SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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 November 9, 2000, 50,494,793 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>
September 30, December 31,
2000 1999
---------------------- ---------------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 464,431 $ 373,044
Restricted cash equivalents 4,530 9,632
Restricted marketable securities 82,760 125,581
Trade accounts receivable, net of allowance for doubtful accounts of
$36,465 and $10,034, respectively 217,424 115,103
VAT receivables, net 51,991 37,867
Prepaid expenses and other current assets 36,126 16,789
---------------------- ---------------------
Total current assets 857,262 678,016
---------------------- ---------------------
Restricted marketable securities, non-current - 62,547
Property and equipment, net 1,336,353 884,328
Cash securing letters of credit for network construction 27,888 50,165
Intangible assets, net 965,560 1,011,659
Other assets 34,873 17,382
---------------------- ---------------------
Total assets $ 3,221,936 $2,704,097
====================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued telecommunications costs $ 102,872 $ 77,333
Accounts payable and other accrued expenses 307,209 161,136
Property and equipment purchases payable 132,458 87,810
Accrued interest 49,113 37,545
Current installments of notes payable 21,177 24,997
Current installments of obligations under capital leases 6,843 10,337
---------------------- ---------------------
Total current liabilities 619,672 399,158
---------------------- ---------------------
Long-term liabilities:
Long-term debt, excluding current installments 1,941,738 1,680,885
Notes payable and obligations under capital leases, excluding current
installments 93,730 86,663
---------------------- ---------------------
Total long-term liabilities 2,035,468 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 321,383 -
---------------------- ---------------------
Viatel-obligated mandatorily redeemable (in 2015) convertible preferred
securities of subsidiary grantor trust whose sole assets are junior
subordinated debentures of Viatel 180,000 -
---------------------- ---------------------
Stockholders' equity:
Preferred stock, $.01 par value; authorized 1,350,000 shares; 0 shares
issued and outstanding - -
Common stock, $.01 par value; authorized 300,000,000 shares; issued and
outstanding 50,486,074 and 47,093,361 shares, respectively 505 471
Additional paid-in capital 1,118,206 1,066,964
Unearned compensation (25,986) (5,768)
Accumulated other comprehensive loss (126,986) (45,464)
Accumulated deficit (900,326) (478,812)
---------------------- ---------------------
Total stockholders' equity 65,413 537,391
---------------------- ---------------------
Total liabilities and stockholders' equity $ 3,221,936 $2,704,097
====================== =====================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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 Nine Months Ended
September 30, September 30,
---------------------------------- ------------------------------------
2000 1999 2000 1999
--------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenue:
Communication services revenue $ 159,163 $ 54,960 $ 481,278 $ 151,204
Capacity sales 41,386 25,072 102,983 59,173
--------------- -------------- ---------------- ----------------
Total revenue 200,549 80,032 584,261 210,377
--------------- -------------- ---------------- ----------------
Operating expenses:
Cost of services and sales 144,225 59,250 416,303 162,858
Selling, general and administrative 77,996 23,527 215,049 63,380
Depreciation and amortization 75,746 17,458 215,810 39,039
Restructuring 1,168 - 5,098 -
--------------- -------------- ---------------- ----------------
Total operating expenses 299,135 100,235 852,260 265,277
--------------- -------------- ---------------- ----------------
Other income (expense):
Interest income 8,243 7,648 26,402 21,413
Interest expense (55,095) (35,681) (157,689) (97,344)
--------------- -------------- ---------------- ----------------
Net Loss (145,438) (48,236) (399,286) (130,831)
Dividends on convertible preferred securities (10,507) - (22,233) (1,341)
--------------- -------------- ---------------- ----------------
Net loss attributable to common stockholders $(155,945) $ (48,236) $ (421,519) $(132,172)
=============== ============== ================ ================
Net loss per common share attributable to common
stockholders, basic and diluted $ (3.09) $ (1.48) $ (8.48) $ (4.85)
=============== ============== ================ ================
Weighted average common shares outstanding,
basic and diluted 50,454 32,608 49,693 27,250
=============== ============== ================ ================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
------------------------------------------
2000 1999
-------------------- --------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (399,286) $ (130,831)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 215,810 39,039
Accreted interest expense on long term debt 38,924 28,449
Provision for losses on accounts receivable 22,261 6,076
Earned stock compensation 9,659 436
Changes in operating assets and liabilities, net of effect of acquisitions (84,366) (8,182)
-------------------- --------------------
Net cash used in operating activities (196,998) (65,013)
-------------------- --------------------
Cash flows from investing activities:
Capital expenditures (464,388) (372,305)
Purchase of marketable securities (62,149) (224,210)
Proceeds from maturity of marketable securities 167,723 322,425
Acquisitions, net of cash received of $23,638 in 2000 (109,552) (12,000)
Decrease/(increase) in cash securing letters of credit for network
construction 19,214 (79,537)
Issuance of notes receivable - (7,711)
-------------------- --------------------
Net cash used in investing activities (449,152) (373,338)
-------------------- --------------------
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) (12,887)
Proceeds from issuance of common stock 29,966 194,241
Payments under capital leases and notes payable (22,271) (7,299)
-------------------- --------------------
Net cash provided by financing activities 756,440 539,526
-------------------- --------------------
Effects of exchange rate changes on cash (24,005) (613)
-------------------- --------------------
Net increase in cash and cash equivalents 86,285 100,562
Cash and cash equivalents at beginning of period 382,676 339,821
-------------------- --------------------
Cash and cash equivalents at end of period $ 468,961 $ 440,383
==================== ====================
Supplemental disclosures of cash flow information:
Interest paid $ 117,196 $ 81,084
==================== ====================
Supplemental disclosures of non-cash investing and financing activities:
Assets acquired under capital lease obligations $ 20,144 $ 13,550
==================== ====================
Conversion of preferred stock and convertible debentures $ - $ 60,791
==================== ====================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE PERIODS ENDED
SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999)
(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. Due to the different nature of these
customers, commencing with the third quarter of 2000 the Company's
services began being marketed and sold through two separate business
units: Wholesale/Consumer Voice and Broadband/Enterprise, which units are
organized to service and support these distinct customer segments. The
Company is a licensed provider of telecommunications services in nine
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 September 30, 2000 and for the
three and nine month periods ended September 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 (the
"SEC"). 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 audited annual consolidated financial
statements. Certain reclassifications have been made to the prior year's
unaudited consolidated financial statements to conform to the current
year's presentation. Operating results for the three and nine month
periods ended September 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"). 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 SEC 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 was 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 required to be
recognized on a prospective basis from July 1, 2000. The Company has
adopted FIN 44 on its interim consolidated financial statements for the
three months ended September 30, 2000. The adoption of FIN 44 had no
impact on the Company's consolidated financial position, results of
operations or cash flows.
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------------------- -----------------------
<S> <C> <C>
Communications systems $1,034,786 $698,483
Construction in progress 337,573 210,671
Furniture, office and computer equipment and other 30,543 25,707
Software 15,189 13,481
Leasehold improvements 33,719 11,926
----------------------- -----------------------
1,451,810 960,268
Less accumulated depreciation and amortization 115,457 75,940
----------------------- -----------------------
$1,336,353 $884,328
======================= =======================
</TABLE>
At September 30, 2000, construction in progress primarily represents
construction of the Company's fiber optic network. For the three and nine
month periods ended September 30, 2000, $6.4 million and $17.1 million,
respectively, of interest was capitalized compared to $2.4 million and
$7.1 million for the three and nine month periods ended September 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 February 2001. As of September 30, 2000, the total
amount outstanding relating to this letter of credit was $27.9 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.
(4) ACCOUNTS PAYABLE AND OTHER ACCRUED EXPENSES
Accounts payable and other accrued expenses consist of the following as of
(in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------------------ ---------------------
<S> <C> <C>
Accounts payable $ 120,236 $ 78,677
Other accrued expenses 186,973 82,459
------------------------ ---------------------
Total $ 307,209 $ 161,136
======================== =====================
</TABLE>
6
<PAGE>
(5) LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt and Notes Payable consist of the following as of (in
thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------------------ ---------------------
<S> <C> <C>
11.25% Senior Notes $ 400,000 $ 400,000
12.50% Senior Discount Notes, less discount of $132,560 and
$164,393, respectively 367,440 335,607
11.50% Senior Notes, less discount of $3,202 and $3,486,
respectively 266,254 265,986
11.50% Senior Notes 200,000 200,000
13.50% Senior Notes 157,600 158,300
11.50% Senior Notes ((EURO)150,000) 131,868 151,027
11.15% Senior Notes ((EURO)91,010) 80,009 91,633
12.75% Senior Notes ((EURO)300,000), (a) 263,736 -
12.40% Senior Discount Notes ((EURO)115,552), less discount of
$26,753 ((EURO)30,432) and $38,011 ((EURO)37,752), 74,831 78,332
respectively ----------------------- ---------------------
$1,941,738 $1,680,885
======================== =====================
</TABLE>
-----------
(a) On April 20, 2000, the Company completed a high yield offering of
(EURO)300 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. 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.
Destia Communications, Inc. ("Destia") has a credit facility with NTFC
Capital Corporation ("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 September 30,
2000, the aggregate amount borrowed under the facility was $25.9 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 require
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 has the
right to require Destia, which is now a subsidiary of the Company, 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 this right until December 31, 2000. Before December 31, 2000, the
Company will be required to either (i) obtain a further extension of the
consent date, (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 long-term portion of the NTFC
borrowings as a long-term liability classified as notes payable.
(6) STOCK OPTION PLAN
Stock option activity for the nine months ended September 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 41.42 3,592
Exercised 10.77 (2,742)
Forfeited 40.96 (117)
------------------- ------------------
Outstanding at September 30, 2000 $29.50 6,474
=================== ==================
</TABLE>
7
<PAGE>
As of September 30, 2000, approximately 1.0 million options were currently
exercisable.
(7) COMPREHENSIVE LOSS
The Company's comprehensive loss is as follows (in thousands):
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------------- --------------------------------
2000 1999 2000 1999
------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
Net loss $(145,438) $(48,236) $ $(130,831)
(399,286)
Foreign currency translation adjustments (38,562) 2,493 (81,522) (18,722)
------------- -------------- ------------- ---------------
Comprehensive loss $(184,000) $(45,743) $ (480,808) $(149,553)
============= ============== ============= ===============
</TABLE>
(8) 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, the Company recorded
accruals related to the closing and termination of Destia facilities and
lease and other contract costs of $17.5 million and employee termination
costs relating to Destia employees of $2.2 million. Payments made during
the nine months ended September 30, 2000 against these accruals totaled
$14.8 million, of which $13.1 million related to lease and other contract
cancellation costs and $1.7 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.
In connection with the Company's integration plan, the Company recorded
accruals of $30.3 million related to the closing and termination of Comms
UK facilities and lease and other contract costs. Payments made during the
nine months ended September 30, 2000 against these accruals totaled $2.7
million.
The following pro forma financial information presents the combined
results of operations (in thousands, except for per share data) 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.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
-------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
Revenue $200,549 $210,069 $603,879 $563,231
Net loss attributable to common
stockholders (155,945) (115,398) (430,628) (340,945)
Net loss per common share
attributable to common stockholders $ (3.09) $ (2.46) $ (8.67) $ (8.21)
</TABLE>
8
<PAGE>
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.
(9) SEGMENT AND GEOGRAPHIC DATA
As a result of the integration of our acquisitions, commencing with the
third quarter 2000 the Company's management is monitoring its operations
under two business segments: Wholesale/Consumer Voice and
Broadband/Enterprise. These business segments, which were acquired
following publication of the Company's 1999 annual results, were set up to
market, sell, service and support different classes of customers. Prior
period results have been reclassified to conform to the current period's
presentation. Segment data reflects the acquisition of Destia, included in
the Wholesale/Consumer Voice segment for the three and nine months ended
September 30, 2000, and also the acquisition of Comms UK, included in the
Broadband/Enterprise segment from February 29, 2000, the date of
acquisition.
The Company markets and sells its products and services through its
Wholesale/Consumer Voice and Broadband/Enterprise segments. The
information below summarizes revenue and EBITDA by segment for the three
and nine month periods ended September 30 (in thousands):
<TABLE>
<CAPTION>
For the Three Months Ended
September 30, 2000 September 30, 1999
--------------------------------------------- --------------------------------------------
Wholesale/ Broadband/ Total Wholesale/ Broadband/ Total
Consumer Voice Enterprise Consumer Voice Enterprise
--------------- --------------- ------------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $123,352 $ 77,197 $ 200,549 $45,570 $34,462 $80,032
EBITDA (1) $(16,934) $ (4,738) $ (21,672) $(3,927) $ 1,182 $(2,745)
For the Nine Months Ended
September 30, 2000 September 30, 1999
--------------------------------------------- --------------------------------------------
Wholesale/ Broadband/ Total Wholesale/ Broadband/ Total
Consumer Voice Enterprise Consumer Voice Enterprise
--------------- --------------- ------------- --------------- -------------- -------------
Revenue $385,600 $198,661 $ 584,261 $123,744 $86,633 $210,377
EBITDA (1) $(37,539) $ (9,552) $ (47,091) $(13,927) $(1,934) $(15,861)
</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.
The information below summarizes total assets by segment as of September
30 (in thousands):
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
-------------------------------------------------------- ------------------------------------------------------
Wholesale/ Broadband/ Corporate Total Wholesale/ Broadband/ Corporate Total
Consumer Enterprise Consumer Enterprise
Voice Voice
--------------- ------------ ------------- ------------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$1,200,079 $1,442,248 $579,609 $3,221,936 $1,298,349 $784,779 $620,969 $2,704,097
</TABLE>
9
<PAGE>
The information below summarizes revenue by geographic area for the three
and nine month periods ended September 30 (in thousands):
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------------- --------------------------------
2000 1999 2000 1999
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Western Europe $128,516 $56,803 $359,700 $152,010
North America 70,253 21,057 218,917 50,939
Other 1,780 2,172 5,644 7,428
-------------- ------------- -------------- --------------
Consolidated $200,549 $80,032 $584,261 $210,377
============== ============= ============== ==============
</TABLE>
The information below summarizes long lived assets by geographic area as
of (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------------- --------------------
<S> <C> <C>
Western Europe $1,510,250 $1,087,038
North America 739,219 762,198
Other 364 201
-------------------- --------------------
Consolidated $2,249,833 $1,849,437
==================== ====================
</TABLE>
(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 September 30, 2000, approximately 240 employees have
been made redundant through the Company's initiatives.
As of September 30, 2000, the Company had $0.7 million of remaining
accruals relating to the Destia-related restructuring. The Company has, in
total, accrued $4.7 million for such restructuring, consisting primarily
of charges relating to employee terminations and lease and other contract
cancellation costs. Payments made during the nine months ended September
30, 2000 against the restructuring accruals totaled $4.0 million, of which
$1.1 million related to employee terminations and $2.9 million related to
lease and other contract cancellation costs. The Company recorded
restructuring expenses relating to the Destia acquisition of $1.2 million
and $2.7 million for the three and nine months ended September 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. As of September
30, 2000, the Company had $1.9 million of remaining accruals relating to
the Comms UK restructuring. Payments made during the nine months ended
September 30, 2000 against the restructuring accruals totaled $0.5
million. The Company anticipates that all restructuring 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
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$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 nine months
ended September 30, 2000, the Company recorded $7.0 million and $15.7
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.
(12) VIATEL-OBLIGATED MANDATORILY REDEEMABLE (IN 2015) CONVERTIBLE PREFERRED
SECURITIES OF SUBSIDIARY GRANTOR TRUST WHOSE SOLE ASSETS ARE JUNIOR
SUBORDINATED DEBENTURES OF VIATEL
On April 12, 2000, a Delaware trust and a 100%-owned statutory
consolidated subsidiary of Viatel, Inc. 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 nine months ended September 30, 2000, the
Company recorded $3.5 million and $6.5 million, respectively, 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. No other subsidiary of Viatel has guaranteed
such securities. One of Viatel's subsidiaries, formerly named Destia
Communications, Inc., is party to an indenture pursuant to which its
13.50% Senior Notes due 2007 were issued, which contains covenants that
currently prohibit Viatel from receiving dividends or borrowing monies
from that subsidiary. (See 13.50% Senior Notes Indenture, which was filed
as Exhibit 4.5 to Destia Communications, Inc.'s (formerly Econophone)
registration statement on Form S-4, Registration No. 333-33117, filed on
August 7, 1997).
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.
(13) STOCKHOLDERS' EQUITY
At the Company's 2000 Annual Meeting of Stockholders held in September,
2000, the stockholders approved an increase in the company's capital stock
from 152 million to 302 million shares. This increase reflected an
increase in the available shares of common stock from 150 million to 300
million.
(14) SUBSEQUENT EVENTS
LEASE FACILITIES
On October 20, 2000, Viatel U.K. Limited, a wholly owned subsidiary of the
Company, obtained a (EURO)170.6 million lease facility with Nortel
Networks PLC. Viatel U.K. Limited plans to use the funds primarily for
success-based capital expenditures that support its network expansion and
broaden its advanced services offerings. Specifically, Viatel U.K. Limited
intends to purchase Nortel Networks' OPTera kit, enabling it to offer 2.5
Gbps wavelengths over its trans-Atlantic and Pan-European Network,
optronics to light its metropolitan networks, and servers to provide
Internet access services.
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On October 27, 2000, Viatel U.K. Limited also secured a $50 million lease
facility from Cisco Systems Capital. Viatel U.K. Limited plans to use the
funds primarily for success-based capital expenditures that support its
network expansion and broaden its advanced services offerings.
Specifically, Viatel U.K. Limited intends to lease, purchase and license
certain Cisco Systems networking hardware and software products and
services for use in connection with the Company's Pan-European Network,
including the configuration of the Network for the provision of Internet
access services.
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.
As a result of the integration of the Destia and Comms UK acquisitions
(the "Acquisitions"), commencing with the third quarter of 2000 our
management is monitoring and measuring our operations under two business
segements: Wholesale/Consumer Voice and Broadband/Enterprise. These
business segments are organized to market, sell, service and support
different classes of customers. Prior period presentations have been
reclassified to conform to the current period's presentation.
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. These services are marketed and
sold through our Wholesale/Consumer Voice segment and our
Broadband/Enterprise segment. These respective segments are organized to
service and support different classes of customers. 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 are
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 IRUs 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.
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 communication services 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. As a result, our September
30, 2000 consolidated financial statements include the results of
operations of Destia for the nine months ended September 30, 2000 and of
Comms UK for the seven months ended September 30, 2000.
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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 communication services.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- -----------------------------
2000 1999 2000 1999
-------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
Cost of services and sales 71.9% 74.0% 71.3% 77.4%
Selling, general and administrative 38.9% 29.4% 36.8% 30.1%
Depreciation and amortization 37.8% 21.8% 36.9% 18.6%
Restructuring 0.6% - 0.9% -
EBITDA loss (1) (10.8)% (3.4)% (8.1)% (7.5)%
Adjusted EBITDA (2) 3.3% 4.8% 3.2% 1.9%
</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 SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999
TOTAL REVENUE. Total revenue increased by 150.6% to $200.5 million for the
three months ended September 30, 2000 from $80.0 million for the three
months ended September 30, 1999. This growth was primarily attributable to
a 189.6% increase in communication services revenue (which includes
revenue from Basic and Advanced Services) to $159.2 million for the three
months ended September 30, 2000 from $55.0 million for the three months
ended September 30, 1999. Basic Services represented $134.5 million, or
84.5% of communication services revenue, for the quarter ended September
30, 2000, compared to $53.1 million, or 96.6% of communication services
revenue, for the quarter ended September 30, 1999. Advanced Services grew
to $24.7 million, or 15.5% of communication services revenue, for the
quarter ended September 30, 2000 compared to $1.9 million, or 3.4% of
communication services revenue, for the third quarter of 1999, and will
continue to become an increasingly larger component of revenue. Capacity
sales increased to $41.3 million, or 20.6% of total revenue, for the three
months ended September 30, 2000 from $25.0 million, or 31.3% of total
revenue, for the three months ended September 30, 1999. Revenue growth
continues to be generated primarily by growth from European operations,
capacity sales, and as a result of the Acquisitions.
Wholesale/Consumer Voice segment revenue increased by 170.7% to $123.4
million for the three months ended September 30, 2000 from $45.6 million
for the three months ended September 30, 1999. This growth was primarily
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attributable to our acquisition of Destia. Broadband/Enterprise segment
revenue increased by 124.0% to $77.2 million for the three months ended
September 30, 2000 from $34.5 million for the three months ended September
30, 1999. This growth was primarily attributable to our $16.3 million
increase in capacity sales and the acquisition of Comms UK.
Communication services revenue from the sale of Basic Services to retail
customers represented $82.9 million, or 41.3% of total revenue, for the
three months ended September 30, 2000, compared to $24.1 million, or 30.1%
of total revenue, for the three months ended September 30, 1999. For the
three months ended September 30, 2000 as compared to the same period in
1999, our Basic Services revenue derived from carrier services grew on an
absolute basis to $51.6 million from $29.0 million, but decreased on a
percentage basis to 25.7% of total revenue for the three months ended
September 30, 2000 from 36.3% of total revenue for the three months ended
September 30, 1999.
Billable minutes increased to 1.7 billion for the three months ended
September 30, 2000 from 360.2 million for the three months ended September
30, 1999. Although there was a substantial increase in billable minutes
from the three months ended September 30, 1999 to the three months ended
September 30, 2000, the effects of such growth were partially offset by a
decline in revenue per billable minute, which declined by 46.7% to $.08
from $.15 primarily because of (1) a higher percentage of lower-priced
intra-European and national long distance traffic on our network and (2)
reductionsin 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 $144.2
million for the three months ended September 30, 2000 from $59.3 million
for the three months ended September 30, 1999. As a percentage of revenue,
however, cost of services and sales decreased to 71.9% for the three
months ended September 30, 2000 from 74.0% for the three months ended
September 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 September 30, 2000 also
includes the non-cash charges associated with capacity sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $78.0 million for the three months
ended September 30, 2000 from $23.5 million for the three months ended
September 30, 1999 and, as a percentage of total revenue, increased to
38.9% from 29.4%. The increase was primarily the result of the Company's
increased focus on the Broadband/Enterprise segment, resulting in
continued investments in its sales force, operations, branding and product
development. Reorganization expenses related to the Acquisitions also
contributed to the increase. 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 50.6% for the three months ended
September 30, 2000 compared to 45.6% for the three months ended September
30, 1999. As a percentage of total selling, general and administrative
expenses, advertising and promotion expenses were 7.3% for the three
months ended September 30, 2000 compared to 11.0% for the three months
ended September 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 $21.7 million for the
three months ended September 30, 2000 from $2.7 million for the three
months ended September 30, 1999. As a percentage of total revenue, EBITDA
loss increased to 10.8% for the three months ended September 30, 2000 from
3.4% for the three months ended September 30, 1999. Adjusted EBITDA
increased to $6.6 million for the three months ended September 30, 2000
from $3.8 million for the three months ended September 30, 1999. As a
percentage of total revenue, Adjusted EBITDA decreased to 3.3% for the
quarter ended September 30, 2000 from 4.8% for the quarter ended September
30, 1999.
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DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense,
which includes depreciation of our network, increased to $75.7 million for
the three months ended September 30, 2000 from $17.5 million for the three
months ended September 30, 1999. The increase was due primarily to the
increase in gross property and equipment to $1.5 billion at September 30,
2000 from $770.1 million at September 30, 1999 and an increase of $36.3
million in amortization of goodwill and other intangibles related to the
Acquisitions.
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 $854.5 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 $23.8 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 September 30, 2000, we had $0.7 million of accruals relating to the
Destia restructuring. We have, in total, accrued $4.7 million for the
Destia restructuring, consisting primarily of charges relating to employee
terminations and lease and other contract cancellation costs. Payments
made during the three months ended September 30, 2000 against the
restructuring accruals totaled $1.3 million, of which $0.4 million related
to employee terminations and $0.9 million related to lease and other
contract cancellation costs. We recorded restructuring expenses relating
to the Destia acquisition of $1.2 million for the three months ended
September 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. As of September
30, 2000, we had $1.9 million of remaining accruals relating to the Comms
UK restructuring. Payments made during the three months ending September
30, 2000 against the restructuring accruals totaled $0.5 million. We
anticipate that any additional charges associated with the Comms UK
acquisition will be recognized by June 2001.
INTEREST. Interest expense increased to $55.1 million for the three months
ended September 30, 2000 from $35.7 million for the three months ended
September 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 September 30, 2000 from $1.3 billion at
September 30, 1999. For the three months ended September 30, 2000, we
capitalized $6.4 million of interest costs. Interest income increased to
$8.2 million for the three months ended September 30, 2000, from $7.6
million for the three months ended September 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
$10.5 million for the three months ended September 30, 2000 as a result of
the $7.0 million in accrued dividends relating to the March 9, 2000
offering of Series B cumulative convertible preferred stock and the $3.5
million in accrued distributions relating to the April 12, 2000 offering
of trust convertible securities. No dividends were recorded for the same
period in 1999.
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NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED
JUNE 30, 1999
TOTAL REVENUE. Total revenue increased by 177.7% to $584.3 million for the
nine months ended September 30, 2000 from $210.4 million for the nine
months ended September 30, 1999. This growth was primarily attributable to
a 218.3% increase in communication services revenue to $481.3 million for
the nine months ended September 30, 2000 from $151.2 million for the nine
months ended September 30, 1999. Basic Services represented $421.1
million, or 87.5% of communication services revenue for the first nine
months of 2000, compared to $148.1 million, or 97.9% of communication
services revenue, for the first nine months of 1999. Advanced Services
grew to $60.2 million, or 12.5% of communication services revenue, for the
first nine months of 2000 compared to $3.1 million, or 2.1% of
communication services revenue, for the first nine months of 1999.
Capacity sales increased to $103.0 million, or 17.6% of total revenue, for
the nine months ended September 30, 2000, from $59.2 million, or 28.1% of
total revenue, for the nine months ended September 30, 1999. The revenue
growth was primarily the result of the same factors that contributed to
the growth during the three months ended September 30, 2000.
Wholesale/Consumer Voice segment revenue increased by 211.6% to $385.6
million for the nine months ended September 30, 2000 from $123.7 million
for the nine months ended September 30, 1999. This growth was primarily
attributable to our acquisition of Destia. Broadband/Enterprise segment
revenue increased by 129.3% to $198.7 million for the nine months ended
September 30, 2000 from $86.6 million for the nine months ended September
30, 1999. This growth was primarily attributable to our $43.8 million
increase in capacity sales and the acquisition of Comms UK.
Communication services revenue from the sale of Basic Services to retail
customers represented $272.8 million, or 46.7% of total revenue, for the
nine months ended September 30, 2000 compared to $80.4 million, or 38.2%
of total revenue, for the nine months ended September 30, 1999. For the
nine months ended September 30, 2000 as compared to the same period in
1999, our Basic Services revenue derived from carrier services grew on an
absolute basis to $148.3 million from $67.7 million, but decreased on a
percentage basis to 25.4% of total revenue for the nine months ended
September 30, 2000 from 32.2% of total revenue for the nine months ended
September 30, 1999.
Billable minutes increased to 4.8 billion for the nine months ended
September 30, 2000 from 909.6 million for the nine months ended September
30, 1999. Although there was a substantial increase in billable minutes
from the first nine months of 1999 to the first nine months of 2000, the
effects of such growth were partially offset by a decline in revenue per
billable minute, which declined by 43.8% to $.09 from $.16, 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 $416.3
million for the nine months ended September 30, 2000 from $162.9 million
for the nine months ended September 30, 1999. As a percentage of total
revenue, however, cost of services and sales decreased to 71.3% for the
nine months ended September 30, 2000 from 77.4% for the nine months ended
September 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 $215.0 million for the first nine
months of 2000 from $63.4 million for the first nine months of 1999 and,
as a percentage of total revenue, increased to 36.8% from 30.1%. The
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increase was primarily attributable to the same factors associated with
the increase during the three months ended September 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 49.9% for the nine months ended September 30, 2000 compared
to 45.3% for the nine months ended September 30, 1999. As a percentage of
total selling, general and administrative expenses, advertising and
promotion expenses were 6.2%, for the nine months ended September 30, 2000
compared to 7.0% for the nine months ended September 30, 1999.
EBITDA AND ADJUSTED EBITDA. EBITDA loss increased to $47.1 million for the
nine months ended September 30, 2000 from $15.9 million for the nine
months ended September 30, 1999. As a percentage of total revenue, EBITDA
loss increased to 8.1% for the first nine months of 2000 from 7.5% for the
first nine months of 1999. Adjusted EBITDA increased to $18.8 million for
the nine months ended September 30, 2000 from $4.0 million for the nine
months ended September 30, 1999. As a percentage of total revenue,
Adjusted EBITDA increased to 3.2% for the nine-month period ended
September 30, 2000 from 1.9% for the nine-month period ended September 30,
1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased to $215.8 million for the nine months ended September 30, 2000
from $39.0 million for the nine months ended September 30, 1999. The
increase was due primarily to the increase in gross property and equipment
to $1.5 billion at September 30, 2000 from $770.1 million at September 30,
1999 and an increase of $106.7 million in amortization of goodwill and
other intangibles related to the Acquisitions.
RESTRUCTURING. As of September 30, 2000, we had $0.7 million of accruals
relating to the Destia-related restructuring. We have, in total, accrued
$4.7 million for the Destia-related restructuring, consisting primarily of
charges relating to employee terminations and lease and other contract
cancellation costs. Payments made during the nine months ended September
30, 2000 against the restructuring accruals totaled $4.0 million, of which
$1.1 million related to employee terminations and $2.9 million related to
lease and other contract cancellation costs. We recorded restructuring
expenses relating to the Destia acquisition of $2.7 million for the nine
months ended September 30, 2000, primarily related to employee termination
costs. In addition, as of September 30, 2000, we had $1.9 million of
remaining accruals relating to the Comms UK-related restructuring.
Payments made during the nine months ended September 30, 2000 against the
restructuring accruals totaled $0.5 million. We anticipate that any
additional restructuring charges associated with the Destia acquisition
plan will be recognized by December 2000 while any additional charges
associated with the Comms UK acquisition will be recognized by June 2001.
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INTEREST. Interest expense increased to $157.7 million for the nine months
ended September 30, 2000 from $97.3 million for the nine months ended
September 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 September 30, 2000 from $1.3 billion at
September 30, 1999. For the nine months ended September 30, 2000, we
capitalized approximately $17.1 million of interest costs. Interest income
increased to $26.4 million for the nine months ended September 30, 2000,
from $21.4 million for the nine months ended September 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
$22.2 million for the nine months ended September 30, 2000, from $1.3
million for the nine months ended September 30, 1999, as a result of the
$15.7 million in accrued dividends relating to the March 9, 2000 offering
of Series B cumulative convertible preferred stock and the $6.5 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 September 30, 2000, we had
aggregate cash resources of $579.6 million, comprised of $492.3 million in
cash, cash equivalents and cash securing letters of credit for network
construction and $87.3 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 100%-owned 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
(EURO)300.0 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, under which Destia had borrowed
approximately $25.9 million as of September 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 require
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 has the right to require Destia to repay all
outstanding obligations under the NTFC facility within 90 days following
the closing of the transaction. NTFC has extended the date by which it may
exercise this right until December 31, 2000. Before December 31, 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 long-term portion of the NTFC borrowings
as a long-term liability.
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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.
On October 20, 2000, Viatel U.K. Limited obtained a (EURO)170.6 million
lease facility with Nortel Networks PLC. Viatel U.K. Limited plans to use
the funds primarily for success-based capital expenditures that support
its network expansion and broaden its advanced services offerings.
Specifically, Viatel U.K. Limited intends to purchase Nortel Networks'
OPTera kit, enabling it to offer 2.5 Gbps wavelengths over its
trans-Atlantic and Pan-European Network, optronics to light its
metropolitan networks, and servers to provide Internet access services.
On October 27, 2000, Viatel U.K. Limited secured a $50 million lease
facility from Cisco Systems Capital. Viatel U.K. Limited plans to use the
funds primarily for success-based capital expenditures that support its
network expansion and broaden its advanced services offerings.
Specifically, Viatel U.K. Limited intends to lease, purchase and license
certain Cisco Systems networking hardware and software products and
services for use in connection with the Company's Pan-European Network,
including the configuration of the Network for the provision of Internet
access services.
During the fourth 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 warrants. 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 nine months ended September 30, 2000, we
had an operating loss of $268.0 million and a net loss of $399.3 million.
We believe that the net proceeds from our 2000 offerings together with
cash and marketable securities on hand, cash securing letters of credit
for network construction, receivables and future capacity and broadband
related 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.
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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 nine
months ended September 30, 2000, capital additions totaled $546.2 million
and consisted of capital expenditures of approximately $464.4 million, a
net increase of $44.6 million in property and equipment purchases payable,
$20.1 million of assets acquired under capital lease obligations and
capitalized interest of $17.1 million. We have also entered into certain
agreements associated with our network, purchase commitments for network
expansion and other items aggregating approximately $174.0 million as of
September 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 communication 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.
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 September 30, 2000
and our results of operations for the three and nine months ended
September 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 nine months ended September 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.
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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, 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 Financial Accounting
Standards Board ("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 is
currently in the process of assessing the impact of SFAS 133.
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.
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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.
The Company held its Annual Meeting of Stockholders on September 13,
2000. Proposals presented for a stockholder vote were (1) the election
of three Class A Directors, (2) the approval of the Company's 2000
Stock Incentive Plan, (3) the approval of an amendment to the Company's
Amended and Restated Certificate of Incorporation to increase the
number of authorized shares of common stock, (4) the approval of an
amendment to the Company's Amended and Restated Certificate of
Incorporation to increase the number of authorized shares of preferred
stock, (5) the approval of the Company's Employee Stock Purchase Plan
and (6) the ratification of the appointment of KPMG LLP as independent
auditors for the Company for fiscal year 2000.
Each of the incumbent Class A directors nominated by the Company were
elected with the following voting results:
VOTES FOR VOTES AGAINST
Sheldon M. Goldman 36,170,459 6,550,289
William C. Murphy 36,227,486 6,493,262
Allan L. Shaw 33,313,552 9,407,196
The Company's 2000 Stock Incentive Plan was approved with the following
voting results:
VOTES FOR VOTES AGAINST ABSTENTIONS
15,131,335 12,694,313 100,261
An Amendment to the Company's Amended and Restated Certificate of
Incorporation, as amended, to increase the number of authorized shares
of common stock was approved with the following voting results:
VOTES FOR VOTES AGAINST ABSTENTIONS
34,464,375 8,096,068 160,305
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An Amendment to the Company's Amended and Restated Certificate of
Incorporation, as amended, to increase the number of shares of
preferred stock was rejected with the following voting results:
VOTES FOR VOTES AGAINST ABSTENTIONS
18,713,470 9,037,155 175,284
The Company's Employee Stock Purchase Plan was approved with the
following voting results:
VOTES FOR VOTES AGAINST ABSTENTIONS
22,652,504 5,194,610 78,795
The appointment of KPMG LLP, as the Company's independent auditors for
the fiscal year 2000, was approved with the following voting results:
VOTES FOR VOTES AGAINST ABSTENTIONS
40,716,879 1,949,730 54,139
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS.
4.17 Amendment No. 2 to Rights Agreement between Viatel, Inc.
and The Bank of New York, as Rights Agent.
27 Financial Data Schedule.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the
three months ended September 30, 2000.
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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
Chief Executive Officer
By: /s/ Allan L. Shaw
----------------------------------------
Allan L. Shaw
Chief Financial Officer
Date: November 14, 2000
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EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION OF DOCUMENT NUMBERED PAGE
4.17 Amendment No. 2 to Rights Agreement
between Viatel, Inc. and The Bank of New York,
as Rights Agent.
27 Financial Data Schedule.
---------------------------
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