<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
(COMMISSION FILE NUMBER: )
HERMES EUROPE RAILTEL B.V.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
NETHERLANDS NONE
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
TERHULPSESTEENWEG 6A
1560 HOEILAART
BELGIUM
(Address of principal executive office)
(322) 658-5200
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] [ ]
At December 14, 1998, there were outstanding 196,716 shares of common stock
of the registrant.
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<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. Financial Information
Item 1 Financial Statements........................................ 3
Condensed Consolidated Balance Sheets as of December 31,
1997 and September 30, 1998............................... 4
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 1997 and 1998... 5
Condensed Consolidated Statements of Cash Flows for the
Three and Nine Months Ended September 30, 1997 and 1998... 6
Notes to Condensed Consolidated Financial Statements........ 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 10
PART II. Other Information...........................................
Item 4 Submission of Matters to a Vote of Security Holders......... 14
Item 6 Exhibits and Reports on Form 8-K............................ 14
Signatures............................................................ 15
</TABLE>
2
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of December 31, 1997 and September
30, 1998
Condensed Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 1997 and 1998
Condensed Consolidated Statements of Cash Flows for the Three and Nine
Months Ended September 30, 1997 and 1998
Notes to Condensed Consolidated Financial Statements
3
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HERMES EUROPE RAILTEL B.V.
CONDENSED, CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Current assets
Cash and cash equivalents................................. $204,327 $185,034
Restricted cash........................................... 29,539 29,467
Accounts receivable....................................... 2,129 26,112
Other assets.............................................. 13,330 33,532
-------- --------
Total current assets.............................. 249,325 274,145
Property and equipment, net................................. 204,944 362,322
Goodwill and intangible assets, net......................... 13,310 31,875
Restricted cash............................................. 28,271 --
Other noncurrent assets..................................... -- 13,176
-------- --------
Total Assets...................................... $495,850 $681,518
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses..................... $ 37,457 $ 83,914
Due to affiliated companies............................... 1,311 16,381
Deferred income........................................... 1,436 28,527
Current portion of capital lease obligations.............. 21,540 31,186
Other current liabilities................................. -- 2,114
-------- --------
Total current liabilities......................... 61,744 162,122
Long-term debt, less current portion........................ 265,383 265,367
Long-term portion of capital lease obligations.............. 117,645 187,900
Other noncurrent liabilities................................ 236 20,607
-------- --------
Total Liabilities................................. 445,008 635,996
Minority interest........................................... -- 27,710
Commitments and contingencies
Shareholders' Equity
Common stock, 1000 guilders par value (297,000 shares
authorized and 190,468 shares issued and outstanding at
December 31, 1997 and September 30, 1998).............. 96,757 96,757
Additional paid-in capital................................ 10,130 11,093
Accumulated other comprehensive loss...................... (3,665) (2,488)
Accumulated deficit....................................... (52,380) (87,550)
-------- --------
Total Shareholders' Equity........................ 50,842 17,812
-------- --------
Total Liabilities and Shareholders' Equity........ $495,850 $681,518
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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HERMES EUROPE RAILTEL B.V.
CONDENSED, CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1997 1998 1997 1998
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT WEIGHTED AVERAGE SHARES AND PER
SHARE DATA)
<S> <C> <C> <C> <C>
Revenues........................................... $ 1,669 $ 26,997 $ 2,262 $ 42,933
-------- -------- -------- --------
Operating costs and expenses:
Cost of revenues................................. 2,685 19,720 5,989 36,677
Selling, general and administrative.............. 3,832 7,794 10,177 18,201
-------- -------- -------- --------
6,517 27,514 16,166 54,878
-------- -------- -------- --------
Loss from operations............................... (4,848) (517) (13,904) (11,945)
Other income/(expense):
Interest income.................................. 2,649 1,932 2,729 7,844
Interest expense................................. (3,944) (7,898) (4,593) (23,419)
Foreign currency (losses) gains.................. 498 (2,561) 93 (5,227)
-------- -------- -------- --------
(797) (8,527) (1,771) (20,802)
-------- -------- -------- --------
Net loss before income taxes and minority
interest......................................... (5,645) (9,044) (15,675) (32,747)
Income taxes....................................... -- 1,819 -- 1,819
-------- -------- -------- --------
Net loss before minority interest.................. (5,645) (10,863) (15,675) (34,566)
Minority interest.................................. -- (564) -- (604)
-------- -------- -------- --------
Net loss........................................... $ (5,645) $(11,427) $(15,675) $(35,170)
======== ======== ======== ========
Net loss per share................................. $ (0.03) $ (0.06) $ (0.28) $ (0.18)
======== ======== ======== ========
Weighted average common shares outstanding......... 169,200 190,468 56,453 190,468
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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HERMES EUROPE RAILTEL B.V.
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1997 1998 1997 1998
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating Activities
Net loss....................................... $ (5,645) $(11,427) $(15,675) $(35,170)
Adjustments to reconcile net loss to net cash
Provided by (used in) operating activities:
Depreciation and amortization............... 1,030 8,035 1,862 16,896
Fair value adjustment for foreign currency
Instruments............................... -- 18,016 -- 21,240
Minority interest........................... -- 564 604
Non-cash compensation....................... -- 468 -- 996
Changes in assets and liabilities:
Accounts receivable....................... 251 (3,647) (414) (15,477)
Deposits.................................. 319 (2,644) 319 (2,831)
Accounts payable and accrued expenses..... 6,693 26,817 7,871 28,815
Other changes in assets and liabilities... 4,829 (2,646) 234 5,454
-------- -------- -------- --------
Net cash provided by (used in)
operating activities................. 7,477 33,536 (5,803) 20,527
Investing Activities
Purchases of property and equipment............ (14,839) (45,102) (19,316) (75,946)
Acquisitions -- cash acquired.................. -- -- -- 13,352
Restricted cash................................ (57,558) 14,755 (54,860) 28,367
Other investing activities..................... -- (314) -- (314)
-------- -------- -------- --------
Net cash used in investing
activities........................... (72,397) (30,661) (74,176) (34,541)
Financing Activities
Proceeds from debt............................. 270,849 -- 270,849 --
Repayments of debt............................. -- (2,231) -- (12,952)
Payment of debt issue costs.................... (13,238) -- (13,238) (825)
Net proceeds from issuance of common stock..... 52,015 -- 52,015 --
Proceeds from shareholders' loans.............. -- -- 13,311 --
Due to affiliated companies, net............... (4,782) 14,769 (1,964) 14,270
-------- -------- -------- --------
Net cash provided by financing
activities........................... 304,844 12,538 320,973 493
Effect of exchange rate changes on cash and cash
equivalents.................................... (3,433) (5,713) (5,466) (5,772)
-------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................... 236,491 9,700 235,528 (19,293)
Cash and cash equivalents at beginning of
period......................................... 1,050 175,334 2,013 204,327
-------- -------- -------- --------
Cash and cash equivalents at end of period....... $237,541 $185,034 $237,541 $185,034
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
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HERMES EUROPE RAILTEL B.V.
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL PRESENTATION
The financial statements of Hermes Europe Railtel B.V. (the "Company")
included herein are unaudited and have been prepared in accordance with
generally accepted accounting principles for interim financial reporting and
Securities and Exchange Commission regulations. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. Material intercompany affiliate account
transactions have been eliminated; however, other adjustments may have been
required had an audit been performed. In the opinion of management, the
financial statements reflect all adjustments of a normal and recurring nature
necessary to present fairly the Company's financial position, results of
operations and cash flows for the interim periods. These financial statements
should be read in conjunction with the Company's 1997 audited consolidated
financial statements and the notes related thereto. The results of operations
for the three months and nine months ended September 30, 1998 may not be
indicative of the operating results for the full year.
The Company is developing and operating segments of a pan-European high
capacity fiber optic network that is designed to interconnect a majority of the
largest Western and Central European cities and to transport international
voice, data and multimedia/image traffic for other carriers throughout Western
and Central Europe.
The Company's objective is to become the leading pan-European carriers'
carrier by providing centrally managed cross-border telecommunications
transmission capacity to telecommunications companies including traditional
public telecommunications operators and new entrants, such as alternative
carriers, global consortia of telecommunications operators, international
carriers, Internet backbone networks, resellers, value-added networks and other
service providers.
2. POLICIES AND PROCEDURES
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which establishes
standards for reporting and display of comprehensive income (loss) and its
components in a full set of general purpose financial statements. Comprehensive
income (loss) is defined as the change in equity of a business enterprise during
a period from nonowner sources. Comprehensive loss was $6.6 million and $18.9
million for the three and nine months ended September 30, 1997, respectively,
and was comprised of net losses of $5.6 million and $15.7 million and foreign
currency translation losses of $1.0 million and $3.2 million for the three and
nine months ended September 30, 1997, respectively. Comprehensive loss was $9.6
million and $34.0 million for the three and nine months ended September 30,
1998, respectively, and was comprised of net losses of $11.4 million and $35.2
million and foreign currency translation income of $1.8 million and $1.2 million
for the three and nine months ended September 30, 1998.
During 1997, the Company adopted SFAS No. 128, "Earnings Per Share," which
requires the Company to present basic and diluted earnings per share for all
periods presented. The Company's net loss per share calculation (basic and
diluted) is based upon the weighted average common shares issued. There are no
reconciling items in the numerator or denominator of the Company's net loss per
share calculation. Employee stock options have been excluded from the net loss
per share calculation because their effect would be anti-dilutive.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which is
required to be adopted by January 1, 2000. This statement establishes accounting
and reporting standards requiring that every derivative instrument be recorded
in the balance sheet as either an asset or liability measured at its fair value.
The statement also requires that changes in the derivatives' fair value be
recognized in earnings (losses) unless specific hedge
7
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HERMES EUROPE RAILTEL B.V.
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accounting criteria are met. The Company is currently assessing the impact of
this new statement on its consolidated financial position and results of
operations.
Certain reclassifications have been made to the December and September 1997
condensed, consolidated financial statements in order to conform to the 1998
presentation.
3. CAPITAL LEASE OBLIGATIONS
During the nine months ended September 30, 1998, HER entered into
additional contractual commitments to lease fiber pairs, including facilities
and maintenance and utilizing the partial routes for laying fiber optic cable.
Based on the contract provisions, these commitments are currently estimated to
aggregate approximately $83.5 million. The commitments have expected lease terms
of eight and one-half to twenty-five years with options for renewal rights of
one to eight additional years. Subsequent to September 30, 1998, HER entered
into an additional contractual commitment for $36.8 million, payable within
twelve months, to lease an indefeasable right of use to transatlantic capacity
for a term of twenty-five years.
4. ACQUISITION
On June 24, 1998, the Company completed the acquisition for ECU 90 million
(approximately $99.5 million) of a 75% interest in Ebone A/S ("Ebone"). The
Company funded the acquisition with proceeds of a short-term bank loan, which
has been repaid. Ebone is a Tier 1 Internet backbone provider that principally
serves as a carriers' carrier for European Internet service providers. As part
of the transaction, Ebone will purchase, under a transmission capacity
agreement, long-term capacity rights on the Company's network valued at ECU 90
million. In addition to the majority interest held by the Company, Ebone's new
ownership structure will continue to include many of Ebone's existing customers,
which own the balance of Ebone's shares through an association. The members of
the association were offered the right to buy shares of Ebone in the third
quarter of 1998; however, the Company's ownership interest in Ebone was not
reduced as a result of the acceptances of this offer.
The acquisition has been accounted for using the purchase method of
accounting. The excess purchase price over the fair value of assets acquired of
ECU 15.7 million (approximately $17.2 million) was allocated to goodwill and is
being amortized over 5 years. The results of Ebone have been included in the
accompanying consolidated financial statements from the date of the acquisition.
The following summarized unaudited pro forma financial information assumes
the acquisition had occurred on January 1 of each year:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1997 1998
----------- -----------
(IN THOUSANDS, EXCEPT LOSS
PER SHARE)
<S> <C> <C>
Revenues.................................................... $ 17,556 $ 53,316
Net loss.................................................... (17,199) (34,843)
Net loss per share.......................................... (0.30) (0.18)
</TABLE>
The pro forma results include amortization of the goodwill, elimination of
intercompany revenue and costs of revenues on transactions between the Company
and Ebone and the recording of the 25% minority interest. The pro forma data is
for informational purposes only and does not purport to be indicative of the
results that would have been obtained had this acquisition actually occurred at
the beginning of the periods presented, nor is it intended to be a projection of
the results which may be achieved in the future.
8
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HERMES EUROPE RAILTEL B.V.
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. FOREIGN CURRENCY TRANSACTIONS
On April 19, 1998, the Company entered into a foreign currency swap
transaction agreement (the "Swap") with Rabobank International ("Rabo") in order
to minimize the foreign currency exposure resulting from the issuance in August
1997 of $265 million aggregate principal amount 11.5% Senior Notes due 2007 (the
"Notes"). The Company has marked the Swap to its fair value as of September 30,
1998 and the resulting adverse change in the fair value of $20.4 million has
been recorded as a Noncurrent Liability on the balance sheet and recognized as a
foreign currency loss in the statement of operations. In addition, in July 1998,
the Company entered into several forward exchange contracts, with terms ranging
from thirty to ninety days, to limit the Company's exposure to foreign currency
transactions. The Company has marked the outstanding contracts to their fair
value as of September 30,1998 and the resulting adverse change in the fair value
of $2.1 million has been recorded as an Other Current Liability on the balance
sheet and recognized as a foreign currency loss in the statement of operations.
6. SUBSEQUENT EVENTS
On October 16, 1998, 6,248 shares of common stock were issued as a result
of certain employees exercising vested options under the Company's stock option
plan. On October 31, 1998, GTS Hermes, Inc. acquired AB Swed Carrier's ownership
interest of 6,551 common shares in the Company for approximately $5.8 million.
In connection with this purchase, GTS Hermes, Inc. paid approximately $5.3
million to a company, which is affiliated with a board member, for negotiating
with AB Swed Carrier and SNCB/NMBS on behalf of GTS Hermes, Inc., to purchase
their respective ownership interest in the Company. Further, on October 26,
1998, the name of GTS Hermes, Inc. was changed to GTS Carrier Services, Inc.
The ownership of the Company as a result of the subsequent events is as
follows:
<TABLE>
<CAPTION>
SHARES OWNERSHIP %
------- -----------
<S> <C> <C>
GTS Carrier Services, Inc. ................................. 176,858 89.9
NMBS........................................................ 13,610 6.9
Employees................................................... 6,248 3.2
------- -----
196,716 100.0%
======= =====
</TABLE>
9
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HERMES EUROPE RAILTEL B.V.
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company as of September 30, 1998 and 1997 and for the three
and nine months ended September 30, 1998 and 1997 and of certain factors that
management believes are likely to affect the Company's prospective financial
condition. The following discussion should be read in conjunction with the
Company's unaudited Condensed, Consolidated Financial Statements and the notes
related thereto, included in this report.
Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" including, without limitation,
those concerning (i) projected traffic volume, (ii) future revenues and costs,
(iii) changes in the Company's competitive environment and (iv) the performance
of future equity-method investments, contain forward-looking statements
concerning the Company's operations, economic performance and financial
condition. Because such statements involve risks and uncertainties, actual
results may differ materially from those expressed or implied by such
forward-looking statements.
OVERVIEW
The Company is continuing to develop and operate segments of a pan-European
high capacity fiber optic network. The Company began delivering services to
customers in November 1996 when the Brussels-Amsterdam route came into
operation. The cities of London and Paris came into commercial operation during
the last quarter of 1997 and in the first and second quarters of 1998,
Frankfurt, Zurich, Geneva, Stuttgart, Dusseldorf and Munich were added to the
network. Milan was added to the network during the third quarter. On June 24,
1998, the Company acquired a 75% interest in Ebone A/S ("Ebone"), a Tier 1
Internet backbone provider that principally serves as a carriers' carrier for
European Internet service providers. The results of Ebone have been included in
the accompanying consolidated financial statements from the date of the
acquisition.
RESULTS OF OPERATIONS
Revenue. The Company's consolidated revenue for the three and nine months
ended September 30, 1998 was $27.0 million and $42.9 million, respectively,
compared to $1.7 million and $2.3 million for the comparable periods in 1997.
The growth in revenue is attributable to the continued deployment of the
Company's network and revenues from Ebone, whose revenue was $7.4 million for
the three months ended September 30, 1998.
Cost of Revenue. The Company's cost of revenue for the three and nine
months ended September 30, 1998 was $19.7 million and $36.7 million,
respectively, compared to $2.7 million and $6.0 million for the comparable
periods in 1997. The increase in cost of revenue for the three and nine months
ended September 30, 1998 as compared to the comparable periods in 1997 was
associated with the costs related to operating and maintaining the network,
local access costs and the depreciation of the network.
Gross Margin. The Company had favorable gross margins of $7.3 million and
$6.3 million for the three and nine months ended September 30, 1998. The Company
had unfavorable gross margins of $(1.0) and $(3.7) million for the three and
nine months ended September 30, 1997. The improvement in gross margins in 1998
as compared to 1997 is reflective of the increased utilization of the network
and gross margin from Ebone whose gross margin was $3.9 million for the three
months ended September 30, 1998.
Operating Expenses. Operating expenses for the three and nine months ended
September 30, 1998 were $7.8 million and $18.2 million, respectively, as
compared to $3.8 million and $10.2 million for the comparable periods in 1997.
The increase in operating expenses is related to increased costs associated with
the growth of the Company's business operations and support personnel.
10
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HERMES EUROPE RAILTEL B.V.
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest. Interest expense for the three and nine months ended September
30, 1998 was $7.9 million and $23.4 million, respectively, as compared to $3.9
million and $4.6 million for the comparable periods in 1997. The increase was
primarily attributable to the interest and related costs associated with the
issuance by the Company in August 1997 of $265 million aggregate principal
amount of 11.5% Senior Notes due 2007 (the "Senior Notes").
Interest income for the three and nine months ended September 30, 1998 was
$1.9 million and $7.8 million, respectively as compared to $2.6 million and $2.7
million for the comparable periods in 1997. The increase in interest income was
the result of investing the excess cash generated from the issuance of the
Senior Notes in various highly liquid investments.
Foreign Currency Losses. Foreign currency losses were $2.6 million and $5.2
million for the three and nine months ended September 30, 1998, respectively, as
compared to foreign currency gains of $0.5 million and $0.1 million for the
comparable periods in 1997. The losses in 1998 were primarily the result of
foreign currency exposure from the issuance of the Senior Notes in U.S. dollars,
other U.S. dollar cash and payables balances, losses on several forward exchange
contracts and the weakening of the dollar versus European currencies in the
third quarter of 1998.
Income Taxes. Income taxes of $1.8 million and $1.8 million for the three
and nine months ended September 30, 1998, respectively, is primarily Ebone's
income tax provision.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of Company funding through September 30, 1998 have been
net proceeds of $251.3 million from the issuance of the Senior Notes, that are
general unsecured obligations, and cash equity contributions of $103.2 million
in 1997.
Development of the Company's fiber optic network is capital intensive. The
Company has spent approximately $136 million on network capital expenditures
through September 30, 1998 and expects to incur an additional $654 million
through 2000 in order to complete the build-out of the network. The total
capital expenditures required for the build-out of the network has increased as
a result of additional routes being planned, including transatlantic capacity,
and for enhancing the speed and capacity of the network. Additionally, as of
September 30, 1998, the Company has capitalized $242 million in connection with
long-term fiber lease arrangements and expects to capitalize an additional $181
million through 2000 in order to complete the build-out of the network.
Moreover, subsequent to September 30, 1998, the Company entered into a
contractual commitment for approximately $36.8 million, payable within twelve
months, to lease an indefeasable right of use to transatlantic capacity for
twenty-five years. The Company believes that the net proceeds from the issuance
of the Senior Notes, and a contemplated private offering of $200 million in
senior notes on substantially similar terms as the Senior Notes, combined with
the Company's projected internally generated funds, should be sufficient to fund
such expected capital expenditures as well as payments on the long-term fiber
lease arrangements and other cash needs. However, the actual amount and timing
of the Company's future requirements may differ materially from management's
estimates. Any failure to obtain necessary financing may require the Company to
delay or abandon its plans for deploying the remainder of the network and would
jeopardize the viability of the Company.
The Company had working capital of $112.0 million and $251.1 million as of
September 30, 1998 and 1997, respectively. The Company had cash and cash
equivalents of $185.0 million and $237.5 million at September 30, 1998 and 1997
respectively. The Company had $29.5 million and $57.0 million of restricted cash
at September 30, 1998 and 1997, respectively.
11
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HERMES EUROPE RAILTEL B.V.
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the three and nine months ended September 30, 1998, operating
activities provided cash of $33.5 million and $20.5 million, respectively, and
provided cash of $7.5 million and used cash of $5.8 million for the comparable
periods in 1997. Investing activities used cash of $30.7 million and $34.5
million for the three and nine months ended September 30, 1998, respectively, as
compared to using cash of $72.4 million and $74.2 million for the comparable
periods in 1997.
The Company has developed risk management policies that establish
guidelines for managing foreign exchange risk. The Company is currently
evaluating the materiality of foreign exchange exposures in different countries
and the financial instruments available to mitigate this exposure. The Company
is designing reporting processes to monitor the potential exposure on an ongoing
basis and expects to implement this process by the end of 1998. The Company has
limited its foreign currency exposure by entering into a foreign currency swap
agreement and several forward foreign exchange contracts. The Company finds it
impractical to hedge all foreign currency exposure and as a result, will
continue to experience foreign currency gains and losses.
YEAR 2000
The Company expects to complete the assessment phase of its Year 2000
readiness in the fourth quarter of 1998. The assessment phase includes internal
and third party review of potential risks associated with the availability,
integrity and reliability of operational systems necessary to conduct business.
The Company's preliminary observations during the third quarter 1998 from the
assessment phase is that most of the Company's telecommunications equipment and
software has been purchased within the past three years and bears a lower risk
of Year 2000 non-compliance. In addition, the Company is obtaining confirmations
from the Company's primary telecommunication vendors, business partners,
customers and hardware and software vendors as to what plans, if any, are being
developed or are already in place to address their ability to process
transactions in the Year 2000. Upon the completion of this assessment phase,
which is expected during the fourth quarter of 1998, the Company intends to
commence a detailed planning phase that will then be followed by a remediation
and testing phase in early 1999.
The Company expects that it will incur approximately $0.7 million to
complete the assessment, detailed planning and remediation and testing phases,
of which approximately $0.2 million has been incurred for the nine months ended
September 30, 1998. Funding of these costs will be absorbed from operating cash
flows and expensed as incurred. In addition, the preceding cost estimate does
not include amounts associated with the accelerated acquisition of replacement
systems as none are included in the initial assessment during the third quarter
1998. The Company does not expect that the costs of addressing its Year 2000
readiness will have a material effect on the Company's financial condition or
results of operations. However, there can be no assurance that Year 2000
non-compliance by the Company's systems or the systems of vendors, customers,
partners or others will not result in a material adverse effect.
The worst case scenario for the Company would be the failing of its
telecommunications equipment, power providers and/or interfaces with other
telecommunication vendors. These cases would create business interruption at
some of the Company's operations and would adversely affect the Company's
revenues. However, the Company has operations that are geographically
diversified; therefore, it is not anticipated that the worst case scenario would
affect all operations at the same time. Additionally, if power failures occur,
the Company currently has diesel generators at almost all of its sites and
expects to install diesel generators in the remaining sites in 1999. Based on
its assessment during the third quarter of 1998, the Company does not foresee a
material loss due to these conditions and management is hopeful that its
remediation and testing efforts will ensure that it has addressed its Year 2000
readiness. However, there can be no assurance that Year 2000 non-compliance by
the Company's systems or the systems of vendors, customers, partners or others
will not result in a material adverse effect.
12
<PAGE> 13
HERMES EUROPE RAILTEL B.V.
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is considering a contingency plan to address its worst case
scenario; however, certain of the initiatives are subject to execution risk.
This risk would include the ability to have access to diesel fuel should power
failures occur, the ability to quickly replace telecommunications equipment and
the ability to contract with alternative telecommunication and maintenance
providers at reasonable terms.
INTRODUCTION OF THE EURO
On January 1, 1999, eleven of the fifteen member countries of the European
Union, including Belgium, The Netherlands, Ireland, France, Germany, Italy and
Spain, in which countries the Company has its headquarters and the majority of
its subsidiaries and operations, are scheduled to establish fixed conversion
rates between their existing sovereign currencies and a new currency called the
"Euro." These countries have agreed to adopt the Euro as their common legal
currency on that date. The Euro will then trade on currency exchanges and be
available for non-cash transactions. Thereafter and until January 1, 2002, the
existing sovereign currencies will remain legal tender in these countries. On
January 1, 2002, the Euro is scheduled to replace the sovereign legal currencies
of these countries.
The Company is currently evaluating the impact the implementation of the
Euro will have on its continuing business operations and no assurances can be
given that the implementation of the Euro will not have material adverse affect
on the Company's business, financial condition and results of operations.
However, the Company does not expect the Euro to have a material effect on its
competitive position as a result of price transparency within the European Union
because it has always operated as a pan-European business with prices in the
European Currency Unit (the "ECU"), the predecessor of the Euro, for the
majority of its customers. Moreover, the Company is evaluating its ability to
update its information systems to accommodate the adoption of the Euro but it
does not expect to incur material costs in either the evaluating or the updating
of such systems. In addition, the Company cannot accurately predict the impact
the Euro will have on currency exchange rates or the Company's currency exchange
risk.
The Company intends to adopt the Euro as its functional currency on January
1, 1999.
13
<PAGE> 14
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
On July 14,1998, the Company had an extraordinary general meeting of
shareholders. The following proposals were submitted to the shareholders for
approval and unanimously approved:
Approval of the appointment of two nominees to the Supervisory Board
Approval to amend the Articles of Association in order to reflect that
resolutions of the General Assembly be adopted by a simple majority
On August 20, 1998, the Company had an extraordinary general meeting of
shareholders. The following proposals were submitted to the shareholders for
approval and unanimously approved:
Approval of the appointment of two nominees to the Supervisory Board
Approval of the appointment of Mr. Jan Loeber as Statutory Managing
Director, replacing GTS-Hermes, Inc. as Statutory Managing Director
Approval to amend the Articles of Association in order to allow for
more than one member of Board of Managing Directors
Approval of the appointment of two nominees to the Management Board
Approval of the amended HER Stock Option Plan
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
DESIGNATION DESCRIPTION
----------- -----------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
<TABLE>
<CAPTION>
DATE OF REPORT SUBJECT OF REPORT
-------------- -----------------
<S> <C>
July 7, 1998, amended on September 8, 1998 Acquisition of EBONE
</TABLE>
The Company filed a report on Form 8-K on July 7, 1998, which reported that
it had completed its acquisition from Ebone Holding Association of a 75%
interest in Ebone A/S. A copy of the purchase agreement was included as Exhibit
10.1 to the Form. An amendment that furnished the required financial statements
and pro forma information with the Securities and Exchange Commission was filed
on September 8, 1998.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
HERMES EUROPE RAILTEL B.V.
(Registrant)
By: /s/ FRANCOIS NOTE
----------------------------------
Name: Francois Note
Title: Corporate Financial
Director --
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: December 14, 1998
15
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
DESIGNATION DESCRIPTION
----------- -----------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
CONDENSED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 185,034
<SECURITIES> 0
<RECEIVABLES> 26,112
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 274,145
<PP&E> 382,931
<DEPRECIATION> 20,609
<TOTAL-ASSETS> 681,518
<CURRENT-LIABILITIES> 162,122
<BONDS> 484,453
0
0
<COMMON> 96,757
<OTHER-SE> (45,915)
<TOTAL-LIABILITY-AND-EQUITY> 681,518
<SALES> 0
<TOTAL-REVENUES> 42,933
<CGS> 0
<TOTAL-COSTS> 36,677
<OTHER-EXPENSES> 23,428
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,419
<INCOME-PRETAX> (32,747)
<INCOME-TAX> 1,819
<INCOME-CONTINUING> (35,170)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (35,170)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
