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 September 30, 1999
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 Identification No.)
of incorporation or organization)
685 Third Avenue
New York, New York
(Address of principal executive offices)
10017
(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 November 2, 1999, 32,659,744 shares of the registrant's common
stock, $.01 par value per share, were outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
VIATEL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except share data)
September 30, December 31,
1999 1998
---------------- ----------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 434,936 $ 329,511
Restricted cash equivalents 5,447 10,310
Restricted marketable securities, current 66,569 50,870
Marketable securities, current - 171,771
Trade accounts receivable, net of allowance for doubtful accounts of
$6,013 and $4,722, respectively 60,995 28,517
Other receivables 42,610 13,404
Prepaid expenses 10,277 2,417
---------------- ----------------
Total current assets 620,834 606,800
---------------- ----------------
Restricted marketable securities, non-current 96,848 83,343
Property and equipment, net 715,483 266,256
Cash securing letters of credit for network construction 79,537 -
Intangible assets, net 66,506 46,968
Other assets 15,193 5,744
---------------- ----------------
$1,594,401 $1,009,111
================ ================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accrued telecommunications costs $ 34,896 $ 26,518
Accounts payable and other accrued expenses 64,051 23,656
Property and equipment purchases payable 196,814 97,288
Accrued interest 28,500 12,240
Liability under joint construction agreement - 9,523
Current installments of notes payable and obligations under capital leases 12,259 8,918
---------------- ----------------
Total current liabilities 336,520 178,143
---------------- ----------------
Long-term liabilities:
Long-term debt 1,262,491 896,503
Notes payable and obligations under capital leases, excluding
current installments 28,109 24,636
---------------- ----------------
Total long-term liabilities 1,290,600 921,139
Series A Redeemable Convertible Preferred Stock, $.01 par value; authorized
718,042 shares; issued and outstanding none and 461,258 shares, respectively - 47,121
Commitments and contingencies ---------------- ----------------
Stockholders' deficiency:
Preferred stock, $.01 par value; authorized 1,281,958 shares, no shares
issued and outstanding - -
Common stock, $.01 par value; authorized 150,000,000 shares; issued and
outstanding 32,627,144 and 23,184,465 shares, respectively 326 232
Additional paid-in capital 389,845 128,357
Unearned compensation (6,115) -
Accumulated other comprehensive loss (24,968) (6,246)
Accumulated deficit (391,807) (259,635)
---------------- ----------------
Total stockholders' deficiency (32,719) (137,292)
---------------- ----------------
$1,594,401 $1,009,111
================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
VIATEL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share data)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------------------- --------------------------------------
1999 1998 1999 1998
----------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Revenue:
Communication services revenue $ 54,960 $ 37,144 $ 151,204 $ 86,133
Capacity sales 25,072 - 59,173 -
----------------- ---------------- ---------------- -----------------
Total revenue 80,032 37,144 210,377 86,133
----------------- ---------------- ---------------- -----------------
Operating expenses:
Cost of services and sales 59,250 33,424 162,858 77,624
Selling, general and administrative 23,527 11,669 63,380 31,057
Depreciation and amortization 17,458 3,670 39,039 10,706
----------------- ---------------- ---------------- -----------------
Total operating expenses 100,235 48,763 265,277 119,387
----------------- ---------------- ---------------- -----------------
Other income (expense):
Interest income 7,648 10,093 21,413 19,906
Interest expense (35,681) (26,384) (97,344) (52,715)
----------------- ---------------- ---------------- -----------------
Loss before extraordinary loss (48,236) (27,910) (130,831) (66,063)
Extraordinary loss on debt prepayment - - - (28,304)
----------------- ---------------- ---------------- -----------------
Net loss (48,236) (27,910) (130,831) (94,367)
Dividend on redeemable convertible
preferred stock - (1,120) (1,341) (2,131)
----------------- ---------------- ---------------- -----------------
Net loss attributable to common stockholders $ (48,236) $ (29,030) $ (132,172) $ (96,498)
================= ================ ================ =================
Loss per common share, basic and diluted:
Before extraordinary item $ (1.48) $ (1.25) $ (4.85) $ (2.96)
From extraordinary item - - - (1.23)
================= ================ ================ =================
Net loss attributable to
common stockholders $ (1.48) $ (1.25) $ (4.85) $ (4.19)
================= ================ ================ =================
Weighted average common shares outstanding,
basic and diluted 32,608 23,157 27,250 23,013
================= ================ ================ =================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
VIATEL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
For the Nine Months Ended
September 30,
-----------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (130,831) $ (94,367)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 39,039 10,706
Accreted interest expense on long-term debt 28,449 24,016
Provision for losses on accounts receivable 6,076 3,149
Extraordinary loss on debt prepayment - 28,304
Earned compensation 436 49
Changes in assets and liabilities:
Increase in accounts receivable and accrued interest (37,962) (17,505)
Increase in accrued interest expense on Senior Notes 16,261 27,312
Increase in prepaid expenses and other receivables (41,077) (4,952)
Increase in other assets and intangible assets (2,000) (364)
Increase in accrued telecommunication costs, accounts
payable and other accrued expenses 56,596 10,151
---------------- ----------------
Net cash used in operating activities (65,013) (13,501)
---------------- ----------------
Cash flows from investing activities:
Purchase of property, equipment and software (372,305) (33,994)
Payment for business acquired, net of cash acquired (12,000) (5,000)
Purchase of marketable securities (224,210) (144,458)
Proceeds from maturity of marketable securities 322,425 34,776
Cash securing letters of credit for network construction (79,537) -
Issuance of notes receivable (7,711) -
---------------- ----------------
Net cash used in investing activities (373,338) (148,676)
---------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of senior notes and senior discount notes 365,471 845,752
Proceeds from issuance of convertible debentures and convertible preferred
stock - 42,198
Repayment of senior discount notes - (119,282)
Deferred financing costs (12,887) (31,547)
Proceeds from issuance of Common Stock 194,241 898
Repayment of notes payable and bank credit line (2,459) (2,781)
Payments under capital leases (4,840) (4,612)
---------------- ----------------
Net cash provided by financing activities 539,526 730,626
---------------- ----------------
Effects of exchange rate changes on cash (613) 649
---------------- ----------------
Net increase in cash and cash equivalents 100,562 569,098
Cash and cash equivalents at beginning of period 339,821 21,096
---------------- ----------------
Cash and cash equivalents at end of period $ 440,383 $ 590,194
================ ================
Supplemental disclosures of cash flow information:
Interest paid $ 81,084 $ 1,705
================ ================
Assets acquired under capital lease obligations $ 13,550 $ 16,000
================ ================
Conversion of preferred stock and convertible debentures $ 60,791 -
================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Information as of September 30, 1999 and for the periods
ended September 30, 1999 and 1998 is unaudited)
(1) DESCRIPTION OF BUSINESS
Viatel, Inc. and subsidiaries (collectively, the "Company") is a global
integrated services provider of long distance communication and data
services to end-users, carriers and resellers. The Company operates a
pan-European network with points of interconnection in over 78 cities,
direct sales forces in 12 Western European cities and an indirect sales
force in more than 180 locations in Western Europe. The Company is
currently constructing a series of five interconnected state-of-the-art,
high quality, high capacity, self-healing fiber optic rings utilizing the
synchronous digital hierarchy standard for digital transmission which will
connect major cities in six European countries (the "Circe Network").
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements as of September 30, 1999 and for the
three and nine month periods ended September 30, 1999 and 1998,
respectively, have been prepared by 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. Certain
reclassifications have been made to the prior years' condensed
consolidated financial statements to conform to the current year's
presentation. Operating results for the three and nine months ended
September 30, 1999 may not be indicative of the results that may be
expected for the full year.
CAPACITY SALES Customers of the Company can purchase capacity on the
Company's network. Revenue from capacity sales that qualify under
generally accepted accounting principles to be treated as sales are
recognized under a line item titled "Capacity sales". Such capacity sales
are recognized as revenue when the purchaser obtains the right to use the
capacity. The related cost of capacity is reported in the same period.
Cost of capacity sales in any period is determined based upon the ratio of
total capacity sold and total anticipated capacity to be utilized
multiplied by the related total costs of the relevant portion of the
Company's network.
NEW PRONOUNCEMENTS
On January 1, 1999, the Company adopted Statement of Position 98-5 (SOP
98-5), "Reporting on the Costs of Start-Up Activities," issued by the
American Institute of Certified Public Accountants. SOP 98-5 requires that
certain start-up expenditures and organization costs previously
capitalized must now be expensed. The adoption of this statement did not
have a material effect on the consolidated financial statements.
On July 1, 1999, the Company applied FASB Interpretation No. 43, "Real
Estate Sales - an interpretation of FASB Statement No. 66." This
interpretation amended the standards for recognition of profit on all real
estate sales transactions including sales of real estate with property
improvements or integral equipment that cannot be removed and used
separately from the real estate without incurring significant costs.
Therefore, it may affect the way the Company accounts for revenues and
expenses associated with capacity sales.
5
<PAGE>
(3) 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 therefore does not
classify any securities as trading.
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
available for sale as of September 30, 1999.
The following is a summary of the amortized cost, which approximates fair
value, of restricted securities held to maturity at September 30, 1999 (in
thousands):
<TABLE>
<S> <C>
U.S. Treasury obligations $119,682
German government obligations 43,735
-----------------
Total $163,417
=================
</TABLE>
The amortized cost, which approximates fair value, of restricted
securities held to maturity at September 30, 1999 are shown below (in
thousands):
<TABLE>
<S> <C>
Due within one year $ 66,569
Due after one through two years 96,848
-----------------
Total $ 163,417
=================
</TABLE>
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.
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of (in thousands):
<TABLE>
<S> <C> <C>
September 30, December 31,
1999 1998
------------------ ------------------
Communication system $ 660,311 $ 96,193
Construction in progress 79,736 172,630
Furniture, equipment and other 17,577 16,450
Leasehold improvements 12,482 6,651
------------------ ------------------
770,106 291,924
Less accumulated depreciation
and amortization 54,623 25,668
================== ==================
$ 715,483 $ 266,256
================== ==================
</TABLE>
At September 30, 1999, construction in progress primarily represents
construction of the Circe Network. For the nine month periods ended
September 30, 1999 and 1998, $7.1 million and $1.5 million, respectively,
of interest was capitalized.
In connection with the Company's joint construction of the civil works
associated with a national communications network being constructed in
Germany during 1999, the Company was required to obtain a letter of credit
in support of its obligation. At September 30, 1999, the total amount
outstanding relating to this letter of credit was approximately $79.5
million (DM146.0 million).
6
<PAGE>
(5) INTANGIBLE ASSETS
Intangible assets consist of the following as of (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------ ------------------
<S> <C> <C>
Deferred financing and
registration fees $ 44,434 $ 31,547
Licenses, trademarks,
and servicemarks 9,963 10,031
Goodwill 20,270 8,744
Purchased software 4,379 1,859
Other - 206
------------------ ------------------
79,046 52,387
Less accumulated amortization 12,540 5,419
------------------ ------------------
$ 66,506 $ 46,968
================== ==================
</TABLE>
During the first nine months of 1999, the Company recognized and paid its
obligation for contingent consideration for its 1998 acquisition of Flat
Rate Communications, Inc. based upon key operating performance targets
being met during the period ended March 31, 1999. Such contingent
consideration has been recorded as goodwill.
(6) LONG TERM DEBT AND CONVERTIBLE SECURITIES
At September 30, 1999, the Company has aggregate long term debt consisting
of senior notes due 2008 and senior discount notes due 2009 totaling $1.3
billion. A portion of the proceeds from the senior notes were used to
purchase U.S. government and German government securities which were
pledged as security for the first six and four interest payments on the
senior notes due 2008 and 2009, respectively. The amount of restricted
securities remaining pledged as security for these notes is $163.4
million. The interest on the senior notes is payable in semi-annual
installments. The senior discount notes accrete through April 15, 2003 and
interest becomes payable in cash in semi-annual installments thereafter.
The indentures pursuant to which the senior notes and the senior discount
notes were issued contain certain covenants that, among other things,
limit the ability of the Company to incur additional indebtedness, pay
dividends or make certain other distributions, enter into transactions
with stockholders and affiliates and create liens on its assets. In
addition, upon a change of control, the Company is required to make an
offer to purchase the senior notes and the senior discount notes at a
purchase price equal to 101% of the principal amount, in the case of the
senior notes, and 101% of the accreted value of the notes, in the case of
the senior discount notes.
Long term debt consists of the following as of (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------- --------------
<S> <C> <C>
11.25% Senior Notes $400,000 $400,000
11.15% Senior Notes (E91,010) 96,912 106,015
11.50% Senior Notes 200,000 -
11.50% Senior Notes (E150,000) 159,727 -
12.50% Senior Discount Notes,
less discount of $174,514 325,486 297,284
12.40% Senior Discount Notes (E115,552),
less discount of $42,680 (E40,081) 80,366 80,355
10% Subordinated Convertible Debentures - 12,849
--------------- --------------
$1,262,491 $896,503
=============== ==============
</TABLE>
7
<PAGE>
On May 13, 1999, the conditions for mandatory conversion were met for
both the Series A Preferred Stock and the Subordinated Convertible
Debentures. The conversion rates for the Series A Preferred Stock and
Subordinated Convertible Debentures were $13.20 and DM24.473, at the then
applicable exchange rates, respectively. Accordingly, the Company issued
approximately 4.6 million shares of its common stock and paid cash for any
fractional shares due upon conversion.
During 1997, the Company entered into Loan and Security Agreements
pursuant to which the Company borrowed an aggregate of $11.1 million.
Under the terms of these agreements, the Company is required to satisfy
certain covenants and restrictions. As of September 30, 1999, the Company
was either in compliance with, or had received waivers to, these
covenants. Obligations under these Loan and Security Agreements are
secured by the grant of a security interest in certain telecommunications
equipment as well as a portion of the payment obligations also being
secured by letters of credit.
(7) STOCK INCENTIVE PLAN
At the 1999 Annual Meeting of Stockholders held in September, 1999, the
Company's stockholders approved an amendment to its Stock Incentive Plan
that increased the number of shares of common stock available for future
issuance thereunder from 3.6 million to 5.3 million shares. Under the
Amended Stock Incentive Plan, also amended, (the "Stock Incentive Plan")
the Company had approximately 1.7 million shares available as of September
30, 1999 for future grant.
Stock option activity for the nine months ended September 30, 1999
under the Stock Incentive Plan is shown below (in thousands):
<TABLE>
<CAPTION>
WEIGHTED AVERAGE NUMBER OF
EXERCISE PRICES SHARES
---------------- ---------
<S> <C> <C>
Outstanding at December 31, 1998 $ 7.41 2,594
Granted 26.57 703
Exercised 6.08 (360)
Forfeited 5.85 (1)
---------------- ---------
Outstanding at September 30, 1999 $12.10 2,936
================ =========
</TABLE>
As of September 30, 1999, approximately 0.8 million options were
exercisable under the Stock Incentive Plan.
(8) COMPREHENSIVE LOSS
The Company's comprehensive loss is as follows (in thousands):
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
--------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
-------------- --------------- --------------- ---------------
Net loss $(48,236) $(27,910) $ (130,831) $(94,367)
Foreign currency translation adjustment (2,493) 1,021 (18,722) 1,155
============== =============== =============== ===============
Comprehensive loss $(45,743) $(26,889) $(149,553) $(93,212)
============== =============== =============== ===============
</TABLE>
8
<PAGE>
(9) SEGMENT AND GEOGRAPHIC DATA
While the Company's chief decision maker monitors revenue streams of the
various products and geographic locations, operations are managed and
financial performance is evaluated based on the delivery of multiple,
integrated services to customers over a single network. As a result, there
are many shared expenses generated by the various revenue streams and
management believes that any allocation of the expenses incurred to
multiple revenue streams or geographic locations would be impractical and
arbitrary. Management does not currently make such allocations internally.
The Company groups its products and services by wholesale, retail, and
capacity. The information below summarizes revenue by customer type for the
three and nine months ended September 30, 1999 and 1998, respectively (in
thousands):
<TABLE>
<CAPTION>
For the three months For the nine months
ended ended
September 30, September 30,
---------------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Retail............... $24,111 $14,820 $ 78,799 $38,885
Wholesale............ 30,849 22,324 72,405 47,248
Capacity............. 25,072 - 59,173 -
-------- ------- -------- -------
Consolidated......... $80,032 $37,144 $210,377 $86,133
======= ======= ======== =======
</TABLE>
The information below summarizes revenue by geographic area for the three
and nine months ended September 30, 1999 and 1998, respectively (in
thousands):
<TABLE>
<CAPTION>
For the three months For the nine months
ended ended
September 30, September 30,
---------- ---------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Western Europe.............. $56,803 $16,241 $ 152,361 $ 40,817
North America............... 21,057 16,836 50,581 32,721
Latin America............... 2,148 3,730 7,332 11,237
Asia/Pacific Rim and other.. 24 337 103 1,358
--------- ------- --------- --------
Consolidated................ $80,032 $37,144 $210,377 $86,133
========= ======= ========= ========
</TABLE>
The information below summarizes long lived assets by geographic area as
of September 30, 1999 and December 31, 1998, respectively (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- -------------
<S> <C> <C>
Western Europe ..................... $681,498 $237,443
North America ...................... 61,873 46,837
Latin America ...................... 194 289
------------- -------------
Consolidated ....................... $743,565 $284,569
============= =============
</TABLE>
9
<PAGE>
(10) ACQUISITION
On August 27, 1999, a wholly-owned subsidiary of the Company, and Destia
Communications, Inc. (formerly Econophone, Inc.) entered into an Agreement
and Plan of Merger which provides, among other things, for the merger with
Destia. Upon consummation of the merger, Destia will become a wholly-owned
subsidiary of Viatel. Under the terms of the merger agreement, Destia
shareholders will receive 0.445 share of Viatel's common stock in exchange
for each share of Destia common stock held by such stockholders at the
effective time of the merger. The transaction is contingent upon, among
other things, approval of both Viatel's and Destia's stockholders, certain
regulatory approvals and other customary conditions. The merger is intended
to constitute a tax-free reorganization, and is expected to be completed by
year-end.
(11) SUBSEQUENT EVENT
On November 4, 1999, the Company commenced an exchange offer pursuant to
which it is offering $686.03 principal amount of its 11.50% senior dollar
notes due 2009 and $71.24 in cash (of which $20.00 of the cash payment per
$1,000 principal amount at maturity of each Destia Communications, Inc.
discount note constitutes a consent payment, only if the holders deliver
and do not withdraw their existing notes for each $1,000 principal amount
at maturity of Destia's 11% senior discount notes due 2008)and a concurrent
consent solicitation which would amend the indenture under which the Destia
11% notes were issued to eliminate substantially all of the restrictive
covenants contained in such indenture. The Company also intends to raise
approximately $72.4 million through the sale of additional 11.50% senior
notes due 2009. The purpose of this financing is to fund and secure the
first three interest payments on the new issuance of 11.50% notes and to
fund our cash payments in the exchange offer and consent solicitation. The
Company may offer more than $72.4 million of additional 11.50% senior
notes. If so, it intends to apply the proceeds in excess of $72.4 million
to retire outstanding Destia long-term debt.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and the notes thereto included elsewhere in this Form 10-Q. The
following discussion includes certain forward-looking statements. For a
discussion of important factors, including, but not limited to, the continued
development of our business, actions of regulatory authorities and competitors,
price declines and other factors which could cause actual results to differ
materially from the results referred to in the forward-looking statements, see
our "Annual Report on Form 10-K" for fiscal 1998 and filings made by the Company
with the Securities and Exchange Commission either on Form S-3 or S-4.
OVERVIEW
We are a rapidly growing international communications company, providing
high quality, competitively priced, long distance communication and data
services to end-users, carriers and resellers. We have direct sales forces in 12
Western European cities and an indirect sales force in more than 180 locations
in Western Europe.
To capitalize on the opportunities presented by deregulation of the
telecommunication in Western Europe, we established an early presence and fought
aggressively to acquire licenses, interconnection and infrastructure. Today, we
have licenses in Belgium, France, Germany, Italy, The Netherlands, Spain and the
United Kingdom and interconnection agreements with the incumbent
telecommunications operator in each of these countries. We also have a license
in Switzerland and expect to obtain an interconnection agreement with
Switzerland's incumbent telecommunications operator by the end of 1999.
We currently operate one of Europe's largest pan-European networks, with
points of interconnection in over 78 cities. We believe that control of network
infrastructure is critical to becoming a high quality, low-cost provider of
communications services because it will enable us to better manage service
offerings, quality of transmission and costs. Accordingly, we are in the process
of migrating from a network composed of international and domestic leased
circuits to a network composed primarily of owned infrastructure.
On August 27, 1999, we agreed to acquire Destia Communications, Inc.,
through a merger of Destia with one of our subsidiaries. Destia is a rapidly
growing, facilities-based provider of domestic and international long distance
telecommunications services in Europe and North America. The merger is expected
to be completed in December 1999, at which time Destia will be integrated into
Viatel.
THE CIRCE NETWORK
In 1998, we began the network construction of a five ring bi-directional,
state-of-the-art, fiber optic network, which, when completed, is expected to
consist of approximately 8,700 route kilometers (the "Circe Network"). The first
phase of the Circe Network, consisting of approximately 1,850 route kilometers,
was completed in March 1999 and connects four European countries and includes,
London, Paris, Amiens, Brussels, Antwerp, Rotterdam, and Amsterdam. The second
phase of the Circe Network became operational in July 1999 and now carries
commercial traffic through northern France, The Netherlands and into western
Germany. Construction of the third phase which will extend through eastern
Germany has commenced. Phase three is currently scheduled to be placed in
service during the first quarter of 2000. We plan to begin construction of
phases four and five, which will extend into southern France and Switzerland,
prior to year-end. Phases four and five are scheduled to be completed during the
third quarter of 2000.
We began selling capacity on the Circe Network during the first quarter of
1999. Revenue from capacity sales that qualify under generally accepted
accounting principles to be treated as sales are recognized under a line item
titled "Capacity sales". Such capacity sales are recognized as revenue when the
purchaser obtains the right to use the capacity. The related cost of capacity is
reported in the same period. With respect to each sale of capacity, the related
cost of capacity sales is equal to a proportionate amount of the total
capitalized cost of the related network. The sale of capacity on the Circe
Network will vary substantially from period to period and, as a result, may
cause fluctuations in our operating results. Revenue from operating leases of
private line circuits will be included in communication services revenue and
11
<PAGE>
will be recognized on a straight line basis over the life of the lease. The
portion of the total capitalized cost of the Circe Network used to provide
communication services is included in property and equipment and is being
charged to depreciation and amortization over its useful life.
We expect to trade capacity on the Circe Network for capacity on other
cable systems. Depending upon structure, these trades of capacity may have a
material effect on our statement of operations. We will continue to incur sales
and marketing and related expenses that will not be capitalized and will affect
our results of operations, particularly while the Circe Network is being
designed, built and placed into service. In addition, we will continue to incur
additional operating and maintenance expenses as the remaining Circe phases
become operational. As a result of financing the Circe Network with debt, we are
capitalizing a portion of the interest incurred that relates to the construction
of the Circe Network until it is placed in service.
The Circe Network will have a beneficial effect on our costs of services
and sales as well as net income (loss). This will occur as we bring traffic
"on-net," to facilities we own, as opposed to facilities that we lease from
other carriers. A large portion of the expenses associated with facilities we
own is accounted for as depreciation and amortization, while leased capacity is
accounted for as a cost of services and sales. As a result, we expect that our
gross margins and profit will be improved as we bring traffic "on-net". However,
our net income (loss) will not improve to the same extent. The effect of
bringing traffic "on-net" will be somewhat delayed, because our leased line
agreements require minimum notification to terminate our obligations.
RESULTS OF OPERATIONS
The following table summarizes the breakdown of our results of operations
as a percentage of revenue. Our revenue, and therefore these percentages, could
fluctuate substantially from period to period due to capacity sales, which have
a substantially different impact on margins than communications services.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------- --------------------------------
1999 1998 1999 1998
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of services and sales 74.0% 90.0% 77.4% 90.1%
Selling, general and administrative expenses 29.4% 31.4% 30.1% 36.1%
Depreciation and amortization 21.8% 9.9% 18.6% 12.4%
EBITDA loss (1) 3.4% 21.4% 7.5% 26.2%
</TABLE>
- ---------------------------------
(1) As used herein "EBITDA" consists of earnings before interest, income taxes,
extraordinary loss, dividends on convertible preferred stock 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 SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1998
REVENUE. Revenue is derived from communication service and capacity sales.
Revenue increased by 115.6% to $80.0 million for the three months ended
September 30, 1999 from $37.1 million for the three months ended September 30,
1998. This growth was attributable to a 48.0% increase in communication services
revenue which increased to $54.9 million on 360.3 million billable minutes for
the third quarter of 1999 from $37.1 million on 113.2 million billable minutes
for the third quarter of 1998. Capacity sales were $25.1 million for the third
quarter of 1999 and represented 31.3% of revenue. We had no capacity sales
during the third quarter of 1998. Revenue growth for the third quarter of 1999
continues to be generated primarily by growth from European operations.
12
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Although there was a substantial increase in billable minutes from the
third quarter of 1998 to the third quarter of 1999, the effects of such growth
were partially offset by a decline in revenue per billable minute, as revenue
per billable minute declined by 54.6% to $.15 in the third quarter of 1999 from
$.33 in the third quarter of 1998, primarily because of (i) a higher percentage
of lower-priced intra-European and national long distance traffic on our network
and (ii) reductions in prices in response to price reductions by incumbent
telecommunications operators and other carriers in many of our markets. Revenue
per billable minute excludes fixed fees associated with our other products and
service offerings. We expect these price reductions to continue.
Communication services revenue from the sale of services to retail
customers, which represented 30.1% of revenue for the three months ended
September 30, 1999 compared to 39.9% for the three months ended September 30,
1998, decreased 66.7% to $.12 per billable minute in the third quarter of 1999
from $.36 per billable minute in the third quarter of 1998. Communication
services revenue per billable minute from the sale of services to carriers and
other resellers decreased 38.7% to $.19 in the third quarter of 1999 from $.31
in the third quarter of 1998.
During the third quarter of 1999 as compared to the third quarter of 1998,
our carrier business (through which we provide switched minutes, private lines
and ports to carriers, internet service providers and other resellers) grew on
an absolute basis, but decreased as a percentage of revenue because our other
services grew at a faster rate. The carrier business represented approximately
38.6% of revenue and approximately 42.3% of billable minutes for the three
months ended September 30, 1999 as compared to approximately 60.1% of revenue
and approximately 63.1% of billable minutes for the three months ended September
30, 1998.
During the third quarter of 1999, approximately 71.0% of revenue was
generated in Western Europe as compared to 43.7% of the revenue during the third
quarter of 1998. Revenue from North America represented 26.3% during the third
quarter of 1999 compared to 45.3% during third quarter 1998. Revenue from Latin
America represented approximately 2.7% during the three months ended September
30, 1999 compared to 10.0% during the three months ended September 30, 1998.
Pacific Rim revenues were less than 1% during third quarters of 1999 and 1998.
COST OF SERVICES AND SALES. Cost of services and sales increased to $59.3
million in the third quarter of 1999 from $33.4 million in the third quarter of
1998. As a percentage of total revenue, however, cost of services and sales
decreased to approximately 74.0% for the three months ended September 30, 1999
from approximately 90.0% for the three months ended September 30, 1998, due to
our continued migration from leased infrastructure to the Circe Network and
other owned capacity. The effect of bringing traffic "on-net", however, will be
somewhat delayed because our leased line agreements require minimum notification
to terminate our obligations.
Cost of services and sales for the three months ended September 30, 1999
includes costs associated with the sale of capacity on the network. The cost of
the sold capacity represented non-cash charges of the pro rata cost of the
network asset and is determined based upon the ratio of total capacity sold to
total estimated capacity multiplied by the total capitalized costs of the
related network.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $23.5 million in the three months ended
September 30, 1999 from $11.7 million in the three months ended September 30,
1998 and, as a percentage of revenue, decreased to approximately 29.4% in the
three months ended September 30, 1999 from approximately 31.4% in the same
period in 1998. Much of these expenses are attributable to overhead costs
associated with our headquarters, back office and operations as well as
maintaining a physical presence in multiple jurisdictions. We expect to incur
additional expenses as we continue to invest in operating infrastructure and
actively market our products and services. Salaries and commissions, as a
percentage of total selling, general and administrative expenses, were
approximately 45.6% and 48.4% for the three months ended September 30, 1999 and
1998, respectively. Advertising and promotion expenses have increased
substantially and will continue to be a significant component of selling,
general and administrative expenses. As a percentage of total selling, general
and administrative expenses, advertising and promotion expenses were
approximately 11.0% and 3.3% for the three months ended September 30, 1999 and
1998, respectively.
EBITDA LOSS. EBITDA loss decreased to $2.7 million for the three months
ended September 30, 1999 from $7.9 million for the three months ended September
30, 1998. As a percentage of revenue, EBITDA loss decreased to approximately
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3.4% in the third quarter of 1999 from approximately 21.4% in the same quarter
of 1998. We expect this trend to continue as we continue to migrate traffic
on-net.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense, which
includes depreciation of the network, increased to approximately $17.5 million
in the quarter ended September 30, 1999 from approximately $3.7 million in the
quarter ended September 30, 1998. The increase was due primarily to the $596.8
million increase in gross property and equipment from $173.3 million at
September 30, 1998 to $770.1 million at September 30, 1999. Depreciation expense
will continue to increase substantially as each additional ring of the Circe
Network becomes operational.
INTEREST. Interest expense increased from approximately $26.4 million in
the three months ended September 30, 1998 to approximately $35.7 million in the
three months ended September 30, 1999, primarily as a result of increases in
outstanding indebtedness, which includes notes and capital lease obligations,
which increased from $899.8 million at September 30, 1998 to $1.3 billion at
September 30, 1999. During the three months ended September 30, 1999, we
capitalized $2.4 million of interest costs. Interest income decreased from
approximately $10.1 million during the three months ended September 30, 1998 to
approximately $7.6 million in the three months ended September 30, 1999,
primarily as a result of our investment in capital expenditures relating to the
development of the Circe Network.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998
REVENUE. Revenue increased by 144.2% to $210.4 million for the nine months
ended September 30, 1999 from $86.1 million for the nine months ended September
30, 1998. This growth was attributable to a 75.6% increase in communication
services revenue to $151.2 million on 909.6 million billable minutes for the
first nine months of 1999 from $86.1 million on 248.9 million billable minutes
for the first nine months of 1998. Capacity sales represented $59.2 million, or
28.1% of revenue, for the first nine months of 1999. We had no capacity sales
during the first nine months of 1998. Revenue growth for the nine months ended
September 30, 1999 continues to be generated primarily by growth from European
operations.
Although there was a substantial increase in billable minutes from the
first nine months of 1998 to the first nine months of 1999, the effects of such
growth were partially offset by a decline in revenue per billable minute, as
revenue per billable minute declined by 54.3% to $.16 in the first nine months
of 1999 from $.35 in the first nine months of 1998, primarily because of (i) a
higher percentage of lower-priced intra-European and national long distance
traffic on our network and (ii) reductions in prices in response to price
reductions by incumbent telecommunications operators and other carriers in many
of our markets. Revenue per billable minute excludes fixed fees associated with
our other products and service offerings.
Communication services revenue from the sale of services to retail
customers, which represented 37.5% of revenue for the nine months ended
September 30, 1999 compared to 45.2% for the nine months ended September 30,
1998, decreased 69.1% to $.13 per billable minute in the first nine months of
1999 from $.42 per billable minute in the first nine months of 1998.
Communication services revenue per billable minute from the sale of services to
carriers and other resellers decreased to $.23 in the first nine months of 1999
from $.30 in the first nine months of 1998.
During the first nine months of 1999 as compared to the first nine months
of 1998, our carrier business grew on an absolute basis, but decreased as a
percentage of revenue because our other services grew at a faster rate. The
carrier business represented approximately 34.4% of revenue and approximately
34.0% of billable minutes for the nine months ended September 30, 1999 as
compared to approximately 54.8% of revenue and approximately 63.3% of billable
minutes for the nine months ended September 30, 1998.
During the first nine months of 1999, approximately 72.4% of revenue was
generated in Western Europe as compared to 47.4% of the revenue during the first
nine months of 1998. Revenue from North America represented 24.0% during the
first nine months of 1999 compared to 38.0% during the same period in 1998.
Revenue from Latin America represented approximately 3.5% during the nine months
ended September 30, 1999 compared to 13.0% during the nine months ended
September 30, 1998. Pacific Rim revenues were less than 1% during the first nine
months of 1999 and less than 2% for the same period in 1998.
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<PAGE>
COST OF SERVICES AND SALES. Cost of services and sales increased to $162.9
million in the first nine months of 1999 from $77.6 million in the first nine
months of 1998. As a percentage of revenue, however, cost of services and sales
decreased to approximately 77.4% for the nine months ended September 30, 1999
from approximately 90.1% for the nine months ended September 30, 1998, due to
our migration from leased infrastructure to the Circe Network and other owned
capacity. The effect of bringing traffic on-net, however, will be somewhat
delayed because our leased line agreements require minimum notification to
terminate our obligations.
Cost of services and sales for the nine months ended September 30, 1999
includes costs associated with the sale of capacity on the network. The cost of
the sold capacity represented non-cash charges of the pro rata cost of the
network asset and is determined based upon the ratio of total capacity sold to
total estimated capacity multiplied by the total capitalized costs of the
related network.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $63.4 million for the nine months ended
September 30, 1999 from $31.1 million for the nine months ended September 30,
1998 and, as a percentage of revenue, decreased to approximately 30.1% for the
nine months ended September 30, 1999 from approximately 36.1% for the
corresponding period in 1998. Much of these expenses are attributable to
overhead costs associated with our headquarters, back office and operations as
well as maintaining a physical presence in multiple jurisdictions. We expect to
incur additional expenses as we continue to invest in operating infrastructure
and actively market our products and services. Salaries and commissions, as a
percentage of total selling, general and administrative expenses, were
approximately 45.3% and 49.3% for the nine months ended September 30, 1999 and
1998, respectively. Advertising and promotion expenses have increased
substantially and will continue to be a significant component of selling,
general and administrative expenses. As a percentage of total selling, general
and administrative expenses, advertising and promotion expenses were
approximately 7.0% and 2.7% for the nine months ended September 30, 1999 and
1998, respectively.
EBITDA LOSS. EBITDA loss decreased to $15.9 million for the nine months
ended September 30, 1999 from $22.5 million for the nine months ended September
30, 1998. As a percentage of revenue, EBITDA loss decreased to approximately
7.5% in the first nine months of 1999 from approximately 26.2% in the first nine
months of 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense, which
includes depreciation of the network, increased to approximately $39.0 million
for the nine months ended September 30, 1999 from approximately $10.7 million
for the nine months ended September 30, 1998. The increase was due primarily to
the $596.8 million increase in gross property and equipment from $173.3 million
at September 30, 1998 to $770.1 million at September 30, 1999.
INTEREST. Interest expense increased from approximately $52.7 million in
the nine months ended September 30, 1998 to approximately $97.3 million in the
nine months ended September 30, 1999, primarily as a result of increases in our
outstanding indebtedness, which includes notes and capital lease obligations,
which increased from $899.8 million at September 30, 1998 to $1.3 billion at
September 30, 1999. During the nine months ended September 30, 1999, we
capitalized approximately $7.1 million of interest costs. Interest income
increased from approximately $19.9 million in the nine months ended September
30, 1998 to approximately $21.4 million in the nine months ended September 30,
1999, primarily as a result of the interim investment of the net proceeds from
our debt and equity financings.
LIQUIDITY AND CAPITAL RESOURCES
We have incurred losses from operating activities in each year of
operations since our inception and expect to continue to incur operating and net
losses for the next several years. Since inception, we have utilized cash
provided by financing activities to fund operating losses, interest expense and
capital expenditures. The sources of this cash have primarily been through
private and public equity and debt financings and, to a lesser extent,
equipment-based financing. As of September 30, 1999, we had $514.5 million of
cash, cash equivalents and cash securing letters of credit for network
construction and $168.9 million of restricted cash equivalents and other
restricted marketable securities, which primarily secure interest payments on
our notes through April 2001.
15
<PAGE>
On June 29, 1999, the Company completed an offering of 4,315,000 shares of
its common stock at $47.00 per share. The net proceeds of the offering were
approximately $192.2 million and will be used primarily to fund the further
development of our network as well as for working capital and general corporate
purposes.
On May 13, 1999, our series A preferred stock and subordinated convertible
debentures converted into shares of our common stock. The conversion was based
upon maintenance of our common stock above a certain per share price for a
specified time period. The series A preferred stock and the subordinated
convertible debentures converted at a conversion price equal to $13.20 and
DM24.473, at the then applicable exchange rate, respectively. Accordingly, we
issued approximately 4.6 million shares of our common stock and paid cash for
any fractional shares due upon conversion. These transactions, and their
extinguishment of our related commitments, significantly strengthen our
financial position.
On March 19, 1999, we completed a high yield offering through which we
raised approximately $352.6 million of net proceeds in a combination of senior
dollar notes and senior Euro notes.
On April 8, 1998, we completed a high yield offering through which we
raised approximately $856.6 million of net proceeds. A portion of the proceeds
from this high yield offering were utilized by us to retire our 15% senior
discount notes due 2005 pursuant to a tender offer.
The proceeds of the 1999 and 1998 high yield offerings are being used to
construct the Circe Network. The Circe Network, when completed, will be one of
the largest cross-border fiber optic networks in the major metropolitan
telecommunications markets in Western Europe. This five-ring system is expected
to encompass approximately 8,700 route kilometers.
On August 27, 1999, we agreed to acquire Destia through a merger of Destia
with one of our subsidiaries. Destia is a rapidly growing, facilities-based
provider of domestic and international long distance telecommunications services
in Europe and North America. The merger is expected to be completed in December
1999, at which time Destia will be integrated into Viatel.
Before the merger is completed, we expect to raise approximately $72.4
million through the sale of additional 11.50% senior notes in a private
placement. The purpose of this financing is to fund and secure the first three
interest payment obligations on the new issuance of 11.50% notes and to fund our
cash payments in the exchange offer and consent solicitation. This obligation
applies both to the 11.50% notes to be issued in the private placement and the
11.50% notes to be issued in the exchange offer discount notes. We can provide
no assurance that the private placement will be successfully completed.
We believe that the net proceeds from the offerings, discussed above,
together with cash and marketable securities on hand and future sales of the
capacity on the Circe Network, will provide sufficient funds for us to expand
our business as planned and to fund operating losses for at least the next 12 to
18 months. However, the amount of future capital requirements will depend on a
number of factors, including the success of our business, the start-up dates of
each ring of the Circe Network, the dates at which we further expand our
network, the types of services we offer, staffing levels, acquisitions and
customer growth, as well as other factors that are not within our control,
including an obligation to fund Destia's repurchase offer obligation with
respect to its senior notes and the Destia discount notes that will be triggered
upon completion of the merger (as currently structured), competitive conditions,
government regulatory developments and capital costs. In the event our plan or
assumptions change or prove to be inaccurate, we are unable to convert from
leased to owned infrastructure or obtain interconnection in accordance with our
current plans or the net proceeds of our offerings, cash and investments on
hand, equity offerings and the proceeds from the sale of capacity on the Circe
Network prove to be insufficient to fund our growth in the manner and at the
rate currently anticipated, we may be required to delay or abandon some or all
of our development and expansion plans or we may be required to seek additional
sources of financing earlier than currently anticipated. In the event we are
required to seek additional financing, there can be no assurance that such
financing will be available on acceptable terms or at all.
16
<PAGE>
CAPITAL ADDITIONS; COMMITMENTS. The development of our business has
required substantial capital. Capital additions consist of capital expenditures,
the net increase in property and equipment purchases payable, assets acquired
under capital lease obligations and capitalized interest during the period.
During 1998, capital additions totaled $220.9 million and consisted of capital
expenditures of approximately $94.7 million, a net increase of $92.5 million in
property and equipment purchases payable, $30.4 million of assets acquired under
capital lease obligations and capitalized interest of $3.3 million. For the nine
months ended September 30, 1999, we had capital additions of approximately
$511.9 million, which consisted of capital expenditures of approximately $391.7
million, a net increase of $99.5 million in property and equipment payable,
$13.6 million of assets acquired under capital lease obligations and capitalized
interest of approximately $7.1 million. We have also entered into certain
agreements associated with the Circe Network, purchase commitments for network
expansion and other items aggregating in excess of $204.6 million at September
30, 1999. Additionally, we have minimum volume commitments to purchase
transmission capacity from various domestic and foreign carriers aggregating
approximately $13.2 million for all of 1999. We expect to continue to have
substantial capital expenditures in the future.
When Destia becomes a wholly-owned subsidiary of ours as a result of the
merger (as currently structured), it will be required to offer to repurchase all
of the outstanding Destia discount notes and 13.50% senior notes due 2007 at a
purchase price equal to 101% of the accreted value of the Destia discount notes
and 101% of the outstanding principal amount, together with accrued and unpaid
interest, of the Destia 13.50% notes. However, if necessary, the acquisition
could be restructured to eliminate this obligation. As of September 30, 1999,
the accreted value of the Destia discount notes was $209.1 million and the
outstanding principal amount of the Destia 13.50% notes was $150.7 million.
Based on the current and historical trading prices of the Destia 13.50% notes,
we do not expect that the holders of these notes will tender their notes for
repurchase. However, if there is significant adverse change in the market for
debt securities or an adverse change with respect to either us or Destia, it is
likely that some or all of the Destia 13.50% notes will be tendered in the
repurchase offer. Based on the current and historical trading prices of the
Destia discount notes, we consider it likely that holders will tender them for
repurchase. To the extent that holders of Destia discount notes tender their
notes in the exchange offer, it will have the effect of reducing the amount of
such notes that Destia will have to repurchase following completion of the
merger (as currently structured).
If we divert our available cash to fund the repurchase of all or a
significant amount of Destia notes, our business plan, which is currently fully
funded, could be restricted. The closing of the merger is not subject to the
condition that the exchange offer be successfully completed. If we and Destia
conclude prior to the completion of the merger that the terms on which the
exchange offer can be completed are likely to be unreasonable or that it is
likely that the Destia notes will be tendered in the repurchase offer in an
amount or on terms that could significantly deplete our available cash, we and
Destia may restructure the merger in order to avoid Destia's obligation to make
a repurchase offer or effect the exchange offer.
FOREIGN CURRENCY. We have exposure to fluctuations in foreign currencies
relative to the U.S. Dollar as a result of billing portions of our
communications services revenue in the local European currency in countries
where the local currency is relatively stable while many of our obligations,
including a substantial portion of our transmission costs, are denominated in
U.S. Dollars. In countries with less stable currencies, such as Brazil, we bill
in U.S. Dollars. Debt service on certain of the notes issued by us are currently
payable in Euros. A substantial portion of capital expenditures are and will
continue to be denominated in various European currencies, including the Euro.
Most of the European currencies in which we do business converged effective
January 1, 1999, with the exception of the British Pound Sterling. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Euro")
With the continued expansion of our network, a substantial portion of the
costs associated with the network, such as local access and termination charges
and a portion of the leased line costs, as well as a majority of local selling
expenses and debt service related to the Euro denominated notes, will be charged
to us in the same currencies as revenue is billed. These developments create a
natural hedge against a portion of our foreign exchange exposure. To date, much
of the funding necessary to establish the local direct sales organizations has
17
<PAGE>
been derived from communications services revenue that was billed in local
currencies. Consequently, our financial position as of September 30, 1999 and
our results of operations for the nine months ended September 30, 1999 were not
significantly impacted by fluctuations in the U.S. Dollar in relationship to
foreign currencies.
YEAR 2000
The Year 2000 problem is the result of computer programs, microprocessors
and embedded date reliant systems using two digits rather than four to define
the applicable year. If these programs are not corrected, such date sensitive
computer programs, microprocessors and embedded systems may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculation causing disruptions in operations.
In an effort to assess our Year 2000 state of readiness, during 1997 we
began performing a complete inventory assessment of all of our internal systems,
which we have divided into two categories, business essential, or mission
critical, and support systems, or non-mission critical. As part of our Year 2000
program and as part of our overall procurement plan, we have sought to ensure
that fixed assets acquired were Year 2000 compliant. At December 31, 1997, gross
property and equipment was $67.0 million compared to $770.1 million at September
30, 1999. As part of this process, we have inventoried and tested Year 2000
compliance of our mission critical systems and believe they are Year 2000
compliant. Our Nortel switches, a critical component of our network backbone,
are Year 2000 compliant. Our message processing and billing systems, which are
used to record and process millions of call detail records, and our transmission
equipment, which are our only mission critical systems, are also Year 2000
compliant. The majority of our non-mission critical systems are Year 2000
compliant. We anticipate our non-mission critical systems being Year 2000
compliant prior to December 31, 1999. The total estimated cost of ensuring our
preparation for Year 2000 is approximately $200,000, a portion of which has
already been incurred and expensed.
We continue to communicate formally with the key carriers and other vendors
on which our operations and infrastructure are dependent to determine the extent
to which we are susceptible to a failure resulting from such third parties'
inability to remediate their own Year 2000 problems. Accordingly, during the
procurement process, we have taken steps to ensure that our vendors, carriers,
and products purchased are Year 2000 compliant or are adequately addressing the
Year 2000 issues. We can provide no assurance that the carriers and other
vendors on which our operations and infrastructure rely are or will be Year 2000
compliant in a timely manner. Interruptions in the services provided to us by
these third parties could result in disruptions in our services. Depending upon
the extent and duration of any such disruptions and the specific services
affected, such disruptions could have a material adverse affect on our business,
financial condition and results of operations. As a contingency against any
possible disruptions in services provided by vendors, we have sought to
diversify our vendor base. We believe that the diversity of our vendor base is
sufficient to mitigate Year 2000 related disruptions in service to customers. In
addition, we believe that the fact we conduct business in, and derive revenue
from, multiple Western European countries helps to mitigate the potential impact
of Year 2000 related disruptions.
In addition, disruptions in the economy generally resulting from the Year
2000 issue could also have a material adverse affect on us. We could be subject
to litigation resulting from any disruption in our services. The amount of
potential liability or lost revenue which would result from these disruptions in
service could have a material adverse effect on our business, financial
condition and results of operations.
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EURO
On January 1, 1999, eleven of the fifteen member countries of the European
Union established irrevocable fixed conversion rates between their existing
sovereign currencies and a single currency called the Euro. The sovereign
currencies are scheduled to remain legal tender as denominations of the Euro
during a transition period from January 1, 1999 to January 1, 2002.
We have completed an internal analysis regarding business and systems
issues related to the Euro conversion and, as a result, made necessary
modifications to our business processes and software applications. We are now
able to conduct business in both Euro and sovereign currencies on a parallel
basis, as required by the European Union.
We believe that the Euro conversion has not and will not have a significant
impact on our business in Europe. The costs to convert all systems to be Euro
compliant did not have a significant impact on our results of operations.
INFLATION
We do not believe that inflation has had a significant effect on our
operations to date.
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PROSPECTIVE ACCOUNTING PRONOUNCEMENTS
SFAS NO. 133 and SFAS NO. 137
Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities," was issued
in June 1998. SFAS 133 standardizes the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, by requiring recognition of those instruments as assets and
liabilities and to measure them at fair value. In June 1999, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of SFAS No. 133", which
amends SFAS No. 133 to delay the date by which all companies must comply
with SFAS 133. Companies must comply with SFAS No. 133 for all fiscal years
beginning after June 15, 2000. We have not completed our analysis of the
impact of these statements on our financial statements.
FASB INTERPRETATION NO. 43
On July 1, 1999, the Company applied FASB Interpretation No. 43, "Real
Estate Sales - an interpretation of FASB Statement No. 66." This
interpretation clarified the standards for recognition of profit on all
real estate sales transactions including sales of real estate with property
improvements or integral equipment that cannot be removed and used
separately from the real estate without incurring significant costs.
Therefore, it may affect the way the Company accounts for revenues and
expenses associated with capacity sales.
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<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are subject to foreign currency exchange rate risk relating to receipts
from customers, payments to suppliers and interest and principal payments on the
outstanding Euro denominated senior notes and senior discount notes in foreign
currencies. We do not consider the market risk exposure relating to foreign
currency exchange to be material. See "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources - Foreign Currency."
We have financial instruments which are subject to interest rate risk,
principally short-term investments and debt obligations issued at a fixed rate.
Historically, we have not experienced material gains or losses due to interest
rate changes when selling short-term investments and typically holding these
securities until maturity. Based on current holdings of short-term investments,
our exposure to interest rate risk is not material. Fixed-rate debt obligations
issued by us are generally not callable until maturity.
21
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its Annual Meeting of Stockholders on September 14,
1999. Proposals presented for a stockholder vote were (I) the election
of two Class C Directors, (II) the approval of an amendment to the
Company's Amended Stock Incentive Plan, (III) the approval of an
amendment to the Company's Amended and Restated Certificate of
Incorporation and (IV) the ratification of the appointment of KPMG LLP
as independent auditors for the Company for fiscal year 1999.
Each of the incumbent Class C directors nominated by the Company were
elected with the following voting results:
VOTES FOR VOTES AGAINST
--------- -------------
Michael J. Mahoney 26,925,720 764,146
John G. Graham 26,900,716 789,150
An Amendment to the Company's Amended Stock Incentive Plan was approved
with the following voting results:
VOTES FOR VOTES AGAINST ABSTENTIONS
--------- ------------- -----------
12,084,819 10,407,158 171,144
An Amendment to the Company's Amended and Restated Certificate of
Incorporation, as amended, was approved with the following voting
results:
VOTES FOR VOTES AGAINST ABSTENTIONS
--------- ------------- -----------
17,291,651 10,382,767 15,488
The appointment of KPMG LLP as the Company's independent auditors for
the fiscal year 1999 was approved with the following voting results:
VOTES FOR VOTES AGAINST ABSTENTIONS
--------- ------------- -----------
27,601,600 77,754 10,512
22
<PAGE>
ITEM 5. OTHER INFORMATION.
None.
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 August 27,
1999, pursuant to Item 5 thereof, announcing the execution of an
Agreement and Plan of Merger to acquire Destia Communications, Inc.
23
<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: November 12, 1999
24
<PAGE>
EXHIBIT INDEX
Sequentially
NO. Description Numbered Page
- --- ----------- -------------
27 Financial Data Schedule
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information in thousands extracted from
the unaudited consolidated financial statements of the Company for the nine
months ended September 30, 1999 and is qualified in its entirety by reference to
such unaudited consolidated financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 434,936
<SECURITIES> 66,569
<RECEIVABLES> 67,008
<ALLOWANCES> 6,013
<INVENTORY> 0
<CURRENT-ASSETS> 620,834
<PP&E> 772,210
<DEPRECIATION> 56,727
<TOTAL-ASSETS> 1,594,401
<CURRENT-LIABILITIES> 336,520
<BONDS> 1,262,401
0
0
<COMMON> 326
<OTHER-SE> (33,045)
<TOTAL-LIABILITY-AND-EQUITY> 1,594,401
<SALES> 0
<TOTAL-REVENUES> 210,377
<CGS> 0
<TOTAL-COSTS> 162,858
<OTHER-EXPENSES> 102,419
<LOSS-PROVISION> 6,076
<INTEREST-EXPENSE> 75,931
<INCOME-PRETAX> (130,831)
<INCOME-TAX> 0
<INCOME-CONTINUING> (130,831)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (83,937)
<EPS-BASIC> (4.85)
<EPS-DILUTED> (4.85)
</TABLE>
