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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 June 30, 1999
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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)
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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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<PAGE>
VERSATEL TELECOM INTERNATIONAL N.V.
REPORT ON FORM 6-K FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 1999
INDEX
-----
Page
----
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS............................................... 4
Audited Consolidated Balance Sheet as of December 31, 1998
and unaudited Consolidated Balance Sheet as of June 30, 1999....... 4
Unaudited Consolidated Statements of Operations for the
Six Months Ended June 30, 1998 and June 30, 1999 and
for the Three Months Ended June 30, 1998 and June 30 1999.......... 6
Unaudited Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1998 and June 30, 1999................... 7
Unaudited Consolidated Statements of Shareholders' Equity
for the Years Ended December 31, 1998, 1997 and 1996 and
for the Six Months Ended June 30, 1999............................. 8
Notes to the Unaudited Consolidated Financial Statements........... 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK...............................................................26
PART II: OTHER INFORMATION..................................................27
SIGNATURES...................................................................29
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Report on Form 6-K includes forward-looking statements. We have
based these forward-looking statements on our current expectations and
projections about future events. These forward-looking statements are subject to
risks, uncertainties, and assumptions about us, including, among other things:
o Our anticipated expansion plans for our network and growth
strategies,
o Our ability to integrate recently acquired companies,
o Our expectation of the impact of this expansion on our
revenue potential, cost basis and margins,
o Our expectation of the competitiveness of our services,
o Our intention to introduce new products and services,
o Anticipated trends and conditions in our industry, including
regulatory reform and the liberalization of
telecommunications services across Europe, and
o Our ability to compete, both nationally and internationally.
In light of these risks, uncertainties, and assumptions, the
forward-looking events discussed in this prospectus might not occur. We
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
PRESENTATION OF INFORMATION
We publish our financial statements in Dutch guilders. In this
document, references to "U.S. dollars" or "$" are to United States dollars,
references to "Dutch guilders" or "NLG" are to the currency of The Netherlands.
Solely for the convenience of the reader, this document contains translations of
certain Dutch guilder amounts into U.S. dollars at specified rates. These
translations should not be construed as representations that the Dutch guilder
amounts actually represent such U.S. dollar amounts or could be converted into
U.S. dollars at the rate indicated or at any other rate. The Netherlands has
adopted the euro as of January 1, 1999. The conversion rate between the euro and
the Dutch guilder is fixed at NLG 2.2037 per euro 1.00. Unless otherwise
indicated, the translations of Dutch guilders into U.S. dollars have been made
at NLG 2.14 per $1.00, based on the noon buying rate in the City of New York for
cable transfers in euros as certified for customs purposes by the Federal
Reserve Bank of New York on June 30, 1999.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VERSATEL TELECOM INTERNATIONAL N.V.
AUDITED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998 AND UNAUDITED CONSOLIDATED
BALANCE SHEET AS OF JUNE 30, 1999
(amounts in thousands)
December 31,1998 June 30, 1999
---------------- -------------------
(unaudited)
NLG NLG US$
ASSETS
Current Assets:
Cash ..................................... 372,014 176,380 82,421
Restricted cash, current portion ......... 89,752 98,462 46,010
Accounts receivable, net ................. 7,902 24,208 11,312
Inventory, net ........................... 1,083 2,779 1,299
Prepaid expenses and other ............... 12,909 21,939 10,252
--------- --------- ---------
Total current assets ................. 483,660 323,768 151,294
--------- --------- ---------
Fixed Assets:
Property, plant and equipment, net ....... 38,608 117,184 54,759
Construction in progress ................. 46,019 115,199 53,831
--------- --------- ---------
Total fixed assets ................... 84,627 232,383 108,590
--------- --------- ---------
Restricted cash, net of current portion .... 121,804 93,480 43,682
Capitalized finance costs, net ............. 28,750 31,955 14,932
Goodwill, net .............................. 4,556 400,282 187,048
Deferred tax asset ......................... -- 210 98
--------- --------- ---------
Total assets ............................... 723,397 1,082,078 505,644
========= ========= =========
See notes to the unaudited consolidated financial statements.
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VERSATEL TELECOM INTERNATIONAL N.V.
AUDITED CONSOLIDATED BALANCE SHEET AS OF
DECEMBER 31, 1998 AND UNAUDITED CONSOLIDATED
BALANCE SHEET AS OF JUNE 30, 1999
(amounts in thousands)
<TABLE>
<CAPTION>
December 31,1998 June 30, 1999
---------------- ----------------------
(unaudited)
NLG NLG US$
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C> <C>
Current Liabilities:
Accounts payable ................................ 39,863 86,181 40,271
Due to related parties .......................... 806 -- --
Accrued liabilities ............................. 28,005 63,056 29,465
Current portion of deferred income .............. -- 8,887 4,153
Current portion of capital lease obligations .... 71 286 134
Interim financing ............................... -- 320,619 149,822
---------- ---------- ----------
Total current liabilities ................... 68,745 479,029 223,845
---------- ---------- ----------
Capital lease obligations, net of current portion . 37 455 213
Long term liabilities ............................. 670 2,719 1,271
Long term debt (13 1/4% Senior Notes) ............. 688,018 784,449 366,565
Pension liability ................................. -- 600 280
---------- ---------- ----------
Total liabilities ........................... 757,470 1,267,252 592,174
---------- ---------- ----------
Shareholders' Equity:
Ordinary shares, NLG 0.05 par value ............. 1,949 1,970 921
Additional paid-in capital ...................... 51,112 88,130 41,182
Warrants ........................................ 5,212 5,212 2,435
Accumulated deficit ............................. (92,346) (280,486) (131,068)
---------- ---------- ----------
Total shareholders' equity .................. (34,073) (185,174) (86,530)
---------- ---------- ----------
Total liabilities and shareholders' equity ........ 723,397 1,082,078 505,644
========== ========== ==========
</TABLE>
See notes to the unaudited consolidated financial statements.
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VERSATEL TELECOM INTERNATIONAL N.V.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
(amounts in thousands, except for per share amounts)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- ---------------------------------
1998 1999 1998 1999
--------- --------------------- -------- ---------------------
NLG NLG US$ NLG NLG US$
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES ......................... 9,348 23,624 11,039 15,750 39,125 18,283
OPERATING EXPENSES:
Cost of Revenues, excluding depreciation . 7,630 18,152 8,482 13,090 30,637 14,316
Selling, general and administrative ...... 8,730 55,172 25,781 14,274 75,319 35,196
Depreciation and amortization ............ 1,607 8,069 3,771 2,694 11,153 5,212
-------- -------- -------- -------- -------- --------
Total operating expenses .......... 17,967 81,393 38,034 30,058 117,109 54,724
-------- -------- -------- -------- -------- --------
Operating Loss ....................... (8,619) (57,769) (26,995) (14,308) (77,984) (36,441)
OTHER INCOME (EXPENSES):
Interest income .......................... 1,958 4,902 2,291 1,972 10,945 5,114
Interest expense--third parties .......... (72) (25,935) (12,119) (99) (49,830) (23,285)
Interest expense--related parties ........ (7,712) -- -- (7,899) -- --
Currency exchange gains (losses), net .... (225) (26,471) (12,370) (340) (66,786) (31,208)
Other (expense) .......................... -- (4,032) (1,884) -- (4,032) (1,884)
-------- -------- -------- -------- -------- --------
Total other income (expenses) ..... (6,051) (51,536) (24,082) (6,366) (109,703) (51,263)
Loss before income taxes .......... (14,670) (109,305) (51,077) (20,674) (187,687) (87,704)
Provision for income taxes ................. -- 454 212 -- 454 212
-------- -------- -------- -------- -------- --------
Net loss .......................... (14,670) (109,759) (51,289) (20,674) (188,141) (87,916)
Net loss per share (basic and diluted)
in NLG ................................... (0.44) (2.80) (1.31) (0.79) (4.81) (2.25)
Weighted average number of shares
outstanding ................................ 33,255 39,223 39,223 26,246 39,105 39,105
</TABLE>
See notes to the unaudited consolidated financial statements.
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VERSATEL TELECOM INTERNATIONAL N.V.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
(amounts in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------
1998 1999
-------- ---------------------
NLG NLG US$
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss ............................................... (20,674) (188,141) (87,916)
Adjustments to reconcile net loss to net cash used in
operating activities--
Depreciation and amortization .......................... 2,527 11,153 5,212
Amortization finance cost .............................. 167 1,500 701
Deferred income ........................................ (49) 429 200
Exchange loss on long-term debt and restricted cash .... -- 67,017 31,316
Changes in other operating assets and liabilities--
Accounts receivable .................................... (3,260) (6,300) (2,944)
Inventory .............................................. (327) (1,487) (695)
Prepaid expenses and other ............................. (1,680) (8,615) (4,026)
Accounts payable ....................................... (941) 57,231 26,744
Due to related parties ................................. (249) (806) (377)
Accrued liabilities .................................... 9,372 15,241 7,122
-------- -------- --------
Net cash provided by (used in) operating activities . (15,114) (52,778) (24,663)
======== ======== ========
Cash Flows from Investing Activities:
Capital expenditures ................................... (13,573) (132,462) (61,899)
Purchase price paid on acquisition ..................... -- (416,463) (194,609)
-------- -------- --------
Net cash used in investing activities ............... (13,573) (548,925) (256,508)
======== ======== ========
Cash Flows from Financing Activities:
Proceeds from (redemptions of) capital lease
obligations .......................................... (137) (998) (466)
Proceeds from (repayments of) short term loans ......... -- 321,000 150,000
Proceeds from long term debt (13 1/4% Senior Notes) .... 446,976 -- --
Restricted cash ........................................ (165,977) 49,027 22,910
Capitalized finance costs .............................. (20,000) -- --
Shareholder contributions .............................. 48,925 37,040 17,308
-------- -------- --------
Net cash provided by financing activities ........... 309,787 406,069 189,752
======== ======== ========
Net increase (decrease) in cash ............................. 281,100 (195,634) (91,419)
Cash, beginning of the period ............................... 1,346 372,014 173,838
-------- -------- --------
Cash, end of the period ..................................... 282,446 176,380 82,421
Supplemental Disclosures of Cash Flow Information:
Cash paid for--
Interest (net of amounts capitalized) .................. -- 53,168 24,845
Income taxes ........................................... -- -- --
</TABLE>
See notes to the unaudited consolidated financial statements.
7
<PAGE>
VERSATEL TELECOM INTERNATIONAL N.V.
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
AND FOR THE SIX MONTHS ENDED JUNE 30, 1999
(amounts in thousands of Dutch guilders, except for share and per share amounts)
<TABLE>
<CAPTION>
Number of Additional
shares Ordinary paid-in Accumulated
outstanding shares capital Warrants deficit Total
----------- ---------- ---------- ---------- -------------- ----------
NLG NLG NLG NLG NLG
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 ........... 9,900,000 495 -- -- (616) (121)
Shareholder contributions .............. 7,920,000 396 4,604 -- -- 5,000
Net loss ............................. -- -- -- -- (4,733) (4,733)
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 ........... 17,820,000 891 4,604 -- (5,349) 146
Shareholder contributions .............. 1,339,286 67 1,433 -- -- 1,500
Net loss ............................. -- -- -- -- (19,860) (19,860)
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1997 ............. 19,159,286 958 6,037 -- (25,209) (18,214)
Shareholder contributions .............. 19,695,524 985 44,750 5,212 -- 50,947
Shares issued for acquisition .......... 130,000 6 325 -- -- 331
Net loss ............................... -- -- -- -- (67,137) 67,137)
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1998 ............. 38,984,810 1,949 51,112 5,212 (92,346) (34,073)
Shares issued for acquisitions ......... 425,000 21 9,345 -- _ 9,366
Stock option compensation .............. -- -- 27,673 -- _ 27,673
Net loss ............................... -- -- -- -- (188,140) (188,140)
---------- ---------- ---------- ---------- ---------- ----------
Balance, June 30, 1999 ................. 39,409,810 1,970 88,130 5,212 (280,486) (185,174)
========== ========== ========== ========== ========== ==========
</TABLE>
See notes to the unaudited consolidated financial statements.
8
<PAGE>
VERSATEL TELECOM INTERNATIONAL N.V.
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
AS OF JUNE 30, 1999 AND FOR THE
THREE MONTHS ENDED JUNE 30, 1998 AND 1999 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999
1. Financial Presentation and Disclosures
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements of VersaTel Telecom International N.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 June 30, 1999, and
the results of operations and cash flows for the six months ended June 30, 1998
and 1999.
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 1998 audited financial
statements and the notes related thereto, filed on Form 20-F. The results of
operations for the three and six months ended June 30, 1999 may not be
indicative of the operating results for the full year.
As of June 30, 1999, the Company (directly or indirectly) wholly-owned,
except as where indicated, the following subsidiaries:
- VersaTel Telecom Europe B.V.
- VersaTel Telecom Netherlands B.V.
- VersaTel Telecom Belgium N.V.
- Bizztel Telematica B.V.
- CS Net B.V.
- CS Engineering B.V.
- Numedi Net N.V. (70% owned by the Company)
- Amstel Alpha B.V.
- SpeedPort N.V.
- Glabana U.S.A., Inc.
- 7-Klapper Beheer B.V.
- VuurWerk Internet B.V.
- VuurWerk Access B.V.
- ITinera Services N.V.
- Svianed 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
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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, as amended by SFAS No. 137, is effective for fiscal years
beginning after June 15, 2000 and can not be applied retroactively. The Company
has not yet quantified the impacts of adopting SFAS No. 133 on the financial
statements and has not determined the timing of or method of our adoption of
SFAS No. 133.
2. Inventory
Inventory, consisting primarily of dialers to be installed at customer
locations, is stated at the lower of cost (first-in, first-out) or market value.
3. Acquisition of Svianed
The acquisition of Svianed was accounted for as a purchase.
Accordingly, the purchase price was allocated to the net assets acquired based
upon their estimated fair market values. The excess purchase price over the
estimated fair value of net assets acquired amounted to approximately NLG 358
million, which has been accounted for as goodwill and is being amortized over
ten years using the straight line method. This allocation was based on
preliminary estimates and may be revised at a later date. The accompanying
consolidated statements of income reflect the operating results of Svianed since
the acquisition. Pro forma unaudited consolidated operating results of the
Company and Svianed for the six months ended June 30, 1999 and 1998, assuming
the acquisition had been made as of at the beginning of the respective periods
are summarized below (in thousands of NLG except per share amounts):
Six Months Ended
June 30,
----------------------
1998 1999
-------- --------
(unaudited)
Net sales......................... 42,263 66,486
Net (loss)........................ (96,165) 263,590)
Earnings per share................ (3.66) (6.74)
These pro forma results have been prepared for comparative purposes
only and include certain adjustments such as additional depreciation expense as
a result of a step-up in the basis of fixed assets, additional amortization
expense as a result of goodwill and other intangible assets. They do not purport
to be indicative of the results of operations which actually would have resulted
had the combination been in effect at the beginning of the respective periods
or of future results of operations of the consolidated entities.
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4. Financial Condition and Operations
For the three month period ended June 30, 1999, the Company had a loss
from operating activities of NLG 57.8 million. In addition, the Company had an
accumulated deficit of NLG 185.2 million as of June 30, 1999.
Although 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, it should be able to continue its operations through December 31,
1999. On July 28, 1999, the Company raised additional funds by means of an
initial public offering and the issuance of senior notes denominated in euros
and U.S. dollars. See also Note 7.
5. Commitments
Commitments in connection to the roll-out of the Company's network, not
yet recorded on the balance sheet, amount to approximately NLG 59 million as of
June 30, 1999.
Earn-out arrangements with the former shareholders of CS Net B.V.,
ITinera Services N.V. and SpeedPort N.V. have been agreed-upon. Any payments
resulting from this earn-out arrangement will be recorded as an adjustment to
the purchase price upon the time they become certain. No such adjustments have
yet been recorded.
6. Legal Proceeding
One of the shareholders of the Company objected to the 1998
recapitalization as described in the Company's Form 20-F (filed with the
Securities and Exchange Commission on March 30, 1999), and to the issuance of
the two tranches of units consisting of warrants and senior notes as described
in the Form 20-F, and threatened to challenge in court certain of the Company's
actions in connection therewith. In January 1999, this shareholder filed,
pursuant to article 2:345 of the Netherlands Civil Code, a petition with the
Enterprise Chamber of the Court of Appeals in Amsterdam requesting the
appointment of one or more experts to investigate the management and affairs of
the Company. In May 1999, the Enterprise Chamber denied the shareholder's
request.
On July 20, 1999, the Company entered into, along with its shareholders
and certain other parties, a Settlement Agreement with Cromwilld Limited, in
order to resolve disputes arising out of our shareholders' agreement and other
matters. The major terms of the Settlement Agreement provide for:
o the transfer of 146,988 of our ordinary shares held by Telecom
Founders B.V. to Cromwilld;
o the issuance of 200,000 shares of the Company on July 20, 1999
to Cromwilld at a price of NLG 7.50 per ordinary share;
o the ability for Cromwilld to include 1,800,000 of its ordinary
shares in initial public offering of the Company;
o certain piggyback registration rights in favor of Cromwilld that
will take effect 180 days from the date of the initial public
offering of the Company;
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o the payment by us of $300,000 for Cromwilld's fees and expenses
related to the Settlement Agreement and certain other matters;
o the acknowledgment by all parties to the shareholders' agreement
of the Company that the shareholders' agreement will be
terminated concurrently with the closing of the initial public
offering of the Company;
o the withdrawal by Cromwilld of its pending legal proceedings
against the Company and its shareholders;
o Cromwilld's full cooperation with the initial public offering of
the Company; and
o the obligation of the Company's shareholders, including
Cromwilld, to procure the resignation or dismissal of Cromwilld's
nominee, Denis O'Brien, from Supervisory Board of the Company,
after the completion of the initial public offering.
7. Subsequent Events
On July 28, 1999, VersaTel and certain selling shareholders completed
its initial public offering of 21.25 million ordinary shares in a dual listing
on the Amsterdam Stock Exchange and Nasdaq National Market. The offering
generated approximately euro190 million ($200 million) in proceeds for the
Company and euro23 million ($24 million) in proceeds for selling
shareholders. After the exercise of the underwriters' over-allotment options for
3.19 million ordinary shares, the offering generated approximately euro220
million ($230 million) in aggregate proceeds for the Company.
Concurrent with the initial public offering, the Company completed an
offering of euro120 million and $180 million of 11 7/8% Senior Notes due
2009. Approximately $152.1 million of the net proceeds from this offering were
used to repay outstanding interim financing related to the Svianed acquisition.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
We are a rapidly growing, competitive network operator focused
primarily on the Benelux, which consists of The Netherlands, Belgium and
Luxembourg. Our objective is to become the leading fully integrated provider of
local access, facilities-based broadband services, including voice, data and
Internet services to our customers in this region. During the past year, we have
substantially expanded our product offering from our initial offering of long
distance voice services. We currently offer a broad portfolio of voice, data and
Internet services to our business customers and a broad range of connectivity,
termination, co-location and hosting services to other telecommunications, data
and Internet service providers.
We are building a high bandwidth network throughout the Benelux to
directly connect to our customers and we are extending our network to connect to
certain key international destinations. As of June 30, 1999, our construction
passed 14 city centers, 10 business parks and 7,750 buildings. On July 7, 1999,
we completed a ring connecting Amsterdam, Rotterdam and Antwerp. We intend to
complete our international rings connecting the Benelux network, London and
Paris and connecting the Benelux network, Frankfurt, Dusseldorf and Paris by
December 1999. We have completed our international connection from the Benelux
network to London and to Frankfurt. We currently have both a Nortel Networks DMS
100 digital circuit switch and a Cisco Systems data switch in both Amsterdam and
Antwerp. We expect to have an additional Nortel DMS switch and an additional
Cisco Systems data switch installed in each of Rotterdam, in the third quarter
of 1999, and Brussels, in 2000. The Nortel DMS switches enable us to deliver
voice and ISDN telecommunications services and the Cisco data switches allow us
to support multiple data communications protocols including ATM, IP (Internet
Protocol), IPX (Novell), Frame Relay and others.
On June 11, 1999, we acquired Svianed B.V., the third largest provider
of data services in The Netherlands in terms of revenues. Svianed complements
VersaTel's strategy by providing data services to approximately 50 customers,
primarily in the financial services and banking industry, including the
principal social insurance organization and the largest financial institution in
The Netherlands. These customers are served on a network which connects to over
600 buildings and utilizes over 700 leased lines covering approximately 6,000
kilometers. The Svianed network has 50 regional points of presence and
transports traffic at speeds of up to 150 Mbps. Svianed has evolved from an
internal unit responsible for network management within the Gak Group into a
company that provides data, voice and value added network services to both the
Gak Group as well as other customers. Svianed was incorporated as a separate
company in July 1995. The Gak Group is responsible for the execution of and
payments under a number of social insurance laws in The Netherlands, such as the
Unemployment Act and the Disability Act. In addition, the Gak Group offers
insurance services on a commercial basis to a wide variety of clients.
Through our acquisition of Svianed, we will be able to significantly
accelerate the deployment of our broadband data services product offerings by
combining our market presence with Svianed's data network management expertise.
We intend to directly connect Svianed's customers to, and transition Svianed's
traffic onto, our network in order to reduce our reliance on leased lines. We
believe this will significantly enhance the quality of our service offering to
Svianed's customers and reduce our costs.
In May 1999, we acquired SpeedPort N.V. and VuurWerk Internet B.V. and,
in June 1999, we acquired ITinera Services N.V., each of which provides
co-location, hosting and international Internet services to business customers
and other Internet service providers. Also, in November 1998, we acquired CS Net
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B.V., which provides Internet-based, business-to-business transaction services
for trade groups in specific industries.
Revenues
Historically, our revenues were derived primarily from the provision of
long distance telecommunications services in The Netherlands and more recently
in Belgium. VersaTel's customer base predominately consists of small- and
medium-sized businesses and to a lesser extent residential customers. With the
acquisition of Svianed, we started to generate revenues from data services. We
also provide carrier services to other telecommunications, data and Internet
service providers.
Our revenues to date have been derived primarily from minutes of
telecommunications traffic billed. The percentage of our revenues that consist
of fixed monthly fees will increase substantially as a result of our acquisition
of Svianed. We expect this percentage to further increase as we continue to
deploy our network. The following table sets forth the total revenues and
billable minutes of use for voice services attributable to our operations for
the six months ended June 30, 1998 and June 30, 1999 as well as our total number
of customers for voice services, based on the number of invoices issued, as of
June 30, 1998 and June 30, 1999. However, as a result of our recent
acquisitions, our number of customers, including data and Internet customers, is
more than 16,000 as of June 30, 1999.
<TABLE>
<CAPTION>
Fiscal Years Ended Six Months Ended
December 31, June 30,
--------------------- ----------------------
1997 1998 1998 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Customers:
Voice services
Business ......................... 1,828 5,649 3,810 8,269
Residential ...................... 230 1,234 1,054 1,569
Carrier Services ................. 1 4 3 13
------- ------- ------- -------
Total ....................... 2,059 6,887 4,867 9,851
(NLG in thousands)
Revenues:
Voice services
Business ......................... 16,948 34,472 13,833 28,988
Residential ...................... 11 386 123 491
Carrier Services ................. 1,937 3,806 1,794 2,908
Data services ........................ -- -- -- 4,361
Internet services .................... -- 897 -- 2,377
------- ------- ------- -------
Total ....................... 18,896 39,561 15,750 39,125
Billable minutes:
Voice services
Business ......................... 21,469 102,980 31,654 118,115
Residential ...................... 42 1,817 458 2,681
Carrier Services ................. 1,850 16,806 7,183 27,225
------- ------- ------- -------
Total ....................... 23,361 121,603 39,295 148,021
</TABLE>
In 1997, all VersaTel's revenues were generated in The Netherlands. In
October 1998, VersaTel started generating revenues in Belgium. Almost all of
Svianed's revenues are generated in The Netherlands.
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The geographical composition of our revenues for the six months ended June 30,
1998 and June 30, 1999 was as follows:
Fiscal Years Ended Six Months Ended
December 31, June 30,
-------------------- --------------------
1997 1998 1998 1999
------ ------ ------ ------
(NLG in thousands)
The Netherlands ........ 18,896 39,324 15,750 36,769
Belgium ................ -- 237 -- 2,356
------ ------ ------ ------
Total ............. 18,896 39,561 15,750 39,125
Historically, small- to medium-sized businesses generate the majority
of VersaTel's revenues. We have also derived increasing amounts of revenue from
providing services, including switched voice and co-location services, to other
telecommunications, data and Internet service providers. As a result of our
acquisition of Svianed a substantial portion of our revenues will be derived
from providing data and Internet services to larger customers. We have recently
changed our approach to reaching residential customers by offering carrier
select hosting services to switchless resellers, who themselves target the
residential market. We believe that this approach is a more cost-effective way
of reaching residential customers. As our network expands and as we have
available capacity, we intend to increase our marketing efforts in the carrier
services segment to increase the use of our network and to capture revenues and
margins from markets we do not target directly.
Our revenues, which are derived both from minutes of telecommunications
traffic billed and fixed fees, are allocated to the period in which the traffic
or fees have occurred. We expect that the percentage of our revenues
attributable to fixed fees will increase in future periods principally as a
result of the Svianed acquisition. We generally price our telecommunications
services at a discount to the local monopoly telecommunications service
providers, which are commonly known as PTTs, and expect to continue this pricing
strategy as we expand our operations. In general, PTTs have been reducing their
rates over the last several years. As a result, we have experienced and expect
to continue to experience declining revenues per minute. KPN Telecom N.V.
reduced its prices per minute of telecommunications traffic billed in May and
July 1998 and most recently in January 1999 and May 1999 with reductions of
approximately 10.0%, 15.0%, 10.0% and 20.0%, respectively, which are expected to
have an adverse impact on margins in the near term. Additionally, we expect to
increase our 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 we build out our network, we expect
costs per minute to decline as well. Management believes that the decline of per
minute prices will outpace the decline in per minute costs in the remainder of
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 outpace 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 other services, would have a material adverse effect on our business and
financial results. In addition, the introduction of the euro may lead to a
greater transparency for prices in the European telecommunications market, which
may lead to further competition and price decreases.
Svianed's revenues are currently derived primarily from the provision
of data services in The Netherlands. Svianed's revenues to date have been
derived mostly from fixed monthly fees under long-term
15
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contracts. In addition, Svianed derives a portion of its revenues from minutes
of telecommunications traffic billed. Svianed's revenues are derived from data,
voice and value added network services and are generated primarily from
large-sized customers. Prior to 1996, all of Svianed's revenues were derived
from the Gak Group. In 1996, Svianed started generating revenues from other
customers. For the six months ended June 30,1999, 40.3% of Svianed's revenues
were derived from other customers, compared to 39.2% in 1998, 29.0% in 1997 and
16.0% in 1996.
Cost of Revenues
Our cost of revenues derived from telecommunications services is
comprised of origination costs, certain network costs and termination costs and
is both fixed and variable. Origination costs represent the cost of carrying
traffic from the customer to our network. Origination charges for calls
transported to our 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 PTTs to VersaTel.
We have experienced a significant decrease in origination costs and
expect that these will continue to decrease significantly over time due to
competition and regulatory orders. In July 1998, the Netherlands regulatory
authority Onafhankelijke Post en Telecommunicatie Autoriteit ("OPTA"), ruled
that origination and termination charges be reduced by 55% and 30%,
respectively. In addition, as we continue to build out our network, we intend to
connect directly as many business customers as economically feasible to the
network, thereby eliminating origination charges for these customers. These
decreases would be offset to some extent by amortization and depreciation
charges associated with the construction of our 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 us to experience a decline in gross margins per
billable minute which would have a material adverse effect on our business and
financial performance.
Network costs represent the cost of transporting traffic between our
switches and points of interconnection and consist of depreciation and
amortization costs and the cost of leased lines. To date, our network costs and
Svianed's network costs have primarily consisted of the cost of leased lines as
well as, in the case of Svianed, Internet uplink costs. In the near term, we
expect that Svianed's network costs will increase our fixed costs as a
percentage of cost of revenues. However, as we continue to build out our
network, we expect depreciation and amortization costs to increase. We expect
this increase to be off-set, at least partially, by a reduction in the cost of
leased lines. In addition, as we provision Svianed's traffic onto our network,
we will experience a significant reduction in the cost of leased lines currently
attributable to Svianed. Depreciation and amortization costs are not included in
cost of revenues. As a result, network costs as a percentage of cost of revenues
will decline. See "--Depreciation and Amortization."
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, our switches direct calls to the most
cost-efficient carrier for the required destination. As we build out our network
to new points of interconnection, we expect to be able to reduce average
termination costs per minute. For example, since we established a direct link
from Amsterdam to Rotterdam, we will no longer pay for national termination
costs on that route and will only pay local and regional termination costs from
the point of interconnection in Rotterdam to the final destination in that city.
We also believe that per minute termination costs will continue to decrease due
to several additional factors, including: (i) the incremental build out of our
network, which will increase the number of carriers with which we interconnect;
(ii) the increase of minutes originated by VersaTel, which should lead to higher
volume discounts available to VersaTel; (iii) more rigorous implementation of
the European Commission directives requiring cost-based termination rates and
leased line
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<PAGE>
rates; and (iv) the emergence of new telecommunication service providers and the
construction of new transmission facilities, which should result in increased
competition. There can be no assurance, however, that the trend of decreasing
termination costs will continue.
Svianed's cost of revenues is primarily fixed and consists of the cost
of leased lines and internet uplink costs. Currently, almost all of Svianed's
leased lines are leased from KPN Telecom. The prices for such leased lines are
set by OPTA. As a reseller of voice traffic, a portion of Svianed's cost of
revenues is also variable on a per minute basis.
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 we
have developed and expanded our workforce, and they are expected to continue to
increase as we expand and establish new operations. 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.
We have grown substantially since our inception and we intend to
continue to grow by adding more sales, marketing and customer support staff and
by establishing additional sales offices. This growth involves substantial
training and start-up costs, a large portion of which will be reflected as fixed
costs and will be recorded as selling, general and administrative charges.
Accordingly, our results of operations will vary depending on the timing and
speed of our 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.
Svianed's selling, general and administrative expenses are comprised
primarily of salaries, employee benefits, office and administrative expenses and
overhead charges from the Gak Group as well as other charges for services and
facilities provided by the Gak Group. These expenses have increased as Svianed
has developed and expanded its workforce. Selling, general and administrative
expenses as a percentage of revenue have remained stable over the last years.
Depreciation and Amortization
VersaTel capitalizes and depreciates its fixed assets, including
switching equipment and fiber optic cable, over periods ranging from three to 25
years. In addition, VersaTel capitalizes and amortizes the cost of installing
dialers at customer sites. The development of our network will require large
capital expenditures and larger depreciation charges in the future. Increased
capital expenditures will adversely affect our future operating results due to
increased depreciation charges and interest expense.
Svianed capitalizes and depreciates its fixed assets, including its
Cisco routers and Newbridge Frame Relay and ATM switches, over periods ranging
from 2 to 5 years.
Foreign Exchange
VersaTel has substantial U.S. dollar denominated assets and liabilities
and its revenues are generated and costs incurred in certain other currencies,
primarily the Dutch guilder. VersaTel is therefore exposed to fluctuations in
the U.S. dollar and other currencies, which may result in foreign exchange gains
and/or losses. As both The Netherlands and Belgium have adopted the euro,
VersaTel will no longer be exposed to any fluctuations between the Dutch guilder
and the Belgian franc. At this moment only a limited number of
17
<PAGE>
equipment purchases and consultancy activities are billed to VersaTel in
currencies other than Dutch guilders. VersaTel from time to time hedges a
portion of its foreign currency risk in order to lock into a rate for a given
time.
Almost all of Svianed's revenues are generated in Dutch guilders and
all of its assets and liabilities are denominated in Dutch guilders. However, a
majority of equipment purchases are billed to Svianed in currencies other than
Dutch guilders.
Results of Operations
For the three months ended June 30, 1999 compared to the three months ended June
30, 1998
Revenues increased by NLG 14.3 million to NLG 23.6 million for the
three months ended June 30, 1999 from NLG 9.3 million for the three months ended
June 30, 1998, representing an increase of 152.7%. The growth in revenues
resulted primarily from the addition of new customers, the introduction of
national long distance services in The Netherlands, the acquisition of Svianed,
the introduction of national and international long distance services in Belgium
and an increase in wholesale traffic. Included in the revenues for the three
months ended June 30, 1999 are the revenues of Svianed, from the date of the
acquisition, of NLG 5.8 million. Revenues for the three months ended June 30,
1999 as compared to the same period in 1998 were negatively impacted by general
price reductions initiated by KPN Telecom in May 1998, July 1998 and, most
recently, January 1999 and May 1999 of approximately 10%, 15%, 10% and 20%
respectively. VersaTel responded to these price reductions by reducing its own
prices.
Billable minutes of use for voice services increased by 52.0 million to
78.9 million for the three months ended June 30, 1999 from 26.9 million for the
three months ended June 30, 1998, representing an increase of 193.5%. The number
of customers for voice services increased by 4,984 to 9,851 as of June 30, 1999
from 4,867 as of June 30, 1998. However, as a result of our recent acquisitions,
our number of customers, including data and Internet customers, is more than
16,000 as of June 30, 1999.
Cost of revenues increased by NLG 10.6 million to NLG 18.2 million for
the three months ended June 30, 1999 from NLG 7.6 million for the three months
ended June 30, 1998, primarily as a result of an increase in billable minutes,
increasing interconnect capacity, short-term network capacity requirements
(leased lines) in Belgium, Internet uplink and international leased lines to
London and Frankfurt. The acquisition of Svianed added NLG 2.5 million to the
cost of revenue for the period.
Selling, general and administrative expenses increased by NLG 46.5
million to NLG 55.2 million for the three months ended June 30, 1999 from NLG
8.7 million for the three months ended June 30, 1998, representing a 532.0%
increase. The increase was partially due to a one-time, non-cash charge of NLG
27.7 million related to a revaluation of employee stock options. Excluding this
one-time charge the selling, general and administrative expenses increased by
NLG 18.8 million to NLG 27.5 million, representing an increase of 214.7%,
primarily as a result of 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, additional
facilities cost, expenses related to the expansion of our Belgium operations and
additional expenses as a result of the acquisitions of CS Net, Vuurwerk,
SpeedPort, Svianed and ITinera.
Depreciation and amortization expenses increased by NLG 6.5 million to
NLG 8.1 million for the three months ended June 30, 1999 from NLG 1.6 million
for the three months ended June 30, 1998. This increase primarily resulted from
capital expenditures incurred in connection with the expansion of the network,
including the expansion of the Nortel DMS-100 switch in Amsterdam and the
deployment of a
18
<PAGE>
Nortel DMS 100 switch in Antwerp as well as from the purchase of additional
IT-equipment for new customer support systems, an increase in the number of
dialers, the purchase of computer equipment and office furniture for new
employees, as well as amortization of goodwill of NLG 3.3 million as result of
the acquisition of Svianed.
Interest income increased by approximately NLG 2.9 million to NLG 4.9
million for the three months ended June 30, 1999 from NLG 2.0 million for the
three months ended June 30, 1998. This increase was primarily related to
VersaTel's positive cash balance as a result of our offering of units consisting
of warrant and senior notes in May 1998 (the "First High Yield Offering") and
our offering of units consisting of warrant and senior notes in November 1998
(the "Second High Yield Offering").
Interest expense increased by NLG 18.1 million to NLG 25.9 million for
the three months ended June 30, 1999 from NLG 7.8 million for the three months
ended June 30, 1998. This increase is primarily related to the accrual of
interest expense on the notes issued in the First High Yield Offering and the
Second High Yield Offering.
Currency exchange losses, net, increased by NLG 26.3 million to NLG
26.5 million for the three months ended June 30, 1999 from NLG 0.2 million for
the three months ended June 30, 1998 as a result of a net loss of VersaTel's
U.S. dollar denominated assets and liabilities on the balance sheet.
Other expenses amounted to NLG 4.0 million for the three months ended
June 30, 1999. No other expenses were incurred for the three month period ended
June 30, 1998. These expenses relate to a settlement agreement with one of the
shareholders of VersaTel and related legal expenses.
For the six months ended June 30, 1999 compared to the six months ended June 30,
1998
Revenues increased by NLG 23.3 million to NLG 39.1 million for the six
months ended June 30, 1999 from NLG 15.8 million for the six months ended June
30, 1998, representing an increase of 148.4%. The growth in revenues resulted
primarily from the addition of new customers, the introduction of national long
distance services in The Netherlands, the acquisition of Svianed, the
introduction of national and international long distance services in Belgium and
an increase in wholesale traffic. Included in the revenues for the six months
ended June 30, 1999 are the revenues of Svianed, from the date of the
acquisition, of NLG 5.8 million. Revenues for the six months ended June 30,
1999, as compared to the same period in 1998, were negatively impacted by
general price reductions initiated by KPN Telecom in May 1998, July 1998 and,
most recently, January 1999 and May 1999 of approximately 10%, 15%, 10% and 20%
respectively. VersaTel responded to these price reductions by reducing its own
prices.
Billable minutes of use for voice services increased by 108.7 million
to 148.0 million for the six months ended June 30, 1999 from 39.3 million for
the six months ended June 30, 1998, representing an increase of 276.7%. The
number of customers increased by 4,984 to 9,851 as of June 30, 1999 from 4,867
as of June 30, 1998. However, as a result of our recent acquisitions, our number
of customers, including data and Internet customers, is more than 16,000 as of
June 30, 1999.
Cost of revenues increased by NLG 17.5 million to NLG 30.6 million for
the six months ended June 30, 1999 from NLG 13.1 million for the six months
ended June 30, 1998, primarily as a result of an increase in billable minutes,
increasing interconnect capacity, short-term network capacity requirements
(leased lines) in Belgium, Internet uplink and international leased lines to
London and Frankfurt. The acquisition of Svianed added NLG 2.5 million to the
cost of revenue for the period.
19
<PAGE>
Selling, general and administrative expenses increased by NLG 61.0
million to NLG 75.3 million for the six months ended June 30, 1999 from NLG 14.3
million for the six months ended June 30, 1998, representing a 427.7% increase.
The increase was partially due to a one-time, non-cash charge of NLG 27.7
million related to a revaluation of employee stock options. Excluding this
one-time charge the selling, general and administrative expenses increased by
NLG 33.3 million to NLG 47.6 million, representing an increase of 233.6%,
primarily as a result of 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, additional
facilities cost, expenses related to the expansion of our Belgium operations and
additional expenses as a result of the acquisitions of CS Net, Vuurwerk,
SpeedPort, Svianed and ITinera.
Depreciation and amortization expenses increased by NLG 8.5 million to
NLG 11.2 million for the six months ended June 30, 1999 from NLG 2.7 million for
the six months ended June 30, 1998. This increase primarily resulted from
capital expenditures incurred in connection with the expansion of the network,
including the expansion of the Nortel DMS-100 switch in Amsterdam and the
deployment of a Nortel DMS 100 switch in Antwerp as well as from the purchase of
additional IT-equipment for new customer support systems, an increase in the
number of dialers, the purchase of computer equipment and office furniture for
new employees as well as amortization of goodwill of NLG 3.3 million as a result
of the acquisition of Svianed.
Interest income increased by approximately NLG 8.9 million to NLG 10.9
million for the six months ended June 30, 1999 from NLG 2.0 million for the six
months ended June 30, 1998. This increase was primarily related to VersaTel's
positive cash balance as a result of the First High Yield Offering and the
Second High Yield Offering.
Interest expense increased by NLG 41.8 million to NLG 49.8 million for
the six months ended June 30, 1999 from NLG 8.0 million for the six months ended
June 30, 1998. This increase is primarily related to the accrual of interest
expense on the notes issued in the First High Yield Offering and the Second High
Yield Offering.
Currency exchange losses, net, increased by NLG 66.5 million to NLG
66.8 million for the six months ended June 30, 1999 from NLG 0.3 million for
the six months ended June 30, 1998 as a result of a net loss of VersaTel's U.S.
dollar denominated assets and liabilities on the balance sheet.
Other expenses amounted to NLG 4.0 million for the six months ended
June 30, 1999. No other expenses were incurred for the six month period ended
June 30, 1998. These expenses relate to a settlement agreement with one of the
shareholders of VersaTel and related legal expenses.
Liquidity and Capital Resources
We have incurred significant operating losses and negative cash flows
as a result of the development of our business and network. Prior to the First
High Yield Offering, VersaTel had financed its growth primarily through equity
and subordinated loans from its shareholders. In May 1998, VersaTel issued notes
and warrants in the First High Yield Offering and raised net proceeds, after
transaction expenses, of $216.2 million, $80.6 million of which was invested in
U.S. government securities placed in escrow to fund the first six interest
payments on the notes issued in the First High Yield Offering. In December 1998,
VersaTel issued notes and warrants in the Second High Yield Offering and raised
net proceeds, after transaction expenses, of $139.5 million, $45.7 million of
which was invested in U.S. government securities placed in escrow to fund the
first five interest payments on the notes issued in the Second High Yield
Offering. VersaTel has since used a significant amount of the remaining net
proceeds of the First High Yield Offering and the Second High
20
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Yield Offering to make capital expenditures related to the expansion and
development of its network, to fund operating losses and for other general
corporate purposes. On June 11, 1999, VersaTel borrowed $131.25 million in
Interim Loans from Lehman Commercial Paper Inc., an affiliate of Lehman Brothers
Inc. and Lehman Brothers International (Europe), and $18.75 million in Interim
Loans from ING (U.S.) Capital, LLC, an affiliate of each of ING Barings Limited
and ING Barings LLC. The proceeds of the Interim Loans, together with remaining
proceeds from the notes issued in the First High Yield Offering and the Second
High Yield Offering, were used to fund the purchase price of Svianed of
approximately NLG 362.5 million.
In July 1999, VersaTel issued euro120,000,000 11 7/8% Senior Euro
Notes due 2009 and $180,000,000 11 7/8% Senior Dollar Notes due 2009 (the "Third
High Yield Offering") and raised net proceeds, after transaction expenses, of
euro 116.1 million and $173.9 million, $152.1 million of which was used to
repay the Interim Loans, including interest, in full. Concurrently with the
Third High Yield Offering, VersaTel and a number of selling shareholders sold
21,250,000 ordinary shares in the form of Shares and American Depositary Shares
("ADSs") in an initial public offering (the "IPO"). In August 1999, VersaTel
sold an additional 3,187,500 ordinary shares in connection with an
over-allotment option granted to the underwriters in the IPO. VersaTel raised
aggregate net proceeds, after transaction expenses, of euro 174.5 million and
$35.5 million, in the IPO. The Shares have been listed on the Amsterdam Stock
Exchange under the symbol "VRSA" and the ADSs have been listed on the NASDAQ
National Market under the Symbol "VRSA".
To date, VersaTel has made limited use of bank facilities and capital
lease financing. In May 1999, VersaTel reached an agreement with Nortel,
pursuant to which Nortel will extend vendor financing to VersaTel of up to
euro 45.4 million (approximately NLG 100.0 million) to be used to finance the
purchase of equipment from Nortel. To date, no amounts have been drawn under
this facility. VersaTel may seek to raise senior secured debt financing in the
future to fund the expansion of its network and for general corporate purposes.
Although we currently maintain significant cash balances, we will
require additional capital to continue funding the expansion and development of
our network, including the expansion of local access infrastructure. Also, we
are continually re-evaluating our business objectives and are considering
further expansions of our services and the acceleration of our network
construction. We expect that the net proceeds of the IPO and the Third High
Yield Offering, combined with the Nortel Facility and the remaining proceeds
from the First High Yield Offering and the Second High Yield Offering and
together with other available financings and cash flows from operations, will
provide us with sufficient capital to fund planned capital expenditures and
anticipated losses for the next 12 months. We expect to raise additional funds
through public or private financings or from financial institutions.
We will be required to meet our debt service obligations on the notes
issued in the Third High Yield Offering out of cash reserves and net cash flow
beginning in January 15, 2000. In addition, starting November 15, 2001, our
funds that have been placed in escrow to cover interest payments on the notes
issued in the First High Yield Offering and the Second High Yield Offering will
have been exhausted. As a result, we will need to increase substantially our net
cash flow in order to meet our debt service obligations.
The general rate of inflation has been low in the Benelux in recent
years. We do not expect that inflationary pressures in the future, if any, will
have a material effect on our results of operations or financial condition.
Net cash used in operating activities was NLG 52.8 million for the six
months ended June 30, 1999 compared to NLG 15.1 million for the six months ended
June 30, 1998. This increase was primarily the result of an increase in
operating losses incurred during the first half of 1999.
21
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Net cash used in investing activities was NLG 548.9 million in the six
months ended June 30, 1999 and NLG 13.6 million in the six months ended June 30,
1998. This increase was the result of the acquisitions we completed during the
second quarter of 1999, as well as ongoing capital expenditures to expand our
network and operations.
Net cash used in financing activities was NLG 406.1 million in the six
months ended June 30, 1999 and NLG 309.8 million in the six months ended June
30, 1998. This increase was primarily the result of interim financing that we
obtained in connection with the acquisition of Svianed.
In February 1998, as part of a recapitalization, two of the three
shareholders of VersaTel, Telecom Founders B.V. and NeSBIC Venture Fund C.V., a
subsidiary of Fortis, invested an additional NLG 7.2 million in equity capital
in VersaTel. Although this contribution was received in February 1998, the
formal shareholders meeting approving the amount to be labeled as capital was
not executed until April 17, 1998. In addition, NeSBIC and Cromwilld converted
their subordinated convertible shareholder loans totaling NLG 3.6 million into
ordinary shares of VersaTel, and NeSBIC converted its NLG 4.5 million bridge
loan into ordinary shares of VersaTel. The third component of this
recapitalization was comprised of a new equity investment by Paribas
Deelnemingen N.V. of NLG 12.8 million. Lastly, VersaTel received from Telecom
Founders, NeSBIC, Paribas Deelnemingen N.V. and NPM Capital N.V. an additional
NLG 15.0 million in equity capital immediately prior to the closing of the First
High Yield Offering. As a result of this recapitalization, VersaTel's share
capital increased from NLG 7.0 million to NLG 50.1 million.
Risks Associated with the Year 2000
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
We have initiated a formal Year 2000 project and recruited an
experienced Year 2000 project manager. We are undertaking a comprehensive
program to address the Year 2000 issue with respect to the following:
o our information technology systems,
o the telephony switching network (including equipment installed at
customers' premises),
o our non-information technology systems (including buildings,
plant, equipment, and other infrastructure systems that may
contain embedded microcontroller technology),
o the systems of our major vendors (insofar as they relate to our
business), and
o our customers.
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This program involves 4 "Steps": (1) a wide ranging assessment of Year
2000 problems that might affect VersaTel; (2) the development and implementation
of remedies to address discovered problems; (3) the testing of our systems where
necessary; and (4) an analysis of the most likely worst case scenario and the
preparation of contingency plans. We expect to complete Steps 1 and 2 of this
program during the second quarter of 1999 and Steps 3 and 4 during the third
quarter of 1999.
Steps 1-2: Assessment of Year 2000 Issues, Development and Implementation of
Remedies
The Information Technology Systems. VersaTel is currently undergoing a
major program to replace all of its existing operating support systems for
billing, customer care and mediation and expects to have completed the
replacement program by the end of the third quarter of 1999. In selecting the
new operating support systems, VersaTel asks for guarantees of Year 2000
compliance from its manufacturers. VersaTel is also checking all its custom
designed software for Year 2000 compliance.
VersaTel uses Windows 95 and Windows NT 4.0 as its operating systems.
VersaTel expects to upgrade all of its Windows 95 operating systems to Windows
98, which is Year 2000 compliant, during the second quarter of 1999. VersaTel
expects to install the latest service pack for its NT 4.0 operating system,
which is Year 2000 compliant, during the second quarter of 1999. VersaTel does
not presently use any other desktop or server operating systems.
The Telephony Switching Network. VersaTel has consulted with Nortel,
the manufacturer of its DMS 100 telephony switches and transport layer, and
believes that Nortel's equipment is Year 2000 compliant. VersaTel has requested
a guarantee from Nortel regarding this compliance. We have requested a similar
guarantee from Cisco Systems, our supplier of router switches and certain other
equipment.
The Non-Information Technology Systems. VersaTel's office buildings
have the following embedded systems: monitor alarms (intrusion and sensors),
personnel registration plus floor access, fire alarm, climate control and
electrical power maintenance (generators). VersaTel'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 second quarter of 1999.
Major Vendors' Systems. VersaTel 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 VersaTel. VersaTel 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. VersaTel is now formalizing these requests,
sending letters, and compiling a list of vendors' responses.
Customers' Systems. VersaTel's customer services department intends to
discuss with customers the Year 2000 issue, including whether or not such
customer is Year 2000 compliant and to suggest to customers that, where this
issue has not been resolved, the customer seek advice. We can give no assurances
that VersaTel's customers will either take such advice or be Year 2000 compliant
on a timely basis.
Step 3: Testing of VersaTel's Systems
As VersaTel has tested its various systems and processes and believes
them to be Year 2000 compliant, it no longer plans to conduct a full operational
test of its entire business. VersaTel may, however, continue to test various
systems and processes through the remainder of the year, both on its own and
together with certain customers.
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Step 4: Most Likely Worst Case Scenario
VersaTel believes that the most likely worst effect of the Year 2000
issue would be the inability of customers to complete calls. Nortel, the
manufacturer of VersaTel's switches, has conducted extensive Year 2000 tests
with the EURO-8 software and has informed VersaTel that it believes VersaTel's
switches are Year 2000 compliant. VersaTel has requested a guarantee from Nortel
regarding this compliance. We have requested a similar guarantee from Cisco
Systems, our supplier of router switches and certain other equipment.
If VersaTel's Year 2000 compliant billing system fails to function
correctly, VersaTel 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 VersaTel's customer care team to supply quality service
would be significantly affected if the operating support systems were not
available. Service provisioning, additional services and the development of new
customers could not continue effectively if the automated provisioning systems
were to fail. VersaTel is asking for certificates from the manufacturers of
these systems stating that they are Year 2000 compliant.
VersaTel's ability to collect revenues depends upon certain financial
institutions' computer systems, because approximately 50.0% of its retail
customers pay by way of direct debit facilities. VersaTel is seeking assurances
from these financial institutions that they are Year 2000 compliant.
VersaTel believes that it is unlikely 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, VersaTel would attempt to rectify the problem with the appropriate
entities. However, we can give no assurance that VersaTel will be successful in
obtaining valid assurances or guarantees, that the Year 2000 issue will not have
a material adverse effect on VersaTel, that any Year 2000 effects will be
resolved or that VersaTel will 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, VersaTel has incurred approximately NLG 500,000 in costs for
its Year 2000 readiness 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. VersaTel is replacing these systems to support its
business growth and not specifically to remedy the Year 2000 problem. VersaTel
expects to incur additional specific Year 2000 readiness charges that are
estimated to be less than NLG 1.0 million.
The Year 2000 and Svianed's Readiness
Svianed has undertaken a number of measures to ensure that its business
will not be affected as a result of the Year 2000 issue. In 1997, Svianed
appointed a project leader and made an assessment of all systems and equipment
that could potentially be affected by the Year 2000 issue. The initial focus was
to ensure that the services provided by Svianed to its customers would not be
interrupted as a result of the Year 2000 issue. The next phase was to ensure
that Svianed's management control systems would not be affected by the Year 2000
issue. Starting in mid-1997, Svianed has obtained for all its purchases of
hardware and software guarantees as to their Year 2000 compliance. In addition,
the installed base of Cisco routers and
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Newbridge ATM and Frame Relay switches have been confirmed by their suppliers to
be Year 2000 compliant.
Svianed relies on leased lines from KPN Telecom for the provision of
its services. Svianed understands, based on information it has received from KPN
Telecom, that KPN Telecom has commenced a Year 2000 risk analysis and has
established a remediation plan intended to ensure that KPN Telecom will be Year
2000 compliant. Svianed has received a written confirmation from KPN Telecom
that it will maximize its effort to be Year 2000 compliant. However, Svianed has
not received any guarantee from KPN Telecom as to its Year 2000 compliance, and
we can give no assurance that Svianed's network will not experience any
interruptions as a result of any failure by KPN Telecom to be Year 2000
compliant.
The most likely worst case scenario for Svianed would be a disruption
of its network management system. Svianed expects to incur costs of
approximately NLG 500,000 in connection with its Year 2000 readiness program,
most of which has already been expensed.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial department manages our funding, liquidity and exposure to
foreign exchange rate risks. It is our policy not to enter into any transactions
of a speculative nature.
Our debt obligations that are denominated in U.S. dollars expose us to
risks associated with changes in the exchange rates between the U.S. dollar and
the Dutch guilder and Belgian franc (which currencies are now both pegged to the
euro) in which our revenues are denominated. However, in conjunction with the
First High Yield Offering and the Second High Yield Offering, we have placed in
escrow and pledged for the benefit of the holders of the notes issued in the
First High Yield Offering and the Second High Yield Offering U.S. government
securities sufficient to pay interest due on the notes issued in the First High
Yield Offering and the Second High Yield Offering until and including the
scheduled interest payment on May 15, 2001.
The notes issued in the First High Yield Offering and the Second High
Yield Offering will mature on May 15, 2008 and VersaTel is not required to make
any mandatory redemptions (other than an offer to repurchase the notes issued in
the First High Yield Offering and the Second High Yield Offering upon a change
in control of VersaTel) prior to maturity of the notes issued in the First High
Yield Offering and the Second High Yield Offering. Since the interest rate on
each of the notes issued in the First High Yield Offering and the Second High
Yield Offering is fixed, we have limited our exposure to risks due to
fluctuations of interest rates. At June 30, 1999 the fair value of the notes
issued in the First High Yield Offering and the Second High Yield Offering
outstanding was approximately $390.0 million. Also, the notes that we recently
issued in the Third High Yield Offering will mature on July 15, 2009 and
VersaTel is not required to make any mandatory redemptions (other than an offer
to repurchase the notes issued in the Third High Yield Offering upon a change in
control of VersaTel) prior to maturity of the notes. Since the interest rates on
the notes issued in the Third High Yield Offering is fixed, we have limited our
exposure to risks due to fluctuations of interest rates.
The costs and expenses relating to the construction of our network and
the development of our sales and marketing resources will largely be in Dutch
guilders, Belgian francs and, increasingly, euros. Therefore, the construction
of our network and the development of our sales and marketing resources will
also be subject to currency exchange rate fluctuations as we exchange the
proceeds from the First High Yield Offering and the Second High Yield Offering
to pay our construction costs. However, as of June 30, 1999 we had exchanged all
but $6.3 million of the proceeds from the First High Yield Offering and the
Second High Yield Offering into Dutch guilders. Prior to the application of the
net proceeds from the First High Yield Offering and the Second High Yield
Offering, such funds have been invested in short-term investment grade
securities. VersaTel from time to time hedges a portion of its foreign currency
risk in order to lock into a rate for a given time. In addition, we will become
subject to greater foreign exchange fluctuations as we expand our operations
outside The Netherlands and receive more revenues denominated in currencies
other than Dutch guilders, although the introduction of the euro has largely
eliminated these risks as all 3 Benelux countries have adopted the euro as their
legal currency.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We have filed complaints in the past with the European Commission, OPTA
and the Minister of Transport and Waterways of The Netherlands as part of its
regulatory strategy. We also make routine filings with the regulatory agencies
and governmental authorities in the countries in which we operate or intend to
operate.
Cromwilld Limited, one of our shareholders, objected to the
recapitalization of VersaTel, the First High Yield Offering and the Second High
Yield Offering and threatened to challenge in court certain of VersaTel's
actions in connection with the Recapitalization, the First Offering and the
Second Offering. In January 1999, Cromwilld filed, pursuant to Article 2:345 of
the Netherlands Civil Code, a petition with the Enterprise Chamber
(Ondernemingskamer) of the Court of Appeals in Amsterdam requesting the
appointment of one or more experts to investigate the management and affairs of
VersaTel. In May 1999, the Enterprise Chamber denied Cromwilld's request.
On July 20, 1999, we entered into, along with our shareholders and
certain other parties, a Settlement Agreement with Cromwilld Limited, in order
to resolve disputes arising out of our shareholders' agreement and other
matters. The major terms of the Settlement Agreement provide for:
o the transfer of 146,988 of our ordinary shares held by Telecom
Founders B.V. to Cromwilld;
o the issuance of 200,000 of our shares on July 20, 1999 to
Cromwilld at a price of NLG 7.50 per ordinary share;
o the ability for Cromwilld to include 1,800,000 of its ordinary
shares in the IPO;
o certain piggyback registration rights in favor of Cromwilld that
will take effect 180 days from the date of the IPO;
o the payment by us of $300,000 for Cromwilld's fees and expenses
related to the Settlement Agreement and certain other matters;
o the acknowledgement by all parties to our shareholders' agreement
that the shareholders' agreement will be terminated concurrently
with the closing of the IPO;
o the withdrawal by Cromwilld of its pending legal proceedings
against us and our shareholders;
o Cromwilld's full cooperation with the IPO; and
o the obligation of our shareholders, including Cromwilld, to
procure the resignation or dismissal of Cromwilld's nominee, Denis
O'Brien, from our Supervisory Board, after the completion of the
IPO.
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VersaTel is from time to time involved in routine litigation
in the ordinary course of business. We believe that no currently pending
litigation to which VersaTel is a party will have a material adverse effect on
our financial position or results of operations.
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 8-K
None.
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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 August 13, 1999.
VERSATEL TELECOM INTERNATIONAL N.V.
By: /s/ R. GARY MESCH
-----------------------------
R. Gary Mesch
Managing Director
By: /s/ RAJ RAITHATHA
-----------------------------
Raj Raithatha
Chief Financial Officer
29
