SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q / A-1
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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
of incorporation or organization) (I.R.S. Employer Identification No.)
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 May 13, 1999, 23,227,013 shares of the registrant's Common Stock, $.01
par value, were outstanding.
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
VIATEL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except share data)
March 31, December 31,
1999 1998
ASSETS (Unaudited)
---------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $442,042 $ 329,511
Restricted cash equivalents 23,530 10,310
Restricted marketable securities, current 90,430 50,870
Marketable securities, current 56,713 171,771
Trade accounts receivable, net of allowance for
doubtful accounts of $2,966 and $3,093, respectively 47,107 28,517
Other receivables 14,463 13,404
Prepaid expenses 8,512 2,417
---------- -----------
Total current assets 682,797 606,800
---------- -----------
Restricted marketable securities, non-current 115,836 83,343
Property and equipment, net 409,909 266,256
Cash securing letters of credit for network
construction 121,239 -
Intangible assets, net 70,579 46,968
Other assets 11,630 5,744
----------- -----------
$1,411,990 $1,009,111
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accrued telecommunications costs $ 41,913 $26,518
Accounts payable and other accrued expenses 25,379 23,656
Property and equipment purchases payable 141,361 97,288
Accrued interest 27,288 12,240
Liability under joint construction agreement 9,631 9,523
Current installments of notes payable and
obligations under capital leases 10,008 8,918
--------- -----------
Total current liabilities 255,580 178,143
---------- -----------
Long-term liabilities:
Long term debt 1,256,196 896,503
Notes payable and obligations under capital
leases, excluding current installments 36,286 24,636
---------- -----------
Total long-term liabilities 1,292,482 921,139
Series A Redeemable Convertible Preferred Stock,
$.01 par value; Authorized 718,042 Shares;
issued and outstanding 472,791 and 461,258
shares, respectively 48,298 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
50,000,000 shares, issued and
outstanding 23,193,265 and 23,184,465 shares,
respectively 232 232
Additional paid-in capital 128,403 128,357
Accumulated other comprehensive loss (15,082) (6,246)
Accumulated deficit (297,923) (259,635)
---------- -----------
Total stockholders' deficiency (184,370) (137,292)
---------- -----------
$1,411,990 $1,009,111
=========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
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
March 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenue:
Communication service revenue $ 48,395 $ 21,239
Capacity sales 13,246 -
------------ ------------
Total revenue 61,641 21,239
------------ ------------
Operating expenses:
Cost of service and sales 51,048 19,105
Selling, general and administrative 18,763 8,955
Depreciation and amortization 9,603 2,911
------------ ------------
Total operating expenses 79,414 30,971
------------ ------------
Other income (expense):
Interest income 6,828 510
Interest expense (26,166) (3,781)
------------ ------------
Net loss (37,111) (13,003)
Dividend on redeemable convertible
preferred stock (1,177) -
------------ ------------
Net loss attributable to common shareholders $ (38,288) $ (13,003)
============ ============
Net loss per common share attributable to
common shareholders $ (1.65) $ (0.57)
============ ============
Weighted average common shares outstanding 23,186 22,783
============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
VIATEL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
For the Three Months
Ended
March 31,
-----------------------
1999 1998
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(37,111) $ (13,003)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 9,603 2,911
Accreted interest expense on long term debt 10,330 3,447
Provision for losses on accounts receivable 1,600 754
Earned compensation - 16
Changes in assets and liabilities:
Increase in accounts receivable (18,936) (2,732)
Increase in accrued interest expense on Senior Notes 15,049 -
Increase in prepaid expenses and other receivables (8,855) (1,248)
(Increase)decrease in other assets and intangible
assets (947) 555
Increase(decrease) in accrued telecommunication
costs, accounts payable and other accrued
expenses 7,689 (1,471)
---------- -----------
Net cash used in operating activities (21,578) (10,771)
---------- -----------
Cash flows from investing activities:
Purchase of property, equipment and software (101,691) (2,716)
Payment for business acquired, net of cash acquired - (5,000)
Purchase of marketable securities (194,058) (3,510)
Cash securing letters of credit (121,239) -
Issuance of notes receivable (4,390) -
Proceeds from maturity of marketable securities 220,954 27,681
---------- -----------
Net cash (used in) provided by investing
activities (200,424) 16,455
---------- -----------
Cash flows from financing activities:
Proceeds from issuance of senior notes 365,471 -
Deferred financing costs (12,880) -
Proceeds from issuance of Common Stock 46 421
Repayment of notes payable and bank credit line (682) (577)
Payments under capital leases (300) (53)
---------- -----------
Net cash provided by (used in) financing
activities 351,655 (209)
---------- -----------
Effects of exchange rate changes on cash (3,902) (109)
---------- -----------
Net increase in cash and cash equivalents 125,751 5,366
Cash and cash equivalents at beginning of period 339,821 21,096
========== ===========
Cash and cash equivalents at end of period $ 465,572 $ 26,462
========== ===========
Supplemental disclosures of cash flow information:
Interest paid $ 231 $ 334
========== ===========
Assets acquired under capital lease obligations $ 13,550 -
========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Information as of March 31, 1999 and for the periods
ended March 31, 1999 and 1998 is unaudited)
(1) DESCRIPTION OF BUSINESS
Viatel Inc. and subsidiaries (collectively, the "Company") is a global
integrated services provider of high quality, competitively priced, long
distance communication and data services to end users, carriers and
resellers. The Company operates one of Europe's largest pan-European
networks with points of presence in 45 cities, direct sales forces in twelve
Western European cities and an indirect sales force in more than 180
locations in Western Europe. The Company is currently constructing a series
of 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 March 31, 1999 and for the three
month periods ended March 31, 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' financial
statements to conform to the current year's presentation. Operating results
for the three months ended March 31, 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.
Revenues from the sale of network capacity are recognized in the period that
the rights and obligations of ownership transfer to the purchaser.
Cost of IRU 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 Network.
NEW PRONOUNCEMENTS
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, during the three months ended March 31, 1999. 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 material effect on our consolidated financial statements.
(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.
5
<PAGE>
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
March 31, 1999.
The following is a summary of the amortized cost, which approximates fair
value, of marketable securities held to maturity at March 31, 1999 (in
thousands):
U.S. corporate debt securities $34,043
German corporate debt securities 22,670
------------
Total $56,713
============
The following is a summary of the amortized cost, which approximates fair
value, of restricted securities held to maturity at March 31, 1999 (in
thousands):
U.S. Treasury obligations $148,859
German government obligations 57,407
------------
Total $206,266
============
The amortized cost, which approximates fair value, of restricted securities
held to maturity at March 31, 1999 are shown below (in thousands):
Due within one year $ 90,430
Due after one through two years 115,836
------------
Total $ 206,266
============
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>
<CAPTION>
March 31, December 31,
1999 1998
------------- -------------
<S> <C> <C>
Communication system $326,511 $ 96,193
Construction in progress 89,067 172,630
Furniture, equipment and other 17,742 16,450
Leasehold improvements 6,695 6,651
------------- -------------
440,015 291,924
Less accumulated depreciation and
amortization 30,106 25,668
============= =============
$409,909 $266,256
============= =============
</TABLE>
At March 31, 1999, construction in progress primarily represents
construction of the Circe Network. For the three month period ended March
31, 1999, $2.3 million interest was capitalized. No interest was capitalized
for the three months ended March 31, 1998.
6
<PAGE>
(5) INTANGIBLE ASSETS
Intangible assets consist of the following as of (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------- -------------
<S> <C> <C>
Deferred financing and registration
fees $44,427 $31,547
Licenses, trademarks, and servicemarks 9,464 10,031
Goodwill 20,270 8,744
Purchased software 3,096 1,859
Other 140 206
------------- -------------
77,397 52,387
Less accumulated amortization 6,818 5,419
------------- -------------
$70,579 $46,968
============= =============
</TABLE>
The Company recognized its obligation to pay contingent consideration for
its 1998 acquisition of Flat Rate 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
On April 8, 1998, the Company completed an offering of units (the "Units
Offering") consisting of senior notes or senior discount notes due 2008 and
shares of 10% Series A Redeemable Convertible Preferred Stock due 2010
("Series A Preferred"), $.01 par value per share, of the Company and units
consisting of senior notes or senior discount notes due 2008 and
subordinated convertible debentures due 2011 (the "Subordinated Debentures")
through which it raised approximately $889.6 million of gross proceeds
($856.6 million of net proceeds). The Company utilized $118.9 million of the
proceeds from the Units Offering to retire its 15% Senior Discount Notes due
2005 resulting in an extraordinary loss of $28.3 million. 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 first six interest payments on the U.S. dollar
denominated senior notes and approximately $30.6 million of German
government obligations which were pledged as security for the first six
interest payments on the Deutsche Mark denominated senior notes issued in
the Units Offering. The senior discount notes accrete through April 15, 2003
and interest becomes payable in cash in semi-annual installments thereafter.
The interest on the senior notes is payable in semi-annual installments. The
Series A Preferred and the Subordinated Debentures require quarterly
payments which are paid in additional securities, cash or any combination
thereof through April 15, 2003 and payable in cash thereafter. The Series A
Preferred and the Subordinated Debentures are mandatorily convertible in the
event the closing price of the Company's common stock exceeds certain
predetermined annual price targets. On May 13, 1999, the conditions for
mandatory conversion were met for both the Series A Preferred and the
Subordinated Debentures. The Series A Preferred and Subordinated Debentures
conversion rates are $13.20 and DM24.473, at the then applicable exchange
rate, respectively.
On September 30, 1998, the Company consummated an offer to exchange senior
notes and senior discount notes due 2008 which have been registered under
the Securities Act of 1933, as amended, for outstanding notes of each such
series which were not registered under the Securities Act of 1933, as
amended.
On March 19, 1999 the Company completed a high yield offering through which
it raised approximately $365.5 million of gross proceeds. A portion of the
proceeds from this offering were used to purchase securities which were
pledged as security for the first four interest payments on notes issued.
<PAGE>
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.
7
<PAGE>
The indenture pursuant to which the Subordinated Debentures were issued
also required that the Company offer to repurchase the debentures at 101%
of the principal amount in the event of a change of control.
Long term debt consists of the following as of (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------- -------------
<S> <C> <C>
11.25% Senior Notes $400,000 $400,000
11.15% Senior Notes (E91,010) 98,389 106,015
11.50% Senior Notes 200,000 -
11.50% Senior Notes (E150,000) 162,162 -
12.50% Senior Discount Notes, less discount 306,336 297,284
of $193,664
12.40% Senior Discount Notes, (E115,552), 76,828 80,355
less discount of $48,093 (E44,486)
10% Subordinated convertible debentures 12,481 12,849
(E11,545) ------------- -------------
$1,256,196 $896,503
============= =============
</TABLE>
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 March 31, 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
The Amended Stock Incentive Plan (the "Stock Incentive Plan") provides for
the issuance of up to a maximum of 4,166,666 shares of the Company's Common
Stock.
Stock option activity for the three months ended March 31, 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 22.88 573
Exercised 5.27 (9)
------- -------
Outstanding at March 31, 1999 $ 10.22 3,158
======= =======
</TABLE>
As of March 31, 1999, 950,471 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
March 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net loss $(37,111) $(13,003)
Foreign currency translation (8,836) (517)
adjustment =========== ===========
Comprehensive loss $(45,947) $(13,520)
=========== ===========
</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 months ended March 31, 1999 and 1998, respectively (in thousands):
<TABLE>
<CAPTION>
March 31,
1999 1998
------- -------
<S> <C> <C>
Wholesale................................. $21,061 $9,477
Retail.................................... 27,334 11,762
Capacity.................................. 13,246 -
------- -------
Consolidated.............................. $61,641 $21,239
======= =======
</TABLE>
The information below summarizes revenue by geographic area for the three
months ended March 31, 1999 and 1998, respectively (in thousands):
<TABLE>
<CAPTION>
March 31,
1999 1998
------- -------
<S> <C> <C>
Western Europe.............................. $41,449 $11,228
North America............................... 17,252 5,707
Latin America............................... 2,897 3,694
Asia/Pacific Rim and other.................. 43 610
------- -------
Consolidated................................ $61,641 $21,239
======= =======
</TABLE>
The information below summarizes long lived assets by geographic area as of
March 31, 1999 and December 31, 1998, respectively (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- -----------
<S> <C> <C>
Western Europe............................. $381,712 $237,443
North America.............................. 98,558 75,492
Latin America.............................. 218 289
----------- -----------
Consolidated............................... $480,488 $313,224
=========== ===========
</TABLE>
(10) SUBSEQUENT EVENT - CONVERSION
On May 13, 1999, the Company's Series A preferred stock and its
subordinated debentures converted into shares of the Company's common
stock. The conversion was based upon maintenance of the Company's stock
price above a certain per share price for a specified time period. The
Preferred Stock and the Subordinated Debentures converted at a conversion
price equal to $13.20 and DM24.473, at the then applicable exchange rate,
respectively. Accordingly, the Company will issue approximately 4.6 million
shares of common stock and will pay cash for any fractional shares due upon
conversion, which is deemed to be immaterial.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 maintain direct sales forces in twelve
Western European cities and an indirect sales force in more than 180 locations
throughout Western Europe.
To capitalize on the opportunities presented by deregulation of the
telecommunication industry in Western Europe, we established an early presence
and acquired licenses, interconnection, and infrastructure. Today, we hold
licenses in Belgium, France, Germany, The Netherlands, Italy and the United
Kingdom and interconnection agreements with each incumbent telecommunications
operator in these countries. We also have licenses in Spain and Switzerland and
expect to obtain interconnection in these countries.
We currently operate one of Europe's largest pan-European networks, with
points of presence in 45 cities. We believe that control of network
infrastructure is critical to becoming a high quality, low cost provider of
communications services. We also believe that network ownership will enable us
to better manage service offerings. Accordingly, we are in the process of
migrating from a network comprised of international and domestic leased
infrastructure to a network primarily of owned infrastructure.
As part of our strategy to own or control key elements of our network, we
completed an offering of senior notes in March 1999 (the "High Yield Offering")
through which we raised approximately $365.5 million of gross proceeds. The
proceeds of the High Yield Offering along with proceeds from a previous
offering, which raised approximately $889.6 million of gross proceeds, are being
used to complete and construct our five interconnected state-of-the-art fiber
optic rings which, when completed, will link over 40 cities and six countries
which include the United Kingdom, France, Belgium, The Netherlands, Switzerland,
and Germany (the "Circe Network"). The Circe Network, when completed, will be
one of the largest cross-border fiber optic networks in the largest
telecommunications market in Western Europe. This five-ring system is expected
to encompass approximately 8,700 route kilometers.
THE CIRCE NETWORK
The Circe Network is a series of state-of-the-art, high quality, high
capacity, self-healing rings, utilizing advanced synchronous digital hierarchy,
the current international standard for digital transmission, and dense wave
division multiplexing technology.
As planned, the Circe Network will be comprised of interlocking,
bi-directional rings, encompassing approximately 8,700 route kilometers of fiber
optic cable. The first phase of the Circe Network, consisting of approximately
1,850 route kilometers was completed in March 1999 and connects, among other
cities, London, Paris, Amiens, Brussels, Antwerp, Rotterdam, and Amsterdam.
Construction activity has also commenced on a second ring which is expected to
be placed into service during the third quarter of 1999 and will connect Paris,
Nancy, Strasbourg, Frankfurt, Koln, Dusseldorf, and Amsterdam. Construction on a
third ring which will connect Essen, Hamburg, Berlin, Dresden, Bremen, Leipzig,
Nurnberg, Munich, Stuttgart, Frankfurt and Koln has also begun and is expected
to be available during the first quarter of 2000. We anticipate that the fourth
and fifth phases of the Circe Network will extend into southern France and
Switzerland and will be completed during the second quarter of 2000.
We sell capacity on the Circe 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". 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.
Revenue from operating leases of private line circuits will be included in
communication services revenue and 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 circuits is included in
property and equipment and is being charged to depreciation and amortization
over its useful life. The sale of capacity on the Circe Network will vary
substantially from period to period and may result
10
<PAGE>
in fluctuations in our operating results. During the first quarter of 1999 we
began selling capacity on the Circe Network. These sales substantially increase
our gross profits (i.e., total revenue less cost of services and sale) and our
gross margin (i.e., gross profits divided by total revenues). As a result, our
gross profits and gross margins will also fluctuate substantially, in ways that
will not necessarily reflect the trends in our communications services business.
In addition, we expect to trade capacity on the Circe Network for capacity
on other cable systems. These trades of capacity may be considered to be
non-monetary exchanges and may not have a material effect on our statement of
operations. We will continue to incur selling, general and administrative
expenses with respect to the Circe Network, which will not be capitalized and
will affect our results of our operations, particularly while the Network is
being designed, built and placed into service, and will continue to incur
additional operating and maintenance expense until the 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 and will incur increases in
interest expense thereafter.
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 total revenue. Our total 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>
For the Three Months
EndedMarch 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Total revenue 100.0% 100.0%
Cost of services and sales 82.8% 90.0%
Selling, general and 30.4% 42.2%
administrative expenses
Depreciation and amortization 15.6% 13.7%
EBITDA loss (1) 13.3% 32.1%
</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 MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED MARCH
31, 1998
<PAGE>
TOTAL REVENUE. Revenue is derived from communication service and capacity
sales. Total revenue increased by 190.2% to $61.6 million for the three months
ended March 31, 1999 from $21.2 million for the three months ended March 31,
1998. Within this growth was a 127.9% increase in communication services revenue
to $48.4 million on 270.8 million billable minutes for first quarter of 1999
from $21.2 million on 52.4 million billable minutes for first quarter of 1998.
Capacity sales were $13.2 million for the first quarter of 1999. We had no
capacity sales during the first quarter of 1998, because the Circe Network did
not exist. Revenue growth for the first quarter of 1999 was generated primarily
by growth from European end user revenues and capacity sales.
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<PAGE>
A substantial increase in billable minutes from the first quarter of 1998 to
the first quarter of 1999 was partially offset by a very substantial decline in
revenue per billable minute, as revenue per billable minute declined by 53.8% to
$.18 in the first quarter of 1999 from $.39 in the first 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.
Communication services revenue per billable minute from the sale of services
to retail customers, which represented 44.3% of total revenue for the three
months ended March 31, 1999, compared to 55.2% for the three months ended March
31, 1998, decreased 72.5% to $.14 in the first quarter of 1999 from $.51 in the
first quarter of 1998. Communication services revenue per billable minute from
the sale of services to carriers and other resellers remained constant at $.29
in the first quarter of 1999 and in the first quarter of 1998.
During the first quarter of 1999 as compared to the first quarter of 1998,
we increased our carrier business (through which we provide switched minutes,
private lines and ports to carriers, Internet Service Providers ("ISPs") and
other resellers) on an absolute basis. However, our carrier business has
declined as a percentage of communications service revenue, because our retail
services grew at a faster rate. The carrier business represented approximately
34.2% of total revenue and approximately 27.1% of billable minutes for the three
months ended March 31, 1999 as compared to approximately 44.6% of total revenue
and approximately 56.2% of billable minutes for the three months ended March 31,
1998.
COST OF SERVICES AND SALES. Cost of services and sales increased to $51.0
million in the first quarter of 1999 from $19.1 million in the first quarter of
1998. As a percentage of total revenue, however, cost of services and sales
decreased to approximately 82.8% from approximately 90.0% for the three months
ended March 31, 1999 and 1998, respectively. Cost of services and sales for the
three months ended March 31, 1999 includes costs associated with the sale of
capacity on the network. These costs did not occur in the first quarter of 1998.
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. Our gross margin increased, as a result of capacity sales
to 17.2% for the three months ended March 31, 1999 as compared to 10.0% for the
three months ended March 31, 1998.
Cost of services and sales continued to increase in the three months ended
March 31, 1999 in part because of the relatively high cost of leased
infrastructure and the increase in minutes. These costs are expected to decrease
as a percentage of revenue as we migrate from leased infrastructure to the Circe
Network and other owned capacity. The effect of bringing traffic "on-net" will
be somewhat delayed, because our leased line agreements require minimum
notification to terminate our obligations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $18.8 million in the three months ended
March 31, 1999 from $9.0 million in the three months ended March 31, 1998 and,
as a percentage of total revenue, decreased to approximately 30.4% in the three
months ended March 31, 1999 from approximately 42.2% in 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 seventeen different 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 47.5% and 52.3% for the three months ended March 31, 1999 and
1998, respectively. Advertising and promotion expenses, as a percentage of total
selling, general and administrative expenses, were approximately 5.1% and 1.1%
for the three months ended March 31, 1999 and 1998, respectively.
EBITDA LOSS. EBITDA loss increased to $8.2 million for the three months
ended March 31, 1999 from $6.8 million for the three months ended March 31,
1998. As a percentage of total revenue, EBITDA loss decreased to approximately
13.3% in the first quarter of 1999 from approximately 32.1% in the first quarter
of 1998. We expect gross margin to improve as we migrate traffic from leased
lines to our own network.
<PAGE>
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense, which
includes depreciation of the network, increased to approximately $9.6 million in
the three months ended March 31, 1999 from approximately $2.9 million in the
three months ended March 31, 1998. The increase was due primarily to the $367.8
million
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<PAGE>
increase in gross property and equipment from $72.2 million at March 31, 1998 to
$440.0 at March 31, 1999. Depreciation expense will increase substantially as
each additional ring of the Circe Network becomes operational.
INTEREST. Interest expense increased from approximately $3.8 million in the
three months ended March 31, 1998 to approximately $26.2 million in the three
months ended March 31, 1999, primarily as a result of our aggregate debt, which
includes notes and capital lease obligations, increasing from $104.2 million at
March 31, 1998 to $1.3 billion at March 31, 1999. During the three months ended
March 31, 1999, we capitalized $2.3 million of interest costs. Interest income
increased from approximately $510,000 in the three months ended March 31, 1998
to approximately $6.8 million in the three months ended March 31, 1999 primarily
as a result of the interim investment of the net proceeds from our 1998 high
yield offering.
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 March 31, 1999, we had $620.0 million of cash, cash
equivalents, cash securing letters of credit for network construction and
marketable securities and $229.8 million of restricted cash equivalents and
other restricted marketable securities, which secure interest payments on our
notes through April 2001.
On March 19, 1999, we completed a high yield offering through which we
raised approximately $365.5 million of gross 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 $889.6 million of gross proceeds ($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.
We believe that the net proceeds from this offering and the 1999 high yield
offering, 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 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 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 at
all.
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 the
three months ended March 31, 1999, we had capital additions of approximately
$161.6 million, which consisted of capital expenditures of approximately $101.7
million, a net increase of $44.1 million in property and equipment purchases
payable, $13.6 million of assets acquired under capital lease obligations and
capitalized interest of $2.3 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 $225.0 million at March 31,
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.
<PAGE>
Based upon certain key operating performance targets which were met during
the period ended March 31, 1999, we recognized our obligation to pay contingent
consideration for our 1998 Flat Rate acquisition.
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<PAGE>
On May 13, 1999, our Series A preferred stock and our subordinated
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
debentures converted at a conversion price equal to $13.20 and DM24.473,
respectively, at the then applicable exchange rate. Accordingly, we issued
approximately 4.6 million shares of our Common Stock and will pay cash for any
fractional shares due upon conversion.
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.
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
been derived from communications services revenue that was billed in local
currencies. Consequently, our financial position as of March 31, 1999 and our
results of operations for the three months ended March 31, 1999 were not
significantly impacted by fluctuations in the U.S. Dollar in relation 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 $440.0 million at March 31,
1999, an increase of 556.7 percent in gross property and equipment. As part of
this process, we have inventoried, tested, and ensured Year 2000 compliance of
our mission critical systems. The inventory and testing of these mission
critical systems is complete. The backbone of our communications network is
primarily composed of Nortel switches which 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 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 during the third quarter of 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.
<PAGE>
We have initiated formal communications 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.
14
<PAGE>
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 cannot be reasonably estimated at this time.
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 strategy 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 upon
operations to date.
ACCOUNTING PRONOUNCEMENTS
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. While scheduled to be
effective for us in the year 2000, there is a proposal to delay the
implementation of the statement for one year. We have not completed our
analysis of the impact of this statement on our financial statements.
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, senior discount notes and
subordinated convertible debentures in foreign currencies. We do not consider
the market risk exposure relating to foreign currency exchange to be material.
See "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.
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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.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS.
+*10.22 Project Services Agreement between Viatel, Inc. and Bechtel Limited,
dated as of January 11, 1999.
+*10.23 Development Agreement by and among Vicame Infrastructure Development
GmbH, Viatel German Asset GmbH, Carrier 1 Fiber Network GmbH & Co.
oHG, Metromedia Fiber Network GmbH, Viatel Inc. and Metromedia Fiber
Network, Inc., dated as of February 19, 1999.
+27 Financial Data Schedule
- --------------------------------------------
+ Filed previously.
* Confidential treatment granted as to certain portions.
(B) REPORTS ON FORM 8-K.
A report on Form 8-K was filed by the Company on March 12, 1999
pursuant to Item 5 announcing that the Company has priced a $365
million offering of debt securities consisting of $200 million of
U.S. denominated 11.50% Senior Notes Due 2009 and $165 million of
Euro denominated 11.50% Senior Notes Due 2009.
A report on Form 8-K was filed by the Company on March 18, 1999
pursuant to Item 5 to release its most current financial
information by filing it with the Securities and Exchange
Commission.
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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: August 18, 1999
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EXHIBIT INDEX
NO. DESCRIPTION
+*10.22 Project Services Agreement between Viatel, Inc. and Bechtel Limited,
dated as of January 11, 1999.
+*10.23 Development Agreement by and among Vicame Infrastructure Development
GmbH, Viatel German Asset GmbH, Carrier 1 Fiber Network GmbH & Co.
oHG, Metromedia Fiber Network GmbH, Viatel Inc. and Metromedia Fiber
Network, Inc., dated as of February 19, 1999.
+27 Financial Data Schedule
- --------------------------------------------
+ Filed previously.
* Confidential treatment granted as to certain portions.
