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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
|_| 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 13-378366
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
800 THIRD AVENUE, NEW YORK, NEW YORK 10022
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 350-9200
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
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 BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K [ ].
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF
THE REGISTRANT AS OF MARCH 27, 1997 WAS APPROXIMATELY $85,339,595. AS OF MARCH
27, 1997, 22,609,213 SHARES OF THE REGISTRANT'S COMMON STOCK, $0.01 PAR VALUE,
WERE OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE. THE INFORMATION CALLED FOR BY PART III
IS INCORPORATED BY REFERENCE TO THE DEFINITIVE PROXY STATEMENT FOR THE COMPANY'S
1997 ANNUAL MEETING OF STOCKHOLDERS, WHICH WILL BE FILED ON OR BEFORE APRIL 30,
1997.
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TABLE OF CONTENTS
PAGE
PART I..................................................................... 1
ITEM 1. BUSINESS.................................................... 1
General..................................................... 1
Business Strategy........................................... 1
Market Opportunity.......................................... 3
Services.................................................... 4
The Viatel Network.......................................... 5
Information Systems......................................... 7
Sales and Marketing; Customers.............................. 8
Carrier Contracts........................................... 9
Competition................................................. 9
Government Regulation...................................... 10
Employees.................................................. 13
ITEM 2. PROPERTIES................................................. 13
ITEM 3. LEGAL PROCEEDINGS.......................................... 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 14
PART II.................................................................... 16
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 16
ITEM 6. SELECTED FINANCIAL DATA..................................... 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................... 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE......................... 48
PART III................................................................... 48
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........ 48
ITEM 11. EXECUTIVE COMPENSATION.................................... 48
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT. ..................................... 48
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............ 48
ITEM IV.....................................................................48
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K......................................... 48
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED HEREIN WHICH EXPRESS "BELIEF," "ANTICIPATION,"
"EXPECTATION," OR "INTENTION" OR ANY OTHER PROJECTION, INCLUDING STATEMENTS
CONCERNING THE DESIGN, CONFIGURATION, FEATURE AND PERFORMANCE OF VIATEL, INC.'S
NETWORK AND RELATED SERVICES, THE DEVELOPMENT AND EXPANSION OF VIATEL, INC.'S
BUSINESS, THE MARKETS IN WHICH VIATEL, INC.'S SERVICES ARE OR WILL BE OFFERED,
CAPITAL EXPENDITURES AND REGULATORY REFORM, INSOFAR AS THEY MAY APPLY
PROSPECTIVELY AND ARE NOT HISTORICAL FACTS, ARE "FORWARD-LOOKING" STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E
OF THE SECURITIES EXCHANGE ACT OF 1934. 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 "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- CERTAIN FACTORS WHICH MAY AFFECT THE COMPANY'S
FUTURE RESULTS."
PART I
ITEM 1. BUSINESS.
GENERAL
Viatel, Inc. (together with its subsidiaries and predecessor the "Company"
or "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 nine additional switches in
Amsterdam, Antwerp, Barcelona, Brussels, Frankfurt, Madrid, Milan, Paris and
Rome connected by 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 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 $50.4 million in 1996. Viatel,
Inc. is a Delaware corporation with its principal headquarters located at 800
Third Avenue, New York, New York.
The Company derives revenue primarily through the provision of
competitively priced long distance services with value-added features that have
not been 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 paid access, international
toll-free ("ITF"), national toll-free ("NTF"), dedicated line or callback.
The Company conducts its business on a global basis, with a principal focus
on Western Europe. Of the Company's telecommunications revenue for 1996,
approximately 41.9% was generated in Western Europe, approximately 28.4% was
generated in Latin America, approximately 17.0% was generated in North America,
primarily from the Company's wholesale business of selling switched minutes to
other carriers and approximately 12.4% was generated in the Pacific Rim. The
remaining 0.3% 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 in 1998 of European Union ("EU") directives to
eliminate the ITOs' existing monopolies on
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Voice Telephony, defined as 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. 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 "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Factors Which May Affect the Company's Future Results
-- Substantial Government Regulation."
Key elements of the Company's business strategy include:
- - 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
deregulation of the dominant geographic telecommunications markets as
evidenced by the World Trade Organization ("WTO") Basic Telecommunications
Agreement (the "WTO Agreement") 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. See "-- Market Opportunity."
- - 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 1996, approximately 41.9% of the
Company's telecommunications revenue was generated in Western Europe, with
approximately 33.1% of its revenue attributable to calls originated on the
European Network. The Company intends to expand the European Network by
installing points of presence ("POP") 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 switches
in Vienna and Zurich and POPs in up to 17 Western European cities in 1997,
including Berlin, Lyon, Rotterdam, Turin and Valencia. During the first
quarter of 1997, the Company installed a switch in Antwerp. The Company is
currently upgrading its switch in London and its POP in New York to
international gateway switches and anticipates that these improvements will
be completed during the second and third quarters of 1997, respectively.
See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Certain Factors Which May Affect the Company's
Future Results."
- - 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 focus
principally 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."
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- - 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 16.5% of the Company's
telecommunications revenue for 1996 as compared to approximately 6.2% for
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.
- - 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.
- - 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 "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Certain Factors Which May Affect the Company's Future Results -- Risks
Associated With Acquisitions, Investments and Strategic Alliances."
MARKET OPPORTUNITY
According to the International Telecommunications Union ("ITU"), the
international telephone service industry had total worldwide revenue of
approximately $55.0 billion in 1995. 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 operated represented 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
operated represented 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 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 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 "--Competition" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Certain Factors Which Affect the Company's Future Results -- 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
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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 by industry participants generally. See "--
Government Regulation," " -- Competition" and "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Certain Factors
Which May Affect the Company's Future Results -- Substantial Government
Regulation."
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 and expanding the Viatel
Network as other geographic regions with high density telecommunications
markets, such as Latin America and the Pacific Rim, start to deregulate. 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. During 1996, the Company
commenced offering national long distance telecommunications service in Spain,
Germany 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.
On February 15, 1997, representatives of 70 countries, including the United
States, finalized the WTO Agreement, which addresses market access,
foreign investment and procompetitive regulatory principles for countries
generating over 95% of world-wide telecommunications revenue. The WTO Agreement
becomes effective January 1, 1998. Although certain countries took specific
exceptions to the agreement, the WTO Agreement generally provides (a) market
access to U.S. companies for local, long distance and international service
through any means of network technology on either a resale or facilities basis,
(b) the opportunity for U.S. companies to acquire, establish or hold a
significant stake in telecommunications companies in the countries which are a
party to the WTO Agreement, and (c) the ability to take advantage of these
opportunities within a framework of procompetitive regulatory principles. The
Company expects to benefit from the anticipated effects of the WTO Agreement,
including the expansion of legally permissible uses of the Company's European
Network, but it cannot predict the extent of the opportunities that may be
presented.
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 accounted for approximately 75.1% of the Company's Western
European revenue during 1996. 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 fourth quarter of
1996, the Company simplified access to this service through the use of automatic
number identification, where feasible.
VIAISDNFAX - permits companies with ISDN lines and high-volume national and
international long-distance fax communications to send fax communications
directly to a destination using abbreviated codes, if preferred.
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 Corporation, MCI
Telecommunications Corporation and other providers of credit-based international
calling cards, VIAGLOBE provides 24-hour operator assistance and speed dialing.
VIACARD - introduced in the first quarter of 1997, 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.
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
"--Government Regulation" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Certain Factors Which Could
Affect the Company's Future Results -- Substantial Government Regulation."
THE VIATEL NETWORK
The Viatel Network consists of central switching centers in London, England
and Omaha, Nebraska and switches, each connected to London by digital fiber
optic transmission facilities, in Amsterdam, Antwerp, Barcelona, Brussels,
Frankfurt, Madrid, Milan, Paris and Rome. 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
Company is using the net proceeds from its initial public offering completed in
October 1996 (the "Offering") for the purpose of upgrading and expanding the
Viatel Network. The Company has also used and intends to continue to use certain
of the proceeds from its Offering to purchase interests in fiber optic cable
systems in strategically positioned submarine cables. See "-- Expansion Plans"
and "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations --Liquidity and Capital Resources -- Capital Expenditures
and Working Capital."
To originate and terminate calls on the European Network, the Company's
switches must have access and egress into and from the public switched telephone
network ("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
offered, local
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connectivity is currently provided under tariffed services offered by the ITO.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Certain Factors Which May Affect the Company's Future
Results -- 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 nine 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 " -- Business Strategy -- Capitalize on Anticipated Settlement
Agreement Obsolescence" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Certain Factors Which May
Affect the Company's Future Results -- Potential Difficulties Associated With
Implementing European Expansion Strategy."
INTERNATIONAL PRIVATE LINE CIRCUITS. The Company's nine switches in Western
Europe are connected to the central switching center in London by international
private line circuit ("IPLC"). 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 acquired an interest in fiber optic cable
systems 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. The Company has received approval in principle from the Department of
Trade and Industry in England in connection with its International Facilities
License, which would allow the ownership of an interest in a transatlantic
digital fiber optic cable originating in the United Kingdom. The Company
anticipates that this license will be granted in April 1997 following the
completion of a 28-day public comment period. Once the Company has obtained its
International Facilities License, it intends to acquire an interest in
transatlantic digital fiber optic cable originating in the United Kingdom.
The Company is also considering acquiring an interest in cross-channel digital
fiber optic cable originating in the United Kingdom. The Company has also become
a signatory to the FIBEROPTIC Link Around the Globe ("FLAG") agreement. FLAG
will provide the Company with added bandwidth capacity on a new transoceanic,
intercontinental fiber system, currently under construction.
INTELLIGENT SWITCHES. The Viatel Network utilizes "intelligent switches"
which incorporate proprietary software to achieve least cost routing ("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 Integrated Services Digital Network ("ISDN"), hierarchical
call control and simplified network management protocol 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.
The Company is in the process of installing international gateway switches
in London and New York and anticipates that these switches will become
operational during the second and third quarters of 1997, respectively.
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 in-country private line circuit capacity
before the capacity limitations of such circuits are reached. See "Item 7.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Factors Which May Affect the Company's Future Results --
Potential Difficulties Associated With Implementing European Expansion
Strategy."
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 from the Company's initial public offering in October 1996 (the
"Offering") to expand and upgrade the Viatel Network. The Company is in the
process of upgrading its switch in London and its POP in New York to
international gateway switches. When a switch is replaced, it will be redeployed
to upgrade POPs in other strategic locations. In the first quarter of 1997, the
Company installed a switch in Antwerp. The Company has also purchased an
interest in fiber optic cable systems 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. Once the Company has obtained its
International Facilities License, it intends to acquire an interest in
transatlantic digital fiber optic cable originating in the United Kingdom. The
Company is also considering acquiring an interest in cross-channel digital fiber
optic cable originating in the United Kingdom. To further extend the European
Network, the Company also anticipates installing switches in Vienna and Zurich
and POPs in up to 17 Western European cities in 1997, including Berlin, Lyon,
Rotterdam and Valencia. 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 "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations --Certain Factors Which May Affect the Company's Future Results --
Potential Difficulties Associated With Implementing European Expansion
Strategy."
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 "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Certain Factors
Which May Affect the Company's Future Results -- Dependence on Effective
Information Systems."
The Company currently has a turnaround time of approximately 24 hours for
new account entry, subject to credit approval. The Company's billing system
provides multicurrency billing, itemized call detail, city level detail for
destination reporting and electronic output for select accounts. Customers are
provided with several payment options, including automated credit card
processing and automated direct debiting.
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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
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Certain Factors Which May Affect the Company's Future
Results -- 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. See "Item 2. Legal Proceedings."
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 and independent sales agents 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 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 prices its retail services generally at a discount to the ITOs'
prices in the various geographic markets. For its retail 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
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10.0% 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 approximately $1.0 million, which represents approximately 32%
of the Company's monthly variable transmission expense. 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 "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Certain Factors Which May Affect the
Company's Future Results -- 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 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 retail 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
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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 "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Certain Factors Which May
Affect the Company's Future Results -- 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 lines for the
provision of switched services between the United States and the United Kingdom
and between the United States and Canada is pursuant to the authorization (the
"Section 214 Private Line Authorization") granted under Section 214 of the
Communications Act of 1934, as amended (the "Communications Act"). The Company
is additionally authorized to provide these services, among others, pursuant to
the Section 214 Global Authorization (as hereinafter defined). 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, Sweden and New Zealand) 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 or the Section 214 Global Authorization.
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 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 "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Certain Factors Which May
Affect the Company's Future Results -- 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 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
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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.
UNSETTLED NATURE OF REGULATORY ENVIRONMENT. 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. An
example is the Company's aggressive interpretation of indefinite or unfavorable
laws regarding 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 believes that it is not providing any impermissible
service and continues to offer services which utilize callback access.
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
determines, following consultation with regulatory counsel in a jurisdiction,
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, the Section 214 Switched
Authorization, the Section 214 Global Authorization or the Section 214 UK
Facilities Authorization (each as hereinafter defined) 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. To date, the Company has not been subject to any fines, penalties or other
sanctions nor has it been the subject of any legal or regulatory action or
inquiry. In addition, the Section 214 Switched 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. The
Company does not believe, however, that an adverse determination as to the
permissibility of any individual service offered by the Company in any
particular jurisdiction would have a material adverse long-term effect on its
business. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Certain Factors Which May Affect the
Company's Future Results -- 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,
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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 EU 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 in which the Company currently conducts its
business. 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.
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, Portugual and Spain, each
of which has a less developed network, and Luxembourg, which has a very small
network, was granted the right to delay the abolition of the Voice Telephony
monopoly until 2003 and 2000, respectively. Ireland, Portugal and Luxembourg
have received deregations with respect to Voice Telephony until 2000, Spain
until December 1998 and Greece until 2003.
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. The Section 214 Switched
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 Switched Authorization, it could impose a
variety of sanctions on the Company, including fines, additional conditions on
the Section 214 Switched Authorization, cease and desist or show cause orders or
the revocation of the Section 214 Switched 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 Private Line
Authorization, the Section 214 Global Authorization and the Section 214 UK
Facilities 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 "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operation --Certain Factors Which
May Affect the Company's Future Results -- Substantial Government Regulation."
As previously noted, the FCC has also granted the Section 214 Private Line
Authorization. Additionally, in October 1996 the Company received final approval
for another Section 214 authorization from the FCC to provide both
facilities-based services and resale services (including both
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the resale of switched services and the resale of private lines for the
provision of switched services) to all permissible international points (the
"Section 214 Global Authorization"). Finally, in October 1996 the Company also
received final approval for another Section 214 authorization from the FCC to
provide facilities-based service between the United States and the United
Kingdom over the CANUS-1 and CANTAT-3 cable systems (the "Section 214 UK
Facilities Authorization").
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
1996, 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 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 U.S.
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, Sweden and New Zealand are "equivalent."
LATIN AMERICA. The Company is subject to a different regulatory regime in
each country in Latin America 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 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
As of December 31, 1996, the Company had 238 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.
ITEM 2. 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 $108,000 and expire on March 31, 1999 and
July 31, 2000.
The Company also leases office space in various cities in Europe where it
maintains sales offices with annual rents ranging from $17,700 in Rome to
$173,400 in Frankfurt (based on foreign currency exchange rates in effect as of
March 24, 1997). The Company's aggregate annual rental obligations for its
European offices is approximately $709,600 (based on foreign currency exchange
rates in effect as of March 24, 1997).
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ITEM 3. LEGAL PROCEEDINGS.
On January 23, 1996, the Company's former independent sales representative
in Madrid (the "Spanish Representative") commenced an arbitration proceeding
before the American Arbitration Association in New York 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. The Company believes
that it has meritorious defenses against each of the claims alleged by the
Spanish Representative. The Company is vigorously pursuing 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 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with respect to the
executive officers of the Company as of March 24, 1997.
NAME AGE POSITION
- ---- --- --------
Martin Varsavsky........ 36 Chairman of the Board, Chief Executive Officer and
Director
Michael J. Mahoney...... 37 President, Chief Operating Officer and Director
Allan L. Shaw........... 33 Vice President, Finance; Chief Financial Officer;
Treasurer and Director
Lawrence G. Malone...... 45 Vice President, Managing Director,
Intercontinental
Morten Steen-Jorgensen.. 33 Vice President, Managing Director, Europe
Sheldon M. Goldman...... 37 Vice President, Business & Legal Affairs,
Assistant Secretary
Mark St. J. Courtney.... 37 European General Counsel and Secretary
Paolo Di Fraia.......... 36 European Finance Director and Assistant Treasurer
MARTIN VARSAVSKY. Mr. Varsavsky, a founder of the Company, has served as
Chairman of the Board and Chief Executive Officer of the Company since September
1996 and as Chief Executive Officer and director of the Company since February
1991. Mr. Varsavsky was also President of the Company from February 1991 through
September 1996. In 1985, Mr. Varsavsky founded both Urban Capital Corporation, a
commercial real estate development company, and Medicorp Sciences, a
biotechnology company which conducts AIDS research. Mr. Varsavsky does not
currently hold an officer position with either Urban Capital Corporation or
Medicorp Sciences. 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 President and Chief Operating
Officer of the Company since September 1996 and as a director of the Company
since 1995. Mr. Mahoney was also Executive Vice President, Operations and
Technology of the Company from July 1994 to September 1996 and Managing
Director, Intercontinental of the Company from January 1996 to September 1996.
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.
ALLAN L. SHAW. Mr. Shaw has served as Vice President, Finance and Chief
Financial Officer of the Company since January 1996 and as Treasurer of the
Company since September 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
14
<PAGE>
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.
LAWRENCE G. MALONE. Mr. Malone has served as Vice President and Managing
Director, Intercontinental of the Company since September 1996 and served as
Vice President of Sales for Carriers/Wholesale of the Company from January 1995
to September 1996. From December 1993 to December 1994, Mr. Malone was employed
by Frame Relay Technologies, a communications equipment manufacturer, as
Director of Sales. From December 1987 to November 1993, Mr. Malone was employed
by Republic Telcom Systems, a voice/data networking company, where he most
recently served as Vice President of Sales and Marketing.
MORTEN STEEN-JORGENSEN. Mr. Jorgensen has served as Vice President and
Managing Director, Europe of the Company since September 1996. From September
1987 to August 1996, Mr. Jorgensen was employed by NCR, where he most recently
served as an Assistant Vice President, Channel Sales and Marketing.
SHELDON M. GOLDMAN. Mr. Goldman has served as Vice President, Business and
Legal Affairs since December 1996 and served as United States General Counsel of
the Company from April 1996 until December 1996. From January 1987 to March
1996, Mr. Goldman was associated with the law firm of Wien, Malkin & Bettex.
Since March 1996, Mr. Goldman has been Of Counsel to the law firm of Brief
Kesselman Knapp & Schulman, LLP.
MARK ST. J. COURTNEY. Mr. Courtney has served as European General Counsel
of the Company 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 Corporation, 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 Ltd., a U.K. investment bank, from November 1985 to March 1991.
PAOLO DI FRAIA. Mr. Di Fraia has served as European Finance Director of the
Company since January 1996 and as Assistant Treasurer of the Company since
September 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.
SENIOR MANAGEMENT
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 the Company's Latin American specialist from October
1993 to December 1994.
FRED HUGHES. Mr. Hughes has served as Vice President, Operations -- Europe
of the Company since July 1994. From August 1993 to July 1994, Mr. Hughes served
as Director of Telephony of the Company. 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.
GEORGE A. PIERACCINI. Mr. Pieraccini has served as the Company's Corporate
Controller since January 1996. Mr. Pieraccini served as Assistant Controller of
the Company from November 1994 until December 1995. From October 1991 to
November 1994, Mr. Pieraccini was employed by Edward Isaacs & Company LLP,
independent Certified Public Accountants, most recently as an Audit Senior. Mr.
Pieraccini is a Certified Public Accountant and a member of the American
Institute and the New York State Society of Certified Public Accountants.
PHIL WILKEN. Mr. Wilken has served as Vice President of Operations of the
Company 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 Co. 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.
15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock, $0.01 per value per share (the "Common Stock")
commenced trading on October 18, 1996, on the Nasdaq National Market ("NNM")
under the symbol "VYTL". The high and low sales prices for the Common Stock, as
reported by the NNM from October 18, 1996 to December 31, 1996 were $12.25 and
$8.50, respectively.
On March 24, 1997, there were approximately 80 stockholders of record of
the Common Stock. The Company believes that it has in excess of 300 beneficial
owners.
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 Delaware General
Corporation Law, 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, dated as
of December 15, 1994, and amended October 11, 1996 (as amended, the
"Indenture"), between the Company and United States Trust Company of New York,
unless certain financial tests are met.
ITEM 6. SELECTED FINANCIAL 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,
1996, 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 Report, which were audited by KPMG Peat Marwick LLP,
independent Certified Public Accountants, as of and for the years ended December
31, 1996, 1995, 1994 and 1993 and audited by Edward Isaacs & Company LLP,
independent Certified Public Accountants, as of and for the year ended December
31, 1992. This information should be read in conjunction with "Item 7.
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 Report.
16
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1996 1995 1994 1993 1992
-------- --------- ---------- ------- --------
(In thousands, except other operating data)(1)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Telecommunications revenue....... ....................... $ 50,419 $ 32,313 $ 26,268 $21,393 $ 6,701
Operating expenses:
Costs of telecommunications services.................... 42,130 27,648 22,953 18,159 5,462
Selling, general and administrative expenses............ 32,857 24,328 14,318 8,458 2,505
Depreciation and amortization........................... 4,802 2,637 789 111 15
Equipment impairment loss............................... -- 560 -- -- --
-------- -------- -------- ------- -------
Total operating expenses.............................. 79,789 55,173 38,060 26,728 7,982
-------- -------- -------- ------- -------
Operating loss............................................ $(29,370) $(22,860) $(11,792) $(5,335) $(1,281)
Interest income (expense), net............................ (8,996) (5,574) (558) 21 (8)
Share in loss of affiliate................................ (10) (42) (145) (142) --
-------- -------- -------- ------- -------
Net loss.................................................. $(38,375) $(28,476) $(12,495) $(5,456) $(1,289)
======== ======== ======== ======= =======
Net loss per share(2)..................................... $(2.47) $ (2.09) $ (1.22) $ (0.77) $ (0.21)
OTHER FINANCIAL DATA:
EBITDA(3)................................................. $(24,578) $(20,265) $(11,148) $(5,366) $(1,266)
Net cash (used in) provided by operating activities....... (26,331) (18,489) (11,571) (1,442) 438
Net cash used in investing activities..................... (1,592) (37,057) (4,996) (2,949) (70)
Net cash provided by (used in) financing activities....... 94,772 (2,306) 80,984 6,329 (15)
Capital expenditures, including acquisitions of business.. $ 9,423 $ 11,378 $ 4,843 $ 2,643 $ 70
OTHER OPERATING DATA(4):
Billable minutes (000's)(5)............................... 62,249 25,932 14,981 10,899 3,097
Average revenue per billable mnute(6)..................... $ .80 $ 1.23 $ 1.70 $ 1.87 $ 2.16
Average cost per billable minute(7)....................... $ .67 $ 1.04 $ 1.53 $ 1.67 $ 1.76
Switches(8)(9)(10)........................................ 13 10 2 2
Customers(8)(10).......................................... 18,172 9,218 6,469 5,486
BALANCE SHEET DATA(10):
Working capital........................................... $ 79,665 $26,214 $58,549 $(3,628) $(1,219)
Property and equipment, net............................... 21,074 15,715 6,933 3,584 62
Total assets.............................................. 134,664 65,613 83,923 10,585 2,147
Long-term debt, excluding current installments............ 77,904 67,283 59,955 866 --
Stockholders' equity (deficit)(11) ....................... 38,482 (17,618) 10,985 (162) (1,139)
</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.
(3) 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
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) 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.
(7) 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.
17
<PAGE>
(8) Blanks indicate that data is not available for such period.
(9) At December 31, 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. See
"Item 5. Market For Registrant's Common Equity and Related
Stockholder Matters."
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
SUMMARY
The following is a discussion of the financial condition and results of
operations of the Company for the years ended December 31, 1996, 1995 and 1994.
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 Report.
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. 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 render effectively 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 continued expansion which has resulted in substantial net losses since
its inception. The Company expects to incur substantial net losses and negative
cash flow until at least the years 2001 and 2000, respectively.
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 through 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 16.5% and 35.2% of total
telecommunications revenue and billable minutes, respectively, for 1996 compared
to 6.2% and 21.6% of total telecommunications revenue and billable minutes,
respectively, for 1995. Third, Western Europe is becoming an increasingly
important market for the Company. During 1996, approximately 41.9% of the
Company's telecommunications revenue was generated in Western Europe as compared
to approximately 38.2% of the Company's telecommunications revenue during 1995.
In contrast, despite an increase of approximately 19.5% over 1995,
telecommunications revenue from Latin America represented approximately 28.4% of
the Company's telecommunications revenue during 1996 as compared to
approximately 37.6% of the Company's telecommunications revenue during 1995.
Finally, quarterly revenue growth has fluctuated based on the number of business
days and the strength of the U.S. dollar relative to European currencies in
which the Company bills its customers.
Both billable minutes and growth in the number of customers exceeded
Viatel's expectations for 1996. Revenue per billable minutes, however, have
declined more quickly than expected as a result of competitive pressures. The
Company believes that these competitive market forces should ultimately have a
favorable impact on the average cost per minute as alternative infrastructure is
placed in service by third parties. The Company believes that the addition of
alternative infrastructure should result in decreased leased line and related
costs.
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 ITF numbers or callback which are relatively
more expensive to the Company. 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 "--
19
<PAGE>
Certain Factors Which May Affect the Company's Future Results -- Potential
Difficulties Associated With Implementing European Expansion Strategy" and
"Item 1. Business -- The Viatel Network -- The European Network."
The Company's selling, general and administrative expenses include
commissions to independent sales representatives and 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.
On February 15, 1997, representatives of 70 countries, including the United
States, finalized the WTO Agreement, which addresses market access, foreign
investment and procompetitive regulatory principles for countries generating
over 95% of world-wide telecommunications revenue. The WTO Agreement becomes
effective January 1, 1998. Although certain countries took specific exceptions
to the agreement, the WTO Agreement generally provides (a) market access to U.S.
companies for local, long distance and international service through any means
of network technology on either a resale or facilities basis, (b) the
opportunity for U.S. companies to acquire, establish or hold a significant stake
in telecommunications companies in the countries which are a party to the WTO
Agreement, and (c) the ability to take advantage of these opportunities within a
framework of procompetitive regulatory principles. The Company expects to
benefit from the anticipated effects of the WTO Agreement, including the
expansion of legally permissible uses of the Company's European Network, but it
cannot predict the extent of the opportunities that may be presented.
RESULTS OF OPERATIONS
The following table summarizes the breakdown of the Company's results of
operations as a percentage of revenue:
YEAR ENDED DECEMBER 31,
------------------------
1996 1995 1994
---- ---- ----
Telecommunications revenue....................... 100.0% 100.0% 100.0%
Cost of telecommunications services.............. 83.6 85.6 87.4
Selling, general and administrative expenses..... 65.2 75.3 54.5
Depreciation and amortization.................... 9.5 8.2 3.0
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
TELECOMMUNICATIONS REVENUE. Telecommunications revenue increased by 56.0%
to $50.4 million on 62.2 million billable minutes for 1996 from $32.3 million on
25.9 million billable minutes for 1995. Telecommunications revenue growth for
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. This revenue
included approximately $0.62 million of hardware and software sales associated
with the provision of telecommunications services.
The overall increase of 140.0% in billable minutes from 1995 to 1996 was
partially offset by declining revenue per billable minute. Average revenue per
billable minute declined 35% to $.80 in 1996 from $1.23 in 1995 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 retail customers in response to
pricing reductions enacted by certain ITOs and (iv) changes in customer access
methods. See "-- Cost of Telecommunications Services" and "-- Certain Factors
Which May Affect the Company's Future Results --Competition."
20
<PAGE>
Telecommunications revenue per billable minute from the sale of services to
retail customers decreased 28.8% to $1.04 in 1996 from $1.46 in 1995.
Telecommunications revenue per billable minute from the sale of services to
carriers and other resellers increased 8.6% to $.38 in 1996 from $.35 in 1995
primarily as a result of an overall increase in intercontinental call traffic.
The number of customers billed rose 97.1% to 18,172 at December 31, 1996 from
9,218 at December 31, 1995. During the second half of 1996, the Company
commenced offering domestic long distance telecommunications services in
Germany, Italy and Spain.
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 wholesale business has lower
average gross margins than the Company's retail business, the telecommunications
revenue generated from the wholesale business partially offsets the fixed costs
associated with the Viatel Network. The wholesale business represented
approximately 16.5% and 35.2% of total telecommunications revenue and billable
minutes, respectively, for 1996 as compared to approximately 6.2% and 21.6% of
total telecommunications revenue and billable minutes, respectively, for 1995.
While the increase in telecommunications revenue represents an approximately
320.0% 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.
COST OF TELECOMMUNICATIONS SERVICES. Cost of telecommunications services
increased to $42.1 million in 1996 from $27.6 million in 1995 and, as a
percentage of telecommunications revenue, decreased to approximately 83.6% from
approximately 85.6% for 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 35.6%
decrease in average cost per billable minute to $.67 during 1996 from $1.04
during 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 which resulted in reduced
costs on a per minute basis with respect to European long distance
telecommunications services, (ii) an increase in switched minutes generated by
the Company's wholesale business and (iii) changes in customer access methods.
Gross margins for 1996 were negatively impacted by increases in certain
costs related to the expansion of the Company's overall transmission capacity.
The fixed costs per minute are expected to decrease as a percentage of
telecommunications revenue as traffic volume over the European Network
increases. As a result of obtaining additional IPLC capacity, the costs
associated with the European Network increased to approximately $4.1 million for
1996 (approximately 8.2% of telecommunications revenue for such period) from
approximately $2.0 million for 1995 (approximately 6.3% of telecommunications
revenue for such period). IPLCs represent a significant portion of the Company's
fixed costs and were not fully utilized in 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 is required to transport the call
over the PSTN at higher transmission costs and reduced margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $32.9 million in 1996 from $24.3 million in
1995 and, as a percentage of telecommunications revenue, decreased to
approximately 65.2% in 1996 from approximately 75.3% in 1995. Much of the
increased dollar amount of selling, general and administrative expenses is
attributable to the costs of building a direct sales force in Western Europe and
the Company's continued transition from indirect to direct sales organizations
in certain other countries in which the Company does business, and overhead cost
associated with the Company's headquarters, back office and network operations.
The transition to a direct sales force was significantly completed in 1995
and 1996 is the first year in which the costs of such sales force was
incurred throughout the year.
During 1996, the Company took a $1.3 million charge associated with a
corporate restructuring undertaken during the year principally for employee
termination and relocation costs and the write-down of a portion of the
Company's lease for its administrative headquarters in London (the
"Reorganization") and an $.85 million expense associated with a French
arbitration award against the Company. Had these expenses not been incurred,
selling, general and administrative expenses would have decreased to
approximately 61.0%, as a percentage of telecommunications revenue. Salary
related selling, general and administrative expenses represented approximately
41.0% and 42.1% of total selling, general and administrative expenses for 1996
and 1995, respectively.
The Company is also the subject of an arbitration proceeding in which the
Company's former Spanish Representative is seeking $5.8 million in damages. The
Company believes that any potential adverse determination
21
<PAGE>
in this arbitration would not have a material adverse effect on the Company's
business, financial condition or results of operations. See "Item 3. Legal
Proceedings" for details regarding the arbitration proceeding with the Spanish
Representative.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense, which
includes depreciation of the Viatel Network, increased to approximately $4.8
million in 1996 from approximately $2.6 million in 1995. The increase was due
primarily to the depreciation of switches and other equipment placed in service
during 1995 and 1996.
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-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 increased to approximately $10.8 million in 1996
from approximately $8.9 million in 1995 due to the accretion of non-cash
interest on the Company's 15% Senior Discount Notes due January 15, 2005 (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. Interest income was approximately $1.9 million and $3.3 million
for 1996 and 1995, respectively.
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 15.0 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% to $1.23 in 1995 from
$1.70 in 1994. 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 retail customers decreased to $1.46
in 1995 from $1.72 in 1994 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 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. Due to delays in the implementation of the European Network,
however, 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.
22
<PAGE>
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, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $24.3 million in 1995 from $14.3 million in
1994 and, as a percentage of telecommunications revenue, increased to
approximately 75.3% in 1995 from approximately 54.5% in 1994. 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. Salaries as a percentage of selling, general
and administrative expenses increased to approximately 42.1% in 1995 from
approximately 34.4% in 1994.
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 intangible assets
which principally related to acquired employee base and sales force in place
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.
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.
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 December 31, 1996, the Company had incurred
$86.0 million of aggregate losses from operating activities. As of February 28,
1997, the Company had $86.1 million of cash, cash equivalents and other liquid
investments. The Company believes that, based on its current forecasts it 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 2000.
CAPITAL EXPENDITURES AND WORKING CAPITAL. The development of the Company's
business has required substantial capital expenditures and working capital. The
Company will incur 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 1996, 1995 and 1994, the Company had capital expenditures,
including acquisitions of businesses, of approximately $9.4, $11.4 million and
$4.8 million, respectively. Historically, the Company has funded its capital
expenditures through equity and debt issuances and vendor financings. As of
December 31, 1996, the Company had entered into purchase commitments for network
upgrades and other items aggregating approximately $7.4 million. Additionally,
the Company anticipates making additional capital expenditures during 1997
of approximately $14.9 million. See "-- Certain Factors Which May Affect the
Company's Future Results -- Substantial Capital Requirements."
AVERAGE MONTHLY CASH REQUIREMENTS. During 1996, the Company's average
current monthly cash requirements were approximately $1.9 million, including
approximately $.5 million relating to minimum commitments under carrier
contracts. This average excludes approximately (i) $9.4 million for capital
expenditures for the purchase of equipment, software and the continued
development of the European Network, (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).
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,
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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,
use the proceeds from certain sales of assets and pay dividends. There can be no
assurance that the Company will be able to comply with such restrictive
covenants in the future.
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 year ended December 31, 1996,
approximately 41.7% 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 December 31, 1996 and its results of
operations for the year then ended were not significantly impacted by
fluctuations in the U.S. Dollar in relationship to foreign currencies. See "--
Certain Factors Which May Affect the Company's Future Results -- 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.
CERTAIN FACTORS WHICH MAY AFFECT THE COMPANY'S FUTURE RESULTS
LIMITED OPERATING HISTORY; SUBSTANTIAL NET LOSSES AND NEGATIVE CASH FLOW FROM
OPERATIONS; EXPECTED FUTURE NET LOSSES AND NEGATIVE CASH FLOW FROM
OPERATIONS; SUBSTANTIAL LEVERAGE
The Company commenced operations in 1991 and has only a limited operating
history. In addition, to date, the Company has incurred substantial net
losses, and, in each of the last three years, has experienced significant
increases in expenses associated with the development and expansion of the
Viatel Network. The Company expects to incur substantial net losses and negative
cash flows from operating activities until at least the years 2001 and 2000,
respectively. There can be no assurance 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," "Item 6. Selected
Financial Data," and the Company's Consolidated Financial Statements, including
the Notes thereto.
In December 1994, the Company issued, for approximately $58.0 million,
$120.7 million aggregate principal amount of the Notes. Cash payments of
interest are not required on the Notes prior to July 15, 2000, at which point
the Company will be required to make annual interest payments of approximately
$18.1 million. At December 31, 1996, the Company had total long-term debt of
approximately $77.9 million and stockholders' equity of approximately $38.5
million. The Company's leverage could (i) impair the Company's ability to obtain
additional future financing to fund working capital, capital expenditures, debt
service requirements or acquisitions or for other purposes; (ii) require that
all or a substantial portion of the Company's future cash flow from operations
may be dedicated to the payment of interest and principal on the Notes; or (iii)
make the Company more vulnerable to the effects of a prolonged economic
downturn, limit its ability both to withstand competitive pressures and to
exploit
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new business opportunities and reduce its flexibility in responding to changing
business and economic conditions. See "-- Liquidity and Capital Resources --
Interest Requirements and Debt Repayment."
SUBSTANTIAL 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 service which the Company can provide and the transmission methods by which
such service can be provided. For example, 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 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 "Item 1.
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. 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, 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.
In addition, there can be no assurance that certain EU member states will not
begin charging substantial fees for the issuance of licenses to provide Voice
Telephony.
UNSETTLED NATURE OF REGULATORY ENVIRONMENT. The Company expects to continue
to pursue a strategy of providing its services to the maximum extent it believes
permissible under applicable laws and regulations. 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. If the Company determines, following
consultation with regulatory counsel in a jurisdiction, that it has a legal
basis for doing so, it may persist in 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 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. There
can be no assurance that the Company has accurately interpreted or will
accurately interpret applicable laws and regulations in particular
jurisdictions.
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's business, financial condition and results of operations. See "Item 1.
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. In
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addition, 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 and 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," i.e., access and egress into and from the 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.
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," " Item 1. Business -- Business Strategy," "Item 1.
Business -- The Viatel Network -- The European Network" and "Item 1.
Business -- Competition."
SUBSTANTIAL CAPITAL REQUIREMENTS
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. Although the Company believes that it has sufficient funds to
fund its current capital expenditure 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 competitive local exchange carrier services, 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. See "-- Limited Operating History; Substantial Net
Losses and Negative Cash Flow from Operations; Expected Future Net Losses and
Negative Cash Flow from Operations; Substantial Leverage" and "-- 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. 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
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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 other
telecommunications providers in each of its markets. These providers include the
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 competition
has recently increased and the Company believes that 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, 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. 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.
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
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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," "-- Results of Operations
- -- Liquidity and Capital Resources -- Foreign Currency," and "Item 1. 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 does not have any present understanding,
commitment or agreement with respect to any acquisition, investment, strategic
alliance or related effort (other than a strategic alliance with PSINet
Europe Limited for the sale of internet services to Viatel customers). Any
future acquisitions, investments, strategic alliances or related efforts will be
accompanied by the risks commonly encountered in such transactions or efforts.
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 "Item 1. 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 advancement and introduction of new products and services
utilizing new technologies. Competitive pressures may force the Company to
implement new technologies at substantial cost, and competitors may implement
new technologies before the Company is able to implement such technologies,
allowing such competitors to provide such enhanced services before the Company
is able to. 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. 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, including as volume increases. 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 "Item 1. Business -- Information Systems."
VARIABILITY OF OPERATING RESULTS
The Company's quarterly operating results have fluctuated in the past,
primarily as a result of the evolution of the Company's business, 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 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
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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; Expected Future Net Losses and Negative Cash Flow from Operations;
Substantial Leverage," and "Item 6. Selected Financial Data."
RELIANCE ON THIRD PARTIES FOR LEASED CAPACITY
Other than certain interests in digital fiber optic cables, 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'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 "Item 1.
Business -- The Viatel Network" and "Item 1. Business -- Carrier Contracts."
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following statements are filed as part of this Report:
FORM 10-K
Financial Statements: PAGE NO.
---------
Independent Auditors' Report........................................... 31
Consolidated Balance Sheets as of December 31, 1996 and 1995.......... 32
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994.................................. 33
Consolidated Statements of Stockholders' Equity (Deficit) for the
Years ended December 31, 1996, 1995 and 1994...................... 34
Consolidated Statements of Cash Flows for the Years ended
December 31, 1996, 1995 and 1994.................................. 35
Notes to Consolidated Financial Statements for the Years
Ended December 31, 1996, 1995 and 1994............................ 36
II. Valuation and Qualifying Accounts.................................. 47
All other schedules have been omitted because the required information either is
not applicable or is shown in the consolidated financial statements or notes
thereto.
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INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Viatel, Inc:
We have audited the consolidated financial statements of Viatel, Inc. and
subsidiaries as listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we also audited the financial
statement schedule as listed in the accompanying index. These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
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, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles. Also in our opinion, the related 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.
KPMG PEAT MARWICK LLP
New York, New York
March 7, 1997
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VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
1996 1995
------------ -----------
ASSETS
Current Assets:
Cash and cash equivalent ..................... $ 75,796,102 $ 8,934,914
Marketable securities, current ............... 8,181,332 25,004,050
Trade accounts receivable, less
allowance for doubtful accounts
of $602,000 and $473,000, respectively ..... 8,542,305 4,723,664
Other receivable ............................... 4,633,571 2,757,675
Prepaid expenses................................ 789,307 742,803
------------ ----------
Total current asset ........................ 97,942,617 42,163,106
------------ ----------
Marketable securities, non-current ............. 9,004,075 1,127,442
Property and equipment, net .................... 21,074,417 15,715,121
Deferred financing and registration fees, less
accumulated amortization of $742,000 and
$364,000, respectively........................ 3,046,897 3,431,540
Intangible assets, net ......................... 1,973,910 2,070,055
Other assets ................................... 1,622,534 1,106,182
------------ -----------
$134,664,450 $65,613,446
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accrued telecommunications costs ................ $ 11,915,671 $11,056,235
Accounts payable and other accrued expenses ..... 5,916,223 4,591,628
Commissions payable ............................. 349,646 300,655
Current installments of obligations under
capital leases................................. 96,064 --
----------- ----------
Total current liabilities ....................... 18,277,604 15,948,518
----------- ----------
Long term liabilities:
Senior discount notes, less discount of
$42,945,967 and $53,416,992, respectively.... 77,754,033 67,283,008
Obligations under capital leases, excluding
current installments........................... 149,983 --
----------- -----------
Total long term liabilities ................. 77,904,016 67,283,008
=========== ===========
Commitments and contingencies
Stockholders' equity (deficit):
Common Stock, $.01 par value. Authorized
50,000,000 shares, issued and outstanding
22,513,226 and 10,736,135 shares,
respectively................................. 225,132 107,361
Class A Common Stock, $.01 par value.
Authorized 10,000,000 shares, issued and
outstanding no shares and 2,904,846 shares,
respectively...... ............................ -- 29,048
Additional paid-in capita1 ...................... 125,236,410 30,099,011
Unearned compensation ........................... (130,080) (78,000)
Cumulative translation adjustment ............... (862,458) (164,676)
Accumulated deficit ............................. (85,986,174) (47,610,824)
----------- -----------
Total stockholders' equity (deficit) ......... 38,482,830 (17,618,080)
------------ -----------
$134,664,450 $65,613,446
============ ===========
See accompanying notes to consolidated financial statements.
32
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------- --------- ----------
<S> <C> <C> <C>
Telecommunications revenue....................... $50,418,694 $32,313,293 $26,267,741
------------ ------------ ------------
Operating expenses:
Costs of telecommunications services ......... 42,130,308 27,648,340 22,952,941
Selling, general and administrative expenses.. 32,856,785 24,327,537 14,317,791
Depreciation and amortization ................ 4,801,624 2,636,787 789,359
Equipment impairment loss .................... -- 560,419 --
------------ ------------ ------------
Total operating expenses .................. 79,788,717 55,173,083 38,060,091
Other income (expenses):
Interest income .............................. 1,852,323 3,281,926 213,611
Interest expense ............................. (10,848,025) (8,856,317) (771,782)
Share in loss of affiliate ................... (9,625) (41,530) (144,867)
------------ ------------ ------------
Net loss .................................. $(38,375,350) $(28,475,711) $(12,495,388)
============ ============ ============
Net loss per common share ................. $ (2.47) $ (2.09) $ (1.22)
============ ============ ============
Weighted average common shares outstanding 15,514,479 13,640,980 10,252,416
============ ============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
33
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
NUMBER
OF
NUMBER OF CLASS A
COMMON COMMON CLASS A ADDITIONAL
STOCK STOCK COMMON COMMON PAID-IN
SHARES SHARES STOCK STOCK CAPITAL
---------- -------- ------- -------- ----------
<S> <C> <C> <C> <C> <C>
Balance at January 8,575, 596 -- $ 85,756 -- $ 6,427,781
1994.............
Issuance of common
stock and warrants,
net of $412,338 issue
costs.......... 2,140,539 -- 21,405 -- 7,567,527
Issuance of Class A
common stock, net
of $977,132 issue
costs.......... -- 2,904,846 -- 29,048 15,987,173
Recognition of
unearned
compensation... -- -- -- -- --
Foreign currency
transalation
adjustment..... -- -- -- -- --
Net loss......... -- -- -- -- --
---------- -------- ------ ------ ----------
Balance at December
31, 1994........ 10,716,135 2,940,846 107,161 29,048 29,982,211
Issuance of restricted
common stock... 20,000 -- 200 -- 116,800
Foreign currency
translatoin
adjustment..... -- -- -- -- --
Net loss......... -- -- -- -- --
---------- -------- ------ ------ ----------
Balance at December
31, 1995....... 10,736,135 2,904,846 107,361 29,048 30,099,011
Issuance of restricted
common stock... 66,666 -- 667 -- 389,333
Issuance of common
stock, net of
$9,541,954 issue
cost........... 8,667,000 -- 86,670 -- 94,375,376
Conversion of Class A
common stock to
common stock..... 2,904,846 (2,904,846) 29,048 (29,048) --
Stock options
exercised........ 138,579 -- 1,386 -- 372,690
Foreign currency
translation
adjustment...... -- -- -- -- --
Net loss......... -- -- -- -- --
--------- -------- ------ -------- ----------
Balance at December
31, 1996........ 22,513,226 -- $225,132 $ -- $125,236,410
========== ======== ======== ======== ============
34
<PAGE>
CUMULATIVE
UNEARNED TRANSLATION ACCUMULATED
COMPENSATION ADJUSTMENT DEFICIT TOTAL
------------ ----------- ----------- -----
Balance at January $(36,100) -- $(6,639,725) $ (162,288)
1994.............
Issuance of common
stock and warrants,
net of $412,338 issue
costs.......... -- -- -- 7,588,662
Issuance of Class A
common stock, net
of $977,132 issue
costs.......... -- -- -- 16,016,221
Recognition of
unearned
compensation... 36,100 -- -- 36,100
Foreign currency
transalation
adjustment..... -- 1,523 -- 1,523
Net loss......... -- -- (12,495,388) (12,495,388)
------- --------- ------------ ------------
Balance at December
31, 1994........ -- 1,523 (19,135,113) 10,984,830
Issuance of restricted
common stock... (78,000) -- -- 39,000
Foreign currency
translatoin
adjustment..... -- (166,199) -- (166,199)
Net loss......... -- -- (28,475,711) (28,475,711)
------- --------- ------------ ------------
Balance at December
31, 1995....... (78,000) (164,676) (47,610,824) (17,618,080)
Issuance of restricted
common stock... (52,080) -- -- 337,920
Issuance of common
stock, net of
$9,541,954 issue
cost........... -- -- -- 94,462,046
Conversion of Class A
common stock to
common stock..... -- -- -- --
Stock options
exercised........ -- -- -- 374,076
Foreign currency
translation
adjustment...... -- (697,782) -- (697,782)
Net loss......... -- -- (38,375,350) (38,375,350)
------- --------- ------------ ------------
Balance at December
31, 1996........ $(130,080) $(862,458) $(85,986,174) $38,482,830
========== ========== ============ ============
</TABLE>
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................... $ (38,375,350) $(28,475,711) $(12,495,388)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization.............. 4,801,624 2,636,787 789,359
Interest expense on senior discount notes.. 10,783,468 8,773,438 364,506
Accrued interest income on
marketable securities ................... (369,761) (714,468) --
Provision for losses on accounts receivable 2,224,953 1,229,473 900,094
Share in loss of affiliate................. 9,625 41,530 144,867
Earned compensation........................ 337,920 39,000 36,100
Deferred financing and registration costs.. -- (460,032) (3,335,015)
Equipment impairment loss.................. -- 560,419 --
Changes in assets and liabilities:
Increase in accounts receivable............ (6,057,936) (2,127,611) (1,052,611)
Increase in prepaid expenses and
other receivables ......................... (1,013,989) (2,593,863) (540,125)
Increase in other assets and intangible asset (315,056) (991,345) (9,273)
Increase in accrued telecommunications
costs, accounts payable, accrued
expenses and commissions payable .......... 1,643,858 3,592,930 3,626,126
------------- ------------ ------------
Net cash used in operating activities ... (26,330,644) (18,489,453) (11,571,360)
------------- ------------ ------------
Cash flows from investing activities:
Purchase of property, equipment and software (9,423,191) (11,377,850) (3,671,811)
Purchase of marketable securities ........... (30,571,006) (55,495,423) --
Proceeds from maturity of marketable
securities ................................ 38,807,045 30,078,399 --
Investment in affiliate ..................... (101,904) (262,214) (152,439)
Issuance of notes receivable ................ (303,227) -- --
Purchase of sales organizations ............. -- -- (1,171,320)
---------- -------- -----------
Net cash used in investing activities .... (1,592,283) (37,057,088) (4,995,570)
----------- ------------- -----------
Cash flows from financing activities:
Proceeds from issuance of Common Stock
and warrants .............................. 94,836,122 -- 7,588,662
Payments under capital leases ............... (63,885) (1,306,453) (620,979)
Repyament 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
Borrowings on notes payable ................. -- -- 3,000,000
------------ ----------- ------------
Net cash provided by (used in) financing
activities ............................. 94,772,237 (2,305,916) 80,983,875
----------- ----------- -----------
Effects of exchange rate changes on cash .... 11,878 25,757 17,212
----------- ------------ ------------
Net increase (decrease) in cash and
cash equivalents .......................... 66,861,188 (57,826,700) 64,434,157
Cash and cash equivalent at beginning of year 8,934,914 66,761,614 2,327,457
----------- ------------ -----------
Cash and cash equivalent at end of year ..... $75,796,102 $8,934,914 $66,761,614
=========== ========== ===========
Supplemental disclosures of cash flow
information:
Interest paid ............................... $64,557 $ 58,040 $ 425,608
========== ========= ===========
Equipment acquired under capital lease
obligations ............................... $309,933 $ -- $ 595,000
========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(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 $71,765,458 and $3,116,218 at December
31, 1996 and 1995, respectively.
(D) REVENUE
The Company records telecommunications revenue as earned, at the time
services are provided.
(E) PROPERTY AND EQUIPMENT
Property and equipment consist principally of telecommunications related
equipment such as switches, fiber optic cable systems, 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. Maintenance
and repairs are expensed as incurred.
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:
Communications system................................ 5 to 7 years
Fiber optic cable systems............................ 15 years
Leasehold improvements............................... 2 to 5 years
Furniture, equipment and other....................... 5 years
36
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(F) 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.
Acquired employee base and sales force in place represents the intangible
assets associated with the acquisition of independent sales organizations and is
being amortized over three years.
Deferred financing and registration fees represent debt financing costs
incurred to issue and register debt and 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 related intangible asset 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.
(G) INCOME TAXES
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. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income or expense in the period it occurs.
(H) 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 selling, general and administrative
expenses in the period in which they occur. For the years ending December 31,
1996, 1995 and 1994, the Company experienced $10,637 in foreign exchange
transaction losses and $107,846 and $15,234 in foreign exchange transaction
gains, respectively.
(I) NET LOSS PER SHARE
Net loss per common and common equivalent share is based on the weighted
average number of common shares outstanding during each period. Per share
amounts have been retroactively restated to give effect to a reverse stock split
at a ratio of 3-to-2. (See Note 7).
37
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(J) 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.
(K) RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year's presentation.
(L) 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.
(M) ADDITIONAL ACCOUNTING POLICIES
Additional accounting policies are incorporated into the notes herein.
(N) STOCK OPTION PLAN
Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
As such, compensation expense was recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method, as defined in SFAS No. 123, had
been applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure required by SFAS No. 123.
See Note 10.
(O) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" on
January 1, 1996. SFAS 121 requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of SFAS 121 did not have a material impact on the Company's
financial position, results of operations, or liquidity.
38
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(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 which
principally related to the acquired employee base and sales force in place which
will be amortized over three years, which corresponds to the estimated remaining
service lives of the employee base and sales force. The allocation of the
aggregate purchase price is summarized as follows:
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
==========
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 higher than
the reported net loss for the year ended December 31, 1994.
(3) INVESTMENTS IN DEBT SECURITIES
Management determines the appropriate classification of its investments in
debt securities at the time of purchase and classifies them as held to maturity
or available for sale. The Company does not invest in securities for the purpose
of trading and as such does not classify any securities as trading. These
investments are diversified among high credit quality securities in accordance
with the Company's investment policy. Debt securities that the Company has both
the intent and ability to hold to maturity are carried at amortized cost. Debt
securities for which the Company does not have the intent or ability to hold to
maturity are classified as available for sale. Securities available for sale are
carried at fair value, with the unrealized gains and losses, net of tax,
reported in a separate component of stockholders' equity.
The amortized cost of debt securities classified as held to maturity are
adjusted for amortization of premiums and accretion of discounts to maturity
over the estimated life of the security. Such amortization and interest are
included in interest income. There were no securities classified as held to
maturity as of December 31, 1996.
39
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(3) INVESTMENTS IN DEBT SECURITIES (CONTINUED)
The following is a summary of the fair value of securities held to maturity
and securities available for sale at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---------- --------------------------------------
SECURITIES SECURITIES SECURITIES
AVAILABLE HELD TO AVAILABLE
FOR SALE MATURITY FOR SALE TOTAL
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury obligations........ $ 6,932,280 $ -- $ -- $ --
Money Market Instruments......... -- 1,402,562 -- 1,402,562
Federal agencies obligations..... 1,121,401 -- 5,786,796 5,786,796
Corporate debt securities........ 9,131,726 -- 18,942,134 18,942,134
----------- ---------- ---------- -----------
Total.................. $17,185,407 $1,402,562 $24,728,930 $26,131,492
=========== ========== =========== ===========
</TABLE>
Unrealized gains or losses on securities classified as available for sale are
not material at December 31, 1996 and 1995.
Securities available for sale at December 31, 1996 by contractual maturity
are shown below:
Due within one year............................. $ 8,181,332
Due after one year through two years............ 9,004,075
-----------
Total....................................... $17,185,407
===========
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.
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31:
1996 1995
----------- -----------
Communications system .......................... $20,514,213 $13,997,966
Fiber optic cable systems ...................... 309,933 --
Leasehold improvements ......................... 2,122,911 1,062,742
Furniture, equipment and other ................. 4,750,137 2,755,600
Construction in progress ....................... 100,962 679,935
----------- -----------
27,798,156 18,496,243
Less accumulated depreciation and amortization . 6,723,739 2,781,122
----------- -----------
$21,074,417 $15,715,121
=========== ===========
At December 31, 1996 and 1995, construction in progress represents a
portion of the current expansion of the European Network. As of December 31,
1996 and 1995, $575,100 and $508,600, respectively, of interest has been
capitalized with respect to this project.
40
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(5) INTANGIBLE ASSETS
Intangible assets consist of the following as of December 31:
1996 1995
---------- ----------
Acquired employee base and sales
force in place ..................... $1,607,225 $1,607,225
Goodwill ............................. 474,065 474,065
Purchased software ................... 1,157,467 661,999
Other ................................ 374,539 133,834
---------- ----------
3,613,296 2,877,123
Less accumulated amortization ........ 1,639,386 807,068
---------- ----------
$1,973,910 $2,070,055
========== ==========
(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 accreted value, 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.
On December 31, 1996, the Company estimated the fair value of these notes
to be $77,800,000 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
On April 5, 1994, the Company issued 2,140,538 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.
41
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(7) STOCKHOLDERS' EQUITY (CONTINUED)
On December 16, 1994, the Company authorized the creation of 10,000,000
shares of non-voting, $.01 par value, Class A Common Stock (the "Class A Common
Stock"). On December 21, 1994, 2,904,846 shares of Class A Common Stock were
issued for net proceeds of $16,016,221.
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 ($94.5 million of net proceeds).
In connection with the IPO, all outstanding shares of 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 Company's 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, of which no shares were issued and outstanding at December 31, 1996, 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.
(8) INCOME TAXES
The statutory Federal tax rates for the years ended December 31, 1996, 1995
and 1994 were 35%. The effective tax rates were zero for the years ended
December 31, 1996, 1995 and 1994 due to the Company incurring net operating
losses for which no tax benefit was recorded.
For Federal income tax purposes, the Company has unused net operating loss
carryforwards of approximately $64,783,000 expiring in 2007 through 2011. The
availability of the net operating loss carryforwards to offset income in future
years is restricted as a result of the Company's issuance of its Common Stock
and 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:
DECEMBER 31,
--------------------------
1996 1995
------------ ------------
Accounts receivable principally
due to allowance for doubtful accounts......... $ 352,000 $ 166,000
OID Interest not deductible in current period.... 6,914,000 2,933,000
Net operating loss carryforwards 22,674,000 13,231,000
------------ ------------
Total gross deferred tax assets............ 29,940,000 16,330,000
Less valuation allowance (29,940,000) (16,330,000)
------------ ------------
Net deferred tax assets.................... $ -- $ --
============ ============
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 1996 and 1995, the
valuation allowance increased by $13,610,000 and $9,703,000, respectively.
42
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(9) SEGMENT DATA
The information below summarizes export sales by geographic area.
1996 1995 1994
----------- ----------- -----------
Latin America .................. $14,401,901 $12,093,771 $12,914,289
Europe ......................... -- -- 7,720,166
Africa ......................... 78,833 1,207,225 1,832,547
Asia/Pacific Rim ............... 6,159,507 4,375,412 2,061,246
Middle East .................... 77,832 554,139 1,449,093
Other .......................... 267,446 369,425 290,400
----------- ----------- -----------
$20,985,519 $18,599,972 $26,267,741
=========== =========== ===========
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, 1996, revenue, operating loss, capital expenditures and
depreciation expense from this geographic segment were approximately
$19,917,000, $14,753,000, $6,475,000 and $2,258,000, respectively. 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, 1996 and 1995 for this geographic segment were
approximately $15,103,000 and $10,216,000, respectively. For December 31, 1994
and for the year then ended, results from operations, capital expenditures,
depreciation expense and identifiable assets for this geographic segment were
not significant.
(10) STOCK OPTION 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
1,833,333 shares of Common Stock and is currently administered by the
Compensation Committee of the Board of Directors. 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 Board of Directors 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.
The per share weighted average fair value of stock options granted during
1996 and 1995 was $2.29 and $2.83, respectively, on the date of grant using the
Black-Scholes option pricing model with the following assumptions: (1) a risk
free interest rate of 5.5% in 1996 and 7.9% in 1995, (2) an expected life of 10
years for both 1996 and 1995, (3) volatility of approximately 35.9% for both
1996 and 1995 and (4) an annual dividend yield of 0% for both 1996 and 1995.
43
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(10) STOCK OPTION PLAN (CONTINUED)
The Company applies APB Opinion No. 25 in accounting for its Stock Incentive
Plan and, accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net loss would have been increased to the pro forma
amounts indicated below:
1996 1995
----------- -----------
As reported net loss (in 000s) $ (38,375) $ (28,476)
Pro forma net loss (in 000s) (38,986) (28,642)
As reported net loss per share (2.47) (2.09)
Pro forma net loss per share (2.51) (2.10)
Pro forma net loss reflects only options granted during 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net loss amounts because
compensation cost is reflected over the options' vesting period of three years
and compensation cost for options granted prior to January 1, 1995 is not
considered.
Stock option activity under the Stock Incentive Plan is shown below:
WEIGHTED
AVERAGE
EXERCISE NUMBER OF
PRICES SHARES
-------- ----------
Outstanding at January 1, 1994 ........... $0.75 80,662
Granted .................................. 3.74 316,992
Forfeited ................................ 3.74 (5,000)
----- ---------
Outstanding at December 31, 1994 ......... 3.13 392,654
Granted .................................. 5.85 177,654
Forfeited ................................ 3.80 (96,171)
----- ---------
Outstanding at December 31, 1995 ......... 4.01 474,137
Granted .................................. 5.85 822,265
Forfeited ................................ 5.77 (187,987)
Exercised ................................ 2.70 (138,579)
----- ---------
Outstanding at December 31, 1996 ......... 5.42 969,836
===== =========
Exercisable at December 31, 1996 ......... $4.52 504,370
===== =========
The range of exercise prices for stock options outstanding and exercisable
at December 31, 1996 is $0.75 to $5.85.
Prior to the adoption of the Stock Incentive Plan, 5,913 options were
granted. These options were exercised at $0.75 per share during the year ended
December 31, 1996.
The exercise price of all options approximates the fair market value of the
Common Stock on the date of grant.
44
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(10) STOCK OPTION PLAN (CONTINUED)
In addition, prior to the adoption of the Stock Incentive Plan, the Board
of Directors authorized the issuance of up to 233,333 shares of Common Stock as
compensation to employees and consultants of the Company of which 219,639 are
available for issuance at December 31, 1996.
(11) EQUIPMENT IMPAIRMENT LOSS
On August 4, 1995, the Company entered into an agreement (the "Termination
Agreement") with TMI USA (Delaware), Inc. ("TMI") which terminated its existing
agreements. Pursuant to the terms of the Termination Agreement, the Company
prepaid the existing capital lease obligation of $1,025,000, thereby acquiring
all of the equipment previously leased from TMI. The capital lease obligation
was payable over a three year term expiring on December 31, 1996. In addition,
on August 4, 1995, the Company entered into a short-term facilities management
agreement with TMI effective through August 31, 1996, pursuant to which TMI
performed maintenance, equipment housing, site preparation, network extension
and other similar services for the European Network under its present
configuration. Thereafter, the Company managed the European Network using its
own personnel rather than a third party provider.
As a result of the Termination Agreement, the Company has written off the
costs relating to the original installation of such equipment. Accordingly, the
Company has recognized non-cash charges of approximately $560,000 which
represent the original installation costs of such equipment and the difference
between the carrying value and the expected selling price of the equipment not
redeployed.
(12) COMMITMENTS AND CONTINGENCIES
(A) LEASES
At December 31, 1996, the Company was committed under non-cancelable
operating and capital leases for the rental of office space and for fiber optic
cable systems.
The Company's future minimum capital and operating lease payments are as
follows:
CAPITAL OPERATING
-------- ----------
1997................................... $117,638 $1,199,192
1998 .................................. 111,934 1,102,739
1999 .................................. 51,991 959,363
2000 .................................. -- 883,796
2001 .................................. -- 485,603
Thereafter ............................ -- 1,741,324
-------- ----------
281,563 $6,372,017
Less interest costs ................... 35,516 ==========
--------
$246,047
========
Total rent expense amounted to $1,530,889, $948,826 and $935,267 for the
years ended December 31, 1996, 1995 and 1994, respectively.
45
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(12) COMMITMENTS AND CONTINGENCIES (CONTINUED)
(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 volume commitments are $12,552,000 for the year ending
December 31, 1997.
(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 $7,415,000.
(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, 1996 for the next three years under such
contracts aggregates approximately $1,558,000.
(E) LITIGATION
As a result of the Company's transition to direct sales organizations in
Europe, the Company's independent sales representative in Spain has asserted
breach of contract and certain other claims. An arbitration proceeding before
the American Arbitration Association in New York is pending. The representative
in Spain is seeking $5.8 million in damages. The Company believes that it has
meritorious defenses against each of the claims alleged and is vigorously
pursuing all defenses available to it. The Company believes that any potential
adverse determination will not have a material adverse effect on the Company's
business, financial condition or results of operations.
(13) 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.
46
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
SCHEDULE VII - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF PERIOD EXPENSES RETIREMENTS CHANGES OF PERIOD
----------- ---------- ---------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Reserves and allowances deducted
from asset accounts:
Allowances for uncollectible
accounts receivable
Year ended December 31, 1994 336,000 912,000 773,000 - 475,000
Year ended December 31, 1995 475,000 1,230,000 1,232,000 - 473,000
Year ended December 31, 1996 473,000 2,225,000 2,096,000 - 602,000
Allowance for asset impairment
Year ended December 31, 1995 - 560,000 - - 560,000
Year ended December 31, 1996 560,000 - - - 560,000
</TABLE>
47
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to executive officers of the Company is presented
in Item 4 of this Report under the caption "Executive Officers of the Company."
The information appearing under the captions "Proposal 1 - Election of
Directors," "Certain Transactions" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's Proxy Statement for its 1997 Annual
Meeting of Stockholders (the "1997 Proxy Statement") is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information appearing under the caption "Executive Compensation" in the
1997 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information appearing under the caption "Security Ownership of Beneficial
Owners and Management" in the 1997 Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information appearing under the caption "Certain Transactions" in the 1997
Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) 1. FINANCIAL STATEMENTS.
The financial statements are included in Part II, Item 8 of this
Report.
2. FINANCIAL STATEMENT SCHEDULES AND SUPPLEMENTARY INFORMATION
REQUIRED TO BE SUBMITTED.
Any required financial statement schedules are included in Part II,
Item 8 of this Report.
(B) Report on Form 8-K.
The Company did not file any Current Reports on Form 8-K during the
fourth quarter of 1996.
48
<PAGE>
(C) Index to Exhibits.
The following is a list of all Exhibits filed as part of this Report:
EXHIBIT NO. DESCRIPTION OF DOCUMENTS
- -------------- ------------------------
3.1(i)(a) - Amended and Restated Certificate of Incorporation of the
Company (incorporated herein by reference to Exhibit
3.1(i)(a) to the Company's Registration Statement on Form
S-1, filed on August 7, 1996, Registration No. 333-09699
(the "Company's S-1")).*
3.1(ii) - Amended and Restated Bylaws of the Company (incorporated
herein by reference to Exhibit 3.1(ii)(b) of the Company's
S-1).*
4.1 - Indenture, dated as of December 15, 1994, between the
Company and United States Trust Company of New York, as
Trustee (incorporated herein by reference to Exhibit 4.2 to
the Company's Registration Statement on Form S-4, filed on
May 24, 1995, Registration No. 33-92696 (the "Company's
S-4").*
4.2 - 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 (incorporated herein by reference
to Exhibit 4.3 to the Company's S-4).*
4.3 - Company Common Stock Certificate (incorporated herein by
reference to Exhibit 4.4 to the Company's S-1).*
4.4 - Amendment No. 1 to the Indenture, dated as of December 15,
1994, between the Company and United States Trust Company
of New York, as Trustee (incorporated herein by reference
to Exhibit 4.5 to the Company's S-1).*
10.1 - Placement Agreement, dated as of December 15, 1994, between
the Company and Morgan Stanley & Co. Incorporated
(incorporated herein by reference to Exhibit 10.3 to the
Company's S-4).*
10.2 - 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 (incorporated herein by reference to Exhibit
10.4 to the Company's S-4).*
10.3 - The Company's Amended Flexible Stock Incentive Plan
(incorporated herein by reference to Exhibit 10.33 to the
Company's S-1).*+
10.4 - Carrier Contract, dated as of May 3, 1993, between the
Company and AT&T Corp. (incorporated herein by reference
to Exhibit 10.6 to the Company's S-4).*
10.5 - MCI Carrier Agreement, dated as of January 1, 1995, between
the Company and MCI Telecommunications Corporation
(incorporated herein by reference to Exhibit 10.7 to the
Company's S-4).*
10.6 - Mercury Carrier Services Agreement, dated as of March 1,
1994, between the Company and Mercury Communications
Limited (incorporated herein by reference to Exhibit 10.8
to the Company's S-4).*
10.7 - Provision and Management Facilities Agreement, dated as of
October 17, 1994, between the Company and Mercury
Communications Limited (incorporated herein by reference to
Exhibit 10.9 to the Company's S-4).*
49
<PAGE>
10.8 - Managed Telecommunications Network Agreement, dated as of
February 5, 1993, between the Company and TMI USA, Inc.
(Delaware) (incorporated herein by reference to Exhibit
10.10 to the Company's S-4).*
10.9 - Representative Agreement, dated as of June 1, 1993, and as
amended as of April 19, 1995, between the Company and
Maximiliano Fernandez (incorporated herein by reference to
Exhibit 10.11 to the Company's S-4).*
10.10 - Representative Agreement, dated as of April 23, 1993,
between the Company and Viatel de Colombia Comunicaciones
S.A. (incorporated herein by reference to Exhibit 10.12 to
the Company's S-4).*
10.11 - 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. (incorporated herein by reference to
Exhibit 10.13 to the Company's S-4).*
10.12 - Stock Purchase Agreement, dated as of April 5, 1994,
between the Company and COMSAT Investments, Inc.
(incorporated herein by reference to Exhibit 10.14 to the
Company's S-4).*
10.13 - Stock Purchase Agreement, dated as of December 3, 1993,
between the Company and Herald L. Ritch (incorporated
herein by reference to Exhibit 10.15 to the Company's S-1).
10.14 - Stock Purchase Agreement, dated as of October 1, 1993,
between the Company and Robert Conrads (incorporated herein
by reference to Exhibit 10.16 to the Company's S-4).*
10.15 - Stock Purchase Agreement, dated as of December 9, 1993,
between the Company and Robert Conrads (incorporated herein
by reference to Exhibit 10.17 to the Company's S-4).*
10.16 - 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. (incorporated herein by reference to
Exhibit 10.19 to the Company's S-4).*
10.17 - 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. (incorporated herein by reference to
Exhibit 10.21 to the Company's S-4).*
10.18 - Purchase Agreement, dated as of December 8, 1994, between
the Company and ECI Telecom, Inc. (incorporated herein by
reference to Exhibit 10.22 to the Company's S-4).*
10.19 - Carrier Digital Services Agreement, dated as of November
29, 1994, between the Company and Norline Communications,
Inc. (incorporated herein by reference to Exhibit 10.23 to
the Company's Form S-4).*
10.20 - 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 (incorporated
herein by reference to Exhibit 10.24 to the Company's Form
S-4).*
10.21 - Asset Purchase Agreement, dated as of August 27, 1993,
between the Company and Sitel Corporation (incorporated
herein by reference to Exhibit 10.26 to the Company's S-4).*
50
<PAGE>
10.22 - Memorandum of Understanding, dated as of August 4, 1994,
between the Company and TMI USA, Inc. (incorporated herein
by reference to Exhibit 10.27 to the Company's S-4).*
10.23 - Settlement Agreement, dated as of August 4, 1994, between
the Company and TMI USA, Inc. (incorporated herein by
reference to Exhibit 10.28 to the Company's S-4).*
10.24 - Release and Settlement Agreement, dated as of August 1,
1994, between the Company and AT&T Corp. (incorporated
herein by reference to Exhibit 10.29 to the Company's S-4).*
10.25 - Termination Agreement, dated August 4, 1995, between the
Company and Telemedia International, Inc. (incorporated
herein by reference to Exhibit 10.31 to the Company's S-4).*
10.26 - Facilities Management and Services Agreement, dated as of
August 4, 1995, between Viatel U.K. Limited and Telemedia
International Ltd. (incorporated herein by reference to
Exhibit 10.32 to the Company's S-4).*
10.27 - Agreement of Lease, dated August 7, 1995, between the
Company and Joseph P. Day Realty Corp. (incorporated herein
by reference to Exhibit 10.33 to the Company's S-4).*
10.28 - Severance Agreement, dated July 30, 1996, between the
Company and Alan Levy (incorporated herein by reference to
Exhibit 10.30 to the Company's S-1).*+
10.29 - Employment Agreement between the Company and Martin
Varsavsky (incorporated herein by reference to Exhibit
10.31 to the Company's S-1).*+
10.30 - Employment Agreement between the Company and Michael J.
Mahoney (incorporated herein by reference to Exhibit 10.32
to the Company's S-1).*
10.31 - Amended Flexible Stock Incentive Plan (incorporated herein
by reference to Exhibit 10.33 to the Company's S-1).*+
21.1 - Subsidiaries of the Company.
23.1 - Consent of KPMG Peat Marwick LLP.
23.2 - Consent of Edward Isaacs & Company LLP.
24.1 - Power of Attorney (Appears on signature page).
27.1 - Financial Data Schedule.
- ----------
* Incorporated herein by reference.
+ Management contract or compensatory plan or arrangement.
51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City and State
of New York, on the 28th day of March, 1997.
VIATEL, INC.
By: /S/ MARTIN VARSAVSKY
-----------------------------------
Martin Varsavsky
Chairman of the Board and Chief
Executive Officer
KNOWN BY ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Allan S. Shaw and Sheldon M. Goldman his
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-K,
and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or their or his substitutes
or substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 28th day of March, 1997.
SIGNATURE TITLE(S)
--------- --------
/s/ MARTIN VARSAVSKY
- ----------------------------------- Chairman of the Board and
Martin Varsavsky Chief Executive Officer
(Principal Executive Officer)
/s/ MICHAEL J. MAHONEY
- ----------------------------------- President, Chief Operating Officer
Michael J. Mahoney and Director (Principal
Executive Officer)
/s/ ALLAN S. SHAW
- ----------------------------------- Vice President, Finance;
Allan S. Shaw Chief Financial Officer;
Treasurer (Principal
Financial and Accounting
Officer) and Director
/S/ PAUL G. PIZZANI
- ----------------------------------- Director
Paul G. Pizzani
/S/ W. JAMES PEET
- ----------------------------------- Director
W. James Peet
/S/ ANTONIO CARRO
- ----------------------------------- Director
Antonio Carro
52
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION OF DOCUMENTS NUMBERED PAGE
- -------------- ------------------------ -------------
<S> <C> <C>
3.1(i)(a) - Amended and Restated Certificate of Incorporation of the
Company (incorporated herein by reference to Exhibit
3.1(i)(a) to the Company's Registration Statement on Form
S-1, filed on August 7, 1996, Registration No. 333-09699
(the "Company's S-1")).*
3.1(ii) - Amended and Restated Bylaws of the Company (incorporated
herein by reference to Exhibit 3.1(ii)(b) of the Company's
S-1).*
4.1 - Indenture, dated as of December 15, 1994, between the
Company and United States Trust Company of New York, as
Trustee (incorporated herein by reference to Exhibit 4.2 to
the Company's Registration Statement on Form S-4, filed on
May 24, 1995, Registration No. 33-92696 (the "Company's
S-4").*
4.2 - 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 (incorporated herein by reference
to Exhibit 4.3 to the Company's S-4).*
4.3 - Company Common Stock Certificate (incorporated herein by
reference to Exhibit 4.4 to the Company's S-1).*
4.4 - Amendment No. 1 to the Indenture, dated as of December 15,
1994, between the Company and United States Trust Company
of New York, as Trustee (incorporated herein by reference
to Exhibit 4.5 to the Company's S-1).*
10.1 - Placement Agreement, dated as of December 15, 1994, between
the Company and Morgan Stanley & Co. Incorporated
(incorporated herein by reference to Exhibit 10.3 to the
Company's S-4).*
10.2 - 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 (incorporated herein by reference to Exhibit
10.4 to the Company's S-4).*
10.3 - The Company's Amended Flexible Stock Incentive Plan
(incorporated herein by reference to Exhibit 10.33 to the
Company's S-1).*+
10.4 - Carrier Contract, dated as of May 3, 1993, between the
Company and AT&T Corp. (incorporated herein by reference
to Exhibit 10.6 to the Company's S-4).*
10.5 - MCI Carrier Agreement, dated as of January 1, 1995, between
the Company and MCI Telecommunications Corporation
(incorporated herein by reference to Exhibit 10.7 to the
Company's S-4).*
10.6 - Mercury Carrier Services Agreement, dated as of March 1,
1994, between the Company and Mercury Communications
Limited (incorporated herein by reference to Exhibit 10.8
to the Company's S-4).*
10.7 - Provision and Management Facilities Agreement, dated as of
October 17, 1994, between the Company and Mercury
Communications Limited (incorporated herein by reference to
Exhibit 10.9 to the Company's S-4).*
53
<PAGE>
10.8 - Managed Telecommunications Network Agreement, dated as of
February 5, 1993, between the Company and TMI USA, Inc.
(Delaware) (incorporated herein by reference to Exhibit
10.10 to the Company's S-4).*
10.9 - Representative Agreement, dated as of June 1, 1993, and as
amended as of April 19, 1995, between the Company and
Maximiliano Fernandez (incorporated herein by reference to
Exhibit 10.11 to the Company's S-4).*
10.10 - Representative Agreement, dated as of April 23, 1993,
between the Company and Viatel de Colombia Comunicaciones
S.A. (incorporated herein by reference to Exhibit 10.12 to
the Company's S-4).*
10.11 - 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. (incorporated herein by reference to
Exhibit 10.13 to the Company's S-4).*
10.12 - Stock Purchase Agreement, dated as of April 5, 1994,
between the Company and COMSAT Investments, Inc.
(incorporated herein by reference to Exhibit 10.14 to the
Company's S-4).*
10.13 - Stock Purchase Agreement, dated as of December 3, 1993,
between the Company and Herald L. Ritch (incorporated
herein by reference to Exhibit 10.15 to the Company's S-1).
10.14 - Stock Purchase Agreement, dated as of October 1, 1993,
between the Company and Robert Conrads (incorporated herein
by reference to Exhibit 10.16 to the Company's S-4).*
10.15 - Stock Purchase Agreement, dated as of December 9, 1993,
between the Company and Robert Conrads (incorporated herein
by reference to Exhibit 10.17 to the Company's S-4).*
10.16 - 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. (incorporated herein by reference to
Exhibit 10.19 to the Company's S-4).*
10.17 - 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. (incorporated herein by reference to
Exhibit 10.21 to the Company's S-4).*
10.18 - Purchase Agreement, dated as of December 8, 1994, between
the Company and ECI Telecom, Inc. (incorporated herein by
reference to Exhibit 10.22 to the Company's S-4).*
10.19 - Carrier Digital Services Agreement, dated as of November
29, 1994, between the Company and Norline Communications,
Inc. (incorporated herein by reference to Exhibit 10.23 to
the Company's Form S-4).*
10.20 - 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 (incorporated
herein by reference to Exhibit 10.24 to the Company's Form
S-4).*
10.21 - Asset Purchase Agreement, dated as of August 27, 1993,
between the Company and Sitel Corporation (incorporated
herein by reference to Exhibit 10.26 to the Company's S-4).*
54
<PAGE>
10.22 - Memorandum of Understanding, dated as of August 4, 1994,
between the Company and TMI USA, Inc. (incorporated herein
by reference to Exhibit 10.27 to the Company's S-4).*
10.23 - Settlement Agreement, dated as of August 4, 1994, between
the Company and TMI USA, Inc. (incorporated herein by
reference to Exhibit 10.28 to the Company's S-4).*
10.24 - Release and Settlement Agreement, dated as of August 1,
1994, between the Company and AT&T Corp. (incorporated
herein by reference to Exhibit 10.29 to the Company's S-4).*
10.25 - Termination Agreement, dated August 4, 1995, between the
Company and Telemedia International, Inc. (incorporated
herein by reference to Exhibit 10.31 to the Company's S-4).*
10.26 - Facilities Management and Services Agreement, dated as of
August 4, 1995, between Viatel U.K. Limited and Telemedia
International Ltd. (incorporated herein by reference to
Exhibit 10.32 to the Company's S-4).*
10.27 - Agreement of Lease, dated August 7, 1995, between the
Company and Joseph P. Day Realty Corp. (incorporated herein
by reference to Exhibit 10.33 to the Company's S-4).*
10.28 - Severance Agreement, dated July 30, 1996, between the
Company and Alan Levy (incorporated herein by reference to
Exhibit 10.30 to the Company's S-1).*+
10.29 - Employment Agreement between the Company and Martin
Varsavsky (incorporated herein by reference to Exhibit
10.31 to the Company's S-1).*+
10.30 - Employment Agreement between the Company and Michael J.
Mahoney (incorporated herein by reference to Exhibit 10.32
to the Company's S-1).**
10.31 - Amended Flexible Stock Incentive Plan (incorporated herein
by reference to Exhibit 10.33 to the Company's S-1).*+
21.1 - Subsidiaries of the Company.
23.1 - Consent of KPMG Peat Marwick LLP.
23.2 - Consent of Edward Isaacs & Company LLP.
24.1 - Power of Attorney (Appears on signature page).
27.1 - Financial Data Schedule.
- ----------
* Incorporated herein by reference.
+ Management contract or compensatory plan or arrangement.
</TABLE>
56
EXHIBIT 21.1
SUBSIDIARIES OF VIATEL, INC.
JURISDICTION OF INCORPORATION
NAME OF SUBSIDIARY: OR ORGANIZATION:
- ------------------- -----------------------------
Viatel U.K. Limited United Kingdom
Viaphone S.R.L. Italy
Viatel S.R.L. Italy
VPN, S.A. France
Viatel S.A. France
YYC Communications, Inc. Delaware
Viafon Dat Iberica, S.A. Spain
Viatel Global Communications Espana S.A. Spain
Viatel SA/NV Belgium
Viatel BV (branch) of Viatel Belgium Belgium
Viatel Gmbh Germany
Viatel Colombia Management, Inc. Delaware
Viatel Colombia Holdings, Inc. Delaware
Viatel Sales U.S.A., Inc. Delaware
<PAGE>
Exhibit 23.1
Independent Auditors' Consent
-----------------------------
The Board of Directors and Stockholders
Viatel, Inc.:
We consent to incorporation by reference in the registration statement No.
333-15155 on Form S-8 and in the registration statement No. 333-16671 on Form
S-8 of Viatel, Inc. of our report dated March 7, 1997, relating to the
consolidated balance sheets of Viatel, Inc. and Subsidiaries as of December 31,
1996 and 1995 and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the years in the
three-year period ended December 31, 1996, and the related schedule, which
appears in the December 31, 1996 annual report on Form 10-K of Viatel, Inc.
/s/ KPMG Peat Marwick LLP
New York, New York
March 27, 1997
INDEPENDENT AUDITORS' CONSENT
-----------------------------
The Board of Directors and Stockholders
Viatel, Inc. and Subsidiaries:
We consent to the reference to our firm under the heading "Selected Financial
Data" in the Annual Report on Form 10-K of Viatel, Inc. for the year ended
December 31, 1996
/s/ EDWARD ISAACS & COMPANY LLP
New York, New York
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF VIATEL, INC. FOR THE YEAR ENDED
DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
AUDITED CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 75,796,102
<SECURITIES> 17,185,407
<RECEIVABLES> 8,181,332
<ALLOWANCES> 602,000
<INVENTORY> 0
<CURRENT-ASSETS> 97,942,617
<PP&E> 21,074,417
<DEPRECIATION> 6,723,739
<TOTAL-ASSETS> 134,664,450
<CURRENT-LIABILITIES> 18,277,604
<BONDS> 77,754,033
0
0
<COMMON> 225,132
<OTHER-SE> 125,236,410
<TOTAL-LIABILITY-AND-EQUITY> 134,664,450
<SALES> 0
<TOTAL-REVENUES> 50,418,694
<CGS> 0
<TOTAL-COSTS> 42,130,308
<OTHER-EXPENSES> 37,658,409
<LOSS-PROVISION> 2,224,953
<INTEREST-EXPENSE> 10,848,025
<INCOME-PRETAX> (38,375,350)
<INCOME-TAX> 0
<INCOME-CONTINUING> (38,375,350)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (38,375,350)
<EPS-PRIMARY> (2.47)
<EPS-DILUTED> (2.47)
</TABLE>
