**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

| **ý**                            |   | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------|--------|----------------------------------------------------------------------------------------------------|
|                                  |   |                                                                                               |
|                                  |   | **FOR THE QUARTERLY PERIOD ENDED  JUNE 30, 2004**                                             |
|                                  |   |                                                                                               |
| **OR**                                |
|                                  |   |                                                                                               |
| **o**                                 |   | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                  |   |                                                                                               |
| **Commission file number: 000-29391** |

 

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| **VIA NET.WORKS, INC.**                                                   |
|--------------------------------------------------------------------------------|
| (Exact name  of registrant as specified in its charter)                        |
|                                                                           |   |   |
| **Delaware**                                                                   |   | **84-1412512** |
| (State or  other jurisdiction)                                                 |   | (I.R.S. Employer  Identification No.) |
|                                                                           |   |   |
| **H. Walaardt Sacrestraat 401-403**                                            |
| **1117 BM Schiphol**                                                           |
| **The Netherlands**                                                            |
| (Address of  principal executive offices)                                      |
|                                                                           |   |   |
| Registrant’s  telephone number, including area code: **+31  20 502 0000** |
|                                                                           |   |   |
| (Former name  or former address, if changed since last report)                 |

 

Indicate by check mark whether theregistrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such report) and (2) has been subject to such filingrequirements for the past 90 days. Yes ý  No o

 

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

 

As of August 2, 2004, there wereoutstanding 56,053,988 shares of the registrant’s common stock and 5,050,000shares of the registrant’s non-voting common stock.

 

 

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**VIA NET.WORKS, INC.**

 

**TABLE OF CONTENTS**

 
|                           | **Page**                                                                                                        |
|--------------------------------|-----------------------------------------------------------------------------------------------------------------|
| PART  I. FINANCIAL INFORMATION | 3                                                                                                               |
| Item 1.                        | Financial Statements:                                                                                           | 3 |
|                           | Condensed Consolidated Balance Sheets as of  December 31, 2003 and June 30, 2004                      | 3 |
|                           | Condensed Consolidated Statements of Operations  for the three and six months ended June 30, 2003 and 2004 | 4 |
|                           | Condensed Consolidated Statements of Cash  Flows for the six months ended June 30, 2003 and 2004           | 5 |
|                           | Notes to Condensed Consolidated Financial  Statements                                                           | 6 |
| Item 2.                        | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                     | 13 |
| Item 3.                        | Quantitative and Qualitative Disclosures  About Market Risk                                                     | 23 |
| Item 4.                        | Controls and Procedures                                                                                         | 24 |
| PART  II. OTHER INFORMATION    | 25                                                                                                              |
| Item 1.                        | Legal Proceedings                                                                                               | 25 |
| Item 2.                        | Changes in Securities and Use of Proceeds                                                                       | 25 |
| Item 3.                        | Defaults Upon Senior Securities                                                                                 | 25 |
| Item 4.                        | Submission of Matters to a Vote of Security  Holders                                                            | 25 |
| Item 5.                        | Other Information                                                                                               | 25 |
| Item 6.                        | Exhibits and Reports on Form 8-K                                                                                | 25 |
| SIGNATURES                     | 26                                                                                                              |
| EXHIBIT INDEX                  | 27                                                                                                              |

 

2

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**PART I**

 

**ITEM 1.FINANCIAL STATEMENTS**

 

**VIANET.WORKS, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

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

 
|                                                                                                                  |   | **December 31, 2003** |    | **June 30,  2004** |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|----------------------------|---------|-------------------------|--------|
|                                                                                                                  |   |                       |    | **(Unaudited)**         |   |
| **ASSETS**                                                                                                            |   |                       |    |                    |   |
| Current  assets:                                                                                                      |   |                       |    |                    |   |
| Cash and  cash equivalents                                                                                            |   | $                          | 65,803  |                    | $      | 42,291 |   |
| Restricted  cash                                                                                                      |   | 1,391                      |    | 1,409                   |   |
| Trade and  other accounts receivable, net of allowance of $1,911 and $2,879 respectively                              |   | 14,295                     |    | 13,868                  |   |
| Other  current assets                                                                                                 |   | 4,542                      |    | 6,157                   |   |
| Deferred tax  assets                                                                                                  |   | —                     |    | 1,637                   |   |
| Total  current assets                                                                                                 |   | 86,031                     |    | 65,362                  |   |
| Property and  equipment, net                                                                                          |   | 12,003                     |    | 12,455                  |   |
| Goodwill                                                                                                              |   | 3,111                      |    | 14,154                  |   |
| Intangible  assets, net                                                                                               |   | 731                        |    | 4,420                   |   |
| Other  non-current assets                                                                                             |   | 884                        |    | 1,224                   |   |
| Deferred tax  asset                                                                                                   |   | 7,928                      |    | 7,928                   |   |
| Total assets                                                                                                          |   | $                          | 110,688 |                    | $      | 105,543 |   |
|                                                                                                                  |   |                       |    |                    |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                         |   |                       |    |                    |   |
| Current  liabilities:                                                                                                 |   |                       |    |                    |   |
| Accounts  payable                                                                                                     |   | $                          | 10,021  |                    | $      | 11,997 |   |
| VAT and other  taxes payable                                                                                          |   | 1,303                      |    | 1,952                   |   |
| Current  portion of capital lease obligations and long-term payables                                                  |   | 173                        |    | 426                     |   |
| Deferred  revenue                                                                                                     |   | 13,264                     |    | 18,636                  |   |
| Accrued  expenses                                                                                                     |   | 7,659                      |    | 8,950                   |   |
| Deferred tax  liability                                                                                               |   | 7,928                      |    | 7,928                   |   |
| Other  current liabilities                                                                                            |   | 1,848                      |    | 3,083                   |   |
| Total  current liabilities                                                                                            |   | 42,196                     |    | 52,972                  |   |
| Capital  lease obligations and long-term payables, less current portion                                               |   | 328                        |    | 228                     |   |
| Deferred tax  liability                                                                                               |   | —                     |    | 1,142                   |   |
|                                                                                                                  |   |                       |    |                    |   |
| Total  liabilities                                                                                                    |   | 42,524                     |    | 54,342                  |   |
|                                                                                                                  |   |                       |    |                    |   |
| Commitments and  contingencies (Note 11)                                                                              |   |                       |    |                    |   |
|                                                                                                                  |   |                       |    |                    |   |
| Stockholders’  equity:                                                                                           |   |                       |    |                    |   |
| Preferred  stock, $.001 par value; 10,000,000 shares authorized; no shares issued and  outstanding                    |   | —                     |    | —                  |   |
| Common  stock, $.001 par value; 132,500,000 shares authorized; 61,507,694 and  62,624,777 shares issued, respectively |   | 62                         |    | 63                      |   |
| Additional  paid-in capital                                                                                           |   | 556,112                    |    | 557,909                 |   |
| Treasury  stock, 1,520,789 shares                                                                                     |   | (1,521                     | )       | (1,521                  | )      |
| Accumulated  deficit                                                                                                  |   | (452,154                   | )       | (473,448                | )      |
| Accumulated  other comprehensive loss                                                                                 |   | (34,335                    | )       | (31,802                 | )      |
| Total  stockholders’ equity                                                                                      |   | 68,164                     |    | 51,201                  |   |
| Total  liabilities and stockholders’ equity                                                                      |   | $                          | 110,688 |                    | $      | 105,543 |   |

 

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

 

3

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**VIA NET.WORKS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

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

**(Unaudited)**

 
|                                                       |   | **For the three months ended June 30,** |   | **For the six months ended June 30,** |   |
|------------------------------------------------------------|--------|----------------------------------------------|--------|--------------------------------------------|--------|
|                                                       |   | **2003**                                     |   | **2004**                                   |   | **2003** |   | **2004** |   |
| Revenue                                                    |   | $                                            | 16,612 |                                       | $      | 18,256 |   | $ | 34,378 |   | $ | 36,474 |   |
|                                                       |   |                                         |   |                                       |   |   |   |   |   |
| Operating  costs and expenses:                             |   |                                         |   |                                       |   |   |   |   |   |
| Internet  services                                         |   | 7,829                                        |   | 8,842                                      |   | 16,349 |   | 17,589 |   |
| Selling,  general and administrative                       |   | 15,713                                       |   | 17,477                                     |   | 30,410 |   | 34,589 |   |
| Impairment and  restructuring charges                      |   | 1,415                                        |   | 483                                        |   | 2,282 |   | 783 |   |
| Depreciation  and amortization                             |   | 1,799                                        |   | 2,284                                      |   | 3,848 |   | 4,718 |   |
| Total  operating costs and expenses                        |   | 26,756                                       |   | 29,086                                     |   | 52,889 |   | 57,679 |   |
| Operating  loss from continuing operations                 |   | (10,144                                      | )      | (10,830                                    | )      | (18,511 | ) | (21,205 | ) |
| Interest  income                                           |   | 290                                          |   | 183                                        |   | 719 |   | 291 |   |
| Interest  expense                                          |   | (3                                           | )      | —                                     |   | (7 | ) | (18 | ) |
| Other  (expense) income, net                               |   | (96                                          | )      | (203                                       | )      | (144 | ) | 3,576 |   |
| Foreign  currency gains (losses), net                      |   | 4,711                                        |   | (554                                       | )      | 7,260 |   | (3,881 | ) |
| Loss from  continuing operations before income taxes       |   | (5,242                                       | )      | (11,404                                    | )      | (10,683 | ) | (21,237 | ) |
| Income tax  expense                                        |   | —                                       |   | (73                                        | )      | — |   | (57 | ) |
| Net loss  from continuing operations                       |   | (5,242                                       | )      | (11,477                                    | )      | (10,683 | ) | (21,294 | ) |
|                                                       |   |                                         |   |                                       |   |   |   |   |   |
| Discontinued  operations:                                  |   |                                         |   |                                       |   |   |   |   |   |
| Loss from  discontinued operations                         |   | (471                                         | )      | —                                     |   | (505 | ) | — |   |
| Net loss                                                   |   | $                                            | (5,713 | )                                          | $      | (11,477 | ) | $ | (11,188 | ) | $ | (21,294 | ) |
|                                                       |   |                                         |   |                                       |   |   |   |   |   |
| Basic and  diluted loss per share:                         |   |                                         |   |                                       |   |   |   |   |   |
| Continuing  operations                                     |   | $                                            | (0.09  | )                                          | $      | (0.19 | ) | $ | (0.18 | ) | $ | (0.35 | ) |
| Discontinued  operations                                   |   | (0.01                                        | )      | —                                     |   | (0.01 | ) | — |   |
| Net loss per  share—basic and diluted                 |   | $                                            | (0.10  | )                                          | $      | (0.19 | ) | $ | (0.19 | ) | $ | (0.35 | ) |
|                                                       |   |                                         |   |                                       |   |   |   |   |   |
| Shares used  in computing basic and diluted loss per share |   | 60,051,373                                   |   | 61,076,502                                 |   | 60,099,272 |   | 60,860,462 |   |

 

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

 

4

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**VIA NET.WORKS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

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

**(Unaudited)**

 
|                                                                                                     |   | **For the six months ended  June 30,** |    |
|----------------------------------------------------------------------------------------------------------|--------|---------------------------------------------|---------|
|                                                                                                     |   | **2003**                                    |    | **2004** |   |
| Cash flows  from operating activities:                                                                   |   |                                        |    |   |   |
| Net loss  from continuing operations                                                                     |   | $                                           | (10,683 | ) | $ | (21,294 | ) |
| Adjustments  to reconcile net loss from continuing operations to net cash used in  operating activities: |   |                                        |    |   |   |
| Depreciation  and amortization                                                                           |   | 3,848                                       |    | 4,718 |   |
| Impairment  charges                                                                                      |   | 134                                         |    | — |   |
| Provision  for doubtful accounts receivable                                                              |   | 633                                         |    | 563 |   |
| Unrealized  foreign currency transaction (gains) losses                                                  |   | (5,850                                      | )       | 2,867 |   |
| Deferred tax                                                                                             |   | —                                      |    | (319 | ) |
| Stock  compensation                                                                                      |   | —                                      |    | 80 |   |
| Changes in  assets and liabilities, net of acquisitions:                                                 |   |                                        |    |   |   |
| Trade  accounts receivable                                                                               |   | 717                                         |    | (2,235 | ) |
| Other  current assets                                                                                    |   | (1,989                                      | )       | 941 |   |
| Other  non-current assets                                                                                |   | 14                                          |    | 35 |   |
| Accounts  payable                                                                                        |   | 4,013                                       |    | 595 |   |
| VAT and  other taxes payable                                                                             |   | (819                                        | )       | 274 |   |
| Accrued  expenses                                                                                        |   | (1,276                                      | )       | 191 |   |
| Other  current liabilities                                                                               |   | (193                                        | )       | 1,134 |   |
| Deferred  revenue                                                                                        |   | (651                                        | )       | 529 |   |
| Net cash  used in operating activities                                                                   |   | (12,102                                     | )       | (11,921 | ) |
| Cash flows  from investing activities:                                                                   |   |                                        |    |   |   |
| Increase in  restricted cash                                                                             |   | (45                                         | )       | (58 | ) |
| Acquisition  of subsidiaries (net of cash acquired)                                                      |   | —                                      |    | (7,976 | ) |
| Purchases of  property, equipment and other assets                                                       |   | (1,874                                      | )       | (3,712 | ) |
| Net cash  used in investing activities                                                                   |   | (1,919                                      | )       | (11,746 | ) |
| Cash flows  from financing activities:                                                                   |   |                                        |    |   |   |
| Repayment of  debt and principal payments on capital lease obligations                                   |   | (84                                         | )       | (119 | ) |
| Purchase of  treasury stock                                                                              |   | (788                                        | )       | — |   |
| Proceeds  from issuance of common stock, net                                                             |   | 133                                         |    | 369 |   |
| Net cash  (used in) received from financing activities                                                   |   | (739                                        | )       | 250 |   |
| Cash flows used  by discontinued operations                                                              |   | (30                                         | )       | — |   |
| Effect of  currency exchange rate changes on cash                                                        |   | (204                                        | )       | (95 | ) |
| Net decrease  in cash and cash equivalents                                                               |   | (14,994                                     | )       | (23,512 | ) |
| Cash and  cash equivalents, beginning of period                                                          |   | 97,813                                      |    | 65,803 |   |
| Cash and  cash equivalents, end of period                                                                |   | $                                           | 82,819  |   | $ | 42,291 |   |

 

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

 

5

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**VIA NET.WORKS, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**(Unaudited)**

 

**1.****                                      Basisof Presentation and Recent Pronouncements**

 

These condensedconsolidated financial statements as of June 30, 2004 and for the threeand six month periods ended June 30, 2003 and 2004 and the relatedfootnote information are unaudited and have been prepared on a basissubstantially consistent with the audited consolidated financial statements ofVIA NET.WORKS, Inc. (“VIA” or “the Company”) as of and for the year endedDecember 31, 2003, included in VIA’s Annual Report on Form 10-K asfiled with the Securities and Exchange Commission (“2003 Annual Report”). Thesecondensed consolidated financial statements should be read in conjunction withthe audited consolidated financial statements and the related notes to thefinancial statements included in the 2003 Annual Report. In the opinion ofmanagement, the accompanying unaudited condensed consolidated financialstatements contain all adjustments (consisting of normal recurring adjustments)that management considers necessary to present fairly the consolidatedfinancial position of VIA at June 30, 2004 and the results of itsoperations and its cash flows for the three and six month periods endedJune 30, 2003 and 2004. The results of operations for the three and sixmonth periods ended June 30, 2004 may not be indicative of the resultsexpected for any succeeding quarter or for the year ending December 31,2004.

 

The preparation of financial statements inconformity with generally accepted accounting principles requires VIA to makeestimates and assumptions that affect the reported amounts of assets,liabilities, revenue and expenses, together with amounts disclosed in therelated notes to the consolidated financial statements. Actual results coulddiffer from the recorded estimates.

 

**2.****                                      DiscontinuedOperations**

 

In July 2003 VIA NET.WORKS Italia, whichhad been included in the European segment, was sold for nominal considerationto the then-current management team. VIA also sold its operations in Brazil andMexico in 2002, but because of the method by which these transactions werestructured, these operations were not treated as discontinued operations in2002 but rather classified as businesses transferred under contractualagreements. The Company eliminated all continuing involvement in theseoperations in 2003 and both are now treated as discontinued operations for allperiods presented. See note 2 of the financial statements included in the 2003Annual Report for further details.

 

As each of the Italian, Brazilian and Mexicanoperations represented a component of an entity as defined by SFAS 144, *“Accounting for the Impairment or Disposal ofLong-Lived Assets”*, the Company has classified each operation as adiscontinued operation for all periods presented. Revenues related to discontinuedoperations were approximately $0.3 million and $0.6 million for thethree and six months ended June 30, 2003 respectively, and nil for thethree and six months ended June 30, 2004. The pre-tax loss, excludingaccounting for the sale transaction, related to discontinued operations wasapproximately $0.5 million and $0.5 million for the three and six months endedJune 30, 2003 respectively, and nil for the three and six months endedJune 30 2004.

 

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

 

*Impairment charges:*

 

There were no impairment charges for thethree and six months ended June 30, 2004. During the first quarter of2003, the Company recorded fixed asset impairment charges of $0.1 million forfixed asset fixtures and fittings that were written down to net realizablevalue as a result of the closure of the Reston office.

 

6

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*Restructuring charges:*

 
| **In  thousands of U.S. dollars**  |   | **Employee  termination  payments** |   | **Future  operating  lease obligations** |   | **Other** |   | **Total  Restructuring  Charges** |   |
|------------------------------------|--------|-------------------------------------|--------|------------------------------------------|--------|-----------|--------|-----------------------------------|--------|
| Balance at  December 31, 2002 |   | $                                   | 415    |                                     | $      | 456       |   | $                                 | — |   | $ | 871 |   |
| Additions                          |   | 676                                 |   | 57                                       |   | —    |   | 733                               |   |
| Reserves  utilized                 |   | (610                                | )      | (73                                      | )      | —    |   | (683                              | )      |
| Balance at  March 31, 2003    |   | $                                   | 481    |                                     | $      | 440       |   | $                                 | — |   | $ | 921 |   |
| Additions                          |   | 883                                 |   | 92                                       |   | 440       |   | 1,415                             |   |
| Reserves  utilized                 |   | (901                                | )      | (66                                      | )      | (99       | )      | (1,066                            | )      |
| Foreign  exchange                  |   | 10                                  |   | —                                   |   | —    |   | 10                                |   |
| Balance at  June 30, 2003     |   | $                                   | 473    |                                     | $      | 466       |   | $                                 | 341    |   | $ | 1,280 |   |

 
| **In  thousands of U.S. dollars**  |   | **Employee  termination  payments** |   | **Future  operating  lease obligations** |   | **Other** |   | **Total  Restructuring  Charges** |   |
|------------------------------------|--------|-------------------------------------|--------|------------------------------------------|--------|-----------|--------|-----------------------------------|--------|
| Balance at  December 31, 2003 |   | $                                   | 285    |                                     | $      | 276       |   | $                                 | 121    |   | $ | 682 |   |
| Additions                          |   | 151                                 |   | —                                   |   | 149       |   | 300                               |   |
| Reserves  utilized                 |   | (217                                | )      | (41                                      | )      | (114      | )      | (372                              | )      |
| Foreign  exchange                  |   | 1                                   |   | —                                   |   | —    |   | 1                                 |   |
| Balance at  March 31, 2004    |   | $                                   | 220    |                                     | $      | 235       |   | $                                 | 156    |   | $ | 611 |   |
| Additions                          |   | 361                                 |   | —                                   |   | 122       |   | 483                               |   |
| Reserves  utilized                 |   | (570                                | )      | (83                                      | )      | (253      | )      | (906                              | )      |
| Balance at  June 30, 2004     |   | $                                   | 11     |                                     | $      | 152       |   | $                                 | 25     |   | $ | 188 |   |

 

2003

 

Duringthe three and six months ended June 30, 2003, the Company recordedrestructuring charges related to the implementation of its strategic plan of$1.4 million and $2.1 million respectively. The restructuring charge for the three months ended March 31, 2003related to severance payments at four of its European operations and anadjustment to the future lease obligations for the closure of the Reston,Virginia office. The restructuring charge for the three months endedJune 30, 2003 related to severance payments at six of its Europeanoperations and at the corporate headquarters, future lease obligations onvacant office space in Germany, and implementation costs for back-office andadministrative outsourcing initiatives.

 

Theemployee termination costs incurred in the first quarter of $0.7 million relateto the severance and benefits for twenty-seven employees at four Europeanoperations. Cash payments of $0.6 million were made in the quarter ($0.3million by European operations and $0.3 million by Corporate). The employeetermination costs incurred in the three months ended June 30, 2003 of $0.9million include $0.7 million in severance and benefits for twenty-eight,predominately sales staff, at six European operations. Cash payments of $0.7million were made in the period in respect of these accruals. In additionemployee termination costs of $0.2 million were incurred at the corporateheadquarters in respect of severance and benefits for two employees. Thisentire amount was paid in the three months ended June 30, 2003.

 

The future operatinglease obligations balance at March 31, 2003 of $0.4 million related to theReston office. The accrual was drawn down by the monthly payments on the officelease, which continues through February 2005, less the income from asublease of the space. The future operating lease cost for the three monthsended June 30, 2003 of $0.1 million related to the fair value of thefuture lease obligations on vacant office space in Germany, which continuedthrough December 31, 2003.

 

Other charges of $0.4million incurred in the three months ended June 30, 2003 related to the implementationcosts for back-office and administrative outsourcing initiatives. Cash paymentsof $0.1 million were made in the quarter.

 

2004

 

TheCompany recorded restructuring charges of $0.5 million and $0.8 million duringthe three and six months ended June 30, 2004 respectively. Therestructuring charge for the three months ended March 31, 2004 related toseverance payments at the corporate headquarters and transition implementationcosts for back-office and administrative outsourcing initiatives. The restructuringcharge for the three months ended June 30, 2004 related to severancepayments at the United Kingdom operation and corporate headquarters, andtransition implementation costs for back-office and administrative outsourcinginitiatives.

 

Theemployee termination costs of $0.2 million for the three months endedMarch 31, 2004 relate to five employees in finance at the corporateheadquarters. Cash payments for severance and benefits of $0.2 million weremade in the first quarter of 2004 by the European operations ($0.1 million) andCorporate ($0.1 million). The employee termination costs of $0.4 million forthe three months ended June 30, 2004 relate to twenty-nine employees inthe United Kingdom and three employees at corporate headquarters. Cash paymentsof $0.6 million were made in the quarter in respect of the March 31, 2004accrual and costs incurred in the period. The remaining accrual of $11,000 atJune 30, 2004 relates to three employees in the United Kingdom.

 

7

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The accrual for future operating leaseobligations, relating mainly to the Reston office, has been drawn down by themonthly payments on the office lease, which continues throughFebruary 2005, less the income from a sublease of the space. Other chargesincurred in the three and six months ended June 30, 2004 related to theimplementation costs for back-office and administrative outsourcinginitiatives.

 

Certain of the actionsVIA might take as part of its strategic plan may lead to additional impairmentor restructuring charges in future periods and such amounts may be material.

 

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

 

In January 2004, the Company purchased100% of the issued and outstanding shares of Amen SAS, Amen Srl and AmenLimited (collectively “Amen”), a European web-hosting company based in Paris,France. Amen has operations in France, the United Kingdom, Spain and Italy. TheCompany acquired Amen to strengthen its Europe segment and benefit from Amen’soperating platform and service offerings. The Company paid $7.5 million incash and issued 673,652 shares of its common stock, which had a market value of$2 per share on the date of acquisition having a total value of approximately$1.3 million for Amen common stock. The former shareholders will have theopportunity to receive further consideration expected to be between$0.7—$1.8 million in cash and shares of the Company’s common stock, basedon the 2004 operating performance of Amen. The purchase considerationcalculated below includes $0.7 million of additional consideration, which iscurrently determinable. If any further amounts are paid to the formershareholders, this will result in a corresponding increase in the amount ofgoodwill recognized.

 

The purchase price allocation is as follows:

 
| **In thousands  of U.S. dollars**                    |   |   |   |
|------------------------------------------------------|--------|--------|--------|
| Goodwill (Europe segment)                            |   | $      | 11,393 |   |
| Intangible assets                                    |   | 4,445  |   |
| Other assets and liabilities                         |   | (5,006 | )      |
|                                                 |   |   |   |
| Purchase consideration, including  acquisition costs |   | $      | 10,832 |   |

 

The intangible assets are being amortizedover 3-10 years. The results of Amen have been included from January 28, 2004,the acquisition date. The allocation of purchase consideration was amended fromthe preliminary allocation as a result of additional acquisition costs ($0.2million). It is anticipated that the final allocation of the purchase pricewill not differ materially from this amended allocation.

 

The actual results of operations for thethree and six months ended June 30, 2004 did not differ materially fromthe pro forma results of operations computed under the assumption that theacquisition was consummated effective January 1, 2004.

 

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

 

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

 

**6.****                                      ComprehensiveLoss**

 

Comprehensive loss for the three and sixmonths ended June 30, 2003 and 2004 was as follows:

 
|                                                    |   | **Three months ended  June 30,** |   | **Six months ended  June 30,** |   |
|---------------------------------------------------------|--------|---------------------------------------|--------|-------------------------------------|--------|
| **In  thousands of U.S. dollars**                       |   | **2003**                              |   | **2004**                            |   | **2003** |   | **2004** |   |
| Net loss                                                |   | $                                     | (5,713 | )                                   | $      | (11,477 | ) | $ | (11,188 | ) | $ | (21,294 | ) |
| Foreign  currency translation adjustment (losses) gains |   | (3,589                                | )      | 607                                 |   | (5,375 | ) | 2,533 |   |
|                                                    |   |                                  |   |                                |   |   |   |   |   |
| Comprehensive  loss                                     |   | $                                     | (9,302 | )                                   | $      | (10,870 | ) | $ | (16,563 | ) | $ | (18,761 | ) |

 

8

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

 

Property and equipment consisted of thefollowing:

 
| **In  thousands of U.S. dollars** |   | **December 31, 2003** |   | **June 30, 2004** |   |
|-----------------------------------|--------|----------------------------|--------|------------------------|--------|
| Hardware and  other equipment     |   | $                          | 16,393 |                   | $      | 17,505 |   |
| Network and  data center assets   |   | 11,914                     |   | 13,612                 |   |
| Software                          |   | 14,471                     |   | 16,394                 |   |
| Furniture  and fixtures           |   | 1,105                      |   | 1,051                  |   |
|                              |   | 43,883                     |   | 48,562                 |   |
| Accumulated  depreciation         |   | (31,880                    | )      | (36,107                | )      |
| Property and  equipment, net      |   | $                          | 12,003 |                   | $      | 12,455 |   |

 

Depreciation expense was $1.8 millionfor the three months ended June 30, 2003 and 2004. Depreciation expensewas $3.8 million and $3.9 million for the six months endedJune 30, 2003 and 2004, respectively.

 

**8.****                                      Goodwill**

 

The changes in the carrying amount ofgoodwill during the three and six months ended June 30, 2004 are asfollows:

 
| **In  thousands of U.S. dollars**     |   | **Total** |   | **Europe** |   | **Americas** |   |
|---------------------------------------|--------|-----------|--------|------------|--------|--------------|--------|
| Balance as  of December 31, 2003 |   | $         | 3,111  |       | $      | 1,965        |   | $ | 1,146 |   |
| Acquisition  (see Note 4)             |   | 11,157    |   | 11,157     |   | —       |   |
| Foreign  exchange adjustment          |   | (284      | )      | (284       | )      | —       |   |
| Balance as  of March 31, 2004    |   | $         | 13,984 |       | $      | 12,838       |   | $ | 1,146 |   |
| Acquisition  (see Note 4)             |   | 236       |   | 236        |   | —       |   |
| Foreign  exchange adjustment          |   | (66       | )      | (66        | )      | —       |   |
| Balance as  of June 30, 2004     |   | $         | 14,154 |       | $      | 13,008       |   | $ | 1,146 |   |

 

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

 

Intangible assets consisted of the following:

 
| **In  thousands of U.S. dollars** |   | **December 31, 2003** |   | **June 30, 2004** |   |
|-----------------------------------|--------|----------------------------|--------|------------------------|--------|
| Customer  lists                   |   | $                          | 794    |                   | $      | 3,054 |   |
| Software                          |   | —                     |   | 1,934                  |   |
| Tradename                         |   | —                     |   | 242                    |   |
| Accumulated  amortization         |   | (63                        | )      | (810                   | )      |
| Intangible  assets, net           |   | $                          | 731    |                   | $      | 4,420 |   |

 

Amortization expense for the threemonths ended June 30, 2003 and 2004 was nil and $0.5 million, respectively.Amortization expense for the six months ended June 30, 2003 and 2004 wasnil and $0.8 million, respectively. See Note 4 for intangible asset additionsfrom the acquisition of Amen.

 

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

 

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.

 

9

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

 
|                                                                                                                           |   | **For the three months ended  June 30,** |   | **For the six months ended  June 30,** |   |
|--------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|--------|---------------------------------------------|--------|
| **In  thousands of U.S. dollars**                                                                                              |   | **2003**                                      |   | **2004**                                    |   | **2003** |   | **2004** |   |
| Net loss (as  reported)                                                                                                        |   | $                                             | (5,713 | )                                           | $      | (11,477 | ) | $ | (11,188 | ) | $ | (21,294 | ) |
| Add back:  Total stock-based employee compensation expense determined under intrinsic  value method                            |   | —                                        |   | —                                      |   | — |   | 80 |   |
| Deduct:  Total stock-based employee compensation expense determined under fair value  based method, net of related tax effects |   | (740                                          | )      | (509                                        | )      | (1,924 | ) | (1,118 | ) |
| Pro forma net loss                                                                                                             |   | $                                             | (6,453 | )                                           | $      | (11,986 | ) | $ | (13,112 | ) | $ | (22,332 | ) |
|                                                                                                                           |   |                                          |   |                                        |   |   |   |   |   |
| Net loss per  share, basic and diluted (as reported)                                                                           |   | $                                             | (0.10  | )                                           | $      | (0.19 | ) | $ | (0.19 | ) | $ | (0.35 | ) |
| Net loss per  share, basic and diluted (pro forma)                                                                             |   | $                                             | (0.11  | )                                           | $      | (0.20 | ) | $ | (0.22 | ) | $ | (0.37 | ) |

 

During the three months ended March 31,2004, a total of 37,500 shares of the Company’s common stock were issued to twodirectors pursuant to the Company’s director compensation program. The marketvalue of the stock as issued on the date of grant was $2.13 per share. Thiscost to the Company has been expensed in the condensed consolidated statementof operations for the six months ended June 30, 2004.

 

**11.****                               Contingencies**

 

*Legal Proceedings*

 

On November 5, 2001 a class actionlawsuit was filed in the District Court for the Southern District of New Yorkagainst VIA NET.WORKS, Inc., certain of the underwriters who supported itsinitial public offering (“IPO”) and certain of its officers, under the titleO’Leary v. Via Net.works [sic], et al [01-CV-9720] (the “Complaint”). Anamended complaint was filed in April 2002. The Complaint alleges that theprospectus the Company filed with its registration statement in connection withits IPO was materially false and misleading because it failed to disclose,among other things, that: (i) the named underwriters had solicited andreceived excessive and undisclosed commissions from certain investors inexchange for the right to purchase large blocks of VIA IPO shares; and(ii) the named Underwriters had entered into agreements with certain oftheir customers to allocate VIA IPO shares in exchange for which the customersagreed to purchase additional VIA shares in the aftermarket at pre-determinedprices (“Tie-in Arrangements”), thereby artificially inflating the Company’sstock price. The Complaint further alleges violations of Sections 11, 12(a)(2)and 15 of the Securities Act of 1933 and Section 10(b) of the SecuritiesExchange Act of 1934 and Rule 10b-5 promulgated thereunder arising out ofthe alleged failure to disclose and the alleged materially misleadingdisclosures made with respect to the commissions and the Tie-in Arrangements inthe prospectus. The plaintiffs in this action seek monetary damages in anunspecified amount. Approximately 300 other issuers and their underwriters havehad similar suits filed against them, all of which are included in a singlecoordinated proceeding in the Southern District of New York (the “IPOLitigation”).

 

On June 30, 2003, the special litigationcommittee of the board of directors of the Company conditionally approved theglobal settlement between all plaintiffs and issuers in the IPO Litigations;the Company is in the process of completing a settlement with the plaintiffs inthe 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 financialimpact of the proposed settlement is expected to be borne by the Company’s insurers.The special litigation committee agreed to approve the settlement subject to anumber of conditions, including the participation of a substantial number ofother defendants in the proposed settlement, the consent of the Company’sinsurers to the settlement, and the completion of acceptable final settlementdocumentation. Furthermore, the settlement is subject to a hearing on fairnessand approval by the Court overseeing the IPO Litigations. The Company continuesto progress toward settlement and awaits approval of settlement by all partiesinvolved.

 

*Guarantees*

 

From time to time, the Company enters intoindemnification agreements with certain contractual parties in the ordinarycourse of business, including agreements with lenders, lessors, serviceproviders and certain vendors. All such indemnification agreements are enteredinto in the context of the particular agreements and are provided in an attemptto properly allocate risk of loss in connection with the consummation of theunderlying contractual arrangements. Although the maximum amount of futurepayments that the Company could be required to make under these indemnificationagreements is unlimited, management believes that historically, costs incurredto settle claims related to these indemnifications have not been material tothe Company’s financial position, results of operations or cash flows and thatthis is the expectation for the future. Additionally, the fair value of theindemnifications that the Company issued during the three and six months endedJune 30, 2003 and 2004 was not material to the Company’s financialposition, results of operations or cash flows.

 

10

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*Other*

 

The Company is subject to claims and legalproceedings that arise in the ordinary course of its business operations. Eachof these matters is subject to various uncertainties, and it is possible thatsome of these matters may be decided unfavorably to the Company. The Companydoes not believe that any of these matters will have a material adverse affecton its business, assets or operations.

 

**12.****                               SegmentReporting**

 

VIA offers a variety of Internet access,managed bandwidth, web-hosting, Internet security and related services tobusinesses and consumers in Europe and the Americas. As of June 30, 2004,VIA served primary markets in nine countries. These country operations generateInternet-related revenues from leased lines, dial-up Internet access,web-hosting and design, Internet security and consulting services, and sales ofthird-party hardware and software. All of the European operating companies aregrouped into one reportable segment (Europe). The Company’s U.S operatingcompany is reported as Americas. The Company is reorganizing its salesoperations into two channels: VIA Express and Industry Solutions. As thechannels further develop over 2004, it is anticipated that the Company willbegin to manage its operations around these channels and will adapt its segmentreporting accordingly.

 

The Company evaluates the performance of itssegments based on revenue and operating loss. Corporate expenses, which alsoinclude the regional IRU companies, are shown to reconcile to the totalconsolidated figures. Total segment assets, as presented in the table below,are total assets net of intercompany funding amounts.

 

The table below presents the total assets byreportable segment as of June 30, 2003 and 2004. In addition, the tablepresents information about the reported revenue, operating loss from continuingactivities, and impairment and restructuring charges of the Company’s segmentsfor the three and six months ended June 30, 2003 and 2004.

 

11

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| **In  thousands of U.S. dollars**          |   | **Europe** |   | **Americas** |   | **Corporate** |   | **Total** |   |
|--------------------------------------------|--------|------------|--------|--------------|--------|---------------|--------|-----------|--------|
| Total assets  as of June 30, 2003     |   | $          | 37,211 |         | $      | 6,345         |   | $         | 88,205 |   | $ | 131,761 |   |
| Total assets  as of June 30, 2004     |   | $          | 50,365 |         | $      | 2,455         |   | $         | 52,723 |   | $ | 105,543 |   |
| 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   | )      |
| Impairment  and restructuring charges      |   | 775        |   | —       |   | 640           |   | 1,415     |   |
| Three months  ended June 30, 2004:    |   |       |   |         |   |          |   |      |   |
| Revenue                                    |   | $          | 17,308 |         | $      | 948           |   | $         | — |   | $ | 18,256 |   |
| Operating  loss from continuing operations |   | (3,001     | )      | (219         | )      | (7,610        | )      | (10,830   | )      |
| Impairment  and restructuring charges      |   | 288        |   | —       |   | 195           |   | 483       |   |
| 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   | )      |
| Impairment  and restructuring charges      |   | 1,451      |   | —       |   | 831           |   | 2,282     |   |
| Six months  ended June 30, 2004:      |   |       |   |         |   |          |   |      |   |
| Revenue                                    |   | $          | 34,611 |         | $      | 1,863         |   | $         | — |   | $ | 36,474 |   |
| Operating  loss from continuing operations |   | (5,232     | )      | (610         | )      | (15,363       | )      | (21,205   | )      |
| Impairment  and restructuring charges      |   | 288        |   | —       |   | 495           |   | 783       |   |

 

In the second and third quarters of 2003, VIAsold its operation in Italy previously reported in the Europe region andrecognized Brazil and Mexico as discontinued operations (see Note 2).

 

**13.****                               SubsequentEvents**

 

On August 9, 2004, VIA announced that itentered into definitive agreements with PSI Net Europe B.V. and affiliatedcompanies to acquire the PSINet Europe operations in Belgium, France, Germany,the Netherlands and Switzerland. These operations provide managed hosting,managed networks and monitored access services to more than 4,000 customers inmainland Europe. Under the terms of the deal, which is expected to close byAugust 19, 2004, VIA would pay total consideration for the shares andinter-company debt of the PSINet Europe companies as follows: Euro 10 millionin cash (approximately $12.2 million) at closing; Euro 2 million (approximately$2.5 million), subject to adjustments for any deficit in the agreed workingcapital balance, to be paid in the fourth quarter of 2004; Euro 6 million(approximately $7.4 million) in cash or, at the option of the sellers, 4.5million shares of VIA common stock, 15 months after closing, subject to anyfinal adjustments for warranty claims, if any.

 

12

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**ITEM. 2. MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussionand analysis should be read in conjunction with the condensed consolidatedfinancial statements and related notes included in Item 1 of thisForm 10-Q. This discussion contains forward-looking statements, orstatements that relate to future events or our future performance. Thesestatements include, but are not limited to those relating to the Company’sstrategic plan and business model change, projections regarding financialimpacts of the business model shift, new product roll-out, cost reductions ingeneral, statements relating to reductions in cash usage, and any acquisitionor disposition activities in which we engage, including the pending acquisitionof PSINet Europe continental operations. These statements are only predictionsor planned actions that are subject to a number of risks, uncertainties andother factors. Actual events or results may differ materially. Informationregarding the risks, uncertainties and other factors that could cause actualresults to differ from the results in these forward-looking statements arediscussed in the “Risk Factors” described in Exhibit 99.1 on thisForm 10-Q, as well as those described in the “Risk Factors”section of VIA’s 2003 Annual Report. You are urged to carefully considerthese factors, as well as other information contained in this Form 10-Qand in our other periodic reports and documents filed with the Securities andExchange Commission.

 

**Overview**

** **

We are a provider of Internet-protocol (IP)based business communication solutions to small- and medium-sized enterprises,or SMEs, in Europe and the United States. We have operations in France,Germany, Italy, the Netherlands, Portugal, Spain, Switzerland, the UnitedKingdom and the United States. We have recently announced the signing ofdefinitive agreements to acquire the continental operations of PSINet Europe.If we successfully close this transaction, we would add to the VIA group a newoperation in Belgium and expand upon our existing operations in Germany, theNetherlands, Switzerland and France.

 

Our goal is to be the leader in providingIP-based business communications solutions to the rapidly growing SME market.We believe we have identified an attractive opportunity:

 

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

 

•                  Wehave a solid understanding of our SME customers’ needs and have developed asales approach, and portfolio of key products and services, that is designed tomeet their very specific requirements. This focus on and understanding of SMErequirements provides us with a competitive advantage over other IPcommunications providers.

 

•                  Therecurrently is no clear leader in this particular market.

 

Our products and services includeweb-hosting, Internet and network security services, virtual private networks(VPNs), and Internet access (through dial-up, DSL, or ISDN and leased-lineconnectivity). We also offer a voice communications product; thus, we have anadded competitive advantage of being able to serve our customers as the singlesource for all of their communications requirements.

 

Our goal is to deliver returns to ourshareholders by generating recurring and positive cash flows on a consolidatedbasis, while building an enduring and growing business. To this end, we have,over the past year-and-three-quarters, developed and begun implementing ourStrategic Plan for 2003-2005.  Thecomponents of this Plan include the following:

 

•                  Builda solid operational foundation on which to construct a healthy organization andscalable business.  In 2003 andearly 2004, we took major steps to reduce costs and increase operatingefficiencies by outsourcing the systems and personnel of our network operationscenter and certain financial and accounting services, as well as introducingacross all our operations a standardized billing, provisioning andcustomer-care platform. We moved certain financial and accounting services fromour local operations to a single third party shared service center in onelocation. This shared service center manages general ledger and fixed assetaccounting, accounts payable and receivable, and credit and collections. Wehave begun to see the benefits of the financial shared service center withimproved processes and a tangible improvement in information flows tomanagement. We expect to see an annual net savings of approximately$1.8 million from the financial shared service center. We completed thefinance-outsourcing project in January 2004 and expect to complete thebilling project for our current operations by the end of 2004. We expectcontinued benefits in terms of cost savings and operating efficiencies goingforward.

 

•                  Re-examinethe economics of our original business model and our legacy business.  We have recognized the strategic weakness inthe economics of our legacy business; i.e., that the percentage of revenues wewere generating from the sale of third-party access services was too high andthat it lacked sufficient margins. Moreover, we concluded that we were too 

 

13

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dependent on third party pricing and services, and that we wereattempting to compete in a commodity market without benefit of a necessarytool, our own network.

 

Following this reexamination, we immediatelybegan to refocus our business model to align it with the realities of ourindustry’s economics. Accordingly:

 

•                  Weshifted the focus of our business model from providing primarily dial-up andleased line Internet access services to offering high margin web-hosting andInternet security services that we can deliver on our own product platforms.

 

•                  Werealigned our sales approach to drive this new focus: we improved theefficiency of our sales efforts by re-organizing our sales operations into twochannels:

 

1.               Industry Solutions,which markets and sells a higher-value portfolio of bundled services throughthe efforts of our direct sales force professionals, and

2.               VIA Express, whichsells lower-margin products and services by steering customers to ourtelephone-based sales and Internet stores.

 

•                  Weare actively pursuing, and completing, strategic acquisitions and partnershipsthat complement or enhance our infrastructure, product offerings, channelstrategies or customer base and that allow us to leverage our recently improvedoperational capabilities to realize higher margins from acquired revenue. (Ouracquisition of Amen in January 2004 was the first example, and ourrecently announced agreement to acquire the mainland Europe operations ofPSINet Europe B.V. is another.)

 

•                  Weare continuing to improve operational performance.

 

Reflecting our current business model, aswell as many of the actions already implemented, we believe we can achievepositive cash flow from consolidated operations by mid-2005. We expect this tobe achieved through the generation of new and incremental revenues, which weanticipate generating from our new sales and product strategy. We believe weare positioned to achieve this objective: We have a cash position of $42.3million. We have no material debt. We have successfully implemented a programto reduce our expenses; and we have developed and begun implementing a newbusiness model designed to generate increased, and higher-margin, revenues.

 

We recognize that our ability to successfullyexecute our Strategic Plan to improve operational performance and generatemeaningful and profitable revenue growth is subject to a number of risks anddependencies, which are not insignificant. These risks and dependencies are further discussed in the “Risk Factors”described in Exhibit 99-1 on this Form 10-Q, as well as thosedescribed in the “Risk Factors” section of our 2003 Annual Report.

 

**Strategic Acquisitions and Divestments**

 

As part of our Strategic Plan, and consistentwith our goal of realizing higher margins, we continue to explore and evaluateacquisition and divestment opportunities, as well as partnerships, even as weremain committed to prudent cash management. Our goal in pursuing these transactions is to complement or enhance ourexisting infrastructure, product offerings, channel strategies or customerbase. Our strategic plan calls for us to be flexible and opportunisticregarding acquisitions and as a result, if we find one or more opportunities webelieve are very attractive, we may decide to spend a substantial portion ofour available cash to finance these acquisitions.

 

To date, we have identified, and acted upon,two such opportunities:

 

1.          In January 2004, wepurchased 100% of the issued and outstanding shares of Amen SAS, Amen Srl andAmen Limited (collectively “Amen”), a group of European web-hosting companiesbased in Paris, France. Amen has operations in France, the United Kingdom,Spain and Italy. Our goal in acquiring Amen is to strengthen our Europeoperation by leveraging Amen’s operating platform and service offerings. Forthis acquisition, we paid $7.5 million in cash and issued 673,652 sharesof our common stock, which had a market value of $2 per share on the date ofacquisition for a total value of approximately $1.3 million. The formershareholders will have the opportunity to receive further consideration that weexpect will be between $0.7 - $1.8 million in cash and shares of VIAcommon stock, based on the 2004 operating performance of Amen. Informationrelated to our operational opportunities as a result of this acquisition aswell as other details and risks associated with the Amen business is describedin the”Risk Factors” in Exhibit 99.1 on this Form 10-Q and the “RiskFactors” section of our 2003 Annual Report. To date, Amen has performedconsistent with our expectations, both financially and operationally. Since theacquisition, Amen has contributed approximately $1.4 million of positive cashflows.

 

14

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2.          On August 9, 2004,we announced that we entered into definitive agreements with PSI Net EuropeB.V. and affiliated companies to acquire the PSINet Europe operations inBelgium, France, Germany, the Netherlands and Switzerland. (PSINet Europe’sU.K. operation is not part of the acquisition, nor is its headquarters and central functions.) These operationsprovide managed hosting, managed networks and monitored access servicesto more than 4,000 customers in mainland Europe.  Under the terms of the deal, which is expected to close byAugust 19, 2004, we would pay total consideration for the shares andinter-company debt of the PSINet Europe companies as follows: Euro 10 millionin cash (approximately $12.2 million) at closing; Euro 2 million (approximately$2.5 million), subject to adjustments for any deficit in the agreed workingcapital balance, to be paid in the fourth quarter of 2004; Euro 6 million(approximately $7.4 million) in cash or, at the option of the sellers, 4.5million shares of VIA common stock, 15 months after closing, subject to anyfinal adjustments for warranty claims, if any.

 

We will continue to review appropriateacquisitions as the opportunities arise. We do not know whether we will besuccessful in identifying appropriate further opportunities and, if we aresuccessful, and with respect to Amen and PSINet Europe, there is no assurancethat such acquisitions or partnerships will be executed and integratedefficiently. Our corporate development program also calls for us to examinefrom time to time each of our operations and business segments to ensure theiroverall strategic fit and potential for contributing to shareholder value. Tothe extent that market conditions permit, and anticipated future opportunitiesfor the operation or segment are not anticipated to contribute as required, wewill seek to dispose, sell or otherwise discontinue that operation or segment.

 

**OurOperations**

 

In the second and third quarters of 2003, wesold VIA NET.WORKS Italy and recognized Brazil and Mexico as discontinuedoperations. These operations are accounted for as discontinued operations andhave been excluded from the financial results from continuing operations, aswell as the financial results for the comparative prior period. We acquiredAmen in January 2004, which has operations in France, the United Kingdom,Spain, and Italy. The following table shows the revenue contribution from eachof our continuing operations in the Europe and the Americas reporting segments.As of June 30, 2004 we owned 100% of all our operations.

 
| **Country**           |   | **Percentages of  Total Revenue from  continuing operations  for the Three Months Ended  June 30, 2003** |   | **Percentages of  Total Revenue from  continuing operations  for the Three Months Ended  June 30, 2004** |    | **Percentages of  Total Revenue from  continuing operations  for the Six Months Ended  June 30, 2003** |   | **Percentages of  Total Revenue from  continuing operations  for the Six Months Ended  June 30, 2004** |   |
|-----------------------|--------|---------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------|---------|-------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------|--------|
| France                |   | 11                                                                                                            | %      |                                                                                                          | 10      | %                                                                                                           |   | 11                                                                                                          | %      |   | 10 | % |   |
| Germany               |   | 11                                                                                                            | %      |                                                                                                          | 11      | %                                                                                                           |   | 12                                                                                                          | %      |   | 11 | % |   |
| The  Netherlands      |   | 13                                                                                                            | %      |                                                                                                          | 12      | %                                                                                                           |   | 12                                                                                                          | %      |   | 12 | % |   |
| Portugal              |   | 9                                                                                                             | %      |                                                                                                          | 8       | %                                                                                                           |   | 8                                                                                                           | %      |   | 8 | % |   |
| Spain                 |   | 3                                                                                                             | %      |                                                                                                          | 2       | %                                                                                                           |   | 3                                                                                                           | %      |   | 2 | % |   |
| Switzerland           |   | 12                                                                                                            | %      |                                                                                                          | 12      | %                                                                                                           |   | 13                                                                                                          | %      |   | 12 | % |   |
| United  Kingdom       |   | 35                                                                                                            | %      |                                                                                                          | 28      | %                                                                                                           |   | 35                                                                                                          | %      |   | 30 | % |   |
| United  States        |   | 6                                                                                                             | %      |                                                                                                          | 5       | %                                                                                                           |   | 6                                                                                                           | %      |   | 5 | % |   |
| Amen:                 |   | —                                                                                                        | %      |                                                                                                          | 12      | %                                                                                                           |   | —                                                                                                      | %      |   | 10 | % |   |
| *Amen France*         |   | *—*                                                                                                      | *%*    |                                                                                                          | *9*     | *%*                                                                                                         |   | *—*                                                                                                    | *%*    |   | *8* | *%* |   |
| *Amen United Kingdom* |   | *—*                                                                                                      | *%*    |                                                                                                          | *2*     | *%*                                                                                                         |   | *—*                                                                                                    | *%*    |   | *1* | *%* |   |
| *Amen Spain*          |   | *—*                                                                                                      | *%*    |                                                                                                          | *1*     | *%*                                                                                                         |   | *—*                                                                                                    | *%*    |   | *1* | *%* |   |
| *Amen Italy*          |   | *—*                                                                                                      | *%*    |                                                                                                          | *<1* | *%*                                                                                                         |   | *—*                                                                                                    | *%*    |   | *<1* | *%* |   |

 

**RESULTSOF OPERATIONS**

 

**Three and six months ended June 30, 2003 compared with the three andsix months ended June 30, 2004**

 

*Foreign CurrencyImpact*

 

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

 

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|                  |   | **Three months ended**  |   | **Six months ended**    |   |
|-----------------------|--------|-------------------------|--------|-------------------------|--------|
|                  |   | **June 30,  2003** |   | **June 30,  2004** |   | **June 30,  2003** |   | **June 30,  2004** |   |
| Euro                  |   | 47                      | %      |                    | 53     | % |   | 46 | % |   | 52 | % |   |
| Great  British pounds |   | 35                      | %      |                    | 30     | % |   | 35 | % |   | 31 | % |   |
| Swiss Francs          |   | 12                      | %      |                    | 12     | % |   | 13 | % |   | 12 | % |   |
| U.S. Dollars          |   | 6                       | %      |                    | 5      | % |   | 6 | % |   | 5 | % |   |
|                  |   |                    |   |                    |   |   |   |   |   |   |   |   |   |
|                  |   | 100                     | %      |                    | 100    | % |   | 100 | % |   | 100 | % |   |

 

The Euro varied by approximately 5% inrelation to the U.S. dollar during the second quarter of 2004 and byapproximately 10% in the six months ended June 30, 2004. The British poundvaried by approximately 6% in relation to the U.S. dollar during the secondquarter of 2004 and by approximately 10% in the six months ended June 30,2004. The Euro varied by approximately 9% in relation to the U.S. dollar duringthe second quarter of 2003 and by approximately 15% in the six months endedJune 30, 2003. The British pound varied by approximately 9% in relation tothe U.S. dollar during the three and six months ended June 30, 2003. Theseexchange rate fluctuations have a significant impact on our reported results ofoperations, including revenue, expenses and net loss.

 

The average Euro-to-U.S. dollar foreignexchange rate for the three and six months ended June 30, 2004 was 6% and 11%higher respectively than the average Euro-to-U.S. dollar foreign exchange ratefor the corresponding periods in 2003. The average British pound-to-U.S. dollarforeign exchange rate for the three and six months ended June 30, 2004 was12% and 13% higher respectively than the average British pound-to-U.S. dollarforeign exchange rate for the corresponding periods in 2003. The effect of theweakening of the U.S. dollar is that revenues, operating costs and expenses andoperating profits and losses in operations with a functional currency otherthan U.S. dollars translate into larger U.S. dollar amounts than would havebeen the case had foreign exchange rates remained unchanged.

 

*Revenue:*

 
|    |   | **Three months ended**             |   |                    |   | **Six months ended**               |   |                    |   |
|---------|--------|------------------------------------|--------|-------------------------|--------|------------------------------------|--------|-------------------------|--------|
|    |   | **June 30,  2003**            |   | **June 30,  2004** |   | **% Increase/  (Decrease)**        |   | **June 30,  2003** |   | **June 30,  2004** |   | **% Increase/  (Decrease)** |   |
|    |   | **(in thousands of U.S. dollars)** |   |                    |   | **(in thousands of U.S. dollars)** |   |                    |   |
| Revenue |   | 16,612                             |   | 18,256                  |   | 10                                 | %      | 34,378                  |   | 36,474 |   | 6 | % |

 

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

 

Revenue for the three months endedJune 30, 2004 was $18.3 million, up from $16.6 million for thethree months ended June 30, 2003. The increase in revenues quarter overquarter is partly attributable to revenues recorded in the second quarter of2004 by the Amen business, which we acquired in January 2004 (impact ofapproximately $2.1 million) as discussed above. In addition, the averageEuro-to-U.S. dollar foreign exchange rate and British pound-to-U.S. dollarforeign exchange rate for the three months ended June 30, 2004 havestrengthened by approximately 6% and 12% respectively when compared with thecorresponding period last year, thus having a positive impact on revenuesduring the second quarter of 2004 of approximately $1.1 million. Thatpositive impact offset the decrease in underlying revenue (in all countriesexcept Switzerland) for the three months ended June 30, 2004 as comparedto the three months ended June 30, 2003. The decrease in underlyingrevenue is most significant in our UK operation as discussed further below.

 

Revenue for the six months endedJune 30, 2004 was $36.5 million, up from $34.4 million for thesix months ended June 30, 2003. The increase in revenues is partlyattributable to revenues recorded in the first half of 2004 by the Amenbusiness, which we acquired in January 2004 (impact of approximately $3.6million) as discussed above. In addition, the average Euro-to-U.S. dollarforeign exchange rate and British pound-to-U.S. dollar foreign exchange ratefor the six months ended June 30, 2004 have strengthened by approximately11% and 13% respectively when compared with the corresponding period last year,thus having a positive impact on revenues during the first half of 2004 ofapproximately $3.1 million. That positive impact offset the decrease inunderlying revenue (in all countries, and notably in the UK, Germany andFrance) for the six months ended June 30, 2004 as compared to the sixmonths ended June 30, 2003.

 

UK revenues, excluding the impact of foreignexchange and the acquisition of Amen’s UK business, decreased by 19%(approximately $1.3 million) and 21% (approximately $2.9 million) inthe three and six months ended June 30, 2004 respectively, compared withthe corresponding periods in 2003. This decline in revenue is primarily theresult of customer churn, price erosion and cash collection issues. Germanrevenues, excluding the impact of foreign exchange, decreased by 15%(approximately $0.7 million) in the six months ended June 30, 2004,compared with the corresponding period in 2003. This decline in revenue is dueto customer cancellations 

 

16

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and price erosion. French revenues, excluding the impact of foreignexchange and the acquisition of Amen’s French business, decreased by 13%(approximately $0.6 million) due to customer churn and fewer hardware andsoftware sales in the first quarter.

 

As a result of our continuous assessment ofour operating results and prospective future revenues, by the end of the fourthquarter 2003, management concluded that increased competition and price erosionwould have a significant impact on our future ability to grow our core businessof selling Internet access services, particularly through our labor-intensivesales channels. As a result, in the beginning of 2004 we began a strategicshift of our sales and channel focus from Internet access to web-hosting andInternet security services to be sold through our new VIA Express channel. Thisshift is intended to increase our opportunities for profitable revenue growth.Reflecting the recent timing of this strategic change in sales focus, we haveyet to realize the expected positive impact. As illustration, recently, inJune 2004, we announced the introduction of Microsoft-based sharedhosting, the foundation of the VIA Express channel.

 

During the second quarter of 2004,approximately 60% of our revenue was derived from Internet access services, 25%from web hosting, 5% from Internet security services, and 10% from otherrevenue sources. We expect that the percentage of future revenues from Internetaccess services will decline as we maintain our focus on growing our webhosting and managed security and other services. Because of the systemic errorsand limitations we experienced with our legacy billing platforms, we are notable to provide an accurate breakdown of our revenues for prior periods.

 

*OPERATING COSTS AND EXPENSES:*

 

*Internet services:*

 
|                |   | **Three months ended**             |   |                    |   | **Six months ended**               |   |                    |   |
|---------------------|--------|------------------------------------|--------|-------------------------|--------|------------------------------------|--------|-------------------------|--------|
|                |   | **June 30,  2003**            |   | **June 30,  2004** |   | **% Increase/  (Decrease)**        |   | **June 30,  2003** |   | **June 30,  2004** |   | **% Increase/  (Decrease)** |   |
|                |   | **(in thousands of U.S. dollars)** |   |                    |   | **(in thousands of U.S. dollars)** |   |                    |   |
| Internet  services  |   | 7,829                              |   | 8,842                   |   | 13                                 | %      | 16,349                  |   | 17,589 |   | 8 | % |
| % of Total  Revenue |   | 47                                 | %      | 48                      | %      |                               |   | 48                      | %      | 48 | % |   |   |

 

Our Internet services operating costs are thecosts we incur to carry customer traffic to and over the Internet. We leaselines that connect our PoPs, either to our own network or to other networkproviders. We pay other network providers for transit, which allows us totransmit our customers’ information to or from the Internet over theirnetworks. We also pay other recurring telecommunications costs and personnelcosts, including the cost of the local telephone lines our customers use toreach our PoPs and access our services, and costs related to customer supportand care.

 

Our Internet services operating costs were$8.8 million, or 48% of revenues, for the three months ended June 30,2004, up from $7.8 million, or 47% of revenues, for the three months endedJune 30, 2003. Our Internet services operating costs were$17.6 million, or 48% of revenues, for the six months ended June 30,2004, compared with $16.3 million, or 48% of revenues, for the six monthsended June 30, 2003. The increase in Internet services expenses is partlyattributable to the Internet services costs of the Amen business acquired inJanuary 2004 (impact of approximately $0.3 million and $0.5 million forthe three and six months ended June 30, 2004 respectively) discussed aboveand partly attributable to the translation impact of foreign currency movements(impact of approximately $0.5 million and $1.6 million for the three and sixmonths ended June 30, 2004 respectively). Excluding Amen’s Internetservices costs and the adverse impact of the strengthening Euro and Britishpound-to-U.S. dollar foreign currency exchange rates, Internet services costsincreased by approximately 2% for the three months ended June 30, 2004 anddecreased by approximately 5% for the six months ended June 30, 2004, fromthe corresponding periods in 2003.

 

The increase in Internet services operatingcosts in the second quarter of 2004, excluding Amen’s Internet services costsand the adverse impact of the strengthening Euro and British pound-to-U.S.dollar foreign currency exchange rates, is attributable to the release of telecommunicationcost accruals in the second quarter of 2003 in connection with disputed chargesand line-cancellation credits in two operations in the European reportingsegment (approximately $0.6 million). The year-over-year decrease in Internetservices costs in the six months ended June 30, 2004, excluding Amen’sInternet services costs and the adverse impact of the strengthening Euro andBritish pound-to-U.S. dollar foreign currency exchange rates, is primarily dueto lower revenues from decreased customer network usage, decreasing marketrates for network bandwidth, and non-recurring benefits of $0.5 million in thefirst quarter of 2004 following the resolution of a number of Internet servicescost disputes.

 

17

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*Selling, general and administrative:*

 
|                                   |   | **Three months ended**             |   |                    |   | **Six months ended**               |   |                    |   |
|----------------------------------------|--------|------------------------------------|--------|-------------------------|--------|------------------------------------|--------|-------------------------|--------|
|                                   |   | **June 30,  2003**            |   | **June 30,  2004** |   | **% Increase/  (Decrease)**        |   | **June 30,  2003** |   | **June 30,  2004** |   | **% Increase/  (Decrease)** |   |
|                                   |   | **(in thousands of U.S. dollars)** |   |                    |   | **(in thousands of U.S. dollars)** |   |                    |   |
| Selling,  general & administrative |   | 15,713                             |   | 17,477                  |   | 11                                 | %      | 30,410                  |   | 34,589 |   | 14 | % |
| % of Total  Revenue                    |   | 95                                 | %      | 96                      | %      |                               |   | 88                      | %      | 95 | % |   |   |

 

Our largest selling, general andadministrative (SG&A) expenses are compensation costs, the costs associatedwith marketing our products and services, and professional fees paid to outsideconsultants. Compensation costs include salaries and related benefits,commissions, bonuses and costs associated with staff reductions in the normalcourse of business. 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 incurred SG&A expenses of$17.5 million for the three months ended June 30, 2004, an 11%increase from the $15.7 million we incurred for the three months endedJune 30, 2003. The increase in SG&A expenses quarter over quarter ispartly attributable to expenses associated with the Amen business acquired inJanuary 2004 (impact of approximately $1.3 million) discussed above andpartly due to the strengthening of the Euro and British pound-to-U.S. dollarforeign currency exchange rates of approximately $0.6 million. Excluding Amen’sSG&A expenses and the adverse impact of the foreign currency exchangerates, SG&A expenses decreased by approximately 1%, or $0.2 million, forthe three months ended June 30, 2004, compared with the correspondingperiod in 2003. This is due to a decrease in compensation expense and bad debtexpense, offset by an increase in professional fees.

 

We incurred SG&A expenses of$34.6 million for the six months ended June 30, 2004, a 14% increasefrom the $30.4 million we incurred for the six months ended June 30,2003. The increase in SG&A expenses year over year is partly attributableto expenses associated with the Amen business acquired in January 2004(impact of approximately $2.1 million) discussed above and partly due to thestrengthening of the Euro and British pound-to-U.S. dollar foreign currencyexchange rates of approximately $1.8 million. The balance of the difference,for the six months ended June 30, 2004 compared to the correspondingperiod in 2003, is attributable to an increase in professional fees and marketingexpenses, partially offset by a decrease in compensation expense.

 

Compensation expense accounted forapproximately 58% ($10.1 million) of total SG&A costs for the three monthsended June 30, 2004, compared with 63% ($9.9 million) for the three monthsended June 30, 2003.  Compensationexpense accounted for approximately 57% ($19.7 million) of total SG&A costsfor the six months ended June 30, 2004, compared with 63% of totalSG&A costs ($19.2 million) for the six months ended June 30, 2003. Theincrease in compensation expense of 3% and 2% for the three and six monthsended June 30, 2004 respectively compared to the same periods in 2003 isdue to the Amen acquisition and the strengthening of the Euro and Britishpound-to-U.S. dollar foreign currency exchange rates. Excluding these factors,compensation expense decreased approximately 13% and 10%, respectively, in thethree and six months ended June 30, 2004 compared with the correspondingperiods in 2003 primarily due to head count reductions. Headcount (excludingAmen) at June 30, 2004 decreased by approximately 19% from June 30,2003. Compensation expense did not decline by the same percentage due to higherone-off severance payments made in the six months ended June 30, 2004 andthe relative salary levels of the employees terminated.

 

In the three and six months endedJune 30, 2004, marketing expenses increased by approximately $0.5 million,or 123%, and $1.1 million, or 176%, respectively, from the correspondingperiods in 2003. For the three months ended June 30, 2004, most of theincrease in marketing expenses is attributable to the Amen business. For thesix months ended June 30, 2004, $0.7 million of the increase in marketingexpenses is attributable to the Amen business and the impact of foreign exchange.

 

Professional fees, related to legal, audit,outsourcing and other consulting fees, accounted for approximately 15% and 8%of total SG&A for the three months ended June 30, 2004 and 2003respectively and for approximately 13% and 8% of total SG&A for the sixmonths ended June 30, 2004 and 2003 respectively. The increase inprofessional fees of 91% and 71% for the three and six months endedJune 30, 2004 respectively compared with the corresponding periods in 2003relates to Amen management fees, expenses for outsourcing certain finance andaccounting services, and increased consulting fees in one of our localoperations and the corporate headquarters.

 

Bad debtexpense in the three and six months ended June 30, 2004 was $0.2 millionand $0.6 million respectively compared with $0.4 million and $0.6 million forthe corresponding periods in 2003. The decrease in bad debt expense quarterover quarter is primarily due to a decrease in bad debt charges in our Europeanoperations.

 

18

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*Impairment and restructuring charges:*

 
|                                  |   | **Three months ended**             |   |                    |   | **Six months ended**               |   |                    |   |
|---------------------------------------|--------|------------------------------------|--------|-------------------------|--------|------------------------------------|--------|-------------------------|--------|
|                                  |   | **June 30,  2003**            |   | **June 30,  2004** |   | **% Increase/  (Decrease)**        |   | **June 30,  2003** |   | **June 30,  2004** |   | **% Increase/  (Decrease)** |   |
|                                  |   | **(in thousands of U.S. dollars)** |   |                    |   | **(in thousands of U.S. dollars)** |   |                    |   |
| Impairment  and restructuring charges |   | 1,415                              |   | 483                     |   | (66                                | )%     | 2,282                   |   | 783 |   | (66 | )% |
| % of Total  Revenue                   |   | 9                                  | %      | 3                       | %      |                               |   | 7                       | %      | 2 | % |   |   |

 

During the three and six months endedJune 30, 2004, we recorded impairment and restructuring changes of $0.5million and $0.8 million respectively. The restructuring charge for the threemonths ended June 30, 2004 related to severance payments for twenty-ninestaff at our United Kingdom operation and three staff at the corporateheadquarters, and transition implementation costs for back-office andadministrative outsourcing initiatives. The restructuring charge for the threemonths ended March 31, 2004 of $0.3 million related to severance paymentsat our corporate headquarters and transition implementation costs forback-office and administrative outsourcing initiatives.

 

During the three and six months ended June 30, 2003 we recordedrestructuring and impairment charges related to the implementation of ourstrategic plan of $1.4 million and $2.3 million, respectively. Therestructuring charge for the three months ended June 30, 2003 related toseverance payments for twenty-eight predominately sales staff at six of ourEuropean operations and at the corporate headquarters, future lease obligationson vacant office space in Germany, and implementation costs for back-office andadministrative outsourcing initiatives. The impairment and restructuringcharges of $0.9 million for the three months ended March 31, 2003 relatedto severance payments at four of our operations, and an adjustment to thefuture lease obligations and an impairment charge for fixtures and fittingsboth relating to the closure of the Reston, Virginia office. See Note 3 to theunaudited condensed consolidated financial statements for further information.

 

*Depreciation and amortization:*

 
|                           |   | **Three months ended**             |   |                    |   | **Six months ended**               |   |                    |   |
|--------------------------------|--------|------------------------------------|--------|-------------------------|--------|------------------------------------|--------|-------------------------|--------|
|                           |   | **June 30,  2003**            |   | **June 30,  2004** |   | **% Increase/  (Decrease)**        |   | **June 30,  2003** |   | **June 30,  2004** |   | **% Increase/  (Decrease)** |   |
|                           |   | **(in thousands of U.S. dollars)** |   |                    |   | **(in thousands of U.S. dollars)** |   |                    |   |
| Depreciation  and amortization |   | 1,799                              |   | 2,284                   |   | 27                                 | %      | 3,848                   |   | 4,718 |   | 23 | % |
| % of Total  Revenue            |   | 11                                 | %      | 13                      | %      |                               |   | 12                      | %      | 13 | % |   |   |

 

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

 

Our depreciation and amortization expense was$2.3 million for the three months ended June 30, 2004, up from $1.8million for the three months ended June 30, 2003. Depreciation andamortization expense was $4.7 million for the six months endedJune 30, 2004, up from $3.8 million for the six months ended June 30,2003. For the three months ended June 30, 2004, $1.8 million relatedto the depreciation of fixed assets and $0.5 million related to theamortization of intangible assets. For the six months ended June 30, 2004,$3.9 million related to the depreciation of fixed assets and$0.8 million related to the amortization of intangible assets. For thethree and six months ended June 30, 2003, all of our depreciation andamortization expense was related to the depreciation of fixed assets. Theincrease in total depreciation and amortization expense is primarily due to theacquisition of Amen resulting in amortization of identified intangible assetsand depreciation of tangible fixed assets totaling approximately $0.6 millionand $0.9 million for the three and six months ended June 30, 2004respectively. Excluding Amen, the depreciation expense increased slightlyduring the six months ended June 30, 2004 compared to the same period in2003 due to the impact of foreign currency exchange rates (approximately $0.2million).

 

*Interest income, net:*

 
|                  |   | **Three months ended**             |   |                    |   | **Six months ended**               |   |                    |   |
|-----------------------|--------|------------------------------------|--------|-------------------------|--------|------------------------------------|--------|-------------------------|--------|
|                  |   | **June 30,  2003**            |   | **June 30,  2004** |   | **% Increase/  (Decrease)**        |   | **June 30,  2003** |   | **June 30,  2004** |   | **% Increase/  (Decrease)** |   |
|                  |   | **(in thousands of U.S. dollars)** |   |                    |   | **(in thousands of U.S. dollars)** |   |                    |   |
| Interest  income, net |   | 287                                |   | 183                     |   | (36                                | )%     | 712                     |   | 273 |   | (62 | )% |
| % of Total  Revenue   |   | 2                                  | %      | 1                       | %      |                               |   | 2                       | %      | 1 | % |   |   |

 

19

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For the three and six months endedJune 30, 2004, we earned $0.2 million and $0.3 million in interestincome, down from $0.3 million and $0.7 million for the three and sixmonths ended June 30, 2003. Interest income was generated from investingfunds received from our initial public offering in February 2000, untilthose funds were used for acquisitions, operating expenses or capitalexpenditures. Net proceeds from the public offering were $333.0 million.The decrease in interest income is primarily due to the decrease in theavailable cash for investing. We also incurred nil and $18,000 of interestexpense for the three and six months ended June 30, 2004, compared with$3,000 and $7,000 of interest expense incurred in the same periods in 2003.

 

*Other (expense) income, net:*

 
|                         |   | **Three months ended**             |   |                    |   | **Six months ended**               |   |                    |   |
|------------------------------|--------|------------------------------------|--------|-------------------------|--------|------------------------------------|--------|-------------------------|--------|
|                         |   | **June 30,  2003**            |   | **June 30,  2004** |   | **% Increase/  (Decrease)**        |   | **June 30,  2003** |   | **June 30,  2004** |   | **% Increase/  (Decrease)** |   |
|                         |   | **(in thousands of U.S. dollars)** |   |                    |   | **(in thousands of U.S. dollars)** |   |                    |   |
| Other  (expense) income, net |   | (96                                | )      | (203                    | )      | 111                                | %      | (144                    | )      | 3,576 |   | 2,583 | % |
| % of Total  Revenue          |   | (1                                 | )%     | (1                      | )%     |                               |   | (0                      | )%     | 10 | % |   |   |

 

For the three months ended June 30,2004, we incurred other expense, net of $0.2 million related to the recognitionof a contingent liability in one of our European operations.  For the six months ended June 30, 2004,we earned other income, net in the amount of $3.6 million related primarily tothe settlement of a commercial litigation in our UK operation recognized in thefirst quarter of 2004 ($3.8 million). An additional $2.2 million was recognizedin the fourth quarter of 2003. We received cash of approximately $6 million forthis settlement in the second quarter of 2004. For the three and six monthsended June 30, 2003, we incurred other expense, net of $0.1 million and$0.1 million respectively relating mainly to losses on equipment disposals.

 

*Foreign currency gains (losses), net:*

 
|                                  |   | **Three months ended**             |   |                    |   | **Six months ended**               |   |                    |   |
|---------------------------------------|--------|------------------------------------|--------|-------------------------|--------|------------------------------------|--------|-------------------------|--------|
|                                  |   | **June 30,  2003**            |   | **June 30,  2004** |   | **% Increase/  (Decrease)**        |   | **June 30,  2003** |   | **June 30,  2004** |   | **% Increase/  (Decrease)** |   |
|                                  |   | **(in thousands of U.S. dollars)** |   |                    |   | **(in thousands of U.S. dollars)** |   |                    |   |
| Foreign  currency gains (losses), net |   | 4,711                              |   | (554                    | )      | (112                               | )%     | 7,260                   |   | (3,881 | ) | (153 | )% |
| % of Total  Revenue                   |   | 28                                 | %      | (3                      | )%     |                               |   | 21                      | %      | (11 | )% |   |   |

 

We recognized a foreign currency loss of  $0.6 million and $3.9 million for thethree and six months ended June 30, 2004 respectively, as compared to again of $4.7 million and $7.3 million for the three and six months endedJune 30, 2003. The change from period to period was primarily due to thefluctuation in the exchange rate of the Euro and British pound as compared tothe U.S. dollar and its impact on the revaluation of our Euro and British pounddenominated intercompany balances held by the parent company and on our Eurodenominated cash accounts. See ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK *Foreign Currency ExchangeRisks* for more information.

 

We established the Euro denominated cashaccounts in connection with our initial public offering in February 2000,in which we sold shares of our common stock for both U.S. dollars and Euros. AtJune 30, 2004, the parent company maintained a Euro cash reserve of Euro11.5 million.

 

*Liquidity and Capital Resources*

 

Liquidity

 

We began 2004 with $65.8 million in cash andcash equivalents and $1.4 million in restricted cash. We had negative cashflow of $23.5 million for the six months ended June 30, 2004, leavingus with $42.3 million in cash and cash equivalents and $1.4 millionin restricted cash at June 30, 2004. Our negative cash flow for the sixmonths ended June 30, 2004 increased by $8.5 million compared withour negative cash flow of $15.0 million for the six months ended June 30,2003 primarily due to the Amen acquisition discussed below and an increase inpurchases of tangible fixed assets. 

 

We believe our available cash will be sufficientto fund our expenditures under our strategic business plans and our workingcapital and capital expenditure requirements until we achieve positive net cashflows. At that point, we expect to still have adequate cash reserves remainingto support our working capital and capital expenditure requirements, even as wepursue our acquisition strategy discussed below. Our expectation for reachingpositive cash flows is dependant on our successful implementation of ourStrategic Plan and the business focus shift described above. There can be noassurances we will be successful in these efforts. If, contrary to management’sexpectations, we use all our available cash before reaching positive cashflows, or if we reach such point without sufficient cash reserves remaining, wemay not be able to continue our operations unless we obtain other financing. Weexpect our capital requirements for the remainder of 2004 to totalapproximately $4 million, primarily to support new sales. Capitalrequirements beyond 2004 will principally be related to supporting revenuegrowth.

 

20

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In our Form 10-Q for the three months ended March 31, 2004, we statedour expectations that we would end 2004 with a cash balance of $33 to $36million. On August 9, 2004, we announced that we entered intodefinitive agreements with PSI Net Europe B.V. and affiliated companies toacquire the PSINet Europe operations in Belgium, France, Germany, theNetherlands and Switzerland. Under the terms of the deal, which is expected toclose by August 19, 2004, we would pay total consideration for the shares andintercompany debt of the PSINet Europe companies as follows: Euro 10 million incash (approximately $12.2 million) at closing; Euro 2 million (approximately $2.5 million), subjectto adjustments for any deficit in the agreed working capital balance, to bepaid in the fourth quarter of 2004; Euro 6 million (approximately $7.4 million)in cash or, at the option of the sellers, 4.5 million shares of VIA commonstock, 15 months after closing, subject to any final adjustments for warrantyclaims, if any. We will issue an unsecured zero coupon convertible note onclosing as consideration for the latter payment.

 

Assuming the transaction issuccessfully closed, we expect that our cash balances for the end of the yearwould be reduced by the amount of the consideration that is payable during thethird and fourth quarters of this year. Subject to close, VIA expects that itscash balances will also be impacted by the costs it would incur and pay forduring these periods in transitioning the change of control and inrestructuring the acquired operations. We anticipate that the newly acquiredoperations would, when integrated, contribute positively to our cash flow.Outside of the cash impact of the pending transaction, we expect that our netcash use for the balance of the year will be negatively impacted (byapproximately $2 to $5 million) primarily due to softer than anticipatedresults in our Industry Solutions channel and our plan to bring forwardmarketing and personnel expenditures for VIA Express in order to acceleraterevenue and cash growth into 2005. We anticipate that the acceleratedexpenditures for VIA Express for the balance of 2004 will generate increasedcash flows into 2005 offsetting these negative impacts.

 

Notwithstanding theprospective cash impacts of the pending acquisition of the PSINet Europecompanies, the softness in the Industry Solutions channel, and acceleratedspending for the VIA Express channel, we continue to expect that VIA will reachthe point of positive cash flows by mid-2005. This is dependent upon theachievement of new and incremental revenues, which we anticipate generatingfrom our new sales and product strategy. Management intends to provide morespecific indications of our expected cash position, in the Form 10-Q for threeand nine months ended September 30, 2004, after closing the transaction withPSINet, finalizing plans to eliminate redundancies in the two operations, andtaking into account results of VIA’s third quarter operations.

 

In order for us to achieve consolidatedpositive cash flow, our business plan calls for substantial growth in revenueswhile continuing to control the costs associated with that revenue. Our estimatesof the cash flows generated by the revenue growth and the capital resourcesneeded and available to generate such growth could change, and such changecould differ materially from the estimates used to evaluate our ability torealize our plans. If operations do not generate sufficient cash flow tocontinue operating, we will need to find other financing mechanisms, which maynot be available to us.

 

We are continuing to pursue theidentification of additional potential partners and strategic acquisitions. Ifwe are successful in these endeavors, we may use a portion of our cash balancesto finance all or a portion of these potential transactions. We also intend toseek to utilize the value of our share capital as consideration for anyinvestment and we may also consider other opportunities to finance attractiveacquisitions, such as the sale of non-core assets or business operations. Aspart of this acquisition strategy, in January 2004, we acquired Amen. Inconnection with this acquisition, we spent approximately $7.5 million incash and issued common stock having a total value of approximately$1.3 million at the time of the purchase. The former shareholders willhave the opportunity to receive further consideration that we expect will bebetween $0.7 - $1.8 million in cash and shares of VIA common stock, basedon the 2004 operating performance of Amen, payable in April 2005. On amonthly basis beginning in May 2004, we have placed Euro 0.1 million into anescrow account for the benefit of the former shareholders, limited to Euro 0.7million, related to this additional consideration, provided that Amen’s monthlyoperating performance meets or exceeds the targeted amount. We estimate thatAmen will contribute positive cash flow in the remainder of 2004 ofapproximately $1.5 million.

 

In April 2003, we announced therestarting of our previously authorized stock repurchase plan to acquire up to$10 million worth of VIA stock. No shares were purchased in the six monthsended June 30, 2004. In the second quarter of 2003, we purchased 823,593shares of our common stock at a total cost of $0.8 million. We can suspend thisplan at any time.

 

Cash used in operating activities was$11.9 million for the six months ended June 30, 2004, down from$12.1 million for the six months ended June 30, 2003. Cash flows fromoperating activities can vary significantly from period to period depending onthe timing of operating cash receipts and payments and other working capitalchanges, especially accounts receivable, other current assets, accountspayable, accrued expenses and other current liabilities. In both periods, ournet losses were the primary component of cash used in operating activities.These losses include some significant non-cash items such as depreciation, amortization,provision for doubtful accounts receivable, impairment and unrealized foreigncurrency transaction gains and losses.

 

Cash used in investing activities was$11.7 million for the six months ended June 30, 2004, and$1.9 million for the corresponding period in 2003. In 2004, we used cashto purchase Amen ($8.0 million including acquisition costs and net of cashacquired) (discussed above) and to acquire tangible fixed assets ($3.7million). For the six months ended June 30, 2003, we used cash primarilyto purchase tangible fixed assets.

 

Cash received from (used in) financingactivities was $0.3 million for the six months ended June 30, 2004, and($0.7 million) for the six months ended June 30, 2003. For the sixmonths ended June 30, 2004, cash was received primarily from stock optionexercises ($0.4 million) and in 2003, cash was used primarily to purchasetreasury stock ($0.8 million).

 

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Capital Resources

 

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

 

In connection with the acquisition of Amendescribed above, we issued 673,652 shares of common stock at a price of $2 pershare, having a total value of approximately $1.3 million on the date ofacquisition for Amen common stock.

 

The foregoing statements regarding ourliquidity and possible need for additional capital resources areforward-looking statements based on our current expectations, which involvecertain risks and uncertainties. Actual results and the timing of these eventscould differ materially from these forward-looking statements depending uponcertain factors that we cannot predict, including the nature, size and timingof future acquisitions and dispositions, if any, our future net income and oursuccess in executing our Strategic Plan as well as other factors discussed in“Risk Factors” described in Exhibit 99-1 on this Form 10-Q, as wellas those described in the “Risk Factors” section of our 2003 AnnualReport.

 

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**ITEM 3. QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

The following discussion relates to anychanges in our exposure to market risk, related to changes in interest rates andchanges in foreign exchange rates from that disclosed in our 2003 AnnualReport. This discussion contains forward-looking statements that are subject torisks and uncertainties. Actual results could differ materially due to a numberof factors, as set forth in the “Risk Factors” included as Exhibit 99.1 on thisForm 10-Q and included in the “Risk Factors” section of our 2003 AnnualReport.

 

***Foreign Currency Exchange Risks***

 

Transaction risks

 

The parent company’s cash balances consist ofEuros and U.S. dollars. The Euro bank account is revalued each month and theresultant gain or loss is reflected in the condensed consolidated statements ofoperations as “Foreign currency gains/(losses), net.” This exposes the Companyto foreign currency exchange rate risk in the Statement of Operations. Forexample, as of June 30, 2004, a 10% increase or decrease in the level ofthe Euro exchange rate against the U.S. dollar with all other variables heldconstant would result in a realized gain or loss of approximately $9 million.The change in exposure from period to period is related to the change in thebalance of the Euro cash and intercompany accounts. The parent companycontinues to hold approximately €11.5 million in the Euro cash account andremains exposed to changes in the foreign currency rate.

 

The fluctuation in the exchange ratesresulted in foreign currency gains (losses) reflected in the consolidatedstatements of operations as “Foreign currency gains (losses), net” of($0.6 million) and ($3.9 million) for the three and six months endedJune 30, 2004 respectively, and $4.7 million and $7.3 million for the sameperiods in 2003.

 

Translation risks

 

The fluctuation in the exchange ratesresulted in foreign currency translation (losses) gains reflected as a componentof accumulated other comprehensive loss in stockholders’ equity, net of$0.6 million and $2.5 million for the three and six months endedJune 30, 2004 respectively, and ($3.6 million) and ($5.4 million) for thesame periods in 2003.

 

Exchange rates can vary significantly. TheEuro high and low rates varied by approximately 5% and 10% in relation to theU.S. dollar during the three and six months ended June 30, 2004respectively. The British pound high and low rates varied by approximately 6%and 10% in relation to the U.S. dollar during the three and six months endedJune 30, 2004 respectively. This variation affects the average exchangerates used to translate the income statements of our operating companies whosefunctional currency is not U.S. dollars. At June 30, 2004, theEuro-to-U.S. dollar exchange rate was approximately 4% below where it was atthe beginning of the year and the British pound to U.S. dollar exchange ratewas approximately 2% above where it was at the beginning of the year. This variationaffects the ending exchange rates used to translate amounts on the balancesheet of our operating companies whose functional currency is not U.S. dollars.Future changes in the value of the Euro and GBP could have a material impact onour financial position and results of operations. We also experiencedfluctuations in other exchange rates.

 

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**ITEM 4. CONTROLS ANDPROCEDURES**

 

Our management and the Audit Committee of theboard of directors has engaged in regular evaluations of our internal controls,as well as the processes we maintain to ensure that all material informationrelating to us and our subsidiaries is recorded, processed, summarized,evaluated and reported within the time periods specified by rules establishedby the Securities and Exchange Commission. These latter processes are known asDisclosure Controls and Procedures. Disclosure Controls and Procedures are alsodesigned to ensure that all such information is communicated to our management,including our CEO and Interim CFO, in such a manner as to allow timelydecisions to be made regarding required disclosures.

 

We have evaluated, with the oversight of ourCEO and Interim CFO, the effectiveness of our Disclosure Controls and Proceduresas of June 30, 2004. In designing and evaluating the Disclosure Controlsand Procedures, our management necessarily was required to apply its judgmentin evaluating the costs and benefits of possible controls and procedures. Inaddition, we recognize that Disclosure Controls and Procedures by their naturecan provide only reasonable assurance that our information flow objectives aremet. As disclosed in previous periodic filings during 2001, material weaknessesin the internal control environment were identified. Management implemented aseries of mitigating controls and procedures that fully addressed thesematerial weaknesses in 2002. These procedures currently include additional andenhanced manual processes, procedures and controls including expanded analyticalprocedures and increased frequency and breadth of management inquiries. As ofJune 30, 2004 our CEO and Interim CFO have concluded that our DisclosureControls and Procedures are effective in all material respects.

 

During the six months ended June 30,2004, there have been no significant changes in our internal controls that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting. We continue to work to improve ourinternal controls and Disclosure Controls and Procedures. Specifically, aspreviously disclosed we are continuing to perform a phased implementation tostandardize processes and outsource back office functions that includes systemautomation and technology-enabled improvements associated with the generalledger accounting, accounts payable, accounts receivable, provisioning andbilling administration, credit and collections and customer operations. Thisphased implementation is progressing well. We completed the finance-outsourcingproject in January of 2004 and expect to complete the billing project bythe end of 2004.

 

We believe that our current controls andprocedures enable us to present our financial results fairly in all materialrespects, as required by U.S. generally accepted accounting principles.

 

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**PART II**

 

**Item 1. Legal Proceedings**

 

There have been no significant developmentsregarding legal proceedings since the filing of VIA’s Form 10-K onMarch 29, 2004. See note 11 to the condensed consolidated financialstatements for further information.

 

**Item 2. Changes inSecurities and Use of Proceeds**

 

*Changes in Securities:*

 

None.

 

*Use of InitialPublic Offering Proceeds:*

 

On February 11, 2000, we completed ourinitial public offering of shares of common stock, par value $.001 per share.Our initial public offering was made pursuant to a prospectus datedFebruary 11, 2000, which was filed with the SEC as part of a registrationstatement, file No. 333-91615, that was declared effective by the SEC onFebruary 10, 2000.

 

The net offering proceeds after deducting theexpenses and underwriting discounts and commissions was approximately$333.0 million. From the effective date of the initial public offeringthrough June 30, 2004, we have used $95.3 million for acquisitions ofother businesses, including the repayment of debt for acquisitions we made in1999, increases in our investment in various partially owned subsidiaries,$56.2 million for capital expenditures and approximately$144.3 million to fund operating losses.

 

**Item 3. Defaults UponSenior Securities**

 

None.

 

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

 

On April 27, 2004, the Annual Meeting ofShareholders was held at the Company’s offices located in Schiphol, theNetherlands, beginning at 12:00 pm Central European Time. At the annualmeeting, shareholders considered and approved the election of two Class Idirectors to serve for a three-year term, by the number of votes indicatedbelow:

 
| **DIRECTOR**      |   | **VOTES FOR** |   | **WITHHELD** |   |
|-------------------|--------|---------------|--------|--------------|--------|
|              |   |          |   |         |   |
| Michael McTighe   |   | 45,482,330    |   | 1,504,495    |   |
| Rhett S. Williams |   | 45,481,330    |   | 1,505,495    |   |

 

**Item 5. Other Information**

 

None.

 

**Item 6. Exhibits andReports on Form 8-K**

 

**a)Exhibits**

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

 

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

 

We filed 3 reports on Form 8-K duringthe three months ended June 30, 2004. On April 5, 2004, we filed a Form 8-Kannouncing our financial results for the fourth quarter and the year endedDecember 31, 2003. On April 6, 2004, we filed a Form 8-K announcing certain statementsmade during the conference call held to discuss our financial results for thefourth quarter and the year ended December 31, 2003. OnJune 17, 2004, we filed a Form 8-K announcing that we received a letterfrom The Nasdaq Stock Market indicating that our common stock has failed tomeet Nasdaq’s requirement that the common stock trade above $1.00 per sharebecause it has traded below $1.00 per share for the preceding 30 consecutivetrading days.

 

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**SIGNATURES**

 

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

 
|                       | VIA NET.WORKS, INC. |
|----------------------------|---------------------|
|                       |                |   |
|                       |                |   |
| Date: August 13, 2004 | By:                 | /s/ Rhett S.  Williams |
|                       |                | *Chief Executive Officer (Principal  Executive Officer)  and Director* |
|                       |                |   |
| Date: August 13, 2004 | By:                 | /s/ Cameron  Mackenzie |
|                       |                | *Interim Chief Financial Officer  (Principal Financial and Accounting Officer)* |

 

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**EXHIBIT INDEX**

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

 

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