SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission File Number: 000-21261
VIATEL, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3787366
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
800 Third Avenue
New York, New York
(Address of principal executive offices)
10022
(Zip Code)
(212) 935-6800
(Registrant's telephone number, including area code)
--------------------------------------------------
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. /X/ Yes / / No
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date. As of November 12, 1996, the
registrant had outstanding 22,374,647 shares Common Stock, par value $.01 per
share.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
VIATEL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
September 30,
1996 December 31,
<CAPTION>
Assets (Unaudited) 1995
------------- -------------
Current assets:
<S> <C> <C>
Cash and cash equivalents .............................................................. $ 3,191,091 $ 8,934,914
Marketable securities, current ......................................................... 3,105,254 25,004,050
Trade accounts receivable, less allowance for doubtful accounts of $601,000
and $473,000, respectively .......................................................... 8,031,165 4,723,664
Other receivables ...................................................................... 3,721,231 2,757,675
Prepaid expenses ....................................................................... 748,156 742,803
------------ ------------
Total current assets ...................................................... 18,796,897 42,163,106
Marketable securities, non-current ......................................................... -- 1,127,442
Property and equipment, less accumulated depreciation of $5,529,000 and
$2,781,000, respectively ............................................................... 18,288,955 15,715,121
Deferred financing and registration fees, less accumulated amortization of
$648,000 and $364,000, respectively .................................................... 3,141,529 3,431,540
Intangible assets, less accumulated amortization of $1,432,000 and
$807,000, respectively ................................................................. 2,159,777 2,070,055
Other assets ............................................................................... 1,611,363 1,106,182
------------ ------------
$ 43,998,521 $ 65,613,446
============ ============
Liabilities and Stockholders' Deficit
Current liabilities:
Accrued telecommunications costs ....................................................... $ 9,789,374 $ 11,056,235
Accounts payable and other accrued expenses ............................................ 5,872,851 4,591,628
Commissions payable .................................................................... 422,009 300,655
Current installments of obligations under capital leases ............................... 120,553 --
------------ ------------
Total current liabilities ................................................. 16,204,787 15,948,518
------------ ------------
Long-term liabilities:
Senior discount notes, less discount of $45,674,389 and $53,416,992,
respectively ........................................................................ 75,025,611 67,283,008
Obligations under capital leases, excluding current installments ....................... 193,678 --
------------ ------------
Total long-term liabilities ............................................... 75,219,289 67,283,008
------------ ------------
Commitments and contingencies
Stockholders' deficit:
Common Stock, $.01 par value. Authorized 50,000,000 shares, issued and
outstanding 10,802,801 and 10,736,135 shares, respectively (Note 5).................. 108,028 107,361
Class A Common Stock, $.01 par value. Authorized 10,000,000 shares,
issued and outstanding 2,904,846 shares (Note 5)..................................... 29,048 29,048
Additional paid-in capital ............................................................. 30,488,343 30,099,011
Unearned compensation .................................................................. (146,340) (78,000)
Cumulative translation adjustment ...................................................... (325,913) (164,676)
Accumulated deficit .................................................................... (77,578,721) (47,610,824)
------------ ------------
Total stockholders' deficit ............................................... (47,425,555) (17,618,080)
------------ ------------
$ 43,998,521 $ 65,613,446
============ ============
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
---------------------------- -------------------------------
1996 1995 1996 1995
------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Telecommunications revenue ......................... $ 13,107,477 $ 8,305,582 $ 35,389,706 $ 22,497,564
------------ ------------ ------------ ------------
Operating Expenses:
Costs of telecommunications services ........... 11,212,010 7,224,695 29,789,776 19,333,441
Selling expenses ............................... 2,270,870 1,905,661 7,341,838 5,274,681
General and administrative expense ............. 5,085,975 4,594,084 17,675,688 11,812,180
Depreciation and amortization .................. 1,156,946 646,551 3,388,769 1,527,482
Equipment impairment loss ...................... -- -- -- 560,419
------------ ------------ ------------ ------------
Total operating expenses .................... 19,725,801 14,370,991 58,196,071 38,508,203
------------ ------------ ------------ ------------
Other income (expenses):
Interest income ................................ 120,629 754,754 860,081 2,610,194
Interest expense ............................... (2,843,982) (2,127,432) (8,014,734) (6,454,407)
Share in loss of affiliate ..................... (1,938) (14,107) (6,879) (36,871)
------------ ------------ ------------ ------------
Net loss .................................... $ (9,343,615) $ (7,452,194) $(29,967,897) $(19,891,723)
============ ============ ============ ============
Net loss per common share (Note 5) .......... $ (0.68) $ (0.55) $ (2.19) $ (1.46)
============ ============ ============ ============
Weighted average common
shares outstanding (Note 5) .............. 13,707,648 13,640,981 13,707,648 13,640,981
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
------------------------------
1996 1995
-------------- -------------
Cash flows from operating activities:
<S> <C> <C>
Net loss ........................................................................ $(29,967,897) $(19,891,723)
Adjustments to reconcile net loss to net cash used in operating activities:
Deferred financing costs ..................................................... -- (245,370)
Equipment impairment loss .................................................... -- 560,419
Depreciation and amortization ................................................ 3,388,769 1,527,482
Interest expense on senior discount notes .................................... 7,960,414 6,381,065
Accrued interest income on marketable securities ............................. (279,111) (1,291,917)
Provision for losses on accounts receivable .................................. 1,388,149 (83,879)
Share in loss of affiliate ................................................... 6,879 36,871
Unearned compensation ........................................................ 321,661 --
Changes in assets and liabilities:
Increase in accounts receivable .............................................. (4,679,584) (226,166)
Decrease (increase) in prepaid expenses and other receivables ................ 228,869 (1,516,588)
Increase in other assets ..................................................... (302,296) (946,152)
Increase (decrease) in accrued telecommunication costs, accounts payable,
other accrued expenses and commissions payable .......................... 15,343 (215,919)
------------ ------------
Net cash used in operating activities .............................. (21,918,804) (15,911,877)
------------ ------------
Cash flows from investing activities:
Purchase of property, equipment and software .................................... (5,372,006) (8,460,034)
Issuance of notes receivable .................................................... (323,227) --
Investment in marketable securities ............................................. (14,794,332) (50,926,308)
Proceeds from maturity of marketable securities ................................. 36,821,827 13,137,443
Investment in affiliate ......................................................... (96,952) (264,267)
------------ ------------
Net cash provided by (used in) investing activities ................ 16,235,310 (46,513,166)
------------ ------------
Cash flows from financing activities:
Payments under capital leases ................................................... (41,801) (1,306,453)
Repayment of notes payable ...................................................... -- (966,755)
------------ ------------
Net cash used in financing activities .............................. (41,801) (2,273,208)
------------ ------------
Effects of exchange rates on cash ................................................... (18,528) 23,169
------------ ------------
Net decrease in cash and cash equivalents ........................................... (5,743,823) (64,675,082)
Cash and cash equivalents at beginning of period .................................... 8,934,914 66,761,614
------------ ------------
Cash and cash equivalents at end of period .......................................... $ 3,191,091 $ 2,086,532
============ ============
Supplemental disclosure of cash flow information:
Interest paid ................................................................... $ 44,553 $ 73,342
============ ============
Assets acquired under capital lease obligations ................................. $ 356,033 $ --
============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the periods
ended September 30, 1996 and 1995 is unaudited)
(1) INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements as of September 30, 1996 and for the
three and nine month periods ended September 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 adjustments) 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 nine months ended September
30, 1996 may not be indicative of the results that may be expected for the
full year.
(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 September 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 September 30, 1996.
The following is a summary of the fair value of securities available for
sale at September 30, 1996:
U.S. Treasury obligations.......................... $1,998,792
Federal agencies obligations....................... 1,106,462
----------
Total $3,105,254
==========
The fair value of each investment approximates the amortized cost and,
therefore, there are no unrealized gains or losses as of September 30,
1996.
Based upon contractual maturity, all securities available for sale at
September 30, 1996 are due within one year.
<PAGE>
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) STOCK INCENTIVE PLAN
Stock option activity for the nine months ended September 30, 1996 under
the Amended Stock Incentive Plan (the "Stock Incentive Plan") is shown
below:
Option Price
----------------------
Number of Per Share Total
Shares Average Price
--------- --------- -----------
Shares under option at December 31, 1995 496,749 $ 4.03 $ 2,002,543
Granted ................................. 782,293 $ 5.85 $ 4,576,414
Forfeitures ............................. (203,531) $ 5.78 $(1,175,969)
========= ========= ===========
Shares under option at September 30, 1996 1,075,511 $ 5.02 $ 5,402,988
========= ========= ===========
As of September 30, 1996, 376,587 options were exercisable under the Stock
Incentive Plan.
(4) 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.
(5) SUBSEQUENT EVENTS
(A) INITIAL PUBLIC OFFERING
On October 23, 1996, the Company completed an initial public offering
("IPO") of its common stock, $.01 par value per share (the "Common Stock"),
through which it sold 8,667,000 shares of Common Stock at $12 a share and
raised approximately $104 million of gross proceeds (approximately $95.1
million of net proceeds).
(B) STOCK SPLIT/CAPITALIZATION
In connection with the IPO, all outstanding shares of the Company's
non-voting Class A Common Stock, $.01 par value per share (the "Class A
Common Stock"), were converted into shares of Common Stock at a ratio of
one-to-one and all then outstanding shares of Common Stock were then
subject to a reverse stock split at a ratio of 3-to-2. In addition, the
Company's stockholders approved an amendment to the Certificate of
Incorporation which (i) authorized the Board of Directors to issue up to 1
million shares of Preferred Stock, $.01 par value per share, in one or more
series and to fix the powers, voting rights, designations and preferences
of each series and (ii) eliminated the Class A Common Stock.
All earnings per share and share data presented herein have been restated
retroactively to reflect the conversion of the Class A Common Stock into
Common Stock and the reverse stock split of all then outstanding shares of
Common Stock.
<PAGE>
(C) PRO FORMA BALANCE SHEET
The following table presents the effects on the Company's balance sheet of
the IPO as of September 30, 1996, on a pro forma basis, assuming the IPO
had occurred at that date.
<TABLE>
<CAPTION>
As of September 30, 1996
---------------------------------
Actual Pro Forma
--------------- ---------------
(In thousands, except share data)
<S> <C> <C>
Cash, cash equivalents and marketable securities ................ $ 6,296 $ 101,420
========= =========
Long-term debt .................................................. $ 75,219 $ 75,219
--------- ---------
Stockholders' (deficit) equity:
Common Stock, $.01 par value; 50,000,000 shares
authorized, 10,802,801 shares issued and
outstanding; 22,374,647 shares issued and
outstanding, pro forma 108 224
Class A Common Stock, $.01 par value; 10,000,000
shares authorized, 2,904,846 shares issued
and outstanding; no shares issued and outstanding,
pro forma 29 --
Preferred Stock, $.01 par value; no shares
authorized, no shares issued and outstanding;
pro forma 1,000,000 shares authorized, no shares
issued and outstanding -- --
Additional paid-in capital ................................ 30,488 125,525
Unearned compensation ..................................... (146) (146)
Cumulative translation adjustment ......................... (326) (326)
Accumulated deficit ....................................... (77,579) (77,579)
--------- ---------
Total stockholders' (deficit) equity .................... (47,426) 47,698
--------- ---------
Total capitalization .................................... $ 27,793 $ 122,917
========= =========
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
Since its inception in 1991, the Company has invested heavily in developing
its ability to provide international telecommunications services. In 1993, the
Company began focusing on providing international telecommunications services in
Western Europe and creating an extensive telecommunications network for voice
and voice band data in Western Europe. In 1996, the Company commenced a national
long distance trial in certain countries in Western Europe. Based on the
favorable results of this trial, the Company has commenced an expansion plan and
anticipates entering the national long distance markets in all countries in
Western Europe in which it does business by the end of 1997.
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 believes that the European Network
allows the Company effectively to render its services currently and will offer
it a competitive advantage after the European Union's liberalization of voice
telephony, now scheduled for January 1, 1998.
In September 1996, the Federal Communications Commission authorized the Company
to provide both facilities-based services and resale services (including both
the resale of switched services and the resale of private lines for the
provision of switched services) to all permissible international points. In
addition, in September 1996, the Federal Communications Commission authorized
the Company to provide facilities-based service between the United States and
the United Kingdom over the CANUS-1 and CANTAT-3 cable systems. The Company had
recently acquired an indefeasible right of use in CANUS-1 and the United States
portion of CANTAT-3. It is the Company's intention to pursue regulatory
permission for, and ownership of, the United Kingdom portion of CANTAT-3.
During the first nine months of 1996, the Company experienced growth of
approximately 57.3% in telecommunications revenue and an improvement in gross
margin as compared to the corresponding period in 1995. While the Company
experienced an EBITDA loss of approximately $19.4 million during the first nine
months of 1996, as compared to an EBITDA loss of approximately $14.5 million
during the first nine months of 1995, as a percentage of revenue, the EBITDA
loss decreased by approximately 14.9% to 54.9% from 64.5%. The growth in
telecommunications revenue and EBITDA loss are the result of the ongoing
investment in operating infrastructure related to expanding the Company's
presence in its targeted geographic markets in Western Europe and expanding its
ability to offer its services. As a result, the Company does not expect to have
positive EBITDA until the year 2000.
During the third quarter of 1996, as compared to the second quarter of 1996,
certain trends were evident including (i) a 12.1% increase in telecommunications
revenue to $13.1 million from $11.7 million, (ii) a 17.1% increase in billable
minutes to 16.7 million billable minutes from 14.2 million billable minutes,
(iii) a decrease in gross margins to 14.5% from 18.1% (primarily resulting from
fewer work days in Europe during the summer months), (iv) a decrease in selling
expenses and general and administrative expenses, as a percentage of revenue, to
56.1% from 86.6% (68.2% excluding costs for (1) the Company's reorganization
(the "Reorganization") and (2) an expense associated with a judgment rendered by
a French arbitration tribunal against the Company (the "French Arbitration
Award") on behalf of an independent sales representative) and (v) a decrease in
EBITDA loss, as a percentage of revenue, to 41.7% from 68.6% (50.7% if charges
for the Reorganization and the French Arbitration Award had not been incurred).
SEE "-- RESULTS OF OPERATIONS."
On October 23, 1996, the Company completed the IPO through which it raised
approximately $104 million of gross proceeds (approximately $95.1 million of net
proceeds). The Company anticipates that it will be able to fund its capital
requirements for the foreseeable future. SEE "-- LIQUIDITY AND CAPITAL
RESOURCES."
RESULTS OF OPERATIONS
The following table summarizes the breakdown of the Company's results of
operations as a percentage of revenue:
<PAGE>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
---------------- ---------------
1996 1995 1996 1995
------- ------ ------ ------
Telecommunications revenue ................. 100.0% 100.0% 100.0% 100.0%
Cost of telecommunications services ........ 85.5% 87.0% 84.2% 85.9%
Selling expenses ........................... 17.3% 22.9% 20.7% 23.4%
General and administrative expense ......... 38.8% 55.3% 49.9% 52.5%
Depreciation and amortization .............. 8.8% 7.8% 9.6% 6.8%
EBITDA loss (1)............................. 41.7% 65.4% 54.9% 64.5%
- ---------------
(1) As used herein "EBITDA" consists of earnings before interest (net), income
taxes and depreciation and amortization. EBITDA is a measure commonly used in
the telecommunications industry to analyze companies on the basis of operating
performance. EBITDA is not a measure of financial performance under generally
accepted accounting principles and should not be considered as an alternative to
net income as a measure of performance or as an alternative to cash flow as a
measure of liquidity.
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1995.
TELECOMMUNICATIONS REVENUE. Telecommunications revenue increased by 57.8% to
$13.1 million for the three months ended September 30, 1996 from $8.3 million
for the three months ended September 30, 1995. Telecommunications revenue growth
for the three month period ended September 30, 1996 was generated primarily from
increased traffic volume on the European Network, growth in the Company's
wholesale business and, to a lesser extent, increased traffic volume in Latin
America and the Pacific Rim.
Billable minutes increased by 143.2% during the three months ended September 30,
1996 to 16.7 million billable minutes from 6.9 million billable minutes during
the third quarter of 1995. This increase was partially offset by declining
revenue per billable minute, as average revenue per billable minute declined by
31.0% to $0.78 in the three-month period ended September 30, 1996 from $1.13 in
the three-month period ended September 30, 1995, primarily because of (i) a
higher percentage of lower-priced intra-European traffic from the European
Network as compared to intercontinental traffic, (ii) a higher percentage of
lower-priced wholesale traffic as compared to retail traffic, (iii) reductions
in certain rates charged to non-wholesale customers in response to pricing
reductions enacted by certain incumbent telecommunications operators ("ITOs") in
Western Europe and (iv) changes in customer access methods. SEE "-- COST OF
TELECOMMUNICATIONS SERVICES."
Telecommunications revenue per billable minute from the sale of services to
non-wholesale customers decreased to $1.02 in the three months ended September
30, 1996 from $1.47 in the corresponding period in 1995. Telecommunications
revenue per billable minute from the sale of services to carriers and other
resellers remained constant at $0.36 in the three months ended September 30,
1996 and 1995. The number of customers billed rose 101.1% to 16,319 at September
30, 1996 from 8,115 at September 30, 1995.
Western Europe continues to be an increasingly important market for the Company.
During the three months ended September 30, 1996, approximately 41.5% of the
Company's telecommunications revenue was generated in Western Europe as compared
to approximately 34.4% of the Company's telecommunications revenue during the
corresponding period in 1995. In contrast, despite an increase of approximately
27.9% over the corresponding period in 1995, telecommunications revenue from
Latin America represented approximately 28.9% of the Company's
telecommunications revenue during the three months ended September 30, 1996 as
compared to approximately 37.9% of the Company's telecommunications revenue
during the three months ended September 30, 1995. Historically, significant
portions of the Company's telecommunications revenue have been derived from
Latin America, principally from the provision of callback and international toll
free related services. Presently, the Company is devoting substantial resources
to the deregulating Western European market, and although it expects revenue
from Latin America as well as other geographic regions to grow, it expects such
revenue to continue to decrease as a percentage of the Company's total
telecommunications revenue in the near term.
The Company has significantly increased its wholesale business through which it
sells switched minutes to carriers and other resellers at discounted rates.
While the 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 16.6% of total
telecommunications revenue and approximately 36.0% of billable minutes for the
three months ended September 30, 1996 as compared to approximately 9.6% of total
telecommunications revenue and approximately 30.3% of billable minutes, for the
three months ended September 30, 1995. While this increase in telecommunications
revenue represents an increase of approximately 190.7% over the corresponding
period in 1995, the Company does not expect telecommunications revenue generated
by its wholesale business to continue to grow at this rate.
COST OF TELECOMMUNICATIONS SERVICES. Cost of telecommunications services
increased to $11.2 million for the three months ended September 30, 1996 from
$7.2 million for the three months ended September 30, 1995 and, as a percentage
of revenue, decreased to approximately 85.5% from approximately 87.0% for the
three months ended September 30, 1996 and 1995, respectively. The corresponding
increase of approximately 75.4% in gross margins to $1.9 million for the three
months ended September 30, 1996 from $1.1 million for the comparable period in
1995 was primarily due to changes in overall service mix and increased
utilization of the European Network. The Company's average cost per billable
minute decreased to $0.67 during the three months ended September 30, 1996 from
$1.00 during the three months ended September 30, 1995, a 33.0% decrease. 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 three months ended September 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 an increase of approximately 140% in private
line circuit ("PLC") capacity from September 30, 1995 to September 30, 1996, the
costs associated with the European Network increased to approximately $1.0
million for the three months ended September 30, 1996 (approximately 7.5% of
telecommunications revenue for such period) from approximately $0.6 million for
the three months ended September 30, 1995 (approximately 7.6% of
telecommunications revenue for such period). PLCs represent a significant
portion of the Company's fixed costs and were not fully utilized in the three
months ended September 30, 1996. The Company believes that its use of PLCs for
the routing of minutes over the European Network will continue to increase, and
such increased use will positively impact the Company's overall gross margins,
as a percentage of telecommunications revenue. The benefit of such increased
use, however, is primarily limited to calls that either originate or terminate
in a city where the Company has a switch or a point of presence ("POP"), because
otherwise the Company transports the call over the public switched telephone
network ("PSTN") at higher transmission costs and reduced margins.
SELLING EXPENSES. Selling expenses increased to $2.3 million in the three months
ended September 30, 1996 from $1.9 million in the three months ended September
30, 1995 and, as a percentage of revenue, decreased to approximately 17.3% in
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF VIATEL, INC. FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,191,091
<SECURITIES> 3,105,254
<RECEIVABLES> 8,031,165
<ALLOWANCES> 601,000
<INVENTORY> 0
<CURRENT-ASSETS> 18,796,897
<PP&E> 18,288,955
<DEPRECIATION> 5,529,000
<TOTAL-ASSETS> 43,998,521
<CURRENT-LIABILITIES> 16,204,787
<BONDS> 75,025,611
0
0
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