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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, 1999
(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
incorporation or organization) Identification No.)
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 April 30, 1999, there were outstanding approximately 196,716 shares of
common stock of the registrant.
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TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
Item 1 Financial Statements ............................................... 3
Consolidated Balance Sheets as of March 31, 1999 and 1998 .......... 4
Consolidated Statements of Operations for the three months ended
March 31, 1999 and 1998 .......................................... 5
Consolidated Statements of Cash Flows for the three months ended
March 31, 1999 and 1998 .......................................... 6
Notes to Consolidated Financial Statements ......................... 7
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................ 9
Item 3 Quantitative and Qualitative Disclosure about Market Risk .......... 12
PART II. OTHER INFORMATION
Item 1 Legal Proceedings................................................... 13
Item 2 Changes in Securities and Use of Proceeds........................... 13
Item 3 Defaults Upon Senior Securities..................................... 13
Item 4 Submission of Matters to a Vote of Security Holders ................ 13
Item 5 Other Information................................................... 13
Item 6 Exhibits and Reports on Form 8-K ................................... 13
Signatures .................................................................. 14
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of March 31, 1999 and December 31,
1998
Condensed Consolidated Statements of Operations for the three months ended
March 31, 1999 and 1998
Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 1999 and 1998
Notes to Condensed Consolidated Financial Statements
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HERMES EUROPE RAILTEL B.V.
CONDENSED, CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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ASSETS
MARCH 31, DECEMBER 31,
1999 1998
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(IN THOUSANDS, EXCEPT
SHARE DATA)
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Current assets
Cash and cash equivalents ................................................... $ 373,858 $ 130,081
Restricted cash ............................................................. 14,866 30,062
Accounts receivable net ..................................................... 61,086 48,034
Due from affiliated companies ............................................... 3,233 2,164
Other assets ................................................................ 36,032 29,810
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Total current assets ................................................ 489,075 240,151
Property and equipment, net ................................................... 447,321 438,984
Goodwill and intangible assets, net ........................................... 37,247 32,467
Other non-current assets ...................................................... 13,612 14,456
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TOTAL ASSETS ........................................................ $ 987,255 $ 726,058
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses ....................................... $ 59,005 $ 84,047
Due to affiliated companies ................................................. 3,947 15,976
Deferred income ............................................................. 46,160 32,255
Other current liabilities ................................................... 1,643 --
Current portion of capital lease obligations ................................ 58,106 37,135
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Total current liabilities ........................................... 168,861 169,413
Long-term debt, less current portion ....................................... 556,382 265,353
Long term portion of capital lease obligations .............................. 176,396 190,378
Deferred income ............................................................. 44,247 34,000
Other non-current liabilities ............................................... 6,293 29,259
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TOTAL LIABILITIES ................................................... 952,179 688,403
Commitments and contingencies
Minority interest ............................................................. 27,889 27,759
SHAREHOLDERS' EQUITY
Common stock, 1000 guilders par value (297,000 shares authorized; 196,716
shares issued and outstanding at March 31, 1999 and December 31, 1998 ... 100,110 100,110
Additional paid-in capital .................................................. 8,490 8,437
Accumulated other comprehensive loss ........................................ (3,195) (1,300)
Accumulated deficit ......................................................... (98,218) (97,351)
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TOTAL SHAREHOLDERS' EQUITY .......................................... 7,187 9,896
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .......................... $ 987,255 $ 726,058
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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HERMES EUROPE RAILTEL B.V.
CONDENSED, CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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THREE MONTHS ENDED
MARCH 31,
----------------------
1999 1998
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(IN THOUSANDS,
EXCEPT WEIGHTED
AVERAGE SHARES AND
PER SHARE DATA)
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Revenues ..................................... $ 55,727 $ 4,706
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Operating costs and expenses:
Telecommunications services ................ 19,306 2,852
Selling, general and administrative ........ 11,137 4,421
Depreciation and amortization .............. 9,872 3,433
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40,315 10,706
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Income (loss) from operations ................ 15,412 (6,000)
Other income/(expense):
Interest income ............................ 3,810 3,292
Interest expense ........................... (17,245) (7,428)
Foreign currency losses .................... (1,569) (1,124)
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(15,004) (5,260)
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Net income (loss) before income taxes and
minority interest .......................... 408 (11,260)
Income taxes ................................. 1,145 --
--------- ---------
Net loss before minority interest ............ (737) (11,260)
Minority interest ............................ (130) --
--------- ---------
Net loss ..................................... $ (867) $ (11,260)
========= =========
Net loss per share ........................... $ (0.004) $ (0.06)
========= =========
Weighted average common shares outstanding ... 196,716 190,468
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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HERMES EUROPE RAILTEL B.V.
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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THREE MONTHS ENDED
MARCH 31,
1999 1998
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(IN THOUSANDS)
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OPERATING ACTIVITIES
Net loss .......................................................... $ (867) $ (11,260)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ................................... 11,122 3,726
Change in value of foreign currency instruments ................. (22,769) --
Minority interest ............................................... 130 --
Non-cash compensation ........................................... 51 266
Changes in assets and liabilities:
Accounts receivable .......................................... (18,831) (1,958)
Deposits ..................................................... (3,469) (421)
Accounts payable and accrued expenses ........................ (21,445) (13,914)
Other changes in assets and liabilities ...................... 27,855 4,034
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Net cash used in operating activities ................... (28,223) (19,527)
INVESTING ACTIVITIES
Purchases of property and equipment ............................. (17,427) (12,463)
Restricted cash ................................................. 15,860 14,155
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Net cash (used in) provided by investing activities ..... (1,567) 1,692
FINANCING ACTIVITIES
Proceeds from debt .............................................. 302,450 --
Repayments of debt .............................................. (13,189) (3,619)
Payment of debt issue costs ..................................... (9,973) (825)
Due to affiliated companies, net ................................ (13,489) (119)
--------- ---------
Net cash provided by (used in) financing activities ..... 265,799 (4,563)
Effect of exchange rate changes on cash and cash equivalents ...... 7,768 864
--------- ---------
Net increase (decrease) in cash and cash equivalents .............. 243,777 (21,534)
Cash and cash equivalents at beginning of period .................. 130,081 204,327
--------- ---------
Cash and cash equivalents at end of period ........................ $ 373,858 $ 182,793
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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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 1998 audited consolidated
financial statements and the notes related thereto. The results of operations
for the three months ended March 31, 1999 may not be indicative of the operating
results for the full year.
The Company is a provider of centrally managed telecommunications
transmission capacity across national borders in Europe and to the United States
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. The
Company began commercial operations in November 1996 and as of March 31, 1999
operated in Belgium, the Netherlands, the United Kingdom, France, Germany,
Switzerland, Italy, Denmark, Sweden and Spain. As of March 31, 1999 the high
capacity fiber optic network ("the Network") linked the cities of Brussels,
Antwerp, Rotterdam, Amsterdam, London, Paris, Frankfurt, Strasbourg, Zurich,
Geneva, Stuttgart, Dusseldorf, Munich, Milan, Berlin, Copenhagen, Stockholm,
Hamburg and Madrid. The Company intends to continue to build the Network using
an accessible and cost-efficient infrastructure of rights-of-way and fiber of
railways, motorways, pipeline companies, waterways and power companies.
The Company was formed on July 6, 1993 and is 89.9% owned by GTS Carrier
Services, Inc., a wholly owned subsidiary of Global TeleSystems Group, Inc.
("GTS"), a leading independent provider of telecommunications services to
businesses, other high usage customers and telecommunications carriers in
Europe, Russia and the Commonwealth of Independent States.
2. POLICIES AND PROCEDURES
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income", comprehensive loss was $2.8 million and
$12.7 million for the three months ended March 31, 1999 and 1998, respectively,
and was comprised of net loss of $0.9 million and $11.3 million and foreign
currency translation adjustments of $1.9 million and $1.4 million for the three
months ended March 31, 1999 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. In accordance with SFAS No.128, "Earnings per Share" 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 FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Company expects to adopt the new
statement effective January 1, 2000. The statement will require the Company to
recognize all derivatives on the balance sheet at fair value. The Company does
not anticipate that the adoption of the statement will have a significant effect
on its results of operations or financial position.
As of January 1,1999, the Company adopted the Euro as its functional
currency.
Certain reclassifications have been made to the March 1998 condensed,
consolidated financial statements in order to conform to the 1999 presentation.
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3. DEBT OBLIGATIONS
In January, 1999 the Company issued, through a private placement, aggregate
principal amount $200 million of senior notes due January 15, 2009 (the "Dollar
Notes") and Euro 85 million (approximately $100 million) of senior notes due
January 15, 2006 (the "Euro Notes" and together with the Dollar Notes, the "New
Senior Notes"). The New Senior Notes are general unsecured obligations of the
Company, with interest payable semiannually at a rate of 10.375%. The Company
may redeem the Dollar Notes in whole or in part, any time on or after January
15, 2004 at specific redemption prices. The Company may redeem the Euro Notes,
in whole or in part, any time on or after January 15, 2003 at specific
redemption prices. The Company may also redeem the Dollar Notes and the Euro
Notes at a price equal to 110.375% of the principal amounts prior to January 15,
2002 with net cash proceeds of a public equity offering with gross proceeds of
at least $75 million or in certain other circumstances specified in the
indentures for the Dollar Notes and the Euro Notes provided, however that at
least two-third of the principal amount of the Dollar Notes and the Euro Notes
originally issued remain outstanding after each such redemption. Net proceeds
from the issuance of the New Senior Notes was approximately $289.3 million. The
Company filed an S-4 registration statement with the Securities and Exchange
Commission to exchange registered senior notes, with the same terms and
conditions as the New Senior Notes, for the New Senior Notes, which became
effective in February 1999. The exchange of registered notes for the New
Senior Notes was completed on March 24, 1999.
4. CAPITAL LEASE OBLIGATIONS
During the three months ended March 31, 1999, the Company 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 $37.3 million. The commitments have expected lease terms
of ten to fifteen years.
5. Subsequent Events
Subsequent to March 31, 1999, certain employees were issued 2,967 shares of
the Company's common stock, as a result of the exercise of their vested stock
options.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis relates to our financial condition and
results of operations as of March 31, 1999 and 1998 and for the three months
ended March 31, 1999 and 1998 and of certain factors that management believes
are likely to affect our prospective financial condition. The following
discussion should be read in conjunction with our Condensed, Consolidated
Financial Statements and the notes related thereto.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
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
and (iii) changes in our competitive environment, contain forward-looking
statements concerning our 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.
In addition, any statements that express, or involve discussions as to,
expectations, beliefs, plans, objectives, assumptions or future events or
performance (often, but not always, through the use of words or phrases such as
"will likely result," "are expected to," "will continue," "is anticipated,"
"estimated," "intends," "plans," "projection" and "outlook") are not historical
facts and may be forward-looking and, accordingly, such statements involve
estimates, assumptions and uncertainties which could cause actual results to
differ materially from those expressed in the forward-looking statements.
Accordingly, any such statements are qualified in their entirety by reference
to, and are accompanied by, the factors discussed throughout this Report. Among
the key factors that have a direct bearing on our results of operations are the
potential risk of delay in implementing our business plan; the political,
economic and legal aspects of the markets in which we operate; competition and
our need for additional substantial financing. These and other factors are
discussed herein under "Business," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this Report.
The factors described in this Report could cause actual results or outcomes
to differ materially from those expressed in any forward-looking statements made
by us or on behalf of us, and investors, therefore, should not place undue
reliance on any such forward-looking statements. Further, any forward-looking
statement speaks only as of the date on which such statement is made, and we
undertake no obligation to update any forward-looking statement or statements to
reflect events or circumstances after the date on which such statement is made
or to reflect the occurrence of unanticipated events. New factors may emerge
from time to time, and it is not possible for management to predict all of such
factors. Further, we cannot assess the impact of each such factor on our
business or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any forward-looking
statements.
OVERVIEW
We are continuing to develop and operate a pan-European high capacity fiber
optic network. We began delivering services to customers in November 1996 when
the Brussels-Amsterdam route came into operation. London, Paris, Antwerp and
Rotterdam came into operation during 1997 and Frankfurt, Strasbourg, Zurich,
Geneva, Stuttgart, Dusseldorf, Munich, Milan, Berlin, Copenhagen and Stockholm
during 1998. In the first quarter of 1999, Hamburg and Madrid came into
operation. We also currently lease capacity on transatlantic cables linking the
network to North America. On June 24, 1998, we acquired a 75% interest in Ebone
A/S ("Ebone"), a Tier 1 Internet backbone provider, principally serving 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 acquisition.
RESULTS OF OPERATIONS
Revenue. Our consolidated revenues for the three months ended March 31, 1999
were $55.7 million as compared to $4.7 million for the comparable period in
1998. The growth in revenue is attributable to the continued deployment of our
network as well as the inclusion of Ebone, whose revenue was $9.3 million for
the three months ended March 31, 1999.
Telecommunications Services. Our telecommunications services costs for the
three months ended March 31, 1999 were $19.3 million as compared to $2.9 million
for the comparable period in 1998. The increase in telecommunications services
costs for the three months ended March 31, 1999 was primarily due to increased
costs related to operating and maintaining the network as it is continued to be
deployed, as well as the increase in local access costs and the inclusion of
Ebone, whose telecommunications services costs were $4.2 million for the three
months ended March 31, 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended March 31, 1999 were $11.1
million as compared to $4.4 million for the same period in 1998. The increase in
selling, general and administrative
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expenses is reflective of the growth of our business operations and support
personnel. At March 31, 1999 we employed 280 people as compared to 153 people at
March 31, 1998.
Depreciation and Amortization. Depreciation and amortization expense for the
three months ended March 31, 1999 was $9.9 million as compared to $3.4 million
for the comparable period in 1998. The increase in depreciation and amortization
expense is attributable to an increase in depreciation of network assets due to
the continued deployment of our network.
Interest. Interest expense for the three months ended March 31, 1999 was
$17.2 million as compared to $7.4 million for the same period in 1998. The
increase was primarily attributable to the interest and related costs associated
with the issuance in January 1999 of $200 million aggregate principal amount of
10.375% senior notes due 2009 and Euro 85 million aggregate principal amount of
10.375% senior notes due 2006.
Interest income for the three months ended March 31, 1999 was $3.8 million
as compared to $3.3 million in the comparable period in 1998. The increase is
due to the interest earned through our short-term investments that have grown,
due to the proceeds of our financing activities.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of our funding through December 31, 1998 have been net
proceeds of $251.3 million from the issuance of the $265 million aggregate
principal amount of 11.5% senior notes in 1997 and cash equity contributions of
$103.2 million in 1997. In addition, in January 1999, we completed the issuance
of $200 million aggregate principal amount of 10.375% senior notes due 2009 and
Euro 85 million (approximately $100 million) aggregate principal amount of
10.375% senior notes due 2006. The senior notes issued in 1999 are general
unsecured obligation and have substantially the same general terms and
conditions as the senior notes issued in 1997. Net proceeds from the issuance of
these senior notes were approximately $289.3 million.
Development of our fiber optic network is capital intensive. We have spent
approximately $217 million in cash on network capital expenditures through March
31, 1999 and expect to incur an additional $573 million through 2000 in order to
complete the build-out of the network and enhance our capacity through the
implementation of dense wave multiplexing technology. In addition, as of March
31, 1999, $308 million has been capitalized in connection with long-term fiber
lease arrangements and an additional $115 million is expected to be capitalized
through 2000 in order to complete the build-out of the network. We believe that
the net proceeds from the issuance of the 1997 and 1999 senior notes, combined
with projected internally generated funds, should be sufficient to fund expected
capital expenditures as well as payments on the long-term fiber lease
arrangements. However, the actual amount and timing of our future requirements
may differ materially from our estimates. Any failure to obtain necessary
financing may require that we delay or abandon our plans for deploying the
remainder of the network and would jeopardize our viability.
We had a positive working capital of $320.2 million and $180.7 million as of
March 31, 1999 and 1998, respectively. We had cash and cash equivalents of
$373.9 million and $182.8 million at March 31, 1999 and 1998 respectively. We
had $14.9 million and $43.6 million of restricted cash at March 31, 1999 and
1998, respectively. The restricted cash at March 31, 1999 and 1998 primarily
represents our obligation to place into escrow the first four scheduled
semi-annual interest payments on the 1997 senior notes.
During the three months ended March 31, 1999, we used $28.2 million cash for
operating activities compared with using $19.5 million for the comparable period
in 1998. Investing activities used cash of $1.6 million for the three months
ended March 31, 1999 as compared to providing cash of $1.7 million for the
comparable period in 1998.
We have developed risk management policies that establish guidelines for
managing foreign exchange risk. We are currently evaluating the materiality of
foreign exchange exposures in different countries and the financial instruments
available to mitigate this exposure. We are designing reporting processes to
monitor the potential exposure on an ongoing basis and expect to implement this
process by the end of the second quarter of 1999. We have limited our foreign
currency exposure by entering into a foreign currency swap agreement. We find it
impractical to hedge all foreign currency exposure and as a result, will
continue to experience foreign currency gains and losses.
YEAR 2000 COMPLIANCE
The "Year 2000" issue is the result of computer programs using two digits
rather than four to define the applicable year. Because of this programming
convention, software, hardware or firmware may recognize a date using "00" as
the year 1900 rather than the
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year 2000. Use of non-Year 2000 compliant programs could result in system
failures, miscalculations or errors causing disruptions of operations or other
business problems, including, among others, a temporary inability to process
transactions and invoices or engage in similar normal business activities.
Issues Posed by the Year 2000 Issue. We are exposed to the Year 2000 issue
in a number of ways. Among other things, the Year 2000 issue might affect our:
(i) computer hardware and software; (ii) telecommunications equipment and other
systems with embedded logic (among other things, this includes our fire
detection, access control systems, heating, ventilation and air conditioning,
and uninterruptible power supply; (iii) operating partners and organizations
upon which we are dependent; (iv) local access connections, upon which we are
dependent; and (v) supply chain.
Hermes Europe Railtel Year 2000 Compliance Program. We have initiated a Year
2000 compliance program to address the aforementioned risks which the Year 2000
issue poses and to avoid any material loss or impact to us or our customers due
to these risks. The object of the Year 2000 compliance program is to ensure that
neither the performance nor functionality of our operations is affected by
dates, prior to, during and after 2000. The scope of the Year 2000 compliance
program includes all of the business functions, locations and resources that are
essential. The resources that are within the scope of the Year 2000 compliance
program are, among other things, our computer systems, software, vendor supplied
software, telecommunications equipment, third party telecommunications partners
and other network service suppliers, environmental and building control systems,
internal communications systems and other interfaces with third party services.
As explained below, our efforts to assess systems as well as non-system areas
related to Year 2000 compliance involve (i) a wide-ranging assessment of the
Year 2000 problems that may affect us, (ii) the development of remedies to
address the problems discovered in the assessment phase and (iii) testing of the
remedies.
Assessment Phase. 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. During the
assessment phase we have identified substantially all of our major hardware and
software platforms, applications, telecommunications equipment and other non-IT
resources that support the business functions. The assessment phase of the Year
2000 compliance program further identified the internal and external technical
interfaces, third party business relationships and internally developed systems
that might be materially impacted by Year 2000 issues. Our observations from the
assessment phase during the third and fourth quarters of 1998 is that most of
our telecommunications equipment and software has been purchased within the last
three years and the majority is already compliant or can be made compliant with
minor upgrades. We completed the assessment phase of our Year 2000 readiness in
the fourth quarter of 1998.
Remediation, Prevention and Testing Phase. Based on those resources
identified in the assessment phase, we developed a detailed plan in the fourth
quarter of 1998, that will then be followed by an upgrade, a remediation, a
prevention and a testing phase in early 1999. These phases are expected to be
completed during the second quarter of 1999.
Assessment of Third Party Compliance. As noted above, we have also
undertaken our Year 2000 compliance program to assess and monitor the progress
of third party vendors in resolving Year 2000 issues. To ensure the compliance
of vendors of hardware and software applications used by us, we are obtaining
confirmations from its primary telecommunications vendors, business partners 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. We intend to continue follow-up with any vendors who indicate any
material problems in their replies. We expect to receive statements of intended
compliance by mid-1999.
Worst Case Scenario for the Company. Our worst case scenario would be the
failing of our telecommunications equipment, power providers and/or interfaces
with other telecommunication vendors. These cases would create business
interruption at some of our operations and would adversely affect our revenues.
However, we have 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, we currently have diesel
generators at almost all of our sites and expect to install diesel generators in
the remaining sites in 1999. Based on our assessment during the third and fourth
quarters of 1998, we do not foresee a material loss due to these conditions and
we are hopeful that its remediation and testing efforts will ensure that we have
addressed our Year 2000 readiness. However, there can be no assurance that Year
2000 non-compliance by our systems or the systems of vendors, customers,
partners or others will not result in a material adverse effect.
Contingency Plans. We are considering a contingency plan to address our
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
telecommunications providers at reasonable terms.
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Costs related to the Year 2000 Issue. We expect that we will incur
approximately $0.8 million to complete the assessment, detailed planning,
remediation prevention and testing phases, of which approximately $0.3 million
has been incurred through March 31, 1999. These costs will be funded 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 and fourth quarters of 1998. We do not expect that the costs of addressing
our Year 2000 readiness will have a material effect on our financial condition
or results of operations. However, there can be no assurance that Year 2000
non-compliance by our systems or the systems of vendors, customers, partners or
others will not result in a material adverse effect.
Risks Related to the Year 2000 Issue. Although our efforts to be Year 2000
compliant are intended to minimize the adverse effects of the Year 2000 issue on
our business and operations, the actual effects of the issue will not be known
until 2000. Difficulties in implementing the remediation or prevention phases or
our failure to fully implement the planning or remediation phases or the failure
of our major vendors, third party network service providers, and other material
service providers and customers to adequately address their respective Year 2000
issues in a timely manner would have a material adverse effect on our business,
results of operations, and financial condition.
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, where we have our headquarters and the majority of our subsidiaries and
operations, established fixed conversion rate between their existing sovereign
currencies and a new currency called the "Euro." These countries adopted the
Euro as their common legal currency on that date. The Euro trades on currency
exchanges and is available for non-cash transactions. Hereafter 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.
We have significant operations within the European Union including many of
the countries that have adopted the Euro. We are currently evaluating the impact
the Euro will have on our continuing business operations and no assurances can
be given that the Euro will not have material adverse affect on our business,
financial condition and results of operations. However, we do not expect the
Euro to have a material effect on our competitive position as a result of price
transparency within the European Union as we have always operated as a
pan-European business with transparent pricing in ECU for the majority of our
customers. Moreover, we are evaluating our ability to update our information
systems to accommodate the adoption of the Euro but we do not expect to incur
material costs in either the evaluating or the updating of such systems. In
addition, we cannot accurately predict the impact the Euro will have on currency
exchange rates or on our currency exchange risk.
We adopted the Euro as our functional currency on January 1, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates on long-term
obligations and as a global company, we also face exposure to adverse movements
in foreign currency exchange rates. A portion of the our debt obligations are
denominated in currencies which expose us to risk associated with changes in
foreign exchange rates. We have developed risk management policies that
establish guidelines for managing foreign exchange risk and periodically
evaluates the materiality of foreign exchange exposures and the financial
instruments available to mitigate this exposure.
We entered into a foreign currency swap agreement in 1998 in order to
mitigate our exposure on US dollar denominated debt. We also attempt to
mitigate this and other exposures from debt obligations denominated in exposed
currencies by maintaining assets in the exposed currency wherever possible. We
find it impractical to hedge all foreign currency exposure and as a result will
continue to experience foreign currency gains and losses. The introduction of
the Euro as a common currency for members of the European Union occurred on
January 1, 1999. We have not determined what impact, if any, the Euro will have
on our foreign exchange exposure.
The only significant change in our market risk since December 31, 1998 is
the issuance in January 1999 of $200 million 10.375% senior notes due January
15, 2009 which expose us to changes in interest and foreign exchange rates, and
the issuance of Euro 85 million 10.375% senior notes due January 15, 2006 which
expose us to changes in interest rates.
12
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) In January 1999, the Company issued, through a private placement,
aggregate principal amount $200 million of senior notes due January 15,
2009 and Euro 85 million (approximately $100 million) of senior notes
due January 15, 2006 (together, the "New Senior Notes"). The New Senior
Notes were subsequently replaced with similar registered securities. The
net proceeds from the New Senior Notes was approximately $289.3 million
and such net proceeds will be used to finance the cost of the network
assets to permit network expansion beyond the originally contemplated
scope, including transatlantic capacity, enhancing the capacity and
speed of the network and continuing the buildout of the network.
Accordingly, there were no direct or indirect payments to directors or
officers of the Company or to any person or entity.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
On January 15, 1999, our shareholders approved by unanimous written
consent, the issuance of up to $ 200 million aggregate principal amount
of 10.375% senior notes due 2009 and up to Euro 85 million 10.375%
senior notes due 2006.
ITEM 5. OTHER INFORMATION
See Note 5 to the Company's unaudited, condensed, consolidated financial
statements included in this report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
<TABLE>
<CAPTION>
DESIGNATION DESCRIPTION
----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
B. Reports on Form 8-K
<TABLE>
<CAPTION>
DATE OF REPORT SUBJECT OF REPORT
-------------- -----------------
<S> <C>
None
</TABLE>
13
<PAGE> 14
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 17, 1999
14
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------
<S> <C>
27 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 373,858
<SECURITIES> 0
<RECEIVABLES> 61,086
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 489,075
<PP&E> 482,008
<DEPRECIATION> 34,687
<TOTAL-ASSETS> 987,255
<CURRENT-LIABILITIES> 168,861
<BONDS> 790,884
0
0
<COMMON> 100,110
<OTHER-SE> (92,923)
<TOTAL-LIABILITY-AND-EQUITY> 987,255
<SALES> 0
<TOTAL-REVENUES> 55,727
<CGS> 0
<TOTAL-COSTS> 19,306
<OTHER-EXPENSES> 21,009
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,245
<INCOME-PRETAX> 408
<INCOME-TAX> 1,145
<INCOME-CONTINUING> (867)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (867)
<EPS-PRIMARY> (0.004)
<EPS-DILUTED> (0.004)
</TABLE>
