  June 30, 2002** |   | **Percentages  of  Total Revenue from  continuing operations for  the six months ended  June, 2003** |   |
|-----------------|--------|-----------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------|--------|
|            |   |                                                                                                      |   |                                                                                                      |   |                                                                                                    |   |                                                                                                 |   |
| United Kingdom  |   | 30                                                                                                        | %      | 35                                                                                                        | %      | 30                                                                                                      | %      | 35                                                                                                   | %      |
| Switzerland     |   | 6                                                                                                         | %      | 12                                                                                                        | %      | 6                                                                                                       | %      | 13                                                                                                   | %      |
| The Netherlands |   | 10                                                                                                        | %      | 13                                                                                                        | %      | 9                                                                                                       | %      | 12                                                                                                   | %      |
| Germany         |   | 14                                                                                                        | %      | 11                                                                                                        | %      | 14                                                                                                      | %      | 12                                                                                                   | %      |
| France          |   | 11                                                                                                        | %      | 11                                                                                                        | %      | 11                                                                                                      | %      | 11                                                                                                   | %      |
| Portugal        |   | 7                                                                                                         | %      | 9                                                                                                         | %      | 6                                                                                                       | %      | 8                                                                                                    | %      |
| United States   |   | 6                                                                                                         | %      | 6                                                                                                         | %      | 5                                                                                                       | %      | 6                                                                                                    | %      |
| Spain           |   | 2                                                                                                         | %      | 3                                                                                                         | %      | 2                                                                                                       | %      | 3                                                                                                    | %      |
| Brazil          |   | 3                                                                                                         | %      | 0                                                                                                         | %      | 4                                                                                                       | %      | 0                                                                                                    | %      |
| Mexico          |   | 11                                                                                                        | %      | 0                                                                                                         | %      | 13                                                                                                      | %      | 0                                                                                                    | %      |

 

14

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Our customersgenerally transact business with only one of our operations, which is locatedin the same country as the customer. Consequently, the same operating unitmanages the client relationship, including delivery of service, invoicing andcollections. This being the case, revenue for a country operation primarilyrelates directly to invoices delivered in respect of services such operationprovides. When, in the small number of instances that a customer receivesservices across several VIA operations, one of the operations will act as leadsupplier to that customer and the other operation or operations will raiseinvoices to the lead operation as it were a non-related third party.

 

**RESULTSOF OPERATIONS**

 

VIA sold itsoperations in Brazil and Mexico during the second and third quarters of 2002respectively. These dispositions were structured in such a way that they werenot accounted for as discontinued operations and therefore their partial yearresults continue to be reported in our consolidated results of operations for2002.

 

As VIA has not andwill not consolidate any results from the Brazilian and Mexican operations fromthe date of the legal sale of these operations, management believes it ismeaningful to investors to not only discuss results of our continuingoperations (which include results of operations in Brasil and Mexico in 2002),but also results after excluding the results of Brazil and Mexico as detailedin the table set out below under *AdjustedContinuing Operations*below. The table below provides areconciliation of the “Adjusted Continuing” results to the U.S. GAAP measures.Specifically, since the results from the Brazilian and Mexican operations areonly reported in our financial results through the dates of sale of each operation,being June 2002 and September 2002, respectively, we present below actualreported results and what we call “adjusted continuing operations,” whichexcludes the results of the Brazilian and Mexican operations so that trends andcomparisons of our operating results on a period to period basis can moreeasily be identified.  The “adjustedcontinuing” measures that are reported below, including revenues, Internetservices operating costs, selling, general and administrative expenses, andcompensation expenses for adjusted continuing operations should not beconsidered an alternative to these same reported measures for total continuingoperations, when determined in accordance with generally accepted accountingprinciples in the United States, or GAAP.

 

*Foreign Currency Impact*

** **

**Foreign exchange rates can vary significantly and impact our results ofoperations, which are reported in U.S. dollars. During the six months endedJune 30, 2003, only our U.S. operation, which represented approximately 6% ofour consolidated revenues from continuing operations during this period,conducted business in U.S. dollars. The Euro varied by approximately 9% inrelation to the U.S. dollar during the second quarter of 2003 and byapproximately 15% in the six months to June 30, 2003. These exchange ratefluctuations can have a significant impact on all elements of our results ofoperations, including revenue, expenses and net loss. During the three and sixmonth periods ended June 30, 2003, the dollar was declining in value ascompared to the currencies in which we conduct most of our business.  The effect of the weakening of the U.S.dollar is that revenues and costs in operations with a functional currencyother than U.S. dollars translate into larger U.S. dollar amounts than wouldhave been the case had the June 30, 2002 foreign exchange rate been used.**

 

***Three and six months ended June 30, 2003 compared with thethree and six months ended June 30, 2002***

 

*Revenue:*

 
|    |   | **Three  months ended**                  |   |                    |   | **Six  months ended**                    |   |                    |   |
|---------|--------|------------------------------------------|--------|-------------------------|--------|------------------------------------------|--------|-------------------------|--------|
|    |   | **June 30,  2002**                  |   | **June 30,  2003** |   | **%  Increase/  (Decrease)**             |   | **June 30,  2002** |   | **June 30,  2003** |   | **%  Increase/  (Decrease)** |   |
|    |   | **(in  thousands of U.S. dollars)** |   |                    |   | **(in  thousands of U.S. dollars)** |   |                    |   |
| Revenue |   | $                                        | 19,036 |                    | $      | 16,612                                   |   | (13                     | )%     | $ | 37,030 |   | $ | 34,378 |   | (7 | )% |
|         |        |                                          |        |                         |        |                                          |        |                         |        |  |  |  |  |  |  |  |  |

 

We derive ourrevenue from the sale of Internet goods and services, specifically Internetaccess and other Internet value added services, such as managed bandwidth, weband applications hosting.

 

For revenuetransactions we apply the provisions of SAB No. 101 *Revenue Recognition.* We recognize revenue from the sale ofInternet goods and services when persuasive evidence of an arrangement exists,delivery has occurred or services have been

 

15

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rendered, the fee isfixed or determinable and collection of the resulting receivable is reasonablyassured. We assess collectibility based on a number of factors, including pasttransaction history with the customer and the credit-worthiness of thecustomer. We do not perform credit checks on all potential customers beforeproviding services. If we determine that collection of a fee is not reasonablyassured, the revenue is recognized upon the receipt of cash, provided otherrevenue recognition criteria have been satisfied.

 

Our practices regardingthe evidence of an arrangement vary from country to country. For sales, otherthan those completed over the Internet, we use either a purchase order or acustomer agreement as evidence of an arrangement. For sales over the Internet,we use a credit card authorization or direct debit mandate as evidence of anarrangement.

 

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

 

Revenue for thethree months ended June 30, 2003 was $16.6 million as compared to$19.0 million for total continuing operations for the three months endedJune 30, 2002, which includes the results of our Brazilian and Mexicanoperations, and $16.4 million for adjusted continuing operations in the sameperiod, which excludes the results of our Brazilian and Mexicanoperations.  The revenue of theSwitzerland operation was higher in the three months to June 30, 2003 followingthe purchase of a customer list in June 2002. In addition, the Euro to U.S.dollar foreign exchange rate has strengthened by approximately 15 per cent inthe year since June 30, 2002. The effect of this strengthening is that revenuesand costs in operations with a Euro functional currency translate into largerU.S. dollar amounts than would have been the case had the June 30, 2002 Euro toU.S. dollar foreign exchange rate been used. See the *Foreign Currency Exchange Risks* section below for moreinformation. 

 

Revenue for thesix months ended June 30, 2003 was $34.4 million as compared to$37.0 million for total continuing operations for the six months endedJune 30, 2002, and $30.7 million for adjusted continuing operations in the sameperiod. The increase is principally due to the increased revenues of theSwitzerland operation and the positive impact of the strengthening Euro to U.S.dollar foreign exchange rate. These gains were partly offset by revenuedecreases period on period recorded by the French and German operations.

 

Through the firstsix months of 2003, VIA has taken significant actions in implementing its2003-2005 Strategic Plan, including replacing many of our direct salesprofessionals and sales managers with higher caliber professionals. We havecontinued to rationalize our product portfolio and are actively recruitingresellers and other value-added partners. As expected, these and otherinitiatives we have undertaken through the implementation of our StrategicPlan, has had a dampening effect on our revenues. VIA anticipates that revenueswill continue to be impacted over the course of 2003 by these actions. Despitethe challenges of pursuing growth while also making significant operationalimprovements and organizational changes, we expect to generate modest revenuegrowth over the six months ending December 31, 2003. Specifically, we continueto expect to deliver revenues of between $70 - $75 million for the full year2003, although at the lower end of the range, assuming no signifigant adversemovements in foreign currency exchange rates, particularly the Euro to Dollarexchange rate.  

 

In prior reportingperiods, we have provided information on categories of revenues that wegenerate. Because of the systemic errors and limitations we have experienced inand with our legacy billing platforms and our ongoing projects to address theseand process issues, we are not currently able to provide an accurate breakdownof our revenues. We anticipate that when we have completed our various systemsand process remediation efforts, we will begin again to report certain revenuecategories.

 

*OPERATINGCOSTS AND EXPENSES:*

 

*Internetservices:*

 
|                |   | **Three  months ended**                  |   |                    |   | **Six  months ended**        |   |                    |   |
|---------------------|--------|------------------------------------------|--------|-------------------------|--------|------------------------------|--------|-------------------------|--------|
|                |   | **June 30,  2002**                  |   | **June 30,  2003** |   | **%  Increase/  (Decrease)** |   | **June 30,  2002** |   | **June 30,  2003** |   | **%  Increase/  (Decrease)** |   |
|                |   | **(in  thousands of U.S. dollars)** |   |                    |   |                         |   |                    |   |   |   |
| Internet  services  |   | $                                        | 10,572 |                    | $      | 7,829                        |   | (26                     | )%     | $ | 21,592 |   | $ | 16,349 |   | (24 | )% |
| % of  Total Revenue |   | 56                                       | %      | 47                      | %      |                         |   | 58                      | %      | 48 | % |   |   |
|                     |        |                                          |        |                         |        |                              |        |                         |        |  |  |  |  |  |  |  |  |

 

16

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Our Internetservices operating costs are the costs we incur to carry customer traffic toand over the Internet. We lease lines that connect our points of presence, or"PoPs", either to our own network or to other network providers. Wepay other network providers for transit, which allows us to transmit ourcustomers’ information to or from the Internet over their networks. We also payother recurring telecommunications costs and personnel costs, including thecost of the local telephone lines our customers use to reach our PoPs andaccess our services, and costs related to customer support and care.

 

Our Internetservices operating costs for total continuing operations were $7.8 millionor 47% of revenues for the three months ended June 30, 2003 as compared to$10.6 million or 56% of revenues for the three months ended June 30, 2002and $9.0 million or 55% for adjusted continuing operations in the same period.As a percentage of revenue, Internet services costs have fallen for the threeand six month periods ended June 30, 2003 from the same periods in 2002primarily due to the renegotiation of network access costs, despite thenegative impact of the strengthening Euro to U.S. dollar foreign currencyexchange rate.

 

Our Internetservices operating costs for total continuing operations were $16.3 millionfor the six months ended June 30, 2003 as compared to $21.6 million forthe six months ended June 30, 2002 and $17.6 million for adjusted continuingoperations in the same period. Total Internet service costs for the three andsix month periods ended June 30, 2003 benefited from the release oftelecommunication cost accruals in respect of disputed charges and linecancellation credits in two operations in the European reporting segment of$0.6 million. Management considers the likelihood that VIA will ultimately berequired to pay these amounts as remote.

 

*Selling,general and administrative:*

 
|                                        |   | **Three  months ended** |   |                    |   | **Six  months ended**        |   |                    |   |
|---------------------------------------------|--------|-------------------------|--------|-------------------------|--------|------------------------------|--------|-------------------------|--------|
|                                        |   | **June 30,  2002** |   | **June 30,  2003** |   | **%  Increase/  (Decrease)** |   | **June 30,  2002** |   | **June 30,  2003** |   | **%  Increase/  (Decrease)** |   |
|                                        |   |                    |   |                    |   |                         |   |                    |   |   |   |   |   |
| Selling,  general & administrative |   | $                       | 17,836 |                    | $      | 15,713                       |   | (12                     | )%     | $ | 38,045 |   | $ | 30,410 |   | (20 | )% |
| % of  Total Revenue                         |   | 94                      | %      | 95                      | %      |                         |   | 103                     | %      | 88 | % |   |   |
|                                             |        |                         |        |                         |        |                              |        |                         |        |  |  |  |  |  |  |  |  |

 

Our largestselling, general and administrative (SG&A) expenses are compensation costs,the costs associated with marketing our products and services, and professionalfees paid to outside consultants. Compensation costs include salaries andrelated benefits, commissions, bonuses and costs associated with staffreductions. In many of our markets, we are required to make significantmandatory payments for government-sponsored social welfare programs and we havelittle control over these costs. Our marketing expenses include the costs ofdirect mail and other mass marketing programs, advertising, customercommunications, trade show participation, web site management and otherpromotional costs. Other SG&A expenses include the costs of travel, rent,utilities, insurance and bad debt expense.

 

We incurredSG&A expenses for continuing operations of $15.7 million for the threemonths ended June 30, 2003, a 12% decrease from the $17.8 million we incurredfor the three months ended June 30, 2002 and a 1% decrease from the $15.8million for adjusted continuing operations in the same period. The year overyear increase in SG&A costs for adjusted continuing operations for thethree months ended June 30, 2003 as compared to the three months ended June 30,2002 is a result primarily of the adverse cost impact of the 15 per centincrease in the Euro to U.S. dollar foreign exchange rate since June 30, 2003noted in the *Revenue* sectionabove. To summarize, the Euro to U.S. dollar foreign exchange rate hasstrengthened by approximately 15 per cent in the year since June 30, 2002. Thishas had a material adverse effect on our reported costs.

 

SG&A expensesfor continuing operations for the three months ended June 30, 2003 included abad debt expense of $0.4 million. SG&A expenses for continuing operationsfor the three months ended 30 June 2002 included a release from our bad debtprovision of $1.1 million.

 

We incurredSG&A expenses of $30.4 million for the six months ended June 30, 2003,a 20% decrease from the $38.0 million we incurred for the six months ended June30, 2002 for total continuing operations and a 9% decrease from $33.2 millionfor adjusted continuing operations in the same period. We achieved thesereported cost reductions despite the adverse effect of the strengthening Euroto U.S. dollar foreign exchange rate, and the change in bad debt expensebetween the periods.

 

17

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SG&A expensesfor continuing operations for the six months ended June 30, 2003 included a baddebt expense of $0.6 million. SG&A expenses for continuing operations forthe six months ended 30 June 2002 included a release from our bad debtprovision of $1.9 million.

 

Principally as aresult of the issues arising from the legacy billing systems and businessprocesses, substantial reserves were previously recorded against the carryingvalue of receivables. The billing system and process improvements made during2002, combined with our intensified focus on cash collection, resulted in thecollection in the three and six months ended June 30, 2002 of accountsreceivable previously provided against and the release of $1.9 million in thefirst half of 2002 and $2.0 million in the second half of 2002. The bad debtexpense in the three and six months ended June 30, 2003, was a charge of $0.4million and $0.6 million, respectively compared to a benefit of $1.1 millionand $1.9 million in the three and six month periods ended June 30, 2002.

 

Compensationexpense for continuing operations for the three months ended June 30, 2003 was$9.9 million as compared to $11.5 million for the three months ended June 30,2002 and $10.0 million for adjusted continuing operations in the same period.Compensation expense in 2003 has been adversely impacted by the strengtheningEuro to U.S. dollar foreign exchange rate as noted above.

 

Compensationexpense for continuing operations for the six months ended June 30, 2003 was$19.2 million as compared to $23.0 million for the six months ended June 30,2002 and $19.9 million for adjusted continuing operations in the sameperiod.  This decrease in totalcompensation costs has been achieved despite the adverse impact of foreignexchange rates as noted above. Headcount for adjusted continuing operations hasfallen from 575 at December 31, 2002 to 480 at June 30, 2003.

 

Our SG&Aexpenses include the amortization of deferred compensation. In March 2002,we recorded forfeitures of unvested stock options in the amount of$1.8 million, which reduced the deferred compensation balance to zero witha corresponding adjustment to additional paid in capital. As a result, we didnot record any deferred compensation expense in the first half of 2003. Thedeferred compensation amortization for the three and six months ended June 30,2002 was $0 and $0.5 million, respectively.

 

*Adjusted Continuing Operations*

 

VIA sold itsoperations in Brazil and Mexico during the second and third quarters of 2002respectively. These dispositions were structured in such a way that they werenot accounted for as discontinued operations and therefore their partial yearresults continue to be reported in our consolidated results of operationsthrough the dates of sale of each operation, being June 2002 and September2002, respectively.

 

As VIA has not andwill not consolidate any future results from the Brazilian and Mexicanoperations from the date of legal sale of these operations, management believesit is meaningful to investors to not only discuss results of our continuingoperations (which include results of operations in Brazil and Mexico in 2002),but also results after excluding the results of Brazil and Mexico as detailedin the table below (in thousands of U.S. dollars). These results are notnecessarily indicative of future results: 

 
| **Three  months ended June 30** |   | **Total  Continuing  Operations** |   | **Brazil  Results of  Operations** |   | **Mexico  Results of  Operations** |   | **Adjusted  Continuing  Operations** |   |
|---------------------------------|--------|-----------------------------------|--------|------------------------------------|--------|------------------------------------|--------|--------------------------------------|--------|
|                            |   |                              |   |                               |   |                               |   |                                 |   |
| 2002 Revenue                    |   | 19,036                            |   | 552                                |   | 2,102                              |   | 16,382                               |   |
| 2003 Revenue                    |   | 16,612                            |   | —                             |   | —                             |   | 16,612                               |   |
| 2002 Internet  services         |   | 10,572                            |   | 199                                |   | 1,374                              |   | 8,999                                |   |
| 2003 Internet  services         |   | 7,829                             |   | —                             |   | —                             |   | 7,829                                |   |
| 2002 SG&A  costs            |   | 17,836                            |   | 378                                |   | 1,629                              |   | 15,829                               |   |
| 2003 SG&A  costs            |   | 15,713                            |   | —                             |   | —                             |   | 15,713                               |   |
| 2002  Compensation expenses     |   | 11,512                            |   | 221                                |   | 1,302                              |   | 9,989                                |   |
| 2003  Compensation expenses     |   | 9,872                             |   | —                             |   | —                             |   | 9,872                                |   |

 
| **Six months ended June 30** |   | **Total  Continuing  Operations** | ** ** | **Brazil  Results of  Operations** | ** ** | **Mexico  Results of  Operations** | ** ** | **Adjusted  Continuing  Operations** | ** ** |
|------------------------------|--------|-----------------------------------|------------|------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
|                         |   |                              |       |                               |       |                               |       |                                 |       |
| 2002 Revenue                 |   | 37,030                            |       | 1,368                              |       | 4,951                              |       | 30,711                               |       |
| 2003 Revenue                 |   | 34,378                            |       | —                             |       | —                             |       | 34,378                               |       |
| 2002 Internet  services      |   | 21,592                            |       | 532                                |       | 3,488                              |       | 17,572                               |       |
| 2003 Internet  services      |   | 16,349                            |       | —                             |       | —                             |       | 16,349                               |       |
| 2002 SG&A  costs         |   | 38,045                            |       | 988                                |       | 3,828                              |       | 33,229                               |       |
| 2003 SG&A  costs         |   | 30,410                            |       | —                             |       | —                             |       | 30,410                               |       |
| 2002  Compensation expenses  |   | 23,074                            |       | 554                                |       | 2,632                              |       | 19,888                               |       |
| 2003  Compensation expenses  |   | 19,191                            |       | —                             |       | —                             |       | 19,191                               |       |

 

18

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Due to the finalsettlement between VIA and the buyers of our Brazilian operation on thepurchase price promissory note and the release of the lien on the shares of theoperation, the sale of the former VIA NET.WORKS Brasil will qualify as anaccounting disposition under SAB Topic 5E in the three month period endingSeptember 30, 2003.  See footnote 3 toFinancial Statements.  As a result,beginning in the three month reporting period ending September 30, 2003, VIAwill include our former Brazilian operation as a discontinued operation. Oncethe disposals of the Brazilian and Mexican operations qualify as divestituresunder SAB Topic 5E the period on period comparability of our statement ofoperations will improve and we will cease use of the above table and discussionof  “adjusted continuing operations.”

 

*Depreciationand amortization:*

 
|                           |   | **Three  months ended**                  |   |                    |   | **Six  months ended**                    |   |                    |   |
|--------------------------------|--------|------------------------------------------|--------|-------------------------|--------|------------------------------------------|--------|-------------------------|--------|
|                           |   | **June 30,  2002**                  |   | **June 30,  2003** |   | **%  Increase/  (Decrease)**             |   | **June 30,  2002** |   | **June 30,  2003** |   | **%  Increase/  (Decrease)** |   |
|                           |   | **(in  thousands of U.S. dollars)** |   |                    |   | **(in  thousands of U.S. dollars)** |   |                    |   |
| Depreciation  and amortization |   | $                                        | 3,034  |                    | $      | 1,799                                    |   | (41                     | )%     | $ | 5,814 |   | $ | 3,848 |   | (34 | )% |
| % of  Total Revenue            |   | 16                                       | %      | 11                      | %      |                                     |   | 16                      | %      | 12 | % |   |   |
|                                |        |                                          |        |                         |        |                                          |        |                         |        |  |  |  |  |  |  |  |  |

 

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

 

Our depreciationand amortization expense was $1.8 million and $3.8 million for the three andsix months ended June 30, 2003. The depreciation and amortization expense forthe three and six months ended June 30, 2002 was $3.0 million and $5.8million, respectively. In the first quarter of 2002 $0.2 million of the chargerelated to amortization of intangible assets. The decrease is primarily due toa lower depreciable asset base due to asset impairments in 2002 and the firstquarter of 2003 and to the fact that intangible assets had been fully amortizedby the end of 2002.

 

*Restructuringand impairment charges:*

 
|                                  |   | **Three  months ended**                  |   |                    |   | **Six  months ended**                    |   |                    |   |
|---------------------------------------|--------|------------------------------------------|--------|-------------------------|--------|------------------------------------------|--------|-------------------------|--------|
|                                  |   | **June 30,  2002**                  |   | **June 30,  2003** |   | **%  Increase/  (Decrease)**             |   | **June 30,  2002** |   | **June 30,  2003** |   | **%  Increase/  (Decrease)** |   |
|                                  |   | **(in  thousands of U.S. dollars)** |   |                    |   | **(in  thousands of U.S. dollars)** |   |                    |   |
| Restructuring  and Impairment charges |   | —                                   |   | $                       | 1,415  |                                     | 100    | %                       | — |   | $ | 2,282 |   | 100 | % |
| % of  Total Revenue                   |   | —                                   |   | 9                       | %      |                                     |   | —                  |   | 7 | % |   |   |
|                                       |        |                                          |        |                         |        |                                          |        |                         |        |  |  |  |  |  |  |

 

During the threeand six months ended June 30, 2003 the Company recorded restructuring andimpairment charges related to the implementation of the Group’s strategic planof $1.4 million and $2.3 million, respectively. The restructuring charge forthe three months ended June 30, 2003 related to severance payments for 28predominately sales staff at six of its European operations and at the corporateheadquarters, future lease obligations on vacant office space in Germanyand  implementation costs for backoffice and administrative outsourcing initiatives.  The restructuring charge for the three months ended March 31,2003 of $0.9 million related to severance payments at four of its Europeanoperations of $0.7 million, an adjustment to the future lease obligations forthe closure of the Reston, Virginia office of $0.1 million and a fixed assetimpairment charge of $0.1 million for fixed asset fixtures and fittings thatwere written down to net realizable value as a result of the closure of theReston office in March 2003. There were no restructuring or impairment chargesin the six months ended June 30, 2002. For further information see Note 4 tothe Consolidated Financial Statements.

 

We anticipate thatwe will incur further restructuring charges during the balance of 2003 and thefirst quarter of 2004 as we execute on our Strategic Plan, specifically for thecosts of headcount reductions that will result from our organizationalfunctional realignment and from our outsourcing projects. By the end of thefirst quarter of 2004, we expect to further reduce VIA's total headcount of 480as of June 30, 2003 to less than 400. If the Company fails to achieve thebenefits assumed from its Strategic Plan, further goodwill and long-lived assetimpairments may arise.

 

19

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*Interestincome, net:*

 
|                  |   | **Three  months ended**                  |   |                    |   | **Six  months ended**                    |   |                    |   |
|-----------------------|--------|------------------------------------------|--------|-------------------------|--------|------------------------------------------|--------|-------------------------|--------|
|                  |   | **June 30,  2002**                  |   | **June 30,  2003** |   | **%  Increase/  (Decrease)**             |   | **June 30,  2002** |   | **June 30,  2003** |   | **%  Increase/  (Decrease)** |   |
|                  |   | **(in  thousands of U.S. dollars)** |   |                    |   | **(in  thousands of U.S. dollars)** |   |                    |   |
| Interest  income, net |   | $                                        | 644    |                    | $      | 287                                      |   | (55                     | )%     | $ | 1,307 |   | $ | 712 |   | (46 | )% |
| % of  Total Revenue   |   | 3                                        | %      | 2                       | %      |                                     |   | 4                       | %      | 2 | % |   |   |
|                       |        |                                          |        |                         |        |                                          |        |                         |        |  |  |  |  |  |  |  |  |

 

For the three andsix months ended June 30, 2003, we earned $0.3 million and$0.7 million in interest income, a 50% and 40% decrease over the$0.7 million and $1.4 million we earned for the three and six monthsended June 30, 2002. Interest income was generated from investing fundsreceived from our initial public offering in February 2000, until thosefunds were used for acquisitions, operating expenses or capital expenditures.Net proceeds from the public offering were $333.0 million. The decrease inthe interest income is the combined result of the decrease in the availablecash for investing and the decrease in the interest rates. We also incurred$3,000 and $7,000 of interest expense for the three and six months ended June30, 2003, as compared to $20,000 and $0.1 million of interest expenseincurred in the same periods in 2002. Interest expense relates to vendorfinancing at both the subsidiary and corporate levels.

 

*Otherexpense, net:*

 
|                |   | **Three  months ended**                  |   |                    |   | **Six  months ended**                    |   |                    |   |
|---------------------|--------|------------------------------------------|--------|-------------------------|--------|------------------------------------------|--------|-------------------------|--------|
|                |   | **June 30,  2002**                  |   | **June 30,  2003** |   | **%  Increase/  (Decrease)**             |   | **June 30,  2002** |   | **June 30,  2003** |   | **%  Increase/  (Decrease)** |   |
|                |   | **(in  thousands of U.S. dollars)** |   |                    |   | **(in  thousands of U.S. dollars)** |   |                    |   |
| Other  expense, net |   | $                                        | 118    |                    | $      | 96                                       |   | (19                     | )%     | $ | 446 |   | $ | 144 |   | (68 | )% |
| % of  Total Revenue |   | 1                                        | %      | 1                       | %      |                                     |   | 1                       | %      | 0 | % |   |   |
|                     |        |                                          |        |                         |        |                                          |        |                         |        |  |  |  |  |  |  |  |  |

 

For the three andsix months ended June 30, 2003, we incurred other expense of $0.1 million and$0.1 million, as compared to $0.1 million and $0.4 million for the same periodin 2002. Other expense for the six months ended June 30, 2002 included a chargeof $0.3 million in respect of the write off of the balance owing on a relatedparty loan.

 

*Foreigncurrency gains, net:*

* *
|                         |   | **Three  months ended**                  |   |                    |   | **Six  months ended**                    |   |                    |   |
|------------------------------|--------|------------------------------------------|--------|-------------------------|--------|------------------------------------------|--------|-------------------------|--------|
|                         |   | **June 30,  2002**                  |   | **June 30,  2003** |   | **%  Increase/  (Decrease)**             |   | **June 30,  2002** |   | **June 30,  2003** |   | **%  Increase/  (Decrease)** |   |
|                         |   | **(in  thousands of U.S. dollars)** |   |                    |   | **(in  thousands of U.S. dollars)** |   |                    |   |
| Foreign  currency gains, net |   | $                                        | 11,046 |                    | $      | 4,711                                    |   | (57                     | )%     | $ | 8,555 |   | $ | 7,260 |   | (15 | )% |
| % of  Total Revenue          |   | 58                                       | %      | 28                      | %      |                                     |   | 23                      | %      | 21 | % |   |   |
|                              |        |                                          |        |                         |        |                                          |        |                         |        |  |  |  |  |  |  |  |  |

 

We recognized a$4.7 million and $7.3 million foreign currency gain for the three and sixmonths ended June 30, 2003, as compared to a $11.0 million and $8.6foreign currency gain for the three and six months ended June 30, 2002. Thechange from period to period was primarily due to the fluctuation in theexchange rate of the Euro as compared to the U.S. dollar and its impact on therevaluation of our Euro denominated intercompany balances held by the parentcompany and on our Euro denominated cash accounts. See the *Foreign Currency Exchange Risks* sectionbelow for more information.

 

We established theEuro denominated cash accounts in connection with our initial public offeringin February 2000, in which we sold shares of our common stock for bothU.S. dollars and Euros. To minimize our exposure to foreign currency exchangerate risk on cash balances held in 2003, VIA purchased €15.0 million worthof U.S. dollars on March 10, 2003, thus substantially reducing the balancein the Euro cash account. At June 30, 2003, VIA maintained a Euro cash reserveof €9.9 million.

 

*Liquidityand Capital Resources*

 

VIA began 2003with $97.8 million in cash and cash equivalents and $0.9 million in restrictedcash. We had negative cash flow of $15 million during the first six months of2003, leaving us with $82.8 million in cash and cash equivalents and $0.9 millionin restricted cash at June 30, 2003.

 

The execution ofour Strategic Plan will increase our capital expenditures from 2002 levels, andresult in cash expenditures for restructuring and other non-recurring costsassociated with the Strategic Plan. We believe that the cash expendituresassociated with execution of the Strategic Plan are necessary to accelerate ourpath toward profitability. Under the Strategic Plan we will be increasing ourexpenditures of cash in the short term, but we anticipate that these up-frontexpenditures will result in less cash being spent to fund operating losses aswe approach a positive net cash flow position.

 

20

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In addition, inApril 2003, VIA announced the restarting of its previously authorized stockrepurchase plan to acquire up to $10 million worth of VIA stock.  In the second quarter of 2003, VIA purchased823,593 shares of its common stock at a total cost of $0.8 million. This plancan be suspended by VIA at any time.  Inlight of the recent rise in the trading price of our common stock, weanticipate that further substantial repurchases under the program will belimited.

 

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

 

Since inception,we have financed our operations primarily through the sale of equitysecurities. We raised approximately $181.0 million in aggregate throughthree private preferred stock offerings between August 1997 andApril 1999. Through our initial public offering of common stock inFebruary 2000, we raised approximately $333.0 million, net ofunderwriting discounts and commissions. At June 30, 2003, we had cash and cashequivalents of $82.8 million and restricted cash of $0.9 million.

 

Cash used inoperating activities was $12.1 million****forthe six months ended June 30, 2003 and $20.0 million for the six months endedJune 30, 2002. Cash flows from operating activities can vary significantly fromperiod to period depending on the timing of operating cash receipts andpayments and other working capital changes, especially accounts receivable,other current assets, accounts payable, accrued expenses and other currentliabilities. In both periods, our net losses were the primary component of cashused in operating activities, offset by significant non-cash depreciation,amortization, provision for doubtful accounts receivable and unrealized foreigncurrency transaction gains and losses.

 

Cash used ininvesting activities was $1.9 million for the six months ended June 30, 2003and $3.0 million for the same period in 2002. In 2003, we used cash toprimarily purchase tangible fixed assets.

 

Cash used infinancing activities was $0.7 million for the six months ended June 30, 2003and $1.5 for the six months ended June 30, 2002. In 2003 cash was usedprimarily to purchase treasury stock and in 2002, cash was used primarily torepay capital lease obligations.

 

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

 

*ForeignCurrency Exchange Risks*

 

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

 

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

 

Transaction risks

 

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

 

Our local operationstransact business in their local currencies. They do not have significantassets, liabilities or other accounts denominated in currencies other thantheir local currency, and therefore are not subject to significant exchangerate risk with respect to their normal operations. Foreign currency exchangefluctuations currently have little or no impact on the price of our productsand our competitiveness in various markets primarily for two reasons.  First, the Company’s revenue stream issolely derived from the local operating subsidiaries. These subsidiariestransact with customers in the same country and the supporting agreements aredenominated in the same local currency. There are no significant cross bordercustomers served by VIA. Second, the local operating subsidiaries cost base isentirely denominated in the local functional currency. The majority ofunderlying

 

21

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agreements with backboneand bandwidth suppliers, and salary costs, which comprise the majority of ourexpenses, are also denominated in the same currency as the local revenuestream.

 

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

 

When required theparent company funds the local operating subsidiaries in their functionalcurrency supported with a corresponding intercompany receivable denominated inthe local operating subsidiary’s functional currency. In addition, intercompanycharges between corporate and the local operating subsidiaries are transactedin the functional currency of the operating entity. Thus, the parent company’sintercompany balances are held in the operating subsidiaries local functionalcurrency and consequently are revalued on a monthly basis. The resultantforeign exchange gain or loss is reflected in the consolidated statements ofoperations as “Foreign currency gains (losses), net.”

 

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

 

The fluctuation inthe exchange rates resulted in a foreign currency gain reflected in theconsolidated statements of operations as “Foreign currency gains (losses), net”of $4.7 million and $7.3 million for the three and six months ended June30, 2003.

 

Translation risks

 

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

 

The fluctuation inthe exchange rates resulted in a foreign currency gain reflected as a componentof accumulated other comprehensive loss in stockholders’ equity, net of$3.6 million and $5.4 million for the three and six months ended June 30,2003.

 

Exchange rates canvary significantly. The Euro high and low rates varied by approximately 7% and15% in relation to the U.S. dollar during the three and six months ended June30, 2003. This variation affects the average exchange rates used to translatethe income statements of our operating companies whose functional currency isnot U.S. dollars. At June 30, 2003, the Euro exchange rate was approximately 9%above where it was at the beginning of the year. This variation affects the endingexchange rates used to translate amounts on the balance sheet of our operatingcompanies whose functional currency is not U.S. dollars. Future changes in thevalue of the Euro could have a material impact on our financial position andresults of operations. We also experienced fluctuations in other exchangerates.

 

Hedging againstforeign exchange risks

 

We do not activelymanage our exposure to foreign currency translation risks that affect ourreported results, which result in no cash impact unless the operation issold.  We have in the past consideredinsurance and financial risk products to manage this risk, but determined suchproducts to be prohibitively expensive. We currently have no hedgingarrangements or derivatives in place to address this form of translation risk.

 

The parent companymaintains a Euro cash balance to meet the working capital requirements of thesix local operating subsidiaries with a Euro functional currency. The parentcompany maintains its remaining cash resources in U.S. dollars.

 

**Item 3****.Quantitative and Qualitative Disclosures About Market Risk**

 

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

 

VIA has exposureto financial market risks, including changes in interest rates and foreignexchange rates. At June 30, 2003 VIA’s financial instruments consisted ofshort-term investments. VIA's investments are fixed rate short-term investmentgrade and government securities denominated in U.S. dollars. At June 30, 2003all of VIA's investments were due to mature within three months and thecarrying value of such investments approximates fair value.

 

22

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

 

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

 

A full discussionof VIA’s exposure to foreign currency exchange risks is provided in the“Foreign Currency Exchange Risks” section above.

 

23

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**Item 4****.Controls and Procedures**

 

The Company andthe audit committee of the board of directors has engaged in regularevaluations of our internal controls, as well as the processes we maintain toensure that all material information relating to VIA and its subsidiaries isrecorded, processed, summarized, evaluated and reported within the time periodsspecified by rules established by the Securities and Exchange Commission. Theselatter processes are known as Disclosure Controls and Procedures. DisclosureControls and Procedures are also designed to ensure that all such informationis communicated to VIA’s management, including our CEO and CFO, in such amanner as to allow timely decisions to be made regarding required disclosures.

 

We engaged in anevaluation, with the oversight of our CEO and CFO, of the effectiveness of ourDisclosure Controls and Procedures as of June 30, 2003. In designing andevaluating the Disclosure Controls and Procedures, our management necessarilywas required to apply its judgment in evaluating the costs and benefits ofpossible controls and procedures. In addition, we recognize that DisclosureControls and Procedures by their nature can provide only reasonable assurancethat our information flow objectives are met. As disclosed in previous periodicfilings, material weaknesses in the internal control environment wereidentified. Management implemented a series of mitigating controls andprocedures that fully addressed these material weaknesses. These procedurescurrently include additional and enhanced manual processes, procedures andcontrols including expanded analytical procedures and increased frequency andbreadth of management inquiries.  Uponthe completion of that evaluation, our CEO and CFO concluded that ourDisclosure Controls and Procedures were effective in all material respects.

 

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

 

We believe thatthese procedures enable us to present our financial results fairly in allmaterial respects, as required by U.S. generally accepted accountingprinciples.

 

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**PART II**

 

**Item1.  LegalProceedings**

 

OnNovember 5, 2001 a class action lawsuit was filed in the District Courtfor the Southern District of New York against VIA NET.WORKS, Inc., certainof the underwriters who supported its initial public offering (“IPO”) andcertain of its officers, under the title O’Leary v. Via Net.works [sic], et al[01-CV-9720] (the “Complaint”). An amended complaint was filed inApril 2002. The Complaint alleges that the prospectus the Company filedwith its registration statement in connection with its IPO was materially falseand misleading because it failed to disclose, among other things, that:(i) the named underwriters had solicited and received excessive andundisclosed commissions from certain investors in exchange for the right topurchase large blocks of VIA IPO shares; and (ii) the named Underwritershad entered into agreements with certain of their customers to allocate VIA IPOshares in exchange for which the customers agreed to purchase additional VIAshares in the aftermarket at pre-determined prices (“Tie-in Arrangements”), therebyartificially inflating the Company’s stock price. The Complaint further allegesviolations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 andSection 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5promulgated thereunder 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. This Complaint is one of over300 similar suits filed to date against underwriters, issuers and theirofficers alleging similar activities, known as “laddering,” all of which areincluded in a single coordinated proceeding in the Southern District of New York,or the IPO Litigation.

 

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

 

On June 30, 2003,the special litigation committee of the board of directors of the Companyconditionally approved the global settlement between all plaintiffs and issuersin the IPO Litigations, the Company is in the process of completing asettlement with the plaintiffs in the case. The settlement would provide, among other things, a release of theCompany and of the individual defendants for the conduct alleged in the actionto be wrongful by the plaintiffs. Under the proposed settlement, the Companywould agree to undertake other responsibilities under the partial settlement,including agreeing to assign away, not assert, or release certain potentialclaims the Company may have against its underwriters.  Any direct financial impact of the proposed settlement isexpected to be borne by the Company’s insurers.   The special litigation committee agreed to approve thesettlement subject to a number of conditions, including the participation of asubstantial number of other defendants in the proposed settlement, the consentof the Company’s insurers to the settlement, and the completion of acceptablefinal settlement documentation. Furthermore, the settlement is subject to a hearing on fairness andapproval by the Court overseeing the IPO Litigations.

 

**Item2.  Changes in Securities and Use ofProceeds**

 

Changes in Securities:None.

 

**Use ofInitial Public Offering Proceeds**

 

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

 

The net offeringproceeds to VIA after deducting the expenses and underwriting discounts andcommissions was approximately $333.0 million. The principal cash outflowsfrom the effective date of the initial public offering through June 30, 2003are as follows, VIA has used approximately $87 million for acquisitions ofother businesses, including the repayment of debt for 1999 acquisitions andincreases in VIA’s investment in various partially owned subsidiaries,approximately $49 million for capital expenditures and approximately$120 million to fund operating losses.

 

25

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**Item3.  Defaults Upon Senior Securities**

 

None.

 

**Item4.  Submissionof Matters to a Vote of Security Holders**

 

OnMay 22, 2003 the Annual Meeting of Shareholders was held at the Company’soffices located in Reading, United Kingdom beginning at 10:00 a.m. GMT.  At the annual meeting, shareholdersconsidered and approved the election of Class III directors to the board ofdirectors, by the number of votes indicated below:

 
| **DIRECTOR**       |   | **VOTES FOR** |   | **WITHHELD** |   |
|--------------------|--------|---------------|--------|--------------|--------|
|               |   |          |   |         |   |
| Steven C. Halstedt |   | 43,875,159    |   | 491,532      |   |
| John C. Steele     |   | 43,973,359    |   | 393,332      |   |

 

In addition, shareholdersconsidered and approved three proposed amendments to the Company’s Amended andRestated Certificate of Incorporation to effect a reverse split of theCompany’s issued and outstanding common stock, as indicated below.  Shareholders authorized the Board ofDirectors to implement, at their discretion and without any further shareholderapproval, any one of the approved amendments.

 

| **RATIO OF SPLIT** |   | **AFFIRMATIVE** |   | **AGAINST** |   | **ABSTAIN** |   |
|--------------------|--------|-----------------|--------|-------------|--------|-------------|--------|
| 1-to-5             |   | 44,205,598      |   | 160,456     |   | 637         |   |
| 1-to-7             |   | 44,087,648      |   | 278,406     |   | 637         |   |
| 1-to-10            |   | 44,091,548      |   | 272,506     |   | 2,637       |   |

 

**Item5.  OtherInformation**

 

None.

 

**Item6.  Exhibitsand Reports on Form 8-K**

 

**a)Exhibits**

 
| **Exhibits** |   |                                                                                                                                                 |
|--------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit 10.1 |   | Master Services Agreement between Dimension Data  Network Services Limited and VIA NET.WORKS Europe Holding B.V. effective as  of May 13, 2003. |
| Exhibit 10.2 |   | Software License Agreement between Inovaware  Corporation and VIA NET.WORKS, Inc. effective as of May 14, 2003.                                 |
| Exhibit 31.1 |   | Section 302 Certification - Chief Executive Officer                                                                                                  |
| Exhibit 31.2 |   | Section 302  Certification - Chief Financial Officer                                                                                                 |
| Exhibit 32   |   | Written  Statement of Chief Executive Officer and Chief Financial Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002            |
| Exhibit 99.1 |   | Risk Factors                                                                                                                                         |
|         |   |                                                                                                                                                 |

 

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

 

VIA filed threereports on Form 8-K during the three months ended June 30, 2003. On May13, 2003, VIA filed a report on Form 8-K announcing the adoption of anautomated trading program. On May 13, 2003, VIA filed a report on Form 8-Kto announce its first quarter 2003 results. On June 24, 2003, VIA filed areport on Form 8-K announcing receipt of a Nasdaq Staff Determination onContinued Listing.

 

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**SIGNATURES**

 

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

 
|                  | VIA NET.WORKS, INC. |
|-----------------------|---------------------|
|                  |                |
|                  |                |
|                  | By:                 | /s/ Rhett S. Williams |
|                  |                | *Chief  Executive Officer (Principal Executive Officer)  and Director* |
| Date: August 14, 2003 |                |   |
|                  |                |   |
|                  | By:                 | /s/ Fraser R. Park |
| Date: August 14, 2003 |                | *Vice  President, Chief Financial Officer and Treasurer  (Principal Financial and Accounting Officer)* |

 

27

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**EXHIBIT INDEX**

 
| **Exhibit** |   |                                                                                                                                                 |
|-------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1        |   | Master Services Agreement between Dimension Data  Network Services Limited and VIA NET.WORKS Europe Holding B.V. effective as  of May 13, 2003. |
| 10.2        |   | Software License Agreement between Inovaware  Corporation and VIA NET.WORKS, INC. effective as of May 14, 2003.                                 |
| 31.1        |   | Section 302  Certification - Chief Executive Officer                                                                                                 |
| 31.2        |   | Section 302  Certification - Chief Financial Officer                                                                                                 |
| 32          |   | Written Statement of  Chief Executive Officer and Chief Financial Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002            |
| 99.1        |   | Risk Factors                                                                                                                                         |

 

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