<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 20, 1996
REGISTRATION NO. 333-09699
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
VIATEL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 4813 13-3787366
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION INDUSTRIAL IDENTIFICATION NO.)
OF INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
</TABLE>
800 Third Avenue
New York, New York 10022
(212) 935-6800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
SHELDON M. GOLDMAN, ESQ.
U.S. GENERAL COUNSEL
VIATEL, INC.
800 Third Avenue
New York, New York 10022
(212) 935-6800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
JOHN T. CAPETTA, ESQ. GEORGE W. BILICIC, JR., ESQ.
KELLEY DRYE & WARREN LLP CRAVATH, SWAINE & MOORE
Two Stamford Plaza Worldwide Plaza
281 Tresser Boulevard 825 Eighth Avenue
Stamford, Connecticut 06901 New York, New York 10019
(203) 324-1400 (212) 474-1000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act of 1933, please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
VIATEL, INC.
CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
INFORMATION REQUIRED BY ITEMS IN PART I OF FORM S-1
<TABLE>
<CAPTION>
FORM S-1 ITEM NUMBER
AND HEADING LOCATION IN PROSPECTUS
--------------------------------------------- ---------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus....... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus................................... Inside Front Cover Page; Additional
Information; Outside Back Cover Page
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges................. Prospectus Summary; Risk Factors
4. Use of Proceeds.............................. Prospectus Summary; Use of Proceeds
5. Determination of Offering Price.............. Outside Front Cover Page; Risk Factors;
Underwriting
6. Dilution..................................... Dilution
7. Selling Security Holders..................... Not Applicable
8. Plan of Distribution......................... Outside Front Cover Page; Underwriting
9. Description of Securities to be Registered... Outside Front Cover Page; Prospectus Summary;
Dividend Policy; Description of Capital
Stock; Shares Eligible For Future Sale
10. Interests of Named Experts and Counsel....... Not Applicable
11. Information with Respect to the Registrant
(a) Description of Business................ Prospectus Summary; Business
(b) Description of Property................ Business
(c) Legal Proceedings...................... Business
(d) Market Price of and Dividends on the
Registrant's Common Equity and Related
Stockholder Matters.................... Dividend Policy; Description of Capital Stock
(e) Financial Statements................... Consolidated Financial Statements
(f) Selected Consolidated Financial Data... Selected Consolidated Financial and Other
Data
(g) Supplementary Financial Information.... Prospectus Summary; Selected Consolidated
Financial and Other Data; Management's
Discussion and Analysis of Financial
Condition and Results of Operations
(h) Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(i) Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure............................. Not Applicable
(j) Directors and Executive Officers....... Management
(k) Executive Compensation................. Management
(l) Security Ownership of Certain
Beneficial Owners and Management....... Principal Stockholders; Shares Eligible For
Future Sale
(m) Certain Relationships and Related
Transactions........................... Certain Transactions
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.................................. Not Applicable
</TABLE>
<PAGE> 3
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to be
used in connection with an underwritten offering in the United States and Canada
(the "U.S. Prospectus") and one to be used in a concurrent international
offering (the "International Prospectus") of the Common Stock, par value $.01
per share, of Viatel, Inc. The complete prospectus for the offering in the
United States and Canada follows immediately after this Explanatory Note. After
the U.S. Prospectus are the alternate pages for the International Prospectus: a
front cover page, an "Underwriting" section, a "Certain United States Tax
Considerations For Non-United States Holders" section and a back cover page. A
copy of the complete U.S. Prospectus and International Prospectus in the exact
forms in which they are to be used after effectiveness will be filed with the
Securities and Exchange Commission pursuant to Rule 424(b).
<PAGE> 4
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
Subject to Completion
August 20, 1996
PROSPECTUS
SHARES
LOGO
VIATEL, INC.
COMMON STOCK
($.01 PAR VALUE)
All of the shares of common stock (the "Common Stock") offered hereby are being
sold by Viatel, Inc. (the "Company" or "Viatel"). Of the shares of
Common Stock offered, shares are being offered by the U.S.
Underwriters (as defined herein) in the United States and Canada (the "U.S.
Offering") and shares are being offered by the International
Underwriters (as defined herein), in a concurrent offering outside the United
States and Canada (the "International Offering" and together with the U.S.
Offering, the "Offerings"), subject to transfers between the U.S. Underwriters
and the International Underwriters (collectively, the "Underwriters"). The
initial public offering price and the aggregate underwriting discount per share
will be identical for the Offerings. See "Underwriting." The closing of the U.S.
Offering and the International Offering are conditioned upon each other.
Prior to the Offerings, there has been no public market for the Common Stock. It
is currently estimated that the initial public offering price per share will be
between $ and $ . See "Underwriting" for a discussion of
the factors considered in determining the initial public offering price.
Application has been made to have the shares of Common Stock approved for
quotation on the Nasdaq National Market under the symbol "VYTL."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY POTENTIAL INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROCEEDS
PRICE TO UNDERWRITING TO
PUBLIC DISCOUNT COMPANY(1)
<S> <C> <C> <C>
Per Share................................ $ $ $
Total(2)................................. $ $ $
</TABLE>
- --------------------------------------------------------------------------------
(1) Before deducting offering expenses payable by the Company, estimated at
$ .
(2) The Company has granted the Underwriters a 30-day option to purchase up to
an aggregate of additional shares of Common Stock at the Price to
Public, less the Underwriting Discount, solely to cover over-allotments, if
any. If the Underwriters exercise such option in full, the total Price to
Public, Underwriting Discount and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
The shares of Common Stock are offered subject to receipt and acceptance by the
Underwriters, to prior sale and to the Underwriters' right to reject any order
in whole or in part and to withdraw, cancel or modify the offer without notice.
It is expected that delivery of the shares of Common Stock offered hereby will
be made at the office of Salomon Brothers Inc, Seven World Trade Center, New
York, New York, or through the facilities of The Depository Trust Company, on or
about , 1996.
- -------------------------------------------------
SALOMON BROTHERS INC
- --------------------------------------------------------------------------------
The date of this Prospectus is , 1996.
<PAGE> 5
------------------------
The Company intends to furnish its stockholders with annual reports
containing consolidated financial statements audited by an independent
accounting firm.
------------------------
IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and Consolidated Financial
Statements, including the Notes thereto, and other financial data appearing
elsewhere in this Prospectus. Except as otherwise indicated, all information in
this Prospectus (i) assumes an initial public offering price of $ per
share of Common Stock and no exercise of the Underwriters' over-allotment option
and (ii) has been adjusted to give effect to the conversion of all outstanding
shares of the Company's non-voting Class A Common Stock, $.01 par value (the
"Class A Common Stock") into shares of Common Stock. As used herein, the terms
"Company" and "Viatel" refer to Viatel, Inc. and its subsidiaries and
predecessor, and the term "Latin America" refers to the United Mexican States,
Central America and South America, collectively. All industry data included in
this Prospectus, including that of the International Telecommunications Union
("ITU"), has been presented as of 1994, the most recent year for which such data
is available. See the "Glossary" appearing elsewhere herein for definitions of
certain technical terms used in this Prospectus.
THE COMPANY
Viatel is a growing provider of international and national long distance
telecommunications services principally in Western Europe, Latin America, the
United States and the Pacific Rim and offers its services primarily to small and
medium-sized businesses, carriers and other resellers. The Company operates a
digital, switch-based telecommunications network in Western Europe including a
central switching center in London and additional switches in Amsterdam,
Barcelona, Brussels, Frankfurt, Madrid, Milan, Paris and Rome connected by
leased, digital fiber optic transmission facilities (the "European Network"). In
addition, the Company operates a switching center in Omaha, Nebraska which is
connected to the central switching center in London by leased, digital fiber
optic transmission facilities (together with the European Network, the "Viatel
Network"). The Company has achieved rapid growth since its inception in 1991
with telecommunications revenue reaching $32.3 million in 1995 and $22.3 million
during the six months ended June 30, 1996.
The Company derives revenue primarily through the provision of
competitively priced long distance services with value-added features that are
not typically provided by the respective incumbent telecommunications operator
("ITO") in many of the countries in which the Company operates. The Company's
services include virtual private networks, dedicated access for high volume
users, calling cards, fax service and the provision of switched minutes to
wholesale customers. The value-added features include itemized and multicurrency
billing, abbreviated dialing and multiple payment methods. Access to the
Company's services is obtained through callback, paid access, international
toll-free ("ITF"), national toll-free ("NTF") or direct access through a
dedicated line.
The Company conducts its business on a global basis, with its principal
focus on Western Europe. Of the Company's telecommunications revenue for the six
months ended June 30, 1996, approximately 42.4% was generated in Western Europe,
approximately 29.1% was generated in Latin America, approximately 16.2% was
generated in North America, primarily from the Company's wholesale business of
selling switched minutes to other carriers, and approximately 11.7% was
generated in the Pacific Rim. The remaining .6% was generated in Africa and the
Middle East.
The Company's objective is to be a significant provider of international
and national long distance telecommunications services within Western Europe and
other deregulating markets. The Company believes it is strategically positioned
to take advantage of fundamental changes occurring in the telecommunications
industry as a result of global deregulation and rapid advances in technology. In
particular, the Company believes that its early entry into the Western European
market as an alternative network operator has positioned it to take advantage of
the anticipated implementation of European Union ("EU") directives to eliminate
the ITOs' existing monopolies on Voice Telephony (as defined herein), scheduled
to occur by 1998 in most EU member states. The Company is currently prohibited
from supplying Voice Telephony in most EU member states until 1998. Accordingly,
the Company instead provides competitively priced international and national
long distance services with value-added features,
3
<PAGE> 7
thus positioning itself to capitalize on anticipated deregulation. Key elements
of the Company's business strategy include: (i) focusing on the European market
and leveraging the European Network; (ii) capitalizing on the anticipated
obsolescence of settlement agreements with ITOs; (iii) maintaining low-cost
operations; (iv) focusing on the Company's target market of small and
medium-sized businesses; (v) increasing sales of switched minutes to wholesale
customers; (vi) continuing the development of the Company's local sales
distribution channels; (vii) leveraging the Company's information systems; and
(viii) pursuing acquisitions, investments and strategic alliances.
The Company believes it is well positioned to achieve its objective as a
result of its: (i) switch-based network capabilities; (ii) early entry into the
Western European market as an alternative network operator; (iii) focus on
international and national long distance telecommunications traffic; (iv)
competitively priced services and value-added features; and (v) local sales,
marketing and customer service organizations.
The Company is a Delaware corporation and is the successor to VIA USA, Ltd.
(a Colorado corporation) which was merged into the Company on October 11, 1994
to effectuate a reincorporation within the State of Delaware. The Company is an
operating company which renders its services directly and indirectly through
subsidiaries in each Western European country in which it currently operates.
The Company's principal executive offices are located at 800 Third Avenue, New
York, New York 10022. Its telephone number is (212) 935-6800.
THE OFFERINGS
<TABLE>
<S> <C>
Common Stock offered hereby:
U.S. Offering...................... shares
International Offering............. shares
-----------
Total(1)...................... shares
-----------
-----------
Common Stock outstanding after the
Offerings(1)(2)....................... shares
Use of proceeds......................... The net proceeds of the Offerings, estimated to be
approximately $108.0 million (approximately $124.4
million if the Underwriters' over-allotment option
is exercised in full), will be used by the Company
for (i) network upgrade and expansion; (ii)
investments in digital undersea fiber optic cable;
(iii) acquisitions of customer bases and businesses
or for investment in joint ventures or strategic
alliances; and (iv) general corporate and working
capital purposes, including feasibility studies of
the Company's provision of competitive local
exchange carrier ("CLEC") services. See "Risk
Factors -- Broad Discretion Over Use of Proceeds"
and "Use of Proceeds."
Proposed Nasdaq National Market
symbol................................ VYTL
</TABLE>
- ---------------
(1) Does not include up to an aggregate of shares of Common Stock
subject to an over-allotment option granted to the Underwriters. See
"Underwriting."
(2) Excludes (i) 1,750,000 shares of Common Stock reserved for issuance under
the Stock Incentive Plan (as defined herein) of which options to purchase
1,294,078 shares of Common Stock, exercisable at prices ranging from $.50 to
$3.90 per share, have been granted and are outstanding on the date hereof
and (ii) 8,871 other outstanding options to purchase shares of Common Stock
exercisable at $.50 per share. See "Management -- Stock Incentive Plan."
RISK FACTORS
See "Risk Factors" beginning on page 7 for a discussion of certain factors
that should be considered by potential investors.
4
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
The following summary Consolidated Statement of Operations Data and Other
Financial Data as of and for the years ended December 31, 1995, 1994 and 1993
have been derived from the Consolidated Financial Statements of the Company, and
the Notes related thereto, included elsewhere in this Prospectus, which were
audited by KPMG Peat Marwick LLP, independent Certified Public Accountants. The
summary Consolidated Statement of Operations Data, Other Financial Data and
Balance Sheet Data as of and for the six months ended June 30, 1996 and the
Statement of Operations Data and Other Financial Data as of and for the six
months ended June 30, 1995 have been derived from the unaudited Consolidated
Financial Statements of the Company, and the Notes related thereto, included
elsewhere in this Prospectus, which, in the opinion of management, include all
adjustments necessary for a fair presentation of the financial condition and
results of operations of the Company for such periods. The results of operations
for interim periods are not necessarily indicative of a full year's operations.
This information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the Company's
Consolidated Financial Statements, including the Notes thereto, and the other
financial data included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------ --------------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
(IN THOUSANDS, EXCEPT OTHER OPERATING DATA)(1)
STATEMENT OF OPERATIONS DATA:
Telecommunications revenue............. $ 22,282 $ 14,192 $ 32,313 $ 26,268 $ 21,393
Operating expenses:
Cost of telecommunications
services........................... 18,578 12,109 27,648 22,953 18,159
Selling expenses..................... 5,071 3,369 7,468 4,459 2,389
General and administrative expense... 11,755 7,218 16,860 9,859 6,069
Depreciation and amortization........ 2,232 881 2,637 789 111
Equipment impairment loss............ -- 560 560 -- --
------- ------- ------- ------- -------
Total operating expenses........... 37,636 24,137 55,173 38,060 26,728
------- ------- ------- ------- -------
Operating loss......................... $ (15,353) $ (9,945) $ (22,860) $ (11,792) $ (5,335)
Interest income (expense), net......... (4,431) (2,472) (5,574) (558) 21
Share in loss of affiliate............. (5) (23) (42) (145) (142)
------- ------- ------- ------- -------
Net loss............................... $ (19,790) $ (12,440) $ (28,476) $ (12,495) $ (5,456)
======= ======= ======= ======= =======
OTHER FINANCIAL DATA:
EBITDA(2).............................. $ (13,122) $ (9,064) $ (20,223) $ (11,003) $ (5,224)
Capital expenditures, including
acquisitions of businesses........... $ 4,660 $ 5,361 $ 11,378 $ 4,843 $ 2,643
OTHER OPERATING DATA(3):
Billable minutes (000's)(4)............ 25,110 10,010 25,932 14,981 10,899
Average revenue per billable
minute(5)............................ $ 0.88 $ 1.41 $ 1.23 $ 1.70 $ 1.87
Average cost per billable minute(6).... $ 0.72 $ 1.21 $ 1.04 $ 1.53 $ 1.67
Switches(7)(8)......................... 13 2 10 2 2
Customers(7)........................... 13,779 7,360 9,218 6,469 5,486
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------------
ACTUAL AS ADJUSTED(9)
--------- ------------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital..................................................... $ 8,281
Property and equipment, net......................................... 18,108
Total assets........................................................ 49,384
Long-term debt...................................................... 72,329
Stockholders' (deficit) equity...................................... (37,760)
</TABLE>
- ---------------
(1) Amounts presented may not total due to rounding.
5
<PAGE> 9
(2) As used herein "EBITDA" consists of earnings before interest (net), income
taxes, depreciation and amortization and share in loss of affiliate. 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 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.
(3) Information derived from operating records prepared by the Company.
(4) Billable minutes are those minutes during which a call is connected at any
Company switch and for which the Company bills a customer.
(5) Represents the gross call usage revenue per billable minute. Amounts exclude
other revenue and revenue related items such as hardware sales, software
licensing, credits, discounts and other non-usage charges.
(6) Represents the cost associated with the Company's provision of
telecommunications services per billable minute. Amounts exclude
nontransmission costs such as hardware and software purchased for resale.
(7) Information presented as of the end of the period indicated.
(8) At June 30, 1996, includes three switches at the Omaha, Nebraska switching
center, two switches at the London switching center and one switch at each
of the Company's other switching sites. At December 31, 1995, includes two
switches at each of the Company's switching centers in Omaha, Nebraska and
London and one switch at each of the Company's other switching sites.
(9) Adjusted to give effect to the Offerings and the estimated net proceeds
therefrom. See "Use of Proceeds" and "Capitalization."
6
<PAGE> 10
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in "Risk Factors," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business,"
including statements regarding the anticipated development and expansion of the
Company's business, the markets in which the Company's services are offered,
anticipated capital expenditures and regulatory reform, the intent, belief or
current expectations of the Company, its directors or its officers, primarily
with respect to the future operating performance of the Company and other
statements contained herein regarding matters that are not historical facts, are
"forward-looking" statements (as such term is defined in the Private Securities
Litigation Reform Act of 1995). Because such statements include risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause actual
results to differ materially from those expressed or implied by such
forward-looking statements include, but are not limited to, the factors set
forth in "Risk Factors" and "Business."
RISK FACTORS
In addition to the other information and financial data set forth elsewhere
in this Prospectus, potential investors should consider the following risk
factors in evaluating the Company and its business before purchasing the shares
of Common Stock offered hereby.
LIMITED OPERATING HISTORY; SUBSTANTIAL NET LOSSES AND NEGATIVE CASH FLOW FROM
OPERATIONS
The Company commenced operations in 1991 and has only a limited operating
history upon which potential investors may base an evaluation of its
performance. For example, of the 13 switches the Company operated as of June 30,
1996, only two were deployed as of June 30, 1995. Potential investors,
therefore, have limited historical financial information upon which to base an
evaluation of the Company's performance and an investment in shares of the
Company's Common Stock. The Company's prospects must be considered in light of
the risks, expenses and difficulties frequently encountered by companies in
their early stage of development.
To date, the Company has incurred substantial net losses and negative
EBITDA. Net loss for each of 1995, 1994 and 1993 and the six months ended June
30, 1996 was approximately $(28.5) million, $(12.5) million, $(5.5) million and
$(19.8) million, respectively. EBITDA for each of 1995, 1994 and 1993 and for
the six months ended June 30, 1996 was approximately $(20.2) million, $(11.0)
million, $(5.2) million and $(13.1) million, respectively. At June 30, 1996, the
Company had incurred $67.4 million of aggregate losses from operating
activities. In each of the last three years, the Company has experienced
significant increases in expenses associated with the development and expansion
of the Viatel Network. The Company expects to incur substantial net losses,
negative EBITDA and negative cash flows from operating activities until at least
the year 2001. There can be no assurance, however, that the Company will achieve
or sustain profitability or positive cash flows from operating activities in the
future. If the Company cannot achieve profitability or positive cash flows from
operating activities, it may be unable to meet its working capital or future
debt service requirements which would have a material adverse effect on the
Company's business, financial condition and results of operations. See "--
Substantial Capital Requirements," "-- Variability of Operating Results,"
"Selected Consolidated Financial and Other Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements, including the Notes thereto.
SUBSTANTIAL GOVERNMENT REGULATION
The Company's provision of international and national long distance
telecommunications services is heavily regulated. Many of the countries in which
the Company provides, or intends to provide, services prohibit or limit the
services which the Company can provide and the transmission methods by which it
can provide such services. For example, in the United States, the Company's
authority to engage in the resale of international private line communications
services is pursuant to the authorization (the "Section 214 Private Line
Authorization") granted to YYC Communications, Inc., a wholly owned subsidiary
of the
7
<PAGE> 11
Company, under Section 214 of the Communications Act of 1934, as amended (the
"Communications Act"). Certain rules of the Federal Communications Commission
("FCC") prohibit the Company from (i) transmitting calls routed over the
Company's leased line between the United States and the United Kingdom onward
over the European Network (other than to countries which the FCC deems to be
"equivalent," currently the United Kingdom, Canada and Sweden) or (ii)
transmitting calls from European countries (other than those deemed to be
equivalent) over the European Network and then onward over its leased line
between the United States and the United Kingdom. If a violation of FCC rules
concerning resale of international private line service were found to exist and
to be sufficiently severe, the FCC could impose sanctions and penalties,
including revocation of the Section 214 Private Line Authorization. FCC
restrictions thus materially limit the optimal and most profitable use of the
Company's leased line between the United States and the United Kingdom.
In addition, the Company provides its customers located outside the EU,
and, to a lesser degree within the EU, with access to its services through the
use of callback. A substantial number of countries have prohibited certain forms
of callback as a mechanism to access the Company's services. This has caused the
Company to cease providing services in some jurisdictions, including Kuwait,
Costa Rica and Jordan, and may require it to do so in other countries in the
future. There can be no assurance that certain of the Company's services and
transmission methods will not continue to be or will not become prohibited in
certain jurisdictions, and, depending on the jurisdictions, services and
transmission methods affected, there could be a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Government Regulation."
Local laws and regulations differ significantly among the jurisdictions in
which the Company operates, and, within such jurisdictions, the interpretation
and enforcement of such laws and regulations can be unpredictable. For example,
EU member states have inconsistently and, in some instances, unclearly
implemented the 1990 EU directive (the "Services Directive") under which the
Company provides voice services for closed user groups ("CUGs") in Western
Europe. As a result, some EU member states may limit, constrain or otherwise
adversely affect the Company's ability to provide certain services. There can be
no assurance that certain EU member states will implement, or will implement
consistently, the Services Directive or the Full Competition Directive adopted
by the EU in March 1996 (the "Full Competition Directive"), and either the
failure to implement or inconsistent implementation of such directives could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company has pursued and expects to continue to pursue a strategy of
providing its services to the maximum extent it believes permissible under
applicable laws and regulations. For example, the Company provides its ViaGLOBE
service to individuals for calling within the EU and such service may constitute
prohibited Voice Telephony. A further example of the Company's aggressive
interpretation of indefinite or unfavorable laws is its provision of services
utilizing the callback access method in Colombia, where the Colombian Ministry
of Communications has stated that callback access is not permitted and has so
notified the FCC, and in other Latin American countries, where services
utilizing such access method may not currently be permitted.
The Company's aggressive strategy may result in the Company's (i) providing
services or using transmission methods that violate local laws or regulations or
(ii) failing to obtain formal approvals required under such laws or regulations.
Where the Company is found to be in violation of local laws and regulations, it
usually seeks to modify its operations so as to comply with such laws and
regulations. There can be no assurance, however, that the Company will not be
subject to fines, penalties or other sanctions as a result of past violations
even though such violations were corrected. In addition, if the Company believes
that it has a legal basis for doing so, it may persist in providing such
services, using such transmission methods or otherwise continuing such actions.
If the Company's interpretation of applicable laws and regulations proves
incorrect, it could lose, or be unable to obtain, regulatory approvals,
including the Section 214 Private Line Authorization or the Section 214 Switched
Authorization (as defined herein), necessary to provide certain of its services
or to use certain of its transmission methods. The Company also could have
substantial monetary fines and penalties imposed against it. In
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addition, the Section 214 Private Line Authorization requires that services be
provided "in a manner consistent with the laws and regulations of the countries
in which [the Company] operates." There can be no assurance that the Company has
accurately interpreted or will accurately interpret applicable laws and
regulations in particular jurisdictions.
Moreover, the Company may be incorrect in its assumption that (i) EU member
states will abolish on a timely basis the respective ITO's monopoly to provide
Voice Telephony within and between such member states, as required by the
Services Directive and the Full Competition Directive, (ii) deregulation will
continue to occur or (iii) it will be allowed to continue to provide and to
expand its services. The Company's provision of services in Europe may also be
affected if any EU member state imposes greater restrictions on non-EU
international service than on such service within the EU. There can be no
assurance that the United States or foreign jurisdictions will not adopt laws or
regulatory requirements that will adversely affect the Company. Additionally,
there can be no assurance that future United States or foreign regulatory,
judicial or legislative changes will not have a material adverse effect on the
Company or that regulators or third parties will not raise material issues with
regard to the Company's compliance with applicable laws or regulations. If the
Company is unable to provide the services it is presently providing or intends
to provide or to use its existing or contemplated transmission methods due to
its inability to receive or retain formal or informal approvals for such
services or transmission methods, or for any other reason related to regulatory
compliance or the lack thereof, such events could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business -- Government Regulation."
POTENTIAL DIFFICULTIES ASSOCIATED WITH IMPLEMENTING EUROPEAN EXPANSION STRATEGY
The Company believes that an increasing percentage of its future revenue
will be derived from its Western European business operations. Execution of the
Company's European expansion strategy, however, is subject to a variety of
risks, including operating and technical problems, regulatory uncertainties,
possible delays in the full implementation of the Services Directive and
competition. The successful implementation of its European expansion strategy
will require that the Company, among other things, continue to develop its
European Network, back-office capacity and direct sales organizations. There can
be no assurance that the Company will successfully implement its European
expansion strategy or that the Company's Western European operations will
contribute an increasing percentage of revenue in the future.
Expansion and development of the European Network are necessary to enable
the Company to meet customer requirements and to increase the number of
customers served, thereby increasing traffic volume which is fundamental to the
achievement of economies of scale and to the Company's overall financial
success. There can be no assurance, however, that the Company will be able to
expand and develop the European Network successfully. The European Network
enables the Company to operate in the Western European market on a competitive
basis. The primary economic benefits of the European Network, however, are
limited to those calls that either originate or terminate in a city where the
Company has a switch or point of presence ("POP"). The Company currently incurs
significant fixed costs associated with the operation of the European Network,
consisting principally of leased line rental charges and local connectivity (as
defined herein) and facility/network management costs. Although the current
traffic volume through the European portion of the Company's network is too low
to achieve desired economies of scale, transmission costs are expected to
decline as a percentage of revenue as call traffic through the European Network
increases. There can be no assurance, however, that the European Network will
ever achieve the economies of scale which the Company believes are critical to
its overall financial success.
To originate and terminate calls on the European Network, the Company
requires "local connectivity," which is access and egress into and from the
public switched telephone network ("PSTN"). Although the Company has been
successful to date in obtaining local connectivity, there can be no assurance
that the Company will be able to maintain local connectivity or that local
connectivity will always be obtained. Currently, the Company obtains its local
connectivity from the local ITOs which are, and are expected to continue to be,
the Company's competitors.
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In addition, under a prior configuration, the Company experienced problems
affecting the quality of the voice and voice band data transmission of some
calls transmitted over the European Network. These problems resulted from time
to time in poor quality voice transmission over the European Network and, in
some instances, resulted in interruptions in service. There can be no assurance
that the European Network will not experience quality problems or service
interruptions in the future. To provide redundancy in the event of technical
difficulties with the European Network, the Company relies upon the PSTN. To the
extent that calls are transmitted over the PSTN rather than over the European
Network, these calls will be more costly to the Company and may result in losses
on such calls.
Any failure to expand and develop the European Network successfully would
have a material adverse effect on the Company's ability to implement its
European expansion strategy, which is a key component of its overall business
strategy. Failure to implement successfully the Company's European expansion
strategy, or future problems with local connectivity, quality of service or
service interruptions would have a material adverse effect on the Company's
business, financial condition and results of operations. See "-- Substantial
Government Regulation," "-- Competition," "-- Risks Associated with
International Operations," "Business -- Business Strategy," "Business -- The
Viatel Network -- The European Network" and "Business -- Competition."
SUBSTANTIAL CAPITAL REQUIREMENTS
The development of the Company's business has, in the past, required
substantial capital expenditures. In the future, the Company will require
substantial capital expenditures significantly in excess of historical levels to
upgrade and expand the Viatel Network generally, and the European Network
specifically, as well as to develop and expand new and existing services. During
the years ended December 31, 1995, 1994 and 1993 and the six months ended June
30, 1996, the Company had capital expenditures, including acquisitions of
businesses, of approximately $11.4 million, $4.8 million, $2.6 million and $4.7
million, respectively.
The Company expects to use the net proceeds of the Offerings to meet its
capital expenditure requirements and estimates that it will use approximately
(i) $32.2 million of the net proceeds of the Offerings for network upgrade and
expansion, (ii) $9.0 million for investments in digital undersea fiber optic
cable, (iii) $20.0 million for acquisitions of customer bases and businesses or
for investment in joint ventures or strategic alliances, and (iv) $46.8 million
for general corporate and working capital purposes, including up to
approximately $1.0 million for feasibility studies of the Company's provision of
CLEC services. See "-- Broad Discretion Over Use of Proceeds," "Use of Proceeds"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Capital Expenditures and
Working Capital." Although the Company believes that the proceeds of the
Offerings will be sufficient to fund its current plans, actual capital
expenditures may vary significantly from the Company's estimates depending on a
number of factors, including the pace and extent of network upgrade and
expansion, the magnitude of potential acquisitions, investments or strategic
alliances, levels of incremental sales and regulatory actions, which,
individually or collectively, could cause material changes in the Company's
capital expenditure requirements.
The Company will need additional capital to (i) finance its anticipated
growth, (ii) fund working capital needs and future debt service obligations,
(iii) take advantage of unanticipated opportunities, including more rapid
international expansion, acquisitions of customer bases or businesses or
investments in, or strategic alliances with, companies that are complementary to
the Company's current operations, (iv) develop or expand into new services, such
as CLEC, or (v) otherwise respond to unanticipated competitive pressures. The
Company currently expects to obtain any such additional capital through debt
offerings and internally generated cash flow. There can be no assurance,
however, that the Company will be successful in producing sufficient internally
generated cash flow or raising sufficient capital on terms acceptable to the
Company, if at all. Moreover, the amount of, and the terms and conditions of the
instruments relating to, the Company's current outstanding indebtedness may
adversely affect the Company's ability to raise additional capital. Failure to
internally generate or raise sufficient funds may require the Company to delay,
abandon or reduce the scope of any potential future
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expansion, which could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation -- Liquidity and
Capital Resources."
RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH AND IMPLEMENTATION OF GROWTH STRATEGY
The Company's rapid growth has placed, and is expected to continue to
place, a significant strain on the Company's administrative, operational and
financial resources and has increased demands on its systems and controls. There
can be no assurance, however, that the Company will be able to successfully add
services or expand its geographic markets or that existing regulatory barriers
to its current or future operations will be reduced or eliminated. For example,
the introduction of one of the Company's services, ViaCALL Plus, was delayed due
to greater than expected software development efforts required to accommodate
the many national variants of Integrated Services Digital Network ("ISDN"), a
prerequisite for the ViaCALL Plus service, and delays in obtaining regulatory
approval of the Company's switching equipment. As the Company increases its
services and expands its geographic markets, there will be additional demands on
the Company's customer support, sales and marketing and administrative resources
and network infrastructure. There can be no assurance that the Company's
administrative, operating and financial control systems and infrastructure will
be adequate to maintain and effectively monitor future growth or that the
Company will be able to successfully attract, train and manage additional
employees. The failure to continue to upgrade the Company's administrative,
operating and financial control systems and infrastructure or the occurrence of
unexpected expansion difficulties could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"-- Potential Difficulties Associated With Implementing European Expansion
Strategy" and "-- Dependence on Effective Information Systems."
COMPETITION
The international telecommunications industry is highly competitive. The
Company's success depends upon its ability to compete with a variety of other
telecommunications providers in each of its markets, including the respective
ITO in each country in which the Company operates and global alliances among
some of the world's largest telecommunications carriers. Other potential
competitors include cable television companies, wireless telephone companies,
electric and other utilities with rights of way, railways, microwave carriers
and large end users which have private networks. The intensity of such
competition has recently increased and the Company believes that such
competition will continue to intensify as the number of new entrants increases.
Many of the Company's current or potential competitors have substantially
greater financial, marketing and other resources than the Company. If the
Company's competitors devote significant additional resources to the provision
of international or national long distance telecommunications services to the
Company's target customer base of small and medium-sized businesses, such action
could have a material adverse effect on the Company's business, financial
condition and results of operations, and there can be no assurance that the
Company will be able to compete successfully against such new or existing
competitors.
Competition for customers in the telecommunications industry is primarily
based on price and, to a lesser extent, on the type and quality of services
offered. The Company prices its services primarily by offering discounts to the
prices charged by its competitors. The Company has no control over the prices
set by its competitors, and some of the Company's competitors may be able to use
their financial resources to cause severe price competition in the countries in
which the Company operates. Although the Company does not believe that there is
an economic incentive for its competitors to pursue such a pricing strategy or
that its competitors are likely to engage in such a course of action, there can
be no assurance that severe price competition will not occur. Any such price
competition would have a material adverse effect on the Company's business,
financial condition and results of operations. Additionally, intensified
competition in certain of the Company's markets will cause the Company to
continue to reduce its prices. For example, the Company recently reduced certain
rates which it charges to non-wholesale customers in response to pricing
reductions enacted by certain ITOs. Such price reductions
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may reduce the Company's revenue and margins. The Company has experienced, and
expects to continue to experience, declining revenue per billable minute in all
of its markets, in part as a result of increasing worldwide competition within
the telecommunications industry.
The Company believes that the ITOs generally have certain competitive
advantages due to their control over local connectivity and apparent close ties
with national regulatory authorities. The Company also believes that, in certain
instances, some regulators have shown a reluctance to adopt policies and grant
regulatory approvals that would result in increased competition for the local
ITO. Moreover, the Company believes that it has encountered anti-competitive
behavior on the part of certain ITOs. If the Company encounters anti-competitive
behavior in countries in which it operates or if the ITO in any country in which
the Company operates uses its competitive advantages to the fullest extent, the
Company's business, financial condition and results of operations could be
materially adversely affected.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
There are certain risks inherent in doing business on an international
level, including regulatory limitations restricting or prohibiting the provision
of the Company's services, unexpected changes in regulatory requirements,
tariffs, customs, duties and other trade barriers, difficulties in staffing and
managing foreign operations, longer payment cycles, problems in collecting
accounts receivable, political risks, fluctuations in currency exchange rates,
foreign exchange controls which restrict or prohibit repatriation of funds,
technology export and import restrictions or prohibitions, delays from customs
brokers or government agencies, seasonal reductions in business activity during
the summer months in Europe and certain other parts of the world and potentially
adverse tax consequences resulting from operating in multiple jurisdictions with
different tax laws. For example, regulatory limitations restricting or
prohibiting the Company's operations in Latin America, including regulations in
certain countries prohibiting the provision of services through the automatic
callback access method utilized by the Company, have contributed to the
Company's decision to discontinue or modify certain of its services in such
countries. Existing or future regulations in other countries could also have
similar consequences.
Since its inception in 1991, the Company has invested heavily in developing
its ability to provide international telecommunications services within Western
Europe and other deregulating markets and in developing and expanding its market
presence including, more recently, entering into the national long distance
telecommunications markets in Spain and Italy. If the Company's operations in
Western Europe expand as expected, an increasing portion of the Company's
revenue and expenses will be denominated in currencies other than U.S. Dollars,
and changes in exchange rates will likely affect the Company's results of
operations. Furthermore, international rates charged to customers are likely to
decrease in the future for a variety of reasons, including increased competition
between existing carriers, new entrants into geographic markets in which the
Company operates or intends to operate and additional strategic alliances or
joint ventures among large international carriers that facilitate targeted
pricing and cost reductions. Depending on the countries involved, any or all of
the foregoing factors could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, there can
be no assurance that laws or administrative practices relating to taxation,
foreign exchange or other matters in countries within which the Company operates
will not change. Any such change could have a material adverse effect on the
Company's business, financial condition and results of operations. See "--
Substantial Government Regulation," "-- Competition," "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- Foreign Currency," and "Business -- Government Regulation."
RISKS ASSOCIATED WITH ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES
The Company may, in the future, acquire or engage in efforts to acquire
customer bases and businesses from, make investments in, or enter into strategic
alliances with, companies which have customer bases, switching capabilities or
existing networks in the Company's current markets or in areas into which the
Company intends to expand the Viatel Network, generally, and the European
Network, specifically. Although the Company is currently evaluating several
potential investment opportunities, it
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does not have any present understanding, commitment or agreement with respect to
any acquisition, investment, strategic alliance or related effort (other than a
joint venture with Global Telecommunication Solutions, Inc. with respect to the
Company's marketing of its proposed ViaCARD services). Any future acquisitions,
investments, strategic alliances or related efforts will be accompanied by the
risks commonly encountered in such transactions or efforts. Such risks include,
among others, the difficulty of identifying appropriate acquisition candidates,
the difficulty of assimilating the operations and personnel of the respective
entities, the potential disruption of the Company's ongoing business, the
inability of management to capitalize on the opportunities presented by
acquisitions, investments, strategic alliances or related efforts, the failure
to successfully incorporate licensed or acquired technology and rights into the
Company's services, the inability to maintain uniform standards, controls,
procedures and policies and the impairment of relationships with employees and
customers as a result of changes in management. Additionally, in connection with
an acquisition, the Company may experience rates of customer attrition which are
significantly higher than the rate of customer attrition which it generally
experiences. Further, to the extent that any such transaction involves customer
bases or businesses located outside the United States, the transaction would
involve the risks associated with international operations. There can be no
assurance that the Company would be successful in overcoming these risks or any
other problems encountered with such acquisitions, investments, strategic
alliances or related efforts. See "-- Potential Difficulties Associated With
Implementing European Expansion Strategy," "-- Risks Associated with
International Operations" and "Business -- Business Strategy -- Pursue
Acquisitions, Investments and Strategic Alliances."
RAPID CHANGES IN TECHNOLOGY AND CUSTOMER REQUIREMENTS
The telecommunications industry is characterized by rapid and significant
technological advancements and introductions of new products and services
utilizing new technologies. As new technologies develop, the Company may be
placed at a competitive disadvantage, and competitive pressures may force the
Company to implement such new technologies at substantial cost. In addition,
competitors may implement new technologies before the Company is able to
implement such technologies, allowing such competitors to provide enhanced
services and superior quality compared with that which the Company is able to
provide. There can be no assurance that the Company will be able to respond to
such competitive pressures and implement such technologies on a timely basis or
at an acceptable cost. One or more of the technologies currently utilized by the
Company, or which it may implement in the future, may not be preferred by its
customers or may become obsolete. If the Company is unable to respond to
competitive pressures, implement new technologies on a timely basis, penetrate
new markets in a timely manner in response to changing market conditions or
customer requirements, or if new or enhanced services offered by the Company do
not achieve a significant degree of market acceptance, any such event could have
a material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE ON EFFECTIVE INFORMATION SYSTEMS
To efficiently produce customer bills in a timely manner, the Company must
record and process millions of call detail records quickly and accurately. While
the Company believes that its billing and information systems are currently
sufficient for its operations, such systems will require enhancements and
ongoing investments. There can be no assurance that the Company will not
encounter difficulties in enhancing its systems or integrating new technology
into its systems. The inability of the Company to implement any required system
enhancement, to acquire new systems or to integrate new technology in a timely
and cost effective manner could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Business Strategy -- Leverage Information Systems" and
"Business -- Information Systems."
VARIABILITY OF OPERATING RESULTS
The Company's quarterly operating results have fluctuated in the past and
may fluctuate significantly in the future as a result of a variety of factors,
including: (i) pricing changes; (ii) changes in the mix of services sold or
channels through which those services are sold; (iii) changes in user demand,
customer terminations of service, capital expenditures and other costs relating
to the expansion of the Viatel Network; (iv) the timing and costs of any
acquisitions of customer bases and businesses, services or
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technologies; (v) the timing and costs of marketing and advertising efforts;
(vi) the effects of government regulation and regulatory changes; and (vii)
specific economic conditions in the telecommunications industry. Such
variability could have a material adverse effect on the Company's business,
financial condition and results of operations. Any significant shortfall in
demand for the Company's services in relation to the Company's expectations, or
the occurrence of any other factor which causes revenue to fall significantly
short of the Company's expectations, would also have a material adverse effect
on the Company's business, financial condition and results of operations. In
addition, the uncertainty of revenue growth coupled with substantial planned
increases in operating expenses and the continued evolution in the Company's
transmission methodology from switchless resale to use of the Viatel Network may
result in substantial quarterly fluctuations in the Company's operating results
which could have a material adverse effect on the Company's business, financial
condition and results of operations. See "-- Limited Operating History;
Substantial Net Losses and Negative Cash Flow from Operations," "Selected
Consolidated Financial and Other Data" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
RELIANCE ON THIRD PARTIES FOR LEASED CAPACITY
The Company does not currently own any telecommunications transmission
lines. As a result, the Company depends upon facilities-based carriers, some of
which are or may become competitors of the Company, to provide its services. The
Company currently leases transmission lines from, among others, British
Telecommunications, Plc, Cable & Wireless International, Inc., Mercury
Communications Ltd. and the respective ITO in each country in which the Company
conducts its Western European operations. The Company's profitability depends,
in part, on its ability to obtain and utilize leased capacity on a cost-
effective basis. The Company leases capacity pursuant to agreements with
twelve-month terms and is vulnerable to changes in its lease arrangements, such
as price increases and service cancellations. Although the Company believes that
it has and will continue to enjoy favorable arrangements with the
facilities-based carriers from which it leases transmission lines, there can be
no assurance that such arrangements will continue or that leased capacity will
continue to be available at cost-effective rates. See "Business -- The Viatel
Network" and "Business -- Carrier Contracts."
CONTROL BY PRINCIPAL STOCKHOLDERS
Upon completion of the Offerings, Martin Varsavsky, the Company's President
and Chief Executive Officer, COMSAT Investments, Inc. ("COMSAT"), S-C V-Tel
Investments, L.P. ("S-C V-Tel") and Juan Manuel Aisemberg, a person related by
marriage to Mr. Varsavsky, will control, in the aggregate, approximately % of
the then outstanding shares of Common Stock on a fully diluted basis
(approximately % if the Underwriters' over-allotment option is exercised in
full) and Mr. Varsavsky will individually beneficially own approximately % of
the then outstanding shares of Common Stock on a fully diluted basis
(approximately % if the Underwriters' over-allotment option is exercised in
full). These stockholders, acting pursuant to a shareholders' agreement and a
voting agreement, effectively will have the ability to control the election of
all members of the Company's Board of Directors, the outcome of most matters
submitted to a vote of the holders of Common Stock and generally will be able to
direct the affairs of the Company. Such concentration of ownership may have the
effect of delaying, deterring or preventing a change in control of the Company.
See "Management -- Compensation Committee Interlocks and Insider Participation
- -- Shareholders Agreements," "Management -- Compensation Committee Interlocks
and Insider Participation -- Voting Agreement" and "Principal Stockholders."
DEPENDENCE ON KEY PERSONNEL
The success of the Company's business will depend, to a significant extent,
upon the abilities and continued efforts of its senior management, and
particularly upon the abilities and efforts of Mr. Varsavsky and Michael J.
Mahoney, the Company's Executive Vice President, Operations and Technology. The
Company does not have employment or similar agreements with any executive
officer other than Messrs. Varsavsky and Mahoney. The term of Mr. Varsavsky's
employment agreement extends until the earlier of (i) April 4, 1997, (ii) the
date on which neither COMSAT nor S-C V-Tel beneficially owns at least 10.0%
(subject to certain adjustments) of the issued and outstanding shares of Common
Stock on
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a fully diluted basis and (iii) the agreement's termination in accordance with
its terms. Mr. Mahoney's employment extends through September 30, 1996. Except
for a $3.0 million "key man" life insurance policy which the Company maintains
on the life of Mr. Varsavsky, the Company does not maintain nor is it currently
contemplating obtaining "key man" life insurance policies on any of its
employees. The Company's success also will depend on its ability to attract,
retain and motivate qualified management, marketing, technical and sales
executives and other personnel who are in high demand and are often subject to
competing employment opportunities. The loss of the services of key management
personnel, or the inability to attract additional qualified personnel, could
have a material adverse effect on the Company's business, financial condition
and results of operations. There can be no assurance that the Company will be
successful in attracting, retaining and motivating such executives and
personnel. See "Management -- Directors and Executive Officers" and
"Management -- Employment, Expatriate and Severance Agreements." Currently, no
member of management, except for Messrs. Varsavsky and Mahoney, own shares of
Common Stock. However, certain members of management have been granted options
to acquire shares of Common Stock, which options are subject to vesting
criteria. See "Management -- Stock Incentive Plan" and "Principal Stockholders."
ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offerings, there has been no public market for the Common
Stock and, although the Company intends to have the Common Stock quoted on the
Nasdaq National Market, there can be no assurance that an active trading market
will develop or be maintained following the Offerings. The initial public
offering price of the Common Stock will be determined by negotiation between the
Company and the representatives of the Underwriters (as defined herein) and may
bear no relationship to the price at which the Common Stock will trade after
completion of the Offerings. For factors to be considered in determining the
initial public offering price see "Underwriting." After completion of the
Offerings, the market price of the Common Stock will be subject to fluctuations
in response to various factors and events, including the liquidity of the market
for the Common Stock, variations in the Company's quarterly operating results,
regulatory or other changes, both domestic and international, affecting the
telecommunications industry generally or the Company specifically, announcements
of business developments by the Company or its competitors, changes in operating
results and changes in general market conditions. See "-- Limited Operating
History; Substantial Net Losses and Negative Cash Flow from Operations" and
"-- Variability of Operating Results."
BROAD DISCRETION OVER USE OF PROCEEDS
Approximately $46.8 million, or 43.3%, of the estimated net proceeds of the
Offerings has been allocated for general corporate and working capital purposes,
including up to approximately $1.0 million for feasibility studies of the
Company's provision of CLEC services. Due to the number and variability of
factors that will be analyzed before the Company determines how to use such net
proceeds, the Company will have broad discretion in allocating a significant
portion of the net proceeds from the Offerings without any action or approval of
the Company's stockholders. Accordingly, investors will not have the opportunity
to evaluate the economic, financial and other relevant information which will be
considered by the Company in determining the application of such net proceeds.
See "Use of Proceeds."
NET OPERATING LOSS CARRYFORWARDS
As of June 30, 1996, the Company had United States federal income tax net
operating loss ("NOL") carryforwards of $52.1 million. Such NOL carryforwards
begin to expire in the year 2007.
As a result of an "ownership change," as defined by Section 382 of the
Internal Revenue Code of 1986, as amended (the "Code"), triggered by the
Company's $75 million unit offering in December 1994 (the "Unit Offering"),
approximately $18 million of the Company's NOL carryforwards from periods before
the Unit Offering are subject to annual limitations. Section 382 of the Code
imposes limitations with respect to the carryforward of NOLs by a corporation
that experiences a more-than-50-percent ownership change over a three-year
testing period (or over a shorter period if there has been a prior ownership
change within the immediately preceding three-year period). In general, if such
an ownership change occurs, Section 382 of the Code limits the amount of the
NOLs carried over from pre-ownership
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change years that can be used in any post-ownership change year to an amount
equal to the product obtained by multiplying (1) the value of the corporation's
capital stock (with certain adjustments) at the time of the ownership change and
(2) an interest rate determined by the Internal Revenue Service for the month of
the ownership change.
The Company does not believe that the Offerings will result in a
more-than-50-percent ownership change. If, however, after the completion of the
Offerings, additional direct or indirect changes in the ownership of the
Company's capital stock occur within the relevent testing period, such ownership
changes could, when considered together with the Offerings, result in a
more-than-50-percent ownership change and substantially restrict the Company's
subsequent use of its then unutilized NOL carryforwards.
The Company will be required to pay federal income tax in any year in which
its taxable income exceeds the amount of each of the NOL carryforwards limited
by Section 382 of the Code plus the aggregate NOL carryforwards from years after
the ownership change. To the extent the Company does not use the full amount of
its limited NOL carryforward in any year, such unused portion can be used to
increase the NOL carryforwards limitation for subsequent years prior to the
expiration of the NOL carryforwards subject to the limitation.
IMMEDIATE AND SUBSTANTIAL DILUTION
At an assumed initial public offering price of $ per share of
Common Stock, and after giving effect to the conversion of all outstanding
shares of Class A Common Stock into shares of Common Stock, purchasers of Common
Stock in the Offerings will experience immediate and substantial dilution of
$ per share in net tangible book value per share of outstanding Common
Stock. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of Common Stock by existing stockholders under Rule 144 ("Rule
144") of the Securities Act of 1933, as amended (the "Securities Act"), through
the exercise of outstanding registration rights or otherwise, could have an
adverse effect on the market price of the Common Stock and the ability of the
Company to raise capital in the future. The shares of Common Stock sold in the
Offerings will be eligible for immediate resale, except to the extent acquired
by affiliates of the Company. Additionally, 1,386,878 shares of Common Stock
which are "restricted securities," as that term is defined in Rule 144, owned by
persons who are not affiliates of the Company are currently eligible for sale
under Rule 144. Upon the expiration or waiver of certain lock-up agreements with
the Underwriters, approximately additional shares of Common Stock
will be eligible for sale in the public market pursuant to Rule 144. Pursuant to
lock-up agreements with the Underwriters, each of Messrs. Varsavsky and
Aisemberg, COMSAT and S-C V-Tel, as well as certain other directors and officers
of the Company, has agreed not to offer, sell or contract to sell, or otherwise
dispose of, directly or indirectly, or announce the offering of, any shares of
Common Stock, including any such shares beneficially or indirectly owned or
controlled, or any securities convertible into, or exchangeable or exercisable
for, shares of Common Stock for days from the date of this Prospectus, without
the prior written consent of Salomon Brothers Inc. The remaining shares
outstanding upon completion of the Offerings will be eligible for sale pursuant
to Rule 144 upon the expiration of the current two-year holding period. Certain
existing stockholders have certain rights to require the Company to register a
total of 10,321,824 shares of Common Stock after expiration of the lock-up
agreements. See "Description of Capital Stock -- Registration Rights," "Shares
Eligible for Future Sale" and "Underwriting."
The Securities and Exchange Commission (the "Commission") has proposed
amendments to Rule 144 which would reduce the holding period required for shares
subject to Rule 144 to become eligible for resale on the public market. This
proposal, if adopted, would increase the number of shares of Common Stock
eligible for immediate resale following the expiration of lock-up agreements.
16
<PAGE> 20
ANTI-TAKEOVER CONSIDERATIONS
Prior to completion of the Offerings, the Company's Certificate of
Incorporation, as amended, and Bylaws will be amended and restated to include
certain provisions which are intended to enhance the likelihood of continuity
and stability in the composition of the Company's Board of Directors and which
may have the effect of delaying, deterring or preventing a future takeover or
change in control of the Company unless such takeover or change in control is
approved by the Company's Board of Directors, even though such a transaction may
offer the holders of Common Stock the opportunity to sell such shares of Common
Stock at a price above the prevailing market price. Such provisions may also
render the removal of directors and management more difficult. Specifically, the
Company's Certificate of Incorporation, as amended, and Bylaws, as the case may
be, will be amended to provide for a classified Board of Directors serving
staggered, three-year terms and certain advance notice requirements for
stockholder nominations of candidates for election to the Company's Board of
Directors and certain other stockholder proposals. Such provisions could limit
the price that certain persons might be willing to pay in the future for shares
of Common Stock. In addition, prior to completion of the Offerings, the
Company's Certificate of Incorporation, as amended, will be amended and restated
to authorize the Board of Directors of the Company to issue from time to time,
without any further action of stockholders, up to 1.0 million shares of
Preferred Stock (as defined herein), on such terms and with such rights,
designations, preferences, qualifications, limitations and restrictions as the
Board of Directors may determine. The issuance of such Preferred Stock,
depending upon the rights, designations, preferences, qualifications,
limitations and restrictions thereof, may have the effect of delaying, deterring
or preventing a change in control of the Company or may otherwise adversely
affect the interests of holders of Common Stock. The issuance of Preferred
Stock, for example, could decrease the amount of earnings or assets available
for distribution to holders of Common Stock or could adversely affect the rights
and powers, including voting rights, of the holders of the Common Stock.
Further, certain provisions of the Delaware General Corporation Law (the "DGCL")
prevent certain stockholders from engaging in business combinations with the
Company, subject to certain exceptions. See "Description of Capital Stock --
Preferred Stock," "Description of Capital Stock -- Certain Provisions of the
Company's Certificate of Incorporation, Bylaws and Indenture" and "Description
of Capital Stock -- Delaware Anti-Takeover Law."
The Indenture, dated as of December 15, 1994 (the "Indenture"), between the
Company and United States Trust Company of New York, as Trustee, relating to the
Company's 15.0% Senior Discount Notes due 2005 (the "Notes"), provides that upon
the occurrence of a "Change of Control" (as defined herein) the Company will be
required to make an offer (a "Change of Control Offer") to purchase all of the
Notes issued and then outstanding under the Indenture at a purchase price equal
to 101.0% of the principal amount thereof, plus accrued and unpaid interest
thereon, if any, to the date of purchase. The Notes currently outstanding have
an aggregate principal amount of $120.7 million. There can be no assurance that,
in the event of a Change of Control, the Company will have, or will have access
to, sufficient funds to repurchase the Notes. See "Description of Capital
Stock -- Certain Provisions of the Company's Certificate of Incorporation,
Bylaws and Indenture." In addition, Mr. Mahoney's expatriate agreement contains
provisions which require the Company to make certain payments to Mr. Mahoney in
the event he is terminated in connection with a "change of control" (as defined
herein). See "Management -- Employment, Expatriate and Severance Agreements."
Further, the Stock Incentive Plan provides that outstanding options, restricted
stock or Stock Appreciation Rights ("SARs") vest in their entirety and become
exercisable or, with respect to restricted stock, are released from restrictions
on transfer and repurchase rights in the event of a "Corporate Transaction" (as
defined herein). See "Management -- Stock Incentive Plan." The Indenture,
expatriate agreement and Stock Incentive Plan provisions may have the effect of
delaying, deterring or preventing a change of control of the Company, may
discourage bids for outstanding shares of Common Stock and may adversely affect
the market price of the Common Stock.
17
<PAGE> 21
USE OF PROCEEDS
The net proceeds of the Offerings are estimated to be approximately $108.0
million (approximately $124.4 million if the Underwriters' over-allotment option
is exercised in full) after deducting estimated expenses of the Offerings
payable by the Company. The Company estimates that it will use approximately (i)
$32.2 million of the net proceeds of the Offerings for network upgrade and
expansion, including the purchase and installation of POPs or switches to expand
the European Network from nine to up to 48 Western European cities, the
installation of a POP in Miami and a switch in Los Angeles and for the upgrade
of the Company's switch in London and its New York City POP to a switch, (ii)
$9.0 million for investments in digital undersea fiber optic cable, (iii) $20.0
million for acquisitions of customer bases and businesses or for investment in
joint ventures or strategic alliances, and (iv) $46.8 million for general
corporate and working capital purposes, including up to approximately $1.0
million for feasibility studies of the Company's provision of CLEC services. See
"Risk Factors -- Substantial Capital Requirements" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- Capital Expenditures and Working Capital."
There can be no assurance that the Company's actual application of the
proceeds will not vary substantially from the Company's current plans. See "Risk
Factors -- Broad Discretion Over Use of Proceeds." Moreover, the Company will
need additional capital to (i) finance its anticipated growth, (ii) fund working
capital needs and future debt service obligations, (iii) take advantage of
unanticipated opportunities, including more rapid international expansion,
acquisitions of customer bases or businesses or investments in, or strategic
alliances with, companies that are complementary to the Company's current
operations, (iv) develop or expand into new services, such as CLEC, or (v)
otherwise respond to unanticipated competitive pressures. See "Risk
Factors -- Substantial Capital Requirements," "Risk Factors -- Risks Associated
With Management of Growth and Implementation of Growth Strategy," "Risk
Factors -- Risks Associated with International Operations," "Risk
Factors -- Risks Associated with Acquisitions, Investments and Strategic
Alliances" and "Business -- Business Strategy."
Although the Company is currently evaluating several potential investment
opportunities, it does not have any present understanding, commitment or
agreement with respect to any acquisition, investment, strategic alliance or
related effort (other than a joint venture with Global Telecommunication
Solutions, Inc. with respect to the Company's marketing of its proposed ViaCARD
services).
Pending application of the net proceeds of the Offerings, the Company
expects that it will place such net proceeds in interest-bearing bank accounts
or invest such proceeds in United States government securities or other
short-term, interest bearing, investment grade securities. The Company is not
currently, and does not expect as a result of the Offerings to become, subject
to the registration requirements of the Investment Company Act of 1940 (the
"1940 Act"). If the Company were required to register as an investment company
under the 1940 Act, it would become subject to substantial regulations with
respect to its capital structure, management, operations, transactions with
affiliates (as defined in the 1940 Act), and other matters. Application of the
provisions of the 1940 Act would have a material adverse effect on the Company.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock and does not expect to do so in the foreseeable future. The Company
anticipates that all future earnings, if any, generated from operations will be
retained to finance the expansion and continued development of its business. Any
future determination with respect to the payment of dividends will be within the
sole discretion of the Company's Board of Directors and will depend upon, among
other things, the Company's earnings, capital requirements, the terms of then
existing indebtedness, applicable requirements of the DGCL, general economic
conditions and such other factors considered relevant by the Company's Board of
Directors. In addition, the Company's ability to pay cash dividends is
restricted under the terms of the Indenture unless certain financial tests are
met.
18
<PAGE> 22
DILUTION
The Company's pro forma net tangible book value as of June 30, 1996 was
approximately ($ ) million, or approximately ($ ) per share of
outstanding Common Stock (after giving effect to the conversion of all
outstanding shares of Class A Common Stock). Net tangible book value per share
of Common Stock represents the total amount of tangible assets of the Company,
less the total amount of liabilities of the Company, divided by the number of
shares of Common Stock outstanding on a fully diluted basis. After giving effect
to the sale by the Company of the shares of Common Stock offered hereby and
assuming no exercise of the Underwriters' over-allotment option, less estimated
underwriting discounts and commissions and estimated expenses of the Offerings
payable by the Company, and the application of the estimated net proceeds
therefrom, the Company's pro forma net tangible book value as of June 30, 1996
would have been approximately $ million, or approximately $ per
share of Common Stock. This represents an immediate increase in net tangible
book value of approximately $ per share of Common Stock to existing
stockholders and an immediate dilution in net tangible book value of
approximately $ per share of Common Stock to new investors purchasing
shares of Common Stock in the Offerings. The following table illustrates this
dilution on a per share basis to the new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $
Pro forma net tangible book value per share at June 30,
1996.................................................. ($ )
Increase in net tangible book value per share
attributable to net proceeds of the Offerings.........
-----
Pro forma net tangible book value per share after giving
effect to the Offerings....................................
-----
Dilution per share to new investors.......................... $
=====
</TABLE>
The following table sets forth, on a pro forma basis as of June 30, 1996,
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share of Common
Stock paid by existing stockholders and by new investors before deducting the
estimated underwriting discounts and commissions and estimated expenses of the
Offerings payable by the Company:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION AVERAGE
------------------ ------------------ PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------- ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... % $ % $
New investors.................. % %
----- -----
Total........................ % $ %
===== =====
</TABLE>
The above tables assume conversion of all outstanding shares of Class A
Common Stock into shares of Common Stock, the exercise of outstanding options to
purchase 1,302,949 shares of Common Stock at exercise prices ranging from $.50
to $3.90 and no exercise of the Underwriters' over-allotment option. See
"Management -- Stock Incentive Plan" and "Capitalization."
19
<PAGE> 23
CAPITALIZATION
The following table sets forth as of June 30, 1996, the actual
capitalization of the Company and the capitalization of the Company at such date
after giving effect to the conversion of all outstanding shares of Class A
Common Stock into shares of Common Stock, the issuance of the shares of Common
Stock offered hereby, at an assumed initial public offering price of $
per share of Common Stock, and the application of the estimated net proceeds
from the Offerings as described in "Use of Proceeds." This table should be read
in conjunction with the Company's Consolidated Financial Statements, including
the Notes thereto, and the other financial data included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
------------------------------
ACTUAL AS ADJUSTED
--------- -----------------
<S> <C> <C>
(IN THOUSANDS)
Cash, cash equivalents and marketable securities............... $ 12,769 $
======== ========
Long-term debt................................................. $ 72,329 $
-------- --------
Stockholders' (deficit) equity:
Common Stock, $.01 par value; 50,000,000 shares
authorized, 16,204,202 shares issued and outstanding;
shares issued and outstanding, as
adjusted(1)............................................. 162
Class A Common Stock, $.01 par value; 10,000,000 shares
authorized, 4,357,270 shares issued and outstanding; no
shares authorized, no shares issued and outstanding, as
adjusted................................................ 44 --
Preferred Stock, $.01 par value; no shares authorized, no
shares issued and outstanding; 1,000,000 shares
authorized, no shares issued and outstanding, as
adjusted................................................ -- --
Additional paid-in capital................................ 30,420
Unearned compensation..................................... (163)
Cumulative translation adjustment......................... (822)
Accumulated deficit....................................... (67,400)
-------- --------
Total stockholders' (deficit) equity................. (37,759)
-------- --------
Total capitalization................................. $ 47,339 $
======== ========
</TABLE>
- ---------------
(1) Excludes (i) 1,750,000 shares of Common Stock reserved for issuance under
the Stock Incentive Plan of which options to purchase 1,294,078 shares of
Common Stock, exercisable at prices ranging from $.50 to $3.90 per share,
have been granted and are outstanding on the date hereof and (ii) 8,871
other outstanding options to purchase shares of Common Stock, exercisable at
$.50 per share. See "Management -- Stock Incentive Plan."
20
<PAGE> 24
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following selected Consolidated Statement of Operations Data, Other
Financial Data and Balance Sheet Data as of and for the years ended December 31,
1995, 1994, 1993 and 1992 have been derived from the Consolidated Financial
Statements of the Company and the Notes related thereto, included elsewhere in
this Prospectus, which were audited by KPMG Peat Marwick LLP, independent
Certified Public Accountants, for the years ended December 31, 1995, 1994 and
1993 and by Edward Isaacs & Company LLP, independent Certified Public
Accountants, for the year ended December 31, 1992. The selected Statement of
Operations Data, Other Financial Data and Balance Sheet Data as of and for the
eleven-month period ended December 31, 1991 have been derived from the unaudited
Financial Statements of the Company which, in the opinion of management, include
all adjustments necessary for a fair presentation of the financial condition and
results of operations for the Company for such period. The selected consolidated
Statement of Operations Data, Other Financial Data and Balance Sheet Data as of
and for the six months ended June 30, 1996 and 1995 have been derived from the
unaudited Consolidated Financial Statements of the Company included elsewhere in
this Prospectus, which, in the opinion of management, include all adjustments
necessary for a fair presentation of the financial condition and results of
operations of the Company for such periods. The results of operations for
interim periods are not necessarily indicative of a full year's operations. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the Company's
Consolidated Financial Statements, including the Notes thereto, and the other
financial data included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
ELEVEN
SIX MONTHS MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31, ENDED
----------------------- --------------------------------------------------- DEC. 31,
1996 1995 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT OTHER OPERATING DATA)(1)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Telecommunications revenue......... $ 22,282 $ 14,192 $ 32,313 $ 26,268 $ 21,393 $ 6,701 $ 268
Operating expenses:
Cost of telecommunications
services....................... 18,578 12,109 27,648 22,953 18,159 5,462 260
Selling expenses................. 5,071 3,369 7,468 4,459 2,389 895 39
General and administrative
expense........................ 11,755 7,218 16,860 9,859 6,069 1,610 58
Depreciation and amortization.... 2,232 881 2,637 789 111 15 5
Equipment impairment loss........ -- 560 560 -- -- -- --
----- -------- -------- --------- --------- -------- --------
Total operating expenses....... 37,636 24,137 55,173 38,060 26,728 7,982 362
----- -------- -------- --------- --------- -------- --------
Operating loss..................... $ (15,353) $ (9,945) $ (22,860) $ (11,792) $ (5,335) $ (1,281) $ (94)
Interest income (expense), net..... (4,431) (2,472) (5,574) (558) 21 (8) --
Share in loss of affiliate......... (5) (23) (42) (145) (142) -- --
----- -------- -------- --------- --------- -------- --------
Net loss........................... $ (19,790) $ (12,440) $ (28,476) $ (12,495) $ (5,456) $ (1,289) $ (94)
===== ======== ======== ========= ========= ======== ========
Net loss per share(2).............. $ $
OTHER FINANCIAL DATA:
EBITDA(3).......................... $ (13,122) $ (9,064) $ (20,223) $ (11,003) $ (5,224) $ (1,266) $ (89)
Capital expenditures, including
acquisitions of businesses....... $ 4,660 $ 5,361 $ 11,378 $ 4,843 $ 2,643 $ 70 $ 2
OTHER OPERATING DATA(4):
Billable minutes (000's) (5)(6).... 25,110 10,010 25,932 14,981 10,899 3,097
Average revenue per billable
minute(6)(7)..................... $ 0.88 $ 1.41 $ 1.23 $ 1.70 $ 1.87 $ 2.16
Average cost per billable
minute(6)(8)..................... $ 0.72 $ 1.21 $ 1.04 $ 1.53 $ 1.67 $ 1.76
Switches(6)(9)(10)................. 13 2 10 2 2
Customers(6)(10)................... 13,779 7,360 9,218 6,469 5,486
BALANCE SHEET DATA(10):
Working capital.................... 8,281 33,287 $ 26,214 $ 58,549 $ (3,628) $ (1,219) $ (44)
Property and equipment, net........ 18,108 11,263 15,715 6,933 3,584 62 2
Total assets....................... 49,384 71,742 65,613 83,923 10,585 2,147 161
Long-term debt, excluding current
installments..................... 72,329 62,712 67,283 59,955 866 -- --
Stockholders' (deficit)
equity(11)....................... (37,760) (1,504) (17,618) 10,985 (162) (1,139) (19)
</TABLE>
- ---------------
(1) Amounts presented may not total due to rounding.
(2) Net loss per share is computed on the basis described in Note 1 of the
Company's Consolidated Financial Statements, except that such data has been
computed to give effect to the conversion of the Class A Common Stock.
(3) As used herein, "EBITDA" consists of earnings before interest (net), income
taxes, depreciation and amortization and share in loss of affiliate. 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 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.
(4) Information derived from operating records prepared by the Company.
(5) Billable minutes are those minutes during which a call is connected at any
Company switch and for which the Company bills a customer.
(6) Blanks indicate that data is not available for such period.
(7) Represents the gross call usage revenue per billable minute. Amounts
exclude other revenue and revenue related items such as hardware sales,
software licensing, credits, discounts and other non-usage charges.
(8) Represents the cost associated with the Company's provision of
telecommunications services per billable minute. Amounts exclude
nontransmission costs such as hardware and software purchased for resale.
(9) At June 30, 1996, includes three switches at the Omaha, Nebraska switching
center, two switches at the London switching center and one switch at each
of the Company's other switching sites. At December 31, 1995, includes two
switches at each of the Company's switching centers in Omaha, Nebraska and
London and one switch at each of the Company's other switching sites.
(10) Information presented as of the end of the period indicated.
(11) The Company has never paid cash dividends on its Common Stock.
21
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company for the six months ended June 30, 1996 and 1995 and
the years ended December 31, 1995, 1994 and 1993. This discussion should be read
in conjunction with the Company's Consolidated Financial Statements, including
the Notes related thereto, and the other financial data included elsewhere in
this Prospectus.
OVERVIEW
Since its inception in 1991, the Company has invested heavily in developing
its ability to provide international telecommunications services within Western
Europe and other deregulating markets and in developing and expanding its market
presence including, more recently, entering into the national long distance
telecommunications markets in certain EU member states. During the past five
years, the Company has made substantial investments in software and back office
operations, an administrative infrastructure and a direct sales organization in
Western Europe. Furthermore, the Company has created an extensive commercial
telecommunications network for voice and voice band data in Europe, which the
Company believes is necessary to effectively render the services it currently
offers and intends to offer after the liberalization of regulations relating to
Voice Telephony. Consequently, the Company has incurred a high level of expense
in connection with its inception and its continued expansion which has resulted
in net operating losses since its inception.
During the past two years, several key trends have affected the composition
of the Company's telecommunications revenue, which is derived principally from
the number of minutes of use billed by the Company, or "billable minutes."
First, a growing proportion of the Company's customers, particularly in Western
Europe, now access the Viatel Network using paid local access through the PSTN
rather than paid access through the Company using callback or ITF. This change
has had a negative impact on the Company's revenue per minute. Second, the
Company expanded its wholesale business, which represented approximately 15.8%
and 33.4% of total telecommunications revenue and billable minutes,
respectively, for the first six months of 1996. Third, Western Europe is
becoming an increasingly important market for the Company. During the first six
months of 1996, approximately 42.4% of the Company's telecommunications revenue
was generated in Western Europe as compared to approximately 35.2% of the
Company's telecommunications revenue during the six months ended June 30, 1995.
In contrast, despite an increase of approximately 7.5% over the corresponding
period of 1995, telecommunications revenue from Latin America represented
approximately 29.1% of the Company's telecommunications revenue during the first
six months of 1996 as compared to approximately 42.6% of the Company's revenue
during the first six months of 1995.
Cost of telecommunications service is comprised of costs associated with
the transmission of voice and voice band data telecommunications services. The
European Network was developed to reduce the Company's costs of providing
telecommunications services and to increase customer usage. This change in
service provision has resulted in the Company's customer access methods evolving
from callback and ITF access to NTF and paid local access. Calls that are not
routed through the European Network generate significantly higher variable costs
because they are connected using relatively expensive ITF numbers or callback.
In contrast, because the Viatel Network has significant fixed costs associated
with its operations, consisting primarily of leased line rental charges, local
connectivity and facility/network management costs, calls routed through the
Viatel Network have lower variable costs than off-network traffic. Although the
current traffic volume through the European portion of the Company's network is
too low to achieve desired economies of scale, transmission costs are expected
to decline as a percentage of revenue as call traffic through the European
Network increases. See "Risk Factors -- Potential Difficulties
22
<PAGE> 26
Associated With Implementing European Expansion Strategy" and "Business -- The
Viatel Network -- The European Network."
The Company's selling expenses include commissions to independent sales
representatives in countries in which the Company does not operate its own
direct sales force. The Company's general and administrative expense includes
overhead costs associated with its headquarters, back office and network
operations and Western European sales offices. The costs associated with
maintaining this management infrastructure, along with the Company's selling
expenses, are substantially higher than the gross margins currently being
generated by the Company.
As a consequence of the establishment of an administrative infrastructure
for managing the business, changes in the composition of both telecommunications
revenue and transmission costs, development of the European Network and the
establishment of direct sales organizations since the Company's inception, the
Company's results of operations for the periods presented are not necessarily
comparable.
RESULTS OF OPERATIONS
The following table summarizes the breakdown of the Company's results of
operations as a percentage of revenue:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
--------------- -------------------------
1996 1995 1995 1994 1993
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Telecommunications revenue.................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of telecommunications services........... 83.4 85.3 85.6 87.4 84.9
Selling expenses.............................. 22.8 23.7 23.1 17.0 11.2
General and administrative expense............ 52.8 50.9 52.2 37.5 28.4
Depreciation and amortization................. 10.0 6.2 8.2 3.0 0.5
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Telecommunications Revenue. Telecommunications revenue increased by 57.0%
to $22.3 million on 25.1 million billable minutes for the six months ended June
30, 1996 from $14.2 million on 10.0 million billable minutes for the six months
ended June 30, 1995. Telecommunications revenue growth for the six months ended
June 30, 1996 was generated primarily from higher traffic volume on the European
Network, from growth in the Company's wholesale business and, to a lesser
extent, from growth in traffic volume in Latin America and the Pacific Rim.
The overall increase of 150.9% in billable minutes from the six months
ended June 30, 1995 to the six months ended June 30, 1996 was partially offset
by declining revenue per billable minute. Average revenue per billable minute
declined by 37.6% from $1.41 in the six-month period ended June 30, 1995 to $.88
in the corresponding period in 1996 primarily because of (i) a higher percentage
of lower-priced intra-European traffic from the European Network, (ii) a higher
percentage of low-priced wholesale traffic, (iii) reductions in certain rates
charged to non-wholesale customers in response to pricing reductions enacted by
certain ITOs in Western Europe and (iv) changes in customer access methods. See
"-- Cost of Telecommunications Services" and "Risk Factors -- Competition."
Telecommunications revenue per billable minute from the sale of services to
non-wholesale customers decreased to $1.12 in the six-month period ended June
30, 1996 from $1.56 in the six-month period ended June 30, 1995.
Telecommunications revenue per billable minute from the sale of services to
carriers and other resellers increased to $.42 in the six months ended June 30,
1996 from $.30 in the six months ended June 30, 1995 primarily as a result of an
overall increase in intercontinental call traffic. The number of customers
billed rose 87.2% to 13,779 at June 30, 1996 from 7,360 at June 30, 1995.
The Company has significantly increased its wholesale business through
which it sells switched minutes to carriers and other resellers at discounted
rates to utilize excess network capacity. While the
23
<PAGE> 27
wholesale business has lower average gross margins than the Company's
non-wholesale business, the telecommunications revenue generated from the
wholesale business partially offsets the fixed costs associated with the Viatel
Network. The wholesale business represented approximately 15.8% and
approximately 33.4% of total telecommunications revenue and billable minutes,
respectively, for the six months ended June 30, 1996 as compared to
approximately 2.6% and approximately 12.5% of total telecommunications revenue
and billable minutes, respectively, for the six months ended June 30, 1995.
While the increase in telecommunications revenue represents more than a
nine-fold increase over the corresponding period for 1995, a portion of this
increase represents the migration of business formerly conducted by the Company
in Africa and the Middle East through indirect sales representatives to carriers
which purchase switched minutes from the Company. The Company does not expect
telecommunications revenue generated by its wholesale business to continue to
grow at this rate.
During the first quarter of 1996, the Company commenced trials of domestic
long distance telecommunications services in Spain and Italy, the two countries
in which the Company had the technical ability to provide such services. After
having obtained favorable results, the Company decided to enter the national
long distance business in certain EU member states in which it operates.
Cost of Telecommunications Services. Cost of telecommunications services
increased to $18.6 million in the six months ended June 30, 1996 from $12.1
million in the six months ended June 30, 1995 and, as a percentage of
telecommunications revenue, decreased to approximately 83.4% from approximately
85.3% for the six months ended June 30, 1996 and 1995, respectively. The
corresponding increase in gross margins was primarily due to changes in overall
service mix and increased utilization of the European Network. The Company
experienced a 40.5% decrease in average cost per billable minute to $.72 during
the six months ended June 30, 1996 from $1.21 during the six months ended June
30, 1995. This decrease, which more than offset the effect of the decline in
average revenue per billable minute, was attributable primarily to (i) increased
traffic being routed through the European Network, (ii) an increase in switched
minutes generated by the Company's wholesale business and (iii) changes in
customer access methods. Increased European Network utilization helped reduce
costs on a per minute basis with respect to European long distance
telecommunications services.
Gross margins for the six months ended June 30, 1996 were negatively
impacted by increases in certain costs related to the expansion of the Company's
overall transmission capacity. These fixed costs are expected to decrease as a
percentage of telecommunications revenue as traffic volume over the European
Network increases. As a result of obtaining additional international private
line circuit ("IPLC") capacity, the costs associated with the European Network
increased to approximately $1.8 million for the six months ended June 30, 1996
(approximately 8.1% of telecommunications revenue for such period) from
approximately $.8 million for the six months ended June 30, 1995 (approximately
5.7% of telecommunications revenue for such period). IPLCs represent a
significant portion of the Company's fixed costs and were not fully utilized in
the six months ended June 30, 1996. The Company believes its use of IPLCs will
continue to increase and such increase will positively impact the Company's
overall gross margins, as a percentage of revenue, as more minutes are routed
through the European Network. This benefit, however, is primarily limited to
calls that either originate or terminate in a city where the Company has a
switch or a POP, because otherwise the Company transports the call over the PSTN
at higher transmission costs and reduced margins.
Selling Expenses. Selling expenses increased to $5.1 million in the six
months ended June 30, 1996 from $3.4 million in the corresponding period in 1995
and, as a percentage of telecommunications revenue, decreased to approximately
22.8% in the six months ended June 30, 1996 from approximately 23.7% in the six
months ended June 30, 1995. Commissions paid to independent sales
representatives constituted approximately 24.3% of all selling expenses for the
six months ended June 30, 1996 compared to approximately 38.6% for the six
months ended June 30, 1995. The increase in selling expenses is attributable to
the Company's establishment of direct sales organizations. Salary related
selling expenses represented approximately 48.4% and approximately 47.6% of
total selling expenses for the six months ended June 30, 1996 and 1995,
respectively.
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General and Administrative Expense. General and administrative expense
increased to $11.8 million in the six months ended June 30, 1996 from $7.2
million in the corresponding period in 1995 and, as a percentage of
telecommunications revenue, increased to approximately 52.8% in the six months
ended June 30, 1996 from approximately 50.9% in the six months ended June 30,
1995. Much of this increase is attributable to the costs of building a direct
sales force in Western Europe and overhead costs associated with the Company's
headquarters, back office and network operations. Absent a charge associated
with a corporate restructuring undertaken by the Company during the period (the
"Reorganization"), general and administrative expense would have decreased to
approximately 47.1%.
During the second quarter of 1996, the Company recognized approximately
$1.3 million of general and administrative expense associated with the
Reorganization, of which approximately $.4 million has been paid to date and
approximately $.3 million represents non-cash deferred compensation. These
expenses are comprised principally of employee termination and relocation costs
and the write-down of a portion of the Company's lease for its administrative
quarters in London.
Depreciation and Amortization. Depreciation and amortization expense,
which includes depreciation of the Viatel Network, increased to approximately
$2.2 million in the six months ended June 30, 1996 from approximately $.9
million in the six months ended June 30, 1995. The increase was due primarily to
the depreciation of switches and other equipment placed in service during 1995
and the first six months of 1996.
Interest. Interest expense increased to approximately $5.2 million in the
six months ended June 30, 1996 from approximately $4.3 million in the six months
ended June 30, 1995 due to the accretion of non-cash interest on the Notes. No
interest is payable on the Notes until July 15, 2000, at which time semi-annual
interest payments will be required through the January 15, 2005 maturity date.
This expense was partially offset by interest income of approximately $.7
million and approximately $1.9 million for the six months ended June 30, 1996
and 1995, respectively, derived from the investment of the net proceeds from the
Unit Offering in highly liquid debt instruments.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Telecommunications Revenue. Telecommunications revenue increased by
approximately 23.0% to $32.3 million on 25.9 million billable minutes in 1995
from $26.3 million on 15.1 million billable minutes in 1994. This growth in
telecommunications revenue resulted primarily from the use of direct sales
organizations in Europe which the Company began to establish in late 1994, the
creation of a wholesale business and growth experienced in the Company's revenue
derived from the Pacific Rim ($4.4 million in 1995 versus $2.0 million in 1994).
Part of this increase was offset by declining revenue per billable minute.
Average revenue per billable minute declined by 27.6% from $1.70 in 1994 to
$1.23 in 1995. The decrease was primarily due to a change in revenue mix, which
in 1995 included a higher percentage of lower-priced intra-European traffic
associated with the European Network becoming operational and a higher
percentage of wholesale traffic, together with a reduction in rates as a result
of the Company's response to price reductions by ITOs. The Company's wholesale
business represented approximately 6.2% of telecommunications revenue and
approximately 21.6% of billable minutes for 1995. Telecommunications revenue per
billable minute from the sale of services to non-wholesale customers decreased
from $1.72 in 1994 to $1.46 in 1995 while revenue per billable minute from the
sale of services to other carriers and resellers was $0.35 in 1995. The number
of customers billed rose approximately 42.5% to 9,218 at December 31, 1995 from
6,469 at December 31, 1994.
Cost of Telecommunications Services. Cost of telecommunications services
increased to $27.6 million in 1995 from $23.0 million in 1994 and, as a
percentage of telecommunications revenue, decreased to approximately 85.6% from
approximately 87.4% for the years ended December 31, 1995 and 1994,
respectively. The corresponding increase in gross margin was primarily
attributable to changes in customer access methods and changes in service mix
attributable to the European Network becoming operational. Accordingly, the
Company experienced an approximately 32.0% decrease in average cost per billable
minute to $1.04 during 1995 from $1.53 during 1994. This decrease, which more
than offset the effect of the decline in average revenue per billable minute,
was attributable to a continued decline in
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<PAGE> 29
U.S. international rates for outbound switched minutes and to increased traffic
volume being routed through the European Network, which was used to originate
calls accounting for approximately 58.0% of the Company's European-related call
revenue during 1995. The increased European Network utilization helped reduce
costs associated with intra-European and intercontinental telecommunications
services due to the predominantly fixed cost nature of the European Network. On
the other hand, during 1994 the Company's gross margin was adversely affected by
the delayed implementation of the European Network. The Company had priced its
services to be competitive with the ITOs in Spain and Italy in anticipation of
the European Network's becoming operational; however, due to delays in the
implementation of the European Network, the Company realized significant losses
on this traffic as a result of having to route calls through ITF access instead
of through the European Network.
Increases in certain fixed costs related to expansion of the Company's
overall transmission capacity negatively impacted the Company's gross margin for
the year ended December 31, 1995. As a result of obtaining additional IPLC
capacity, the costs associated with the European Network increased to
approximately $2.0 million for 1995 (approximately 6.3% of revenue for such
period) from approximately $1.1 million for 1994 (approximately 4.1% of revenue
for such period). Additionally, the Company incurred costs associated with
obtaining redundant fiber optic capacity at the Omaha, Nebraska facility
totaling approximately $.5 million (approximately 1.7% of revenue for 1995).
Selling Expenses. Selling expenses increased to $7.5 million in 1995 from
$4.5 million in 1994 and, as a percentage of telecommunications revenue,
increased to approximately 23.1% from approximately 17.0% for the years ended
December 31, 1995 and 1994, respectively. During 1994, these expenses were
principally comprised of commissions paid to independent sales representatives
which constituted approximately 75.2% of all selling expenses in comparison to
approximately 31.5% for 1995. The increase in selling expenses and change in
expense structure is attributable to the Company's strategy of establishing
direct sales organizations to take greater control over the marketing of its
services and to provide a higher level of customer service. The Company began to
implement this strategy in late 1994 and, as of December 31, 1995, had sales
offices in Belgium, France, Germany, the Netherlands, Italy and Spain.
Accordingly, salary related selling expenses increased to approximately 48.5% of
total selling expenses for 1995 in comparison to approximately 7.7% for 1994. As
a percentage of telecommunications revenue, the use of direct sales
organizations is more costly than the use of independent sales organizations
during the start-up phase of a sales operation. However, the Company anticipates
that selling expenses, as a percentage of telecommunications revenue, will
decrease over time.
General and Administrative Expense. General and administrative expense
increased to $16.9 million in 1995 from $9.9 million in 1994 and, as a
percentage of telecommunications revenue, increased to approximately 52.2% from
approximately 37.5% for the years ended December 31, 1995 and 1994,
respectively. Beginning in the third quarter of 1994, the Company invested
significant funds in establishing a physical presence in its various geographic
markets in Western Europe and in building an administrative infrastructure in
its United States and Western European offices. Such an effort entailed
significant expenditures for salary, rent, office and similar expenses.
Depreciation and Amortization. Depreciation and amortization expense,
which includes depreciation of the Viatel Network, increased to approximately
$2.6 million in 1995 from approximately $.8 million in 1994. The increase in
such expense was due primarily to the depreciation of the European Network which
became operational during October 1994 and the amortization of territorial
exclusivity rights associated with the Company's acquisition of independent
sales organizations in Italy and Barcelona, which occurred in December 1994, as
well as recognizing depreciation for additional switches and other items placed
in service during 1994 and 1995.
Equipment Impairment Loss. In connection with the replacement of
substantial portions of the European Network during 1995, the Company entered
into a termination agreement with TeleMedia International, Inc. ("TMI").
Pursuant to the terms of such agreement, the Company prepaid the remaining lease
obligation of approximately $1.0 million, thereby acquiring all of the equipment
previously leased from TMI, most of which equipment was subsequently redeployed.
The Company recorded a non-
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<PAGE> 30
cash charge of approximately $.6 million in 1995, which represented the original
installation costs of such equipment and the difference between the carrying
value and the expected selling price of the equipment not expected to be
redeployed.
Interest. Interest expense for 1995 increased by approximately $8.1
million from 1994 due to the accretion of non-cash interest on the Notes. This
expense was partially offset by interest income of approximately $3.3 million
for 1995 derived from the investment of the net proceeds from such issuance in
highly liquid debt instruments.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Telecommunications Revenue. Telecommunications revenue increased by
approximately 22.8% to $26.3 million on 15.1 million billable minutes in 1994
from $21.4 million on 10.9 million billable minutes in 1993. This growth in
telecommunications revenue resulted primarily from the Company's existing
markets. Part of this increase was offset by declining revenue per billable
minute rates. Average revenue per billable minute declined by approximately 9.1%
from $1.87 in 1993 to $1.70 in 1994. The decrease was due primarily to a change
in the revenue mix, which in 1994 included a higher percentage of lower priced
intra-European traffic, and a reduction in rates in response to price reductions
by certain ITOs. The number of customers billed rose approximately 17.9% to
6,469 at December 31, 1994 from 5,486 at December 31, 1993.
Cost of Telecommunications Services. Cost of telecommunications services
increased to $23.0 million in 1994 from $18.2 million in 1993 and, as a
percentage of telecommunications revenue, increased to approximately 87.4% in
1994 from approximately 84.9% in 1993. The Company had priced its services to be
competitive with the ITOs in Spain and Italy in anticipation of the European
Network becoming operational; however, due to delays in the implementation of
the European Network, the Company realized significant losses on this traffic as
a result of having to route calls through ITF access instead of through the
European Network. In October 1994, the European Network became operational and
was used to originate approximately 48.0% of the Company's European call revenue
through the remainder of the year. This negative impact on gross margin was
partially offset by an approximately 8.4% decrease in average cost per billable
minute to $1.53 in 1994 from $1.67 in 1993. This decrease was attributable to
the migration in access from higher cost per minute ITF access to callback
access in Brazil and Argentina, traffic being routed through the European
Network and a general decline in U.S. switched international rates for outbound
services attributable to the Company's successful negotiation of favorable
rates.
Selling Expenses. Selling expenses increased to $4.5 million in 1994 from
$2.4 million in 1993 and, as a percentage of telecommunications revenue,
increased to approximately 17.0% in 1994 from approximately 11.2% in 1993. These
expenses consisted primarily of commissions paid to independent sales
representatives in the countries in which the Company did not operate its own
direct sales organizations. Commissions paid to these representatives ranged
from five percent to fifteen percent of telecommunications revenue, net of
chargebacks for amounts deemed uncollectible in the period the related services
were provided.
General and Administrative Expense. General and administrative expense
increased to $9.9 million in 1994 from $6.1 million in 1993 and, as a percentage
of telecommunications revenue, increased to approximately 37.5% in 1994 and
approximately 28.4% in 1993. A significant portion of the increase was
attributable to building an administrative infrastructure in the Company's New
York, Omaha and European offices and to hiring an experienced management team.
In addition, during 1994 the Company charged to operations current costs
associated with the European Network which had been capitalized prior to the
European Network becoming operational.
Depreciation and Amortization. Depreciation and amortization expense,
which includes depreciation of the Viatel Network, increased to $.8 million in
1994 from approximately $.1 million in 1993. The increase in such expense was
due primarily to the recognition of a full year of depreciation and amortization
expense with respect to the Omaha switching center, which was purchased on
October 1,
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1993. In February 1994, the Company began to depreciate the European Network,
resulting in depreciation expense of approximately $.3 million in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred losses from operating activities in each year of
operations since its inception and expects to continue to incur operating losses
for the next several years. Through June 30, 1996, the Company had incurred
$67.4 million of aggregate losses from operating activities. As of June 30,
1996, the Company had $12.8 million of cash, cash equivalents and other liquid
investments. The Company believes that, based on its current forecasts and
assuming the successful completion of the Offerings, the Company should be able
to fund its capital requirements at least until the year 1999 even though cash
flow from operations will continue to be negative until at least the year 2001.
Capital Expenditures and Working Capital. The development of the Company's
business has, in the past, required substantial capital expenditures. In the
future, the Company will require substantial capital expenditures significantly
in excess of historical levels to upgrade and expand the Viatel Network
generally, and the European Network specifically, as well as to develop and
expand new and existing services. During the years ended December 31, 1995, 1994
and 1993 and the six months ended June 30, 1996, the Company had capital
expenditures, including acquisitions of businesses, of approximately $11.4
million, $4.8 million, $2.6 million and $4.7 million, respectively.
Historically, the Company has funded its capital expenditures through equity and
debt issuances and vendor financings. The Company expects to use the net
proceeds of the Offerings to meet its capital expenditure requirements, which
include upgrade and expansion of the European Network in up to 39 additional
Western European cities by the year 2000. The Company estimates that it will use
approximately (i) $32.2 million of the net proceeds of the Offerings for network
upgrade and expansion, including the purchase and installation of POPs or
switches to expand the European Network from nine to up to 48 Western European
cities, the installation of a POP in Miami and a switch in Los Angeles and for
the upgrade of the Company's switch in London and its New York City POP to a
switch, (ii) $9.0 million for investments in digital undersea fiber optic cable,
(iii) $20.0 million for acquisitions of customer bases and businesses or for
investment in joint ventures or strategic alliances, and (iv) $46.8 million for
general corporate and working capital purposes, including up to approximately
$1.0 million for feasibility studies of the Company's provision of CLEC
services. See "Risk Factors -- Substantial Capital Requirements," "Risk
Factors -- Broad Discretion Over Use of Proceeds" and "Use of Proceeds."
Average Monthly Cash Requirements. During the six months ended June 30,
1996, the Company's average current monthly cash requirements were approximately
$2.05 million. This average excludes approximately (i) $5.3 million for capital
expenditures for the purchase of equipment, software and the continued
development of the European Network (including approximately $.6 million of
equipment purchased in 1995 and paid for in 1996), (ii) $3.6 million incurred in
connection with the settlement of the Company's fee dispute for past services
with a facilities-based IPLC vendor, and (iii) $1.1 million for other
non-recurring items (including $.4 million paid in connection with employee
termination and relocation costs). Due to cost savings associated with the
Reorganization, it is anticipated that, over time, average monthly cash
requirements will be reduced.
Interest Requirements and Debt Repayment. Until January 15, 2000, the
Notes will accrue interest on a semi-annual basis to their aggregate $120.7
million principal amount. No interest is payable on the Notes until July 15,
2000, at which time semi-annual interest payments will be required through the
January 15, 2005 maturity date. If the Company is unable to generate sufficient
cash flow from operations to satisfy the debt service requirements on the Notes,
the Company will be required to refinance the Notes or raise additional capital.
There can be no assurance that any refinancing could be obtained on terms
favorable to the Company, if at all, or that any form of additional capital will
be available. In addition, the Indenture contains certain restrictive covenants
that, among other things, limit the ability of the Company and certain of its
subsidiaries to incur indebtedness, make pre-payments of certain indebtedness
and pay dividends. There can be no assurance that the Company will be able to
comply with such restrictive covenants in the future.
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Foreign Currency. The Company has exposure to fluctuations in foreign
currencies relative to the U.S. dollar as a result of billing portions of its
telecommunications revenue in the local currency in countries where the local
currency is relatively stable, while many of its obligations, including the
Notes and a substantial portion of its transmission costs, are denominated in
U.S. Dollars. In countries with less stable currencies, such as Brazil, the
Company bills in U.S. Dollars. For the six months ended June 30, 1996,
approximately 42.1% of the Company's telecommunications revenue was billed in
currencies other than the U.S. Dollar. Furthermore, substantially all of the
costs of acquisition and upgrade of the Company's switches have been, and will
continue to be, U.S. Dollar denominated transactions.
With the continued expansion of the European Network, a substantial portion
of the costs associated with the European Network, such as local access charges
and a portion of leased line costs, as well as a majority of local selling
expenses, will be charged to the Company in the same currencies as revenue is
billed. These developments create a natural hedge against a portion of the
Company's foreign exchange exposure. To date, much of the funding necessary to
establish the local direct sales organizations has been derived from
telecommunications revenue that was billed in local currencies. Consequently,
the Company's financial position as of June 30, 1996 and its results of
operations for the six months ended June 30, 1996 were not significantly
impacted by fluctuations in the U.S. Dollar in relationship to foreign
currencies. See "Risk Factors -- Risks Associated with International
Operations."
INFLATION
The Company does not believe that inflation has had a significant effect on
the Company's operations to date.
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<PAGE> 33
BUSINESS
OVERVIEW
Viatel is a growing provider of international and national long distance
telecommunications services principally in Western Europe, Latin America, the
United States and the Pacific Rim and offers its services primarily to small and
medium-sized businesses, carriers and other resellers. The Company operates a
digital, switch-based telecommunications network in Western Europe including a
central switching center in London and additional switches in Amsterdam,
Barcelona, Brussels, Frankfurt, Madrid, Milan, Paris and Rome connected by
leased, digital fiber optic transmission facilities. In addition, the Company
operates a switching center in Omaha, Nebraska which is connected to the central
switching center in London by leased, digital fiber optic transmission
facilities. The Company has achieved rapid growth since its inception in 1991
with telecommunications revenue reaching $32.3 million in 1995 and $22.3 million
during the six months ended June 30, 1996.
The Company derives revenue primarily through the provision of
competitively priced long distance services with value-added features that are
not typically provided by the respective ITO in many of the countries in which
the Company operates. The Company's services include virtual private networks,
dedicated access for high volume users, calling cards, fax service and the
provision of switched minutes to wholesale customers. The value-added features
include itemized and multicurrency billing, abbreviated dialing and multiple
payment methods. Access to the Company's services is obtained through callback,
paid access, ITF, NTF or direct access through a dedicated line.
The Company conducts its business on a global basis, with its principal
focus on Western Europe. Of the Company's telecommunications revenue for the six
months ended June 30, 1996, approximately 42.4% was generated in Western Europe,
approximately 29.1% was generated in Latin America, approximately 16.2% was
generated in North America, primarily from the Company's wholesale business of
selling switched minutes to other carriers and approximately 11.7% was generated
in the Pacific Rim. The remaining .6% was generated in Africa and the Middle
East.
BUSINESS STRATEGY
The Company's objective is to be a significant provider of international
and national long distance telecommunications services within Western Europe and
other deregulating markets. The Company believes it is strategically positioned
to take advantage of fundamental changes occurring in the telecommunications
industry as a result of global deregulation and rapid advances in technology. In
particular, the Company believes that its early entry into the Western European
market as an alternative network operator has positioned it to take advantage of
the anticipated implementation of EU directives to eliminate the ITOs' existing
monopolies on Voice Telephony (as defined herein), scheduled to occur by 1998 in
most EU member states. The Company is currently prohibited from supplying Voice
Telephony in most EU member states until 1998. Accordingly, the Company instead
provides competitively priced international and national long distance services
with value-added features, thus positioning itself to capitalize on anticipated
deregulation. See "Risk Factors -- Substantial Government Regulation" and
"-- Government Regulation." Key elements of the Company's business strategy
include:
- FOCUS ON THE EUROPEAN MARKET; LEVERAGE EUROPEAN NETWORK. To capitalize
on opportunities presented by the changing regulatory environment and
the size of the Western European market, the Company intends to further
utilize and expand the European Network. During the six months ended
June 30, 1996, approximately 42.4% of the Company's telecommunications
revenue was generated in Western Europe, with approximately 32.9% of its
revenue attributable to calls originated on the European Network. The
Company intends to expand the European Network by installing POPs in
cities with both significant calling activity directed to the Company's
switch-based cities and significant potential for originating and
terminating international and national long distance traffic. The
Company anticipates installing POPs in up to 19 Western European cities
in 1997, including Berlin, Lyon, Rotterdam, Turin, Valencia, Vienna and
Zurich. The Company also intends to install a POP in Miami and a switch
in Antwerp in the fourth quarter of
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1996. In the first quarter of 1997, the Company plans to upgrade its switch in
London, upgrade the New York City POP to a switch and install a switch in Los
Angeles. See "Risk Factors -- Substantial Government Regulation," "Risk
Factors -- Potential Difficulties Associated With Implementing European
Expansion Strategy," "Risk Factors -- Substantial Capital Requirements,"
"Risk Factors -- Risks Associated With International Operations" and
"-- Maintain Low-Cost Operations."
- CAPITALIZE ON ANTICIPATED SETTLEMENT AGREEMENT OBSOLESCENCE. In
contrast to many other companies engaged in the sale of international
long distance services, the Company is not dependent on settlement
agreements with ITOs for traffic origination and termination. The
Company believes that the trend toward deregulation could hasten the
obsolescence of settlement agreements anticipated by the Company, thus
encouraging carriers to consider alternatives to the ITOs for long
distance traffic termination. Currently, the European Network is
primarily used to originate international long distance traffic from and
within Western Europe. The Company plans to further leverage the
European Network to take advantage of settlement agreement obsolescence
anticipated by the Company by offering other carriers an alternative to
the ITOs for long distance traffic origination and termination within
Western Europe. While the trend toward settlement agreement obsolescence
anticipated by the Company is likely to reduce prices for long distance
services, the Company believes that increased utilization of the
European Network for both origination and termination of traffic and
reduced transmission costs should offset any such price reductions.
- MAINTAIN LOW-COST OPERATIONS. The Company believes that the Viatel
Network efficiently utilizes least cost routing ("LCR") of
telecommunications traffic over multiple transmission facilities to: (i)
reduce costs; (ii) control access to customer information; and (iii)
allow increases in network usage without proportionate increases in
costs. In addition, the Company pursues a disciplined, incremental
approach to expansion. When the Company initially expands into a region,
it provides services on a variable cost basis. As traffic volume grows,
the Company typically reconfigures the network by acquiring fixed-cost
facilities with greater capacity thereby expanding the Company's
addressable market on a cost-effective basis. See "-- The Viatel
Network -- Expansion Plans."
- FOCUS ON SMALL AND MEDIUM-SIZED BUSINESSES. The Company's principal
target market consists of small and medium-sized businesses for which
the cost of long distance telecommunications services represents a
significant business expense. The Company believes that these customers
tend to principally be focused on price and customer service. The
Company also believes that, within any particular EU member state, the
Company's services and pricing will be more attractive to such customers
when, in addition to providing international long distance services, the
Company provides national long distance services within such state. The
Company believes that its ability to offer national and international
long distance services to its targeted customers, and to bundle such
services where desirable, will result in increased traffic volume on the
European Network due to (i) existing high demand for national long
distance service by the Company's targeted customers, (ii) potential
savings which the customer would receive by purchasing both services
from the Company and (iii) convenience associated with purchasing such
services from a single vendor. See "-- Sales and Marketing; Customers."
- EXPAND WHOLESALE SWITCHED SERVICE. To increase utilization of the
Viatel Network, the Company sells switched minutes to wholesale
customers and other resellers in the United States and the United
Kingdom. Sales to such customers accounted for approximately 15.8% of
the Company's telecommunications revenue for the six months ended June
30, 1996 (as compared to approximately 2.6% for the corresponding period
in 1995). The Company intends to continue to expand its wholesale
service, thus providing the Company with a source of additional revenue
and minutes originating and terminating on the Viatel Network.
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<PAGE> 35
- CONTINUE DEVELOPMENT OF LOCAL SALES DISTRIBUTION CHANNELS. The
Company's sales and marketing strategy is to leverage its locally based
sales forces, which include direct and indirect sales representatives
and telemarketing agents, to establish direct sales forces in other key
Western European cities and to augment the efforts of its direct local
sales, marketing and customer service functions by utilizing
non-exclusive independent representatives. The Company believes that the
knowledge of its sales, marketing and customer service personnel of
local systems, customs and languages increases the Company's ability to
develop and serve its principal target customer base.
- LEVERAGE INFORMATION SYSTEMS. The Company believes that integrated and
reliable billing and information systems are key elements for growth and
success in the telecommunications industry. Accordingly, the Company has
made significant investments to acquire and implement sophisticated
information systems which enable the Company to: (i) monitor and respond
to customer needs by developing new and customized services; (ii) manage
LCR; (iii) provide customized billing information; (iv) provide high
quality customer service; (v) detect and minimize fraud; (vi) verify
payables to suppliers; and (vii) rapidly integrate new customers. The
Company believes that its network intelligence, billing and financial
reporting systems enhance its ability to competitively meet the
increasingly complex and demanding requirements of the international and
national long distance markets. See "Risk Factors -- Dependence on
Effective Information Systems" and "-- Information Systems."
- PURSUE ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES. The Company
expects to pursue selective acquisitions of customer bases or
businesses, make investments in companies that complement the Company's
current operations or expand its services or network capabilities and
engage in strategic alliances. The Company believes that such
acquisitions, investments and strategic alliances are an important means
of increasing network traffic volume and achieving economies of scale.
In particular, the Company believes that, in certain instances, it is
more efficient to acquire rather than develop customer bases. See "Risk
Factors -- Risks Associated With Acquisitions, Investments and Strategic
Alliances."
MARKET OPPORTUNITY
According to the ITU, the international telephone service industry had
total worldwide revenue of approximately $50.6 billion in 1994. While revenue
data is not available on a per country basis for Europe, Europe accounted for
approximately 45.0% or 24.0 billion of worldwide international outgoing voice
and voice band data minutes of use. The Company believes that, during 1996, the
Western European countries in which the Company currently operates or intends to
operate will represent approximately 22.6% or 13.6 billion of worldwide
international outgoing voice and voice band data revenue and approximately 35.2%
or 22.3 billion of related minutes of use.
The Company also believes that, during 1996, the market for national long
distance voice and voice band data revenue in the Western European countries in
which the Company operates will represent approximately $41.7 billion or 196.9
billion minutes of use.
In the Company's target markets, deregulation and new technologies have
resulted in increased competition between telecommunications service providers
and increased demand for the transmission of information across national
borders. Such deregulation and technological innovation has: (i) decreased the
cost of providing toll service; (ii) enabled the provision of sophisticated
value-added features; and (iii) allowed other companies to compete with the
ITOs.
Historically, the respective ITO in each country has had the exclusive
right to provide telephone services within that country and, as a result, long
distance callers have paid relatively high prices for limited service. Since
1990, the EU telecommunications market has become increasingly liberalized, but
the provision of Voice Telephony is reserved to the local ITO in most EU member
states until scheduled deregulation in 1998. See "-- Government Regulation." In
response to the liberalization of telecommunications services within the EU, a
number of different competitors have emerged to compete with the
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ITOs, including the Company, alliances between large United States
telecommunications service providers and ITOs and other competitors that
primarily provide long distance service through callback access or through
developing networks servicing specific geographic markets. See "Risk Factors --
Competition" and "-- Competition."
In the telecommunications industry, deregulation has coincided with
technological advances, which include utilization of fiber optic cable and
improved computer software and processing technology. Fiber optic cable, which
has widely replaced traditional copper wire lines for long distance
transmission, has dramatically increased the capacity, speed and flexibility of
transmission lines and has virtually eliminated limited capacity as a technical
barrier to entry for new international telephone companies. Improvements in
computer software and processing technology have allowed the provision of
value-added features such as itemized and multicurrency billing, international
debit and charge networks and ITF numbers.
The Company believes, along with many industry observers, that the current
deregulation in many EU member states, coupled with technological innovation,
will lead to market developments similar to those that occurred upon
deregulation of long distance telecommunications services in the United States
and the United Kingdom, including an increase in traffic volume and the
continued introduction of new providers of telecommunications services of
varying sizes. While significant reductions in prices and improvements in
telecommunications and customer services have occurred and are expected to
continue, the Company expects that market prices will continue to permit
services to be profitably rendered. See "Risk Factors -- Substantial Government
Regulation," "-- Government Regulation" and "-- Competition."
The Company further believes that its operating experience in deregulating
markets in the United States and the United Kingdom, and its experience as an
early entrant into the Western European market as an alternative network
operator, will assist it in identifying opportunities in other deregulating
countries with high density telecommunications traffic. The Company also
believes that its position in the Western European telecommunications market and
its experience providing international telecommunications services will assist
it in establishing a presence in national long distance markets in Western
Europe. The Company recently launched national long distance telecommunications
services in Spain and Italy and, based upon favorable results in such markets,
has determined to enter the national long distance business in all EU member
states in which it currently operates.
SERVICES
The Company provides competitively priced long distance services with
value-added features that are not typically provided by the respective ITO in
many of the countries in which the Company operates. The Company's services
include virtual private networks, dedicated access for high volume users,
calling cards, fax service and the provision of switched minutes to wholesale
customers. The value-added features include itemized and multicurrency billing,
abbreviated dialing and multiple payment methods. See "-- The Viatel Network."
Access to the Company's services is obtained either through "dial up
access" or "direct access." Dial up access requires the use of: (i) paid access,
which requires the customer to pay the ITO for the cost of accessing the
Company's services; (ii) callback, which enables the customer to receive a
return call providing a dial tone originated from the Company's Omaha, Nebraska
switching center; (iii) ITF, which accesses the Omaha, Nebraska switching center
by direct dial; or (iv) NTF, which accesses a local switch in the European
Network. Customers using direct access are connected to a Company switch by a
dedicated leased line.
Paid access currently accounts for approximately 74.8% of the Company's
Western European revenue. To reduce the Company's costs and improve usage, the
Company has evolved from callback and ITF access to access by NTF numbers, paid
access and, ultimately, in the case of ViaCALL Plus, by direct access. Until
regulatory considerations permit, all customers outside of Europe, except for
wholesale customers, are expected to continue to access the Company's services
through callback or ITF numbers.
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The Company's principal services include:
VIACALL -- enables virtual private network calling to a pre-defined group
of locations within a closed user group that can be modified as required,
subject only to regulatory limitations.
VIACALL PLUS -- provides dedicated access via a leased line from the
customer to the Viatel Network, permitting calling without dialing access or
location codes.
VIACALL EXPRESS -- provides a paid (local) access or toll free number
programmed to dial an existing phone number or system, generally in another
country, without the need for special circuits or modifications.
VIAWORLDFAX -- permits calling for facsimile and other voice band data
services and is marketed exclusively in Western Europe. In the third quarter of
1996, the Company intends to simplify access to this service through the use of
automatic number identification, where feasible.
VIACONNECT -- provides "anywhere to anywhere" international callback access
through manual, automatic, X.25 or Internet initiated callback. These services
are also offered with ITF access, subject to pricing considerations.
VIAGLOBE -- provides calling card access from over 45 countries. In
addition to offering savings over the calling cards of AT&T Corp., MCI
Communications Corporation and other providers of credit-based international
calling cards, ViaGLOBE provides 24-hour operator assistance and speed dialing.
The Company expects to introduce a new service in the second half of 1996
called ViaCARD. ViaCARD is a prepaid international debit card which provides
many of the same features as ViaGLOBE in a prepaid environment. The numerous
benefits and opportunities afforded customers with a prepaid card include better
internal cost controls and the ability to offer small denomination cards as
promotional items. There can be no assurance that the Company will be able to
launch ViaCARD in the second half of 1996 or thereafter or that, if launched,
such service will be successful.
The Company markets its services under a number of registered and common
law service marks and uses various registered logos including "Viatel," a
federally registered service mark in the United States.
In certain of the Company's existing and target markets there are laws or
regulations that either prohibit or limit, or could be used to prohibit or
limit, certain of the transmission methods by which the Company's services are
provided and the provision of certain of the Company's services. See "Risk
Factors -- Substantial Government Regulation" and "-- Government Regulation."
THE VIATEL NETWORK
The Viatel Network consists of a central switching center in London, a
switching center in Omaha, Nebraska and switches in Amsterdam, Barcelona,
Brussels, Frankfurt, Madrid, Milan, Paris and Rome each connected by leased,
digital fiber optic transmission facilities. The Company's ownership of switches
reduces its reliance on other carriers, enables routing of telecommunications
traffic over multiple leased transmission lines, aids in controlling costs and
permits the compilation of call record data and other customer information. The
availability and price of existing transmission capacity for long distance
transmissions in the Company's primary geographic markets makes leasing
transmission lines attractive and is expected to enable the Company to grow
network usage without incurring significant capital and operating costs. The
Company intends to use a significant portion of the net proceeds of the
Offerings to upgrade and expand the Viatel Network. See "Use of Proceeds,"
"-- Business Strategy -- Maintain Low-Cost Operations" and " -- Expansion
Plans."
To originate and terminate calls on the European Network, the Company's
switches must have access and egress into and from the PSTN through local
connectivity. Each of the Company's services, other than ViaCALL Plus, requires
use of the PSTN to connect with a Company switch, using either a NTF number or
paid access. For ViaCALL Plus, local connectivity is provided by dedicated
leased lines that connect a customer's premises directly to a Company switch. In
each country in which ViaCALL Plus is
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offered, local connectivity is currently provided under tariffed services
offered by the ITO. See "Risk Factors -- Potential Difficulties Associated With
Implementing European Expansion Strategy."
THE EUROPEAN NETWORK. The European Network currently consists of a central
switching center in London and switches in the eight Western European cities
mentioned above. These cities were chosen as switch locations due to the
substantial number of international calls originating from such cities. The
European Network has been primarily used to originate traffic in Western Europe.
The Company anticipates increasing use of the European Network to terminate
traffic in Western Europe, particularly if settlement agreements become
obsolete. See "Risk Factors -- Potential Difficulties Associated With
Implementing European Expansion Strategy" and "-- Business
Strategy -- Capitalize on Anticipated Settlement Agreement Obsolescence."
INTERNATIONAL PRIVATE LINE CIRCUITS. The Company's eight switches in
Western Europe are connected to the central switching center in London by IPLCs,
except for the Barcelona switch which is connected to the Madrid switch through
an in-country private line circuit ("PLC"). IPLCs are permanent point-to-point
connections for voice and voice band data transmissions and are a less expensive
alternative to PSTNs, which are typically controlled by the local ITOs. The
Company transmits call traffic to Omaha, Nebraska from London and to London from
Omaha, Nebraska by an IPLC. The IPLCs connecting the Company's switches to the
central switching center in London are leased directly, or indirectly through
third parties, from the ITOs in the countries in which such calls originate.
To reduce transmission costs and to provide additional capacity between the
United States and London, the Company (i) is in the process of acquiring an
indefeasible right of use ("IRU") in the portion of a transatlantic digital
fiber optic cable originating in the United States for transmission of traffic
between the United States and Europe, (ii) anticipates filing an application in
the third quarter of 1996 which would permit the Company to acquire an IRU in
transatlantic digital fiber optic cable originating in the United Kingdom and
(iii) is considering acquiring an IRU in cross-channel digital fiber optic cable
originating in the United Kingdom.
INTELLIGENT SWITCHES. The Viatel Network utilizes "intelligent switches"
which incorporate proprietary software to achieve LCR, the process by which the
Company optimizes the routing of calls over the Viatel Network for more than 230
countries and territories. LCR allows calls that are not routed over the Viatel
Network to be routed directly from the Company's switches through the PSTN to
their destinations at the lowest rates. These switches also enable the Company
to efficiently perform billing functions and account activation and to render
value-added services. See "-- Information Systems."
The Viatel Network uses high capacity, programmable switching platforms
designed to deploy network-based intelligent services quickly and cost
effectively. The switches are modular and scaleable and incorporate advanced
technologies such as ISDN, hierarchical call control and SNMP network management
software. These switches can also provide a bridge between older and emerging
standards. As the Viatel Network continues to evolve, the installed base of
switches can be upgraded easily to create a cost effective, scaleable service
switching point in an SS7 (an industry standard signaling protocol) based
network.
REDUNDANCY. In general, the Company relies upon the PSTN to provide
redundancy in the event of technical difficulties with the Viatel Network.
However, the Company maintains two facilities in Omaha, Nebraska to provide some
degree of redundancy in its back office operations, billing and switching
systems. The Company believes that the strategy of using the PSTN for redundancy
is more cost-effective than building its own redundant capacity, although there
can be no assurance that this will be the case in the future. To the extent that
customer demand over the European Network exceeds the Company's transmission
capacity, the Company may elect or be required to route overflow traffic over
the PSTN, and the Company may experience reduced margins and/or losses on such
calls. The Company's strategy is to monitor its anticipated traffic volume on a
regular basis and to increase IPLC and PLC capacity before the capacity
limitations of such circuits are reached. See "Risk Factors -- Potential
Difficulties Associated With Implementing European Expansion Strategy."
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ECONOMIC BENEFITS OF THE NETWORK. The economic benefits to Viatel of
owning and operating its own network arise principally from reduced transmission
costs. Calls that are not routed through the network generate significantly
higher variable costs because they are connected using relatively expensive ITF
numbers or callback. In contrast, because the Viatel Network has significant
fixed costs associated with its operations, consisting primarily of leased line
rental charges, local connectivity and facility/network management costs, calls
routed through the Viatel Network have lower variable costs than off-network
traffic. Although the current traffic volume through the European portion of the
Company's network is too low to achieve desired economies of scale, transmission
costs are expected to decline as a percentage of revenue as call traffic through
the European Network increases. This economic benefit, however, is primarily
limited to traffic which either originates or terminates in a city where the
Company has a switch or POP. If a switch or POP does not exist in an origination
or destination city, the Company transports the call over the PSTN, at higher
transmission costs and reduced margins. Accordingly, as the European Network is
expanded, the Company anticipates being able to serve a greater number of
customers on a more cost effective basis. In the future, the Company expects
that most of its European calling traffic will originate or terminate through
the European Network both for international and national long distance calls. In
addition, as traffic patterns warrant, the Company expects to further reduce
transmission costs by connecting switches directly to one another with private
lines, bypassing the Company's switching centers in London and Omaha.
EXPANSION PLANS. The Company intends to use a significant portion of the
net proceeds of the Offerings to expand and upgrade the Viatel Network. The
Company plans to install a POP in Miami and a switch in Antwerp in the fourth
quarter of 1996. In the first quarter of 1997, the Company plans to upgrade its
switch in London, upgrade the New York City POP to a switch and install a switch
in Los Angeles. Switches that have been replaced will be redeployed to upgrade
POPs in other strategic locations. To further extend the European Network, the
Company also anticipates installing POPs in up to 19 Western European cities in
1997, including Berlin, Lyon, Rotterdam, Turin, Valencia, Vienna and Zurich.
Expanding the European Network to include such additional major European
business centers should ultimately reduce transmission costs and increase the
addressable market of the European Network. See "Risk Factors -- Potential
Difficulties Associated With Implementing European Expansion Strategy." In
addition, to further reduce transmission costs, the Company (i) is in the
process of acquiring an IRU in the portion of a transatlantic digital fiber
optic cable originating in the United States for transmission of traffic between
the United States and Europe, (ii) anticipates filing an application in the
third quarter of 1996 which would permit the Company to acquire an IRU in
transatlantic digital fiber optic cable originating in the United Kingdom and
(iii) is considering acquiring an IRU in cross-channel digital fiber optic cable
originating in the United Kingdom.
INFORMATION SYSTEMS
The Company believes that integrated and reliable billing and information
systems are key elements for growth and success in the telecommunications
industry. Accordingly, the Company has made significant investments to acquire
and implement sophisticated information systems which enable the Company to: (i)
monitor and respond to customer needs by developing new and customized services;
(ii) manage LCR; (iii) provide customized billing information; (iv) provide high
quality customer service; (v) detect and minimize fraud; (vi) verify payables to
suppliers; and (vii) rapidly integrate new customers. The Company believes that
its network intelligence, billing and financial reporting systems enhance its
ability to competitively meet the increasingly complex and demanding
requirements of the international and national long distance markets. While the
Company believes that such systems are currently sufficient for its operations,
such network intelligence, selling and financial reporting systems will require
enhancements and ongoing investments. See "Risk Factors -- Dependence on
Effective Information Systems" and "-- Business Strategy -- Leverage Information
Systems."
The Company currently has a turnaround time of approximately 24 hours for
new account entry. The Company's billing system provides multicurrency billing,
itemized call detail, city level detail for
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destination reporting and electronic output for select accounts. Customers are
provided with several payment options, including automated credit card
processing and automated direct debiting.
The Company has developed proprietary software to provide
telecommunications services and render customer support. In contrast to most
traditional telecommunications companies, the software used to support the
European Network resides outside of the switches and, therefore, does not
currently rely on third party switch manufacturers for upgrades. The Company
believes its software configuration facilitates the rapid development and
deployment of new services and provides the Company with a competitive
advantage. Each switch has a call detail recording function which enables the
Company to: (i) achieve accelerated collection of call records; (ii) detect
fraud and unauthorized usage; and (iii) permit rapid call detail record
analysis. See "-- The Viatel Network -- Intelligent Switches."
The Company also uses its proprietary software to assist it in analyzing
traffic patterns and determining network usage and busy hour percentage,
originating traffic by switching center, terminating traffic by supplier and
originating traffic by customer. This data is utilized to optimize LCR, which
may result in call traffic being transmitted over the Company's transmission
facilities, other carriers' transmission facilities or a combination of such
facilities. If traffic cannot be handled over the least cost route due to
overflow, the LCR system is designed to transmit the traffic over the next least
cost route. The LCR system chooses among the following variables to minimize the
cost of a long distance call: (i) over 15 different suppliers; (ii) 24 different
time zones; and (iii) multiple choices of terminating carrier per country. The
performance of the LCR system is verified based on a daily overflow report
generated by the Company's network traffic management and a weekly/monthly
average termination cost report generated by the Company's billing system. See
"Risk Factors -- Dependence on Effective Information Systems."
SALES AND MARKETING; CUSTOMERS
From 1991 to 1994, the Company's sales and marketing efforts were conducted
by independent sales representatives in each of its markets. In late 1994, the
Company began establishing its own direct sales forces in certain Western
European and Latin American countries to take greater control over the sales and
marketing functions and to provide a higher level of customer service.
Currently, the Company has direct sales forces in the nine cities in Western
Europe in which it has switches. The Company intends to establish direct sales
forces in other key Western European cities and to utilize non-exclusive
independent representatives to augment the efforts of its direct sales forces.
This strategy is expected to provide the Company with the benefits derived from
a direct sales organization while minimizing the organizational and other fixed
costs associated with such an undertaking.
The initial phase of development of the Company's direct sales organization
in a given country involves setting up a team of salespeople led by a sales
manager and supported by a centralized telemarketing and customer service team.
Over time, the Company expects each country in which it provides services to be
served by multiple sales teams under the leadership of a country manager and a
central telemarketing team responsible for generating new sales leads. The
Company does not engage in general advertising, but instead uses local
advertising directed to its target customer base.
The Company's principal target market consists of small and medium-sized
businesses. This market includes trading companies, financial institutions, call
centers and import-export companies, for which long distance telecommunications
service represents a significant business expense. The Company also targets
carriers and other resellers. The Company has four sales professionals dedicated
to marketing and maintaining the Company's relationships with its wholesale
customers in the United States and in the United Kingdom. Currently, no customer
of the Company individually accounts for more than 10% of the Company's revenue.
In addition to providing long distance services to third party call
centers, the Company believes that it can profitably establish its own call
centers within certain Western European cities which will provide the ViaCALL
Plus service. Call centers are primarily used by students, travelers and other
expatriates as an alternative to coin telephone, callback or third party billed
calls. The Company believes that the
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establishment of its own call centers will enable it to earn high margin revenue
while controlling credit problems associated with third party call centers.
The Company employs a decentralized approach to pricing non-wholesale
services and, as a result, its discount relative to the ITOs' prices varies
among geographic markets. For its non-wholesale services, the Company offers
discounts to the prices charged by the ITO in each market which typically range
from approximately 10.0% to approximately 20.0% for international calls and from
approximately 20.0% to approximately 40.0% for intercontinental calls. In those
markets where the Company currently provides national long distance services,
the discounts typically range from approximately 8.0% to approximately 28.0%.
The Company generally sets its wholesale rates on a case by case basis with
an overall margin objective based upon a customer traffic profile. The rates
charged are generally priced at or below the market price of the leading United
States international facilities-based carriers, but the Company does not offer a
standard discount relative to any major carrier.
CARRIER CONTRACTS
The Company has entered into contracts to purchase switched minute capacity
from various domestic and foreign carriers and depends on such contracts for
origination and termination of traffic on the Viatel Network as well as for
resale of such capacity to others. Carrier costs constitute a significant
portion of the Company's variable costs. Pursuant to these contracts, the
Company obtains guaranteed rates, which are generally more favorable than
otherwise would be available, by committing to purchase switched minute minimums
from such carriers. If the Company fails to meet its switched minute minimum
requirements under a carrier contract, it could still be required to pay its
minimum monthly commitment as a penalty. The Company's aggregate minimum monthly
commitments are $.53 million, which represents less than 20.0% of the Company's
monthly variable transmission expense. The Company has never paid a penalty for
failing to meet such a commitment. The Company does not believe that the loss of
any one supplier or contract would have a material adverse impact on the
Company's business, financial condition or results of operations. See
"-- Competition."
COMPETITION
The international telecommunications industry is highly competitive. The
Company's success depends upon its ability to compete with a variety of other
telecommunications providers in each of its markets, including the respective
ITO in each country in which the Company operates and global alliances among
some of the world's largest telecommunications carriers. Other potential
competitors include cable television companies, wireless telephone companies,
electric and other utilities with rights of way, railways, microwave carriers
and large end users which have private networks. The intensity of such
competition has recently increased and the Company believes that such
competition will continue to intensify as the number of new entrants increases.
Many of the Company's current or potential competitors have substantially
greater financial, marketing and other resources than the Company. If the
Company's competitors devote significant additional resources to the provision
of international or national long distance telecommunications services to the
Company's target customer base of small and medium-sized businesses, such action
could have a material adverse effect on the Company's business, financial
condition and results of operations, and there can be no assurance that the
Company will be able to compete successfully against such new or existing
competitors. See "Risk Factors -- Competition."
Competition for customers in the telecommunications industry is primarily
based on price and, to a lesser extent, on the type and quality of services
offered. The Company prices its services primarily by offering discounts to the
prices charged by its competitors. The Company has no control over the prices
set by its competitors, and some of the Company's competitors may be able to use
their financial resources to cause severe price competition in the countries in
which the Company operates. Although the Company does not believe that there is
an economic incentive for its competitors to pursue such a pricing strategy or
that its competitors are likely to engage in such a course of action, there can
be no
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assurance that severe price competition will not occur. Any such price
competition would have a material adverse effect on the Company's business,
financial condition and results of operations. Additionally, intensified
competition in certain of the Company's markets will cause the Company to
continue to reduce its prices. For example, the Company recently reduced certain
rates which it charges to non-wholesale customers in response to pricing
reductions enacted by certain ITOs. Such price reductions may reduce the
Company's revenue and margins. The Company has experienced, and expects to
continue to experience, declining revenue per billable minute in all of its
markets, in part as a result of increasing worldwide competition within the
telecommunications industry.
In response to deregulation, additional competitors of various sizes are
beginning to emerge in Western Europe. The Company's services are currently
marketed to small and medium-sized businesses, however, and thus the Company
generally does not directly compete with mega-carrier alliances which generally
target larger customers. The Company's ViaCALL Plus service is targeted at
medium-sized businesses and may in the future compete with some services offered
by the mega-carrier alliances. In addition, many smaller carriers have emerged,
most of which specialize in offering intercontinental telephone services
utilizing dial up access methods, and some of which have begun to build networks
similar to the European Network. Although these competitors have focused
primarily on London, several have expressed an intention to build networks
across Europe in the future.
The Company believes that the ITOs generally have certain competitive
advantages due to their control over local connectivity and apparent close ties
with national regulatory authorities. The Company also believes that, in certain
instances, some regulators have shown a reluctance to adopt policies and grant
regulatory approvals that would result in increased competition for the local
ITO. The Company believes that, at least in the short-term, the ITOs will not
concentrate on marketing their services to the Company's small and medium-sized
business customer base. As a result, the Company does not believe that the ITOs
will seek to pressure national regulators to prevent it from providing its
services; however, there can be no assurance that the ITOs will not apply such
pressure in the future. If the ITOs were to successfully pressure such
regulators, the Company could be denied regulatory approval in certain
jurisdictions in which its services would otherwise be permitted, thereby
requiring the Company to seek judicial or other legal enforcement of its right
to provide services. Any delay in obtaining approval, or failure to obtain
approval, could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company believes that it has encountered anti-competitive behavior on
the part of certain ITOs. If the Company encounters anti-competitive behavior in
countries in which it operates or if the ITO in any country in which the Company
operates uses its competitive advantages to the fullest extent, the Company's
business, financial condition and results of operations could be materially
adversely affected. See "Risk Factors --Competition."
GOVERNMENT REGULATION
OVERVIEW. The Company's provision of international and national long
distance telecommunications services is heavily regulated. Many of the countries
in which the Company provides, or intends to provide, services prohibit or limit
the services which the Company can provide and the transmission methods by which
it can provide such services. For example, in the United States, the Company's
authority to engage in the resale of international private line communications
services is pursuant to the Section 214 Private Line Authorization. Certain
rules of the FCC prohibit the Company from (i) transmitting calls routed over
the Company's leased line between the United States and the United Kingdom
onward over the European Network (other than to countries which the FCC deems to
be "equivalent," currently the United Kingdom, Canada and Sweden) or (ii)
transmitting calls from European countries (other than those deemed to be
equivalent) over the European Network and then onward over its leased line
between the United States and the United Kingdom. If a violation of FCC rules
concerning resale of international private line service were found to exist and
to be sufficiently severe, the FCC could impose sanctions and penalties,
including revocation of the Section 214 Private Line
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Authorization. FCC restrictions thus materially limit the optimal and most
profitable use of the Company's leased line between the United States and the
United Kingdom.
In addition, the Company provides its customers located outside the EU,
and, to a lesser degree within the EU, with access to its services through the
use of callback. A substantial number of countries have prohibited certain forms
of callback as a mechanism to access the Company's services. This has caused the
Company to cease providing services in some jurisdictions, including Kuwait,
Costa Rica and Jordan, and may require it to do so in other countries in the
future. There can be no assurance that certain of the Company's services and
transmission methods will not continue to be or will not become prohibited in
certain jurisdictions, and, depending on the jurisdictions, services and
transmission methods affected, there could be a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors -- Substantial Government Regulation."
Local laws and regulations differ significantly among the jurisdictions in
which the Company operates, and, within such jurisdictions, the interpretation
and enforcement of such laws and regulations can be unpredictable. For example,
EU member states have inconsistently and, in some instances, unclearly
implemented the Services Directive under which the Company provides voice
services for CUGs in Western Europe. As a result, some EU member states may
limit, constrain or otherwise adversely affect the Company's ability to provide
certain services. There can be no assurance that certain EU member states will
implement, or will implement consistently, the Services Directive or the Full
Competition Directive adopted by the EU in March 1996, and either the failure to
implement or inconsistent implementation of such directives could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company has pursued and expects to continue to pursue a strategy of
providing its services to the maximum extent it believes permissible under
applicable laws and regulations. For example, the Company provides its ViaGLOBE
service to individuals for calling within the EU and such service may constitute
prohibited Voice Telephony. A further example of the Company's aggressive
interpretation of indefinite or unfavorable laws is its provision of services
utilizing the callback access method in Colombia, where the Colombian Ministry
of Communications has stated that callback access is not permitted and has so
notified the FCC, and in other Latin American countries, where services
utilizing such access method may not currently be permitted.
The Company's aggressive strategy may result in the Company's (i) providing
services or using transmission methods that violate local laws or regulations or
(ii) failing to obtain formal approvals required under such laws or regulations.
Where the Company is found to be in violation of local laws and regulations, it
usually seeks to modify its operations so as to comply with such laws and
regulations. There can be no assurance, however, that the Company will not be
subject to fines, penalties or other sanctions as a result of past violations
even though such violations were corrected. In addition, if the Company believes
that it has a legal basis for doing so, it may persist in providing such
services, using such transmission methods or otherwise continuing such actions.
If the Company's interpretation of applicable laws and regulations proves
incorrect, it could lose, or be unable to obtain, regulatory approvals,
including the Section 214 Private Line Authorization or the Section 214 Switched
Authorization, necessary to provide certain of its services or to use certain of
its transmission methods. The Company also could have substantial monetary fines
and penalties imposed against it. In addition, the Section 214 Private Line
Authorization requires that services be provided "in a manner consistent with
the laws and regulations of the countries in which [the Company] operates."
There can be no assurance that the Company has accurately interpreted or will
accurately interpret applicable laws and regulations in particular
jurisdictions.
The Company may be incorrect in its assumption that (i) EU member states
will abolish on a timely basis the respective ITO's monopoly to provide Voice
Telephony within and between such member states, as required by the Services
Directive and the Full Competition Directive, (ii) deregulation will continue to
occur or (iii) it will be allowed to continue to provide and to expand its
services. The Company's provision of services in Europe may also be affected if
any EU member state imposes greater
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restrictions on non-EU international service than on such service within the EU.
There can be no assurance that the United States or foreign jurisdictions will
not adopt laws or regulatory requirements that will adversely affect the
Company. Additionally, there can be no assurance that future United States or
foreign regulatory, judicial or legislative changes will not have a material
adverse effect on the Company or that regulators or third parties will not raise
material issues with regard to the Company's compliance with applicable laws or
regulations. If the Company is unable to provide the services it is presently
providing or intends to provide or to use its existing or contemplated
transmission methods due to its inability to receive or retain formal or
informal approvals for such services or transmission methods, or for any other
reason related to regulatory compliance or the lack thereof, such events could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Risk Factors -- Substantial Government
Regulation."
REGULATORY FRAMEWORK. A summary discussion of the regulatory frameworks in
certain geographic regions in which the Company operates or has targeted for
penetration is set forth below. This discussion is intended to provide a general
outline of the more relevant regulations and current regulatory posture of the
various jurisdictions and is not intended as a comprehensive discussion of such
regulations or regulatory posture.
Europe. In Europe, the regulation of the telecommunications industry is
governed at a supra-national level by the EU (consisting of the following member
states: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland,
Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United
Kingdom) which is responsible for creating pan-European policies and, through
legislation, a regulatory framework to ensure an open, competitive
telecommunications market. The EU was established by the Treaty of Rome and
subsequent conventions and is authorized by such treaties to issue EU
"directives." EU member states are required to implement these directives
through national legislation. If an EU member state fails to adopt such
directives, the European Commission may take action, including referral to the
European Court of Justice, to enforce the directives.
In 1990, the EU issued the Services Directive requiring each EU member
state to abolish existing monopolies in telecommunications services, with the
exception of Voice Telephony. The effect of the Services Directive was to permit
the competitive provision of all services other than Voice Telephony, including
value-added services and voice services within CUGs. However, as a consequence
of local implementation of the Services Directive through the adoption of
national legislation, there are differing interpretations of the definition of
prohibited Voice Telephony and permitted value-added and CUG services. Voice
services which use leased lines for customer access, such as ViaCALL Plus, are
permissible in all EU member states. The European Commission has generally taken
a narrow view of the services classified as Voice Telephony declaring that voice
services may not be reserved to the ITOs if (i) dedicated customer access is
used to provide the service, (ii) the service confers new value-added benefits
on users (such as alternative billing methods) or (iii) calling is limited by a
service provider to a group having legal, economic or professional ties.
Notwithstanding the Services Directive, Greece, Ireland, Portugal and
Spain, each of which has a less developed network, and Luxembourg, which has a
very small network, may, provided it is necessary to achieve a structural
adjustment, delay the abolition of the Voice Telephony monopoly until 2003 and
2000, respectively. Spain volunteered to implement the Services Directive by
1998, but certain Spanish officials have recently indicated that they may
reconsider this decision and postpone the abolition of the Voice Telephony
monopoly.
In March 1996, the EU adopted the Full Competition Directive containing two
key provisions which required EU member states to allow the creation of
alternative telecommunications infrastructures by July 1, 1996, and which
reaffirmed the obligation of EU member states to abolish the ITOs' monopolies in
Voice Telephony by 1998. The Full Competition Directive encouraged EU member
states to accelerate liberalization of Voice Telephony. To date, Sweden,
Finland, Denmark and the United Kingdom have liberalized facilities-based
services to all routes. However, Greece, Ireland, Portugal, Spain and Luxembourg
may apply to the European Commission to delay for up to 5 years the provisions
of the Full
41
<PAGE> 45
Competition Directive relating to the liberalization of Voice Telephony or
alternative infrastructures. Certain Spanish officials have indicated that Spain
will apply for such derogation.
Each EU member state in which the Company currently conducts its business
has a different regulatory regime and such differences are expected to continue
beyond January 1998. The requirements for the Company to obtain necessary
approvals vary considerably from country to country. The Company believes that,
to the extent required, it has either filed applications, received comfort
letters or obtained licenses from the applicable regulatory authorities.
United States. The Company's provision of international service to, from,
and through the United States is subject to regulation by the FCC. Section 214
of the Communications Act requires a company to make application to, and receive
authorization from, the FCC to, among other things, resell telecommunications
services of other U.S. carriers with regard to international calls. In May 1994,
the FCC authorized the Company pursuant to Section 214 of the Communications Act
(the "Section 214 Switched Authorization") to resell public switched
telecommunications services of other U.S. carriers. As previously noted, the FCC
has also granted the Section 214 Private Line Authorization. The Section 214
Private Line Authorization requires that services be provided in a manner that
is consistent with the laws of countries in which the Company operates. As
described above, the Company's aggressive regulatory strategy could result in
the Company's providing services that ultimately may be considered to be
provided in a manner that is inconsistent with local law. If the FCC finds that
the Company has violated the terms of the Section 214 Private Line
Authorization, it could impose a variety of sanctions on the Company, including
fines, additional conditions on the Section 214 Private Line Authorization,
cease and desist or show cause orders or the revocation of the Section 214
Private Line Authorization, the latter of which is usually imposed only in the
case of serious violations. The FCC has the authority to take the same action
with respect to the Section 214 Switched Authorization. Depending upon the
sanction imposed, such sanction could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors -- Substantial Government Regulation".
In order to conduct its business involving the origination and termination
of calls in the United States, the Company must use leased lines. In October
1995, YYC Communications, Inc., a wholly owned subsidiary of the Company,
obtained the Section 214 Private Line Authorization from the FCC to resell
international private line service between the United States and the United
Kingdom, with the private line interconnected to the PSTN, for the purpose of
providing switched telecommunications services. The Company plans to seek FCC
approval of the pro forma transfer of the Section 214 Private Line Authorization
from YYC Communications, Inc. to the Company itself. The FCC restricts the use
of the leased line between the United States and the United Kingdom to the
handling of traffic that enters or exits the United Kingdom end of the leased
line via the PSTN. The FCC currently prohibits the Company from using the leased
line between the United States and the United Kingdom to carry to the United
States any calls that originate on the European Network at switches outside of
the United Kingdom. The FCC also prohibits the Company from using the leased
line between the United States and the United Kingdom to carry United
States-originated calls that will be handed off to the European Network for
delivery to countries on the European continent. The FCC has imposed this
prohibition because no continental EU member state offers US telecommunications
service providers competitive opportunities that are "equivalent" to those
available in the United States. To date, the FCC has found that only Canada, the
United Kingdom and Sweden offer such opportunities. Following implementation of
the Full Competition Directive by EU member states, the FCC may authorize the
Company to originate and terminate traffic over the leased line between the
United States and the United Kingdom and the European Network to additional
member states if the FCC finds that they provide equivalent competitive
opportunities. However, there can be no assurance that the FCC will find such
equivalence.
Latin America. The Company is subject to a different regulatory regime in
each country in Latin American in which it conducts business. Local regulations
determine issues significant to the Company's business, including whether it can
obtain authorization to offer transmission of voice and voice band data directly
or through callback. In general, competition is restricted in the region, with
the result that the Company's ability to offer such service is limited.
Regulations governing enhanced services (such as
42
<PAGE> 46
facsimile and voicemail and data transmission) tend to be more permissive than
those covering Voice Telephony.
Some countries in Latin America oppose the provision of callback. The Latin
American countries in which the Company conducts the greatest portion of its
business are Brazil, Colombia and Argentina. In Brazil, callback is currently
permissible but the Company has experienced opposition in the past and will
likely experience such opposition in the future. In Colombia, the Ministry of
Communications has stated that callback access is prohibited and has so notified
the FCC. The Company does not believe that the Ministry of Communications has
the requisite authority to regulate in this area, and this is the subject of
litigation brought by a third party in the Colombian courts. At present,
regulations appear to permit callback access in Argentina. However, the
regulatory agency in Argentina has changed its position regarding callback
access on several occasions in the past.
EMPLOYEES
At June 30, 1996, the Company had 236 full-time employees, approximately
108 of whom were engaged in sales, marketing and customer service. None of the
Company's employees are covered by a collective bargaining agreement. Management
believes that the Company's relationship with its employees is good.
PROPERTIES
The Company currently occupies approximately 6,000 square feet of office
space in New York, New York, which serves as the Company's principal executive
office. The lease has an annual rental obligation of approximately $174,300 and
expires on January 31, 2001. The Company also leases an aggregate of
approximately 17,850 square feet of office space at two sites in Omaha,
Nebraska, which serve as the Company's operations center and its United States
switching center. The lease terms of the two sites have an annual combined
rental obligation of approximately $112,000 and expire on March 31, 1997 and
July 31, 2000, respectively. The Company has a renewal option for two years on
one of the sites, each year at a rent comparable to that paid during the initial
term of the lease.
The Company also leases office space in various cities in Europe where it
maintains sales offices with annual rents ranging from $19,600 in Rome to
$192,000 in Frankfurt (based on foreign currency exchange rates in effect as of
June 30, 1996). The Company's aggregate annual rental obligations for its
European properties is approximately $740,000 (based on foreign currency
exchange rates in effect as of June 30, 1996).
LEGAL PROCEEDINGS
On June 5, 1996, a French arbitration tribunal rendered a judgment against
the Company in connection with a claim by an independent sales representative
(the "Claimant") for alleged breach of contract and certain other claims. The
Claimant requested total monetary damages of approximately $3 million and sought
reinstatement as the Company's exclusive sales representative in France.
Although the arbitration panel awarded the Claimant FF 4.3 million
(approximately $.86 million based on foreign currency exchange rates in effect
as of July 31, 1996), the panel terminated the Claimant's sales agency. This
award is subject to interest accruing at an annual rate of 6.5% commencing
January 1995.
On January 23, 1996, the Company's independent sales representative in
Madrid (the "Spanish Representative") commenced an arbitration proceeding before
the American Arbitration Association claiming a breach by the Company of a
contract between the Spanish Representative and the Company relating to the
improper termination of such agreement by the Company. The Spanish
Representative is seeking $5.8 million in damages. On February 8, 1996, the
Company obtained, in the Supreme Court of the State of New York, County of
Nassau, an order to show cause bringing an application to stay the arbitration
on the ground that the Company did not agree to arbitrate breach of contract
disputes. The Court issued a temporary restraining order that stayed the
arbitration proceeding pending determination of the motion. On February 29,
1996, the attorneys for the Spanish Representative removed the action pending in
the Supreme Court of the State of New York to the United States District Court
for the Eastern District of New York and cross-moved for an order compelling
arbitration. The Company believes that the
43
<PAGE> 47
dispute is not subject to arbitration and, in any event, that it has meritorious
defenses against each of the claims alleged by the Spanish Representative. The
Company intends to vigorously pursue all defenses available to it.
The Company is also involved from time to time in other litigation
incidental to the conduct of its business. The Company believes that the
judgment rendered against it by the French arbitration panel and any potential
adverse determination in the action brought by the Spanish Representative or an
adverse decision in any other pending action will not have a material adverse
effect on the Company's business, financial condition or results of operations.
44
<PAGE> 48
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- ---- -----------------------------------------------------
<S> <C> <C>
Martin Varsavsky................. 36 President, Chief Executive Officer and Director
Michael J. Mahoney(1)............ 37 Executive Vice President, Operations and Technology;
Managing Director, Intercontinental and Director
Allan L. Shaw(2)................. 32 Vice President, Finance; Chief Financial Officer and
Director
Mark St. J. Courtney............. 37 European General Counsel and Secretary
Sheldon M. Goldman............... 36 United States General Counsel and Assistant Secretary
Paolo Di Fraia................... 35 European Finance Director
W. James Peet(1)(2).............. 41 Director
Paul G. Pizzani(1)(2)............ 36 Director
</TABLE>
- ---------------
(1) Member of the Company's Compensation Committee
(2) Member of the Company's Audit Committee
Martin Varsavsky. Mr. Varsavsky, a founder of the Company, has served as
its President and Chief Executive Officer and as a director since February 1991.
Mr. Varsavsky also founded both Urban Capital Corporation, a commercial real
estate development company, and Medicorp Sciences, a biotechnology company which
conducts AIDS research, in 1985. Mr. Varsavsky is related by marriage to Mr.
Juan Manuel Aisemberg, a principal stockholder of the Company.
Michael J. Mahoney. Mr. Mahoney has served as the Company's Executive Vice
President, Operations and Technology since July 1994 and Managing Director,
Intercontinental since January 1996. Mr. Mahoney has served as a director of the
Company since 1995. From August 1990 to June 1994, Mr. Mahoney was employed by
SITEL Corporation, a telemarketing services company, most recently as President,
Information Services Group. From August 1987 to August 1990, Mr. Mahoney was
employed by URIX Corporation, a manufacturer of telecommunications hardware and
software, in a variety of sales and marketing positions, most recently as the
Director, Product Marketing.
Allan L. Shaw. Mr. Shaw has served as the Company's Vice President,
Finance and Chief Financial Officer since January 1996. Mr. Shaw has served as a
director of the Company since June 1996. Prior to becoming the Company's Vice
President, Finance and Chief Financial Officer, Mr. Shaw served as Corporate
Controller of the Company from November 1994 to December 1995. From August 1987
to November 1994, Mr. Shaw was employed by Deloitte & Touche LLP, most recently
as a Manager. Mr. Shaw is a Certified Public Accountant and a member of the
American Institute, United Kingdom Society and New York State Society of
Certified Public Accountants.
Mark St. J. Courtney. Mr. Courtney has served as the Company's European
General Counsel since August 1995 and as Secretary of the Company since March
1996. From December 1992 to July 1995, Mr. Courtney served as European and
International Counsel for Legent, Inc., a software company, and from April 1991
to November 1992, Mr. Courtney served as Legal Counsel for ICL, Ltd., a U.K.
hardware and computer services company. Mr. Courtney was employed by Lloyds
Merchant Bank, a U.K. investment bank, from November 1985 to March 1991.
Sheldon M. Goldman. Mr. Goldman has served as the Company's United States
General Counsel since April 1996. From January 1987 to March 1996, Mr. Goldman
was associated with the law firm of
45
<PAGE> 49
Wien, Malkin & Bettex. Since March 1996, Mr. Goldman has been Of Counsel to the
law firm of Brief Kesselman Knapp & Schulman, LLP.
Paolo Di Fraia. Mr. Di Fraia has served as the Company's European Finance
Director since January 1996. From November 1994 to December 1995, Mr. Di Fraia
served as European Controller of the Company. From April 1989 to August 1994,
Mr. Di Fraia was employed by Philip Crosby Associates, S.A. as European
Controller.
W. James Peet. Mr. Peet has served as a director of the Company since
November 1995. He is Vice President of The Chatterjee Group, an affiliate of S-C
V-Tel, a principal stockholder of the Company, and has been associated with The
Chatterjee Group since August 1991. From June 1985 to July 1991, Mr. Peet was a
management consultant employed by McKinsey & Company.
Paul G. Pizzani. Mr. Pizzani has served as a director of the Company since
April 1996. He is the Vice President of Finance and Business Planning of COMSAT
International Ventures, a division of COMSAT Corporation, where he has been
employed in various capacities since November 1985. COMSAT Investments, Inc., an
affiliate of COMSAT Corporation, is a principal stockholder of the Company.
SENIOR MANAGEMENT
Patrick Attallah. Mr. Attallah has served as the Company's Regional
Director for Southern Europe since April 1996. From August 1995 to March 1996,
Mr. Attallah served as the Company's Country Manager of France. Prior to joining
the Company, Mr. Attallah was employed at TeleMedia International, Ltd. from
October 1994 to July 1995 as a senior account manager and was employed by Sprint
International in various capacities from September 1989 to September 1994, most
recently as the Indirect Sales Director in France.
Alfredo Candal. Mr. Candal has served as the Company's Regional Manager
for Latin America since January 1996 and as the Company's Latin American
Business Development Manager from May 1995 to December 1995. Prior to such date,
Mr. Candal served as the Company's Acting Country Manager for Italy from
December 1994 to May 1995 and as Latin American specialist from October 1993 to
December 1994.
Alfred Heilbron. Mr. Heilbron became a consultant to the Company in May
1995 and, in this capacity, acts as the Company's Regional Director for Northern
Europe. From October 1993 to April 1995, Mr. Heilbron acted as the Company's
agent in Belgium through his wholly owned corporation, Across International
Limited. For at least three years prior to becoming affiliated with the Company,
Mr. Heilbron was self employed.
Fred Hughes. Mr. Hughes has served as the Company's Vice President,
Operations since July 1994. From August 1993 to July 1994, Mr. Hughes served as
the Company's Director of Telephony. From January 1991 to August 1993, Mr.
Hughes was President of Communications Services Group, a Connecticut-based voice
and data communications consulting company. From August 1988 to January 1991,
Mr. Hughes was Director of Engineering at Millicom Telecommunications Services,
Inc.
Larry Malone. Mr. Malone has served as the Company's Vice President of
Carrier/Wholesale Sales since January 1995. From December 1987 to December 1994,
Mr. Malone was employed by Republic Telcom Systems, a voice/data networking
company, where he most recently served as Director of Sales.
George Pieraccini. Mr. Pieraccini has served as the Company's Corporate
Controller since January 1996. Mr. Pieraccini served as the Company's Assistant
Controller from November 1994 until December 1995. From October 1991 to November
1994, Mr. Pieraccini was employed as an Audit Senior at Edward Isaacs & Company
LLP, independent Certified Public Accountants. Mr. Pieraccini is a Certified
Public Accountant and a member of the American Institute and the New York State
Society of Certified Public Accountants.
46
<PAGE> 50
Phil Wilken. Mr. Wilken has served as the Company's Vice President of
Operations since joining the Company in March 1996. From October 1995 to
February 1996, Mr. Wilken was a private consultant in the telecommunications
industry. Mr. Wilken was employed by CNA Insurance in various capacities from
January 1983 to September 1995, beginning as a Manager in Network Management
and, most recently, as an Assistant Vice President of Teleservices.
The Company's Board of Directors is comprised of six directorships of which
one is currently vacant. All directors of the Company currently hold office
until the next annual meeting of stockholders of the Company or until their
successors are elected and qualified. Prior to completion of the Offerings, the
Board of Directors will be divided into three classes serving staggered,
three-year terms. At each annual meeting of stockholders of the Company,
successors to the class of directors whose term expires at such meeting will be
elected to serve for three-year terms and until their successors are elected and
qualified. Messrs. Peet and Pizzani were elected to the Board of Directors
pursuant to the terms of the COMSAT Shareholders Agreement and the S-C V-Tel
Shareholders Agreement (each as herein defined), respectively. S-C V-Tel's right
to nominate a director to the Company's Board of Directors terminates upon
completion of the Offerings. See "-- Compensation Committee Interlocks and
Insider Participation -- Shareholders Agreements." Executive officers hold
office until their successors are chosen and qualified, subject to earlier
removal by the Board of Directors and subject to the terms of any written
agreements. See "-- Employment, Expatriate and Severance Agreements."
The Board of Directors has established two committees, a Compensation
Committee and an Audit Committee. The current members of the Compensation
Committee are Messrs. Mahoney, Peet and Pizzani and the current members of the
Audit Committee are Messrs. Peet, Pizzani and Shaw. The Compensation Committee
reviews general policy matters relating to compensation and benefits of
employees and officers of the Company and administers the Stock Incentive Plan.
The Audit Committee, which was established in July 1996, will (i) recommend the
appointment of a firm of independent accountants to audit the Company's
financial statements, (ii) discuss the scope and results of the audit with the
independent accountants, (iii) review with management and the independent
accountants the Company's interim and year-end operating results, (iv) consider
the adequacy of the internal controls and audit procedures of the Company and
(v) review the nonaudit services to be performed by the independent accountants.
Currently, the Company's directors do not receive any cash compensation for
their service on the Board of Directors. Following the completion of the
Offerings, non-employee directors will be entitled to receive an annual fee of
$12,000, a meeting fee of $1,000 for every board meeting attended and each
committee meeting held separately and a $500 fee for each board meeting or
committee meeting participated in by telephone. Directors who are also employees
of the Company will not be separately compensated for serving on the Board of
Directors. All directors will be reimbursed for out-of-pocket expenses. Under
the Stock Incentive Plan, the Company may, from time to time and in the
discretion of the Board of Directors, grant options to directors. See "-- Stock
Incentive Plan."
47
<PAGE> 51
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
for services in all capacities awarded to, earned by or paid to, the Company's
Chief Executive Officer and the Company's other most highly compensated
executive officers, whose aggregate cash and cash equivalent compensation
exceeded $100,000 (the "Named Executives"), with respect to the last two fiscal
years. The table also identifies the principal capacity in which each of the
Named Executives served the Company at the end of 1995.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------- LONG TERM COMPENSATION
OTHER ------------------------
ANNUAL RESTRICTED SECURITIES
COMPENSATION STOCK UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) AWARDS($) OPTIONS(#)
- ------------------------------------- ----- --------- -------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Martin Varsavsky,
President and Chief Executive
Officer............................ 1995 $ 329,673 $100,000 $ 99,813 -- --
1994 309,345 200,000 -- -- --
Alan L. Levy(2),
Executive Vice President, Legal and
Finance............................ 1995 165,017 122,248 124,460 117,000(3) --
1994 111,250 150,000 -- 70,000
--
Ardean Cary(4),
Executive Vice President, Marketing
and Sales.......................... 1995 110,029 -- -- -- --
1994 123,000 100,000 -- -- 35,000
Michael J. Mahoney(5),
Executive Vice President,
Operations and Technology; Managing
Director, Intercontinental......... 1995 123,000 117,607 52,715 -- 35,000
1994 59,538 50,000 -- -- 35,000
</TABLE>
- ---------------
(1) The aggregate value of the perquisites and other personal benefits received
by each Named Executive in 1994 and for Mr. Cary in 1995 have not been
reflected for such year because the amount was below the Commission's
required reporting threshold. The amounts reflected in this column for 1995
include (i) $35,880 of housing allowance expense and $47,500 of relocation
expense reimbursement for Mr. Varsavsky, (ii) $38,667 of housing allowance
expense for Mr. Levy and (iii) $23,834 of housing allowance expense for Mr.
Mahoney.
(2) Mr. Levy ceased to be an executive officer of the Company effective July 31,
1996. See "-- Employment, Expatriate and Severance Agreements."
(3) Mr. Levy held a total of 30,000 shares of restricted Common Stock at
December 31, 1995 having an aggregate market value on such date of
approximately $117,000. As of such date, such shares were to vest ratably
over the 36 month period ending December 31, 1997. Dividends, if any, paid
with respect to vested shares of restricted stock would be paid directly to
Mr. Levy. In connection with Mr. Levy's separation from the Company, the
Company vested all unvested shares of restricted stock. See "-- Employment,
Expatriate and Severance Agreements."
(4) Mr. Cary ceased to be an executive officer of the Company effective May 15,
1995.
(5) Mr. Mahoney began his employment with the Company in July 1994.
48
<PAGE> 52
STOCK OPTION GRANTS
The following table sets forth information regarding grants of options to
purchase shares of Common Stock made by the Company during the year ended
December 31, 1995 to each Named Executive. No SARs were granted to these
individuals during 1995.
OPTION GRANTS IN 1995
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------ VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(3)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME GRANTED(#) 1995(1) ($/SHARE)(2) DATE (5%) (10%)
- ---------------------- ---------- ------------- ------------ ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Martin Varsavsky...... -- -- -- -- -- --
Alan L. Levy.......... -- -- -- -- -- --
Ardean Cary........... -- -- -- -- -- --
Michael J. Mahoney.... 35,000(4) 13.4% $ 3.90 01/01/2005 $85,844 $217,546
</TABLE>
- ---------------
(1) The Company granted options to purchase a total of 261,500 shares of Common
Stock in 1995.
(2) The exercise price was equal to the fair market value of the shares of
Common Stock underlying the options on the grant date as determined by the
Board of Directors.
(3) Amounts reported in these columns represent amounts that may be realized
upon exercise of options immediately prior to the expiration of their term
assuming the specified compounded rates of appreciation (5.0% and 10.0%) on
the Common Stock over the term of the options. These assumptions are based
on rules promulgated by the Commission and do not reflect the Company's
estimate of future stock price appreciation. Actual gains, if any, on the
stock option exercises and Common Stock holdings are dependent on the
timing of such exercises and the future performance of the Common Stock.
There can be no assurance that the rates of appreciation assumed in this
table can be achieved or that the amounts reflected will be received by the
option holder.
(4) In the event of certain Corporate Transactions (as defined herein), all
unvested stock options become exercisable, unless assumed by the successor
corporation or its parent company. See "-- Stock Incentive Plan."
Since January 1, 1996, the Company has granted, pursuant to the terms of
the Stock Incentive Plan, options to purchase an aggregate of 840,940 shares of
Common Stock exercisable at a price of $3.90 per share. Current executive
officers to whom options have been granted during 1996 are as follows: Michael
J. Mahoney, 200,000 options; Allan L. Shaw, 30,000 options; Mark St. J.
Courtney, 30,000 options; Paolo Di Fraia, 30,000 options; and Sheldon M.
Goldman, 20,000 options. Of the 200,000 options granted to Mr. Mahoney in 1996,
up to 66,666 options may vest during 1996 if specified operational objectives
are achieved by the Company and 66,667 options may vest in each of 1997 and 1998
if certain objective criteria established by the Company's President in January
of each such year are achieved. In addition, Mr. Mahoney's 200,000 options
become exercisable upon any financing in a percentage equal to the percentage
that the equity securities issued by the Company in such financing represents of
the total number of equity securities of the Company outstanding, determined
immediately after the issuance of such equity securities on a fully diluted
basis.
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<PAGE> 53
OPTION EXERCISES AND YEAR-END VALUE TABLE
The following table sets forth information regarding the exercise of stock
options during fiscal 1995 and the number and year-end value of unexercised
options held at December 31, 1995, by each of the Named Executives. No stock
options or SARs were exercised by the Named Executives during fiscal 1995.
AGGREGATE OPTION EXERCISES IN FISCAL 1995
AND FISCAL 1995 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED "IN-THE-MONEY"
OPTIONS AT FISCAL OPTIONS AT FISCAL
YEAR-END(#) YEAR-END($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
- ------------------------------------------ ------------------------- ----------------------------
<S> <C> <C>
Martin Varsavsky.......................... 0/0 $0/$0
Alan L. Levy.............................. 46,003/27,223 71,284/38,384
Ardean Cary............................... 20,417/0 28,788/0
Michael J. Mahoney........................ 31,110/38,890 26,046/23,304
</TABLE>
- ---------------
(1) Options are "in-the-money" if the fair market value of the underlying
securities exceeds the exercise price of the options. The amounts set forth
represent the difference between $3.90 per share, the fair market value of
the Common Stock issuable upon exercise of options at December 31, 1995 (as
determined by the Board of Directors), and the exercise price of the option,
multiplied by the applicable number of options.
EMPLOYMENT, EXPATRIATE AND SEVERANCE AGREEMENTS
On September 30, 1993, the Company entered into an employment agreement
with Martin Varsavsky pursuant to which Mr. Varsavsky agreed to serve full time
as Chief Executive Officer of the Company for an annual base salary of $350,000,
payable in accordance with the Company's payroll practices then in effect, less
any applicable withholding or payroll deductions. In addition to his annual
salary, Mr. Varsavsky is eligible for an annual bonus determined by the
Compensation Committee and is also eligible for additional bonuses and such
other incentive compensation programs available generally to executive officers.
Pursuant to an April 5, 1994 amendment to Mr. Varsavsky's employment agreement,
the term of such agreement extends until the earlier of (i) April 4, 1997, (ii)
the date on which neither COMSAT nor S-C V-Tel beneficially owns at least 10.0%
(subject to certain adjustments) of the issued and outstanding Common Stock on a
fully diluted basis and (iii) the agreement's termination in accordance with its
terms. If Mr. Varsavsky's employment is terminated prior to such date by reason
of disability, he will receive a severance payment equal to one year's base
salary. If the Company terminates Mr. Varsavsky's employment with or without
cause during the term of his employment, the Company is required to give him
prior written notice and is required to pay his base salary for the notice
period. If the Company terminates Mr. Varsavsky's employment without cause and
Mr. Varsavsky agrees to be bound by certain non-competition obligations, then
the Company must pay Mr. Varsavsky the salary to which he otherwise would have
been entitled through September 30, 1996.
In August 1995, the Company entered into an expatriate agreement with
Michael J. Mahoney, pursuant to which Mr. Mahoney agreed to continue as the
Company's Executive Vice President, Operations and Technology for an annual base
salary of no less than $130,000 ($165,000 in the current year). In addition to
his base salary, Mr. Mahoney is eligible for bonuses, based on operating,
business and financial objectives, as well as qualitative objectives, and other
forms of compensation which are generally available to other senior and
executive managers. Mr. Mahoney's employment extends through September 30, 1996.
If Mr. Mahoney's employment is terminated other than voluntarily by Mr. Mahoney,
as a result of his death or for Cause (as defined in his expatriate agreement),
the Company is required to pay Mr. Mahoney his salary through September 30,
1996. In addition, if following a "change of control"
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<PAGE> 54
Mr. Mahoney's position is eliminated or he elects to leave because the Company
has reduced or altered his position, Mr. Mahoney will be entitled to receive six
months salary. Pursuant to the terms of his expatriate agreement, Mr. Mahoney
was compensated for certain costs attributable to his relocation to and
assignment in London and his repatriation to New York. For purposes of such
expatriate agreement, a "change of control" is deemed to have occurred if: (i)
there has been a merger or consolidation in which the Company is not the
surviving entity, other than a transaction the principal purpose of which is to
change the Company's name or state of incorporation; (ii) the Company sells,
transfers or otherwise disposes of all or substantially all of its assets; (iii)
there has occurred a reverse merger in which the Company is the surviving entity
but in which the Company's stockholders immediately prior to such merger do not
hold (by virtue of their shares in the Company held immediately prior to such
transaction) securities of the Company representing more than 51.0% of the total
voting power of the Company immediately after such transaction.
The Company has entered into a severance agreement, dated July 30, 1996,
with Alan L. Levy, the Company's former Executive Vice President, Legal and
Finance, pursuant to which the Company agreed (i) to make semi-monthly payments,
in the amount of $6,875, to Mr. Levy through January 15, 1997 and a lump sum
payment to him, in the amount of $89,375, on January 31, 1997, in each instance
for consulting services, (ii) to accelerate the vesting of approximately 16,700
restricted shares of Common Stock and options to purchase approximately 9,700
shares of Common Stock so that Mr. Levy would be fully vested in options to
purchase 73,226 shares of Common Stock at an average exercise price of $2.40 per
share and 80,000 shares of Common Stock, each granted pursuant to the Stock
Incentive Plan, and (iii) to file an S-8 Registration Statement covering such
shares of restricted stock and the shares of Common Stock underlying such
options no later than October 31, 1996. In exchange for the foregoing, Mr. Levy
agreed to certain provisions, including non-solicitation and confidentiality
covenants.
STOCK INCENTIVE PLAN
The Company has adopted the 1993 Flexible Stock Incentive Plan (the "Stock
Incentive Plan") under which "non-qualified" stock options ("NQSOs") to acquire
shares of Common Stock may be granted to employees, directors and consultants of
the Company and "incentive" stock options ("ISOs") to acquire shares of Common
Stock may be granted to employees, including employee-directors. The Stock
Incentive Plan also provides for the grant of SARs and shares of restricted
stock to the Company's employees, directors and consultants.
The Stock Incentive Plan provides for the issuance of up to a maximum of
1,750,000 shares of Common Stock and is currently administered by the
Compensation Committee. Under the Stock Incentive Plan, the option price of any
ISO may not be less than the fair market value of a share of Common Stock on the
date on which the option is granted. The option price of an NQSO may be less
than the fair market value on the date the NQSO is granted if the Compensation
Committee so determines. An ISO may not be granted to a "ten percent
stockholder" (as such term is defined in Section 422A of the Code) unless the
exercise price is at least 110.0% of the fair market value of the Common Stock
and the term of the option may not exceed five years from the date of grant.
Each option granted pursuant to the Stock Incentive Plan is evidenced by a
written agreement executed by the Company and the grantee, which contains the
terms, provisions and conditions of the grant. Stock options may not be assigned
or transferred during the lifetime of the holder except as may be required by
law or pursuant to a qualified domestic relations order. Common Stock subject to
a restricted stock purchase or bonus agreement is transferable only as provided
in such agreement. The maximum term of each stock option granted to persons
other than ten percent stockholders is ten years from the date of grant.
For options to qualify as ISOs, the aggregate fair market value, determined
on the date of grant, of the shares with respect to which the ISOs are
exercisable for the first time by the grantee during any calendar year may not
exceed $100,000. Payment by option holders upon exercise of an option may be
made in cash or, with the consent of the Compensation Committee, in whole or in
part, (i) with shares of Common Stock, (ii) by irrevocable direction to an
approved securities broker to sell shares and deliver all
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<PAGE> 55
or a portion of the proceeds to the Company, (iii) by delivery of a promissory
note with such provisions as the Compensation Committee determines appropriate
or (iv) in any combination of the foregoing. In addition, the Compensation
Committee, in its sole discretion, may authorize the surrender by an optionee of
all or part of an unexercised stock option and authorize a payment in
consideration thereof of an amount equal to the difference between the aggregate
fair market value of the shares of Common Stock subject to such stock option and
the aggregate option price per share of such Common Stock. In the Compensation
Committee's discretion, such payment may be made in cash, shares of Common Stock
with a fair market value on the date of surrender equal to the payment amount or
some combination thereof.
The Stock Incentive Plan provides that outstanding options, restricted
shares of Common Stock or SARs vest in their entirety and become exercisable, or
with respect to restricted stock, are released from restrictions on transfer and
repurchase rights, in the event of a "Corporate Transaction." For purposes of
the Stock Incentive Plan, a Corporate Transaction includes any of the following
stockholder-approved transactions to which the Company is a party: (i) a merger
or consolidation in which the Company is not the surviving entity, other than a
transaction the principal purpose of which is to change the state of the
Company's incorporation, or a transaction in which the Company's stockholders
immediately prior to such merger or consolidation hold (by virtue of securities
received in exchange for their shares in the Company) securities of the
surviving entity representing more than 50.0% of the total voting power of such
entity immediately after such transaction; (ii) the sale, transfer or other
disposition of all or substantially all of the assets of the Company unless the
Company's stockholders immediately prior to such sale, transfer or other
disposition hold (by virtue of securities received in exchange for their shares
in the Company) securities of the purchaser or other transferee representing
more than 50.0% of the total voting power of such entity immediately after such
transaction; or (iii) any reverse merger in which the Company is the surviving
entity but in which the Company's stockholders immediately prior to such merger
do not hold (by virtue of their shares in the Company held immediately prior to
such transaction) securities of the Company representing more than 50.0% of the
total voting power of the Company immediately after such transaction. As of July
31, 1996, options to purchase 1,302,949 shares of Common Stock were outstanding
under the Stock Incentive Plan at exercise prices ranging from $.50 to $3.90 per
share.
Promptly after the completion of the Offerings, the Company intends to file
with the Commission a Registration Statement on Form S-8 covering the restricted
shares of Common Stock and the shares of Common Stock underlying options granted
under the Stock Incentive Plan. This registration statement will become
effective immediately upon filing with the Commission. See "Shares Eligible for
Future Sale."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors did not have a Compensation Committee prior to the
establishment of one in January 1996. As a result, the entire Board of
Directors, including Messrs. Varsavsky, Levy and Mahoney, made all
determinations concerning compensation of executive officers. The current
members of the Compensation Committee are Messrs. Mahoney, Peet and Pizzani.
None of the executive officers of the Company currently serves on the
compensation committee of another entity or any other committee of the board of
directors of another entity performing functions similar to the Compensation
Committee. No interlocking relationships exist between the Company's Board of
Directors or its Compensation Committee and the board of directors or
compensation committee of any other company.
Shareholders Agreements. S-C V-Tel and Mr. Varsavsky are parties to a
shareholders' agreement (the "S-C V-Tel Shareholders Agreement") pursuant to
which S-C V-Tel has certain rights relating to the appointment of one member of
the Board of Directors, a member of the Board of Directors' Executive Committee,
if any such committee is established, and the agreement of Mr. Varsavsky to
cause the Board of Directors not to take any Major Action (as defined therein)
without the consent of S-C V-Tel. The S-C V-Tel Shareholders Agreement and all
of the rights and obligations of the parties to the agreement terminate upon
consummation of the Offerings.
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<PAGE> 56
On April 5, 1994, Mr. Varsavsky, Juan Manuel Aisemberg and COMSAT entered
into a shareholders' agreement (as subsequently amended, the "COMSAT
Shareholders Agreement"), which contains similar terms to those contained in the
S-C V-Tel Shareholders Agreement, except with respect to COMSAT's rights
regarding the nomination of directors to the Company's Board of Directors and
COMSAT's rights regarding participation in sales of shares of Common Stock by
Mr. Varsavsky. Pursuant to the terms of the COMSAT Shareholders Agreement, so
long as COMSAT beneficially owns at least 10.0% (subject to certain adjustments)
of the issued and outstanding shares of Common Stock on a fully diluted basis,
COMSAT is entitled to representation on the Company's Board of Directors in
proportion to its percentage ownership of Common Stock, subject to a minimum of
one seat, and to designate one member of an Executive Committee of the Board of
Directors, if any such committee is established. In addition, in certain
instances, if Mr. Varsavsky proposes to sell 10.0% or more of the shares of
Common Stock which he owns, COMSAT has the right to sell its shares of Common
Stock in such a transaction on a pro rata basis with Mr. Varsavsky and holders
of Class A Common Stock exercising participation rights for the same
consideration per share and on the same terms as Mr. Varsavsky. COMSAT's right
to representation on the Board of Directors and the Executive Committee and its
rights regarding participation in sales of Common Stock survive the completion
of the Offerings.
Voting Agreement. S-C V-Tel and COMSAT are parties to a voting agreement
(the "Voting Agreement"), pursuant to which, at all times that either S-C V-Tel
or COMSAT is entitled to nominate directors to the Company's Board of Directors,
the other party is required to vote its respective shares of Common Stock in
favor of the first party's nominees. The Voting Agreement remains in effect
until the earlier of the dissolution of the Company or the date on which either
S-C V-Tel or COMSAT no longer owns any shares of Common Stock. See "Certain
Transactions -- S-C V-Tel Investments, L.P." and "Certain Transactions -- COMSAT
Investments, Inc." for a description of the registration rights held by each of
S-C V-Tel and COMSAT.
CERTAIN TRANSACTIONS
S-C V-TEL INVESTMENTS, L.P.
Pursuant to the terms of a stock purchase agreement, dated September 30,
1993 (as subsequently amended, the "S-C V-Tel Stock Purchase Agreement"), S-C
V-Tel purchased 2,543,298 shares of Common Stock on October 1, 1993 and 4,108
shares of Common Stock on December 15, 1993 for an aggregate purchase price of
$5 million (the "S-C V-Tel Shares"). In connection with the purchase of the S-C
V-Tel Shares, for consideration in the aggregate amount of $1,000, S-C V-Tel
acquired certain warrants to purchase shares of Common Stock. Such warrants
expired on October 15, 1995.
The terms of the S-C V-Tel Stock Purchase Agreement provide that, among
other things, after six months from the effective date of the Registration
Statement of which this Prospectus forms a part, S-C V-Tel has the right to
demand registration under the Securities Act of the S-C V-Tel Shares. Such
demand right must be exercised for at least 30.0%, and no more than 70.0%, of
the S-C V-Tel Shares then owned by S-C V-Tel. No earlier than six months after
the effective date of its first demand registration, S-C V-Tel may request a
second demand registration for any remaining S-C V-Tel Shares. The expenses of
such demand registrations, excluding any underwriter's commissions and discounts
relating to the sale of the S-C V-Tel Shares, will be paid by the Company. In
addition, if the Company proposes to register any of its securities under the
Securities Act at any time after the effectiveness of the Registration Statement
of which this Prospectus forms a part, S-C V-Tel will have the right, on up to
four occasions, to include in such registration a maximum of 33 1/3% of the S-C
V-Tel Shares it then owns. The expenses of any such "piggy-back" registration,
excluding any underwriter's commissions and discounts relating to the sale of
the S-C V-Tel Shares and the fees and disbursements of S-C V-Tel's legal
counsel, will be paid by the Company.
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<PAGE> 57
As of June 30, 1996, S-C V-Tel is entitled to sell or transfer any of the
S-C V-Tel Shares, without the consent of the Company, provided that the
transferee is not in competition with, or does not otherwise have interests
adverse to, the Company.
Prior to an initial public offering or sale of all or substantially all of
the assets of the Company or a merger in which the Company is not the surviving
entity, S-C V-Tel has certain rights of first offer on proposed private
offerings of securities by either the Company or any of its subsidiaries and has
certain rights to invest, together with COMSAT, in any joint venture proposed by
the Company. S-C V-Tel also has the right to request that the Company sell all
or substantially all of its assets or merge into another person or entity or
effect an initial public offering, if the Company has not consummated an initial
public offering or sale or merger of the Company on or prior to June 30, 1997.
Such rights of S-C V-Tel will terminate upon the effective date of the
Registration Statement of which this Prospectus forms a part. See
"Management -- Compensation Committee Interlocks and Insider
Participation -- Shareholders Agreements" for a description of certain voting
rights held by S-C V-Tel.
COMSAT INVESTMENTS, INC.
Pursuant to the terms of a stock purchase agreement, dated April 5, 1994
(as subsequently amended, the "COMSAT Purchase Agreement"), COMSAT purchased
3,210,808 shares of Common Stock for a purchase price of $8.0 million (the
"COMSAT Shares"). In connection with the purchase of the COMSAT Shares, for
consideration in the aggregate amount of $1,000, COMSAT acquired certain
warrants to purchase shares of Common Stock. Such warrants expired on October
15, 1995.
Pursuant to the terms of the COMSAT Purchase Agreement, COMSAT has been
granted the same demand and piggyback registration rights as S-C V-Tel. The
COMSAT Purchase Agreement further provides that COMSAT may not transfer any
COMSAT Shares to any transferee without first offering such shares to the
Company if, following such transfer, such transferee would own 20.0% or more of
the then outstanding shares of Common Stock. In addition, COMSAT has agreed that
it will not acquire more than 30.0% of the shares of Common Stock outstanding at
any time except in certain circumstances relating to changes in the percentage
of the outstanding Common Stock owned by Mr. Varsavsky. Such 30.0% limitation
does not apply to shares of Common Stock acquired by COMSAT pursuant to any
exercise of its right of first offer with respect to private offerings of
securities by the Company.
Prior to an initial public offering or sale of all or substantially all of
the assets of the Company or a merger in which the Company is not the surviving
entity, COMSAT has certain rights of first offer on proposed private offerings
of securities by either the Company or any of its subsidiaries, certain rights
to invest in any joint venture proposed by the Company and certain rights of
first offer if S-C V-Tel demands a sale of the Company. Such rights of COMSAT
will terminate upon the effective date of the Registration Statement of which
this Prospectus forms a part. See "Management -- Compensation Committee
Interlocks and Insider Participation -- Shareholders Agreements" for a
description of certain voting rights held by COMSAT.
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<PAGE> 58
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock, as of September 1, 1996, before and
after giving effect to the Offerings, by (i) each person known by the Company to
own beneficially 5.0% or more of the Company's outstanding shares of Common
Stock, (ii) each director of the Company, (iii) each of the Named Executives,
and (iv) all current executive officers and directors of the Company, as a
group. All information with respect to beneficial ownership has been furnished
to the Company by the respective stockholders of the Company.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERINGS(1) OFFERINGS(1)(2)
------------------------------- -------------------------------
NAME NUMBER PERCENT NUMBER PERCENT
- ----------------------------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C>
Martin Varsavsky(3)
Parque Empresarial Edificio
2,
c/o Beatriz De Bobadilla
14,5o Ofic. B
Madrid, Spain................ 7,540,000 36.7% 7,540,000 %
COMSAT Investments, Inc.
6560 Rock Spring Drive
Bethesda, MD 20817........... 3,210,808(4) 15.6 3,210,808(4)
S-C V-Tel Investments, L.P.
888 Seventh Avenue
New York, NY 10106........... 2,547,406(4) 12.4 2,547,406
Juan Manuel Aisemberg(3)
Callao 1801, Buenos Aires,
Argentina 1024............... 1,389,110 6.8 1,389,110
Michael J. Mahoney........... 100,555(5) * 100,555(5) *
Alan L. Levy................. 153,226(6) * 153,226(6) *
Ardean Cary.................. 20,417(7) * 20,417(7) *
Allan L. Shaw................ 12,777(7) * 12,777(7) *
W. James Peet................ -- -- -- --
Paul G. Pizzani.............. -- -- -- --
All directors and executive
officers as a group (8
persons)................... 7,670,553 37.2 7,670,553 --
</TABLE>
- ---------------
* Represents beneficial ownership of less than 1.0% of the outstanding shares
of Common Stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Commission. In computing the number of shares of Common Stock beneficially
owned by a person and the percentage ownership of that person, shares of
Common Stock subject to options and warrants held by that person that are
currently exercisable or exercisable within 60 days of September 1, 1996
are deemed outstanding. Such shares, however, are not deemed outstanding
for the purposes of computing the percentage ownership of any other person.
Except as indicated in the footnotes to this table, each stockholder named
in the table has sole voting and investment power with respect to the
shares set forth opposite such stockholder's name.
(2) Assumes no exercise of the Underwriters' over-allotment option.
(3) Mr. Varsavsky and Mr. Aisemberg are related by marriage.
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<PAGE> 59
(4) Does not include 11,476,516 and 10,750,808 shares of Common Stock,
respectively, which COMSAT and S-C V-Tel may be deemed to beneficially own
as a result of certain voting arrangements contained in the Voting
Agreement, the COMSAT Shareholders Agreement and the S-C V-Tel Shareholders
Agreement. The S-C V-Tel Shareholders Agreement will terminate upon
completion of the Offerings. See "Management -- Compensation Committee
Interlocks and Insider Participation -- Voting Agreement" and
"Management -- Compensation Committee Interlocks and Insider
Participation -- Shareholders Agreements."
(5) Includes vested options to purchase 50,555 shares of Common Stock which
options were granted pursuant to the Stock Incentive Plan.
(6) Includes vested options to purchase 73,326 shares of Common Stock which
options were granted pursuant to the Stock Incentive Plan.
(7) Represents vested options to purchase shares of Common Stock which options
were granted pursuant to the Stock Incentive Plan.
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<PAGE> 60
DESCRIPTION OF CAPITAL STOCK
GENERAL
Effective upon completion of the Offerings, the Company's authorized
capital stock will consist of (i) 50.0 million shares of Common Stock, par value
$.01 per share (the "Common Stock"), and (ii) 1.0 million shares of Preferred
Stock, par value $.01 per share (the "Preferred Stock"), of which shares
of Common Stock and no shares of Preferred Stock will be issued and outstanding.
As of August 1, 1996, there were 17 holders of record of 16,204,202 outstanding
shares of Common Stock and 2 holders of record of 4,357,270 outstanding shares
of Class A Common Stock.
The statements under this caption are brief summaries of certain material
provisions of the Certificate of Incorporation, as amended, the Bylaws, the
Indenture and a Registration Rights Agreement, dated December 15, 1994, among
the Company, Martin Varsavsky and Juan Manuel Aisemberg (the "Founding
Shareholders") and Morgan Stanley & Co. Incorporated (the "Registration Rights
Agreement"), each of which are incorporated by reference as exhibits to the
Registration Statement of which this Prospectus is a part. Such summaries do not
purport to be complete, and are subject to, and are qualified in their entirety
by reference to, such documents.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote per share on all
matters on which the holders of Common Stock are entitled to vote and do not
have any cumulative voting rights. This means that the holders of more than
50.0% of the shares voting for the election of directors can elect all of the
directors if they choose to do so; in such event, the holders of the remaining
shares of Common Stock will not be able to elect any person to the Board of
Directors. Subject to the rights of the holders of shares of any series of
Preferred Stock, holders of Common Stock are entitled to receive ratably such
dividends as may from time to time be declared by the Board of Directors of the
Company out of funds legally available therefor. See "Dividend Policy." Holders
of shares of Common Stock have no preemptive, conversion, redemption,
subscription or similar rights. In the event of a liquidation, dissolution or
winding up of the Company, whether voluntary or involuntary, holders of shares
of Common Stock are entitled to share ratably in the assets of the Company which
are legally available for distribution, if any, remaining after the payment or
provision for the payment of all debts and other liabilities of the Company and
the payment and setting aside for payment of any preferential amount due to the
holders of shares of any series of Preferred Stock. All outstanding shares of
Common Stock are, and all shares of Common Stock offered hereby when issued will
be, upon payment therefor, validly issued, fully-paid and nonassessable.
Delaware law does not require stockholder approval for any issuance of
authorized shares of Common Stock. Such authorized and unissued shares may be
used for a variety of corporate purposes, including future public offerings to
raise additional capital or to facilitate corporate acquisitions. One of the
effects of the existence of unissued and unreserved Common Stock may be to
enable the Board of Directors to issue shares to persons friendly to current
management, which issuance could render more difficult or discourage an attempt
to obtain control of the Company by means of a merger, tender offer, proxy
contest or otherwise, and thereby protect the continuity of the Company's
current management and possibly deprive the stockholders of opportunities to
sell their shares of Common Stock at prices higher than prevailing market
prices.
At present there is no established trading market for the Common Stock. The
Company has filed an application to have the Common Stock approved for quotation
on the Nasdaq National Market under the proposed symbol "VYTL."
PREFERRED STOCK
Prior to completion of the Offerings, the Certificate of Incorporation, as
amended, of the Company will be amended and restated to authorize the Board of
Directors of the Company to issue from time to time up to one million shares of
Preferred Stock in one or more series and to fix the rights, designations,
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<PAGE> 61
preferences, qualifications, limitations and restrictions thereof, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of shares
constituting any series, without any further action by the stockholders of the
Company. The issuance of Preferred Stock with voting rights could have an
adverse affect on the voting power of holders of Common Stock by increasing the
number of outstanding shares having voting rights. In addition, if the Board of
Directors authorizes Preferred Stock with conversion rights, the number of
shares of Common Stock outstanding could potentially be increased up to the
authorized amount. The issuance of Preferred Stock could decrease the amount of
earnings and assets available for distribution to holders of Common Stock. Any
such issuance could also have the effect of delaying, deterring or preventing a
change in control of the Company and may adversely affect the rights of holders
of Common Stock. The Board of Directors does not presently intend to issue any
shares of Preferred Stock.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION, BYLAWS AND
INDENTURE
The Company's Certificate of Incorporation, as amended, provides that no
director of the Company shall be liable to the Company or its stockholders for
monetary damages for breach of his fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) in respect of
certain unlawful dividend payments or stock redemptions or repurchases or (iv)
for any transaction from which the director derived an improper personal
benefit. The effect of these provisions is to eliminate the rights of the
Company and its stockholders (through stockholders' derivative suits on behalf
of the Company) to recover monetary damages against a director for breach of
fiduciary duty as a director (including breaches resulting from grossly
negligent behavior), except in the situations described above.
The Company's Bylaws require the Company to indemnify any legal
representative, director or officer of the Company or any person who is or was
serving at the request of the Company as a director, officer, employee or agent
of another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, to the
fullest extent authorized by the DGCL. The Company has obtained officers' and
directors' liability insurance of $10 million for members of its Board of
Directors and executive officers. In addition to the indemnification provided in
the Company's Certificate of Incorporation, as amended, and Bylaws, the Company
has entered into agreements to indemnify its directors and officers from and
against any Expenses (as defined in the indemnity agreement) incurred by such
person in connection with investigating, defending, serving as a witness in,
participating in (including on appeal), or preparing for any of the foregoing in
any threatened, pending or contemplated action, suit, or proceeding (including
an action by or in the right of the Company), or any inquiry, hearing or
investigation, to the fullest extent permitted by law, as such law may be
amended or interpreted (but only to the extent that such amendment or
interpretation provides for broader indemnification rights). The indemnity
agreement contains certain provisions to ensure that the indemnitee receives the
benefits contemplated by the indemnity agreement in the event of a "change in
control" (as defined in the indemnity agreement) such as the establishment and
funding of a trust in an amount sufficient to satisfy any and all expenses
reasonably anticipated to be incurred by the indemnitee in connection with
investigating, preparing for, participating in and/or defending a proceeding.
Prior to completion of the Offerings, the Company's Certificate of
Incorporation, as amended, and Bylaws will be amended and restated to include
certain provisions which are intended to enhance the likelihood of continuity
and stability in the composition of the Company's Board of Directors and which
may have the effect of delaying, deterring or preventing a future takeover or
change in control of the Company unless such takeover or change in control is
approved by the Company's Board of Directors. Such provisions may also render
the removal of directors and management more difficult.
The Certificate of Incorporation, as amended and restated, will provide
that the Company's Board of Directors will be divided as equally as possible
into three classes serving staggered, three-year terms. The Company's Bylaws
will be amended to establish advance notice procedures with regard to the
nomination, other than by or at the direction of the Board of Directors, of
candidates for election as
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<PAGE> 62
directors and with regard to certain matters to be brought before an annual
meeting of stockholders of the Company. In general, notice must be received by
the Company not less than 120 days prior to the meeting and must contain certain
specified information concerning the person to be nominated or the matter to be
brought before the meeting and concerning the stockholder submitting the
proposal.
The Indenture provides that upon the occurrence of a "Change of Control"
(as defined in the Indenture), the Company will be required to make a Change of
Control Offer (as defined in the Indenture) to purchase all of the Notes issued
and then outstanding under the Indenture at a purchase price equal to 101.0% of
the principal amount thereof, plus accrued and unpaid interest thereon, if any,
to the date of purchase. Under the Indenture, a Change of Control is deemed to
occur when (i) a person or group, other than certain Existing Stockholders (as
defined in the Indenture), becomes the beneficial owner of more than 30.0% of
the total voting power of the then outstanding voting stock of the Company on a
fully diluted basis and such ownership is greater than the amount of voting
stock on a fully diluted basis held by the Existing Stockholders on such date or
(ii) individuals who at the beginning of any period of two consecutive calendar
years constituted the Board of Directors (together with any new directors whose
election to the Board of Directors or whose nomination for election by the
Company's stockholders was approved by a vote of at least two-thirds of the
members of the Board of Directors then still in office who either were members
of the Board of Directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the members of the Board of Directors then in office;
provided, however, that in the case of clause (i) above, a Change of Control
will not be deemed to have occurred if a group becomes the ultimate beneficial
owner of more than 30.0% of the total voting power of the then outstanding
voting stock of the Company on a fully diluted basis so long as a majority of
the voting power of the voting stock of the Company beneficially owned by such
group is beneficially owned by the Existing Stockholders.
DELAWARE ANTI-TAKEOVER LAW
As a Delaware corporation, the Company is subject to the DGCL, including
Section 203. Section 203 of the DGCL prohibits certain transactions between a
Delaware corporation and an "interested stockholder," which is defined as a
person who, together with any affiliates or associates of such person,
beneficially owns, directly or indirectly, 15.0% or more of the outstanding
voting shares of a Delaware corporation. This provision prohibits certain
business combinations (defined broadly to include mergers, consolidations, sales
or other dispositions of assets having an aggregate value in excess of 10.0% of
the consolidated assets of the corporation, and certain transactions that would
increase the interested stockholder's proportionate share ownership in the
corporation) between an interested stockholder and a corporation for a period of
three years after the date the interested stockholder becomes an interested
stockholder, unless (i) prior to the date the interested stockholder becomes an
interested stockholder, the business combination or the transaction by which the
stockholder becomes an interested stockholder is approved by the corporation's
board of directors, (ii) upon consummation of the transaction which resulted in
the stockholder becoming an interested stockholder, such stockholder held at
least 85.0% of the voting stock of the corporation outstanding at the time the
transaction commenced (other than stock held by directors who are also officers
or by certain employee stock plans) or (iii) the business combination is
approved by a majority of the board of directors, and at an annual or special
meeting of stockholders, and not by written consent, by the affirmative vote of
66 2/3% of the outstanding voting stock that is not owned by the interested
stockholder.
RIGHTS AND OBLIGATIONS TO SELL
Pursuant to the terms of the Registration Rights Agreement, in the event
that, prior to the earlier of the third anniversary of the closing of the Unit
Offering (December 21, 1997) and the effective date of an initial public
offering of the Common Stock, either or both of the Founding Shareholders, in
one or more related transactions, sell 20.0% or more of the aggregate number of
shares of Common Stock beneficially owned by them to any "person" or "group"
(within the meaning of Section 13(d) or 14(d)(2) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act")), Holders (as defined in the
Registration Rights Agreement) will have the right to sell a percentage, equal
to the percentage of
59
<PAGE> 63
beneficially owned shares of Common Stock sold by the Founding Shareholders, of
their shares of Class A Common Stock or of shares issued as a dividend with
respect to, in exchange for, or as a replacement of the Class A Common Stock
(the "Registrable Securities") to such person or group on the same terms and
conditions as the Founding Shareholders. In the event that, prior to the earlier
of the third anniversary of the closing of the Unit Offering (December 21, 1997)
and the effective date of an initial public offering of the Common Stock, each
of the Founding Shareholders sells all of the shares of Common Stock
beneficially owned by them (in a bona fide third party transaction) to any
person or group (within the meaning of Section 13(d) or 14(d)(2) of the Exchange
Act), the Founding Shareholders may require Holders of Registrable Securities to
sell all of their shares of Registrable Securities to such person or group, on
the same terms and conditions as the Founding Shareholders; provided that such
Holders shall not be required to sell their shares of Registrable Securities
unless such Holders shall receive, in consideration therefor, cash (in U.S.
dollars) or securities traded on a nationally recognized stock exchange or
automated quotation system in the United States. In the event of any merger,
acquisition or consolidation of the Company in which Holders receive any
unregistered security of any entity in exchange for their Registrable
Securities, the rights referred to in the immediately preceding sentence remain
in effect, except that such rights relate to such securities of such entity that
are received by such Holders of Registrable Securities. The Founding
Shareholders are required to give Holders of the shares of Registrable
Securities specified notice of any sale by the Founding Shareholders
contemplated by this paragraph.
REGISTRATION RIGHTS
Pursuant to the Registration Rights Agreement, the Company is required,
subject to certain limitations and upon the written request of the Holders of
Registrable Securities, together with any holders of Common Stock, representing
in the aggregate at least 15.0% or more of the outstanding Common Stock, to file
and use its best efforts to cause to become effective under the Securities Act a
registration statement with respect to resales of such shares of Common Stock.
The Holders of Registrable Securities may make such a request at any time or
from time to time (unless a registration statement by the Company has been
declared effective during the preceding 180 days) 180 days after the Company
completes an initial public offering of Common Stock; provided that in no event
may the Holders of Registrable Securities make more than three such requests. If
specified by the Holders of the Registrable Securities to be registered, the
Company shall cause to be filed a shelf registration statement and shall use its
best efforts to keep such shelf registration statement continuously effective
for up to one year. In addition, after a public offering of shares of Common
Stock by the Company, Holders of the Registrable Securities are entitled,
subject to certain limitations, to include their Registrable Securities in a
registration of shares of Common Stock initiated by the Company or other selling
stockholders. In the event the aggregate number of Registrable Securities which
the Holders request the Company to include in any such registration, together
with the shares of Common Stock to be sold by the Company and by any selling
stockholders participating in such registration, exceeds the number of shares
which, in the opinion of the managing underwriter, can be sold in such offering
without materially affecting the offering price of such shares, the number of
Registrable Securities of each such Holder and the shares of Common Stock held
by such selling stockholders to be included in such registration will be reduced
pro rata based on the aggregate number of shares of Common Stock for which
registration has been so requested.
Holders of Registrable Securities are required, to the extent they do not
participate in an initial public offering, not to transfer their Registrable
Securities for a period of 180 days following such initial public offering. The
Company is also obligated to cause the Registrable Securities to be listed on a
recognized securities exchange as soon as practicable after the third
anniversary of the closing of the Unit Offering (December 21, 1997).
The Registration Rights Agreement contains customary provisions whereby the
Company and the Holders of Registrable Securities indemnify and agree to
contribute to the other with regard to losses caused by the misstatement of any
information required to be provided in a registration statement filed
60
<PAGE> 64
under the Securities Act. The Registration Rights Agreement requires the Company
to pay all Registration Expenses (as defined in the agreement) associated with
any registration. Registration Expenses do not include underwriting discounts
and commissions.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is
, whose address is .
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offerings, there has been no public market for the Common
Stock. Sales of a substantial amount of Common Stock in the public market, or
the perception that such sales may occur, could adversely affect the market
price of the Common Stock prevailing from time to time in the public market and
could impair the Company's ability to raise additional capital through the sale
of its equity securities in the future.
Upon completion of the Offerings, the Company will have approximately
shares of Common Stock outstanding ( if the Underwriters'
over-allotment option is exercised in full), including shares of
Common Stock offered hereby ( if the Underwriters' over-allotment
option is exercised in full) and 20,561,472 "restricted" shares of Common Stock.
Of the restricted shares held by persons other than "affiliates" of the Company
within the meaning of Rule 144, 1,386,878 shares of Common Stock are currently
eligible for sale under Rule 144, as currently in effect, and an additional
4,357,270 shares of Common Stock will be eligible for sale under Rule 144, as
currently in effect, beginning in December 1997.
The shares of Common Stock offered in the Offerings will be freely
tradeable without restriction or further registration under the Securities Act
by persons other than "affiliates" of the Company within the meaning of Rule
144. The holders of restricted shares generally will be entitled to sell these
shares in the public securities market without registration under the Securities
Act to the extent permitted by Rule 144 or any exemption under the Securities
Act.
In general, under Rule 144, as currently in effect, if two years have
elapsed since the later of the date of acquisition of restricted shares from the
Company or any "affiliate" of the Company, the holder is entitled to sell within
any three-month period such number of shares of Common Stock that does not
exceed the greater of 1.0% of the then outstanding shares of Common Stock or the
average weekly trading volume of shares of Common Stock during the four calendar
weeks preceding the date on which notice of the sale is filed with the
Commission. Sales under Rule 144 are also subject to certain restrictions on the
manner of sale, notice requirements and the availability of current public
information about the Company. If three years have elapsed since the holder
acquired the restricted shares from the Company or from any "affiliate" of the
Company, and the holder is deemed not to have been an affiliate of the Company
at any time during the 90 days preceding a sale, such person will be entitled to
sell such Common Stock in the public market under Rule 144(k) without regard to
the volume limitations, manner of sale provisions, public information
requirements or notice requirements. The Commission has proposed an amendment to
Rule 144 to shorten each of the two and three year holding periods by one year.
This proposal, if adopted, would increase the number of shares of Common Stock
eligible for immediate sale following the expiration of the "lock-up period"
described below.
The Company and each of its directors and executive officers and certain
other stockholders have entered into "lock-up" agreements with the Underwriters,
providing that, subject to certain exceptions, they will not, for a period of
days from the date of this Prospectus, without the prior written consent of
Salomon Brothers Inc, offer, sell or contract to sell, or otherwise dispose of,
directly or indirectly, or announce an offering of, any shares of Common Stock
or any securities convertible into, or exchangeable
61
<PAGE> 65
for, shares of Common Stock, provided that the Company may issue and sell shares
of Common Stock pursuant to the Stock Incentive Plan. See "Underwriting."
Promptly after completion of the Offerings, the Company intends to file
with the Commission a Registration Statement on Form S-8, covering the
restricted shares of Common Stock and the shares of Common Stock underlying
options granted under the Stock Incentive Plan. This registration statement will
become effective immediately upon filing with the Commission. As a result, the
shares of Common Stock so registered and acquired pursuant to the Stock
Incentive Plan will be available for sale by non-affiliates in the public
securities market without limitation and by affiliates, subject to the volume
limitations of Rule 144.
62
<PAGE> 66
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
among the Company and the U.S. Underwriters (the "U.S. Underwriting Agreement"),
the Company has agreed to sell to each of the U.S. Underwriters named below (the
"U.S. Underwriters"), and each of the U.S. Underwriters, for whom Salomon
Brothers Inc is acting as the U.S. representative (the "U.S. Representative"),
has severally agreed to purchase from the Company the number of shares set forth
opposite its name below:
<TABLE>
<CAPTION>
NUMBER
U.S. UNDERWRITERS OF SHARES
------------------------------------------------------------ ----------
<S> <C>
Salomon Brothers Inc........................................
----------
Total.............................................
============
</TABLE>
The Company has been advised by the U.S. Representative that the several
U.S. Underwriters initially propose to offer such shares of Common Stock to the
public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share of Common Stock. The U.S. Underwriters may allow, and
such dealers may re-allow, a concession not in excess of $ per share of
Common Stock to other dealers. After the Offerings, the public offering price
and such concessions may be changed.
The Company has granted to the U.S. Underwriters and the international
underwriters (the "International Underwriters" and, collectively with the U.S.
Underwriters, the "Underwriters") an option, exercisable during the 30-day
period after the date of this Prospectus, to purchase up to additional
shares of Common Stock from the Company at the price to public less the
underwriting discount, solely to cover over-allotments. To the extent that the
U.S. Underwriters and the International Underwriters exercise such option, each
of the U.S. Underwriters and the International Underwriters, as the case may be,
will be committed, subject to certain conditions, to purchase a number of option
shares proportionate to such U.S. Underwriter's or International Underwriter's
initial commitment.
The Company has entered into an International Underwriting Agreement with
the International Underwriters named therein, for whom Salomon Brothers
International Limited is acting as the representative (the "International
Representative"), providing for the concurrent offer and sale of
shares of Common Stock (in addition to the shares covered by the over-allotment
option described above) outside the United States and Canada. Both the U.S.
Underwriting Agreement and the International Underwriting Agreement provide that
the obligations of the U.S. Underwriters and the International Underwriters are
such that if any of the shares of Common Stock are purchased by the U.S.
Underwriters pursuant to the U.S. Underwriting Agreement, or by the
International Underwriters pursuant to the International Underwriting Agreement,
all the shares of Common Stock agreed to be purchased by either the U.S.
Underwriters or the International Underwriters, as the case may be, pursuant to
their respective agreements must be so purchased. The price to public and
underwriting discount per share of Common Stock for the U.S. Offering and the
International Offering will be identical. The closing of the International
Offering is a condition to the closing of the U.S. Offering and the closing of
the U.S. Offering is a condition to the closing of the International Offering.
Each U.S. Underwriter has severally agreed that, as part of the
distribution of the shares of Common Stock offered by the U.S.
Underwriters, (i) it is not purchasing any shares of Common Stock for the
account of anyone other than a United States or Canadian Person and (ii) it has
not offered or sold, and will not offer or sell, directly or indirectly, any
shares of Common Stock or distribute this Prospectus to any person outside the
United States or Canada or to anyone other than a United States or Canadian
63
<PAGE> 67
Person. Each International Underwriter has severally agreed that, as part of the
distribution of the shares of Common Stock by the International
Underwriters, (i) it is not purchasing any shares of Common Stock for the
account of any United States or Canadian Person, and (ii) it has not offered or
sold, and will not offer or sell, directly or indirectly, any shares of Common
Stock or distribute any Prospectus relating to the International Offering to any
person within the United States or Canada or to any United States or Canadian
person.
The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the Agreement Between U.S. Underwriters
and International Underwriters. "United States" or "Canadian Person" means any
person who is a national or resident of the United States or Canada, any
corporation, partnership or other entity created or organized in or under the
laws of the United States or Canada or of any political subdivision thereof, and
any estate or trust which is subject to United States or Canadian federal income
taxation, regardless of the source of its income (other than the foreign branch
of any United States or Canadian Person), and includes any United States or
Canadian branch of a person other than a United States or Canadian Person.
Pursuant to the Agreement Between U.S. Underwriters and International
Underwriters, sales may be made between the U.S. Underwriters and the
International Underwriters of such number of shares of Common Stock as may be
mutually agreed. The price of any shares of Common Stock so sold shall be the
public offering price, less an amount not greater than the concession to
securities dealers. To the extent that there are sales between the U.S.
Underwriters and the International Underwriters pursuant to the Agreement
Between U.S. Underwriters and International Underwriters, the number of shares
of Common Stock initially available for sale by the U.S. Underwriters or by the
International Underwriters may be more or less than the amount specified on the
cover page of this Prospectus.
Any offer of the shares of Common Stock in Canada will be made only
pursuant to an exemption from the registration and qualification requirements in
any jurisdiction in Canada in which such offer is made.
The U.S. Underwriting Agreement provides that the Company will indemnify
the U.S. Underwriters against certain liabilities and expenses, including
liabilities under the Securities Act, or contribute to payments the U.S.
Underwriters may be required to make in respect thereof.
The Company and each of its directors and executive officers and certain
other stockholders have agreed not to offer, sell, contract to sell or otherwise
dispose of, directly or indirectly, or announce the offering of any shares of
Common Stock, including any such shares beneficially or indirectly owned or
controlled by the Company, or any securities convertible into, or exchangeable
or exercisable for, shares of Common Stock, for days from the date of
this Prospectus, without the prior written consent of Salomon Brothers Inc,
except for (i) shares issued in connection with any employee benefit or
incentive plans of the Company existing on the date of this Prospectus, (ii)
shares issued in respect of obligations existing before the date of this
Prospectus and (iii) shares issued in connection with the Offerings.
The U.S. Representative does not intend to confirm sales to any account
over which it exercises discretionary authority.
Prior to the Offerings, there has been no public market for the Common
Stock. The initial public offering price of the Common Stock will be determined
by negotiation among the Company, the U.S. Representative and the International
Representative. The factors to be considered in determining the initial public
offering price include the information set forth in this Prospectus and
otherwise available to the U.S. Representative and the International
Representative, the history of and future prospects for the industry in which
the Company competes, the ability of the Company's management, the general
conditions of the securities market at the time of the Offerings and the market
prices of securities and certain financial and operating information of
companies engaged in activities similar to those of the Company. There can be no
assurance that the price at which shares of Common Stock will sell in the public
market after the Offerings will not be lower than the price at which they are
sold in the Offerings by the Underwriters.
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<PAGE> 68
LEGAL MATTERS
The validity of the shares of Common Stock will be passed upon for the
Company by Kelley Drye & Warren LLP, New York, New York. Certain legal matters
in connection with the Offerings will be passed upon for the Underwriters by
Cravath, Swaine & Moore, New York, New York.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1995 and 1994 and for each of the years in the three year period ended December
31, 1995 appearing herein and in the Registration Statement have been audited by
KPMG Peat Marwick LLP, independent Certified Public Accountants, as set forth in
their report appearing elsewhere herein and in the Registration Statement of
which this Prospectus forms a part and upon the authority of said firm as
experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the shares of Common Stock being
sold in the Offerings. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all the information set forth in the
Registration Statement and the exhibits and schedule thereto, certain portions
of which have been omitted as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock, reference is made to the Registration Statement and the exhibits and
schedule filed as a part thereof. Statements contained in the Prospectus as to
the contents of any contract, agreement or other document referred to are brief
summaries of the material provisions thereof but are not necessarily complete,
and in each instance reference is made to the copy of such contract, agreement
or other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. The Registration
Statement, including exhibits and the schedule thereto, may be inspected without
charge at the Commission's principal office at 450 Fifth Street, N.W., Judiciary
Plaza, Room 1024, Washington, D.C. 20549 and at the following regional offices
of the Commission: Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511 and at Seven World Trade Center, Suite 1300, New
York, New York 10048. Copies of all or any portion of the Registration Statement
may be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549, upon payment of fees
prescribed by the Commission.
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files periodic reports and other information
with the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549. Copies of the reports and information so filed can be inspected without
charge at the public reference facility and regional offices referred to above.
Copies of such material can also be obtained from the Public Reference Section
of the Commission, upon payment of fees prescribed by the Commission.
The Commission maintains a Web site that contains reports, proxy statements
and other information regarding registrants that file electronically with the
Commission. The address of the Commission's Web site is http://www.sec.gov.
65
<PAGE> 69
GLOSSARY
Callback -- A form of dial up access. Viatel offers callback services
utilizing "Code Calling" (a caller dials an Omaha, Nebraska telephone number
which uniquely identifies the caller), Internet Access or X.25 access. The
Company provides both "anywhere to anywhere" calling and virtual private network
calling via Callback access.
CLEC (competitive local exchange carrier) -- A company that provides its
customers with an alternative to the local exchange carrier for local transport
of private line and special access telecommunications services.
CUG (closed user group) -- A group of specified users of a voice or data
network that is assigned a facility that permits them to communicate with each
other, but precludes communications with other users of the service.
Dedicated access -- A means of accessing the Company's network through the
use of a permanent point to point circuit typically leased from the ITO. The
advantage of dedicated access is simplified premises to anywhere calling, faster
call setup times and potentially lower access costs (provided there is
sufficient traffic over the circuit to generate economies of scale).
Dedicated leased line -- Any circuit (typically supplied by and leased from
an ITO) designated to be at the exclusive disposal of a given subscriber.
Dial up access -- A form of service rendering whereby access to the Viatel
Network is obtained by means of dialing an ITF, NTF or paid local access number.
Currently, all of the Company's services except ViaCALL Plus are offered via
this access method.
Direct access -- Access to the Company's services using a dedicated leased
line from the customer's premises to the Company's switch.
Facilities-based carrier -- A carrier which owns long distance
interexchange and transmission facilities and originates and terminates calls
through local exchange systems.
IPLC (international private line circuit) -- A permanent international
point-to-point connection for voice and dial up data.
IRU -- Indefeasible right of use.
ISDN -- Integrated Services Digital Network.
ITF -- International toll-free (a form of dial up access).
ITO -- "Incumbent telecommunications operator" or "incumbent TO" previously
known as the Postal, Telephone and Telegraph company or PTT.
LCR (least cost routing) -- Routing of calls in the least expensive manner.
Local connectivity -- Physical circuits connecting the Company's switches
to the ITO.
Local exchange -- A geographic area determined by the appropriate
regulatory authority in which calls generally are transmitted without toll
charges to the calling or called party.
NTF -- National toll-free (a form of dial up access).
PLC (private line circuit) -- A permanent in-country point-to-point
connection for voice and dial up data.
POPs (points of presence) -- Locations where a long distance carrier has
installed transmission equipment in a service area that serves as, or relays
calls to, a network switching center of that long distance carrier.
PSTN (public switched telephone network) -- An abbreviation used by the
ITU, PSTN refers to the local phone company.
G-1
<PAGE> 70
Private line -- A dedicated telecommunications connection between end user
locations.
Resale -- Resale by a provider of telecommunications services (such as a
local exchange carrier) of such services to other providers or carriers on a
wholesale or a retail basis.
Settlement agreement -- A method by which revenues are distributed between
international long distance telecommunications companies.
SNMP -- Simplified network management protocol, the defacto network
management standard for wide area voice and data networks.
SS7 (signaling system 7) -- The standard signaling protocol currently in
use.
Switch -- A device that opens or closes circuits or selects the paths or
circuits to be used for transmission of information. Switching is a process of
interconnecting circuits to form a transmission path between users.
Virtual private networks -- Carrier provided services which provide
capabilities similar to those of private lines, such as conditioning, error
testing, and higher speed, full-duplex, four wire transmission with a line
quality adequate for data.
Voice Telephony -- The commercial provision for the public of the direct
transport and switching of speech in real-time between public switched network
termination points, enabling any user to use equipment connected to such a
network termination point in order to communicate with another termination
point.
X.25 -- A form of packet switching (a system whereby messages are broken
down into smaller units called packets which are then individually addressed and
routed through the network). The Company uses X.25 packet switching as a means
of originating callback requests.
G-2
<PAGE> 71
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1994.......................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1995, 1994 and
1993................................................................................ F-4
Consolidated Statements of Stockholders' (Deficit) Equity for the Years ended December
31, 1995, 1994 and 1993............................................................. F-5
Consolidated Statements of Cash Flows for the Years ended December 31, 1995, 1994 and
1993................................................................................ F-6
Notes to Consolidated Financial Statements for the Years ended December 31, 1995, 1994
and 1993............................................................................ F-7
Consolidated Balance Sheet as of June 30, 1996 (Unaudited)............................ F-17
Consolidated Statements of Operations for the Three and Six Months ended June 30, 1996
and 1995 (Unaudited)................................................................ F-18
Consolidated Statements of Cash Flows for the Six Months ended June 30, 1996 and 1995
(Unaudited)......................................................................... F-19
Notes to Consolidated Financial Statements for the Three and Six Months ended June 30,
1996 and 1995 (Unaudited)........................................................... F-20
</TABLE>
F-1
<PAGE> 72
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Viatel, Inc. and Subsidiaries
We have audited the consolidated balance sheets of Viatel, Inc. and
Subsidiaries as of December 31, 1995 and 1994 and the consolidated statements of
operations, stockholders' (deficit) equity and cash flows for each of the years
in the three-year period ended December 31, 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Viatel, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
New York, New York
March 8, 1996
F-2
<PAGE> 73
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................................. $ 8,934,914 $ 66,761,614
Marketable securities, current............................. 25,004,050 --
Trade accounts receivable, less allowance for doubtful
accounts of $473,000 and $475,000, respectively......... 4,723,664 3,844,595
Other receivables.......................................... 2,757,675 662,885
Prepaid expenses........................................... 742,803 263,353
------------ ------------
Total current assets............................... 42,163,106 71,532,447
------------ ------------
Marketable securities, non-current........................... 1,127,442 --
Property and equipment, net.................................. 15,715,121 6,933,462
Deferred financing and registration fees, less accumulated
amortization of $364,000 and $14,000, respectively......... 3,431,540 3,321,015
Intangible assets, net....................................... 2,070,055 1,904,414
Other assets................................................. 1,106,182 232,132
------------ ------------
$ 65,613,446 $ 83,923,470
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current Liabilities:
Accrued telecommunications costs........................... $ 11,056,235 $ 7,754,580
Accounts payable and other accrued expenses................ 4,591,628 3,327,355
Commissions payable........................................ 300,655 233,558
Notes payable, current portion............................. -- 966,755
Current installments of obligations under capital leases... -- 700,865
------------ ------------
Total current liabilities.......................... 15,948,518 12,983,113
------------ ------------
Long term liabilities:
Senior discount notes, less discount of $53,416,992 and
$62,349,523, respectively............................... 67,283,008 58,350,477
Accrued telecommunications costs, less current portion..... -- 999,463
Obligations under capital leases, excluding current
installments............................................ -- 605,587
------------ ------------
Total long term liabilities........................ 67,283,008 59,955,527
------------ ------------
Commitments and contingencies
Stockholders' (deficit) equity:
Common Stock, $.01 par value. Authorized 50,000,000 shares,
issued and outstanding 16,104,202 and 16,074,202 shares,
respectively............................................ 161,042 160,742
Class A Common Stock, $.01 par value. Authorized 10,000,000
shares, issued and outstanding 4,357,270 shares......... 43,573 43,573
Additional paid-in capital................................. 30,030,805 29,914,105
Unearned compensation...................................... (78,000) --
Cumulative translation adjustment.......................... (164,676) 1,523
Accumulated deficit........................................ (47,610,824) (19,135,113)
------------ ------------
Total stockholders' (deficit) equity............... (17,618,080) 10,984,830
------------ ------------
$ 65,613,446 $ 83,923,470
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 74
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ -----------
<S> <C> <C> <C>
Telecommunications revenue........................ $ 32,313,293 $ 26,267,741 $21,392,967
------------ ------------ -----------
Operating expenses:
Costs of telecommunications services............ 27,648,340 22,952,941 18,159,410
Selling expenses................................ 7,467,874 4,458,910 2,389,314
General and administrative expense.............. 16,859,663 9,858,881 6,068,655
Depreciation and amortization................... 2,636,787 789,359 110,892
Equipment impairment loss....................... 560,419 -- --
------------ ------------ -----------
Total operating expenses................ 55,173,083 38,060,091 26,728,271
Other income (expenses):
Interest income................................. 3,281,926 213,611 21,432
Interest expense................................ (8,856,317) (771,782) --
Share in loss of affiliate...................... (41,530) (144,867) (141,903)
------------ ------------ -----------
Net loss................................ $(28,475,711) $(12,495,388) $(5,455,775)
============ ============ ===========
Net loss per common share............... $ (1.39) $ (0.81) $ (0.51)
============ ============ ===========
Weighted average common shares
outstanding........................... 20,461,472 15,357,889 10,638,991
============ ============ ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-4
<PAGE> 75
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
NUMBER
OF
NUMBER OF CLASS A
COMMON COMMON CLASS A ADDITIONAL CUMULATIVE
STOCK STOCK COMMON COMMON PAID-IN UNEARNED TRANSLATION ACCUMULATED
SHARES SHARES STOCK STOCK CAPITAL COMPENSATION ADJUSTMENT DEFICIT TOTAL
---------- --------- -------- ------- ----------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January
1,
1993.............. 9,628,000 -- $ 96,280 $ -- $ (51,383) $ -- $ -- $(1,183,950 ) $ (1,139,053)
Issuance of common
stock and
warrants, net of
$381,804 issue
costs............. 2,547,406 -- 25,474 -- 4,593,722 -- -- -- 4,619,196
Issuance of common
stock............. 629,160 -- 6,292 -- 1,754,305 -- -- -- 1,760,597
Issuance of common
stock, in lieu of
payment of
services.......... 38,667 -- 386 -- 38,461 -- -- -- 38,847
Issuance of
restricted common
stock............. 20,161 -- 202 -- 49,798 (36,100) -- -- 13,900
Net loss............ -- -- -- -- -- -- -- (5,455,775 ) (5,455,775)
----------- ---------- -------- ------- ----------- ------- --------- ------------ ------------
Balance at December
31, 1993.......... 12,863,394 -- 128,634 -- 6,384,903 (36,100) -- (6,639,725 ) (162,288)
Issuance of common
stock and
warrants, net of
$412,338 issue
costs............. 3,210,808 -- 32,108 -- 7,556,554 -- -- -- 7,588,662
Issuance of Class A
common stock, net
of $977,132 issue
costs............. -- 4,357,270 -- 43,573 15,972,648 -- -- -- 16,016,221
Recognition of
unearned
compensation...... -- -- -- -- -- 36,100 -- -- 36,100
Foreign currency
translation
adjustment........ -- -- -- -- -- -- 1,523 -- 1,523
Net loss............ -- -- -- -- -- -- -- (12,495,388 ) (12,495,388)
----------- ---------- -------- ------- ----------- ------- --------- ------------ ------------
Balance at December
31, 1994.......... 16,074,202 4,357,270 160,742 43,573 29,914,105 -- 1,523 (19,135,113 ) 10,984,830
Issuance of
restricted common
stock............. 30,000 -- 300 -- 116,700 (78,000) -- -- 39,000
Foreign currency
translation
adjustment........ -- -- -- -- -- -- (166,199 ) -- (166,199)
Net loss............ -- -- -- -- -- -- -- (28,475,711 ) (28,475,711)
----------- ---------- -------- ------- ----------- ------- --------- ------------ ------------
Balance at December
31, 1995.......... 16,104,202 4,357,270 $161,042 $43,573 $30,030,805 $(78,000) $(164,676 ) $(47,610,824) $(17,618,080)
=========== ========== ======== ======= =========== ======= ========= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 76
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................ $(28,475,711) $(12,495,388) $(5,455,775)
Adjustments to reconcile net loss to net cash
used in operating activities:
Deferred financing and registration costs.... (460,032) (3,335,015) --
Equipment impairment loss.................... 560,419 -- --
Depreciation and amortization................ 2,636,787 789,359 110,892
Interest expense on senior discount notes.... 8,773,438 364,506 --
Accrued interest income on marketable
securities................................. (714,468) -- --
Provision for losses on accounts
receivable................................. 1,229,473 900,094 703,000
Share in loss of affiliate................... 41,530 144,867 141,903
Unearned compensation........................ 39,000 36,100 13,900
Changes in assets and liabilities:
Increase in accounts receivable.............. (2,127,611) (1,052,611) (2,728,373)
Increase in prepaid expenses and other
receivables................................ (2,593,863) (540,125) (223,354)
Increase in other assets and intangible
assets..................................... (991,345) (9,273) (76,937)
Increase in accrued telecommunications costs,
accounts payable, accrued expenses and
commissions payable........................ 3,592,930 3,626,126 6,072,247
------------ ------------ -----------
Net cash used in operating activities... (18,489,453) (11,571,360) (1,442,497)
------------ ------------ -----------
Cash flows from investing activities:
Purchase of property, equipment and software.... (11,377,850) (3,671,811) (1,090,102)
Purchase of sales organizations................. -- (1,171,320) --
Purchase of Sitel assets........................ -- -- (1,553,350)
Purchase of marketable securities............... (55,495,423) -- --
Proceeds from maturity of marketable
securities................................... 30,078,399 -- --
Investment in affiliate......................... (262,214) (152,439) (305,257)
------------ ------------ -----------
Net cash used in investing activities... (37,057,088) (4,995,570) (2,948,709)
------------ ------------ -----------
Cash flows from financing activities:
Payments under capital leases................... (1,306,453) (620,979) (51,258)
Repayment of notes payable...................... (999,463) (3,000,000) --
Proceeds from issuance of senior discount
notes........................................ -- 57,999,971 --
Proceeds from issuance of Class A Common
Stock........................................ -- 16,016,221 --
Proceeds from issuance of Common Stock and
warrants..................................... -- 7,588,662 6,379,793
Borrowings on notes payable..................... -- 3,000,000 --
------------ ------------ -----------
Net cash (used in) provided by financing
activities............................ (2,305,916) 80,983,875 6,328,535
------------ ------------ -----------
Effects of exchange rate changes on cash.......... 25,757 17,212 --
------------ ------------ -----------
Net (decrease) increase in cash and cash
equivalents..................................... (57,826,700) 64,434,157 1,937,329
Cash and cash equivalents at beginning of year.... 66,761,614 2,327,457 390,128
------------ ------------ -----------
Cash and cash equivalents at end of year.......... $ 8,934,914 $ 66,761,614 $ 2,327,457
============ ============ ===========
Supplemental disclosures of cash flow information:
Interest paid................................... $ 58,040 $ 425,608 $ --
============ ============ ===========
Equipment acquired under capital lease
obligations.................................. $ -- $ 595,000 $ 1,479,411
============ ============ ===========
Common Stock issued in lieu of payment for
services..................................... $ -- $ -- $ 38,847
============ ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 77
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
Viatel, Inc. (the "Company") provides value-added telecommunications
services primarily to businesses operating internationally. In order to
effectuate a reincorporation in the State of Delaware, VIA USA, Ltd. (a
predecessor Colorado corporation) merged with and into its wholly owned
subsidiary, Viatel, Inc., on October 11, 1994. The surviving entity, Viatel,
Inc., has reflected all assets and liabilities at historical cost.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant inter-company balances and
transactions have been eliminated in consolidation. Investments in affiliates in
which the Company has significant influence but does not exercise control are
accounted for under the equity method.
(c) Cash and Cash Equivalents
The Company's policy is to maintain its uninvested cash at minimum levels.
Cash equivalents, which include highly liquid debt instruments purchased with a
maturity of three months or less, were $3,116,218 and $63,111,992 at December
31, 1995 and 1994, respectively.
(d) Revenue
The Company records telecommunications revenue as earned, at the time
services are provided.
(e) Cost of Telecommunications Services and Selling Expenses
Cost of telecommunications services is recognized as incurred and consist
of charges for switched long distance services and costs of leased lines.
Selling expenses included commissions to sales representatives in the countries
in which the Company does not operate its own sales organizations. Commission
expense is recorded net of chargebacks for amounts deemed uncollectible in the
period the related services are provided.
(f) Property and Equipment
Property and equipment consist principally of telecommunications related
equipment such as switches, remote nodes and related computer software and is
stated at cost. Equipment acquired under capital leases is stated at the present
value of the future minimum lease payments.
Depreciation is provided using the straight-line method over the estimated
useful lives of the related assets. Leasehold improvements are amortized over
the life of the lease or useful life of the improvement, whichever is shorter.
The estimated useful lives are as follows:
<TABLE>
<S> <C>
Communications system................................................ 5 to 7 years
Leasehold improvements............................................... 2 to 5 years
Furniture, equipment and other....................................... 5 years
Maintenance and repairs are expensed as incurred.
</TABLE>
F-7
<PAGE> 78
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
(g) Intangible Assets
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, seven years.
Rights to territorial exclusivity represents the period of territory
exclusivity previously granted to the independent sales organizations which were
acquired and is being amortized over three years.
Deferred financing fees represent debt financing costs which are being
amortized over the term of the related debt.
The costs of all other intangible assets are being amortized over their
useful lives, ranging from one to five years.
The Company's intangible assets are assessed for recoverability at least
quarterly. The Company assesses the recoverability of its intangible assets by
determining whether the amortization of the goodwill balance over its remaining
life can be recovered through projections of undiscounted future operating cash
flows of the related intangible assets. The amount of intangible asset
impairment, if any, is measured based on projected discounted future operating
cash flows using a discount rate reflecting the Company's average cost of funds.
The assessment of the recoverability of intangible assets will be impacted if
estimated future operating cash flows are not achieved.
(h) Income Taxes
Effective January 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under
the asset and liability method of Statement 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under Statement
109, the effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income or expense in the period that includes the enactment
date. Adoption of Statement 109 did not have a material impact on the financial
statements of the Company.
(i) Foreign Currency Translation
Foreign currency assets and liabilities are translated using the exchange
rates in effect at the balance sheet date. Results of operations are translated
using the average exchange rates prevailing throughout the year. The effects of
exchange rate fluctuations on translating foreign currency assets and
liabilities into U.S. dollars are accumulated as part of the foreign currency
translation adjustment in stockholders' equity. Gains and losses from foreign
currency transactions are included in general and administrative expense in the
period in which they occur. For the years ending December 31, 1995, 1994 and
1993, the Company experienced $107,846 and $15,324 in foreign exchange
transaction gains and $62,558 in foreign exchange transaction losses,
respectively.
(j) Net Loss Per Share
Net loss per common and common equivalent share is based on the weighted
average number of common shares outstanding during the year. No effect has been
given to common stock equivalents as they are antidilutive.
F-8
<PAGE> 79
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
(k) Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of temporary cash investments and trade
receivables. The Company restricts investment of temporary cash investments to
financial institutions with high credit standing. Credit risk on trade
receivables is minimized as a result of the large and diverse nature of the
Company's worldwide customer base.
(l) Reclassifications
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year's presentation.
(m) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
(n) Additional Accounting Policies
Additional accounting policies are incorporated into the notes herein.
(2) ACQUISITIONS
During December 1994, the Company acquired all of the issued and
outstanding stock of two of its independent sales organizations. These
acquisitions have been accounted for under the purchase method of accounting
and, accordingly, the aggregate purchase price of $1,171,320 has been allocated
to the assets acquired and liabilities assumed, based upon their estimated fair
values as of the acquisition date. Additionally, the results of operations of
these organizations are included in the consolidated statements of operations
from dates of acquisition. Included among the assets acquired are intangible
assets related to rights to territorial exclusivity which will be amortized over
three years, which corresponds to the remaining period of territory exclusivity
previously granted to the sales organizations. The allocation of the aggregate
purchase price is summarized as follows:
<TABLE>
<S> <C>
Current assets........................................................ $ 161,486
Current liabilities................................................... (232,865)
Property and equipment................................................ 102,922
Intangible and other assets acquired.................................. 1,139,777
----------
Total purchase price........................................ $1,171,320
==========
</TABLE>
Due to the nature of the organizations acquired, pro forma revenue would
equal reported revenue and the pro forma net loss would be $194,007 and $48,387
higher than the reported net loss for the years ended December 31, 1994 and
1993, respectively, assuming the acquisitions occurred on January 1, 1993.
F-9
<PAGE> 80
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(3) INVESTMENTS IN DEBT SECURITIES
Management determines the appropriate classification of its investments in
debt securities at the time of purchase and reevaluates such determination at
each balance sheet date. These investments are diversified among high credit
quality securities in accordance with the Company's investment policy. Debt
securities that the Company has both the intent and ability to hold to maturity
are carried at amortized cost. Debt securities for which the Company does not
have the intent or ability to hold to maturity are classified as available for
sale. Securities available for sale are carried at fair value, with the
unrealized gains and losses, net of tax, reported in a separate component of
stockholders' equity. At December 31, 1995, the Company had no investments that
qualified as trading.
The amortized cost of debt securities classified as held to maturity and
available for sale are adjusted for amortization of premiums and accretion of
discounts to maturity over the estimated life of the security. Such amortization
and interest are included in interest income.
The following is a summary of the fair value of securities held to maturity
and securities available for sale at December 31, 1995:
<TABLE>
<CAPTION>
SECURITIES SECURITIES
HELD TO AVAILABLE
MATURITY FOR SALE TOTAL
---------- ----------- -----------
<S> <C> <C> <C>
Money market instruments................ $1,402,562 $ -- $ 1,402,562
Federal agencies obligations............ -- 5,786,796 5,786,796
Corporate debt securities............... -- 18,942,134 18,942,134
---------- ----------- -----------
Total......................... $1,402,562 $24,728,930 $26,131,492
========== =========== ===========
</TABLE>
The fair value of each investment approximates the amortized cost, and,
therefore, there are no unrealized gains or losses as of December 31, 1995.
The fair value of debt securities held to maturity and securities available
for sale at December 31, 1995 by contractual maturity are shown below:
<TABLE>
<CAPTION>
SECURITIES SECURITIES
HELD TO AVAILABLE
MATURITY FOR SALE TOTAL
---------- ----------- -----------
<S> <C> <C> <C>
Due within one year..................... $1,402,562 $23,601,488 $25,004,050
Due after one year through two years.... -- 1,127,442 1,127,442
---------- ----------- -----------
Total......................... $1,402,562 $24,728,930 $26,131,492
========== =========== ===========
</TABLE>
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
There were no changes in the classification of any securities held to
maturity or securities available for sale from the time of purchase to the time
of maturity or sale.
F-10
<PAGE> 81
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31:
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Communications system.................................. $13,997,966 $5,495,396
Leasehold improvements................................. 1,062,742 107,331
Furniture, equipment and other......................... 2,755,600 960,678
Construction in progress............................... 679,935 1,142,835
----------- ----------
18,496,243 7,706,240
Less accumulated depreciation and amortization......... 2,781,122 772,778
----------- ----------
$15,715,121 $6,933,462
=========== ==========
</TABLE>
At December 31, 1995 and 1994, construction in progress represents a
portion of the current expansion of the European Network. As of December 31,
1995, $508,600 of interest has been capitalized with respect to this project.
(5) INTANGIBLE ASSETS
Intangible assets consist of the following as of December 31:
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Rights to territorial exclusivity...................... $ 1,607,225 $1,091,451
Goodwill............................................... 474,065 474,065
Purchased software..................................... 661,999 418,756
Other.................................................. 133,834 67,668
----------- ----------
2,877,123 2,051,940
Less accumulated amortization.......................... 807,068 147,526
----------- ----------
$ 2,070,055 $1,904,414
=========== ==========
</TABLE>
(6) LONG TERM LIABILITIES
(a) Senior Discount Notes
On December 21, 1994, the Company issued $120,700,000, representing the
aggregate principal amount, of 15% senior unsecured discount notes due January
15, 2005 for approximately $58,000,000. The notes will fully accrete on a
semiannual compounding basis to face value on January 15, 2000 with semiannual
interest payments commencing July 15, 2000 until maturity.
The notes are redeemable at the Company's option, in whole or in part, at
any time on or after January 15, 2000 until maturity at redemption prices that
range from 110% to 100% of the notes face value plus accrued interest. In
addition, at any time prior to January 15, 1998, the Company may redeem up to
$42,245,000 of the face value of the notes with the proceeds of one or more
public equity offerings at 115% of the then accreted value of the notes, plus
accrued interest, if any, to the redemption date. Upon a change of control, the
Company is required to make an offer to purchase the notes at a purchase price
equal to 101% of their principal amount, plus accrued interest, if any. The
notes contain certain covenants that, among other things, limit the ability of
the Company and certain of its subsidiaries to incur indebtedness, make
pre-payments of certain indebtedness and pay dividends.
F-11
<PAGE> 82
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(6) LONG TERM LIABILITIES -- (CONTINUED)
On December 31, 1995, the Company estimated the fair value of these notes
to be $67,300,000 which approximates its accreted value. The estimate is based
on quoted market prices for the notes.
(b) Note Payable -- MCI
On January 28, 1994, the Company converted $2,666,755 of its outstanding
balance to MCI Telecommunications Corporation as of December 31, 1993 to a 7%
note secured by the Company's accounts receivable. At December 31, 1994,
$966,755 was outstanding under this note and was included in notes payable,
current. At December 31, 1995, the note was no longer outstanding.
(7) STOCKHOLDERS' EQUITY
During 1993, the Company increased the number of its authorized shares of
voting, no par value Common Stock from 100 to 20,000,000. In addition, the Board
of Directors authorized a recapitalization of the amount of its issued and
outstanding Common Stock by means of a 96,666 2/3 to 1 stock split. On March 21,
1994, the Company increased the number of its authorized shares of no par value
Common Stock from 20,000,000 to 50,000,000. On October 11, 1994, the Company
changed its voting Common Stock from no par value to $.01 par value per share.
All Common Stock and additional paid-in capital amounts have been restated to
reflect these changes.
In lieu of cash payments for call switching, initial screening, account
establishment and billing services, the Sitel Corporation received 2% of the
issued and outstanding Common Stock of the Company based on a market valuation
of $10,000,000. Of these shares, 80% were issued and outstanding at December 31,
1992 and the remaining 20% were issued during February 1993.
On October 1, 1993, the Company issued 2,547,406 shares of its Common Stock
for $5,000,000 and warrants to purchase additional shares of Common Stock. As of
December 31, 1995, the warrants have expired and are no longer exercisable.
Additionally, certain rights of the Company to repurchase a portion of the
shares have expired. Certain of such shares are subject to certain registration
rights in the event of public offerings by the Company.
On April 5, 1994, the Company issued 3,210,808 shares of its Common Stock
for $8,000,000 and warrants to purchase additional shares of Common Stock. As of
December 31, 1995, the warrants have expired and are no longer exercisable.
Additionally, certain rights of the Company to repurchase a portion of the
shares have expired. Certain of such shares are subject to certain registration
rights in the event of public offerings by the Company.
On December 16, 1994, the Company authorized the creation of 10,000,000
shares of non-voting, $.01 par value, Class A Common Stock. On December 21,
1994, 4,357,270 shares of Class A Common Stock were issued for net proceeds of
$16,016,221. Each share of Class A Common Stock will automatically convert after
October 15, 1995 into one share of Common Stock upon the earlier of an initial
public offering of the Common Stock or the third anniversary of its initial sale
by the Company. Except for voting and the above described anti-dilution rights,
the rights of holders are substantially identical to those of Common
Stockholders.
(8) INCOME TAXES
The statutory Federal tax rates for the years ended December 31, 1995, 1994
and 1993 were 35%. The effective tax rates were zero for the years ended
December 31, 1995, 1994 and 1993 due to the Company incurring net operating
losses for which no tax benefit was recorded.
F-12
<PAGE> 83
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(8) INCOME TAXES -- (CONTINUED)
For Federal income tax purposes, the Company has unused net operating loss
carryforwards of approximately $37,804,000 expiring in 2007 through 2010. The
availability of the net operating loss carryforwards to offset income in future
years may be restricted if the Company undergoes an ownership change, which may
occur as a result of future sales of Company stock and other events.
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1994
------------ -----------
<S> <C> <C>
Accounts receivable principally due to allowance for
doubtful accounts.................................. $ 166,000 $ 356,000
OID Interest not deductible in current period........ 2,933,000 --
Net operating loss carryforwards..................... 13,231,000 6,271,000
------------ -----------
Total gross deferred tax assets............ 16,330,000 6,627,000
Less valuation allowance............................. (16,330,000) (6,627,000)
------------ -----------
Net deferred tax assets.................... $ -- $ --
============ ===========
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning in making these assessments. During 1995, 1994 and 1993, the
valuation allowance increased by $9,703,000, $4,267,000 and $1,978,000,
respectively.
(9) SEGMENT DATA
The information below summarizes export sales by geographic area.
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Latin America......................... $12,093,771 $12,914,289 $12,492,542
Europe................................ -- 7,720,166 5,589,202
Africa................................ 1,207,225 1,832,547 1,761,965
Asia/Pacific Rim...................... 4,375,412 2,061,246 652,532
Middle East........................... 554,139 1,449,093 559,387
Other................................. 369,425 290,400 337,339
----------- ----------- -----------
$18,599,972 $26,267,741 $21,392,967
=========== =========== ===========
</TABLE>
In late 1994, the European Network became operational and the Company began
to establish direct sales organizations within Europe. For the year ended
December 31, 1995, revenue, operating loss, capital expenditures and
depreciation expense from this geographic segment were approximately
$11,601,000, $11,076,000, $9,959,000 and $243,000, respectively. Identifiable
assets as of December 31, 1995 for this geographic segment were approximately
$10,216,000. For December 31, 1994 and for the year then ended, revenue, results
from operations, capital expenditures, depreciation expense and identifiable
assets for this geographic segment were not significant.
F-13
<PAGE> 84
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(10) STOCK INCENTIVE PLAN
During 1993, the Board of Directors approved the 1993 Flexible Stock
Incentive Plan (the "Stock Incentive Plan") under which "non-qualified" stock
options ("NQSOs") to acquire shares of Common Stock may be granted to employees,
directors and consultants of the Company and "incentive" stock options ("ISOs")
to acquire shares of Common Stock may be granted to employees, including non-
employee directors. The Stock Incentive Plan also provides for the grant of
stock appreciation rights ("SARs") and shares of restricted stock to the
Company's employees, directors and consultants.
The Stock Incentive Plan provides for the issuance of up to a maximum of
1,750,000 shares of Common Stock and is currently administered by the
Compensation Committee. Under the Stock Incentive Plan, the option price of any
ISO may not be less than the fair market value of a share of Common Stock on the
date on which the option is granted. The option price of an NQSO may be less
than the fair market value on the date the NQSO is granted if the Compensation
Committee so determines. An ISO may not be granted to a "ten percent
stockholder" (as such term is defined in Section 422A of the Internal Revenue
Code) unless the exercise price is at least 110% of the fair market value of the
Common Stock and the term of the option may not exceed five years from the date
of grant. Common Stock subject to a restricted stock purchase or bonus agreement
is transferable only as provided in such agreement. The maximum term of each
stock option granted to persons other than ten percent stockholders is ten years
from the date of grant.
As of December 31, 1995, 1994 and 1993, options to purchase 745,123,
596,514 and 121,014 shares of Common Stock were outstanding respectively, at
exercise prices ranging from $.50 to $3.90 per share. As of December 31, 1995,
no SARs have been granted.
Stock option activity under the Stock Incentive Plan is shown below:
<TABLE>
<CAPTION>
OPTION PRICE
-----------------------
NUMBER OF PER SHARE TOTAL
SHARES AVERAGE PRICE
--------- --------- ----------
<S> <C> <C> <C>
Shares under option at January 1, 1993
Granted.......................................... 121,014 $0.50 $ 60,507
-------- ----- ----------
Shares under option at December 31, 1993......... 121,014 $0.50 $ 60,507
Granted.......................................... 475,500 $2.49 $1,183,995
-------- ----- ----------
Shares under option at December 31, 1994......... 596,514 $2.09 $1,244,502
Granted.......................................... 291,500 $3.90 $1,136,850
Forfeitures...................................... (142,891) $2.65 $ (378,809)
-------- ----- ----------
Shares under option at December 31, 1995......... 745,123 $2.69 $2,002,543
======== ===== ==========
</TABLE>
As of December 31, 1995, 1994 and 1993, options exercisable under the Stock
Incentive Plan were 461,553, 377,482 and 60,507, respectively.
Prior to the adoption of the Stock Incentive Plan, 8,871 options were
granted. As of December 31, 1995, 1994 and 1993, these options were outstanding
and fully vested, subject to early termination under certain conditions and are
exercisable at $.50 per share through December 31, 2002.
The exercise price of all options was equal to the fair market value of the
Common Stock at the date of grant.
In addition, prior to the adoption of the Stock Incentive Plan, the Board
of Directors authorized the issuance of up to 350,000 shares of Common Stock as
compensation to employees and consultants of
F-14
<PAGE> 85
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(10) STOCK INCENTIVE PLAN -- (CONTINUED)
the Company. Pursuant to this authorization, the Company issued 20,542 shares in
1993 in partial payment of a finders fee in connection with a purchase of Common
Stock by a principal stockholder of the Company.
(11) COMMITMENTS AND CONTINGENCIES
(a) Leases
At December 31, 1995, the Company was committed under non-cancelable
operating leases for the rental of office space and data processing equipment.
The Company's future minimum operating lease payments are as follows:
<TABLE>
<S> <C>
1996............................................ $1,062,388
1997............................................ 962,466
1998............................................ 909,238
1999............................................ 768,818
2000............................................ 688,376
Thereafter...................................... 742,195
----------
$5,133,481
==========
</TABLE>
Total rent expense amounted to $948,826, $935,267 and $420,713 for the
years ended December 31, 1995, 1994 and 1993, respectively.
On August 4, 1995, the Company entered into a termination agreement with a
vendor, pursuant to which the Company prepaid the 8% existing capital lease
obligation of approximately $1,025,000, thereby acquiring all of the equipment
previously leased.
(b) Carrier Contracts
The Company has entered into contracts to purchase transmission capacity
from various domestic and foreign carriers. By committing to purchase minimum
volumes of transmission capacity from carriers, the Company is able to obtain
guaranteed rates which are more favorable than those generally offered in the
marketplace. The minimum purchase commitments are $8,300,000 for the year ending
December 31, 1996.
(c) Purchase Commitments
The Company is continually upgrading and expanding the European Network and
the Omaha, Nebraska switching facility. In connection therewith, the Company has
entered into purchase commitments to expend approximately $1,200,000. The
Company has also entered into purchase commitments of approximately $400,000 in
connection with financial and administrative software upgrades.
(d) Employment Contracts
The Company has employment contracts with certain officers at amounts
generally equal to such officers' current levels of compensation. The Company's
remaining commitments at December 31, 1995 for the next three years under such
contracts aggregates approximately $916,000.
F-15
<PAGE> 86
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(11) COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
(e) Litigation
As a result of the Company's transition to direct sales organizations in
Europe, two of its former independent sales representatives, in France and in
Spain, have asserted breach of contract and certain other claims. Arbitration
proceedings in respect to these claims are currently under way or pending. The
aggregate amount of damages sought by the representatives is $8.8 million. The
Company believes that it has meritorious defenses against the claims alleged by
the representatives and intends to vigorously pursue all such defenses but the
outcomes can not be predicted. The Company believes that any possible awards in
these suits would not be in excess of $1 million in the aggregate and would
result in an increase in recorded cost of the territorial exclusivity rights.
(12) REGULATORY MATTERS
The Company is subject to regulation in countries in which it does
business. The Company believes that an adverse determination as to the
permissibility of the Company's services under the laws and regulations of any
such country would not have a material adverse long-term effect on its business.
F-16
<PAGE> 87
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 7,713,531
Marketable securities, current........................................... 5,055,909
Trade accounts receivable, less allowance for doubtful accounts of
$621,000.............................................................. 6,745,493
Other receivables........................................................ 2,847,959
Prepaid expenses......................................................... 733,098
-----------
Total current assets............................................. 23,095,990
-----------
Property and equipment, less accumulated depreciation and amortization of
$4,560,000............................................................... 18,108,129
Deferred financing and registration fees, less accumulated amortization of
$553,000................................................................. 3,236,167
Intangible assets, less accumulated amortization of $1,220,000............. 3,136,967
Other assets............................................................... 1,807,008
-----------
$ 49,384,261
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accrued telecommunications costs......................................... $ 8,619,071
Accounts payable and other accrued expenses.............................. 5,791,109
Commissions payable...................................................... 405,199
-----------
Total current liabilities........................................ 14,815,379
-----------
Long-term liabilities:
Senior discount notes, less discount of $48,371,027...................... 72,328,973
Commitments and contingencies
Stockholders' deficit:
Common Stock, $.01 par value. Authorized 50,000,000 shares, issued and
outstanding 16,204,202 shares......................................... 162,042
Class A Common Stock, $.01 par value. Authorized 10,000,000 shares,
issued and outstanding, 4,357,270 shares.............................. 43,573
Additional paid-in capital............................................... 30,419,804
Unearned compensation.................................................... (162,600)
Cumulative translation adjustment........................................ (822,431)
Accumulated deficit...................................................... (67,400,479)
-----------
Total stockholders' deficit...................................... (37,760,091)
-----------
$ 49,384,261
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-17
<PAGE> 88
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ------------------------------
1996 1995 1996 1995
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Telecommunications revenue....... $ 11,691,959 $ 7,262,683 $ 22,282,229 $ 14,191,982
------------ ----------- ------------ ------------
Operating expenses:
Costs of telecommunications
services.................... 9,578,517 6,208,514 18,577,766 12,108,746
Selling expenses............... 2,669,744 1,832,324 5,070,968 3,369,020
General and administrative
expense..................... 6,625,996 4,315,545 11,755,086 7,218,096
Depreciation and
amortization................ 1,144,146 465,029 2,231,823 880,931
Equipment impairment loss...... -- 560,419 -- 560,419
------------ ----------- ------------ ------------
Total operating
expenses............. 20,018,403 13,381,831 37,635,643 24,137,212
------------ ----------- ------------ ------------
Other income (expenses):
Interest income................ 268,808 821,712 739,452 1,855,440
Interest expense............... (2,601,556) (2,156,581) (5,170,752) (4,326,975)
Share in loss of affiliate..... (3,639) (11,083) (4,941) (22,764)
------------ ----------- ------------ ------------
Net loss............... $ (10,662,831) $ (7,465,100) $ (19,789,655) $ (12,439,529)
============ =========== ============ ============
Net loss per common
share................ $ (.52) $ (.36) $ (.96) $ (.61)
============ =========== ============ ============
Weighted average common
shares outstanding... 20,561,472 20,461,472 20,561,472 20,461,472
============ =========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE> 89
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................... $(19,789,655) $(12,439,529)
Adjustments to reconcile net loss to net cash used in
operating activities:
Deferred financing costs................................ -- (125,559)
Equipment impairment loss............................... -- 560,419
Depreciation and amortization........................... 2,231,823 880,931
Interest expense on senior discount notes............... 5,169,138 4,270,026
Accrued interest income on marketable securities........ (219,899) (1,195,522)
Provision for losses on accounts receivable............. 1,044,308 56,697
Share in loss of affiliate.............................. 4,941 22,764
Unearned compensation................................... 305,400 --
Changes in assets and liabilities:
Increase in accounts receivable......................... (3,048,211) (42,485)
Decrease (increase) in prepaid expenses and other
receivables........................................... 673,756 (1,000,223)
Increase in other assets................................ (1,299,321) (891,658)
Decrease in accrued telecommunications costs, accounts
payable, other accrued expenses and commissions
payable............................................... (1,580,529) (1,828,364)
----------- ------------
Net cash used in operating activities.............. (16,508,249) (11,732,503)
----------- ------------
Cash flows from investing activities:
Purchase of property, equipment and software............... (4,660,158) (5,360,740)
Issuance of notes receivable............................... (323,227) --
Investment in marketable securities........................ (13,774,332) (50,695,308)
Proceeds from maturity of marketable securities............ 34,159,209 8,137,443
Investment in affiliate.................................... (93,953) (202,255)
----------- ------------
Net cash provided by (used in) investment
activities....................................... 15,307,539 (48,120,860)
----------- ------------
Cash flows from financing activities:
Payments under capital leases.............................. -- (285,252)
Repayment of notes payable................................. -- (1,966,218)
----------- ------------
Net cash used in financing activities.............. -- (2,251,470)
----------- ------------
Effects of exchange rate changes on cash..................... (20,673) 30,680
----------- ------------
Net decrease in cash and cash equivalents.................... (1,221,383) (62,074,153)
Cash and cash equivalents at beginning of period............. 8,934,914 66,761,614
----------- ------------
Cash and cash equivalents at end of period................... $ 7,713,531 $ 4,687,461
=========== ============
Supplemental disclosure of cash flow information:
Interest paid.............................................. $ -- $ 56,949
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE> 90
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE PERIODS
ENDED JUNE 30, 1996 AND 1995 IS UNAUDITED)
(1) INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements as of June 30, 1996 and for the three
and six month periods ended June 30, 1996 and 1995 have been prepared by Viatel,
Inc. and Subsidiaries (collectively, the "Company"), without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. In the
opinion of management, all adjustments (consisting of only normal recurring
accruals) necessary for a fair presentation of the consolidated results of
financial position, 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 information presented not misleading. It
is suggested that these financial statements be read in conjunction with the
Company's 1995 annual consolidated financial statements. Operating results for
the three and six months ended June 30, 1996 may not be indicative of the
results that may be expected for the full year.
The Company has adopted Statement of Financial Accounting Standard No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" ("SFAS 121") and Statement of Financial Accounting Standard No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123") as of January 1,
1996. With respect to SFAS 123, the Company has elected the "intrinsic value"
based method of accounting for its stock-based compensation arrangements.
Neither the adoption of SFAS 121 nor SFAS 123 had a material adverse effect on
the Company.
(2) INVESTMENTS IN DEBT SECURITIES
Management determines the appropriate classification of its investments in
debt securities at the time of purchase and reevaluates such determination at
each balance sheet date. These investments are diversified among high credit
quality securities in accordance with the Company's investment policy. Debt
securities that the Company has both the intent and ability to hold to maturity
are carried at amortized cost. Debt securities for which the Company does not
have the intent or ability to hold to maturity are classified as available for
sale. Securities available for sale are carried at fair value, with the
unrealized gains and losses, net of tax, reported in a separate component of
stockholders' equity. At June 30, 1996, the Company had no investments that
qualified as trading.
The amortized cost of debt securities classified as held to maturity and
available for sale are adjusted for amortization of premiums and accretion of
discounts to maturity over the estimated life of the security. Such amortization
and interest are included in interest income. There were no securities
classified as held to maturity as of June 30, 1996.
The following is a summary of the fair value of securities available for
sale at June 30, 1996:
<TABLE>
<CAPTION>
<S> <C>
U.S. Treasury obligations............................................... $3,936,487
Federal agencies obligations............................................ 1,119,422
----------
Total......................................................... $5,055,909
==========
</TABLE>
The fair value of each investment approximates the amortized cost and,
therefore, there are no unrealized gains or losses as of June 30, 1996.
Based upon contractual maturity, all securities available for sale at June
30, 1996 are due within one year.
F-20
<PAGE> 91
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE PERIODS
ENDING JUNE 30, 1996 AND 1995 IS UNAUDITED)
(2) INVESTMENTS IN DEBT SECURITIES -- (CONTINUED)
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
There were no changes in the classification of any securities held to
maturity or securities available for sale from the time of purchase to the time
of maturity or sale.
(3) REGULATORY MATTERS
The Company is subject to regulation in countries in which it does
business. The Company believes that an adverse determination as to the
permissibility of the Company's services under the laws and regulations of any
such country would not have a material adverse long-term effect on its business.
(4) COMMITMENTS AND CONTINGENCIES -- LITIGATION
On June 5, 1996, a French arbitration tribunal rendered a judgment against
the Company in connection with a claim by an independent sales representative
(the "Claimant") for alleged breach of contract and certain other claims. The
Claimant requested total monetary damages of approximately $3 million and sought
reinstatement as the Company's exclusive sales representative in France.
Although the arbitration panel awarded the Claimant FF 4.3 million
(approximately $.86 million based on foreign currency exchange rates in effect
as of July 31, 1996), the panel terminated the Claimant's sales agency. This
award has resulted in an increase in recorded cost of intangible assets related
to territorial exclusivity rights. Such increase in intangible assets will be
amortized over twenty-one months, which corresponds to the remaining period of
territorial exclusivity previously granted to the Claimant.
F-21
<PAGE> 92
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATES AS OF WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH SOLICITATION.
---------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 7
Use of Proceeds......................... 18
Dividend Policy......................... 18
Dilution................................ 19
Capitalization.......................... 20
Selected Consolidated Financial and
Other Data............................ 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 22
Business................................ 30
Management.............................. 45
Certain Transactions.................... 53
Principal Stockholders.................. 55
Description of Capital Stock............ 57
Shares Eligible for Future Sale......... 61
Underwriting............................ 63
Legal Matters........................... 65
Experts................................. 65
Additional Information.................. 65
Glossary................................ G-1
Index to Consolidated Financial
Statements............................ F-1
</TABLE>
SHARES
VIATEL, INC.
COMMON STOCK
($.01 PAR VALUE)
LOGO
- ------------------------------------------------------
SALOMON BROTHERS INC
- ---------------------------------------------------------------------
PROSPECTUS
DATED , 1996
<PAGE> 93
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
[ALTERNATE FRONT COVER PAGE - INTERNATIONAL TRANCHE]
Subject to Completion
August 20, 1996
PROSPECTUS
SHARES
LOGO
VIATEL, INC.
COMMON STOCK
($.01 PAR VALUE)
All of the shares of common stock (the "Common Stock") offered hereby are being
sold by Viatel, Inc. (the "Company" or "Viatel"). Of the shares of
Common Stock offered, shares are being offered by the U.S.
Underwriters (as defined herein) in the United States and Canada (the "U.S.
Offering") and shares are being offered by the International
Underwriters (as defined herein), in a concurrent offering outside the United
States and Canada (the "International Offering" and together with the U.S.
Offering, the "Offerings"), subject to transfers between the U.S. Underwriters
and the International Underwriters (collectively, the "Underwriters"). The
initial public offering price and the aggregate underwriting discount per share
will be identical for the Offerings. See "Underwriting." The closing of the U.S.
Offering and the International Offering are conditioned upon each other.
Prior to the Offerings, there has been no public market for the Common Stock. It
is currently estimated that the initial public offering price per share will be
between $ and $ . See "Underwriting" for a discussion of
the factors considered in determining the initial public offering price.
Application has been made to have the shares of Common Stock approved for
quotation on the Nasdaq National Market under the symbol "VYTL."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE POTENTIAL INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT COMPANY(1)
<S> <C> <C> <C>
Per Share.................................... $ $ $
Total(2)..................................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
(1) Before deducting offering expenses payable by the Company, estimated at
$ .
(2) The Company has granted the Underwriters a 30-day option to purchase up to
an aggregate of additional shares of Common Stock at the Price to
Public, less the Underwriting Discount, solely to cover over-allotments, if
any. If the Underwriters exercise such option in full, the total Price to
Public, Underwriting Discount and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
The shares of Common Stock are offered subject to receipt and acceptance by the
Underwriters, to prior sale and to the Underwriters' right to reject any order
in whole or in part and to withdraw, cancel or modify the offer without notice.
It is expected that delivery of the shares of Common Stock offered hereby will
be made at the office of Salomon Brothers Inc, Seven World Trade Center, New
York, New York, or through the facilities of The Depository Trust Company, on or
about , 1996.
- --------------------------------------------------------------------------------
SALOMON BROTHERS INTERNATIONAL LIMITED
- --------------------------------------------------------------------------------
The date of this Prospectus is , 1996.
<PAGE> 94
[ALTERNATE UNDERWRITING SECTION -- INTERNATIONAL TRANCHE]
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
among the Company and the International Underwriters (the "International
Underwriting Agreement"), the Company has agreed to sell to each of the
International Underwriters named below (the "International Underwriters"), and
each of the International Underwriters, for whom Salomon Brothers International
Limited is acting as the international representative (the "International
Representative"), has severally agreed to purchase the number of shares of
Common Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL UNDERWRITERS SHARES
-------------------------------------------------------- ---------
<S> <C>
Salomon Brothers International Limited..................
----
Total.........................................
====
</TABLE>
The Company has been advised by the International Representative that the
several International Underwriters initially propose to offer such shares of
Common Stock to the public at the public offering price set forth on the cover
page of this Prospectus and to certain dealers at such price less a concession
not in excess of $ per share of Common Stock. The International
Underwriters may allow, and such dealers may re-allow, a concession not in
excess of $ per share of Common Stock to other dealers. After the
Offerings, the public offering price and such concessions may be changed.
The Company has granted to the International Underwriters and the U.S.
underwriters (the "U.S. Underwriters" and, collectively with the International
Underwriters, the "Underwriters") an option, exercisable during the 30-day
period after the date of this Prospectus, to purchase up to additional
shares of Common Stock from the Company at the price to public less the
underwriting discount, solely to cover over-allotments. To the extent that the
International Underwriters and the U.S. Underwriters exercise such option, each
of the International Underwriters and the U.S. Underwriters, as the case may be,
will be committed, subject to certain conditions, to purchase a number of option
shares proportionate to such International Underwriter's or U.S. Underwriter's
initial commitment.
The Company has entered into a U.S. Underwriting Agreement with the U.S.
Underwriters named therein, for whom Salomon Brothers Inc is acting as the
representative (the "U.S. Representative"), providing for the concurrent offer
and sale of shares of Common Stock (in addition to the shares covered
by the over-allotment option described above) in the United States and Canada.
Both the International Underwriting Agreement and the U.S. Underwriting
Agreement provide that the obligations of the International Underwriters and the
U.S. Underwriters are such that if any of the shares of Common Stock are
purchased by the International Underwriters pursuant to the International
Underwriting Agreement, or by the U.S. Underwriters pursuant to the U.S.
Underwriting Agreement, all the shares of Common Stock agreed to be purchased by
either the International Underwriters or the U.S. Underwriters, as the case may
be, pursuant to their respective agreements must be so purchased. The price to
public and underwriting discount per share of Common Stock for the International
Offering and the U.S. Offering will be identical. The closing of the U.S.
Offering is a condition to the closing of the International Offering and the
closing of the International Offering is a condition to the closing of the U.S.
Offering.
Each International Underwriter has severally agreed that, as part of the
distribution of the shares of Common Stock offered by the
International Underwriters, (i) it is not purchasing any shares of Common Stock
for the account of any United States or Canadian Person and (ii) it has not
offered or sold, and will not offer or sell, directly or indirectly, any shares
of Common Stock or distribute this
63
<PAGE> 95
Prospectus to any person within the United States or Canada or to any United
States or Canadian Person. Each U.S. Underwriter has severally agreed that, as
part of the distribution of the shares of Common Stock by the U.S.
Underwriters, (i) it is not purchasing any shares of Common Stock for the
account of anyone other than a United States or Canadian Person, and (ii) it has
not offered or sold, and will not offer or sell, directly or indirectly, any
shares of Common Stock or distribute any Prospectus relating to the U.S.
Offering to any person outside the United States or Canada or to anyone other
than a United States or Canadian person.
The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the Agreement Between U.S. Underwriters
and International Underwriters. "United States" or "Canadian Person" means any
person who is a national or resident of the United States or Canada, any
corporation, partnership or other entity created or organized in or under the
laws of the United States or Canada or of any political subdivision thereof, and
any estate or trust which is subject to United States or Canadian federal income
taxation, regardless of the source of its income (other than the foreign branch
of any United States or Canadian Person), and includes any United States or
Canadian branch of a person other than a United States or Canadian Person.
Pursuant to the Agreement Between U.S. Underwriters and International
Underwriters, sales may be made between the International Underwriters and the
U.S. Underwriters of such number of shares of Common Stock as may be mutually
agreed. The price of any shares of Common Stock so sold shall be the public
offering price, less an amount not greater than the concession to securities
dealers. To the extent that there are sales between the International
Underwriters and the U.S. Underwriters pursuant to the Agreement Between U.S.
Underwriters and International Underwriters, the number of shares of Common
Stock initially available for sale by the International Underwriters or by the
U.S. Underwriters may be more or less than the amount specified on the cover
page of this Prospectus.
Each International Underwriter has severally represented and agreed that:
(i) it has not offered or sold and, prior to the date six months after the
closing date of the Offerings, will not offer to sell any shares of Common Stock
to persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise in
circumstances which have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995 (the "Regulations"); (ii) it has complied and will
comply with all applicable provisions of the Financial Services Act 1986 and the
Regulations with respect to anything done by it in relation to the shares of
Common Stock in, from or otherwise involving the United Kingdom; and (iii) it
has only issued or passed on or will only issue or pass on in the United Kingdom
any document received by it in connection with the issue of the shares of Common
Stock, to a person who is of a kind described in Article 11(3) of the Financial
Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995, or is a
person to whom the document may otherwise lawfully be issued or passed on.
Purchasers of the shares of Common Stock offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase in addition to the offering price set forth on the cover
page thereof.
The International Underwriting Agreement provides that the Company will
indemnify the International Underwriters against certain liabilities and
expenses, including liabilities under the Securities Act, or contribute to
payments the International Underwriters may be required to make in respect
thereof.
The Company and each of its directors and executive officers and certain
other stockholders have agreed not to offer, sell, contract to sell or otherwise
dispose of, directly or indirectly, or announce the offering of any shares of
Common Stock, including any such shares beneficially or indirectly owned or
controlled by the Company, or any securities convertible into, or exchangeable
or exercisable for, shares of Common Stock, for days from the date of this
Prospectus, without the prior written consent of Salomon Brothers Inc except for
(i) shares issued in connection with any employee benefit or incentive plans of
the Company existing on the date of this Prospectus, (ii) shares issued in
respect of obligations existing before the date of this Prospectus and (iii)
shares issued in connection with the Offerings.
64
<PAGE> 96
The International Representative does not intend to confirm sales to any
account over which it exercises discretionary authority.
Prior to the Offerings, there has been no public market for the Common
Stock. The initial public offering price of the Common Stock will be determined
by negotiation among the Company, the International Representative and the U.S.
Representative. The factors to be considered in determining the initial public
offering price include the information set forth in this Prospectus and
otherwise available to the International Representative and the U.S.
Representative, the history of and future prospects for the industry in which
the Company competes, the ability of the Company's management, the general
conditions of the securities market at the time of the Offerings and the market
prices of securities and certain financial and operating information of
companies engaged in activities similar to those of the Company. There can be no
assurance that the price at which shares of Common Stock will sell in the public
market after the Offerings will not be lower than the price at which they are
sold in the Offerings by the Underwriters.
65
<PAGE> 97
[TAX SECTION -- INTERNATIONAL TRANCHE]
CERTAIN UNITED STATES TAX CONSIDERATIONS FOR NON-UNITED STATES HOLDERS
The following is a discussion of certain United States federal income and
estate tax consequences of the acquisition, ownership and disposition of shares
applicable to Non-United States Holders of Common Stock. In general, a "Non-U.S.
Holder" is any person other than (i) a citizen or resident of the United States,
(ii) a corporation created or organized in the United States or under the laws
of the United States or of any State or (iii) an estate or trust whose income is
includable in gross income for United States federal income tax purposes
regardless of its source. The discussion is based on current law and is for
general information only. The discussion assumes that the Common Stock will be
included in the Nasdaq National Market. The discussion does not address aspects
of taxation other than federal income and estate taxation and does not address
all aspects of federal income and estate taxation. The discussion does not
consider any specific facts or circumstances that may apply to a particular
Non-U.S. Holder. The discussion assumes that a Non-U.S. Holder holds its Common
Stock as a "capital asset" (generally, non-depreciable property held for
investment) for federal income tax purposes. Moreover, the discussion does not
address legislation which is currently being considered by Congress or has been
proposed by the Treasury Department that could adversely effect a Non-U.S.
Holder. Accordingly, prospective investors are urged to consult their tax
advisors regarding the United States federal, state, local, non-United States
income and other tax consequences of acquiring, holding and disposing of shares
of Common Stock, and whether such a prospective investor would be treated as a
resident of the United States for federal income tax purposes.
Dividends. In general, dividends paid to a Non-U.S. Holder that are not
effectively connected with a trade or business carried on by the Non-U.S. Holder
within the United States will be subject to United States withholding tax at a
rate of 30% of the gross amount thereof. Dividends effectively connected with a
United States trade or business of a Non-U.S. Holder generally will not be
subject to withholding (if the Non-U.S. Holder files certain forms with the
payor of the dividend) and generally will be subject to United States federal
income tax at the same rates and in the same manner as if the income had been
received by a domestic taxpayer. In the case of Non-U.S. Holder corporations,
such effectively connected income also may be subject to the branch profits tax
(which generally is imposed on a foreign corporation in connection with earnings
and profits effectively connected with a U.S. trade or business). Non-U.S.
Holders should consult any applicable income tax treaties, which may provide for
reduced withholding or other rules different from those described above. A
Non-U.S. Holder may be required to satisfy certain certification requirements in
order to claim treaty benefits or to otherwise claim a reduction of or exemption
from withholding under the foregoing rules.
Sale of Common Stock. Generally, a Non-U.S. Holder will not be subject to
United States federal income tax on any gain realized upon the disposition of
his Common Stock unless (i) the Company is or has been during the five-year
period ending on the date of disposition, a "United States real property holding
corporation" for federal income tax purposes (which the Company has not been, is
not and is not likely to become) and the Non-U.S. Holder held, directly or
indirectly at anytime during the five-year period ending on the date of
disposition, more than 5% of the Common Stock, (ii) the gain is effectively
connected with a trade or business carried on by the Non-U.S. Holder within the
United States or, if a tax treaty applies, is attributable to a permanent
establishment (generally an office or other fixed place of business maintained
by the Non-U.S. Holder in the United States), or (iii) the Non-U.S. Holder is an
individual who holds the Common Stock as a capital asset and is present in the
United States for 183 days or more in the taxable year of the disposition and
either (a) such Non-U.S. Holder individual has a "tax home" (as defined for
United States federal income tax purposes) in the United States and either the
gain from the disposition is not attributable to an office or other fixed place
of business maintained by the Non-U.S. Holder individual in a foreign country
or, if it is, an income tax equal to at least 10% of the gain is not actually
paid to a foreign country or (b) the gain from the disposition is attributable
to an office or other fixed place of business maintained in the United States by
such Non-U.S. Holder individual. Gain that is effectively connected with the
conduct of a trade or business within the United States by a Non-
66
<PAGE> 98
U.S. Holder will be subject to United States federal income tax on net income
that applies to United States persons (and, with respect to corporate holders
under certain circumstances, the branch profits tax), but will not be subject to
withholding. An individual described in (iii) above generally will be subject to
tax at a 30% rate on any gain recognized on such disposition, but will not be
subject to withholding. Individual Non-U.S. Holders also may be subject to tax
pursuant to provisions of United States federal income tax law applicable to
expatriates of the United States. Non-U.S. Holders should consult applicable
treaties, which may provide for different rules.
Estate Tax. Common Stock owned or treated as owned by an individual who is
not a citizen or resident (as defined for United States federal estate tax
purposes) of the United States at the time of death will be includable in the
individual's gross estate for United States federal estate tax purposes, unless
an applicable tax treaty provides otherwise. Such individual's estate may be
subject to United States federal estate tax on the property includable in the
estate for United States federal estate tax purposes. Estates of nonresident
aliens are generally allowed a $13,000 credit against the estate tax otherwise
due; however, applicable tax treaties may provide for an increased estate tax
credit.
Backup Withholding and Information Reporting. The Company must report
annually to the Internal Revenue Service (the "IRS") and to each Non-U.S. Holder
the amount of dividends paid to, and the tax withheld with respect to, each
Non-U.S. Holder. These information reporting requirements apply regardless of
whether withholding was reduced or eliminated by an applicable tax treaty or
eliminated because such dividends were effectively connected with a United
States trade or business and the Non-U.S. Holder files certain forms with the
payor. Copies of these information returns also may be made available under the
provisions of a specific treaty or agreement to the tax authorities in the
country in which the Non-U.S. Holder resides. United States backup withholding
tax (which generally is a withholding tax imposed at the rate of 31% on certain
payments to United States persons that fail to furnish the information required
under the United States information reporting requirements) generally will not
apply to dividends paid on Common Stock to a Non-U.S. Holder if the dividends
are subject to withholding at the 30% rate (or lower treaty rate) or would be
subject to withholding at the 30% rate (or lower treaty rate) but for the fact
that such dividends are effectively connected with a United States trade or
business.
The payment of the proceeds from the disposition of Common Stock to or
through the United States office of a broker will be subject to information
reporting and backup withholding unless the owner, under penalties of perjury,
certifies, among other things, as to its status as a Non-U.S. Holder or
otherwise establishes an exemption (and the broker has no actual knowledge to
the contrary). The payment of the proceeds from the disposition of Common Stock
to or through a non-United States office of a broker generally will not be
subject to information reporting or backup withholding. However, information
reporting (but not backup withholding) will apply to a payment of the proceeds
from a sale of Common Stock if the payment is made through a non-United States
office of a United States broker or through a non-United States office of a
non-United States broker that is (i) a "controlled foreign corporation" (as
defined for United States federal income tax purposes) as to the United States
or (ii) a person 50% or more of whose gross income for a certain three-year
period is effectively connected with a United States trade or business, unless
the broker has documentary evidence in its records that the holder is a Non-U.S.
Holder and the broker does not have actual knowledge to the contrary and certain
conditions are met, or the holder otherwise establishes an exemption.
Backup withholding tax is not an additional tax and may be credited against
a holder's United States federal income tax liability, provided that required
information is furnished to the IRS. Non-U.S. Holders generally may obtain a
refund of any excess amount withheld under the backup withholding rules by
filing the appropriate refund claim with the IRS.
The Treasury Department has issued proposed regulations that would modify
the information reporting and withholding rules as they apply to Non-U.S.
Holders. The proposed regulations would unify the current certification
procedures and forms and would, in certain circumstances, require additional
information from Non-U.S. Holders claiming treaty benefits. The proposed
regulations are scheduled to take effect January 1, 1998, and are subject to
further changes. Consequently, the proposed regulations are not discussed in
this section.
67
<PAGE> 99
[ALTERNATE BACK COVER PAGE - INTERNATIONAL TRANCHE]
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR, BY ANY OF THE UNDERWRITERS. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATES AS OF WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH SOLICITATION.
---------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 7
Use of Proceeds......................... 18
Dividend Policy......................... 18
Dilution................................ 19
Capitalization.......................... 20
Selected Consolidated Financial and
Other Data............................ 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 22
Business................................ 30
Management.............................. 45
Certain Transactions.................... 53
Principal Stockholders.................. 55
Description of Capital Stock............ 57
Shares Eligible for Future Sale......... 61
Underwriting............................ 63
Certain United States Tax Considerations
for Non-United States Holders......... 66
Legal Matters........................... 68
Experts................................. 68
Additional Information.................. 68
Glossary................................ G-1
Index to Consolidated Financial
Statements............................ F-1
</TABLE>
SHARES
VIATEL, INC.
COMMON STOCK
($.01 PAR VALUE)
LOGO
- ---------------------------------------------------
SALOMON BROTHERS
INTERNATIONAL LIMITED
- ---------------------------------------------------------------------
PROSPECTUS
DATED , 1996
<PAGE> 100
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All the amounts shown are estimated
except the Securities and Exchange Commission (the "Commission") registration
fee, the National Association of Securities Dealers, Inc. (the "NASD") filing
fee and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................... $ 46,553.00
NASD filing fee....................................................... 14,000.00
Nasdaq National Market listing application fee........................ 50,000.00
Printing and engraving expenses....................................... *
Legal fees and expenses............................................... *
Accounting fees and expenses.......................................... *
Blue Sky fees and expenses (including legal fees)..................... *
Transfer agent and registrar fees and expenses........................ *
Miscellaneous......................................................... *
-------
Total....................................................... $ *
=======
</TABLE>
- ---------------
* To be supplied by amendment.
ITEM 16. EXHIBITS AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------ -----------------------------------------------------------------------------
<S> <C> <C>
1.1 -- Form of U.S. Underwriting Agreement between the Company and the U.S.
Underwriters.*
1.2 -- Form of International Underwriting Agreement between the Company and the
International Underwriters.*
3.1(i)(a) -- Certificate of Incorporation of the Company, as amended (filed as Exhibit 3.1
to the Company's Registration Statement on Form S-4, File No. 33-92696, filed
on May 24, 1995).**
3.1(i)(b) -- Amended and Restated Certificate of Incorporation of the Company.*
3.1(ii)(a) -- Bylaws of the Company (filed as Exhibit 3.2 to the Company's Registration
Statement on Form S-4, File No. 33-92696, filed on May 24, 1995).**
3.1(ii)(b) -- Amended and Restated Bylaws of the Company.*
4.1 -- See Exhibit numbers 3.1(i)(a), 3.1(i)(b), 3.1(ii)(a) and 3.1(ii)(b) for
provisions of the Certificate of Incorporation and Bylaws of the Company
defining the rights of the holders of Common Stock.
4.2 -- Indenture, dated as of December 15, 1994, between the Company and United
States Trust Company of New York, as Trustee (filed as Exhibit 4.2 to the
Company's Registration Statement on Form S-4, File No. 33-92696, filed on May
24, 1995).**
4.3 -- Notes Registration Rights Agreement, dated as of December 15, 1994, between
the Company and Morgan Stanley & Co. Incorporated in connection with the
Company's 15% Senior Discount Notes due 2005 (filed as Exhibit 4.3 to the
Company's Registration Statement on Form S-4, File No. 33- 92696, filed on
May 24, 1995).**
</TABLE>
II-1
<PAGE> 101
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------ -----------------------------------------------------------------------------
<S> <C> <C>
5.1 -- Opinion of Kelley Drye & Warren LLP (including the consent of such firm) as
to the validity of the securities being offered.*
10.1 -- Employment Agreement, dated as of September 30, 1993, and as further amended
as of April 5, 1994, between the Company and Martin Varsavsky (filed as
Exhibit 10.1 to the Company's Registration Statement on Form S-4, File No.
33-92696, filed on May 24, 1995).+**
10.2 -- Expatriate Agreement, dated August 22, 1995, between the Company and Michael
Mahoney (filed as Exhibit 10.2 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995, filed on April 1, 1996).+**
10.3 -- Placement Agreement, dated as of December 15, 1994, between the Company and
Morgan Stanley & Co. Incorporated (filed as Exhibit 10.3 to the Company's
Registration Statement on Form S-4, File No. 33-92696, filed on May 24,
1995).**
10.4 -- Common Stock Registration Rights Agreement, dated as of December 15, 1994,
among the Company, Martin Varsavsky, Juan Manuel Aisemberg and Morgan Stanley
& Co. Incorporated in connection with the Company's shares of non-voting
Class A Common Stock (filed as Exhibit 10.4 to the Company's Registration
Statement on Form S-4, File No. 33-92696, filed on May 24, 1995).**
10.5 -- The Company's 1993 Flexible Stock Incentive Plan, dated as of September 29,
1993 (filed as Exhibit 10.5 to the Company's Registration Statement on Form
S-4, File No. 33-92696, filed on May 24, 1995).+**
10.6 -- Carrier Contract, dated as of May 3, 1993, between the Company and AT&T Corp.
(filed as Exhibit 10.6 to the Company's Registration Statement on Form S-4,
File No. 33-92696, filed on May 24, 1995).**
10.7 -- MCI Carrier Agreement, dated as of January 1, 1995, between the Company and
MCI Telecommunications Corporation (filed as Exhibit 10.7 to the Company's
Registration Statement on Form S-4, File No. 33-92696, filed on May 24,
1995).**
10.8 -- Mercury Carrier Services Agreement, dated as of March 1, 1994, between the
Company and Mercury Communications Limited (filed as Exhibit 10.8 to the
Company's Registration Statement on Form S-4, File No. 33-92696, filed on May
24, 1995).**
10.9 -- Provision and Management Facilities Agreement, dated as of October 17, 1994,
between the Company and Mercury Communications Limited (filed as Exhibit 10.9
to the Company's Registration Statement on Form S-4, File No. 33-92696, filed
on May 24, 1995).**
10.10 -- Managed Telecommunications Network Agreement, dated as of February 5, 1993,
between the Company and TMI USA, Inc. (Delaware) (filed as Exhibit 10.10 to
the Company's Registration Statement on Form S-4, File No. 33-92696, filed on
May 24, 1995).**
10.11 -- Representative Agreement, dated as of June 1, 1993, and as amended as of
April 19, 1995, between the Company and Maximiliano Fernandez (filed as
Exhibit 10.11 to the Company's Registration Statement on Form S-4, File No.
33-92696, filed on May 24, 1995).**
10.12 -- Representative Agreement, dated as of April 23, 1993, between the Company and
Viatel de Colombia Comunicaciones S.A. (filed as Exhibit 10.12 to the
Company's Registration Statement on Form S-4, File No. 33-92696, filed on May
24, 1995).**
</TABLE>
II-2
<PAGE> 102
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------ -----------------------------------------------------------------------------
<S> <C> <C>
10.13 -- Stock Purchase Agreement, dated as of September 30, 1993, as amended as of
April 5, 1994, and as further amended as of December 21, 1994, between the
Company and S-C V-Tel Investments, L.P. (filed as Exhibit 10.13 to the
Company's Registration Statement on Form S-4, File No. 33-92696, filed on May
24, 1995).**
10.14 -- Stock Purchase Agreement, dated as of April 5, 1994, between the Company and
COMSAT Investments, Inc. (filed as Exhibit 10.14 to the Company's
Registration Statement on Form S-4, File No. 33-92696, filed on May 24,
1995).**
10.15 -- Stock Purchase Agreement, dated as of December 3, 1993, between the Company
and Herald L. Ritch.***
10.16 -- Stock Purchase Agreement, dated as of October 1, 1993, between the Company
and Robert Conrads (filed as Exhibit 10.16 to the Company's Registration
Statement on Form S-4, File No. 33-92696, filed on May 24, 1995).**
10.17 -- Stock Purchase Agreement, dated as of December 9, 1993, between the Company
and Robert Conrads (filed as Exhibit 10.17 to the Company's Registration
Statement on Form S-4, File No. 33-92696, filed on May 24, 1995).**
10.18 -- Shareholders' Agreement, dated as of April 5, 1994, and as amended as of
November 22, 1994, by and among the Company, Martin Varsavsky, Juan Manuel
Aisemberg and COMSAT Investments, Inc. (filed as Exhibit 10.19 to the
Company's Registration Statement on Form S-4, File No. 33-92696, filed on May
24, 1995).**
10.19 -- Shareholders' Agreement, dated as of September 30, 1993, as amended as of
December 9, 1993 and as further amended as of April 5, 1994, November 22,
1994 and December 21, 1994, by and among the Company, Martin Varsavsky and
S-C V-Tel Investments, L.P. (filed as Exhibit 10.21 to the Company's
Registration Statement on Form S-4, File No. 33-92696, filed on May 24,
1995).**
10.20 -- Purchase Agreement, dated as of December 8, 1994, between the Company and ECI
Telecom, Inc. (filed as Exhibit 10.22 to the Company's Registration Statement
on Form S-4, File No. 33-92696, filed on May 24, 1995).**
10.21 -- Carrier Digital Services Agreement, dated as of November 29, 1994, between
the Company and Norline Communications, Inc. (filed as Exhibit 10.23 to the
Company's Registration Statement on Form S-4, File No. 33-92696, filed on May
24, 1995).**
10.22 -- Commercial Lease Agreement, dated as of November 1, 1993, and Addendum, dated
as of December 8, 1994, between the Company and 123rd Street Partnership in
connection with the Company's premises located in Omaha, Nebraska (filed as
Exhibit 10.24 to the Company's Registration Statement on Form S-4, File No.
33-92696, filed on May 24, 1995).**
10.23 -- Asset Purchase Agreement, dated as of August 27, 1993, between the Company
and Sitel Corporation (filed as Exhibit 10.26 to the Company's Registration
Statement on Form S-4, File No. 33-92696, filed on May 24, 1995).**
10.24 -- Memorandum of Understanding, dated as of August 4, 1994, between the Company
and TMI USA, Inc. (filed as Exhibit 10.27 to the Company's Registration
Statement on Form S-4, File No. 33-92696, filed on May 24, 1995).**
10.25 -- Settlement Agreement, dated as of August 4, 1994, between the Company and TMI
USA, Inc. (filed as Exhibit 10.28 to the Company's Registration Statement on
Form S-4, File No. 33- 92696, filed on May 24, 1995).**
10.26 -- Release and Settlement Agreement, dated as of August 1, 1994, between the
Company and AT&T Corp. (filed as Exhibit 10.29 to the Company's Registration
Statement on Form S-4, File No. 33-92696, filed on May 24, 1995).**
</TABLE>
II-3
<PAGE> 103
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------ -----------------------------------------------------------------------------
<S> <C> <C>
10.27 -- Termination Agreement, dated August 4, 1995, between the Company and
Telemedia International, Inc. (filed as Exhibit 10.31 to the Company's
Registration Statement on Form S-4, File No. 33-92696, filed on May 24,
1995).**
10.28 -- Facilities Management and Services Agreement, dated as of August 4, 1995,
between Viatel U.K. Limited and Telemedia International Ltd. (filed as
Exhibit 10.32 to the Company's Registration Statement on Form S-4, File No.
33-92696, filed on May 24, 1995).**
10.29 -- Agreement of Lease, dated August 7, 1995, between the Company and Joseph P.
Day Realty Corp. (filed as Exhibit 10.33 to the Company's Registration
Statement on Form S-4, File No. 33-92696, filed on May 24, 1995).**
10.30 -- Severance Agreement, dated July 30, 1996, between the Company and Alan
Levy.***
21.1 -- Subsidiaries of the Company.*
23.1 -- Consent of Kelley Drye & Warren LLP (included in Exhibit 5.1).*
23.2 -- Consent of KPMG Peat Marwick LLP.
23.3 -- Consent of Edward Isaacs & Company LLP.
24.1 -- Power of Attorney.***
27.1 -- Financial Data Schedule (December 31, 1995).***
27.2 -- Financial Data Schedule (June 30, 1996) (filed as Exhibit 27 to the Company's
Form 10-Q for the quarterly period ended June 30, 1996, filed on August 14,
1996).**
</TABLE>
- ---------------
* To be filed by amendment.
** Incorporated herein by reference.
*** Previously filed.
+ Management contract or compensatory plan or arrangement.
(B) FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts
All other schedules are omitted because they are inapplicable or the
requested information is shown in the consolidated financial statements or
related notes.
II-4
<PAGE> 104
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on the 20th day of August, 1996.
VIATEL, INC.
By: MARTIN VARSAVSKY*
Martin Varsavsky
President and Chief Executive
Officer
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement was signed on the 20th day of August, 1996,
by the following persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE(S)
- -------------------------------------------- -----------------------------------------------
<S> <C>
MARTIN VARSAVSKY* President, Chief Executive Officer and Director
- -------------------------------------------- (Principal Executive Officer)
Martin Varsavsky
MICHAEL J. MAHONEY* Executive Vice President, Operations and
- -------------------------------------------- Technology; Managing Director, International
Michael J. Mahoney and Director
/s/ ALLAN L. SHAW Vice President, Finance; Chief Financial
- -------------------------------------------- Officer (Principal Financial and Accounting
Allan L. Shaw Officer) and Director
PAUL G. PIZZANI* Director
- --------------------------------------------
Paul G. Pizzani
W. JAMES PEET* Director
- --------------------------------------------
W. James Peet
*By: /s/ ALLAN L. SHAW
- --------------------------------------------
Allan L. Shaw
Attorney-in-fact
</TABLE>
II-5
<PAGE> 105
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGE
- ------------ ------------------------------------------------------------------ ------------
<S> <C> <C> <C>
1.1 -- Form of U.S. Underwriting Agreement between the Company and the
U.S. Underwriters.*...............................................
1.2 -- Form of International Underwriting Agreement between the Company
and the International Underwriters.*..............................
3.1(i)(a) -- Certificate of Incorporation of the Company, as amended (filed as
Exhibit 3.1 to the Company's Registration Statement on Form S-4,
File No. 33-92696, filed on May 24, 1995).**......................
3.1(i)(b) -- Amended and Restated Certificate of Incorporation of the
Company.*.........................................................
3.1(ii)(a) -- Bylaws of the Company (filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-4, File No. 33-92696, filed on
May 24, 1995).**..................................................
3.1(ii)(b) -- Amended and Restated Bylaws of the Company.*......................
4.1 -- See Exhibit numbers 3.1(i)(a), 3.1(i)(b), 3.1(ii)(a) and
3.1(ii)(b) for provisions of the Certificate of Incorporation and
Bylaws of the Company defining the rights of the holders of Common
Stock. ...........................................................
4.2 -- Indenture, dated as of December 15, 1994, between the Company and
United States Trust Company of New York, as Trustee (filed as
Exhibit 4.2 to the Company's Registration Statement on Form S-4,
File No. 33-92696, filed on May 24, 1995).**......................
4.3 -- Notes Registration Rights Agreement, dated as of December 15,
1994, between the Company and Morgan Stanley & Co. Incorporated in
connection with the Company's 15% Senior Discount Notes due 2005
(filed as Exhibit 4.3 to the Company's Registration Statement on
Form S-4, File No. 33- 92696, filed on May 24, 1995).**...........
5.1 -- Opinion of Kelley Drye & Warren LLP (including the consent of such
firm) as to the validity of the securities being offered.*........
10.1 -- Employment Agreement, dated as of September 30, 1993, and
as further amended as of April 5, 1994, between the Company
and Martin Varsavsky (filed as Exhibit 10.1 to the Company's
Registration Statement on Form S-4, File No. 33-92696, filed on
May 24, 1995).+**.................................................
10.2 -- Expatriate Agreement, dated August 22, 1995, between the Company
and Michael Mahoney (filed as Exhibit 10.2 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995,
filed on April 1, 1996).+**.......................................
10.3 -- Placement Agreement, dated as of December 15, 1994, between the
Company and Morgan Stanley & Co. Incorporated (filed as Exhibit
10.3 to the Company's Registration Statement on Form S-4, File No.
33-92696, filed on May 24, 1995).**...............................
10.4 -- Common Stock Registration Rights Agreement, dated as of December
15, 1994, among the Company, Martin Varsavsky, Juan Manuel
Aisemberg and Morgan Stanley & Co. Incorporated in connection with
the Company's shares of non-voting Class A Common Stock (filed as
Exhibit 10.4 to the Company's Registration Statement on Form S-4,
File No. 33-92696, filed on May 24, 1995).**......................
</TABLE>
<PAGE> 106
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGE
- ------------ ------------------------------------------------------------------ ------------
<S> <C> <C> <C>
10.5 -- The Company's 1993 Flexible Stock Incentive Plan, dated as of
September 29, 1993 (filed as Exhibit 10.5 to the Company's
Registration Statement on Form S-4, File No. 33-92696, filed on
May 24, 1995).+**.................................................
10.6 -- Carrier Contract, dated as of May 3, 1993, between the Company and
AT&T Corp. (filed as Exhibit 10.6 to the Company's Registration
Statement on Form S-4, File No. 33-92696, filed on May 24,
1995).**..........................................................
10.7 -- MCI Carrier Agreement, dated as of January 1, 1995, between the
Company and MCI Telecommunications Corporation (filed as Exhibit
10.7 to the Company's Registration Statement on Form S-4, File No.
33-92696, filed on May 24, 1995).**...............................
10.8 -- Mercury Carrier Services Agreement, dated as of March 1, 1994,
between the Company and Mercury Communications Limited (filed as
Exhibit 10.8 to the Company's Registration Statement on Form S-4,
File No. 33-92696, filed on May 24, 1995).**......................
10.9 -- Provision and Management Facilities Agreement, dated as of October
17, 1994, between the Company and Mercury Communications Limited
(filed as Exhibit 10.9 to the Company's Registration Statement on
Form S-4, File No. 33-92696, filed on May 24, 1995).**............
10.10 -- Managed Telecommunications Network Agreement, dated as of February
5, 1993, between the Company and TMI USA, Inc. (Delaware) (filed
as Exhibit 10.10 to the Company's Registration Statement on Form
S-4, File No. 33-92696, filed on May 24, 1995).**.................
10.11 -- Representative Agreement, dated as of June 1, 1993, and as amended
as of April 19, 1995, between the Company and Maximiliano
Fernandez (filed as Exhibit 10.11 to the Company's Registration
Statement on Form S-4, File No. 33-92696, filed on May 24,
1995).**..........................................................
10.12 -- Representative Agreement, dated as of April 23, 1993, between the
Company and Viatel de Colombia Comunicaciones S.A. (filed as
Exhibit 10.12 to the Company's Registration Statement on Form S-4,
File No. 33-92696, filed on May 24, 1995).**......................
10.13 -- Stock Purchase Agreement, dated as of September 30, 1993, as
amended as of April 5, 1994, and as further amended as of December
21, 1994, between the Company and S-C V-Tel Investments, L.P.
(filed as Exhibit 10.13 to the Company's Registration Statement on
Form S-4, File No. 33-92696, filed on May 24, 1995).**............
10.14 -- Stock Purchase Agreement, dated as of April 5, 1994, between the
Company and COMSAT Investments, Inc. (filed as Exhibit 10.14 to
the Company's Registration Statement on Form S-4, File No.
33-92696, filed on May 24, 1995).**...............................
10.15 -- Stock Purchase Agreement, dated as of December 3, 1993, between
the Company and Herald L. Ritch.***...............................
10.16 -- Stock Purchase Agreement, dated as of October 1, 1993, between the
Company and Robert Conrads (filed as Exhibit 10.16 to the
Company's Registration Statement on Form S-4, File No. 33-92696,
filed on May 24, 1995).**.........................................
</TABLE>
<PAGE> 107
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGE
- ------------ ------------------------------------------------------------------ ------------
<S> <C> <C> <C>
10.17 -- Stock Purchase Agreement, dated as of December 9, 1993, between
the Company and Robert Conrads (filed as Exhibit 10.17 to the
Company's Registration Statement on Form S-4, File No. 33-92696,
filed on May 24, 1995).**.........................................
10.18 -- Shareholders' Agreement, dated as of April 5, 1994, and as amended
as of November 22, 1994, by and among the Company, Martin
Varsavsky, Juan Manuel Aisemberg and COMSAT Investments, Inc.
(filed as Exhibit 10.19 to the Company's Registration Statement on
Form S-4, File No. 33-92696, filed on May 24, 1995).**............
10.19 -- Shareholders' Agreement, dated as of September 30, 1993, as
amended as of December 9, 1993 and as further amended as of April
5, 1994, November 22, 1994 and December 21, 1994, by and among the
Company, Martin Varsavsky and S-C V-Tel Investments, L.P. (filed
as Exhibit 10.21 to the Company's Registration Statement on Form
S-4, File No. 33-92696, filed on May 24, 1995).**.................
10.20 -- Purchase Agreement, dated as of December 8, 1994, between the
Company and ECI Telecom, Inc. (filed as Exhibit 10.22 to the
Company's Registration Statement on Form S-4, File No. 33-92696,
filed on May 24, 1995).**.........................................
10.21 -- Carrier Digital Services Agreement, dated as of November 29, 1994,
between the Company and Norline Communications, Inc. (filed as
Exhibit 10.23 to the Company's Registration Statement on Form S-4,
File No. 33-92696, filed on May 24, 1995).**......................
10.22 -- Commercial Lease Agreement, dated as of November 1, 1993, and
Addendum, dated as of December 8, 1994, between the Company and
123rd Street Partnership in connection with the Company's premises
located in Omaha, Nebraska (filed as Exhibit 10.24 to the
Company's Registration Statement on Form S-4, File No. 33-92696,
filed on May 24, 1995).**.........................................
10.23 -- Asset Purchase Agreement, dated as of August 27, 1993, between the
Company and Sitel Corporation (filed as Exhibit 10.26 to the
Company's Registration Statement on Form S-4, File No. 33-92696,
filed on May 24, 1995).**.........................................
10.24 -- Memorandum of Understanding, dated as of August 4, 1994, between
the Company and TMI USA, Inc. (filed as Exhibit 10.27 to the
Company's Registration Statement on Form S-4, File No. 33-92696,
filed on May 24, 1995).**.........................................
10.25 -- Settlement Agreement, dated as of August 4, 1994, between the
Company and TMI USA, Inc. (filed as Exhibit 10.28 to the Company's
Registration Statement on Form S-4, File No. 33- 92696, filed on
May 24, 1995).**..................................................
</TABLE>
<PAGE> 108
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGE
- ------------ ------------------------------------------------------------------ ------------
<S> <C> <C> <C>
10.26 -- Release and Settlement Agreement, dated as of August 1, 1994,
between the Company and AT&T Corp. (filed as Exhibit 10.29 to the
Company's Registration Statement on Form S-4, File No. 33-92696,
filed on May 24, 1995).**.........................................
10.27 -- Termination Agreement, dated August 4, 1995, between the Company
and Telemedia International, Inc. (filed as Exhibit 10.31 to the
Company's Registration Statement on Form S-4, File No. 33-92696,
filed on May 24, 1995).**.........................................
10.28 -- Facilities Management and Services Agreement, dated as of August
4, 1995, between Viatel U.K. Limited and Telemedia International
Ltd. (filed as Exhibit 10.32 to the Company's Registration
Statement on Form S-4, File No. 33-92696, filed on May 24,
1995).**..........................................................
10.29 -- Agreement of Lease, dated August 7, 1995, between the Company and
Joseph P. Day Realty Corp. (filed as Exhibit 10.33 to the
Company's Registration Statement on Form S-4, File No. 33-92696,
filed on May 24, 1995).**.........................................
10.30 -- Severance Agreement, dated July 30, 1996, between the Company and
Alan Levy.***.....................................................
21.1 -- Subsidiaries of the Company.*.....................................
23.1 -- Consent of Kelley Drye & Warren LLP (included in Exhibit 5.1).*...
23.2 -- Consent of KPMG Peat Marwick LLP. ................................
23.3 -- Consent of Edward Isaacs & Company LLP. ..........................
24.1 -- Power of Attorney.*** ............................................
27.1 -- Financial Data Schedule (December 31, 1995).***...................
27.2 -- Financial Data Schedule (June 30, 1996) (filed as Exhibit 27 to
the Company's Form 10-Q for the quarterly period ended June 30,
1996, filed on August 14, 1996).** ...............................
</TABLE>
- ---------------
* To be filed by amendment.
** Incorporated herein by reference.
*** Previously filed.
+ Management contract or compensatory plan or arrangement.
<PAGE> 1
EXHIBIT 23.2
ACCOUNTANTS' REPORT ON SCHEDULE AND CONSENT
The Board of Directors and Stockholders
Viatel, Inc. and Subsidiaries:
The audits referred to in our report dated March 8, 1996, included the
related financial statement schedule as of December 31, 1995 and 1994, and for
each of the years in the three-year period ended December 31, 1995, included in
the registration statement. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits. In our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
We consent to the use of our reports included herein and to the references
to our firm under the headings "Summary Consolidated Financial and Other Data,"
"Selected Consolidated Financial and Other Data" and "Experts" in the
prospectus.
/s/ KPMG PEAT MARWICK LLP
New York, New York
August 20, 1996
<PAGE> 1
Exhibit 23.3
INDEPENDENT AUDITORS' CONSENT
The Boards of Directors and Stockholders
Viatel, Inc. and Subsidiaries:
We consent to the reference to our firm under the heading "Selected
Consolidated Financial and Other Data" in the prospectus.
/s/ Edward Isaacs & Company LLP
----------------------------------
EDWARD ISAACS & COMPANY LLP
New York, New York
August 20, 1996
