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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
Form 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the quarterly period ended September 30, 1998
_______________
VERSATEL TELECOM INTERNATIONAL N.V.
(Exact name of Registrant as specified in its charter)
Paalbergweg 36
1105 BV Amsterdam-Zuidoost
The Netherlands
(Address of principal executive offices)
______________
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.
Form 20-F __X__ Form 40-F _____
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes _____ No __X__
If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82- N/A
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VERSATEL TELECOM INTERNATIONAL N.V.
REPORT ON FORM 6-K FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Audited Condensed Consolidated Balance Sheet as of December 31, 1997
and Unaudited Condensed Consolidated Balance Sheet
as of September 30, 1998 ............................................. 3
Unaudited Condensed Consolidated Statements of Operations for
the Quarterly Periods ended September 30, 1997 and 1998 and for
the Nine Month Periods Ended September 30, 1997 and 1998 ............. 5
Unaudited Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 1997 and 1998 .................... 6
Unaudited Condensed Consolidated Statement of Shareholders' Equity for
the Nine Months Ended September 30, 1998 .............................. 7
Notes to the Unaudited Condensed Consolidated Financial Statements...... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .............................................. 9
PART II: OTHER INFORMATION ..................................................... 19
SIGNATURES ..................................................................... 20
</TABLE>
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PART I
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
VERSATEL TELECOM INTERNATIONAL N.V. AND ITS SUBSIDIARIES
AUDITED CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997 AND UNAUDITED CONDENSED CONSOLIDATED
BALANCE SHEET AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
September 30,
December 31, 1998
1997 (Unaudited)
------------ ----------------------------
NLG NLG US$
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash ..................................................... 1,345,981 239,647,819 127,472,244
Current portion of restricted cash ....................... 75,980 -- --
Accounts receivable, net of allowance for doubtful
accounts of NLG 65,000 and NLG 208,602, respectively .. 1,804,373 5,898,552 3,137,528
Inventory ................................................ 417,572 1,128,695 600,370
Prepaid expenses and other ............................... 1,995,251 3,307,981 1,759,564
------------ ------------- -------------
Total current assets .................................. 5,639,157 249,983,047 132,969,706
------------ ------------- -------------
Restricted Cash, net of current portion .................... 72,932 155,517,867 82,722,270
------------ ------------- -------------
Capitalized finance costs, net ............................. -- 19,333,330 10,283,686
------------ ------------- -------------
Property and Equipment, net ................................ 13,619,207 23,161,261 12,319,820
------------ ------------- -------------
Construction in progress ................................... -- 10,406,731 5,535,495
------------ ------------- -------------
Goodwill ................................................... -- 1,477,582 785,948
------------ ------------- -------------
Total assets .......................................... 19,331,296 459,879,818 244,616,925
============ ============= =============
</TABLE>
See notes to the unaudited condensed consolidated financial statements.
3
<PAGE> 4
VERSATEL TELECOM INTERNATIONAL N.V. AND ITS SUBSIDIARIES
AUDITED CONDENSED CONSOLIDATED BALANCE SHEET AUDITED
AS OF DECEMBER 31, 1997 AND UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
December 31, September 30, 1998
1997 (Unaudited)
------------ ----------------------------
NLG NLG US$
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ....................................... 20,674,434 11,443,960 6,087,213
Due to related parties ................................. 248,525 -- --
Accrued liabilities .................................... 7,690,886 34,924,226 18,576,716
Current portion of deferred income ..................... 98,434 157,003 83,512
Current portion of capital lease obligations ........... 278,661 325,346 173,057
----------- ----------- -----------
Total current liabilities ........................... 28,990,940 46,850,535 24,920,498
----------- ----------- -----------
Deferred Income, net of current portion .................. 341,648 -- --
----------- ----------- -----------
Capital Lease Obligations, net of current portion ........ 107,813 -- --
----------- ----------- -----------
Long Term Debt ........................................... -- 422,539,286 224,754,939
----------- ----------- -----------
Subordinated Convertible Shareholder Loans ............... 8,105,000 -- --
----------- ----------- -----------
Shareholders' Equity:
Ordinary Shares, NLG 0.10 par value, 44,550,000 shares
authorized and 19,427,405 issued and outstanding at
September 30, 1998 and 9,579,643 issued and
outstanding at December 31, 1997 .................... 957,964 1,942,741 1,033,373
Additional paid-in capital ............................. 6,037,011 50,786,536 27,014,115
Warrants ............................................... -- 3,341,000 1,777,128
Accumulated deficit .................................... (25,209,080) (65,580,280) (34,883,128)
----------- ----------- -----------
Total shareholders' equity .......................... (18,214,105) (9,510,003) (5,058,512)
----------- ----------- -----------
Total liabilities and shareholders' equity ..... 19,331,296 459,879,818 244,616,925
=========== =========== ===========
</TABLE>
See notes to the unaudited condensed consolidated financial statements.
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VERSATEL TELECOM INTERNATIONAL N.V. AND ITS SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
QUARTERLY PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 AND FOR THE NINE
MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1998.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------------------------- ---------------------------------------
1997 1998 1998 1997 1998 1998
--------- ---------- --------- ---------- ---------- ----------
NLG NLG US$ NLG NLG US$
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES......................... 5,325,110 10,130,246 5,388,429 14,262,632 25,880,335 13,766,136
OPERATING EXPENSES
Cost of Revenues excluding depreciation
and amortization..................... 4,841,231 8,030,332 4,271,453 11,169,554 21,120,277 11,234,190
Selling, general and administrative..... 5,597,885 15,727,760 8,365,830 10,929,293 30,001,986 15,958,504
Depreciation and amortization........... 557,984 2,220,048 1,180,877 1,238,377 4,913,693 2,613,666
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses................ 10,997,100 25,978,140 13,818,160 23,337,224 56,035,956 29,806,360
----------- ----------- ----------- ----------- ----------- -----------
Operating loss.......................... (5,671,990) (15,847,894) (8,429,731) (9,074,592) (30,155,621) (16,040,224)
OTHER INCOME (EXPENSES)
Foreign exchange gains, net............. 6 5,086,856 2,705,774 6 4,747,232 2,525,123
Interest income......................... 0 6,172,061 3,283,011 20,686 8,143,802 4,331,810
Interest expense - third parties........ (13,698) (15,108,621) (8,036,500) (34,424) (20,296,407) (10,795,961)
Interest expense - related parties...... (126,318) -- -- (315,939) (2,810,398) (1,494,893)
----------- ----------- ----------- ----------- ----------- -----------
(140,010) (3,849,704) (2,047,715) (329,671) (10,215,771) (5,433,921)
Net loss................................ (5,812,000) (19,697,598) (10,477,446) (9,404,263) (40,371,392) (21,474,145)
----------- ----------- ----------- ----------- ----------- -----------
Net loss per share (Basic and Diluted).. (0.65) (1.01) (0.54) (1.06) (2.65) (1.41)
Weighted average number of shares
outstanding.......................... 8,910,000 19,427,405 19,427,405 8,910,000 15,247,579 15,247,579
=========== =========== =========== =========== =========== ===========
</TABLE>
See notes to the unaudited condensed consolidated financial statements.
5
<PAGE> 6
VERSATEL TELECOM INTERNATIONAL N.V. AND ITS SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1997 1998
---------- --------------------------
<S> <C> <C>
NLG NLG US$
Cash Flows from Operating Activities:
Net loss.................................................. (9,404,263) (40,371,392) (21,474,145)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation and amortization.......................... 1,238,377 4,913,693 2,613,666
Restricted cash........................................ 139,332 (155,368,955) (82,643,061)
Deferred income........................................ -- (283,079) (150,572)
Currency translation adjustment........................ -- 192 102
Changes in other operating assets and liabilities
Accounts receivable.................................... (941,437) (4,094,179) (2,177,755)
Inventory.............................................. (383,024) (711,123) (378,257)
Prepaid expenses and other............................. (2,531,483) (1,312,730) (698,261)
Accounts payable....................................... 9,632,954 (9,230,474) (4,909,827)
Due to related parties................................. (217,987) (248,525) (132,194)
Accrued liabilities.................................... 3,299,548 27,233,340 14,485,819
--------- ------------ ------------
Net cash provided by (used in) operating
activities...................................... 832,017 (179,473,232) (95,464,485)
--------- ------------- -------------
Cash Flows from Investing Activities:
Capital expenditures...................................... (5,237,884) (24,075,808) (12,806,281)
----------- ------------- -------------
Cash Flows from Financing Activities:
Proceeds (redemptions) from capital lease obligations..... (126,262) (61,128) (32,515)
Proceeds from subordinated convertible shareholder
loans.................................................. 2,000,000 (8,105,000) (4,311,170)
Finance costs, net........................................ -- (20,000,000) (10,638,298)
Proceeds from senior notes................................ -- 422,539,286 224,754,939
Shareholder contributions................................. -- 49,075,302 26,103,884
Goodwill paid on acquisition.............................. -- (1,597,582) (849,778)
----------- ------------ -------------
Net cash provided by financing activities......... 1,873,738 441,850,878 235,027,063
----------- ------------ -------------
Net Increase (Decrease) in Cash............................. (2,532,129) 238,301,838 126,756,297
Cash, beginning of the year................................. 4,290,119 1,345,981 715,947
----------- ------------ -------------
Cash, end of the period..................................... 1,757,990 239,647,819 127,472,244
Supplemental Disclosures of Cash Flow Information:
Cash paid for --
Interest (net of amounts capitalized).................. (274,000) (217,000) (115,425)
Income taxes........................................... -- -- --
</TABLE>
See notes to the unaudited condensed consolidated financial statements.
6
<PAGE> 7
VERSATEL TELECOM INTERNATIONAL N.V. AND ITS SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Common Paid-in Accumulated
Stock Capital Warrants Deficit Total
------ ------- -------- ----------- -----
NLG NLG NLG NLG NLG
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997....... 957,964 6,037,011 -- (25,209,080) (18,214,105)
Net Loss......................... -- -- -- (40,371,392) (40,371,392)
Issuance of warrants............. -- -- 3,341,000 -- 3,341,000
Contributions.................... 984,777 44,749,525 -- -- 45,734,302
Currency translation adjustment.. -- -- -- 192 192
--------- ---------- --------- ----------- -----------
Balance, September 30, 1998...... 1,942,741 50,786,536 3,341,000 (65,580,280) (9,510,003)
--------- ---------- --------- ----------- -----------
</TABLE>
See notes to the unaudited condensed consolidated financial statements.
7
<PAGE> 8
VERSATEL TELECOM INTERNATIONAL N.V. AND ITS SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1998
AND FOR THE THREE
AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1998
(ALL AMOUNTS EXPRESSED IN DUTCH GUILDERS)
1. FINANCIAL PRESENTATION AND DISCLOSURES
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements of VersaTel Telecom International N.V.,
formerly known as VersaTel Telecom B.V., and its wholly-owned subsidiaries (the
"Company") have been prepared in conformity with US generally accepted
accounting principles ("US GAAP") and contain all adjustments (consisting only
of normal recurring accruals) necessary to present fairly the Company's
consolidated financial position as of September 30, 1998, and the results of
operations and cash flows for the three months and nine months ended September
30, 1997 and 1998.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
be read in conjunction with the Company's 1997 audited financial statements and
the notes related thereto. The results of operations for the nine months period
ended September 30, 1998 may not be indicative of the operating results for the
full year.
As of September 30, 1998, the Company wholly-owned the following
subsidiaries:
-- VersaTel Telecom Europe B.V.
-- VersaTel Telecom Netherlands B.V.
-- VersaTel Telecom Belgium N.V.
-- Bizztel Telematica B.V.
All intercompany assets, liabilities and transactions have been eliminated
in consolidation.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured as its fair value. It also requires that changes in the derivative's
fair value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate, and
assess the effectiveness of transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999
and can not be applied retroactively. The Company has not yet quantified the
impacts of adopting SFAS No. 133 on the financial statements and have not
determined the timing of or method of our adoption of SFAS No. 133.
2. FINANCIAL CONDITION AND OPERATIONS
For the year ended December 31, 1997, the Company had a loss from operating
activities of NLG 19,273,250 and negative working capital of NLG 23,351,783 at
December 31, 1997. For the nine-month period ended September 30, 1998, the loss
from operating activities amounted to NLG 40,371,392 and the positive working
capital at September 30, 1998 amounted to NLG 203,132,512. In addition, the
Company had an accumulated deficit of NLG 25,209,080 as of December 31, 1997 and
of NLG 65,580,280 as of September 30, 1998. The Company expects to incur
operating losses and net losses for the foreseeable future as it incurs
additional costs associated with the development and expansion of the Company's
network, the expansion of its marketing and sales organization and the
introduction of new telecommunications services. In addition, prices in the
telecommunications industry in Europe have declined in recent years and, as
competition continues to increase, the Company expects that prices will continue
to decline. Management of the Company believes that the Company will be able to
borrow additional financing in order to develop its network and by that
increasing traffic volume. Also, management believes that it is able to reduce
the cost of providing telecommunication services, commensurate with the decline
of the prices. To sustain its current and future level of operations the Company
issued a private debt offering with gross proceeds of US$225,000,000 on May 20,
1998 repayable in 2008 (the "First Offering"). The First Offering consists of
13 1/4% senior notes due 2008 and warrants to purchase 1,500,000 Ordinary
Shares of the Company. The costs in connection with the First Offering of
NLG 20.0 million have been capitalized and are being amortized over the
duration of the underlying offering (10 years).
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<PAGE> 9
3. RECAPITALIZATION
To increase the equity of the Company by means of the conversion of
subordinated debt and cash contribution by its shareholders, the Company has
completed the following four part recapitalization (the "Recapitalization").
In February 1998, NeSBIC Venture Fund C.V. ("NeSBIC") converted its NLG 4.5
million bridge loan into ordinary shares of the Company (the "Ordinary Shares").
In addition, Telecom Founders B.V. ("Telecom Founders") and NeSBIC invested an
additional NLG 7.2 million in equity capital in the Company which was formally
contributed on April 17, 1998. In addition, NeSBIC and Cromwilld converted their
subordinated convertible notes totaling NLG 3.6 million into Ordinary Shares of
the Company in April 1998. The third component included a new equity investment
by Paribas Deelnemingen N.V. ("Paribas") of NLG 12.8 million. In May 1998,
NeSBIC, Telecom Founders, Paribas and Nederlandse Participatie Maatschappij N.V.
("NPM") have invested an additional NLG 15.0 million in equity capital.
Accordingly, the invested equity in the Company has increased from NLG 7.0
million to NLG 50.1 million.
The conversion price of NLG 3.36 per share used for the conversion of the
1996 and 1997 loans was approved in separate shareholder resolutions, dated
March 2, 1998 and September 30, 1997, respectively.
The estimated fair value at the date of the extinguishment of the
shareholder loans amounted to NLG 4.45 per share, which represented the price
paid by an unrelated party on April 8, 1998 for the Company's ordinary shares.
As the conversion took place very shortly thereafter on April 17, 1998, the
price paid by the new shareholder was deemed to be fair value on the date of
extinguishment.
Cromwilld, one of the shareholders of the Company, has objected to the
above Recapitalization. Based upon advice from the Company's legal counsel, the
impact of this objection is considered to be remote.
4. CONSTRUCTION IN PROGRESS
The company continues to build out its network and is securing rights of
way for the Benelux overlay network (the "Benelux Overlay Network"). The
resulting assets as of September 30, 1998 have been recorded at cost under the
caption "Construction in progress." Reference is also made to Note 6.
5. ACQUISITION
On May 29, 1998 and August 10, 1998, the Company acquired the shares of
Bizztel Telematica B.V. ("Bizztel") in two phases. The figures of Bizztel are
included in the financial statements as of September 30, 1998. The key figures
of Bizztel as included in the financial statements of VersaTel as of September
30, 1998 of VersaTel are sales of NLG 176,000, total assets NLG 311,000, total
equity of NLG (679,256) and net loss for the period of NLG (213,502).
The Company applied the purchase accounting method. The goodwill, being the
difference between the purchase price amounting to NLG 1,131,827 in total and
the net asset value as of acquisition date, is being capitalized and amortized
in 5 years.
Since the impact on the revenues, net income and earnings per share data
on the consolidated Company figures is not material, pro forma figures have
been omitted.
6. COMMITMENTS NOT REFLECTED IN THE BALANCE SHEET
Commitments in connection to the roll-out of the Company's network, not
yet recorded on the balance sheet, amount to approximately NLG 36 million as
of September 30, 1998. Reference is also made to Note 4.
7. SUBSEQUENT EVENT
In November 1998 the Company acquired CS Net B.V. and its subsidiaries
("CS Net"). The key figures of CS Net as of July 31, 1998 are summarized as
follows: sales NLG 2,023,000, total assets NLG 1,491,000, and net income
for the period ended July 31, 1998 NLG 173,000.
9
<PAGE> 10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
VersaTel is a rapidly growing alternative telecommunications service
provider based in Amsterdam, The Netherlands. VersaTel's objective is to become
the leading alternative provider of facilities-based national and international
telecommunications services in the Benelux region. The Company currently
provides high quality competitively priced international and national long
distance telecommunications services in The Netherlands, primarily to small -
and-medium-sized businesses and selected residential customers. The Company also
offers international telecommunications services to Belgium for small - and
medium-sized businesses. The Company's network (the "Network" or the "VersaTel
Network") currently operates through a Nortel DMS 100 switch located in
Amsterdam and connections to other carriers, including PTT Telecom. The Company
also expects that an additional Nortel DMS 100 switch located in Antwerp will
come operational by year end. Business and residential customers access the
VersaTel Network indirectly by dialing (manually, through an auto-dialer or
through pre-programmed PBX's) the Company's "1611" carrier select code.
Wholesale customers access the Network directly through leased lines. Prior to
liberalization and the implementation of the "1611" code, business and
residential customers used the six-digit Virtual Private Network ("VPN") code or
the Company's Direct Inward System Access ("DISA") code, which involves a two
stage call set-up. Both the VPN and DISA codes are currently being phased out as
customers are being migrated to the "1611" carrier select code.
REVENUES
VersaTel currently derives most of its revenues from the provision of long
distance telecommunications services in The Netherlands. VersaTel provides
international long distance and national long distance services to its customer
base of small- and medium-sized businesses as well as selected residential
customers. The Company also provides wholesale services to other
telecommunications service providers.
VersaTel's revenues are derived primarily from minutes of
telecommunications traffic billed. The following table sets forth the total
revenues and billable minutes of use attributable to VersaTel's operations for
the years ended December 31, 1996 and December 31, 1997 and for the nine months
ended September 30, 1997 and September 30, 1998 as well as the total number of
customers as of December 31, 1996 and December 31, 1997 and as of September 30,
1998. All of VersaTel's 1996 and 1997 revenues were derived from The
Netherlands. VersaTel started generating revenues in Belgium in October 1998 and
is expecting to start generating revenues in Luxembourg in 1999.
<TABLE>
<CAPTION>
Fiscal Nine Months
Years Ended Ended
December 31, September 30,
---------------- ----------------
1996 1997 1997 1998
------ ------ ------ ------
(NLG IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUES
Business customers........................................ 6,143 16,948 12,868 22,917
Residential customers..................................... 0 11 -- 233
Wholesale customers....................................... 285 1,937 1,395 2,730
------ ------ ------ ------
Total.................................................. 6,428 18,896 14,263 25,880
(IN THOUSANDS)
BILLABLE MINUTES OF USE
Business customers........................................ 6,237 21,469 14,910 61,650
Residential customers..................................... 0 42 0 1,022
Wholesale customers....................................... 250 1,850 1,324 10,644
------ ------ ------ ------
Total.................................................. 6,487 23,361 16,234 73,316
</TABLE>
<TABLE>
<CAPTION>
As Of As Of
December 31, September 30,
-------------- ----------------
1996 1997 1997 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
CUSTOMERS
Business customers........................................ 669 2,014 1,463 5,022
Residential customers..................................... 0 230 -- 1,436
Wholesale customers....................................... 1 1 1 3
----- ----- ----- -----
Total.................................................. 670 2,245 1,464 6,461
</TABLE>
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<PAGE> 11
Currently, small- to medium-sized businesses generate the majority of
VersaTel's revenues. VersaTel expects revenues from the residential customer
segment to grow substantially with increased awareness of its "1611" carrier
select code, future introduction of carrier pre-selection, additional marketing
efforts and the introduction of new products and services targeted at
residential customers. In the future, the Company also expects to derive
revenues from monthly charges, incoming calls and new services as a result of
directly connecting business customers to the VersaTel Network. The Company also
derives a limited amount of revenues from switched voice services offered to
other telecommunications service providers on a wholesale basis. As the Benelux
Overlay Network is completed and as the Company has capacity available, it
intends to increase its marketing efforts in the wholesale segment to increase
utilization of the Network. The Company expects to expand its wholesale
offerings to include the sale of dark fiber, conduit and rights-of-way access to
help offset the cost of constructing the Network.
VersaTel's revenues are derived from minutes of telecommunications traffic
billed and revenues are allocated to the period in which the traffic has
occurred. VersaTel generally prices its services at a discount to the local PTTs
and expects to continue this pricing strategy as the Company expands its
operations. In general, PTTs have been reducing their rates over the last few
years. As a result, VersaTel has experienced and expects to continue to
experience declining revenue per minute. KPN Telecom N.V. reduced its prices
most recently in May and July 1998 with reductions of approximately 10.0% and
15.0%, respectively, which are expected to have an adverse impact on margins in
the near term. Additionally, the Company expects to increase its national
billable minutes, which are priced at lower rates than international minutes. As
national and wholesale billable minutes increase as a percentage of total
billable minutes, average revenue per billable minute will further decline.
However, due to technological improvements, liberalization of the European
telecommunications market and increased available transmission capacity, both
from third parties and as the VersaTel Network is built out, VersaTel expects
costs per minute to decline as well. Management believes that the decline of per
minute prices will out-pace the decline in per minute costs into 1999, resulting
in downward pressure on operating margins. Management believes that over the
long term, this trend will reverse and operating margins will thereby improve;
however, there can be no assurances that this will occur. If reductions in costs
do not in fact out-pace reductions in revenues, VersaTel may experience a
substantial reduction in its margins on calls which, absent a significant
increase in billable minutes of traffic carried or increased charges for
additional services, would have a material adverse effect on VersaTel's business
and financial results. In addition, the introduction of the euro will lead to a
greater transparency for prices in the European telecommunications market, which
may lead to further competition and price decreases.
COST OF REVENUES
VersaTel's costs of revenues are comprised of origination costs, network
costs and termination costs and are both fixed and variable. Origination costs
represent the cost of carrying traffic from the customer to the VersaTel
Network. Origination charges for calls transported to the VersaTel Network are
variable and are incurred on a per minute basis, including the call set-up
charges. Origination charges for business and residential customers are charged
by the PTT either to VersaTel, in the case of the "1611" and VPN codes, or
directly to customers, in the case of the DISA code. In cases where the business
or residential customer is charged directly by the former monopoly
telecommunications carrier (a "PTT") for the origination costs, VersaTel
reimburses the customer by means of a credit to the customer's account. The
charges credited directly to the customer are a result of the use of the DISA
access code and, as noted above, are being phased out by the Company.
Origination costs billed directly to customers by the PTT are not included in
the revenues of VersaTel. The charges credited to the customer are recorded as
cost of revenues.
The Company has experienced a significant decrease in origination costs and
expects that these will continue to decrease significantly over time due to
competition and regulatory orders. In July 1998, the Netherlands regulatory
authority, the Onafhankelijke Post en Telecommunicatie Autoriteit ("OPTA"),
ruled that origination and termination charges be reduced by 55% and 30%,
respectively. In addition, as VersaTel builds-out its Network, it intends to
connect directly as many business customers as economically feasible to the
VersaTel Network, thereby eliminating origination charges for these customers.
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These decreases would be offset to some extent by amortization and depreciation
charges associated with the construction of the Network. There can be no
assurance that the trend in decreasing access costs will continue. As a result,
if origination costs do not continue to decrease, anticipated decreases in
revenues per minute would cause the Company to experience a decline in gross
margins per billable minute which would have a material adverse effect on the
Company's business and financial performance.
Currently, network costs represent the cost of transporting traffic between
the VersaTel switch and points of interconnection using leased lines. However,
as VersaTel builds-out the Network, the Company will establish more points of
interconnection and, as a result, expects network costs to rise in the future.
Termination costs are the per minute costs associated with using carriers
to carry a call from the point of interconnection to the final destination.
Through least-cost routing, the VersaTel switch directs calls to the most
cost-efficient carrier for the required destination. As VersaTel builds-out the
Network to new points of interconnection, the Company expects to be able to
reduce average termination costs per minute. For example, once VersaTel
establishes a direct link from Amsterdam to Rotterdam, the Company will no
longer pay for national termination costs on that route and will only pay local
termination costs from the point of interconnection in Rotterdam to the final
destination in that city. The Company also believes that per minute termination
costs will continue to decrease due to several additional factors including: (i)
the incremental build-out of the VersaTel Network which will increase the number
of carriers with which it interconnects; (ii) the increase of minutes originated
by VersaTel which should lead to higher volume discounts available to the
Company; (iii) more rigorous implementation of the EC directives requiring
cost-based termination rates and leased line rates; and (iv) emergence of new
telecommunication service providers and the construction of new transmission
facilities resulting in increased competition. There can be no assurance,
however, that the trend in decreasing termination costs will continue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses are comprised primarily of
salaries, employee benefits, office and administrative expenses, professional
and consulting fees and marketing costs. These expenses have increased as the
Company has developed and expanded its workforce, and are expected to continue
to increase as new operations are established and the Company expands. Selling,
general and administrative expenses as a percentage of revenue will continue to
vary from period to period as a result of start-up costs relating to expansion
into new regions.
The Company has grown substantially since its inception and intends to
continue to grow by adding more sales, marketing and customer support staff. In
addition, the Company expects to establish additional sales offices in the
future. The expansion of its sales, marketing and customer support staff and the
development of additional sales offices involves substantial training costs and
start-up costs, a large portion of which will be reflected as fixed costs and
recorded as selling, general and administrative charges. Accordingly, the
Company's results of operations will vary depending on the timing and speed of
the Company's expansion strategy and, during a period of rapid expansion,
selling, general and administrative expenses will be relatively higher than
during more stable periods of growth.
DEPRECIATION AND AMORTIZATION
The Company capitalizes and depreciates its fixed assets, including
switching equipment and fiber-optic cable, over periods ranging from two to
twenty-five years. In addition, the Company capitalizes and amortizes the cost
of installing dialers at customer sites. The development of the VersaTel Network
will require large capital expenditures and larger depreciation charges in the
future. Increased capital expenditures will adversely affect the Company's
future operating results due to increased depreciation charges and interest
expense.
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FOREIGN EXCHANGE
The Company has substantial U.S. dollar denominated assets and liabilities.
The Company is therefore exposed to fluctuations in the U.S. dollar and other
currencies which may result in foreign exchange gains and/or losses. Only a
limited number of equipment purchases and consultancy activities are billed to
the Company in currencies other than Dutch guilders. The Company reviews on a
weekly basis the currency risk of U.S. dollars to Dutch guilders. Based on its
requirements for Dutch guilders, the Company from time to time hedges a portiom
of its foreign currency risk in order to lock into a rate for a given time.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1997
Revenues increased by NLG 4.8 million to NLG 10.1 million for the three
months ended September 30, 1998 from NLG 5.3 million for the three months ended
September 30, 1997, representing an increase of 90.6%. The growth in revenues
resulted primarily from the addition of new customers, the introduction of
national long distance services in The Netherlands and an increase in wholesale
traffic. The revenue for the three months ended September 30 of 1998 as compared
to the same period in 1997 was negatively impacted by general price reductions
initiated by PTT Telecom in October 1997 of approximately 28.0%, in May 1998 of
approximately 10.0% and in July of 1998 of approximately 15.0%. VersaTel
responded to these price reductions by reducing its own prices.
Billable minutes of use increased by 27.8 million to 34.0 million for the
three months ended September 30, 1998 from 6.2 million for the three months
ended September 30, 1997, representing an increase of 448.4%. The number of
customers increased by 4,997 to 6,461 as of September 30, 1998 from 1,464 as of
September 30, 1997.
Cost of revenues increased by NLG 3.2 million to NLG 8.0 million for the
three months ended September 30, 1998 from NLG 4.8 million for the three months
ended September 30, 1997, primarily reflecting an increase in billable minutes.
This increase was partially offset by declines in per minute international
termination and origination costs resulting from the migration of customers from
the DISA and VPN codes to the "1611" carrier select code.
Selling, general and administrative expense increased by NLG 10.1 million
to NLG 15.7 million for the three months ended September 30, 1998 from NLG 5.6
million for the three months ended September 30, 1997, representing an 180.4%
increase. This primarily resulted from an increase in the cost of staff
(including temporary personnel and consultants) in the areas of network
operations, customer service, sales and marketing, installation services,
accounting personnel, a major brand advertising campaign and one time related
start-up expenses for Belgium operations network expenses.
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Depreciation and amortization expenses increased by NLG 1.6 million to NLG
2.2 million for the three months ended September 30, 1998 from NLG 0.6 million
for the three months ended September 30, 1997. This increase was primarily
related to capital expenditures incurred in connection with the deployment of
the Nortel DMS 100 switch in Amsterdam, an increase in the number of dialers
installed due to customer growth and the purchase of office furniture and
computer equipment.
Currency exchange gains, net, increased to NLG 5.1 million for the three
months ended September 30, 1998 from no gain/loss for the three months ended
September 30, 1997 as a result of the net gains of the Company's dollar
denominated assets and liabilities on the balance sheet.
Interest income increased to NLG 6.2 million for the three months ended
September 30, 1998 from no income for the three months ended September 30, 1997.
This increase is primarily related to the Company's positive cash balance as a
result of the First Offering.
Interest expense increased by NLG 15.0 million to NLG 15.1 million for the
three months ended September 30, 1998 from NLG 0.1 million for the three months
ended September 30, 1997. This increase is primarily related to the accrual of
interest expense on the notes issued in the First Offering.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues increased by NLG 11.6 million to NLG 25.9 million for the nine
months ended September 30, 1998 from NLG 14.3 million for the nine months ended
September 30, 1997, representing an increase of 81.1%. The growth in revenues
resulted primarily from the addition of new customers, the introduction of
national long distance services in The Netherlands and an increase in wholesale
traffic. The revenue for the nine months ended September 30 of 1998 as compared
to the same period in 1997 was negatively impacted by general price reductions
initiated by PTT Telecom, in May 1998 of approximately 10.0% and in July of 1998
of approximately 15.0%. VersaTel responded to these price reductions by reducing
its own prices.
Billable minutes of use increased by 57.1 million to 73.3 million for the
nine months ended September 30, 1998 from 16.2 million for the nine months ended
September 30, 1997, representing an increase of 352.5%. The number of customers
increased by 4,997 to 6,461 as of September 30, 1998 from 1,464 as of September
30, 1997.
Cost of revenues increased by NLG 9.9 million to NLG 21.1 million for the
nine months ended September 30, 1998 from NLG 11.2 million for the nine months
ended September 30, 1997, primarily reflecting an increase in billable minutes.
This increase was partially offset by declines in per minute international
termination and origination costs resulting from the migration of customers from
the DISA and VPN codes to the "1611" carrier select code.
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Selling, general and administrative expense increased by NLG 19.1 million
to NLG 30.0 million for the nine months ended September 30, 1998 from NLG 10.9
million for the nine months ended September 30, 1997, representing an 175.2%
increase. This primarily resulted from an increase in the cost of staff
(including temporary personnel and consultants) in the areas of network
operations, customer service, sales and marketing, installation services,
accounting personnel, a major brand advertising campaign and one time related
start-up expenses for Belgium operations network expenses.
Depreciation and amortization expenses increased by NLG 3.7 million to NLG
4.9 million for the nine months ended September 30, 1998 from NLG 1.2 million
for the nine months ended September 30, 1997. This increase was primarily
related to capital expenditures incurred in connection with the deployment of
the Nortel DMS 100 switch in Amsterdam and an increase in the number of dialers
installed due to customer growth and the purchase of computer equipment and
office furniture.
Currency exchange gains, net, increased to NLG 4.7 million for the nine
months ended September 30, 1998 from no gain/loss for the nine months ended
September 30, 1997 as a result of the net gains of the Company's dollar
denominated assets and liabilities on the balance sheet.
Interest income increased by NLG 8.1 million to NLG 8.1 million for the
nine months ended September 30, 1998 from NLG 20,000 for the nine months ended
September 30, 1997. This increase was primarily related to the Company's
positive cash balance as a result of the First Offering.
Interest expense increased by NLG 22.8 million to NLG 23.1 million for the
nine months ended September 30, 1998 from 0.3 million for the nine months ended
September 30, 1997. This increase is primarily related to the accrual of
interest expense on the notes issued in the First Offering.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred significant operating losses and negative cash
flows as a result of the development of its business and the VersaTel Network.
Prior to the First Offering, the Company had financed its growth primarily
through equity and subordinated loans from its shareholders. In May 1998, the
Company issued notes and warrants in the First Offering and raised net proceeds
of $216.2 million, $78.9 million of which was placed in escrow to fund the first
six interest payments on the notes. The Company has since used a significant
amount of the remaining net proceeds of the First Offering to make capital
expenditures related to the expansion and development of the VersaTel Network,
to fund operating losses and for other general corporate purposes.
Although the Company currently maintains significant cash balances, it will
require substantial additional capital to continue funding the cost of the
VersaTel Network.
From and after November 15, 2001, the Company will be required to fund
substantial interest payments on the notes on a current basis. The Company will
need to substantially increase its net cash flow in order to meet its debt
service obligations at that time, including its obligations on the notes.
To date, the Company has made limited use of bank facilities and capital
lease financing. The Company currently is in the process of raising
approximately $150,000,000 through a private placement of notes and warrants.
Net cash provided by operating activities was NLG 5.8 million in the fiscal
year December 31, 1997 compared to negative NLG 1.7 million in the fiscal year
ended December 31, 1996. This was primarily the result of an increase in
accounts payable of NLG 18.7 million in the fiscal year ended December 31, 1997.
The increase in accounts payable was mainly caused by non-paying of current
payables as a result of the liquidity difficulties discussed below.
Net cash used in investing activities was NLG 14.5 million in the fiscal
year ended December 31, 1997 and NLG 2.6 million in the fiscal year ended
December 31, 1996. Substantially all the cash utilized by investing activities
in each fiscal year resulted from an increase in capital expenditures to expand
the VersaTel Network. The Company does not expect any material disruption nor
any material expenditures in connection with the transition of its billing and
information systems to the year 2000.
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Net cash provided by financing activities was NLG 5.8 million in the fiscal
year ended December 31, 1997 and NLG 8.6 million in the fiscal year ended
December 31, 1996. Net cash provided by financing activities in the fiscal year
ended December 31, 1997 resulted mainly from NLG 1.5 million of capital
contributions and NLG 4.5 million of subordinated loans obtained from one of the
Company's shareholders. For the fiscal year ended December 31, 1996, net cash
provided by financing activities of NLG 8.6 million resulted from NLG 5.0
million of capital contributions and NLG 3.2 million of subordinated loans
obtained from the Company's shareholders, as well as capital leases to an amount
of NLG 0.4 million.
Prior to the First Offering, the Company experienced liquidity
difficulties, which resulted in attachments to its bank account by certain
creditors. This situation was resolved by the contribution of new equity by
certain of the Company's shareholders and by guarantees for the benefit of one
of the creditors.
In February 1998, as part of the Recapitalization two of the three
shareholders of the Company, Telecom Founders and NeSBIC, a subsidiary of
Fortis, invested an additional NLG 7.2 million in equity capital in the Company.
Although this contribution was received in February 1998, the formal
shareholders meeting approving the amount to be labelled as capital was not
executed until April 17, 1998. In addition, NeSBIC and Cromwilld converted their
subordinated convertible notes totaling NLG 3.6 million into Ordinary Shares of
the Company, and NeSBIC converted its NLG 4.5 million bridge loan into Ordinary
Shares of the Company. The third component of the Recapitalization was comprised
of a new equity investment by Paribas of NLG 12.8 million. Lastly, the Company
received from Telecom Founders, NeSBIC, Paribas and NPM to invest an additional
NLG 15.0 million in equity capital immediately prior to the closing of the First
Offering. As a result of the Recapitalization, the Company's share capital
increased from NLG 7.0 million to NLG 50.1 million.
YEAR 2000 COMPLIANCES
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 year 2000. This 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,
send invoices, or engage in similar normal business activities.
THE YEAR 2000 AND VERSATEL'S READINESS
VersaTel is undertaking a comprehensive program to address the Year 2000
issue with respect to the following:
1. The Company's information technology systems;
2. The telephony switching network (including equipment installed at
customers' premises);
3. The Company's non-information technology systems (including buildings,
plant, equipment and other infrastructure systems that may contain
embedded micro controller technology);
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4. The systems of the Company's major vendors (insofar as they relate to
the Company's business); and
5. The Company's customers.
This program involves four "Steps": (1) a wide ranging assessment of Year
2000 problems that might affect the Company; (2) the development and
implementation of remedies to address discovered problems; (3) the testing of
the Company's systems; and (4) an analysis of the worst case scenario for the
Company. The Company expects to complete Steps 1 and 2 of this program by the
end of the first quarter, Step 3 by the end of the second quarter of 1999 and
Step 4 by the end of the second quarter of 1999.
STEPS 1-2: ASSESSMENT OF YEAR 2000 ISSUES, DEVELOPMENT AND IMPLEMENTATION OF
REMEDIES
The Information Technology Systems.
The Company is currently undergoing a major program to replace all of its
existing systems for billing, customer care and mediation and expects to have
completed the replacement program by the end of the first quarter of 1999. In
selecting the new OSS systems, the Company asks for guarantees from the
manufacturers of Year 2000 compliance. The Company is also checking all its
custom designed software for Year 2000 compliance.
The Company uses Windows 95 and Windows NT 4.0 as its operating systems.
The Company expects to upgrade all of its Windows 95 operating systems to
Windows 98, which is Year 2000 compliant, in the first quarter of 1999. The
Company expects to install the latest service pack for its NT 4.0 operating
systems which is Year 2000 compliant in the first quarter of 1999. The Company
does not presently use any other desktop or server operating systems.
The Telephony Switching Network.
The Company has consulted with Nortel, the manufacturer of its DMS-100
telephony switches and believes that its switches will be Year 2000 compliant
before the end of 1998. The Company is currently upgrading its switch operating
software to EURO-8, which is Year 2000 certified and is also investigating the
Year 2000 compliance of its routers installed at customer premises to direct
traffic on to the VersaTel Network.
The Non-Information Technology Systems.
The Company's office buildings have the following embedded systems: monitor
alarm (intrusion and sensors), personnel registration plus floor access, fire
alarm, climate control and electrical power maintenance (generators). The
Company's facilities management team is currently investigating if the embedded
systems are Year 2000 compliant and intends to ensure that they will be by the
end of the fourth quarter of 1998.
Major Vendors' Systems.
The Company is asking all of its major vendors to demonstrate their
approach to the Year 2000 problem and to give guarantees that the millennium
will not interrupt their services to the Company. The Company is informing its
vendors that Year 2000 compliance in their services and products is an essential
element of the existing business relationship. The managers responsible for each
vendor relationship are asking for these guarantees and the response to date has
been positive. The Company is now formalizing these requests, sending letters,
and compiling a list of vendors' responses.
Customers' Systems.
The Company's customer services department intends to discuss with
customers the Year 2000 issue, including whether such customer is Year 2000
compliant and to suggest that, where this issue has not been resolved, the
customer seek advice. No assurances can be given that the Company's customers
will either take such advice or be Year 2000 compliant on a timely basis.
STEP 3: TESTING OF THE COMPANY'S SYSTEMS
VersaTel intends to conduct a full operational test of its entire business
by the end of the second quarter of 1999, when the Company expects that all of
its systems and processes will be Year 2000 compliant. The Company's services
and products are primarily provided to business customers who operate Monday
through Friday and therefore it plans to conduct this test during a weekend.
Certain customers have approved this plan and have agreed to participate in the
test.
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STEP 4: WORST CASE SCENARIO
The Company believes that the worst effect of the Year 2000 issue would be
the inability of customers to complete calls. Nortel, the manufacturer of the
Company's switches, has conducted extensive Year 2000 tests with the EURO-8
software and has informed the Company that it believes the Company's switches
are Year 2000 compliant. The Company will be approaching Nortel for guarantees
regarding this compliance.
If the Company's Year 2000 compliant billing system fails to function
correctly, the Company believes that bills could still be distributed by
modifying the call detail record's timestamp to reflect a pre-Year 2000 date.
The ability of the Company's customer care team to supply quality service
would be significantly affected if the OSS systems were not available. Service
provisioning, additional services and the development of new customers could not
continue effectively if the automated provisioning systems fail. The Company is
asking for certificates from the manufacturers of these systems that they are
Year 2000 compliant.
The Company's ability to collect revenues depends upon certain financial
institutions' computer systems, because approximately 50% of its retail
customers pay by way of direct debit facilities. The Company is seeking
assurances from these financial institutions that they are Year 2000 compliant.
The Company believes that it is not very likely that any of the above
situations will occur due to the assurances of Year 2000 compliance that it
expects to receive from its vendors, software and systems programmers, customers
and financial institutions. In the event that one or more of the situations
should occur, the Company would attempt to rectify the problem with the
appropriate people. However, no assurance can be given that the Company will be
successful in obtaining valid assurances or guarantees, that the Year 2000 issue
will not have a material adverse effect on the Company, that any Year 2000
effects could be resolved or that the Company would be reimbursed for any
additional expenditure under any of the assurances or guarantees that it expects
to obtain or otherwise.
COSTS RELATED TO THE YEAR 2000 ISSUE
To date, the Company has incurred approximately NLG 200,000 in costs for
its Year 2000 program. A substantial portion of costs for the Year 2000 issue
will be included in the replacement of the current generation of operating
support systems. The Company is replacing these systems to support the business
growth and not specifically to remedy the Year 2000 problem. The Company expects
to incur additional specific Year 2000 charges that are estimated to be less
than NLG 2 million, the majority of which will be incurred during 1999.
FORWARD-LOOKING STATEMENTS
Certain statements included in this document, including without limitation
those concerning (i) the Company's expansion plans for its Network, (ii)
management's belief concerning the impact of this expansion on its revenue
potential, cost basis and margins, (iii) management's belief concerning the
competitiveness of its services, (iv) the effects on the Company of certain
regulatory developments and the rate and scope of the liberalization of
telecommunication services across Europe and (v) the Company's revenue, access,
network and termination costs, liquidity and capital resources and rate of
future expenditures, contain certain forward-looking statements concerning the
Company's business, operating performance and financial condition. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, no assurance can be given that such expectations will
prove to have been correct.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 6-K
(a) Exhibits
3.1* - Deed of Incorporation and Articles of Association (as
amended) of the Company
4.1* - Indenture, dated May 27, 1998, between the Company
and United States Trust Company of New York
* Previously filed as an exhibit to the Company's Registration
Statement on Form F-4, file No. 333-59979.
(b) No reports on Form 8-K were filed during the period covered
by this report.
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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, thereunto duly authorized, on November 19, 1998.
By s/s Raj Raithatha
----------------------------
Chief Financial Officer
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