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 June 30, 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 (I.R.S. Employer
of 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 August 13, 1997, 22,630,699 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>
June 30,
1997 December 31,
ASSETS (Unaudited) 1996
--------------- ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 17,514,480 $ 75,796,102
Marketable securities, current 13,487,379 8,181,332
Trade accounts receivable, less allowance for doubtful accounts of
$745,000 and $602,000, respectively 9,985,795 8,542,305
Other receivables 4,826,447 4,633,571
Prepaid expenses 1,202,791 789,307
--------------- ----------------
Total current assets 47,016,892 97,942,617
--------------- ----------------
Marketable securities, non-current 33,839,370 9,004,075
Property and equipment, less accumulated depreciation of $8,657,000 and
$6,724,000, respectively 33,692,221 21,074,417
Deferred financing and registration fees, less accumulated amortization of
$932,000 and $742,000, respectively 2,857,717 3,046,897
Intangible assets, less accumulated amortization of $2,124,000 and
$1,639,000, respectively 1,829,740 1,973,910
Other assets 1,799,330 1,622,534
--------------- ----------------
$ 121,035,270 $ 134,664,450
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued telecommunications costs $ 11,071,739 $ 11,915,671
Accounts payable and other accrued expenses 9,696,803 5,916,223
Commissions payable 331,154 349,646
Current installments of obligations under capital leases 273,469 96,064
--------------- ----------------
Total current liabilities 21,373,165 18,277,604
--------------- ----------------
Long-term liabilities:
Senior discount notes, less discount of $37,115,150 and $42,945,967,
respectively 83,584,850 77,754,033
Obligations under capital leases, excluding current installments 706,331 149,983
--------------- ----------------
Total long-term liabilities 84,291,181 77,904,016
--------------- ----------------
Commitments and contingencies
Stockholders' equity:
Common Stock, $.01 par value. Authorized 50,000,000 shares, issued and
outstanding 22,630,699 and 22,513,226 shares, respectively 226,307 225,132
Additional paid-in capital 125,635,278 125,236,410
Unearned compensation (97,560) (130,080)
Cumulative translation adjustment (4,733,534) (862,458)
Accumulated deficit (105,659,567) (85,986,174)
--------------- ----------------
Total stockholders' equity 15,370,924 38,482,830
--------------- ----------------
$ 121,035,270 $ 134,664,450
=============== ================
See accompanying notes to consolidated financial statements.
</TABLE>
2
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
---------------------------------- ------------------------------------
1997 1996 1997 1996
---------------- --------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Telecommunications revenue $ 18,448,295 $ 11,691,959 $ 33,000,629 $ 22,282,229
---------------- --------------- ------------------ ---------------
Operating Expenses:
Cost of telecommunications services 15,690,745 9,578,517 27,769,829 18,577,766
Selling, general and administrative
expenses 9,644,560 10,130,367 18,367,560 17,660,681
Depreciation and amortization 1,458,440 1,144,146 2,720,602 2,231,823
---------------- --------------- ------------------ ---------------
Total operating expenses 26,793,745 20,853,030 48,857,991 38,470,270
---------------- --------------- ------------------ ---------------
Other income (expenses):
Interest income 1,052,629 268,808 2,171,447 739,452
Interest expense (2,978,212) (2,601,556) (5,987,478) (5,170,752)
Share in loss of affiliate - (3,639) - (4,941)
---------------- --------------- ------------------ ---------------
Net loss $ (10,271,033) $ (11,497,458) $ (19,673,393) $ (20,624,282)
================ =============== ================== ===============
Net loss per common share $ (0.45) $ (0.84) $ (0.87) $ (1.50)
================ =============== ================== ===============
Weighted average common
shares outstanding 22,618,728 13,707,647 22,605,290 13,707,647
================ =============== ================== ===============
See accompanying notes to consolidated financial statements.
</TABLE>
3
<PAGE>
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
-----------------------------------
1997 1996
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (19,673,393) $ (20,624,282)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 2,720,602 2,231,823
Interest expense on senior discount notes 6,019,997 5,169,138
Accrued interest income on marketable securities (1,167,026) (219,899)
Provision for losses on accounts receivable 1,042,505 1,044,308
Earned compensation 32,520 305,400
Changes in assets and liabilities:
Increase in accounts receivable (2,393,558) (3,048,211)
(Increase) decrease in prepaid expenses and other receivables (540,580) 673,756
Increase in other assets and intangible assets (322,048) (464,694)
Increase (decrease) in accrued telecommunication costs, accounts
payable, other accrued expenses and commissions payable 1,880,095 (1,575,588)
--------------- ----------------
Net cash used in operating activities (12,400,886) (16,508,249)
--------------- ----------------
Cash flows from investing activities:
Purchase of property, equipment and software (15,870,021) (4,660,158)
Purchase of marketable securities (38,016,237) (13,774,332)
Proceeds from maturity of marketable securities 8,028,667 34,159,209
Issuance of notes receivable - (323,227)
Investment in affiliate - (93,953)
--------------- ----------------
Net cash (used in) provided by investing activities (45,857,591) 15,307,539
--------------- ----------------
Cash flows from financing activities:
Payments under capital leases (388,247) -
Proceeds from issuance of Common Stock 400,043 -
--------------- ----------------
Net cash provided by financing activities 11,796 -
--------------- ----------------
Effects of exchange rates on cash (34,941) (20,673)
--------------- ----------------
Net decrease in cash and cash equivalents (58,281,622) (1,221,383)
Cash and cash equivalents at beginning of period 75,796,102 8,934,914
--------------- ----------------
Cash and cash equivalents at end of period $ 17,514,480 $ 7,713,531
=============== ================
Supplemental disclosures of cash flow information:
Interest paid $ 32,519 $ -
=============== ================
Equipment acquired under capital lease obligations $ 1,122,000 $ -
=============== ================
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information as of June 30, 1997 and for the periods
ended June 30, 1997 and 1996 is unaudited)
(1) INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements as of June 30, 1997 and for the
three and six month periods ended June 30, 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 and six months ended June 30, 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 year's 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.
Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income," and Statement of Financial Accounting Standards No.
131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related
Information," were issued in June 1997. SFAS 130 establishes standards for
reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. This statement requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial statements.
The Company does not expect comprehensive income to be materially
different from net income reported under existing generally accepted
accounting principles. SFAS 131 establishes standards for the way public
companies report information about operating segments in annual financial
statements and requires that those companies report selected information
about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The Company
is required to adopt both new standards in the first quarter of 1998.
(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.
5
<PAGE>
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 June 30, 1997.
The following is a summary of the fair value of securities available for
sale at June 30, 1997:
U.S. Treasury obligations $10,886,832
Federal agencies obligations 8,610,594
Corporate debt securities 27,829,323
--------------
Total $47,326,749
==============
Unrealized gains or losses on securities classified as available for sale
are not material at June 30, 1997.
The fair value of debt securities available for sale at June 30, 1997 by
contractual maturity are shown below:
Due within one year $13,487,379
Due after one through two years 11,731,305
Due after two years 22,108,065
--------------
Total $47,326,749
==============
Actual 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 six months ended June 30, 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 9.00 361,861
Forfeited 5.85 (94,665)
Expired 3.38 (3,865)
Exercised 3.41 (117,473)
----- ---------
Outstanding at June 30, 1997 $6.76 1,115,694
===== =========
As of June 30, 1997, 335,059 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 single country would not have a material adverse long-term effect on
its business.
6
<PAGE>
(5) LEGAL PROCEEDINGS
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 proceeding before the American Arbitration Association in New
York claiming a breach of contract by the Company and seeking $5.8 million
in damages. In May 1997, the Company settled this matter for an aggregate
cost, including the Company's legal fees, of approximately $0.8 million
and exchanged mutual releases (the "Spanish Representative Settlement").
This settlement was 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 operates a digital, switch-based telecommunications network with
twenty-one 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") as follows: Bilbao, Gerona, Majorca, Tarragona and Valencia in Spain;
Ghent, Kortrijk and Leuven in Belgium and Rotterdam, The Hague and Utrecht in
The Netherlands, 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 EU's
liberalization of voice telephony, now scheduled in most EU member states for
January 1, 1998.
In the first six months of 1997 the Company upgraded its switch in London to an
international gateway switch, added 12 network locations, resulting in a 133%
increase in network reach, and purchased interests in digital fiber optic cable
systems in (i) CANTAT-3 (8.196 Mb/s), a transatlantic cable originating in the
United States and the United Kingdom, (ii) TAT-12/13 (8.196 Mb/s), a
transatlantic cable originating in the United States, the United Kingdom and
France, and (iii) FLAG (20.48 Mb/s), a cable originating in, among other places,
the United Kingdom, Italy and Spain. The Company also intends to acquire
additional interests in cross-channel digital fiber optic cable originating in
the United Kingdom and connected to other EU member states in which the Company
has a physical presence. These cables will be used for transmission of traffic
between the United States and Europe and within Europe resulting in improved
service quality at lower cost. The Company also (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 and (ii) signed interconnection
agreements with Mercury Communications Limited and British Telecommunications
PLC in the United Kingdom, PTT Telecom B.V. in the Netherlands, Infostrada (with
32 POPs) in Italy and ECN (with 28 POPs) in Germany. These agreements
significantly extend the Company's network reach in the respective countries,
allowing Viatel's customers to originate and terminate calls across the Viatel
Network in all cities served by those companies. During this period, the Company
also commenced upgrading its POP in New York to an international gateway switch,
which upgrade is expected to be completed in the third quarter of 1997. By
combining the Company's international gateways in New York and London with its
transatlantic fiber optic cable capacity, the Company believes that it will be
able to provide customers with improved quality.
During the first six months of 1997, the Company experienced growth of
approximately 48% in telecommunications revenue as compared to the corresponding
period in 1996. The growth in telecommunications revenue is 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. The Company experienced an EBITDA
loss of approximately $13.1 million during the first six months of 1997, as
compared to an EBITDA loss of approximately $14.0 million during the first six
months of 1996, as a percentage of revenue the EBITDA loss decreased by
approximately 36.5% to 39.8% from 62.7%. Absent the Spanish Representative
Settlement of $.8 million
8
<PAGE>
(see Note 5 to the Company's Consolidated Financial Statements), the EBITDA loss
would have been $12.3 million and, as a percentage of revenue, 37.3%. The
Company is committed to converting its international submarine cable circuits
from leased to owned capacity as regulatory barriers fall. Contingent, in part,
on the Company's ability to acquire such ownership, the Company currently
expects to become EBITDA positive in the first half of 1999 - one full year
ahead of the Company's original estimate.
During the second quarter of 1997, as compared to the first quarter of 1997,
certain trends were evident including (i) a 26.8% increase in telecommunications
revenue to $18.4 million from $14.6 million, (ii) a 50.6% increase in billable
minutes to 35.4 million billable minutes from 23.5 million billable minutes,
(iii) a decrease in gross margins to 14.9% from 17.0%, (iv) a decrease in
selling, general and administrative expenses, as a percentage of revenue, to
52.3% (47.8% absent an expense associated with the Spanish Representative
Settlement) from 59.9%, (v) a decrease in EBITDA loss, as a percentage of
revenue, to 37.3% from 42.9% and (vi) a decrease in average revenue per minute
and average cost per minute. 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:
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Telecommunications revenue 100.0% 100.0% 100.0% 100.0%
Cost of telecommunications services 85.1% 81.9% 84.1% 83.4%
Selling, general and administrative expenses 52.3% 86.6% 55.7% 79.3%
Depreciation and amortization 7.9% 9.8% 8.2% 10.0%
EBITDA loss (1) 37.3% 68.6% 39.8% 62.7%
</TABLE>
- -------------------------
(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 JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996.
TELECOMMUNICATIONS REVENUE. Telecommunications revenue increased by 57.8% to
$18.4 million for the three months ended June 30, 1997 from $11.7 million for
the three months ended June 30, 1996. Telecommunications revenue growth for the
three month period ended June 30, 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.
Billable minutes increased by 148.5% during the three months ended June 30, 1997
to 35.4 million billable minutes from 14.2 million billable minutes during the
second quarter of 1996. This increase was partially offset by declining revenue
per billable minute, as average revenue per billable minute declined by 38.6% to
$.51 in the three-month period ended June 30, 1997 from $.83 in the three-month
period ended June 30, 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 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."
9
<PAGE>
Telecommunications revenue per billable minute from the sale of services to
retail customers decreased to $.73 in the three months ended June 30, 1997 from
$1.07 in the corresponding period in 1996. Telecommunications revenue per
billable minute from the sale of services to carriers and other resellers
decreased to $.29 in the three months ended June 30, 1997 from $.42 in the
corresponding period in 1996. The number of customers billed rose 60.6% to
22,125 at June 30, 1997 from 13,792 at June 30, 1996.
Western Europe continues to be an important market for the Company. During the
three months ended June 30, 1997, approximately 37.7% of the Company's
telecommunications revenue was generated in Western Europe as compared to
approximately 41.4% of the Company's telecommunications revenue during the
corresponding period in 1996. This fluctuation was primarily attributable to the
current strength of the U.S. dollar in respect to Western European currencies.
Despite an increase of approximately 25.3% over the corresponding period in
1996, telecommunications revenue from Latin America represented approximately
22.8% of the Company's telecommunications revenue during the three months ended
June 30, 1997 as compared to approximately 28.0% of the Company's
telecommunications revenue during the three months ended June 30, 1996.
The Company has significantly increased its carrier business through which it
sells switched minutes to carriers and other resellers at discounted rates. The
carrier business has enabled the Company to recover partially the costs
associated with increased capacity in advance of demand within retail markets.
Such economy of scale has allowed the Company to use its network more profitably
for network originations and terminations within Europe. The carrier business
represented approximately 26.9% of total telecommunications revenue and
approximately 48.3% of billable minutes for the three months ended June 30, 1997
as compared to approximately 18.6% of total telecommunications revenue and
approximately 36.8% of billable minutes for the three months ended June 30,
1996. This increase in telecommunications revenue represents an increase of
approximately 122.9% over the corresponding period in 1996.
COST OF TELECOMMUNICATIONS SERVICES. Cost of telecommunications services
increased to $15.7 million for the three months ended June 30, 1997 from $9.6
million for the three months ended June 30, 1996 and, as a percentage of
revenue, increased to approximately 85.1% from approximately 81.9% for the three
months ended June 30, 1997 and 1996, respectively. The corresponding gross
margin increased by approximately 30.5% to $2.8 million for the three months
ended June 30, 1997 from $2.1 million for the comparable period in 1996. This
increase was primarily due to the increase in revenue, changes in overall
service mix and increased utilization of the European Network. The Company's
average cost per billable minute decreased to $.44 during the three months ended
June 30, 1997 from $.67 during the three months ended June 30, 1996, a 34.3%
decrease. This decrease, which partially offset the effect of the decline in
average revenue per billable minute, was attributable primarily to (i) increased
originating and terminating traffic being routed through the European Network,
(ii) increased 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 June 30, 1997 were negatively impacted
by increases in certain costs related to the expansion of the Company's
transmission capacity and the accelerated rollout of European POPs. These costs
are expected to decrease as a percentage of telecommunications revenue as
traffic volume over the European Network continues to increase and as the
Company converts leased lines to owned facilities. The Company increased its
private line circuit ("PLC") capacity by 100%, and as a result the fixed costs
associated with the European Network increased to approximately $1.6 million for
the three months ended June 30, 1997 (approximately 8.5% of telecommunications
revenue) from approximately $1.0 million for the three months ended June 30,
1996 (approximately 8.2% of telecommunications revenue). PLCs, which represent a
significant portion of the Company's fixed costs, were not fully utilized in the
three months ended June 30, 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 through the
European Network. This benefit, however, is primarily limited to calls
originating or 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 decreased to $9.6 million in the three months ended June
30, 1997 from $10.1 million in the three months ended June 30, 1996 and, as a
percentage of revenue, decreased to approximately 52.3% (47.8% absent an expense
associated with the Spanish Representative
10
<PAGE>
Settlement) in the second quarter of 1997 from approximately 86.6% in the second
quarter of 1996 (70.5% absent period charges associated with a corporate
restructuring and a French arbitration award). Much of these expenses are
attributable to overhead costs associated with the Company's headquarters, back
office and network operations as well as maintaining a physical presence in
sixteen different jurisdictions. Salaries and commissions, as a percentage of
total selling, general and administrative expenses, were approximately 51.2% and
47.5% for the three months ended June 30, 1997 and 1996, respectively.
EBITDA LOSS. EBITDA loss decreased to $6.9 million for the three months ended
June 30, 1997 from $8.0 million for the three months ended June 30, 1996. As a
percentage of revenue, EBITDA loss decreased to approximately 37.3% in the
second quarter of 1997 from approximately 68.6% in the second 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 $1.5
million in the second quarter of 1997 from approximately $1.1 million in the
second quarter of 1996. The increase was due primarily to the depreciation of
equipment related to network expansion and fiber optic cable systems placed in
service during the first six months of 1997.
INTEREST. Interest expense increased to approximately $3.0 million in the three
months ended June 30, 1997 from approximately $2.6 million in the three months
ended June 30, 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 June
30, 1997 from approximately $.3 million for the three months ended June 30, 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").
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996.
TELECOMMUNICATIONS REVENUE. Telecommunications revenue increased by 48.1% to
$33.0 million for the six months ended June 30, 1997 from $22.3 million for the
six months ended June 30, 1996. Telecommunications revenue growth for the six
month period ended June 30, 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.
Billable minutes increased by 134.7% during the six months ended June 30, 1997
to 58.9 million billable minutes from 25.1 million billable minutes during the
six months ended June 30, 1996. This increase was partially offset by declining
revenue per billable minute, as average revenue per billable minute declined by
36.4% to $.56 in the six-month period ended June 30, 1997 from $.88 in the
six-month period ended June 30, 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
reductions enacted by certain 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 $.77 in the six months ended June 30, 1997 from
$1.12 in the corresponding period in 1996. Telecommunications revenue per
billable minute from the sale of services to carriers and other resellers
decreased to $.28 in the six months ended June 30, 1997 from $.42 in the
corresponding period in 1996.
During the six months ended June 30, 1997, approximately 39.6% of the Company's
telecommunications revenue was generated in Western Europe as compared to
approximately 42.4% of the Company's telecommunications revenue during the
corresponding period in 1996. This fluctuation was primarily attributable to the
current strength of the U.S. Dollar in respect to Western European currencies.
Despite an increase of approximately 25.0% over the corresponding period in
1996, telecommunications revenue from Latin America represented approximately
24.6%
11
<PAGE>
of the Company's telecommunications revenue during the six months ended June 30,
1997 as compared to approximately 29.1% of the Company's telecommunications
revenue during the six months ended June 30, 1996.
The carrier business represented approximately 22.3% of total telecommunications
revenue and approximately 44.1% of billable minutes for the six months ended
June 30, 1997 as compared to approximately 15.8% of total telecommunications
revenue and approximately 33.4% of billable minutes for the six months ended
June 30, 1996. This increase in telecommunications revenue represents an
increase of approximately 108.6% over the corresponding period in 1996.
COST OF TELECOMMUNICATIONS SERVICES. Cost of telecommunications services
increased to $27.8 million for the six months ended June 30, 1997 from $18.6
million for the six months ended June 30, 1996 and, as a percentage of revenue,
increased to approximately 84.1% from approximately 83.4% for the six months
ended June 30, 1997 and 1996, respectively. The corresponding gross margin
increased by approximately 41.2% to $5.2 million for the six months ended June
30, 1997 from $3.7 million for the comparable period in 1996. This increase was
primarily due to the increase in revenue, changes in overall service mix and
increased utilization of the European Network. The Company's average cost per
billable minute decreased to $.47 during the six months ended June 30, 1997 from
$.74 during the six months ended June 30, 1996, a 36.5% decrease. This decrease,
which partially offset the effect of the decline in average revenue per billable
minute, was attributable primarily to (i) increased originating and terminating
traffic being routed through the European Network, (ii) increased 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 six months ended June 30, 1997 were negatively impacted by
increases in certain costs related to the expansion of the Company's
transmission capacity and the accelerated rollout of European POPs. These costs
are expected to decrease as a percentage of telecommunications revenue as
traffic volume over the European Network continues to increase and as the
Company converts leased lines to owned facilities. The Company increased its PLC
capacity by 100%, and as a result the fixed costs associated with the European
Network increased to approximately $3.0 million for the six months ended June
30, 1997 (approximately 9.2% of telecommunications revenue) from approximately
$1.8 million for the six months ended June 30, 1996 (approximately 8.1% of
telecommunications revenue). PLCs were not fully utilized in the six months
ended June 30, 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $18.4 million in the six months ended June
30, 1997 from $17.7 million in the six months ended June 30, 1996 and, as a
percentage of revenue, decreased to approximately 55.7% (53.2% absent an expense
associated with the Spanish Representative Settlement) in the six months ended
June 30, 1997 from approximately 79.3% in the six months ended June 30, 1996
(69.9% absent period charges associated with a corporate restructuring and a
French arbitration award). Much of these expenses are attributable to overhead
costs associated with the Company's headquarters, back office and network
operations as well as maintaining a physical presence in sixteen different
jurisdictions. Salaries and commissions, as a percentage of total selling,
general and administrative expenses, were approximately 51.9% and 48.7% for the
six months ended June 30, 1997 and 1996, respectively.
EBITDA LOSS. EBITDA loss decreased to $13.1 million for the six months ended
June 30, 1997 from $14.0 million for the six months ended June 30, 1996. As a
percentage of revenue, EBITDA loss decreased to approximately 39.8% in the six
months ended June 30, 1997 from approximately 62.7% in the six months ended June
30, 1996.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
to approximately $2.7 million in the six months ended June 30, 1997 from
approximately $2.2 million in the six months ended June 30, 1996. The increase
was due primarily to the depreciation of equipment related to network expansion
and fiber optic cable systems placed in service during the first six months of
1997.
INTEREST. Interest expense increased to approximately $6.0 million in the six
months ended June 30, 1997 from approximately $5.2 million in the six months
ended June 30, 1996 due to the accretion of non-cash interest on the Notes.
Interest income increased to approximately $2.2 million in the six months ended
June 30, 1997 from approximately $.7 million for the six months ended June 30,
1996, primarily as a result of the investment of the net proceeds from the IPO.
12
<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 and
net losses for the next several years. Through June 30, 1997, the Company had
incurred $105.7 million in aggregate losses from operating activities. As of
June 30, 1997, the Company had $64.8 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.
CAPITAL EXPENDITURES AND WORKING CAPITAL. The development of the Company's
business has required substantial capital expenditures and working capital. The
Company has incurred 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, 1997, the Company had capital
expenditures of approximately $15.9 million. Historically, the Company has
funded its capital expenditures through equity and debt issuances and vendor
financings. As of June 30, 1997, the Company had entered into purchase
commitments for network upgrades and other items aggregating approximately $12.4
million. Additionally, the Company anticipates making additional capital
expenditures aggregating approximately $1.9 million during the remainder of
1997.
AVERAGE MONTHLY CASH REQUIREMENTS. During the six months ended June 30, 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) $15.9 million
for capital expenditures for the purchase of equipment, software and corporate
overhead expense associated with the continued development of the European
Network and (ii) $2.8 million for other non-recurring items including costs
associated with the IPO, long term maintenance contracts, deferred bonus
payments and the Spanish Representative Settlement.
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, 1997,
approximately 39.5% 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, 1997 and its results of
operations for the three and six months ended June 30, 1997 were not
significantly impacted by fluctuations in the U.S. Dollar in relationship to
foreign currencies.
13
<PAGE>
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not currently applicable to the Company.
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 June 30, 1997.
14
<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: August 14, 1997
15
<PAGE>
EXHIBIT INDEX
SEQUENTIALLY
NO. DESCRIPTION NUMBERED PAGE
- --- ----------- -------------
27. Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF VIATEL, INC. FOR THE SIX MONTHS
ENDED JUNE 30, 1997 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-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 17,514,480
<SECURITIES> 13,487,379
<RECEIVABLES> 10,730,795
<ALLOWANCES> 745,000
<INVENTORY> 0
<CURRENT-ASSETS> 47,016,892
<PP&E> 42,349,221
<DEPRECIATION> 8,657,000
<TOTAL-ASSETS> 121,035,270
<CURRENT-LIABILITIES> 21,373,165
<BONDS> 83,584,850
0
0
<COMMON> 226,307
<OTHER-SE> 125,635,278
<TOTAL-LIABILITY-AND-EQUITY> 121,035,270
<SALES> 0
<TOTAL-REVENUES> 33,000,629
<CGS> 0
<TOTAL-COSTS> 27,769,829
<OTHER-EXPENSES> 21,088,162
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,987,478
<INCOME-PRETAX> (19,673,393)
<INCOME-TAX> 0
<INCOME-CONTINUING> (19,673,393)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,673,393)
<EPS-PRIMARY> (.87)
<EPS-DILUTED> (.87)
</TABLE>
