SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 10-Q/A-1
(Mark One)
/X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
(State or other jurisdiction 13-3787366
of incorporation or organization) (I.R.S. Employer Identification No.)
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
Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock, as of the latest practicable date. As of June
30, 1996, the registrant had outstanding 4,357,270 shares of Class A
Common Stock, par value $.01 per share, and 16,204,202 shares of Common
Stock, par value $.01 per share.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
<CAPTION>
VIATEL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
Assets June 30,
1996 December 31,
(Unaudited) 1995
__________ ____________
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 7,713,531 $ 8,934,914
Marketable securities, current 5,055,909 25,004,050
Trade accounts receivable, less allowance
for doubtful accounts of $621,000 and
$473,000, respectively 6,745,493 4,723,664
Other receivables 2,847,959 2,757,675
Prepaid expenses 733,098 742,803
-------------- ------------
Total current assets 23,095,990 42,163,106
-------------- ------------
Marketable securities, non-current --- 1,127,442
Property and equipment, less accumulated
depreciation of $4,560,000 and
$2,781,000, respectively 18,108,129 15,715,121
Deferred financing and registration fees,
less accumulated amortization of
$553,000 and $364,000, respectively 3,236,167 3,431,540
Intangible assets, less accumulated
amortization of $1,220,000 and
$807,000, respectively 2,302,340 2,070,055
Other assets 1,807,008 1,106,182
-------------- ------------
$ 48,549,634 $ 65,613,446
============== ============
Liabilities and Stockholders' Deficit
Current Liabilities:
Accrued telecommunications costs $ 8,619,071 $ 11,056,235
Accounts payable and other accrued
expenses 5,791,109 4,591,628
Commissions payable 405,199 300,655
-------------- ------------
Total current liabilities 14,815,379 15,948,518
-------------- ------------
Long-term liabilities:
Senior discount notes, less discount
of $48,371,027 and $53,416,992,
respectively 72,328,973 67,283,008
Commitments and contingencies
Stockholders' deficit:
Common stock, $.01 par value. Authorized
50,000,0000 shares issued and
outstanding 16,204,202 and 16,104,202
shares, respectively 162,042 161,042
Class A Common Stock, $.01 par value.
Authorized 10,000,000 shares, issued
and outstanding 4,357,270 shares 43,573 43,573
Additional paid-in capital 30,419,804 30,030,805
Unearned compensation (162,600) (78,000)
Cumulative translation adjustment (822,431) (164,676)
Accumulated deficit (68,235,106) (47,610,824)
------------ -----------
Total Stockholders' deficit (38,594,718) (17,618,080)
------------ -----------
$ 48,549,634 $ 65,613,446
============ ============
</TABLE>
See accompanying notes to consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
VIATEL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended
June 30,
--------------------------
1996 1995
-------- --------
<S> <C> <C>
Telecommunications revenue $ 11,691,959 $ 7,262,683
------------- -----------
Operating Expenses:
Costs of telecommunications services 9,578,517 6,208,514
Selling expenses 2,669,744 1,832,324
General and administrative expense 7,460,623 4,315,545
Depreciation and amortization 1,144,146 465,029
Equipment impairment loss --- 560,419
------------ -----------
Total operating expenses 20,853,030 13,381,831
------------- -----------
Other income (expenses):
Interest income 268,808 821,712
Interest expense (2,601,556) (2,156,581)
Share in loss of affiliate (3,639) (11,083)
------------- ----------
Net loss $(11,497,458) $(7,465,100)
============ ===========
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
--------------------------
1996 1995
-------- --------
<S> <C> <C>
Telecommunications revenue $ 22,282,229 $ 14,191,982
------------ -----------
Operating Expenses:
Costs of telecommunications services 18,577,766 12,108,746
Selling expenses 5,070,968 3,369,020
General and administrative expense 12,589,713 7,218,096
Depreciation and amortization 2,231,823 880,931
Equipment impairment loss --- 560,419
------------ -----------
Total operating expenses 38,470,270 24,137,212
------------ -----------
Other income (expenses):
Interest income 739,452 1,855,440
Interest expense (5,170,752) (4,326,975)
Share in loss of affiliate (4,941) (22,764)
------------ ----------
Net loss $ (20,624,282) $(12,439,529)
============= ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VIATEL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the Six Months Ended
June 30,
--------------------------
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (20,624,282) $ (12,439,529)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Deferred financing costs --- (125,559)
Equipment impairment loss --- 560,419
Depreciation and amortization 2,231,823 880,931
Interest expense on senior discount notes 5,169,138 4,270,026
Accrued interest income on marketable
securities (219,899) (1,195,522)
Provision for losses on accounts
receivable 1,044,308 56,697
Share in loss of affiliate 4,941 22,764
Unearned compensation 305,400 ---
Changes in assets and liabilities:
Increase in accounts receivable (3,048,211) (42,485)
Decrease (Increase) in prepaid
expenses and other receivables 673,756 (1,000,223)
Increase in other assets ( 464,694) (891,658)
Decrease in accrued telecommunications
costs, accounts payable, other
accrued expenses and commissions
payable (1,580,529) (1,828,364)
------------- -------------
Net cash used in operating
activities (16,508,249) (11,732,503)
------------- -------------
Cash flows from investing activities:
Purchase of property, equipment and
software (4,660,158) (5,360,740)
Issuance of notes receivable (323,227) ---
Investment in marketable securities (13,774,332) (50,695,308)
Proceeds from maturity of marketable
securities 34,159,209 8,137,443
Investment in affiliate (93,953) (202,255)
------------ -------------
Net cash provided by (used
in) investing activities 15,307,539 (48,120,860)
------------ -------------
Cash flows from financing activities:
Payments under capital leases --- (285,252)
Repayment of notes payable --- (1,966,218)
------------ -------------
Net cash used in
financing activities --- (2,251,470)
------------ -------------
Effects of exchange rates on cash (20,673) 30,680
------------ -------------
Net decrease in cash and cash
equivalents (1,221,383) (62,074,153)
Cash and cash equivalents at
beginning of period 8,934,914 66,761,614
------------ -------------
Cash and cash equivalents at
end of period $ 7,713,531 $ 4,687,461
============ =============
Supplemental disclosure of cash
flow information:
Interest paid $ --- $ 56,949
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information as of June 30, 1996 and for the periods
ended June 30, 1996 and 1995 is unaudited)
(1) Interim Consolidated Financial Statements
The consolidated financial statements as of June 30, 1996 and for the
three and six month periods ended June 30, 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 be read in conjunction with the Company's 1995 annual
consolidated financial statements. Operating results for the three and
six months ended June 30, 1996 may not be indicative of the results that
may be expected for the full year.
The Company has adopted Statement of Financial Accounting Standard No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of" ("SFAS 121") and Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123") as of January 1, 1996. With respect to SFAS 123, the
Company has elected the "intrinsic value" based method of accounting for
its stock-based compensation arrangements. Neither the adoption of SFAS
121 nor SFAS 123 had a material adverse effect on the Company.
(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 June 30, 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. There were no securities classified as held to maturity as of
June 30, 1996.
The following is a summary of the fair value of securities available for
sale at June 30, 1996:
U.S. Treasury obligations $3,936,487
Federal agencies obligations 1,119,422
----------
Total $5,055,909
==========
The fair value of each investment approximates the amortized cost and,
therefore, there are no unrealized gains or losses as of June 30, 1996.
<PAGE>
Based upon contractual maturity, all securities available for sale at
June 30, 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) Stock Incentive Plan
Stock option activity under the 1993 Flexible Stock Incentive Plan
(the "Stock Incentive Plan") is shown below.
Option Price
-------------------------
Number of Per Share
Shares Average Total Price
--------- --------- -----------
Shares under option at
December 31, 1995 745,123 $2.69 $2,002,543
Granted 820,940 $3.90 $3,201,666
Forfeitures (47,836) $3.61 $ (172,851)
------- ----- ----------
Shares under option at
June 30, 1996 1,518,227 $3.31 $5,031,358
========= ===== ==========
As of June 30, 1996, 537,479 options were exercisable under the
Stock Incentive Plan.
(4) Reorganization
During the three months ended June 30, 1996, the Company recognized
approximately $1.3 million of general and administrative expense for
reorganizing certain elements of its operations. These expenses, of
which approximately $.4 million has been paid to date and approximately
$.3 million represents non-cash deferred compensation, are comprised
principally of employee termination costs of approximately $1.0 million
associated with the termination of 28 employees and a charge of
approximately $.2 million for a portion of the Company's lease for its
administrative quarters in London. The Company undertook this
reorganization for the purpose of managing growth more effectively.
(5) 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.
(6) Commitments and Contingencies - Litigation
On June 5, 1996, a French arbitration tribunal rendered a judgment
against the Company in connection with a claim by an independent sales
representative (the "Claimant") for alleged breach of contract and
certain other claims. Although the Claimant requested total monetary
damages of approximately $3 million and sought reinstatement as the
Company's exclusive sales representative in France, the arbitration
panel awarded the Claimant FF 4.3 million (approximately $0.83 million
based on foreign exchange rates in effect as of June 30, 1996) and the
panel terminated the Claimant's sales agency. As a result, included in
general administrative expense is a charge of approximately $.83 million
for the three and six months ended June 30, 1996.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Overview
The Company operates a digital, switch-based telecommunications network
in Western Europe including a central switching center in London and
additional switches in Amsterdam, Barcelona, Brussels, Frankfurt,
Madrid, Milan, Paris and Rome connected by leased, digital fiber optic
transmission facilities (the "European Network"). In addition, the
Company operates a switching center in Omaha, Nebraska, which is
connected to the central switching center in London by leased, digital
fiber optic transmission facilities (together with the European Network,
the "Viatel Network").
During the first six months of 1996, the Company experienced growth of
approximately 57.0% in telecommunications revenue and an improvement in
gross margin as compared to the corresponding period in 1995. However,
telecommunications revenue and gross margins remained below the
Company's targets, and general and administrative expenses, as a
percentage of revenue, increased more than anticipated. As a result,
the Company experienced a net loss of approximately $20.6 million during
the first six months of 1996, as compared to a net loss of approximately
$12.4 million during the first six months of 1995. A substantial
portion of the increase in net loss is attributable to additional costs
incurred by the Company in connection with its expansion of its direct
sales force in Western Europe and its administrative infrastructure.
During the first six months of 1996, certain trends were evident
including (i) an increase in telecommunications revenue of 10.4% from
$10.6 million in the first quarter of 1996 to $11.7 million in the
second quarter of 1996, (ii) an increase in billable minutes of 30.3%
from 10.9 million billable minutes in the first quarter of 1996 to 14.2
million billable minutes in the second quarter of 1996, (iii) an
increase in gross margins from 15.0% in the first quarter of 1996 to
18.1% in the second quarter of 1996 and (iv) a relative stability in
selling expenses, as a percentage of revenue, which was 22.7% in the
first quarter of 1996 and 22.8% in the second quarter of 1996. In
addition, while general and administrative expense, as a percentage of
revenue, increased from 48.4% in the first quarter of 1996 to 63.8% in
the second quarter of 1996, such expense would have decreased, as a
percentage of revenue, to 45.9% if charges for the Company's
reorganization (the "Reorganization") and an expense associated with a
judgment rendered by a French arbitration tribunal against the Company
in connection with a claim by an independent sales representative had
not been incurred. See "-- Results of Operations."
The Company's ability to generate positive cash flow depends upon many
factors beyond the Company's control. The Company currently anticipates
that it will be able to fund its capital requirements until the first
quarter of 1997. Consequently, the Company is currently exploring
several alternatives for raising additional capital including a public
offering of Common Stock. On August 7, 1996, the Company filed a
registration statement on Form S-1 with the Securities and Exchange
Commission to register the offering of up to $135.0 million of Common
Stock (assuming the exercise in full of an over-allotment option granted
to the underwriters). There can be no assurance that the Company will
be able to complete the offering contemplated in such registration
statement or that any financing will be obtained on terms favorable to
the Company. See "-- Liquidity and Capital Resources."
Results of Operations
Three Months Ended June 30, 1996 Compared to Three Months Ended June 30,
1995.
TELECOMMUNICATIONS REVENUE. Telecommunications revenue increased by
61.0% to $11.7 million on 14.2 million billable minutes for the three
months ended June 30, 1996 from $7.3 million on 5.4 million billable
minutes for the three months ended June 30, 1995. Telecommunications
revenue growth for the three months ended June 30, 1996 was generated
primarily from higher traffic volume on the European Network, from
growth in the Company's wholesale business and, to a lesser extent, from
growth in traffic volume in Latin America and the Pacific Rim.
The overall increase of 163.5% in billable minutes from the second
quarter of 1995 to the second quarter of 1996 was partially offset by
declining revenue per billable minute. Average revenue per billable
minute declined by
<PAGE>
37.6% from $1.33 in the three months ended June 30, 1995 to $0.83 in the
corresponding period in 1996 primarily because of (i) a higher
percentage of lower-priced intra-European traffic from the European
Network, (ii) a higher percentage of low-priced wholesale traffic, (iii)
reductions in certain rates charged to non-wholesale customers in
response to pricing reductions enacted by certain incumbent
telecommunications operators ("ITOs") in Western Europe, formerly known
as Postal, Telephone and Telegraph companies and (iv) changes in
customer access methods. See "-- Cost of Telecommunications Services."
Telecommunications revenue per billable minute from the sale of services
to non-wholesale customers decreased to $1.07 in the three months ended
June 30, 1996 from $1.56 in the corresponding period in 1995.
Telecommunications revenue per billable minute from the sale of services
to carriers and other resellers increased to $0.42 in the three months
ended June 30, 1996 from $0.29 in the corresponding period in 1995
primarily as a result of an overall increase in intercontinental call
traffic. The number of customers billed rose 87.2% to 13,779 at June
30, 1996 from 7,360 at June 30, 1995.
Western Europe is becoming an increasingly important market for the
Company. During the three months ended June 30, 1996, approximately
41.4% of the Company's telecommunications revenue was generated in
Western Europe as compared to approximately 34.8% of the Company's
telecommunications revenue during the corresponding period in 1995. In
contrast, despite an increase of approximately 9.2% over the
corresponding period in 1995, telecommunications revenue from Latin
America represented approximately 28.0% of the Company's
telecommunications revenue during the three months ended June 30, 1996
as compared to approximately 42.1% of the Company's telecommunications
revenue during the three months ended June 30, 1995. Historically,
significant portions of the Company's telecommunications revenue have
been derived from Latin America, principally from the provision of
callback and international toll free related services. Presently, the
Company is devoting substantial resources to the deregulating Western
European market, and although it expects revenue from Latin America as
well as other geographic regions to grow, it expects such revenue to
continue to decrease as a percentage of the Company's total
telecommunications revenue in the near term.
The Company has significantly increased its wholesale business through
which it sells switched minutes to carriers and other resellers at
discounted rates to utilize excess network capacity. While the
wholesale business has lower average gross margins than the Company's
non-wholesale business, the telecommunications revenue generated from
the wholesale business partially offsets the fixed costs associated with
the Viatel Network. The wholesale business represented approximately
18.6% and approximately 36.8% of total telecommunications revenue and
billable minutes, respectively, for the three months ended June 30, 1996
as compared to approximately 3.9% and approximately 17.9% of total
telecommunications revenue and billable minutes, respectively, for the
three months ended June 30, 1995. While this increase in
telecommunications revenue represents more than an eight-fold increase
over the corresponding period in 1995, a portion of this increase
represents the migration of business formerly conducted by the Company
in Africa and the Middle East through indirect sales representatives to
carriers which purchase switched minutes from the Company. The Company
does not expect telecommunications revenue generated by its wholesale
business to continue to grow at this rate.
COST OF TELECOMMUNICATIONS SERVICES. Cost of telecommunications
services increased to $9.6 million for the three months ended June 30,
1996 from $6.2 million for the three months ended June 30, 1995 and, as
a percentage of revenue, decreased to approximately 81.9% from
approximately 85.5% for the three months ended June 30, 1996 and 1995,
respectively. The corresponding increase in gross margins was primarily
due to changes in overall service mix and increased utilization of the
European Network. The Company experienced a 41.7% decrease in average
cost per billable minute to $0.67 during the three months ended June 30,
1996 from $1.15 during the three months ended June 30, 1995. This
decrease, which more than offset the effect of the decline in average
revenue per billable minute, was attributable primarily to (i) increased
traffic being routed through the European Network, (ii) an increase in
switched minutes generated by the Company's wholesale business and (iii)
changes in customer access methods. Increased European Network
utilization helped reduce costs on a per minute basis with respect to
European long distance telecommunications services.
Gross margins for the three months ended June 30, 1996 were negatively
impacted by increases in certain costs related to the expansion of the
Company's overall transmission capacity. These fixed costs are expected
to decrease as a percentage of telecommunications revenue as traffic
volume over the European Network increases. As a result
<PAGE>
of obtaining additional international private line circuit ("IPLC")
capacity, the costs associated with the European Network increased to
approximately $1.0 million for the three months ended June 30, 1996
(approximately 8.2% of telecommunications revenue for such period) from
approximately $0.4 million for the three months ended June 30, 1995
(approximately 5.9% of telecommunications revenue for such period).
IPLCs represent a significant portion of the Company's fixed costs and
were not fully utilized in the three months ended June 30, 1996. The
Company believes its use of IPLCs will continue to increase and such
increase will positively impact the Company's overall gross margins, as
a percentage of revenue, as more minutes are routed through the European
Network. This benefit, however, is primarily limited to calls that
either originate or terminate in a city where the Company has a switch
or a point of presence ("POP"), because otherwise the Company transports
the call over the public switched telephone network ("PSTN") at higher
transmission costs and reduced margins.
SELLING EXPENSES. Selling expenses increased to $2.7 million in the
three months ended June 30, 1996 from $1.8 million in the three months
ended June 30, 1995 and, as a percentage of telecommunications revenue,
decreased to approximately 22.8% in the second quarter of 1996 from
approximately 25.2% in the second quarter of 1995. Commissions paid to
independent sales representatives constituted approximately 24.6% of all
selling expenses for the three months ended June 30, 1996 compared to
approximately 32.8% for the three months ended June 30, 1995. The
increase in selling expenses is attributable to the Company's
establishment of direct sales organizations. Salary related selling
expenses represented approximately 47.7% and approximately 47.6% of
total selling expenses for the three months ended June 30, 1996 and
1995, respectively.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased to $7.5 million in the three months ended June 30, 1996 from
$4.3 million in the three months ended June 30, 1995 and, as a
percentage of revenue, increased to approximately 63.8% in the second
quarter of 1996 from approximately 59.4% in the second quarter of 1995.
Much of this increase is attributable to the costs of building a direct
sales force in Western Europe and overhead costs associated with the
Company's headquarters, back office and network operations. Absent a
charge associated with a corporate restructuring undertaken by the
Company during the period (the "Reorganization") and an expense
associated with a French arbitration award against the Company, general
and administrative expense would have decreased to approximately 45.9%
as a percentage of telecommunications revenue. The Company is also the
subject of an arbitration proceeding in which the Company's former
independent sales representative in Madrid (the "Spanish
Representative") is seeking $5.8 million in damages. The Company
believes that any potential adverse determination in this arbitration
would not have a material adverse effect on the Company's business,
financial condition or results of operations.
During the second quarter of 1996, the Company recognized approximately
$1.3 million of general and administrative expense associated with the
Reorganization, of which approximately $0.4 million has been paid to
date and approximately $0.3 million represents non-cash deferred
compensation. These expenses are comprised principally of employee
termination and relocation costs and the write-down of a portion of the
Company's lease for its administrative quarters in London.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense,
which includes depreciation of the Viatel Network, increased to
approximately $1.1 million in the second quarter of 1996 from
approximately $0.5 million in the second quarter of 1995. The increase
was due primarily to the depreciation of switches and other equipment
placed in service during 1995 and the first six months of 1996.
INTEREST. Interest expense increased to approximately $2.6 million in
the three months ended June 30, 1996 from approximately $2.2 in the
three months ended June 30, 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 interest
income of approximately $0.3 million and approximately $0.8 million for
the three months ended June 30, 1996 and 1995, respectively, derived
from the investment of the net proceeds from the Unit Offering in highly
liquid debt instruments.
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30,
1995.
TELECOMMUNICATIONS REVENUE. Telecommunications revenue increased by
57.0% to $22.3 million on 25.1 million billable minutes for the six
months ended June 30, 1996 from $14.2 million on 10.0 million billable
minutes for the six months ended June 30, 1995. Telecommunications
revenue growth for the six months ended June 30, 1996 was
<PAGE>
generated primarily from higher traffic volume on the European Network,
from growth in the Company's wholesale business and, to a lesser extent,
from growth in traffic volume in Latin America and the Pacific Rim.
The overall increase of 150.9% in billable minutes from the six months
ended June 30, 1995 to the six months ended June 30, 1996 was partially
offset by declining revenue per billable minute. Average revenue per
billable minute declined by 37.6% from $1.41 in the six-month period
ended June 30, 1995 to $0.88 in the corresponding period in 1996
primarily because of (i) a higher percentage of lower-priced intra-
European traffic from the European Network, (ii) a higher percentage of
low-priced wholesale traffic, (iii) reductions in certain rates charged
to non-wholesale customers in response to pricing reductions enacted by
certain ITOs in Western Europe and (iv) changes in customer access
methods. See "-- Cost of Telecommunications Services."
Telecommunications revenue per billable minute from the sale of services
to non-wholesale customers decreased to $1.12 in the six-month period
ended June 30, 1996 from $1.56 in the six-month period ended June 30,
1995. Telecommunications revenue per billable minute from the sale of
services to carriers and other resellers increased to $0.42 in the six
months ended June 30, 1996 from $0.30 in the six months ended June 30,
1995 primarily as a result of an overall increase in intercontinental
call traffic. The number of customers billed rose 87.2% to 13,779 at
June 30, 1996 from 7,360 at June 30, 1995.
During the six months ended June 30, 1996, approximately 42.4% of the
Company's telecommunications revenue was generated in Western Europe as
compared to 35.2% of the Company's telecommunications revenue during the
six months ended June 30, 1995. In contrast, despite a 7.5% increase
over the corresponding period in 1995, telecommunications revenue from
Latin America represented approximately 29.1% of the Company's
telecommunications revenue during the first six months of 1996 as
compared to approximately 42.6% of the Company's telecommunications
revenue during the first six months of 1995.
The Company's wholesale business represented approximately 15.8% and
approximately 33.4% of total telecommunications revenue and billable
minutes, respectively, for the six months ended June 30, 1996 as
compared to approximately 2.6% and approximately 12.5% of total
telecommunications revenue and billable minutes, respectively, for the
six months ended June 30, 1995. While this increase in
telecommunications revenue represents more than a nine-fold increase
over the corresponding period in 1995, a portion of this increase
represents the migration of business formerly conducted by the Company
in Africa and the Middle East through indirect sales representatives to
carriers which purchase switched minutes from the Company. The Company
does not expect telecommunications revenue generated by its wholesale
business to continue to grow at this rate.
During the first quarter of 1996, the Company commenced trials of
domestic long distance telecommunications services in Spain and Italy,
the two countries in which the Company had the technical ability to
provide such services. After having obtained favorable results, the
Company decided to enter the national long distance business in certain
European Union member states in which it operates.
COST OF TELECOMMUNICATIONS SERVICES. Cost of telecommunications
services increased to $18.6 million in the six months ended June 30,
1996 from $12.1 million in the six months ended June 30, 1995 and, as a
percentage of revenue, decreased to approximately 83.4% from
approximately 85.3% for the six months ended June 30, 1996 and 1995,
respectively. The corresponding increase in gross margins was primarily
due to changes in overall service mix and increased utilization of the
European Network. The Company experienced a 40.5% decrease in average
cost per billable minute to $0.72 during the six months ended June 30,
1996 from $1.21 during the six months ended June 30, 1995. This
decrease, which more than offset the effect of the decline in average
revenue per billable minute, was attributable primarily to (i) increased
traffic being routed through the European Network, (ii) an increase in
switched minutes generated by the Company's wholesale business and (iii)
changes in customer access methods. Increased European Network
utilization helped reduce costs on a per minute basis with respect to
European long distance telecommunications services.
<PAGE>
Gross margins for the six months ended June 30, 1996 were negatively
impacted by increases in certain costs related to the expansion of the
Company's overall transmission capacity. These fixed costs are expected
to decrease as a percentage of telecommunications revenue 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 $1.8 million for the six months ended June
30, 1996 (approximately 8.1% of telecommunications revenue for such
period) from approximately $0.8 million for the six months ended June
30, 1995 (approximately 5.7% of telecommunications revenue for such
period). IPLCs represent a significant portion of the Company's fixed
costs and were not fully utilized in the six months ended June 30, 1996.
The Company believes its use of IPLCs will continue to increase and such
increase will positively impact the Company's overall gross margins, as
a percentage of revenue, as more minutes are routed through the European
Network. This benefit, however, is primarily limited to calls that
either originate or terminate in a city where the Company has a switch
or a POP, because otherwise the Company transports the call over the
PSTN at higher transmission costs and reduced margins.
SELLING EXPENSES. Selling expenses increased to $5.1 million in the six
months ended June 30, 1996 from $3.4 million in the corresponding period
in 1995 and, as a percentage of telecommunications revenue, decreased to
approximately 22.8% in the six months ended June 30, 1996 from
approximately 23.7% in the six months ended June 30, 1995. Commissions
paid to independent sales representatives constituted approximately
24.3% of all selling expenses for the six months ended June 30, 1996
compared to approximately 38.6% for the six months ended June 30, 1995.
The increase in selling expenses is attributable to the Company's
establishment of direct sales organizations. Salary related selling
expenses represented approximately 48.4% and approximately 47.6% of
total selling expenses for the six months ended June 30, 1996 and 1995,
respectively.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased to $12.6 million in the six months ended June 30, 1996 from
$7.2 million in the corresponding period in 1995 and, as a percentage of
telecommunications revenue, increased to approximately 56.5% in the six
months ended June 30, 1996 from approximately 50.9% in the six months
ended June 30, 1995. Much of this increase is attributable to the costs
of building a direct sales force in Western Europe and overhead costs
associated with the Company's headquarters, back office and network
operations. Absent a charge associated with the Reorganization and an
expense associated with a French arbitration award against the Company,
general and administrative expense would have decreased to approximately
47.1%, as a percentage of telecommunications revenue. The Company is
also the subject of an arbitration proceeding in which the Spanish
Representative is seeking $5.8 million in damages. The Company believes
that any potential adverse determination in this arbitration would not
have a material adverse effect on the Company's business, financial
condition or results of operations.
During the second quarter of 1996, the Company recognized approximately
$1.3 million of general and administrative expense associated with the
Reorganization, of which approximately $0.4 million has been paid to
date and approximately $0.3 million represents non-cash deferred
compensation. These expenses are comprised principally of employee
termination and relocation costs and the write-down of a portion of the
Company's lease for its administrative quarters in London.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense,
which includes depreciation of the Viatel Network, increased to
approximately $2.2 million in the six months ended June 30, 1996 from
approximately $0.9 million in the six months ended June 30, 1995. The
increase was due primarily to the depreciation of switches and other
equipment placed in service during 1995 and the first six months of
1996.
INTEREST. Interest expense increased to approximately $5.2 million in
the six months ended June 30, 1996 from approximately $4.3 million in
the six months ended June 30, 1995 due to the accretion of non-cash
interest on the Notes. This expense was partially offset by interest
income of approximately $0.7 million and approximately $1.9 million for
the six months ended June 30, 1996 and 1995, respectively, derived from
the investment of the net proceeds from the Unit Offering in highly
liquid debt instruments.
<PAGE>
Liquidity and Capital Resources
The Company has incurred losses from operating activities in each year
of operations since its inception and expects to continue to incur
operating losses for the next several years. Through June 30, 1996, the
Company had incurred $68.2 million in aggregate losses from operating
activities. As of June 30, 1996, the Company had $12.8 million of cash,
cash equivalents and other liquid investments. The Company currently
anticipates that it will be able to fund its capital requirements until
the first quarter of 1997. Consequently, the Company is currently
exploring several alternatives for raising additional capital including
a public offering of Common Stock. On August 7, 1996, the Company filed
a registration statement on Form S-1 with the Securities and Exchange
Commission to register the offering of up to $135.0 million of Common
Stock (assuming the exercise in full of an over-allotment option granted
to the underwriters). There can be no assurance that the Company will
be able to complete the offering contemplated in such registration
statement or that any financing will be obtained on terms favorable to
the Company.
CAPITAL EXPENDITURES. The development of the Company's business has, in
the past, required substantial capital expenditures. In the future, the
Company will require substantial capital expenditures significantly in
excess of historical levels to upgrade and expand the Viatel Network
generally, and the European Network specifically, as well as to develop
and expand new and existing services. During the six months ended June
30, 1996, the Company had capital expenditures of approximately $4.7
million. Historically, the Company has funded its capital expenditures
through equity and debt issuances and vendor financings. As of June 30,
1996, the Company had entered into purchase commitments for network
upgrades and other items aggregating approximately $0.8 million. The
Company anticipates making additional capital expenditures aggregating
approximately $1.2 million during the remainder of 1996.
AVERAGE MONTHLY CASH REQUIREMENTS. During the six months ended June 30,
1996, the Company's average current monthly cash requirements were
approximately $2.05 million, including approximately $0.5 million
relating to minimum commitments under carrier contracts. This average
excludes approximately (i) $5.3 million for capital expenditures for the
purchase of equipment, software and the continued development of the
European Network including approximately $.6 million of equipment
purchased in 1995 and paid for in 1996, (ii) $3.6 million incurred in
connection with the settlement of the Company's fee dispute for past
services with a facilities-based IPLC vendor and (iii) $1.1 million for
other non-recurring items (including $0.4 million paid in connection
with employee termination and relocation costs). Due to the cost
savings associated with the Reorganization, it is anticipated that, over
time, average monthly cash requirements will be reduced.
INTEREST REQUIREMENTS AND DEBT REPAYMENT. Until January 15, 2000, the
Notes will accrue interest on a semi-annual basis to their aggregate
$120.7 million principal amount. 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. If the Company is
unable to generate sufficient cash flow from operations 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. In addition, the Indenture pursuant to which the Notes
were issued contains certain restrictive 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, use
the proceeds from certain sales of assets and pay dividends. There can
be no assurance that the Company will be able to comply with such
restrictive covenants in the future.
FOREIGN CURRENCY. The Company has exposure to fluctuations in foreign
currencies relative to the U.S. Dollar as a result of billing portions
of its telecommunications revenue in local currency in countries where
the local currency is relatively stable, while many of its obligations,
including the Notes and a substantial portion of its transmission costs,
are denominated in U.S. Dollars. In countries with less stable
currencies, such as Brazil, the Company bills in U.S. Dollars. For the
six months ended June 30, 1996, approximately 42.1% of the Company's
telecommunications revenue was billed in currencies other than the U.S.
Dollar. Furthermore, substantially all of the costs of acquisition and
upgrade of the Company's switches have been, and will continue to be,
U.S. Dollar denominated transactions.
With the continued expansion 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 revenue is billed. These developments create a
natural hedge against a portion of the Company's foreign exchange
exposure. To date, much of the funding necessary to establish the local
direct sales organizations has been derived from telecommunications
revenue that was billed in local currencies. Consequently, the
Company's financial position as of June 30, 1996 and
<PAGE>
its results of operations for the six months ended June 30, 1996 were
not significantly impacted by fluctuations in the U.S. Dollar in
relationship to foreign currencies.
Forward Looking Statements
Certain statements contained herein are "forward-looking" statements (as
such term is defined in the Private Securities Litigation Reform Act of
1995). Because such statements include risks and uncertainties, actual
results may differ materially from those expressed or implied by such
forward-looking statements.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company
during the quarter ended June 30, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amended report to be signed on its
behalf by the undersigned thereunto duly authorized.
VIATEL, INC.
By: /s/ Michael J. Mahoney
------------------------------
Michael J. Mahoney
President and
Chief Operating Officer
By: /s/ Allan Shaw
------------------------------
Allan Shaw
Vice President, Finance and
Chief Financial Officer
Date: September 25, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY FOR THE SIX MONTHS
ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 7,713,531
<SECURITIES> 5,055,909
<RECEIVABLES> 6,745,493
<ALLOWANCES> 621,000
<INVENTORY> 0
<CURRENT-ASSETS> 23,095,990
<PP&E> 18,108,129
<DEPRECIATION> 4,559,858
<TOTAL-ASSETS> 48,549,634
<CURRENT-LIABILITIES> 14,815,379
<BONDS> 72,328,973
0
0
<COMMON> 205,615
<OTHER-SE> 30,419,804
<TOTAL-LIABILITY-AND-EQUITY> 48,549,634
<SALES> 0
<TOTAL-REVENUES> 22,282,229
<CGS> 0
<TOTAL-COSTS> 18,577,776
<OTHER-EXPENSES> 19,892,504
<LOSS-PROVISION> 1,044,308
<INTEREST-EXPENSE> 5,170,752
<INCOME-PRETAX> (20,624,282)
<INCOME-TAX> 0
<INCOME-CONTINUING> (20,624,282)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,624,282)
<EPS-PRIMARY> (1.00)
<EPS-DILUTED> (0.98)
</TABLE>
