<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
JUNE 24, 1998
Date of Report (Date of earliest event reported)
HERMES EUROPE RAILTEL, B.V.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
NETHERLANDS NONE
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
</TABLE>
<TABLE>
<S> <C>
TERHULPSESTEENWEG 6A NONE
1560 HOEILAART, BELGIUM (Zip Code)
(Address of principal executive offices)
</TABLE>
(322) 658-5200
(Registrant's telephone number, including area code)
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<PAGE> 2
The undersigned registrant hereby reports the following items related to
the Registrant's acquisition of Ebone A/S in a transaction accounted for as a
purchase. The Registrant filed on July 7, 1998 a Current Report on Form 8-K,
which disclosed that the acquisition had been completed. The Registrant
indicated in that report its intention to submit the financial statements and
pro forma financial information prescribed by Rule 3-05 of Regulation S-X and
Article 11 of Regulation S-X, respectively, not later than September 8, 1998, in
accordance with Subsection (a)(4) of Item 7 of the General Instructions for the
Current Report on Form 8-K. This Amendment to that Current Report is being filed
to provide that financial information.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements.
Report of Ernst & Young, Independent Auditors
Ebone A/S Balance Sheets as of December 31, 1997 and June 30, 1998
(unaudited)
Ebone A/S Statements of Operations for the Year Ended December 31, 1997
and for the Six Months Ended June 30, 1997 and 1998 (unaudited)
Ebone A/S Statements of Changes in Shareholders' Equity for the Year
Ended December 31, 1997 and for the Six Months Ended June 30, 1998
(unaudited)
Ebone A/S Statements of Cash Flows for the Year Ended December 31, 1997
and for the Six Months Ended June 30, 1997 and 1998 (unaudited)
(b) Pro Forma Financial Statements.
Unaudited Pro Forma Combined Statements of Operations for the Year
Ended December 31, 1997 and for the Six Months Ended June 30, 1998
Notes to Pro Forma Statements of Operations
<PAGE> 3
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
The Board of Directors and the Shareholders of
Ebone A/S, Copenhagen, Denmark
We have audited the accompanying balance sheet of Ebone A/S, as of December
31, 1997, and the related statement of operations, cash flow, and shareholders'
equity for the year ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ebone A/S at December 31,
1997, and the result of its operations and its cash flow for the year ended
December 31, 1997, in conformity with generally accepted accounting principles
in the United States.
Ernst & Young
Statsautoriseret
Revisionsaktieselskab
Copenhagen, Denmark
August 25, 1998
<PAGE> 4
EBONE A/S
BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ --------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 9,168 $ 13,371
Accounts receivable trade, net............................ 570 5,118
Accounts receivable, related parties...................... 3,032 3,097
Prepaid expenses.......................................... 8 --
Other current assets...................................... 76 74
------- --------
Total current assets.............................. 12,854 21,660
Technical equipment....................................... 477 630
Less accumulated depreciation............................. (206) (311)
------- --------
Net technical equipment................................... 271 319
Prepaid transmission capacity, net........................ -- 98,550
------- --------
Total assets...................................... $13,125 $120,529
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,367 $ 1,464
Accounts payable, related parties......................... 1,403 973
Deferred income........................................... -- 5,470
Accrued expenses.......................................... 122 209
Income taxes payable...................................... 2,300 3,865
------- --------
Total current liabilities......................... 6,192 11,981
Commitments and contingencies:
Shareholders' equity:
Common shares (17,000 and 68,000 authorized, issued and
outstanding at December 31, 1997 and June 30, 1998,
respectively).......................................... 2,467 9,868
Additional paid-in capital................................ -- 91,148
Retained earnings......................................... 4,466 7,532
------- --------
Total shareholders' equity........................ 6,933 108,548
------- --------
Total liabilities and shareholders' equity........ $13,125 $120,529
======= ========
</TABLE>
See accompanying notes
<PAGE> 5
EBONE A/S
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
YEAR ENDED -------------------------
DECEMBER 31, 1997 1997 1998
----------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenues.............................................. $21,266 $9,419 $12,013
Operating costs and expenses:
Cost of revenues...................................... 14,869 7,412 6,909
Selling, general and administrative................... 723 293 612
Depreciation.......................................... 159 26 105
------- ------ -------
Income from operations......................... 15,751 7,731 7,626
Interest income....................................... 218 76 182
Foreign exchange gains, net........................... 292 194 62
------- ------ -------
Income before income taxes.......................... 6,025 1,958 4,631
Income taxes.......................................... (2,300) (733) (1,565)
------- ------ -------
Net income............................................ $ 3,725 $1,225 $ 3,066
======= ====== =======
Net income per share.................................. $ 0.34 $ 0.40 $ 0.17
======= ====== =======
Weighted average common shares outstanding............ 11,050 3,058 17,708
======= ====== =======
</TABLE>
See accompanying notes
<PAGE> 6
EBONE A/S
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON ADDITIONAL RETAINED
SHARES PAID-IN CAPITAL EARNINGS TOTAL
------ --------------- -------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1996....................... $ 435 $ -- $ 741 $ 1,176
Issuance of 14,000 shares........................ 2,032 -- -- 2,032
Net income....................................... -- -- 3,725 3,725
------ ------- ------ --------
Balance at December 31, 1997....................... 2,467 4,466 6,933
Issuance of 51,000 shares........................ 7,401 91,148 -- 98,549
Net income....................................... -- -- 3,066 3,066
------ ------- ------ --------
Balance at June 30, 1998 (unaudited)............... $9,868 $91,148 $7,532 $108,548
====== ======= ====== ========
</TABLE>
See accompanying notes
<PAGE> 7
EBONE A/S
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
YEAR ENDED --------------------------
DECEMBER 31, 1997 1997 1998
----------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................... $ 3,725 $ 1,225 $ 3,066
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization...................... 159 26 105
Changes in operating assets and liabilities:
Accounts receivable, trade...................... 447 (984) (4,548)
Accounts receivable, related parties............ (2,020) (5,650) (65)
Accounts payable................................ 1,547 4,492 (903)
Accounts payable, related parties............... 1,403 585 (430)
Deferred income................................. (1,582) 2,344 5,470
Accrued/prepaid expenses, net................... (99) (173) 95
Income taxes payable............................ 1,843 733 1,565
------- ------- --------
Cash provided by operating activities:............. 5,423 2,598 4,355
------- ------- --------
Cash flows from investing activities:
Cash capital expenditure........................... (377) (154) (98,701)
------- ------- --------
Cash used in investing activities:................. (377) (154) (98,701)
------- ------- --------
Cash flows from financing activities:
Proceeds from issuance of common shares............ 2,032 2,032 98,549
------- ------- --------
Cash provided by financing activities:............. 2,032 2,032 98,549
------- ------- --------
Net increase in cash and cash equivalents............ 7,118 4,476 4,203
Cash and cash equivalents, beginning of period....... 2,050 2,050 9,168
------- ------- --------
Cash and cash equivalents, end of period............. $ 9,168 $ 6,526 $ 13,371
======= ======= ========
Cash paid for taxes.................................. $ 457 $ -- $ --
======= ======= ========
</TABLE>
See accompanying notes
<PAGE> 8
EBONE A/S
NOTES TO THE FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Ebone A/S ("Ebone" or "the Company"), is a Tier 1 Internet backbone
provider, principally serving as a carriers' carrier for European Internet
service providers. As of December 31, 1997, the Company is a wholly-owned
subsidiary of Ebone Holding Association ("EHA"), an association whose members
are Internet service providers. In June 1998, in an effort to increase the
capitalization of the Company, 51,000 shares of common stock were issued to
Hermes Europe Railtel B.V. ("HER"), a company that is 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 Europe, for ECU 90 million. As a result, HER has a
75% interest in the Company. As part of the transaction, the Company purchased,
under a ten year transmission capacity agreement, long-term capacity rights on
HER's network valued at ECU 90 million. In addition, the individual members of
EHA have been given the right to purchase an additional 32,000 shares of the
Company's common stock in a future issuance to occur by the end of 1998.
Foreign currency
Danish Kroner ("DKK") is considered the functional currency of the Company.
The Company follows a translation policy in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation".
Assets and liabilities are translated at the rates of exchange at the balance
sheet date. Income and expense accounts are translated at average monthly rates
of exchange. The resultant translation adjustments are included in the
cumulative translation adjustment, a separate component of shareholders' equity.
Gains and losses from foreign currency transactions are included in the
operations.
Use of estimates in preparation of financial statements
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash and cash equivalents
Cash and cash equivalents represent cash and short-term deposits with
maturities of less than three months at the time of purchase.
Technical equipment
Technical equipment is stated at cost. Depreciation is calculated on a
straight-line basis over the estimated life of three years. Maintenance and
repairs are charged to expense as incurred.
Prepaid transmission capacity
The Company's right to use transmission capacity on the HER network is
amortized over the lesser of straight-line over the contract life of 10 years or
the actual use of the capacity.
<PAGE> 9
EBONE A/S
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Long-lived assets
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," long-lived
assets to be held and used by the Company are reviewed to determine whether any
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. For long-lived assets to be held and used, the
Company bases its evaluation on such impairment indicators as the nature of the
assets, the future economic benefit of the assets, any historical or future
profitability measurements, as well as other external market conditions or
factors that may be present. If such impairment indicators are present or other
factors exist that indicate that the carrying amount of the asset may not be
recoverable, the Company determines whether an impairment has occurred through
the use of an undiscounted cash flows analysis of assets at the lowest level for
which identifiable cash flows exist. If an impairment has occurred, the Company
recognizes a loss for the difference between the carrying amount and the
estimated value of the asset.
Earnings per share
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 earnings 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
earnings per share calculation.
Revenue recognition
The Company records as revenue the amount of telecommunications services
rendered, as measured primarily by the Internet access capacity provided.
Billings received in advance of service being rendered are deferred and
recognized as the service is rendered.
Fair value of financial instruments
Carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents, trade accounts receivable, accrued payroll
and other accrued liabilities approximate fair value because of their short
maturities.
Concentration of credit risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of cash and cash equivalents and accounts
receivable. The Company maintains most of its cash and cash equivalents in one
high-quality Danish financial institution. The Company extends credit to various
customers and establishes an allowance for doubtful accounts for specific
customers that it determines to have significant credit risk. The Company
provides allowances for potential credit losses when necessary.
The Company does not currently hedge against foreign currency fluctuations,
although the Company may implement such practices in the future. Under current
practices, the Company's results of operations could be adversely affected by
fluctuations in foreign currency exchange rates.
Income taxes
The Company accounts for income taxes using the liability method. Deferred
tax assets and liabilities are recognized for the expected future tax
consequences of events that have been recognized in the financial statements or
tax returns.
<PAGE> 10
EBONE A/S
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Comprehensive income
The Financial Accounting Standards Board issued SFAS No. 130, "Reporting
Comprehensive Income," which became effective for reporting periods beginning
after December 15, 1997 and requires additional disclosures with respect to
certain changes in assets and liabilities that previously were not required to
be reported as results of operations for the period. The Company adopted SFAS
130 on January 1, 1998. For the six months ended June 1, 1998, comprehensive
income is equal to net income.
Interim information
The unaudited interim information has been prepared on the same basis as
the annual financial statements and, in the opinion of the Company's management,
reflects normal recurring adjustments necessary for a fair presentation of the
information for the periods presented. Operating results for the six months
ended June 30, 1998 are not necessarily indicative of results for the full year.
2. INCOME TAXES
The reconciliation of taxes on income at the statutory tax rate to the
actual provision for income taxes is:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -----------------
1997 1997 1998
------------ ------ --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Tax at statutory rate (34%).............................. $2,048 $666 $1,574
Interest on tax.......................................... 242 -- --
Change in valuation allowance............................ 10 67 ( 10)
------ ---- ------
Income taxes............................................. $2,300 $733 $1,565
====== ==== ======
Significant components of the Company's deferred tax
assets and liabilities consisted of:
Deferred tax assets:
Book over tax depreciation............................... $ 33 $ 31 $ 24
less valuation allowance................................. (33) (31) (24)
------ ---- ------
$ -- $ -- $ --
====== ==== ======
</TABLE>
The Company has no deferred tax liabilities.
3. RELATED PARTY TRANSACTIONS
The Company earned $12.0 million for the year ended December 31, 1997 and
$7.4 million and $6.6 million for the six months ended June 30, 1997 and 1998,
respectively, from the individual members of EHA, who through their ownership of
EHA, are indirect shareholders of the Company. In addition, the Company incurred
costs of $10.6 million for the year ended December 31, 1997 and $6.2 million and
$5.9 million for the six months ended June 30, 1997 and 1998, respectively, to
the members of EHA for transmission capacity.
On June 24, 1998 the Company entered into a ten year transmission capacity
agreement, effective 1 July 1998, with HER, the majority shareholder. See Note
1.
4. COMMITMENTS AND CONTINGENCIES
Major customers
In 1997, the Company had a major customer representing $3.1 million or
14.4% of revenue.
<PAGE> 11
EBONE A/S
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Other matters
In the ordinary course of business, the Company may be party to various
legal and tax proceedings, and subject to claims, certain of which relate to the
regulatory environment in which the Company currently operates or intends to
operate. In the opinion of management, the Company's liability, if any, in all
pending litigation, or other legal proceeding or other matter other than what is
discussed above, will not have a material effect upon the financial condition,
results of operations or liquidity of the Company.
<PAGE> 12
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
The unaudited pro forma combined statement of operations for the year ended
December 31, 1997 gives effect to the acquisition of Ebone A/S ("Ebone") as if
it had occurred on January 1, 1997. The unaudited pro forma combined statement
of operations for the six months ended June 30, 1998 gives effect to the
acquisition of Ebone A/S as if it had occurred on January 1, 1997. No
adjustments has been included in the pro forma amounts for any anticipated cost
savings or other synergies.
The unaudited pro forma statements of operations are based on available
information and on certain assumptions and adjustments described in the
accompanying notes which Hermes Europe Railtel B.V. ("HER") believes are
reasonable. The unaudited pro forma combined statements of operations are
provided for informational purposes only and do not purport to present the
results of operations of HER had the transaction assumed therein occurred on or
as of the date indicated, nor is it necessarily indicative of the results of
operations which may be achieved in the future. The unaudited pro forma combined
statements of operations and related notes should be read in conjunction with
the consolidated financial statements of HER filed on its Form 10-K and Form
10-Q and the financial statements of Ebone including the notes thereto.
HERMES EUROPE RAILTEL B.V.
UNAUDITED PROFORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT WEIGHTED AVERAGE SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA
HER EBONE ADJUSTMENTS PRO FORMA
(A) (B) (C) COMBINED
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues....................................... $ 5,373 $21,266 $ (135)(d) $ 26,504
Operating costs and expenses:
Cost of revenues............................. 9,972 14,869 (135)(d) 24,706
Selling, general and administrative.......... 18,493 882 3,439(e) 22,814
-------- ------- ------- --------
28,465 15,751 3,304 47,520
-------- ------- ------- --------
(Loss) income from operations.................. (23,092) 5,515 (3,439) (21,016)
Other income/(expense):
Interest income.............................. 6,596 218 -- 6,814
Interest expense............................. (12,826) -- -- (12,826)
Foreign currency (losses) gains.............. (367) 292 -- (75)
-------- ------- ------- --------
(6,597) 510 -- (6,087)
-------- ------- ------- --------
Net (loss) income before income taxes and
minority interest............................ (29,689) 6,025 (3,439) (27,103)
Income taxes................................... -- 2,300 -- 2,300
-------- ------- ------- --------
Net (loss) income before minority interest..... (29,689) 3,725 (3,439) (29,403)
Minority interest.............................. -- -- (931)(f) (931)
-------- ------- ------- --------
Net (loss) income.............................. $(29,689) $ 3,725 $(4,370) $(30,334)
======== ======= ======= ========
Net loss per share............................. $ (0.33) $ (0.34)
======== ========
Weighted average common shares outstanding..... 89,957 89,957
======== ========
</TABLE>
<PAGE> 13
HERMES EUROPE RAILTEL B.V.
UNAUDITED PROFORMA COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT WEIGHTED AVERAGE SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA
HER EBONE ADJUSTMENTS PRO FORMA
(G) (H) (C) COMBINED
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues...................................... $ 15,936 $11,599 $(1,209)(i) $ 26,326
Operating costs and expenses:
Cost of revenues............................ 16,957 6,688 (1,209)(i) 22,436
Selling, general and administrative......... 10,407 700 1,672(j) 12,779
-------- ------- ------- --------
27,364 7,388 463 35,215
-------- ------- ------- --------
(Loss) income from operations................. (11,428) 4,211 (1,672) (8,889)
Other income/(expense):
Interest income............................. 5,912 141 -- 6,053
Interest expense............................ (15,521) -- -- (15,521)
Foreign currency (losses) gains............. (2,666) 62 -- (2,604)
-------- ------- ------- --------
(12,275) 203 -- (12,072)
-------- ------- ------- --------
Net (loss) income before income taxes and
minority interest........................... (23,703) 4,414 (1,672) (20,961)
Income taxes.................................. -- 1,507 -- 1,507
-------- ------- ------- --------
Net (loss) income before minority interest.... (23,703) 2,907 (1,672) (22,468)
Minority interest............................. (40) -- (727)(k) (767)
-------- ------- ------- --------
Net (loss) income............................. $(23,743) $ 2,907 $(2,399) $(23,235)
======== ======= ======= ========
Net loss per share............................ $ (0.12) $ (0.12)
======== ========
Weighted average common shares outstanding.... 190,468 190,468
======== ========
</TABLE>
<PAGE> 14
NOTES TO THE UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(a) Consolidated Statement of Operations for HER for the year ended December
31, 1997.
(b) Statement of Operations for Ebone for the year ended December 31, 1997.
(c) Represents pro forma adjustments for the acquisition of 75% of Ebone based
on a purchase price of approximately ECU 90 million in cash.
(d) Represents the elimination of $0.1 million of intercompany revenues and
corresponding costs between HER and Ebone in 1997.
(e) Represents amortization expense of $3.4 million related to the goodwill of
$17.2 million acquired in the Ebone acquisition. The goodwill will be
amortized on a straight-line basis over five years.
(f) Represents minority interest of $0.9 million related to the 25% minority
partner.
(g) Consolidated Statement of Operations for HER for the six months ended June
30, 1998.
(h) Statement of Operations for Ebone for the period ended June 24, 1998. The
results of Ebone for the six days ended June 30, 1998 are included in the
consolidated statements of operations of HER for the six months ended June
30, 1998 as a result of the acquisition occurring on June 24, 1998.
(i) Represents the elimination of $1.2 million of intercompany revenues and
corresponding costs between HER and Ebone during the six months ended June
30, 1998.
(j) Represents amortization expense of $1.7 million related to the goodwill of
$17.2 million acquired in the Ebone acquisition.
(k) Represents minority interest of $0.7 million related to the 25% minority
partner.
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Hermes Europe Railtel, B.V.
(Registrant)
/s/ FRANCOIS NOTE
------------------------------------
Francois Note
Corporate Financial Director--
Chief Financial Officer
Date: September 8, 1998
