SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
(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, 1997
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: 000-21261
VIATEL, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3787366
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 Third Avenue
New York, New York
(Address of principal executive offices)
10022
(Zip Code)
(212) 350-9200
(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
As of May 14, 1997, 22,614,613 shares of the registrant's Common Stock, $.01 par
value, were outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
VIATEL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31,
1997 December 31,
ASSETS (Unaudited) 1996
--------------- ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 32,389,040 $ 75,796,102
Marketable securities, current 14,324,327 8,181,332
Trade accounts receivable, less allowance for doubtful accounts
of $676,000 and $602,000, respectively 8,565,714 8,542,305
Other receivables 4,480,601 4,633,571
Prepaid expenses 1,392,435 789,307
--------------- ----------------
Total current assets 61,152,117 97,942,617
--------------- ----------------
Marketable securities, non-current 32,264,396 9,004,075
Property and equipment, less accumulated depreciation of $7,576,000 and
$6,724,000, respectively 24,480,056 21,074,417
Deferred financing and registration fees, less accumulated amortization of
$837,000 and $742,000, respectively 2,952,309 3,046,897
Intangible assets, less accumulated amortization of $1,867,000 and
$1,639,000, respectively 2,026,071 1,973,910
Other assets 1,785,959 1,622,534
--------------- ----------------
$124,660,908 $134,664,450
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued telecommunications costs $ 10,133,359 $ 11,915,671
Accounts payable and other accrued expenses 5,252,208 5,916,223
Commissions payable 362,214 349,646
Current installments of obligations under capital leases 258,409 96,064
--------------- ----------------
Total current liabilities 16,006,190 18,277,604
--------------- ----------------
Long-term liabilities:
Senior discount notes, less discount of $40,047,557 and $42,945,967,
respectively 80,652,443 77,754,033
Obligations under capital leases, excluding current installments 718,162 149,983
--------------- ----------------
Total long-term liabilities 81,370,605 77,904,016
--------------- ----------------
Commitments and contingencies
Stockholders' equity:
Common Stock, $.01 par value. Authorized 50,000,000 shares, issued and
outstanding 22,609,213 and 22,513,226 shares, respectively 226,092 225,132
Additional paid-in capital 125,588,282 125,236,410
Unearned compensation (113,820) (130,080)
Cumulative translation adjustment (3,027,907) (862,458)
Accumulated deficit (95,388,534) (85,986,174)
--------------- ----------------
Total stockholders' equity 27,284,113 38,482,830
--------------- ----------------
$124,660,908 $134,664,450
=============== ================
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended
March 31,
--------------------------
1997 1996
----------- -----------
Telecommunications revenue $14,552,334 $10,590,270
----------- -----------
Operating Expenses:
Cost of telecommunications services 12,079,084 8,999,249
Selling, general and
administrative expenses 8,723,000 7,530,314
Depreciation and amortization 1,262,162 1,087,677
----------- -----------
Total operating expenses 22,064,246 17,617,240
----------- -----------
Other income (expenses):
Interest income 1,118,818 470,644
Interest expense (3,009,266) (2,569,196)
Share in loss of affiliate - (1,302)
----------- -----------
Net loss $(9,402,360) $(9,126,824)
=========== ===========
Net loss per common share $ (0.42) $ (0.67)
=========== ===========
Weighted average common shares outstanding 22,591,745 13,707,647
=========== ===========
See accompanying notes to consolidated financial statements.
3
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (9,402,360) $ (9,126,824)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,262,162 1,087,677
Interest expense on senior discount notes 2,992,999 2,568,623
Accrued interest income on marketable securities (455,212) (64,734)
Provision for losses on accounts receivable 503,993 373,037
Share in loss of affiliate - 1,302
Earned compensation 16,260 9,750
Changes in assets and liabilities:
Increase in accounts receivable (510,106) (1,098,590)
Increase in prepaid expenses and other receivables (780,467) (223,734)
Increase in other assets and intangible assets (290,886) (144,032)
Decrease in accrued telecommunication costs,
accounts payable, other accrued expenses
and commissions payable (3,886,064) (1,564,796)
----------- ------------
Net cash used in operating activities (10,549,681) (8,182,321)
------------ ------------
Cash flows from investing activities:
Purchase of property, equipment and software (3,721,743) (3,227,251)
Purchase of marketable securities (118,541,950) (5,276,748)
Proceeds from maturity of marketable securities 89,360,201 10,086,464
Issuance of notes receivable - (323,227)
Investment in affiliate - (87,412)
------------ ------------
Net cash (used in) provided by
investing activities (32,903,492) 1,171,826
------------ ------------
Cash flows from financing activities:
Payments under capital leases (292,475) -
Proceeds from issuance of Common Stock 352,832 -
------------ ------------
Net cash provided by financing
activities 60,357 -
------------ ------------
Effects of exchange rates on cash (14,246) (19,018)
------------ ------------
Net decrease in cash and cash equivalents (43,407,062) (7,029,513)
Cash and cash equivalents at beginning of period 75,796,102 8,934,914
------------ ------------
Cash and cash equivalents at end of period $ 32,389,040 $ 1,905,401
============ ============
Supplemental disclosures of cash flow information:
Interest paid $ 16,267 $ -
============ ============
Equipment acquired under capital lease
obligations $ 1,023,000 $ -
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information as of March 31, 1997 and for the periods
ended March 31, 1997 and 1996 is unaudited)
(1) INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements as of March 31, 1997 and for the
three month periods ended March 31, 1997 and 1996 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 adjustments) 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
annual consolidated financial statements. Operating results for the three
months ended March 31, 1997 may not be indicative of the results that may
be expected for the full year. Certain reclassifications have been made to
the previous year's financial statements to conform to the current years
presentation.
Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings
Per Share," which supersedes APB Opinion No. 15, "Earnings Per Share," was
issued in February 1997. SFAS 128 requires dual presentation of basic and
diluted earnings per share (EPS) for complex capital structures on the face
of the statement of operations. Basic EPS is computed by dividing income or
loss by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution from the exercise or
conversion of securities into common stock, such as stock options. SFAS 128
is required to be adopted for year-end 1997; earlier application is not
permitted. The Company does not expect the basic or diluted EPS measured
under SFAS 128 to be materially different than if measured under APB No.
15.
(2) INVESTMENTS IN DEBT SECURITIES
Management determines the appropriate classification of its investments in
debt securities at the time of purchase and classifies them as held to
maturity or available for sale. The Company does not invest in securities
for the purpose of trading and as such does not classify any securities as
trading. 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.
The amortized cost of debt securities classified as held to maturity 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 March 31, 1997.
5
<PAGE>
The following is a summary of the fair value of securities available for
sale at March 31, 1997:
U.S. Treasury obligations $ 13,842,188
Federal agencies obligations 32,746,535
--------------
Total $ 46,588,723
==============
Unrealized gains or losses on securities classified as available for sale
are not material at March 31, 1997.
The fair value of debt securities available for sale at March 31, 1997 by
contractual maturity are shown below:
Due within one year $ 14,324,327
Due after one through two years 32,264,396
--------------
Total $ 46,588,723
==============
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 for the three months ended March 31, 1997 under the
Amended Stock Incentive Plan (the "Stock Incentive Plan") is shown below:
Weighted
Average
Exercise Number of
Prices Shares
-------- ---------
Outstanding at January 1, 1997 $ 5.42 969,836
Granted - -
Forfeited 5.85 (19,110)
Expired 3.38 (3,865)
Exercised 3.68 (95,987)
---- --------
Outstanding at March 31, 1997 $5.61 850,874
==== ========
As of March 31, 1997, 348,108 options were exercisable under the Stock
Incentive Plan.
(4) 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.
(5) Subsequent Event
In connection with the Company's transition to direct sales representatives
in Europe, the Company's former independent sales representative in Madrid
(the "Spanish Representative") commenced an arbitration
6
<PAGE>
proceeding before the American Arbitration Association in New York claiming
a breach of contract by the Company and certain other claims and seeking
$5.8 million in damages. On May 2, 1997, the Company settled this matter
for approximately $0.7 million and the exchange of mutual releases. This
settlement will be charged to selling, general and administrative expenses
during the quarter ended June 30, 1997.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
Since its inception in 1991, the Company has invested heavily in developing its
ability to provide international telecommunications services within Western
Europe and other deregulating markets and in developing and expanding its market
presence including, more recently, entering into the national long distance
telecommunications markets in certain European Union ("EU") member states. The
Company has made substantial investments in software and back office operations,
an administrative infrastructure and a direct sales organization in Western
Europe. Furthermore, the Company has created an extensive commercial
telecommunications network for voice and voice band data in Europe which the
Company believes is necessary to render effectively the services it currently
offers and intends to offer after the liberalization of regulations relating to
Voice Telephony, defined as the commercial provision for the public of the
direct transport and switching of speech in real-time between public switched
network termination points, enabling any user to use equipment connected to such
a network termination point in order to communicate with another termination
point. Consequently, the Company has incurred a high level of expense in
connection with its continued expansion which has resulted in substantial net
losses since its inception. The Company expects to incur substantial net losses
and negative cash flow until at least the years, 2001 and 2000, respectively.
The Company operates a digital, switch-based telecommunications network with
eighteen locations within Western Europe including a central switching center in
London (England), switches in Amsterdam (Netherlands), Antwerp (Belgium),
Barcelona (Spain), Brussels (Belgium), Frankfurt (Germany), Madrid (Spain),
Milan (Italy), Paris (France) and Rome (Italy) and additional points of presence
("POPs") in Bilbao (Spain), Gerona (Spain), Kortrijk (Belgium), Majorca (Spain),
Rotterdam (Netherlands), Tarragona (Spain), Utrecht (Netherlands) and Ghent
(Belgium) 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"). The Company believes that the European Network
allows the Company effectively to render its services currently and will offer
it a competitive advantage after the European Union's liberalization of voice
telephony, now scheduled in most EU member states for January 1, 1998.
In the first quarter of 1997, the Company installed a switch in Antwerp and
purchased interests in fiber optic cable systems in a transatlantic digital
fiber optic cable originating in the United States and the United Kingdom for
transmission of traffic between the United States and Europe. The Company also
intends to acquire an interest in cross-channel digital fiber optic cable
originating in the United Kingdom. The Company is currently upgrading its switch
in London and its POP in New York to international gateway switches and
anticipates that these improvements will be completed during the second and
third quarters of 1997, respectively. By combining the Company's international
gateways in New York and London with its transatlantic fiber cable capacity, the
Company expects that it will be able to provide customers with faster call
set-up and improved quality.
During the second quarter of 1997, the Company (i) received an international
facilities license for the United Kingdom and an Article 23 license for the
Netherlands to offer telecommunications services, including unrestricted
switched-voice calling, in these countries (effective immediately and July 1,
1997, respectively) and (ii) signed interconnection agreements with Infostrada
(with 32 POPs) and ECN (with 28 POPs), leading alternative telecommunications
service providers in Italy and Germany, respectively. These agreements
significantly extend the Company's network reach in Italy and Germany and allow
the customers to originate and terminate calls across the Viatel Network in all
cities served by Infostrada and ECN.
During the first three months of 1997, the Company experienced growth of
approximately 37.4% in telecommunications revenue and a 200 basis point
improvement in gross margin as compared to the corresponding period in 1996.
While the Company experienced an EBITDA loss of approximately $6.2 million
during the first three months of 1997, as compared to an EBITDA loss of
approximately $5.9 million during the first three months
8
<PAGE>
of 1996, as a percentage of revenue the EBITDA loss decreased by approximately
23.5% to 42.9% from 56.1%. The growth in telecommunications revenue and EBITDA
loss are the result of the ongoing investment in operating infrastructure
related to expanding the Company's presence in its targeted geographic markets
in Western Europe and expanding its ability to offer its services.
During the first quarter of 1997, as compared to the fourth quarter of 1996,
certain trends were evident including (i) a 3.2% decrease in telecommunications
revenue to $14.6 million from $15.0 million, (ii) a 15.0% increase in billable
minutes to 23.5 million billable minutes from 20.5 million billable minutes,
(iii) a decrease in gross margins to 17.0% from 17.9%, (iv) an increase in
selling, general and administrative expenses, as a percentage of revenue, to
59.9% from 52.2%, (v) an increase in EBITDA loss, as a percentage of revenue, to
42.9% from 34.3% and (vi) a decrease in average revenue per minute and average
cost per minute. First quarter financial results were adversely affected by a
number of factors including foreign currency fluctuations, seasonality, extreme
weather conditions in certain Western European countries and competitive price
pressure in certain markets. See "-- Results of Operations."
RESULTS OF OPERATIONS
The following table summarizes the breakdown of the Company's results of
operations as a percentage of revenue:
For the Three Months Ended
March 31,
--------------------------
1997 1996
-------- --------
Telecommunications revenue 100.0% 100.0%
Cost of telecommunications services 83.0% 85.0%
Selling, general and administrative expenses 59.9% 71.1%
Depreciation and amortization 8.7% 10.3%
EBITDA loss (1) 42.9% 56.1%
- -----------------------
(1) As used herein "EBITDA" consists of earnings before interest (net), income
taxes and depreciation and amortization. EBITDA is a measure commonly used in
the telecommunications industry to analyze companies on the basis of operating
performance. EBITDA is not a measure of financial performance under generally
accepted accounting principles and should not be considered as an alternative to
net income as a measure of performance or as an alternative to cash flow as a
measure of liquidity.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996.
TELECOMMUNICATIONS REVENUE. Telecommunications revenue increased by 37.4% to
$14.6 million for the three months ended March 31, 1997 from $10.6 million for
the three months ended March 31, 1996. Telecommunications revenue growth for the
three month period ended March 31, 1997 was generated primarily from increased
traffic volume on the European Network, growth in the Company's carrier business
and, to a lesser extent, increased traffic volume in Latin America and the
Pacific Rim. First quarter 1997 telecommunications revenue was suppressed by a
number of factors including foreign currency fluctuations, seasonality, extreme
weather conditions in certain Western European countries and competitive price
pressure in certain markets.
Billable minutes increased by 116.5% during the three months ended March 31,
1997 to 23.5 million billable minutes from 10.9 million billable minutes during
the first quarter of 1996. This increase was partially offset by declining
revenue per billable minute, as average revenue per billable minute declined by
34.7% to $.62 in the three-month period ended March 31, 1997 from $.95 in the
three-month period ended March 31, 1996, primarily because of (i) a higher
percentage of lower-priced intra-European and national long distance traffic
from the European Network as compared to intercontinental traffic, (ii) a higher
percentage of lower-priced carrier traffic as compared to retail traffic, (iii)
reductions in certain rates charged to retail customers in response to pricing
9
<PAGE>
reductions enacted by certain incumbent telecommunications operators ("ITOs")
and other carriers in Western Europe and Latin America, (iv) changes in customer
access methods and (v) foreign currency fluctuations. See "-- Cost of
Telecommunications Services."
Telecommunications revenue per billable minute from the sale of services to
retail customers decreased to $.83 in the three months ended March 31, 1997 from
$1.17 in the corresponding period in 1996. Telecommunications revenue per
billable minute from the sale of services to carriers and other resellers
decreased to $.27 in the three months ended March 31, 1997 from $.42 in the
corresponding period in 1996. The number of customers billed rose 78.0% to
20,224 at March 31, 1997 from 11,363 at March 31, 1996.
Western Europe continues to be an important market for the Company. During the
three months ended March 31, 1997, approximately 41.9% of the Company's
telecommunications revenue was generated in Western Europe as compared to
approximately 43.5% of the Company's telecommunications revenue during the
corresponding period in 1996. In contrast, despite an increase of approximately
24.7% over the corresponding period in 1996, telecommunications revenue from
Latin America represented approximately 26.9% of the Company's
telecommunications revenue during the three months ended March 31, 1997 as
compared to approximately 30.2% of the Company's telecommunications revenue
during the three months ended March 31, 1996.
The Company has significantly increased its carrier business through which it
sells switched minutes to carriers and other resellers at discounted rates.
While the carrier business has lower average gross margins than the Company's
retail business, the telecommunications revenue generated from the carrier
business partially offsets the fixed costs associated with the Viatel Network.
The carrier business represented approximately 16.6% of total telecommunications
revenue and approximately 37.6% of billable minutes for the three months ended
March 31, 1997 as compared to approximately 12.6% of total telecommunications
revenue and approximately 29.0% of billable minutes, for the three months ended
March 31, 1996. While this increase in telecommunications revenue represents an
increase of approximately 84.5% over the corresponding period in 1996, the
Company does not expect telecommunications revenue generated by its carrier
business to continue to grow at this rate.
COST OF TELECOMMUNICATIONS SERVICES. Cost of telecommunications services
increased to $12.1 million for the three months ended March 31, 1997 from $9.0
million for the three months ended March 31, 1996 and, as a percentage of
revenue, decreased to approximately 83.0% from approximately 85.0% for the three
months ended March 31, 1997 and 1996, respectively. The corresponding increase
of approximately 55.5% in gross margins to $2.5 million for the three months
ended March 31, 1997 from $1.6 million for the comparable period in 1996 was
primarily due to changes in overall service mix and increased utilization of the
European Network. The Company's average cost per billable minute decreased to
$.51 during the three months ended March 31, 1997 from $.78 during the three
months ended March 31, 1996, a 34.6% decrease. This decrease, which 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 carrier 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 March 31, 1997 were negatively impacted
by increases in certain costs related to the expansion of the Company's
transmission capacity. These costs are expected to decrease as a percentage of
telecommunications revenue as traffic volume over the European Network
increases. The Company increased its private line circuit ("PLC") capacity, as a
result of which the costs associated with the European Network increased to
approximately $1.5 million for the three months ended March 31, 1997
(approximately 10.1% of telecommunications revenue) from approximately $0.8
million for the three months ended March 31, 1996 (approximately 8.0% of
telecommunications revenue). PLCs, which represent a significant portion of the
Company's fixed costs, were not fully utilized in the three months ended March
31, 1997. The Company believes that its use of PLCs for routing of minutes over
the European Network will continue to increase, and such increase should
positively impact the Company's overall gross margins, as a percentage of
telecommunications revenue, as more minutes are routed in the European Network.
This benefit, however, is primarily limited to calls originating or
10
<PAGE>
terminating in a city where the Company has a switch or a POP because otherwise
the Company transports the call over the public switched telephone network
at higher transmission costs and reduced margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $8.7 million in the three months ended
March 31, 1997 from $7.5 million in the three months ended March 31, 1996 and,
as a percentage of revenue, decreased to approximately 59.9% in the first
quarter of 1997 from approximately 71.1% in the first quarter of 1996. Much of
these expenses are attributable to overhead cost associated with the Company's
headquarters, back office and network operations as well as maintaining a
physical presence in sixteen different jurisdictions. The increase in these
expenses is attributable to indirect expenses associated with expansion of the
Viatel Network and selling costs associated with entering new markets. Salaries
and commissions, as a percentage of total selling, general and administrative
expenses, were approximately 52.7% and 50.4% for the three months ended March
31, 1997 and 1996, respectively.
EBITDA LOSS. EBITDA loss increased to $6.2 million for the three months ended
March 31, 1997 from $5.9 million for the three months ended March 31, 1996. The
increase in EBITDA loss is primarily the result of the Company's continued
investment in its infrastructure and physical presence within various geographic
markets in Western Europe. However, as a percentage of revenue, EBITDA loss
decreased to approximately 42.9% in the first quarter of 1997 from approximately
56.1% in the first quarter of 1996. The EBITDA loss is generally attributable to
the significant investment currently required for the purpose of expanding the
Company's geographic presence and its ability to offer its services.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense, which
includes depreciation of the Viatel Network, increased to approximately $1.3
million in the first quarter of 1997 from approximately $1.1 million in the
first quarter of 1996. The increase was due primarily to the depreciation of
equipment and fiber optic cable systems placed in service during first three
months of 1997.
INTEREST. Interest expense increased to approximately $3.0 million in the three
months ended March 31, 1997 from approximately $2.6 million in the three months
ended March 31, 1996 due to the accretion of non-cash interest on the Company's
15% Senior Discount Notes due January 15, 2005 (the "Notes"). 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. Interest
income increased to approximately $1.1 million in the three months ended March
31, 1997 from approximately $0.5 million for the three months ended March 31,
1996 primarily as a result of the investment of the net proceeds from Company's
initial public offering which occurred in October 1996 (the "IPO").
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 March 31, 1997, the Company had incurred
$95.4 million in aggregate losses from operating activities. As of March 31,
1997, the Company had $79.0 million of cash, cash equivalents and other liquid
investments. The Company believes that, based on its current forecasts, it
should be able to fund its capital requirements at least until the year 1999
even though EBITDA and cash flow from operations will continue to be negative
until at least the year 2000.
CAPITAL EXPENDITURES AND WORKING CAPITAL. The development of the Company's
business has required substantial capital expenditures and working capital. The
Company will incur 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 three months ended March 31, 1997, the Company had capital
expenditures of approximately $3.7 million. Historically, the Company has funded
its capital expenditures through equity and debt issuances and vendor
financings. As of March 31, 1997, the Company had entered into purchase
commitments for network upgrades and other items aggregating approximately $12.9
million. Additionally, the Company anticipates making additional capital
expenditures aggregating approximately $4.7 million during the remainder of
1997.
11
<PAGE>
AVERAGE MONTHLY CASH REQUIREMENTS. During the three months ended March 31, 1997,
the Company's average current monthly cash requirements were approximately $2.1
million, including approximately $1.0 million relating to minimum commitments
under carrier contracts. This average excludes approximately (i) $3.7 million
for capital expenditures for the purchase of equipment, software and the
continued development of the European Network, (ii) $2.0 million for other
non-recurring items including registration costs for the IPO, long term
maintenance contracts and deferred bonus payments and (iii) $2.1 million of
payments to vendors in connection with certain accrued telecommunication costs
in anticipation of obtaining favorable pricing on a prospective basis.
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 three months ended March 31, 1997,
approximately 41.8% 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 March 31, 1997 and its results of
operations for the three months ended March 31, 1997 were not significantly
impacted by fluctuations in the U.S. Dollar in relationship to foreign
currencies.
FORWARD LOOKING STATEMENTS
Certain statements contained herein which express "belief," "anticipation,"
"expectation," or "intention" or any other projection, including statements
concerning the design, configuration, feature and performance of the Company's
network and related services, the development and expansion of the Company's
business, the markets in which the Company's services are or will be offered,
capital expenditures and regulatory reform, insofar as they may apply
prospectively and are not historical facts, are "forward-looking" statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Because such statements include risks
and uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause actual
results to differ materially from those expressed or implied by such
forward-looking statements include, but are not limited to, the factors set
forth in "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Certain Factors Which May Affect the Company's
Future Results," of the Company's Annual Report on Form 10-K for fiscal 1996.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See Note 5 to the Company's Consolidated Financial Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
---------
27. Financial Data Schedule
(b) Reports on Form 8-K.
--------------------
No reports on Form 8-K were filed by the Company during the
quarter ended March 31, 1997.
13
<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/ Michael J. Mahoney
-------------------------------------------
Michael J. Mahoney
President and Chief Operating
Officer
By: /s/ Allan L. Shaw
-------------------------------------------
Allan L. Shaw
Vice President, Finance, Treasurer and
Chief Financial Officer
Date: May 14, 1997
14
<PAGE>
EXHIBIT INDEX
Sequentially
No. Description Numbered Page
- --- ----------- -------------
27. Financial Data Schedule
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF VIATEL, INC. FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 32,389,040
<SECURITIES> 14,324,327
<RECEIVABLES> 9,241,714
<ALLOWANCES> 676,000
<INVENTORY> 0
<CURRENT-ASSETS> 61,152,117
<PP&E> 32,056,056
<DEPRECIATION> 7,576,000
<TOTAL-ASSETS> 124,660,908
<CURRENT-LIABILITIES> 16,006,190
<BONDS> 80,652,443
0
0
<COMMON> 226,092
<OTHER-SE> 125,588,282
<TOTAL-LIABILITY-AND-EQUITY> 124,660,908
<SALES> 0
<TOTAL-REVENUES> 14,552,334
<CGS> 0
<TOTAL-COSTS> 12,079,084
<OTHER-EXPENSES> 9,985,162
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,009,266
<INCOME-PRETAX> (9,402,360)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,402,360)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,402,360)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> (0.42)
</TABLE>
