<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1996.
OR
/_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission File Number: 33-92696
VIATEL, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3787366
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
800 Third Avenue New York, New York
(Address of principal executive offices)
10022
(Zip Code)
(212) 935-6800
(Registrant's telephone number, including area code)
--------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. /X/ Yes /_/ No
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of March 31, 1996, the registrant had outstanding 4,357,270 Shares of
Class A Common Stock, par value $.01 per share, and 16,104,202 shares of Common
Stock, par value $.01 per share.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
VIATEL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31,
Assets 1996 December 31,
(Unaudited) 1995
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,905,401 $ 8,934,914
Marketable securities, current 21,176,310 25,004,050
Trade accounts receivable, less allowance for doubtful accounts of
$549,000 and $473,000, respectively 5,462,506 4,723,664
Other receivables 2,942,537 2,757,675
Prepaid expenses 989,478 742,803
-------------- -------------
Total current assets 32,476,232 42,163,106
-------------- -------------
Marketable securities, non-current -- 1,127,442
Property and equipment, net 17,589,704 15,715,121
Deferred financing and registration fees, less accumulated amortization
of $458,000 and $364,000, respectively 3,336,664 3,431,540
Intangible assets, net 2,452,777 2,070,055
Other assets 1,628,049 1,106,182
============== =============
$ 57,483,426 $ 65,613,446
============== =============
Liabilities and Stockholders' Deficit
Current liabilities:
Accrued telecommunication costs $ 8,378,114 $ 11,056,235
Accounts payable and other accrued expenses 5,629,808 4,591,628
Commissions payable 322,593 300,655
-------------- -------------
Total current liabilities 14,330,515 15,948,518
-------------- -------------
Long-term liabilities:
Senior discount notes, less discount of $50,908,745 and
$53,416,992, respectively 69,791,255 67,283,008
Commitments and contingencies
Stockholders' deficit:
Common Stock, $.01 par value. Authorized 50,000,000 shares, issued
and outstanding 16,104,202 shares 161,042 161,042
Class A Common Stock, $.01 par value. Authorized 10,000,000 shares,
issued and outstanding 4,357,270 43,573 43,573
Additional paid-in capital 30,030,805 30,030,805
Unearned compensation (68,250) (78,000)
Cumulative translation adjustment (67,866) (164,676)
Accumulated deficit (56,737,648) (47,610,824)
-------------- -------------
Total stockholders' deficit (26,638,344) (17,618,080)
-------------- -------------
$ 57,483,426 $ 65,613,446
============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
For Three Months Ended
March 31,
----------------------------
1996 1995
------------ ------------
Telecommunications revenue $ 10,590,270 $ 6,929,299
------------ ------------
Operating expenses:
Costs of telecommunication services 8,999,249 5,900,232
Selling expenses 2,401,224 1,536,697
General and administrative expense 5,129,090 2,902,549
Depreciation and amortization 1,087,677 499,278
------------ ------------
Total operating expenses 17,617,240 10,838,756
------------ ------------
Other income (expenses):
Interest income 470,644 1,033,728
Interest expense (2,569,196) (2,087,018)
Share in loss of affiliate (1,302) (11,680)
------------ ------------
Net loss $ (9,126,824) $ (4,974,427)
============ ============
See accompanying notes to consolidated financial statements.
3
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For Three Months Ended
March 31,
-------------------------------------
1996 1995
--------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (9,126,824) $ (4,974,427)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 1,087,677 499,278
Interest expense on senior discount notes 2,568,623 2,046,919
Accrued interest income on marketable securities (64,734) (564,178)
Provision for losses on accounts receivable 373,037 77,789
Share in loss of affiliate 1,302 11,680
Unearned compensation 9,750 --
Changes in assets and liabilities:
Increase in accounts receivable (1,098,590) (409,914)
Increase in prepaid expenses and other receivables (223,734) (498,660)
Increase in other assets (144,032) (285,208)
Decrease in accrued telecommunication costs, accounts payable,
other accrued expenses and commissions payable (1,564,796) (1,912,977)
------------- --------------
Net cash used in operating activities (8,182,321) (6,009,698)
------------- --------------
Cash flows from investing activities:
Purchase of property, equipment and software (3,227,251) (3,134,453)
Issuance of notes receivable (323,227) --
Investment in marketable securities (5,276,748) (50,695,308)
Proceeds from maturity of marketable securities 10,086,464 --
Investment in affiliate (87,412) (5,176)
------------- --------------
Net cash provided by (used in) investment activities 1,171,826 (53,834,937)
------------- --------------
Cash flows from financing activities:
Payments under capital leases -- (170,011)
Repayment of notes payable -- (1,316,755)
------------- --------------
Net cash used in financing activities -- (1,486,766)
------------- --------------
Effects of exchange rate changes on cash (19,018) 34,610
Net decrease in cash and cash equivalents (7,029,513) (61,296,791)
Cash and cash equivalents at beginning of period 8,934,914 66,761,614
------------- --------------
Cash and cash equivalents at end of period $ 1,905,401 $ 5,464,823
============= ==============
Supplemental disclosures of cash flow information:
Interest paid $ -- $ 40,099
============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information as of March 31, 1996 and for the periods
ending March 31, 1996 and 1995 is unaudited)
(1) Interim Consolidated Financial Statements
The consolidated financial statements as of March 31, 1996 and for the
three month periods ended March 31, 1996 and 1995 have been prepared by
Viatel, Inc. and Subsidiaries (collectively, the "Company"), without
audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, all adjustments
(consisting of only normal recurring accruals) necessary for a fair
presentation of the consolidated results of financial position,
operations and cash flows for each period presented have been made on a
consistent basis. Certain information and footnote disclosures normally
included in consolidated financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations although management believes that
the disclosures herein are adequate to make information presented not
misleading. It is suggested that these financial statements should be
read in conjunction with the Company's 1995 annual consolidated financial
statements. Operating results for the three months ended March 31, 1996
may not necessarily be indicative of the results that may be expected for
the full year.
(2) Investments in Debt Securities
Management determines the appropriate classification of its investments
in debt securities at the time of purchase and reevaluates such
determination at each balance sheet date. These investments are
diversified among high credit quality securities in accordance with the
Company's investment policy. Debt securities that the Company has both
the intent and ability to hold to maturity are carried at amortized cost.
Debt securities for which the Company does not have the intent or ability
to hold to maturity are classified as available for sale. Securities
available for sale are carried at fair value, with the unrealized gains
and losses, net of tax, reported in a separate component of stockholders'
equity. At March 31, 1996, the Company had no investments that qualified
as trading.
The amortized cost of debt securities classified as held to maturity and
available for sale are adjusted for amortization of premiums and
accretion of discounts to maturity over the estimated life of the
security. Such amortization and interest are included in interest income.
The following is a summary of the fair value of securities held to
maturity and securities available for sale at March 31, 1996:
Securities Securities
Held to Available
Maturity for Sale Total
------------- ------------- -------------
Money market instruments $ 1,166,127 $ -- $ 1,166,127
Federal agencies obligations -- 1,109,518 1,109,518
Corporate debt securities -- 18,900,665 18,900,665
------------ ------------ ------------
Total $ 1,166,127 $ 20,010,183 $ 21,176,310
============ ============ ============
5
<PAGE>
The fair value of each investment approximates the amortized cost and,
therefore, there are no unrealized gains or losses as of March 31, 1996.
Based upon contractual maturity, all securities held to maturity and
securities available for sale at March 31, 1996 are due within one year.
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
There were no changes in the classification of any securities held to
maturity or securities available for sale from the time of purchase to
the time of maturity or sale.
(3) Property and Equipment
Property and equipment consists of the following as of:
March 31, December 31,
1996 1995
----------- ------------
Communications system $15,857,587 $13,997,966
Leasehold improvements 1,375,415 1,062,742
Furniture, equipment and other 3,379,468 2,755,600
Construction in progress 631,600 679,935
----------- -----------
21,244,070 18,496,243
Less accumulated depreciation and amortization 3,654,366 2,781,122
----------- -----------
$17,589,704 $15,715,121
=========== ===========
At March 31, 1996, construction in progress represents a portion of the
current expansion of the European Network. As of March 31, 1996, $543,100
of interest has been capitalized with respect to this project.
(4) Intangible Assets
Intangible assets consist of the following as of:
March 31, December 31,
1996 1995
---------- ------------
Rights to territorial exclusivity $1,607,225 $1,607,225
Goodwill 474,065 474,065
Purchased software 1,039,825 661,999
Trademarks 213,599 --
Other 131,225 133,834
---------- ----------
3,465,939 2,877,123
Less accumulated amortization 1,013,162 807,068
---------- ----------
$2,452,777 $2,070,055
========== ==========
Rights to territorial exclusivity represents the period of territorial
exclusivity previously granted to the independent sales organizations
which were acquired and is being amortized over three years.
Goodwill, which represents the excess of purchase price over fair value
of net assets acquired, is amortized on a straight-line basis over the
expected periods to be benefited, seven years.
6
<PAGE>
The costs of all other intangible assets are being amortized over their
useful lives, ranging from one to five years.
The Company's intangible assets are assessed for recoverability at least
quarterly. The Company assesses the recoverability of its intangible
assets by determining whether the amortization of the goodwill balance
over its remaining life can be recovered through projections of
undiscounted future operating cash flows of the related intangible
assets. The amount of intangible asset impairment, if any, is measured
based on projected discounted future operating cash flows using a
discount rate reflecting the Company's average cost of funds. The
assessment of the recoverability of intangible assets will be impacted if
estimated future operating cash flows are not achieved.
(5) Long Term Liabilities
In December 1994, the Company issued $120,700,000 of 15% senior unsecured
discount notes due January 15, 2005 for approximately $58,000,000. The
notes will fully accrete on a semiannual compounding basis to face value
on January 15, 2000 with semiannual interest payments commencing July 15,
2000 until maturity.
The notes are redeemable at the Company's option, in whole or in part, at
any time on or after January 15, 2000 until maturity at redemption prices
that range from 110% to 100% of the notes face value plus accrued
interest. In addition, at any time prior to January 15, 1998, the Company
may redeem up to $42,245.000 of the face value of the notes with the
proceeds of one or more public equity offerings at 115% of the then
accreted value of the notes to the redemption date. Upon a change of
control, the Company is required to make an offer to purchase the notes
at a purchase price equal to 101% of their accreted value, plus accrued
interest, if any. The notes contain certain covenants that, among other
things, limit the ability of the Company and certain of its subsidiaries
to incur indebtedness, make pre-payments of certain indebtedness and pay
dividends.
On March 31, 1996, the Company estimated the fair value of these notes to
be $69,800,000 which approximates its accreted value. The estimate is
based on quoted market prices for the notes.
(6) Income Taxes
The statutory Federal tax rate for the three months ended March 31, 1996
and 1995 was 35%. The effective tax rates were zero for the same periods,
respectively, due to the Company incurring net operating losses for which
no tax benefit was recorded.
For Federal income tax purposes, the Company has unused loss carry
forwards of approximately $43,800,000, expiring in 2007 through 2011. The
availability of the net operating loss carry forwards to offset income in
future years may be restricted if the Company undergoes an ownership
change, which may occur as a result of future sales of Company stock and
other events.
7
<PAGE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets are as follows:
<TABLE>
<CAPTION>
March 31, March 31,
1996 1995
--------------- ---------------
<S> <C> <C>
Accounts receivable principally due to allowance for doubtful
accounts $ 225,000 $ 235,000
OID Interest not deductible in current period 3,832,000 --
Net operating loss carryforwards 15,328,000 7,758,000
-------------- -------------
Total gross deferred tax assets 19,385,000 7,993,000
Less valuation allowance (19,385,000) (7,993,000)
-------------- -------------
Net deferred tax assets $ -- $ --
============== =============
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning in making
these assessments. During the three months ended March 31, 1996 and 1995,
the valuation allowance increased by $3,055,000 and $1,366,000,
respectively.
(7) Regulatory Matters
The Company is subject to regulation in countries in which it does
business. The Company believes that an adverse determination as to the
permissibility of the Company's services under the laws and regulations
of any such country would not have a material adverse long-term effect on
its business.
(8) Commitments and Contingencies - Litigation
As a result of the Company's transition to direct sales organizations in
Europe, two of its former independent sales representatives, in France
and in Spain, have asserted breach of contract and certain other claims.
Arbitration proceedings in respect to these claims are currently under
way or pending. The aggregate amount of damages sought by the
representatives is $8.8 million. The Company believes that it has
meritorious defenses against the claims alleged by the representatives
and intends to vigorously pursue all such defenses but the outcomes
cannot be predicted.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
In Europe, the Company has created a telecommunications network with switching
and multiplexing equipment ("Nodes") in Amsterdam, Barcelona, Brussels, Madrid,
Milan, Paris, Rome and Frankfurt and a master switch in London (collectively,
the "European Network"). The Company currently anticipates that two additional
Nodes will be connected to the European Network in 1996. All Nodes are connected
by international private leased circuits ("IPLC's") to the master switch in
London (except for the Node in Barcelona, from which traffic is routed though
Madrid via an in-country leased line) which generally routes transmissions
between the Nodes. Intercontinental transmissions are generally transmitted via
a transatlantic leased line to the master switch in Omaha, Nebraska.
Since the incremental roll out of the Nodes in August of 1995, both quality and
consistency of transmissions over the European Network have improved. However,
consistency has been impeded by, among other factors, IPLC micro-interruptions,
access problems and hardware/software failures. The IPLC micro-interruptions
were substantially attributable to a third party, and the Company believes that
this problem has been substantially remedied. See "Liquidity and Capital
Resources--Average Monthly Cash Requirements." In addition, access problems and
hardware/software failures are also expected to be reduced as certain equipment
modifications and software refinements are made.
During the first quarter of 1996, the Company experienced growth of 52.8% and
136.0% in revenues and minutes, respectively, and a modest improvement on gross
margins as compared to the corresponding period of 1995. However, revenue and
gross margins remained below the Company's targets, and general and
administrative expenses were larger than anticipated. As a result, the Company
experienced a net loss of $9.1 million during the first quarter of 1996, as
compared to a net loss of approximately $5.0 million for such period of 1995. A
substantial portion of this increase reflects costs incurred during the third
and fourth quarters of 1995 in building a direct sales organization in Europe
and expanding the infrastructure for the Company's operations.
The Company has decided to reorganize certain elements of its operations to
manage growth more effectively. Through this reorganization, the Company
anticipates that expenses will be reduced, operational efficiency and service
will be improved and capital expenditures will be curtailed until such time as
increased revenue justifies a larger infrastructure. In addition, the Company's
executive offices will be relocated to New York where its financial, legal and
human resource departments reside. Such a relocated executive office will be
more centrally located between its operational headquarters in Omaha, Nebraska,
the Company's principal markets of Europe and Latin America (together
representing approximately 72.1% of revenue for the quarter ended March 31,
1996) and the wholesale business conducted in the United States (representing
approximately 12.4% of revenue for the quarter ended March 31, 1996). The
Company also anticipates that other financial functions currently performed
elsewhere will be moved to New York.
9
<PAGE>
The Company's President will continue to be resident in Europe, and he, together
with the two recently appointed regional directors of Europe, will oversee the
operations of the European sales organizations. Should circumstances warrant,
the Company will appoint a European coordinator for sales and marketing. In
London, the Company will maintain a reduced administrative staff, including its
European General Counsel, and will continue to maintain its master switch for
the European Network. The European Network's sales and marketing functions, such
as pricing and marketing, will be moved from London to certain of the Company's
field offices to allow these functions to better reflect regional customs and
practices.
Finally, in managing growth, the Company will be more conservative in allocating
its resources. See "--Liquidity and Capital Resources-Capital Expenditures."
The Company is currently exploring alternatives for extending the addressable
market of its European Network in a less capital intensive manner. One
alternative involves establishing points of presence in strategic locations
to supplement Nodes. The Company has not yet adopted any alternative, and no
assurance can be provided that the overall cost of any alternative will be
less than the cost of purchasing, installing and maintaining Nodes.
There can be no assurance that the Company's efforts to manage its growth
through this reorganization will be successful. The Company's ability to
generate positive cash flow will depend upon many factors beyond the Company's
control. If the Company is unable to generate sufficient cash flow to meet its
capital requirements, the Company will be required to refinance all or a portion
of its indebtedness or raise additional capital. There can be no assurance that
any such refinancing could be obtained on terms favorable to the Company, if at
all, or that any form of additional capital will be available. See "--Liquidity
and Capital Resources."
Results of Operations
Three months ended March 31, 1996 compared to three months ended March 31, 1995.
Revenues. Net revenues increased by 52.8% to $10.6 million on 10.9 million
revenue minutes for the first quarter of 1996 from $6.9 million on 4.6 million
revenue minutes for first quarter of 1995. This revenue growth was generated
primarily from the European Network, Latin America, the wholesale business and
the Pacific Rim. In addition, revenue from the provision of sales through
independent sales agents in Africa and the Middle East have become
insignificant, although much of the sales has been migrated to carriers with
which the Company does wholesale business.
The overall increase in revenue minutes was partially offset by declining
revenue per minute. Average revenue per minute declined by 36.2% from $1.49 in
the first quarter of 1995 to $0.95 in the first quarter of 1996 primarily
because of a higher percentage of (i) lower-priced European traffic from the
European Network and (ii) low priced wholesale traffic and a rate reduction in
response to pricing reductions enacted by local PTTs. See "Results of
Operations-Cost of Telecommunication Services."
Revenue per minute from the sale of services to end users decreased to $1.17 in
the first quarter of 1996 from $1.57 in the first quarter of 1995. Revenue per
minute from the sale of services to other carriers and resellers increased to
$0.42 in the first quarter of 1996 from $0.34 in the first quarter of 1995. The
number of customers billed rose 64.2% to 11,363 at March 31, 1996 from 6,922 at
March 31, 1995.
10
<PAGE>
Europe is becoming an increasingly more important market for the Company. During
the first quarter of 1996, approximately 42.5% of the Company's revenue was
generated in Europe as compared to 36% of the Company's revenues during the
first quarter of 1995. In contrast, despite a 5.7% increase over the
corresponding period of 1995, revenue from Latin America represented 29.6% of
the Company's revenue during the first quarter of 1996 versus 43% of the
Company's revenue during such quarter of 1995. The Company is increasing its
efforts in Latin America to make its services more attractive through
intensified sales and marketing and aggressive pricing.
The Company also significantly increased its wholesale carrier business under
which the Company sells transmission and other telecommunication services to
other carriers and resellers at discounted rates to utilize excess network
capacity. While the wholesale carrier business has a lower average margin than
the Company's other business units, such gross profits contribute to satisfying
fixed costs. The wholesale carrier business represented 12.6% and 29.0% of total
revenue and minutes, respectively, for the first quarter of 1996 as compared to
1.3% and 6.0% of total revenue and minutes, respectively, for the first quarter
of 1995. While this increase represents more than a nine-fold increase over the
corresponding period for 1995, some of the increase represents the migration of
business formerly conducted by the Company in Africa and the Middle East through
independent sales representatives to carriers with which the Company does
wholesale business. The Company does not expect continued growth of this
magnitude, but intends to continue selling its unused capacity.
The Company experienced customer cancellations and non-usage, or "churn" in the
quarters ended March 31, 1996 and 1995. The Company believes, based on
preliminary data, that churn has diminished, primarily because of improvements
in both quality and consistency of transmissions over the European Network and
that its ability to further minimize churn is contingent on further improvements
to the European Network's consistency and customer service. However, in the
competitive telecommunications environment in which the Company operates, churn
is expected.
During the first quarter of 1996, the Company commenced trials of domestic long
distance telecommunication services in Spain and Italy, the two countries in
which the Company had the technical ability to provide such services. No
assurance can be provided that these trials will be successful or that these
services will be extended beyond the trial phase.
Cost of Telecommunication Services. Cost of telecommunication services increased
to $9.0 million in the first quarter of 1996 from $5.9 million in the first
quarter of 1995 and as a percentage of revenue marginally decreased to
approximately 85% in the first quarter of 1996 from 85.2% in the first quarter
of 1995. The corresponding increase in gross margin was primarily due to changes
in revenue attributable to changes in access, overall product mix and
increased transmissions over the European Network. Accordingly, the Company
experienced a 41.8% decrease in average cost per minute to $0.64 during the
first quarter of 1996 from $1.10 during the first quarter of 1995. This
decrease, which mitigated the effect of the decline in average revenue per
minute, was attributable primarily to traffic being routed through the
European Network (which originated approximately 79% of the Company's
European-related call revenue during the first quarter of 1996). The
increased European Network utilization helped reduce
11
<PAGE>
costs associated with intra-European and intercontinental telecommunication
services due to the significant fixed cost nature of the European Network.
Gross margins for the first quarter of 1996 were adversely effected by increases
in certain fixed costs related to expanding the Company's overall transmission
capacity. These fixed costs are expected to be absorbed as traffic volume over
the European Network increases. As a result of obtaining additional IPLC
capacity, the costs associated with the European Network increased to
approximately $0.8 million for the first quarter of 1996 (8.0% of revenues for
such period) from approximately $0.4 million for the first quarter of 1995 (5.6%
of revenues for such period). Additionally, costs associated with enhancing the
United States backbone (redundant fiber optic capacity at the Omaha facility and
a leased line between New York and Omaha) totaling approximately $0.2 million
(2.0% of revenues for such period) were incurred. The IPLC's represent a
significant portion of the Company's fixed costs and were not fully utilized in
the first quarter of 1996. The Company believes that use of the IPLC's will
continue to increase and that such increase will positively impact the overall
gross margin as a percentage of revenue.
As demand for minutes increases by the Company's customers, the Company is able
to reduce its per minute cost by purchasing increasingly larger quantity of
minutes than was previously purchased.
Selling Expenses. Selling expenses increased to $2.4 million in the first
quarter of 1996 from $1.5 million in the first quarter of 1995 and, as a
percentage of revenue, increased to approximately 22.7% in the first quarter of
1996 from 22.2% in the first quarter of 1995. In contrast, commissions paid to
independent sales representatives constituted 24% of all selling expenses for
the first quarter of 1996 compared to 43.8% for the first quarter of 1995. The
increase in selling expenses and overall change in the expense structure is
attributable to the Company's establishment of direct sales organizations.
The Company currently has sales offices in Belgium, France, Germany, Holland,
Italy and Spain. Accordingly, salary related selling expenses represented
49.1% and 42.3% of total selling expenses for the three months ended
March 31, 1996 and 1995, respectively. The Company has commenced using
non-exclusive independent representatives to supplement the efforts of the
direct sales organizations. This strategy provides the Company with the benefits
of a direct sales organization while minimizing the costs associated with such
an undertaking.
General and Administrative Expense. General and administrative expense increased
to $5.0 million in the first quarter of 1996 from $2.9 million in the first
quarter of 1995 and, as a percentage of revenue, increased to approximately
48.4% in the first quarter of 1996 from 42.8% in the first quarter of 1995. Much
of this increase is attributable to the costs of building a direct sales force
in Europe and an infrastructure for operations. As discussed above, the Company
is seeking to manage growth more effectively and is taking measures to reduce
costs, with an emphasis on general and administrative expenses. See "Overview."
Depreciation and Amortization. Depreciation and amortization expense, which
includes depreciation on the Company's transmission facilities, increased to
approximately $1.0 million in
12
<PAGE>
the first quarter of 1996 from approximately $0.5 million in the first quarter
of 1995. The increase was due primarily to the depreciation of nodes and
other equipment placed in service during 1995 and the first quarter of 1996.
Interest Expense. Interest expense increased to approximately $2.6 million in
the first quarter of 1996 from approximately $2.1 million in the first quarter
of 1995 due to the accretion of non cash interest on the notes (the "Notes")
issued by the Company as part of a $75 million unit offering in December 1994
(the "Unit Offering"). No interest is payable on the Notes until July 15, 2000,
at which time semi-annual interest payments will be required through the January
15, 2005 maturity date. This expense was partially offset by investing the net
proceeds from the Unit Offering in highly liquid debt which generated
approximately $0.5 million and $1.0 million in interest income for the three
months ended March 31, 1996 and 1995, respectively.
Liquidity and Capital Resources
The Company has incurred $56.7 million of aggregate annual losses from
operations since its organization through March 31, 1996 and anticipates that
the cash flow from operations will continue to be negative until the last
quarter of 1997. As of March 31, 1996, the Company had $23.1 million of cash,
cash equivalents and other liquid investments.
The Company believes that, based on its current forecasts, the Company should be
able to fund its capital requirements until the fourth quarter of 1997. However,
there can be no assurance that such efforts will be successful as the Company's
ability to generate positive cash flow will depend upon many factors beyond the
Company's control. Among these factors are the Company's future performance in
its principal markets, competition, regulatory and legislative action,
technological developments and the availability of leased capacity. If the
Company is unable to generate sufficient cash flow to meet its capital
requirements, the Company will be required to refinance its indebtedness or
raise additional capital. There can be no assurance that any such refinancing
could be obtained on terms favorable to the Company, if at all, or that any form
of additional capital will be available.
Capital Expenditures. The Company's operations have required substantial capital
expenditures for the creation of an operational infrastructure, the purchase of
Nodes and the continued development of the European Network. The Company
anticipates that it will continue to make such expenditures, but significant
capital expenditures will be made only if a return on the investment can be
expected in the near term. Historically, the Company has funded these
investments through equity and debt issuances and vendor financings. As of March
31, 1996, the Company had entered into purchase commitments for two Nodes for an
aggregate price of approximately $0.8 million. Based on current needs and
projections, it is anticipated that capital expenditures aggregating
approximately $3.0 million will be made during the balance of 1996.
Average Monthly Cash Requirements. During the quarter ended March 31, 1996, the
Company's average current monthly cash requirements were approximately $2.0
million. This average excludes approximately (i) $3.2 million for capital
expenditures for the purchase of equipment, software, and the continued
development of the European Network, (ii) $2.2 million in connection with the
settlement of the Company's fee dispute for past services with its
facilities-based IPLC vendor, under which the Company also will pay $1.4 million
for past services during
13
<PAGE>
the second quarter of 1996 and (iii) $0.6 million for other non-recurring items.
Due to the costs savings associated with the reorganization, it is anticipated
that over time the average monthly cash requirements will be reduced.
Interest Requirements and Debt Repayment. No interest is payable on the Notes
until July 15, 2000, at which time semi-annual interest payments will be
required through the January 15, 2005 maturity date. Until January 15, 2000, the
Notes will fully accrete on a semi-annual basis to their aggregate $120.7
million face value. If the Company is unable to generate sufficient cash flow
to satisfy the debt service requirements on the Notes, the Company will be
required to refinance the Notes or raise additional capital. There can be no
assurance that any such refinancing could be obtained on terms favorable to
the Company, if at all, or that any form of additional capital will be
available.
Foreign Currency. The Company has exposure to fluctuations in foreign currencies
relative to the U.S. Dollar since the Company bills in local currency in
countries where the local currency is relatively stable, while transmission
costs are largely incurred in U.S. Dollars. In countries with less stable
currencies, such as Brazil, the Company bills in U.S. Dollars. For the three
months ended March 31, 1996 approximately 53% of the Company's revenues were
billed in currencies other than the U.S. Dollar. Furthermore, the costs of
substantially all of the Company's transmission equipment (i.e., Nodes) related
to the ongoing expansion of the European Network have been and will continue to
be U.S. Dollar denominated.
With the continued deployment of the European Network, a substantial portion of
the costs associated with the European Network, such as local access charges and
a portion of the leased line costs, as well as a majority of local selling
expenses, will be charged to the Company in the same currencies as revenues.
These developments are creating a natural hedge against a portion of the
Company's foreign exchange exposure. To date, much of the funding necessary to
establish the local sales organizations has been derived from revenue that was
collected in local currencies. Consequently, the Company's financial position as
of March 31, 1996 and results of operations for the three months ended March 31,
1996 were not significantly impacted by the volatility experienced by the U.S.
Dollar in foreign markets. The Company's foreign currency exposure, resulting
from foreign currency revenues in excess of foreign currency denominated costs,
will be managed, as necessary, in part through the use of hedging techniques as
considered necessary.
14
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) None.
(b) No reports on Form 8-K were filed by the Company during the
quarter ended March 31, 1996.
15
<PAGE>
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.
VIATEL, INC.
By: /s/ Martin Varsavsky
---------------------------------
Martin Varsavsky
President and
Chief Executive Officer
By: /s/ Allan Shaw
---------------------------------
Allan Shaw
Vice President Finance,
Chief Financial Officer
Date: May 14, 1996
16
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