================================================================================
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 March 31, 1999
---------------
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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<PAGE>
VERSATEL TELECOM INTERNATIONAL N.V.
QUARTERLY REPORT ON FORM 6-K
FOR THE PERIOD ENDED MARCH 31, 1999
INDEX
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Page
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PART I: FINANCIAL INFORMATION
ITEM 1. Financial Statements................................................ 4
Unaudited Consolidated Balance Sheet as of March 31, 1999 and
Audited Consolidated Balance Sheet as of December 31, 1998.......... 4
Unaudited Consolidated Statements of Operations for the Three
Months Ended March 31, 1999 and March 31, 1998...................... 6
Unaudited Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1999 and March 31, 1998...................... 7
Notes to the Unaudited Consolidated Financial Statements............ 8
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 11
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.......... 20
PART II: OTHER INFORMATION.................................................. 21
SIGNATURES................................................................... 23
2
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly 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 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. Unless otherwise
indicated, the translations of Dutch guilders into U.S. dollars have been made
at NLG 2.04 per $1.00, the noon buying rate in the City of New York for cable
transfers in Dutch guilders as certified for customs purposes by the Federal
Reserve Bank of New York on March 31, 1999.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VERSATEL TELECOM INTERNATIONAL N.V.
AUDITED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998 AND UNAUDITED CONSOLIDATED
BALANCE SHEET AS OF MARCH 31, 1999
(amounts in thousands, except for share and per share amounts)
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1999
----------------- --------------
(unaudited)
NLG NLG US$
ASSETS
<S> <C> <C> <C>
Current Assets:
Cash.................................................... 372,014 329,551 161,545
Restricted cash, current portion........................ 89,752 94,201 46,177
Accounts receivable, net................................ 7,902 11,001 5,393
Inventory, net.......................................... 1,083 2,992 1,467
Prepaid expenses and other.............................. 12,909 17,439 8,549
---------- ---------- ----------
Total current assets................................ 483,660 455,184 223,131
---------- ---------- ----------
Fixed Assets:
Property, plant and equipment, net...................... 38,608 41,766 20,474
Construction in progress................................ 46,019 92,205 45,199
---------- ---------- ----------
Total fixed assets.................................. 84,627 133,971 65,673
---------- ---------- ----------
Restricted cash, net of current portion................... 121,804 135,614 66,477
Capitalized finance costs, net............................ 28,750 28,000 13,725
Goodwill, net............................................. 4,556 4,354 2,133
---------- ---------- ----------
Total assets.............................................. 723,397 757,123 371,139
========== ========== ==========
</TABLE>
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 MARCH 31, 1999
(amounts in thousands, except for share and per share amounts)
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1999
----------------- --------------
(unaudited)
NLG NLG US$
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C> <C>
Current Liabilities:
Accounts payable........................................ 39,863 50,556 24,782
Due to related parties.................................. 806 -- --
Accrued liabilities..................................... 28,005 70,413 34,516
Current portion of capital lease obligations............ 71 71 35
---------- ---------- ----------
Total current liabilities........................... 68,745 121,040 59,333
---------- ---------- ----------
Capital lease obligations, net of current portion......... 37 23 11
Long term liabilities..................................... 670 670 329
Long term debt (13 1/4% Senior Notes)..................... 688,018 747,845 366,591
Shareholders' Equity:
Ordinary shares, NLG 0.05 par value 1,949 1,949 955
Additional paid-in capital.............................. 51,112 51,112 25,055
Warrants................................................ 5,212 5,212 2,555
Accumulated deficit..................................... (92,346) (170,728) (83,690)
---------- ---------- ----------
Total shareholders' equity.......................... (34,073) (112,455) (55,125)
---------- ---------- ----------
Total liabilities and shareholders' equity................ 723,397 757,123 371,139
========== ========== ==========
</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 MARCH 31, 1999 AND MARCH 31, 1998
(amounts in thousands, except for share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998 March 31, 1999
-------------- --------------
(unaudited)
NLG NLG US$
<S> <C> <C> <C>
OPERATING REVENUES........................................ 6,402 15,501 7,599
OPERATING EXPENSES:
Cost of Revenues, excluding depreciation................ 5,460 12,485 6,120
Selling, general and administrative..................... 5,544 20,179 9,892
Depreciation and amortization........................... 1,087 3,084 1,512
---------- ---------- ----------
Total operating expenses......................... 12,091 35,748 17,524
---------- ---------- ----------
Operating Loss...................................... (5,689) (20,247) (9,925)
OTHER INCOME (EXPENSES):
Foreign currency exchange gains (losses), net (115) (40,283) (19,747)
Interest income ........................................ 14 6,043 2,962
Interest expense--third parties......................... (27) (23,895) (11,713)
Interest expense--related parties....................... (187) -- --
---------- ---------- ----------
Total other income (expenses).................... (315) (58,135) (28,498)
Loss before income taxes......................... (6,004) (78,382) (38,423)
---------- ---------- ----------
Provision for income taxes................................ -- -- --
---------- ---------- ----------
Net loss......................................... (6,004) (78,382) (38,423)
========== ========== ==========
Net loss per share (Basic and Diluted) in NLG............. (0.31) (2.01) (0.99)
Weighted average number of shares outstanding............. 19,159,286 38,984,810 38,984,810
</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 THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998
(amounts in thousands, except for share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998 March 31, 1999
-------------- --------------
NLG NLG US$
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss................................................ (6,004) (78,382) (38,423)
Adjustments to reconcile net loss to net cash used
in operating activities--
Depreciation and amortization........................... 1,087 3,084 1,512
Amortization finance cost............................... -- 750 368
Deferred income......................................... (16) -- --
Exchange loss on long-term debt and restricted cash..... -- 41,568 20,377
Changes in other operating assets and liabilities
Accounts receivable..................................... (1,516) (3,099) (1,519)
Inventory............................................... (359) (1,909) (936)
Prepaid expenses and other.............................. 157 (4,530) (2,221)
Accounts payable........................................ 3,670 10,693 5,242
Due to related parties.................................. 282 (806) (395)
Accrued liabilities..................................... 1,794 42,408 20,788
---------- ---------- ----------
Net cash provided by (used in) operating activities... (905) 9,777 4,793
========== ========== ==========
Cash Flows from Investing Activities:
Capital expenditures.................................... (2,424) (52,226) (25,601)
---------- ---------- ----------
Net cash used in investing activities .............. (2,424) (52,226) (25,601)
========== ========== ==========
Cash Flows from Financing Activities:
Redemptions of capital lease obligations................ (68) (14) (7)
Shareholder contributions............................... 7,200 -- --
---------- ---------- ----------
Net cash provided by (used in) financing activities. 7,132 (14) (7)
========== ========== ==========
Net Increase (Decrease) in Cash.......................... 3,803 (42,463) (20,815)
Cash, beginning of the period............................ 1,346 372,014 182,360
---------- ---------- ----------
Cash, end of the period.................................. 5,149 329,551 161,545
========== ========== ==========
Supplemental Disclosures of Cash Flow Information:
Cash paid for--
Interest (net of amounts capitalized)................. -- -- --
Income taxes.......................................... -- -- --
</TABLE>
See notes to the unaudited consolidated financial statements.
7
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VERSATEL TELECOM INTERNATIONAL N.V.
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 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 March 31, 1999, and
the results of operations and cash flows for the three months ended March 31,
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 months ended March 31, 1999 may not be indicative of
the operating results for the full year.
As of March 31, 1999, the Company (directly or indirectly) wholly-owned
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.
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.
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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. Foreign Currency Transactions
The Company's functional currency is the Dutch guilder. Transactions
involving other currencies are converted into Dutch guilders using the exchange
rates which are in effect at the time of the transactions.
At the balance sheet date, monetary assets and liabilities which are
denominated in other currencies are adjusted to reflect the current exchange
rates. Gains or losses resulting from foreign currency remeasurements are
reflected in the accompanying statements of operations.
For the three months ended March 31, 1999 an exchange loss of NLG 59.8
million was realized on the long-term debt (13 1/4% senior notes, denominated in
U.S. dollars). In the same period, an exchange gain was realized on the
restricted cash, denominated in U.S. dollars, to an amount of NLG 18.3 million.
4. Financial Condition and Operations
For the period ended March 31, 1999, the Company had a loss from
operating activities of NLG 20.2 million. In addition, the Company had an
accumulated deficit of NLG 170.7 million as of March 31, 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 has a positive working capital of NLG 334.1 million at March 31,
1999, which should enable it to continue its operations through December 31,
1999. The Company expects to raise additional funds in 1999 through public or
private financings or from financial institutions.
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 65 million as of
March 31, 1999.
An earn-out arrangement with the former shareholders of CS Net B.V. has
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 Form 20-F, and to the issuance of the two
tranches of senior notes as described in Form 20-F, and threatened to challenge
in court certain of the Company's actions in connection with the
recapitalization and the issuance of the senior notes. 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. If this request is granted, the person or persons
appointed by the court will file a report with the court upon conclusion of the
investigation. The Netherlands Civil Code provides that if the findings in such
report show mismanagement of the subject company, the Enterprise Chamber of the
Court of Appeals may, in its discretion, at the request of either the
petitioner, the other shareholders of the company representing at least 10% of
the outstanding share capital or the Solicitor-General with the Court of
Appeals, take any one or more of the following actions: (i) suspend or dismiss
one or more of the managing or supervisory directors; (ii)
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appoint, on a temporary basis, one or more managing or supervisory directors;
(iii) deviate, on a temporary basis, from such provisions of the articles of
association of the company as indicated by the court; (iv) transfer shares in
the company on a temporary basis; and (v) dissolve the company.
Based upon advice from the Company's legal counsel, it is unlikely that
this objection would have a material impact on the Company's consolidated
balance sheets or statements of operations.
7. Subsequent Events
In May 1999 the Company acquired Amstel Alpha B.V. and its direct and
indirect subsidiaries, SpeedPort N.V. and Glabana U.S.A., Inc. (collectively,
"SpeedPort"). The key figures of SpeedPort as of April 30, 1999 are summarized
as follows: no sales, total assets NLG 1.0 million, and a net loss for the
period since inception in 1998 until April 30, 1999 of NLG 2.2 million.
On April 13, 1999 a two-for-one stock split was effected, which
resulted in the issuance of 19,492,405 additional shares of class A ordinary
shares. The authorized capital of the Company now consists of 140,000,000 class
A shares and 10,000,000 class B shares, each with a par value of NLG 0.05. All
share, per share and weighted average share amounts have been restated in this
document to reflect this stock split. As of March 31, 1999, 38,984,810 class A
shares (as adjusted) were outstanding and no class B shares were issued.
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<PAGE>
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 and
Internet service providers. In November 1998, we acquired CS Net B.V., which
provides Internet-based, business-to-business transaction services for vertical
trade communities which act as comprehensive sources of information, interaction
and electronic commerce for their users.
We are building a high bandwith 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 March 31, 1999, our construction
passed 10 city centers, 2 business parks and 4,500 buildings. 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 we will connect the Benelux network to Frankfurt by May
1999. We currently have a Nortel 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 data switch installed in
each of Rotterdam, in the third quarter of 1999, and in 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.
Revenues
Our long distance revenues are currently derived primarily from the
provision of long distance telecommunications services in The Netherlands and
Belgium. VersaTel provides international long distance and national long
distance services to its customer base, which predominately consists of small-
and medium-sized businesses as well as certain residential customers. We also
provide carrier services to other telecommunications and Internet service
providers.
Our revenues to date have been derived primarily from minutes of
telecommunications traffic billed. As we deploy our network, we expect the
percentage of our revenues that consist of fixed monthly fees will increase
substantially. The following table sets forth the total revenues and billable
minutes of use attributable to our operations for the years ended December 31,
1997 and December 31, 1998, and for the three months ended March 31, 1998 and
March 31, 1999, as well as our total number of customers, based on the number of
invoices issued, as of December 31, 1997 and December 31, 1998 and as of March
31, 1998 and as of March 31, 1999. All of our 1997 revenues were derived from
The Netherlands. We started generating revenues in Belgium in October 1998.
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<TABLE>
<CAPTION>
Fiscal Years Ended Three Months Ended
December 31, March 31,
----------------------------------- -----------------------------------
1997 1998 1998 1999
----------------- ----------------- ----------------- -----------------
(at period end)
<S> <C> <C> <C> <C>
Customers
Business customers........................ 1,828 5,649 2,459 7,180
Residential customers..................... 230 1,234 519 1,507
Carrier services customers................ 1 4 3 7
--------------- --------------- --------------- ---------------
Total................................... 2,059 6,887 2,981 8,694
(NLG in thousands)
Revenues
Business customers
Telephony................................. 16,948 34,472 5,620 13,294
Internet/data......................... -- 897 -- 828
Residential customers..................... 11 386 33 232
Carrier services customers................ 1,937 3,806 749 1,147
--------------- --------------- --------------- ---------------
Total................................. 18,896 39,561 6,402 15,501
(in thousands)
Billable Minutes of Use
Business customers........................ 21,469 102,986 10,355 54,218
Residential customers..................... 42 1,817 105 1,298
Carrier services customers................ 1,850 16,806 1,972 13,649
--------------- --------------- --------------- ---------------
Total................................. 23,361 121,603 12,432 69,165
</TABLE>
In 1997, all our revenues were generated in The Netherlands. In October
1998, we started generating revenues in Belgium. The geographical composition of
our revenues for the fiscal years ended December 31, 1997 and December 31, 1998
and for the three months ended March 31, 1998 and March 31, 1999 was as follows:
<TABLE>
<CAPTION>
Fiscal Years Ended Three Months Ended
December 31, March 31,
----------------------------------- -----------------------------------
1997 1998 1998 1999
----------------- ----------------- ----------------- -----------------
(NLG in thousands)
<S> <C> <C> <C> <C>
The Netherlands........................... 18,896 39,324 6,402 14,644
Belgium................................... -- 237 -- 857
--------------- --------------- --------------- ---------------
Total................................... 23,361 39,561 6,402 15,501
</TABLE>
Currently, 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 and Internet service providers. We have also begun generating
data- and Internet-based revenues. We have recently changed our approach to
reaching residential customers and we now plan to do so 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 generally price our services
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at a discount to the local 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 with reductions of approximately 10.0%, 15.0% and
10.0%, 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 out-pace the
decline in per minute costs in 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 other services, would have a material adverse
effect on our 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
Our cost of revenues 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, 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
primarily consist of the cost of leased lines. 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. 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.
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, once
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VersaTel establishes a direct link from Amsterdam to Rotterdam, VersaTel 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 EC directives requiring cost-based
termination rates and leased line 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. See "--Depreciation and Amortization."
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 the development of
new products and the 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.
Depreciation and Amortization
VersaTel capitalizes and depreciates its fixed assets, including
switching equipment and fiber optic cable, over periods ranging from three to
twenty-five 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.
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 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.
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Results of Operations
For the three months ended March 31, 1999 compared to the three months ended
March 31, 1998
Revenues increased by NLG 9.1 million to NLG 15.5 million for the three
months ended March 31, 1999 from NLG 6.4 million for the three months ended
March 31, 1998, representing an increase of 142.1%. 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 CS Net
B.V., the introduction of services in Belgium and an increase in wholesale
traffic. Revenues for the three months ended March 31, 1999 as compared to the
same period in 1998 were negatively impacted by general price reductions
initiated by KPN Telecom N.V. in May 1998, July 1998 and, most recently, January
1999 of approximately 10.0%, 15.0% and 10% respectively. VersaTel responded to
these price reductions by reducing its own prices and VersaTel's revenues would
have been higher without such price reductions.
Billable minutes of use increased by 56.8 million to 69.2 million for
the three months ended March 31, 1999 from 12.4 million for the three months
ended March 31, 1998, representing an increase of 456.3%. The number of
customers increased by 5,713 to 8,694 for the three months ended March 31, 1999
from 2,981 as of March 31, 1998.
Cost of revenues increased by NLG 7.0 million to NLG 12.5 million for
the three months ended March 31, 1999 from NLG 5.5 million for the three months
ended March 31, 1998, primarily reflecting an increase in billable minutes,
increasing interconnect capacity and short-term network capacity requirements
(leased lines) in Belgium. 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 expenses increased by NLG 14.7
million to NLG 20.2 million for the three months ended March 31, 1999 from NLG
5.5 million for the three months ended March, 1998, representing an 264.0%
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, additional facilities cost, expenses related to the
expansion of our Belgium operations and additional expenses as a result of the
acquisition of CS Net B.V.
Depreciation and amortization expenses increased by NLG 2.0 million to
NLG 3.1 million for the three months ended March 31, 1999 from NLG 1.1 million
for the three months ended March 31, 1998. This increase was primarily related
to capital expenditures incurred in connection with the deployment of an
additional Nortel DMS 100 switch in Antwerp, the expansion and deployment of the
network and an increase in the number of dialers installed due to customer
growth and the purchase of computer equipment and office furniture for new
employees.
Currency exchange losses, net, increased by NLG 40.2 million to NLG
40.3 million for the three months ended March 31, 1999 from a loss of NLG 0.1
million for the three months ended March 31, 1998 as a result of a net loss of
VersaTel's U.S. dollar denominated assets and liabilities on the balance sheet.
Interest income increased by approximately NLG 6.0 million to NLG 6.0
million for the three months ended March 31, 1999 from NLG 14.0 thousand for the
three months ended March 31, 1998. This increase was primarily related to
VersaTel's positive cash balance as a result of the two high yield offerings in
1998.
Interest expense increased by NLG 23.7 million to NLG 23.9 million for
the three months ended March 31, 1999 from NLG 0.2 million for the three months
ended March 31, 1998. This increase is primarily related to the accrual of
interest expense on the notes issued in the two high yield offerings.
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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. Historically,
VersaTel had financed its growth primarily through equity and subordinated loans
from its shareholders. In May 1998, VersaTel issued units consisting of
$225,000,000 principal aggregate amount of 13 1/4% senior notes due 2008 and
warrants to purchase 3,000,000 (as adjusted for a two-for-one stock split in
April 1999) ordinary shares of VersaTel ("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 units consisting of $150,000,000
principal aggregate amount of 13 1/4% senior notes due 2008 and warrants to
purchase 2,000,100 (as adjusted for a two-for-one stock split in April 1999)
ordinary shares of VersaTel (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 Yield Offering to make capital
expenditures related to the expansion and development its network, to fund
operating losses and for other general corporate purposes.
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.
Although we currently maintain significant cash balances, we will
require substantial additional capital to continue funding the cost 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 to raise additional funds through public or private financings or from
financial institutions in 1999.
Starting November 15, 2001, when 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 (the "Notes") will have been
exhausted, we will be required to fund substantial interest payments on the
Notes as they become due. We will need to increase substantially our net cash
flow in order to meet our debt service obligations at that time, including our
obligations on the Notes.
To date, VersaTel has made limited use of bank facilities and capital
lease financing. VersaTel has finalized an agreement with Nortel, pursuant to
which Nortel will extend vendor financing to VersaTel of up to NLG 100.0 million
to be used to finance the purchase of Nortel equipment. VersaTel may seek to
raise senior secured debt financing in the future to fund the expansion of its
network and for general corporate purposes.
Net cash provided in operating activities was NLG 9.8 million for the
three months ended March 31, 1999 compared to NLG 0.9 million for the three
months ended March 31, 1998. This increase was primarily the result of operating
losses incurred during the first quarter of 1999.
Net cash used in investing activities was NLG 52.2 million in the three
months ended March 31, 1999 and NLG 2.4 million in the three months ended March
31, 1998. Substantially all the cash utilized by investing activities in both
fiscal years resulted from an increase in capital expenditures to expand our
network. We do 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 used in financing activities was NLG 14.0 thousand in the
three months ended March 31, 1999 and NLG 7.1 million in the three months ended
March 31, 1998. Net cash provided by financing activities in the three months
ended March 31, 1998 resulted mainly from NLG 7.2 million of prepaid capital
contributions from two of our shareholders.
In February 1998, as part of a recapitalization (the
"Recapitalization"), two of the three shareholders of VersaTel, Telecom Founders
B.V. ("Telecom Founders") and NeSBIC Venture Fund C.V. ("NeSBIC"), 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 Nederlandse Participatie
Maatschappij 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.
This program involves four "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 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.
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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
VersaTel intends to conduct a full operational test of its entire
business by the end of the second quarter of 1999, when VersaTel expects that
all of its systems and processes will be Year 2000 compliant. VersaTel'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.
Step 4: Most Likely Worst Case Scenario
VersaTel believes that the 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
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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 OSS 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 400,000 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.
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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 are denominated in U.S. dollars, which exposes 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 U.S.
government securities sufficient to pay interest due on the Notes until and
including the scheduled interest payment on May 15, 2001. The Notes will mature
on May 15, 2008 and VersaTel is not required to make any mandatory redemptions
(other than an offer to repurchase the Notes upon a change in control of
VersaTel) prior to maturity of the Notes. Since the interest rates on the Notes
is fixed, we have limited our exposure to risks due to fluctuations of interest
rates. At March 31, 1999, the fair value of the Notes outstanding was
approximately $390.0 million.
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 March 31, 1999, we had exchanged
all but $11.2 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 three Benelux countries have adopted the euro as
their legal currency.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In January 1999, one of our shareholders, Cromwilld Limited
("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. Cromwilld currently owns 18.8% of our
outstanding ordinary shares, on a fully diluted basis, and is controlled by
Denis O'Brien, a member of our supervisory board. If Cromwilld's request is
granted, the person or persons appointed by the court will file a report with
the court upon conclusion of the investigation.
The Netherlands Civil Code provides that if the findings in such a
report indicate the mismanagement (wanbeleid) of the company involved, the
Enterprise Chamber of the Court of Appeals may, in its discretion, at the
request of either the petitioner, the other shareholders of the company
representing at least 10% of the outstanding share capital, or the
Solicitor-General with the Court of Appeals, take one or more of the following
actions: (i) suspend or dismiss one or more of the managing or supervisory
directors; (ii) appoint on a temporary basis one or more managing or supervisory
directors; (iii) deviate on a temporary basis from such provisions of the
articles of association of the company as indicated by the court; (iv) transfer
shares in the company on a temporary basis; and (v) dissolve the company. Since
the object of inquiry proceedings pursuant to Article 2:345 of the Netherlands
Civil Code is to restore a company's internal relationships, the measures that
may be taken by the Enterprise Chamber are temporary only; no dissolution will
be ordered unless the restoration has become permanently impossible.
VersaTel is of the opinion that there is, and has been, no
mismanagement and, therefore, that there is no ground to grant the petition of
Cromwilld and/or to take one or more of the aforementioned actions. However, we
can give no assurances that the Enterprise Chamber of the Court of Appeals in
Amsterdam will not grant the petition of Cromwilld to appoint one or more
experts or that such experts, when appointed, will not conclude that there was
mismanagement of VersaTel. In March 1999, VersaTel filed its response to
Cromwilld's petition with the Enterprise Chamber. The hearing before the
Enterprise Chamber will take place on May 20, 1999. The court has indicated that
it expects to issue a judgment in this matter on the same day. In addition, we
are not certain whether or not Cromwilld will attempt to frustrate, block or
challenge our future actions.
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.
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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 May 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
23
