SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
OR
/_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission File Number: 000-21261
VIATEL, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3787366
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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. Yes /X/ No /_/
As of August 7, 2000, 50,483,201 shares of the registrant's common stock,
$.01 par value per share, were outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
VIATEL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ -------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 623,232 $ 373,044
Restricted cash equivalents 10,833 9,632
Restricted marketable securities 122,437 125,581
Trade accounts receivable, net of allowance
for doubtful accounts of $23,562
and $10,034, respectively 212,371 115,103
VAT receivables, net 47,600 37,867
Prepaid expenses and other current assets 44,594 16,789
---------------------- ---------------------
Total current assets 1,061,067 678,016
---------------------- ---------------------
Restricted marketable securities, non-current - 62,547
Property and equipment, net 1,321,388 884,328
Cash securing letters of credit for network construction 30,951 50,165
Intangible assets, net 979,350 1,011,659
Other assets 24,587 17,382
----------------------- ---------------------
Total assets $3,417,343 $2,704,097
====================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued telecommunications costs $ 91,282 $ 77,333
Accounts payable and other accrued expenses 296,597 161,136
Property and equipment purchases payable 139,274 87,810
Accrued interest 50,568 37,545
Current installments of notes payable 23,699 24,997
Current installments of obligations under capital leases 8,562 10,337
---------------------- ---------------------
Total current liabilities 609,982 399,158
---------------------- ---------------------
Long-term liabilities:
Long-term debt, excluding current installments 1,973,618 1,680,885
Notes payable and obligations under capital leases,
excluding current installments 83,489 86,663
---------------------- ---------------------
Total long-term liabilities 2,057,107 1,767,548
---------------------- ---------------------
Series B mandatorily redeemable (in 2015) cumulative convertible preferred stock,
$.01 par value: authorized 650,000 shares; issued and outstanding 325,000 and
0 shares, respectively 314,364 -
---------------------- ---------------------
Viatel-obligated mandatorily redeemable (in 2015) convertible preferred securities of
subsidiary grantor trust whose sole assets are junior subordinated
debentures of Viatel 180,000 -
---------------------- ---------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; authorized 1,350,000 shares; 0 shares
issued and outstanding - -
Common stock, $.01 par value; authorized 150,000,000 shares; issued and
outstanding 50,451,404 and 47,093,361 shares, respectively 504 471
Additional paid-in capital 1,117,762 1,066,964
Unearned compensation (29,566) (5,768)
Accumulated other comprehensive loss (88,424) (45,464)
Accumulated deficit (744,386) (478,812)
----------------------- ---------------------
Total stockholders' equity 255,890 537,391
----------------------- ---------------------
Total liabilities and stockholders' equity $3,417,343 $2,704,097
======================= =====================
See accompanying notes to consolidated financial statements.
</TABLE>
2
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
---------------------------------- ------------------------------------
2000 1999 2000 1999
--------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenue:
Communication services revenue $ 161,475 $ 47,849 $ 322,115 $96,243
Capacity sales 41,559 20,855 61,597 34,102
--------------- -------------- ---------------- ----------------
Total revenue 203,034 68,704 383,712 130,345
--------------- -------------- ---------------- ----------------
Operating expenses:
Cost of services and sales 141,916 52,559 272,078 103,607
Selling, general and administrative 75,625 21,090 137,053 39,853
Depreciation and amortization 73,398 11,978 140,064 21,582
Restructuring 3,359 - 3,930 -
--------------- -------------- ---------------- ----------------
Total operating expenses 294,298 85,627 553,125 165,042
--------------- -------------- ---------------- ----------------
Other income (expense):
Interest income 10,813 6,937 18,159 13,766
Interest expense (54,209) (35,498) (102,594) (61,665)
--------------- -------------- ---------------- ----------------
Net Loss (134,660) (45,484) (253,848) (82,596)
--------------- -------------- ---------------- ----------------
Dividends on convertible preferred securities (9,946) (164) (11,726) (1,341)
=============== ============== ================ ================
Net loss attributable to common stockholders $ (144,606) $ (45,648) $ (265,574) $ (83,937)
=============== ============== ================ ================
Net loss per common share attributable to common
stockholders, basic and diluted $ (2.87) $ (1.77) $ (5.39) $ (3.42)
=============== ============== ================ ================
Weighted average common shares outstanding,
basic and diluted 50,330 25,846 49,266 24,524
=============== ============== ================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
------------------------------------------
2000 1999
-------------------- --------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (253,848) $ (82,596)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 140,064 21,582
Accreted interest expense on long term debt 25,913 20,935
Provision for losses on accounts receivable 13,435 4,036
Earned stock compensation 5,819 108
Changes in operating assets and liabilities, net of effect of acquisitions (44,690) (18,996)
-------------------- --------------------
Net cash used in operating activities (113,307) (54,931)
-------------------- --------------------
Cash flows from investing activities:
Capital expenditures (372,686) (225,864)
Purchase of marketable securities (62,546) (219,725)
Proceeds from maturity of marketable securities 130,301 299,049
Acquisition, net of cash received of $23,638 in 2000 (109,552) (12,000)
Decrease/(increase) in cash securing letters of credit 19,214 (112,404)
for network construction
Issuance of notes receivable - (4,498)
-------------------- --------------------
Net cash used in investing activities (395,269) (275,442)
-------------------- --------------------
Cash flows from financing activities:
Proceeds from issuance of senior notes 281,241 365,471
Proceeds from issuance of convertible preferred securities 477,541 -
Deferred financing and registration costs (10,037) (12,880)
Proceeds from issuance of common stock 29,361 194,150
Payments under capital leases and notes payable (14,123) (3,856)
-------------------- --------------------
Net cash provided by financing activities 763,983 542,885
-------------------- --------------------
Effects of exchange rate changes on cash (4,018) (3,688)
-------------------- --------------------
Net increase in cash and cash equivalents 251,389 208,824
Cash and cash equivalents at beginning of period 382,676 339,822
-------------------- --------------------
Cash and cash equivalents at end of period $ 634,065 $ 548,646
==================== ====================
Supplemental disclosures of cash flow information:
Interest paid $ 67,327 $ 28,651
==================== ====================
Supplemental disclosures of non-cash investing and financing activities:
Assets acquired under capital lease obligations $ 4,126 $ 13,550
==================== ====================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE PERIODS
ENDED JUNE 30, 2000 AND JUNE 30, 1999 ARE UNAUDITED)
(1) DESCRIPTION OF BUSINESS
Viatel, Inc., together with its subsidiaries (collectively, the
"Company"), is an "All Distance, All Services(TM)" provider of
telecommunications services to individuals, corporations, Internet service
providers, applications service providers and other communications
carriers in Europe and North America. The Company is a licensed provider
of telecommunications services in ten Western European countries, Canada
and the United States. The Company owns and operates international
telecommunications networks and is also the owner, operator and builder of
a fiber optic network in Western Europe.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
The consolidated financial statements as of June 30, 2000 and for the
three and six month periods ended June 30, 2000 and 1999, 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 consolidated financial statements be read in conjunction with
the Company's annual consolidated financial statements. Certain
reclassifications have been made to the prior year's condensed
consolidated financial statements to conform to the current year's
presentation. Operating results for the three and six month periods ended
June 30, 2000 may not be indicative of the results that may be expected
for the full year.
(B) REVENUE AND COST OF SERVICES AND SALES
The Company records communication services revenue as earned at the time
services are provided. The related cost of communication services is
reported in the same period.
Revenue from capacity sales mainly represents indefeasible-rights-of-use
("IRUs") for sales of portions of the Company's network that qualify for
sales-type lease accounting. Transactions that do not meet the criteria
for sales-type lease accounting are accounted for as operating leases and
revenue is recognized over the term of the lease.
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 43, "Real Estate Sales, an Interpretation of FASB
Statement No. 66" ("FIN 43") which is applicable for all contracts entered
into after June 30, 1999. FIN 43 requires that a lease of property
improvements or integral equipment include a provision allowing title to
transfer to the lessee in order for that lease to be accounted for as a
sales-type lease.
The Company recognizes revenue in accordance with FIN 43 and the
Securities and Exchange Commission Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements". However, accounting
practices and guidance for sales of IRUs are evolving. Standard setting
bodies are currently reviewing a number of issues related to FIN 43 and
other related issues will probably be referred to these bodies. Changes in
the accounting treatment as a result of the foregoing could affect the way
that the Company recognizes revenue and costs associated with these
capacity sales in the future.
5
<PAGE>
(C) NEW PRONOUNCEMENT
In March 2000, FASB issued Interpretation No. 44 - "Accounting for Certain
Transactions Involving Stock Compensation, an Interpretation of APB
Opinion No. 25" ("FIN 44"). FIN 44 clarifies the application of APB No. 25
regarding (a) the definition of employee for purposes of applying APB No.
25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 does not address the application of the fair
value method of Statement No. 123, "Accounting for Stock-Based
Compensation". This interpretation is effective July 1, 2000, but certain
conclusions in this interpretation cover specific events that occur after
either December 15, 1998, or January 12, 2000. To the extent that this
interpretation covers events occurring during the period after December
15, 1998, or January 12, 2000, but before the effective date of July 1,
2000, the effects of applying this interpretation are recognized on a
prospective basis from July 1, 2000. The Company has not yet assessed the
impact of FIN 44.
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------------- ------------
<S> <C> <C>
Communications systems $1,074,060 $698,483
Construction in progress 279,204 210,671
Furniture, office and computer equipment and other 41,164 25,707
Software 17,815 13,481
Leasehold improvements 36,431 11,926
-------------- ------------
1,448,674 960,268
Less accumulated depreciation and amortization 127,286 75,940
-------------- ------------
$1,321,388 $884,328
=============== ===========
</TABLE>
At June 30, 2000, construction in progress primarily represents
construction of the Company's fiber optic network. For the three and six
month periods ended June 30, 2000, $6.5 million and $10.7 million,
respectively, of interest was capitalized compared to $2.3 million and
$4.6 million for the three and six month periods ended June 30, 1999,
respectively.
In connection with the Company's joint construction of the civil works
associated with a national communications network in Germany, the Company
was required to obtain a letter of credit in support of its obligations,
which expires during August 2000. The Company currently expects that it
will obtain an extension of this letter of credit. As of June 30, 2000,
the total amount outstanding relating to this letter of credit was
approximately $31.0 million (DM61.7 million) and was collateralized by
cash deposits.
On April 11, 2000, the Company executed a definitive agreement with Level
3 Communications and certain of its affiliates (collectively, "Level 3"),
under the terms of which the Company acquired a 25% ownership interest in
the trans-Atlantic fiber optic cable project being developed by Level 3.
As part of this agreement, the Company also obtained 128 STM-1s of
capacity on the Atlantic Crossing cable system operated by Global
Crossing.
6
<PAGE>
(4) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following as of (in
thousands) :
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------------------- ---------------------
<S> <C> <C>
Accounts payable $ 95,877 $ 78,677
Accrued expenses 200,720 82,459
--------------------- ---------------------
Total $296,597 $161,136
===================== =====================
</TABLE>
(5) LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt and Notes Payable consist of the following as of (in
thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
11.25% Senior Notes $400,000 $400,000
12.50% Senior Discount Notes, less discount
of $143,420 and $164,393, respectively 356,580 335,607
11.50% Senior Notes, less discount of
$3,296 and $3,486, respectively 266,160 265,986
11.50% Senior Notes 200,000 200,000
13.50% Senior Notes 157,620 158,300
11.50% Senior Notes (E150,000) 142,694 151,027
11.15% Senior Notes (E91,010) 86,577 91,633
12.75% Senior Notes (E300,000), (a) 285,388 -
12.40% Senior Discount Notes (E115,552),
less discount of $31,324 (E32,928)
and $38,011 (E37,752), respectively 78,599 78,332
============= ============
$1,973,618 $1,680,885
============= ============
</TABLE>
(a) On April 20, 2000, the Company completed a high yield offering of
E300 million ($281.2 million) principal amount of 12.75% senior Euro
notes due 2008 pursuant to a private placement transaction. In
connection therewith, the Company received net proceeds of
approximately $271.2 million. Interest on these notes is payable
semi-annually in cash on April 15 and October 15, commencing October
15, 2000. The notes are not redeemable prior to maturity. The
indenture pursuant to which the notes were issued contains covenants
virtually identical to those in the Company's existing indentures.
The Company has entered into a credit facility with NTFC, which provides
for borrowings to fund certain equipment acquisition costs and related
expenses. The facility provides for an aggregate commitment from NTFC of
$49.0 million. As of June 30, 2000, the aggregate amount due to NTFC was
$27.2 million. All of the equipment purchased with the proceeds of the
NTFC facility has been pledged as security to NTFC. The terms of the NTFC
facility required Destia Communications, Inc. ("Destia") to maintain
certain debt service coverage ratios, certain EBITDA thresholds (both as
defined in the NTFC facility), and minimum cash balances. As a result of
the Company's acquisition of Destia, NTFC had the right to require Destia
to repay all outstanding obligations under the NTFC facility within 90
days following the acquisition. NTFC has extended the date by which it may
exercise its right until September 8, 2000. Before September 8, 2000, the
Company will be required to either (i) obtain a further extension of the
consent date or (ii) prepay the outstanding amounts owed at a premium of
not more than 102% of the amount outstanding or (iii) negotiate a new
facility. The Company's intent is to negotiate a new facility with NTFC
and, as such, the Company continues to classify the NTFC borrowings as a
long-term liability classified as notes payable.
7
<PAGE>
(6) STOCK OPTION PLAN
Stock option activity for the six months ended June 30, 2000 under the
Company's various stock option plans is shown below:
<TABLE>
<CAPTION>
Number
Weighted Average of Shares
Exercise Price (in thousands)
------------------- -----------------
<S> <C> <C>
Outstanding at December 31, 1999 $13.33 5,741
Granted 48.56 2,855
Exercised 10.79 (2,721)
Forfeited 40.68 (106)
------------------- -----------------
Outstanding at June 30, 2000 $31.46 5,769
=================== =================
</TABLE>
As of June 30, 2000, approximately 1.0 million options were currently
exercisable under the Company's various stock option plans.
(7) COMPREHENSIVE LOSS
The Company's comprehensive loss is as follows (in thousands):
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
------------------------------- --------------------------------
2000 1999 2000 1999
------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
Net loss $(134,660) $(45,484) $(253,848) $(82,596)
Foreign currency translation adjustments (22,526) (12,379) (42,960) (21,215)
------------- -------------- ------------- ---------------
Comprehensive loss $(157,186) $(57,863) $(296,808) $(103,811)
============= ============== ============= ===============
</TABLE>
(8) SEGMENT AND GEOGRAPHIC DATA
While the Company's management monitors the 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 under retail, wholesale,
advanced services and capacity segments. The information below summarizes
revenue by type for the three and six month periods ended June 30 (in
thousands):
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
2000 1999 2000 1999
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Retail $ 90,003 $28,992 $189,857 $ 57,731
Wholesale 47,574 18,323 96,690 37,257
Advanced Services 23,898 534 35,568 1,255
Capacity 41,559 20,855 61,597 34,102
------------- -------------- ------------- --------------
Consolidated $203,034 $68,704 $383,712 $130,345
============= ============== ============= ==============
</TABLE>
The information below summarizes revenue by geographic area for the three
and six month periods ended June 30 (in thousands):
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
------------------------------- --------------------------------
2000 1999 2000 1999
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Western Europe $137,323 $54,109 $231,184 $97,358
North America 63,859 12,272 148,662 27,724
Other 1,852 2,323 3,866 5,263
-------------- ------------- -------------- --------------
Consolidated $203,034 $68,704 $383,712 $130,345
============== ============= ============== ==============
</TABLE>
8
<PAGE>
The information below summarizes long lived assets by geographic area as
of (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------------------- --------------------
<S> <C> <C>
Western Europe $1,504,758 $1,087,038
North America 741,881 762,198
Other 364 201
-------------------- --------------------
Consolidated $2,247,003 $1,849,437
==================== ====================
</TABLE>
(9) ACQUISITIONS
DESTIA COMMUNICATIONS, INC.
On December 8, 1999, the Company acquired Destia through a merger of
Destia with one of the Company's subsidiaries. Destia is a
facilities-based provider of domestic and international long distance
telecommunications services in Europe and North America. Its customer base
consists of residential customers, commercial customers, ethnic groups and
other telecommunications carriers. Destia offers a variety of retail
telecommunications services, including international and domestic long
distance, Internet access and wireless services. On February 13, 2000,
Destia changed its name to Viatel Communications, Inc.
In connection with the Company's integration plan, as of December 31,
1999, the Company recorded accruals related to the closing and termination
of Destia facilities and lease and other contract costs of $9.2 million
and employee termination costs relating to Destia employees of $2.2
million. Payments made during the six months ended June 30, 2000 against
these accruals totaled $8.5 million, of which $7.2 million related to
lease and other contract cancellation costs and $1.3 million related to
employee termination costs.
NEW COMMS (UK) LIMITED.
On February 29, 2000, the Company acquired all of the issued and
outstanding share capital of AT&T Corporation's UK subsidiary, New Comms
(UK) Limited ("Comms UK"). As a result of the transaction, Comms UK became
a wholly-owned subsidiary of the Company. Comms UK is a provider of voice
and data solutions to primarily enterprise level customers. Following the
acquisition, Comms UK changed its name to Viatel Global Communications
Limited.
The purchase price for Comms UK, including certain post closing
adjustments in connection with preliminary acquired working capital, was
$109.6 million, net of cash acquired of $23.6 million, and was comprised
of a $125.0 million cash payment at the time of closing, and estimated
transaction costs. The acquisition has been accounted for under the
purchase method of accounting. The purchase price has been preliminarily
allocated based on estimated fair values at the date of acquisition,
pending final determination of certain acquired balances. The preliminary
allocation has resulted in goodwill of $23.2 million, which is being
amortized on a straight-line basis over an estimated useful life of seven
years.
In connection with the Company's integration plan, as of June 30, 2000,
the Company recorded accruals of $30.0 million related to the closing and
termination of Comms UK facilities and lease and other contract costs.
The current allocation of the Comms UK purchase price is as follows (in
thousands):
Current assets, net of cash acquired of $23,638 $56,836
Property, equipment and leasehold improvements 131,340
Other non-current assets 16,715
Current liabilities (112,453)
Long-term liabilities (6,075)
-----------
Fair value of net assets acquired 86,363
Purchase price, net of cash acquired of $23,638 109,552
-----------
Goodwill $23,189
===========
The following pro forma financial information presents the combined
results of operations of Viatel, Destia, and Comms UK, as if the
acquisitions had occurred as of the beginning of 2000 and 1999, after
giving effect to certain adjustments, including amortization of goodwill,
depreciation expense, and interest income and expense. The pro forma
financial information does not necessarily reflect the results of
operations that would have occurred had Viatel, Destia, and Comms UK
constituted a single entity during such periods.
9
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
-------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
Revenue $203,034 $189,873 $403,330 $359,331
Net loss attributable to common
stockholders (144,606) (116,339) (274,667) (224,747)
Net loss per common share
attributable to common stockholders $(2.87) $(2.90) $(5.58) $(5.79)
</TABLE>
Comms UK had significant transactions and relationships with AT&T Corp.and
its affiliates. As a result of these relationships it is possible that the
terms of these transactions were not the same as those that would have
resulted from transactions among wholly unrelated parties.
(10) RESTRUCTURING
DESTIA RELATED RESTRUCTURING PLAN
During 1999, the Company recognized restructuring charges relating to the
streamlining of the Company's organizational structure and the strategic
repositioning of certain operations, primarily as a result of its merger
with Destia. These restructuring charges were composed primarily of
anticipated costs to terminate leases and other contract cancellation
costs as well as employee termination costs associated with workforce
reductions. As of June 30, 2000, approximately 190 employees have been
made redundant through the Company's initiatives.
As of June 30, 2000, the Company has $1.3 million of accruals relating to
the Destia acquisition. During 1999, a total of $3.9 million was accrued
for restructuring, consisting primarily of charges relating to employee
terminations and lease and other contract cancellation costs. Payments
made during the six months ended June 30, 2000 against the restructuring
accruals totaled $2.6 million, of which $0.8 million related to employee
terminations and $1.8 million related to lease and other contract
cancellation costs. The Company recorded restructuring expenses relating
to the Destia acquisition of $1.0 million and $1.6 million for the three
and six months ended June 30, 2000, respectively, primarily related to
employee termination costs. The Company anticipates that all restructuring
charges associated with the Destia acquisition will be recognized by
December 2000.
COMMS UK RELATED RESTRUCTURING PLAN
During the second quarter of 2000, the Company recognized $2.4 million in
restructuring charges relating to the streamlining of the Company's
organizational structure as a result of its acquisition of Comms UK. These
restructuring charges were composed primarily of anticipated costs to
terminate leases and other contract cancellation costs. The Company
anticipates that any additional charges associated with the Comms UK
acquisition will be recognized by June 2001.
(11) SERIES B MANDATORILY REDEEMABLE CUMULATIVE CONVERTIBLE PREFERRED STOCK
On March 9, 2000, the Company completed an offering of $325 million of
Series B cumulative convertible preferred stock for net proceeds to the
Company of $306.1 million. The Series B preferred stock accrues dividends
at an annual rate of 7.50% of the then-effective liquidation preference,
may be converted at the option of the holder at a conversion price of
$46.25 per share and is mandatorily redeemable in 2015. Dividends on the
Series B preferred stock accumulate until May 31, 2005. Thereafter
dividends, to the extent not paid in full in cash, shall accrue and shall
be added to the liquidation preference. For the three and six months
ended June 30, 2000, the Company recorded $6.9 million and $8.7 million,
respectively, in dividends on the Series B preferred stock. As part of
this financing, the Company also issued warrants to purchase 753,116
shares of the Company's common stock, 50% of which are exercisable for 5
years at a price of $75 per share, and 50% of which are exercisable for
7-1/2 years at a price of $100 per share. In addition, the Company issued
warrants to purchase 7,532 shares of its Series C preferred stock (each
share of which is convertible into 100 shares of the Company's common
stock), 50% of which are exercisable for 5 years at a price of $7,500 per
share and 50% of which are exercisable for 7-1/2 years at a price of
$10,000 per share.
10
<PAGE>
(12) VIATEL-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES
OF SUBSIDIARY GRANTOR TRUST WHOSE SOLE ASSETS ARE JUNIOR SUBORDINATED
DEBENTURES OF VIATEL
On April 12, 2000, a Delaware trust and statutory consolidated subsidiary
of the Company sold 3,600,000 shares of trust convertible preferred
securities, which are convertible at the holder's option into Viatel
common stock, to certain placement agents, and 111,340 shares of common
securities to the Company. The proceeds from the sale of the trust
convertible preferred securities were invested by the trust in $180.0
million aggregate principal amount of the Company's 7.75% convertible
junior subordinated debentures due 2015 (the "Debentures"). The Debentures
and the common securities represent the sole assets of the trust. The
Debentures mature on April 15, 2015, bear interest at the rate of 7.75%,
payable quarterly, and are redeemable by the Company beginning in April
2003 at 105.43% of the principal amount thereof.
Holders of the trust preferred securities are entitled to cumulative cash
distributions at an annual rate of 7.75% of the liquidation amount of $50
per security. For the three and six months ended June 30, 2000, the
Company recorded $3.0 million in accrued distributions relating to the
trust preferred securities. Each trust preferred security is convertible
into shares of the Company's common stock at the rate of 1.048 shares of
Company common stock per trust preferred security, subject to adjustment
in certain circumstances. The trust preferred securities will be redeemed
upon repayment of the Debentures and are callable by the Company at
105.43% of the liquidation amount beginning in April 2003.
The Company has guaranteed, on a subordinated basis, distributions and
other payments due on the preferred securities (the "Guarantee"). The
Guarantee, when taken together with the Company's obligations under the
Debentures, the indenture pursuant to which the Debentures were issued and
the Amended and Restated Declaration of Trust governing the subsidiary
trust, provides a full and unconditional guarantee of amounts due on the
trust preferred securities.
The Debentures and related trust investment in the common securities have
been eliminated in consolidation and the trust preferred securities are
reflected as outstanding in the accompanying consolidated financial
statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a rapidly growing provider of "All Distance, All Services (TM)"
integrated telecommunication services to individuals, corporations,
Internet service providers, applications service providers and other
communications carriers in Europe and North America. We operate one of
Europe's largest pan-European networks, with international gateways in New
York City and London, direct sales forces in 12 Western European cities
and New York City, and an indirect sales force in numerous locations in
Western Europe and North America. We have full public telecommunications
operator licenses in nine Western European countries, Canada and the
United States and interconnection agreements with the incumbent
telecommunications provider in each of these countries.
Historically, our revenues have been derived primarily from communication
services and the provision of telecommunications services in Europe and
more recently in North America. Communication services revenue is
comprised of Basic and Advanced Services. Basic Services can be provided
as both retail and carrier services. Our Basic Services revenue includes
revenue from switched and dedicated long distance, 800/FreePhone services,
conference calling, and enhanced fax services as well as prepaid,
postpaid, and debit calling cards. Basic Services revenue is primarily
generated from billed minutes of use. Advanced Services is comprised of
domestic and international private line services, Internet access, frame
relay, asynchronous transfer mode, Internet protocol services and managed
bandwidth. Advanced Services have been offered as a response to the
growing demand for such services from our customers and are anticipated to
continue to grow as a percentage of revenue. Communications services
revenue per billable minute excludes fixed monthly fees associated with
our other products and service offerings.
Capacity sales mainly represent indefeasible rights-of-use for sales of
portions of our network that qualify for sales-type lease accounting.
Transactions that do not meet the criteria for sales-type lease accounting
are accounted for as operating leases and revenue is recognized over the
term of the lease and is included in communication services revenue.
11
<PAGE>
Each revenue source has a different impact on our results of operations.
Revenue from capacity sales will continue to vary substantially from
period-to-period and will result in fluctuations in our operating results.
These sales substantially increase our gross profit (i.e., total revenue
less cost of services and sales) because our cost of communication
services as a percentage of communications service revenue is currently
higher than the cost of capacity sales as a percentage of capacity sales.
Due to the timing of capacity sales and the higher margin associated with
such sales, our gross profits and gross margin may also fluctuate
substantially in the future, in ways that will not necessarily reflect the
trends in our communication services business. We capitalize all of the
costs associated with designing, building, funding and placing each
portion of our constructed network into service.
In December 1999, we completed our acquisition of Destia and in February
2000, we completed our acquisition of Comms UK (the "Acquisitions"). As a
result, our June 30, 2000 consolidated financial statements include the
results of operations of Destia for the six months ended June 30, 2000 and
of Comms UK for the four months ended June 30, 2000.
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 revenues from
capacity sales, which have a substantially different impact on margins
than revenues from communications services.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- -----------------------------
2000 1999 2000 1999
-------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
Cost of services and sales 69.9% 76.5% 70.9% 79.5%
Selling, general and administrative 37.2% 30.7% 35.7% 30.6%
Depreciation and amortization 36.2% 17.4% 36.5% 16.6%
Restructuring 1.7% - 1.0% -
EBITDA loss (1) (7.1%) (7.2%) (6.6%) (10.1%)
Adjusted EBITDA income (2) 6.8% 4.2% 3.2% 0.1%
</TABLE>
-----------
(1) As used herein, "EBITDA" consists of earnings before interest,
income taxes, restructuring and impairment charges, 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.
(2) As used herein, "Adjusted EBITDA" is defined as "EBITDA" plus the
non-cash cost of capacity sold, non-cash stock related
compensation, and the cash portion of the change in deferred
revenue.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE THREE MONTHS ENDED JUNE
30, 1999
TOTAL REVENUE. Total revenue increased by 195.5% to $203.0 million for the
three months ended June 30, 2000 from $68.7 million for the three months
ended June 30, 1999. This growth was primarily attributable to a 237.5%
increase in communication services revenue (which includes revenue from
Basic and Advanced Services) to $161.5 million for the three months ended
June 30, 2000 from $47.8 million for the three months ended June 30, 1999.
Basic Services represented $137.6 million, or 85.2% of communication
services revenue, for the quarter ended June 30, 2000, compared to $47.3
million, or 98.9% of communication services revenue, for the quarter ended
June 30, 1999. Advanced Services grew to $23.9 million, or 14.8% of
communication services revenue, for the quarter ended June 30, 2000
compared to $0.5 million, or 1.1% of communication services revenue, for
the second quarter of 1999, and will become an increasingly larger
component of revenue. Capacity sales increased to $41.6 million, or 20.5%
of total revenue, for the three months ended June 30, 2000 from $20.9
million, or 30.4% of total revenue, for the three months ended June 30,
1999. Revenue growth continues to be generated primarily by growth from
European operations, capacity sales, and as a result of the Acquisitions.
12
<PAGE>
Communication services revenue from the sale of Basic Services to retail
customers represented $90.0 million, or 44.3% of total revenue, for the
three months ended June 30, 2000, compared to $29.0 million, or 42.2% of
total revenue, for the three months ended June 30, 1999. For the three
months ended June 30, 2000 as compared to the same period in 1999, our
Basic Services revenue derived from carrier services grew on an absolute
basis to $47.6 million from $18.3 million, but decreased on a percentage
basis to 23.4% of total revenue for the three months ended June 30, 2000
from 26.7% of total revenue for the three months ended June 30, 1999.
Billable minutes increased to 1.7 billion for the three months ended June
30, 2000 from 278.5 million for the three months ended June 30, 1999.
Although there was a substantial increase in billable minutes from the
three months ended June 30, 1999 to the three months ended June 30, 2000,
the effects of such growth were partially offset by a decline in revenue
per billable minute, which declined by 52.9% to $.08 from $.17, primarily
because of (1) a higher percentage of lower-priced intra-European and
national long distance traffic on our network and (2) reductions in prices
in response to price reductions by incumbent telecommunications operators
and other carriers in many of our markets.
COST OF SERVICES AND SALES. Cost of services and sales increased to $141.9
million for the three months ended June 30, 2000 from $52.6 million for
the three months ended June 30, 1999. As a percentage of revenue, however,
cost of services and sales decreased to 69.9% for the three months ended
June 30, 2000 from 76.5% for the three months ended June 30, 1999, due to
our continued migration from leased infrastructure to our own network,
higher capacity sales and as a result of the Acquisitions. The beneficial
effect associated with ongoing expansion of network infrastructure
ownership and of bringing traffic on-net, however, is somewhat delayed
because our leased line agreements require minimum notification to
terminate our obligations. Cost of services and sales for the three months
ended June 30, 2000 also includes the non-cash charges associated with
capacity sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $75.6 million for the three months
ended June 30, 2000 from $21.1 million for the three months ended June 30,
1999 and, as a percentage of total revenue, increased to 37.2% from 30.7%.
The increase was primarily the result of the expanded geographical reach
of our network, additional product offering capabilities and
reorganization expenses related to our strategic acquisitions. 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 49.0% for the
three months ended June 30, 2000 compared to 43.1% for the three months
ended June 30, 1999. As a percentage of total selling, general and
administrative expenses, advertising and promotion expenses were 5.1% for
the three months ended June 30, 2000 compared to 4.1% for the three months
ended June 30, 1999. Advertising and promotion expenses will continue to
be a significant component of selling, general and administrative expenses
for the foreseeable future.
EBITDA AND ADJUSTED EBITDA. EBITDA loss increased to $14.5 million for the
three months ended June 30, 2000 from $4.9 million for the three months
ended June 30, 1999. As a percentage of total revenue, EBITDA loss
decreased slightly to 7.1% for the three months ended June 30, 2000 from
7.2% for the three months ended June 30, 1999. Adjusted EBITDA increased
to $13.9 million for the three months ended June 30, 2000 from $2.9
million for the three months ended June 30, 1999. As a percentage of total
revenue, Adjusted EBITDA increased to 6.8% for the quarter ended June 30,
2000 from 4.2% for the quarter ended June 30, 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense,
which includes depreciation of our network, increased to $73.4 million for
the three months ended June 30, 2000 from $12.0 million for the three
months ended June 30, 1999. The increase was due primarily to the increase
in gross property and equipment to $1.4 billion at June 30, 2000 from
$626.5 million at June 30, 1999 and an increase of $36.1 million in
amortization of goodwill and other intangibles related to the
Acquisitions.
13
<PAGE>
The purchase price for Destia was $901.9 million and was allocated based
on estimated fair values at the date of acquisition, pending final
determination. This allocation has resulted in intangible assets and
goodwill of $131.0 million and $830.4 million, respectively, which are
being amortized on a straight-line basis over their estimated useful lives
which are four to seven years and seven years, respectively. The purchase
price for Comms UK was $109.6 million, net of cash acquired of $23.6
million, and was allocated based on estimated fair values at the date of
acquisition, pending final determination. This preliminary allocation has
resulted in goodwill of $23.2 million, which is being amortized on a
straight-line basis over its estimated useful life of seven years.
RESTRUCTURING. During 1999, we recognized restructuring charges relating
to the streamlining of our organizational structure and the strategic
repositioning of certain operations, primarily as a result of our merger
with Destia. These restructuring charges were composed primarily of
anticipated costs to terminate lease and certain other contract
cancellation costs, as well as employee termination costs associated with
workforce reductions.
As of June 30, 2000, we had $1.3 million of accruals relating to the
Destia acquisition. During 1999, a total of $3.9 million was accrued for
restructuring, consisting primarily of charges relating to employee
terminations and lease and other contract cancellation costs. Payments
made during the three months ended June 30, 2000 against the restructuring
accruals totaled $1.6 million, of which $0.6 million related to employee
terminations and $1.0 million related to lease and other contract
cancellation costs. We recorded restructuring expenses relating to the
Destia acquisition of $1.0 million for the three months ended June 30,
2000, primarily related to employee termination costs. We anticipate that
any additional restructuring charges associated with the Destia
acquisition will be recognized by December 2000.
In addition, as a result of our acquisition of Comms UK, during the second
quarter of 2000 we recognized $2.4 million in restructuring charges
relating to the streamlining of our organizational structure. These
restructuring charges were composed primarily of anticipated costs to
terminate leases and other contract cancellation costs. We anticipate that
any additional charges associated with the Comms UK acquisition will be
recognized by June 2001.
INTEREST. Interest expense increased to $54.2 million for the three months
ended June 30, 2000 from $35.5 million for the three months ended June 30,
1999, primarily as a result of increases in our outstanding indebtedness,
which includes notes and capital lease obligations, which increased to
$2.1 billion at June 30, 2000 from $1.3 billion at June 30, 1999. For the
three months ended June 30, 2000, we capitalized $6.5 million of interest
costs. Interest income increased to $10.8 million for the three months
ended June 30, 2000, from $6.9 million for the three months ended June 30,
1999, primarily as a result of the interim investment of the net proceeds
from our second quarter 2000 debt and convertible trust preferred
offerings.
DIVIDENDS. Dividends on convertible preferred securities increased to $9.9
million for the three months ended June 30, 2000, from $0.2 million for
the three months ended June 30, 1999, as a result of the $6.9 million in
accrued dividends relating to the March 9, 2000 offering of Series B
cumulative convertible preferred stock and the $3.0 million in accrued
distributions relating to the April 12, 2000 offering of trust convertible
securities. The $0.2 million recorded in the three months ended June 30,
1999, reflected accrued dividends on the Company's Series A redeemable
convertible preferred stock, which was mandatorily converted into shares
of our common stock on May 13, 1999.
14
<PAGE>
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
1999
TOTAL REVENUE. Total revenue increased by 194.4% to $383.7 million for the
six months ended June 30, 2000 from $130.3 million for the six months
ended June 30, 1999. This growth was primarily attributable to a 234.7%
increase in communication services revenue to $322.1 million for the six
months ended June 30, 2000 from $96.2 million for the six months ended
June 30, 1999. Basic Services represented $286.5 million, or 89.0% of
communication services revenue for the first half of 2000, compared to
$95.0 million, or 98.7% of communication services revenue, for the first
half of 1999. Advanced Services grew to $35.6 million, or 11.0%, of
communication services revenue, for the first six months of 2000 compared
to $1.3 million, or 1.3% of communication services revenue, for the first
six months of 1999, and will become an increasingly larger component of
total revenue. Capacity sales increased to $61.6 million, or 16.1% of
total revenue, for the six months ended June 30, 2000 from $34.1 million,
or 26.2% of total revenue, for the six months ended June 30, 1999. The
revenue growth was primarily the result of the same factors that
contributed to the growth during the three months ended June 30, 2000.
Communication services revenue from the sale of Basic Services to retail
customers represented $189.9 million, or 49.5% of total revenue, for the
six months ended June 30, 2000 compared to $57.7 million, or 44.3% of
total revenue, for the six months ended June 30, 1999. For the six months
ended June 30, 2000 as compared to the same period in 1999, our Basic
Services revenue derived from carrier services grew on an absolute basis
to $96.7 million from $37.3 million, but decreased on a percentage basis
to 25.2% of total revenue for the six months ended June 30, 2000 compared
to 28.6% of total revenue for the six months ended June 30, 1999.
Billable minutes increased to 3.1 billion for the six months ended June
30, 2000 from 549.3 million for the six months ended June 30, 1999.
Although there was a substantial increase in billable minutes from the
first half of 1999 to the first half of 2000, the effects of such growth
were partially offset by a decline in revenue per billable minute, which
declined by 47.1% to $.09 from $.17, primarily because of (1) a higher
percentage of lower-priced intra-European and national long distance
traffic on our network and (2) reductions in prices in response to price
reductions by incumbent telecommunications operators and other carriers in
many of our markets.
COST OF SERVICES AND SALES. Cost of services and sales increased to $272.1
million for the six months ended June 30, 2000 from $103.6 million for the
six months ended June 30, 1999. As a percentage of total revenue, however,
cost of services and sales decreased to 70.9% for the six months ended
June 30, 2000 from 79.5% for the six months ended June 30, 1999, due to
our continued migration from leased infrastructure to our own network,
higher capacity sales and as a result of the Acquisitions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $137.1 million for the first half of
2000 from $39.9 million for the first half of 1999 and, as a percentage of
total revenue, increased to 35.7% from 30.6%. The increase was primarily
attributable to the same factors associated with the increase during the
three months ended June 30, 2000. 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 48.1% for the six
months ended June 30, 2000 compared to 45.2% for the six months ended June
30, 1999. As a percentage of total selling, general and administrative
expenses, advertising and promotion expenses were 6.0%, for the six months
ended June 30, 2000 compared to 4.6% for the six months ended June 30,
1999.
EBITDA AND ADJUSTED EBITDA. EBITDA loss increased to $25.4 million for the
six months ended June 30, 2000 from $13.1 million for the six months ended
June 30, 1999. As a percentage of total revenue, EBITDA loss decreased to
6.6% for the first half of 2000 from 10.1% for the first half of 1999.
Adjusted EBITDA increased to $12.2 million for the six months ended June
30, 2000 from $0.2 million for the six months ended June 30, 1999. As a
percentage of total revenue, Adjusted EBITDA increased to 3.2% for the six
month period ended June 30, 2000 from 0.1% for the six month period ended
June 30, 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased to $140.1 million for the six months ended June 30, 2000 from
$21.6 million for the six months ended June 30, 1999. The increase was due
primarily to the increase in gross property and equipment to $1.4 billion
at June 30, 2000 from $626.5 million at June 30, 1999 and an increase of
$70.4 million in amortization of goodwill and other intangibles related to
the Acquisitions.
15
<PAGE>
RESTRUCTURING. As of June 30, 2000, we had $1.3 million of accruals
relating to the Destia acquisition. During 1999, a total of $3.9 million
was accrued for restructuring, consisting primarily of charges relating to
employee terminations and lease and other contract cancellation costs.
Payments made during the six months ended June 30, 2000 against the
restructuring accruals totaled $2.6 million, of which $0.8 million related
to employee terminations and $1.8 million related to lease and other
contract cancellation costs. We recorded restructuring expenses relating
to the Destia acquisition of $1.6 million for the six months ended June
30, 2000, primarily related to employee termination costs. We anticipate
that any additional restructuring charges associated with the Destia
acquisition plan will be recognized by December 2000.
INTEREST. Interest expense increased to $102.6 million for the six months
ended June 30, 2000 from $61.7 million for the six months ended June 30,
1999, primarily as a result of increases in our outstanding indebtedness,
consisting of notes and capital lease obligations, which increased to $2.1
billion at June 30, 2000 from $1.3 billion at June 30, 1999. For the six
months ended June 30, 2000, we capitalized approximately $10.7 million of
interest costs. Interest income increased to $18.2 million for the six
months ended June 30, 2000, from $13.8 million for the six months ended
June 30, 1999, primarily as a result of the interim investment of the net
proceeds from our debt and convertible preferred securities offerings.
DIVIDENDS. Dividends on convertible preferred securities increased to
$11.7 million for the six months ended June 30, 2000, from $1.3 million
for the six months ended June 30, 1999, as a result of the $8.7 million in
accrued dividends relating to the March 9, 2000 offering of Series B
cumulative convertible preferred stock and the $3.0 million in accrued
distributions relating to the April 12, 2000 offering of trust convertible
securities.
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 used
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 offerings and, to a
limited extent, vendor financing. As of June 30, 2000, we had aggregate
cash resources of $787.5 million, comprised of $654.2 million in cash,
cash equivalents and cash securing letters of credit for network
construction and $133.3 million in restricted cash equivalents and other
restricted marketable securities, which primarily secure interest payments
on our notes through April 2001. The following 2000 private and public
equity and debt financings have provided funds for our liquidity needs.
On February 1, 2000, we executed a securities purchase agreement pursuant
to which we agreed to sell, and affiliates of Hicks, Muse, Tate & Furst
and Chase Capital Partners committed to buy, $325 million in Series B
cumulative convertible preferred stock for net proceeds to us of $306.1
million. The transaction closed on March 9, 2000, following receipt of
Hart-Scott-Rodino Antitrust Improvements Act clearance. Following the
initial closing, affiliates of Chase Capital Partners sold a portion of
their Series B preferred stock to certain affiliates of The Blackstone
Group. The net proceeds of this private placement are being used for
network expansion, services development and general corporate purposes.
On April 12, 2000, Viatel Financing Trust I, a Delaware statutory trust
and consolidated subsidiary of ours, sold 3,600,000 shares of 7.75% trust
convertible preferred securities. The proceeds from this offering were
invested by the trust in $180.0 million aggregate principal amount of the
Company's 7.75% convertible junior subordinated debentures. In addition,
on April 20, 2000, we completed a high yield offering of E300.0 million
principal amount of 12.75% senior Euro notes due 2008. We will use the net
proceeds of $442.6 million from these two offerings to further develop and
enhance our network, to make selective acquisitions and investments and
for working capital and general corporate purposes.
Destia's credit facility with NTFC Capital Corporation, under which Destia
had borrowed approximately $27.2 million as of June 30, 2000, provides for
borrowings to fund certain equipment acquisition costs and related
expenses. All of the equipment purchased with the proceeds of the NTFC
note has been pledged to NTFC. The terms of the NTFC facility required
Destia to maintain certain debt service coverage ratios, certain EBITDA
thresholds, and minimum cash balances. As a result of the Company's
acquisition of Destia, NTFC had the right to require Destia to repay all
outstanding obligations under the NTFC facility within 90 days following
16
<PAGE>
the closing of the transaction. NTFC has extended the date by which it may
exercise its right until September 8, 2000. Before September 8, 2000, we
will be required to (i) obtain a further extension of the consent date
from NTFC, (ii) prepay the outstanding amounts owed at a premium of not
more than 102% of the amount outstanding or (iii) negotiate a new
facility. Our intent is to negotiate a new facility with NTFC and, as
such, we continue to classify the NTFC borrowings as a long-term
liability.
On February 29, 2000, we acquired all of the issued and outstanding share
capital of Comms UK. The purchase price, including certain post closing
adjustments in connection with all of the acquired working capital, was
$109.6 million, net of cash acquired of $23.6 million, and was comprised
of a $125.0 million cash payment at the time of closing, and estimated
transaction costs.
During the third quarter of 2000, we intend to file a universal shelf
registration statement that will enable us to issue, from time to time,
additional shares of our common stock, preferred stock or debt securities.
At this time, we have not determined the dollar amount of securities that
will be registered for future offerings. We have no current intention to
issue any securities pursuant to this shelf registration statement.
We have very substantial interest expense. Although we have restricted
cash available to make our interest payments on certain of our high yield
notes through April 15, 2001, thereafter we will be required to pay our
interest expense from unrestricted cash on hand and from future operating
income or borrowings. During the six months ended June 30, 2000, we had an
operating loss of $169.4 million.
We believe that the net proceeds from our 2000 offerings together with
cash and marketable securities on hand and future capacity sales will
provide sufficient funds for us to expand our business as planned and to
fund operating losses for the next 12 to 18 months. However, the amount of
our future capital requirements will depend on a number of factors,
including the success of our business, any acquisitions or investments we
make, the start-up dates of each additional segment of our network, the
dates on which we further expand our network, whether our network
build-out is on-time and on-budget, the types of services we offer,
staffing levels, and customer growth as well as other factors that are not
within our control, including competitive conditions, government
regulatory developments and capital costs. Depending on the factors listed
above, we may need more capital, we may be required to delay or abandon
some or all of our development and expansion plans, we may be required to
seek additional sources of financing earlier than currently anticipated or
we may be required to sell certain assets. If we are required to seek
additional financing, there can be no assurance that such financing will
be available on acceptable terms, or 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. For the six months
ended June 30, 2000, capital additions totaled $439.0 million and
consisted of capital expenditures of approximately $372.7 million, a net
increase of $51.5 million in property and equipment purchases payable,
$4.1 million of assets acquired under capital lease obligations and
capitalized interest of $10.7 million. We have also entered into certain
agreements associated with our network, purchase commitments for network
expansion and other items aggregating approximately $182.0 million as of
June 30, 2000.
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, we bill in U.S.
dollars. Debt service on certain of the notes issued by us is currently
payable in Euros. A substantial portion of our capital expenditures is and
will continue to be denominated in various European currencies, including
the Euro. Most of the European currencies in which we do business
converged on January 1, 1999, with the exception of the British Pound
Sterling.
17
<PAGE>
Significant portions of our assets are foreign-denominated and, as such,
are subject to fluctuations in value due to movements in foreign exchange
rates. 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, are 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. Our financial position as of June 30, 2000 and
our results of operations for the three and six months ended June 30, 2000
were not significantly affected by fluctuations in the U.S. Dollar in
relation to foreign currencies.
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.
Throughout most of 1999, and the six months ended June 30, 2000, we have
been able to conduct business in both the 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.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS NO. 133 AND SFAS NO. 137. Statement of Financial Accounting Standards
("SFAS") 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
SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of SFAS 133," which amends
SFAS 133 to delay the date by which all companies must comply with SFAS
133. In June 2000, the FASB issued Statement of Financial Accounting
Standards No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities, an Amendment of FASB Statement No. 133" which
intended to simplify the accounting for derivatives under SFAS 133 and is
effective upon adoption of SFAS 133. Companies must comply with SFAS 133
for all fiscal years beginning after June 15, 2000. The Company has not
yet assessed the impact of SFAS 133.
In March 2000, FASB Interpretation No. 44 - "Accounting for Certain
Transactions Involving Stock Compensation, an Interpretation of APB
Opinion No. 25" ("FIN 44") was issued. FIN 44 clarifies the application of
APB No. 25 regarding (a) the definition of EMPLOYEE for purposes of
applying APB No. 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of
various modifications to the terms of a previously fixed stock option or
award, and (d) the accounting for an exchange of stock compensation awards
in a business combination. FIN 44 does not address the application of the
fair value method of Statement No. 123, "Accounting for Stock-Based
Compensation". This interpretation is effective July 1, 2000, but certain
conclusions in this interpretation cover specific events that occur after
either December 15, 1998, or January 12, 2000. To the extent that this
interpretation covers events occurring during the period after December
15, 1998, or January 12, 2000, but before the effective date of July 1,
2000, the effects of applying this interpretation are recognized on a
prospective basis from July 1, 2000. The Company has not yet assessed the
impact of FIN 44.
18
<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 our 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.
19
<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.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS.
EXHIBIT NO. DESCRIPTION OF DOCUMENT
4.16 Amendment to Rights Agreement, dated as of
February 1, 2000, between Viatel, Inc. and The
Bank of New York, as Rights Agent.
10.34+++ Fiber Purchase Agreement, dated as of April 11,
2000, by and between Level 3 Landing Station,
Inc., Level 3 (Bermuda) Limited, Level 3
Communications Limited, and Viatel, Inc.
10.35+++ Capacity and Dark Fiber IRU Purchase Agreement,
dated as of April 11, 2000, by and between Level 3
Landing Station, Inc., Level 3 (Bermuda) Limited,
Level 3 Communications Limited, and Viatel, Inc.
27 Financial Data Schedule
----------------------------
+++ Confidential treatment requested as to certain portions of
these exhibits.
(B) REPORTS ON FORM 8-K.
A report on Form 8-K was filed by the Company on April 3, 2000,
pursuant to Item 5 thereof, announcing the execution of a memorandum
of understanding with Level 3 Communications under the terms of
which the Company agreed to acquire a 25% ownership interest in the
transatlantic fiber optic cable being developed by Level 3.
20
<PAGE>
A report on Form 8-K was filed by the Company on April 3, 2000,
pursuant to Item 7 thereof, in which the Company filed a financial
data schedule, audited financial statements of the Company, and
notes thereto, for the fiscal year ended December 31, 1999 and
unaudited pro forma combining financial information, and notes
thereto, for the year ended December 31, 1999 in connection with the
Company's acquisition of Destia Communications, Inc.
A report on Form 8-K was filed by the Company on April 7, 2000,
pursuant to Item 5 thereof, announcing that the Company was
intending to raise approximately E200 million through an offering of
its Senior Notes due 2008 pursuant to a private placement.
A report on Form 8-K was filed by the Company on April 7, 2000,
pursuant to Item 5 thereof, announcing that it had priced an
offering of $150 million of trust convertible preferred securities
being issued by Viatel Financing Trust I, a Delaware statutory trust
and consolidated subsidiary of the Company.
An amended report on Form 8-K/A was filed by the Company on May 12,
2000, pursuant to Item 7 thereof, in which the Company filed
required financial statements relating to its acquisition of Comms
UK (formerly AT&T Communications (UK) Limited).
21
<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
Chief Executive Officer
By: /s/ Allan L. Shaw
----------------------------------
Allan L. Shaw
Chief Financial Officer
Date: August 9, 2000
22
<PAGE>
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION OF DOCUMENT NUMBERED PAGE
4.16 Amendment to Rights Agreement, dated as of
February 1, 2000, between Viatel, Inc. and
The Bank of New York, as Rights Agent.
10.34+++ Fiber Purchase Agreement, dated as of April 11,
2000, by and between Level 3 Landing Station,
Inc., Level 3 (Bermuda) Limited, Level 3
Communications Limited, and Viatel, Inc.
10.35+++ Capacity and Dark Fiber IRU Purchase Agreement,
dated as of April 11, 2000, by and between Level
3 Landing Station, Inc., Level 3 (Bermuda) Limited,
Level 3 Communications Limited, and Viatel, Inc.
27 Financial Data Schedule
---------------------------
+++ Confidential treatment requested as to certain portions of these exhibits.
