<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
(Commission file number: )
HERMES EUROPE RAILTEL B.V.
(Exact name of registrant as specified in its charter)
Netherlands None
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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] No [ ]
At April 30, 1998, there were outstanding approximately 190,468 shares of
common stock of the registrant.
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<PAGE> 2
TABLE OF CONTENTS
PART I. Financial Information
Item 1 Financial Statements
Consolidated Balance Sheets
As of March 31, 1997 and 1998
Consolidated Statements of Operations
For the Three Months Ended March 31, 1997 and 1998
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1997 and 1998
Notes to Consolidated Financial Statements
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. Other Information
Item 6 Exhibits and Reports on Form 8-K
Signatures
4
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of
December 31, 1997 and March 31, 1998
Condensed Consolidated Statements of Operations
For the Three Months Ended March 31, 1997 and 1998
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1997 and 1998
Notes to Condensed Consolidated Financial Statements
<PAGE> 4
HERMES EUROPE RAILTEL B.V.
Condensed, Consolidated Balance Sheets
(unaudited)
<TABLE>
<S> <C>
December 31, March 31,
1997 1998
- ----------------------------------------------------------------- ------------- -------------
ASSETS (in thousands, except share data)
Current assets
Cash and cash equivalents $ 204,327 $ 182,793
Restricted cash 29,539 29,463
Accounts receivable 2,129 3,990
Due from affiliated companies 49 28
Other assets 13,281 13,109
------------ ------------
Total current assets 249,325 229,383
Property and equipment, net 204,944 232,506
Deferred financing costs, net 13,310 13,368
Restricted cash 28,271 14,131
------------ ------------
TOTAL ASSETS $ 495,850 $ 489,388
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 37,457 $ 22,728
Due to affiliated companies 1,311 1,134
Deferred income 1,436 5,244
Other current liabilities 236 229
Debt maturing within one year 50 49
Current portion of capital lease obligations 21,490 19,250
------------ ------------
Total current liabilities 61,980 48,634
Long-term debt, less current portion 265,383 265,359
Long-term portion of capital lease obligations 117,645 136,988
------------- -------------
TOTAL LIABILITIES 445,008 450,981
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 March 31, 1998) 96,757 96,757
Additional paid-in capital 10,130 10,395
Accumulated other comprehensive loss (3,665) (5,105)
Accumulated deficit (52,380) (63,640)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 50,842 38,407
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 495,850 $ 489,388
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
HERMES EUROPE RAILTEL B.V.
Condensed, Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------
1997 1998
- ----------------------------------------------------- -------------- --------------
(in thousands, except weighted
average shares and per share data)
<S> <C> <C>
Revenues $ 189 $ 4,706
------------ ------------
Operating costs and expenses:
Cost of revenues 1,817 6,109
Selling, general and administrative 2,666 4,597
------------ ------------
4,483 10,706
------------ ------------
Loss from operations (4,294) (6,000)
Other income/(expense):
Interest income 31 3,292
Interest expense (248) (7,428)
Foreign currency (losses) gains 262 (1,124)
------------ ------------
45 (5,260)
------------ ------------
Net loss before income taxes (4,249) (11,260)
Income taxes -- --
------------ ------------
Net loss $ (4,249) $ (11,260)
============ ============
Net loss per share $ (53.11) $ (0.06)
============ ============
Weighted average common shares outstanding 80 190,468
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 6
HERMES EUROPE RAILTEL B.V.
Condensed, Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------
1997 1998
- ------------------------------------------------------------ ------------- ---------------
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (4,249) $ (11,260)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 549 3,726
Deferred interest - -
Non-cash compensation - 266
Changes in assets and liabilities:
Accounts receivable (99) (1,958)
Deposits (421)
Accounts payable and accrued expenses (1,877) (13,914)
Other changes in assets and liabilities (82) 4,034
------------- --------------
Net cash used in operating activities (5,758) (19,527)
INVESTING ACTIVITIES
Purchases of property and equipment (4,275) (12,463)
Restricted cash (89) 14,155
------------- --------------
Net cash (used in) provided by investing activities (4,364) 1,692
FINANCING ACTIVITIES
Proceeds from debt (8) (3,619)
Payment of debt issue costs - (825)
Net proceeds from issuance of common stock - -
Proceeds from shareholders' loans 9,945 -
Due to affiliated companies, net 635 (119)
------------- --------------
Net cash provided by (used in) financing activities 10,572 (4,563)
Effect of exchange rate changes on cash and
cash equivalents (291) 864
------------- --------------
Net increase (decrease) in cash and cash equivalents 159 (21,534)
Cash and cash equivalents at beginning of period 2,013 204,327
------------- --------------
Cash and cash equivalents at end of period $ 2,172 $ 182,793
============= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 7
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 ended March
31, 1998 may not be indicative of the operating results for the full year.
The Company is developing and operating the initial 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 and
its components in a full set of general purpose financial statements.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from nonowner sources. Comprehensive loss was
$5.9 million and $12.7 million for the three months ended March 31, 1997 and
1998, respectively, and was comprised of net loss of $4.2 million and $11.3
million and foreign currency translation adjustments of $0.9 million and $1.4
million for the three months ended March 31, 1997 and 1998, respectively.
During 1997, the Company adopted SFAS No. 128, "Earnings Per Share," which
requires the Company to present basic and fully diluted earnings per share
for all periods presented. The Company's net loss per share calculation
(basic and fully 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.
Certain reclassifications have been made to the March 1997 condensed,
consolidated financial statements in order to conform to the 1998
presentation.
<PAGE> 8
HERMES EUROPE RAILTEL B.V.
Notes to Condensed, Consolidated Financial Statements
3. CAPITAL LEASE OBLIGATIONS
During the three months ended March 31, 1998, HER entered into 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 $26.9 million. The commitments have expected lease terms of
ten to twenty-one years with options for renewal rights of one and one-half
to five additional years. Subsequent to March 31, 1998, HER entered into
additional contractual commitments to lease fiber pairs that are currently
estimated to aggregate approximately $22.5 million. These commitments have
expected lease terms of eight and one-half to eighteen years with certain of
the leases having options for renewal rights of five additional years.
<PAGE> 9
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 March 31, 1998 and 1997 and for the three months
ended March 31, 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 Condensed,
Consolidated Financial Statements and the notes related thereto.
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 developing and operating the initial segments of a
pan-European high capacity fiber optic network and has been delivering services
to customers since 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 quarter of 1998, Frankfurt was added
to the network.
RESULTS OF OPERATIONS
Revenue. The Company's consolidated revenues for the three months ended
March 31, 1998 were $4.7 million compared to $0.2 million for the same period in
1997. Revenue for the three months ended March 31, 1998 was generated from the
Brussels-Amsterdam-London-Paris routes whereas revenue for the three months
ended March 31, 1997 was only from the Brussels-Amsterdam route.
Cost of Revenue. The Company's cost of revenue for the three months
ended March 31, 1998 and 1997 was $6.1 million and $1.8 million, respectively.
The increase in cost of revenue for the three months ended March 31, 1998 as
compared to the same period 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 negative gross margins of $1.4 million
and $1.6 million for the three months ended March 31, 1998 and 1997,
respectively. The growth in revenues for the three months ended March 31, 1998
as compared to 1997 was more than offset by its increase of cost of revenues
during the same period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended 1998 were $4.6 million as
compared to $2.7 million for the same period in 1997. The increase in selling,
general and administrative expenses is reflective of the growth of the Company's
business operations and support personnel. At March 31, 1998 the Company
employed 153 people as compared to 107 people at March 31, 1997.
Interest. Interest expense for the three months ended March 31, 1998
was $7.4 million as compared to $0.2 million for the same period in 1997. The
increase was primarily attributable to the interest and related costs associated
with the issuance in August 1997 of $265 million aggregate principal amount of
11.5% Senior Notes due 2007 (The "Senior Notes").
Interest income for the three months ended March 31, 1998 was $3.3
million. Interest income was minimal for the same period 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.
<PAGE> 10
Global TeleSystems Group, Inc. ("GTS"), a Delaware corporation that provides a
broad range of telecommunications services to businesses, other
telecommunications service providers and consumers in Russia, The Commonwealth
of Independent States and Central Europe, owns 89.4% of the Company. In May
1998, GTS filed registration statements with the Securities and Exchange
Commission to offer for sale concurrently $300 million of GTS's common stock and
$400 million aggregate principal amount of GTS's convertible senior debentures.
GTS indicated in such filings that the net proceeds of such offerings would be
applied primarily to the implementation of its plans to offer, through one or
more subsidiaries, facilities-based telecommunications products and services
primarily to business and other high-usage customers in certain metropolitan
markets throughout Europe ("GTS's European Services Strategy"). Many of GTS's
planned service offerings will compete with the services offered by customers
that HER targets as an independent carrier's carrier. To the extent that GTS's
other subsidiaries offering the new services discussed above contract with HER
for capacity, GTS expects that such arrangements will be entered into on an
arm's length basis. However, GTS's European Services Strategy could affect the
perception of HER as an independent operator and could negatively impact HER's
ability to attract and retain customers.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of Company funding through March 31, 1998 have been
cash equity contributions of $103.2 million in 1997 and net proceeds of $251.3
million from the issuance of the Senior Notes.
Development of the Company's fiber optic network is capital intensive.
The build-out of the network is expected to require approximately $290.0 million
of capital expenditures. Through March 31, 1998 approximately $64.7 million has
been spent on network capital expenditures. An additional $173.1 million has
been capitalized in connection with long-term fiber lease arrangements. In
August 1997, HER completed the issuance of $265.0 million in gross proceeds of
11.5% Senior Notes, due in August 2007. The 11.5% Senior Notes are general
unsecured obligations of HER. The Company believes that the net proceeds of the
Senior Notes, combined with HER's projected internally generated funds, should
be sufficient to fund HER's expected capital expenditures. However, the actual
amount and timing of HER'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 a positive working capital of $180.7 million at
March 31, 1998 compared to a negative working capital of $2.5 million at March
31, 1997. The Company had cash and cash equivalents of $182.8 million and $2.2
million as at March 31, 1998 and 1997 respectively. The Company had $43.6
million and $3.6 million of restricted cash at March 31, 1998 and 1997,
respectively. The restricted cash at March 31, 1998 primarily represents the
Company's obligation to place into escrow the first four scheduled semi-annual
interest payments on the Senior Notes.
During the three months ended March 31, 1998 and 1997, the Company used
$19.5 million and $5.8 million, respectively, of cash for operating activities.
Investing activities provided cash of $1.7 million and used cash of $4.4 million
for the three months ended March 31, 1998 and 1997, respectively.
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. In April 1998,
the Company consummated a transaction to hedge the foreign exchange exposure
resulting from the issuance of the Senior Notes.
YEAR 2000 COMPLIANCE
The Company is currently in the process of assessing its year 2000
compliance costs and of converting, where necessary, its computer systems to
year 2000 compliant software. This process includes obtaining confirmations from
the Company's primary vendors that plans are being developed or are already in
place to address processing of transactions in the year 2000. The Company does
not expect that the cost of converting such systems will be material to its
financial condition or results of operations. The Company currently believes it
will be able to achieve year 2000 compliance by the end of 1999, and currently
does not anticipate any material disruption in its operations as the result of
any failure by the Company to be in compliance or that year 2000 compliance
costs will have a material effect on the Company's earnings.
<PAGE> 11
Item 6 Exhibits and Reports on Form 8-K
A. Exhibits
Designation Description
27 Financial Data Schedule
B. Reports on Form 8-K
Date of Report Subject of Report
None
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: May 15, 1998
<PAGE> 12
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
27 Financial Data Schedule
<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> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 182,793
<SECURITIES> 0
<RECEIVABLES> 3,990
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 229,383
<PP&E> 239,976
<DEPRECIATION> 7,470
<TOTAL-ASSETS> 489,388
<CURRENT-LIABILITIES> 48,634
<BONDS> 421,648
0
0
<COMMON> 96,757
<OTHER-SE> (58,350)
<TOTAL-LIABILITY-AND-EQUITY> 489,388
<SALES> 0
<TOTAL-REVENUES> 4,706
<CGS> 0
<TOTAL-COSTS> 6,109
<OTHER-EXPENSES> 5,721
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,428
<INCOME-PRETAX> (11,260)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,260)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,260)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
