<PAGE>
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, 1998
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 Identification No.)
incorporation or organization)
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 12, 1998, 23,103,861 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
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31,
1998 December 31,
Assets (Unaudited) 1997
--------------- ----------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 26,461,943 $ 21,095,635
Marketable securities, current 1,688,343 3,499,691
Trade accounts receivable, less allowance for doubtful accounts
of $1,313,000 and $1,041,000, respectively 13,815,690 10,980,737
Other receivables 7,283,260 6,505,875
Prepaid expenses 1,283,854 1,347,814
--------------- ----------------
Total current assets 50,533,090 43,429,752
--------------- ----------------
Marketable securities, non-current - 22,546,591
Property and equipment, net of accumulated depreciation of $15,182,000 and
$12,932,000, respectively 56,997,123 54,093,748
Deferred financing and registration fees, net of accumulated amortization of
$1,217,000 and $1,121,000, respectively 2,571,962 2,668,541
Intangible assets, net of accumulated amortization of $3,102,000 and
$2,754,000, respectively 9,995,352 1,670,251
Other assets 1,796,104 2,400,315
--------------- ----------------
$ 121,893,631 $ 126,809,198
=============== ================
Liabilities and Stockholders' Deficiency
Current liabilities:
Accrued telecommunications costs $ 19,572,434 $ 16,899,194
Accounts payable and other accrued expenses 14,878,000 15,491,472
Current installments of notes payable and obligations under capital leases 3,353,527 3,372,923
--------------- ----------------
Total current liabilities 37,803,961 35,763,589
--------------- ----------------
Long-term liabilities:
Senior discount notes, less discount of $27,495,460 and $30,845,388,
respectively 93,204,540 89,854,612
Notes payable and obligations under capital leases, excluding
current installments 7,655,835 8,254,682
Equipment purchase obligation 1,500,000 1,500,000
--------------- ----------------
Total long-term liabilities 102,360,375 99,609,294
--------------- ----------------
Commitments and contingencies
Stockholders' deficiency:
Preferred Stock, $.01 par value. Authorized 1,000,000 shares, no shares
issued and outstanding - -
Common Stock, $.01 par value. Authorized 50,000,000 shares, issued and
outstanding 23,077,023 and 22,635,267 shares, respectively 230,770 226,353
Additional paid-in capital 129,453,149 125,661,323
Unearned compensation (48,780) (65,040)
Cumulative translation adjustment (5,873,448) (5,356,474)
Accumulated deficit (142,032,396) (129,029,847)
--------------- ----------------
Total stockholders' deficiency (18,270,705) (8,563,685)
--------------- ----------------
$ 121,893,631 $ 126,809,198
=============== ================
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
------------------------------------
1998 1997
------------------ ---------------
<S> <C> <C>
Telecommunications revenue $ 21,238,772 $ 14,552,334
------------------ ---------------
Operating Expenses:
Cost of telecommunications services 19,104,652 12,079,084
Selling, general and administrative expenses 8,954,802 8,723,000
Depreciation and amortization 2,910,912 1,262,162
------------------ ---------------
Total operating expenses 30,970,366 22,064,246
------------------ ---------------
Other income (expense):
Interest income 509,872 1,118,818
Interest expense (3,780,827) (3,009,266)
------------------ ---------------
Net loss $ (13,002,549) $ (9,402,360)
================== ===============
Net loss per common share, basic and diluted $ (0.57) $ (0.42)
================== ===============
Weighted average common
shares outstanding 22,783,095 22,591,745
================== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
-----------------------------------
1998 1997
--------------- ----------------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (13,002,549) $ (9,402,360)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 2,910,912 1,262,162
Interest expense on senior discount notes 3,446,507 2,992,999
Accrued interest income on marketable securities (354,962) (455,212)
Provision for losses on accounts receivable 753,941 503,993
Earned compensation 16,260 16,260
Changes in assets and liabilities:
Increase in accounts receivable (2,731,794) (510,106)
Increase in prepaid expenses and other receivables (1,248,084) (780,467)
Decrease (Increase) in other assets and intangible assets 555,122 (290,886)
Decrease in accrued telecommunication costs, accounts payable
and other accrued expenses (1,116,029) (3,886,064)
--------------- ----------------
Net cash used in operating activities (10,770,676) (10,549,681)
--------------- ----------------
Cash flows from investing activities:
Purchase of property, equipment and software (2,715,742) (3,721,743)
Payment for business acquired excluding cash of $364,000 (5,000,000) -
Purchase of marketable securities (3,509,922) (118,541,950)
Proceeds from maturity of marketable securities 27,680,804 89,360,201
--------------- ----------------
Net cash provided by (used in) investing activities 16,455,140 (32,903,492)
--------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of Common Stock 421,243 352,832
Repayment of notes payable and bank credit line (576,803) -
Payments under capital leases (53,422) (292,475)
--------------- ----------------
Net cash (used in) provided by financing activities (208,982) 60,357
--------------- ----------------
Effects of exchange rate changes on cash (109,174) (14,246)
--------------- ----------------
Net increase (decrease) in cash and cash equivalents 5,366,308 (43,407,062)
Cash and cash equivalents at beginning of period 21,095,635 75,796,102
--------------- ----------------
Cash and cash equivalents at end of period $ 26,461,943 $ 32,389,040
=============== ================
Supplemental disclosures of cash flow information:
Interest paid $ 334,320 $ 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 Condensed Consolidated Financial Statements
(Information as of March 31, 1998 and for the periods
ended March 31, 1998 and 1997 is unaudited)
(1) INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements as of March 31, 1998 and for the
three month periods ended March 31, 1998 and 1997 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 financial position, results of 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 the 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, 1998 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.
The Company adopted the provisions of Statement of Financial Acocunting
Standards No. 128, "Earnings Per Share" ("SFAS 128"), for year-end 1997.
SFAS 128, which supersedes APB Opinion No. 15, "Earning 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. Per share amounts
for the three months ended March 31, 1998 and 1997 have been retroactively
restated to give effect to SFAS 128 and were not different from EPS
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, such as foreign currency fluctuations
currently reported in stockholder's equity, be reported in an annual
financial statement that is displayed with the same prominence as other
financial statements. 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
has adopted SFAS 130 in the first quarter of 1998 and will adopt SFAS 131
for its annual reporting in 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. 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 Company does
not invest in securities for the purpose of trading and as such does not
classify any securities as trading.
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 March 31, 1998.
As of March 31, 1998, the Company had corporate debt securities available
for sale of $1,688,343 which were, by contractual maturity, due within one
year.
Unrealized gains or losses on securities classified as available for sale
are not material at March 31, 1998.
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
The Amended Stock Incentive Plan (the "Stock Incentive Plan") provides for
the issuance of up to a maximum of 2,566,666 shares of the Company's
common stock, $.01 par value (the "Common Stock").
Stock option activity for the three months ended March 31, 1998 under the
Stock Incentive Plan is shown below:
Weighted
Average
Exercise Number of
Prices Shares
------ ---------
Outstanding at January 1, 1998 $ 7.40 1,052,200
Granted 5.44 1,117,000
Exercised 6.31 (66,755)
---- ------
Outstanding at March 31, 1998 $ 6.39 2,102,455
====== =========
As of March 31, 1998, 515,369 options were exercisable under the Stock
Incentive Plan.
(4) COMPREHENSIVE LOSS
The Company's comprehensive loss is as follows:
Three Months Ended
March 31,
----------------------------------
1998 1997
-------------- -----------------
Net loss $ (13,002,549) $ (9,402,360)
Foreign currency translation
adjustment (516,974) (2,165,449)
-------------- -------------
Comprehensive loss $ (13,519,523) $(11,567,809)
============== =============
(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 single country would not have a material adverse long-term effect on
its business.
(6) ACQUISITION
On February 27, 1998, the Company acquired Flat Rate Communications, Inc.
("Flat Rate"), a long distance telecommunications reseller, for $5.0
million of cash, 375,000 shares of Common Stock valued at approximately
$3.4 million and a contingent payment based upon operating results for the
twelve month period ending February 28, 1999 which will range from zero to
$21.0 million in cash and zero to 1.0 million shares of Common Stock. The
Company recorded this acquisition under the purchase method of accounting.
6
<PAGE>
(7) SUBSEQUENT EVENTS
(a) UNITS OFFERING
On April, 8, 1998, the Company completed an offering of units consisting
of senior notes or senior discount notes and shares of 10% Series A
Redeemable Convertible Preferred Stock, $.01 par value per share, of the
Company (the "Series A Preferred") and units consisting of senior notes or
senior discount notes and subordinated convertible debentures (the "Units
Offering") through which it raised approximately $889.6 million of gross
proceeds ($856.6 million of net proceeds). A portion of the proceeds from
the Units Offering were utilized by the Company to retire its 15% Senior
Discount Notes due 2005 (the "1994 Notes") pursuant to a tender offer
transaction. Additionally, a portion of the proceeds from the Units
Offering were used to purchase approximately $122.8 million of U.S.
government securities which were pledged as security for the U.S. dollar
denominated senior notes and approximately $30.6 million of German
government obligations which were pledged as security for the Deutschmark
denominated senior notes issued in the Units Offering.
(b) PRO FORMA BALANCE SHEET
The following table presents the effects on the Company's selected balance
sheet data of the Units Offering as of March 31, 1998, on a pro forma
basis, assuming the Units Offering had occurred at that date.
<TABLE>
<CAPTION>
As of March 31, 1998
-------------------------------------
Actual Pro Forma (1)
-------------- ------------------
Pro forma Balance Sheet Data (000s):
<S> <C> <C>
Cash, cash equivalents and marketable securities $ 28,150 $ 612,507
Restricted cash, current and non current - 153,347
Working Capital 12,729 626,034
Property and equipment, net 56,997 56,997
Total assets 121,894 887,876
Series A redeemable convertible preferred stock - 43,820
Long-term debt, excluding current installments 102,360 854,907
Stockholders' deficiency (18,271) (48,655)
</TABLE>
- ----------------
(1) Adjusted to give effect to approximately $856.6 million of net proceeds from
the Units Offering, capitalization of approximately $30.8 million of debt
issue costs and the reduction of additional paid in capital of approximately
$2.1 million for issuance costs associated with the Series A Preferred
issued as part of certain of the units and the extinguishment of the
Company's then existing 1994 Notes for approximately $118.9 million
resulting in an extraordinary loss of approximately $28.3 million which
includes the writeoff of deferred financing costs of approximately $2.6
million.
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 created an extensive
commercial telecommunications network for voice and voice band data in Western
Europe, which the Company believes is necessary to effectively render the
services it offers and intends to offer. The Company currently operates one of
the largest Pan-European networks, with international gateway switching centers
in New York and London, which are connected by Company-owned digital fiber optic
transmission facilities and has developed an integrated digital, switch-based
telecommunications network with thirty locations in Western Europe including ten
switches and twenty points of presence ("POPs") connected by leased, digital
fiber optic transmission facilities (together with the switches located at its
international gateway switching center in London, the "European Network"). The
European Network, together with the Company's switches located at its
international gateway switching center in New York and POPs located within the
United States is referred to as the "Viatel Network." The Company has invested
heavily in developing the ability to provide long distance telecommunications
services and in developing and expanding its market presence within Western
Europe and in certain other countries in Latin America and Asia. The Company has
also made substantial investments in software and back office operations and an
administrative infrastructure.
The Company believes that network ownership is critical to becoming a
high quality, low-cost provider and creates the necessary platform to provide a
full array of telecommunications products and services to customers. The Company
has recently initiated a program to own or control key elements of its network
infrastructure, including interests in fiber optic cable systems. By owning or
controlling key elements of its network, the Company will be better able to
control service offerings, quality, and transmission and other operating costs.
Ownership of network facilities is an essential element in the Company's
expansion into new service offerings such as data products, including frame
relay, Internet services and asynchronous transfer mode services.
As part of the Company's strategy to own or control key elements of its
network, the Company recently completed the Units Offering through which it
raised approximately $889.6 million of gross proceeds, a substantial portion of
which will be used to construct a state-of-the-art fiber optic ring which will
connect five European countries and will include London, Paris, Nancy, Brussels,
Rotterdam, Amsterdam, Strasbourg, Stuttgart, Frankfurt, Cologne, Dusseldorf,
Essen and Antwerp (the "Circe Network"). The Circe Network will be a high
quality, high capacity, self-healing ring, utilizing advanced synchronous
digital hierarchy and dense wave division multiplexing technologies. The Circe
Network is projected to significantly expand the Company's revenue opportunities
by enabling it to (i) provide a broader range of products and services to retail
customers, (ii) provide wholesale services to the large base of resellers that
the Company expects will develop as deregulation continues in Western Europe and
(iii) capitalize on the growing demand for bandwidth intensive services in
Europe.
During the three month period ended March 31, 1998, the Company
experienced growth of approximately 45.9% in telecommunications revenue as
compared to the corresponding period in 1997. The growth in telecommunications
revenue is the result of (i) 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 and (ii) to a
limited extent, telecommunications revenue derived from Flat Rate.
The Company experienced an EBITDA loss of approximately $6.8 million
during the first three months of 1998 as compared to an EBITDA loss of
approximately $6.2 million during the first three months of 1997. As a
percentage of revenue, EBITDA loss decreased to 32.1% for the first quarter of
1998 from 42.9% for the first quarter of 1997.
On February 27, 1998, the Company completed the acquisition of Flat
Rate, a long distance telecommunications reseller. The consideration for Flat
Rate consisted of $5.0 million in cash, 375,000 shares of Common Stock and a
contingent payment based upon Flat Rate's operating results for the twelve month
period ending February 28, 1999 which will range from zero to $21.0 million in
cash and zero to 1.0 million shares of Common Stock.
8
<PAGE>
THE CIRCE NETWORK
When constructed, the Circe Network is expected to have significant
effects on the Company's results of operations. The sale of indefeasible rights
of use or capacity on the Circe Network will vary substantially from period to
period and result in fluctuations in the Company's operating results. The
Company will capitalize substantially all of the costs associated with designing
and building the Circe Network, as well as the costs associated with placing the
system in service. These costs are expected to be approximately $530.0 million,
although there can be no assurance in this regard.
The Company will also incur selling, general and administrative
expenses with respect to the Circe Network that will not be capitalized and will
affect the Company's results of operations, particularly while the Circe Network
is being designed and built in 1998 and placed into service in 1999 and will
incur additional operating and maintenance expenses until capacity on the Circe
Network is sold. As a result of financing the Circe Network with debt, the
Company will capitalize a portion of the interest incurred that relates to the
Circe Network until it is placed in service and will incur substantial increases
in interest expense thereafter.
RESULTS OF OPERATIONS
The following table summarizes the breakdown of the Company's results
of operations as a percentage of telecommunications revenue:
For the Three Months Ended
March 31,
----------------------------
1998 1997
------------- ------------
Telecommunications revenue 100.0% 100.0%
Cost of telecommunications services 90.0% 83.0%
Selling, general and administrative expenses 42.2% 59.9%
Depreciation and amortization 13.7% 8.7%
EBITDA loss (1) 32.1% 42.9%
- -------------------------
(1) As used herein "EBITDA" consists of earnings before interest, 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, is not necessarily comparable to similarly
titled measures of other companies and should not be considered as an
alternative to net income as a measure of performance nor as an alternative to
cash flow as a measure of liquidity.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
TELECOMMUNICATIONS REVENUE. Telecommunications revenue increased by
45.9% to $21.2 million on 52.4 million billable minutes for the three months
ended March 31, 1998 from $14.6 million on 23.5 million billable minutes for the
three months ended March 31, 1997. Telecommunications revenue growth for the
first quarter of 1998 was generated primarily from increased European traffic
and from growth in the Company's carrier business which was partially offset by
decreased traffic from the Company's Pacific Rim operations.
The overall increase of 122.9% in billable minutes from the first
quarter of 1997 to the first quarter of 1998 was partially offset by declining
revenue per billable minute, as average revenue per billable minute declined by
37.1% to $.39 in the first quarter of 1998 from $.62 in the first quarter of
1997, 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 many of
the Company's markets and (iv) foreign currency fluctuations. See "- Cost of
Telecommunications Services."
Telecommunications revenue per billable minute from the sale of
services to retail customers, which represented 55.2% of total
telecommunications revenue for the three months ended March 31, 1998 (compared
9
<PAGE>
to 82.6% for the three months ended March 31, 1997), decreased 38.6% to $.51 in
the first quarter of 1998 from $.83 in the first quarter of 1997.
Telecommunications revenue per billable minute from the sale of services to
carriers and other resellers increased to $.29 in the first quarter of 1998 from
$.27 in the first quarter of 1997. The number of customers billed declined 15.5%
to 17,090 at March 31, 1998 from 20,224 at March 31, 1997. This decline in
customers billed is primarily attributable to the Company's Pacific Rim
operations where the number of customers billed declined 73.5% to 1,584 at March
31, 1998 from 5,970 at March 31, 1997, representing a net loss of 4,386
customers.
During the first quarter of 1998, approximately 52.9% of the Company's
telecommunications revenue was generated in Western Europe as compared to
approximately 41.9% of the Company's telecommunications revenue during the first
quarter of 1997. Telecommunications revenue from Latin America represented
approximately 17.3% of the Company's telecommunications revenue during the three
months ended March 31, 1998 as compared to approximately 26.9% of the Company's
telecommunications revenue during the three months ended March 31, 1997.
Telecommunications revenue from the Pacific Rim represented approximately 2.9%
of the Company's telecommunications revenue during the three months ended March
31, 1998 as compared to approximately 14.5% of the Company's telecommunications
revenue during the three months ended March 31, 1997.
During the first quarter of 1998 as compared to the first quarter of
1997, 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 44.6% of total telecommunications revenue and
approximately 56.2% of billable minutes for the three months ended March 31,
1998 as compared to approximately 16.6% of total telecommunications revenue and
approximately 37.6% of billable minutes for the three months ended March 31,
1997. The increase in telecommunications revenue derived from carriers and other
resellers represents an increase of approximately 275.1% over the corresponding
period in 1997.
COST OF TELECOMMUNICATIONS SERVICES. Cost of telecommunications
services increased to $19.1 million in the first quarter of 1998 from $12.1
million in the first quarter of 1997 and, as a percentage of telecommunications
revenue, increased to approximately 90.0% from approximately 83.0% for the three
months ended 1998 and 1997, respectively. The Company's gross margin decreased
to 10.0% for the three months ended March 31, 1998 from 17.0% for the three
months ended March 31, 1997. This decrease was primarily due to (i) decreased
revenue per minute (resulting from price competition and foreign currency
fluctuations) which was not offset by corresponding decreases in infrastructure
costs, (ii) increased sales to carrier customers (which generate substantially
lower margins), and (iii) an increase in intra-European and national long
distance traffic compared to higher margin international traffic. This decrease
in gross margin is one of the principal reasons the Company initiated a strategy
to own key elements of its network infrastructure. Although it did not decrease
as fast as revenues per minute, the Company's average cost per billable minute
decreased to $.35 during the three months ended March 31, 1998 from $.51 during
the three months ended March 31, 1997, a 31.4% decrease. This decrease, which
partially offset the effect of the decline in average revenue per billable
minute, was attributable primarily to increased traffic being routed through the
European Network and increased switched minutes generated by the Company's
carrier business, both of which increased the utilization of fixed cost leased
lines. Increased European Network utilization helped reduce costs on a per
minute basis with respect to European long distance telecommunications services.
Cost of telecommunications services increased in the three months ended
March 31, 1998 in part because of the relatively high cost of leased
infrastructure related to increasing the Viatel Network's transmission capacity.
These costs are expected to decrease as a percentage of telecommunications
revenue as the Company continues its efforts to convert from leased to owned
capacity. The Company increased its private line circuits capacity by 175%, and
as a result the fixed costs associated with the Viatel Network, costs for
private line circuits increased to approximately $2.8 million for the three
months ended March 31, 1998 (approximately 13.0% of telecommunications revenue)
from approximately $1.7 million for the three months ended March 31, 1997
(approximately 11.4% of telecommunications revenue). Due to the high cost of
leased lines in Western Europe, the Company believes its use of private line
circuits will decrease and such decrease will positively impact the Company's
overall gross margins as more minutes are routed through infrastructure owned by
the Company. This benefit, however, is primarily limited to calls that either
originate or terminate in a city where the Company has a switch or POP, because
otherwise the Company is required to transport the call over the public switched
telephone network at higher transmission costs and reduced margins.
10
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $9.0 million in the three months ended
March 31, 1998 from $8.7 million in the three months ended March 31, 1997 and,
as a percentage of telecommunications revenue, decreased to approximately 42.2%
in the three months ended March 31, 1998 from approximately 59.9% in the
corresponding period in 1997. 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 seventeen
different jurisdictions. Salaries and commissions, as a percentage of total
selling, general and administrative expenses, were approximately 52.3% and 52.7%
for the three months ended March 31, 1998 and 1997, respectively.
EBITDA LOSS. EBITDA loss increased to $6.8 million for the three months
ended March 31, 1998 from $6.2 million for the three months ended March 31,
1997. As a percentage of telecommunications revenue, EBITDA loss decreased to
approximately 32.1% in the first quarter of 1998 from approximately 42.9% in the
first quarter of 1997. These losses resulted from lower gross margins as a
percentage of telecommunications revenue due to the relatively high cost of
intra-European leased lines which was compounded by price reductions implemented
by certain ITOs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense,
which includes depreciation of the Viatel Network, increased to approximately
$2.9 million in the three months ended March 31, 1998 from approximately $1.3
million in the three months ended March 31, 1997. The increase was due primarily
to the depreciation of equipment related to network expansion and fiber optic
cable systems placed in service during 1997 and the first quarter of 1998.
Depreciation expense will increase substantially as a result of the further
expansion of the Viatel Network, particularly, in the near term, from the
construction of the Circe Network.
INTEREST. Interest expense increased to approximately $3.8 million in
the three months ended March 31, 1998 from approximately $3.0 million in the
three months ended March 31, 1997 primarily due to the accretion of non-cash
interest on the 1994 Notes. Interest income decreased to approximately $.5
million for the three months ended March 31, 1998 from approximately $1.1
million in the three months ended March 31, 1997. Interest expense and income
will increase substantially as a result of the completion of the Units Offering.
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. Since inception, the Company has utilized
cash provided by financing activities to fund operating losses and capital
expenditures. The sources of this cash have primarily been private equity
financing, the proceeds from the sale of the 1994 Notes, the proceeds from the
Company's initial public offering of Common Stock in October 1996 and, to a
lesser extent, equipment-based financing. As of March 31, 1998, the Company had
$28.2 million of cash, cash equivalents and other liquid investments.
On April 8, 1998, the Company completed the Units Offering through
which it raised approximately $889.6 million of gross proceeds ($856.6 million
of net proceeds). The Company believes that the net proceeds from the Units
Offering, together with project financing, equipment financing and the sale of
capacity on the Circe Network will provide sufficient funds for the Company to
expand its business as planned and to fund operating losses for at least the
next 18 to 24 months. The Company has used certain of the net proceeds from the
Units Offering to (i) finance a tender offer as described below and (ii) to
purchase approximately $122.8 million of U.S. government securities which were
pledged as security for the U.S. dollar denominated senior notes and
approximately $30.6 million of German government obligations which were pledged
as security for the Deutschmark denominated senior notes issued in the Units
Offering. The Company intends to use the remaining net proceeds to fund a
portion of the construction and operational start-up of the Circe Network, to
fund other capital expenditures and for general corporate and working capital
purposes.
The Company also completed a tender offer for the 1994 Notes on April
8, 1998 in which all $120.7 million aggregate principal amount at maturity of
the 1994 Notes were tendered. In connection with the tender for the 1994 Notes,
the Company estimates that a one-time charge of approximately $28.3 million will
be incurred and recorded in the second quarter of 1998. This extraordinary
charge relates to the early extinguishment of debt and is comprised of the
following: (i) a $24.7 million premium paid in connection with the tender offer,
(ii) a $0.3 million fee and $0.7 million of other costs associated with the
tender offer, and (iii) a write-off of $2.6 million in unamortized deferred
issuance and registration fees associated with the 1994 Notes.
11
<PAGE>
CAPITAL EXPENDITURES; COMMITMENTS. The development of the Company's
business has required substantial capital expenditures. During the three months
ended March 31, 1998, the Company had capital expenditures of approximately $2.7
million. The Company expects to spend approximately $530.0 million to construct
the Circe Network and place it in service, although there can be no assurance
that the Company will not spend substantially more to complete the Circe
Network. The Company has or intends to enter into certain agreements associated
with the Circe Network, purchase commitments for network expansion and other
items aggregating $200 to $400 million during 1998. In addition, the Company has
minimum volume commitments to purchase transmission capacity from various
domestic and foreign carriers aggregating approximately $13.8 million for 1998.
In connection with the Company's license application in Germany, the Company
expects that it will be required to pay, during 1998, a one-time license fee in
the amount of approximately $7.5 million (based on exchange rates as of March
31, 1998). The Company has signed various letters of intent relating to the
Circe Network, which currently commit the Company to make certain payments equal
to the lesser of actual cost or $5.3 million. The Company's obligations with
respect to such amounts are subject to further reduction based on an obligation
of the vendor to mitigate damages if the arrangements are terminated by the
Company.
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 the local European currency in a country where the
local currency is relatively stable, while many of its obligations, including 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, 1998, approximately 52.9% of
the Company's telecommunications revenue was billed in various European
currencies. Debt service on certain of the notes issued in the Units Offering
are payable in German Deutschmarks. Substantially all of the costs of
acquisition and upgrade of the Company's switches have been, and are expected to
continue to be, U.S. Dollar denominated transactions, however, a substantial
portion of the costs to construct the Circe Network will be denominated in
various European currencies, including German Deutschmarks. All of the European
currencies in which the Company does business are expected to converge as part
of the European Monetary Union, except for the British Pound Sterling.
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 and debt service related to the Deutschmark denominated notes,
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, 1998 and its results of operations for the
three months ended March 31, 1998 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 1997.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not currently applicable to the Company.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) Not Applicable.
(b) Not Applicable.
(c) On February 27, 1998, the Company completed the acquisition
of Flat Rate. As part of the acquisition price, the Company
issued 375,000 shares of Common Stock. The shares of Common
Stock issued in the Flat Rate acquisition were issued in
reliance upon Rule 506 of Regulation D. There were no
underwriters involved in the transaction.
On April 8, 1998, the Company completed the Units Offering
which included two units consisting of either senior notes or
senior discount notes and Series A Preferred. In total,
438,200 shares of Series A Preferred were issued in the Units
Offering for an aggregate price of approximately $43.8
million. The underwriting discounts and commissions
associated with the Series A Preferred was approximately $2.0
million. The initial purchasers of the units sold in the
Units Offering were Morgan Stanley & Co. Incorporated, Morgan
Stanley Bank AG, Salomon Brothers, Inc, ING Baring (U.S.)
Securities, Inc. and NationsBanc Montgomery Securities LLC.
The units which included the Series A Preferred were sold in
reliance upon Rule 144A under the Securities Act of 1933. The
Series A Preferred are convertible, at the option of the
holders, at any time on or after April 8, 1999, at a
conversion price equal to $13.20 per share of Common Stock
(the "Conversion Price"), subject to certain adjustments. In
addition, the Series A Preferred is mandatorily convertible
into shares of Common Stock at the Conversion Price if the
per share price of the Common Stock for any 20 consecutive
trading days during the twelve months ending April 15, 1999,
April 15, 2000, April 15, 2001, April 15, 2002 or April 15,
2003 exceeds $26.40, $32.30, $38.20, $44.10 or $50.00,
respectively, subject to certain limitations.
(d) The Company has filed with the Securities and Exchange
Commission a Form SR, for the period ending January 17, 1997,
and an Amendment No. 1 to such Form SR, for the period ending
July 26, 1997, reporting use of proceeds from its initial
public offering of Common Stock which was completed on
October 23, 1996. The Company has used the $93,617,620 net
proceeds from its initial public offering as follows:
$44,541,723 for purchase and installation of machinery and
equipment and for acquisitions; and $49,075,897 for working
capital.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K.
A report on Form 8-K was filed by the Company on March 3,
1998 pursuant to Item 5 thereof reporting its intention to
raise additional financing through a new high yield offering
and to use a portion of the net proceeds thereof to retire
the 1994 Notes.
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 Executive Officer
By: /s/ Allan L. Shaw
-----------------------------------------
Allan L. Shaw
Senior Vice President, Finance and
Chief Financial Officer
Date: May 14, 1998
14
<PAGE>
EXHIBIT INDEX
No. Description
- --- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE>5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets of the Corporation at March 31, 1998
and the consolidated statements of operations for the three months ended
March 31, 1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 26,461,943
<SECURITIES> 1,688,343
<RECEIVABLES> 15,128,690
<ALLOWANCES> 1,313,000
<INVENTORY> 0
<CURRENT-ASSETS> 50,533,090
<PP&E> 72,179,123
<DEPRECIATION> 15,182,000
<TOTAL-ASSETS> 121,893,631
<CURRENT-LIABILITIES> 37,803,962
<BONDS> 93,204,540
0
0
<COMMON> 230,770
<OTHER-SE> 129,453,149
<TOTAL-LIABILITY-AND-EQUITY> 121,893,631
<SALES> 0
<TOTAL-REVENUES> 21,238,772
<CGS> 0
<TOTAL-COSTS> 19,104,652
<OTHER-EXPENSES> 11,865,714
<LOSS-PROVISION> 753,941
<INTEREST-EXPENSE> 3,780,827
<INCOME-PRETAX> (13,002,549)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,002,549)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,002,549)
<EPS-PRIMARY> (0.57)
<EPS-DILUTED> (0.57)
</TABLE>
