<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 7, 1998
REGISTRATION NO. 333-58921
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4/A-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
VIATEL, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 4813 13-3787366
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
Incorporation or Organization) Number)
</TABLE>
800 THIRD AVENUE
NEW YORK, NEW YORK 10022
(212) 350-9200
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
------------------------------
SHELDON M. GOLDMAN, ESQ.
SENIOR VICE PRESIDENT
BUSINESS AFFAIRS AND GENERAL COUNSEL
VIATEL, INC.
800 THIRD AVENUE
NEW YORK, NEW YORK 10022
(212) 350-9261
(Name, Address, Including Zip Code,
and Telephone
Number, Including Area Code, of Agent
For Service)
COPIES OF ALL COMMUNICATIONS TO:
JAMES P. PRENETTA, ESQ.
KELLEY DRYE & WARREN LLP
101 PARK AVENUE
NEW YORK, NEW YORK 10178
(212) 808-7800
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the registration statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
PROSPECTUS
VIATEL, INC.
OFFER TO EXCHANGE
12.50% SENIOR DISCOUNT NOTES DUE 2008 AND 11.25% SENIOR NOTES DUE 2008 (DOLLAR
DENOMINATED) AND 12.40% SENIOR DISCOUNT NOTES DUE 2008 AND 11.15% SENIOR NOTES
DUE 2008 (DM DENOMINATED)
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT FOR ANY AND ALL OUTSTANDING
12.50% SENIOR DISCOUNT NOTES DUE 2008 AND 11.25% SENIOR NOTES DUE 2008 (DOLLAR
DENOMINATED) AND 12.40% SENIOR DISCOUNT NOTES DUE 2008 AND 11.15% SENIOR NOTES
DUE 2008 (DM DENOMINATED)
WHICH HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
The Exchange Offer and withdrawal rights will expire at 5:00 p.m., New York
City time, on September 16, 1998 (as such date may be extended, the "Expiration
Date").
Viatel, Inc., a Delaware corporation ("Viatel" and together with its
subsidiaries, the "Company") hereby offers, upon the terms and subject to the
conditions set forth in this Prospectus and the accompanying letters of
transmittal (the "Letters of Transmittal") (which together constitute the
"Exchange Offers"), to exchange its (i) 12.50% Senior Discount Notes Due 2008
(Dollar Denominated) (the "12.50% Exchange Notes"), (ii) 11.25% Senior Notes Due
2008 (Dollar Denominated) (the "11.25% Exchange Notes"), (iii) 12.40% Senior
Discount Notes Due 2008 (DM Denominated) (the "12.40% Exchange Notes") and (iv)
11.15% Senior Notes Due 2008 (DM Denominated) (the "11.15% Exchange Notes" and
together with the 12.50% Exchange Notes, the 11.25% Exchange Notes and the
12.40% Exchange Notes, the "Exchange Notes"), each of which has been registered
under the Securities Act of 1933, as amended (the "Securities Act"), for a like
principal amount of Viatel's (w) 12.50% Senior Discount Notes Due 2008 (Dollar
Denominated) (the "Existing 12.50% Notes"), (x) 11.25% Senior Notes Due 2008
(Dollar Denominated) (the "Existing 11.25% Notes"), (y) 12.40% Senior Discount
Notes Due 2008 (DM Denominated) (the "Existing 12.40% Notes") and (z) 11.15%
Senior Notes Due 2008 (DM Denominated) (the "Existing 11.15% Notes" and together
with the Existing 12.50% Notes, the Existing 11.25% Notes and the Existing
12.40% Notes, the "Existing Notes"), respectively, each of which has not been
registered under the Securities Act. The Existing 12.50% Notes and the Existing
12.40% Notes are hereinafter sometimes referred to as the "Existing Discount
Notes" and the Existing 11.25% Notes and the Existing 11.15% Notes are sometimes
hereinafter referred to as the "Existing Senior Notes." The form and terms of
the Exchange Notes are identical in all material respects to the form and terms
of the corresponding series of Existing Notes except that the Exchange Notes
will not bear legends restricting the transfer thereof or contain interest rate
step-up provisions upon failure to register the Existing Notes. The Exchange
Notes will evidence the same debt as the Existing Notes and will be issued
pursuant to, and entitled to the benefits of, the Indentures (as defined herein)
pursuant to which the Existing Notes were issued. The Existing Notes and the
Exchange Notes are referred to collectively herein as the "Notes". As of the
date hereof, $500.0 million principal amount at maturity ($272,055,000 original
issue price) of Existing 12.50% Notes, $400.0 million principal amount of
Existing 11.25% Notes, DM 226.0 million principal amount at maturity (DM
123,549,680 original issue price) of Existing 12.40% Notes and DM 178.0 million
principal amount of Existing 11.15% Notes are outstanding.
The Existing Notes were issued by Viatel in an offering (the "Offering") of
(i) Senior Discount Dollar Units (the "Senior Discount Dollar Units"), each of
which consisted of one U.S. dollar denominated Existing 12.50% Note and .490 of
a share of Series A redeemable convertible preferred stock, $.01 par value per
share, of Viatel (the "Series A Preferred"), (ii) Senior Dollar Units (the
"Senior Dollars Units"), each of which consisted of one U.S. dollar denominated
Existing 11.25% Note and .483 of a share of Series A Preferred, (iii) Senior
Discount DM Units (the "Senior Discount DM Units"), each of which consisted of
one DM denominated Existing 12.40% Note and 2.77 DM denominated 10% Subordinated
Convertible Debentures Due 2011 (the "Subordinated Convertible Debentures") and
(iv) Senior DM Units (the "Senior DM Units" and together with the Senior
Discount Dollar Units, the Senior Dollar Units and the Senior Discount DM Units,
the "Units"), each of which consisted of one DM denominated Existing 11.15% Note
and 2.69 Subordinated Convertible Debentures. The Existing Notes will become
separately tradeable from the Series A Preferred and the Subordinated
Convertible Debentures, as the case may be, upon effectiveness of the
Registration Statement (as defined herein) of which this Prospectus forms a
part.
Viatel will accept for exchange any and all Existing Notes that are validly
tendered prior to 5:00 p.m., New York City time, on the Expiration Date. Tenders
of Existing Notes may be withdrawn at any time prior to 5:00 p.m., New York City
time, on the Expiration Date. The Exchange Offers are not conditioned upon any
minimum principal amount of Existing Notes being tendered for exchange. However,
the Exchange Offers are subject to certain customary conditions, which may be
waived by Viatel. Viatel reserves the right to amend, terminate or extend the
Exchange Offers at any time prior to the Expiration Date upon the occurrence of
any such condition. The Existing 12.50% Notes may be tendered only in multiples
of $1,000 principal amount at maturity, the Existing 11.25% Notes may be
tendered only in multiples of $1,000 principal amount, the Existing 12.40% Notes
may be tendered only in multiples of DM 100,000 principal amount at maturity and
any integral multiple of DM 1,000 above such number and the Existing 11.15%
Notes may be tendered only in DM 100,000 principal amount and any integral
multiple of DM 1,000 above such number. See "The Exchange Offers."
The Exchange Offers are being made pursuant to the terms of the Registration
Rights Agreement, dated April 3, 1998 (the "1998 Registration Rights
Agreement"), entered into among Viatel, Morgan Stanley & Co. Incorporated,
Morgan Stanley Bank AG, Salomon Brothers Inc, ING Baring (U.S.) Securities,
Inc., and NationsBanc Montgomery Securities LLC (collectively, the "Initial
Purchasers") pursuant to the terms of a Purchase Agreement, dated April 3, 1998
(the "Purchase Agreement") among Viatel and the Initial Purchasers. See "The
Exchange Offers."
Any Existing Notes not tendered and accepted in the Exchange Offers will
remain outstanding and will be entitled to all the rights and preferences, and
will be subject to the limitations applicable thereto, under the respective
Indenture governing such Notes. Following consummation of the Exchange Offers,
the holders of Existing Notes will continue to be subject to the existing
restrictions upon transfer thereof, and Viatel will have no further obligation
to such holders to provide for the registration under the Securities Act of the
Existing Notes held by them. Following completion of the Exchange Offers, none
of the Notes will be entitled to the step-up in interest rate relating to the
obligations of Viatel to register the Existing Notes within a specific period of
time. See "Risk Factors -- Consequences of Failure to Exchange Existing Notes"
and "The Exchange Offers."
Interest on the Existing 12.50% Notes and the 12.50% Exchange Notes
(collectively, the "12.50% Notes"), is 12.50% per annum and interest on the
Existing 12.40% Notes and the 12.40% Exchange Notes (collectively, the "12.40%
Notes") is 12.40% per annum. Interest on the 12.50% Notes and the 12.40% Notes
(collectively, the "Discount Notes") is payable semi-annually in cash on April
15 and October 15 of each year prior to maturity, commencing October 15, 2003.
Interest on the Existing 11.25% Notes and the
(CONTINUED ON NEXT PAGE)
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 23 HEREIN FOR A DISCUSSION OF CERTAIN
RISKS THAT SHOULD BE CONSIDERED BY ELIGIBLE HOLDERS IN EVALUATING THE EXCHANGE
OFFERS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is August 11, 1998.
<PAGE>
11.25% Exchange Notes (collectively, the "11.25% Notes") is 11.25% per annum and
interest on the Existing 11.15% Notes and the 11.15% Exchange Notes
(collectively, the "11.15% Notes") is 11.15% per annum. Interest on the 11.25%
Notes and the 11.15% Notes (collectively, the "Senior Notes") is payable
semi-annually in cash on April 15 and October 15 of each year prior to maturity,
commencing October 15, 1998. For U.S. federal income tax purposes, holders of
Discount Notes will be required to include amounts in gross income in advance of
receipt of the cash payments to which income is attributable. See "Certain
Income Tax Considerations."
The Notes
are redeemable, at Viatel's option, in whole or in part, at any time on or after
April 15, 2003, at the redemption prices set forth herein. In addition, at any
time prior to April 15, 2001, Viatel may, at its option, redeem up to 35% of the
aggregate principal amount at maturity of the Notes with the net proceeds of one
or more Public Equity Offerings (as defined herein) at the redemption prices set
forth herein, plus accrued and unpaid interest, if any; PROVIDED (i) that Notes
representing at least 65% of the principal amount at maturity of the Notes
initially issued remain outstanding immediately after each such redemption and
(ii) that notice of such redemption is mailed within 60 days of each such Public
Equity Offering. See "Description of the Exchange Notes -- Optional Redemption."
Upon a Change of Control (as defined herein), Viatel will be required to
make an offer to purchase the Notes, at a purchase price of 101% of their
Accreted Value (as defined herein) in the case of the Discount Notes and 101% of
the principal amount in the case of the Senior Notes (as defined herein), in
each case, plus accrued and unpaid interest thereon to the repurchase date. See
"Description of the Exchange Notes -- Repurchase of Notes Upon a Change of
Control."
The Existing Notes are, and the Exchange Notes will be, unsecured (except as
described below), senior obligations of Viatel, ranking PARI PASSU in right of
payment with all existing and future unsecured unsubordinated obligations and
will be senior in right of payment to all existing and future subordinated
indebtedness of Viatel. After giving PRO FORMA effect to the Tender Offer (as
defined herein) and the Offering, at March 31, 1998, Viatel would have had
approximately $845.7 million of senior indebtedness. The Existing Notes are, and
the Exchange Notes will be, effectively subordinated to all existing and future
liabilities (including trade payables) of Viatel's subsidiaries. As of March 31,
1998, Viatel's subsidiaries had approximately $14.7 million of liabilities
(excluding intercompany payables). The Indentures limit the ability of Viatel
and its subsidiaries to incur additional indebtedness. See "Risk Factors --
Substantial Indebtedness; Ability to Service Debt; Restrictive Covenants." On
the closing date of the Offering, Viatel utilized a portion of the net proceeds
from the sale of the Existing 11.25% Notes to purchase a portfolio of U.S.
Pledged Securities (as defined herein), consisting of U.S. government
obligations, and utilized a portion of the net proceeds from the sale of the
Existing 11.15% Notes to purchase a portfolio of DM Pledged Securities (as
defined herein), consisting of German government obligations, that have been
pledged as security for the first six scheduled interest payments on the 11.25%
Notes and 11.15% Notes, respectively.
The Existing Notes were issued and sold on April 8, 1998 in a transaction
exempt from the registration requirements of the Securities Act and applicable
state securities laws and may not be offered or sold in the United States unless
so registered or pursuant to an applicable exemption under the Securities Act
and applicable state securities laws. The Exchange Notes are being offered
hereunder in order to satisfy certain obligations of Viatel contained in the
1998 Registration Rights Agreement. Based on interpretations by the staff of the
Securities and Exchange Commission (the "Commission") set forth in no-action
letters and interpretive letters issued to third parties, Viatel believes that
the Exchange Notes issued pursuant to the Exchange Offers in exchange for
Existing Notes may be offered for resale, resold and otherwise transferred by
any holder thereof (other than a broker-dealer who purchased Existing Notes
directly from Viatel for resale pursuant to Rule 144A under the Securities Act
or any other available exemption under the Securities Act), without compliance
with the registration and prospectus delivery requirements of the Securities
Act, provided that the holder is not an affiliate of Viatel, within the meaning
of Rule 405 under the Securities Act, is acquiring the Exchange Notes in the
ordinary course of business and such holder is not participating, does not
intend to participate and has no arrangement or understanding with any person to
participate, in any distribution of the Exchange Notes. However, Viatel has not
sought a no-action letter with respect to the Exchange Offers and there can be
no assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Offers. Holders of the Existing Notes (other than
broker-dealers) wishing to accept the Exchange Offers must represent to Viatel
in the Letters of Transmittal that the conditions referred to above have been
met.
Any holder who tenders in the Exchange Offers with the intention to
participate, or for the purpose of participating, in a distribution of the
Exchange Notes (i) may not rely upon such interpretations by the staff of the
Commission, (ii) will not be entitled to validly tender Existing Notes in the
Exchange Offers and (iii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection
2
<PAGE>
with any sale or transfer of such Existing Notes, unless such sale or transfer
is made pursuant to an exemption from, or in a transaction not subject to, such
requirements.
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offers must acknowledge that it will deliver a prospectus
meeting the requirements of the Securities Act in connection with any resale of
such Exchange Notes. The Letters of Transmittal accompanying this Prospectus
state that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
Exchange Notes received in exchange for Existing Notes where such Existing Notes
were acquired by such broker-dealer for its own account as a result of
market-making activities or other trading activities. Pursuant to the 1998
Registration Rights Agreement, Viatel has agreed that, for a period of 180 days
after the closing of the Exchange Offers, it shall use its best efforts to
maintain the effectiveness of the Registration Statement of which this
Prospectus is a part, in connection with any such resale.
Upon consummation of the Exchange Offers, the 12.50% Exchange Notes and the
11.25% Exchange Notes will be represented by permanent global notes in
definitive, fully registered book-entry form ("New Global Notes") deposited with
a custodian for, and registered in the name of, The Depositary Trust Company
("DTC") or its nominee. The 12.50% Exchange Notes and the 11.25% Exchange Notes
represented by the New Global Notes will be shown on, and transfers thereof will
be effected only through, records maintained by DTC or its nominee and its
direct and indirect participants, including Morgan Guaranty Trust Company New
York, Brussels Office, as operator of the Euroclear System ("Euroclear") and
Citibank N.A., as operator of Cedel Bank SOCIETE ANONYME ("Cedel").
Upon consummation of the Exchange Offers, the 12.40% Exchange Notes and the
11.15% Exchange Notes issued in exchange for Existing 12.40% Notes and Existing
11.15% Notes, respectively, originally sold outside the United States pursuant
to Regulation S under the Securities Act ("Regulation S") will be represented by
permanent global certificates in bearer form, deposited with Deutsche Borse
Clearing AG ("DBC") (the "New DBC-DM Global Certificates") and will represent
the 12.40% Exchange Notes and 11.15% Exchange Notes held by account holders in
DBC, including the 12.40% Exchange Notes and 11.15% Exchange Notes which are
held through Euroclear and Cedel, each of which has an account with DBC. The
12.40% Exchange Notes and 11.15% Exchange Notes represented by the New DBC-DM
Global Certificates will be shown on, and transfers thereof will be effected
only through, records maintained by DBC and its direct and indirect
participants. Certificated notes will not be issued in exchange for legal
co-ownership interests in the New DBC-DM Global Certificates. Upon consummation
of the Exchange Offers, the 12.40% Exchange Notes and 11.15% Exchange Notes
issued in exchange for Existing 12.40% Notes and Existing 11.15% Notes,
respectively, originally sold pursuant to Rule 144A under the Securities Act
("Rule 144A") will be represented by permanent global certificates in
definitive, fully registered book-entry form deposited with a custodian for, and
registered in the name of DTC or its nominee (the "New DTC-DM Global
Certificates" and together with the New DBC-DM Global Certificates, the "New
Global Certificates"). The 12.40% Exchange Notes and 11.15% Exchange Notes
represented by the New DTC-DM Global Certificates will be shown on, and
transfers thereof will be effected only through, records maintained by DTC or
its nominee and its direct and indirect participants. Certificated notes will
not be issued in exchange for beneficial interests in the New DTC-DM Global
Certificates. See "Description of the Exchange Notes -- Book Entry; Delivery and
Form."
3
<PAGE>
There has previously been only a limited secondary market, and no public
market, for the Existing Notes. The Existing Notes have been approved for
trading in the Private Offering, Resales and Trading through Automatic Linkages
("PORTAL") market. There is no established trading market for the Exchange
Notes. Viatel does not currently intend to apply for listing of the Exchange
Notes on any national securities exchange or for quotation through any automated
quotation system. Accordingly, there can be no assurance as to the development
of any market for or the liquidity of any market that may develop for the
Exchange Notes, the ability of the holders of the Exchange Notes to sell their
Exchange Notes or the price at which such holders would be able to sell their
Exchange Notes. If such a trading market were to develop, the Exchange Notes
could trade at prices that may be higher or lower than the initial market values
depending on many factors, including prevailing interest rates, Viatel's results
of operations, the market for similar securities and general macroeconomic and
market conditions. Depending on such factors, the Exchange Notes may trade at a
discount from their face value. See "Risk Factors -- Absence of a Public Market
for the Exchange Notes."
Viatel will not receive any proceeds from the Exchange Offers. Pursuant to
the 1998 Registration Rights Agreement, Viatel will bear all expenses incident
to Viatel's consummation of the Exchange Offers and compliance with the 1998
Registration Rights Agreement. See "The Exchange Offers."
This Prospectus, together with the Letters of Transmittal, are being sent to
all holders of Existing Notes as of August 10, 1998 (the "Exchange Record
Date").
THE EXCHANGE OFFERS ARE NOT BEING MADE TO, NOR WILL VIATEL ACCEPT SURRENDERS
OF EXISTING NOTES FOR EXCHANGE FROM, HOLDERS OF EXISTING NOTES IN ANY
JURISDICTION IN WHICH THE EXCHANGE OFFERS OR THE ACCEPTANCE THEREOF WOULD NOT BE
IN COMPLIANCE WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY EXCHANGE MADE PURSUANT
HERETO SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF VIATEL OR THAT THE INFORMATION SET FORTH HEREIN IS CURRENT AS OF ANY
DATE SUBSEQUENT TO THE DATE HEREOF.
THIS PROSPECTUS AND THE RELATED LETTERS OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF EXISTING NOTES ARE URGED TO READ THIS PROSPECTUS AND THE
RELATED LETTERS OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER THEIR
EXISTING NOTES PURSUANT TO THE EXCHANGE OFFERS.
THE 12.40% EXCHANGE NOTES AND THE 11.15% EXCHANGE NOTES ARE ISSUED UNDER THE
"EURO SECURITIES EXEMPTION" PURSUANT TO SECTION 4 PARAGRAPH 1 NO. 1 AND SECTION
4 PARAGRAPH 2 OF THE SECURITIES SALES PROSPECTUS ACT OF THE FEDERAL REPUBLIC OF
GERMANY (WERTPAPIER-VERKAUFSPROSPEKTGESETZ) OF 13 DECEMBER, 1990 (THE
"SECURITIES PROSPECTUS ACT") OR UNDER ANOTHER EXEMPTION UNDER THE SECURITIES
PROSPECTUS ACT.
4
<PAGE>
------------------------
THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
THE SECURITIES LAWS. ALL STATEMENTS REGARDING THE COMPANY'S EXPECTED FINANCIAL
POSITION, BUSINESS AND FINANCING PLANS ARE FORWARD-LOOKING STATEMENTS. ALTHOUGH
THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING
STATEMENTS ARE REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL
PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM SUCH EXPECTATIONS ARE DISCLOSED IN THIS PROSPECTUS. ALL
SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE
COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR
ENTIRETY BY THE CAUTIONARY STATEMENTS. NOTHING CONTAINED IN THIS PROSPECTUS IS
OR SHOULD BE RELIED UPON AS A PROMISE OR REPRESENTATION AS TO FUTURE RESULTS OR
EVENTS.
------------------------
VIACALL, VIACALL Plus, VIACALL Express, VIAPN and VIAISDN are marketed under
a number of pending service marks and the Company uses various registered logos
including "Viatel," a federally registered service mark in the United States.
6
<PAGE>
AVAILABLE INFORMATION
Viatel has filed with the Commission a Registration Statement on Form S-4
(together with all amendments, exhibits, schedules and supplements thereto, the
"Registration Statement") under the Securities Act with respect to the Exchange
Notes offered by this Prospectus. This Prospectus, which constitutes a part of
the Registration Statement, does not contain all the information set forth in
the Registration Statement and the exhibits and schedules thereto, to which
reference is hereby made. Each statement made in this Prospectus referring to a
document filed as an exhibit or schedule to the Registration Statement is not
necessarily complete and is qualified in its entirety by reference to the
exhibit or schedule for a complete statement of its terms and conditions. Viatel
is subject to the informational and reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy and information statements and other information
with the Commission. Such reports, statements and other information filed by
Viatel with the Commission in accordance with the Exchange Act may be inspected,
without charge, and copied at the Public Reference Section of the Commission
located at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549 and at the Northeast Regional Office of the Commission located at 7 World
Trade Center, Suite 1300, New York, New York 10048 and at its Chicago Regional
Office at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of all or any portion of such materials may be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549 upon payment of the prescribed fees.
The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of the Commission's Web site is
http://www.sec.gov. Viatel's common stock, $.01 par value per share (the "Common
Stock"), is traded on the Nasdaq National Market, and its periodic reports,
proxy and information statements and other information also can be inspected at
the office of NASDAQ Operations, 1735 K Street, N.W., Washington, D.C. 20006.
7
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY AND SHOULD BE READ IN
CONJUNCTION WITH THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL
STATEMENTS, INCLUDING THE NOTES THERETO, AND OTHER FINANCIAL DATA APPEARING
ELSEWHERE IN THIS PROSPECTUS. CAPITALIZED TERMS USED IN THIS SUMMARY AND NOT
OTHERWISE DEFINED SHALL HAVE THE MEANING SPECIFIED ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
OVERVIEW
The Company is a rapidly growing international telecommunications company
providing high quality, competitively priced, international and domestic long
distance telecommunications services, primarily to small and medium-sized
businesses, carriers and resellers. The Company established an early presence in
several key Western European countries to capitalize on the opportunities
presented by full deregulation of the telecommunications industry. The Company
currently operates one of the largest alternative Pan-European networks, with
international gateway switching centers in New York and London, network points
of presence ("POPs") in 30 cities, direct sales forces in nine Western European
cities and indirect sales offices in more than 100 additional locations in
Western Europe. The Company's telecommunications revenues have grown from $32.3
million in 1995 to $73.0 million in 1997.
The Company believes that network ownership is critical to becoming a high
quality, low-cost provider and will create the necessary platform to provide a
full array of telecommunications products and services to customers. The Company
has recently initiated a program to own key elements of its network
infrastructure, including interests in fiber optic cable systems. As part of
this strategy, the Company is developing a state-of-the-art fiber optic ring
which will connect five countries and will include London, Paris, Nancy,
Strasbourg, Stuttgart, Frankfurt, Cologne, Dusseldorf, Essen, Brussels, Antwerp,
Rotterdam and Amsterdam (the "Circe Network"). The Circe Network will be a high
quality, high capacity, bi-directional self-healing ring, utilizing advanced
synchronous digital hierarchy ("SDH") and dense wave division multiplexing
("DWDM") technologies. Bechtel International, Inc. (together with its affiliated
companies, "Bechtel"), one of the largest construction contractors in the world,
has been engaged by the Company to manage the construction of the system.
The Circe Network will significantly expand the Company's revenue
opportunities by enabling it to (i) provide a broader range of products and
services to retail customers, (ii) provide wholesale services to the large base
of resellers that the Company expects will develop as deregulation continues in
Western Europe and (iii) capitalize on the growing demand for bandwidth
intensive services in Europe. The Company believes there is currently a shortage
of cost-effective capacity between Western European countries. Under the
traditional system of carrying cross-border telecommunications traffic in
Europe, no incumbent telecommunications operator ("ITO") developed end-to-end
cross-border circuits. In addition, the Company believes no alternative carrier
currently offers cost-effective capacity. The Circe Network will offer
cost-effective cross-border connectivity between major Western European cities
as a compelling alternative to ITO-provided leased lines, which suffer from a
number of deficiencies in terms of cost, quality and availability. The Circe
Network will allow the Company to become a preferred provider of bandwidth to
new entrants, such as alternative carriers, global consortia of
telecommunications operators, international carriers, Internet backbone
networks, resellers, value-added networks and other service providers
(collectively, "New Entrants").
THE CIRCE NETWORK
The Circe Network is expected to have approximately 3,671 route kilometers,
including approximately 471 route kilometers of a Belgium national network and
320 route kilometers of undersea fiber optic cable. The development and
operational start-up of the Circe Network is estimated to cost approximately
$530.0 million. The Company commenced construction of Phase 1 of the Circe
Network, consisting of the portion
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of the Circe Network connecting London, Paris, Brussels, Antwerp, Rotterdam and
Amsterdam ("Phase 1"). The Company plans to commence construction of Phase 2 of
the Circe Network, consisting of the portion of the Circe Network connecting
Paris, Nancy, Strasbourg, Stuttgart, Frankfurt, Cologne, Dusseldorf, Essen and
Amsterdam ("Phase 2"). The Company began construction of the Circe Network in
the Spring of 1998, with initial turn-up in the first quarter of 1999. The Circe
Network will be deployed along various rights-of-way, including motorways,
railways, waterways and pipelines through a combination of "new digs" and the
acquisition of dark fiber. Key characteristics of the Circe Network will
include:
STATE-OF-THE-ART TECHNOLOGY. The Company will install state-of-the-art,
technologically advanced equipment in a uniform configuration throughout the
entire Circe Network, which will provide a Pan-European SDH self-healing
ring. The Circe Network will use laser-generated light to transmit bi-
directionally over fiber optic glass strands with an initial capacity of 20
gigabits per second ("Gb/s"). In connection with the development and
construction of the Circe Network, the Company will be upgrading its Network
Operations Centers ("NOCs") to enable real-time monitoring and
reconfiguration of its network.
HIGH SECURITY AND RELIABILITY. The Circe Network is being designed for
high security and reliability, based upon (i) a self-healing system that
will allow for instantaneous restoration, virtually eliminating down time in
the event of a fiber cut, (ii) fiber cable generally installed in
high-density polyethylene conduits on terrestrial portions of the system and
(iii) advanced cable armoring techniques on the submarine portions of the
system.
ADDITIONAL CAPACITY AND FLEXIBILITY. The Circe Network's high-density
network architecture may be upgraded, without service interruption, to 160
Gb/s (16 STM-64) through the use of DWDM and bi-directional multi-wavelength
optical amplifiers, to support future demand for bandwidth intensive data
applications such as frame relay, Internet and asynchronous transfer mode
("ATM") services. The Company is currently marketing capacity on the system
to other telecommunications carriers and New Entrants. The Circe Network
will enable the Company to expand the reach of its existing network to
additional strategic destinations through the exchange of capacity on the
Circe Network for capacity on other fiber optic systems. See
"Business -- Circe Network."
The Company began planning Phase 1 of the Circe Network in the Fall of 1997
and retained MK International Limited ("MKI"), a subsidiary of WorldCom, Inc.
("WorldCom"), to perform a feasibility study and to propose a terrestrial route
for Phase 1. On January 28, 1998, the Company received a preliminary route study
from MKI which identifies (i) the preferred rights-of-way for Phase 1, as well
as alternative routing options, (ii) procedures for obtaining all permits,
licenses and other regulatory requirements necessary to allow Phase 1 to be
installed along the preferred route and (iii) construction methodology and
associated risk analysis. Recently, the Company received a route study from
Bechtel for Phase 2 which (i) identifies the preferred rights-of-way, (ii)
evaluates lease or build options for rights of way, (iii) provides time and cost
estimates for obtaining rights-of-way and (iv) provides a proposed action plan.
Bechtel has overall responsibility for the procurement for, and the
arranging and administering of, the engineering, construction, commissioning and
testing of the Circe Network. The Company's binding letter of intent with
Bechtel, dated March 13, 1998, which currently covers only Phase 1 of the Circe
Network, provides incentives for on-time and on-budget delivery and penalties
for failure to meet specified ready-for-service dates. Bechtel has been involved
in over 15,000 projects worldwide, including hundreds of projects in England,
France, Germany and The Netherlands. Bechtel's European projects include Euro
Disney, the Euro Tunnel connecting the United Kingdom and France, and various
rail projects across Europe.
The Company has also executed a binding letter of intent and term sheet with
Alcatel Submarine Networks ("ASN"), dated March 18, 1998, under which ASN has
agreed to procure, install and test, on a fixed price, date certain basis,
optical fiber for the submarine portions of the Circe Network. In addition,
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the Company has executed a definitive agreement with Nortel Telecom, Inc.
("Nortel"), executed on June 29, 1998, for the engineering, manufacturing,
testing, installation and commissioning of transmission equipment and related
network management systems for Phase 1 at a fixed price. Each of the
arrangements with ASN and Nortel establishes maximum contract prices and
provides for the payment of liquidated damages in the event that the respective
contractor fails to meet agreed upon ready-for-service dates.
BUSINESS STRATEGY
The Company's mission is to build a Pan-European telecommunications company
focusing on small and medium-sized businesses, while becoming a high quality,
low-cost provider of telecommunications products and services through the
ownership of key network infrastructure. The key elements of the Company's
strategy include:
CAPITALIZE ON LARGE AND RAPIDLY DEREGULATING EUROPEAN MARKETS
The Company's principal focus is on exploiting opportunities presented by
rapidly deregulating European markets. For 1996, the European international long
distance market was the largest in the world with approximately 28 billion
minutes. The Company estimates that, during 1997, the market for long distance
services and voice band data in the Western European countries in which the
Company operates represented approximately $59.6 billion, with approximately
$45.0 billion representing national long distance and approximately $14.6
billion representing international long distance. A substantial portion of the
international traffic originating in Europe terminates in Europe or the United
States where the Company has international gateway switches. As liberalization
takes effect throughout Western Europe, the Company believes New Entrants will
play a significant role in penetrating these markets.
LEVERAGE ESTABLISHED MARKET PRESENCE AND LOCAL DISTRIBUTION NETWORK
The Company established an early presence in Western Europe to capitalize on
the opportunities presented by deregulation of the telecommunications industry.
As a result, the Company has gained substantial experience in the operational,
technical, financial and logistical issues involved in building a network and
sales force in Western Europe. To date, the Company has established sales
offices in nine Western European cities and has established indirect sales
offices, through arrangements with independent sales representatives and
telemarketing agents, in more than 100 additional locations in Western Europe.
The Company believes it is well positioned to identify and capitalize on
increasing market opportunities in Western Europe and will continue to build and
enhance its sales force and operations in Europe over the next few years and add
products and services as telecommunications markets continue to deregulate.
FOCUS ON SIGNIFICANT BASE OF SMALL AND MEDIUM-SIZED BUSINESSES
The Company has established a retail customer base of small and medium-sized
businesses and intends to continue to focus its retail marketing efforts on this
market segment. In most European markets, small and medium-sized businesses
account for a significant percentage of national and international calling
traffic and the Company expects this segment will continue to provide a
significant opportunity for the Company. In 1996, small and medium-sized
businesses represented, on average, 60.0% of the total company revenues
generated and, as of 1994, approximately 66.0% of the total workforce in the EU
member states. The Company believes that small and medium-sized businesses are
likely to be receptive to competitively priced bundled service offerings by New
Entrants, such as those offered by the Company, because these businesses have
traditionally been underserved by the ITOs, which offer their best rates and
services primarily to higher-volume multinational business customers. See
"Business -- Sales and Marketing; Customers."
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ENHANCE REVENUE OPPORTUNITIES THROUGH CIRCE NETWORK
The Company believes that the Circe Network will significantly expand the
Company's ability to capitalize on opportunities presented by the deregulation
of the Western European telecommunications markets. First, the Circe Network
will provide the Company with the ability to control the quality and scope of
services to retail customers, while effectively competing on price. Second, the
Company believes that deregulation of the continental European
telecommunications market will lead to the creation of numerous New Entrants,
principally consisting of resellers, as occurred in the United States and the
United Kingdom following deregulation of the telecommunications markets in those
countries. The Circe Network will enable the Company to capture a greater share
of the expanding Western European telecommunications market by providing
wholesale services to other New Entrants. Third, the Company believes that
demand for data services will significantly outgrow existing capacity. The Circe
Network will enable the Company to service the expanding need created by
bandwidth intensive services.
ESTABLISH LOW-COST POSITION THROUGH NETWORK OWNERSHIP AND CONTROL
The Company believes it is critical to own or control key elements of its
network in order to be a low-cost provider. By owning or controlling key
elements of its network, the Company will be better able to control service
offerings, quality, and transmission and other operating costs. As part of the
Company's efforts to own key portions of its network, the Company (i) has
purchased Indefeasible Rights-of-Use ("IRU's") or Minimum Investment Units
("MIUs") in digital fiber optic cable systems, (ii) has purchased POPs and
switches, and (iii) is constructing the Circe Network. The Company also intends
to acquire additional interests in submarine fiber optic cable. The Circe
Network's advanced fiber and transmission electronics are expected to provide
lower installation, operating and maintenance costs than older fiber optic
systems generally in commercial use today. In addition, to offset the
construction costs of the Circe Network, the Company intends to sell IRUs on the
Circe Network for cash or in exchange for IRUs on other cable systems.
CAPITALIZE ON EXPANDING DATA NEEDS
The majority of the Company's revenue is currently derived from
international long distance services. As liberalization leads to more favorable
interconnection rates in Western Europe, the Company intends to offer national
long distance services in additional Western European countries. Network
infrastructure ownership will facilitate the Company's entry into new products,
such as data products including frame relay, Internet and ATM services, which
are more bandwidth and transmission intensive. According to industry sources,
bandwidth demand for data in the U.S. is currently growing approximately 10
times faster than voice and the Company expects this trend to develop in Europe
as competitively priced capacity becomes available. The Company believes that
there will be substantial demand for data products by small and medium-sized
businesses, and that a bundled service offering of national and international
data and voice services will be attractive to this targeted customer base.
LEVERAGE NETWORK THROUGH CARRIER SALES
In order to complement and efficiently utilize capacity on Viatel's network,
the Company sells switched minutes to wholesale customers and other resellers in
the United States and the United Kingdom. The Company believes that the sale of
switched minutes to such customers is an effective means of achieving network
efficiencies. The Company believes that the Flat Rate Acquisition (as defined
herein) further enhances the Company's network efficiency, builds scale and
provides the Company with the critical mass necessary to compete in today's
competitive telecommunications markets. See "-- Recent Developments."
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PURSUE ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES
To date, the Company's growth primarily has been internally generated and
managed. In addition to systematically expanding the Company through internal
growth, the Company intends to expand its services and network capabilities
through acquisitions, investments and strategic alliances. The Company believes
that such acquisitions, investments and strategic alliances are an important
means of increasing network traffic volume and achieving lower termination costs
and desired economies of scale.
RECENT DEVELOPMENTS
On August 6, 1998, the Company announced that it had signed a pact with 32
other telecommunications and Internet service providers to build a trans-Pacific
cable system that will connect Japan and the United States by mid-2000. This
cable system is expected to have approximately 21,000 route kilometers and will
utilize SDH over its proposed four fiber, self-healing ring. The system is
expected to operate initially at 80 Gb/s, or 20 Gb/s per fiber pair.
In July 1998, the Company announced that the French Ministry of Economy,
Finance and Industry had granted the Company licenses to build
telecommunications network infrastructure and to sell voice telephony in France.
Also in July, the Company was awarded national licenses to build a
telecommunications network and sell voice telephony services in Belgium by the
Belgium Institute for Postal Services and Telecommunications. The Belgium
licenses represent the final regulatory approvals required for construction and
operation of Phases 1 and 2 of the Circe Network.
In June 1998, the Company announced that it had signed a Mutual Cooperation
Agreement with Martin Varsavsky and Jazz Telecom S.A. ("JazzTel"). For details
regarding this Agreement, see "Certain Transactions -- Varsavsky/JazzTel."
In May 1998, the Company announced that it had signed a long-term contract
with NMBS Telecom, a division of the Belgian National Railway, to secure fiber
infrastructure for portions of the Circe Network. The agreement includes
provisions for a national fiber ring within Belgium, initially passing ten
cities including Antwerp, Brussels, Charleroi, Gent, Hasselt, Kortrijk, Liege,
Mons, Namur and Tournai. The fiber covered by the agreement will total
approximately 630 route kilometers, including 159 border-to-border route
kilometers between The Netherlands and France. The agreement also provides for
equipment housing for the Company's national network in Belgium and for
equipment supporting the Circe Network.
On April 8, 1998, Viatel refinanced all of its $120.7 million principal
amount at maturity of 15% Senior Discount Notes Due 2005 (the "1994 Notes")
through the consummation of a tender offer and related consent solicitation (the
"Tender Offer"). Viatel utilized approximately $118.6 million from the Offering
to finance the Tender Offer.
In the Tender Offer, Viatel offered to purchase up to all of the 1994 Notes
for an amount in cash based on a fixed spread of 100 basis points over the yield
to maturity of the 6.375% U.S. Treasury Notes due January 1, 2000. Viatel also
solicited consents from holders of the 1994 Notes to amend the indenture under
which the 1994 Notes were issued to eliminate substantially all of the
restrictive covenants contained therein and paid a separate consent fee to
holders who tendered their 1994 Notes and delivered their consents prior to the
expiration of a specified consent date. Viatel received consents relating to,
and tenders of, 100% of the outstanding 1994 Notes.
On February 27, 1998, the Company completed the acquisition of Flat Rate
Communications, Inc. ("Flat Rate"), a United States-based international
telecommunications company that markets capacity to other carriers (the "Flat
Rate Acquisition"). The consideration for Flat Rate consisted of $5.0 million in
cash, 375,000 shares of Common Stock and a contingent payment (based upon Flat
Rate's operating results for the 12 month period ending February 28, 1999) which
will range from zero to $21.0 million in cash and zero to 1.0 million shares of
Common Stock.
Viatel is an operating company which renders its services directly and
indirectly through subsidiaries in each Western European country in which it
currently operates. The Company's principal executive offices are located at 800
Third Avenue, New York, New York 10022. Its telephone number is (212) 350-9200.
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THE EXCHANGE OFFERS
The Existing Notes were issued and sold on April 8, 1998 in a transaction
exempt from the registration requirements of the Securities Act and applicable
state securities laws and may not be offered or sold in the United States unless
so registered or pursuant to an applicable exemption under the Securities Act
and applicable state securities laws. In connection with the Offering, Viatel
entered into the 1998 Registration Rights Agreement, which grants holders of
Existing Notes certain exchange and registration rights. The Exchange Offers are
intended to satisfy such exchange and registration rights, all of which will
terminate upon the consummation of the Exchange Offers except under limited
circumstances. The Exchange Offers are being made for all outstanding Existing
Notes. See "The Exchange Offers." The Exchange Notes will be entitled to the
benefits of the respective Indenture under which the particular series of
Existing Notes were issued. See "Description of the Exchange Notes."
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The Exchange Offers............. The Exchange Offers will commence on August 17, 1998.
Pursuant to the Exchange Offers, (i) the 12.50% Exchange
Notes will be issued in exchange for an equal principal
amount at maturity of the Existing 12.50% Notes, (ii) the
11.25% Exchange Notes will be issued in exchange for an
equal principal amount of the Existing 11.25% Notes, (iii)
the 12.40% Exchange Notes will be issued in exchange for
an equal principal amount at maturity of the Existing
12.40% Notes and (iv) the 11.15% Exchange Notes will be
issued in exchange for an equal principal amount of
Existing 11.15% Notes, in each case that are validly
tendered and not withdrawn. As of the date hereof, $500.0
million principal amount at maturity ($272,055,000
original issue price) of Existing 12.50% Notes, $400.0
million principal amount of Existing 11.25% Notes, DM
226.0 million principal amount at maturity (DM 123,549,680
original issue price) of Existing 12.40% Notes and DM
178.0 million principal amount of Existing 11.15% Notes
are outstanding. Any holder of Existing Notes that is an
"affiliate" of Viatel within the meaning of Rule 405 under
the Securities Act may not participate in the Exchange
Offers. See "The Exchange Offers -- Terms of the Exchange
Offers."
Holders of Existing Notes whose Existing Notes are not
tendered or accepted in the Exchange Offers will continue
to hold such Existing Notes and will be entitled to all
the rights and preferences, and will be subject to the
limitations applicable thereto, under the respective
Indenture governing such Notes. Following consummation of
the Exchange Offers, the holders of Existing Notes will
continue to be subject to the existing restrictions upon
transfer thereof, and Viatel will have no further
obligation to such holders to provide for the registration
under the Securities Act of the Existing Notes held by
them. Following completion of the Exchange Offers, none of
the Notes will be entitled to the step-up in interest rate
relating to the obligations of Viatel to register the
Existing Notes within a specific period of time. See "The
Exchange Offers."
Resale.......................... Based on interpretations by the staff of the Commission
set forth in no-action letters and interpretative letters
issued to third parties,
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Viatel believes that the Exchange Notes issued pursuant to
the Exchange Offers in exchange for Existing Notes may be
offered for resale, resold and otherwise transferred by
any holder thereof (other than broker-dealers, as set
forth below) without compliance with the registration and
prospectus delivery requirements of the Securities Act,
provided that the holder is not an "affiliate" of Viatel,
within the meaning of Rule 405 under the Securities Act,
is acquiring the Exchange Notes in the ordinary course of
business, and such holder is not participating, does not
intend to participate and has no arrangement or
understanding with any person to participate, in any
distribution of the Exchange Notes. However, Viatel has
not sought a no-action letter with respect to the Exchange
Offers and there can be no assurance that the staff of the
Commission would make a similar determination with respect
to the Exchange Offers. Holders of Existing Notes (other
than broker-dealers) wishing to accept the Exchange Offers
must represent to Viatel in the Letters of Transmittal
that the conditions referred to above have been met.
Any holder who tenders in the Exchange Offers with the
intention to participate, or the purpose of participating,
in a distribution of the Exchange Notes (i) may not reply
upon such interpretations by the staff of the Commission,
(ii) will not be entitled to validly tender Existing Notes
in the Exchange Offers and (iii) must comply with the
registration and prospectus delivery requirements of the
Securities Act in connection with any sale or transfer of
the Exchange Notes, unless such sale or transfer is made
pursuant to an exemption from, or in a transaction not
subject to, such requirements.
Each broker-dealer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange
Notes. The Letters of Transmittal accompanying this
Prospectus state that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. See "Plan of Distribution."
The Exchange Offers are not being made to, nor will Viatel
accept surrenders of Existing Notes for exchange from,
holders thereof in any jurisdiction in which the Exchange
Offers or the acceptance thereof would not be in
compliance with the securities or blue sky laws of such
jurisdiction.
Expiration Date................. The Exchange Offers will expire at 5:00 p.m., New York
City time, on September 16, 1998, unless extended, in
which case the term "Expiration Date" shall mean the
latest date and time to which the Exchange Offers are
extended.
Conditions to the Exchange
Offers........................ The Exchange Offers are subject to certain conditions,
which may be waived by Viatel. See "The Exchange Offers --
Terms of the
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Exchange Offers -- Conditions of the Exchange Offers." The
Exchange Offers are not conditioned upon any minimum
principal amount of Existing Notes being tendered for
exchange.
Procedures for Tendering the
non-DBC Notes................. Each holder of Existing Notes, excluding the Existing
12.40% Notes and Existing 11.15% Notes represented by
global certificates in bearer form deposited with DBC
("DBC-DM Global Certificates") (the "non-DBC Notes")
wishing to accept an Exchange Offer must complete, sign
and date the applicable Letter of Transmittal, or a
facsimile thereof, in accordance with the instructions
contained herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or a facsimile
thereof, together with such non-DBC Existing Notes and any
other required documentation to The Bank of New York, as
U.S. exchange agent (the "U.S. Exchange Agent"), at the
address set forth herein and therein. Persons holding
Existing Notes through DTC and wishing to accept the
Exchange Offers must do so pursuant to DTC's Automated
Tender Offer Program ("ATOP"), by which each tendering
participant will agree to be bound by the Letter of
Transmittal.
By executing a Letter of Transmittal, a holder will
represent to Viatel that, among other things, (i) the
Exchange Notes acquired pursuant to the applicable
Exchange Offer are being obtained in the ordinary course
of business of the person receiving such Exchange Notes,
whether or not such person is the holder, (ii) neither the
holder nor any such other person has an arrangement or
understanding with any person to participate in the
distribution of such Exchange Notes, (iii) if the holder
is not a broker-dealer, or is a broker-dealer but will not
receive Exchange Notes for its own account in exchange for
Existing Notes, neither the holder nor any other such
person is participating in or intends to participate in
the distribution of such Exchange Notes and (iv) neither
the holder nor any such other person is an "affiliate" of
Viatel within the meaning of Rule 405 under the Securities
Act. See "The Exchange Offers -- Terms of the Exchange
Offers -- Procedures for Tendering the non-DBC Notes."
Special Procedures for
Beneficial Owners of non-DBC
Notes......................... Any beneficial owner whose non-DBC Notes are registered in
the name of a broker-dealer, commercial bank, trust
company or other nominee and who wishes to tender such
non-DBC Notes in the Exchange Offers should contact such
registered holder promptly and instruct such registered
holder to tender on such beneficial owner's behalf. If
such beneficial owner wishes to tender on his or her own
behalf, such owner must, prior to completing and executing
the applicable Letter of Transmittal and delivering his or
her non-DBC Notes, either make appropriate arrangements to
register ownership of the non-DBC Notes in such owner's
name or obtain a properly completed bond power from the
registered
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holder. Such a transfer of registered ownership may take
considerable time and may not be able to be completed
prior to the Expiration Date. See "The Exchange Offers --
Terms of the Exchange Offers -- Procedures for Tendering
Existing Notes."
Special Procedures for
Beneficial Owners of DBC
Notes......................... Each holder of Existing 12.40% Notes and Existing 11.15%
Notes represented by DBC-DM Global Certificates (the "DBC
Notes") wishing to accept an Exchange Offer must make
book-entry delivery of such DBC Notes by causing the
transfer of such DBC Notes to the DBC account of Deutsche
Bank AG, as German Exchange Agent (the "German Exchange
Agent" and together with the U.S. Exchange Agent, the
"Exchange Agents") as set forth in the applicable Letter
of Transmittal and in accordance with applicable German
statutory and contractual provisions, and must complete,
sign and date the applicable Letter of Transmittal, or a
facsimile thereof, in accordance with the instruments
contained herein or therein, and must mail or otherwise
deliver such Letter of Transmittal to the German Exchange
Agent at the address set forth herein and therein.
Guaranteed Delivery
Procedures.................... Holders of non-DBC Notes who wish to tender their non-DBC
Notes and whose non-DBC Notes are not immediately
available or who cannot deliver their non-DBC Notes, the
applicable Letter of Transmittal and any other documents
required by such Letter of Transmittal to the U.S.
Exchange Agent prior to the Expiration Date, must tender
their non-DBC Notes according to the guaranteed delivery
procedures set forth in "The Exchange Offers -- Terms of
the Exchange Offers -- Guaranteed Delivery Procedures."
Acceptance of Existing Notes and
Delivery of Exchange Notes.... Subject to certain conditions, as described more fully in
"The Exchange Offers -- Terms of the Exchange Offers --
Conditions of the Exchange Offers", Viatel will accept for
exchange any and all Existing Notes properly tendered in
the Exchange Offers and not withdrawn, prior to 5:00 p.m.,
New York City time, on the Expiration Date. The Exchange
Notes issued pursuant to the Exchange Offers will be
delivered as promptly as practicable following the
Expiration Date.
Withdrawal Rights............... Tenders of Existing Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the Expiration
Date, unless previously accepted by Viatel. See "The
Exchange Offers -- Terms of the Exchange Offers --
Withdrawal of Tenders of Existing Notes."
Taxation........................ For a discussion of certain United States and German tax
considerations relating to the Exchange Offers and the
purchase, ownership and disposition of Exchange Notes, see
"Certain Income Tax Considerations."
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Use of Proceeds................. Viatel will not receive any proceeds from the issuance of
the Exchange Notes in the Exchange Offers. See "Use of
Proceeds."
Exchange Agents................. The Bank of New York is the U.S. Exchange Agent and
Deutsche Bank AG is the German Exchange Agent. The
addresses of the Exchange Agents are set forth in "The
Exchange Offers -- Terms of the Exchange Offers -- The
U.S. Exchange Agent" and "-- The German Exchange Agent."
THE EXCHANGE NOTES
The form and terms of the Exchange Notes are identical in all material respects to the
form and terms of the Existing Notes except that the Exchange Notes will not bear legends
restricting the transfer thereof (with certain exceptions) or contain interest rate step-up
provisions.
Exchange Notes Offered.......... $500.0 million principal amount at maturity of 12.50%
Exchange Notes, $400.0 million principal amount of 11.25%
Exchange Notes, DM 226.0 million principal amount at
maturity of 12.40% Exchange Notes and DM 178.0 million
principal amount of 11.15% Exchange Notes.
Maturity........................ April 15, 2008.
Yield and Interest.............. 12.50% per annum in the case of the 12.50% Exchange Notes,
11.25% per annum in the case of the 11.25% Exchange Notes,
12.40% per annum in the case of the 12.40% Exchange Notes
and 11.15% per annum in the case of the 11.15% Exchange
Notes. The Existing Discount Notes were sold at a
substantial discount from their principal amount at
maturity, and there will not be any payment of interest on
12.50% Notes or 12.40% Notes prior to October 15, 2003.
Commencing October 15, 2003, the 12.50% Notes and the
12.40% Notes will pay interest semi-annually in cash on
April 15 and October 15 of each year. For U.S. federal
income tax purposes, holders of 12.50% Exchange Notes and
12.40% Exchange Notes will be required to include amounts
in gross income in advance of the receipt of cash payments
to which the income is attributable. See "Certain Income
Tax Considerations."
Interest on the 11.25% Exchange Notes and the 11.15%
Exchange Notes will accrue from the last interest payment
date on which interest was paid on the Existing 11.25%
Notes and the Existing 11.15% Notes or if no interest has
been paid on the Existing 11.25% Notes and the Existing
11.15% Notes, from April 8, 1998. Such accrued interest
shall be payable with the first interest payment on the
11.25% Exchange Notes and the 11.15% Exchange Notes. No
interest shall accrue in respect of the Existing 11.25%
Notes and the Existing 11.15% Notes that are exchanged for
11.25% Exchange Notes and 11.15% Exchange Notes,
respectively, in the Exchange Offers. Interest on the
11.25% Exchange Notes and the 11.15% Exchange Notes will
be payable semi-annually in
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cash on April 15 and October 15 of each year after their
issuance, commencing October 15, 1998.
Security........................ The 12.50% Exchange Notes and the 12.40% Exchange Notes
will be unsecured. The 11.25% Exchange Notes will be
secured by the U.S. Pledged Securities (consisting of U.S.
government obligations) and the 11.15% Exchange Notes will
be secured by the DM Pledged Securities (consisting of
German government obligations), in each case, until Viatel
makes the first six scheduled interest payments on the
11.25% Notes and the 11.15% Notes, respectively, and
thereafter the 11.25% Notes and the 11.15% Notes will be
unsecured.
Pledged Securities.............. In accordance with the terms of the 11.25% Notes Indenture
and the 11.15% Notes Indenture (each as defined herein),
on the closing date of the Offering Viatel purchased and
pledged to the Trustee (as defined herein) for the benefit
of the holders of the 11.25% Notes and the holders of the
11.15% Notes the U.S. Pledged Securities and the DM
Pledged Securities, respectively, in an amount sufficient,
upon receipt of scheduled interest and principal payments
on such securities, to provide for payment in full of the
first six scheduled interest payments due on the 11.25%
Notes and the 11.15% Notes. A failure by Viatel to pay
interest on the 11.25% Notes or the 11.15% Notes in a
timely manner through the first six scheduled interest
payment dates for such Notes will constitute an immediate
Event of Default under the respective Indenture with no
grace or cure period. See "Description of the Exchange
Notes -- Security."
Optional Redemption............. The Notes are redeemable, at Viatel's option, in whole or
in part, at any time on or after April 15, 2003, at the
redemption prices set forth herein. In addition, at any
time prior to April 15, 2001, Viatel may, at its option,
redeem up to 35% of the aggregate principal amount at
maturity of the Notes with the net proceeds of one or more
Public Equity Offerings at the redemption prices set forth
herein, plus accrued and unpaid interest, if any;
PROVIDED, (i) that Notes representing at least 65% of the
principal amount at maturity of the Notes initially issued
remain outstanding immediately after each such redemption
and (ii) that notice of such redemption is mailed within
60 days of each such Public Equity Offering. See
"Description of the Exchange Notes -- Optional
Redemption."
Change of Control............... Upon a Change of Control, Viatel will be required to make
an offer to purchase the Notes, at a purchase price of
101% of their Accreted Value in the case of the Discount
Notes and 101% of the principal amount in the case of the
Senior Notes, in each case, plus accrued and unpaid
interest thereon to the repurchase date. See "Description
of the Exchange Notes -- Repurchase of Notes Upon a Change
of Control."
</TABLE>
18
<PAGE>
<TABLE>
<S> <C>
Ranking......................... The Existing Notes are, and the Exchange Notes will be,
unsecured (except as described in "-- Security" above),
senior obligations of Viatel, ranking PARI PASSU in right
of payment with all existing and future unsecured
unsubordinated obligations of Viatel and will be senior in
right of payment to all existing and future subordinated
indebtedness of Viatel. After giving PRO FORMA effect to
the Tender Offer and the Offering, at March 31, 1998,
Viatel would have had approximately $845.7 million of
senior indebtedness. The Existing Notes are, and the
Exchange Notes will be, effectively subordinated to all
existing and future liabilities (including trade payables)
of Viatel's subsidiaries. As of March 31, 1998, Viatel's
subsidiaries had approximately $14.7 million of
liabilities (excluding intercompany payables). See "Risk
Factors -- Substantial Indebtedness; Ability to Service
Debt; Restrictive Covenants."
Certain Covenants............... Each of the Indentures contains certain covenants which,
among other things, restrict the ability of Viatel and its
Restricted Subsidiaries (as herein defined) to incur
additional indebtedness, create liens, engage in
sale-leaseback transactions, pay dividends or make
distributions in respect of their capital stock, make
investments or certain other restricted payments, sell
assets, redeem capital stock, issue or sell stock of
Restricted Subsidiaries, enter into transactions with
stockholders or affiliates or, with respect to the
Company, effect a consolidation or merger. The covenants
are, however, subject to a number of important
qualifications and exceptions. See "Description of the
Exchange Notes -- Covenants."
Book-Entry; Delivery and Form... The 12.50% Exchange Notes and the 11.25% Exchange Notes
will be represented by the New Global Notes issued in
definitive, fully registered book-entry form and will be
deposited with a custodian for, and registered in the name
of, DTC or its nominee. The 12.50% Exchange Notes and the
11.25% Exchange Notes represented by the New Global Notes
will be shown on, and transfers thereof will be effected
only through, records maintained by DTC or its nominee and
its direct and indirect participants, including Euroclear
and Cedel. The 12.50% Exchange Notes and the 11.25%
Exchange Notes will be issued in minimum denominations of
$1,000 principal amount (principal amount at maturity in
the case of the 12.50% Exchange Notes) and any integral
multiple thereof.
The 12.40% Exchange Notes and the 11.15% Exchange Notes
issued in exchange for Existing 12.40% Notes and Existing
11.15% Notes originally issued pursuant to Regulation S
will be represented by the New DBC-DM Global Certificates
in bearer form, deposited with DBC and will represent the
12.40% Exchange Notes and 11.15% Exchange Notes held by
account holders in DBC, including the 12.40% Exchange
Notes and 11.15% Exchange Notes which are held through
Euroclear and Cedel, each of which has an account with
DBC. Certificated Notes will not be issued in
</TABLE>
19
<PAGE>
<TABLE>
<S> <C>
exchange for legal co-ownership interests in the New
DBC-DM Global Certificates. The 12.40% Exchange Notes and
11.15% Exchange Notes issued in exchange for Existing
12.40% Notes and Existing 11.15% Notes originally sold
pursuant to Rule 144A will be represented by the New
DTC-DM Global Certificates in definitive, fully
registered, book-entry form deposited with a custodian
for, and registered in the name of, DTC or its nominee.
Transfers of the 12.40% Exchange Notes and the 11.15%
Exchange Notes will be limited to transfers of book-entry
interests. Certificated Notes will not be issued in
exchange for beneficial interests in the New DTC-DM Global
Certificates. See "Description of the Exchange Notes --
Book Entry; Delivery and Form." The 12.40% Exchange Notes
and the 11.15% Exchange Notes will be issued in minimum
denominations of DM 100,000 principal amount at maturity
and any integral multiple of DM 1,000 above such number.
Trading......................... There has previously been only a limited secondary market,
and no public market, for the Existing Notes. The Existing
Notes have been approved for trading in the PORTAL market.
There is no established trading market for the Exchange
Notes. Viatel does not currently intend to apply for
listing of the Exchange Notes on any national securities
exchange or for quotation through any automated quotation
system. Accordingly, there can be no assurance as to the
development of any market for or the liquidity of any
market that may develop for the Exchange Notes. See "Risk
Factors -- Absence of a Public Market for the Exchange
Notes."
</TABLE>
For additional information regarding the Exchange Notes, see "Description of
the Exchange Notes" and "Certain Income Tax Considerations."
RISK FACTORS
See "Risk Factors," immediately following this Summary, for a discussion of
certain factors which should be carefully considered before tendering Existing
Notes in the Exchange Offers.
20
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
The following summary Consolidated Statement of Operations Data and Other
Financial Data for the years ended December 31, 1995, 1996 and 1997 have been
derived from the Consolidated Financial Statements of the Company, and the notes
related thereto, included elsewhere in this Prospectus, which were audited by
KPMG Peat Marwick LLP, Independent Certified Public Accountants. The summary
Consolidated Statement of Operations Data, Other Financial Data and Balance
Sheet Data as of and for the three months ended March 31, 1997 and 1998 have
been derived from the unaudited Consolidated Financial Statements of the
Company, and the notes related thereto, included elsewhere in this Prospectus,
which, in the opinion of management, include all adjustments necessary for a
fair presentation of the financial condition and results of operations of the
Company for such periods. The results of operations for interim periods are not
necessarily indicative of a full year's operations. The unaudited pro forma
Statement of Operations Data, Other Financial Data and Balance Sheet Data have
been derived from the unaudited pro forma condensed financial information (the
"Pro Forma Financial Information") included elsewhere in this Prospectus. The
Pro Forma Financial Information does not purport to represent what the Company's
financial condition or results of operations actually would have been for the
date or periods presented had the Tender Offer and the Offering occurred on the
dates indicated or to indicate the results of future periods. This information
should be read in conjunction with the historical financial statements of the
Company, including the Notes thereto, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the other financial data
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
---------------------------------------------- ----------------------------------
1997 1998
-------------------------- -----------------------
1995 1996 ACTUAL PRO FORMA(1) 1997 ACTUAL PRO FORMA(1)
-------- -------- ----------- ------------ --------- --------- ------------
(IN THOUSANDS, EXCEPT OTHER OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Telecommunications revenue........ $ 32,313 $ 50,419 $ 73,018 $ 73,018 $ 14,552 $ 21,239 $ 21,239
Operating expenses:
Costs of telecommunications
services...................... 27,648 42,130 63,504 63,504 12,079 19,105 19,105
Selling, general and
administrative................ 24,328 32,857 36,076 36,076 8,723 8,955 8,955
Depreciation and amortization... 2,637 4,802 7,717 7,717 1,262 2,911 2,911
Equipment impairment loss....... 560 -- -- -- -- -- --
-------- -------- ----------- ------------ --------- --------- ------------
Total operating expenses.... 55,173 79,789 107,297 107,297 22,064 30,971 30,971
-------- -------- ----------- ------------ --------- --------- ------------
Operating loss.................... (22,860) (29,370) (34,279) (34,279) (7,512) (9,732) (9,732)
Interest income................... 3,282 1,853 3,685 3,685 1,119 510 510
Interest expense.................. (8,856) (10,848) (12,450) (102,123)(2) (3,009) (3,781) (25,870)(2)
Share in loss of affiliate........ (42) (10) -- -- -- -- --
-------- -------- ----------- ------------ --------- --------- ------------
Net loss.......................... (28,476) (38,375) (43,044) (132,717)(3) (9,402) (13,003) (35,092)(3)
Dividends on preferred stock...... -- -- -- (4,382)(2) -- -- (1,096)(2)
-------- -------- ----------- ------------ --------- --------- ------------
Net loss to common stockholders... $(28,476) $(38,375) $ (43,044) $(137,099)(3) $ (9,402) $ (13,003) $ (36,188)(3)
-------- -------- ----------- ------------ --------- --------- ------------
-------- -------- ----------- ------------ --------- --------- ------------
OTHER FINANCIAL DATA:
EBITDA(4)......................... $(20,265) $(24,578) $ (26,562) $ (26,562) $ (6,250) $ (6,821) $ (6,821)
Capital expenditures.............. 11,378 9,423 34,190 34,190 3,722 2,716 2,716
Ratio of earnings to fixed
charges(5)...................... -- -- -- -- -- -- --
OTHER OPERATING DATA:
Billable minutes (000s)........... 25,932 62,249 140,918 23,517 52,418
Average revenue per billable
minute.......................... $ 1.23 $ .80 $ .51 $ .62 $ .39
Average cost per billable
minute.......................... $ 1.04 $ .67 $ .44 $ .51 $ .35
Switches(6)....................... 10 13 (147) 14(7) 14(7)
Points of presence(6)............. 11 13 33 17 33
Customers(6)...................... 9,218 18,172 21,515 20,224 17,090
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
------------------------
ACTUAL PRO FORMA(1)
--------- -------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities...................................... $ 28,150 $ 612,507
Restricted cash, current and non-current.............................................. -- 153,347
Property and equipment, net........................................................... 56,997 56,997
Total assets.......................................................................... 121,894 887,876
Long-term debt, excluding current installments........................................ 102,360 854,907
Redeemable convertible preferred stock................................................ -- 43,820
Stockholders' deficiency.............................................................. (18,271) (48,656)(8)
</TABLE>
(FOOTNOTES ON NEXT PAGE)
21
<PAGE>
- ------------------------------
(1) The Pro Forma Financial Information is based on the historical financial
statements of the Company as of and for the year ended December 31, 1997 and
the three months ended March 31, 1998. The Pro Forma Statement of Operations
Data and Other Financial Data have been prepared as if the Tender Offer and
the Offering had occurred on January 1, 1997. The Pro Forma Balance Sheet
Data has been prepared as if the Tender Offer and the Offering occurred on
March 31, 1998.
(2) On a pro forma basis, assuming the Offering closed on January 1, 1997,
interest expense on the Notes and the Subordinated Convertible Debentures
and dividends on the Series A Preferred would have been $99.1 million and
$4.4 million for purposes of the 1997 pro forma financial information and
$24.8 million and $1.1 million for purposes of the March 31, 1998 pro forma
financial information, respectively, assuming an average exchange rate of
approximately DM 1.85 per U.S. $1.00 (a recent market exchange rate at the
time of the Offering) with respect to the 12.40% Notes, the 11.15% Notes and
the Subordinated Convertible Debentures. (See Footnotes 1 and 5 to the Pro
Forma Financial Information included elsewhere in this Prosepctus.) The
Company is utilizing a portion of the proceeds of the Offering for the
construction and operational start-up of the Circe Network. Accordingly, a
portion of the interest cost of the Notes and the Subordinated Convertible
Debentures through 1999 will be capitalized. However, the pro forma interest
expense includes all of the interest cost of the Notes and the Subordinated
Convertible Debentures, including capitalized interest.
(3) Pro forma net loss and pro forma net loss to common stockholders does not
include the extraordinary loss resulting from the extinguishment of the 1994
Notes assumed to occur on January 1, 1997, for purposes of the 1997 pro
forma financial information and January 1, 1998, for purposes of the March
31, 1998 pro forma financial information. Such extraordinary loss would have
been approximately $44.2 million for 1997 and $31.7 million for the three
months ended March 31, 1998.
(4) As used herein, "EBITDA" consists of earnings before interest, 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 ("GAAP"), is not necessarily
comparable to similarly titled measures of other companies, and should not
be considered as an alternative to net income as a measure of performance
nor as an alternative to cash flow as a measure of liquidity. See "Selected
Consolidated Financial Data" for cash flow measures calculated under GAAP.
(5) The ratio of earnings to fixed charges is calculated as income before taxes,
discontinued operations and extraordinary items plus interest expense,
divided by fixed charges. Fixed charges consist of interest on indebtedness,
dividends on preferred stock and one-third of rental expense. For 1995,
1996, 1997, the three months ended March 31, 1997 and the three months ended
March 31, 1998, earnings were insufficient to cover fixed charges by $28.5
million, $38.4 million, $43.0 million ($137.1 million pro forma for the
Tender Offer and the Offering), $9.4 million and $13.0 million ($36.2
million pro forma for the Tender Offer and the Offering), respectively.
(6) Information presented as of the end of the periods indicated.
(7) Consists of four Nortel DMS 100e switches, one Nortel DMS 300 switch, six
Wyatt/Reuters MRX-2000 switches and three call reorigination switches.
(8) Pro forma stockholders' deficiency at March 31, 1998 includes the
extraordinary loss of $28.3 million resulting from the extinguishment of the
1994 Notes assumed to occur on March 31, 1998 as indicated in the footnotes
to the Pro Forma Financial Information included elsewhere in this
Prospectus.
22
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, HOLDERS
OF EXISTING NOTES SHOULD REVIEW CAREFULLY THE FOLLOWING RISK FACTORS BEFORE
TENDERING THEIR EXISTING NOTES IN THE EXCHANGE OFFERS. STATEMENTS CONTAINED IN
THIS PROSPECTUS REGARDING THE COMPANY'S EXPECTATIONS WITH RESPECT TO FUTURE
OPERATIONS AND OTHER MATTERS, WHICH CAN BE IDENTIFIED BY USING FORWARD-LOOKING
TERMINOLOGY, SUCH AS "BELIEVES," "MAY," "WILL," "EXPECT," "ANTICIPATE,"
"ESTIMATE" OR "CONTINUE" OR THE NEGATIVE THEREOF OR VARIATIONS THEREON OR
COMPARABLE TERMINOLOGY, ARE "FORWARD-LOOKING STATEMENTS," WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT. IMPORTANT FACTORS THAT MAY CAUSE ACTUAL
RESULTS OR PERFORMANCE TO DIFFER MATERIALLY FROM THE RESULTS OR PERFORMANCE
DESCRIBED IN SUCH FORWARD-LOOKING STATEMENTS ARE DESCRIBED BELOW.
CONSEQUENCES OF FAILURE TO EXCHANGE EXISTING NOTES
The Existing Notes have not been registered under the Securities Act or any
state securities laws and therefore may not be offered, sold or otherwise
transferred except in compliance with the registration requirements of the
Securities Act and any other applicable securities laws, or pursuant to an
exemption therefrom or in a transaction not subject thereto. Existing Notes that
currently bear legends restricting transfers that remain outstanding after
consummation of the Exchange Offers will continue to bear such legends. In
addition, upon consummation of the Exchange Offers, holders of Existing Notes
which remain outstanding will not be entitled to any rights to have such
Existing Notes registered under the Securities Act or to any similar rights
under the 1998 Registration Rights Agreement. Viatel currently does not intend
to register under the Securities Act any Existing Notes which remain outstanding
after consummation of the Exchange Offers (subject to limited exceptions, if
applicable).
To the extent that Existing Notes are tendered and accepted in the Exchange
Offers, the principal amount of outstanding Existing Notes will be reduced by
the principal amount so tendered and exchanged and a holder's ability to sell
untendered Existing Notes could be adversely affected. As a result, the
liquidity of the market for such untendered Existing Notes could be adversely
affected upon completion of the Exchange Offers.
Based on an interpretation by the staff of the Commission set forth in
no-action letters and interpretative letters issued to third parties, Viatel
believes that the Exchange Notes issued pursuant to the Exchange Offers in
exchange for Existing Notes may be offered for resale, resold and otherwise
transferred by any holder thereof (other than broker-dealers who purchased
Existing Notes directly from Viatel for resale pursuant to Rule 144A under the
Securities Act or any other available exemption under the Securities Act)
without compliance with the registration and prospectus delivery requirements of
the Securities Act, provided that such Exchange Notes are acquired in the
ordinary course of such holder's business and that such holder is not
participating, does not intend to participate and has no arrangement or
understanding with any person to participate, in any distribution of the
Exchange Notes. However, if any holder acquires Exchange Notes in the Exchange
Offers for the purpose of distributing or participating in a distribution of the
Exchange Notes, such holder cannot rely on the position of the staff of the
Commission enunciated in the no-action letters regarding MORGAN STANLEY & CO.,
INCORPORATED (available June 5, 1991) and EXXON CAPITAL HOLDINGS CORPORATION
(available May 13, 1988), or interpreted in the Commission interpretative letter
to SHEARMAN & STERLING (available July 2, 1993), or similar no-action or
interpretative letters, will not be entitled to validly tender Existing Notes in
the Exchange Offers and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any sale or
transfer of such Existing Notes, unless such sale or transfer is made pursuant
to an exemption from, or in a transaction not subject to, such requirements.
Each broker-dealer that receives Exchange Notes for its own account in exchange
for Existing Notes, where such Existing Notes were acquired by such
broker-dealer as a result of market-making or other trading activities,
acknowledges thereby that it will deliver a copy of this Prospectus in
connection with any resale of such Exchange Notes. See "Plan of Distribution."
In addition, to comply with the securities or "blue sky" laws of certain
jurisdictions, if applicable, the Exchange Notes may not be offered or sold
unless they have been registered or qualified
23
<PAGE>
for sale in such jurisdictions or an exemption from registration or
qualification is available and complied with.
The Existing Notes provide for certain interest rate increases if the
Exchange Offers are not consummated by October 8, 1998. Upon consummation of the
Exchange Offers, holders of Existing Notes will not be entitled to an increase
in the interest rate thereon or any further registration rights under the 1998
Registration Rights Agreement. See "The Exchange Offers."
SUBSTANTIAL INDEBTEDNESS; ABILITY TO SERVICE DEBT; RESTRICTIVE COVENANTS
At March 31, 1998, the Company's total indebtedness (including capitalized
lease obligations) was approximately $102.4 million, net of current portion. On
a pro forma basis after giving effect to the Tender Offer and the Offering as if
they had occurred on January 1, 1998, the Company would have had interest
expense of $25.9 million (assuming none of the interest cost of the Notes is
capitalized), EBITDA of $(6.8) million, a net loss of $36.2 million (excluding
an extraordinary loss of $31.7 million resulting from the extinguishment of the
1994 Notes assumed to occur on January 1, 1998) and its earnings would have been
insufficient to cover its fixed charges by $(36.2) million for the three months
ended March 31, 1998. The Company expects to incur significant additional
indebtedness in the future. See "-- Substantial Capital Requirements." The level
of the Company's indebtedness could have a material adverse effect upon the
Company such as, without limitation: (i) limiting the Company's ability to
obtain additional financing in the future for working capital, capital
expenditures, acquisitions and general corporate purposes, (ii) requiring a
substantial portion of the Company's cash flow from operations (if any) to be
dedicated to the payment of the principal of and interest on its indebtedness,
thereby reducing the funds available to the Company for other purposes, (iii)
making the Company more vulnerable to economic downturns, limiting its ability
to withstand competitive pressures and reducing its flexibility in responding to
changing business and economic conditions, (iv) restricting its ability to take
advantage of business opportunities, and (v) preventing the Company from making
payments on the Notes.
The ability of the Company to meet its debt service obligations will be
dependent upon the future performance of the Company, which, in turn, will be
subject to the Company's successful implementation of its strategy, as well as
to financial, competitive, business, regulatory, technical and other factors,
including factors beyond the Company's control. If the Company is at any time
unable to generate sufficient cash flow from operations to meet its debt service
requirements, it may be required to refinance all or a portion of its
indebtedness. The Company anticipates that cash flows from operations may be
insufficient to repay the Notes and the Subordinated Convertible Debentures in
full at maturity in 2008 and 2011, respectively, and that the Notes and the
Subordinated Convertible Debentures may need to be refinanced. The Company's
ability to do so will depend on, among other things, its financial condition at
the time, the restrictions in the agreements governing its indebtedness and
other factors, including market conditions. There can be no assurance that any
such refinancing would be possible on terms that would be acceptable to the
Company or that any additional financing could be obtained. If such refinancing
were not possible or if additional financing were not available, the Company
could be forced to dispose of assets under circumstances that might not be
favorable to realizing the highest price for such assets or to default on its
obligations with respect to its indebtedness, including the Notes and the
Subordinated Convertible Debentures, which would permit the holders of the Notes
to accelerate the maturity thereof.
The Indentures contain certain restrictive covenants, which affect, and in
some cases significantly limit or prohibit, among other things, the ability of
the Company and its subsidiaries to incur indebtedness, make prepayments of
certain indebtedness, pay dividends, make investments, engage in transactions
with stockholders and affiliates, issue capital stock, create liens, sell assets
and engage in mergers and consolidations. However, the limitations set forth in
the Indentures are subject to a number of important qualifications and
exceptions. In particular, while the Indentures restrict the Company's ability
to incur additional indebtedness, they permit the Company and its subsidiaries
to, among other things, incur an
24
<PAGE>
unlimited amount of secured indebtedness to finance telecommunications assets
and build-out. See "Description of the Exchange Notes -- Covenants -- Limitation
on Indebtedness."
LIMITED OPERATING HISTORY; SUBSTANTIAL NET LOSSES AND NEGATIVE CASH FLOW FROM
OPERATIONS;
EXPECTED FUTURE NET LOSSES AND NEGATIVE CASH FLOW FROM OPERATIONS
The Company commenced operations in 1991 and has only a limited operating
history upon which potential investors may base an evaluation of its
performance. For example, of the 14 switches the Company operated as of March
31, 1998, only two were deployed as of June 30, 1995. Furthermore, the
liberalization of Western European telecommunications regulation since January
1, 1998 has dramatically changed the telecommunications market in a number of
the EU member states in which the Company operates. Potential investors,
therefore, have limited historical financial information upon which to base an
evaluation of the Company's performance. The Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development.
To date, the Company has incurred substantial net losses and negative
EBITDA. Net loss for each of 1995, 1996 and 1997 and the three months ended
March 31, 1998 was approximately $(28.5) million, $(38.4) million, $(43.0)
million and $(13.0) million, respectively. EBITDA for each of 1995, 1996 and
1997 and the three months ended March 31, 1998 was approximately $(20.3)
million, $(24.6) million, $(26.6) million and $(6.8) million, respectively. Over
the last three years, the Company has experienced significant increases in
capital expenditures and expenses associated with the development and expansion
of the Viatel Network (as defined herein). The Company expects to incur
operating and net losses, and negative EBITDA and negative cash flow from
operating activities until at least the year 2000. However, the Company's EBITDA
losses and negative cash flows are likely to continue beyond the year 2000 if
the Company extends its expansion plans, if retail prices decline faster than
anticipated, interconnection rates and wholesale prices paid by the Company do
not decline as quickly as anticipated or because of any of the other risks
described herein. Accordingly, 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, results of
operations and its ability to make payments on the Notes. See "-- Substantial
Capital Requirements," "-- Variability of Operating Results," "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated Financial
Statements, including the notes thereto.
RISKS RELATING TO THE CIRCE NETWORK
The Company's success is dependent, in part, upon its ability to construct
the Circe Network, substantially on budget and on time, substantially increase
its traffic volumes and sell IRUs and other capacity on the Circe Network. The
Company has budgeted approximately $530.0 million to complete the Circe Network
and will have substantial existing commitments for materials and labor, which
may cost more than budgeted. However, other than the definitive agreement with
Nortel with respect to Phase 1, the Company has not yet signed definitive
agreements for the construction of Phase 1. The successful completion and/or use
of Phase 1 could be materially adversely effected by, among other things, the
Company's inability to: (i) enter into final definitive agreements with Bechtel
and ASN with respect to the engineering, construction, installation and testing
of Phase 1; (ii) obtain rights-of-way; (iii) obtain appropriate licenses from
national and local governments; and (iv) effectively manage the construction of
the new fiber routes. The Company's binding letter of intent with ASN covers
price and payment terms, ready-for-service dates and project completion
incentives but needs to be replaced with a definitive agreement. The Company's
binding letter of intent with Bechtel covers cost incentives, ready-for-service
dates and rights-of-way incentives, but also needs to be replaced with a
definitive agreement. The risk that rights-of-way cannot be obtained, and the
cost thereof, will be borne entirely by the Company. Once sufficient
25
<PAGE>
rights-of-way are obtained in a given locality, construction of the local
segment of the Circe Network will commence. In addition, the successful
construction of the Circe Network is substantially dependent on third party
contractors retained by Bechtel. Although the Circe Network will consist
primarily of new "new digs", it will involve the acquisition of existing fiber
in Belgium and may also involve the acquisition of existing fiber for certain
other segments, including the United Kingdom and access and egress to Paris, and
those segments will have substantially fewer fibers than the portions of the
Circe Network that will be newly constructed. Accordingly, the value of the
Circe Network may be less than would be the case if it was entirely a "new dig."
In addition, the Company is in the planning stages of Phase 2. It has not
yet reached any definitive agreements with respect to Phase 2 and may be
required to obtain additonal regulatory approvals for such portion of the Circe
Network. Accordingly, the risks with respect to Phase 2 are currently
substantially greater than the risks with respect to Phase 1. Any such risk
could have a material adverse effect on the Company's business, financial
condition, results of operations and its ability to make payments on the Notes.
The Company will generally not be able to terminate calls over its own
network, even after the Circe Network is built. Therefore, in order to
effectively use the Circe Network, it will need to be interconnected to the
existing networks of ITOs in five separate countries (the United Kingdom,
France, Germany, Belgium and The Netherlands). Such interconnection is expected
to entail difficult negotiations with these ITOs and may be delayed.
Difficulties or delays with respect to any of the foregoing may significantly
delay or prevent the completion and/or use of the Circe Network, which would
have a material adverse effect on the Company and its ability to make payments
on the Notes. The difficulties inherent in a large construction project such as
the Circe Network are exacerbated by the fact that the Circe Network will be
built in five separate countries, each with separate legal and regulatory
regimes and different languages, and will involve submarine cable in the North
Sea and the English Channel.
The Company must obtain rights-of-way and wayleaves in order to complete the
Circe Network. Other than with respect to the Belgium portion of the Circe
Network, the Company does not have any existing rights-of-way or wayleaves on
the routes it intends to use for the Circe Network. Moreover, the Company
generally has no right to acquire rights-of-way. While the Company believes that
rights-of-way will be available at acceptable costs and in a timely manner,
there can be no assurance in this regard.
The Circe Network is also subject to construction risks, including the risks
of cost overruns and delays. If the cost of the Circe Network signficantly
exceeds the Company's budget for the project, the Company will be required to
obtain additional financing or to abandon or curtail the Circe Network. If the
Company encounters construction delays, it will not be able to route its traffic
over owned facilities as soon as it hopes, which will have a detrimental effect
on its ability to increase traffic volumes and on its gross margins. In
addition, construction delays could negatively effect the Company's ability to
sell IRU's or capacity to other carriers and delay or prevent its qualification
as an "infrastructure provider" or "network operator" in France (which are
entitled to obtain substantial discounts on interconnection in France).
The Company is aware that certain long distance carriers and consortia are
expanding capacity in Europe and believes that other long distance carriers, as
well as potential New Entrants, are considering the construction of new fiber
optic and other long distance transmission networks. For example, the Ulysses
cable system owned by WorldCom and the Hermes Europe Railtel B.V. cable system
("Hermes") connect cities that will be linked by the Circe Network. In addition,
Fibernet Group plc has built a 35 city network, primarily in the United Kingdom,
Esprit Telecom Group plc is attempting to build out its Pan-European network,
and other companies such as Level 3 Communications and British Telecom, are
planning to construct fiber optic networks in Europe. As a result, there may be
extreme pricing pressure with respect to sales of IRUs or capacity on the Circe
Network and transmission of calls between those cities. Any price competition
could have a material adverse effect on the Company's business, financial
condition, results of operations and its ability to make payments on the Notes.
Since the cost of the actual
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fiber is a relatively small portion of building new transmission lines, persons
building such lines are likely to install fiber that provides substantially more
transmission capacity than will be needed over the short or medium-term.
Further, recent technological advances have shown the potential to greatly
expand the capacity of existing and new fiber optic cable, which will add to
available supply and thereby create additional pricing pressure. For example,
Lucent Technologies Inc. announced earlier this year that it has developed new
electronics that will substantially improve the capacity of fiber optic cable.
Demand for transmission capacity in the United States has recently been fueled
by businesses seeking data transmission capacity. European businesses are not
currently using data transmission to the same extent as U.S. businesses. If
European businesses do not substantially increase their demand for data
services, the Company's ability to utilize the Circe Network will be adversely
affected. In addition, the Company intends to sell IRUs or capacity in the Circe
Network to other carriers, which will result in competitors having capacity on
the Company's routes along the Circe Network, which in turn will result in
pricing pressures with respect to traffic carried along these routes. If
industry capacity expansion results in capacity that exceeds overall demand in
general or along any of the Company's routes, severe additional pricing pressure
could develop. Furthermore, the marginal cost of carrying calls over fiber optic
cable is extremely low. As a result, certain industry observers have predicted
that, within a few years, there may be dramatic and substantial price reductions
and that long distance calls will not be significantly more expensive than local
calls. Such pricing pressure could have a material adverse effect on the Company
and its ability to make payments on the Notes.
SUBSTANTIAL CAPITAL REQUIREMENTS
In order to further develop and expand the Viatel Network, including the
Circe Network, and to develop and expand new and existing services, the Company
will require substantial additional capital. The Company has budgeted
approximately $530.0 million for the Circe Network. However, there can be no
assurance that actual costs of the Circe Network will not substantially exceed
the Company's budget for such project. Future sources of financing may include
additional public and private debt and equity offerings, project financing,
equipment financings and the sale of IRUs or capacity in the Circe Network.
There can be no assurance that additional financing arrangements will be
available on acceptable terms. Moreover, the amount of the Company's substantial
total outstanding indebtedness as a result of the Offering may adversely affect
the Company's ability to raise additional funds.
The Company believes that the net proceeds from the Offering, project
financing, equipment financing and the sale of IRUs and capacity on the Circe
Network will provide sufficient funds for the Company to expand its business as
planned and to fund its operating losses for at least the next 18 to 24 months.
However, the amount of the Company's future capital requirements will depend on
a number of factors, including the success of the Company's business, the
start-up dates for Phase 1 and Phase 2, the rate at which the Company further
expands the Viatel Network, the types of services that the Company offers,
staffing levels, acquisitions and customer growth, as well as other factors that
are not within the Company's control, including competitive conditions,
government regulatory developments and capital costs. In the event that the
Company's plans or assumptions change or prove to be inaccurate or the net
proceeds of the Offering, project financing, equipment financings and proceeds
from the sale of IRUs or capacity on the Circe Network prove to be insufficient
to fund the Company's growth in the manner and at the rate currently
anticipated, the Company may be required to delay or abandon some or all of the
Company's development and expansion plans or the Company may be required to seek
additional sources of financing earlier than currently anticipated.
COMPETITION
The international telecommunications industry is highly competitive and is
characterized by substantial on-going price declines. For example, France
Telecom has obtained approval to reduce retail prices by 9% during each of 1997
and 1998 and 4.5% during each of 1999 and 2000. Deutsche Telekom has
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announced that it intends to reduce retail long distance prices by up to 40%.
Neither of these ITOs has reduced or is expected to reduce wholesale prices to
the same extent. These pricing policies have created substantial pressure on the
Company's gross margins. 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, such as
British Telecom, France Telecom, Belgacom and Telecom Italia, and global
alliances among some of the world's largest telecommunications carriers, such as
Uniworld, AT&T's WorldPartners' alliance with "Unisource" (Telia of Sweden,
Swiss Telecom PTT and KPN of The Netherlands), "Concert" (British Telecom and
MCI), "Global One" (Sprint, France Telecom and Deutsche Telekom) and the more
recently announced alliances among WorldCom, MCI and Telefonica de Espana and
between AT&T and British Telecom. Other potential competitors include cable
communications 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 and price declines
have increased over the past several years and the Company believes that such
competition and price declines will continue to intensify, particularly in
Western Europe where liberalization of the telecommunications markets continues.
Many of the Company's current and 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, results of operations and its ability to make payments on the Notes
and there can be no assurance that the Company will be able to compete
successfully.
Because all of the Company's current and targeted European markets (other
than the United Kingdom) have only recently liberalized or still are in the
process of liberalizing the provision of Voice Telephony (I.E., 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), customers in most of these markets
are not accustomed to obtaining services from competitors to ITOs and may be
reluctant to use emerging telecommunications providers, such as the Company. In
particular, the Company's target customer base of small and medium-sized
businesses with significant international calling needs, may be reluctant to
entrust their telecommunications needs to new operators that are believed to be
unproven. In addition, in continental Europe, certain of the Company's
competitors (including the ITOs) provide potential customers with a broader
range of services than the Company can offer due to existing regulatory
restrictions.
Competition for customers in the telecommunications industry is primarily
based on price and quality of services offered. The Company prices its services
primarily by offering discounts to the prices charged by ITOs and other major
competitors. However, prices for international long distance calls have
decreased substantially over the past few years in the markets in which the
Company currently maintains operations or in which it expects to establish
operations. Some of the Company's larger competitors may be able to use their
greater financial resources to cause severe price competition in the countries
in which the Company operates or expects to operate. It appears that Western
European ITOs are responding to deregulation more rapidly and aggressively than
occurred after deregulation in the United States and the United Kingdom. The
Company expects that prices for its services will continue to decrease for the
foreseeable future and that ITOs and other dominant telecommunications providers
will continue to improve their product offerings. The improvement in product
offerings and service provisions by the ITOs, as well as the liberalization of
Voice Telephony and infrastructure which has commenced in certain EU member
states, could similarly have a material adverse effect on the competitiveness of
the Company to the extent that the Company is unable to provide similar levels
of offerings and services. If the ITO in any jurisdiction uses its competitive
advantages to their fullest extent, the Company's operations in such
jurisdiction would be adversely affected. Furthermore, the marginal cost of
carrying calls over fiber optic cable is extremely low. As a result, certain
industry observers have predicted that, within a few years, there
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may be dramatic and substantial price reductions and that long distance calls
will not be significantly more expensive than local calls. In addition, certain
carriers, including AT&T, are implementing plans to offer telecommunications
services over the Internet at substantially reduced prices. Any price
competition could have a material adverse effect on the Company's business,
financial condition, results of operations and its ability to make payments on
the Notes.
The Company believes that the ITOs generally have certain competitive
advantages that the Company and other competitors do not have due to their
control over local connectivity. The Company relies on the ITOs for access to
the public switched telephone network (the "PSTN") and the provision of leased
lines, and the failure of the ITOs to provide such access or leased lines at
reasonable pricing could have a material adverse effect on the Company's
business, financial condition, results of operations and its ability to make
payments on the Notes. The reluctance of some national regulators to accept
liberalizing policies, grant regulatory approvals that would result in increased
competition for the local ITO and enforce access to ITO networks and essential
facilities could have a material adverse effect on the Company's competitive
position and its ability to make payments on the Notes. There can be no
assurance that the Company will be able to compete effectively in any of its
markets. See "Business -- Competition."
SUBSTANTIAL GOVERNMENT REGULATION
OVERVIEW. National and local laws and regulations governing the provision
of telecommunications services differ significantly among the countries in which
the Company currently operates and intends to operate. The interpretation and
enforcement of such laws and regulations varies and could limit the Company's
ability to provide certain telecommunications services in certain markets. There
can be no assurance that future regulatory, judicial and legislative changes
will not have a material adverse effect on the Company, that domestic or
international regulators or third parties will not raise material issues with
regard to the Company's compliance or noncompliance with applicable laws and
regulations, or that other regulatory activities will not have a material
adverse effect on the Company's business, financial condition, results of
operations and its ability to make payments on the Notes. See "Business --
Government Regulation."
INTERNATIONAL TRAFFIC. Under the World Trade Organization (the "WTO") Basic
Telecom Agreement (the "WTO Agreement"), concluded on February 15, 1997, 69
countries comprising 95% of the global market for basic telecommunications
services agreed to permit competition from foreign carriers. In addition, 59 of
these countries have subscribed to specific procompetitive regulatory
principles. The WTO Agreement became effective on February 5, 1998 and is
expected to be implemented by most signatory countries in 1998, although there
may be substantial delays. The Company believes that the WTO Agreement will
increase opportunities for the Company and the Company's competitors. However,
the precise scope and timing of the implementation of the WTO Agreement remain
uncertain and there can be no assurance that the WTO Agreement will result in
beneficial regulatory liberalization.
On November 26, 1997, the Federal Communications Commission (the "FCC")
adopted a new order (the "Foreign Participation Order") to implement the U.S.
obligations under the WTO Agreement. In the Foreign Participation Order, the FCC
adopted an open entry standard for carriers from WTO member countries, generally
facilitating market entry for such applicants by eliminating certain existing
tests. These tests remain in effect, however, for carriers from non-WTO member
countries. Petitions for reconsideration of the Foreign Participation Order are
pending at the FCC.
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International carriers serving the United States, including the Company,
remain subject to the FCC's international settlement policies, including new
rules adopted by the FCC regarding international settlement rates (the
"International Settlement Rates Order") which became effective on January 1,
1998. The international accounting rate system allows a U.S. facilities-based
carrier to negotiate an "accounting rate" with a foreign carrier for handling
each minute of international telephone service. Each carrier's portion of the
accounting rate (usually one-half) is referred to as the settlement rate. The
new International Settlement Rates Order generally requires U.S.
facilities-based carriers to negotiate settlement rates with their foreign
correspondent at no greater than FCC-established "benchmark" prices.
Historically, international settlement rates have vastly exceeded the cost of
terminating telecommunications traffic. In addition, the International
Settlement Rates Order imposed new conditions upon certain carriers, including
the Company. First, the FCC conditioned facilities-based authorizations for
service on a route on which a carrier has a foreign affiliate upon the foreign
affiliate offering all other U.S. carriers a settlement rate at or below the
relevant benchmark. The Company's foreign affiliate in the United Kingdom
satisfies this condition. Second, the FCC conditioned any authorization to
provide switched services over either facilities-based or resold international
private lines upon the condition that at least half of the facilities-based
international message telephone service ("IMTS") traffic on the subject route is
settled at or below the relevant benchmark rate. This condition applies whether
or not the licensee has a foreign affiliate on the route in question. However,
if the subject route does not comply with the benchmark requirement, a carrier
from a WTO member country instead can demonstrate that the foreign country
provides resale opportunities "equivalent" to those available in the United
States. Accordingly, since the February 9, 1998 effective date of the Foreign
Participation Order, the Company has been permitted to resell private lines for
the provision of switched services to any country that either has been found by
the FCC to comply with the benchmarks or has been determined to be equivalent.
The Company, however, will require prior FCC approval in order to provide resold
private lines to any country in which it has an affiliated carrier that has not
been found by the FCC to lack market power. Many parties have appealed the
International Settlement Rates Order to the U.S. Court of Appeals for the D.C.
Circuit or have filed petitions for reconsideration with the FCC. These
proceedings are still pending. The Company cannot predict the outcome of this
appeal and its possible impact on the Company. In addition, the FCC is expected
to propose in late summer 1998 to loosen certain requirements of its current
international settlements policy, but Viatel cannot predict the outcome of any
such proposal or its possible impact on the Company.
Increasing regulatory liberalization in many countries' telecommunications
markets now permits more flexibility in the way the Company can route calls.
Although certain FCC rules limit the way in which some international calls can
be routed, the Company does not believe that its network configuration,
specifically the way in which traffic is routed through its UK facilities, is
specifically prohibited by or undermines in any way the intent of these rules.
It is possible, however, that the FCC could find that the Company's network
configuration violates these rules. If the Company were found to be in violation
of these routing restrictions, and if the violation were sufficiently severe, it
is possible that the FCC could impose sanctions and penalties upon the Company.
CALL REORIGINATION. In addition, outside the EU the Company provides its
customers with access to its services through the use of call reorigination. A
substantial number of countries have prohibited certain forms of call
reorigination. There can be no assurance that certain of the Company's services
and transmission methods will not be or 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, results of operations and its ability to make
payments on the Notes. See "Business -- Government Regulation."
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.
The Company's provision of services in Western Europe may also be affected if
any EU member state imposes greater restrictions on non-EU international service
than on such service within
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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, results of operations and its ability to make payments on the Notes.
See "Business -- Government Regulation."
Since January 1, 1998, the Company, as well as its U.S. competitors, have
been required to make FCC-mandated contributions to a universal service fund to
subsidize telecommunications services for low-income persons, schools and
libraries, and rural health care providers. These contributions are based upon
the Company's gross revenues. The precise amount of these contributions for 1998
is unclear, as is whether the rate for these contributions will escalate in
future years. There can be no assurance that the Company will be able fully to
pass the cost of these contributions on to its customers or that doing so will
not result in a loss of customers.
EUROPEAN IMPLEMENTATION. The national governments of EU member states are
required to pass legislation to liberalize the markets within their countries to
give effect to European Commission ("EC") directives. This applies not only to
the liberalization requirements set out in EC directives that already have been
adopted, but will also apply to requirements to be contained in those directives
which still remain to be adopted by the Council of the European Communities. In
addition, some EU member states have inconsistently and, in some instances,
unclearly implemented EC telecommunications directives, which could limit,
constrain or otherwise adversely affect the Company's ability to provide certain
services. Furthermore, national governments may not necessarily pass legislation
enacting an EC directive in the form required, if at all, or may pass such
regulations only after a significant delay. In November 1997, the EC commenced
proceedings against seven EU member states, including Belgium, for failure to
fully implement certain EU telecommunications directives. Even if a national
government enacts appropriate regulations within the time frame established by
the EU, there may be significant resistance to the implementation of such
legislation from ITOs, regulators, trade unions and other sources. For example,
in France, the telecommunications union has stated its objection to the current
move towards liberalization. The above factors and other potential obstacles to
liberalization could have a material adverse effect on the Company's operations
by preventing the Company from expanding its operations as currently intended,
as well as a material adverse effect on the Company's business, financial
condition, results of operations and its ability to make payments on the Notes.
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. In addition,
there can be no assurance 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 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, results of
operations and its
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ability to make payments on the Notes. See "-- Dependence on Effective
Information Systems; Year 2000 Technology Risks."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS AND FOREIGN EXCHANGE RATE RISKS
There are certain risks inherent in conducting an international business,
including regulatory limitations restricting or prohibiting the provision of the
Company's services, unexpected changes in regulatory requirements, tariffs,
customs, duties and other trade barriers, difficulties in staffing and managing
foreign operations, longer payment cycles, problems in collecting accounts
receivable, political risks, fluctuations in currency exchange rates, foreign
exchange controls which restrict or prohibit repatriation of funds, technology
export and import restrictions or prohibitions, delays from customs brokers or
government agencies, seasonal reductions in business activity during the summer
months in Europe and certain other parts of the world, and potentially adverse
tax consequences resulting from operating in multiple jurisdictions with
different tax laws. For example, regulatory limitations restricting or
prohibiting the Company's operations in Latin America (which includes, for
purposes of this Prospectus, the United Mexican States, Central America and
South America, respectively), including regulations in certain countries
prohibiting the provision of services through the automatic callback access
method utilized by the Company, have contributed to the Company's decision to
discontinue or modify certain of its services in such countries. Existing or
future regulations in other countries could also have similar consequences.
Since its inception in 1991, the Company has invested heavily in developing
its ability to provide international telecommunications services within Western
Europe and other deregulating markets and in developing and expanding its market
presence, including entering into the national long distance telecommunications
markets in Germany, Italy and Spain. The Company's payment obligations with
respect to the Notes are denominated in U.S. Dollars and German Deutschmarks,
but the Company's revenues will be increasingly denominated in other currencies.
Any appreciation in the value of the U.S. Dollar or the German Deutschmark
relative to such other currencies could have material adverse effect on the
Company and its ability to make payments on the Notes. The Company does not
currently use financial hedging instruments, although in the future the Company
may elect to manage the exchange rate exposure presented by the 12.40% Notes and
the 11.15% Notes by entering into certain hedging transactions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Foreign Currency." There can be
no assurance, however, that exchange rate fluctuations will not have a material
adverse effect on the Company's ability to make payments on the Notes. 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, results
of operations and its ability to make payment on the Notes. See "-- Substantial
Government Regulation," "-- Competition," "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources -- Foreign Currency," and "Business -- Government Regulation."
The Notes are due and payable in 2008. The third stage of the European
Economic and Monetary Union ("Stage III") is presently anticipated to commence
on January 1, 1999 for the eleven EU member states, including Germany, which the
Council of the EU determined on May 2, 1998 had satisfied the convergence
criteria established in the Treaty of Maastricht. Stage III is the locking of
exchange rates among such eleven member states and the introduction of a single
currency (the "Euro"), which will replace the national currencies of such member
states. Holders of the 12.40% Notes and the 11.15% Notes should recognize that
if the Euro is adopted in Germany, at some time after January 1, 1999 it will
replace the German Deutschmark as the legal tender in Germany, which would
result in the effective redenomination of the 12.40% Notes and the 11.15% Notes
into Euros. There can be no assurance that the Euro will be adopted or, if
adopted, will maintain its value relative to other currencies. If the value of
the Euro were to decline relative to other currencies, the value of the 12.40%
Notes and the 11.15% Notes (as re-
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denominated in Euros) would necessarily decline relative to such currencies. See
"Description of the Exchange Notes -- Substitution of Currency."
RISKS ASSOCIATED WITH ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES
The Company may seek to acquire customer bases and businesses from, make
investments in, or enter into strategic alliances with, other companies. Any
future acquisitions, investments, strategic alliances or related efforts will be
accompanied by the risks commonly encountered in such transactions. Such risks
include, among others, the difficulty of identifying appropriate acquisition
candidates, the difficulty of assimilating the operations and personnel of the
acquired entities, the potential disruption of the Company's ongoing business,
the inability of management to capitalize on the opportunities presented by
acquisitions, investments or strategic alliances, the failure to successfully
incorporate licensed or acquired technology and rights into the Company's
services, the failure to maintain uniform standards, controls, procedures and
policies, and the impairment of relationships with employees as a result of
changes in management and ownership. Additionally, in connection with an
acquisition, the Company may experience rates of customer attrition that are
significantly higher than the rate of customer attrition which it generally
experiences. Further, to the extent that any such transaction involves customer
bases or businesses located outside the United States, the transaction would
involve the risks associated with international operations. There can be no
assurance that the Company would be successful in overcoming these risks or any
other problems encountered with such acquisitions, investments or strategic
alliances. See "-- Risks Relating to the Circe Network," "-- Risks Associated
with International Operations and Foreign Exchange Rate Risks," "-- Risks
Associated with the Operation of the Viatel Network," and "Business -- Business
Strategy -- Pursue Acquisitions, Investments and Strategic Alliances."
RAPIDLY CHANGING INDUSTRY, TECHNOLOGY AND CUSTOMER REQUIREMENTS; SIGNIFICANT
PRICE DECLINES
The telecommunications industry is changing rapidly due to, among other
factors, liberalization, privatization of ITOs, technological improvements,
expansion of telecommunications infrastructure and the globalization of the
world's economies and free trade. Such changes may happen at any time and can
significantly affect the Company's operations from period to period. There can
be no assurance that one or more of these factors will not have unforeseen
effects which could have a material adverse effect on the Company. There can
also be no assurance, even if these factors turn out as anticipated, that the
Company will be able to implement its strategy or that its strategy will be
accepted in this rapidly evolving market.
The telecommunications industry is characterized by rapid and significant
technological advancements, introductions of new products and services utilizing
new technologies, increased availability of transmission capacity and increased
utilization of the Internet for voice and data transmission. As new technologies
develop, the Company may be placed at a competitive disadvantage and competitive
pressures may force the Company to implement such new technologies at
substantial cost. In addition, competitors may implement new technologies before
the Company is able to implement such technologies, allowing such competitors to
provide enhanced services and superior quality compared to those provided by the
Company. There can be no assurance that the Company will be able to respond to
such competitive pressures and implement such technologies on a timely basis or
at an acceptable cost. One or more of the technologies currently utilized by the
Company, or which it may implement in the future, may not be preferred by its
customers or may become obsolete. If the Company is unable to respond to
competitive pressures, implement new technologies on a timely basis, penetrate
new markets in a timely manner in response to changing market conditions or
customer requirements, or if new or enhanced services offered by the Company do
not achieve a significant degree of market acceptance, any such event could have
a material adverse effect on the Company's business, financial condition,
results of operations and its ability to make payments on the Notes.
Prices for international long distance calls historically have been kept
artificially high in part by above-cost international settlement rates and have
allowed carriers to enjoy artificially high gross margins on
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international calls. However, many observers believe that, given the negligible
marginal cost to a facilities-based carrier of carrying an international call
and given the emergence of competition in many countries, the international
settlement rate system is in the process of collapsing and that the price of
international calls will not be sufficiently more expensive than domestic long
distance calls. In addition, an EU Directive which became effective on January
1, 1998 (the "Interconnection Directive"), requires EU operators with
significant market power to charge cost-based and non-discriminatory prices for
transmission of cross-border traffic. This will have an effect on settlement
rates with countries and territories outside the EU and may also contribute to
the collapse of the international settlement rate system. For the foregoing
reasons, substantial price reductions have begun to be reflected in
international rates, particularly the rates charged for calls between countries
where competition exists. For example, Sprint has reduced its rates on certain
calls between the United States and the United Kingdom to $.10 per minute. This
represents a steep decline from rates charged for such calls as recently as
several years ago and the Company expects rates on international calls,
particularly between the United States and Western Europe, to continue to
decline significantly. Furthermore, the FCC has adopted the International
Settlement Rate Order, which is designed to bring downward pressure on
international telephone rates by requiring U.S. carriers to pay lower settlement
rates to their correspondent foreign carriers.
Industry observers predict that telephone charges will be less affected by
the distance a call is carried, particularly with the possible increased use of
voice services over the Internet. As a consequence, the Company would experience
a substantial reduction in its gross margin on international calls which, absent
a substantial increase in billable minutes of traffic carried or charges for
additional services, would have a material adverse effect on the Company's
business, financial condition, results of operations and its ability to make
payments on the Notes. In addition, France Telecom and Deutsche Telekom have
taken steps to substantially reduce retail prices, in excess of reductions in
wholesale prices, in an effort to protect their market share and deter
competitors, such as the Company. See "-- Competition" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
RISKS ASSOCIATED WITH THE OPERATION OF THE VIATEL NETWORK
The Company's success is dependent on the seamless technical operation of
the Viatel Network and on the management of traffic volumes and route selection
over the network. Furthermore, as the Company expands the Viatel Network to
increase both its capacity and reach, and as traffic volume continues to
increase, the Company will face increasing demands and challenges in running and
managing the network, including its circuit capacity and traffic management
systems. The Viatel Network is subject to several risks which are outside of the
Company's control, such as the risk of damage to software and hardware resulting
from fire, power loss, natural disasters and general transmission failures
caused by a number of additional factors. Any failure of the Viatel Network or
other systems or hardware that causes significant interruptions to the Company's
operations could have and a material adverse effect on the Company's business,
financial condition and results of operations and its ability to make payments
on the Notes. The Company's operations are also dependent on its ability to
successfully integrate new and emerging technologies and equipment into the
Viatel Network, which could increase the risk of system failure and result in
further strains upon the Viatel Network. The Company attempts to minimize
customer inconvenience in the event of a system disruption by routing traffic to
other circuits and switches which may be owned by other carriers. However,
prolonged or significant system failures, or difficulties for customers in
accessing and maintaining connection with the Viatel Network, could seriously
damage the reputation of the Company and result in customer attrition and
financial losses. Additionally, any damage to the Company's switching centers in
Omaha, Nebraska could have a material adverse effect on the Company's ability to
monitor and manage the network operations and generate accurate call detail
reports.
The expansion and development of the Viatel Network will entail the
significant expenditure of resources in projecting growth in traffic volume and
routing preferences and determining the most cost-effective means of growing the
Viatel Network, for example, through variable or fixed lease arrangements, the
purchase of IRUs or MIUs on digital fiber optic cables or digital microwave
equipment, or the
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construction of transmission infrastructure. Failure to project traffic volume
and route preferences correctly or to determine the optimal means of expanding
the Viatel Network would result in less than optimal utilization of the Viatel
Network and could have a material adverse effect on the Company's business,
financial condition, results of operations and its ability to make payments on
the Notes. See "Business -- The Viatel Network."
DEPENDENCE ON EFFECTIVE INFORMATION SYSTEMS; YEAR 2000 TECHNOLOGY RISKS
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, particularly 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 failure 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, results
of operations and its ability to make payments on the Notes. See "Business --
Information Systems."
While the Company believes that its software and hardware systems are Year
2000 compliant, there can be no assurance until the Year 2000 occurs that all
systems will then function adequately. The Company does not know whether the
computer systems of ITOs and other carriers on whose services the Company
depends for transmission capacity are Year 2000 compliant. If the computer
systems of the ITOs and such other carriers are not Year 2000 compliant, it
could have a material adverse effect on the Company's business, financial
condition, results of operations and its ability to make payments on the Notes.
RELIANCE ON THIRD PARTIES FOR LEASED CAPACITY AND INTERCONNECTION ARRANGEMENTS
Other than IRUs and MIUs in certain digital fiber optic cables, the Company
does not currently own any telecommunications transmission lines. As a result,
the Company depends upon other facilities-based carriers, virtually all of which
are competitors of the Company. The Company currently leases transmission lines
from, among others, British Telecom, Cable & Wireless, and the respective ITO in
each country in which the Company operates. In addition, the Company's ability
to connect customers to the Viatel Network is dependent upon the Company's
ability to secure interconnection agreements, providing access and egress into
and from the PSTN, with the respective ITO in each market in which the Company
operates. The Company currently has interconnection agreements with Cable &
Wireless, British Telecom, in the United Kingdom, KPN in The Netherlands,
Infostrada in Italy and Deutsche Telekom and ECN Telecommunications in Germany,
and expects to secure additional interconnection agreements in certain other EU
member states in which the Company operates as liberalization continues. The
Company is currently negotiating interconnection agreements with France Telecom,
Belgacom and Telecom Italia. The Company expects to encounter strong resistance
to its efforts to obtain economical interconnection agreements. Even if the
Company obtains such agreements, the actual interconnection of the Viatel
Network with the ITOs is expected to involve disputes and delays. There can be
no assurance that the Company will be successful in securing such
interconnection agreements and actual interconnection in a satisfactory or
timely manner.
The Company currently leases capacity for point-to-point circuits with fixed
monthly payments and buys minutes of use pursuant to agreements with maximum
twelve-month terms and is vulnerable to changes in its lease arrangements,
capacity limitations and service cancellations. These lease arrangements present
the Company with high fixed costs, while revenues generated by the utilization
of these leases will vary based on traffic volume and pricing. Accordingly, if
the Company is unable to generate sufficient traffic volume over particular
routes or is unable to charge appropriate rates, the Company could fail to
generate revenue sufficient to meet the fixed costs associated with the lease
and may incur negative gross
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margins with respect to such routes. Although the Company believes that its
arrangements and relationships with other carriers generally are satisfactory,
the deterioration or termination of the Company's arrangements and relationships
with one or more carriers could have a material adverse effect on the Company's
cost structure, service quality, network coverage, financial condition, results
of operations and its ability to make payments on the Notes. See "Business --
The Viatel Network" and "-- Carrier Contracts."
DEPENDENCE ON CARRIER CUSTOMERS
Revenues derived from carrier customers accounted for 27.9% of the Company's
revenues during 1997 and 44.8% during the first quarter of 1998. Such revenues
are produced by a limited number of carrier customers. Accordingly, the loss of
revenue from one or more carrier customers could have a material adverse effect
upon the Company's business, financial condition, results of operations and its
ability to make payment of the Notes.
Carrier customers are extremely price sensitive, generate very low margin
business and often choose to move their business based solely on small price
changes. In addition, smaller carrier customers generally are perceived in the
telecommunications industry as presenting a higher risk of payment delinquency
or non-payment than other customers. While the Company believes that its credit
criteria enables it to reduce its exposure to the higher payment risks generally
associated with carrier customers, no assurance can be given that such criteria
will afford adequate protection against such risks.
DEPENDENCE ON KEY PERSONNEL
The success of the Company's business will depend, to a significant extent,
upon the abilities and continued efforts of its senior management, and
particularly upon the abilities and efforts of Michael J. Mahoney, the Company's
Chief Executive Officer and President. The Company does not currently have
employment agreements with any executive officer other than Michael J. Mahoney,
Allan L. Shaw, the Company's Senior Vice President and Chief Financial Officer
and Sheldon M. Goldman, the Company's Senior Vice President, Business Affairs
and General Counsel. Except for a $3.0 million "key-man" life insurance policy
which the Company has obtained on the life of Mr. Mahoney, the Company does not
maintain and does not contemplate obtaining such life insurance policies on any
of its employees. The Company's success also will depend on its ability to
attract, retain and motivate qualified management, marketing, technical and
sales executives and other personnel who are in high demand and are often
subject to competing employment opportunities. In addition, the labor market for
software engineers and central office technicians has been extremely competitive
recently and the Company may lose key employees or be forced to increase their
compensation. The loss of the services of key personnel, or the inability to
attract additional qualified personnel, could have a material adverse effect on
the Company's business, financial condition, results of operations and its
ability to make payments on the Notes. There can be no assurance that the
Company will be successful in attracting, retaining and motivating such
personnel. Although members of management participate in the Stock Incentive
Plan (as defined herein), their options do not currently provide the right to
acquire a significant portion of the equity of Viatel. See "Management --
Directors and Executive Officers," "--Stock Option Grants," "-- Employment
Agreements," "-- Stock Incentive Plan" and "Principal Stockholders."
CONTROL BY PRINCIPAL STOCKHOLDERS
COMSAT International, Inc. ("COMSAT"), S-C V-Tel Investments, L.P. ("S-C
V-Tel") and Martin Varsavsky control, in the aggregate, approximately 40.1% of
the outstanding shares of Common Stock and Mr. Varsavsky individually
beneficially owns approximately 23.5% of the outstanding shares of Common Stock.
To the extent that these stockholders exercise their voting rights in concert,
they effectively will have the ability to control the election of all members of
the Company's Board of Directors, the outcome of most matters submitted to a
vote of the holders of Common Stock and generally will be able to direct the
affairs of the Company. The exercise of these powers may present conflicts of
interest between the
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individuals and the holders of the Notes. See "Management -- Compensation
Committee Interlocks and Insider Participation -- Shareholders Agreements," "--
Compensation Committee Interlocks and Insider Participation -- Voting Agreement"
and "Principal Stockholders."
ORIGINAL ISSUE DISCOUNT CONSEQUENCES
The Existing 12.50% Notes and the Existing 12.40% Notes were issued with
original issue discount ("OID") for U.S. federal income tax purposes. The 12.50%
Exchange Notes and the 12.40% Exchange Notes should be treated as a continuation
of the Existing 12.50% Notes and the Existing 12.40% Notes, respectively.
Consequently, a holder of 12.50% Notes and 12.40% Notes will be required to
include in such holder's income, for United States federal income tax purposes,
OID with respect to such Notes as it accrues although no cash payments of
interest thereon are scheduled to be made until October 15, 2003. See "Certain
Income Tax Considerations -- Certain United States Federal Income Tax
Considerations -- The Notes -- Original Issue Discount."
If a bankruptcy case is commenced by or against the Company under the United
States Bankruptcy Code, the claim of a holder of Discount Notes may be limited
to an amount equal to the sum of the issue price as determined by the bankruptcy
court and that portion of the OID which is deemed to accrue from the issue date
to the date of any such bankruptcy filing.
In addition, it is likely that the 12.50% Exchange Notes and the 12.40%
Exchange Notes will constitute "applicable high yield discount obligations"
("AHYDOs") for United States federal income tax purposes. If the 12.50% Exchange
Notes and the 12.40% Exchange Notes do constitute AHYDOs, the Company will not
be permitted to deduct OID in respect of the 12.50% Exchange Notes and the
12.40% Exchange Notes until amounts corresponding to such discount are paid in
cash, and some portion of such discount may not be deductible at any time. See
"Certain Income Tax Considerations -- Certain United States Federal Income Tax
Considerations -- The Notes -- Applicable High Yield Discount Obligations."
POSSIBLE LIMITATIONS ON NET OPERATING LOSS CARRYFORWARDS
As of March 31, 1998, the Company had unused United States federal and
foreign income tax net operating loss ("NOL") carryforwards of approximately
$101.8 million. Such NOL carryforwards begin to expire in the year 2007.
As a result of an "ownership change," as defined in Section 382 of the
Internal Revenue Code of 1986, as amended (the "Code"), in October 1996, certain
of the Company's NOL carryforwards from periods before such time are subject to
annual limitations. Section 382 of the Code imposes limitations with respect to
the carryforward of NOLs by a corporation that experiences a more-than-50
percent ownership change over a three-year period (or over a shorter period if
there has been a prior ownership change within the immediately preceding
three-year period). In general, if such an ownership change occurs, Section 382
of the Code limits the amount of the NOLs carried over from pre-ownership change
years that can be used in any post-ownership change year to an amount equal to
the product obtained by multiplying (1) the value of the corporation's capital
stock (with certain adjustments) at the time of the ownership change and (2) an
interest rate determined by the Internal Revenue Service for the month of the
ownership change.
It is possible that the Offering, when combined with subsequent direct or
indirect changes in the ownership of the Company's capital stock within the
relevant testing period, could result in a more-than-50 percent ownership change
and substantially restrict the Company's subsequent use of its then unutilized
NOL carryforwards.
The Company will be required to pay U.S. federal income tax in any year in
which its taxable income exceeds the amount of each of the NOL carryforwards
limited by Section 382 of the Code, plus the aggregate NOL carryforwards from
years after an ownership change. To the extent that the Company does not use the
full amount of its limited NOL carryforward in any year, such unused portion can
be used to
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increase the NOL carryforward limitation for subsequent years prior to the
expiration of the NOL carryforwards subject to the limitation.
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 start-up of Phase 1 and Phase 2
of the Circe Network; (v) the timing and costs of any acquisitions of customer
bases and businesses, services or technologies; (vi) the timing and costs of
marketing and advertising efforts; (vii) the effects of government regulation
and regulatory changes; and (viii) specific economic conditions in the
telecommunications industry. Such variability could have a material adverse
effect on the Company's business, financial condition, results of operations and
its ability to make payments on the Notes. Any significant shortfall in demand
for the Company's services in relation to the Company's expectations, or the
occurrence of any other factor which causes revenue to fall significantly short
of the Company's expectations, would also have a material adverse effect on the
Company's business, financial condition and results of operations and its
ability to make payments on the Notes. 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. See "-- Limited Operating
History; Substantial Net Losses and Negative Cash Flow from Operations; Expected
Future Net Losses and Negative Cash Flow from Operations," "Selected
Consolidated Financial and Other Data" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
ABSENCE OF A PUBLIC MARKET FOR THE EXCHANGE NOTES
The Existing Notes have been approved for trading in the PORTAL market.
However, the Exchange Notes will be new securities for which there is currently
no public market. There is no established trading market for the Exchange Notes.
Viatel does not currently intend to apply for listing of the Exchange Notes on
any national securities exchange or for quotation through any automated
quotation system. Accordingly, there can be no assurance as to the development
of any market for or the liquidity of any market that may develop for the
Exchange Notes, the ability of the holders of the Exchange Notes to sell their
Exchange Notes or the price at which such holders would be able to sell their
Exchange Notes. If such a trading market were to develop, the Exchange Notes
could trade at prices that may be higher or lower than the initial market values
depending on many factors, including prevailing interest rates, Viatel's results
of operations, the market for similar securities and general macroeconomic and
market conditions.
Historically, the market for noninvestment grade debt securities have been
subject to disruptions that have caused substantial volatility in the prices of
securities similar to the Notes. There can be no assurance that the markets for
the Exchange Notes will not be subject to similar disruptions. Any such
disruptions may have an adverse effect on the holders of the Notes.
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THE EXCHANGE OFFERS
The Existing Notes were issued and sold by Viatel to the Initial Purchasers
on April 8, 1998 pursuant to the Purchase Agreement. The Initial Purchasers
subsequently resold the Existing Notes to persons in offshore transactions in
reliance on Regulation S and to qualified institutional buyers (or "QIBs") in
reliance on Rule 144A. Viatel and the Initial Purchasers also entered into the
1998 Registration Rights Agreement, pursuant to which Viatel agreed, with
respect to the Existing Notes and subject to the determination that the Exchange
Offers are permitted under applicable law, to use its best efforts to consummate
the Exchange Offers on or prior to October 8, 1998. A copy of the 1998
Registration Rights Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part and the description of the terms of
the 1998 Registration Rights Agreement is qualified in its entirety by reference
thereto.
In the event that applicable interpretations of the staff of the Commission
do not permit Viatel to effect the Exchange Offers, or under certain other
circumstances, Viatel is required, at its cost, to use its best efforts to cause
to become effective a shelf registration statement (the "Shelf Registration
Statement") with respect to resales of the Existing Notes by holders who satisfy
certain conditions relating to the provision of information, and to keep such
registration statement effective until the expiration of the time period
referred to in Rule 144(k) under the Securities Act after April 8, 1998, or such
shorter period that will terminate when all Existing Notes covered by such Shelf
Registration Statement have been sold thereunder. The Exchange Offers are
intended to satisfy Viatel's exchange offer obligations under the 1998
Registration Rights Agreement.
In the event that the Exchange Offers are not consummated, or the Shelf
Registration Statement is not declared effective on or prior to October 8, 1998
(or the Registration Statement ceases to be effective or usable) then, from and
after October 9, 1998, interest (in addition to the accrual of original issue
discount on the Existing Discount Notes and interest otherwise due on the
Existing Senior Notes will accure, (i) with respect to the Existing Discount
Notes, at the rate of 0.5% per annum of the Accreted Value on the preceding
Semi-Annual Accrual Date (as defined), and (ii) with respect to the Existing
Senior Notes, at the rate of 0.5% per annum of the principal amount, and, in
each case, be payable in cash semi-annually on April 15 and October 15 of each
year, commencing April 15, 1999, until the Exchange Offers are consummated or
the Shelf Registration Statement is declared effective. Upon consummation of the
Exchange Offers, holders of Existing Notes will not be entitled to any increase
in the interest rate thereon or any further registration rights under the 1998
Registration Rights Agreement.
The Existing Notes were issued by the Company as part of the Units. Upon the
effectiveness of the Registration Statement, the Series A Preferred and the
Subordinated Convertible Debentures, as the case may be, issued as part of such
Units will become separately tradeable from the Existing Notes. The Series A
Preferred and the Subordinated Convertible Debentures are not part of the
Exchange Offers.
TERMS OF THE EXCHANGE OFFERS
GENERAL
Viatel hereby offers, upon the terms and subject to the conditions set forth
herein, and in the accompanying Letters of Transmittal, to exchange $1,000
principal amount at maturity of 12.50% Exchange Notes and $1,000 principal
amount of 11.25% Exchange Notes for each $1,000 principal amount at maturity of
Existing 12.50% Notes and $1,000 principal amount of Existing 11.25% Notes,
respectively. Viatel also hereby offers, upon the terms and subject to the
conditions set forth herein and in the accompanying Letters of Transmittal, to
exchange DM 100,000 principal amount at maturity, and any integral multiple of
DM 1,000 above such number, of 12.40% Exchange Notes and 11.15% Exchange Notes
for a like principal amount of Existing 12.40% Notes and Existing 11.15% Notes.
The Exchange Offers will commence on August 17, 1998. Viatel will accept for
exchange any and all Existing Notes that are validly tendered on or prior to
5:00 p.m., New York City time, on the Expiration Date. The Exchange
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Offers are not conditioned upon any minimum principal amount of Existing Notes
being tendered for exchange (except as provided herein for 12.40% Exchange Notes
and 11.15% Exchange Notes). However, the Exchange Offers are subject to the
terms and provisions of the 1998 Registration Rights Agreement. See "--
Conditions of the Exchange Offers."
Any holder of Existing Notes that is an "affiliate" of Viatel within the
meaning of Rule 405 under the Securities Act may not participate in the Exchange
Offers. Viatel believes that, as of the date of this Prospectus, no such holder
is an "affiliate" as defined in Rule 405.
Existing Notes may be tendered only in multiples of $1,000 (except as
provided herein for Existing 12.40% Notes and Existing 11.15% Notes). Subject to
the foregoing, holders may tender less than the aggregate principal amount
represented by the Existing Notes held by them, provided that they appropriately
indicate this fact on the applicable Letter of Transmittal accompanying the
tendered Existing Notes (or so indicate pursuant to the procedures for
book-entry transfer).
As of the date hereof, $500.0 million principal amount at maturity
($272,055,000 original issue price) of Existing 12.50% Notes, $400.0 million
principal amount of Existing 11.25% Notes, DM 226.0 million principal amount at
maturity (DM 123,549,680 original issue price) of Existing 12.40% Notes and DM
178.0 million principal amount of Existing 11.15% Notes are outstanding. Solely
for reasons of administration (and for no other purpose), Viatel has fixed the
close of business on August 10, 1998 as the Exchange Record Date for purposes of
determining the persons to whom this Prospectus and the applicable Letter of
Transmittal will be mailed initially. Only a holder of Existing Notes or such
holder's legal representative or attorney-in-fact may participate in the
Exchange Offers. There will be no fixed record date for determining holders of
Existing Notes entitled to participate in the Exchange Offers. Holders of
Existing Notes do not have any appraisal or dissenter's rights under the General
Corporation Law of Delaware or the Indentures in connection with the Exchange
Offers.
Viatel shall be deemed to have accepted validly tendered Existing Notes
when, as and if Viatel has given oral notice (confirmed in writing) of such
acceptance to the Exchange Agents. The Exchange Agents will act as agents for
Viatel.
If any tendered Existing Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, any such unaccepted Existing Notes will be returned, without expense,
to the tendering holder thereof as promptly as practicable after the Expiration
Date.
The Exchange Notes issued pursuant to the Exchange Offers will be delivered
as promptly as practicable following the Expiration Date.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The Expiration Date shall be September 17, 1998, at 5:00 p.m., New York City
time, unless extended, in which case the Expiration Date shall be the latest
date and time to which the Exchange Offers are extended.
In order to extend the Exchange Offers, Viatel will notify the Exchange
Agents of any extension by oral or written notice and will make a public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date.
Viatel reserves the right, in its sole discretion (but subject to the 1998
Registration Rights Agreement) (i) to delay accepting any Existing Notes, (ii)
to extend the Exchange Offers and (iii) to amend the terms of the Exchange
Offers in any manner. If the Exchange Offers are amended in a manner determined
by Viatel to constitute a material change, Viatel will promptly disclose such
amendments by means of a prospectus supplement that will be distributed to the
registered holders of the Existing Notes and Viatel will extend the Exchange
Offers for a period of five to ten business days, depending upon the
significance of the amendment and the manner of disclosure to the registered
holders, if the Exchange Offers would otherwise expire during such five to ten
business day period.
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PROCEDURES FOR TENDERING THE NON-DBC NOTES
The tender of a holder's Existing Notes as set forth below and the
acceptance thereof by Viatel will constitute a binding agreement between the
tendering holder and Viatel upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letters of Transmittal. Except
as set forth below, a holder who wishes to tender non-DBC Notes for exchange
pursuant to the Exchange Offers must transmit such non-DBC Notes to the U.S.
Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date,
together with either (i) a properly completed and duly executed applicable
Letter of Transmittal, or facsimile thereof, together with such non-DBC Notes
and any other documents required by such Letter of Transmittal, for receipt by
the U.S. Exchange Agent at the address set forth herein and therein or (ii) a
computer generated message (an "Agent's Message"), transmitted by means of DTC
ATOP system and received by the U.S. Exchange Agent, in which such holder
acknowledges and agrees to be bound by the terms of the applicable Letter of
Transmittal.
THE METHOD OF DELIVERY OF NON-DBC NOTES, LETTERS OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER. IF SUCH
DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED,
WITH RETURN RECEIPT REQUESTED, BE USED. INSTEAD OF DELIVERY BY MAIL, IT IS
RECOMMENDED THAT THE HOLDER USE AN OVER-NIGHT OR HAND DELIVERY SERVICE. IN ALL
SUCH CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO
NON-DBC NOTES OR LETTERS OF TRANSMITTAL SHOULD BE SENT TO VIATEL.
Any financial institution that is a participant in the Book-Entry Transfer
Facility System of DTC may make book-entry delivery of the non-DBC Notes by
causing DTC to transfer such non-DBC Notes into the U.S. Exchange Agent's
account in accordance with DTC's procedures for such transfer. In connection
with a book-entry transfer, a Letter of Transmittal need not be transmitted to
the U.S. Exchange Agent, provided that the book-entry transfer procedure
transferring such non-DBC Notes must be complied with prior to 5:00 p.m., New
York City time, on the Expiration Date.
Any non-DBC Notes presented to the U.S. Exchange Agent for exchange pursuant
to the Exchange Offers shall be exchanged for Exchange Notes of equal principal
amount upon surrender to the U.S. Exchange Agent of the non-DBC Notes to be
exchanged; PROVIDED that the non-DBC Notes so surrendered for exchange are
accompanied by the applicable Letter of Transmittal duly executed by the holder
and are duly endorsed or accompanied by a written instrument of transfer in form
satisfactory to Viatel, the Trustee and the U.S. Exchange Agent and duly
executed by the holder thereof or such holder's attorney who shall be duly
authorized in writing to execute such document on the behalf of such holder.
Whenever any non-DBC Notes are so surrendered for exchange, Viatel shall
execute, and the Trustee shall authenticate and deliver to the surrendering
holder thereof, Exchange Notes in the same aggregate principal amount as the
non-DBC Notes so surrendered as promptly as practicable following the Expiration
Date.
Each signature on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the non-DBC Notes surrendered for exchange are tendered (i) by a
registered holder (as defined below) of the non-DBC Notes who has not completed
either the box entitled "Special Issuance Instructions" or the box entitled
"Special Delivery Instructions" in the applicable Letter of Transmittal, or (ii)
for the account of an Eligible Institution. In the event that a signature on a
Letter of Transmittal or a notice of withdrawal, as the case may be, is required
to be guaranteed, such guarantee must be by a firm that is a member of a
registered national securities exchange or the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or otherwise be an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 under the Exchange Act
(collectively, "Eligible Institutions"). If the applicable Letter of Transmittal
is signed by a person other than the registered holder of the non-DBC
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Notes, the non-DBC Notes surrendered for exchange must either (i) be endorsed by
the registered holder, with the signature thereon guaranteed by an Eligible
Institution or (ii) be accompanied by a bond power, in satisfactory form as
determined by Viatel in its sole discretion, duly executed by the registered
holder, with the signature thereon guaranteed by an Eligible Institution. The
term "registered holder" as used herein with respect to non-DBC notes means any
person in whose name the non-DBC Notes are registered on the books of the
registrar under the applicable Indenture.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the non-DBC Notes tendered for exchange
will be determined by Viatel in its sole discretion, which determination shall
be final and binding. Viatel reserves the absolute right to reject any and all
non-DBC Notes not properly tendered and to reject any non-DBC Notes Viatel's
acceptance of which might, in the judgment of Viatel or its counsel, be
unlawful. Viatel also reserves the absolute right to waive any defects or
irregularities or conditions of the Exchange Offers as to particular non-DBC
Notes either before or after the Expiration Date (including the right to waive
the ineligibility of any holder who seeks to tender non-DBC Notes in the
Exchange Offers). The interpretation of the terms and conditions of the Exchange
Offers (including the Letters of Transmittal and the instructions thereto) by
Viatel shall be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of non-DBC Notes for exchange must be
cured within such period of time as Viatel shall determine. Viatel will use
reasonable efforts to give notification of defects or irregularities with
respect to tenders of non-DBC Notes for exchange but shall not incur any
liability for failure to give such notification. Tenders of the non-DBC Notes
will not be deemed to have been made until such irregularities have been cured
or waived.
If any Letter of Transmittal is signed by a person or persons other than the
holders of non-DBC Notes, such Letter of Transmittal must be accompanied by an
appropriate power of attorney, in either case signed exactly as the name or
names of the registered holder or holders appear on the non-DBC Notes or
security position listing maintained by DTC, as the case may be. If any Letter
of Transmittal, endorsement, bond power, power of attorney or any other
documents required by the Letter of Transmittal is signed by a trustee,
executor, administrator, guardian, attorney-in-fact, officer of the corporation
or other person acting in a fiduciary or representative capacity, such person
should so indicate when signing, and, unless waived by Viatel, proper evidence
satisfactory to Viatel, in its sole discretion, of such person's authority to so
act must be submitted.
Any beneficial owner of a non-DBC Note (a "Beneficial Owner") whose non-DBC
Notes are registered in the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender non-DBC Notes in the Exchange
Offers should contact such registered holder promptly and instruct such
registered holder to tender on such Beneficial owner's behalf. If such
Beneficial Owner wishes to tender directly and is the Beneficial Owner of a
non-DBC Note in certificated form, such Beneficial Owner must, prior to
completing and executing the Letter of Transmittal and tendering non-DBC Notes,
make appropriate arrangements to register ownership of the non-DBC Notes in such
Beneficial Owner's name. Beneficial Owners should be aware that the transfer of
registered ownership may take considerable time.
By tendering (including transmission of an Agent's Message), each holder
will represent to Viatel that, among other things (i) the Exchange Notes to be
acquired in connection with the Exchange Offers by the holder and each
Beneficial Owner of the non-DBC Notes are being acquired by the holder and each
Beneficial Owner in the ordinary course of business of the holder and each
Beneficial Owner; (ii) the holder is not participating, does not intend to
participate, and has no arrangement or understanding with any person to
participate, in any distribution of the Exchange Notes; (iii) neither the holder
nor the related Beneficial Owner is an "affiliate" of Viatel within the meaning
of Rule 405 under the Securities Act; and (iv) if the holder is a broker-dealer
holding Notes acquired for its own account as a result of market-making
activities or other trading activities, it acknowledges that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of Exchange Notes received in respect of such tendered non-DBC Notes
pursuant to the Exchange Offers. In connection with a book-entry transfer,
42
<PAGE>
each participant will confirm that it makes the representations and warranties
contained in the applicable Letter of Transmittal.
BOOK-ENTRY TRANSFER
The U.S. Exchange Agent will make a request to establish an account with
respect to the non-DBC Notes at the Book-Entry Transfer Facility of DTC for the
purpose of the Exchange Offers promptly after the date of this Prospectus. Any
financial institution that is a participant in the Book-Entry Transfer
Facility's system may make book-entry delivery of non-DBC Notes by causing the
Book-Entry Transfer Facility to transfer such non-DBC Notes into the U.S.
Exchange Agent's account in accordance with DTC's ATOP procedures for transfer.
Holders of non-DBC Notes who are unable to deliver confirmation of the
book-entry tender of their non-DBC Notes into the U.S. Exchange Agent's account
at the Book-Entry Transfer Facility or any other documents required by the
applicable Letter of Transmittal to the U.S. Exchange Agent on or prior to the
Expiration Date must tender their non-DBC Notes according to the guaranteed
delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their non-DBC Notes and (i) whose Existing Notes
are not immediately available or (ii) who cannot deliver their non-DBC Notes and
any other documents required by the applicable Letter of Transmittal to the U.S.
Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date
(or who cannot complete the procedure for book-entry transfer on a timely
basis), may tender their non-DBC Notes according to the guaranteed delivery
procedures set forth in the applicable Letter of Transmittal. Pursuant to such
procedures: (i) such tender must be made by or through an Eligible Institution,
(ii) on or prior to the Expiration Date, the U.S. Exchange Agent must have
received from the Eligible Institution a properly completed and duly executed
Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number or
numbers of the tendered non-DBC Notes, and the principal amount of tendered
non-DBC Notes, stating that the tender is being made thereby and guaranteeing
that, within three business days after the Expiration Date, a Letter of
Transmittal, or a facsimile thereof, together with the tendered Existing Notes
(or confirmation of a book-entry transfer of such non-DBC Notes into the U.S.
Exchange Agent's account at DTC), and any other required documents will be
deposited by the Eligible Institution with the U.S. Exchange Agent, and (iii)
such properly completed and executed Letter of Transmittal and all documents
required thereby, and the tendered non-DBC Notes in proper form for transfer (or
confirmation of a book-entry transfer of such Existing Notes into the U.S.
Exchange Agent's account at DTC), must be received by the U.S. Exchange Agent
within three business days after the Expiration Date. Any holder who wishes to
tender Existing Notes pursuant to the guaranteed delivery procedures described
above must ensure that the U.S. Exchange Agent receives the required Notice of
Guaranteed Delivery prior to 5:00 p.m., New York City time, on the Expiration
Date. Copies of a Notice of Guaranteed Delivery, which may be used by Eligible
Institutions for the purposes described in this paragraph are available from the
U.S. Exchange Agent.
PROCEDURES FOR THE TENDERING OF THE DBC NOTES
With respect to the DBC Notes, a holder wishing to tender DBC Notes for
exchange pursuant to the Exchange Offers must make book-entry delivery of such
DBC Notes by causing the transfer of such DBC Notes to the DBC-account of the
German Exchange Agent as set forth in the applicable Letter of Transmittal and
in accordance with the applicable German statutory and contractual provisions,
and must complete, sign and date the applicable Letter of Transmittal, or a
facsimile thereof, in accordance with the instructions contained herein and
therein, and must mail or otherwise deliver such Letter of Transmittal to the
German Exchange Agent at the address set forth herein and therein prior to 5:00
p.m., New York City time (11:00 p.m. Frankfurt/Main time) on the Expiration
Date. Timely delivery by book-entry transfer of
43
<PAGE>
the DBC Notes and of a properly completed and executed Letter of Transmittal to
the German Exchange Agent will be deemed a timely delivery of the DBC Notes.
The German Exchange Agent shall then send by wire or telecopy a confirmation
to Viatel stating the aggregate amount of such DBC Notes delivered by book-entry
transfer to its DBC-account.
Any DBC Notes tendered to the German Exchange Agent for exchange pursuant to
the Exchange Offers shall be exchanged for 12.40% Exchange Notes and 11.15%
Exchange Notes in the principal amount equal to that of the DBC Notes tendered,
provided that the Letters of Transmittal were duly executed by the respective
holders and that a valid book-entry transfer of the DBC Notes was made to the
German Exchange Agent's account in accordance with the terms set forth in the
applicable Letter of Transmittal and further provided that the DBC Notes may be
tendered only in denominations of DM 100,000 principal amount at maturity and
any integral multiples of DM 1,000 above such number and that no such partial
tender may reduce the principal amount at maturity of a DBC Note not tendered to
less than DM 100,000.
Upon consummation of the Exchange Offers, Viatel shall execute, and the
German Exchange Agent, in its capacity as a co-registrant under the Indentures
pursuant to which the DBC Notes were issued, shall authenticate, new DBC-DM
Global Certificates representing the aggregate amount of all of such 12.40%
Exchange Notes and 11.15% Exchange Notes. The New DBC-DM Global Certificates
shall be deposited with DBC as promptly as practicable following the
consummation of the Exchange Offers and all such 12.40% Exchange Notes and
11.15% Exchange Notes shall, on the German Exchange Agent's DBC account, replace
the DBC Notes tendered for exchange.
If all of the DBC Notes are tendered for exchange, the German Exchange Agent
shall request DBC to cancel the DBC-DM Global Certificates and shall withdraw
the cancelled DBC-DM Global Certificates.
If not all of the DBC Notes are tendered for exchange, the German Exchange
Agent shall make a request to DBC to deduct the aggregate amount of the DBC
Notes tendered for exchange pursuant to the Exchange Offers (which aggregate
amount shall be identical with the aggregate amount of the New DBC-DM Global
Certificates) from the principal amount of the DBC-DM Global Certificates.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the DBC Notes tendered for exchange will
be determined by Viatel in its sole discretion, which determination shall be
final and binding. Viatel reserves the absolute right to reject any and all DBC
Notes not properly tendered and to reject any DBC Notes Viatel's acceptance of
which might, in the judgment of Viatel or its counsel, be unlawful. Viatel also
reserves the absolute right to waive any defects or irregularities or conditions
of the Exchange Offers as to particular DBC Notes either before or after the
Expiration Date (including the right to waive the ineligibility of any holder
who seeks to tender DBC Notes in the Exchange Offers). The interpretation of the
terms and conditions of the Exchange Offers (including the Letters of
Transmittal and the instructions thereto) by Viatel shall be final and binding
on all parties. Unless waived, any defects or irregularities in connection with
tenders of DBC Notes for exchange must be cured within such period of time as
Viatel shall determine. Viatel will use reasonable efforts to give notification
of defects or irregularities with respect to tenders of DBC Notes for exchange
but shall not incur any liability for failure to give such notification. Tenders
of the DBC Notes will not be deemed to have been made until such irregularities
have been cured or waived.
ACCEPTANCE OF EXISTING NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all the conditions to the Exchange Offers,
Viatel will accept any and all Existing Notes that are properly tendered in the
Exchange Offers prior to 5:00 p.m., New York City time, on the Expiration Date.
The Exchange Notes issued pursuant to the Exchange Offers will be delivered as
promptly as practicable following the Expiration Date. For the purposes of the
Exchange Offers, Viatel
44
<PAGE>
shall be deemed to have accepted validly tendered Existing Notes, when, as, and
if Viatel has given oral notice (confirmed in writing) thereof to the applicable
Exchange Agent.
In all cases, issuance of Exchange Notes for Existing Notes that are
accepted for exchange pursuant to the Exchange Offers will be made only after
timely receipt by (i) the U.S. Exchange Agent of such non-DBC Notes, properly
completed and duly executed applicable Letter of Transmittal and all other
required documents (or of confirmation of a book-entry transfer of such non-DBC
Notes into the U.S. Exchange Agent's account at DTC) or (ii) the German Exchange
Agent of such DBC Notes delivered by book-entry transfer and a properly
completed and duly executed applicable Letter of Transmittal; PROVIDED HOWEVER,
that Viatel reserves the absolute right to waive any defects or irregularities
in the tender or conditions of the Exchange Offers. If any tendered Existing
Notes are not accepted for any reason, such unaccepted Existing Notes will be
returned without expense to the tendering holder thereof as promptly as
practicable after the expiration or termination of the Exchange Offers.
WITHDRAWAL OF TENDERS OF EXISTING NOTES
Tenders of the non-DBC Notes may be withdrawn by delivery of a written
notice to the U.S. Exchange Agent, at its address set forth herein and in the
applicable Letter of Transmittal, at any time prior to 5:00 p.m., New York City
time, on the Expiration Date, unless previously accepted by Viatel. Tenders of
the DBC Notes may be withdrawn by delivery of a written notice to the German
Exchange Agent, at its address set forth herein and in the applicable Letter of
Transmittal, at any time prior to 5:00 p.m., New York City time, on the
Expiration Date, unless previously accept by Viatel. Any such notice of
withdrawal must (i) specify the name of the person having deposited the Existing
Notes to be withdrawn (the "Depositor"), (ii) identify the Existing Notes to be
withdrawn (including the certificate number or numbers and principal amount of
such Existing Notes, as applicable), (iii) be signed by the holder in the same
manner as the original signatures on the Letter of Transmittal by which such
Existing Notes were tendered (including, with respect to the non-DBC Notes, any
required signature guarantee) or be accompanied by a bond power in the name of
the person withdrawing the tender, in satisfactory form as determined by Viatel
in its sole discretion, duly executed by the registered holder, with the
signature thereon guaranteed by an Eligible Institution (with respect to the
non-DBC Notes) together with the other documents required upon transfer by the
applicable Indenture, and (iv) specify the name in which such Existing Notes are
to be re-registered, if different from the Depositor, pursuant to such documents
of transfer. All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by Viatel, in its sole
discretion. The Existing Notes so withdrawn will be deemed not to have been
validly tendered for exchange for purposes of the Exchange Offers. Any Existing
Notes that have been tendered for exchange but that are withdrawn will be
returned to the holder thereof without cost to such holder as soon as
practicable after withdrawal. Properly withdrawn Existing Notes may be
retendered by following one of the procedures described under "-- Procedures for
Tendering Existing Notes" at any time on or prior to the Expiration Date.
CONDITIONS OF THE EXCHANGE OFFERS
Notwithstanding any other terms of the Exchange Offers, or any extension of
the Exchange Offers, Viatel shall not be required to accept for exchange, or
exchange Exchange Notes for, any Existing Notes, and my terminate the Exchange
Offers as provided herein before the acceptance of such Existing Notes, if:
(a) any statute, rule or regulation shall have been adopted or enacted,
or any actions shall have been taken or threatened by any court or
governmental authority which, in the sole judgment of Viatel would impair
Viatel's ability to proceed with the Exchange Offers or which would
prohibit, restrict or otherwise render illegal consummation of the Exchange
Offers; or
(b) any change, or any development involving a prospective change, in
the business or financial affairs of Viatel or any of its subsidiaries has
occurred which, in the sole judgment of Viatel might
45
<PAGE>
materially impair the ability of Viatel to proceed with the Exchange Offers
or materially impair the contemplated benefits of the Exchange Offers to
Viatel; or
(c) any stop order of the Commission or of any state securities
commission shall be threatened or in effect with respect to the Registration
Statement of which this Prospectus constitutes a part or qualification of
the Indentures under the Trust Indenture Act of 1939, as amended; or
(d) trading on any national securities exchange or generally in the U.S.
over-the-counter market shall have been suspended by order of the Commission
or any other governmental authority which, in Viatel's sole judgment, would
be expected to impair the ability of Viatel to proceed with the Exchange
Offers; or
(e) there shall occur a change in the current interpretations by the
staff of the Commission which, in Viatel's reasonable judgment, might
materially impair Viatel's ability to proceed with the Exchange Offers.
If Viatel determines in its sole and absolute discretion that any of the
above conditions exist, Viatel may (i) terminate the Exchange Offers, refuse to
accept any Existing Notes and return all tendered Existing Notes to the
tendering holders, (ii) extend the Exchange Offers and retain all Existing Notes
tendered prior to the Expiration Date, subject, however, to the right of holders
to withdraw such Existing Notes (see "-- Terms of the Exchange Offers" and "--
Withdrawal of Tenders of Existing Notes") or (iii) waive such conditions with
respect to the Exchange Offers, or amend the terms of the Exchange Offers and
accept all validity tendered Existing Notes which have not been withdrawn. If
such waiver or amendment constitutes a material change to the Exchange Offers,
Viatel will promptly disclose such waiver or amendment by means of a prospectus
supplement that will be distributed to the registered holders, and Viatel will
extend the Exchange Offers for a period of time, depending upon the significance
of the waiver and the manner of disclosure to the registered holders, if the
Exchange Offers would otherwise expire during such period.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Existing Notes have not been registered under the Securities Act or any
state securities laws and therefore may not be offered, sold or otherwise
transferred except in compliance with the registration requirements of the
Securities Act and any other applicable securities laws, or pursuant to an
exemption therefrom or in a transaction not subject thereto. Existing Notes that
currently bear legends restricting transfers that remain outstanding after
consummation of the Exchange Offers will continue to bear such legends. In
addition, upon consummation of the Exchange Offers, holders of Existing Notes
which remain outstanding will not be entitled to any rights to have such
Existing Notes registered under the Securities Act or to any similar rights
under the 1998 Registration Rights Agreement. Viatel currently does not intend
to register under the Securities Act any Existing Notes which remain outstanding
after consummation of the Exchange Offers (subject to limited exceptions, if
applicable).
To the extend that Existing Notes are tendered and accepted in the Exchange
Offers, the principal amount of outstanding Existing Notes will be reduced by
the principal amount so tendered and exchanged and a holder's ability to sell
untendered Existing Notes could be adversely affected. As a result, the
liquidity of the market for such untendered Existing Notes could be adversely
affected upon completion of the Exchange Offers.
The Existing Notes provide for certain interest rate increases if the
Exchange Offers are not consummated by October 8, 1998. Upon consummation of the
Exchange Offers, holders of Existing Notes will not be entitled to any increase
in the interest rate thereon or any further registration rights under the 1998
Registration Rights Agreement.
Each series of Exchange Notes and any corresponding Existing Notes which
remain outstanding after consummation of the Exchange Offers will constitute a
single series of debt under the respective Indenture and, accordingly, will vote
together as a single class for purposes of determining whether holders of the
46
<PAGE>
requisite percentage in outstanding principal amount thereof have taken certain
actions or exercised certain rights under each such Indenture.
THE U.S. EXCHANGE AGENT
The Bank of New York is the U.S. Exchange Agent. All tendered non-DBC Notes,
executed Letters of Transmittal and other related documents should be directed
to the U.S. Exchange Agent. Questions and requests for assistance and requests
for additional copies of this Prospectus, the applicable Letter of Transmittal
and other related documents should be addressed to the U.S. Exchange Agent as
follows:
By registered or certified mail, by overnight courier or by hand:
The Bank of New York
Reorganization Section
101 Barclay Street, Floor 7 East
New York, New York 10286
Attention: Theresa Gass
Telephone No. (212) 815-5942
or
By Facsimile:
The Bank of New York
Attention: Theresa Gass
Facsimile Number (212) 815-6339
In addition, Letters of Transmittal and any other documentation should be
sent to the U.S. Exchange Agent at the address set forth above, except where
facsimile transmission is specifically authorized (e.g., withdrawals and Notices
of Guaranteed Delivery).
THE GERMAN EXCHANGE AGENT
Deutsche Bank AG, is the German Exchange Agent. All tendered DBC Notes,
executed Letters of Transmittal and other related documents should be directed
to the German Exchange Agent. Questions and requests for assistance and requests
for additional copies of this Prospectus, the applicable Letter of Transmittal
and other related documents should be addressed to the German Exchange Agent as
follows:
Deutsche Bank AG
Wertpapierdienste/Kepitaltransaktionen Inland
Alfred-Herrhausen--Allee 16-24
D-60262 Frankfurt am Main
Germany
Attention: Dogmar Riedel
011-49-69-910-66809
DELIVERY OF LETTERS OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE OR DELIVERY OF AN INCORRECT FORM OF LETTER OF TRANSMITTAL WILL NOT
CONSTITUTE A VALID DELIVERY.
FEES AND EXPENSES
All expenses incident to Viatel's performance of or compliance with the 1998
Registration Rights Agreement will be borne by Viatel regardless of whether the
Registration Statement of which this Prospectus is a part becomes effective,
including without limitation: (i) all registration and filing fees and
47
<PAGE>
expenses; (ii) all fees and expenses associated with compliance with federal
securities and state "blue sky" or securities laws; (iii) all expenses of
printing (including printing of any certificates evidencing the Notes and
printing of Prospectuses), messenger and delivery services and telephone; and
(iv) all fees and disbursements of independent certified public accountants of
Viatel.
Viatel has not retained any dealer-manager in connection with the Exchange
Offers and will not make any payments to brokers, dealers or others soliciting
acceptance of the Exchange Offers. Viatel, however, will pay the Exchange Agents
reasonable and customary fees for their services and will reimburse them for
their reasonable out-of-pocket expenses in connection therewith.
TRANSFER TAXES
Viatel will pay all transfer taxes, if any, applicable to the exchange of
the Existing Notes pursuant to the Exchange Offers. If however, Exchange Notes,
or Existing Notes for principal amounts not tendered or accepted for exchange,
are to be delivered to, or to be issued in the name of, any person other than
the registered holder of the Existing Notes tendered or if a transfer tax is
imposed for any reason other than the exchange of Existing Notes pursuant to the
Exchange Offers, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the applicable Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering holder.
RESALES OF THE EXCHANGE NOTES
Based on interpretations by the staff of the Commission set forth in
no-action letters and interpretative letters issued to third parties, Viatel
believes that the Exchange Notes issued pursuant to the Exchange Offers in
exchange for Existing Notes may be offered for resale, resold and otherwise
transferred by any holder thereof (other than a broker-dealer who purchased
Existing Notes directly from Viatel for resale pursuant to Rule 144A under the
Securities Act or any other available exemption under the Securities Act),
without compliance with the registration and prospectus delivery requirements of
the Securities Act, provided that such Exchange Notes are acquired in the
ordinary course of such holder's business and that such holder is not
participating, does not intend to participate and has no arrangement or
understanding with any person to participate, in any distribution of the
Exchange Notes. However, if any holder acquires Exchange Notes in the Exchange
Offers for the purpose of distributing or participating in a distribution of the
Exchange Notes, such holder cannot rely on the position on the staff of the
Commission enunciated in the no-action letters regarding MORGAN STANLEY & CO.,
INCORPORATED (available June 5, 1991) and EXXON CAPITAL HOLDINGS CORPORATION
(available May 13, 1988), or interpreted in the Commission interpretative letter
to SHEARMAN & STERLING (available July 2, 1993), or similar no-action or
interpretative letters, will not be entitled to validly tender Existing Notes in
the Exchange Offers and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any sale or
transfer of such Existing Notes, unless such sale or transfer is made pursuant
to an exemption from, or in a transaction not subject to, such requirements.
Each broker-dealer that receives Exchange Notes for its own account in exchange
for Existing Notes, where such Existing Notes were acquired by such
broker-dealer as a result of market-making or other trading activities,
acknowledges thereby that it will deliver a copy of this Prospectus in
connection with any resale of such Exchange Notes. See "Plan of Distribution."
In addition, to comply with the securities or "blue sky" laws of certain
jurisdictions, if applicable, the Exchange Notes may not be offered or sold
unless they have been registered or qualified for sale in such jurisdictions or
an exemption from registration or qualification is available and complied with.
The 12.40% Exchange Notes and the 11.15% Exchange Notes may only be issued in a
minimum denomination of DM 100,000 at maturity and any integral multiple of DM
1,000 above such number.
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<PAGE>
USE OF PROCEEDS
The Exchange Offers are intended to satisfy certain of Viatel's obligations
under the 1998 Registration Rights Agreement. Viatel will not receive any cash
proceeds from the issuance of the Exchange Notes offered hereby. In
consideration for issuing the Exchange Notes contemplated by this Prospectus,
Viatel will receive, in exchange, Existing Notes in like principal amount, the
terms of which are identical in all material respects to the terms of the
respective Exchange Notes. The Existing Notes surrendered in exchange for
Exchange Notes will be retired and cancelled and cannot be reissued.
Accordingly, the issuance of the Exchange Notes will not result in any increase
or decrease in the outstanding indebtedness of Viatel.
The net proceeds from the Offering were approximately $856.6 million (based
on a conversion rate of Deutschmarks into U.S. dollars of approximately DM 1.85
per U.S. $1.00, a recent exchange rate at the time of the Offering), after
deducting discounts and commissions and expenses of the Offering payable by the
Company. The Company used approximately $118.9 million of the net proceeds from
the Offering to finance the Tender Offer (including the payment of consent
fees), approximately $122.8 million to purchase the U.S. Pledge Securities and
approximately $30.6 million to purchase the DM Pledge Securities.
The Company intends to use the remaining net proceeds from the Offering to
fund a portion of the construction and operational start-up of the Circe
Network, to fund other capital expenditures and for general corporate and
working capital purposes. Pending the foregoing uses, the Company has invested
such proceeds in short-term, interest-bearing, high quality securities.
The Company believes that the net proceeds from the Offering, together with
project financing, equipment financing and the sale of IRUs or capacity on the
Circe Network will provide sufficient funds for the Company to expand its
business as planned and to fund operating losses for at least the next 18 to 24
months. However, the amount of the Company's future capital requirements will
depend on a number of factors, including the success of the Company's business,
the start-up date of the Circe Network, the rate at which the Company further
expands the Viatel Network, the types of services that the Company offers,
staffing levels, acquisitions and customer growth, as well as other factors that
are not within the Company's control, including competitive conditions,
government regulatory developments and capital costs. In the event that the
Company's plans or assumptions change or prove to be inaccurate or the net
proceeds of the Offering, project financing, equipment financings and proceeds
from the sale of IRUs or capacity on the Circe Network prove to be insufficient
to fund the Company's growth in the manner and at the rate currently
anticipated, the Company may be required to delay or abandon some or all of the
Company's development and expansion plans or the Company may be required to seek
additional sources of financing earlier than currently anticipated.
The Company will need substantial additional capital in order to further
develop and expand the Viatel Network, including the further expansion of the
Circe Network and to develop and expand new and existing services. The Company's
future capital requirements will depend on a number of factors, including the
success of the Company's business, the rate that it expands the Viatel Network,
the types of services that the Company offers, staffing levels, acquisitions and
customer growth, as well as other factors not within the Company's control,
including competitive conditions, government regulatory developments and capital
costs. See "Risk Factors -- Substantial Capital Requirements."
49
<PAGE>
CAPITALIZATION
The following table sets forth, as of March 31, 1998, the cash, cash
equivalents and marketable securities and capitalization of the Company (i) on a
historical basis, and (ii) on a pro forma basis to reflect the Tender Offer and
the Offering as if it had occurred on March 31, 1998. This table should be read
in conjunction with "Use of Proceeds," "Unaudited Pro Forma Financial Data,"
"Selected Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
related notes thereto of the Company included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------------
HISTORICAL PRO FORMA(1)
----------- -------------
(IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and marketable securities........................................ $ 28,150 $ 612,507
----------- -------------
----------- -------------
Restricted cash......................................................................... -- 153,347
----------- -------------
----------- -------------
Long-term debt, excluding current installments:
15% Senior Notes Due 2005, at accreted value........................................ $ 93,205 $ --
Discount Notes, at accreted value................................................... -- 338,695
Senior Notes........................................................................ -- 496,009
Subordinated Convertible Debentures................................................. -- 11,048
Other long term debt ............................................................... 9,155 9,155
----------- -------------
Total long-term debt.............................................................. 102,360 854,907
----------- -------------
Series A Redeemable Convertible Preferred Stock, $.01 par value; 718,042 shares
authorized; no shares issued and outstanding actual; 438,200 shares issued and
outstanding pro forma................................................................. -- 43,820
----------- -------------
Stockholders' deficiency:
Preferred stock, $.01 par value; 281,958 shares authorized; no shares issued and
outstanding........................................................................ -- --
Common stock, $.01 par value; 50,000,000 shares authorized;
23,077,023 shares issued and outstanding, actual and pro forma(2)................. 231 231
Additional paid-in capital.......................................................... 129,453 127,358(3)
Unearned compensation............................................................... (49) (49)
Cumulative translation adjustment................................................... (5,873) (5,873)
Accumulated deficit................................................................. (142,033) (170,323)(4)
----------- -------------
Total stockholders' deficiency.................................................... (18,271) (48,656)
----------- -------------
Total capitalization............................................................ $ 84,089 $ 850,071
----------- -------------
----------- -------------
</TABLE>
- ------------------------------
(1) Adjusted to give effect to $856.6 million of net proceeds with respect to
the issuance of the Existing Notes, the Subordinated Convertible Debentures
and 438,200 shares of Series A Preferred in the Offering, assuming an
average exchange rate of approximately DM 1.85 per U.S. $1.00 (a recent
market exchange rate at the time of the Offering) with respect to the
Existing 12.40% Notes, the Existing 11.15% Notes and the Subordinated
Convertible Debentures, partially offset by $118.9 million required to
extinguish the 1994 Notes ($93.2 million accreted value of the 1994 Notes,
approximately $24.7 million of premium paid and approximately $1.0 million
of expenses associated with the extinguishment of the 1994 Notes).
(2) Excludes approximately 2.6 million shares of Common Stock reserved for
issuance upon the exercise of stock options available for grant under the
Stock Incentive Plan pursuant to which options to purchase approximately 2.1
million shares of Common Stock were outstanding at March 31, 1998, at
exercise prices ranging from $0.75 to $12.00. See "Management -- Stock
Incentive Plan."
(3) Gives effect to issuance costs of $2.1 million associated with the Series A
Preferred sold in the Offering.
(4) Includes an extraordinary charge of $28.3 million related to the early
extinguishment of debt comprised of the following: (i) an approximately
$24.7 million premium paid in connection with the Tender Offer, (ii) a $0.3
million fee and $0.7 million of other costs associated with the Tender
Offer, and (iii) a write-off of $2.6 million in unamortized deferred
registration and debt issuance fees associated with the 1994 Notes.
50
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited Pro Forma Financial Information is based on the
historical financial statements of the Company as of and for the year ended
December 31, 1997 and as of and for the three months ended March 31, 1998. The
Statement of Operations Data and Other Financial Data have been prepared as if
the Tender Offer and the Offering occurred on January 1, 1997 for purposes of
the 1997 pro forma information and January 1, 1998 for purposes of the March 31,
1998 pro forma information. The Balance Sheet Data has been prepared as if the
Tender Offer and the Offering had occurred on March 31, 1998. The Pro Forma
Financial Information does not purport to represent what the Company's financial
condition or results of operations actually would have been for the date or
periods presented had the transactions occurred on the dates indicated or to
indicate the financial results of future periods. The Pro Forma Financial
Information should be read in conjunction with the historical financial
statements of the Company included elsewhere in this Prospectus and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
---------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA
------------- ----------- -----------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Telecommunications revenue....................................... $ 73,018 $ -- $ 73,018
Operating expenses:
Costs of telecommunications services........................... 63,504 -- 63,504
Selling, general and administrative............................ 36,076 -- 36,076
Depreciation and amortization.................................. 7,717 -- 7,717
------------- ----------- -----------
Total operating expenses..................................... 107,297 -- 107,297
------------- ----------- -----------
Operating loss................................................... (34,279) -- (34,279)
Interest income.................................................. 3,685 -- 3,685
Interest expense................................................. (12,450) (89,673)(1) (102,123)
------------- ----------- -----------
Net loss......................................................... (43,044) (89,673) (132,717)(2)
Dividend on preferred stock...................................... -- (4,382)(1) (4,382)
------------- ----------- -----------
Net loss to common stockholders.................................. $ (43,044) $ (94,055) $(137,099)(2)
------------- ----------- -----------
------------- ----------- -----------
Net loss per share, basic(3)..................................... $ (1.90) $ (6.06)
------------- -----------
------------- -----------
Net loss per share, diluted(3)................................... $ (1.90) $ (6.06)
------------- -----------
------------- -----------
Weighted average number of shares outstanding.................... 22,620 22,620
------------- -----------
------------- -----------
OTHER FINANCIAL DATA:
EBITDA(4).......................................................... $ (26,562) -- $ (26,562)
Capital expenditures............................................... 34,190 -- 34,190
Ratio of earnings to fixed charges(5).............................. -- --
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
-------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Telecommunications revenue.......................................... $ 21,239 $ -- $ 21,239
Operating expenses:
Costs of telecommunications services.............................. 19,105 -- 19,105
Selling, general and administrative............................... 8,955 -- 8,955
Depreciation and amortization..................................... 2,911 -- 2,911
----------- ----------- -----------
Total operating expenses........................................ 30,971 -- 30,971
----------- ----------- -----------
Operating loss...................................................... (9,732) -- (9,732)
Interest income..................................................... 510 -- 510
Interest expense.................................................... (3,781) (22,089)(6) (25,870)
----------- ----------- -----------
Net loss............................................................ (13,003) (22,089) (35,092)(2)
Dividend on preferred stock......................................... -- (1,096)(6) (1,096)
----------- ----------- -----------
Net loss to common stockholders..................................... $ (13,003) $ (23,185) $ (36,188)(2)
----------- ----------- -----------
----------- ----------- -----------
Net loss per share, basic(3)........................................ $ (.57) $ (1.59)
----------- -----------
----------- -----------
Net loss per share, diluted(3)...................................... $ (.57) $ (1.59)
----------- -----------
----------- -----------
Weighted average number of shares outstanding....................... 22,783 22,783
----------- -----------
----------- -----------
OTHER FINANCIAL DATA:
EBITDA(4)............................................................. $ (6,821) -- $ (6,821)
Capital expenditures.................................................. 2,716 -- 2,716
Ratio of earnings to fixed charges(5)................................. -- --
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
-------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA
----------- ----------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
ASSETS
Current assets
Cash and cash equivalents, marketable securities, current............ $ 28,150 $ 584,357(7) $ 612,507
Restricted cash, current............................................. -- 28,948(8) 28,948
Trade accounts receivable, net....................................... 13,816 -- 13,816
Other receivables.................................................... 7,284 -- 7,284
Prepaid expenses..................................................... 1,284 -- 1,284
----------- ----------- -----------
Total current assets................................................. 50,534 613,305 663,839
Restricted cash, non-current......................................... -- 124,399(8) 124,399
Property and equipment, net.......................................... 56,997 -- 56,997
Deferred financing and registration fees, net........................ 2,572 -- 2,572
Intangible assets, net............................................... 9,995 28,278(9) 38,273
Other assets......................................................... 1,796 -- 1,796
----------- ----------- -----------
$ 121,894 $ 765,982 $ 887,876
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities
Accrued telecommunications costs..................................... $ 19,573 $ -- $ 19,573
Accounts payable and other accrued expenses.......................... 14,878 -- 14,878
Current installments of notes payable and obligations under capital
leases............................................................. 3,354 -- 3,354
----------- ----------- -----------
Total current liabilities............................................ 37,805 -- 37,805
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
-------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term liabilities
Senior Notes, Senior Discount Notes and Subordinated Convertible
Debentures......................................................... 93,205 752,547 (10 845,752
Notes payable and obligations under capital leases, net.............. 7,655 -- 7,655
Equipment purchase obligation........................................ 1,500 -- 1,500
----------- ----------- -----------
Total long-term liabilities.......................................... 102,360 752,547 854,907
Series A Preferred................................................... -- 43,820 (11 43,820
Stockholders' deficiency
Common stock......................................................... 231 -- 231
Additional paid-in-capital........................................... 129,453 (2,095) 12) 127,358
Unearned compensation................................................ (49) -- (49)
Cumulative translation adjustment.................................... (5,873) -- (5,873)
Accumulated deficit.................................................. (142,033) (28,290) 13) (170,323)
----------- ----------- -----------
Total stockholders' deficiency....................................... (18,271) (30,385) (48,656)
----------- ----------- -----------
$ 121,894 $ 765,982 $ 887,876
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- ------------------------
(1) Reflects the effects on the Company's results of operations of the early
extinguishment of the 1994 Notes and the issuance of $43.8 million of Series
A Preferred, the Existing Notes consisting of $272.1 million of Existing
12.50% Notes, DM 123.5 million of Existing 12.40% Notes, $400.0 million of
Existing 11.25% Notes, DM 178.0 million of Existing 11.15% Notes and DM 20.5
million of Subordinated Convertible Debentures as if they had occurred on
January 1, 1997. Comprised of:
(a) a decrease in interest expense of approximately $12.1 million related to
interest on the 1994 Notes;
(b) a decrease in interest expense of $379,000 as a result of the write-off
of deferred registration and debt issuance fees related to the 1994
Notes;
(c) an increase in interest expense of approximately $99.1 million as a
result of the issuance of the Existing Notes and Subordinated Convertible
Debentures assuming an average exchange rate of approximately DM 1.85 per
U.S. $1.00 (a recent market exchange rate at the time of the Offering)
with respect to the Existing 12.40% Notes, the Existing 11.15% Notes and
the Subordinated Convertible Debentures;
(d) an increase in interest expense of approximately $3.1 million related to
amortization of deferred debt issuance cost on the Existing Notes and the
Subordinated Convertible Debentures; and
(e) the recognition of dividends of $4.4 million related to the Series A
Preferred.
(2) Pro forma net loss and pro forma net loss to common stockholders does not
include the extraordinary loss resulting from the extinguishment of the 1994
Notes assumed to occur on January 1, 1997, for purposes of the 1997 pro
forma financial information and January 1, 1998 for purposes of the March
31, 1998 pro forma financial information. Such extraordinary loss would have
been approximately $44.2 million for 1997 and $31.7 million for the three
months ended March 31, 1998.
(3) Net loss per share is computed on the basis described in Note 1 of the
Company's Consolidated Financial Statements.
(4) As used herein, "EBITDA" consists of earnings before interest, 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 GAAP, is
not necessarily comparable to similarly titled measures of other companies,
and should not be considered as an alternative to net income as a measure of
performance nor as an alternative to cash flow as a measure of liquidity.
(5) The ratio of earnings to fixed charges is calculated as income before taxes,
discontinued operations and extraordinary items plus interest expense,
divided by fixed charges. Fixed charges consist of
53
<PAGE>
interest on indebtedness, dividends on preferred stock and one-third of
rental expense. For 1997 and the three months ended March 31, 1998, earnings
were insufficient to cover fixed charges by $43.0 million ($137.1 million
pro forma for the Tender Offer and the Offering) and $13.0 million ($36.2
million pro forma for the Tender Offer and the Offering), respectively.
(6) Reflects the effects on the Company's results of operations of the early
extinguishment of the 1994 Notes and the issuance of $43.8 million of Series
A Preferred, the Existing Notes consisting of $272.1 million of Existing
12.50% Notes, DM 123.5 million of Existing 12.40% Notes, $400.0 million of
Existing 11.25% Notes, DM 173.0 million of Existing 11.15% Notes and DM 20.5
million of Subordinated Convertible Debentures as if they had occurred on
January 1, 1998. Comprised of:
(a) a decrease in interest expense of approximately $3.4 million related to
interest on the 1994 Notes;
(b) a decrease in interest expense of $99,000 as a result of the write-off
of deferred registration and debt issuance fees related to the 1994
Notes;
(c) an increase in interest expense of approximately $24.8 million as a
result of the issuance of the Existing Notes and Subordinated Convertible
Debentures assuming an average exchange rate of approximately DM 1.85 per
U.S. $1.00 (a recent market exchange rate at the time of the Offering)
with respect to the Existing 12.40% Notes, the Existing 11.15% Notes and
the Subordinated Convertible Debentures;
(d) an increase in interest expense of approximately $0.8 million related to
amortization of deferred debt issuance cost on the Existing Notes and the
Subordinated Convertible Debentures; and
(e) the recognition of dividends of $1.1 million related to the Series A
Preferred.
(7) Reflects the net increase in cash as a result of $703.3 million of the net
proceeds of the Offering, assuming an average exchange rate of approximately
DM 1.85 per U.S. $1.00 (a recent market exchange rate at the time of the
Offering) with respect to the Existing 12.40% Notes, the Existing 11.15%
Notes and the Subordinated Convertible Debentures partially offset by $118.9
million required to extinguish the 1994 Notes.
(8) Reflects the increase in restricted cash as a result of $153.3 million
($28.9 million of current and $124.4 million of non-current) of the net
proceeds of the Offering, assuming an average exchange rate of approximately
DM 1.85 per U.S. $1.00 (a recent market exchange rate at the time of the
Offering) with respect to the Existing 12.40% Notes, the Existing 11.15%
Notes and the Subordinated Convertible Debentures.
(9) Reflects the capitalization of $30.9 million of debt issuance costs related
to the Offering, reduced by the write-off of $2.6 million of deferred
registration and debt issuance fees related to the extinguishment of the
1994 Notes.
(10) Reflects an increase in long term debt of $845.8 million as a result of the
issuance of the Existing Notes and the Subordinated Convertible Debentures,
assuming an average exchange rate of approximately DM 1.85 per U.S. $1.00 (a
recent market exchange rate at the time of the Offering) with respect to the
Existing 12.40% Notes, the Existing 11.15% Notes and the Subordinated
Convertible Debentures, offset by a reduction of approximately $93.2 million
due to the early extinguishment of the 1994 Notes.
(11) Reflects the issuance of the Series A Preferred.
(12) Reflects a decrease in additional paid-in-capital as a result of $2.1
million of issuance costs associated with the Series A Preferred.
(13) Reflects an increase in accumulated deficit as a result of the write-off of
approximately $2.5 million of deferred registration and debt issuance costs,
approximately $24.7 million related to the premium paid to extinguish the
1994 Notes and $1.0 million of estimated expenses incurred in connection
with the extinguishment.
54
<PAGE>
SELECTED CONSOLIDATED 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,
1993, 1994, 1995, 1996 and 1997 have been derived from the Consolidated
Financial Statements of the Company and the notes related thereto, which were
audited by KPMG Peat Marwick LLP, Independent Certified Public Accountants. The
consolidated financial statements as of December 31, 1996 and 1997 and for each
of the years in the three-year period ended December 31, 1997 and the report of
KPMG Peat Marwick LLP thereon, are included elsewhere in this Prospectus. The
selected Consolidated Statement of Operations Data, Other Financial Data and
Balance Sheet Data as of and for the three months ended March 31, 1997 and 1998
have been derived from the unaudited Consolidated Financial Statements of the
Company included elsewhere in this Prospectus, which, in the opinion of
Management, include all adjustments necessary for a fair presentation of the
financial condition and results of operations of the Company for such periods.
The results of operations for interim periods are not necessarily indicative of
a full year's operations. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Company's Consolidated Financial Statements, including the
notes thereto, and the other financial data included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER OPERATING DATA)
STATEMENT OF OPERATIONS DATA:
Telecommunications revenue.............. $ 21,393 $ 26,268 $ 32,313 $ 50,419 $ 73,018 $ 14,552 $ 21,239
Operating expenses:
Costs of telecommunications
services............................ 18,159 22,953 27,648 42,130 63,504 12,079 19,105
Selling, general and administrative... 8,458 14,318 24,328 32,857 36,076 8,723 8,955
Depreciation and amortization......... 111 789 2,637 4,802 7,717 1,262 2,911
Equipment impairment loss............. -- -- 560 -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses............ 26,728 38,060 55,173 79,789 107,297 22,064 30,971
--------- --------- --------- --------- --------- --------- ---------
Operating loss.......................... (5,335) (11,792) (22,860) (29,370) (34,279) (7,512) (9,732)
Interest income......................... 21 214 3,282 1,853 3,685 1,119 510
Interest expense........................ -- (772) (8,856) (10,848) (12,450 (1) (3,009) (3,781)(1)
Share in loss of affiliate.............. (142) (145) (42) (10) -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net loss................................ $ (5,456) $ (12,495) $ (28,476) $ (38,375) $ (43,044 (1) $ (9,402) $ (13,003)(1)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net loss per common share, basic(2)..... $ (0.77) $ (1.22) $ (2.09) $ (2.47) $ (1.90) $ (0.42) $ (0.57)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net loss per common share, diluted(2)... $ (0.77) $ (1.22) $ (2.09) $ (2.47) $ (1.90) $ (0.42) $ (0.57)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
OTHER FINANCIAL DATA:
EBITDA(3)............................... $ (5,366) $ (11,148) $ (20,265) $ (24,578) $ (26,562) $ (6,250) $ (6,821)
Net cash used in operating activities... (1,442) (11,571) (18,489) (26,331) (22,525) (10,550) (10,771)
Net cash (used in) provided by investing
activities............................ (2,949) (4,996) (37,057) (1,592) (43,164) (32,903) 16,455
Net cash provided by (used in) financing
activities............................ 6,329 80,984 (2,306) 94,772 11,286 60 (209)
Capital expenditures.................... 1,090 3,672 11,378 9,423 34,190 3,722 2,716
Ratio of earnings to fixed charges(4)... -- -- -- -- -- -- --
OTHER OPERATING DATA:
Billable minutes (000s)................. 10,899 14,981 25,932 62,249 140,918 23,517 52,418
Average revenue per billable minute..... $ 1.87 $ 1.70 $ 1.23 $ .80 $ .51 $ .62 $ .39
Average cost per billable minute........ $ 1.67 $ 1.53 $ 1.04 $ .67 $ .44 $ .51 $ .35
Switches(5)............................. 2 2 10 13 14(6) 14(6) 14(6)
Points of presence(5)................... 3 3 11 13 33 17 33
Customers(5)............................ 5,486 6,469 9,218 18,172 21,515 20,224 17,090
BALANCE SHEET DATA(5):
Cash, cash equivalents and marketable
securities............................ $ 2,327 $66,762 $ 35,066 $ 92,982 $ 47,142 $ 78,978 $ 28,150
Property and equipment, net............. 3,584 6,933 15,715 21,074 54,094 24,480 56,997
Total assets............................ 10,585 83,923 65,613 134,664 126,809 124,661 121,894
Long-term debt, excluding current
installments.......................... 866 59,955 67,283 77,904 99,609 81,371 102,360
Stockholders' (deficiency) equity....... (162) 10,985 (17,618) 38,483 (8,564) 27,284 (18,270)
</TABLE>
55
<PAGE>
- ------------------------------
(1) On a pro forma basis, assuming the Offering closed on January 1, 1997 and
January 1, 1998, interest expense on the Notes and the Subordinated
Convertible Debentures and dividends on the Series A Preferred would have
been $99.1 million and $4.4 million for 1997 and $24.8 million and $1.1
million for the three months ended March 31, 1998, respectively, assuming an
average exchange rate of approximately DM 1.85 per U.S. $1.00 (a recent
market exchange rate at the time of the Offering) with respect to the 12.40%
Notes, the 11.15% Notes and the Subordinated Convertible Debentures. (See
Footnotes 1 and 5 to the Pro Forma Financial Information included elsewhere
in this Prospectus.) The Company is utilizing a portion of the proceeds of
the Offering for the construction and operational start-up of the Circe
Network. Accordingly, a portion of the interest cost of the Notes and the
Subordinated Convertible Debentures through 1999 will be capitalized.
However, the pro forma interest expense includes all the interest cost of
the Notes and the Subordinated Convertible Debentures, including capitalized
interest.
(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, 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 GAAP, is
not necessarily comparable to similarly titled measures of other companies,
and should not be considered as an alternative to net income as a measure of
performance nor as an alternative to cash flow as a measure of liquidity.
(4) The ratio of earnings to fixed charges is calculated as income before taxes,
discontinued operations and extraordinary items plus interest expense,
divided by fixed charges. Fixed charges consist of interest on indebtedness,
dividends on preferred stock and one third of rental expense. For 1993,
1994, 1995, 1996, 1997, the three months ended March 31, 1997 and the three
months ended March 31, 1998, earnings were insufficient to cover fixed
charges by $5.5 million, $12.5 million, $28.5 million, $38.4 million, $43.0
million, $9.4 million and $13.0 million, respectively.
(5) Information presented as of the end of the periods indicated.
(6) Consists of four Nortel DMS 100e switches, one Nortel DMS 300 switch, six
Wyatt/Reuters MRX-2000 switches and three call reorigination switches.
56
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH VIATEL'S
FINANCIAL STATEMENTS, THE NOTES THERETO AND THE OTHER FINANCIAL DATA INCLUDED
ELSEWHERE IN THIS PROSPECTUS. THE FOLLOWING DISCUSSION INCLUDES CERTAIN
FORWARD-LOOKING STATEMENTS. FOR A DISCUSSION OF IMPORTANT FACTORS, INCLUDING,
BUT NOT LIMITED TO, THE CONTINUED DEVELOPMENT OF VIATEL'S BUSINESS, ACTIONS OF
REGULATORY AUTHORITIES AND COMPETITORS, PRICE DECLINES AND OTHER FACTORS WHICH
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE RESULTS REFERRED TO IN
THE FORWARD-LOOKING STATEMENTS, AND IN WHICH INVESTORS SHOULD SPECIFICALLY
CONSIDER IN EVALUATING SUCH STATEMENTS, SEE "RISK FACTORS" AND "UNAUDITED PRO
FORMA FINANCIAL DATA."
OVERVIEW
Since its inception in 1991, the Company has invested heavily in developing
the ability to provide international telecommunications services within Western
Europe and in certain other countries in Latin America and Asia and in
developing and expanding its market presence. During the past six years, the
Company has made substantial investments in software and back office operations,
an administrative infrastructure and a direct sales organization in Western
Europe. Furthermore, the Company has created an extensive commercial
telecommunications network for voice and voice band data in Western Europe,
which the Company believes is necessary to effectively render the services it
offers and intends to offer. In the future, the Company's revenues will be
derived from three primary sources: retail sales, wholesale sales and revenue
from the sale of IRUs or capacity on the Circe Network. Each revenue source will
have a different impact on the Company's results of operations. The sale of IRUs
or capacity on the Circe Network will vary substantially from period to period
and result in fluctuations in the Company's operating results. For a discussion
of the effects of the Circe Network on telecommunications revenue and other line
items, see "-- The Circe Network."
TELECOMMUNICATIONS REVENUE
Viatel's telecommunications revenue is currently based primarily on the
number of minutes of use billed by the Company or "billable minutes" and, to a
lesser extent, on the additional services and products provided through the
Viatel Network. While the Company provides both international and national long
distance telecommunications services, the Company currently derives its
telecommunications revenue principally from international long distance
telecommunications services. The Company believes, however, that revenue from
national long distance telecommunications services will continue to increase as
a percentage of total telecommunications revenue.
The Company competes with other telecommunications providers principally on
the basis of price and quality of services provided. The Company prices its
retail services generally at a discount to the ITO's prices in the various
geographic markets. The wholesale rates charged are generally priced at or
slightly 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.
The Company has experienced, and expects to continue to experience,
declining revenue per minute in all of its markets, in part as a result of
increasing worldwide competition within the telecommunications industry. For
example, in France and Germany, the respective ITO has taken steps to
substantially reduce prices for retail domestic and international long distance
services. France Telecom has obtained approval to reduce prices of such services
by an average of 9% during 1998 and additional amounts thereafter, and Deutsche
Telekom has announced that, subject to regulatory approval, it intends to reduce
prices on domestic and international retail long distance services by up to 40%.
The Company believes, however, that the impact on its results of operations from
such price decreases will be at least partially offset by, continuing decreases
in the Company's cost of providing telecommunications services, particularly
those decreases resulting from its continued efforts to convert from leased to
owned capacity and to obtain cost effective interconnection agreements, and the
introduction of new products and services as the applicable regulatory
environment permits. There can be no assurance, however, that the results
referred to in the
57
<PAGE>
foregoing forward looking statements, including a decline in the Company's cost
of telecommunications services, can be achieved. See "Risk Factors -- Risks
Relating to the Circe Network," "-- Competition," "-- Substantial Government
Regulation," "-- Rapidly Changing Industry, Technology and Customer
Requirements; Significant Price Declines," and "-- Risks Associated with the
Operation of the Viatel Network."
COST OF TELECOMMUNICATIONS SERVICE
The Company's cost of telecommunications service can be classified into
three general categories: access costs, network costs and termination costs.
Access costs generally represent the costs associated with transporting the
traffic from a customer's premises to the closest access point on the Viatel
Network. Access costs vary depending upon the bandwidth and the distance to the
customer's premises and from country to country. The Company currently expects
that the effective per minute cost of these access costs will be reduced as
deregulation continues, certain EU directives requiring cost-oriented pricing
(i.e., costs that an effectively competitive market would yield or that
deregulation would seek to ensure) by ITOs are enforced and as the Company is
able to obtain cost effective interconnection agreements, although there can be
no assurance regarding the extent or timing of such cost decreases. In the event
that such access costs were to fall at a slower rate than the Company's price
per minute, the Company's gross margins could be adversely impacted.
Network costs represent the costs of transporting calls over the Viatel
Network from its point of entry to its point of exit. Network costs generally
consist of leased line rental costs, facility/network management costs and costs
associated with interconnection with facilities of ITOs. Network costs will
decrease substantially as a result of building the Circe Network and upon
securing infrastructure ownership on other routes. However, there will be an
associated increase in depreciation and amortization expense (which is included
in a different line item). See "-- Depreciation and Amortization."
Termination costs currently represent the costs which the Company is
required to pay to other carriers from the point of exit from the Viatel Network
to the point of destination. Termination costs are generally variable with
traffic volume and traffic mix. If a call is terminated in a city in which the
Company has a switch or POP, the call is usually transferred to the PSTN for
local termination. If the call is to a location in which the Company does not
have a switch or POP, then the call must be transferred to another carrier with
which the Company is interconnected. The Company utilizes least cost routing
designed to terminate traffic in the most cost effective manner. The Company
believes that local termination costs should decrease as the Company (i) adds
additional switches and POPs, (ii) interconnects with additional ITOs and other
infrastructure providers, (iii) additional transmission facilities are
constructed or purchased, (iv) new telecommunications service providers emerge,
and (v) in Western Europe, as EU member states implement and enforce regulations
requiring ITOs to establish rates which are set at the forward-looking, long run
economic costs that would be incurred by an efficient provider using
state-of-the-art technology. There can be no assurance regarding the results
referred to in the foregoing forward looking statements, including the extent or
timing of cost decreases. See "Risk Factors -- Risks Relating to the Circe
Network," "-- Competition," "-- Substantial Government Regulation," "-- Rapidly
Changing Industry, Technology and Customer Requirements; Significant Price
Declines," and "-- Risks Associated with the Operation of the Viatel Network."
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The Company's selling, general and administrative expenses include
commissions paid to independent sales representatives and overhead costs
associated with its headquarters, back office and operations and sales offices
in seventeen jurisdictions. The Company's selling, general and administrative
expenses have continued to increase since the Company's inception as the Company
developed and expanded its business. The Company anticipates that such expenses
will continue to increase as the Company's business is expanded in the future
and as the Viatel Network is further developed and that such expenses will
continue to be incurred in advance of anticipated related telecommunications
revenue.
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DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense includes charges relating to
depreciation of property and equipment, which consists principally of
telecommunications-related equipment such as switches and POPs, IRUs and MIUs,
furniture and equipment, leasehold improvements, and amortization of intangible
assets, including goodwill and costs associated with acquired employee base and
sales forces. The Company depreciates its network over periods ranging from five
to 15 years and amortizes its intangible assets over periods ranging from three
to seven years. The Company currently depreciates IRUs over a 15 year period but
may, in the future, depreciate IRU's over periods ranging from 15 to 20 years
based upon the estimated useful life of the systems. The Company expects
depreciation and amortization expense to increase as the Company further expands
the Viatel Network. In particular, depreciation will substantially increase as a
result of the construction of the Circe Network, at least until significant
portions of such system are sold.
THE CIRCE NETWORK
The Circe Network will have significant effects on the Company's future
results of operations. The Company will capitalize substantially all of the
costs associated with designing and building the Circe Network, as well as the
costs associated with placing the system in service. These costs are expected to
be approximately $530.0 million, although there can be no assurance in this
regard. See "Risk Factors -- Risks Relating to the Circe Network."
The Company intends to sell interests in the Circe Network on an IRU basis.
Revenue from the IRUs will be recognized in the period when the IRU is sold
under a new line item that will be titled "Capacity sales revenue." The related
cost of sales will be reported in the period when the related revenue is
recognized. With respect to any given sale of an IRU, the related cost of
capacity sales will generally be equal to the total capitalized cost of the
Circe Network multiplied by a fraction, the numerator of which will be the
capacity of the IRU sold and the denominator of which will be the capacity of
the portion of the Circe Network then available for service (i.e, "lit fiber").
In addition, the Company expects to trade IRUs or capacity on the Circe
Network for IRUs or capacity on other cable systems. These trades of IRUs or
capacity are expected to be non-monetary exchanges and are not expected to have
a material affect on the Company's statement of operations. The Company will
also incur selling, general and administrative expenses with respect to the
Circe Network that will not be capitalized and will affect the Company's results
of operations, particularly while the Circe Network is being designed and built
in 1998 and placed into service in 1999 and will incur additional operating and
maintenance expenses until capacity on the Circe Network is sold. As a result of
financing the Circe Network with debt, the Company will capitalize a portion of
the interest incurred that relates to the Circe Network until it is placed in
service and will incur substantial increases in interest expense thereafter.
RESULTS OF OPERATIONS
The following table summarizes the breakdown of the Company's results of
operations as a percentage of telecommunications revenue:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED
DECEMBER 31, MARCH 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Cost of telecommunications services...................................... 85.6% 83.6% 87.0% 83.0% 90.0%
Selling, general and administrative expenses............................. 75.3 65.2 49.4 59.9 42.2
Depreciation and amortization............................................ 8.2 9.5 10.6 8.7 13.7
EBITDA (loss)............................................................ (62.7) (48.7) (36.4) (42.9) (32.1)
</TABLE>
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THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
TELECOMMUNICATIONS REVENUE. Telecommunications revenue increased by 45.9%
from $14.6 million on 23.5 million billable minutes for the three months ended
March 31, 1997 to $21.2 million on 52.4 million billable minutes for the three
months ended March 31, 1998. Telecommunications revenue growth for the first
quarter of 1998 was generated primarily from increased European traffic and from
growth in the Company's carrier business which was partially offset by decreased
traffic from the Company's Pacific Rim operations.
The overall increase of 122.9% in billable minutes from the first quarter of
1997 to the first quarter of 1998 was partially offset by declining revenue per
billable minute, as average revenue per billable minute declined by 37.1% from
$.62 in the first quarter of 1997 to $.39 in the first quarter of 1998,
primarily because of (i) a higher percentage of lower-priced intra-European and
national long distance traffic from the European Network (as defined herein) as
compared to intercontinental traffic, (ii) a higher percentage of lower-priced
carrier traffic as compared to retail traffic, (iii) reductions in certain rates
charged to retail customers in response to pricing reductions enacted by certain
ITOs and other carriers in many of the Company's markets and (iv) foreign
currency fluctuations. See"--Cost of Telecommunications Services."
Telecommunications revenue per billable minute from the sale of services to
retail customers, which represented 55.2% of total telecommunications revenue
for the three months ended March 31, 1998 (compared to 82.6% for the three
months ended March 31, 1997), decreased 38.6% from $.83 in the first quarter of
1997 to $.51 in the first quarter of 1998. Telecommunications revenue per
billable minute from the sale of services to carriers and other resellers
increased from $.27 in the first quarter of 1997 to $.29 in the first quarter of
1998. The number of customers billed declined 15.5% from 20,224 at March 31,
1997 to 17,090 at March 31, 1998. This decline in customers billed is primarily
attributable to the Company's Pacific Rim operations where the number of
customers billed declined 73.5% from 5,970 at March 31, 1997 to 1,584 at March
31, 1998, representing a net loss of 4,386 customers.
During the first quarter of 1998, approximately 52.9% of the Company's
telecommunications revenue was generated in Western Europe as compared to
approximately 41.9% of the Company's telecommunications revenue during the first
quarter of 1997. Telecommunications revenue from Latin America represented
approximately 17.3% of the Company's telecommunications revenue during the three
months ended March 31, 1998 as compared to approximately 26.9% of the Company's
telecommunications revenue during the three months ended March 31, 1997.
Telecommunications revenue from the Pacific Rim represented approximately 14.5%
of the Company telecommunications revenue during the three months ended March
31, 1997 as compared to approximately 2.9% of the Company's telecommunications
revenue during the three months ended March 31, 1998.
During the first quarter of 1998 as compared to the first quarter of 1997,
the Company has significantly increased its carrier business (through which it
sells switched minutes to carriers and other resellers at discounted rates). The
carrier business has enabled the Company to recover partially the costs
associated with increased capacity in advance of demand within retail markets.
Such economy of scale has allowed the Company to use its network more profitably
for network originations and terminations within Europe. The carrier business
represented approximately 44.6% of total telecommunications revenue and
approximately 56.2% of billable minutes for the three months ended March 31,
1998 as compared to approximately 16.6% of total telecommunications revenue and
approximately 37.6% of billable minutes for the three months ended March 31,
1997. The increase in telecommunications revenue derived from carriers and other
resellers represents an increase of approximately 275.1% over the corresponding
period in 1997.
COST OF TELECOMMUNICATIONS SERVICES. Cost of telecommunications services
increased from $12.1 million in the first quarter of 1997 to $19.1 million in
the first quarter of 1998 and, as a percentage of telecommunications revenue,
increased from approximately 83.0% to approximately 90.0% for the three months
ended March 31, 1997 and 1998, respectively. The Company's gross margin
decreased from 17.0%
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for the three months ended March 31, 1997 to 10.0% for the three months ended
March 31, 1998. This decrease was primarily due to (i) decreased revenue per
minute (resulting from price competition and foreign currency fluctuations)
which was not offset by corresponding decreases in infrastructure costs, (ii)
increased sales to carrier customers (which generate substantially lower
margins), and (iii) an increase in intra-European and national long distance
traffic compared to higher margin international traffic. This decrease in gross
margin is one of the principal reasons the Company initiated a strategy to own
key elements of its network infrastructure. Although it did not decrease as fast
as revenues per minute the Company's average cost per billable minute decreased
from $.51 during the three months ended March 31, 1997 to $.35 during the three
months ended March 31, 1998, a 31.4% decrease. This decrease, which partially
offset the effect of the decline in average revenue per billable minute, was
attributable primarily to increased traffic being routed through the European
Network and increased switched minutes generated by the Company's carrier
business, both of which increased the utilization of fixed cost leased lines.
Increased European Network utilization helped reduce costs on a per minute basis
with respect to European long distance telecommunications services.
Cost of telecommunications services increased in the three months ended
March 31, 1998 in part because of the relatively high cost of leased
infrastructure related to increasing the Viatel Network's transmission capacity.
These costs are expected to decrease as a percentage of telecommunications
revenue as the Company continues its efforts to convert from leased to owned
capacity. The Company increased its private line circuits capacity by 175%, and
as a result the fixed costs associated with the Viatel Network, increased from
approximately $1.7 million for the three months ended March 31, 1997
(approximately 11.4% of telecommunications revenue) to approximately $2.8
million for the three months ended March 31, 1998 (approximately 13.0% of
telecommunications revenue). Due to the high cost of leased lines in Western
Europe, the Company believes its use of private line circuits will decrease and
such decrease will positively impact the Company's overall gross margins as more
minutes are routed through infrastructure owned by the Company. This benefit,
however, is primarily limited to calls that either originate or terminate in a
city where the Company owns infrastructure, because otherwise the Company is
required to transport the call over the public switched telephone network at
higher transmission costs and reduced margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased from $8.7 million in the three months ended
March 31, 1997 to $9.0 million in the three months ended March 31, 1998 and, as
a percentage of telecommunications revenue, decreased from approximately 59.9%
in the three months ended March 31, 1997 to approximately 42.2% in the three
months ended March 31, 1998. Much of these expenses are attributable to overhead
costs associated with the Company's headquarters, back office and network
operations as well as maintaining a physical presence in seventeen different
jurisdictions. Salaries and commissions, as a percentage of total selling,
general and administrative expenses, were approximately 52.7% and 52.3% for the
three months ended March 31, 1997 and 1998, respectively.
EBITDA LOSS. EBITDA loss increased from $6.2 million for the three months
ended March 31, 1997 to $6.8 million for the three months ended March 31, 1998.
As a percentage of telecommunications revenue, EBITDA loss decreased from
approximately 42.9% in the first quarter of 1997 to approximately 32.1% in the
first quarter of 1998. These losses resulted from lower gross margins as a
percentage of telecommunications revenue due to the relatively high cost of
intra-European leased lines which was compounded by price reductions implemented
by certain ITOs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense, which
includes depreciation of the Viatel Network, increased from approximately $1.3
million in the three months ended March 31, 1997 to approximately $2.9 million
in the three months ended March 31, 1998. The increase was due primarily to the
depreciation of equipment related to network expansion and fiber optic cable
systems placed in service during 1997 and the first quarter of 1998.
Depreciation expense will increase substantially
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<PAGE>
as a result of the further expansion of the Viatel Network, particulary, in the
near term, from the construction of the Circe Network.
INTEREST. Interest expense increased from approximately $3.0 million in the
three months ended March 31, 1997 to approximately $3.8 million in the three
months ended March 31, 1998, primarily due to the accretion of non-cash interest
on the 1994 Notes. Interest income decreased from approximately $1.1 million in
the three months ended March 31, 1997 to approximately $.5 million for the three
months ended March 31, 1998. Interest expense and income will increase
substantially as a result of the completion of the Offering.
1997 COMPARED TO 1996
TELECOMMUNICATIONS REVENUE. Telecommunications revenue increased by 44.8%
from $50.4 million on 62.2 million billable minutes for 1996 to $73.0 million on
140.9 million billable minutes for 1997. Telecommunications revenue growth for
1997 was generated primarily from increased traffic volume on the European
Network, from growth in the Company's carrier business and, to a lesser extent,
increased traffic volume in Latin America and the Pacific Rim.
The overall increase of 126.4% in billable minutes from 1996 to 1997 was
partially offset by declining revenue per billable minute, as average revenue
per billable minute declined by 36.3% from $.80 in 1996 to $.51 in 1997,
primarily because of (i) a higher percentage of lower-priced intra-European and
national long distance traffic from the European Network as compared to
intercontinental traffic, (ii) a higher percentage of lower-priced carrier
traffic as compared to retail traffic, (iii) reductions in certain rates charged
to retail customers in response to pricing reductions enacted by certain ITOs
and other carriers in many of the Company's markets, (iv) changes in customer
access methods and (v) foreign currency fluctuations. See "-- Cost of
Telecommunications Services."
Telecommunications revenue per billable minute from the sale of services to
retail customers, which represented 72.1% of total telecommunications revenue in
1997 (compared to 83.5% 1996), decreased from $1.04 in 1996 to $.69 in 1997.
Telecommunications revenue per billable minute from the sale of services to
carriers and other resellers decreased from $.38 in 1996 to $.30 in 1997,
primarily as a result of price competition. The number of customers billed rose
18.4% from 18,172 at December 31, 1996 to 21,515 at December 31, 1997.
During 1997, approximately 44.7% of the Company's telecommunications revenue
was generated in Western Europe as compared to approximately 41.9% of the
Company's telecommunications revenue in 1996. Despite an increase of
approximately 14.1% over 1996, telecommunications revenue from Latin America
represented approximately 22.2% of the Company's telecommunications revenue
during 1997 as compared to approximately 28.4% of the Company's
telecommunications revenue during 1996. Telecommunications revenue from the
Pacific Rim represented approximately 12.4% of the Company's telecommunications
revenue during 1996 as compared to approximately 11.2% of the Company's
telecommunications revenue in 1997.
The Company has significantly increased its carrier business through which
it sells switched minutes to carriers and other resellers at discounted rates.
The carrier business represented approximately 27.9% of total telecommunications
revenue and approximately 46.1% of billable minutes for 1997 as compared to
approximately 16.5% of total telecommunications revenue and approximately 35.2%
of billable minutes for 1996. This increase in telecommunications revenue
represents an increase of approximately 147.0% over 1996.
COST OF TELECOMMUNICATIONS SERVICES. Cost of telecommunications services
increased from $42.1 million in 1996 to $63.5 million in 1997 and, as a
percentage of telecommunications revenue, increased from approximately 83.6% to
approximately 87.0% for 1996 and 1997, respectively. The Company's gross margin
decreased from 16.4% for 1996 to 13% for 1997. This decrease was primarily due
to (i) decreased revenue per minute (resulting from price competition and
foreign currency fluctuations) which was not offset by corresponding decreases
in infrastructure costs, (ii) increased sales to carrier customers (which
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<PAGE>
generate substantially lower margins), and (iii) an increase in intra-European
and national long distance traffic compared to higher margin international
traffic. This decrease in gross margin is one of the principal reasons the
Company initiated a strategy to own key elements of its network infrastructure.
Although it did not decrease as fast as revenues per minute, the Company's
average cost per billable minute decreased from $.67 during 1996 to $.44 during
1997, a 34.3% decrease. This decrease, which partially 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 increased
the utilization of fixed cost leased lines, (ii) increased switched minutes
generated by the Company's carrier business, which also increased the
utilization of fixed cost leased lines, and (iii) changes in customer access
methods. Increased European Network utilization helped reduce costs on a per
minute basis with respect to European long distance telecommunications services.
Cost of telecommunications services increased in 1997 because of leased line
costs for additional transmission capacity and the accelerated rollout of
European POPs. These costs are expected to decrease as a percentage of
telecommunications revenue as the Company continues its efforts to convert from
leased to owned capacity. The Company increased its private line circuits
capacity by 311%, and as a result the fixed costs associated with the European
Network, costs for private line circuits increased from approximately $4.1
million for 1996 (approximately 8.2% of telecommunications revenue) to
approximately $6.0 million for 1997 (approximately 8.2% of telecommunications
revenue). Due to the high cost of leased lines in Europe, the Company believes
its use of private line circuits will decrease and such decrease will positively
impact the Company's overall gross margins as more minutes are routed through
infrastructure owned by the Company. This benefit, however, is primarily limited
to calls that either originate or terminate in a city where the Company has a
switch or 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 from $32.9 million in 1996 to $36.1 million in
1997 and, as a percentage of telecommunications revenue, decreased from
approximately 65.2% in 1996 to approximately 49.4% in 1997. Much of these
expenses are attributable to overhead costs associated with the Company's
headquarters, back office and network operations as well as maintaining a
physical presence in seventeen different jurisdictions. Salaries and
commissions, as a percentage of total selling, general and administrative
expenses, were approximately 49.0% and 51.6% for 1996 and 1997, respectively.
EBITDA LOSS. EBITDA loss increased from $(24.6) million for 1996 to $(26.6)
million for 1997. As a percentage of telecommunications revenue, EBITDA loss
decreased from approximately (48.7)% in 1996 to approximately (36.4)% in 1997.
These losses resulted from lower gross margins as a percentage of
telecommunications revenue due to the relatively high cost of intra-European
leased lines which was compounded by predatory price reductions implemented by
certain ITOs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense, which
includes depreciation of the Viatel Network, increased from approximately $4.8
million in 1996 to approximately $7.7 million in 1997. The increase was due
primarily to the depreciation of equipment related to network expansion and
fiber optic cable systems placed in service during 1997. Amortization expense
will increase substantially as a result of the further expansion of the Viatel
Network, particularly, in the near term, from the construction of the Circe
Network.
INTEREST. Interest expense increased from approximately $10.8 million in
1996 to approximately $12.5 million in 1997 due to the accretion of non-cash
interest on the 1994 Notes not payable until July 15, 2000, at which time
semi-annual interest expense will be required through the January 15, 2005
maturity date. Interest income increased from approximately $1.9 million for
1996 to approximately $3.7 million in 1997, primarily as a result of the
investment of the net proceeds from the IPO. Interest expense will increase
substantially as a result of the Offering.
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1996 COMPARED TO 1995
TELECOMMUNICATIONS REVENUE. Telecommunications revenue increased by 56.0%
from $32.3 million on 25.9 million billable minutes for 1995 to $50.4 million on
62.2 million billable minutes for 1996. 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.
The overall increase of 140.0% in billable minutes from 1995 to 1996 was
partially offset by declining revenue per billable minute, as average revenue
per billable minute declined 35.0% from $1.23 in 1995 to $.80 in 1996 primarily
because of (i) a higher percentage of lower-priced intra-European traffic from
the European Network, (ii) a higher percentage of low-priced wholesale traffic,
(iii) reductions in certain rates charged to retail customers in response to
pricing reductions enacted by certain ITOs and (iv) changes in customer access
methods. See "-- Cost of Telecommunications Services."
Telecommunications revenue per billable minute from the sale of services to
retail customers decreased 28.8% from $1.46 in 1995 to $1.04 in 1996.
Telecommunications revenue per billable minute from the sale of services to
carriers and other resellers increased 8.6% from $.35 in 1995 to $.38 in 1996
primarily as a result of an overall increase in intercontinental call traffic.
The number of customers billed rose 97.1% from 9,218 at December 31, 1995 to
18,172 at December 31, 1996. During the second half of 1996, the Company
commenced offering national long distance telecommunications services in
Germany, Italy and Spain.
In order to utilize excess network capacity, the Company has significantly
increased its wholesale business through which it sells switched minutes to
carriers and other resellers at rates that are at a discount to the rates that
the Company charges its retail customers. 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 6.2% and 21.6% of total telecommunications revenue and billable
minutes, respectively, for 1995 as compared to approximately 16.5% and 35.2% of
total telecommunications revenue and billable minutes, respectively, for 1996.
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.
COST OF TELECOMMUNICATIONS SERVICES. Cost of telecommunications services
increased from $27.6 million in 1995 to $42.1 million in 1996 and, as a
percentage of telecommunications revenue, decreased from approximately 85.6% for
1995 to approximately 83.6% for 1996. 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 from $1.04 during 1995 to $.67 during 1996.
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 private line circuits capacity,
the costs associated with the European Network increased from approximately $2.0
million for 1995 (approximately 6.3% of telecommunications revenue for such
period) to approximately $4.1 million for 1996 (approximately 8.2% of
telecommunications revenue for such period).
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased from $24.3 million in 1995 to $32.9 million in
1996 and, as a percentage of telecommunications revenue, decreased from
approximately 75.3% in 1995 to approximately 65.2% in 1996. 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 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 a charge for a portion of the Company's
lease for its administrative headquarters in London 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 51.2% and 49.0% of total selling, general and administrative
expenses for 1995 and 1996, respectively.
EBITDA LOSS. EBITDA loss increased from $(20.3) million for 1995 to $(24.6)
million for 1996. As a percentage of telecommunications revenue, EBITDA loss
decreased from approximately (62.7)% in 1995 to approximately (48.7)% in 1996.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased from approximately $2.6 million in 1995 to approximately $4.8 million
in 1996. 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 from approximately $8.9 million in
1995 to approximately $10.8 million in 1996 due to the accretion of non-cash
interest on the 1994 Notes. Interest income was approximately $3.3 million and
$1.9 million for 1995 and 1996, respectively.
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 and
net losses for the next several years. Since inception, the Company has utilized
cash provided by financing activities to fund operating losses and capital
expenditures. The sources of this cash have primarily been private equity
financing, the proceeds from the sale of the 1994 Notes, the proceeds from the
Company's initial public offering in October 1996 and, to a lesser extent,
equipment-based financing. As of March 31, 1998, the Company had $28.2 million
of cash, cash equivalents and other liquid investments.
On April 8, 1998, the Company completed the Offering through which it raised
approximately $889.6 million of gross proceeds ($856.6 million of net proceeds).
The Company believes that the net proceeds from the Offering, together with
project financing, equipment financing and the sale of capacity on the Circe
Network will provide sufficient funds for the Company to expand its business as
planned and to fund its operating losses for at least the next 18 to 24 months.
However, the amount of the Company's future
65
<PAGE>
capital requirements will depend on a number of factors, including the success
of the Company's business, the start-up date of the Circe Network, the rate at
which the Company further expands the Viatel Network, the types of services that
the Company offers, staffing levels, acquisitions and customer growth, as well
as other factors that are not within the Company's control, including
competitive conditions, government regulatory developments and capital costs. In
the event that the Company's plans or assumptions change or prove to be
inaccurate, the Company is unable to convert from leased to owned capacity in
accordance with its current plans or the net proceeds of the Offering, project
financing, equipment financings and the proceeds from the sale of capacity on
the Circe Network prove to be insufficient to fund the Company's growth in the
manner and at the rate currently anticipated, the Company may be required to
delay or abandon some or all of the Company's development and expansion plans or
the Company may be required to seek additional sources of financing earlier than
currently anticipated.
The Company has used certain of the net proceeds from the Offering to (i)
finance the Tender Offer (including the payment of consent fees) and (ii) to
purchase approximately $122.8 million of U.S. Pledge Securities and
approximately $30.6 million of DM Pledge Securities. The Company intends to use
the remaining net proceeds to fund a portion of the construction and operational
start-up of the Circe Network, to fund other capital expenditures and for
general corporate and working capital purposes.
The Company completed the Tender Offer on April 8, 1998 in which all $120.7
million aggregate principal amount at maturity of the 1994 Notes were tendered.
In connection with the tender for the 1994 Notes, the Company estimates that a
one-time charge of approximately $28.3 million will be incurred and recorded in
the second quarter of 1998. This extraordinary charge relates to the early
extinguishment of debt and is comprised of the following: (i) a $24.7 million
premium paid in connection with the Tender Offer, (ii) a $0.3 million fee and
$0.7 million of other costs associated with the Tender Offer, and (iii) a
write-off of $2.6 million in unamortized deferred issuance and registration fees
associated with the 1994 Notes.
CAPITAL EXPENDITURES; COMMITMENTS. The development of the Company's
business has required substantial capital expenditures. During 1995, 1996, 1997
and the three months ended March 31, 1998, the Company had capital expenditures
of approximately $11.4 million, $9.4 million, $34.2 million and $2.7 million,
respectively. The Company expects to spend approximately $530.0 million to
construct the Circe Network and place it in service, although there can be no
assurance that the Company will not spend substantially more to complete the
Circe Network. The Company has or intends to enter into certain agreements
associated with the Circe Network, purchase commitments for network expansion
and other items aggregating $200.0 million to $400.0 million during 1998. In
addition, the Company has minimum volume commitments to purchase transmission
capacity from various domestic and foreign carriers aggregating approximately
$13.8 million for 1998. See Note 13 to the Company's Consolidated Financial
Statements, contained elsewhere in this Prospectus. In connection with the
Company's license application in Germany, the Company expects that it will be
required to pay, during 1998, a one-time license fee in the amount of
approximately $7.5 million (based on the exchange rate as of March 31, 1998).
The Company has signed various letters of intent relating to the Circe Network,
which currently commit the Company to make certain payments equal to the lesser
of actual cost or $5.3 million. The Company's obligations with respect to such
amounts are subject to further reduction based on an obligation of the vendor to
mitigate damages if the arrangements are terminated by the Company.
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 local European currency in a country where the
local currency is relatively stable, while many of its obligations, including 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 three months ended March 31, 1998, approximately 52.9% of
the Company's telecommunications revenue was billed in various European
currencies. Debt service on the 12.40% Notes and the 11.15% Notes are payable in
German Deutschmarks. Substantially all of the costs of acquisition and upgrade
of the Company's switches have
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been, and are expected to continue to be, U.S. Dollar denominated transactions,
however, a substantial portion of the costs to construct the Circe Network will
be denominated in various European currencies, including German Deutschmarks.
All of the European currencies in which the Company does business are expected
to converge as part of the European Monetary Union, except for the British Pound
Sterling.
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 the leased line costs, as well as a majority of local selling
expenses and debt service related to the 12.40% Notes and the 11.15% Notes, 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 March 31, 1998 and its results of operations for the three months ended
March 31, 1998 were not significantly impacted by fluctuations in the U.S.
Dollar in relationship to foreign currencies.
YEAR 2000. In 1997, the Company conducted an evaluation of its computer
systems and network for Year 2000 compliance. Based on such evaluation, the
Company believes that its software and hardware systems are Year 2000 compliant.
The Company does not know whether the computer systems of ITOs and other
carriers on whose services the Company depends for transmission capacity are
Year 2000 compliant. If the computer systems of the ITOs and such other carriers
are not Year 2000 compliant, it could have a material adverse effect on the
Company's business, financial condition and results of operations and its
ability to make payments on the Notes. See "Risk Factors -- Dependence on
Effective Information Systems; Year 2000 Technology Risks."
PROSPECTIVE ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income," and Statement of Financial Accounting Standards No. 131
("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information," were issued in June 1997. SFAS 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. This statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income, such as foreign currency fluctuations currently reported
in stockholder's equity, be reported in an annual financial statement that is
displayed with the same prominence as other financial statements. SFAS 131
establishes standards for the way public companies report information about
operating segments in annual financial statements and requires that these
companies report selected information about operating segments in interim
financial reports issued to stockholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company adopted SFAS 130 in the first quarter of 1998 and will
adopt SFAS 131 for its annual reporting in 1998.
Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities," was issued in
June 1998. SFAS 133 standardizes the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, by
requiring recognition of those instruments as assets and liabilities and to
measure them at fair value. SFAS 133 will be effective for the Company in 2000.
The Company has not yet determined the effects of the pronouncement.
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BUSINESS
OVERVIEW
The Company is a rapidly growing international telecommunications company
providing high quality, competitively priced, international and domestic long
distance telecommunications services, primarily to small and medium-sized
businesses, carriers and resellers. These services include national and
international long distance telecommunication services, as well as enhanced
services such as toll free services, calling cards and switched voice band data
services. The Company established an early presence in several key Western
European countries to capitalize on the opportunities presented by full
deregulation of the telecommunications industry. The Company currently operates
one of the largest alternative Pan-European networks, with international gateway
switching centers in New York and London, network POPs in 30 cities, direct
sales forces in nine Western European cities and indirect sales offices in more
than 100 additional locations in Western Europe. Today, the Company provides
telecommunications services in Belgium, France, Germany, Italy, Spain,
Switzerland, The Netherlands and the United Kingdom. The Company also provides
telecommunications services in certain countries in Latin America and Asia and
operates as a carriers' carrier in the United States and the United Kingdom. The
Company's telecommunications revenues have grown from $32.3 million in 1995 to
$73.0 million in 1997.
The Company's mission is to build a Pan-European telecommunications company
focusing on small and medium-sized businesses, while becoming a high quality,
low-cost provider of telecommunications products and services through the
ownership of key network infrastructure. The Company believes that the small and
medium-sized businesses segment offers significant market opportunities because
it has traditionally been underserved by the ITOs and is likely to be receptive
to competitively priced bundled service offerings by New Entrants, such as those
offered by the Company. To service this customer base, to date the Company has
established sales offices in nine Western European cities and has established
indirect sales offices, through arrangements with independent sales
representatives and telemarketing agents, in more than 100 additional locations
in Western Europe. At March 31, 1998, the Company's customer base, primarily
consisting of small and medium-sized businesses, was 17,090, of which 11,712
were located in Western Europe.
The Company believes that network ownership is critical to becoming an high
quality, low-cost provider and will create the necessary platform to provide a
full array of telecommunications products and services to customers. The Company
has recently initiated a program to own key elements of its network
infrastructure, including interests in fiber optic cable systems. By owning or
controlling key elements of its network, the Company will be better able to
control service offerings, quality, and transmission and other operating costs.
Ownership of network facilities is an essential element in the Company's
expansion into new service offerings such as data products, including frame
relay, Internet services and ATM services.
As part of the Company's strategy to own or control key elements of its
network, the Company is developing the Circe Network, a state-of-the-art fiber
optic ring which will connect five countries and will include London, Paris,
Nancy, Strasbourg, Stuttgart, Frankfurt, Cologne, Dusseldorf, Essen, Brussels,
Antwerp, Rotterdam and Amsterdam. Bechtel, one of the largest construction
companies in the world, has been engaged by the Company to manage the
construction of the system. The Circe Network will be a high quality, high
capacity, self-healing ring, utilizing advanced SDH, which is the current
international standard for digital transmission, and DWDM technologies. The
Circe Network will significantly expand the Company's revenue opportunities by
enabling it to (i) provide a broader range of products and services to retail
customers, (ii) provide wholesale services to the large base of resellers that
the Company expects will develop as deregulation continues in Western Europe and
(iii) capitalize on the growing demand for bandwidth intensive services in
Europe. The Company intends to offer its target customer base a better transport
system than is currently available in Europe with a higher and more consistent
level of transmission quality, redundancy, network functionality and service at
lower prices.
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The Circe Network will offer ITOs and New Entrants an attractive alternative
for the transport of cross-border telecommunications traffic. Under the
traditional system of carrying cross-border telecommunications traffic in
Europe, no ITO developed end-to-end cross-border circuits. The Company believes
no alternative carrier currently offers cost-effective capacity, resulting in
the absence of such capacity between Western European countries. The Circe
Network will offer cost-effective cross-border connectivity between major
Western European cities as a compelling alternative to ITO-provided leased
lines, which suffer from a number of deficiencies in terms of cost, quality and
availability. The Circe Network will address these deficiencies by creating a
Pan-European fiber network that will allow carriers to own capacity on a
self-healing, cross-border basis.
In order to complement and efficiently utilize capacity on Viatel's network,
the Company sells switched minutes to wholesale customers and other resellers in
the United States and the United Kingdom. The Company believes that the sale of
switched minutes to such customers is an effective means of achieving network
efficiencies. The Company believes that the Flat Rate Acquisition further
enhances the Company's network efficiency, builds scale and provides the Company
with the critical mass necessary to compete in today's competitive
telecommunications markets.
Viatel is a Delaware corporation and is the successor to VIA USA, Ltd. (a
Colorado corporation) which was merged into Viatel on October 11, 1994 to
effecuate a reincorporation within the State of Delaware.
MARKET OPPORTUNITIES
International telecommunications is one of the fastest growing segments of
the long distance industry, having experienced a compounded growth in total
minutes of 14% per annum from 1989 to 1996, and is expected to continue growing
at a rate of approximately 13% per annum through the year 2000. Based upon this
estimate, worldwide international long distance traffic is projected to grow
from 70 billion minutes in 1996 to over 114 billion minutes by the year 2000.
For 1996, the European international long distance market was the largest in the
world with approximately 28 billion minutes or 40% of international calling
volume originating in Europe. A substantial portion of the traffic originating
in Europe terminates in Europe or the United States where the Company has
international gateway switches.
INTERNATIONAL TRAFFIC PATTERNS
<TABLE>
<CAPTION>
EUROPE* USA OTHER
----------- --------- -----------
<S> <C> <C> <C>
Belgium........................................................... 75.5% 3.7% 20.8%
Netherlands....................................................... 69.0 6.2 24.8
Germany........................................................... 42.7 6.0 51.4
France............................................................ 53.5 5.7 40.8
Italy............................................................. 54.4 9.1 36.5
Spain............................................................. 53.9 4.1 42.0
United Kingdom.................................................... 36.8 14.4 48.8
</TABLE>
- ------------------------
* Europe -- represents the listed countries and Switzerland.
Source: TeleGeography 1997.
The Company estimates that, during 1997, the market for total long distance
voice and voice band data in the Western European countries in which the Company
operates represented approximately $59.6 billion, with $45.0 billion
representing national long distance and approximately $14.6 billion representing
international long distance. In many EU member states, the ability to provide
telecommunications services was liberalized on January 1, 1998. The Company
believes that regulatory liberalization in Western Europe and technological
advancements eventually will lead to market developments similar to those that
have
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occurred in the United States and the United Kingdom following deregulation,
including an increase in both international and national traffic volume, reduced
prices, increased service offerings and the emergence of New Entrants. By 1995,
New Entrants had amassed approximately 19% of the United States long distance
market, from approximately 10% in 1984. In addition, from 1991 to 1995, the
number of competitors in the United Kingdom grew from 2 to 120.
The Company believes there is a shortage of cross-border capacity in Europe.
Most infrastructure in Europe is owned and operated by the ITOs. Under the
traditional system of carrying cross-border telecommunications traffic in
Europe, no ITO developed end-to-end cross-border circuits. Instead, an
international call is carried by the ITO in the country where the call
originates and is passed off to the ITO in the country in which the call
terminates pursuant to bilateral agreements. Cable systems have historically
been built by a consortia of ITOs and certain other carriers under the "Club"
system. The Club system has traditionally had no incentive to (i) upgrade
capacity to provide access to new carriers since their respective needs were
met, or (ii) sell capacity on a cost-effective basis to other carriers. In
addition, landing stations associated with these Club systems have traditionally
been controlled by the ITO members and, in instances where capacity is sold,
other carriers have been required to negotiate "back haul" arrangements in order
to achieve access to the Club systems. The Company believes the system of
bilateralism and the construction of cable systems by the "Club" has resulted in
a serious shortage of cross-border capacity in Europe. Moreover, growth in
bandwidth intensive services will further fuel the need for bandwidth. According
to industry sources, the bandwidth demand for data in the United States is
currently growing at the rate approximately 10 times faster than the demand for
voice services and the Company expects this trend to develop in Europe as
competitively priced capacity becomes available.
There are currently two private systems carrying cross border traffic
currently in operation, Ulysses, which is owned by WorldCom, and Hermes. Ulysses
is an approximately 2,000 route kilometer Pan-European fiber optic network
connecting London, Amsterdam, Brussels, Paris and Frankfurt. Hermes is an
approximately 2,600 route kilometer fiber optic network connecting London,
Rotterdam, Amsterdam, Antwerp, Brussels, Paris, Dusseldorf and Frankfurt. The
Company believes that neither Ulysses nor Hermes are currently selling capacity
on an IRU basis to other carriers. However, Hermes is currently leasing capacity
to carriers and New Entrants at prices which are attractive compared to those
offered by the ITOs, but remain significantly higher than actual costs. In
addition to Hermes and Ulysses, Fibernet Group plc has built a 35 city network,
primarily in the United Kingdom, Espirit Telecom Group plc is attempting to
build out its Pan-European network and other companies such Level 3
Communications and British Telecom are planning to launch a Pan-European
network. Cable & Wireless has also announced its intention to invest significant
resources in European telecommunications facilities and other companies, such as
Unisource and Global One, have announced their intention to continue to focus on
the European telecommunications market. The Company believes that the Circe
Network will provide a valuable opportunity to market capacity to other carriers
on an attractive cost-efficient IRU basis and to New Entrants on an IRU or
long-term lease basis.
The Company believes that a substantial part of the capacity on existing
routes has a number of deficiencies including (i) high costs, (ii) lack of
end-to-end quality control, (iii) limited availability of bandwidth, (iv) long
lead times for provisioning, (v) lack of redundancy and (vi) long delays for
restoration. While there have been significant reductions in leased line costs
as a result of deregulation, these deficiencies are exacerbated by the increase
in demand for bandwidth from New Entrants, thereby resulting in artificially and
significantly higher costs. The Company believes there is a significant
opportunity to provide cost-effective bandwidth to New Entrants.
BUSINESS STRATEGY
The Company's mission is to build a Pan-European telecommunications company
focusing on small and medium-sized businesses, while becoming a high quality,
low-cost provider of telecommunications
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products and services through the ownership of key network infrastructure. The
key elements of the Company's strategy include:
- CAPITALIZE ON LARGE AND RAPIDLY DEREGULATING EUROPEAN MARKETS
The Company's principal focus is on exploiting opportunities presented by
rapidly deregulating European markets. For 1996, the European international long
distance market was the largest in the world with approximately 28 billion
minutes. The Company estimates that, during 1997, the market for long distance
services and voice band data in the Western European countries in which the
Company operates represented approximately $59.6 billion, with approximately
$45.0 billion representing national long distance and approximately $14.6
billion representing international long distance. A substantial portion of the
international traffic originating in Europe terminates in Europe or the United
States where the Company has international gateway switches. As liberalization
takes effect throughout Western Europe, the Company believes New Entrants will
play a significant role in penetrating these markets.
- LEVERAGE ESTABLISHED MARKET PRESENCE AND LOCAL DISTRIBUTION NETWORK
The Company established an early presence in Western Europe to capitalize on
the opportunities presented by deregulation of the telecommunications industry
in Europe. As a result, the Company has gained substantial experience in the
operational, technical, financial and logistical issues involved in building a
network and sales force in Western Europe. To date, the Company has established
sales offices in nine Western European cities and has established indirect sales
offices, through arrangements with independent sales representatives and
telemarketing agents, in more than 100 additional locations in Western Europe.
The Company believes it is well positioned to identify and capitalize on
increasing market opportunities in Western Europe and will continue to build and
enhance its sales force and operations in Europe over the next few years and add
products and services as telecommunications markets continue to deregulate.
- FOCUS ON SIGNIFICANT BASE OF SMALL AND MEDIUM-SIZED BUSINESSES
The Company has established a retail customer base of small and medium-sized
businesses and intends to continue to focus its retail marketing efforts on this
market segment. In most European markets, small and medium-sized businesses
account for a significant percentage of national and international calling
traffic and the Company expects this segment will continue to provide a
significant opportunity for the Company. In 1996, small and medium-sized
businesses represented, on average, 60.0% of the total company revenues
generated and, as of 1994, approximately 66.0% of the total workforce in the EU
member states. The Company believes that small and medium-sized businesses are
likely to be receptive to competitively priced bundled service offerings by New
Entrants, such as those offered by the Company, because these businesses have
traditionally been underserved by the ITOs, which offer their best rates and
services primarily to higher-volume multinational business customers.
- ENHANCE REVENUE OPPORTUNITIES THROUGH CIRCE NETWORK
The Company believes that the Circe Network will significantly expand the
Company's ability to capitalize on opportunities presented by the deregulation
of the European telecommunications market. First, the Circe Network will provide
the Company with the ability to control the quality and scope of services to
retail customers, while effectively competing on price. Second, the Company
believes that deregulation of the continental European telecommunications market
will lead to the creation of numerous New Entrants, principally consisting of
resellers, as occurred in the United States and the United Kingdom following
deregulation of the telecommunications markets in those countries. The Circe
Network will enable the Company to capture a greater share of the expanding
Western European telecommunications market by providing wholesale services to
other New Entrants. Third, the Company believes that
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demand for data services will significantly outgrow existing capacity. The Circe
Network will enable the Company to service the expanding need created by
bandwidth intensive services.
- ESTABLISH LOW-COST POSITION THROUGH NETWORK OWNERSHIP AND CONTROL
The Company believes it is critical to own or control key elements of its
network in order to be a low-cost provider. By owning or controlling key
elements of its network, the Company will be better able to control service
offerings, quality, and transmission and other operating costs. As part of the
Company's efforts to own key portions of its network, the Company (i) has
purchased IRUs or MIUs in digital fiber optic cable systems, (ii) has purchased
POPs and switches, and (iii) is constructing the Circe Network. The Company also
intends to acquire additional interests in submarine fiber optic cable
originating in the United Kingdom and connected to other EU member states in
which the Company has a local presence. The Circe Network's advanced fiber and
transmission electronics are expected to provide lower installation, operating
and maintenance costs than older fiber optic systems generally in commercial use
today. In addition, to offset the construction costs of the Circe Network, the
Company intends to sell IRUs on the Circe Network for cash or in exchange for
IRUs on other cable systems.
- CAPITALIZE ON EXPANDING DATA NEEDS
The majority of the Company's revenue is currently derived from
international long distance services. As liberalization leads to more favorable
interconnection rates in Western Europe, the Company intends to offer national
long distance services in additional Western European countries. Network
infrastructure ownership will facilitate the Company's entry into new products,
such as data products including frame relay, Internet and ATM services, which
are more bandwidth and transmission intensive. According to industry sources,
bandwidth demand for data in the U.S. is currently growing approximately 10
times faster than voice and the Company expects this trend to develop in Europe
as competitively priced capacity becomes available. The Company believes that
there will be substantial demand for data products by small and medium-sized
businesses, and that a bundled service offering of national and international
data and voice services will be attractive to this targeted customer base.
- LEVERAGE NETWORK THROUGH CARRIER SALES
In order to complement and efficiently utilize capacity on Viatel's network,
the Company sells switched minutes to wholesale customers and other resellers in
the United States and the United Kingdom. The Company believes that the sale of
switched minutes to such customers is an effective means of achieving network
efficiencies. The Company believes that the Flat Rate Acquisition further
enhances the Company's network efficiency, builds scale and provides the Company
with the critical mass necessary to compete in today's competitive
telecommunications markets.
- PURSUE ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES
To date, the Company's growth primarily has been internally generated and
managed. In addition to systematically expanding the Company through internal
growth, the Company intends to expand its services and network capabilities
through acquisitions, investments and strategic alliances. The Company believes
that such acquisitions, investments and strategic alliances are an important
means of increasing network traffic volume and achieving lower termination costs
and desired economies of scale.
SERVICES
The Company currently provides competitively priced long distance services
with value-added features that typically have not been provided by the
respective ITO in many of the countries in which the Company operates. The
Company's services include Voice Telephony (where legally permissible), 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 provided by the Company include itemized and multicurrency
billing, abbreviated dialing and multiple payment methods. See "-- The Viatel
Network."
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The Company's principal services include:
VIACALL -- a service permitting domestic and international calling to more
than 230 countries and territories through switched access. This service is
currently marketed exclusively in Germany, the United Kingdom and The
Netherlands where the Company has full interconnection and a national operator's
license.
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.
VIAPN -- 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.
VIAISDN -- permits domestic and international calling to more than 230
countries and territories through switched access via ISDN lines. In Spain, this
service is restricted to fax and voice band data pending the liberalization of
the Spanish market.
VIACONNECT -- provides "anywhere to anywhere" international callback access
through manual, automatic, X.25 or Internet initiated callback. These services
are also offered with International toll-free ("ITF") access, subject to pricing
considerations.
VIAGLOBE -- provides calling card access from more than 50 countries. In
addition to offering savings over the calling cards of AT&T, MCI and other
providers of credit-based international calling cards, VIAGLOBE provides 24-hour
operator assistance and speed dialing.
VIACARD -- is a prepaid international debit card which provides many of the
same features as VIAGLOBE on a prepaid basis.
The Company expects to begin offering data services during the second half
of 1998. The Company currently anticipates that it will incur between
$10.0-$40.0 million of capital expenditures during 1998 and 1999 in developing
such services. There can be no assurance that the Company will be able to launch
data services in the second half of 1998 or thereafter or that, if launched,
such services will be successful.
On January 1, 1998, the market for Voice Telephony was liberalized in all EU
member states where the Company currently does business, with the exception of
Spain. Seven EU member states, including Belgium, Germany and Italy have been
sued by the EC for their failure to timely implement EU directives implementing
the deregulation of Voice Telephony. See "-- Government Regulation."
THE VIATEL NETWORK
The Company currently operates one of the largest Pan-European networks,
with international gateway switching centers in New York and London, which are
connected by Company-owned digital fiber optic transmission facilities and has
developed an integrated digital, switch-based telecommunications network with
thirty locations in Western Europe including switches in Amsterdam (The
Netherlands), Barcelona and Madrid (Spain), Antwerp and Brussels (Belgium),
Frankfurt (Germany), Milan and Rome (Italy) and Paris (France) and additional
POPs as follows: Bilboa, Gerona, Majorca, Tarragona and Valencia (Spain); Leuven
(Belgium); Bordeaux, Lyon, Marseille and Toulouse (France); Geneva
(Switzerland); Rotterdam (The Netherlands); Berlin, Hamburg, Stuttgart and
Wiesbaden (Germany); Brescia, Florence, Genoa and Vicenza (Italy); connected by
leased, digital fiber optic transmission facilities (together with the switches
located at its international gateway switching center in London, the "European
Network"). The European Network, together with the Company's switches located at
its international gateway switching center in New York and POPs in Miami,
Florida and Omaha, Nebraska is referred to as
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the "Viatel Network". The Viatel Network employs four Nortel DMS 100e switches,
one Nortel DMS 300 switch, six Wyatt/Reuters MRX-2000 switches and three call
reorigination switches. The Company intends to install additional POPs in cities
with both significant calling activity directed to the Company's switched-based
cities and significant potential for originating and terminating international
and domestic long distance traffic as required for interconnection with other
carriers.
Access to the Company's services is obtained either through "switched
access" or "dedicated access." Switched access requires the use of: (i) carrier
selection (e.g., "1623" in the Netherlands), which requires the Company to pay
the ITO at a discounted rate for the cost of accessing the Company's services;
(ii) paid access, which requires the customer to pay the ITO for the cost of
accessing the Company's services; (iii) callback, which enables the customer to
receive a return call providing a dial tone originated from the Company's Omaha,
Nebraska switching center; (iv) ITF, which accesses the Company's Omaha,
Nebraska switching center by direct dial; or (v) national toll free, which
accesses a local switch in the European Network. Customers using dedicated
access are connected to a Company switch or POP by a private leased line
connected to the customer's premises. Carrier selection and dedicated access are
the Company's access method of choice in countries where the Company has
achieved full interconnection with the ITO. At this time, the Company has
interconnection agreements with the following ITOs: British Telecom (United
Kingdom), KPN (The Netherlands) and Deutsche Telekom (Germany). The Company also
has interconnection agreements with the following carriers: Cable & Wireless
(United Kingdom), Infostrada (with 32 POPs) (Italy) and ECN Telecommunications
(with 28 POPs) (Germany). Currently, substantially all of the Company's small
and medium-sized business customers use one or more forms of switched access.
The Company is currently negotiating interconnection agreements with France
Telecom, Belgacom and Telecom Italia. There can be no assurance that the Company
will be successful in securing such interconnection agreements in a satisfactory
or timely manner.
The Company's ownership of switches reduces its reliance on other carriers,
enables routing of telecommunications traffic over multiple transmission paths,
aids in controlling costs and permits the compilation of call record data and
other customer information. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital Resources
- -- Capital Expenditures; Commitments."
THE EUROPEAN NETWORK. The European Network currently consists of an
international gateway 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 for call origination.
The Company anticipates increasing use of the European Network to transport
calls in Western Europe. See "-- Carrier Contracts."
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DESCRIPTION OF NETWORK
[Included at this location is a map of Western Europe and the U.K. showing
the Company's points of presence and switches in Western Europe and in London,
its leased lines, the proposed route for the Circe Network, the proposed route
for the Planned German Extension and its interests in certain fiber optic
cables.]
PRIVATE LINE CIRCUITS. The Company's nine switches in Western Europe are
currently connected to its international gateway switching center in London by
private line circuits. Private line circuits are permanent point-to-point
connections for voice and data transmissions and, when certain levels of volume
are reached, are a less expensive alternative to the PSTNs. The private line
circuits connecting the Company's switches to the international gateway
switching center in London are leased directly, or indirectly through third
parties, from the ITOs in the countries in which such calls originate.
As part of the Company's concerted effort to convert leased capacity to
owned capacity for the purpose of improving operating margins, the Company has
continued to purchase IRUs or MIUs in digital fiber optic cable systems,
including IRUs in (i) CANUS-1/CANTAT-3 (8.196 megabits per second ("Mb/s"), a
transatlantic cable originating in the United States, Canada and the United
Kingdom,
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(ii) TAT-12/13 (8.196 Mb/s), a transatlantic cable originating in the United
States, the United Kingdom and France, (iii) Atlantic Crossing 1 (155.5 Mb/s), a
transatlantic cable originating in the United States and the United Kingdom, and
(iv) Gemini (44.7 Mb/s), a transatlantic cable originating in the United States
and the United Kingdom, and MIUs in Fiberoptic Link Around the Globe (18.440
Mb/s), a cable originating in, among other places, the United Kingdom, Italy and
Spain. The Company also intends to acquire additional interests in cross-channel
digital fiber optic cable originating in the United Kingdom and connected to
other EU member states in which the Company has a physical presence. These
cables will be used for transmission of traffic between the United States and
Europe and within Europe, resulting in improved service quality at lower cost.
SWITCHING PLATFORMS. The Viatel Network utilizes "intelligent switches"
which incorporate software designed to achieve least cost routing, the process
by which the Company enhances the routing of calls over the Viatel Network for
more than 230 countries and territories. Least cost routing is designed to allow
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
available rates.
The Viatel Network uses high capacity digital switching platforms designed
to provide services quickly and cost-effectively. The switches are modular and
scaleable and incorporate among the most advanced technologies such as
self-diagnosis ISDN, hierarchical call control and dynamic network management
software. These switches, currently consisting of four Nortel DMS 100e switches,
one Nortel DMS 300 switch, six Wyatt/Reuters MRX-2000 switches and three call
reorigination switches, which can also provide a bridge between older and
emerging standards. As the Viatel Network continues to evolve, the installed
base of switches can be augmented or upgraded easily to create a cost effective,
scaleable network.
By combining the Company's international gateway switching centers in New
York and London with its transatlantic fiber optic cable capacity, the Company
believes that it will be able to provide customers with improved quality, while
lowering its transmission costs.
NETWORK OPERATIONS CENTERS. The Company currently monitors the activity of
the Viatel Network from Omaha, Nebraska in the United States and London in
Europe. Beginning in late 1998, the Company will monitor the activity of its
network from dual NOCs located in London and the greater New York metropolitan
area. These NOC's will be fully fitted with sophisticated surveillance and
control capability, fraud detection and real time transmission quality
enhancements. The Company's Omaha, Nebraska site will continue to house its back
office systems of support of NOC's and the Viatel Network. Each NOC will be
capable of acting as a full backup to the other. Each NOC will also allow "full
view" capability and will have the ability to perform remote diagnostics and
testing on key elements of the Viatel Network, including the Circe Network.
CIRCE NETWORK
As part of the Company's strategy to own or control key elements of its
network infrastructure, the Company is developing the Circe Network linking five
countries and will include London, Paris, Nancy, Strasbourg, Stuttgart,
Frankfurt, Cologne, Dusseldorf, Essen, Brussels, Antwerp, Rotterdam and
Amsterdam. The Circe Network will be a high quality, high capacity
bi-directional, self-healing ring, utilizing advanced SDH and DWDM technologies.
The Circe Network is expected to have approximately 3,671 route kilometers,
including approximately 471 route kilometers of a Belgium national network and
320 route kilometers of undersea fiber optic cable. The development and
operational start-up of the Circe Network is estimated to cost approximately
$530.0 million. The Company commenced construction of the Circe Network in the
Spring of 1998 with initial turn-up in the first quarter of 1999. The Circe
Network will be deployed along various rights-of-way, including motorways,
railways, waterways and pipelines through a combination of new digs and the
acquisition of dark fiber. Key characteristics of the Circe Network will
include:
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STATE-OF-THE-ART TECHNOLOGY. The Company will install state-of-the-art,
technologically advanced equipment in a uniform configuration throughout the
entire Circe Network, which will provide a Pan-European SDH self-healing
ring. The Circe Network will use laser-generated light to transmit bi-
directionally over fiber optic glass strands with an initial capacity at 20
Gb/s. In connection with the development and construction of the Circe
Network, the Company will be upgrading its NOCs to enable near real time
monitoring and reconfiguration of its network.
HIGH SECURITY AND RELIABILITY. The Circe Network is being designed for
high security and reliability, based upon (i) a self-healing system that
will allow for instantaneous restoration, virtually eliminating down time in
the event of a fiber cut, (ii) fiber cable generally installed in
high-density polyethylene conduits on terrestrial portions of the system and
(iii) advanced cable armoring techniques on the submarine portions of the
system.
ADDITIONAL CAPACITY AND FLEXIBILITY. The Circe Network's high-density
network architecture may be upgraded, without service interruption, to 160
Gb/s (16 STM-64) through the use of DWDM and bi-directional multi-wavelength
optical amplifiers, to support future demand for bandwidth intensive data
applications such as frame relay, Internet and ATM services. The Company is
currently marketing capacity on the system to other telecommunications
carriers and New Entrants. The Circe Network will enable the Company to
expand the reach of its existing network to additional strategic
destinations through the exchange of capacity on the Circe Network for
capacity on other fiber optic systems.
The Company began planning Phase 1 of the Circe Network in the Fall of 1997
and retained MKI, a subsidiary of WorldCom, to perform a feasibility study and
to propose a terrestrial route for Phase 1. On January 28, 1998, the Company
received a preliminary route study from MKI which identifies (i) the preferred
rights-of-way for Phase 1, as well as alternative routing options, (ii)
procedures for obtaining all permits, licenses and other regulatory requirements
necessary to allow Phase 1 to be installed along the preferred route and (iii)
construction methodology and associated risk analysis. Recently, the Company
received a route study from Bechtel for Phase 2 which (i) identifies the
preferred rights-of-way, (ii) evaluates lease or build options for rights of
way, (iii) provides time and cost estimates for obtaining rights-of-way and (iv)
provides a proposed action plan.
On March 13, 1998, the Company executed a binding letter of intent and term
sheet with Bechtel, pursuant to which Bechtel was engaged by the Company to
manage the construction of Phase 1. Under the terms of the letter of intent,
Bechtel has overall responsibility for the procurement for, and the arranging
and administering of, the engineering, construction, commissioning and testing
of Phase 1. For its services, Bechtel will be paid a fee equal to the sum of (i)
its Recoverable Costs (as defined), which include hourly costs for personnel,
other direct costs such as costs associated with travel, costs of all equipment
and all costs associated with consultants, subcontractors and other outside
services and facilities, the costs of all equipment, materials and supplies used
or consumed in the performance of its services and all duties, excises,
assessments, levies, taxes, imposts and licenses arising out of the performance
of its services; (ii) agreed upon fees upon the completion of each of the four
major segments into which Phase 1 has been divided; and (iii) specified fees
upon the acquisition of at least 95% of the rights-of-way and wayleaves required
in each of the four countries in which Phase 1 is being constructed. Under the
terms of the letter of intent, Bechtel has committed to a ready-for-service date
of December 31, 1998 for Phase 1. In the event that Bechtel fails to achieve a
specified ready-for-service date for any of the four segments, it will be
subject to certain specified liquidated damages in an amount up to the total fee
pool for the segment, and if it completes the construction of a segment prior to
its scheduled ready-for-service date, Bechtel will be entitled to certain agreed
upon incentive payments.
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The Company has also executed a binding letter of intent and term sheet with
ASN, dated March 18, 1998, under which ASN has agreed to procure, install and
test, on a fixed price, date certain basis, optical fiber for the submarine
portions of the Circe Network. In addition, the Company has executed a
definitive agreement with Nortel, executed on June 29, 1998, for the
engineering, manufacturing, testing, installation and commissioning of
transmission equipment and related network management systems for the Circe
Network at a fixed price. Each of the letter of intent with ASN and the
definitive agreement with Nortel establishes maximum contract prices and
provides for the payment of liquidated damages in the event that the respective
contractor fails to meet agreed upon ready-for-service dates (November 30, 1998
in the case of the ASN agreement and December 1998 in the case of each Nortel
agreement).
Bechtel is one of the largest construction contractors in the world. Bechtel
has been involved in over 15,000 projects in over one hundred nations on seven
continents. Bechtel has substantial experience in constructing projects in
Europe, with hundreds of projects and over 30 years of experience in Western
Europe. Bechtel has played a significant role in the various rail projects in
Europe, including the Euro Tunnel and was involved in the construction of Euro
Disney. Bechtel has over 25 years of experience in telecommunications, with
recent projects in Saudi Arabia, Argentina, Venezuela, the Phillipines,
Indonesia and the United States.
ASN is a leading submarine cable contractor. From 1992 to 1996, ASN had
approximately 33% of the worldwide market for repeated systems and approximately
32% of the worldwide market for unrepeated systems. Nortel is a leading supplier
in the development and deployment of SDH and SONET networks worldwide with a
presence in over 90 countries. Nortel has supplied the two largest new SDH
networks in the world.
The Company will employ DWDM technology, which is among the latest
commercial advancements in optical physics. DWDM is an advancement over basic
wave division multiplexing. With DWDM technology, more light waves can be
transmitted though fiber on the cable thereby permitting the transfer of greater
amounts of information at lower cost than with previous fiber optic technology.
DWDM is a proven technology currently utilized with increasing frequency in the
telecommunications industry. The Company's switching platform is largly
Nortel-based, and fully compatible with the electronics to be utilized on the
Circe Network. The contemplated package of electronics to be purchased from
Nortel includes the INM Network management system which is multi-vendor capable.
The Circe Network will replace the high-cost low-bandwidth leased lines
currently used by the Company to interconnect its switches in London, Paris,
Amsterdam, Antwerp, Brussels and Frankfurt and its POP in Stuttgart and
Rotterdam. Carriers purchasing IRUs will interconnect with the Circe Network at
optical interconnection points, which will be strategically located at sites
along the ring, permitting easy access to the system at minimal cost.
The operation of the Circe Network will be monitored by the Company's NOCs
to be located in London and in Franklin, New Jersey. These NOCs will also
control, monitor and administer switches throughout the Viatel Network and will
provide "full view" capability to the Company's maintenance staff, enabling the
monitoring of the system, as well as the digital switches, on a real-time basis.
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The construction and operation of the Circe Network is being managed by
Francis J. Mount, who joined the Company in December 1997 as Senior Vice
President, Engineering and Network Operations. Mr. Mount has over 30 years of
experience in the telecommunications industry, including six years with MCI
where he most recently served as Director, Global Technical Services,
responsible for international development, alliance management and all technical
operations and services outside of the United States, and 22 years with AT&T
Corporation where he served in various technical and network management
capacities. In addition, the Company has retained Derek Foxwell, as Director of
Infrastructure Programs, who is responsible for overseeing the development of
the design, configuration and construction of the Circe Network. Mr. Foxwell is
a chartered engineer with over 25 years of experience in international
telecommunications networks. Mr. Foxwell has been a consultant to Nynex Network
Service (FLAG Ltd.), where he chaired Flag's Assignment, Routing and Restoration
Subcommittee and to Sprint International (PTAT), where he acted as the
operations and maintenance manager for PTAT systems. Mr. Foxwell was employed by
British Telecom for almost 20 years, most recently as Transmission Engineering
Planning Manager, International Cable Network; International and National
Elements. Once the Circe Network is operational, ongoing maintenance and repair
will be handled by subcontractors, managed by the Company, strategically located
along the system's route.
SALES AND MARKETING; CUSTOMERS
The Company's principal target market consists of small and medium-sized
businesses. This market includes trading companies, financial institutions, and
import-export companies, for which long distance telecommunications service
represents a significant business expense. Small and medium-sized businesses
constitute a large and growing portion of the European economy and, in 1996,
represented on average 60.0% of the total company revenues generated in the EU
member states and, in 1994, represented approximately 66.0% of the total
workforce. The following chart presents the share of revenue generated by small
and medium-sized businesses in certain EU member states as of December 31, 1996:
[Included at this location is a bar chart presenting the percentage of total
business generated by small and medium-sized businesses, in descending order,
from Spain, Italy, France, The Netherlands, Germany, the United Kingdom and
Belgium.]
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The Company believes that this customer segment offers significant market
opportunities because it has been traditionally underserved by the ITOs and
small and medium-sized businesses are more likely to be receptive to
competitively priced bundled service offerings by New Entrants, such as those
offered by the Company, than larger size businesses. The Company also targets
carriers and other resellers.
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 markets 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 and has established indirect sales offices,
through arrangements with independent sales representatives and telemarketing
agents, in more than 100 additional locations in Western Europe. 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. In Europe, the Company's sales and marketing staff is currently
divided into two categories: direct sales representatives and indirect sales
representatives. Direct sales representatives are responsible for face-to-face
sales efforts to accounts with $500 per month of revenue potential and indirect
sales representatives are responsible for telesales to accounts with less than
$500 per month of revenue potential.
The Company's direct sales personnel are currently compensated on a salary
and commission basis, with potential commissions being paid on the basis of
revenues generated by new customers solely during their first three months as a
customer of the Company. After such three month period, the customer is turned
over to "pro-active account managers" or "PAMs" who manage the account and are
compensated based on the monthly growth of such account above certain minimum
requirements. The Company believes that this compensation structure provides
maximum incentive to the Company's direct sales force to continue to grow the
Company's customer base and revenue.
The Company's independent sales representatives are retained on a
non-exclusive/commission-only basis, with commissions being subject to charge
back for revenues not collectible by the Company. The Company believes that its
relationship with its independent sale representatives is good.
During the first quarter of 1998, the Company instituted a sales force
training program which is designed to further educate the Company's sales
personnel regarding the Company's products and services and to improve their
marketing skills. As liberalization of the telecommunications markets in EU
member states continues, the Company anticipates that it will begin to
supplement its sales forces through the expanded use of various marketing
techniques, including direct mail and targeted advertising and promotional
efforts. In addition, as regulatory and marketing conditions warrant, the
Company may begin to utilize partnership marketing as an additional marketing
tool.
The Company generally prices its retail services at a discount to the ITOs'
prices in the various geographic markets. The wholesale rates charged are
generally priced at or slightly 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.
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 are designed to enable the
Company to: (i) monitor and respond to customer needs by developing new and
customized services; (ii) manage lease cost routing; (iii) provide customized
billing information; (iv) provide high quality customer service; (v) detect and
control 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
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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 routine
upgrades and ongoing investments. See "Risk Factors -- Dependence on Effective
Information Systems; Year 2000 Technology Risks."
The Company currently has a turnaround time of approximately 48 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.
The Company has developed software to provide telecommunications services
and render customer support. In certain cases, the software used to support the
Company's services may reside outside of the switches and, therefore, is not
reliant on a third party switch manufacturer for upgrades or support. Each
switch has a call detail recording function which is designed to enable 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 -- Switching Platforms."
The Company also uses proprietary software to assist 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 provide least cost routing, 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 least cost routing system is designed to transmit the traffic over
the next least cost route. The least cost routing system chooses among the
following variables to minimize the cost of a long distance call over 15
different suppliers and multiple choices of terminating carrier per country. The
performance of the least cost routing system is verified based on a daily
overflow report generated by the Company's network traffic management and a
weekly/monthly average termination cost report generated by the Company's
billing system. See "Risk Factors -- Dependence on Effective Information
Systems; Year 2000 Technology Risks."
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 would still be required to pay its
minimum monthly commitment as a penalty. The Company's aggregate annual minimum
commitments are approximately $14.0 million. 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 and is
characterized by substantial on-going price declines. For example, France
Telecom has obtained approval to reduce retail prices by 9% during each of 1997
and 1998 and 4.5% during each of 1999 and 2000. Deutsche Telekom has announced
that it intends to reduce retail long distance prices by up to 40%. Neither of
these ITOs has reduced or is expected to reduce wholesale prices to the same
extent. These pricing policies have created substantial pressure on the
Company's gross margins. The Company's success depends upon its ability to
compete with other telecommunications providers in each of its markets. These
providers include the ITO
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in each country in which the Company operates, such as British Telecom, France
Telecom, Belgacom and Telecom Italia, and global alliances among some of the
world's largest telecommunications carriers, such as Uniworld, AT&T's World
Partners alliance with "Unisource" (Telia of Sweden, Swiss Telecom PTT and KPN
of The Netherlands), "Concert" (British Telecom and MCI), "Global One" (Sprint,
France Telecom and Deutsche Telekom) and the more recently announced alliances
among WorldCom, MCI and Telefonica de Espana and between AT&T and British
Telecom. Other potential competitors include cable communications 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 and price declines has increased over the past
several years and the Company believes that such competition and price declines
will continue to intensify, particularly in Western Europe where liberalization
of the telecommunications markets continues. Many of the Company's current and
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, its ability
to make payments on the Notes, and there can be no assurance that the Company
will be able to compete successfully.
Because all of the Company's current and intended European markets (other
than the United Kingdom) have only recently liberalized or still are in the
process of liberalizing the provision of Voice Telephony, customers in most of
these markets are not accustomed to obtaining services from competitors to ITOs
and may be reluctant to use emerging telecommunications providers, such as the
Company. In particular, the Company's target customer base of small and
medium-sized businesses with significant international calling needs, may be
reluctant to entrust their telecommunications needs to new operators that are
believed to be unproven. In addition, in continental Europe, certain of the
Company's competitors (including the ITOs) provide potential customers with a
broader range of services than the Company can offer due to existing regulatory
restrictions.
Competition for customers in the telecommunications industry is primarily
based on price and quality of services offered. The Company prices its services
primarily by offering discounts to the prices charged by ITOs and other major
competitors. However, prices for international long distance calls have
decreased substantially over the past few years in the markets in which the
Company currently maintains operations or in which it expects to establish
operations. Some of the Company's larger competitors may be able to use their
greater financial resources to cause severe price competition in the countries
in which the Company operates or expects to operate. It appears that Western
European ITOs are responding to deregulation more rapidly and aggressively than
occurred after deregulation in the United States and the United Kingdom. The
Company expects that prices for its services will continue to decrease for the
foreseeable future and that ITOs and other dominant telecommunications providers
will continue to improve their product offerings. The improvement in product
offerings and service provisions by the ITOs, as well as the liberalization of
Voice Telephony and infrastructure which has commenced in certain EU member
states, could similarly have a material adverse effect on the competitiveness of
the Company to the extent that the Company is unable to provide similar levels
of offerings and services. If the ITO in any jurisdiction uses its competitive
advantages to their fullest extent, the Company's operations in such
jurisdiction would be adversely affected. Furthermore, the marginal cost of
carrying calls over fiber optic cable is extremely low. As a result, certain
industry observers have predicted that, within a few years, there may be
dramatic and substantial price reductions and that long distance calls will not
be significantly more expensive than local calls. In addition, certain carriers,
including AT&T, are implementing plans to offer telecommunications services over
the Internet at substantially reduced prices. Any price competition could have a
material adverse effect on the Company's business, financial condition, results
of operations, its ability to make payments on the Notes.
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The Company believes that the ITOs generally have certain competitive
advantages that the Company and other competitors do not have due to their
control over local connectivity. The Company relies on the ITO for access to the
PSTN and the provision of leased lines, and the failure of the ITOs to provide
such access or leased lines at reasonable pricing could have a material adverse
effect on the Company's business, financial condition, results of operations and
its ability to make payments on the Notes. The reluctance of some national
regulators to accept liberalizing policies, grant regulatory approvals that
would result in increased competition for the local ITO and enforce access to
ITO networks and essential facilities could have a material adverse effect on
the Company's competitive position and its ability to make payments on the
Notes. There can be no assurance that the Company would be able to compete
effectively in any of its markets. See "Risk Factors -- Competition" and "--
Rapidly Changing Industry, Technology and Customer Requirements; Significant
Price Declines."
GOVERNMENT REGULATION
OVERVIEW. National and local laws and regulations governing the provision
of telecommunications services differ significantly among the countries in which
the Company currently operates and intends to operate. The interpretation and
enforcement of such laws and regulations varies and could limit the Company's
ability to provide certain telecommunications services in certain markets. There
can be no assurance that future regulatory, judicial and legislative changes
will not have a material adverse effect on the Company, that domestic or
international regulators or third parties will not raise material issues with
regard to the Company's compliance or noncompliance with applicable laws and
regulations or that other regulatory activities will not have a material adverse
effect on the Company's business, financial condition, results of operations and
its ability make payments on the Notes.
INTERNATIONAL TRAFFIC. Under the WTO Agreement, concluded on February 15,
1997, 69 countries comprising 95% of the global market for basic
telecommunications services agreed to permit competition from foreign carriers.
In addition, 59 of these countries have subscribed to specific procompetitive
regulatory principles. The WTO Agreement became effective on February 5, 1998
and is expected to be implemented by most signatory countries in 1998, although
there may be substantial delays. The Company believes that the WTO Agreement
will increase opportunities for the Company and the Company's competitors.
However, the precise scope and timing of the implementation of the WTO Agreement
remain uncertain and there can be no assurance that the WTO Agreement will
result in beneficial regulatory liberalization.
On November 26, 1997, the FCC adopted the Foreign Participation Order to
implement the U.S. obligations under the WTO Agreement. In the Foreign
Participation Order, the FCC adopted an open entry standard for carriers from
WTO member countries, generally facilitating market entry for such applicants by
eliminating certain existing tests. These tests remain in effect, however, for
carriers from non-WTO member countries. Petitions for reconsideration of the
Foreign Participation Order are pending at the FCC.
International carriers serving the United States, including the Company,
remain subject to rules adopted in the International Settlement Rates Order
which became effective on January 1, 1998. The international accounting rate
system allows a U.S. facilities-based carrier to negotiate an "accounting rate"
with a foreign carrier for handling each minute of international telephone
service. Each carrier's portion of the accounting rate (usually one-half) is
referred to as the settlement rate. The new International Settlement Rates Order
generally requires U.S. facilities-based carriers to negotiate settlement rates
with their foreign correspondent at no greater than FCC established "benchmark"
prices. Historically, international settlement rates have vastly exceeded the
cost of carrying telecommunications traffic. In addition, the International
Settlement Rates Order imposed new conditions upon certain carriers, including
the Company. First, the FCC conditioned facilities-based authorizations for
service on a route on which a carrier has a foreign affiliate upon the foreign
affiliate offering all other U.S. carriers a settlement rate at or below the
relevant benchmark. The Company's foreign affiliate in the United Kingdom
satisfies this
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condition. Second, the FCC conditioned any authorization to provide switched
services over either facilities-based or resold international private lines upon
the condition that at least half of the facilities-based IMTS traffic on the
subject route is settled at or below the relevant benchmark rate. This condition
applies whether or not the licensee has a foreign affiliate on the route in
question. However, if the subject route does not comply with the benchmark
requirement, a carrier from a WTO member country instead can demonstrate that
the foreign country provides resale opportunities "equivalent" to those
available in the United States. Accordingly, since the February 9, 1998
effective date of the Foreign Participation Order, the Company has been
permitted to resell private lines for the provision of switched services to any
country that either has been found by the FCC to comply with the benchmarks or
has been determined to be equivalent. The Company, however, will require prior
FCC approval in order to provide resold private lines to any country in which it
has an affiliated carrier that has not been found by the FCC to lack market
power. Many parties have appealed the International Settlement Rates Order to
the U.S. Court of Appeals for the D.C. Circuit or have filed petitions for
reconsideration with the FCC. These proceedings are still pending. The Company
cannot predict the outcome of this appeal and its possible impact on the
Company. In addition, the FCC is expected to propose in late summer 1998 to
loosen certain requirements of its current international settlements policy, but
Viatel cannot predict the outcome of any such proposal or its possible impact on
the Company.
Increasing regulatory liberalization in many countries' telecommunications
markets now permits more flexibility in the way the Company can route calls.
Although certain FCC rules limit the way in which some international calls can
be routed, the Company does not believe that its network configuration,
specifically the way in which traffic is routed through its UK facilities, is
specifically prohibited by or undermines in any way the intent of these rules.
It is possible, however, that the FCC could find that the Company's network
configuration violates these rules. If the Company were found to be in violation
of these routing restrictions, and if the violation were sufficiently severe, it
is possible that the FCC could impose sanctions and penalties upon the Company.
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. 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.
EUROPEAN UNION. The EU consists of the following member states: Austria,
Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,
The Netherlands, Portugal, Spain, Sweden and the United Kingdom. The EU was
established by the Treaty of Rome and subsequent treaties. EU member states are
required to implement directives issued by the EC and the European Council by
passing national legislation. If an EU member state fails to effect such
directives with national (or, as the case may be, regional, community or local)
legislation and/or fails to render the provisions of such directives effective
within its territory, the EC may take action against the EU member state,
including in proceedings before the European Court of Justice, to enforce the
directives. Private parties may also bring actions against EU member states for
failures to implement such legislation.
The EC and European Council have issued a number of key directives
establishing basic principles for the liberalization of the EU
telecommunications market. The general framework for this liberalized
environment has been set out in the EC's Services Directive (the "Services
Directive") and its subsequent amendments, including, in particular, the Full
Competition Directive which was adopted in March 1996 (the "Full Competition
Directive"). This basic framework has been advanced by a series of harmonization
directives, which include the so-called Open Network Provision directives, as
well as two additional directives adopted in 1997, the Licensing Directive of
April 1997 and the Interconnection Directive of June 1997, which address,
respectively, the procedures for granting license authorizations and conditions
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applicable to such licenses and the interconnection of networks and the
interoperability of services as well as the achievement of universal service.
The Services Directive directed EU member states to permit the competitive
provision of all telecommunications services with the exception of Voice
Telephony (which does not include value-added services and voice services within
closed user groups) and certain other services that have been gradually
liberalized through subsequent amendments to the Services Directive. The EC has
generally taken a narrow view of the services classified as Voice Telephony,
declaring that member states may not maintain monopolies or special operating
rights on voice services that (i) confer new value-added benefits on users (such
as alternative billing methods), (ii) are provided through dedicated customer
access (e.g., by leased lines) or (iii) are limited to a group having legal,
economic or professional ties.
The Full Competition Directive amended the Services Directive to set January
1, 1998 as the date by which all EU member states were required to remove all
remaining restrictions on the provision of telecommunications services and
telecommunications infrastructure, including Voice Telephony. Certain
derogations from compliance with this timetable have been granted. The
derogations granted by the EC are as follows: Luxembourg (July 1, 1998), Spain
(November 30, 1998), Ireland (January 1, 2000), Portugal (January 1, 2000) and
Greece (January 1, 2001).
The Licensing Directive sets out framework rules for the procedures
associated with the granting of national authorizations for the provision of
telecommunications services and for the establishment or operation of any
infrastructure for the provision of telecommunications services. It
distinguishes between "general authorizations," which should normally be easier
to obtain since they do not require an explicit decision by the national
regulatory authority, and "individual licenses." Individual licenses may only be
imposed where the licensee is to acquire access to scarce resources (for
example, radio spectrum) or is to be subject to particular obligations or
benefit from particular rights. Accordingly, EU member states may impose
individual license requirements for the establishment and operation of
facilities-based networks and for the provision of Voice Telephony, among other
things. Consequently, operation of the European Network may require that the
Company be subject to an individual licensing system rather than to a general
authorization in the majority of EU member states.
The Interconnection Directive sets out the regulatory framework for securing
in the EU the interconnection of telecommunications networks. The
Interconnection Directive requires member states to remove restrictions
preventing negotiation of interconnection agreements, ensure that
interconnection requirements are non-discriminatory and transparent and to
ensure adequate and efficient interconnection for public telecommunications
networks and publicly available telecommunications services. Several EU member
states have chosen to apply the provisions of the Interconnection Directive
within their jurisdictions in such a way as to give more favorable treatment to
infrastructure providers and network operators than to switch-based carriers and
resellers. Such distinctions must be objectively justified on grounds of the
type of interconnection provided or because of relevant licensing conditions.
The Interconnection Directive is due to be amended shortly to require EU
member states (except those for whom derogations exist) to offer carrier
pre-selection to their customers by January 1, 2000, and to introduce number
portability (the ability of end-users to retain their numbers when changing
carriers) for subscribers on the public switched network by January 1, 2000.
Carrier pre-selection is only required to be made available by operators who
enjoy significant market power within the market for interconnection over the
fixed network.
The Revised Voice Telephony Directive was recently adopted and is concerned
with open and efficient access to, and use of, fixed public telephone networks
and fixed public telephone services. It requires implementation in EU member
states by June 30, 1998. Among other things, this Directive is concerned with
universal service. In some countries where the Company operates, it may be
required to contribute to a fund for the provision of universal service.
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In addition, a sector specific Telecommunications Data Protection Directive
has also been recently adopted which requires implementation by October 1998.
This directive is concerned with ensuring an equivalent level of protection of
fundamental rights and freedoms across EU member states and in particular the
right to privacy in the telecommunications sector and to ensure the free
movement of such data and telecoms equipment and services. In particular, it
contains provisions on an individual's right to restrict the use of calling line
identification and the processing of personal data for telephone bills and
directories.
Each EU member state in which the Company currently conducts its business
has a different regulatory regime and such differences are expected to continue.
The requirements for the Company to obtain necessary approvals vary considerably
from country to country.
BELGIUM
In December 1997, the Belgian Federal Parliament provided for full
liberalization of the telecommunications sector on January 1, 1998. However,
this law must be implemented by a considerable number of implementing Royal
Decrees to be fully effective.
The definitive licensing conditions applicable to certain carriers,
including the Company, are contained in two implementing Royal Decrees dated
June 22, 1998, covering Voice Telephony and public telecommunications networks,
respectively. Pending the adoption of the definitive licensing conditions, a
provisional licensing system was operative. Both the provisional and the
definitive licensing conditions contain equally stringent requirements, such as
the operator's commitments to invest 400 million Belgian Francs or to deploy 500
kilometers of transmission infrastructure within three years of the date the
provisional license is granted in order to be eligible for a public
telecommunications network operator license. Furthermore, the licensing
conditions relating to Voice Telephony and to public telecommunications networks
each contain other stringent requirements, including a contribution of 1% of
annual turnover in order to fund research and development and other initiatives.
Notwithstanding these stringent requirements (which may be modified by EC
intervention that has been formally commenced), the Company obtained a license
under the provisional licensing system for the establishment and operation of a
public telecommunications network on June 30, 1998 and a provisional license for
the provision of Voice Telephony, on July 3, 1998. The Company must following
the procedures contained in the Royal Decrees to convert its provisional license
into a definitive license.
Belgium is one of the EU member states which differentiates between
interconnection for infrastructure providers and network operators and
switch-based carriers and resellers. The interconnection tariffs of Belgacom
(Belgium's ITO), which has been officially approved by the Belgian Institute for
Postal Services and Telecommunications ("BIPT"), provides more favorable
interconnection rates for infrastructure providers and network operators than
for switch-based carriers and resellers. As a result of the construction of the
Circe Network, the Company should qualify for these more favorable rates.
The modified Belgian Telecommunications Law also provides for the creation
of a Universal Service Fund, to be managed by the BIPT, to which operators may
be required to contribute funds in proportion to their revenues from the Belgian
telecommunications market. However, the Universal Service Fund system will not
be activated before the year 2000, and then only insofar as: (i) Belgacom claims
a compensation for being the universal service provider, (ii) the BIPT considers
that universal service provision represents a net cost and (iii) the Belgian
Federal Government takes a formal decision to activate the Universal Service
Fund. From 1998 onwards, the BIPT will "dry-run" the universal service costing
model and keep operators informed of the contributions that they may be required
to make if and when the Universal Service Fund is activated.
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FRANCE
In July 1996, legislation was enacted providing for the immediate
liberalization of all telecommunications activities in France, but maintaining a
partial exception for the provision of Voice Telephony. Voice Telephony was
subsequently fully liberalized on January 1, 1998.
The establishment and operation of public telecommunications networks and
the provision of Voice Telephony are subject to individual licenses, which are
granted by the Minister in charge of telecommunications upon recommendation of
France's new independent regulatory authority, the Autorite de Regulation des
T elecommunications ("ART").
In December 1997, the Company filed a joint application for a license as a
public telecommunications network operator (under Article L33.1 of the French
Code de Postes et T elecommunications) and provider of Voice Telephony services
to the public (under Article L34.1 of the French Code de Postes et
T elecommunications). The license application was approved by ART on April 29,
1998 and has recently received final approval of the relevant Minister.
The Company will be subject to certain obligations in the operation of its
public telecommunications network, most notably in terms of non-discriminatory
treatment of customers and an obligation to accept reasonable requests for
interconnection from other carriers.
France is also one of the EU member states which differentiates between
interconnection for public telecommunications network operators, holding a L33.1
license, and Voice Telephony providers, holding a L34.1 license. The
interconnection tariffs of France Telecom (France's ITO), which have been
officially approved by ART, provide substantially more favorable interconnection
rates for public telecommunications network operators than for Voice Telephony
providers.
The Company has challenged the allocation of single digit access codes as
procedurally and legally invalid. This challenge is currently being pursued
before the French courts. The outcome of this proceeding cannot be predicted.
GERMANY
The German Telecommunications Act of July 25, 1996 liberalized all
telecommunications activities, but postponed effective liberalization of Voice
Telephony until January 1, 1998. The German Telecommunications Act has been
complemented by several Ordinances. The most significant Ordinances concern
license fees, rate regulation, interconnection, universal service, frequencies
and customer protection.
Under the German regulatory scheme, licenses can be granted within four
license classes. A license is required for operation of transmission lines that
extend beyond the limits of a property and that are used to provide
telecommunications services for the general public. The licenses required for
the operation of transmission lines are divided into 3 infrastructure license
classes: mobile telecommunications (license class 1); satellite (license class
2); and telecommunications services for the general public (license class 3).
Beside the infrastructure licenses, an additional license is required for
operation of Voice Telephony services on the basis of self-operated
telecommunications networks (license class 4). A class 4 license does not
include the right to operate transmission lines.
The Bundes Ministerium fur Post und Telekommunikation ("BMPT"), which was
replaced by the Regulierungsbehorde fur Telekommunikation und Post ("RegTP") on
January 1, 1998, granted the Company a regional class 3 and a nationwide class 4
license in December 1997. According to the License Fees Ordinance, a nationwide
class 4 license costs a one-time fee of DM 3,000,000. The costs for a
territorial class 3 license will be determined by RegTP and is dependent on the
population and the geographical area covered by the territorial class 3 license.
A nationwide territorial class 3 license costs DM 10,600,000.
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Licensees that operate transmission lines crossing the boundary of a
property have the right to install transmission lines on, in and above public
roads, squares, bridges and public waterways without payment; however, when
installing transmission lines a planning agreement must be obtained from the
relevant authorities.
A company which operates a public telecommunications network has the right
to receive favorable interconnection rates from Deutsche Telekom, as a dominant
carrier. If the company does not agree with the offered rates or Deutsche
Telecom refuses to interconnect for whatever reason, the company can refer the
case to the RegTP which is required to order interconnection within a period of
six weeks. Since the Company is not a dominant carrier, it is not subject to the
same interconnection obligations as a dominant carrier but is obligated to make
interconnection offers to other carriers at their request. Whether, and under
which conditions, carrier to carrier operators will receive favorable
interconnection rates or less favorable "special network access rates" (reseller
rates) from Deutsche Telekom depends on whether they operate a "public
telecommunications network." No definition of "public telecommunications
network" has yet been provided. A public hearing on the regulatory treatment of
carrier networks and public telecommunications networks in respect of
interconnection is currently being conducted and interested parties are invited
to submit their comments to the RegTP. The RegTP has announced that it will
decide on a final definition by October 1998, based on the results of the public
hearing. Until such date, Deutsche Telekom will only enter into interim
interconnection agreements and only if the companies have a minimum of eight
points of interconnection in the start-up phase and upgrade the network to 23
points of interconnection in the initial phase. The same number of points of
interconnection is requested by Deutsche Telekom in a new special network offer
for carrier networks. The rates offered by Deutsche Telekom to carrier network
operators have not yet been made public. After the decision of the RegTP,
Deutsche Telekom will likely terminate all interconnection agreements if the
networks of contracting parties no longer fulfill the RegTP's definition of a
public telecommunications network.
Several complaints, the outcome of which may affect the Company's business,
are currently pending before the RegTP or German courts concerning the content
of the standard interconnection offer of Deutsche Telekom. Since Deutsche
Telekom and some of its major competitors in Germany have been unable to reach
agreement on interconnection, the BMPT has established provisional
interconnection tariffs. These rates are now part of the standard offer of
Deutsche Telekom and valid for all carriers for as long as the matter is pending
before the German courts. Other pending complaints concern the costs of billing
services provided by Deutsche Telekom to other carriers and rates for direct
access to the end-user lines of Deutsche Telekom. It is expected that a final
resolution to these matters will take at least one year.
Licensed operators are under an obligation to present their standard terms
and conditions to the RegTP. The RegTP may, based upon certain criteria, decide
not to accept these terms and conditions.
The Company may become subject to universal service financing obligations.
Currently, it is unlikely that the universal service financing system will be
implemented in Germany in the foreseeable future.
The Company has not made any regulatory filings with respect to the German
portion of the Circe Network.
ITALY
In July 1997 and September 1997, the Italian authorities enacted basic
legislation and regulations to comply with the EU directives, including the full
liberalization of public telecommunications networks and Voice Telephony by
January 1, 1998. Among other provisions, the Law of July 1997 created a new
regulatory authority, "Autorita per le garanzie nelle communicazioni" (the
"Authority").
Although the new legislation came into effect immediately and the
Presidential Decree of September 1997 covers a wide range of areas including
licensing, interconnection, access, universal service and
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numbering, the framework has been almost completely implemented by a number of
implementation decrees.
License applications can be filed with the Ministry of Communication until
the Authority is incorporated, and since January 1, 1998 a limited number of
licenses to supply and install fixed telecommunications networks have been
granted. Major uncertainties remain with regard to the offer of interconnection
published by Telecom Italia S.P.A. No assurance can be provided as to the timing
or the manner in which the Company will be able to benefit from full
liberalization in Italy. The Company intends to apply for a Voice Telephony
license in Italy.
THE NETHERLANDS
In the Netherlands the installation and operation of a cable-based network
for the purpose of public telecommunications is mainly subject to either (i)
licensing requirements which are currently confined to PTT Telecom (the ITO) and
two licensed nationwide infrastructure operators, EnerTel and Telfort, and a
significant number of licensed regional infrastructure operators, INTER ALIA,
public utility companies and broadcast network operators, or (ii) authorization
by OPTA (Onafhankelijke post-en telecommunicatie autoriteit) under Article 21
(broadcasting networks) or Article 23 (telecommunications networks) of The
Netherlands' Telecommunications Act (the "NTA"). Under the proposed new
Telecommunications Act, as adopted by the Netherlands' Lower House of Parliament
on April 7, 1998, and now awaiting the approval of the Upper House of
Parliament, infrastructure licensing (or authorization) requirements for
cable-based public telecommunications networks will be abolished and replaced by
registration requirements with OPTA if adopted unamended. The Company holds an
authorization based on Article 23 of the NTA which was granted in March 1997.
When the new Telecommunications Act is effective the Article 23 authorization
will lapse automatically and the Company will have six months to apply for
registration after the commencement of the new Act. Registration will be granted
if the Company offers a public telecommunications network or services and
provided the requested data to OPTA.
Under the current NTA, PTT Telecom and the two infrastructure licensees
enjoy statutory rights-of-way over third party land (public or privately owned)
against payment of compensation for the costs incurred. This statutory privilege
is not extended to Article 23 NTA authorization holders which must negotiate
rights-of-way and compensation with such third parties. Under the proposed new
Telecommunications Act, this statutory privilege will be extended to all public
telecommunications or broadcasting network operators.
Under Article 7 of the NTA, restrictions on providing Voice Telephony
through a fixed infrastructure were abolished effective July 1, 1997. Holders of
an authorization based on Article 23 of the NTA wishing to offer such services
to third parties must register with OPTA which may allocate or reserve access
numbers for third party service or the authorization holder's own services. The
Company obtained the access number 1623 for service carrier selection on July
29, 1997.
PTT Telecom is under a statutory obligation to provide leased lines to
anyone against payment and to provide interconnection to other operators, INTER
ALIA, holders of an authorization under Article 23 of the NTA and foreign based
network operators providing voice telephony and having access to end-users. In
addition, PTT Telecom is obligated to provide special access on reasonable
request to Netherlands' and foreign based operators that provide public
telecommunication services. From 2001, the two nationwide infrastructure
licensees will also be obligated to provide leased lines to anyone against
payment and to provide interconnection to PTT Telecom and to other nationwide or
regional infrastructure licensees.
For supervisory purposes, anyone wishing to obtain interconnection or
special access to the PTT Telecom network must register with OPTA and then
negotiate its own interconnection or special access agreement. In August 1997,
the Company registered with OPTA for both interconnection and special access and
concluded an agreement for special access with PTT Telecom in June 1997.
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Under the new Telecommunications Act, all operators of public
telecommunications networks that control access to end-users will be obligated
to provide interconnection to other operators that provide public
telecommunications networks or services. If parties cannot reach agreement on
the contractual terms, OPTA may issue a binding decision subject to
administrative appeal. Conditions for special access are freely negotiable.
Operators with significant market power (defined as market share of 25% or more)
must provide interconnection on a non-discriminatory basis at cost-based prices.
Furthermore, those operators are also obligated on reasonable request to provide
special access on a non-discriminatory basis at cost based prices.
The two registrations obtained by the Company in August 1997 were withdrawn
in February 1998. Subsequently, two new registrations for interconnection and
for special access were granted in February 1998 to the Company subject to
conditions. These conditions have now been satisfied and the registrations have
become final.
The proposed new Telecommunications Act is intended to give full effect to
all remaining EU liberalization directives and obligations in The Netherlands
which should have been implemented no later than January 1, 1998. These include,
but are not limited to, number policy, allocation, and portability; universal
service obligations and their financing; privacy protection; and the general
competitive environment. If and when adopted, the Company intends to seek all
appropriate registrations under the proposed new Telecommunications Act.
SPAIN
Spain is one of the five countries in the EU which was granted a derogation
for implementation of the Directives to open its Voice Telephony market to
competition by January 1, 1998 until December 1, 1998. The government has made
public statements about its intent to open the market by December 1, 1998 and
the new Telecommunications Act (Ley General de Telecomunicaciones) was approved
on April 2, 1998 and entered into force on April 26, 1998. Prior to full
liberalization on December 1, 1998, a second operator began operations at the
beginning of 1998 in competition with the incumbent operator. In addition, a
third national Voice Telephony license was granted in May 1998 and a third
license for mobile telecommunications was granted in June 1998. Limited
competition is already present and cable operators may apply for a license to
provide Voice Telephony over their networks.
The Company intends to apply for a Voice Telephony license in Spain as and
when the appropriate procedures have been published. Although publication of the
procedures is required by the EC by August 1, 1998, it has been announced that
such publication will not take place until September 1998.
SWITZERLAND
A new Telecommunications Act was adopted by the Swiss Parliament in April
1997 and came into effect on January 1, 1998, together with Ordinances
containing more detailed regulations covering telecommunications services,
frequency management, numbering, terminal equipment and license fees. The new
Telecommunications Act provides for liberalization of the Swiss
telecommunications market as of January 1, 1998.
The newly enacted Swiss telecommunications regulatory framework facilitates
market entry by: (i) applying a notification procedure for resellers, (ii)
applying a procedure for operators wishing to be granted a concession for the
establishment and operation of transmission facilities and (iii) providing
rights-of-way, subject to a procedure of authorization, over the public domain
to facilities-based carriers. Pro-competitive regulation is also applicable in
the area of numbering.
The Company intends to register its activities as a provider of Voice
Telephony services in Switzerland (in accordance with the notification
procedure) and will consider applying for a concession as a facilities-based
carrier.
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Switzerland is not a member of the EU and, accordingly, directives do not
apply. Switzerland is, however, a party to the WTO Agreement.
UNITED KINGDOM
The Telecommunications Act 1984 (the "U.K. Act") provides a licensing and
regulatory framework for telecommunications activities in the United Kingdom.
The Secretary of State for Trade and Industry at the Department of Trade and
Industry (the "Secretary of Trade") is responsible for granting licenses under
the U.K. Act and for overseeing telecommunications policy, while the Director
General of Telecommunications (the "Director General") and his office are
responsible, among other things, for enforcing the terms of such licenses. The
Director General will recommend the grant of a license to operate a
telecommunications network to any applicant that the Director General believes
has a reasonable business plan, the necessary financial resources and where
there are no other overriding considerations against the grant of a license.
Since 1992, the British Government has permitted competition in the
provision of "any to any" international services on certain specified routes
over leased lines where all calls originate over the PSTN. From June 1995 to
December 1997, the Company's U.K. subsidiary, Viatel U.K. Limited ("Viatel UK"),
held an International Simple Resale license in the U.K. (the "ISR License"). The
ISR License entitled the Company to resell international message, telephone and
private line services. All ISR Licenses were revoked in December 1997 and all
holders were required to re-apply to the Secretary of Trade to be registered
under the new International Simple Voice Resale Standard License ("ISVR").
Viatel UK has registered under the ISVR which authorizes the provision of
international simple voice resale. International simple data resale and voice
calls which pass over a PSTN at one end only can, as before, be provided by
systems run under a Telecommunications Services Class License.
In December 1996, the British Government introduced the International
Facilities License ("IFL") which authorizes holders to provide international
telecommunications services over their own international infrastructure and/or
by making use of IRUs in undersea cables. Viatel UK acquired an IFL in April
1997. That IFL did not contain Code Powers. Code Powers can be attached to
certain licenses and provide the licensees with the right to go to court to seek
a court order that the licensee be permitted to install, keep, maintain, adjust,
repair or alter infrastructure on, over or under land. Viatel UK subsequently
submitted a request for its IFL to be amended to include Code Powers. An IFL
with Code Powers was awarded to Viatel UK in June 1998.
Implementation of the EU Interconnection Directive in the UK has resulted in
Viatel UK becoming subject to the rights and obligations to interconnect
required by that Directive. As a result, Viatel UK has the right to request and
receive interconnection from all other operators deemed to be entitled to such
rights and obligations (as notified by the Director General) and also the
obligation to provide interconnect at the request of any such operator.
Accordingly, Viatel UK is entitled to obtain interconnection with all
significant telecommunications operators in the U.K.
The UK Government has introduced a Competition Bill ("the Bill") as draft
legislation which proposes to grant concurrent powers to the industry specific
regulators and the Director General of Fair Trading for the enforcement of
prohibitions against anti-competitive behavior modelled on Articles 85 and 86 of
the Treaty of Rome. If passed in its current form, the Bill would introduce into
UK legislation prohibitions on the abuse of a dominant position and
anti-competitive agreements, and would introduce third party rights, stronger
investigative powers, interim measures and effective enforcement powers.
The Bill proposes that the Director General is able, but not required, to
exercise concurrent powers with the Director General of Fair Trading in relation
to "commercial activities connected with telecommunications". The Bill will
enable third parties to bring enforcement actions directly against
telecommunications operators who are in breach of the prohibitions contained in
the Bill and seek damages rather than
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have to wait for the Director General to issue an enforcement order. Depending
on how the Bill is implemented, it may give the Company (and its competitors)
greater ability to challenge anti-competitive behavior in the UK
telecommunications market.
OTHER NEW MARKETS
The Company's ability to expand in other countries will be affected by the
degree to which liberalization has been implemented in that country. If for
strategic reasons the Company decides to build out infrastructure in each
particular market prior to full liberalization and liberalization is delayed or
not fully implemented, the Company could sustain a loss on its infrastructure
investment.
LATIN AMERICA AND THE PACIFIC RIM. Outside of the EU, the Company provides
its customers with access to its services through the use of call reorigination.
A substantial number of countries have prohibited certain forms of call
reorigination. There can be no assurance that certain of the Company's services
and transmission methods will not be or will not become prohibited in certain
jurisdictions.
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 call reorigination. 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 voice mail and
data transmission) tend to be more permissive than those covering Voice
Telephony.
ARGENTINA. The telecommunications industry in Argentina was privatized in
1990, but opportunities for competitive entry in basic telephony services remain
restricted. The companies created at the time of privatization, Telecom and
Telefonica, respectively, were granted exclusive rights until 1997 to the
provision of domestic local and long distance fixed telephone service in the
northern and southern portions of Argentina, respectively. Telintar, a company
owned equally by Telecom and Telefonica, was given exclusive rights until 1997
for the provision of international telephony and data transmission services.
As permitted under the terms of their concessions, Telecom, Telefonica and
Telintar have requested extensions of their exclusive rights until 2000. The
President of Argentina has recently announced a new decree extending the
carriers' exclusive rights for an additional period ending no later than
November 1999. By November 1999, the government will authorize a total of four
nationwide providers of local, domestic long distance and international
services, including Telefonica, Telecom and two additional consortia each
comprised of cooperatives that provide basic service in local areas and entities
already licensed to provide mobile telephone or cable television services in
Argentina or other telecommunications service providers with installed networks
in Argentina. In May 1998, several groups comprised of such entities filed
applications. No licensing decisions have yet been made. In the event that all
of the applications fulfill the requirements of the decree, the Government may
select the two new licensees by auction.
By November 2000, the market for long distance and international basic voice
telephony is to be open to additional competition. At least three existing
companies will be directly granted licenses for such services. However, the
Government has not yet adopted specific rules for this licensing process, and
additional licenses could be awarded through a bidding process for local, long
distance and international basic telephony.
The full implications of this new policy, as well as the timing of its
implementation, are uncertain. Implementation of the new policy must await
resolution of certain procedural questions currently pending in the Argentine
courts. Also, the new decree has been administratively challenged by a PCS
bidder. The PCS auction in Buenos Aires has been judicially stayed, and appeals
by the government of that action are pending in the courts. In any event, the
decree must be complemented with several rules on universal
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service, tariffs and licensing. The Secretary of Communications has issued a
notice of proposed rulemaking on the first two issues. New rules on
interconnection have already been adopted.
In addition to the rights granted to Telecom and Telefonica, other companies
have been permitted to enter the Argentine market to provide private networks
for non-voice services, mobile services, including cellular and paging, as well
as domestic data and value added services. There are no foreign ownership
restrictions for telecommunications services in Argentina.
Value-added services may be competitively provided and are essentially
deregulated. Although a license must be obtained, such licenses are routinely
granted. Facilities for international value-added services must be obtained from
Telintar. Currently, call reorigination is legal in Argentina, although the
established carriers have advocated strenuously against it and the government's
view has changed from time to time, and the government has recently ordered
Telecom and Telefonica to institute significant rate rebalancing measures which
are likely to lessen the attractiveness of call reorigination. The Supreme Court
recently ruled in favor of rate rebalancing, rejecting several challenges to it.
The Company has been operating in Argentina since 1991 and has developed a
significant customer base. The Company has focused on call reorigination,
Internet-initiated international business-to-business service and international
calling card services. The Company does not currently hold any licenses in
Argentina.
The Company is in the process of forming its own Argentine subsidiary. Once
it is formed, this affiliate will apply for a value-added license which will
allow for the provision of value added services domestically and within a
limited scope internationally.
BRAZIL. Brazil is in the process of privatizing its telecommunications
sector and opening the sector to competitive entry. A 1995 Constitutional
amendment removed the legal monopoly previously enjoyed by Telebras and its
affiliates over all public telecommunications services. Privately provided
wireless services as well as value-added and private network services also have
been permitted to compete with Telebras. Under a pair of new telecom laws
enacted in 1996 and 1997, Brazil has further opened the telecom sector. A new
regulatory authority, named the Agencia Nacional de Telecomunicacoes ("ANATEL")
has recently been constituted and has been publishing regulations after public
consultation.
As a state-owned holding company, Telebras controlled 27 regional operating
companies as well as Embratel, the long distance and international carrier. In
connection with the privatization of these state enterprises, the wireless and
wireline companies owned by Telebras were separated from each of the regional
operators and Telebras was divided into twelve holding companies as follows: (i)
three holding companies to control the twenty-seven regional operators providing
wireline services; (ii) eight holding companies to control the A-band mobile
cellular services operations that were separated from the regional operators;
and (iii) one holding company to control Embratel. These holding companies were
sold through an auction mechanism on July 29, 1998. Immediately after the
privatization, a public bidding process was initiated which ultimately will
result in the award of licenses to additional companies to compete with the
three holding companies providing wireline services and Embratel.
In addition to reorganizing basic telecommunications services, Brazil has
established new classifications of services available for competitive entry.
Among the new service classifications is "specialized limited services," which
involves the provision of telephone, telegraph, data transmission or other such
services to closed user groups of corporations. Specialized limited services are
authorized by permit, which may be granted by competitive bid. For the purpose
of conducting auctions, proposed specialized service offerings may be deemed to
fall within one of three possible groups, according to the complexity of the
technology involved, the size of population proposed to be served and the
sophistication of the infrastructure involved. The government may limit the
number of permits that may be granted for technical or public service reasons.
The government also may decide to award a permit for specialized limited service
without conducting an auction.
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Value-added services are not considered to be telecommunications services
and currently can be provided on a completely unregulated basis, without the
necessity of obtaining a permit or a concession. However, the service provider
must operate through a Brazilian company. Call reorigination is not prohibited
in Brazil.
A foreign ownership limit of 49% is imposed under the 1996 "Minimal Law" for
B-Band cellular, satellite and cable TV services. There are presently no foreign
ownership limits for limited services, including specialized limited services,
or value added services. Under the 1997 "General Telecommunications Law," the
President retains the authority to impose foreign ownership limits on other
services, but by decree dated May 15, 1998, the President expressly decided not
to impose any such limits.
The Company is currently in the process of incorporating a subsidiary in
Brazil. The Company services in Brazil currently include call reorigination and
international calling cards and fax store and forward. Once its Brazilian
subsidiary is formed, Viatel plans to offer such services as well as to apply
for licenses to offer specialized limited services.
COLOMBIA. Under a new Constitution adopted in 1991, the possibility of
private provision of public services was ratified in Colombia. This paved the
way for both privatization of the state-owned long distance company, TELECOM, as
well as the competitive entry of other entities. Specific plans for the
privatization of TELECOM have faltered due to, among other things, labor union
resistance. However, the government has mandated that competition be introduced
in 1998. Two competitors to TELECOM have been licensed. A federal judicial body
with jurisdiction over public contracts has recently issued a writ declaring
that the issuance of licenses for any additional competition in long distance
services must be authorized by new legislation. The implications of this
decision for the Company are not clear.
In Colombia, there are approximately 35 local operating companies, many
municipally owned. TELECOM is the sole long distance and international company
currently operating. Under Colombian law, local service has been completely
deregulated and may be provided without a concession or license. Other
telecommunications services require a concession or other authorization.
Value-added services are competitive, but must be licensed. There is
currently intense competition for value-added services, and the market for data
communications is one of the most dynamic segments of the telecommunications
sector.
Although Colombian law requires that all telecommunications services be
rendered by Colombian entities, foreign investment is not limited.
Most of Viatel's customers in Colombia access the Company via toll free
numbers. Callback services are illegal in Colombia. Viatel has formed a
Colombian subsidiary and has been awarded a value-added services license. Viatel
is working on the establishment and operation of a network to utilize the value-
added services license.
VENEZUELA. Pursuant to the Telecommunications Law of 1940, all
telecommunications activities in Venezuela are reserved to the government,
although concessions or permits for the provision of such services may be
granted to third parties. The administration, inspection and monitoring of all
communications systems in Venezuela are carried out by the Ministry of
Transportation and Communications through the Comision Nacional de
Telecommunicaciones ("CONATEL").
The national telephone company of Venezuela, Compania Anonima Nacional de
Telefonos de Venezuela ("CANTV") was privatized in 1991. CANTV's concession
grants it a monopoly in the provision of basic telecommunications services until
the year 2000. The only exceptions to this exclusivity are recently awarded
concessions for the provision of basic services to rural areas not reached by
CANTV.
Other telecommunications services, such as cellular telephony and other
mobile radio services, private telecommunications networks, switched data
networks and value-added services (including e-mail, Internet, video text,
telenext, voicemail and faxmail) are open to competition upon receipt of a
concession
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or permit, as applicable. Call reorigination is officially illegal in Venezuela.
The prohibition is supposed to be enforced by CONATEL with the unofficial aid of
CANTV through termination of subscriber service, but in practice the prohibition
is widely evaded.
The Company does not have a local affiliate in Venezuela and does not hold
any Venezuelan concessions or authorizations. At present, the Company offers
only Internet-initiated international business-to-business services and
international calling cards in Venezuela. The Company does not believe that
these services are encompassed within the prohibition against call
reorigination, but it is possible that Venezuelan authorities may consider them
to raise similar policy issues to prohibited call reorigination services. If the
call reorigination prohibition is deemed to apply, the Company may have to
discontinue Internet-initiated services in Venezuela.
UNITED STATES. The Company's provision of international service to, from
and through the United States generally 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 provide such international
telecommunications services. In May 1994, the FCC authorized the Company
pursuant to Section 214 of the Communications Act to resell public switched
telecommunications services of other U.S. carriers (the "Section 214 Switched
Authorization"). 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. The Company also has a license to resell international
private lines for the provision of switched services between the U.S. and the
U.K. and between the U.S. and Canada. Additionally, in September 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 the resale of switched services and the resale of private lines for the
provision of switched services) to all permissible international points.
Finally, in September 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").
EMPLOYEES
As of March 31, 1998, the Company had 296 full-time employees, approximately
123 of whom were engaged in sales, marketing and customer service. None of the
Company's employees is covered by a collective bargaining agreement. Management
believes that the Company's relationship with its employees is good.
PROPERTIES
The Company currently occupies approximately 14,000 square feet of office
space at two sites in New York City, which serve as the Company's principal
executive office and an international gateway switching center. The leases have
an aggregate annual rental obligation of approximately $357,000 and expire on
January 31, 2001 and May 31, 2007, respectively. In July 1998, the Company
executed a lease for approximately 33,993 rentable square feet of office space
in New York City, which location will serve as the Company's new principal
executive office. This lease currently has an annual rental obligation of
approximately $1.4 million and expires on April 1, 2009. The Company intends to
sublease the space which currently serves as its principal executive office as
well as a portion of the space covered by the new New York City lease. In
addition, the Company leases approximately 22,000 square feet of office space in
Omaha, Nebraska, which serve as the Company's operations center and a switching
center. This lease has an annual rental obligation of approximately $120,000 and
expires on May 31, 2004. The Company also leases approximately 26,000 square
feet of space in Franklin Township, New Jersey, which will serve as an
additional international gateway switching center and one of the Company's NOCs.
This lease has an annual rental obligation of approximately $508,000 and expires
on June 1, 2008.
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The Company also leases office space in various cities in Europe where it
maintains sales offices with annual rents ranging from $17,000 in Rome to
$163,000 in Frankfurt (based on foreign currency exchange rates in effect as of
January 31, 1998). The Company's aggregate annual rental obligations for its
European offices is approximately $727,000 (based on foreign currency exchange
rates in effect as of January 31, 1998).
LEGAL PROCEEDINGS
The Company is involved from time to time in litigation incidental to the
conduct of its business. The Company believes that any potential adverse
determination in any pending action will not have a material adverse effect on
the Company's business, financial condition or results of operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors and executive officers of the Company as of August 7, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Michael J. Mahoney(1)(2)............................. 39 President, Chief Executive Officer and Director
Allan L. Shaw(3)..................................... 34 Senior Vice President, Finance; Chief Financial
Officer; and Director
Lawrence G. Malone................................... 46 Senior Vice President, Global Sales and Marketing
Sheldon M. Goldman................................... 38 Senior Vice President, Business Affairs; General
Counsel and Secretary
Francis J. Mount..................................... 56 Senior Vice President, Engineering and Network
Operations and Director
Paul G. Pizzani(1)(2)(3)............................. 38 Director
John G. Graham....................................... 60 Director
</TABLE>
- ------------------------
(1) Member of the Directors Committee.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
MICHAEL J. MAHONEY. Mr. Mahoney has served as Chief Executive Officer of
the Company since September 1997, as President of the Company since September
1996 and as a director of the Company since 1995. Mr. Mahoney was also Chief
Operating Officer of the Company from September 1996 to September 1997,
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 teleservices 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 Senior Vice President, Finance since
December 1997 and has served as Chief Financial Officer of the Company since
January 1996. Mr. Shaw has served as a director of the Company since June 1996.
Mr. Shaw was Vice President, Finance of the Company from January 1996 to
December 1997 and Treasurer of the Company from September 1996 to April 1998.
Prior to becoming the Company's Vice President, Finance and Chief Financial
Officer, Mr. Shaw served as Corporate Controller of the Company from November
1994 to December 1995. From August 1987 to November 1994, Mr. Shaw was employed
by Deloitte & Touche LLP, most recently as a Manager. Mr. Shaw is a Certified
Public Accountant and a member of the American Institute, United Kingdom Society
and New York State Society of Certified Public Accountants.
LAWRENCE G. MALONE. Mr. Malone has served as Senior Vice President, Global
Sales and Marketing of the Company since May 1997. Mr. Malone served as Vice
President and Managing Director, Intercontinental of the Company from September
1996 to May 1997 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.
SHELDON M. GOLDMAN. Mr. Goldman has served as Senior Vice President,
Business Affairs and General Counsel of the Company since December 1997. Prior
to becoming Senior Vice President, Business Affairs
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and General Counsel, Mr. Goldman served as Vice President, Business and Legal
Affairs of the Company from December 1996 to December 1997 and served as United
States General Counsel of the Company from April 1996 to 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.
FRANCIS J. MOUNT. Mr. Mount has served as Senior Vice President,
Engineering and Network Operations of the Company since December 1997 and as a
Director of the Company since June 1998. Prior to joining the Company, Mr. Mount
was Senior Vice President, Business Initiatives of Primus Telecommunications
Group from October 1997 to December 1997, responsible for Internet telephony,
European operations and network quality. From June 1996 to October 1997, Mr.
Mount was Executive Vice President and Chief Operating Officer of Telepassport,
Inc. and was Vice President and Chief Operating Officer of Telepassport, Inc.
from January 1996 to June 1997. From 1990 to January 1996, Mr. Mount was
employed by MCI, most recently as Director, Global Technical Services,
responsible for international development, alliance management and all technical
operations and services outside the United States, including the construction
and maintenance of large networks such as Hyperstream, "Concert" and private
networks for large accounts such as J.P. Morgan, Proctor and Gamble and I.B.M.
From March 1967 to December 1989, Mr. Mount was employed by AT&T in various
positions.
PAUL G. PIZZANI. Mr. Pizzani has served as a director of the Company since
April 1996. Mr. Pizzani is currently a Managing Director of Wasserstein Perella
Emerging Markets L.P. where he has been employed since November 1997. Prior to
November 1997, Mr. Pizzani was associated with COMSAT Corporation and its
subsidiaries in various capacities from November 1985 to October 1997, most
recently as Treasurer.
JOHN G. GRAHAM. Mr. Graham has served as a director of the Company since
June 1998. Mr. Graham is currently the Senior Vice President and Chief Financial
Officer of GPU, Inc., a domestic and international electric utility and
independent power generation company. Mr Graham has been employed by GPU since
1976 and has held his current position since 1987. From 1970 to 1976, Mr. Graham
was a Partner in the law firm of Ruprecht and Graham, Newark, New Jersey. From
1993 to 1997, Mr. Graham served as a Director and Chairman of the Audit
Committee of Edisto Resources, Inc., which was engaged in the exploration,
production and marketing of natural gas and oil.
SENIOR MANAGEMENT
FRED HUGHES. Mr. Hughes has served as Vice President, Engineering of the
Company since December 1997. From July 1994 to December 1997, Mr. Hughes was
Vice President, Operations-Europe of the Company. 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.
PAUL K. HEUN. Mr. Heun has been Vice President, Operations of the Company
since January 1998. Prior to joining the Company, Mr. Heun was Vice President,
Network Services of Primus Telecommunications Group from October 1997 to January
1998. From April 1996 to October 1997, Mr. Heun was Vice President, Network
Services of Telepassport, Inc. From January 1995 to April 1996, Mr. Heun was
employed by AT&T as Manager, Customer Connectivity. From April 1989 to January
1995, Mr. Heun was employed by MCI, most recently as Senior Manager, Network
Operations.
WAYNE MYERS. Mr. Myers has been General Manager, European Sales of the
Company since July 1997. From February 1996 to June 1997, Mr. Myers was Channel
Sales Director of PSI Net. From November 1994 to February 1996, Mr. Myers was a
Sales Director for LDDS/WorldCom. From June 1993 to November 1994, Mr. Myers was
President of the Gold Club, a direct mail Company. From February 1988 to June
1993, Mr. Myers was employed by Cable & Wireless Communications, Inc. in various
capacities most recent as a National Account Director.
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JAN S. PIAZZA. Ms. Piazza has served as the Company's General Manager,
Carrier Sales since January 1998. Prior to joining the Company, Ms. Piazza was a
Vice President of Primus Telecommunications Group from October 1997 to December
1997. From September 1995 to October 1997, Ms. Piazza was a Vice President,
Sales and Marketing of Telepassport, Inc. From 1987 to August 1995, Ms. Piazza
served in various positions at a predecessor of WorldCom, most recently as Vice
President of Product Development and Carrier Sales. From 1983 until 1987, Ms.
Piazza was Director of Sales Administration and Customer Service for Argo
Communications.
ELLEN S. RUDIN. Ms. Rudin has served as Assistant General Counsel of the
Company since October 1997 and an Assistant Secretary since September 1997.
Prior to becoming Assistant General Counsel, Ms. Rudin served as Counsel of the
Company from March 1997 to October 1997 and as a staff attorney for the Company
from August 1996 to March 1997. From September 1987 to August 1996, Ms. Rudin
was associated with the law firm of Wien, Malkin & Bettex.
CHARLES T. FIELD. Mr. Field has served as Treasurer of the Company since
April 1998. Prior to joining the Company, Mr. Field was employed by Horsehead
Industries, Inc., a diversified manufacturing company, from August 1995 to April
1998. From October 1987 to August 1995, Mr. Field was employed by Deloitte &
Touche LLP, Independent Certified Public Accountants, most recently as Manager.
Mr. Field is a Certified Public Accountant and a member of the American
Institute, United Kingdom Society and Illinois Society of Certified Public
Accountants.
GEORGE A. PIERACCINI. Mr. Pieraccini has served as the Company's Controller
since January 1996. Mr. Pieraccini served as Assistant Controller of the Company
from November 1994 to 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.
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.
CATHERINE W. MACK. Ms. Mack has served as the Company's Director, Human
Resources and Administration since January 1995. Prior to joining the Company,
Ms. Mack served as Manager, Global Compensation and Benefits Administration with
Avon Products, Inc. from February 1993 to November 1994. From July 1990 to
February 1993, Ms. Mack served in various human resources positions with Holiday
Inn Worldwide and from March 1987 to July 1990 was Manager, Corporate Personnel
for RJR Nabisco, Inc.
STEPHEN GRIST. Mr. Grist has served as European Finance Director of the
Company since February 1998. Prior to joining the Company, Mr. Grist was
employed by Mincom Pty Ltd., a privately held Australian software and consulting
company, from October 1994 to February 1998, most recently as U.K./ Europe
Financial Controller. From January 1989 to July 1994, Mr. Grist was employed by
Coopers & Lybrand, Independent Certified Public Accountants, most recently as a
Senior Audit Manager. Mr. Grist has been a member of the Institute of Chartered
Accountants in England and Wales.
DEREK FOXWELL. Mr. Foxwell has served as Director of Infrastructure
Programs since May 1998. From December 1997 to May 1998, Mr. Foxwell served as a
consultant to the Company providing advice to the Company in connection with the
development of the Circe Network. Prior to joining the Company as a consultant,
Mr. Foxwell was a consultant to Nynex Network Service (Flag Ltd.) where he
chaired the Flag Assignment, Routing & Restoration Subcommittee and Sprint
International (PTAT) and acted as the operations and maintenance manager for
PTAT systems. From 1972 to 1991, Mr. Foxwell was employed by British Telecom,
most recently as Transmission Engineering Planning Manager, International Cable
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Network; International and National Elements. Mr. Foxwell is a chartered
engineer with more than 25 years of experience in international
telecommunications networks.
LOUISE LANCASTER. Ms. Lancaster has served as Director of European
Regulatory Affairs of the Company since June 1998. Prior to joining the Company,
Ms. Lancaster was employed by ACC Telecom from January 1995 to June 1998, most
recently as Director of Legal and Regulatory Affairs, Europe. From 1991 to 1994,
Ms. Lancaster was employed by Turner Kenneth Brown, solicitors, as a trainee
solicitor.
GLENN K. DAVIDSON. Mr. Davidson has served as the Company's Vice President,
Corporate Communications since August 1998. Prior to joining the Company, Mr.
Davidson was employed by the Computer & Communications Industry Association as
Executive Vice President, Chief Operating Officer and Corporate Secretary from
September 1995 to July 1998. From November 1994 to September 1995, Mr. Davidson
was an independent consultant. From May 1994 to November 1994, Mr. Davidson was
the Campaign Manager for Douglas Wilder's bid for election to the United States
Senate. From August 1991 to January 1994, Mr. Davidson was employed by the
Office of Governor, Commonwealth of Virginia, most recently as Chief of Staff.
From January 1990 to August 1991, Mr. Davidson was the Director of the Virginia
Liaison Office, Commonwealth of Virginia. From 1985 to 1990, Mr. Davidson was
employed by Computer & Communications Industry Association in various
capacities, most recently as Vice President and Chief of Staff.
LOIS F. BROWN. Ms. Brown has served as the Company's Director, Investor
Relations since July 1998. Prior to joining the Company, Ms. Brown was President
of Prism Group LLC, a management consulting firm which she founded, from April
1995 to July 1998. From September 1993 to March 1995, Ms. Brown was employed by
Ruder Finn as a Vice President and Group Director. From June 1990 to September
1993, Ms. Brown was President of Prism Group, Inc., the predecessor company to
Prism Group LLC. From February 1979 to June 1990, Ms. Brown was employed by the
chemical division of Mobil Corp. as a Financial Coordinator.
The number of directors, constituting a full board is currently seven. The
Board currently has two vacancies. The Board consists of three classes: Class A,
Class B and Class C. One of the three classes, comprising one-third of the
directors, is elected each year to succeed the directors whose terms are
expiring. Directors hold office until the annual meeting for the year in which
their terms expire and until their successors are elected and qualified unless,
prior to that date, they have resigned, retired or otherwise left office.
The Board of Directors has established three committees, a Compensation
Committee, an Audit Committee and a Directors Committee (established in May
1997). During 1997, the members of the Compensation Committee were Messrs.
Mahoney, Peet and Pizzani, the members of the Audit Committee were Messrs. Peet,
Pizzani and Shaw and the members of the Directors Committee were Messrs.
Varsavsky, Mahoney, Peet and Pizzani. The Compensation Committee reviews general
policy matters relating to compensation and benefits of employees and officers
of the Company and administers the Stock Incentive Plan. The Audit Committee
recommends to the Board the firm of independent public accountants to audit the
Company's financial statements, reviews with management and the independent
accountants the Company's operating results, considers the adequacy of the
internal controls and audit procedures of the Company and reviews the nonaudit
services to be performed by the independent accountants. The Directors Committee
searches for and interviews prospective directors, makes recommendations to the
Board regarding the size of the Board and candidates to fill vacancies on the
Board, including vacancies created by reason of an increase in the size of the
Board and nominates candidates for election to the Board.
Effective June 1998, the Company increased the annual fee paid to
non-employee directors from $12,000 to $30,000 (paid $15,000 in cash, in
quarterly installments, and $15,000 in restricted shares of Common Stock),
increased from $1,000 to $1,200 the meeting fee paid to directors for every
board meeting attended and each committee meeting attended and held separately
and increased from $500 to $600 the fee paid to directors for each board meeting
or committee meeting participated in by telephone. All directors continue to be
reimbursed for out-of-pocket expenses incurred in attending Board and committee
meetings. Directors who are also employees of the Company are not separately
compensated for serving on the Board of Directors. See "-- Stock Incentive
Plan."
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SUMMARY COMPENSATION TABLE
The following table sets forth information concerning compensation for
services in all capacities awarded to, earned by or paid to, any person acting
as the Company's Chief Executive Officer during 1997, regardless of the amount
of compensation paid, and the other most highly compensated executive officers
of the Company during 1997 whose aggregate cash and cash equivalent compensation
exceeded $100,000 (collectively, the "Named Executives").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------- LONG TERM COMPENSATION
OTHER --------------------------
ANNUAL RESTRICTED SECURITIES ALL
COMPENSATION STOCK UNDERLYING OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) AWARDS($) OPTIONS(#) COMPENSATION
- -------------------------------- --------- ---------- ---------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael J. Mahoney(2),.......... 1997 1996 $ 212,500 $ 125,000 -- 102,825 -- 299,997(3) -- $ 9,500(4)
President and Chief Executive 1995 166,458 183,129 $ 52,715 $ 253,333 --
Officer 123,000 117,607 -- 23,333 --
Allan L. Shaw(5),............... 1997 1996 140,000 60,000 -- -- 60,666 8,400(4)
Senior Vice President, 108,333 115,000 -- -- 43,333 --
Finance;
Chief Financial
Officer and Treasurer
Lawrence G. Malone(5)........... 1997 1996 141,750 35,588 -- -- 73,533 8,505(4)
Senior Vice President Global 98,333 88,147 -- -- 33,333 --
Sales and Marketing
Sheldon M. Goldman(6)........... 1997 1996 143,750 60,000 -- -- 40,200 9,000(4)
Senior Vice President, 86,354 100,000 -- -- 20,000 --
Business Affairs and General
Counsel
Martin Varsavsky(2)............. 1997 1996 271,875 -- 73,482 76,476 -- -- --
Chairman and 1995 350,000 200,000 99,813 -- -- --
Chief Executive Officer 329,673 100,000 -- -- --
</TABLE>
- ------------------------
(1) The amount reflected for Mr. Mahoney (i) for 1996, includes $32,416 of tax
equalization payments, $28,227 of relocation expense reimbursement
associated with Mr. Mahoney's repatriation from London to New York and
$9,263 of tax gross ups and (ii) for 1995, includes $23,834 of housing
allowance expense. The amount reflected for Mr. Varsavsky (i) for 1997,
includes $43,279 of housing allowance expense, $16,395 for housing related
expenses and $9,069 of tuition reimbursement for his children's schooling,
(ii) for 1996, includes $67,375 of housing allowance expense and $8,180 of
tuition reimbursement for his children's schooling and (iii) for 1995,
includes $35,880 of housing allowance expense and $47,500 of relocation
expense reimbursement.
(2) Mr. Mahoney was appointed as Chief Executive Officer in September 1997
following Mr. Varsavsky's resignation.
(3) Calculated based on a value of $9.00 per share, the fair market value of the
Common Stock on December 31, 1996.
(4) Represents matching contributions under the Company's 401(k) plan.
(5) The executive was not an executive officer of the Company during 1995.
(6) Mr. Goldman began his employment with the Company in March 1996.
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STOCK OPTION GRANTS
The following table sets forth information regarding grants of options to
purchase Common Stock made by the Company during the fiscal year ended December
31, 1997 to each of the Named Executives. No stock appreciation rights ("SARs")
were granted during 1997.
OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE
------------------------------------------------------ AT ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM (3)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME GRANTED (#) 1997 (1) ($/SHARE)(2) DATE (5%) (10%)
- ------------------------------------ ----------- ------------- ------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Mahoney.................. -- -- -- -- -- --
Allan L. Shaw....................... 60,666(4)(5) 14.2% $ 9.00 01/01/07 $ 343,373 $ 870,174
Lawrence G. Malone.................. 40,200(4)(5) 9.4 9.00 01/01/07 227,534 576,616
33,333(4)(6) 7.8 6.50 05/27/07 136,259 345,307
Sheldon M. Goldman.................. 40,200(4)(5) 9.4 9.00 01/01/07 227,534 576,616
Martin Varsavsky.................... -- -- -- -- -- --
</TABLE>
- ------------------------
(1) The Company granted options to purchase a total of 428,194 shares of Common
Stock during 1997.
(2) The exercise price was equal to the fair market value of the shares of
Common Stock underlying the options on the grant date.
(3) Amounts reported in these columns represent amounts that may be realized
upon exercise of options immediately prior to the expiration of their term
assuming the specified compounded rates of appreciation (5% and 10%) on the
Common Stock over the term of the options. These assumptions are based on
rules promulgated by the Commission and do not reflect the Company's
estimate of future stock price appreciation. Actual gains, if any, on the
stock option exercises and Common Stock holdings are dependent on the timing
of such exercise and the future performance of the Common Stock. There can
be no assurance that the rates of appreciation assumed in this table can be
achieved or that the amounts reflected will be received by the option
holder.
(4) In the event of a Corporate Transaction (as defined) involving the Company,
all unvested options become fully vested. See "-- Stock Incentive Plan." The
options granted to Messrs. Shaw and Goldman also vest upon a Change of
Control (as defined). See "-- Employment Agreements."
(5) Options vested and became exercisable as to 33.34% on January 1, 1998 and
will vest and become exercisable as to an additional 33.33% on each
anniversary thereafter.
(6) Options vested and became exercisable as to 33.34% on May 27, 1998 and will
vest and become exercisable as to an additional 33.33% on each anniversary
thereafter.
Effective January 1, 1998, the Company granted stock options to executive
officers as follows: Michael J. Mahoney, 90,000 options at an exercise price of
$5.00 per share and 90,000 options at an exercise price of $5.50 per share;
Allan L. Shaw, 60,000 options at an exercise price of $5.00 per share and 60,000
options at an exercise price of $5.50 per share; Lawrence G. Malone, 27,000
options at an exercise price of $5.00 per share and 60,000 options at an
exercise price of $5.50 per share; Sheldon M. Goldman, 60,000 options at an
exercise price of $5.00 per share and 60,000 options at an exercise price of
$5.50 per share; and Francis J. Mount, 40,000 options at an exercise price of
$5.00 per share and 60,000 options at an exercise price of $5.50 per share.
The Company's Compensation Committee has determined that it would be in the
best interest of the Company and its stockholders to increase the number of
shares available for grant under the Stock Incentive Plan in order to enable the
Company to grant additional stock options to the Company's
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executive officers. If the proposed increase is approved by the Company's
stockholders at the 1998 Annual Meeting, the Compensation Committee intends to
grant to its executive officers additional stock options equal to approximately
12% of the currently outstanding Common Stock.
YEAR-END OPTION VALUES
The following table sets forth information regarding the number and year end
value of unexercised options held at December 31, 1997 by each of the Named
Executives. No SARs were exercised by the Named Executives during fiscal 1997.
FISCAL 1997 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES "IN-THE-MONEY"
UNDERLYING UNEXERCISED OPTIONS AT FISCAL
OPTIONS AT FISCAL YEAR-END ($)
YEAR-END (#) EXERCISABLE/UNEXERCISABLE
NAME EXERCISABLE/UNEXERCISABLE (1)
- ------------------------------------------------------------ ----------------------- --------------------------
<S> <C> <C>
Michael J. Mahoney.......................................... 181,980/118,019 $ 29,400/$0
Allan L. Shaw............................................... 62,443/54,889 0/0
Lawrence G. Malone.......................................... 45,622/71,244 0/0
Sheldon M. Goldman.......................................... 26,734/33,466 0/0
Martin Varsavsky............................................ 0/0 0/0
</TABLE>
- ------------------------
(1) Options are "in-the-money" if the fair market value of the underlying
securities exceeds the exercise price of the options. The amounts set forth
represent the difference between $5.00 per share, the fair market value of
the Common Stock issuable upon exercise of options at December 31, 1997 and
the exercise price of the option, multiplied by the applicable number of
options.
EMPLOYMENT AGREEMENTS
The Company has executed employment agreements with Messrs. Mahoney, Shaw
and Goldman, pursuant to which Mr. Mahoney serves as President and Chief
Executive Officer of the Company, Mr. Shaw serves as Senior Vice President,
Chief Financial Officer and Treasurer of the Company and Mr. Goldman serves as
Senior Vice President, Business Affairs and General Counsel for the Company
(collectively, the "Employment Agreements"). The term of the Mahoney Employment
Agreement extends for a period of three years and the term of the Shaw and
Goldman Employment Agreements extend for a period of two years, in each case
unless earlier terminated in accordance with the terms thereof. Pursuant to the
respective Employment Agreement, Mr. Mahoney is entitled to receive an annual
base salary of $300,000 (subject to inflationary adjustments), Mr. Shaw is
entitled to receive an annual base salary of $175,000 and Mr. Goldman is
entitled to receive an annual base salary of $185,000, subject, in each case, to
increases approved from time to time by the Board. In addition, Mr. Mahoney's
Employment Agreement provides for an annual cash bonus payment equal to 70% of
his base salary multiplied by a bonus multiple ranging from 0.6 to 2.0
determined based upon a comparison of actual versus projected EBITDA and revenue
figures and each of Messrs. Shaw's and Goldman's Employment Agreement provides
for an annual cash bonus payment equal to 50% of their base salary multiplied by
a bonus multiple ranging from 0.6 to 2.0 determined based upon a comparison of
actual versus projected EBITDA and revenue figures. Each of the Employment
Agreements also provides that the executive will be entitled to receive annual
grants of stock options or restricted stock in amounts to be determined by the
Board of Directors in its sole and absolute discretion and provides that
following a Change of Control (as defined therein), the Company will be
obligated to pay the executive an amount equal to the Severance Amount (as
defined therein) if the executive chooses to terminate his employment and
include a non-competition covenant. Each of the Employment Agreements also
contains a prohibition on the solicitation of Company employees.
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For purposes of the Employment Agreements, "Change of Control" is defined to
mean such time as (i) a "person" or "group" (within the meaning of Sections
13(d) and 14(d)(2) of the Exchange Act), becomes the ultimate "beneficial owner"
(as defined in Rule 13d-3 of the Exchange Act) of more than 50% of the total
voting power of the then outstanding voting stock of the Company on a fully
diluted basis or (ii) individuals who at the beginning of any period of two
consecutive calendar years constituted the Board (together with any new
directors whose election by the Board or whose nomination for election by the
Company's stockholders was approved by a vote of at least two-thirds of the
members of the Board then still in office who either were members of the Board
at the beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
members of the Board then in office.
STOCK INCENTIVE PLAN
The Company has adopted the Amended Stock Incentive Plan (the "Stock
Incentive Plan") under which "non-qualified" stock options ("NQSOs") to acquire
shares of Common Stock may be granted to employees, directors and consultants of
the Company and "incentive" stock options ("ISOs") to acquire shares of Common
Stock may be granted to employees, including employee-directors. The Stock
Incentive Plan also provides for the grant of SARs and shares of restricted
Common Stock to the Company's employees, directors and consultants.
The Stock Incentive Plan currently provides for the issuance of up to a
maximum of 2,566,666 shares of Common Stock and is administered by the
Compensation Committee of the Board. 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 Code) unless the
exercise price is at least 110.0% of the fair market value of the Common Stock
and the term of the option may not exceed five years from the date of grant.
Each option granted pursuant to the Stock Incentive Plan is evidenced by a
written agreement executed by the Company and the grantee, which contains the
terms, provisions and conditions of the grant. Stock options may not be assigned
or transferred during the lifetime of the holder except as may be required by
law or pursuant to a qualified domestic relations order. Common Stock subject to
a restricted stock purchase or bonus agreement is transferable only as provided
in such agreement. The maximum term of each stock option granted to persons
other than ten percent stockholders is ten years from the date of grant.
For options to qualify as ISOs, the aggregate fair market value, determined
on the date of grant, of the shares with respect to which the ISOs are
exercisable for the first time by the grantee during any calendar year may not
exceed $100,000. Payment by option holders upon exercise of an option may be
made in cash or, with the consent of the Compensation Committee, in whole or in
part, (i) with shares of Common Stock owned by the participants, (ii) by
irrevocable direction to an approved securities broker to sell shares and
deliver all or a portion of the proceeds to the Company, (iii) by delivery of a
promissory note with such provisions as the Compensation Committee determines
appropriate or (iv) in any combination of the foregoing. In addition, the
Compensation Committee, in its sole discretion, may authorize the surrender by
an optionee of all or part of an unexercised stock option and authorize a
payment in consideration thereof of an amount equal to the difference between
the aggregate fair market value of the shares of Common Stock subject to such
stock option and the aggregate option price per share of such Common Stock. In
the Compensation Committees' discretion, such payment may be made in cash,
shares of Common Stock with a fair market value on the date of surrender equal
to the payment amount or some combination thereof.
The Stock Incentive Plan provides that outstanding options, restricted
shares of Common Stock or SARs vest in their entirety and become exercisable, or
with respect to restricted Common Stock, are released from restrictions on
transfer and repurchase rights, in the event of a "Corporate Transaction." For
purposes of the Stock Incentive Plan, a Corporate Transaction includes any of
the following stockholder-approved transactions to which the Company is a party:
(i) a merger or consolidation in which the
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Company is not the surviving entity, other than a transaction the principal
purpose of which is to change the state of the Company's incorporation, or a
transaction in which the Company's stockholders immediately prior to such merger
or consolidation hold (by virtue of securities received in exchange for their
shares in the Company) securities of the surviving entity representing more than
50.0% of the total voting power of such entity immediately after such
transaction; (ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Company unless the Company's stockholders
immediately prior to such sale, transfer or other disposition hold (by virtue of
securities received in exchange for their shares in the Company) securities of
the purchaser or other transferee representing more than 50.0% of the total
voting power of such entity immediately after such transaction; or (iii) any
reverse merger in which the Company is the surviving entity but in which the
Company's stockholders immediately prior to such merger do not hold (by virtue
of their shares in the Company held immediately prior to such transaction)
securities of the Company representing more than 50.0% of the total voting power
of the Company immediately after such transaction.
The Company has filed with the Commission a Registration Statement on Form
S-8 covering the shares of Common Stock underlying options granted under the
Stock Incentive Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1997, the members of the Compensation Committee were Messrs. Peet,
Pizzani and Mahoney. Mr. Mahoney is the Company's President and Chief Executive
Officer. None of the executive officers of the Company currently serves on the
compensation committee of another entity or any other committee of the board of
directors of another entity performing functions similar to the Compensation
Committee. No interlocking relationships exist between the Company's Board of
Directors or its Compensation Committee and the board of directors or
compensation committee of any other company.
SHAREHOLDERS AGREEMENTS. S-C V-Tel and Martin Varsavsky are parties to a
shareholders' agreement (the "S-C V-Tel Shareholders Agreement") which provides
that, in certain instances, if Mr. Varsavsky and Juan Manuel Aisemberg propose
to sell 20.0% or more of the aggregate number of shares of Common Stock
beneficially owned by them to any person or "group" (within the meaning of
Section 13(d) or 14(d)(2) of the Exchange Act), they shall cause S-C V-Tel,
COMSAT and certain other stockholders to have the right to sell its shares of
Common Stock in such a transaction on a pro rata basis with Messrs. Varsavsky
and Aisemberg, for the same consideration per share and on the same terms as Mr.
Varsavsky.
On April 5, 1994, Messrs. Varsavsky and Aisemberg and COMSAT entered into a
shareholders' agreement (as subsequently amended, the "COMSAT Shareholders
Agreement"). Pursuant to the terms of the COMSAT Shareholders Agreement, so long
as COMSAT beneficially owns at least 10.0% (subject to certain adjustments) of
the issued and outstanding shares of Common Stock on a fully diluted basis,
COMSAT is entitled to representation on the Company's Board of Directors in
proportion to its percentage ownership of Common Stock, subject to a minimum of
one seat, and to designate one member of an Executive Committee of the Board of
Directors, if any such committee is established. COMSAT currently holds less
than 10.0% of the outstanding Common Stock.
VOTING AGREEMENT. S-C V-Tel and COMSAT are parties to a voting agreement
(the "Voting Agreement"), pursuant to which, at all times that either S-C V-Tel
or COMSAT is entitled to nominate directors to the Board, the other party is
required to vote its respective shares of Common Stock in favor of the first
party's nominees. The Voting Agreement remains in effect until the earlier of
the dissolution of the Company or the date on which either S-C V-Tel or COMSAT
no longer owns any shares of Common Stock. See "Certain Transactions -- S-C
V-Tel Investments, L.P.," and "-- COMSAT Investments, Inc." for a description of
the registration rights held by each of S-C V-Tel and COMSAT.
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<PAGE>
CERTAIN TRANSACTIONS
S-C V-TEL INVESTMENTS, L.P.
Pursuant to the terms of a stock purchase agreement, dated September 30,
1993 (as subsequently amended, the "S-C V-Tel Stock Purchase Agreement"), S-C
V-Tel purchased 1,695,532 shares of Common Stock on October 1, 1993 and 2,739
shares of Common Stock on December 15, 1993 for an aggregate purchase price of
$5.0 million (the "S-C V-Tel Shares"). The S-C V-Tel Stock Purchase Agreement
provides that, among other things, after April 16, 1997, S-C V-Tel has the right
to demand registration under the Securities Act of the S-C V-Tel Shares. Such
demand right must be exercised for at least 30.0%, and no more than 70.0% of the
S-C V-Tel Shares then owned by S-C V-Tel. No earlier than six months after the
effective date of its first demand registration, S-C V-Tel may request a second
demand registration for any remaining S-C V-Tel Shares. The expenses of such
demand registrations, excluding any underwriter's commissions and discounts
relating to the sale of the S-C V-Tel Shares, will be paid by the Company. In
addition, if the Company proposes to register any of its securities under the
Securities Act, S-C V-Tel has the right, on up to four occasions, to include in
such registration a maximum of 33 1/3% of the S-C V-Tel Shares it then owns. The
expenses of any such "piggy-back" registration, excluding any underwriter's
commissions and discounts relating to the sale of the S-C V-Tel Shares and the
fees and disbursements of S-C V-Tel's legal counsel, will be paid by the
Company. S-C V-Tel is entitled to sell or transfer any of the S-C V-Tel Shares,
without the consent of the Company, provided that the transferee is not in
competition with, or does not otherwise have interests adverse to, the Company.
See "Management -- Compensation Committee Interlocks and Insider Participation
- -- Shareholders Agreements" for a description of certain tag-along rights of S-C
V-Tel.
COMSAT INVESTMENTS, INC.
Pursuant to the terms of a stock purchase agreement, dated April 5, 1994 (as
subsequently amended, the "COMSAT Purchase Agreement"), COMSAT purchased
2,140,539 shares of Common Stock for a purchase price of $8.0 million (the
"COMSAT Shares"). Pursuant to the terms of the COMSAT Purchase Agreement, COMSAT
has been granted the same demand and piggyback registration rights as S-C V-Tel.
The COMSAT Purchase Agreement further provides that COMSAT may not transfer any
COMSAT Shares to any transferee without first offering such shares to the
Company if, following such transfer, such transferee would own 20.0% or more of
the then outstanding shares of Common Stock. In addition, COMSAT has agreed that
it will not acquire more than 30.0% of the shares of Common Stock outstanding at
any time except in certain circumstances relating to changes in the percentage
of the outstanding Common Stock owned by Mr. Varsavsky. Prior to the sale of all
or substantially all of the assets of the Company or the consolidation or merger
of the Company with any person in which the Company is not the surviving entity,
COMSAT has certain rights to invest in any joint venture proposed by the
Company. See "Management -- Compensation Committee Interlocks and Insider
Participation -- Shareholders Agreements" for a description of certain rights
held by COMSAT.
VARSAVSKY/JAZZTEL
On June 3, 1998, the Company entered into a Mutual Cooperation Agreement
with Martin Varsavsky and JazzTel which provides for (i) the joint construction
of a submarine cable system between Spain and the United Kingdom, (ii) the
purchase by the Company of U.S. $6.0 million of JazzTel common stock, (iii) the
purchase of international switched minutes by JazzTel and the Company from the
other party and the Company's agreement to transit at least 1/3 of its Spain
domestic switched minute traffic over JazzTel's network assuming the prices
charged by JazzTel are competitive, (iv) the sale by each of JazzTel and the
Company to the other of indefeasible rights of use for fixed prices, (v) certain
lockup arrangements regarding shares of Common Stock owned by Mr. Varsavsky and
certain registration obligations and rights with respect to such shares, (vi)
mutual releases and (vii) liquidated damages in the event that Mr. Varsavsky
violates certain provisions of the agreement. The Company's obligations to
invest in JazzTel and its obligations to jointly construct the proposed
submarine cable system are conditioned upon, among other things, JazzTel
raising, through the capital markets, certain specified dollar amounts.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock, as of August 7, 1998, by (i) each person known to
the Company to own beneficially more than 5% of the Company's outstanding shares
of Common Stock, (ii) each director of the Company, (iii) each of the Named
Executives, and (iv) all executive officers and directors of the Company, as a
group. All information with respect to beneficial ownership has been furnished
to the Company by the respective stockholders of the Company.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENTAGE
OF BENEFICIAL OF
NAME AND ADDRESS OWNERSHIP (1) CLASS
- ------------------------------------------------------------------------------------- ------------------ -------------
<S> <C> <C>
Martin Varsavsky
Parque Empresarial Edificio 2,
c/o Beatriz De Bobadilla
14,5 Ofic. B
Madrid, Spain...................................................................... 5,449,666 23.5%
Capital Guardian Trust Company
333 South Hope Street
Los Angeles, CA 90071(2)........................................................... 2,882,700 12.4
COMSAT International, Inc.
6560 Rock Spring Drive
Bethesda, MD 20817(3).............................................................. 2,140,539 9.2
S-C V-Tel Investments, L.P.
888 Seventh Avenue
New York, NY 10106(3).............................................................. 1,698,272 7.3
FMR Corp.
82 Devonshire Street
Boston, MA 02109................................................................... 1,644,200 7.1
Morgan Stanley, Dean Witter, Discover & Co.
1585 Broadway
New York, New York 10036........................................................... 1,244,246 5.4
Michael J. Mahoney(4)................................................................ 230,313 1.0
Allan L. Shaw(4)..................................................................... 67,443 *
Lawrence G. Malone(4)................................................................ 56,733 *
Sheldon M. Goldman(4)(5)............................................................. 34,733 *
Paul G. Pizzani...................................................................... -- *
Francis J. Mount..................................................................... -- *
John G. Graham....................................................................... 1,000 *
All directors and executive
officers as a group (7 persons)(6)................................................. 390,222 1.7
</TABLE>
- ------------------------
* Represents beneficial ownership of less than 1% of the outstanding shares of
Common Stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Commission. In computing the number of shares beneficially owned by a person
and the percentage ownership of that person, shares of Common Stock subject
to options and warrants held by that person that are currently exercisable
or exercisable within 60 days of August 7, 1998 are deemed outstanding. Such
shares, however, are not
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<PAGE>
deemed outstanding for the purpose of computing the percentage ownership of
any other person. Except as indicated in the footnotes to this table, the
stockholder named in the table has sole voting and investment power with
respect to the shares set forth opposite such stockholder's name.
(2) The amount reported reflects shares held by Capital Guardian Trust Company
solely as the investment manager of various institutional accounts.
(3) Does not include 7,147,938 shares of Common Stock which COMSAT may be deemed
to beneficially own as a result of certain voting arrangements contained in
the COMSAT Shareholders Agreement. See "Management -- Compensation Committee
Interlocks and Insider Participation -- Shareholders Agreements."
(4) Includes shares of Common Stock which these individuals have the right to
acquire through the exercise of options within 60 days of August 7, 1998, as
follows: Michael J. Mahoney 135,314; Allan L. Shaw 62,443; Lawrence G.
Malone 56,733; Sheldon M. Goldman 26,733; and Francis J. Mount 0.
(5) Includes 1,000 shares owned by Mr. Goldman's wife. Mr. Goldman disclaims
"beneficial ownership" of such shares within the meaning of Rule 13d-3 under
the Exchange Act.
(6) Includes vested and exercisable options to purchase 327,889 shares of Common
Stock which were granted pursuant to the Stock Incentive Plan.
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DESCRIPTION OF THE EXCHANGE NOTES
The form and terms of the Exchange Notes are identical in all material
respects to the form and terms of the respective series of Existing Notes,
except that the Exchange Notes will not bear legends restricting the transfer
thereof or contain interest rate step-up provisions upon the failure to register
the Existing Notes. Each of the Existing 12.50% Notes, the Existing 11.25%
Notes, the Existing 12.40% Notes and the Existing 11.15% Notes were issued under
an Indenture, dated as of April 8, 1998 (the "12.50% Notes Indenture," the
"11.25% Notes Indenture," the "12.40% Notes Indenture" and the "11.15% Notes
Indentures," respectively, and together the "Indentures"), and each between
Viatel, as issuer, and the Bank of New York, as trustee (the "Trustee"). A copy
of each of the Indentures has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. Upon the issuance of the
Exchange Notes, if any, or the effectiveness of the Shelf Registration
Statement, the Indentures will be subject to the Trust Indenture Act of 1939, as
amended (the "TIA"). The following summary of certain provisions of the
Indentures does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all the provisions of the Indentures, including
the definitions of certain terms therein and those terms made a part thereof by
the TIA. Whenever particular defined terms of the Indentures not otherwise
defined herein are referred to, such defined terms are incorporated herein by
reference. For definitions of certain capitalized terms used in the following
summary, see "-- Certain Definitions."
GENERAL
The Existing Discount Notes are, and the 12.50% Exchange Notes and 12.40%
Exchange Notes will be, unsecured senior obligations of the Company, initially
limited to $500.0 million and DM 226.0 million, respectively, aggregate
principal amount at maturity and will mature on April 15, 2008. Although for
income tax purposes a significant amount of original issue discount, taxable as
ordinary income, will be recognized by a Holder as such discount accrues from
the issue date, no interest will be payable on the 12.50% Notes or the 12.40%
Notes prior to October 15, 2003. From and after April 15, 2003, interest on the
12.50% Notes and the 12.40% Notes will accrue at the rate of 12.50% and 12.40%,
respectively, from April 15, 2003 or from the most recent Interest Payment Date
to which interest has been paid or provided for, payable semi-annually (to
holders of record at the close of business on the April 1 or October 1
immediately preceding the Interest Payment Date) on April 15 and October 15 of
each year, commencing October 15, 2003. Interest will be computed on the basis
of a 360-day year of twelve 30-day months.
The Existing Senior Notes are, and the 11.25% Exchange Notes and 11.15%
Exchange Notes will be, unsecured (except as described in "-- Security") senior
obligations of the Company, initially limited to $400.0 million and DM 178.0
million, respectively, principal amount, and will mature on April 15, 2008.
Interest on the 11.25% Notes and the 11.15% Notes will accrue at the rate of
11.25% and 11.15%, respectively, from April 8, 1998 or from the most recent
Interest Payment Date to which interest has been paid or provided for, payable
semi-annually (to holders of record at the close of business on the April 1 and
October 1 immediately preceding the Interest Payment Date) in cash on April 15
and October 15 of each year, commencing October 15, 1998. Interest will be
computed on the basis of a 360-day year of twelve 30-day months.
If, by October 8, 1998, the Company has not consummated the Exchange Offers
contemplated hereby or the Shelf Registration Statement is not declared
effective, interest (in addition to the accrual of original issue discount on
the Existing Discount Notes and interest otherwise due on the Existing Senior
Notes) will accrue, (i) with respect to the Existing Discount Notes, at the rate
of 0.5% per annum of the Accreted Value on the preceding Semi-Annual Accrual
Date and (ii) with respect to the Existing Senior Notes, at the rate of 0.5% per
annum of the principal amount, and, in each case, be payable in cash
semi-annually on April 15 and October 15 of each year, commencing April 15,
1999, until the Exchange Offers are consummated or the Shelf Registration
Statement is declared effective. See "-- Registration Rights."
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<PAGE>
Principal of, premium, if any, and interest on the Notes is payable, by wire
transfer of immediately available funds to the holder of global notes and with
respect to holders of certificated notes, at the office or agency of Viatel in
the Borough of Manhattan, the City of New York (which initially is the corporate
trust office of the Trustee in the City of New York; PROVIDED that, at the
option of Viatel, payment of interest may be made by check mailed to the Holders
at their addresses as they appear in the Security Register. In addition,
Deutsche Bank AG will act as the DM Paying Agent for purposes of making payments
in German Deutschmarks on the 12.40% Notes and the 11.15% Notes.
The 12.50% Exchange Notes and the 11.25% Exchange Notes will be issued only
in fully registered form, without coupons, in denominations of $1,000 principal
amount at maturity in the case of the 12.50% Exchange Notes and $1,000 principal
amount in the case of the 11.25% Exchange Notes and, in each case, any integral
multiple thereof. The 12.40% Exchange Notes and the 11.15% Exchange Notes will
be issued in bearer form, in the case of the New DBC-DM Global Certificates, or
in registered form, in the case of the New DTC-DM Global Certificates, and only
in denominations of DM 100,000 principal amount at maturity in the case of the
12.40% Exchange Notes and DM 100,000 principal amount in the case of the 11.15%
Exchange Notes and, in each case, in any integral multiple of DM 1,000 above
such amount. No service charge will be made for any registration of transfer or
exchange of Notes, but Viatel may require payment of a sum sufficient to cover
any transfer tax or other similar governmental charge payable in connection
therewith.
Subject to the covenants described below under "-- Covenants" and applicable
law, Viatel may issue additional Notes under the Indentures. Each series of
Notes and any additional Notes in such series subsequently issued will be
treated as a single class for all purposes under the relevant Indenture.
SUBSTITUTION OF CURRENCY
Stage III is presently anticipated to commence on January 1, 1999 in the
eleven EU member states, including Germany, which the Council of the EU
determined on May 2, 1998 had satisfied the convergence criteria established in
the Treaty of Maastricht. Stage III is the locking of exchange rates and the
introduction of the Euro, which will replace the national currencies of such
member states. If Germany adopts the Euro, as planned, the regulations of the EC
relating to the Euro shall apply to the 12.40% Notes and the 11.15% Notes. As a
result, the 12.40% Notes and the 11.15% Notes will effectively be redenominated
into Euros. The circumstances and consequences described in this paragraph
entitle neither Viatel nor any holders of 12.40% Notes or 11.15% Notes to early
redemption, rescission, notice, repudiation, adjustment or renegotiation of the
terms and conditions of the 12.40% Notes, the 11.15% Notes, the 12.40% Notes
Indenture or the 11.15% Notes Indenture or to raise other defenses or to request
any compensation claim, nor will they affect any of the other obligations of
Viatel under the 12.40% Notes or the 11.15% Notes. See "Risk Factors -- Risks
Associated with International Operations and Foreign Exchange Rate Risks."
SECURITY
In accordance with the terms of the 11.25% Notes Indenture, Viatel purchased
and pledged to the Trustee for the benefit of the Holders of the 11.25% Notes
the U.S. Pledged Securities in an amount sufficient, upon receipt of scheduled
interest and principal payments on such securities, in the opinion of a
nationally recognized firm of independent public accountants selected by Viatel,
to provide for payment in full of the first six scheduled interest payments due
on the 11.25% Notes. In accordance with the terms of the 11.15% Notes Indenture,
Viatel purchased and pledged to the Trustee for the benefit of the Holders of
the 11.15% Notes the DM Pledged Securities in an amount sufficient upon receipt
of scheduled interest and principal payments on such securities, in the opinion
of a nationally recognized firm of independent public accountants selected by
Viatel, to provide for payment in full of the first six scheduled interest
payments due on the 11.15% Notes. Viatel used approximately $122.8 million of
the net proceeds of the
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Offering to acquire the U.S. Pledged Securities and approximately $30.6 million
of the net proceeds of the Offering to acquire the DM Pledged Securities. The
U.S. Pledged Securities and the DM Pledged Securities have been pledged by
Viatel to the Trustee for the benefit of the Holders of the 11.25% Notes and the
11.15% Notes, respectively, pursuant to the Pledge Agreement and are being held
by the Trustee in the U.S. Pledge Account and the DM Pledge Account,
respectively. Pursuant to the Pledge Agreement, immediately prior to an Interest
Payment Date on the 11.25% Notes and the 11.15% Notes, Viatel may either deposit
with the Trustee from funds otherwise available to Viatel cash sufficient to pay
the interest scheduled to be paid on such date or Viatel may direct the Trustee
to release from each of the Pledge Accounts proceeds sufficient to pay interest
then due on the 11.25% Notes and the 11.15% Notes. In the event that Viatel
exercises the former option, Viatel may thereafter direct the Trustee to release
to Viatel proceeds or Pledged Securities from the respective Pledge Account in
like amount. A failure to pay interest on the 11.25% Notes and the 11.15% Notes
in a timely manner through the first six scheduled interest payment dates will
constitute an immediate Event of Default under the 11.25% Notes Indenture and
the 11.15% Notes Indenture, as the case may be, with no grace or cure period.
Interest earned on the U.S. Pledged Securities or the DM Pledged Securities
will be added to the respective Pledge Account. In the event that the funds or
Pledged Securities held in a Pledge Account exceed the amount sufficient, in the
opinion of a nationally recognized firm of independent public accountants
selected by Viatel, to provide for payment in full of the first six scheduled
interest payments due on the 11.25% Notes and the 11.15% Notes, as the case may
be (or, in the event an interest payment or payments have been made, an amount
sufficient to provide for payment in full of any interest payments remaining, up
to and including the sixth scheduled interest payment), the Trustee will be
permitted to release to Viatel at Viatel's request any such excess amount. The
11.25% Notes are secured by the U.S. Pledged Securities and the related U.S.
Pledge Account and, accordingly, the U.S. Pledged Securities and the U.S. Pledge
Account also secure repayment of the principal amount of the 11.25% Notes to the
extent of such security. The 11.15% Notes are secured by the DM Pledged
Securities and the related DM Pledge Account and, accordingly, the DM Pledged
Securities and the related DM Pledge Account also secure repayment of the
principal amount of the 11.15% Notes to the extent of such security.
Under the Pledge Agreement, assuming that Viatel makes the first six
scheduled interest payments on the Senior Notes in a timely manner, all of the
remaining Pledged Securities will be released from the Pledge Accounts and
thereafter the Senior Notes will be unsecured.
OPTIONAL REDEMPTION
The Notes are redeemable, at Viatel's option, in whole or in part, at any
time or from time to time, on or after April 15, 2003 and prior to maturity,
upon not less than 30 nor more than 60 days' prior notice mailed by first class
mail to each Holder's last address as it appears in the Security Register, at
the Redemption Prices (expressed in percentages of principal amount at maturity
in the case of the 12.50% Notes and the 12.40% Notes and principal amount in the
case of the 11.25% Notes and 11.15% Notes) set forth below, plus accrued and
unpaid interest, if any, to the Redemption Date (subject to the right of Holders
of record on the relevant Regular Record Date that is on or prior to the
Redemption Date to receive interest due on an Interest Payment Date), if
redeemed during the 12-month period commencing April 15, of the years set forth
below:
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FOR THE 12.50% NOTES
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ---------------------------------------------------------------------------- ----------------
<S> <C>
2003........................................................................ 106.250%
2004........................................................................ 104.167
2005........................................................................ 102.083
2006 and thereafter......................................................... 100.000
</TABLE>
FOR THE 11.25% NOTES
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ---------------------------------------------------------------------------- ----------------
<S> <C>
2003........................................................................ 105.625%
2004........................................................................ 103.750
2005........................................................................ 101.875
2006 and thereafter......................................................... 100.000
</TABLE>
FOR THE 12.40% NOTES
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ---------------------------------------------------------------------------- ----------------
<S> <C>
2003........................................................................ 106.200%
2004........................................................................ 104.133
2005........................................................................ 102.067
2006 and thereafter......................................................... 100.000
</TABLE>
FOR THE 11.15% NOTES
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ---------------------------------------------------------------------------- ----------------
<S> <C>
2003........................................................................ 105.575%
2004........................................................................ 103.717
2005........................................................................ 101.858
2006 and thereafter......................................................... 100.000
</TABLE>
In addition, at any time prior to April 15, 2001, Viatel may, at its option,
redeem up to 35% of the aggregate principal amount at maturity of the Notes with
the net proceeds of one or more Public Equity Offerings, at any time or from
time to time in part, at a Redemption Price (expressed as a percentage of
Accreted Value on the Redemption Date) of 112.50% and 112.40%, respectively,
with respect to the 12.50% Notes and the 12.40% Notes and at a Redemption Price
(expressed as a percentage of the principal amount) of 111.25% 111.15%,
respectively, with respect to the 11.25% Notes and the 11.15% Notes; PROVIDED
(i) that Notes representing at least 65% of the principal amount at maturity of
the Notes initially issued remain outstanding immediately after each such
redemption and (ii) that notice of each such redemption is mailed within 60 days
of each such Public Equity Offering.
In the case of any partial redemption, selection of the Notes for redemption
will be made by the Trustee in compliance with the requirements of the principal
national securities exchange, if any, on which the relevant Notes are listed or,
if the relevant Notes are not listed on a national securities exchange, by lot
or by such other method as the Trustee in its sole discretion shall deem to be
fair and appropriate; PROVIDED that no 12.50% Note of $1,000 in principal amount
at maturity or less, no 11.25% Note of $1,000 in
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principal amount or less, no 12.40% Note of DM 1,000 in principal amount at
maturity or less and no 11.15% Note of DM 1,000 in principal amount or less,
shall be redeemed in part. If any Note is to be redeemed in part only, the
notice of redemption relating to such Note shall state the portion of the
principal amount at maturity or principal amount, as the case may be, thereof to
be redeemed. A new Note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the Holder thereof upon cancellation of
the original Note. On and after the redemption date interest ceases to accrue on
Notes or the portion of the Notes called for redemption.
SINKING FUND
The Notes are not entitled to the benefit of any sinking fund.
REGISTRATION RIGHTS
Pursuant to the 1998 Registration Rights Agreement, Viatel agreed, for the
benefit of the Holders, that Viatel will use its best efforts, at its cost, to
consummate the Exchange Offers by October 8, 1998. In satisfaction of this
obligation, Viatel is hereby offering the Exchange Notes in return for the
surrender of the Existing Notes. It is intended by Viatel that the Exchange
Offer will satisfy the registration rights, which will terminate upon the
consummation of the Exchange Offers. For each Existing Note surrendered to
Viatel under the Exchange Offers, the Holder will receive an Exchange Note of
equal principal amount at maturity or principal amount, as the case may be. The
Accreted Value or principal amount, as the case may be, of each Exchange Note
shall be identical to, and shall be determined in the same manner as, the
Accreted Value or principal amount of the Existing Notes so surrendered and
exchanged therefor. Interest on each Exchange Note shall be calculated and paid
in the same manner as interest on the Existing Notes so surrendered and
exchanged therefor.
RANKING
The Existing Notes are, and the Exchange Notes will be, unsecured (except as
described in "-- Security") senior obligations of Viatel, ranking PARI PASSU in
right of payment with all existing and future unsecured unsubordinated
obligations of Viatel and will be senior in right of payment to all existing and
future subordinated indebtedness of Viatel. After giving PRO FORMA effect to the
Tender Offer and the Offering, as of March 31, 1998, Viatel would have had
approximately $845.7 million of senior indebtedness. The Existing Notes are, and
the Exchange Notes will be, effectively subordinated to all existing and future
liabilities (including trade payables) of Viatel's subsidiaries. As of March 31,
1998, Viatel's subsidiaries had approximately $14.7 million of liabilities
(excluding intercompany payables).
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indentures. Reference is made to the
Indentures for the definition of any other capitalized term used herein for
which no definition is provided.
"Accreted Value" means, (a) with respect to the 12.50% Notes, for any
Specified Date, the amount calculated pursuant to clause (i), (ii), (iii) or
(iv) below for each $1,000 principal amount at maturity of 12.50% Notes:
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(i) if the Specified Date occurs on one of the following dates (each a
"Semi-Annual Accrual Date"), the Accreted Value will equal the amount set
forth below for such Semi-Annual Accrual Date:
<TABLE>
<CAPTION>
ACCRETED
SEMI-ANNUAL ACCRUAL DATE VALUE
- ----------------------------------------------------------------------------------- -------------
<S> <C>
October 15, 1998................................................................... $ 579.48
April 15, 1999..................................................................... $ 615.69
October 15, 1999................................................................... $ 654.18
April 15, 2000..................................................................... $ 695.06
October 15, 2000................................................................... $ 738.50
April 15, 2001..................................................................... $ 784.66
October 15, 2001................................................................... $ 833.70
April 15, 2002..................................................................... $ 885.81
October 15, 2002................................................................... $ 941.17
April 15, 2003..................................................................... $ 1,000.00
</TABLE>
(ii) if the Specified Date occurs before the first Semi-Annual Accrual
Date, the Accreted Value will equal the sum of (a) $544.11 and (b) an amount
equal to the product of (1) $1.29 MULTIPLIED by (2) a fraction, the
numerator of which is the number of days from April 8, 1998 to the Specified
Date, using a 360-day year of twelve 30-day months, and the denominator of
which is the number of days from April 8, 1998 to the first Semi-Annual
Accrual Date, using a 360-day year of twelve 30-day months;
(iii) if the Specified Date occurs between two Semi-Annual Accrual
Dates, the Accreted Value will equal the sum of (a) the Accreted Value for
the Semi-Annual Accrual Date immediately preceding such Specified Date and
(b) an amount equal to the product of (1) the Accreted Value for the
immediately following Semi-Annual Accrual Date less the Accreted Value for
the immediately preceding Semi-Annual Accrual Date MULTIPLIED by (2) a
fraction, the numerator of which is the number of days from the immediately
preceding Semi-Annual Accrual Date to the Specified Date, using a 360-day
year of twelve 30-day months, and the denominator of which is 180; or
(iv) if the Specified Date occurs after the last Semi-Annual Accrual
Date, the Accreted Value will equal $1,000.
(b) with respect to the 12.40% Notes, for any Specified Date, the amount
calculated pursuant to clause (i), (ii), (iii) or (iv) below for each DM 1,000
principal amount at maturity of 12.40% Notes:
(i) if the Specified Date occurs on a Semi-Annual Accrual Date, the
Accreted Value will equal the amount set forth below for such Semi-Annual
Accrual Date:
<TABLE>
<CAPTION>
SEMI-ANNUAL ACCRUAL DATE ACCRETED VALUE
- --------------------------------------------------------------------------------- ---------------
<S> <C>
October 15, 1998................................................................. DM 581.94
April 15, 1999................................................................... DM 618.02
October 15, 1999................................................................. DM 656.33
April 15, 2000................................................................... DM 697.03
October 15, 2000................................................................. DM 740.24
April 15, 2001................................................................... DM 786.14
October 15, 2001................................................................. DM 834.88
April 15, 2002................................................................... DM 886.64
October 15, 2002................................................................. DM 941.61
April 15, 2003................................................................... DM 1,000.00
</TABLE>
(ii) if the Specified Date occurs before the first Semi-Annual Accrual
Date, the Accreted Value will equal the sum of (a) DM 546.68 and (b) an
amount equal to the product of (1) DM 1.28 MULTIPLIED
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by (2) a fraction, the numerator of which is the number of days from April
8, 1998 to the Specified Date, using a 360-day year of twelve 30-day months,
and the denominator of which is the number of days from April 8, 1998 to the
first Semi-Annual Accrual Date, using a 360-day year of twelve 30-day
months;
(iii) if the Specified Date occurs between two Semi-Annual Accrual
Dates, the Accreted Value will equal the sum of (a) the Accreted Value for
the Semi-Annual Accrual Date immediately preceding such Specified Date and
(b) an amount equal to the product of (1) the Accreted Value for the
immediately following Semi-Annual Accrual Date less the Accreted Value for
the immediately preceding Semi-Annual Accrual Date MULTIPLIED by (2) a
fraction, the numerator of which is the number of days from the immediately
preceding Semi-Annual Accrual Date to the Specified Date, using a 360-day
year of twelve 30-day months, and the denominator of which is 180; or
(iv) if the Specified Date occurs after the last Semi-Annual Accrual
Date, the Accreted Value will equal DM 1,000.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition by the Company or a Restricted Subsidiary and not Incurred in
connection with, or in anticipation of, such Person becoming a Restricted
Subsidiary or such Asset Acquisition.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of Viatel and its Restricted Subsidiaries for such period
determined in conformity with GAAP; PROVIDED that the following items shall be
excluded in computing Adjusted Consolidated Net Income (without duplication):
(i) the net income (or loss) of any Person that is not a Restricted Subsidiary,
except (x) with respect to net income, to the extent of the amount of dividends
or other distributions actually paid to Viatel or any of its Restricted
Subsidiaries by such Person during such period and (y) with respect to net
losses, to the extent of the amount of Investments made by Viatel or any
Restricted Subsidiary in such Person during such period; (ii) solely for the
purposes of calculating the amount of Restricted Payments that may be made
pursuant to clause (C) of the first paragraph of the "Limitation on Restricted
Payments" covenant described below (and in such case, except to the extent
includable pursuant to clause (i) above), the net income (or loss) of any Person
accrued prior to the date it becomes a Restricted Subsidiary or is merged into
or consolidated with Viatel or any of its Restricted Subsidiaries or all or
substantially all of the property and assets of such Person are acquired by
Viatel or any of its Restricted Subsidiaries; (iii) the net income of any
Restricted Subsidiary to the extent that the declaration or payment of dividends
or similar distributions by such Restricted Subsidiary of such net income is not
at the time permitted by the operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to such Restricted Subsidiary; (iv) any gains or losses
(on an after-tax basis) attributable to Asset Sales and sales of indefeasible
rights-of-use or dark fibers; (v) except for purposes of calculating the amount
of Restricted Payments that may be made pursuant to clause (C) of the first
paragraph of the "Limitation on Restricted Payments" covenant described below,
any amount paid or accrued as dividends on Preferred Stock of Viatel or any
Restricted Subsidiary owned by Persons other than Viatel and any of its
Restricted Subsidiaries; (vi) all extraordinary gains and extraordinary losses;
and (vii) any compensation expense paid or payable solely with Capital Stock
(other than Disqualified Stock) of Viatel or any options, warrants or other
rights to acquire Capital Stock (other than Disqualified Stock) of Viatel.
"Adjusted Consolidated Net Tangible Assets" means the total amount of assets
of Viatel and its Restricted Subsidiaries (less applicable depreciation,
amortization and other valuation reserves), except to the extent resulting from
write-ups of capital assets (excluding write-ups in connection with accounting
for acquisitions in conformity with GAAP), after deducting therefrom (i) all
current liabilities of Viatel and its Restricted Subsidiaries (excluding
intercompany items) and (ii) all goodwill, trade names, trademarks, patents,
unamortized debt discount and expense and other like intangibles, all as set
forth on the most
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recent quarterly or annual consolidated balance sheet of Viatel and its
Restricted Subsidiaries, prepared in conformity with GAAP and filed with the
Commission or provided to the Trustee pursuant to the "Commission Reports and
Reports to Holders" covenant.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means (i) an investment by Viatel or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person shall
become a Restricted Subsidiary or shall be merged into or consolidated with
Viatel or any of its Restricted Subsidiaries; PROVIDED that such Person's
primary business is related, ancillary or complementary to the businesses of
Viatel or any of its Restricted Subsidiaries on the date of such investment or
(ii) an acquisition by Viatel or any of its Restricted Subsidiaries of the
property and assets of any Person other than Viatel or any of its Restricted
Subsidiaries that constitute substantially all of a division or line of business
of such Person; PROVIDED that the property and assets acquired are related,
ancillary or complementary to the businesses of Viatel or any of its Restricted
Subsidiaries on the date of such acquisition.
"Asset Disposition" means the sale or other disposition by Viatel or any of
its Restricted Subsidiaries (other than to Viatel or another Restricted
Subsidiary) of (i) all or substantially all of the Capital Stock of any
Restricted Subsidiary or (ii) all or substantially all of the assets that
constitute a division or line of business of Viatel or any of its Restricted
Subsidiaries.
"Asset Sale" means any sale, transfer or other disposition (including by way
of merger, consolidation or sale-leaseback transaction) in one transaction or a
series of related transactions by Viatel or any of its Restricted Subsidiaries
to any Person other than Viatel or any of its Restricted Subsidiaries of (i) all
or any of the Capital Stock of any Restricted Subsidiary, (ii) all or
substantially all of the property and assets of a division or line of business
of Viatel or any of its Restricted Subsidiaries or (iii) any other property and
assets (other than the Capital Stock or other Investment in an Unrestricted
Subsidiary) of Viatel or any of its Restricted Subsidiaries outside the ordinary
course of business of Viatel or such Restricted Subsidiary and, in each case,
that is not governed by the provisions of the Indentures applicable to mergers,
consolidations and sales of all or substantially all of the assets of Viatel;
PROVIDED that "Asset Sale" shall not include (a) sales or other dispositions of
inventory, receivables and other current assets, (b) sales, transfers or other
dispositions of assets constituting a Restricted Payment permitted to be made
under the "Limitation on Restricted Payments" covenant, (c) sales, transfers or
other dispositions of assets with a fair market value (as certified in an
Officers' Certificate) not in excess of $1 million in any transaction or series
of related transactions, (d) sales or other dispositions of assets for
consideration at least equal to the fair market value of the assets sold or
disposed of, to the extent that the consideration received would constitute
property or assets of the kind described in clause (B) of the "Limitation on
Asset Sales" covenant, (e) any liquidation of Temporary Cash Investments, (f) a
transfer, directly or indirectly, of receivables or other payment rights arising
from a transfer of indefeasible rights of use or dark fiber which transfer of
receivables or rights is to a special purpose entity created for the purpose of
issuing securities to be paid or redeemed from, or beneficial interests in, the
cash or revenues generated from the assets transferred; PROVIDED that the
consideration received by Viatel is a least equal to the fair market value of
the asset transferred and the proceeds are used by Viatel (A) to repay
unsubordinated Indebtedness of Viatel owed to a Person other than Viatel or a
Restricted Subsidiary, (B) to invest in the manner described in clause (i)(B) of
the "Limitation on Asset Sales" covenant or (C) for working capital purposes or
(g) other transfers of indefeasible rights of use or dark fiber.
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"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether outstanding on April 8,
1998 or issued thereafter, including, without limitation, all Common Stock and
Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the discounted present value of the
rental obligations under a Capitalized Lease.
"Change of Control" means such time as (i) a "person" or a "group" (within
the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becomes the
ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of
more than 50% of the total voting power of the Voting Stock of Viatel on a fully
diluted basis; or (ii) individuals who on April 8, 1998 constitute the Board of
Directors (together with any new directors whose election by the Board of
Directors or whose nomination to the Board of Directors for election by Viatel's
stockholders was approved by a vote of at least two-thirds of the members of the
Board of Directors then in office who either were members of the Board of
Directors on April 8, 1998 or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
members of the Board of Directors then in office.
"Consolidated EBITDA" means, for any period, Adjusted Consolidated Net
Income for such period plus, to the extent such amount was deducted in
calculating such Adjusted Consolidated Net Income, (i) Consolidated Interest
Expense, (ii) income taxes, (iii) depreciation expense, (iv) amortization
expense and (v) all other non-cash items reducing Adjusted Consolidated Net
Income (other than items that will require cash payments and for which an
accrual or reserve is, or is required by GAAP to be, made), less all non-cash
items increasing Adjusted Consolidated Net Income, all as determined on a
consolidated basis for Viatel and its Restricted Subsidiaries in conformity with
GAAP; PROVIDED that, if any Restricted Subsidiary is not a Wholly Owned
Restricted Subsidiary, Consolidated EBITDA shall be reduced (to the extent not
otherwise reduced in accordance with GAAP) by an amount equal to (A) the amount
of the Adjusted Consolidated Net Income attributable to such Restricted
Subsidiary multiplied by (B) the percentage ownership interest in the income of
such Restricted Subsidiary not owned on the last day of such period by Viatel or
any of its Restricted Subsidiaries.
"Consolidated Interest Expense" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting); all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing; the net costs associated with Interest Rate Agreements; and interest
in respect of Indebtedness that is Guaranteed or secured by Viatel or any of its
Restricted Subsidiaries, and all but the principal component of rentals in
respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid
or to be accrued by Viatel and its Restricted Subsidiaries during such period.
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"Consolidated Leverage Ratio" means, on any Transaction Date, the ratio of
(i) the aggregate amount of Indebtedness of Viatel and its Restricted
Subsidiaries on a consolidated basis outstanding on such Transaction Date to
(ii) four times Consolidated EBITDA for the then most recent fiscal quarter for
which financial statements of Viatel have been filed with the Commission or
provided to the Trustee pursuant to the "Commission Reports and Reports to
Holders" covenant described below; PROVIDED that, in making the foregoing
calculation, (A) PRO FORMA effect shall be given to the Incurrence or repayment
of any Indebtedness to be Incurred or repaid on the Transaction Date; (B) PRO
FORMA effect shall be given to Asset Dispositions and Asset Acquisitions
(including giving PRO FORMA effect to the application of proceeds of any Asset
Disposition) that occur from the beginning of the then most recent four fiscal
quarters through the Transaction Date (the "Reference Period"), as if they had
occurred and such proceeds had been applied on the first day of such Reference
Period; and (C) PRO FORMA effect shall be given to asset dispositions and asset
acquisitions (including giving PRO FORMA effect to the application of proceeds
of any asset disposition) that have been made by any Person that has become a
Restricted Subsidiary or has been merged with or into Viatel or any Restricted
Subsidiary during such Reference Period and that would have constituted Asset
Dispositions or Asset Acquisitions had such transactions occurred when such
Person was a Restricted Subsidiary as if such asset dispositions or asset
acquisitions were Asset Dispositions or Asset Acquisitions that occurred on the
first day of such Reference Period; PROVIDED that to the extent that clause (B)
or (C) of this sentence requires that PRO FORMA effect be given to an Asset
Acquisition or Asset Disposition, such PRO FORMA calculation shall be based upon
the four full fiscal quarters immediately preceding the Transaction Date of the
Person, or division or line of business of the Person, that is acquired or
disposed of for which financial information is available.
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of Viatel and its Restricted Subsidiaries (which
shall be as of a date not more than 90 days prior to the date of such
computation, and which shall not take into account Unrestricted Subsidiaries),
including, without limitation, the respective amounts reported on such balance
sheet attributable to Preferred Stock, less any amounts attributable to
Disqualified Stock or any equity security convertible into or exchangeable for
Indebtedness, the cost of treasury stock and the principal amount of any
promissory notes receivable from the sale of the Capital Stock of Viatel or any
of its Restricted Subsidiaries, each item to be determined in conformity with
GAAP (excluding the effects of foreign currency exchange adjustments under
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 52).
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is (i) required to be redeemed prior to
the Stated Maturity of the Notes, (ii) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the Notes or (iii) convertible into or exchangeable for Capital Stock
referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Stated Maturity of the Notes; PROVIDED that any Capital
Stock that would not constitute Disqualified Stock but for provisions thereof
giving holders thereof the right to require such Person to repurchase or redeem
such Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the Stated Maturity of the Notes shall not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable to the holders of such
Capital Stock than the provisions contained in "Limitation on Asset Sales" and
"Repurchase of Notes upon a Change of Control" covenants described below and
such Capital Stock, or the agreements or instruments governing the redemption
rights thereof, specifically provides that such Person will not repurchase or
redeem any such stock pursuant to such provision prior to
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Viatel's repurchase of such Notes as are required to be repurchased pursuant to
the "Limitation on Asset Sales" and "Repurchase of Notes upon a Change of
Control" covenants described below.
"DM Pledge Account" means an account established with the Trustee pursuant
to the terms of the Pledge Agreement for the deposit of the DM Pledged
Securities purchased by Viatel with a portion of the proceeds from the sale of
the Existing 11.15% Notes.
"DM Pledged Securities" means the securities originally purchased by Viatel
with a portion of the proceeds from the sale of the Existing 11.15% Notes,
consisting of Government Securities, deposited in the DM Pledge Account, all in
accordance with the terms of the Pledge Agreement.
"Existing Stockholder Agreements" means the Stock Purchase Agreement, dated
as of September 30, 1993, between the Company and S-C V-Tel, the Stock Purchase
Agreement dated as of April 5, 1994, between the Company and COMSAT, the S-C
V-Tel Shareholders' Agreement and the COMSAT Shareholders' Agreement, in each
case, any amendments to such agreements.
"fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors, whose determination shall be conclusive if
evidenced by a Board Resolution; PROVIDED that for purposes of clause (viii) of
the second paragraph of the "Limitation on Indebtedness" covenant, (x) the fair
market value of any security registered under the Exchange Act shall be the
average of the closing prices, regular way, of such security for the 20
consecutive trading days immediately preceding the sale of Capital Stock and (y)
in the event the aggregate fair market value of any other property (other than
cash or cash equivalents) received by Viatel exceeds $30 million, the fair
market value of such property shall be determined by a nationally recognized
investment banking firm or a nationally recognized firm having expertise in the
specific area which is the subject of such determination and set forth in their
written opinion which shall be delivered to the Trustee.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of April 8, 1998, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations contained or referred to in
the Indentures shall be computed in conformity with GAAP applied on a consistent
basis, except that calculations made for purposes of determining compliance with
the terms of the covenants and with other provisions of the Indentures shall be
made without giving effect to (i) the amortization or write off of any expenses
incurred in connection with the offering of the Units and related Tender Offer
(ii) except as otherwise provided, the amortization of any amounts required or
permitted by Accounting Principles Board Opinion Nos. 16 and 17.
"Government Securities" means (i) in connection with the U.S. Pledged
Securities, the direct obligations of, obligations fully guaranteed by, or
participations in pools consisting solely of obligations of or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States of America is
pledged and which are not callable or redeemable at the option of the issuer
thereof and (ii) in connection with the DM Pledged Securities, the direct
obligations of, obligations fully guaranteed by, or participations in pools
consisting solely of obligations of or obligations guranteed by, the Federal
Republic of Germany for the payment of which guarantee or obligations the full
faith and credit of the Federal Republic of Germany is pledged and which are not
callable or redeemable at the option of the issuer thereof.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness of
such other Person (whether
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arising by virtue of partnership arrangements, or by agreements to keep-well, to
purchase assets, goods, securities or services (unless such purchase
arrangements are on arm's-length terms and are entered into in the ordinary
course of business), to take-or-pay, or to maintain financial statement
conditions or otherwise) or (ii) entered into for purposes of assuring in any
other manner the obligee of such Indebtedness of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in part);
PROVIDED that the term "Guarantee" shall not include endorsements for collection
or deposit in the ordinary course of business. The term "Guarantee" used as a
verb has a corresponding meaning.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an "Incurrence" of Acquired Indebtedness; PROVIDED that neither the
accrual of interest nor the accretion of original issue discount shall be
considered an Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto, but excluding obligations with
respect to letters of credit (including trade letters of credit) securing
obligations (other than obligations described in (i) or (ii) above or (v), (vi)
or (vii) below) entered into in the ordinary course of business of such Person
to the extent such letters of credit are not drawn upon or, if drawn upon, to
the extent such drawing is reimbursed no later than the third Business Day
following receipt by such Person of a demand for reimbursement), (iv) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services, which purchase price is due more than six months after the
date of placing such property in service or taking delivery and title thereto or
the completion of such services, except Trade Payables, (v) all Capitalized
Lease Obligations of such Person, (vi) all Indebtedness of other Persons secured
by a Lien on any asset of such Person, whether or not such Indebtedness is
assumed by such Person; PROVIDED that the amount of such Indebtedness shall be
the lesser of (A) the fair market value of such asset at such date of
determination and (B) the amount of such Indebtedness, (vii) all Indebtedness of
other Persons Guaranteed by such Person to the extent such Indebtedness is
Guaranteed by such Person and (viii) to the extent not otherwise included in
this definition, obligations under Currency Agreements and Interest Rate
Agreements. The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations, as described
above, and the maximum liability at such time with respect to contingent
obligations upon the occurrence of the contingency giving rise to the
obligation, which, in the case of a Guarantee, shall be the outstanding balance
of the Guaranteed Indebtedness, PROVIDED (A) that the amount outstanding at any
time of any Indebtedness issued with original issue discount is the face amount
of such Indebtedness less the remaining unamortized portion of the original
issue discount of such Indebtedness at the time of its issuance as determined in
conformity with GAAP, (B) that money borrowed and set aside at the time of the
Incurrence of any Indebtedness in order to prefund the payment of the interest
on such Indebtedness shall not be deemed to be "Indebtedness" so long as such
money is held to secure the payment of such interest and (C) that Indebtedness
shall not include any liability for federal, state, local or other taxes.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee or
similar arrangement; but excluding extensions of credit to customers in the
ordinary course of business that are, in conformity with GAAP, recorded as
accounts receivable on the balance sheet of Viatel or its Restricted
Subsidiaries) or capital contribution to (by means of any transfer of cash or
other property to others or any payment for property or services for
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the account or use of others), or any purchase or acquisition of Capital Stock,
bonds, notes, debentures or other similar instruments issued by, such Person and
shall include (i) the designation of a Restricted Subsidiary as an Unrestricted
Subsidiary and (ii) the fair market value of the Capital Stock (or any other
Investment), held by Viatel or any of its Restricted Subsidiaries, of (or in)
any Person that has ceased to be a Restricted Subsidiary, including without
limitation, by reason of any transaction permitted by clause (iii) of the
"Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries" covenant; PROVIDED that the fair market value of the Investment
remaining in any Person that has ceased to be a Restricted Subsidiary shall not
exceed the aggregate amount of Investments previously made in such Person valued
at the time such Investments were made less the net reduction of such
Investments. For purposes of the definition of "Unrestricted Subsidiary" and the
"Limitation on Restricted Payments" covenant described below, (i) "Investment"
shall include the fair market value of the assets (net of liabilities (other
than liabilities to Viatel or any of its Restricted Subsidiaries)) of any
Restricted Subsidiary at the time that such Restricted Subsidiary is designated
an Unrestricted Subsidiary, (ii) the fair market value of the assets (net of
liabilities (other than liabilities to Viatel or any of its Restricted
Subsidiaries)) of any Unrestricted Subsidiary at the time that such Unrestricted
Subsidiary is designated a Restricted Subsidiary shall be considered a reduction
in outstanding Investments and (iii) any property transferred to or from an
Unrestricted Subsidiary shall be valued at its fair market value at the time of
such transfer.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or other
title retention agreement or lease in the nature thereof or any agreement to
give any security interest).
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed or
sold with recourse to Viatel or any Restricted Subsidiary) and proceeds from the
conversion of other property received when converted to cash or cash
equivalents, net of (i) brokerage commissions and other fees and expenses
(including fees and expenses of counsel and investment bankers) related to such
Asset Sale, (ii) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without regard
to the consolidated results of operations of Viatel and its Restricted
Subsidiaries, taken as a whole, (iii) payments made or required to be made to
repay Indebtedness or any other obligation outstanding at the time of such Asset
Sale that either (A) is secured by a Lien on the property or assets sold or (B)
is required to be paid as a result of such sale, (iv) payments made or required
to be made to Persons having a beneficial interests in the assets subject to the
Asset Sale, and (v) appropriate amounts to be provided by Viatel or any
Restricted Subsidiary as a reserve against any liabilities associated with such
Asset Sale, including, without limitation, pension and other post-employment
benefit liabilities, liabilities related to environmental matters and
liabilities under any indemnification obligations associated with such Asset
Sale, all as determined in conformity with GAAP and (b) with respect to any
issuance or sale of Capital Stock, the proceeds of such issuance or sale in the
form of cash or cash equivalents, including payments in respect of deferred
payment obligations (to the extent corresponding to the principal, but not
interest, component thereof) when received in the form of cash or cash
equivalents (except to the extent such obligations are financed or sold with
recourse to Viatel or any Restricted Subsidiary) and proceeds from the
conversion of other property received when converted to cash or cash
equivalents, net of attorney's fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees incurred in connection with such issuance or sale and net of taxes
paid or payable as a result thereof.
"Offer to Purchase" means an offer to purchase Notes by Viatel from the
Holders commenced by mailing a notice to the Trustee and each Holder stating:
(i) the covenant pursuant to which the offer is being made and that all Notes
validly tendered will be accepted for payment on a PRO RATA basis; (ii) the
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purchase price and the date of purchase (which shall be a Business Day no
earlier than 30 days nor later than 60 days from the date such notice is mailed)
(the "Payment Date"); (iii) that any Note not tendered will continue to accrue
interest (or original issue discount) pursuant to its terms; (iv) that, unless
Viatel defaults in the payment of the purchase price, any Note accepted for
payment pursuant to the Offer to Purchase shall cease to accrue interest (or
original issue discount) on and after the Payment Date; (v) that Holders
electing to have a Note purchased pursuant to the Offer to Purchase will be
required to surrender the Note, together with the form entitled "Option of the
Holder to Elect Purchase" on the reverse side of the Note completed, to the
Paying Agent at the address specified in the notice prior to the close of
business on the Business Day immediately preceding the Payment Date; (vi) that
Holders will be entitled to withdraw their election if the Paying Agent
receives, not later than the close of business on the third Business Day
immediately preceding the Payment Date, a telegram, facsimile transmission or
letter setting forth the name of such Holder, the principal amount at maturity
of Notes delivered for purchase and a statement that such Holder is withdrawing
his election to have such Notes purchased; and (vii) that Holders whose Notes
are being purchased only in part will be issued new Notes equal in principal
amount to the unpurchased portion of the Notes surrendered; PROVIDED that each
Note purchased and each new Note issued shall be in a principal amount at
maturity of $1,000 or DM 1,000 or an integral multiple thereof. On the Payment
Date, Viatel shall (i) accept for payment on a PRO RATA basis Notes or portions
thereof tendered pursuant to an Offer to Purchase; (ii) deposit with the Paying
Agent money sufficient to pay the purchase price of all Notes or portions
thereof so accepted; and (iii) deliver, or cause to be delivered, to the Trustee
all Notes or portions thereof so accepted together with an Officers' Certificate
specifying the Notes or portions thereof accepted for payment by Viatel. The
Paying Agent shall promptly mail to the Holders of Notes so accepted payment in
an amount equal to the purchase price, and the Trustee shall promptly
authenticate and mail to such Holders a new Note equal in principal amount at
maturity to any unpurchased portion of the Note surrendered; PROVIDED that each
Note purchased and each new Note issued shall be in a principal amount at
maturity of $1,000 or DM 1,000 or an integral multiple thereof. Viatel will
publicly announce the results of an Offer to Purchase as soon as practicable
after the Payment Date. The Trustee shall act as the Paying Agent for an Offer
to Purchase. Viatel will comply with Rule 14e-1 under the Exchange Act and any
other securities laws and regulations thereunder to the extent such laws and
regulations are applicable, in the event that Viatel is required to repurchase
Notes pursuant to an Offer to Purchase.
"Permitted Investment" means (i) an Investment in Viatel or a Restricted
Subsidiary or a Person which will, upon the making of such Investment, become a
Restricted Subsidiary or be merged or consolidated with or into or transfer or
convey all or substantially all its assets to, Viatel or a Restricted
Subsidiary; PROVIDED that such person's primary business is related, ancillary
or complementary to the businesses of Viatel or any of its Restricted
Subsidiaries on the date of such Investment; (ii) Temporary Cash Investments;
(iii) payroll, travel and similar advances to cover matters that are expected at
the time of such advances ultimately to be treated as expenses in accordance
with GAAP; (iv) Investments received in the bankruptcy or reorganization of a
Person or any exchange of such Investment with the issuer thereof or taken in
settlement of or other resolution of claims or disputes or acquired as the
result of foreclosure of any secured Investment, and, in each case, extensions,
modifications and renewal thereof; (v) Investments in prepaid expenses,
negotiable instruments held for collection and lease, utility and worker's
compensation, performance and other similar deposits; (vi) Interest Rate
Agreements and Currency Agreements designed solely to protect Viatel or its
Restricted Subsidiaries against fluctuations in interest rates or foreign
currency exchange rates; (vii) loans or advances to officers or employees of
Viatel or any Restricted Subsidiary that do not in the aggregate exceed $1
million at any time outstanding; (viii) investments consisting of securities
issued by or beneficial interests in a special purpose entity referred to in
clause (f) of the definition of "Asset Sale" and which are received in exchange
for assets that are transferred by Viatel or a Restricted Subsidiary to such
special purpose entity and used for the purpose referred to therein and (ix)
Investments as a result of consideration received in connection with an Asset
Sale made in compliance with the "Limitation on Asset Sales" covenant.
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"Permitted Joint Venture" means any joint venture between Viatel or any
Restricted Subsidiary and (i) any Person other than a Subsidiary, engaged in the
provision or sale of telecommunications services or (ii) any Person engaged as
an independent sale representative of Viatel; PROVIDED that prior to making any
Investment in such a Person, Viatel's Board of Directors shall have determined
that such Investment fits Viatel's strategic plan and is on terms that are fair
and reasonable to Viatel.
"Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims not yet subject to penalty or that are being contested in good
faith by appropriate legal proceedings promptly instituted and diligently
conducted and for which a reserve or other appropriate provision, if any, as
shall be required in conformity with GAAP shall have been made; (ii) statutory
and common law Liens of landlords and carriers, warehousemen, mechanics,
suppliers, materialmen, repairmen or other similar Liens arising in the ordinary
course of business and with respect to amounts not yet delinquent or being
contested in good faith by appropriate legal proceedings promptly instituted and
diligently conducted and for which a reserve or other appropriate provision, if
any, as shall be required in conformity with GAAP shall have been made; (iii)
Liens incurred or deposits made in the ordinary course of business in connection
with workers' compensation, unemployment insurance and other types of social
security; (iv) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory or regulatory obligations, bankers'
acceptances, surety and appeal bonds, government contracts, performance and
return-of-money bonds and other obligations of a similar nature incurred in the
ordinary course of business (exclusive of obligations for the payment of
borrowed money); (v) easements, rights-of-way, municipal and zoning ordinances
and similar charges, encumbrances, title defects or other irregularities that do
not materially interfere with the ordinary course of business of Viatel or any
of its Restricted Subsidiaries; (vi) Liens (including extensions and renewals
thereof) upon real or personal (whether tangible or intangible) property
acquired after April 8, 1998; PROVIDED that (a) such Lien is created solely for
the purpose of securing Indebtedness Incurred, in accordance with the
"Limitation on Indebtedness" covenant described below, to finance or refinance
the cost (including the cost of design, development, acquisition, construction,
installation, improvement, transportation or integration) of the item or related
group of items of property or assets subject thereto or the business in which
such property or assets are used and such Lien is created prior to, at the time
of or within eighteen months after the later of the acquisition, the completion
of (except in the case of refinancing) construction or the commencement of full
operation of such property, (b) the principal amount of the Indebtedness secured
by such Lien does not exceed 100% of such cost and (c) any such Lien shall not
extend to or cover any property or assets other than such item or group of items
of property or assets and any improvements on such item; (vii) leases or
subleases granted to others that do not materially interfere with the ordinary
course of business of Viatel and its Restricted Subsidiaries, taken as a whole;
(viii) Liens encumbering property or assets under construction arising from
progress or partial payments by a customer of Viatel or its Restricted
Subsidiaries relating to such property or assets; (ix) any interest or title of
a lessor in the property subject to any Capitalized Lease or operating lease;
(x) Liens arising from filing Uniform Commercial Code financing statements
regarding leases; (xi) Liens on property of, or on shares of Capital Stock or
Indebtedness of, any Person existing at the time such Person becomes, or becomes
a part of, any Restricted Subsidiary; PROVIDED that such Liens do not extend to
or cover any property or assets of Viatel or any Restricted Subsidiary other
than the property or assets acquired; (xii) Liens in favor of Viatel or any
Restricted Subsidiary; (xiii) Liens arising from the rendering of a final
judgment or order against Viatel or any Restricted Subsidiary that does not give
rise to an Event of Default; (xiv) Liens securing reimbursement obligations with
respect to letters of credit that encumber documents and other property relating
to such letters of credit and the products and proceeds thereof; (xv) Liens in
favor of customs and revenue authorities arising as a matter of law to secure
payment of customs duties in connection with the importation of goods; (xvi)
Liens encumbering customary initial deposits and margin deposits, and other
Liens that are within the general parameters customary in the industry and
incurred in the ordinary course
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of business, in each case, securing Indebtedness under Interest Rate Agreements
and Currency Agreements and forward contracts, options, future contracts,
futures options or similar agreements or arrangements designed solely to protect
Viatel or any of its Restricted Subsidiaries from fluctuations in interest
rates, currencies or the price of commodities; (xvii) Liens arising out of
conditional sale, title retention, consignment or similar arrangements for the
sale of goods entered into by Viatel or any of its Restricted Subsidiaries in
the ordinary course of business in accordance with the past practices of Viatel
and its Restricted Subsidiaries prior to April 8, 1998; (xviii) Liens on or
sales of receivables or other rights to payment; (xix) Liens secured with assets
that have a fair market value not in excess of 15% of Adjusted Consolidated Net
Tangible Assets when such Liens are Incurred; and (xx) any extension, renewal,
or replacement (or successive extensions, renewals, or replacements) in whole or
in part, of Liens described in clauses (i) through (xix) above.
"Permitted Wholesale Consortium" means any Person in which Viatel Invests
for the principal purpose of leasing or otherwise acquiring transmission rights
with respect to long distance telecommunications; PROVIDED that prior to making
any Investment in such a Person, Viatel's Board of Directors shall have
determined that such Investment will afford Viatel greater economic benefits
than it could otherwise obtain from other sources of transmission rights.
"Pledge Accounts" means the U.S. Pledge Account and the DM Pledge Account.
"Pledge Agreement" means the Collateral Pledge and Security Agreement, dated
as of the date of the Indentures, made by Viatel in favor of the Trustee,
governing the disbursement of funds from the Pledge Accounts, as such agreement
may be amended, restated, supplemented or otherwise modified from time to time.
"Public Equity Offering" means an underwritten primary public offering of
Common Stock of Viatel pursuant to an effective registration statement under the
Securities Act.
"Restricted Subsidiary" means any Subsidiary of Viatel other than an
Unrestricted Subsidiary.
"Significant Subsidiary" means, at any date of determination, any Restricted
Subsidiary that, together with its Subsidiaries, (i) for the most recent fiscal
year of Viatel, accounted for more than 10% of the consolidated revenues of
Viatel and its Restricted Subsidiaries or (ii) as of the end of such fiscal
year, was the owner of more than 10% of the consolidated assets of Viatel and
its Restricted Subsidiaries, all as set forth on the most recently available
consolidated financial statements of Viatel for such fiscal year.
"S&P" means Standard & Poor's Ratings Services and its successors.
"Specified Date" means any Redemption Date, any Payment Date for an Offer to
Purchase or any date on which the Notes first become due and payable after an
Event of Default.
"Stated Maturity" means, (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (ii) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
"Strategic Subordinated Indebtedness" means Indebtedness of Viatel Incurred
to finance the acquisition of a Person engaged in a business that is related,
ancillary or complementary to the business conducted by Viatel or any of its
Restricted Subsidiaries, which Indebtedness by its terms, or by the terms of any
agreement or instrument pursuant to which such Indebtedness is Incurred, (i) is
expressly made subordinate in right of payment to the Notes and (ii) provides
that no payment of principal, premium or interest on, or any other payment with
respect to, such Indebtedness may be made prior to the payment in full of all of
Viatel's obligations under the Notes; PROVIDED that such Indebtedness may
provide for and be repaid at any time from the proceeds of a capital
contribution, the sale of Capital Stock (other than Disqualified Stock) of
Viatel, or other Strategic Subordinated Indebtedness Incurred, after the
Incurrence of such Indebtedness.
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"Subsidiary" means, with respect to any Person, any corporation, association
or other business entity of which more than 50% of the voting power of the
outstanding Voting Stock is owned, directly or indirectly, by such Person and
one or more other Subsidiaries of such Person.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States of America or any agency thereof or obligations
fully and unconditionally guaranteed by the United States of America or any
agency thereof, (ii) time deposit accounts, eurodollar time deposits, bankers'
acceptances, certificates of deposit and money market deposits, in each case
maturing within one year of the date of acquisition thereof and issued by a bank
or trust company which is organized under the laws of the United States of
America, any state thereof or any foreign country recognized by the United
States of America, and which bank or trust company has capital, surplus and
undivided profits aggregating in excess of $50 million (or the foreign currency
equivalent thereof) and has outstanding debt which is rated "A" (or such similar
equivalent rating) or higher by at least one nationally recognized statistical
rating organization (as defined in Rule 436 under the Securities Act) or any
money-market fund sponsored by a registered broker dealer or mutual fund
distributor, (iii) repurchase obligations with a term of not more than 30 days
for underlying securities of the types described in clause (i) above entered
into with a bank meeting the qualifications described in clause (ii) above, (iv)
commercial paper, maturing not more than one year after the date of acquisition,
issued by a corporation (other than an Affiliate of Viatel) organized and in
existence under the laws of the United States of America, any state thereof or
any foreign country recognized by the United States of America with a rating at
the time as of which any investment therein is made of "P-2" (or higher)
according to Moody's or "A-2" (or higher) according to S&P, (v) securities with
maturities of one year or less from the date of acquisition issued or fully and
unconditionally guaranteed by any state, commonwealth or territory of the United
States of America, or by any political subdivision or taxing authority thereof,
and rated at least "A" by S&P or Moody's, and (vi) shares or other interests in
an investment company the assets of which consist solely of (A) securities of
the type described in clauses (i) through (v) above and (B) mortgage-backed
securities rated AAA or the equivalent by S&P, Moody's or Fitch Investor
Services, Inc.
"Trade Payables" means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services.
"Transaction Date" means, with respect to the Incurrence of any Indebtedness
by Viatel or any of its Restricted Subsidiaries, the date such Indebtedness is
to be Incurred and, with respect to any Restricted Payment, the date such
Restricted Payment is to be made.
"Unrestricted Subsidiary" means (i) any Subsidiary of Viatel that at the
time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below; and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary (including any newly acquired or newly formed Subsidiary of Viatel)
to be an Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock
of, or owns or holds any Lien on any property of, Viatel or any Restricted
Subsidiary; PROVIDED that (A) any Guarantee by Viatel or any Restricted
Subsidiary of any Indebtedness of the Subsidiary being so designated shall be
deemed an "Incurrence" of such Indebtedness and an "Investment" by Viatel or
such Restricted Subsidiary (or both, if applicable) at the time of such
designation; (B) either (I) the Subsidiary to be so designated has total assets
of $1,000 or less or (II) if such Subsidiary has assets greater than $1,000,
such designation would be permitted under the "Limitation on Restricted
Payments" covenant described below and (C) if applicable, the Incurrence of
Indebtedness and the Investment referred to in clause (A) of this proviso would
be permitted under the "Limitation on Indebtedness" and "Limitation on
Restricted Payments" covenants described below. The Board of Directors may
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; PROVIDED
that (i) no Default or Event of Default shall have occurred and be continuing at
the time of or after giving effect to such designation and (ii) all Liens and
Indebtedness of such Unrestricted Subsidiary outstanding immediately after such
designation would, if Incurred at such time, have been permitted to be Incurred
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(and shall be deemed to have been Incurred) for all purposes of the Indentures.
Any such designation by the Board of Directors shall be evidenced to the Trustee
by promptly filing with the Trustee a copy of the Board Resolution giving effect
to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing provisions.
"U.S. Pledge Account" means an account established with the Trustee pursuant
to the terms of the Pledge Agreement for the deposit of the U.S. Pledged
Securities purchased by Viatel with a portion of the proceeds from the sale of
the Existing 11.25% Notes.
"U.S. Pledged Securities" means the securities originally purchased by
Viatel with a portion of the proceeds from the sale of the Existing 11.25%
Notes, consisting of Government Securities, deposited in the U.S. Pledge
Account, all in accordance with the terms of the Pledge Agreement.
"Voting Stock" means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other than
any director's qualifying shares or Investments by foreign nationals mandated by
applicable law) by such Person or one or more Wholly Owned Subsidiaries of such
Person.
COVENANTS
LIMITATION ON INDEBTEDNESS
(a) Viatel will not, and will not permit any of its Restricted Subsidiaries
to, Incur any Indebtedness (other than the Notes and Indebtedness existing on
April 8, 1998); PROVIDED that Viatel may Incur Indebtedness if, after giving
effect to the Incurrence of such Indebtedness and the receipt and application of
the proceeds therefrom, the Consolidated Leverage Ratio would be greater than
zero and less than 6:1.
Notwithstanding the foregoing, Viatel and any Restricted Subsidiary (except
as specified below) may Incur each and all of the following: (i) Indebtedness
outstanding at any time in an aggregate principal amount not to exceed $100
million of Indebtedness that is PARI PASSU with or subordinated to the Notes and
$150 million of Indebtedness that is subordinated to the Notes, less any amount
of such Indebtedness permanently repaid as provided under the "Limitation on
Asset Sales" covenant described below; (ii) Indebtedness owed (A) by any
Restricted Subsidiary to Viatel or another Restricted Subsidiary or (B) by
Viatel to any Restricted Subsidiary; PROVIDED that any event which results in
any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any
subsequent transfer of such Indebtedness (other than to Viatel or another
Restricted Subsidiary) shall be deemed, in each case, to constitute an
Incurrence of such Indebtedness not permitted by this clause (ii); (iii)
Indebtedness issued in exchange for, or the net proceeds of which are used to
repay, redeem, defease, refinance, refund, extend, renew, replace, discharge or
otherwise retire any then outstanding Indebtedness (other than Indebtedness
Incurred under clause (i), (ii), (iv), (vi), (viii), (xi) or (xii) of this
paragraph) and any refinancings thereof in an amount not to exceed the amount so
refinanced or refunded (plus premiums, penalties, accrued interest, fees and
expenses); PROVIDED that Indebtedness the proceeds of which are used to
refinance or refund the Notes or Indebtedness that is PARI PASSU with, or
subordinated in right of payment to, the Notes shall only be permitted under
this clause (iii) if (A) in case the Notes are refinanced in part or the
Indebtedness to be refinanced is PARI PASSU with the Notes, such new
Indebtedness, by its terms or by the terms of any agreement or instrument
pursuant to which such new Indebtedness is outstanding, is expressly made PARI
PASSU with, or subordinate in right of payment to, the remaining Notes, (B) in
case the Indebtedness to be refinanced is subordinated in right of payment to
the Notes, such new Indebtedness, by its terms or by the terms of any agreement
or instrument pursuant to which such new Indebtedness is issued or remains
outstanding, is expressly made subordinate in right of payment to the Notes at
least to the extent that the Indebtedness to be refinanced is subordinated to
the Notes and (C) such new Indebtedness, determined as of the date of Incurrence
of such
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new Indebtedness, does not mature prior to the Stated Maturity of the
Indebtedness to be refinanced or refunded, and the Average Life of such new
Indebtedness is at least equal to the remaining Average Life of the Indebtedness
to be refinanced or refunded; and PROVIDED FURTHER that in no event may
Indebtedness of Viatel be refinanced by means of any Indebtedness of any
Restricted Subsidiary pursuant to this clause (iii); (iv) Indebtedness (A) in
respect of performance, surety or appeal bonds provided in the ordinary course
of business, (B) under Currency Agreements and Interest Rate Agreements;
provided that such agreements (a) are designed solely to protect Viatel or any
of its Restricted Subsidiaries against fluctuations in foreign currency exchange
rates or interest rates and (b) do not increase the Indebtedness of the obligor
outstanding at any time other than as a result of fluctuations in foreign
currency exchange rates or interest rates or by reason of fees, indemnities and
compensation payable thereunder; and (C) arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations, or from
Guarantees or letters of credit, surety bonds or performance bonds securing any
obligations of Viatel or any of its Restricted Subsidiaries pursuant to such
agreements, in any case Incurred in connection with the disposition of any
business, assets or Restricted Subsidiary (other than Guarantees of Indebtedness
Incurred by any Person acquiring all or any portion of such business, assets or
Restricted Subsidiary for the purpose of financing such acquisition), in a
principal amount not to exceed the gross proceeds actually received by Viatel or
any Restricted Subsidiary in connection with such disposition; (v) Indebtedness
of Viatel, to the extent the net proceeds thereof are promptly (A) used to
purchase Notes tendered in an Offer to Purchase made as a result of a Change in
Control or (B) deposited to defease the Notes as described below under
"Defeasance"; (vi) Guarantees of the Notes and Guarantees of Indebtedness of
Viatel by any Restricted Subsidiary provided the Guarantee of such Indebtedness
is permitted by and made in accordance with the "Limitation on Issuance of
Guarantees by Restricted Subsidiaries" covenant described below; (vii)
Indebtedness (including Guarantees) Incurred to finance the cost (including the
cost of design, development, acquisition, construction, installation,
improvement, transportation or integration) to acquire equipment, inventory or
network assets (including acquisitions by way of Capitalized Lease and
acquisitions of the Capital Stock of a Person that becomes a Restricted
Subsidiary to the extent of the fair market value of the equipment, inventory or
network assets so acquired) by Viatel or a Restricted Subsidiary after April 8,
1998; (viii) Indebtedness of Viatel not to exceed, at any one time outstanding,
two times (A) the Net Cash Proceeds received by Viatel after April 8, 1998 as a
capital contribution or from the issuance and sale of its Capital Stock (other
than Disqualified Stock) to a Person that is not a Subsidiary of Viatel, to the
extent (I) such capital contribution or Net Cash Proceeds have not been used
pursuant to clause (C)(2) of the first paragraph or clause (iii), (iv), (vi) or
(vii) of the second paragraph of the "Limitation on Restricted Payments"
covenant described below to make a Restricted Payment and (II) if such capital
contribution or Net Cash Proceeds are used to consummate a transaction pursuant
to which Viatel Incurs Acquired Indebtedness, the amount of such Net Cash
Proceeds exceeds one-half of the amount of Acquired Indebtedness so Incurred and
(B) 80% of the fair market value of property (other than cash and cash
equivalents) received by Viatel after April 8, 1998 from the sale of its Capital
Stock (other than Disqualified Stock) to a Person that is not a Subsidiary of
Viatel, to the extent (I) such capital contribution or sale of Capital Stock has
not been used pursuant to clause (iii), (iv), (vi) or (vii) of the second
paragraph of the "Limitation on Restricted Payments" covenant described below to
make a Restricted Payment and (II) if such capital contribution or Capital Stock
is used to consummate a transaction pursuant to which Viatel Incurs Acquired
Indebtedness, 80% of the fair market value of the property received exceeds
one-half of the amount of Acquired Indebtedness so Incurred PROVIDED that such
Indebtedness does not mature prior to the Stated Maturity of the Notes and has
an Average Life longer than the Notes; (ix) Acquired Indebtedness; (x) Strategic
Subordinated Indebtedness; (xi) Indebtedness in respect of bankers' acceptance
and letters of credit, all in the ordinary course of business, in an aggregate
amount outstanding at any time of up to $10 million; (xii) Indebtedness arising
from the honoring by a bank or other financial institution of a check, or
similar instrument inadvertently (except in the case of daylight overdrafts)
drawn against insufficient funds in the ordinary course of business, PROVIDED
that such Indebtedness is extinguished within three business days of Incurrence.
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(b) Notwithstanding any other provision of this "Limitation on Indebtedness"
covenant, the maximum amount of Indebtedness that Viatel or a Restricted
Subsidiary may Incur pursuant to this "Limitation on Indebtedness" covenant
shall not be deemed to be exceeded, with respect to any outstanding Indebtedness
due solely to the result of fluctuations in the exchange rates of currencies.
(c) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, (1) Guarantees, Liens or obligations
with respect to letters of credit supporting Indebtedness otherwise included in
the determination of such particular amount shall not be included and (2) any
Liens granted pursuant to the equal and ratable provisions referred to in the
"Limitation on Liens" covenant described below shall not be treated as
Indebtedness. For purposes of determining compliance with this "Limitation on
Indebtedness" covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described in the above
clauses, Viatel, in its sole discretion, shall classify, and from time to time
may reclassify, such item of Indebtedness and only be required to include the
amount and type of such Indebtedness in one of such clauses.
LIMITATION ON RESTRICTED PAYMENTS
Viatel will not, and will not permit any Restricted Subsidiary to, directly
or indirectly, (i)(A) declare or pay any dividend or make any distribution on or
with respect to its Capital Stock (other than (x) dividends or distributions
payable solely in shares of its Capital Stock (other than Disqualified Stock) or
in options, warrants or other rights to acquire shares of such Capital Stock and
(y) PRO RATA dividends or distributions on Common Stock of Restricted
Subsidiaries held by minority stockholders) held by Persons other than Viatel or
any of its Restricted Subsidiaries or (B) pay any cash interest on the
Subordinated Convertible Debentures, (ii) purchase, redeem, retire or otherwise
acquire for value any shares of Capital Stock of (A) Viatel or an Unrestricted
Subsidiary (including options, warrants or other rights to acquire such shares
of Capital Stock) held by any Person or (B) a Restricted Subsidiary (including
options, warrants or other rights to acquire such shares of Capital Stock) held
by any Affiliate of Viatel (other than a Wholly Owned Restricted Subsidiary) or
any holder (or any Affiliate of such holder) of 5% or more of the Capital Stock
of Viatel, (iii) make any voluntary or optional principal payment, or voluntary
or optional redemption, repurchase, defeasance, or other acquisition or
retirement for value, of Indebtedness of Viatel that is subordinated in right of
payment to the Notes or (iv) make any Investment (after the Closing Date), other
than a Permitted Investment, in any Person (such payments or any other actions
described in clauses (i) through (iv) above being collectively "Restricted
Payments") if, at the time of, and after giving effect to, the proposed
Restricted Payment: (A) a Default or Event of Default shall have occurred and be
continuing, (B) Viatel could not Incur at least $1.00 of Indebtedness under the
first paragraph of the "Limitation on Indebtedness" covenant or (C) the
aggregate amount of all Restricted Payments (the amount, if other than in cash,
to be determined in good faith by the Board of Directors, whose determination
shall be conclusive and evidenced by a Board Resolution) made after April 8,
1998 shall exceed the sum of (1) 50% of the aggregate amount of the Adjusted
Consolidated Net Income (or, if the Adjusted Consolidated Net Income is a loss,
minus 100% of the amount of such loss) (determined by excluding income resulting
from transfers of assets by Viatel or a Restricted Subsidiary to an Unrestricted
Subsidiary) accrued on a cumulative basis during the period (taken as one
accounting period) beginning on the first day of the fiscal quarter immediately
following April 8, 1998 and ending on the last day of the last fiscal quarter
preceding the Transaction Date for which reports have been filed with the
Commission or provided to the Trustee pursuant to the "Commission Reports and
Reports to Holders" covenant plus (2) the aggregate Net Cash Proceeds received
by Viatel after April 8, 1998 as a capital contribution or from the issuance and
sale permitted by the Indentures of its Capital Stock (other than Disqualified
Stock) to a Person who is not a Subsidiary of Viatel, including an issuance or
sale permitted by the Indentures of Indebtedness of Viatel for cash subsequent
to April 8, 1998 upon the conversion of such Indebtedness into Capital Stock
(other than Disqualified Stock) of Viatel, or from the issuance to a Person who
is not a Subsidiary of Viatel of any options, warrants or other rights to
acquire Capital Stock of Viatel (in each case, exclusive of any Disqualified
Stock or any options, warrants or other rights that are redeemable at the
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option of the holder, or are required to be redeemed, prior to the Stated
Maturity of the Notes), in each case except to the extent such Net Cash Proceeds
are used to Incur Indebtedness pursuant to clause (viii) of the second paragraph
under the "Limitation on Indebtedness" covenant, PLUS (3) an amount equal to the
net reduction in Investments (other than reductions in Permitted Investments) in
any Person resulting from payments of interest on Indebtedness, dividends,
repayments of loans or advances, or other transfers of assets, in each case to
Viatel or any Restricted Subsidiary or from the Net Cash Proceeds from the
return of capital, redemption, or sale of any such Investment (except, in each
case, to the extent any such payment or proceeds are included in the calculation
of Adjusted Consolidated Net Income), or from redesignations of Unrestricted
Subsidiaries as Restricted Subsidiaries (valued in each case as provided in the
definition of "Investments"), or from the release of any Guarantee that
constituted a Restricted Payment, to the extent of such release, not to exceed,
in each case, the amount of Investments previously made by Viatel or any
Restricted Subsidiary in such Person or Unrestricted Subsidiary.
The foregoing provision shall not be violated by reason of: (i) the payment
of any dividend within 60 days after the date of declaration thereof if, at said
date of declaration, such payment would comply with the foregoing paragraph;
(ii) the redemption, repurchase, defeasance or other acquisition or retirement
for value of Indebtedness that is subordinated in right of payment to the Notes
including premium, if any, and accrued and unpaid interest, with the proceeds
of, or in exchange for, Indebtedness Incurred under clause (iii) of the second
paragraph of part (a) of the "Limitation on Indebtedness" covenant; (iii) the
repurchase, redemption or other acquisition of Capital Stock of Viatel or an
Unrestricted Subsidiary (or options, warrants or other rights to acquire such
Capital Stock) in exchange for, or out of the proceeds of a capital contribution
or a substantially concurrent offering of, shares of Capital Stock (other than
Disqualified Stock) of Viatel (or options, warrants or other rights to acquire
such Capital Stock); (iv) the making of any principal payment or the repurchase,
redemption, retirement, defeasance or other acquisition for value of
Indebtedness of Viatel which is subordinated in right of payment to the Notes in
exchange for, or out of the proceeds of a capital contribution or a
substantially concurrent offering of, shares of the Capital Stock (other than
Disqualified Stock) of Viatel (or options, warrants or other rights to acquire
such Capital Stock); (v) payments or distributions, to dissenting stockholders
pursuant to applicable law, pursuant to or in connection with a consolidation,
merger or transfer of assets that complies with the provisions of the Indentures
applicable to mergers, consolidations and transfers of all or substantially all
of the property and assets of Viatel; (vi) Investments in any Person the primary
business of which is related, ancillary or complementary to the business of
Viatel or any of its Restricted Subsidiaries on the date of such Investments;
provided that the aggregate amount of Investments made pursuant to this clause
(vi) does not exceed $30 million at any one time outstanding; (vii) Investments
acquired in exchange for Capital Stock (other than Disqualified Stock) of Viatel
or the Net Cash Proceeds from the issuance and sale of such Capital Stock
PROVIDED that such proceeds are so used within 180 days of the receipt thereof;
(viii) the redemption, repurchase, retirement, or other acquisition of any
Capital Stock of Viatel (or options, warrants, or other rights to acquire such
Capital Stock) from an employee or former employee of Viatel or any of its
Subsidiaries (or from such person's estate, heirs, or representatives) in
connection with such employee's death, disability, or termination of employment,
PROVIDED that the aggregate amount expended pursuant to this clause does not
exceed $1 million per annum plus the cumulative amount of such per annum limit
not used in prior years and the cash proceeds from such Investments PROVIDED
that such proceeds are used within 180 days of the receipt thereof; (ix)
Investments in permitted Wholesale Consortiums and Permitted Joint Ventures not
exceeding, at the time of the Investment, the sum of (A) 10% of the consolidated
revenue of Viatel (excluding with respect to Persons in whom an equity interest
is owned by Persons other than Viatel and its Restricted Subsidiaries, the pro
rata share of such revenue attributable to such other equity holders) accrued on
a cumulative basis during the period (taken as one accounting period) beginning
on the first day of the first full fiscal quarter immediately following April 8,
1998 and ending on the last day of the last fiscal quarter preceding the date of
such Investment and (B) the Net Cash Proceeds from the disposition of Viatel's
interest in any such Permitted Wholesale Consortium or Permitted Joint Venture;
(x) the repurchase of shares of the Series A Preferred upon a Change of Control
pursuant to an Offer to Purchase; PROVIDED that an Offer to Purchase is
consummated
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with respect to the Notes prior to any repurchase of shares of the Series A
Preferred; (xi) the payment of cash dividends on the Series A Preferred sold as
a Unit with any of the Notes and issued as dividends thereon, after April 15,
2003; and (xii) other Restricted Payments in an aggregate amount not to exceed
$10 million, increased by the amount of any Restricted Payment made pursuant to
this clause (x) that is an Investment and is not outstanding; PROVIDED that,
except in the case of clauses (i) and (iii), no Default or Event of Default
shall have occurred and be continuing or occur as a consequence of the actions
or payments set forth therein.
Each Restricted Payment permitted pursuant to the preceding paragraph (other
than the Restricted Payment referred to in clause (ii) thereof, an exchange of
Capital Stock for Capital Stock or Indebtedness referred to in clause (iii) or
(iv) thereof and an Investment referred to in clause (vi) thereof), and the Net
Cash Proceeds from any capital contribution or any issuance of Capital Stock
referred to in clauses (iii), (iv) and (vi), shall be included in calculating
whether the conditions of clause (C) of the first paragraph of this "Limitation
on Restricted Payments" covenant have been met with respect to any subsequent
Restricted Payments. In the event the proceeds of an issuance of Capital Stock
of Viatel are used for the redemption, repurchase or other acquisition of the
Notes, or Indebtedness that is PARI PASSU with the Notes, then the Net Cash
Proceeds of such issuance shall be included in clause (C) of the first paragraph
of this "Limitation on Restricted Payments" covenant only to the extent such
proceeds are not used for such redemption, repurchase or other acquisition of
Indebtedness.
Any Restricted Payments made in other than cash shall be valued at fair
market value. The amount of any Investment "outstanding" at any time shall be
deemed to be equal to the amount of such Investment on the date made, less the
return of capital, repayment of loans, return on capital and release of
Guarantees, in each case of or to Viatel and its Restricted Subsidiaries with
respect to such Investment (up to the amount of such investment on the date
made).
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
Viatel will not, and will not permit any Restricted Subsidiary to, create or
otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by
Viatel or any other Restricted Subsidiary, (ii) pay any Indebtedness owed to
Viatel or any other Restricted Subsidiary, (iii) make loans or advances to
Viatel or any other Restricted Subsidiary or (iv) transfer any of its property
or assets to Viatel or any Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions: (i) existing on April 8, 1998 in the Indentures or any other
agreements in effect on April 8, 1998, and any extensions, refinancings,
renewals or replacements of such agreements; PROVIDED that the encumbrances and
restrictions in any such extensions, refinancings, renewals or replacements are
no less favorable in any material respect to the Holders than those encumbrances
or restrictions that are then in effect and that are being extended, refinanced,
renewed or replaced; (ii) existing under or by reason of applicable law; (iii)
existing with respect to any Person or the property or assets of such Person
acquired by Viatel or any Restricted Subsidiary, existing at the time of such
acquisition and not incurred in contemplation thereof, which encumbrances or
restrictions are not applicable to any Person or the property or assets of any
Person other than such Person or the property or assets of such Person so
acquired; (iv) in the case of clause (iv) of the first paragraph of this
"Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries" covenant, (A) that restrict in a customary manner the subletting,
assignment or transfer of any property or asset that is a lease, license,
conveyance or contract or similar property or asset, (B) existing by virtue of
any transfer of, agreement to transfer, option or right with respect to, or Lien
on, any property or assets of Viatel or any Restricted Subsidiary not otherwise
prohibited by the Indentures or (C) arising or agreed to in the ordinary course
of business, not relating to any Indebtedness, and that do not, individually or
in the aggregate, detract from the value of property or assets of Viatel or any
Restricted Subsidiary in any manner material to Viatel or any Restricted
Subsidiary; (v) with respect to a Restricted
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Subsidiary and imposed pursuant to an agreement that has been entered into for
the sale or disposition of all or substantially all of the Capital Stock of, or
property and assets of, such Restricted Subsidiary; (vi) contained in the terms
of any Indebtedness or any agreement pursuant to which such Indebtedness was
issued if (A) the encumbrance or restriction applies only in the event of a
payment default or a default with respect to a financial covenant contained in
such Indebtedness or agreement, (B) the encumbrance or restriction is not
materially more disadvantageous to the Holders of the Notes than is customary in
comparable financings (as determined by Viatel) and (C) Viatel determines that
any such encumbrance or restriction will not materially affect Viatel's ability
to make principal or interest payments on the Notes or (vii) imposed in
connection with a transaction described in clause (f) of the proviso to the
definition of "Asset Sale" and relating solely to a Restricted Subsidiary that
transfers assets to the special purpose entity referred to therein; provided
that Viatel determines that any such encumbrance or restriction will not
materially affect Viatel's ability to make principal or interest payments on the
Notes. Nothing contained in this "Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries" covenant shall prevent Viatel or
any Restricted Subsidiary from (1) creating, incurring, assuming or suffering to
exist any Liens otherwise permitted in the "Limitation on Liens" covenant or (2)
restricting the sale or other disposition of property or assets of Viatel or any
of its Restricted Subsidiaries that secure Indebtedness of Viatel or any of its
Restricted Subsidiaries.
LIMITATION ON THE ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES
Viatel will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell, any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) except (i) to Viatel or a Wholly Owned Restricted
Subsidiary; (ii) issuances of director's qualifying shares or sales to foreign
nationals of shares of Capital Stock of foreign Restricted Subsidiaries, to the
extent required by applicable law; (iii) if, immediately after giving effect to
such issuance or sale, such Restricted Subsidiary would no longer constitute a
Restricted Subsidiary and any Investment in such Person remaining after giving
effect to such issuance or sale would have been permitted to be made under the
"Limitation on Restricted Payments" covenant if made on the date of such
issuance or sale; (iv) a pledge or hypothecation of or Lien on any Capital Stock
of a Subsidiary to the extent not prohibited under the "Limitation or Liens"
covenant; or (v) sales by Viatel or Restricted Subsidiaries of Common Stock of a
Restricted Subsidiary, PROVIDED that Viatel or such Restricted Subsidiaries
apply the Net Cash Proceeds, if any, of any such sale in accordance with clause
(A) or (B) of the "Limitation on Asset Sales" covenant described below.
LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES
Viatel will not permit any Restricted Subsidiary, directly or indirectly, to
Guarantee any Indebtedness of Viatel which is PARI PASSU with or subordinate in
right of payment to the Notes ("Guaranteed Indebtedness"), unless (i) such
Restricted Subsidiary simultaneously executes and delivers a supplemental
indenture to the Indentures providing for a Guarantee (a "Subsidiary Guarantee")
of payment of the Notes by such Restricted Subsidiary and (ii) such Restricted
Subsidiary waives and will not in any manner whatsoever claim or take the
benefit or advantage of, any rights of reimbursement, indemnity or subrogation
or any other rights against Viatel or any other Restricted Subsidiary as a
result of any payment by such Restricted Subsidiary under its Subsidiary
Guarantee; PROVIDED that this paragraph shall not be applicable to any Guarantee
of any Restricted Subsidiary that existed at the time such Person became a
Restricted Subsidiary and was not Incurred in connection with, or in
contemplation of, such Person becoming a Restricted Subsidiary. If the
Guaranteed Indebtedness is (A) PARI PASSU with the Notes, then the Guarantee of
such Guaranteed Indebtedness shall be PARI PASSU with, or subordinated to, the
Subsidiary Guarantee or (B) subordinated to the Notes, then the Guarantee of
such Guaranteed Indebtedness shall be subordinated to the Subsidiary Guarantee
at least to the extent that the Guaranteed Indebtedness is subordinated to the
Notes.
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Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer,
to any Person not an Affiliate of Viatel, of all of Viatel's and each Restricted
Subsidiary's Capital Stock in, or all or substantially all the assets of, such
Restricted Subsidiary (which sale, exchange or transfer is not prohibited by the
Indentures) or (ii) the release or discharge of the Guarantee which resulted in
the creation of such Subsidiary Guarantee, except a discharge or release by or
as a result of payment under such Guarantee.
LIMITATION ON TRANSACTIONS WITH SHAREHOLDERS AND AFFILIATES
Viatel will not, and will not permit any Restricted Subsidiary to, directly
or indirectly, enter into, renew or extend any transaction (including, without
limitation, the purchase, sale, lease or exchange of property or assets, or the
rendering of any service) with any holder (or any Affiliate of such holder) of
5% or more of any class of Capital Stock of Viatel or with any Affiliate of
Viatel or any Restricted Subsidiary, except upon fair and reasonable terms no
less favorable to Viatel or such Restricted Subsidiary than could be obtained,
at the time of such transaction or, if such transaction is pursuant to a written
agreement, at the time of the execution of the agreement providing therefor, in
a comparable arm's-length transaction with a Person that is not such a holder or
an Affiliate.
The foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which Viatel or a Restricted Subsidiary delivers
to the Trustee a written opinion of a nationally recognized investment banking
firm stating that the transaction is fair to Viatel or such Restricted
Subsidiary from a financial point of view; (ii) any transaction solely between
Viatel and any of its Restricted Subsidiaries or solely between Restricted
Subsidiaries; (iii) the payment of reasonable and customary regular fees to
directors of Viatel who are not employees of Viatel; (iv) any payments or other
transactions pursuant to any tax-sharing agreement between Viatel and any other
Person with which Viatel files a consolidated tax return or with which Viatel is
part of a consolidated group for tax purposes; (v) compensation,
indemnification, and other benefits paid or made available to officers,
directors, and employees in the ordinary course of business in connection with
services actually rendered and consistent with past practice; (vi) transactions
in accordance with the Existing Stockholder Agreements as in effect on April 8,
1998; or (vii) any Restricted Payments not prohibited by the "Limitation on
Restricted Payments" covenant. Notwithstanding the foregoing, any transaction or
series of related transactions covered by the first paragraph of this
"Limitation on Transactions with Shareholders and Affiliates" covenant and not
covered by clauses (ii) through (v) of this paragraph, the aggregate amount of
which exceeds $2.0 million in value, must be approved or determined to be fair
in the manner provided for in clause (i)(A) or (B) above.
LIMITATION ON LIENS
Viatel will not, and will not permit any Restricted Subsidiary to, create,
incur, assume or suffer to exist any Lien on any of its assets or properties of
any character (including, without limitation, licenses), or any shares of
Capital Stock or Indebtedness of any Restricted Subsidiary, without making
effective provision for all of the Notes and all other amounts due under the
Indentures to be directly secured equally and ratably with (or, if the
obligation or liability to be secured by such Lien is subordinated in right of
payment to the Notes, prior to) the obligation or liability secured by such
Lien.
The foregoing limitation does not apply to (i) Liens existing on April 8,
1998; (ii) Liens granted after April 8, 1998 on any assets or Capital Stock of
Viatel or its Restricted Subsidiaries created in favor of the Holders; (iii)
Liens with respect to the assets of a Restricted Subsidiary granted by such
Restricted Subsidiary to Viatel or a Wholly Owned Restricted Subsidiary to
secure Indebtedness owing to Viatel or such other Restricted Subsidiary; (iv)
Liens securing Indebtedness permitted to be Incurred under clause (iii) of the
second paragraph of the "Limitation on Indebtedness" covenant which is Incurred
to refinance secured Indebtedness; PROVIDED that such Liens do not extend to or
cover any property or assets of Viatel or any Restricted Subsidiary other than
the property or assets securing the Indebtedness being refinanced;
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(v) Liens on the Capital Stock of, or any property or assets of, a Restricted
Subsidiary securing Indebtedness of such Restricted Subsidiary permitted under
the "Limitation on Indebtedness" covenant; (vi) Liens on the Capital Stock of
Restricted Subsidiaries that own a substantial portion of assets financed with
Indebtedness Incurred under clause (vii) of the "Limitation on Indebtedness"
covenant, if such liens secure only such Indebtedness; or (vii) Permitted Liens.
LIMITATION ON SALE-LEASEBACK TRANSACTIONS
Viatel will not, and will not permit any Restricted Subsidiary to, enter
into any sale-leaseback transaction involving any of its assets or properties
whether now owned or hereafter acquired, whereby Viatel or a Restricted
Subsidiary sells or transfers such assets or properties and then or thereafter
leases such assets or properties or any part thereof or any other assets or
properties which Viatel or such Restricted Subsidiary, as the case may be,
intends to use for substantially the same purpose or purposes as the assets or
properties sold or transferred; PROVIDED that a sale-leaseback transaction shall
not include any lease in connection with which Viatel or a Restricted Subsidiary
acquires assets or property in anticipation of the substantially contemporaneous
sale or transfer to the lessor under such lease.
The foregoing restriction does not apply to any sale-leaseback transaction
if (i) the lease is for a period, including renewal rights, of not in excess of
three years; (ii) the lease secures or relates to industrial revenue or
pollution control bonds; (iii) the transaction is solely between Viatel and any
Restricted Subsidiary or solely between Restricted Subsidiaries; or (iv) Viatel
or such Restricted Subsidiary, within 12 months after the sale or transfer of
any assets or properties is completed, applies an amount not less than the net
proceeds received from such sale in accordance with clause (A) or (B) of the
first paragraph of the "Limitation on Asset Sales" covenant described below.
LIMITATION ON ASSET SALES
Viatel and will not permit any Restricted Subsidiary to, consummate any
Asset Sale, unless (i) the consideration received by Viatel or such Restricted
Subsidiary is at least equal to the fair market value of the assets sold or
disposed of and (ii) at least 75% of the consideration received consists of cash
or Temporary Cash Investments. In the event and to the extent that the Net Cash
Proceeds received by Viatel or any of its Restricted Subsidiaries from one or
more Asset Sales occurring on or after April 8, 1998 in any period of 12
consecutive months exceed 10% of Adjusted Consolidated Net Tangible Assets
(determined as of the date closest to the commencement of such 12-month period
for which a consolidated balance sheet of Viatel and its Subsidiaries has been
filed with the Commission pursuant to the "Commission Reports and Reports to
Holders" covenant), then Viatel shall or shall cause the relevant Restricted
Subsidiary to (i) within 12 months after the date Net Cash Proceeds so received
exceed 10% of Adjusted Consolidated Net Tangible Assets (A) apply an amount
equal to such excess Net Cash Proceeds to permanently repay unsubordinated
Indebtedness of Viatel, or any Restricted Subsidiary providing a Subsidiary
Guarantee pursuant to the "Limitation on Issuances of Guarantees by Restricted
Subsidiaries" covenant described above or Indebtedness of any other Restricted
Subsidiary, in each case owing to a Person other than Viatel or any of its
Restricted Subsidiaries or (B) invest an equal amount, or the amount not so
applied pursuant to clause (A) (or enter into a definitive agreement committing
to so invest within 12 months after the date of such agreement), either in
property or assets (other than current assets) of a nature or type or that are
used in a business, or in a company having property and assets of a nature or
type, or engaged in a business, in either case similar or related to the nature
or type of the property and assets of, or the business of, Viatel or any of its
Restricted Subsidiaries existing on the date of such investment (as determined
in good faith by the Board of Directors, whose determination shall be conclusive
and evidenced by a Board Resolution) and (ii) apply (no later than the end of
the 12-month period referred to in clause (i)) such excess Net Cash Proceeds (to
the extent not applied pursuant to clause (i)) as provided in the following
paragraph of this "Limitation on Asset Sales" covenant. The amount of such
excess Net Cash Proceeds required to be applied (or to be committed to be
applied) during such 12-month period as set forth in clause (i) of the preceding
sentence and not applied as so required by the end of such period shall
constitute "Excess Proceeds."
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If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $10 million, Viatel must
commence, not later than the fifteenth Business Day of such month, and
consummate an Offer to Purchase from the Holders on a PRO RATA basis an
aggregate principal amount of Notes equal to the Excess Proceeds on such date,
at a purchase price equal to 101% of the principal amount of the 11.25% Notes
and the 11.15% Notes and 101% of the Accreted Value of the 12.50% Notes and
12.40% Notes on the relevant Payment Date, plus, in each case, accrued interest
(if any) to the Payment Date.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
Viatel must commence, within 30 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase for all Notes then outstanding, at
a purchase price equal to 101% of the principal amount of the 11.25% Notes and
the 11.15% Notes and 101% of the Accreted Value of the 12.50% Notes and 12.40%
Notes on the relevant Payment Date, plus accrued interest (if any) to the
Payment Date.
There can be no assurance that Viatel will have sufficient funds available
at the time of any Change of Control to make any debt payment (including
repurchases of Notes) required by the foregoing covenant (as well as may be
contained in other securities of Viatel which might be outstanding at the time).
The above covenant requiring Viatel to repurchase the Notes will, unless
consents are obtained, require Viatel to repay all indebtedness then outstanding
which by its terms would prohibit such Note repurchase, either prior to or
concurrently with such Note repurchase.
COMMISSION REPORTS AND REPORTS TO HOLDERS
At all times from and after the earlier of (i) the date of the commencement
of an Exchange Offers or the effectiveness of the Shelf Registration Statement
(the "Registration") and (ii) October 8, 1998, in either case, whether or not
Viatel is then required to file reports with the Commission, Viatel shall file
with the Commission all such reports and other information as it would be
required to file with the Commission by Sections 13(a) or 15(d) under the
Securities Exchange Act of 1934 if it were subject thereto. Viatel shall supply
the Trustee and each Holder or shall supply to the Trustee for forwarding to
each such Holder, without cost to such Holder, copies of such reports and other
information. In addition, at all times prior to the earlier of the date of the
Registration and October 8, 1998, Viatel shall, at its cost, deliver to each
Holder of the Notes quarterly and annual reports substantially equivalent to
those which would be required by the Exchange Act. In addition, at all times
prior to the Registration, upon the request of any Holder or any prospective
purchaser of the Notes designated by a Holder, Viatel shall supply to such
Holder or such prospective purchaser the information required under Rule 144A
under the Securities Act.
EVENTS OF DEFAULT
The following events will be defined as "Events of Default" in the
Indentures: (a) default in the payment of principal of (or premium, if any, on)
any Note when the same becomes due and payable at maturity, upon acceleration,
redemption or otherwise; (b) default in the payment of interest on any Note when
the same becomes due and payable, and such default continues for a period of 30
days; PROVIDED that a failure to make any of the first six scheduled interest
payments on the Senior Notes in a timely manner will constitute an Event of
Default with no grace or cure period; (c) default in the performance or breach
of the provisions of the relevant Indentures applicable to mergers,
consolidations and transfers of all or substantially all of the assets of Viatel
or the failure to make or consummate an Offer to Purchase in accordance with the
"Limitation on Asset Sales" or "Repurchase of Notes upon a Change of Control"
covenant; (d) Viatel defaults in the performance of or breaches any other
covenant or agreement of Viatel in the Indentures or under the Notes (other than
a default specified in clause (a), (b) or (c) above) and such default or breach
continues for a period of 30 consecutive days after written notice by the
Trustee or the Holders of 25% or more in aggregate principal amount or principal
amount at maturity, as the case
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may be, of any series of Notes; (e) there occurs with respect to any issue or
issues of Indebtedness of Viatel or any Significant Subsidiary having an
outstanding principal amount of $10 million or more in the aggregate for all
such issues of all such Persons, whether such Indebtedness now exists or shall
hereafter be created, (I) an event of default that has caused the holder thereof
to declare such Indebtedness to be due and payable prior to its Stated Maturity
and such Indebtedness has not been discharged in full or such acceleration has
not been rescinded or annulled within 30 days of such acceleration and/or (II)
the failure to make a principal payment at the final (but not any interim) fixed
maturity and such defaulted payment shall not have been made, waived or extended
within 30 days of such payment default; (f) any final judgment or order (not
covered by insurance) for the payment of money in excess of $10 million in the
aggregate for all such final judgments or orders against all such Persons
(treating any deductibles, self-insurance or retention as not so covered) shall
be rendered against Viatel or any Significant Subsidiary and shall not be paid
or discharged, and there shall be any period of 60 consecutive days following
entry of the final judgment or order that causes the aggregate amount for all
such final judgments or orders outstanding and not paid or discharged against
all such Persons to exceed $10 million during which a stay of enforcement of
such final judgment or order, by reason of a pending appeal or otherwise, shall
not be in effect; (g) a court having jurisdiction in the premises enters a
decree or order for (A) relief in respect of Viatel or any Significant
Subsidiary in an involuntary case under any applicable bankruptcy, insolvency or
other similar law now or hereafter in effect, (B) appointment of a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar official of
Viatel or any Significant Subsidiary or for all or substantially all of the
property and assets of Viatel or any Significant Subsidiary or (C) the winding
up or liquidation of the affairs of Viatel or any Significant Subsidiary and, in
each case, such decree or order shall remain unstayed and in effect for a period
of 60 consecutive days; or (h) Viatel or any Significant Subsidiary (A)
commences a voluntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, or consents to the entry of an order for
relief in an involuntary case under any such law, (B) consents to the
appointment of or taking possession by a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of Viatel or any
Significant Subsidiary or for all or substantially all of the property and
assets of Viatel or any Significant Subsidiary or (C) effects any general
assignment for the benefit of creditors.
If an Event of Default (other than an Event of Default specified in clause
(g) or (h) above that occurs with respect to Viatel) occurs and is continuing
under any Indenture, the Trustee or the Holders of at least 25% in aggregate
principal amount or principal amount at maturity, as the case may be, of any
series of Notes, then outstanding, by written notice to Viatel (and to the
Trustee if such notice is given by the Holders), may, and the Trustee at the
request of such Holders shall, declare the principal amount (in the case of the
11.25% Notes and 11.15% Notes) or Accreted Value (in the case of the 12.50%
Notes or 12.40% Notes) of, premium, if any, and accrued interest on the relevant
series of Notes to be immediately due and payable. Upon a declaration of
acceleration, such principal amount or Accreted Value, as the case may be, of
premium, if any, and accrued interest shall be immediately due and payable. In
the event of a declaration of acceleration because an Event of Default set forth
in clause (e) above has occurred and is continuing, such declaration of
acceleration shall be automatically rescinded and annulled if the event of
default triggering such Event of Default pursuant to clause (e) shall be
remedied or cured by Viatel or the relevant Significant Subsidiary or waived by
the holders of the relevant Indebtedness within 60 days after the declaration of
acceleration with respect thereto. If an Event of Default specified in clause
(g) or (h) above occurs with respect to Viatel, the principal amount or Accreted
Value, as the case may be, of premium, if any, and accrued interest on the Notes
then outstanding shall IPSO FACTO become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any Holder.
The Holders of at least a majority in principal amount or principal amount at
maturity, as the case may be, of the outstanding Notes of any series, by written
notice to Viatel and to the Trustee, may waive all past defaults with respect to
such series of Notes and rescind and annul a declaration of acceleration and its
consequences if (i) all existing Events of Default, other than the nonpayment of
the principal of, premium, if any, and interest on the Notes that have become
due solely by such declaration of acceleration, have
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been cured or waived and (ii) the rescission would not conflict with any
judgment or decree of a court of competent jurisdiction. For information as to
the waiver of defaults, see "-- Modification and Waiver."
The Holders of at least a majority in aggregate principal amount or
principal amount at maturity, as the case may be, of the outstanding Notes of
any series, may direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee or exercising any trust or power
conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the relevant Indenture, that may involve
the Trustee in personal liability, or that the Trustee determines in good faith
may be unduly prejudicial to the rights of Holders of the relevant Notes, not
joining in the giving of such direction and may take any other action it deems
proper that is not inconsistent with any such direction received from Holders of
the relevant Notes. A Holder may not pursue any remedy with respect to the
Indentures or the Notes unless: (i) the Holder gives the Trustee written notice
of a continuing Event of Default; (ii) the Holders of at least 25% in aggregate
principal amount or principal amount at maturity, as the case may be, of
outstanding Notes of the relevant series, make a written request to the Trustee
to pursue the remedy; (iii) such Holder or Holders offer the Trustee indemnity
satisfactory to the Trustee against any costs, liability or expense; (iv) the
Trustee does not comply with the request within 60 days after receipt of the
request and the offer of indemnity; and (v) during such 60-day period, the
Holders of a majority in aggregate principal amount or principal amount at
maturity, as the case may be, of the outstanding Notes of the relevant series,
do not give the Trustee a direction that is inconsistent with the request.
However, such limitations do not apply to the right of any Holder of a Note to
receive payment of the Accreted Value of, premium, if any, or interest on, such
Note or to bring suit for the enforcement of any such payment, on or after the
due date expressed in the Notes, which right shall not be impaired or affected
without the consent of the Holder.
The Indentures require certain officers of Viatel to certify, on or before a
date not more than 90 days after the end of each fiscal year, that a review has
been conducted of the activities of Viatel and its Restricted Subsidiaries and
Viatel's and its Restricted Subsidiaries' performance under the Indentures and
that Viatel has fulfilled all obligations thereunder, or, if there has been a
default in the fulfillment of any such obligation, specifying each such default
and the nature and status thereof. Viatel will also be obligated to notify the
Trustee of any default or defaults in the performance of any covenants or
agreements under the Indentures.
CONSOLIDATION, MERGER AND SALE OF ASSETS
Viatel will not consolidate with, merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of its property
and assets (as an entirety or substantially an entirety in one transaction or a
series of related transactions) to, any Person or permit any Person to merge
with or into Viatel unless: (i) Viatel shall be the continuing Person, or the
Person (if other than Viatel) formed by such consolidation or into which Viatel
is merged or that acquired or leased such property and assets of Viatel shall be
a corporation organized and validly existing under the laws of the United States
of America or any jurisdiction thereof and shall expressly assume, by a
supplemental indenture, executed and delivered to the Trustee, all of the
obligations of Viatel on all of the Notes and under the Indentures; (ii)
immediately after giving effect to such transaction, no Default or Event of
Default shall have occurred and be continuing; (iii) immediately after giving
effect to such transaction on a pro forma basis, Viatel or any Person becoming
the successor obligor of the Notes shall have a Consolidated Net Worth equal to
or greater than the Consolidated Net Worth of Viatel immediately prior to such
transaction; (iv) immediately after giving effect to such transaction on a pro
forma basis Viatel, or any Person becoming the successor obligor of the Notes,
as the case may be, could Incur at least $1.00 of Indebtedness under the first
paragraph of the "Limitation on Indebtedness" covenant; PROVIDED that this
clause (iv) shall not apply to (x) a consolidation, merger or sale of all (but
not less than all) of the assets of Viatel if all Liens and Indebtedness of
Viatel or any Person becoming the successor obligor on the Notes, as the case
may be, and its Restricted Subsidiaries outstanding immediately after such
transaction would, if Incurred at such time, have been permitted to be Incurred
(and all such Liens and Indebtedness, other than Liens and Indebtedness of
Viatel and its
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Restricted Subsidiaries outstanding immediately prior to the transaction, shall
be deemed to have been Incurred) for all purposes of the Indentures or (y) a
consolidation, merger or sale of all or substantially all of the assets of
Viatel if immediately after giving effect to such transaction on a pro forma
basis, Viatel or any Person becoming the successor obligor of the Notes shall
have a Consolidated Leverage Ratio equal to or less than the Consolidated
Leverage Ratio of Viatel immediately prior to such transaction; and (v) Viatel
delivers to the Trustee an Officers' Certificate (attaching the arithmetic
computations to demonstrate compliance with clauses (iii) and (iv) above) and
Opinion of Counsel, in each case stating that such consolidation, merger or
transfer and such supplemental indenture complies with this provision and that
all conditions precedent provided for herein relating to such transaction have
been complied with; PROVIDED, HOWEVER, that clauses (iii) and (iv) above do not
apply if, in the good faith determination of the Board of Directors of Viatel,
whose determination shall be evidenced by a Board Resolution, the principal
purpose of such transaction is to change the state of incorporation of Viatel;
and PROVIDED FURTHER that any such transaction shall not have as one of its
purposes the evasion of the foregoing limitations.
DEFEASANCE
DEFEASANCE AND DISCHARGE. Each Indenture provides that Viatel will be
deemed to have paid and will be discharged from any and all obligations in
respect of the Notes issued thereunder on the 123rd day after the deposit
referred to below, and the provisions of the relevant Indenture will no longer
be in effect with respect to such Notes (except for, among other matters,
certain obligations to register the transfer or exchange of such Notes, to
replace stolen, lost or mutilated Notes, to maintain paying agencies and to hold
monies for payment in trust) if, among other things, (A) Viatel has deposited
with the relevant Trustee, in trust, money and/or U.S. Government Obligations
that through the payment of interest and principal in respect thereof in
accordance with their terms will provide money in an amount sufficient to pay
the principal of, premium, if any, and accrued interest on the relevant Notes on
the Stated Maturity of such payments in accordance with the terms of the
relevant Indenture and the Notes, (B) Viatel has delivered to the relevant
Trustee (i) either (x) an Opinion of Counsel to the effect that Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
Viatel's exercise of its option under this "Defeasance" provision and will be
subject to federal income tax on the same amount and in the same manner and at
the same times as would have been the case if such deposit, defeasance and
discharge had not occurred, which Opinion of Counsel must be based upon (and
accompanied by a copy of) a ruling of the Internal Revenue Service to the same
effect unless there has been a change in applicable federal income tax law after
April 8, 1998 such that a ruling is no longer required or (y) a ruling directed
to the relevant Trustee received from the Internal Revenue Service to the same
effect as the aforementioned Opinion of Counsel and (ii) an Opinion of Counsel
to the effect that the creation of the defeasance trust does not violate the
Investment Company Act of 1940 and after the passage of 123 days following the
deposit, the trust fund will not be subject to the effect of Section 547 of the
United States Bankruptcy Code or Section 15 of the New York Debtor and Creditor
Law, (C) immediately after giving effect to such deposit on a pro forma basis,
no Event of Default, or event that after the giving of notice or lapse of time
or both would become an Event of Default, shall have occurred and be continuing
on the date of such deposit or during the period ending on the 123rd day after
the date of such deposit, and such deposit shall not result in a breach or
violation of, or constitute a default under, any other agreement or instrument
to which Viatel or any of its Subsidiaries is a party or by which Viatel or any
of its Subsidiaries is bound and (D) if at such time the relevant Notes are
listed on a national securities exchange, Viatel has delivered to the relevant
Trustee an Opinion of Counsel to the effect that the relevant Notes will not be
delisted as a result of such deposit, defeasance and discharge.
DEFEASANCE OF CERTAIN COVENANTS AND CERTAIN EVENTS OF DEFAULT. Each
Indenture further provides that the provisions of such Indenture will no longer
be in effect with respect to clauses (iii) and (iv) under "Consolidation, Merger
and Sale of Assets" and all the covenants described herein under "Covenants,"
clause (c) under "Events of Default" with respect to such clauses (iii) and (iv)
under "Consolidation, Merger and Sale of Assets," clause (d) under "Events of
Default" with respect to such other covenants and
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clauses (e) and (f) under "Events of Default" shall be deemed not to be Events
of Default upon, among other things, the deposit with the relevant Trustee, in
trust, of money and/or U.S. Government Obligations, in the case of the 12.50%
Notes and the 11.25% Notes, or German Government Obligations, in the case of the
12.40% Notes and the 11.15% Notes, that through the payment of interest and
principal in respect thereof in accordance with their terms will provide money
in an amount sufficient to pay the principal of, premium, if any, and accrued
interest on the relevant Notes on the Stated Maturity of such payments in
accordance with the terms of the relevant Indenture and the Notes, the
satisfaction of the provisions described in clauses (B)(ii), (C) and (D) of the
preceding paragraph and the delivery by Viatel to the relevant Trustee of an
Opinion of Counsel to the effect that, among other things, the Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
such deposit and defeasance of certain covenants and Events of Default and will
be subject to federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit and defeasance had
not occurred.
DEFEASANCE AND CERTAIN OTHER EVENTS OF DEFAULT. In the event the Company
exercises its option to omit compliance with certain covenants and provisions of
an Indenture with respect to any series of Notes as described in the immediately
preceding paragraph and such Notes are declared due and payable because of the
occurrence of an Event of Default that remains applicable, the amount of money
and/or U.S. Government Obligations, in the case of the 12.50% Notes and the
11.25% Notes, or German Government Obligations, in the case of the 12.40% Notes
and the 11.15% Notes, on deposit with the relevant Trustee will be sufficient to
pay amounts due on such Notes at the time of their Stated Maturity but may not
be sufficient to pay amounts due on such Notes at the time of the acceleration
resulting from such Event of Default. However, Viatel will remain liable for
such payments.
MODIFICATION AND WAIVER
Modifications and amendments of each Indenture may be made by Viatel and the
Trustee with the consent of the Holders of not less than a majority in aggregate
principal amount at maturity of the outstanding 12.50% Notes or 12.40% Notes, or
aggregate principal amount of the 11.25% Notes or 11.15% Notes, as the case may
be; PROVIDED, HOWEVER, that no such modification or amendment may, without the
consent of each Holder affected thereby, (i) change the Stated Maturity of the
principal of, or any installment of interest on, any Note, (ii) reduce the
principal amount of, or premium, if any, or interest on, any Note, (iii) change
the place or currency of payment of principal of, or premium, if any, or
interest on, any Note, (iv) impair the right to institute suit for the
enforcement of any payment on or after the Stated Maturity (or, in the case of a
redemption, on or after the Redemption Date) of any Note, (v) reduce the
above-stated percentage of outstanding 11.25% Notes, 12.50% Notes, 11.15% Notes
or 12.40% Notes, as the case may be, the consent of whose Holders is necessary
to modify or amend the applicable Indenture, (vi) waive a default in the payment
of principal of, premium, if any, or interest on the Notes or (vii) reduce the
percentage or aggregate principal amount or principal amount at maturity, as the
case may be, of outstanding 11.25% Notes, 12.50% Notes, 11.15% Notes or 12.40%
Notes, as the case may be, the consent of whose Holders is necessary for waiver
of compliance with certain provisions of the applicable Indenture or for waiver
of certain defaults.
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS, OR
EMPLOYEES
The Indentures provide that no recourse for the payment of the principal of,
premium, if any, or interest on any of the Notes or for any claim based thereon
or otherwise in respect thereof, and no recourse under or upon any obligation,
covenant or agreement of Viatel in the Indentures, or in any of the Notes or
because of the creation of any Indebtedness represented thereby, shall be had
against any incorporator, stockholder, officer, director, employee or
controlling person of Viatel or of any successor Person thereof. Each Holder, by
accepting the Notes, waives and releases all such liability.
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CONCERNING THE TRUSTEE
The Indentures provide that, except during the continuance of a Default, the
Trustee will not be liable, except for the performance of such duties as are
specifically set forth in such Indentures. If an Event of Default has occurred
and is continuing, the Trustee will use the same degree of care and skill in its
exercise of the rights and powers vested in it under the Indentures as a prudent
person would exercise under the circumstances in the conduct of such person's
own affairs.
The Indentures and provisions of the TIA incorporated by reference therein
contain limitations on the rights of the Trustee, should it become a creditor of
Viatel, to obtain payment of claims in certain cases or to realize on certain
property received by it in respect of any such claims, as security or otherwise.
The Trustee is permitted to engage in other transactions; PROVIDED, HOWEVER,
that if it acquires any conflicting interest, it must eliminate such conflict or
resign.
BOOK ENTRY; DELIVERY AND FORM
12.50% EXCHANGE NOTES AND 11.25% EXCHANGE NOTES
The 12.50% Exchange Notes and the 11.25% Exchange Notes will be represented
by the New Global Notes issued in definitive, fully registered book-entry form
which will be registered in the name of DTC or its nominee and deposited on
behalf of the beneficial holders of such 12.50% Exchange Notes and 11.25%
Exchange Notes represented thereby with a custodian for DTC for credit to the
respective accounts of the beneficial holders (or to such other accounts as they
may direct at the Euroclear or Cedel).
THE NEW GLOBAL NOTES. Viatel expects that pursuant to procedures
established by DTC (a) upon deposit of the New Global Notes, DTC or its
custodian will credit on its internal system portions of the New Global Notes
which shall be comprised of the corresponding respective principal amount of the
New Global Notes to the respective accounts of persons who have accounts with
such depositary and (b) ownership of the 12.50% Exchange Notes and 11.25%
Exchange Notes will be shown on, and the transfer of ownership thereof will be
effected only through, records maintained by DTC or its nominee (with respect to
interests of Participants (as defined herein)) and the records of Participants
(with respect to interests of Persons other than Participants). Ownership of
beneficial interests in the New Global Notes will be limited to persons who have
accounts with DTC ("Participants") or persons who hold interests through
Participants.
So long as DTC or its nominee is the registered owner or holder of the
12.50% Exchange Notes and 11.25% Exchange Notes, DTC or such nominee will be
considered the sole owner or holder of the 12.50% Exchange Notes and 11.25%
Exchange Notes represented by the New Global Notes for all purposes under the
Indentures and the New Global Notes. No beneficial owner of an interest in the
New Global Notes will be able to transfer such interest except in accordance
with the applicable procedures of DTC, Euroclear and Cedel.
Payments of the principal of or premium, if any, on and interest on the New
Global Notes will be made to DTC or its nominee, as the case may be, as the
registered owner thereof. Neither Viatel nor the Trustee or any Paying Agent
under the applicable Indenture will have any responsibility or liability for any
aspect of the records relating to, or payments made on account of, beneficial
ownership interests in the New Global Notes or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
Viatel expects that DTC or its nominee, upon receipt of any payment of the
principal or premium, if any, on and interest on the New Global Notes, will
credit Participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the New Global Notes
as shown on the records of DTC or its nominee. Viatel also expects that payments
by Participants to owners of beneficial interests in the New Global Notes held
through Participants will be governed by standing instructions and customary
practice as is now the case with securities held for the accounts of customers
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registered in the names of nominees for such customers. Such payments will be
the responsibility of such Participants.
Transfers between Participants in DTC will be effected in accordance with
DTC rules and will be settled in immediately available funds. If a holder
requires physical delivery of certificated notes for any reason, including to
sell 12.50% Exchange Notes or 11.25% Exchange Notes, respectively, to persons in
states which require physical delivery of such securities or to pledge such
securities, such holder must transfer its interest in the New Global Notes in
accordance with the normal procedures of DTC and in accordance with the
procedures set forth in the respective Indenture.
DTC has advised Viatel that DTC will take any action permitted to be taken
by a holder of New Global Notes (including the presentation of New Global Notes
for exchange as described below) only at the direction of one or more
Participants to whose account the DTC interests in the New Global Notes are
credited and only in respect of the aggregate principal amount of 12.50%
Exchange Notes and 11.25% Exchange Notes, as the case may be, as to which such
Participant or Participants has or have given such direction. However, if there
is an Event of Default under the applicable Indenture, DTC will exchange the
applicable New Global Notes for certificated notes which it will distribute to
its Participants.
DTC has advised Viatel as follows: DTC is a limited-purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of the New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the Uniform Commercial
Code and a "clearing agency" registered pursuant to the provision of Section 17A
of the Exchange Act. DTC was created to hold securities for its Participants and
facilitate the clearance and settlement of securities transactions between
Participants through electronic book-entry changes in accounts of its
Participants, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations and certain other organizations. Indirect
access to the DTC system is available to others such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a Participant, either directly or indirectly ("Indirect Participants").
Although DTC, Euroclear and Cedel are expected to follow the foregoing
procedures in order to facilitate transfers of interests in the New Global Notes
among Participants of DTC, Euroclear and Cedel, they are under no obligations to
follow such procedures, and such procedures may be discontinued at any time.
Neither Viatel, the Trustee nor any Paying Agent under the respective Indenture
will have any responsibility for the performance by DTC, Euroclear or Cedel or
the Participants or Indirect Participants of their respective obligations under
the rules and procedures governing their operations.
CERTIFICATED NOTES. Subject to certain conditions, any person having a
beneficial interest in the New Global Notes may, upon request to the Trustee,
exchange such beneficial interest for 12.50% Exchange Notes or 11.25% Exchange
Notes, as the case may be, in the form of certificated notes. Upon any such
issuance, the Trustee is required to register such certificated notes in the
name of, and cause the same to be delivered to, such person or persons (or any
nominee thereof). In addition, interests in the New Global Notes will be
exchangeable or transferable, as the case may be, for certificated notes if (i)
DTC notifies Viatel that it is unwilling or unable to continue as depositary for
such New Global Notes, or DTC ceases to be a "Clearing Agency" registered under
the Exchange Act, and a successor depositary is not appointed by Viatel within
90 days or (ii) an Event of Default has occurred and is continuing with respect
to such Notes. Upon the occurrence of any of the events described in the
preceding sentence, Viatel will cause the appropriate certificated notes to be
delivered. Certificated notes may only be transferred on the books and records
of the Paying Agent for such Notes.
12.40% EXCHANGE NOTES AND 11.15% EXCHANGE NOTES
The 12.40% Exchange Notes and the 11.15% Exchange Notes will each be
represented by permanent global certificates without interest coupons. Certain
of such permanent global certificates will be the New DBC-DM Global Certificates
and will be kept in custody by Deutsche Borse Clearing AG, will be issued in
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bearer form and will represent the 12.40% Exchange Notes issued in exchange for
Existing 12.40% Notes and the 11.15% Exchange Notes issued in exchange for
Existing 11.15% Notes, in each case as originally sold outside the United States
to non-U.S. persons pursuant to Regulation S and will be held through financial
institutions that are account holders in DBC ("DBC Accountholders"). The other
permanent global certificates will be represented by the New DTC-DM Global
Certificates, and will include the 12.40% Exchange Notes and 11.15% Exchange
Notes which are held through Euroclear and Cedel, each of which has an account
with DTC. The New DTC-DM Global Certificates will be deposited with a custodian
for DTC, will be issued in registered form in the name of the nominee of DTC,
and will represent the 12.40% Exchange Notes issued in exchange for Existing
12.40% Notes and the 11.15% Exchange Notes issued in exchange for Existing
11.15% Notes, in each case as originally sold to QIBs pursuant to Rule 144A and
will be held through financial institutions that are Participants in DTC.
The amount of 12.40% Exchange Notes and 11.15% Exchange Notes represented by
each of the New DBC-DM Global Certificates and the New DTC-DM Global
Certificates is evidenced by the register (the "Register") maintained for that
purpose by the Registrar (as defined herein). Together, (i) the 12.40% Exchange
Notes represented by the New DBC-DM Global Certificates and the New DTC-DM
Global Certificates will equal the aggregate principal amount at maturity of the
12.40% Exchange Notes outstanding at any time and (ii) the 11.15% Exchange Notes
represented by the New DBC-DM Global Certificates and the New DTC-DM Global
Certificates will equal the aggregate principal amount of the 11.15% Exchange
Notes outstanding at any time.
Transfers of 12.40% Exchange Notes and 11.15% Exchange Notes will be limited
to transfers of book-entry interests between and within DBC and DTC. Transfers
of 12.40% Exchange Notes and 11.15% Exchange Notes between DBC Accountholders on
the one hand and DTC Participants on the other hand shall be recorded in the
Register and shall be effected by an increase or a reduction in the aggregate
amount of 12.40% Exchange Notes or 11.15% Exchange Notes, as the case may be,
represented by the New DBC-DM Global Certificates and a corresponding reduction
or increase in the aggregate amount of 12.40% Exchange Notes or 11.15% Exchange
Notes represented by the New DTC-DM Global Certificates.
Owners of legal co-ownership interests in the New DBC-DM Global Certificates
or of beneficial interests in the New DTC-DM Global Certificates will not be
entitled to have 12.40% Exchange Notes or 11.15% Exchange Notes registered in
their names, and will not receive or be entitled to receive physical delivery of
definitive certificates representing individual 12.40% Exchange Notes or 11.15%
Exchange Notes, as the case may be.
Viatel has appointed The Bank of New York, as registrar (the "Registrar"),
and as paying agent in respect of the 12.40% Exchange Notes and 11.15% Exchange
Notes represented by the New DTC-DM Global Certificates (the "U.S. Paying
Agent") and Deutsche Bank AG as co-registrar (the "Co-Registrar") and as paying
agent for the 12.40% Exchange Notes and 11.15% Exchange Notes represented by the
New DBC-DM Global Certificates (the "DM Paying Agent", and together with the
U.S. Paying Agent, the "Paying Agents"). The Registrar, together with the
Co-Registrar, provides the link between DTC and DBC. Viatel shall ensure that
for as long as any 12.40% Exchange Notes and 11.15% Exchange Notes shall be
outstanding there shall always be a registrar, a U.S. paying agent and a DM
paying agent to perform the functions assigned to any of them in the 12.40%
Notes Indenture and the 11.15% Notes Indenture.
Payment of principal of and interest on the 12.40% Exchange Notes and 11.15%
Exchange Notes represented by the New Global Certificates will be made by Viatel
in German Deutschmarks through the DM Paying Agent. Payments of principal of and
interest on the New DBC-DM Global Certificates will be made by the DM Paying
Agent in German Deutschmarks directly to DBC. Payment of principal of and
interest on the New DTC-DM Global Certificates will be made by the DM Paying
Agent to the U.S. Paying Agent, which in turn shall make such payments in U.S.
Dollars to the nominee for DTC, as the registered holder of the New DTC-DM
Global Certificates or in German Deutschmarks to any person holding
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beneficial interests in the New DTC-DM Global Certificates electing to receive
payments in German Deutschmarks as described below.
Any person holding beneficial interests in the New DTC-DM Global
Certificates (a "New DTC-DM Note Holder") shall receive payments of principal
and interest in respect of 12.40% Exchange Notes and 11.15% Exchange Notes, as
the case may be, in U.S. Dollars, unless such DTC-DM Note Holder elects to
receive payments in German Deutschmarks in accordance with the procedures set
forth below. To the extent that the New DTC-DM Note Holders shall not have made
such election in respect of any payment of principal or interest, the aggregate
amount designated for all such New DTC-DM Note Holders in respect of such
payment (the "DM Conversion Amount") shall be credited to the U.S. Paying
Agent's account and converted by the U.S. Paying Agent into U.S. Dollars and
paid by wire transfer of same-day funds to the registered holder of the New
DTC-DM Global Certificates for payment through DTC's settlement system to the
relevant DTC Participants.
In addition to acting in its capacity as U.S. Paying Agent, The Bank of New
York may act as a foreign exchange dealer for purposes of converting German
Deutschmarks to U.S. Dollars as described in the paragraph above and, when
acting as a foreign exchange dealer, The Bank of New York will derive profits
from such activities in addition to the fees earned by it for its services as
Trustee, Registrar and U.S. Paying Agent. Each such conversion will be made on
such terms, conditions and charges not inconsistent with the terms of the 12.40%
Notes and 11.15% Notes as The Bank of New York may from time to time establish
in accordance with its regular foreign exchange practices, and subject to
applicable U.S. law and regulations.
A New DTC-DM Note Holder may elect to receive payment of principal and
interest with respect to the 12.40% Exchange Notes and 11.25% Exchange Notes in
German Deutschmarks by causing DTC through the relevant DTC Participant to
notify the U.S. Paying Agent by the time specified below of (i) such New DTC-DM
Note Holder's election to receive all or a portion of such payment in German
Deutschmarks and (ii) wire transfer instructions to a German Deutschmark account
in the Federal Republic of Germany. Such election in respect of any payment must
be made by the New DTC-DM Note Holder at the time and in the manner required by
the DTC procedures applicable from time to time and shall, in accordance with
such procedures, be irrevocable and shall relate only to such payment. DTC
notifications of such election, wire transfer instructions and the amount
payable in German Deutschmarks must be received by the U.S. Paying Agent prior
to 5:00 p.m. New York City time on the fifth New York Business Day (as defined
below) following the relevant record date in the case of interest, and prior to
5:00 p.m. New York City time on the tenth day prior to the payment date for the
payment of principal. Any payments in German Deutschmarks shall be made by wire
transfer of same-day funds to German Deutschmarks accounts designated by DTC.
The term "New York Business Day" shall mean any day other than a Saturday or
Sunday or a day on which banking institutions in New York City are authorized or
required by law or executive order to close.
Payments by DTC Participants and Indirect Participants to owners of
beneficial interests in the New DTC-DM Global Certificates will be governed by
standing instructions and customary practices, as is now the case with
securities held by the accounts of customers registered in "street name," and
will be the responsibility of the DTC Participants or Indirect DTC Participants.
Neither the Trustee nor either Paying Agent will have any responsibility or
liability for any aspect of the records of DTC relating to or payments made by
DTC on account of beneficial interests in the New DTC-DM Global Certificates or
for maintaining, supervising or reviewing any records of DTC relating to such
beneficial interests. Substantially similar principles will apply with regard to
the New DBC-DM Global Certificates and payments to holders of interests therein.
CLEARING AND SETTLEMENT
DBC
DBC is incorporated under the laws of Germany and acts as a specialized
depositary and clearing organization. DBC is subject to regulations and
supervision by the German Banking Supervisory Authority.
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DBC holds securities for DBC Accountholders and facilitates the clearance
and settlement of securities transactions between its DBC Accountholders through
electronic book-entry changes in securities accounts with simultaneous payment
in German Deutschmarks in same-day funds. Thus, the need for physical delivery
of certificates is eliminated.
DBC provides to the DBC Accountholders, among other things, services for
safekeeping, administration, clearance and settlement of domestic German and
internationally traded securities and securities-lending and borrowing. DBC
Accountholders include banking institutions located in Germany, including German
branches of non-German financial institutions, securities brokers or dealers
admitted to a German stock exchange that meet certain additional requirements,
certain foreign clearing institutions and, subject to certain requirements,
other credit institutions within the European Union. Indirect access to DBC is
available to others such as securities brokers and dealers, banks, trust
companies, clearing corporations and others, including individuals that clear
through or maintain custodial relationships with DBC Accountholders either
directly or indirectly.
CEDEL
Cedel, 67 Boulevard Grande-Duchesse Charlotte, L-1331 Luxembourg, was
incorporated in 1970 as a limited company under Luxembourg law. Cedel is owned
by banks, securities dealers and financial institutions, and currently has about
100 shareholders, including U.S. financial institutions or their subsidiaries.
No single entity may own more than five percent of Cedel's stock. Cedel is
registered as a bank in Luxembourg, and as such is subject to regulation by the
Insitut Monetaire Luxembourgeois (the Luxembourg Monetary Authority or "IML"),
which supervises Luxembourg banks. Cedel holds securities for its customers and
facilitates the clearance and settlement of securities transactions by
electronic book-entry transfers between their accounts. Cedel provides various
services, including safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing. Cedel
also deals with domestic securities markets in several countries through
established depository and custodial relationships. Cedel has established an
electronic bridge with Morgan Guaranty Trust as the Euroclear Operator in
Brussels to facilitate settlement of trades between systems. Cedel currently
accepts over 90,000 securities issues on its books.
Cedel's customers are worldwide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations ("Cedel Participants"). Cedel's U.S. customers are limited
to securities brokers and dealers, and banks. Currently, Cedel has approximately
3,000 customers located in over 60 countries, including all major European
countries, Canada, and the United States. Indirect access to Cedel is available
to other institutions which clear through or maintain a custodial relationship
with an account holder of Cedel.
EUROCLEAR
Euroclear was created in 1968 to hold securities for Euroclear participants
(as defined below) and to clear and settle transactions between Euroclear
Participants through simultaneous book-entry delivery against payment, thereby
eliminating the need for physical movement of certificates and any risk from
lack of simultaneous transfers of securities and cash. Transactions may now be
settled in various currencies, including German Deutschmarks. Euroclear includes
various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries. Euroclear is operated by
the Brussels, Belgium office of Morgan Guaranty Trust Company of New York (the
"Euroclear Operator"), under contract with Euroclear Clearance System S.C., a
Belgian cooperative corporation (the "Cooperative"). All operations are
conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Cooperative. Euroclear participants (the "Euroclear Participants")
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
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The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
Related Operating Procedures of the Euroclear System, and applicable Belgian law
(collectively, the "Euroclear Terms and Conditions"). The Euroclear Terms and
Conditions govern transfers of securities and cash within Euroclear, withdrawals
of securities and cash from Euroclear, and receipts of payments with respect to
securities in Euroclear. All securities in Euroclear are held on a fungible
basis without attribution of specific certificates to specific securities
clearance accounts. The Euroclear Operator acts under the Euroclear Terms and
Conditions only on behalf of Euroclear Participants, and has no record of, or
relationship with, persons holding through Euroclear Participants.
Distributions with respect to Notes held beneficially through Euroclear will
be credited to the cash accounts of Euroclear Participants in accordance with
the Euroclear Terms and Conditions, to the extent received by the Euroclear
Operator.
GLOBAL CLEARANCE AND SETTLEMENT PROCEDURES
The following paragraphs set forth the procedures governing settlement of
secondary market sales of securities such as the 12.40% Exchange Notes and
11.15% Exchange Notes in effect on the date hereof.
SECONDARY MARKET SALES WITHIN EACH CLEARING SYSTEM AND BETWEEN EUROCLEAR
PARTICIPANTS AND CEDEL PARTICIPANTS. These sales will settle in accordance with
the rules and procedures established by the relevant system. Sales to be settled
within Euroclear or Cedel and between Euroclear and Cedel will normally settle
on a three-day basis unless parties specify a different period (which may be as
short as two days). DTC is a U.S. Dollar-based system but sales may be settled
in other currencies on a free-delivery basis. Sales to be settled within DTC
denominated in U.S. Dollars can settle on a same-day basis; in the case of
non-U.S. Dollar-denominated sales within DTC, the 12.40% Exchange Notes and the
11.15% Exchange Notes can be delivered same-day, but payment will be made
outside DTC.
SECONDARY MARKET SALES BETWEEN DBC ACCOUNTHOLDERS AND EUROCLEAR OR CEDEL
PARTICIPANTS. These trades normally settle on a three-day basis unless parties
specify a different period (which may be as short as two days).
SECONDARY MARKET SALES FROM A DTC PARTICIPANT TO A DBC ACCOUNTHOLDER OR A
EUROCLEAR OR CEDEL PARTICIPANT. Two days prior to settlement, a DTC Participant
selling 12.40% Exchange Notes or 11.15% Exchange Notes to a DBC Accountholder or
a Euroclear Participant or Cedel Participant will notify The Bank of New York of
the settlement instructions and will deliver the 12.40% Exchange Notes or 11.15%
Exchange Notes, as the case may be, to the DM Paying Agent by means of DTC's
Delivery Order procedures. The Bank of New York will send the settlement
instructions to the DM Paying Agent. One day prior to settlement, the DM Paying
Agent will enter delivery-versus-payment instructions into DBC for settlement
through its DBC transfer account; the Euroclear Participant or Cedel Participant
will instruct its clearing system to transmit receipt-versus-payment
instructions to DBC and the DBC Accountholder will transmit such instructions
directly to DBC, with The Bank of New York as counterparty. On the settlement
date, the DTC Participant will input a Deposit/Withdrawal at Custodian ("DWAC")
transaction to remove the 12.40% Exchange Notes or 11.15% Exchange Notes, as the
case may be, to be sold from its DTC securities account; matched and pre-checked
trades are settled-versus-payment, and the DBC Accountholder's or Euroclear
Participant's or Cedel Participant's securities account is credited the same day
for the value settlement date, and the DM Paying Agent causes the DTC
Participant's pre-specified DM account at the DM Paying Agent to be credited for
same-day value, or any other DM account pre-specified by such DTC participant
for value the next day.
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SECONDARY MARKET SALES FROM A DBC ACCOUNTHOLDER OR A EUROCLEAR OR CEDEL
PARTICIPANT TO A DTC PARTICIPANT. Two days prior to settlement, a DTC
Participant will send The Bank of New York the details of the transaction for
transmittal to the DM Paying Agent and instruct its bank to fund the DM Paying
Agent's German Deutschmark account one day prior to settlement.
The Euroclear Participant or Cedel Participant will instruct its clearing
system no later than one day prior to settlement to transmit settlement
instructions to DBC, and a DBC Accountholder will transmit one day prior to
settlement such instructions directly to DBC, naming the DM Paying Agent as
counterparty with further credit to DTC. At the same time (I.E., one day prior
to settlement), the DM Paying Agent will transmit settlement instructions to
DBC.
On the settlement day, upon settlement of the trade in DBC, the DM Paying
Agent will so inform The Bank of New York; the DTC Participant will initiate a
DWAC deposit transaction for The Bank of New York to approve, resulting in a
deposit of 12.40% Exchange Notes or 11.15% Exchange Notes, as the case may be,
in the DTC Participant's securities account same-day value. The DBC
Accountholder or a Euroclear Participant's or Cedel Participant's accounts are
credited with the sales proceeds same-day value.
Settlement in other currencies between the DTC and DBC systems is possible
free-of-payment transfers to move the 12.40% Exchange Notes and the 11.15%
Exchange Notes, but funds movement will take place separately.
Although DTC, DBC, Euroclear and Cedel are expected to follow the foregoing
procedures in order to facilitate transfers of interests in the global
certificates among DTC Participants, DBC Accountholders, Euroclear Participants
and Cedel Participants, they are under no obligation to follow such procedures,
and such procedures may be discontinued at any time. Neither Viatel, the Trustee
nor any Paying Agent will have responsibility for the performance by DTC, DBC,
Euroclear, or Cedel or the DTC Participants, DBC Accountholders, Euroclear
Participants or Cedel Participants of their respective obligations under the
rules and procedures governing their operations.
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CERTAIN INCOME TAX CONSIDERATIONS
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary sets forth the opinion of Kelley Drye & Warren LLP,
counsel to the Company, as to the principal U.S. federal income tax consequences
of an exchange of the Existing Notes for the Exchange Notes and the ownership
and disposition of the Exchange Notes under U.S. federal income tax laws as of
the date hereof. This summary is based on current provisions of the Code,
applicable final, temporary and proposed Treasury Regulations, judicial
authority, and current administrative rulings and pronouncements of the Internal
Revenue Service (the "Service") and upon the facts concerning the Company as of
the date hereof. There can be no assurance that the Service will not take a
contrary view, and no ruling from the Service has been or will be sought by the
Company. Legislative, judicial, or administrative changes or interpretations may
be forthcoming that could alter or modify the statements and conclusions set
forth herein. Any such changes or interpretations may or may not be retroactive
and could affect the tax consequences to holders.
This summary does not purport to deal with all aspects of taxation that may
be relevant to particular holders of the Exchange Notes in light of their
personal investment or tax circumstances, or to certain types of investors
(including individual retirement accounts and other tax deferred accounts,
insurance companies, financial institutions, broker-dealers or tax-exempt
organizations) subject to special treatment under the U.S. federal income tax
laws. This discussion does not deal with special tax situations, such as the
holding of the Exchange Notes as part of a straddle with other investments, or
situations in which the functional currency of a holder is not the U.S. dollar.
In addition, except as otherwise provided, this discussion deals only with
Exchange Notes acquired in exchange for the Existing Notes which were originally
acquired at their initial issue prices in the Offering. Further, this discussion
deals only with Exchange Notes held as capital assets within the meaning of
Section 1221 of the Code.
For purposes of this discussion, the term "U.S. Holder" means a citizen or
resident of the U.S., a corporation, limited liability company or partnership
created or organized in the U.S. or under the law of the U.S. or any state
thereof (including the District of Columbia), an estate the income of which is
includible in gross income for U.S. federal income tax purposes regardless of
its source, or a trust if a court within the U.S. is able to exercise primary
supervision over the administration of the trust and one or more U.S. persons
has the authority to control all substantial decisions of the trust (or, under
certain circumstances, a trust the income of which is includible in gross income
for U.S. federal income tax purposes regardless of its source). The term
"Non-U.S. Holder" means any person other than a U.S. Holder.
THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION ONLY. THE TAX TREATMENT MAY
VARY DEPENDING UPON A HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD CONSULT
THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF
PURCHASING, HOLDING AND DISPOSING OF THE EXCHANGE NOTES, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
THE EXISTING NOTES -- UNITS
For U.S. federal income tax purposes, the Existing Notes were originally
issued and sold as part of a Unit with the issue price of a Unit allocated
between the components of such Unit based on the Company's best judgment of the
relative fair market values on the issue date as follows: (i) $544.11 to the
Existing 12.50% Notes and $100 to the Series A Preferred issued therewith; (ii)
DM 546.68 to the Existing 12.40% Notes and DM 18.54 to the Subordinated
Convertible Debenture issued therewith; (iii) $1,000 to the Existing 11.25%
Notes and $100 to the Series A Preferred issued therewith; and (iv) DM 1,000 to
the Existing 11.15% Notes and DM 18.54 to the Subordinated Convertible Debenture
issued therewith.
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Because each Exchange Note is a continuation of the corresponding Existing
Note, the term "Note" refers to both the Exchange Notes and the Existing Notes.
Pursuant to Treasury Regulations issued under provisions of the Code
relating to OID (the "OID Regulations"), each holder will be bound by such
allocations for U.S. federal income tax purposes unless such holder discloses on
a statement attached to its tax return for the taxable year that includes the
acquisition date of such Unit that its allocations differs from those of the
Company. No assurance can be given that the Service will accept the Company's
allocations. If the Company's allocations were successfully challenged by the
Service, the accrual of OID, if any, on the Notes, the gain or loss on the sale
or other disposition of a Note, and certain other consequences of an investment
in the Units could be different from the consequences that would result under
the allocations determined by the Company.
The exchange of the Existing Notes for the Exchange Notes pursuant to the
Exchange Offers will not be a taxable event for U.S. federal income tax
purposes. As a result, there will not be any material U.S. federal income tax
consequences to a holder exchanging the Existing Notes for the Exchange Notes
pursuant to the Exchange Offers.
THE NOTES
Under applicable authorities, the Company intends to treat the Notes as
indebtedness for U.S. federal income tax purposes. However, it is possible that
the Service will contend that the Notes should be treated as an equity interest
in, rather than indebtedness of, the Company. In the event that the Notes are
treated as equity, the amount of any actual or constructive payments on any such
Note would first be taxable to the holder as dividend income to the extent of
the Company's current and accumulated earnings and profits, and next would be
treated as a return of capital to the extent of the holder's tax basis in the
Note with any remaining amount treated as gain from the sale of a Note. As a
result, until such time as the Company has earnings and profits as determined
for U.S. federal income tax purposes, payments on any Note treated as equity
will be a nontaxable return of capital and will be applied against and reduce
the adjusted tax basis of such Note in the hands of its holder (but not below
zero) and any excess will be treated as gain from the sale of the Note. Further,
payments on the Notes treated as equity to Non-U.S. Holders would not be
eligible for the portfolio interest exception from U.S. withholding tax, and
dividends thereon would be subject to U.S. withholding tax at a flat rate of 30%
(or lower applicable treaty rate) and gain from their sale or other taxable
disposition might also be subject to U.S. tax in certain circumstances. In
addition, in the event of equity treatment, the Company would not be entitled to
deduct interest on the Notes for U.S. federal income tax purposes. The remainder
of this discussion assumes that the Notes will constitute indebtedness of the
Company for such tax purposes.
PAYMENTS OF INTEREST ON THE SENIOR NOTES
GENERAL. Interest paid on a Senior Note (whether in U.S. dollars or in
foreign currency) will generally be taxable to a U.S. Holder as ordinary
interest income at the time it accrues or is received, in accordance with the
U.S. Holder's method of accounting for federal income tax purposes.
FOREIGN CURRENCY DENOMINATED NOTES. A U.S. Holder of an 11.15% Note will be
required to include in income the U.S. dollar value of the interest paid on an
11.15% Note. The amount of interest income so realized by a U.S. Holder that
uses the cash method of tax accounting will be the U.S. dollar value of the
foreign currency payment based on the spot rate of exchange on the date of
receipt regardless of whether the payment in fact is converted into U.S.
dollars.
A U.S. Holder that uses the accrual method of tax accounting will accrue
interest income on an 11.15% Note in foreign currency, and will translate the
accrued amount into U.S. dollars using the average rate of exchange for the
accrual period (generally, the simple average of the spot exchange rates for
each business day of such period or other average exchange rate for the period
reasonably derived and consistently applied by the holder) or, with respect to
an accrual period that spans two taxable years, at the
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average rate for the partial period within the taxable year. At the time the
interest so accrued in a prior accrual period is received, the U.S. Holder will
realize exchange gain or loss equal to the difference, if any, between the spot
rate of the foreign currency received by the U.S. Holder and the amount of
interest income previously accrued for such period. Such exchange gain or loss,
if any, will be ordinary gain or loss and generally will not be treated as
interest income or expense, except to the extent provided by administrative
pronouncements of the Service.
A U.S. Holder may elect to translate accrued interest income into U.S.
dollars at the spot rate on the last day of the interest accrual period (or, in
the case of a partial accrual period, the spot rate on the last day of the
taxable year) or, if the date of receipt is within five business days of the
last day of the interest accrual period, the spot rate on the date of receipt. A
U.S. Holder that makes such an election must apply it consistently to all debt
instruments from year to year and cannot change the election without the consent
of the Service.
For purposes of this discussion, the "spot rate" generally means a rate that
reflects a fair market rate of exchange available to the public for currency
under a "spot contract" in a free market and involving representative amounts. A
"spot contract" is a contract to buy or sell a currency on or before two
business days following the date of the execution of the contract. If such a
spot rate cannot be demonstrated, the Service has the authority to determine the
spot rate.
ORIGINAL ISSUE DISCOUNT
GENERAL. The Discount Notes will be issued with OID for U.S. federal income
tax purposes. Each U.S. Holder will be required to accrue any OID on a Discount
Note into income on a constant-yield basis (regardless of whether such U.S.
Holder is a cash or accrual basis taxpayer) in advance of the receipt of
corresponding cash payments on such Discount Note. See "-- Taxation of Original
Issue Discount."
The amount of OID with respect to a Discount Note will be equal to the
excess of (i) its "stated redemption price at maturity" over (ii) its issue
price, as determined above. See "-- The Existing Notes -- Units." Under the OID
Regulations, the "stated redemption price at maturity" of a Discount Note will
include all payments to be made in respect thereof, including any stated
interest payments, other than "qualified stated interest." Payments of qualified
stated interest are payments of interest which are unconditionally payable in
cash or property (other than debt instruments of the issuer) at least annually
at a qualifying rate, including a single fixed rate. Because stated interest on
the Discount Notes is not payable until October 15 , 2003, all payments of
stated interest on the Discount Notes must be included in the stated redemption
price at maturity.
TAXATION OF ORIGINAL ISSUE DISCOUNT. A U.S. Holder of a Discount Note
issued with OID is required to include in gross income for U.S. federal income
tax purposes an amount equal to the sum of the "daily portions" of such OID for
all days during the taxable year on which the holder holds the Discount Note.
The daily portions of OID required to be included in a U.S. Holder's gross
income in a taxable year will be determined on a constant-yield basis by
allocating to each day during the taxable year on which the holder holds the
Discount Note a pro-rata portion of the OID on such Discount Note which is
attributable to the "accrual period" in which such day is included. Accrual
periods with respect to a Discount Note may be of any length and may vary in
length over the term of the Discount Note as long as (i) no accrual period is
longer than one year and (ii) each scheduled payment of interest or principal on
the Discount Note occurs on either the final or first day of an accrual period.
The amount of the OID attributable to each accrual period will be the product of
the "adjusted issue price" at the beginning of such accrual period and the yield
to maturity of the Discount Note (stated in a manner appropriately taking into
account the length of the accrual period). The yield to maturity is the discount
rate that, when used in computing the present value of all payments to be made
under the Discount Note, produces an amount equal to the issue price of the
Discount Note. The adjusted issue price of a Discount Note at the beginning of
an accrual period
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generally will equal the issue price of the Discount Note plus the aggregate
amount of OID that accrued in all prior accrual periods, less any cash payments
on the Discount Note.
FOREIGN CURRENCY DENOMINATED NOTES. A U.S. Holder of a 12.40% Note will be
required to include in income the U.S. dollar value of the amount of OID and, if
applicable, market discount (provided an election is made to accrue the market
discount currently (see "-- Market Discount, Acquisition Premium")) that has
accrued during an accrual period. The U.S. dollar value of such accrued income
will be determined in the same manner discussed above with respect to U.S.
Holders of 11.15% Notes that are on an accrual method of tax accounting. See
"--Payments of Interest on the Senior Notes -- Foreign Currency Denominated
Notes" above. At the time the interest so accrued in a prior accrual period is
received, the U.S. Holder will realize exchange gain or loss equal to the
difference, if any, between the spot rate of the foreign currency received by
the U.S. Holder and the amount of interest income previously accrued for such
period. Such exchange gain or loss, if any, will be ordinary gain or loss and
generally will not be treated as interest income or expense, except to the
extent provided by administrative pronouncements of the Service.
EFFECT OF MANDATORY AND OPTIONAL REDEMPTIONS ON OID. In the event of a
Change of Control, the Company will be required to offer to redeem all of the
Notes at redemption prices specified elsewhere herein. In the event that the
Company receives net proceeds from one or more Equity Offerings, the Company
may, at any time prior to April 15, 2001, use all or a portion of such net
proceeds to redeem the Notes in amounts and at redemption prices specified
elsewhere herein. Under the OID Regulations, computation of yield and maturity
of the Notes is not affected by such redemption rights and obligations if, based
on all the facts and circumstances as of the issue date, payments on the Notes
are significantly more likely than not to occur in accordance with the stated
payment schedule of the Notes (that does not reflect a Change of Control or
Equity Offerings). The Company believes, based on all of the facts and
circumstances as of the issue date, that the stated payment schedule is
significantly more likely than not to occur with respect to the Notes.
Therefore, the Company will not take the redemption rights and obligations into
account in determining the yield and maturity of the Notes.
The Company may redeem the Notes, in whole or in part, at any time on or
after April 15, 2003, at redemption prices specified elsewhere herein, plus
accrued and unpaid interest to the date of redemption. The OID Regulations
contain rules for determining the yield and maturity of any instrument that may
be redeemed prior to its stated maturity date at the option of the issuer. Under
the OID Regulations, solely for purposes of the accrual of OID, it is assumed
that the issuer will exercise any option to redeem a debt instrument if such
exercise will lower the yield-to-maturity of the debt instrument. The Company
believes that it will not be presumed to redeem the Notes prior to their stated
maturity under the foregoing rules because the exercise of such option would not
lower the yield-to-maturity of the Notes.
APPLICABLE HIGH YIELD DISCOUNT OBLIGATIONS
If the yield to maturity on the Discount Notes equals or exceeds the sum of
(x) the "applicable federal rate" (as determined under Section 1273(d) of the
Code) (or, in the case of the 12.40% Notes, the foreign currency rate of
interest that is analogous to the applicable federal rate) in effect for the
month in which the Discount Notes are issued (the "AFR") and (y) five percent,
and the OID on such Discount Notes is "significant," such Discount Notes will be
considered AHYDOs, as defined in Section 163(i) of the Code. With respect to any
Discount Notes that are AHYDOs, the Company would not be entitled to a deduction
for OID accrued on such Discount Notes for U.S. federal income tax purposes
until such time as the Company actually paid interest on such Discount Notes.
For April, 1998, the long-term AFR was 5.89% (based on semi-annual compounding)
and the mid-term AFR was 5.62% (based on semi-annual compounding). The
appropriate AFR depends upon the weighted average maturity of the Discount
Notes. Moreover, if the yield to maturity on any of the Discount Notes exceeds
the sum of (x) the AFR and (y) six percent (such excess is referred to as the
"Disqualified Yield"), the deduction for OID accrued on such Discount Notes will
be permanently disallowed (regardless of whether the Company actually pays
interest
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on such Discount Notes) to the extent such OID is attributable to the
Disqualified Yield on the such Discount Notes ("Dividend-Equivalent Interest").
For purposes of the dividends-received deduction, such Dividend-Equivalent
Interest generally will be treated as a dividend to the extent it is deemed to
have been paid out of the Company's current or accumulated earnings and profits.
Accordingly, a U.S. Holder that is a corporation may be entitled to a
dividends-received deduction with respect to any Dividend-Equivalent Interest
received by such corporate U.S. Holder in respect of the Discount Notes.
MARKET DISCOUNT, ACQUISITION PREMIUM
GENERAL. If a U.S. Holder acquires a Note for an amount that is less than
its stated redemption price at maturity, or in the case of a Discount Note
issued with OID, its revised issue price (generally, adjusted issue price at the
time of acquisition), the amount of the difference will be treated as "market
discount," unless such difference is less than a specified de minimis amount.
Under the market discount rules of the Code, a U.S. Holder will be required to
treat any principal payment on, or any gain on the sale, exchange, retirement or
other disposition (including a gift) of, a Note as ordinary income to the extent
of any accrued market discount that has not previously been included in income.
Market discount generally accrues on a straight-line basis over the remaining
term of the Note, unless the U.S. Holder elects to accrue market discount on a
constant interest method. A U.S. Holder may not be allowed to deduct immediately
all or a portion of the interest expense on any indebtedness incurred or
continued to purchase or to carry such Note.
A U.S. Holder may elect to include market discount in income currently as it
accrues (either on a straight-line basis or, if the U.S. Holder so elects, on a
constant-yield basis), in which case the interest deferral rule set forth in the
preceding paragraph will not apply. Such an election will apply to all market
discount bonds acquired by the U.S. Holder on or after the first day of the
first taxable year to which such election applies and may be revoked only with
the consent of the Service.
A U.S. Holder that acquires a Note for an amount that is greater than the
adjusted issue price of such Note, but equal to or less than the sum of all
amounts payable on such Note after the purchase date, will be considered to have
purchased such Note at an "acquisition premium." Under the acquisition premium
rules of the Code and the OID Regulations, the daily portion of OID which such
holder must include in its gross income with respect to such Note for any
taxable year will be reduced by an amount equal to the OID multiplied by a
fraction, the numerator of which is the amount of such acquisition premium and
the denominator of which is the OID remaining for the period from the date the
Note was purchased to its maturity date.
FOREIGN CURRENCY DENOMINATED NOTES. A U.S. Holder of 12.40% Notes or 11.15%
Notes that elects not to include market discount, if any, in income currently as
it accrues, must translate such market discount into U.S. dollars at the spot
rate on the date that the 12.40% Notes or 11.15% Notes are disposed of. No part
of such accrued market discount is treated as exchange gain or loss. See "--
Original Issue Discount -- Foreign Currency Denominated Notes" for treatment of
market discount which a holder elects to include in income currently as it
accrues.
AMORTIZATION OF BOND PREMIUM
GENERAL. A U.S. Holder that purchases a Note for an amount in excess of the
sum of all remaining payments due on the Note after the purchase date (other
than payments of qualified stated interest in the case of a Senior Note) will be
considered to have purchased the Note at a premium. Such holder may elect to
amortize such premium (as an offset to interest income), using a constant-yield
method, over the remaining term of the Note. Such election, once made, generally
applies to all debt instruments held or subsequently acquired by the U.S. Holder
on or after the first taxable year to which the election applies and may be
revoked only with the consent of the Service. A U.S. Holder that elects to
amortize such premium must reduce its tax basis in the Note by the amount of the
premium amortized during its holding
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period. With respect to a U.S. Holder that does not elect to amortize bond
premium, the amount of such premium will be included in the U.S. Holder's tax
basis for purposes of computing gain or loss in connection with a taxable
disposition of the Note.
FOREIGN CURRENCY DENOMINATED NOTES. Amortizable bond premium in respect of
a 12.40% Note or 11.15% Note will be computed in, and, if an election is made to
amortize such premium, will reduce interest income in, units of foreign
currency. At the time amortized bond premium offsets interest income, exchange
gain or loss, which will be taxable as ordinary income or loss, will be realized
with respect to amortized bond premium on such 12.40% Note or 11.15% Note based
on the difference between the spot rate of exchange on the date or dates such
premium is recovered through interest payments on such Note and the spot rate of
exchange on the date on which the U.S. Holder acquired the 12.40% Note or 11.15%
Note. With respect to a U.S. Holder that does not elect to amortize bond
premium, the amount of bond premium will constitute a market loss when the
12.40% Note or 11.15% Note matures.
SALE OR OTHER DISPOSITION
GENERAL. In general, upon the sale, exchange or redemption of a Note, a
U.S. Holder will recognize taxable gain or loss equal to the difference between
(i) the amount of cash proceeds and the fair market value of any property
received on the sale, exchange or redemption (not including any amount
attributable to accrued but unpaid qualified stated interest) and (ii) the U.S.
Holder's adjusted tax basis in the Note. A U.S. Holder's adjusted tax basis in a
Note generally will be equal to the cost of the Note to such U.S. Holder (or the
portion of the Unit purchase price allocable to such Note), increased by the
amount of any market discount and OID previously taken into income by the U.S.
Holder and reduced by the amount of any amortized bond premium and all payments
received by the U.S. Holder (other than payments of qualified stated interest).
Subject to the discussion of market discount above, gain or loss realized on
the sale, exchange or redemption of a Note will be capital gain or loss. Capital
gain recognized by individual U.S. Holders generally will be subject to a
maximum federal income tax rate of (i) 39.6% if the U.S. Holder held the Note
for not more than one year, (ii) 28% if the U.S. Holder held the Note for more
than one year but not more than eighteen months, and (iii) 20% if the U.S.
Holder held the Note for more than eighteen months. The distinction between
capital gain or loss and ordinary income or loss is also relevant for purposes
of, among other things, limitations with respect to the deductibility of capital
losses.
FOREIGN CURRENCY DENOMINATED NOTES. Gain or loss realized on the sale,
exchange or redemption of a 12.40% Note or 11.15% Note that is attributable to
fluctuations in currency exchange rates will be ordinary income or loss, which
will not be treated as interest income or expense. Such foreign currency gain or
loss will be realized only to the extent of the total gain or loss realized by a
U.S. Holder on the sale, exchange or redemption of the 12.40% Note or 11.15%
Note. A U.S. Holder will have a tax basis in any foreign currency received on
the sale, exchange or redemption of a 12.40% Note or 11.15% Note equal to the
U.S. dollar value of such foreign currency, determined at the time of such sale,
exchange or redemption.
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NON-U.S. HOLDERS
In general, subject to the discussion below:
(a) payments of principal or interest (including OID) on the Notes by the
Company or any paying agent to a beneficial owner of a Note that is a Non-U.S.
Holder will not be subject to U.S. withholding tax, provided that, in the case
of interest or accrued OID, (i) such Non-U.S. Holder does not own, actually or
constructively, 10% or more of the total combined voting power of all classes of
stock of the Company entitled to vote, within the meaning of Section 871(h)(3)
of the Code, (ii) such Non-U.S. Holder is not a "controlled foreign corporation"
(within the meaning of the Code) that is related, directly or indirectly, to the
Company through stock ownership, (iii) such Non-U.S. Holder is not a bank
receiving interest described in Section 881(c)(3)(A) of the Code, and (iv) the
certification requirements under Section 871(h) or Section 881(c) of the Code
and Treasury Regulations thereunder (summarized below) are satisfied;
(b) a Non-U.S. Holder of a Note will not be subject to U.S. federal income
tax on gains realized on the sale, exchange or other disposition of such Note,
unless (i) such Non-U.S. Holder is an individual who is present in the U.S. for
183 days or more in the taxable year of sale, exchange or other disposition, and
certain conditions are met, (ii) such gain is effectively connected with the
conduct by the Non-U.S. Holder of a trade or business in the U.S. and, if
certain tax treaties apply, is attributable to a U.S. permanent establishment
maintained by the Non-U.S. Holder, or (iii) the Non-U.S. Holder is subject to
Code provisions applicable to certain U.S. expatriates; and
(c) a Note held by an individual who is not a citizen or resident of the
U.S. at the time or his death will not be subject to U.S. estate tax as a result
of such individual's death, provided that, at the time of such individual's
death, the individual does not own, actually or constructively, 10% or more of
the total combined voting power of all classes of stock of the Company entitled
to vote and payments with respect to such Note would not have been effectively
connected with the conduct by such individual of a trade or business in the U.S.
To satisfy the certification requirements referred to in (a)(iv) above,
Sections 871(h) and 881(c) of the Code and currently effective Treasury
Regulations thereunder require that either (i) the beneficial owner of a Note
must certify, under penalties of perjury, to the Company or its paying agent, as
the case may be, that such owner is a Non-U.S. Holder and must provide such
owner's name and address, and U.S. taxpayer identification number ("TIN"), if
any, or (ii) a securities clearing organization, bank or other financial
institution that holds customers securities in the ordinary course of its trade
or business (a "Financial Institution") and holds the Note on behalf of the
beneficial owner thereof must certify, under penalties of perjury, to the
Company or its paying agent, as the case may be, that such certificate has been
received from the beneficial owner and must furnish the payor with a copy
thereof. A certificate described in this paragraph is effective only with
respect to payments of interest made to the certifying Non-U.S. Holder after
delivery of the certificate in the calendar year of its delivery and the two
immediately succeeding calendar years. Under temporary Treasury Regulations,
such requirement will be fulfilled if the beneficial owner of a Note certifies
on IRS Form W-8, under penalties of perjury, that it is a Non-U.S. Holder and
provides its name and address, and any Financial Institution holding the Note on
behalf of the beneficial owner files a statement with the withholding agent to
the effect that it has received such a statement from the beneficial owner (and
furnishes the withholding agent with a copy thereof).
Treasury Regulations published on October 14, 1997 (the "New Regulations"),
and, pursuant to an announcement made by the Service on March 30, 1998,
effective for payments made after December 31, 1999, will provide alternative
methods for satisfying the certification requirements described above. The New
Regulations also would require, in the case of Notes held by a foreign
partnership, that (i) the certification be provided by the partners rather than
by the foreign partnership and (ii) the partnership provide certain information,
including a U.S. taxpayer identification number. A look-through rule would apply
in the case of tiered partnerships.
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If a Non-U.S. Holder of a Note is engaged in a trade or business in the
U.S., and if interest (including OID) on the Note or gain realized on the sale,
exchange or other disposition of the Note are effectively connected with the
conduct of such trade or business (and, if certain tax treaties apply, are
attributable to a U.S. permanent establishment maintained by the Non-U.S. Holder
in the United States), the Non-U.S. Holder, although exempt from U.S. federal
withholding tax (provided that the certification requirements discussed in the
next sentence are met), will generally be subject to regular U.S. income tax on
such interest, dividends or gain in the same manner as if it were a U.S. Holder.
In lieu of the certificate described above (with respect to non-effectively
connected interest), such a Non-U.S. Holder will be required, under currently
effective Treasury Regulations, to provide the Company with a properly executed
IRS Form 4224 in order to claim an exemption from withholding tax. In addition,
if such Non-U.S. Holder is a foreign corporation, it may be subject to a branch
profits tax equal to 30% (or such lower rate provided by an applicable treaty)
of its effectively connected earnings and profits for the taxable year, subject
to certain adjustments. For purposes of the branch profits tax, interest
(including OID) on a Note and any gain recognized on the sale, exchange or other
disposition of a Note will be included in the earnings and profits of such
Non-U.S. Holder if such interest, dividends or gain are effectively connected
with the conduct by a Non-U.S. Holder of a trade or business in the United
States. The New Regulations will change certain of the withholding reporting and
certification requirements described above, effective for payments made after
December 31, 1999, subject to certain grandfathering provisions.
In the event the Notes were treated as equity, the periodic payments
received by a Non-U.S. Holder on the Notes would not qualify for the portfolio
interest exemption from U.S. federal income tax described above. Rather, the
periodic payments would be subject to a 30% U.S. federal withholding tax (or
reduced rate under an applicable tax treaty) if income on the Notes was not
effectively connected with a U.S. trade or business of such Non-U.S. Holder.
Under currently effective Treasury Regulations, a withholding agent would be
required to withhold tax from all payments made on the stock regardless of the
Company's earnings and profits, but holders could apply for refunds if such
stock's share of the Company's earnings and profits were less than the amount of
the payments. Under the New Regulations, and with respect to payments made after
December 31, 1999, a company may reduce the amount of withholding required under
the foregoing rule if it elects to make a reasonable estimate of its current and
accumulated earnings and profits.
Non-U.S. Holders should consult with their tax advisors regarding U.S. and
foreign tax consequences with respect to the Notes.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Backup withholding of U.S. federal income tax at a rate of 31% may apply to
payments made in respect of a Note to a holder that is not an "exempt recipient"
and that fail to provide certain identifying information (such as the holder's
TIN) in the manner required. Generally, individuals are not exempt recipients,
whereas corporations and certain other entities are exempt recipients. Payments
made in respect of a Note must be reported to the Service, unless the holder is
an exempt recipient or otherwise establishes an exemption.
In the case of payments to a Non-U.S. Holder of interest on a Note, Treasury
Regulations provide that backup withholding and information reporting will not
apply to payments with respect to which either requisite certification has been
received or an exemption has otherwise been established (provided that neither
the Company nor a paying agent has actual knowledge that the holder is a U.S.
Holder or that the conditions of any other exemption are not in fact satisfied).
Payments of the proceeds of a sale of a Note to or through a foreign office
of a broker that is a U.S. person, a "controlled foreign corporation" (within
the meaning of the Code) or a foreign person, 50% or more of whose gross income
from all sources for the three-year period ending with the close of its taxable
year preceding the payment was effectively connected with the conduct of a trade
or business within the
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U.S., are currently subject to certain information reporting requirements,
unless the payee is an exempt recipient or such broker has evidence in its
records that the payee is a Non-U.S. Holder and no actual knowledge that such
evidence is false and certain other conditions are met. Temporary Treasury
Regulations indicate that such payments are not currently subject to backup
withholding. Under current Treasury Regulations, payments of the proceeds of a
sale of a Note to or through the U.S. office of a broker will be subject to
information reporting and backup withholding unless the payee certifies under
penalties of perjury as to his or her status as a Non-U.S. Holder and satisfies
certain other qualifications (and no agent or broker who is responsible for
receiving or reviewing such statement has actual knowledge that it is incorrect)
and provides his or her name and address or the payee otherwise establishes an
exemption.
Non-U.S. Holders should consult their tax advisors regarding the application
of information reporting and backup withholding in their particular situations,
the availability of an exemption therefrom, and the procedure for obtaining such
an exemption, if available. Any amounts withheld under the backup withholding
rules from a payment to a holder of a Note will be allowed as a refund or credit
against such holder's U.S. federal income tax, provided that the required
information is furnished to the Service.
As noted above, the Treasury Department recently issued the New Regulations.
In general, the New Regulations do not significantly alter the substantive
withholding and information reporting requirements but unify current
certification procedures and forms and clarify reliance standards. Under the New
Regulations, special rules apply which permit the shifting of primary
responsibility for withholding to certain financial intermediaries acting on
behalf of beneficial owners. Although the New Regulations do not take effect
until after December 31, 1999, the Service announced on March 30, 1998, that it
will regard the 1999 calendar year as a transition period for the administration
of the withholding tax system. Accordingly, in enforcing compliance with current
withholding rules for 1999, the Service will take into account the extent to
which a withholding agent makes a good faith effort to transform its information
systems to comply with the New Regulations. A holder of a Note should consult
with its tax advisor regarding the application of the backup withholding rules
to its particular situation, the availability of an exemption therefrom, the
procedure for obtaining such an exemption, if available, and the impact of the
New Regulations on payments made with respect to Notes after December 31, 1999.
THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF UNITED STATES FEDERAL
INCOME TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF NOTES IN LIGHT OF
ITS PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION. PROSPECTIVE HOLDERS
SHOULD CONSULT THEIR OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM
OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF NOTES, INCLUDING THE APPLICATION
AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS
OF CHANGES IN UNITED STATES OR OTHER TAX LAWS.
CERTAIN FEDERAL REPUBLIC OF GERMANY INCOME TAX CONSIDERATIONS
The following summary sets forth the opinion of Oppenhoff & Radler, German
tax counsel to the Company, as to the principal German income tax consequences
of an exchange of Existing Notes for the Exchange Notes and the ownership and
disposition of the Exchange Notes under German income tax laws as of the date
hereof. This summary is based on current provisions of German law and upon the
facts concerning the Company as of the date hereof. Legislative, judicial, or
administrative changes or interpretations may be forthcoming that could alter or
modify the statements and conclusions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to holders.
THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION ONLY AND REFLECTS GERMAN
LAW AS OF THE DATE OF THIS PROSPECTUS. THE TAX TREATMENT MAY VARY DEPENDING UPON
A HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS
AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF
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PURCHASING, HOLDING AND DISPOSING OF THE EXCHANGE NOTES, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY GERMAN FEDERAL STATE OR LOCAL TAX LAWS.
THE EXISTING NOTES -- UNITS
The Existing Notes were originally issued and sold as part of a Unit
allocated between the components of such Units based on the Company's best
judgment of the relative fair market values on the issue date.The Company's
allocation is not binding on the German tax authorities. If the German tax
authorities do not accept the Company's allocation, the amount of accrued OID,
if any, on the Notes, the amount of a gain or loss on the sale or other
disposition of a Note will be different from the amounts that would result under
the allocation determined by the Company.
The exchange of the Existing Notes for the Exchange Notes pursuant to the
Exchange Offers should not be a taxable event for German income tax purposes.
INCOME TAX
Interest paid (or, if income of the holder is determined on an accrual
basis, including OID, if any, accrued) on a Note that is (i) paid to holders who
are residents of the Federal Republic of Germany for tax purposes or which are
corporations that maintain their statutory seats or principal places of
management in the Federal Republic of Germany ("German Holder"), or is (ii)
attributable to a permanent establishment maintained by, or a fixed base
regularly available to, a holder otherwise not deemed to be resident in the
Federal Republic of Germany for German tax purposes (hereinafter "Foreign
Holder"), is subject to German income tax by assessment at regular German tax
rates. The same applies to accrued interest and accrued OID, if any, at the time
of the sale or redemption of the Notes and included in the price or redemption
price. Such interest or OID, if any, is also subject to a solidarity surcharge
(SOLIDARITATSZUSCHLAG) equal to 5.5% of the otherwise applicable German income
tax liability attributable to such interest income.
WITHHOLDING TAX
Under current German law, principal and interest on the Notes will be
payable without imposition of, or deduction or withholding imposed or levied by,
the Federal Republic of Germany, unless any of the circumstances described below
are met.
Recipients of interest on the Notes will be subject to an advance deduction
for income tax payable by the recipient of interest (ZINSABSCHLAG, hereinafter
the "Deduction") under certain circumstances. The Deduction will apply, INTER
ALIA, at a rate of 30% of the gross amount of interest paid or disbursed by a
German financial institution, including a German branch of a foreign financial
institution, but excluding a foreign branch of a German financial institution
(hereinafter, the "Disbursing Agent") if the Disbursing Agent holds the Notes in
custody.
The Deduction will apply to:
(i) a holder of a Note who is resident in the Federal Republic of Germany,
which, for purposes of German taxation, includes a natural person having
a residence or habitual abode in the Federal Republic of Germany, and a
juridical person having its statutory seat or place of management in the
Federal Republic of Germany, or
(ii) a holder of a Note who is not resident in the Federal Republic of
Germany and who is therefore taxable in the Federal Republic of Germany
only with respect to certain German-source income if according to German
tax law the interest received from such Note constitutes income from such
certain German sources (such as income effectively connected with a
German trade or business, income from the letting and leasing of German
property, etc.).
155
<PAGE>
Where a holder of a Note disposes of the Note prior to maturity, the excess
of interest having accrued since the last interest payment up to the disposal of
the Note (hereinafter "Accrued Interest") over any accrued interest paid by the
holder of a Note to the same Disbursing Agent during the same calendar year will
be subject to the Deduction at a rate of 30%, provided the Accrued Interest is
credited separately.
In case the interest is not paid in cash and interest received in cash is
not sufficient to cover the Deduction, the holder of the Note is obliged under
German law to provide the person who is obliged to withhold the Deduction with
the shortfall. Otherwise, the person who is obliged to withhold the Deduction
must notify the competent tax authorities accordingly.
Due to the fact that the Discount Notes carry OID, an additional Deduction
may apply if such Discount Note is repaid at maturity or sold by the holder of a
Discount Note prior to maturity, as follows:
(x) a positive difference between the issue price or purchase price paid
by such holder (and attributable to the Discount Note) and the
redemption amount or selling price, respectively, will be subject to
the Deduction at a rate of 30%, provided the same Disbursing Agent
acquired or sold the Discount Note and has, since such acquisition
or sale, held such Discount Notes in custody;
(y) in cases in which the Disbursing Agent did not acquire or sell the
Discount Note, and did not hold the Discount Note in custody, the
Deduction will apply at a rate of 30% calculated on 30% of the
redemption amount, or on 30% of the selling price, respectively.
A solidarity surcharge (Solidaritatszuschlag) at a rate of 5.5% of the
amount of the Deduction (the rate mentioned above of 30% increases to 31.65%),
applies while the solidarity surcharge is in effect.
The Deduction gives rise to a refundable tax credit against a German
resident holder's assessed liability to corporate or personal income tax in the
case of (i) above. The same applies in the case of (ii) above with respect to a
holder of a Note not resident in the Federal Republic of Germany.
CAPITAL GAINS
Gains derived from the sale or other disposition of Notes by a holder, other
than those attributable to Accrued Interest or OID, if any, are not subject to
tax in the Federal Republic of Germany, unless (i) in the case of a Foreign
Holder, the gains are attributable to a permanent establishment maintained by,
or a fixed base regularly available to, such holder in the Federal Republic of
Germany, or (ii) in the case of a German Holder, such holder is a corporate
entity resident for tax purposes in the Federal Republic of Germany or the Notes
were otherwise held as business assets of the holder, or (iii) a speculative
capital gain (i.e., if the time period between the acquisition and the disposal
of the Notes does not exceed six months and the Notes do not qualify as business
assets) is given by a German resident who holds the Notes.
THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF FEDERAL REPUBLIC OF
GERMANY INCOME TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF NOTES, IN
LIGHT OF ITS PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION. PROSPECTIVE
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISOR AS TO THE PARTICULAR TAX
CONSEQUENCES TO THEM OF PURCHASING, HOLDING AND DISPOSING OF EXCHANGE NOTES,
INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS
AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL REPUBLIC OF GERMANY TAX LAWS.
156
<PAGE>
PLAN OF DISTRIBUTION
Reference is made to "The Exchange Offers" above for a description of the
Exchange Offers, including the purpose of the Exchange Offers, the basis upon
which the Exchange Notes are offered and expenses incurred in connection with
the Exchange Offers.
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offers must acknowledge that it will deliver a copy of this
Prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Existing Notes where such Existing Notes were acquired by such
broker-dealer for its own account as a result of market-making activities or
other trading activities. For a period of 180 days after the closing of the
Exchange Offers, Viatel will use its best efforts to maintain the effectiveness
of the Registration Statement and to amend and supplement the Prospectus
contained therein in order to permit such Prospectus to be lawfully delivered by
any broker-dealer for use in connection with any such resale. However, if any
holder is acquiring Exchange Notes in the Exchange Offers for the purpose of
distributing or participating in a distribution of the Exchange Notes, such
holder cannot rely on the position of the staff of the Commission enunciated in
the no-action letters regarding MORGAN STANLEY & CO., INCORPORATED (available
June 5, 1991) and EXXON CAPITAL HOLDINGS CORPORATION (available May 13, 1988),
or interpreted in the Commission's interpretative letter to SHEARMAN & STERLING
(available July 2, 1993), or similar no-action or interpretive letters, will not
be entitled to validly tender Existing Notes in the Exchange Offers and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any sale or transfer of such Existing Notes,
unless such sale or transfer is made pursuant to an exemption from, or in a
transaction not subject to, such requirements.
Viatel will not receive any proceeds from the exchange of Existing Notes for
Exchange Notes or from the sale of Exchange Notes by any broker-dealer or any
other person. Exchange Notes received by broker-dealers for their own account
pursuant to the Exchange Offers may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the Exchange Notes or a combination of such methods of
resale, and at market prices prevailing at the time of resale, or at the prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker or dealer and/or the purchasers of any Exchange Notes. Any broker or
dealer that resells Exchange Notes that were received by it for its own account
pursuant to the Exchange Offers and any person that participates in the
distribution of such Exchange Notes may be deemed to be an "underwriter" within
the meaning of the Securities Act and any profit from any such resale of
Exchange Notes or any commissions or concessions received by any such person may
be deemed to be underwriting compensation under the Securities Act. The Letters
of Transmittal state that by acknowledging that it will deliver and by
delivering a Prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
Viatel has agreed to pay all expenses incidental to the Exchange Offers
other than commissions or concessions of any broker-dealer and will indemnify
holders of the Existing Notes (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act.
By acceptance of these Exchange Offers, each broker-dealer that receives
Exchange Notes pursuant to the Exchange Offers agrees that, upon receipt of
notice from Viatel of the happening of any event which makes any statement in
this Prospectus untrue in any material respect or which requires the making of
any changes in this Prospectus in order to make the statements therein not
misleading (which notice Viatel agrees to delivery promptly to such
broker-dealers), such broker-dealer will suspend use of this Prospectus until
Viatel has amended or supplemented this Prospectus to correct such misstatement
or omission and has furnished copies of the amended or supplemented Prospectus
to such broker-dealer or until such broker-dealer is advised in writing by
Viatel that the use of the Prospectus may be resumed, and such
157
<PAGE>
broker-dealer has received copies of any additional or supplemental filings that
are incorporated by reference in the Prospectus.
The Exchange Notes are new securities for which there currently is no
market. It is not intended that the Exchange Notes will be listed on any
national or foreign securities exchange and will not be authorized for trading
on Nasdaq. There can be no assurance that an active market for the Exchange
Notes will develop or as to the liquidity of any such market.
LEGAL MATTERS
The validity of the Exchange Notes will be passed upon for the Company by
Kelley Drye & Warren LLP, New York, New York, counsel to the Company.
EXPERTS
The consolidated financial statements and schedule of Viatel, Inc. and
subsidiaries as of December 31, 1996 and 1997 and for each of the years in the
three year period ended December 31, 1997 appearing herein and elsewhere in the
Registration Statement have been included herein and in the registration
statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, upon the authority of such firm as experts in
accounting and auditing.
158
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
VIATEL, INC. AND SUBSIDIARIES
Independent Auditors' Report............................................................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997............................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997......................................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficiency) for the
Years ended December 31, 1995, 1996 and 1997............................................................. F-5
Consolidated Statements of Cash Flows for the Years ended
December 31, 1995, 1996 and 1997......................................................................... F-6
Notes to Consolidated Financial Statements for the Years
Ended December 31, 1995, 1996 and 1997................................................................... F-7
Condensed Consolidated Balance Sheet as of March 31, 1998 (Unaudited)...................................... F-20
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 1997 and 1998
(Unaudited).............................................................................................. F-21
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1997 and 1998
(Unaudited).............................................................................................. F-22
Notes to Condensed Consolidated Financial Statements for the Three Months Ended March 31, 1997 and 1998
(Unaudited).............................................................................................. F-23
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Viatel, Inc:
We have audited the consolidated balance sheets of Viatel, Inc. and
subsidiaries as of December 31, 1996 and 1997, and the related consolidated
statements of operations, stockholders' equity (deficiency), and cash flows for
each of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements 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 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
New York, New York
March 4, 1998, except as to note 13(c),
which is as of March 18, 1998
F-2
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
-------------- --------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents...................................................... $ 75,796,102 $ 21,095,635
Marketable securities, current................................................. 8,181,332 3,499,691
Trade accounts receivable, net of allowance for doubtful accounts of $602,000
and $1,041,000, respectively................................................. 8,542,305 10,980,737
Other receivables.............................................................. 4,402,944 6,505,875
Prepaid expenses............................................................... 789,307 1,347,814
-------------- --------------
Total current assets......................................................... 97,711,990 43,429,752
-------------- --------------
Marketable securities, non-current............................................... 9,004,075 22,546,591
Property and equipment, net...................................................... 21,074,417 54,093,748
Deferred financing and registration fees, net of accumulated amortization of
$742,000 and $1,121,000, respectively.......................................... 3,046,897 2,668,541
Intangible assets, net........................................................... 1,973,910 1,670,251
Other assets..................................................................... 1,853,161 2,400,315
-------------- --------------
$ 134,664,450 $ 126,809,198
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Accrued telecommunications costs............................................... $ 11,915,671 $ 16,899,194
Accounts payable and other accrued expenses.................................... 5,916,223 15,232,939
Current installments of notes payable.......................................... -- 3,099,454
Current installments of obligations under capital leases....................... 96,064 273,469
Commissions payable............................................................ 349,646 258,533
-------------- --------------
Total current liabilities.................................................... 18,277,604 35,763,589
-------------- --------------
Long term liabilities:
Senior discount notes, less discount of $42,945,967 and $30,845,388,
respectively................................................................. 77,754,033 89,854,612
Notes payable, excluding current installments.................................. -- 7,684,963
Obligations under capital leases, excluding current installments............... 149,983 569,719
Equipment purchase obligation.................................................. -- 1,500,000
-------------- --------------
Total long term liabilities.................................................. 77,904,016 99,609,294
-------------- --------------
Commitments and contingencies
Stockholders' equity (deficiency):
Preferred Stock, $.01 par value. Authorized 1,000,000 shares, no shares issued
and outstanding.............................................................. -- --
Common Stock, $.01 par value. Authorized 50,000,000 shares, issued and
outstanding 22,513,226 and 22,635,267 shares, respectively................... 225,132 226,353
Additional paid-in capital..................................................... 125,236,410 125,661,323
Unearned compensation.......................................................... (130,080) (65,040)
Cumulative translation adjustment.............................................. (862,458) (5,356,474)
Accumulated deficit............................................................ (85,986,174) (129,029,847)
-------------- --------------
Total stockholders' equity (deficiency)...................................... 38,482,830 (8,563,685)
-------------- --------------
$ 134,664,450 $ 126,809,198
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Telecommunications revenue....................................... $ 32,313,293 $ 50,418,694 $ 73,018,004
-------------- -------------- --------------
Operating expenses:
Costs of telecommunications services........................... 27,648,340 42,130,308 63,504,031
Selling, general and administrative expenses................... 24,327,537 32,856,785 36,075,778
Depreciation and amortization.................................. 2,636,787 4,801,624 7,717,236
Equipment impairment loss...................................... 560,419 -- --
-------------- -------------- --------------
Total operating expenses..................................... 55,173,083 79,788,717 107,297,045
Other income (expenses):
Interest income................................................ 3,281,926 1,852,323 3,685,711
Interest expense............................................... (8,856,317) (10,848,025) (12,450,343)
Share in loss of affiliate..................................... (41,530) (9,625) --
-------------- -------------- --------------
Net loss..................................................... $ (28,475,711) $ (38,375,350) $ (43,043,673)
-------------- -------------- --------------
-------------- -------------- --------------
Net loss per common share, basic............................. $ (2.09) $ (2.47) $ (1.90)
-------------- -------------- --------------
-------------- -------------- --------------
Net loss per common share, diluted........................... $ (2.09) $ (2.47) $ (1.90)
-------------- -------------- --------------
-------------- -------------- --------------
Weighted average common shares outstanding................... 13,640,980 15,514,479 22,620,178
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-4
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF CLASS A
COMMON COMMON CLASS A ADDITIONAL CUMULATIVE
STOCK STOCK COMMON COMMON PAID-IN UNEARNED TRANSLATION ACCUMULATED
SHARES SHARES STOCK STOCK CAPITAL COMPENSATION ADJUSTMENT DEFICIT
----------- ----------- --------- --------- ------------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1995............... 10,716,135 2,904,846 $ 107,161 $ 29,048 $ 29,982,211 $ -- $ 1,523 $ (19,135,113)
Issuance of
restricted common
stock.............. 20,000 -- 200 -- 116,800 (78,000) -- --
Foreign currency
translation
adjustment -- -- -- -- -- -- (166,199) --
Net loss........... -- -- -- -- -- -- -- (28,475,711)
----------- ----------- --------- --------- ------------- ------------- ------------ --------------
Balance at December
31, 1995........... 10,736,135 2,904,846 107,361 29,048 30,099,011 (78,000) (164,676) (47,610,824)
Issuance of
restricted common
stock.............. 66,666 -- 667 -- 389,333 (52,080) -- --
Issuance of common
stock, net of
$9,541,954 issue
costs.............. 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......... -- -- -- -- -- -- (697,782) --
Net loss............. -- -- -- -- -- -- -- (38,375,350)
----------- ----------- --------- --------- ------------- ------------- ------------ --------------
Balance at December
31, 1996........... 22,513,226 -- 225,132 -- 125,236,410 (130,080) (862,458) (85,986,174)
Stock options
exercised.......... 122,041 -- 1,221 -- 424,913 -- -- --
Earned
compensation....... -- -- -- -- -- 65,040 -- --
Foreign currency
translation
adjustment......... -- -- -- -- -- -- (4,494,016) --
Net loss............. -- -- -- -- -- -- -- (43,043,673)
----------- ----------- --------- --------- ------------- ------------- ------------ --------------
Balance at December
31, 1997........... 22,635,267 -- $ 226,353 $ -- $ 125,661,323 $ (65,040) $ (5,356,474) $ (129,029,847)
----------- ----------- --------- --------- ------------- ------------- ------------ --------------
----------- ----------- --------- --------- ------------- ------------- ------------ --------------
<CAPTION>
TOTAL
-------------
<S> <C>
Balance at January 1,
1995............... $ 10,984,830
Issuance of
restricted common
stock.............. 39,000
Foreign currency
translation
adjustment (166,199)
Net loss........... (28,475,711)
-------------
Balance at December
31, 1995........... (17,618,080)
Issuance of
restricted common
stock.............. 337,920
Issuance of common
stock, net of
$9,541,954 issue
costs.............. 94,462,046
Conversion of Class A
common stock to
common stock....... --
Stock options
exercised.......... 374,076
Foreign currency
translation
adjustment......... (697,782)
Net loss............. (38,375,350)
-------------
Balance at December
31, 1996........... 38,482,830
Stock options
exercised.......... 426,134
Earned
compensation....... 65,040
Foreign currency
translation
adjustment......... (4,494,016)
Net loss............. (43,043,673)
-------------
Balance at December
31, 1997........... $ (8,563,685)
-------------
-------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................................ $ (28,475,711) $ (38,375,350) $ (43,043,673)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization................................. 2,636,787 4,801,624 7,717,236
Interest expense on senior discount notes..................... 8,773,438 10,783,468 12,478,935
Accrued interest income on marketable securities.............. (714,468) (369,761) (2,002,089)
Provision for losses on accounts receivable................... 1,229,473 2,224,953 2,733,220
Share in loss of affiliate.................................... 41,530 9,625 --
Earned compensation........................................... 39,000 337,920 65,040
Deferred financing and registration costs..................... (460,032) -- --
Equipment impairment loss..................................... 560,419 -- --
Changes in assets and liabilities:
Increase in accounts receivable............................... (2,127,611) (6,057,936) (6,220,589)
Increase in prepaid expenses and other receivables............ (2,593,863) (1,013,989) (1,479,665)
Increase in other assets and intangible assets................ (991,345) (315,056) (1,021,891)
Increase in accrued telecommunications costs, accounts
payable, accrued expenses and commissions payable........... 3,592,930 1,643,858 8,248,754
--------------- --------------- ---------------
Net cash used in operating activities....................... (18,489,453) (26,330,644) (22,524,722)
--------------- --------------- ---------------
Cash flows from investing activities:
Purchase of property, equipment and software.................. (11,377,850) (9,423,191) (34,190,052)
Purchase of marketable securities............................. (55,495,423) (30,571,006) (49,097,155)
Proceeds from maturity of marketable securities............... 30,078,399 38,807,045 40,123,514
Investment in affiliate....................................... (262,214) (101,904) --
Issuance of notes receivable.................................. -- (303,227) --
--------------- --------------- ---------------
Net cash used in investing activities......................... (37,057,088) (1,592,283) (43,163,693)
--------------- --------------- ---------------
Cash flows from financing activities:
Borrowings on notes payable................................... -- -- 11,120,672
Proceeds from issuance of Common Stock........................ -- 94,836,122 426,134
Payments under capital leases................................. (1,306,453) (63,885) (524,859)
Repayment of notes payable.................................... (999,463) -- (336,255)
Borrowings under bank credit line............................. -- -- 600,000
--------------- --------------- ---------------
Net cash (used in) provided by financing activities........... (2,305,916) 94,772,237 11,285,692
--------------- --------------- ---------------
Effects of exchange rate changes on cash.......................... 25,757 11,878 (297,744)
--------------- --------------- ---------------
Net (decrease) increase in cash and cash equivalents.............. (57,826,700) 66,861,188 (54,700,467)
Cash and cash equivalents at beginning of year.................... 66,761,614 8,934,914 75,796,102
--------------- --------------- ---------------
Cash and cash equivalents at end of year.......................... $ 8,934,914 $ 75,796,102 $ 21,095,635
--------------- --------------- ---------------
--------------- --------------- ---------------
Supplemental disclosures of cash flow information:
Interest paid................................................... $ 58,040 $ 64,557 $ 134,409
--------------- --------------- ---------------
--------------- --------------- ---------------
Equipment acquired under capital lease obligations.............. $ -- $ 309,933 $ 1,122,000
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
Viatel, Inc. (the "Company") is an international telecommunications company
providing international and domestic long distance telecommunications services,
primarily to small and medium-sized business carriers and resellers.
(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 $8,204,924 at December
31, 1996 and 1997, 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:
<TABLE>
<S> <C>
5 to 7
Communications systems......................................... years
Fiber optic cable systems...................................... 15 years
2 to 5
Leasehold improvements......................................... years
Furniture, equipment and other................................. 5 years
</TABLE>
(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 benefitted, 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.
F-7
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred financing and registration fees represent costs incurred to issue
and register debt and 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 three to seven years.
(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,
1995, 1996 and 1997, the Company experienced $107,846 in foreign exchange
transaction gains and $10,637 and $858 in foreign exchange transaction losses,
respectively.
(I) NET LOSS PER SHARE
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS 128"), for year-end 1997. SFAS
128, which supersedes APB Opinion No. 15, "Earnings Per Share" was issued in
February 1997. SFAS 128 requires dual presentation of basic and diluted earnings
per share ("EPS") for complex capital structures on the face of the statement of
operations. Basic EPS is computed by dividing income or loss by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution from the exercise or conversion of securities into common
stock. Per share amounts for 1996 and 1995 have been retroactively restated to
give effect to SFAS 128 and were not different from EPS measured under APB No.
15.
Net loss and weighted average shares outstanding used for computing diluted
loss per common share were the same as that used for computing basic loss per
common share for each of the years ended December 31, 1995, 1996 and 1997.
The Company had potentially dilutive common stock equivalents of 474,137,
969,836 and 1,052,200 for the years ended December 31, 1995, 1996 and 1997,
respectively, which were not included in the computation of diluted net loss per
common share because they were antidilutive for the periods presented.
F-8
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(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. The Company does not believe
there is any concentration of credit risk on trade receivables 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 11.
(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
F-9
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
(2) 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. 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 Company does not invest in securities for the purpose
of trading and as such does not classify any securities as trading.
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 or 1997.
The following is a summary of the fair value of securities available for
sale at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Corporate debt securities...................................... $ 9,131,726 $ 13,481,881
U.S. Treasury obligations...................................... 6,932,280 2,027,510
Federal agencies obligations................................... 1,121,401 10,536,891
------------- -------------
Total...................................................... $ 17,185,407 $ 26,046,282
------------- -------------
------------- -------------
</TABLE>
Unrealized gains or losses on securities classified as available for sale
are not material at December 31, 1996 and 1997.
Securities available for sale at December 31, 1997 by contractual maturity
are shown below:
<TABLE>
<S> <C>
Due within one year............................................ $3,499,691
Due after one year through two years........................... 1,027,799
Due after two years............................................ 21,518,792
----------
Total.......................................................... $26,046,282
----------
----------
</TABLE>
Actual maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
F-10
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Communications system.............................................................. $ 20,514,213 $ 43,321,912
Fiber optic cable systems.......................................................... 309,933 1,431,933
Leasehold improvements............................................................. 2,122,911 3,254,515
Furniture, equipment and other..................................................... 4,750,137 8,923,806
Construction in progress........................................................... 100,962 10,093,614
------------- -------------
27,798,156 67,025,780
Less accumulated depreciation and amortization..................................... 6,723,739 12,932,032
------------- -------------
$ 21,074,417 $ 54,093,748
------------- -------------
------------- -------------
</TABLE>
At December 31, 1996 and 1997, construction in progress represents a portion
of the current expansion of the European Network. For the years ended December
31, 1995, 1996 and 1997, $508,600, $66,500 and $163,000, respectively, of
interest was capitalized with respect to this project.
(4) INTANGIBLE ASSETS
Intangible assets consist of the following as of December 31:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Acquired employee base and sales force in place.................................... $ 1,607,225 $ 1,607,225
Goodwill........................................................................... 474,065 474,065
Purchased software................................................................. 1,157,467 1,493,546
Other.............................................................................. 374,539 849,276
------------- -------------
3,613,296 4,424,112
Less accumulated amortization...................................................... 1,639,386 2,753,861
------------- -------------
$ 1,973,910 $ 1,670,251
------------- -------------
------------- -------------
</TABLE>
(5) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following as of
December 31:
<TABLE>
<CAPTION>
1996 1997
------------ -------------
<S> <C> <C>
Accounts payable..................................................................... $ 870,875 $ 5,972,722
Accrued expenses..................................................................... 3,792,657 3,252,750
Accrued capital expenditures......................................................... -- 4,738,902
Accrued compensation and benefits.................................................... 1,252,691 1,268,565
------------ -------------
$ 5,916,223 $ 15,232,939
------------ -------------
------------ -------------
</TABLE>
F-11
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(6) LINE OF CREDIT AND LETTERS OF CREDIT
The Company has a revolving line of credit agreement which provides for
secured borrowings of up to $2.3 million. Borrowings under this line of credit
agreement can be made under either of the following interest rate formulas: (i)
the lending institution's prime rate or (ii) the LIBOR rate plus two hundred
basis points. The Company had $0.6 million and no borrowings under the line of
credit agreement at December 31, 1997 and 1996, respectively. The terms of the
line of credit agreement include, among other provisions, requirements for
maintaining defined levels of securities and other liquid collateral. At
December 31, 1997, standby letters of credit of approximately $1.6 million have
been issued under this line of credit agreement.
The weighted-average interest rate on short-term borrowings under this line
of credit agreement at December 31, 1997 was 8.0%.
(7) 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 (the "1994 Notes") 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. 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, 1997, the Company estimated the fair value of these notes to
be $98,371,000. The estimate is based on quoted market prices for the notes.
On March 3, 1998, the Company commenced a tender offer to purchase all of
the outstanding 1994 Notes and a consent solicitation to eliminate most of the
covenants in the indenture relating to the 1994 Notes. The total consideration
to be paid for the 1994 Notes will be determined by reference to a fixed spread
of 100 basis points over the yield to maturity of the United States Treasury
6.375% Notes Due January 15, 2000. Assuming the extinguishment of the 1994 Notes
is completed on March 31, 1998, the Company expects to record an extraordinary
loss of approximately $28.3 million related to the early extinguishment of debt
comprised of the following: (i) a premium of approximately $24.7 million, (ii)
approximately $2.6 million in unamortized deferred financing and registration
fees, and (iii) approximately $1.0 million of other associated costs. The tender
offer is subject to completion of the offering of Units, consisting of Senior
Notes Due 2008 and shares of convertible redeemable preferred stock of the
Company. See Note 15.
(B) EQUIPMENT FINANCING
In November and December 1997, the Company entered into Loan and Security
Agreements with Charter Financial, Inc. ("Charter") pursuant to which the
Company borrowed an aggregate of $11.1 million. Repayment of these loans
commenced on either December 1997 or January 1998, respectively, and
F-12
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(7) LONG TERM LIABILITIES (CONTINUED)
are repayable in thirty-two or thirty-six successive monthly installments. Under
the terms of these arrangements, the Company is required to satisfy certain
EBITDA, unrestricted cash and tangible net worth requirements. Obligations under
these Loan and Security Agreements are secured by the grant to Charter of a
security interest in certain designated telecommunications equipment. A portion
of the payment obligations under these borrowing arrangements are also secured
by letters of credit issued by The Chase Manhattan Bank.
(C) EQUIPMENT PURCHASE OBLIGATION
Equipment purchase obligation represents the long term portion of accrued
capital expenditures which will be financed in 1998. In connection with the
financing of such equipment, which was delivered to the Company in the fourth
quarter of 1997, the Company has entered into an agreement with Charter which is
expected to contain substantially similar terms and provisions as previous
equipment financings. The Company expects such financing to be completed in the
second quarter of 1998.
(8) STOCKHOLDERS' EQUITY
On October 23, 1996, the Company completed an initial public offering
("IPO") of its 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 shares of then 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 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.
(9) INCOME TAXES
The statutory Federal tax rates for the years ended December 31, 1995, 1996
and 1997 were 35%. The effective tax rates were zero for the years ended
December 31, 1995, 1996 and 1997 due to the Company incurring net operating
losses for which no tax benefit was recorded.
For Federal and foreign income tax purposes, the Company has unused net
operating loss carryforwards of approximately $93.9 million expiring in 2007
through 2012. 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.
F-13
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(9) INCOME TAXES (CONTINUED)
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
<S> <C> <C>
1996 1997
-------------- --------------
Accounts receivable principally due to
allowance for doubtful accounts............................. $ 352,000 $ 587,000
OID Interest not deductible in current period................. 6,914,000 11,149,000
Federal net operating loss carryforwards...................... 21,432,000 29,093,000
Foreign net operating loss carryforwards...................... 1,242,000 3,777,000
-------------- --------------
Total gross deferred tax assets......................... 29,940,000 44,606,000
Less valuation allowance...................................... (29,940,000) (44,606,000)
-------------- --------------
Net deferred tax assets................................. $ -- $ --
-------------- --------------
-------------- --------------
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning in making these assessments. During 1996 and 1997, the
valuation allowance increased by $13,610,000 and $14,666,000, respectively.
(10) SEGMENT DATA
The information below summarizes export sales by geographic area.
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Latin America....................................................... $ 12,093,771 $ 14,401,901 $ 16,240,483
Asia/Pacific Rim.................................................... 4,375,412 6,159,507 8,198,705
Middle East......................................................... 554,139 77,832 1,403
Africa.............................................................. 1,207,225 78,833 --
Other............................................................... 369,425 267,446 --
------------- ------------- -------------
$ 18,599,972 $ 20,985,519 $ 24,440,591
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-14
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(10) SEGMENT DATA (CONTINUED)
The information below summarizes the results of operations and selected
balance sheet data for the Company's European geographic segment.
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Revenue............................................................. $ 11,601,000 $ 19,917,000 $ 32,647,000
Operating loss...................................................... 11,076,000 14,753,000 17,092,000
Capital expenditures................................................ 9,959,000 6,475,000 25,544,000
Depreciation expense................................................ 243,000 2,258,000 4,019,000
<CAPTION>
DECEMBER 31,
-------------------------------------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Identifiable assets................................................. $ 10,216,000 $ 15,103,000 $ 55,949,000
</TABLE>
(11) 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
2,333,333 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 1997 was $2.29 and $5.99, 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 1997, (2) an expected life of 10 years
for both 1996 and 1997, (3) volatility of approximately 35.9% for 1996 and 52.2%
for 1997 and (4) an annual dividend yield of 0% for both 1996 and 1997.
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
F-15
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(11) STOCK OPTION PLAN (CONTINUED)
under SFAS No. 123, the Company's net loss would have been increased to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
As reported net loss (in 000s)............................ $ (28,476) $ (38,375) $ (43,044)
Pro forma net loss (in 000s).............................. (28,642) (38,986) (44,171)
As reported net loss per share............................ (2.09) (2.47) (1.90)
Pro forma net loss per share.............................. (2.10) (2.51) (1.95)
</TABLE>
Pro forma net loss reflects only options granted during 1995, 1996 and 1997.
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:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE NUMBER OF
PRICES SHARES
----------- -----------
<S> <C> <C>
Outstanding at January 1, 1995............................................................ $ 3.13 392,654
Granted................................................................................... 5.85 177,654
Forfeited................................................................................. 3.80 (96,171)
----- -----------
Outstanding at December 31, 1995.......................................................... 4.01 474,137
Granted................................................................................... 6.75 822,265
Forfeited................................................................................. 5.77 (187,987)
Exercised................................................................................. 2.70 (138,579)
----- -----------
Outstanding at December 31, 1996.......................................................... 6.18 969,836
Granted................................................................................... 8.61 428,194
Forfeited................................................................................. 6.68 (197,135)
Expired................................................................................... 5.46 (26,654)
Exercised................................................................................. 3.49 (122,041)
----- -----------
Outstanding at December 31, 1997.......................................................... 7.40 1,052,200
----- -----------
----- -----------
</TABLE>
The following table summarizes weighted-average option exercise price
information:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C>
NUMBER WEIGHTED WEIGHTED WEIGHTED
RANGE OF OUTSTANDING AT AVERAGE AVERAGE NUMBER AVERAGE
EXERCISE DECEMBER 31, REMAINING EXERCISE EXERCISABLE AT EXERCISE
PRICES 1997 LIFE PRICE DECEMBER 31, 1997 PRICE
- -------------------------------- -------------- ---------- ----------- ----------------- -----------
$0.75 - $3.50 3,947 6 Years 0.75 3,947 0.75
3.51 - 5.75 62,931 7 Years 3.74 62,931 3.74
5.76 - 8.75 555,179 9 Years 5.93 369,443 5.85
8.76 - 12.00 430,143 10 Years 9.84 132,548 9.68
-------------- --- ------- ---
1,052,200 7.40 568,869 6.47
-------------- --- ------- ---
-------------- --- ------- ---
</TABLE>
F-16
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(11) STOCK OPTION PLAN (CONTINUED)
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.
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, 1997.
(12) 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.
(13) COMMITMENTS AND CONTINGENCIES
(A) LEASES
At December 31, 1997, 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:
<TABLE>
<CAPTION>
CAPITAL OPERATING
------------ ------------
<S> <C> <C>
1998.............................................................. $ 349,098 $ 1,211,500
1999.............................................................. 271,456 1,054,882
2000.............................................................. 201,825 997,279
2001.............................................................. 184,228 639,008
2002.............................................................. -- 464,991
Thereafter........................................................ -- 1,534,057
------------ ------------
1,006,607 $ 5,901,717
------------
------------
Less interest costs............................................... 163,419
------------
$ 843,188
------------
------------
</TABLE>
F-17
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(13) COMMITMENTS AND CONTINGENCIES (CONTINUED)
Total rent expense amounted to $948,826, $1,530,889 and $1,326,433 for the
years ended December 31, 1995, 1996 and 1997, respectively.
(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 approximately $13.8 million for
the year ending December 31, 1998. The Company is involved in disputes with
carriers arising in the ordinary course of business. The Company believes the
outcome of all current disputes will not have a material effect on the Company's
financial position or results of operations.
(C) PURCHASE COMMITMENTS
The Company is continually upgrading and expanding the European Network and
its switching facilities. In connection therewith, the Company has entered into
purchase commitments to expend approximately $11.8 million.
The Company is developing a fiber-optic ring which will connect London,
Paris, Brussels, Antwerp, Rotterdam and Amsterdam (the "Circe Network"). In
connection with the Circe Network, the Company has signed various letters of
intent which currently commit the Company to make certain payments equal to the
lesser of actual cost or $5.3 million. The Company's obligations with respect to
such amounts are subject to further reduction based on an obligation of the
vendor to mitigate damages if the arrangements are terminated by the Company.
The Company does not believe that such arrangements, if terminated by the
Company prior to April 6, 1998, will result in Company expenditures in excess of
$630,000.
(D) LETTERS OF CREDIT
The Company has outstanding irrevocable letters of credit in the amount of
$1.6 million at December 31, 1997. These letters of credit collateralize the
Company's obligations to third parties. The fair value of these letters of
credit approximates contract values based on the nature of the fee arrangements
with the issuing bank.
(E) 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, 1997 for the next three years under such
contracts aggregates approximately $477,000.
(F) LITIGATION
In connection with the Company's transition to direct sales organizations in
Europe, the Company's former independent sales representative in Madrid, Spain
commenced an arbitration proceeding before the American Arbitration Association
in New York claiming a breach of contract by the Company and seeking $5.8
million in damages. In May 1997, the Company settled this matter for an
aggregate cost, including legal fees, of approximately $0.8 million and
exchanged mutual releases. This settlement was charged to selling, general and
administrative expenses during 1997.
F-18
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(14) 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.
(15) SUBSEQUENT EVENTS
(a) On February 27, 1998, the Company acquired Flat Rate Communications,
Inc. ("Flat Rate"), a long distance telecommunications reseller, for $5.0
million of cash, 375,000 shares of the Company's common stock and a contingent
payment based upon operating results for the twelve month period ending February
28, 1999 which will range from zero to $21.0 million in cash and zero to 1.0
million shares of common stock. The Company will record this acquisition under
the purchase method of accounting. If this acquisition had occurred at January
1, 1997, total telecommunications revenue, net loss and net loss per share would
have been $101,753,000 and $44,769,000, and $1.95, respectively.
(b) To finance the tender offer commenced by the Company on March 3, 1998
and to fund certain proposed capital expenditures and general corporate
purposes, the Company is proposing to raise approximately $889.6 million of the
gross proceeds through an offering of units consisting of senior notes and
shares of convertible redeemable preferred stock and units of senior notes and
subordinated convertible debentures.
F-19
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31,
1998
--------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................................................... $ 26,461,943
Marketable securities, current.................................................................. 1,688,343
Trade accounts receivable, less allowance for doubtful accounts of $1,313,000................... 13,815,690
Other receivables............................................................................... 7,283,260
Prepaid expenses................................................................................ 1,283,854
--------------
Total current assets.......................................................................... 50,533,090
--------------
Marketable securities, non-current................................................................ --
Property and equipment, net of accumulated depreciation of $15,182,000............................ 56,997,123
Deferred financing and registration fees, net of accumulated amortization of $1,217,000........... 2,571,962
Intangible assets, net of accumulated amortization of $3,102,000.................................. 9,995,352
Other assets...................................................................................... 1,796,104
--------------
$ 121,893,631
--------------
--------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accrued telecommunications costs................................................................ $ 19,572,434
Accounts payable and other accrued expenses..................................................... 14,878,000
Current installments of notes payable and obligations under capital leases...................... 3,353,527
--------------
Total current liabilities..................................................................... 37,803,961
--------------
Long-term liabilities:
Senior discount notes, less discount of $27,495,460............................................. 93,204,540
Notes payable and obligations under capital leases, excluding current installments.............. 7,655,835
Equipment purchase obligation................................................................... 1,500,000
--------------
Total long-term liabilities................................................................... 102,360,375
--------------
Commitments and contingencies
Stockholders' deficiency:
Preferred Stock, $.01 par value. Authorized 1,000,000 shares, no shares issued and
outstanding................................................................................... --
Common Stock, $.01 par value. Authorized 50,000,000 shares, issued and outstanding 23,077,023... 230,770
Additional paid-in-capital...................................................................... 129,453,149
Unearned compensation........................................................................... (48,780)
Cumulative translation adjustment............................................................... (5,873,448)
Accumulated deficit............................................................................. (142,032,396)
--------------
Total stockholders' deficiency................................................................ (18,270,705)
--------------
$ 121,893,631
--------------
--------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
------------------------------
1997 1998
-------------- --------------
<S> <C> <C>
Telecommunications revenue........................................................ $ 14,552,334 $ 21,238,772
-------------- --------------
Operating Expenses:
Cost of telecommunications services............................................. 12,079,084 19,104,652
Selling, general and administrative expenses.................................... 8,723,000 8,954,802
Depreciation and amortization................................................... 1,262,162 2,910,912
-------------- --------------
Total operating expenses...................................................... 22,064,246 30,970,366
-------------- --------------
Other income (expense):
Interest income................................................................. 1,118,818 509,872
Interest expense................................................................ (3,009,266) (3,780,827)
-------------- --------------
Net loss...................................................................... $ (9,402,360) $ (13,002,549)
-------------- --------------
-------------- --------------
Net loss per common share, basic and diluted.................................. $ (0.42) $ (0.57)
-------------- --------------
-------------- --------------
Weighted average common shares outstanding.................................... 22,591,745 22,783,095
-------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-21
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
------------------------------
1997 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................................ $ (9,402,360) $ (13,002,549)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................................. 1,262,162 2,910,912
Interest expense on senior discount notes..................................... 2,992,999 3,446,507
Accrued interest income on marketable securities.............................. (455,212) (354,962)
Provision for losses on accounts receivable................................... 503,993 753,941
Earned compensation........................................................... 16,260 16,260
Changes in assets and liabilities:
Increase in accounts receivable............................................... (510,106) (2,731,794)
Increase in prepaid expenses and other receivables............................ (780,467) (1,248,084)
(Increase) decrease in other assets and intangible assets..................... (290,886) 555,122
Decrease in accrued telecommunication costs, accounts payable and other
accrued expenses............................................................ (3,886,064) (1,116,029)
-------------- --------------
Net cash used in operating activities....................................... (10,549,681) (10,770,676)
-------------- --------------
Cash flows from investing activities:
Purchase of property, equipment and software.................................... (3,721,743) (2,715,742)
Payment for business acquired excluding cash of $364,000........................ -- (5,000,000)
Purchase of marketable securities............................................... (118,541,950) (3,509,922)
Proceeds from maturity of marketable securities................................. 89,360,201 27,680,804
-------------- --------------
Net cash (used in) provided by investing activities......................... (32,903,492) 16,455,140
Cash flows from financing activities:
Proceeds from issuance of Common Stock.......................................... 352,832 421,243
Repayment of notes payable and bank credit line................................. -- (576,803)
Payments under capital leases................................................... (292,475) (53,422)
-------------- --------------
Net cash provided by (used in) financing activities......................... 60,357 (208,982)
-------------- --------------
Effects of exchange rate changes on cash.......................................... (14,246) (109,174)
-------------- --------------
Net (decrease) increase in cash equivalents....................................... (43,407,062) 5,366,308
Cash and cash equivalents at beginning of period.................................. 75,796,102 21,095,635
-------------- --------------
Cash and cash equivalents at end of period........................................ $ 32,389,040 $ 26,461,943
-------------- --------------
-------------- --------------
Supplemental disclosures of cash flow information:
Interest paid................................................................... $ 16,267 $ 334,320
-------------- --------------
-------------- --------------
Equipment acquired under capital lease obligations.............................. $ 1,023,000 $ --
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-22
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE PERIODS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(1) INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements as of March 31, 1998 and for the three
month periods ended March 31, 1997 and 1998 have been prepared by Viatel, Inc.
and subsidiaries (collectively, the "Company"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. In the opinion
of management, all adjustments (consisting of only normal recurring adjustments)
necessary for a fair presentation of the consolidated financial position,
results of operations and cash flows for each period presented have been made on
a consistent basis. Certain information and footnote disclosures normally
included in consolidated financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations although management believes that the disclosures
herein are adequate to make the information presented not misleading. It is
suggested that these financial statements be read in conjunction with the
Company's annual consolidated financial statements. Operating results for the
three months ended March 31, 1998 may not be indicative of the results that may
be expected for the full year. Certain reclassifications have been made to the
previous year's financial statements to conform to the current year's
presentation.
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS 128"), for year-end 1997. SFAS
128, which supersedes APB Opinion No. 15, "Earnings Per Share" was issued in
February 1997. SFAS 128 requires dual presentation of basic and diluted earnings
per share ("EPS") for complex capital structures on the face of the statement of
operations. Basic EPS is computed by dividing income or loss by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution from the exercise or conversion of securities into common
stock. Per share amounts for the three months ended March 31, 1997 and 1998 have
been retroactively restated to give effect to SFAS 128 and were not different
from EPS measured under APB No. 15.
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income," and Statement of Financial Accounting Standards No. 131
("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information," were issued in June 1997. SFAS 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. This statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income, such as foreign currency fluctuations currently reported
in stockholder's equity, be reported in an annual financial statement that is
displayed with the same prominence as other financial statements. SFAS 131
establishes standards for the way public companies report information about
operating segments in annual financial statements and requires that those
companies report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company has adopted SFAS 130 in the first quarter of 1998 and
will adopt SFAS 131 for its annual reporting in 1998.
(2) 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. 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
F-23
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE PERIODS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(2) INVESTMENTS IN DEBT SECURITIES (CONTINUED)
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 Company does not
invest in securities for the purpose of trading and as such does not classify
any securities as trading.
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 March 31, 1998.
As of March 31, 1998, the Company had corporate debt securities available
for sale of $1,688,343 which were, by contractual maturity, due within one year.
Unrealized gains or losses on securities classified as available for sale
are not material at March 31, 1998.
Actual maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
There were no changes in the classification of any securities held to
maturity or securities available for sale from the time of purchase to the time
of maturity or sale.
(3)STOCK INCENTIVE PLAN
The Amended Stock Incentive Plan (the "Stock Incentive Plan") provides for
the issuance of up to a maximum of 2,566,666 shares of the Company's common
stock, $.01 par value (the "Common Stock").
Stock option activity for the three months ended March 31, 1998 under the
Stock Incentive Plan is shown below:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE NUMBER OF
EXERCISE PRICES SHARES
----------------- ----------
<S> <C> <C>
Outstanding at January 1, 1998................................. $ 7.40 1,052,200
Granted........................................................ 5.44 1,117,000
Exercised...................................................... 6.31 (66,755)
----- ----------
Outstanding at March 31, 1998.................................. $ 6.39 2,102,455
----- ----------
----- ----------
</TABLE>
As of March 31, 1998, 515,369 options were exercisable under the Stock
Incentive Plan.
F-24
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE PERIODS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(4) COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
1997 1998
-------------- --------------
<S> <C> <C>
Net loss...................................................... $ (9,402,360) $ (13,002,549)
Foreign currency translation adjustment....................... (2,165,449) (516,974)
-------------- --------------
Comprehensive loss............................................ $ (11,567,809) $ (13,519,523)
-------------- --------------
-------------- --------------
</TABLE>
(5) 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 single country
would not have a material adverse long-term effect on its business.
(6) ACQUISITION
On February 27, 1998, the Company acquired Flat Rate Communications, Inc.
("Flat Rate"), a long distance telecommunications reseller, for $5.0 million of
cash, 375,000 shares of Common Stock valued at approximately $3.4 million and a
contingent payment based upon operating results for the twelve month period
ending February 28, 1999 which will range from zero to $21.0 million in cash and
zero to 1.0 million shares of Common Stock. The Company recorded this
acquisition under the purchase method of accounting.
(7) SUBSEQUENT EVENTS
(a) UNITS OFFERING
On April 8, 1998, the Company completed an offering of units consisting of
senior notes or senior discount notes and shares of 10% Series A Redeemable
Convertible Preferred Stock, $.01 par value per share, of the Company (the
"Series A Preferred") and units consisting of senior notes or senior discount
notes and subordinated convertible debentures (the "Units Offering") through
which it raised approximately $889.6 million of gross proceeds ($856.6 million
of net proceeds). A portion of the proceeds from the Units Offering were
utilized by the Company to retire its 15% Senior Discount Notes due 2005 (the
"1994 Notes") pursuant to a tender offer transaction. Additionally, a portion of
the proceeds from the Units Offering were used to purchase approximately $122.8
million of U.S. government securities which were pledged as security for the
U.S. dollar denominated senior notes and approximately $30.6 million of German
government obligations which were pledged as security for the Deutschmark
denominated senior notes issued in the Units Offering.
F-25
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE PERIODS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(7) SUBSEQUENT EVENTS (CONTINUED)
(b) PRO FORMA BALANCE SHEET
The following table presents the effects on the Company's selected balance
sheet data of the Units Offering as of March 31, 1998, on a pro forma basis,
assuming the Units Offering had occurred at that date.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
-------------------------
ACTUAL PRO FORMA(1)
---------- -------------
<S> <C> <C>
Pro forma Balance Sheet Data (000s):
Cash, cash equivalents and marketable securities................. $ 28,150 $ 612,507
Restricted cash, current and non-current......................... -- 153,347
Working Capital.................................................. 12,729 626,034
Property and equipment, net...................................... 56,997 56,997
Total assets..................................................... 121,894 887,876
Series A redeemable convertible preferred stock.................. -- 43,820
Long-term debt, excluding current installments................... 102,360 854,907
Stockholders' deficiency......................................... (18,271) (48,655)
</TABLE>
- -------------------
(1) Adjusted to give effect to approximately $856.6 million of net proceeds from
the Units Offering, capitalization of approximately $30.8 million of debt
issue costs and the reduction of additional paid in capital of approximately
$2.1 million for issuance costs associated with the Series A Preferred
issued as part of certain of the units and the extinguishment of the
Company's then existing 1994 Notes for approximately $118.9 million
resulting in an extraordinary loss of approximately $28.3 million which
includes the writeoff of deferred financing costs of approximately $2.6
million.
F-26
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE EXCHANGE
OFFERS CONTAINED HEREIN, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR IN THE
ACCOMPANYING LETTERS OF TRANSMITTAL AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY VIATEL.
NEITHER THIS PROSPECTUS NOR THE ACCOMPANYING LETTERS OF TRANSMITTAL CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN
THOSE TO WHICH IT RELATES NOR DO THEY CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITY TO ANY PERSON IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR THE ACCOMPANYING LETTERS OF TRANSMITTAL NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATIONS THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF VIATEL SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Available Information.......................... 7
Summary........................................ 8
Risk Factors................................... 23
The Exchange Offers............................ 39
Use of Proceeds................................ 49
Capitalization................................. 50
Unaudited Pro Forma Financial Data............. 51
Selected Consolidated Financial Data........... 55
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 57
Business....................................... 68
Management..................................... 97
Certain Transactions........................... 106
Principal Stockholders......................... 107
Description of the Exchange Notes.............. 109
Certain Income Tax Considerations.............. 146
Plan of Distribution........................... 157
Legal Matters.................................. 158
Experts........................................ 158
Index to Financial Statements.................. F-1
</TABLE>
VIATEL, INC.
OFFERS TO EXCHANGE
12.50% SENIOR DISCOUNT NOTES
DUE 2008,
11.25% SENIOR NOTES DUE 2008,
12.40% SENIOR DISCOUNT NOTES
DUE 2008
AND
11.15% SENIOR NOTES DUE 2008
WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT
FOR ANY AND ALL OUTSTANDING
12.50% SENIOR DISCOUNT NOTES
DUE 2008,
11.25% SENIOR NOTES DUE 2008,
12.40% SENIOR DISCOUNT NOTES
DUE 2008
AND
11.15% SENIOR NOTES DUE 2008,
RESPECTIVELY,
WHICH HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT
------------------
PROSPECTUS
------------------
AUGUST 11, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- ------------------------------------------------------------------------------------------------
<C> <C> <S>
3(i)(a)* -- Amended and Restated Certificate of Incorporation of Viatel (incorporated herein by reference to
Exhibit 3.1(i)(b) to Viatel's Registration Statement on Form S-1, filed on August 7, 1996,
Registration No. 333-09699 ("Viatel's S-1")).
3(i)(b)** -- Certificate of Designations, Preferences and Rights of 10% Series A Redeemable Convertible
Preferred Stock, $.01 par value.
3(ii)* -- Second Amended and Restated Bylaws of Viatel (incorporated herein by reference to Exhibit
3.1(ii) of Viatel's Form 10-Q for the fiscal quarter ended September 30, 1997, File No.
000-21261).
4.1** -- Indenture, dated as of April 8, 1998, between Viatel and The Bank of New York, as Trustee,
relating to Viatel's 12.50% Senior Discount Notes Due 2008 (including form of 12.50% Senior
Discount Note).
4.2** -- Indenture, dated as of April 8, 1998, between Viatel and The Bank of New York, as Trustee,
relating to Viatel's 11.25% Senior Notes Due 2008 (including form of 11.25% Senior Note).
4.3** -- Indenture, dated as of April 8, 1998, among Viatel, The Bank of New York, as Trustee, and
Deutsche Bank, Aktiengesellschaft, as German Paying Agent and Co-Registrar, relating to Viatel's
12.40% Senior Discount Notes Due 2008 (including form of 12.40% Senior Discount Note).
4.4** -- Indenture, dated as of April 8, 1998, among Viatel, The Bank of New York, as Trustee, and
Deutsche Bank, Aktiengesellschaft, as German Paying Agent and Co-Registrar, relating to Viatel's
11.15% Senior Notes Due 2008 (including form of 11.15% Senior Note).
4.5** -- Indenture, dated as of April 8, 1998, among Viatel, The Bank of New York, as Trustee, and
Deutsche Bank, Aktiengesellschaft, as German Paying Agent and Co-Registrar, relating to Viatel's
10% Subordinated Convertible Debentures Due 2011 (including form of 10% Subordinated Convertible
Debenture).
4.6** -- Registration Rights Agreement, dated April 3, 1998, among Viatel, Morgan Stanley & Co.
Incorporated, Morgan Stanley Bank AG, Salomon Brothers Inc, ING Baring (U.S.) Securities, Inc.
and NationsBanc Montgomery Securities LLC.
4.7** -- Conversion Shares Registration Rights Agreement, dated April 3, 1998, among Viatel, Morgan
Stanley & Co. Incorporated, Morgan Stanley Bank AG, Salomon Brothers Inc, ING Baring (U.S.)
Securities, Inc. and NationsBanc Montgomery Securities LLC.
4.8** -- Purchase Agreement, dated April 3, 1998, among Viatel, Morgan Stanley & Co. Incorporated, Morgan
Stanley Bank AG, Salomon Brothers Inc, ING Baring (U.S.) Securities, Inc. and NationsBanc
Montgomery Securities LLC, as Initial Purchasers.
5.1 -- Opinion of Kelley Drye & Warren LLP as to the validity of the securities being registered.
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <C> <S>
10.1* -- Common Stock Registration Rights Agreement, dated as of December 15, 1994, among Viatel, Martin
Varsavsky, Juan Manuel Aisemberg and Morgan Stanley & Co. Incorporated in connection with
Viatel's shares of non-voting Class A Common Stock (incorporated herein by reference to Exhibit
10.4 to Viatel's Registration Statement on Form S-4, filed on May 24, 1995, Registration No.
33-92696 ("Viatel's 1995 S-4")).
10.2* -- Mercury Carrier Services Agreement, dated as of March 1, 1994, between Viatel and Mercury
Communications Limited (incorporated herein by reference to Exhibit 10.8 to Viatel's 1995 S-4).
10.3* -- Provision and Management Facilities Agreement, dated as of October 17, 1994, between Viatel and
Mercury Communications Limited (incorporated herein by reference to Exhibit 10.9 to Viatel's
1995 S-4).
10.4* -- 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 Viatel and S-C V-Tel Investments, L.P.
(incorporated herein by reference to Exhibit 10.13 to Viatel's 1995 S-4).
10.5* -- 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 Viatel's 1995 S-4).
10.6* -- Shareholders' Agreement, dated as of April 5, 1994, and as amended as of November 22, 1994, by
and among Viatel, Martin Varsavsky, Juan Manuel Aisemberg and COMSAT Investments, Inc.
(incorporated herein by reference to Exhibit 10.19 to Viatel's 1995 S-4).
10.7* -- 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
Viatel, Martin Varsavsky and S-C V-Tel Investments, L.P. (incorporated herein by reference to
Exhibit 10.21 to Viatel's 1995 S-4).
10.8* -- Commercial Lease Agreement, dated as of November 1, 1993, and Addendum, dated as of December 8,
1994, between Viatel and 123rd Street Partnership in connection with Viatel's premises located
in Omaha, Nebraska (incorporated herein by reference to Exhibit 10.24 to Viatel's 1995 S-4).
10.9* -- 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
Viatel's 1995 S-4).
10.10* -- Agreement of Lease, dated August 7, 1995, between Viatel and Joseph P. Day Realty Corp.
(incorporated herein by reference to Exhibit 10.33 to Viatel's 1995 S-4).
10.11* -- Employment Agreement between Viatel and Michael J. Mahoney (incorporated herein by reference to
Exhibit 10.12 to Viatel's Annual Report on Form 10-K for the fiscal year ended December 31,
1997, File No. 000-21261 (the "1997 Form 10-K")).+
10.12* -- Amended Stock Incentive Plan (incorporated herein by reference to Exhibit 10.31 to Viatel's Form
10-Q for the fiscal quarter ended September 30, 1997, File No. 000-21261).+
10.13* -- Employment Agreement between Viatel and Allan L. Shaw (incorporated herein by reference to
Exhibit 10.14 to the 1997 Form 10-K).+
10.14* -- Employment Agreement between Viatel and Sheldon M. Goldman (incorporated herein by reference to
Exhibit 10.15 to the 1997 Form 10-K).+
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <C> <S>
10.15* -- Mutual Cooperation Agreement, dated as of June 3, 1998, among Viatel, Martin Varsavsky and Jazz
Telecom S.A. (incorporated herein by reference to Exhibit 10.16 to Viatel's Current Report on
Form 8-K, dated June 8, 1998, File No. 000-21261).
10.16*** -- Equipment Purchase Agreement, dated June 29, 1998, between Viatel and Nortel PLC.
10.17 -- Agreement of Lease, dated June 24, 1998, between 685 Acquisition LLC and Viatel, Inc., as
amended by a letter agreement, dated July 27, 1998.
10.18 -- Lease, dated June 23, 1998, between VC Associates, LLC and Viatel New Jersey, Inc.
12.1** -- Calculation of Ratio of Earnings to Fixed Charges.
21.1** -- Subsidiaries of Viatel.
23.1 -- Consent of Kelley Drye & Warren LLP (included in Exhibit 5.1).
23.2 -- Consent of KPMG Peat Marwick LLP.
24.1** -- Power of Attorney.
25.1** -- Statement of Eligibility of The Bank of New York on Form T-1 relating to the 12.50% Senior
Discount Notes Due 2008.
25.2** -- Statement of Eligibility of The Bank of New York on Form T-1 relating to the 11.25% Senior Notes
Due 2008.
25.3** -- Statement of Eligibility of The Bank of New York on Form T-1 relating to the 12.40% Senior
Discount Notes Due 2008.
25.4** -- Statement of Eligibility of The Bank of New York on Form T-1 relating to the 11.15% Senior Notes
Due 2008.
99.1 -- Letter of Transmittal relating to the 12.50% Senior Discount Notes Due 2008 (Dollar
Denominated), the 11.25% Senior Notes Due 2008 (Dollar Denominated), the 12.40% Senior Discount
Notes Due 2008 (DM Denominated/DTC Held) and the 11.15% Senior Notes Due 2008 (DM
Denominated/DTC Held).
99.2 -- Letter of Transmittal relating to the 12.40% Senior Discount Notes Due 2008 (DM Denominated/DBC
Held) and the 11.15% Senior Notes Due 2008 (DM Denominated/ DBC Held).
99.3 -- Notice of Guaranteed Delivery.
</TABLE>
- ---------
* Incorporated herein by reference.
** Previously filed.
*** Confidential treatment granted as to certain portions of this previously
filed exhibit.
+ Management contract or compensatory plan or arrangement.
(b) SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULES:
Schedule II--Valuation and Qualifying Accounts.
All other schedules are omitted because they are inapplicable or the
requested information is shown in the consolidated financial statements or
related notes.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York, State of
New York, on the 6th day of August, 1998.
<TABLE>
<S> <C> <C>
VIATEL, INC.
By: Michael J. Mahoney*
-----------------------------------------
Michael J. Mahoney
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
In accordance with the requirements of the Securities Act of 1933, as
amended, this Amendment No. 1 was signed on the 6th day of August, 1998, by the
following persons in the capacities indicated.
NAME TITLE(S)
- ------------------------------ ---------------------------------------------
Michael J. Mahoney*
- ------------------------------ President, Chief Executive Officer and
Michael J. Mahoney Director (Principal Executive Officer)
Allan L. Shaw* Senior Vice President, Finance; Chief
- ------------------------------ Financial Officer (Principal Financial and
Allan L. Shaw Accounting Officer); and Director
Paul G. Pizzani*
- ------------------------------ Director
Paul G. Pizzani
Francis J. Mount*
- ------------------------------ Director
Francis J. Mount
- ------------------------------ Director
John G. Graham
<TABLE>
<S> <C> <C> <C>
*By: /s/ SHELDON M. GOLDMAN
-------------------------
Sheldon M. Goldman
Attorney-in-fact
</TABLE>
II-4
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATIONS 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, 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
Year ended December 31, 1997................. 602,000 2,733,000 2,294,000 -- 1,041,000
Allowances for asset impairment
Year ended December 31, 1995................. -- $ 560,000 -- -- 560,000
Year ended December 31, 1996................. 560,000 -- -- -- 560,000
Year ended December 31, 1997................. 560,000 -- -- -- 560,000
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ---------- ----------------------------------------------------------------------------------- ---------------
<C> <C> <S> <C>
3(i)(a)* -- Amended and Restated Certificate of Incorporation of Viatel (incorporated herein by
reference to Exhibit 3.1(i)(b) to Viatel's Registration Statement on Form S-1,
filed on August 7, 1996, Registration No. 333-09699 ("Viatel's S-1")).
3(i)(b)** -- Certificate of Designations, Preferences and Rights of 10% Series A Redeemable
Convertible Preferred Stock, $.01 par value.
3(ii)* -- Second Amended and Restated Bylaws of Viatel (incorporated herein by reference to
Exhibit 3.1(ii) of Viatel's Form 10-Q for the fiscal quarter ended September 30,
1997, File No. 000-21261).
4.1** -- Indenture, dated as of April 8, 1998, between Viatel and The Bank of New York, as
Trustee, relating to Viatel's 12.50% Senior Discount Notes Due 2008 (including form
of 12.50% Senior Discount Note).
4.2** -- Indenture, dated as of April 8, 1998, between Viatel and The Bank of New York, as
Trustee, relating to Viatel's 11.25% Senior Notes Due 2008 (including form of
11.25% Senior Note).
4.3** -- Indenture, dated as of April 8, 1998, among Viatel, The Bank of New York, as
Trustee, and Deutsche Bank, Aktiengesellschaft, as German Paying Agent and
Co-Registrar, relating to Viatel's 12.40% Senior Discount Notes Due 2008 (including
form of 12.40% Senior Discount Note).
4.4** -- Indenture, dated as of April 8, 1998, among Viatel, The Bank of New York, as
Trustee, and Deutsche Bank, Aktiengesellschaft, as German Paying Agent and
Co-Registrar, relating to Viatel's 11.15% Senior Notes Due 2008 (including form of
11.15% Senior Note).
4.5** -- Indenture, dated as of April 8, 1998, among Viatel, The Bank of New York, as
Trustee, and Deutsche Bank, Aktiengesellschaft, as German Paying Agent and
Co-Registrar, relating to Viatel's 10% Subordinated Convertible Debentures Due 2011
(including form of 10% subordinated Convertible Debenture).
4.6** -- Registration Rights Agreement, dated April 3, 1998, among Viatel, Morgan Stanley &
Co. Incorporated, Morgan Stanley Bank AG, Salomon Brothers Inc, ING Baring (U.S.)
Securities, Inc. and NationsBanc Montgomery Securities LLC.
4.7** -- Conversion Shares Registration Rights Agreement, dated April 3, 1998, among Viatel,
Morgan Stanley & Co. Incorporated, Morgan Stanley Bank AG, Salomon Brothers Inc,
ING Baring (U.S.) Securities, Inc. and NationsBanc Montgomery Securities LLC.
4.8** -- Purchase Agreement, dated April 3, 1998, among Viatel, Morgan Stanley & Co.
Incorporated, Morgan Stanley Bank AG, Salomon Brothers Inc, ING Baring (U.S.)
Securities, Inc. and NationsBanc Montgomery Securities LLC, as Initial Purchasers.
5.1 -- Opinion of Kelley Drye & Warren LLP as to the validity of the securities being
registered.
10.1* -- Common Stock Registration Rights Agreement, dated as of December 15, 1994, among
Viatel, Martin Varsavsky, Juan Manuel Aisemberg and Morgan Stanley & Co.
Incorporated in connection with Viatel's shares of non-voting Class A Common Stock
(incorporated herein by reference to Exhibit 10.4 to Viatel's Registration
Statement on Form S-4, filed on May 24, 1995, Registration No. 33-92696 ("Viatel's
1995 S-4")).
</TABLE>
<PAGE>
<TABLE>
<C> <C> <S> <C>
10.2* -- Mercury Carrier Services Agreement, dated as of March 1, 1994, between Viatel and
Mercury Communications Limited (incorporated herein by reference to Exhibit 10.8 to
Viatel's 1995 S-4).
10.3* -- Provision and Management Facilities Agreement, dated as of October 17, 1994,
between Viatel and Mercury Communications Limited (incorporated herein by reference
to Exhibit 10.9 to Viatel's 1995 S-4).
10.4* -- 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 Viatel and S-C V-Tel
Investments, L.P. (incorporated herein by reference to Exhibit 10.13 to Viatel's
1995 S-4).
10.5* -- 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 Viatel's
1995 S-4).
10.6* -- Shareholders' Agreement, dated as of April 5, 1994, and as amended as of November
22, 1994, by and among Viatel, Martin Varsavsky, Juan Manuel Aisemberg and COMSAT
Investments, Inc. (incorporated herein by reference to Exhibit 10.19 to Viatel's
1995 S-4).
10.7* -- 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 Viatel, Martin Varsavsky and S-C V-Tel Investments, L.P.
(incorporated herein by reference to Exhibit 10.21 to Viatel's 1995 S-4).
10.8* -- Commercial Lease Agreement, dated as of November 1, 1993, and Addendum, dated as of
December 8, 1994, between Viatel and 123rd Street Partnership in connection with
Viatel's premises located in Omaha, Nebraska (incorporated herein by reference to
Exhibit 10.24 to Viatel's 1995 S-4).
10.9* -- 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 Viatel's 1995 S-4).
10.10* -- Agreement of Lease, dated August 7, 1995, between Viatel and Joseph P. Day Realty
Corp. (incorporated herein by reference to Exhibit 10.33 to Viatel's 1995 S-4).
10.11* -- Employment Agreement between Viatel and Michael J. Mahoney (incorporated herein by
reference to Exhibit 10.12 to Viatel's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997, File No. 000-21261 (the "1997 Form 10-K")).+
10.12* -- Amended Stock Incentive Plan (incorporated herein by reference to Exhibit 10.31 to
Viatel's Form 10-Q for the fiscal quarter ended September 30, 1997, File No.
000-21261).+
10.13* -- Employment Agreement between Viatel and Allan L. Shaw (incorporated herein by
reference to Exhibit 10.14 to the 1997 Form 10-K).+
10.14* -- Employment Agreement between Viatel and Sheldon M. Goldman (incorporated herein by
reference to Exhibit 10.15 to the 1997 Form 10-K).+
10.15* -- Mutual Cooperation Agreement, dated as of June 3, 1998, among Viatel, Martin
Varsavsky and Jazz Telecom S.A. (incorporated herein by reference to Exhibit 10.16
to Viatel's Current Report on Form 8-K, dated June 8, 1998, File No. 000-21261).
10.16*** -- Equipment Purchase Agreement, dated June 29, 1998, between Viatel and Nortel PLC.
10.17 -- Agreement of Lease, dated June 24, 1998, between 685 Acquisition LLC and Viatel,
Inc., as amended by a letter agreement, dated July 27, 1998.
10.18 -- Lease, dated June 23, 1998, between VC Associates, LLC and Viatel New Jersey, Inc.
</TABLE>
<PAGE>
<TABLE>
<C> <C> <S> <C>
12.1** -- Calculation of Ratio of Earnings to Fixed Charges.
21.1** -- Subsidiaries of Viatel.
23.1 -- Consent of Kelley Drye & Warren LLP (included in Exhibit 5.1).
23.2 -- Consent of KPMG Peat Marwick LLP.
24.1** -- Power of Attorney.
25.1** -- Statement of Eligibility of The Bank of New York on Form T-1 relating to the 12.50%
Senior Discount Notes Due 2008.
25.2** -- Statement of Eligibility of The Bank of New York on Form T-1 relating to the 11.25%
Senior Notes Due 2008.
25.3** -- Statement of Eligibility of The Bank of New York on Form T-1 relating to the 12.40%
Senior Discount Notes Due 2008.
25.4** -- Statement of Eligibility of The Bank of New York on Form T-1 relating to the 11.15%
Senior Notes Due 2008.
99.1 -- Letter of Transmittal relating to the 12.50% Senior Discount Notes Due 2008 (Dollar
Denominated), the 11.25% Senior Notes Due 2008 (Dollar Denominated), the 12.40%
Senior Discount Notes Due 2008 (DM Denominated/DTC Held) and the 11.15% Senior
Notes Due 2008 (DM Denominated/DTC Held).
99.2 -- Letter of Transmittal relating to the 12.40% Senior Discount Notes Due 2008 (DM
Denominated/DBC Held) and the 11.15% Senior Notes Due 2008 (DM Denominated/DBC
Held).
99.3 -- Notice of Guaranteed Delivery.
</TABLE>
- ---------
* Incorporated herein by reference.
** Previously filed.
*** Confidential treatment granted as to certain portions of this previously
filed exhibit.
+ Management contract or compensatory plan or arrangement.
<PAGE>
EXHIBIT 5.1
KELLEY DRYE & WARREN LLP
A Limited Liability Partnership Including Professional Associations
101 Park Avenue
New York, New York 10178
--------
(212) 808-7800
August 7, 1998
Viatel, Inc.
800 Third Avenue
New York, New York 10022
Re: Registration Statement on Form S-4 (File No. 333-58921)
-------------------------------------------------------
Ladies and Gentlemen:
We have acted as special counsel to Viatel, Inc., a Delaware
corporation (the "Company"), in connection with the preparation and filing of a
Registration Statement on Form S-4 (File No. 333-58921) (the "Registration
Statement") with the Securities and Exchange Commission (the "Commission")
pursuant to the Securities Act of 1933, as amended (the "Act"), with respect to
the proposed offer by the Company to exchange (the "Exchange Offers")
$500,000,000 principal amount at maturity of its 12.50% Senior Discount Notes
Due 2008, $400,000,000 principal amount of its 11.25% Senior Notes Due 2008, DM
226,000,000 principal amount at maturity of its 12.40% Senior Discount Notes Due
2008 and DM 178,000,000 principal amount of its 11.15% Senior Notes Due 2008
(collectively, the "Exchange Notes") for a like aggregate principal amount of
its outstanding 12.50% Senior Discount Notes Due 2008, 11.25% Senior Notes Due
2008, 12.40% Senior Discount Notes Due 2008 and 11.15% Senior
<PAGE>
Notes Due 2008 (collectively, the "Existing Notes") which have not been
registered under the Act. The Exchange Notes will be issued pursuant to the
respective Indenture, each dated as of April 8, 1998, between the Company and
The Bank of New York, as Trustee, pursuant to which the corresponding series of
Existing Notes was originally issued (collectively, the "Indentures"). As such
counsel, you have requested our opinion as to the matters described herein
relating to the issuance of the Exchange Notes in the Exchange Offers.
In connection with this opinion, we have examined and relied upon: (i)
the Company's Amended and Restated Certificate of Incorporation, as certified by
governmental officials, and the Company's Second Amended and Restated By-laws,
as certified by the Secretary of the Company; (ii) the minute books and other
records of corporate proceedings of the Company, as made available to us by
officers of the Company; (iii) an executed copy of the Registration Statement
and each amendment thereto through the date hereof, together with the exhibits
and schedules thereto, in the form filed with the Commission; (iv) an executed
copy of each of the Indentures; and (v) such other records, agreements,
certificates, instruments and information from officers and other
representatives of the Company and governmental and regulatory authorities as we
have deemed necessary as the basis for the opinion expressed herein; and we have
reviewed such matters of law deemed necessary by us in order to deliver the
within opinion.
For purposes of this opinion, we have assumed the authenticity of all
documents submitted to us as originals, the conformity to originals of copies
and the authenticity of the originals of such copies. We have also assumed the
legal capacity of all natural persons, the genuineness of all signatures on all
documents examined by us, the authority of such persons signing on behalf of the
parties thereto other than the Company and the due authorization, execution and
delivery of all documents by the parties thereto other than the Company. We
express no opinion with respect to the enforceability of any provision of the
Indentures or the Exchange Notes to the extent such provision may be subject to,
or affected by, applicable bankruptcy, insolvency, reorganization, moratorium or
similar state or federal law affecting the rights and remedies of creditors
generally (including, without limitation, fraudulent conveyance laws). We
express no opinion concerning any law of any jurisdiction other than the laws of
the State of New York, the General Corporation Law of the State of Delaware and
the federal laws of the United States of America. Without limiting the
foregoing, we express no opinion with respect to matters of municipal laws or
the rules, regulations or orders of any municipal agencies within any state.
Based upon and subject to the foregoing qualifications, assumptions
and limitations and the further limitations set forth below, it is our opinion
that the Exchange Notes have been duly authorized for issuance by the Company
and, when issued and delivered in exchange for the Existing Notes in the manner
described in the Registration Statement and when executed, issued and
authenticated in accordance with the terms of the respective Indenture, will
constitute valid and legally binding obligations of the Company, enforceable
against the Company in accordance with their terms.
This opinion is limited to the specific issues addressed herein, and
no opinion may
2
<PAGE>
be inferred or implied beyond that expressly stated herein. We assume no
obligation to revise or supplement this opinion should the present laws of the
State of New York, the General Corporation Law of the State of Delaware or the
federal laws of the United States of America be changed by legislative action,
judicial decision or otherwise.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to the reference to our firm under the heading "Legal
Matters" in the Registration Statement. In giving such consent, we do not admit
that we are in the category of persons whose consent is required under Section 7
of the Act or the rules and regulations of the Commission promulgated
thereunder.
This opinion is furnished to you in connection with the filing of the
Registration Statement and is not to be used, circulated, quoted or otherwise
relied upon for any other purpose.
Very truly yours,
KELLEY DRYE & WARREN LLP
3
<PAGE>
Exhibit 10.17
AGREEMENT OF LEASE
Between
685 ACQUISITION LLC
Landlord,
AND
VIATEL, INC.
Tenant.
Premises:
Entire Twenty-Fourth (24th) and Twenty-Fifth (25th) Floors
685 Third Avenue
New York, New York
<PAGE>
TABLE OF CONTENTS
PAGE
1. BASIC LEASE TERMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
A. PREMISES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
B. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2. USE AND OCCUPANCY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
A. PERMITTED USES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
B. USE PROHIBITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3. ALTERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
A. ALTERATIONS WITHIN PREMISES. . . . . . . . . . . . . . . . . . . . . . . . 4
B. CHLOROFLUOROCARBONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
C. SUBMISSION OF PLANS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
D. MECHANICS' LIENS; LABOR CONFLICTS. . . . . . . . . . . . . . . . . . . . . 7
4. REPAIRS - FLOOR LOAD . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
5. WINDOW CLEANING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6. REQUIREMENTS OF LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
7. SUBORDINATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
A. SUBORDINATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
B. ATTORNMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
C. NON-DISTURBANCE AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . .11
8. RULES AND REGULATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . .12
9. INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
A. TENANT'S INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
B. TENANT'S IMPROVEMENT INSURANCE . . . . . . . . . . . . . . . . . . . . . .15
C. WAIVER OF SUBROGATION. . . . . . . . . . . . . . . . . . . . . . . . . . .15
10. DESTRUCTION OF THE PREMISES; PROPERTY LOSS OR DAMAGE . . . . . . . . . . .15
A. REPAIR OF DAMAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
B. LANDLORD'S TERMINATION OPTION. . . . . . . . . . . . . . . . . . . . . . .16
C. REPAIR DELAYS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
i
<PAGE>
D. PROVISION CONTROLLING. . . . . . . . . . . . . . . . . . . . . . . . . . .17
E. PROPERTY LOSS OR DAMAGE. . . . . . . . . . . . . . . . . . . . . . . . . .17
11. CONDEMNATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
A. CONDEMNATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
B. AWARD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
12. ASSIGNMENT AND SUBLETTING. . . . . . . . . . . . . . . . . . . . . . . . .19
A. PROHIBITION WITHOUT CONSENT. . . . . . . . . . . . . . . . . . . . . . . .19
B. NOTICE OF PROPOSED TRANSFER. . . . . . . . . . . . . . . . . . . . . . . .19
C. LANDLORD'S OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
D. TERMINATION BY LANDLORD. . . . . . . . . . . . . . . . . . . . . . . . . .20
E. TAKEBACK BY LANDLORD . . . . . . . . . . . . . . . . . . . . . . . . . . .20
F. EFFECT OF TAKEBACK OR TERMINATION. . . . . . . . . . . . . . . . . . . . .21
G. CONDITIONS FOR LANDLORD'S APPROVAL . . . . . . . . . . . . . . . . . . . .22
H. FUTURE REQUESTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
I. SUBLEASE PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . .25
J. PROFITS FROM ASSIGNMENT OR SUBLETTING. . . . . . . . . . . . . . . . . . .26
K. OTHER TRANSFERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
L. RELATED CORPORATION. . . . . . . . . . . . . . . . . . . . . . . . . . . .27
M. ASSUMPTION BY ASSIGNEE . . . . . . . . . . . . . . . . . . . . . . . . . .28
N. LIABILITY OF TENANT. . . . . . . . . . . . . . . . . . . . . . . . . . . .28
O. LISTINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
P. EXCLUSIVE BROKER . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
Q. RE-ENTRY BY LANDLORD . . . . . . . . . . . . . . . . . . . . . . . . . . .28
13. CONDITION OF THE PREMISES. . . . . . . . . . . . . . . . . . . . . . . . .29
A. ACCEPTANCE BY TENANT . . . . . . . . . . . . . . . . . . . . . . . . . . .29
B. TENANT'S INITIAL ALTERATION. . . . . . . . . . . . . . . . . . . . . . . .30
14. ACCESS TO PREMISES . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
15. CERTIFICATE OF OCCUPANCY . . . . . . . . . . . . . . . . . . . . . . . . .31
16. LANDLORD'S LIABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . .31
17. DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
A. EVENTS OF DEFAULT; CONDITIONS OF LIMITATION. . . . . . . . . . . . . . . .32
B. EFFECT OF BANKRUPTCY . . . . . . . . . . . . . . . . . . . . . . . . . . .33
ii
<PAGE>
C. CONDITIONAL LIMITATION . . . . . . . . . . . . . . . . . . . . . . . . . .34
18. REMEDIES AND DAMAGES . . . . . . . . . . . . . . . . . . . . . . . . . . .34
A. LANDLORD'S REMEDIES. . . . . . . . . . . . . . . . . . . . . . . . . . . .34
B. DAMAGES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
C. LEGAL FEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
19. FEES AND EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
A. CURING TENANT'S DEFAULTS . . . . . . . . . . . . . . . . . . . . . . . . .37
B. LATE CHARGES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
20. NO REPRESENTATIONS BY LANDLORD . . . . . . . . . . . . . . . . . . . . . .37
21. END OF TERM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
A. SURRENDER OF PREMISES. . . . . . . . . . . . . . . . . . . . . . . . . . .38
B. HOLDOVER BY TENANT . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
22. QUIET ENJOYMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
23. FAILURE TO GIVE POSSESSION . . . . . . . . . . . . . . . . . . . . . . . .39
24. NO WAIVER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39
25. WAIVER OF TRIAL BY JURY. . . . . . . . . . . . . . . . . . . . . . . . . .40
26. INABILITY TO PERFORM . . . . . . . . . . . . . . . . . . . . . . . . . . .40
27. BILLS AND NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
28. ESCALATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
A. DEFINED TERMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
B. ESCALATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44
C. PAYMENT OF ESCALATIONS . . . . . . . . . . . . . . . . . . . . . . . . . .44
D. ADJUSTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46
29. SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47
A. ELEVATOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47
B. HEATING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48
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C. COOLING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48
D. AFTER HOURS AND ADDITIONAL SERVICES. . . . . . . . . . . . . . . . . . . .48
E. CLEANING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49
F. SPRINKLER SYSTEM . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50
G. WATER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50
H. ELECTRICITY SERVICE. . . . . . . . . . . . . . . . . . . . . . . . . . . .51
I. INTERRUPTION OF SERVICES . . . . . . . . . . . . . . . . . . . . . . . . .53
30. PARTNERSHIP TENANT . . . . . . . . . . . . . . . . . . . . . . . . . . . .53
A. PARTNERSHIP TENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . .53
B. LIMITED LIABILITY ENTITY . . . . . . . . . . . . . . . . . . . . . . . . .54
31. VAULT SPACE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55
32. SECURITY DEPOSIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55
33. CAPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56
34. ADDITIONAL DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . .56
35. PARTIES BOUND. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56
36. BROKER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56
37. INDEMNITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57
38. ADJACENT EXCAVATION SHORING. . . . . . . . . . . . . . . . . . . . . . . .57
39. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58
A. NO OFFER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58
B. SIGNATORIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58
C. CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58
D. DIRECTORY LISTINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . .58
E. AUTHORITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59
F. SIGNAGE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59
G. CONSENTS AND APPROVALS . . . . . . . . . . . . . . . . . . . . . . . . . .59
H. ICIP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61
I. STORAGE SPACE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61
40. RENEWAL OPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62
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41. ROOFTOP ANTENNA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63
42. RIGHT OF FIRST OFFER . . . . . . . . . . . . . . . . . . . . . . . . . . .66
Exhibit 1 Floor Plan of Premises
Exhibit 1(a) Desired Sublet Premises
Exhibit 2 Form of Letter of Credit
Schedule A Rules and Regulations
Schedule B Tenant's Initial Alteration
Landlord's Core Work
Schedule C Requirements for "Certificates of Final Approval"
Schedule D Tenant Alteration Work and New Construction Conditions
and Requirements
Schedule E Cleaning Specifications
Schedule F HVAC Specifications
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AGREEMENT OF LEASE, made as of this _____ day of June, 1998, between 685
ACQUISITION LLC, a Delaware l imited liability company, having an office c/o
Blackacre Capital Group, L.P., 450 Park Avenue, New York, New York 10022
("LANDLORD") and VIATEL, INC., a D elaware corporation, having an office at
800 Third Avenue, New York, New York 10573 ("TENANT").
W I T N E S S E T H:
- - - - - - - - - --
The parties hereto, for themselves, their heirs, distributees, executors,
administrators, legal representatives, successors and assigns, hereby covenant
as follows:
1. BASIC LEASE TERMS.
A. PREMISES. Landlord hereby leases to Tenant and Tenant hereby
hires from Landlord the entire twenty-fourth (24th) and twenty-fifth (25th)
floors comprised of 33,993 rentable square feet, as more particularly shown
hatched on EXHIBIT 1 annexed hereto and made a part hereof (the "PREMISES") in
the building known as 685 Third Avenue, in the Borough of Manhattan, New York
County, City and State of New York (the "BUILDING" and, together with the plot
of land upon which such building stands, the "REAL PROPERTY") for a term (the
"TERM") to commence on the "Commencement Date" (as hereinafter defined), and
to end on the "Expiration Date" (as hereinafter defined), both dates
inclusive, unless the Term shall sooner end pursuant to any of the terms,
covenants or conditions of this Lease or pursuant to law at the "Rent" (as
hereinafter defined, which Rent shall also include any additional rent payable
hereunder), which Tenant agrees to pay in lawful money of the United States
which shall be legal tender in payment of all debts and dues, public and
private, at the time of payment, in equal monthly installments, in advance,
commencing on the Rent Commencement Date and on the first (1st) day of each
calendar month thereafter during the Term (except as hereinafter otherwise
provided), at the office of Landlord or, such other place as Landlord may
designate, without, except as may be set forth herein to the contrary, if at
all, any set-off, offset, abatement or deduction whatsoever, except that the
first monthly installment of fixed base Rent shall be payable on the date
hereof. If the Rent Commencement Date (as hereinafter defined) shall occur on
a date other than the first (1st) day of any calendar month, Tenant shall pay
to Landlord, on the first (1st) day of the month next succeeding the month
during which the Rent Commencement Date shall occur, an amount equal to such
proportion of an equal monthly installment of Rent as the number of days from
and including the Rent Commencement Date bears to the total number of days in
said calendar month. Such payment, together with the sum paid by Tenant upon
the execution of this Lease, shall constitute payment of the Rent for the
period from the Rent Commencement Date to and including the last day of the
next succeeding calendar month.
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B. DEFINITIONS. The following definitions contained in this
subsection B of this Article 1 shall have the meanings hereinafter set forth
used throughout this Lease, Exhibits, Schedules and Riders (if any).
(i) "BASE TAX YEAR" shall mean collectively, the second half
of the Tax Year (as defined in Article 28 hereof) 2001 and the first half of
the Tax Year 2002.
(ii) "BROKER" shall mean collectively, Insignia/Edward S.
Gordon Co., Inc. and Schlesinger & Co., LLC.
(iii) "COMMENCEMENT DATE" shall mean the date on which Landlord
shall have completed the initial demolition of the Premises and delivered to
Tenant an ACP-5 certificate with respect to the Premises.
(iv) "EXPIRATION DATE" shall mean the tenth (10th) anniversary
of the Rent Commencement Date.
(v) "HAZARDOUS SUBSTANCES" shall mean, collectively, (a)
asbestos and polychlorinated biphenyls and (b) hazardous or toxic materials,
wastes and substances which are defined, determined and identified as such
pursuant to any law, other than everyday cleaning and office supplies which are
used in compliance with all laws.
(vi) "LANDLORD'S CORE WORK" shall mean the work and
installations at the Premises as set forth in SCHEDULE B. All of the terms,
covenants and conditions of SCHEDULE B are incorporated in this Lease by
reference and shall be deemed a part of this Lease as though more fully set
forth in the body of this Lease.
(vii) "PERMITTED USES" shall mean executive and general
offices.
(viii) "RENT" shall mean:
(a) for the period commencing on the Rent Commencement
Date through and including the day immediately preceding the date on which the
third (3rd) year anniversary of the Rent Commencement Date shall occur,
$1,414,108.00 Dollars per annum, payable in equal monthly installments of
$117,842.00 Dollars each; and
(b) for the period commencing on the date on which the
third (3rd) year anniversary of the Rent Commencement Date shall occur through
and including the day immediately preceding the date on which the sixth (6th)
year anniversary of the Rent Commencement Date shall occur, $1,516,087.00
Dollars per annum, payable in equal monthly installments of $126,340.00 Dollars
each; and
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(c) for the period commencing on the date on which the
sixth (6th) year anniversary of the Rent Commencement Date shall occur through
and including the Expiration Date, $1,567,077.00 Dollars per annum, payable in
equal monthly installments of $130,589.00 each.
(ix) "RENT COMMENCEMENT DATE" shall mean April 1, 1999;
provided, however, that (i) if Landlord shall not have substantially completed
Landlord's Core Work on or prior to the Landlord's Core Work Anticipated
Completion Date (as defined in Section VI of Schedule B) by reasons other than
force majeure and (ii) the substantial completion of Landlord's Core Work after
the Landlord's Core Work Anticipated Completion Date unreasonably interferes
with the commencement and/or substantial completion by or on behalf of Tenant of
Tenant's Initial Alteration so as to actually have caused a material delay
(i.e., two (2) weeks) in the completion thereof, Tenant's Rent Commencement Date
shall be extended one (1) day for each day that the commencement and substantial
completion of Tenant's Initial Alteration was actually materially delayed (i.e.,
two (2) weeks) by Landlord's failure to substantially complete Landlord's Core
Work on or prior to the Landlord's Core Work Anticipated Completion Date by
means other than force majeure; provided further, HOWEVER, if Landlord's Core
Work shall not have been substantially completed by July 31, 1999, Tenant may
terminate this Lease by giving written notice to Landlord no later than August
7, 1999.
(x) "TENANT'S INITIAL ALTERATION" shall mean the work and
installations at the Premises as set forth in SCHEDULE B annexed hereto and made
a part hereof. All of the terms, covenants and conditions of SCHEDULE B are
incorporated in this Lease by reference and shall be deemed a part of this Lease
as though more fully set forth in the body of this Lease.
(xi) "TENANT'S PROPORTIONATE SHARE" shall mean 5.25%. Such
calculation was based on a square footage for the Building of 648,016.
Notwithstanding anything to the contrary contained in this subsection B of
this Article 1, Articles 1 through 42 shall control the rights and obligations
of the parties hereto except that the provisions of any Riders shall supersede
any inconsistent provisions in Articles 1 through 42, as the case may be.
2. USE AND OCCUPANCY.
A. PERMITTED USES. Tenant shall use and occupy the Premises for the
Permitted Uses, and for no other purpose.
B. USE PROHIBITIONS. Tenant hereby represents, warrants and agrees
that Tenant's business is not and shall not be photographic, multilith or
multigraph reproductions or offset printing. Anything contained herein to the
contrary notwithstanding, Tenant shall not
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use the Premises or any part thereof, or permit the Premises or any part thereof
to be used (i) for the business of photographic, multilith or multigraph
reproductions or offset printing, (ii) for a banking, trust company, depository,
guarantee or safe deposit business, (iii) as a savings bank, a savings and loan
association or a loan company, (iv) for the sale of travelers checks, money
orders, drafts, foreign exchange or letters of credit or for the receipt of
money for transmission, (v) as a "retail" stock broker's or dealer's office
which shall be open to the general public (except pursuant to prior
appointment), (vi) except for an employee lunch room and vending machines, as a
restaurant or bar or for the sale of confectionery, soda, beverages, sandwiches,
ice cream or baked goods or for the preparation, dispensing or consumption of
food or beverages in any manner whatsoever, (vii) as a news or cigar stand,
(viii) as an employment agency, labor union office, physician's or dentist's
office or for the rendition of any other diagnostic or therapeutic services,
dance or music studio, school (except for the training of employees of Tenant),
(ix) as a barber shop, beauty salon or manicure shop, (x) for the direct sale to
the general public, at retail, wholesale or otherwise, of any goods or products,
except that Tenant shall be permitted to sell telecommunication services by
telephone and to wholesale customers, by telephone or directly, from time to
time, (xi) for a public stenographer or typist, (xii) for a telegraph agency or
secretarial service for the public at large, (xiii) for a messenger service for
the public at large, (xiv) for gambling or gaming activities, obscene or
pornographic purposes or any sort of commercial sex establishment, (xv) for the
possession, storage, manufacture or sale of alcohol, drugs or narcotics, (xvi)
for the conduct of a public auction, (xvii) for the offices or business of any
federal, state or municipal agency or any agency of any foreign government or
(xviii) for any use that would cause the Premises to be deemed a place of public
accommodation under the Americans with Disabilities Act of 1990. Nothing in
this subsection B shall preclude Tenant from using any part of the Premises for
photographic, multilith or multigraph reproductions in connection with, either
directly or indirectly, its own business and/or activities.
3. ALTERATIONS.
A. ALTERATIONS WITHIN PREMISES. (i) Tenant shall not make or
perform or permit the making or performance of, any alterations, installations,
improvements, additions or other physical changes in or about the Premises
("ALTERATIONS") without Landlord's prior consent. Landlord agrees not to
withhold or delay unreasonably its consent to any Alterations proposed to be
made by Tenant to adapt the Premises for those business purposes permitted by
subsection A of Article 2 hereof, which are nonstructural and which do not
affect the Building's mechanical, electrical, plumbing, Class E or other
Building systems or the structural integrity of the Building, provided that such
Alterations are performed only by contractors or mechanics reasonably approved
by Landlord (provided that Landlord hereby consents to Tishman Technologies
Corporation as Tenant's contractor in respect of Tenant's Initial Alteration),
do not affect any part of the Building other than the Premises, do not affect
any service required to be furnished by Landlord to Tenant or to any other
tenant or occupant of the Building, do not reduce the value or utility of the
Building and are performed in compliance with all applicable laws. Tenant shall
not perform work which would (a) require
4
<PAGE>
changes to the structural components of the Building or the exterior design of
the Building, (b) require any material modification to the Building's
mechanical, electrical, plumbing installations or other Building installations
outside the Premises, (c) not be in compliance with all applicable laws, rules,
regulations and requirements of any governmental department having jurisdiction
over the Building and/or the construction of the Premises, including but not
limited to, the Americans with Disabilities Act of 1990, or (d) be incompatible
with the Certificate of Occupancy for the Building. Any changes, because of
Alterations by or on behalf of Tenant (other than Landlord's Core Work),
required by any governmental department affecting the construction of the
Premises shall be performed at Tenant's sole cost. All Alterations (other than
Landlord's Core Work) shall be done at Tenant's expense and all Alterations
which require Landlord's consent shall be done at such times and in such manner
as Landlord may from time to time reasonably designate pursuant to the
conditions for Alterations prescribed by Landlord for the Premises. A copy of
the current construction conditions and requirements for tenant alteration work
and new construction is annexed hereto as SCHEDULE D and made a part hereof.
Notwithstanding anything to the contrary contained herein, Tenant shall not be
required to obtain Landlord's prior consent for any Alterations which (y) cost
in the aggregate less than $100,000.00 in any twelve (12) month period and
(z) consist of either painting, non-structural improvements or are only
decorative in nature.
(ii) All furniture, furnishings and movable fixtures and removable
partitions installed by Tenant must be removed from the Premises by Tenant, at
Tenant's expense, on or prior to the Expiration Date. All Alterations in and to
the Premises which may be made by Landlord or Tenant prior to and during the
Term, or any renewal thereof, shall become the property of Landlord upon the
Expiration Date or earlier end of the Term or any renewal thereof, and shall not
be removed from the Premises by Tenant unless Landlord, at Landlord's option by
notice to Tenant, if such Alteration is a "non-standard" Building Alteration,
elects by notice to Tenant contemporaneously with Landlord's approval of each
portion of any Alteration, to have them removed from the Premises by Tenant, in
which event the same shall be removed from the Premises by Tenant, at Tenant's
expense, prior to the Expiration Date. In the event Landlord elects to have
Tenant remove such Alterations, Tenant shall repair and restore in a good and
workmanlike manner to Building standard original condition (reasonable wear and
tear excepted) any damage to the Premises or the Building caused by such
removal. Any of such fixtures or installations not so removed by Tenant at or
prior to the Expiration Date or earlier termination of the Term shall become the
property of Landlord, but nothing herein shall be deemed to relieve Tenant of
responsibility for the cost of removal of any such fixtures or installations
which Tenant is obligated to remove hereunder.
B. CHLOROFLUOROCARBONS. In the event, in accordance with the other
provisions of this Lease, Tenant repairs or removes any mechanical or other
equipment within the Premises containing chlorofluorocarbons ("CFC'S"), the
repair or removal of such equipment, as the case may be, shall conform with all
requirements of law and industry practices. Additionally, any such repair or
removal shall be done by contractors approved by Landlord and subject to the
procedures to which Landlord's consent shall have previously been
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<PAGE>
obtained. Tenant shall only indemnify and hold Landlord harmless from any
liability or damages resulting from any contamination within the Building, as a
result of the repair or removal of any of the equipment containing CFC's by
Tenant which equipment was either (a) installed by Tenant or (b) consists of any
of the two (2) supplemental air conditioning units (the "SUPPLEMENTAL UNITS")
which were in the Premises on the Commencement Date.
C. SUBMISSION OF PLANS. Prior to making any Alterations requiring
Landlord's consent, Tenant (i) shall submit to Landlord or to a consultant
appointed by Landlord ("LANDLORD'S CONSULTANT") detailed plans and
specifications (including, if applicable, layout, architectural, mechanical,
electrical, plumbing, Class E sprinkler and structural drawings stamped by a
professional engineer or architect licensed in the State of New York) for each
proposed Alteration and shall not commence any such Alteration without first
obtaining Landlord's approval of such plans and specifications, which approval
shall be granted or denied within twenty (20) days after Tenant's written
request therefor, (ii) shall pay to Landlord all reasonable actual out-of-pocket
costs and expenses incurred by Landlord (including the cost of Landlord's
Consultant, provided same is an unrelated third party) in connection with
Landlord's review of Tenant's plans and specifications, (iii) shall, at its
expense, obtain all permits, approvals and certificates required by any
governmental or quasi-governmental bodies, and (iv) shall furnish to Landlord
duplicate original policies of worker's compensation insurance (covering all
persons to be employed by Tenant, and Tenant's contractors and subcontractors in
connection with such Alteration) and comprehensive public liability (including
property damage coverage) insurance in such form, with such companies, for such
periods and in such amounts as Landlord may reasonably approve, naming Landlord
and its agents as additional insureds. Upon notice to Tenant, Landlord or
Landlord's Consultant may assume responsibility, at Tenant's expense, to file
all plans and obtain the necessary building permits, which filing and the
obtaining of building permits, if undertaken, shall be accomplished within
fifteen (15) working days following the date of notice to Tenant that Landlord
or Landlord's Consultant is assuming responsibility therefor, subject to any
delays caused by the City of New York. Upon completion of such Alteration,
Tenant, at Tenant's expense, shall obtain certificates of final approval of such
Alteration, including the "as-built" drawings showing such Alterations, required
by any governmental or quasigovernmental bodies and shall furnish Landlord with
copies thereof. All Alterations shall be made and performed in accordance with
the Rules and Regulations (as hereinafter defined) and in accordance with the
Americans with Disabilities Act of 1990, including but not limited to the
accessibility provisions thereof; all materials and equipment to be incorporated
in the Premises as a result of all Alterations shall be of good quality; no such
materials or equipment shall be subject to any lien, encumbrance, chattel
mortgage or title retention or security agreement. Landlord's approval of
Tenant's plans, specifications and working drawings for Alterations shall create
no responsibility or liability on the part of Landlord with respect to their
completeness, design, sufficiency or compliance with all applicable laws, rules
or regulations of governmental agencies or authorities.
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<PAGE>
D. MECHANICS' LIENS; LABOR CONFLICTS. Any mechanic's lien filed
against the Premises, or the Real Property, for work claimed to have been done
for, or materials claimed to have been furnished to, Tenant shall be discharged
by Tenant within thirty (30) days thereafter, at Tenant's expense, by payment or
filing the bond required by law. Tenant shall not, at any time prior to or
during the Term, directly or indirectly employ, or permit the employment of, any
contractor, mechanic or laborer in the Premises, whether in connection with any
Alteration or otherwise, if, in Landlord's sole but reasonable discretion, such
employment will interfere or cause any conflict with other contractors,
mechanics, or laborers engaged in the construction, maintenance or operation of
the Building by Landlord, Tenant or others. In the event of any such
interference or conflict, Tenant, upon demand of Landlord, shall cause all
contractors, mechanics or laborers causing such interference or conflict to
leave the Building as promptly as commercially reasonable.
4. REPAIRS - FLOOR LOAD. Landlord shall maintain and repair the Building
systems, public and structural portions of the Building, both exterior and
interior, except that Landlord shall have no responsibility to maintain or
repair the Supplemental Units. Tenant shall, throughout the Term, take good
care of the Premises and the fixtures and appurtenances therein and at Tenant's
sole cost and expense, make all nonstructural repairs thereto as and when needed
to preserve them in good working order and condition, reasonable wear and tear
and damage for which Tenant is not responsible under the terms of this Lease
excepted. Tenant shall pay Landlord for all reasonable out-of-pocket costs for
replacements to the lamps, tubes, ballasts and starters in the lighting fixtures
installed in the Premises. Notwithstanding the foregoing, all damage or injury
to the Premises or to any other part of the Building, or to its fixtures,
equipment and appurtenances, whether requiring structural or nonstructural
repairs, caused by or resulting from omission, neglect or improper conduct of or
Alterations made by Tenant or any of Tenant's servants, employees, invitees or
licensees, shall be repaired promptly by Tenant, at its sole cost and expense,
to the satisfaction of Landlord. Tenant also shall repair all damage to the
Building and the Premises caused by the moving of Tenant's fixtures, furniture
or equipment. All the aforesaid repairs shall be of quality and class equal to
the original work or construction and shall be made in accordance with the
provisions of Article 3 hereof. If Tenant fails after ten (10) business days
notice to proceed with due diligence to make repairs required to be made by
Tenant hereunder, the same may be made by Landlord, at the expense of Tenant,
and the expenses thereof incurred by Landlord shall be collectible by Landlord
as additional rent promptly after rendition of a bill or statement therefor.
Tenant shall give Landlord prompt notice of any defective condition in any
plumbing, electrical, air-cooling or heating system located in, servicing or
passing through the Premises. Tenant shall not place a load upon any floor of
the Premises exceeding the floor load per square foot area which such floor was
designed to carry and which is allowed by law. Landlord reserves the right to
reasonably prescribe the weight and position of all safes, business machines and
heavy equipment and installations. Business machines and mechanical equipment
shall be placed and maintained by Tenant at Tenant's expense in settings
sufficient in Landlord's reasonable judgment to absorb and prevent vibration,
noise and annoyance. Except as expressly provided in Article 10 hereof, there
shall be no allowance to Tenant for a diminution of rental value and
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no liability on the part of Landlord by reason of inconvenience, annoyance or
injury to business arising from Landlord, Tenant or others making, or failing to
make, any repairs, alterations, additions or improvements in or to any portion
of the Building, or the Premises, or in or to fixtures, appurtenances, or
equipment thereof, except that if, because of the making, or failing to make, by
Landlord of any repairs, alterations, additions or improvements in or to any
portion of the Building and if, as a result thereof, Tenant is unable to occupy
the Premises for Tenant's Permitted Use for a period of at least ninety (90)
consecutive days (but no greater than 120 days in any 6 month period), Tenant
shall have the right to terminate this Lease by delivering to Landlord at least
a thirty (30) day written notice, in which event this Lease shall terminate on
the date designated in such notice, provided that on such date on which the
Lease is scheduled to terminate, Tenant is still unable to occupy the Premises
for the Permitted Uses. If the Premises be or become infested with vermin as a
result of Tenant's acts or omissions, Tenant, at Tenant's expense, shall cause
the same to be exterminated from time to time to the satisfaction of Landlord
and shall employ such exterminators and such exterminating company or companies
as shall be reasonably approved by Landlord. If the Premises become infested
with vermin as a result of Landlord's acts or omissions, Landlord shall cause
the same to be exterminated as soon as is commercially reasonable. The water
and wash closets and other plumbing fixtures shall not be used for any purposes
other than those for which they were designed or constructed, and no sweepings,
rubbish, rags, acids or other substances shall be deposited therein.
5. WINDOW CLEANING. Tenant shall not clean, nor require, permit, suffer
or allow any window in the Premises to be cleaned, from the outside in violation
of Section 202 of the Labor Law, or any other applicable law, or of the rules of
the Board of Standards and Appeals, or of any other board or body having or
asserting jurisdiction. Landlord shall clean the windows two (2) times per
year.
6. REQUIREMENTS OF LAW. Tenant, at its sole expense, shall comply with
all laws, statutes, orders, directives and regulations of federal, state,
county, city and municipal authorities, departments, bureaus, boards, agencies,
commissions and other sub-divisions thereof, and of any official thereof and any
other governmental and quasi-public authority and all rules, orders, regulations
or requirements of the New York Board of Fire Underwriters, or any other similar
body which shall now or hereafter impose any violation, order or duty upon
Landlord or Tenant with respect to Tenant's specific manner of use of the
Premises, as opposed to mere use. Tenant shall not do or permit to be done any
act or thing upon the Premises which will invalidate or be in conflict with any
insurance policies covering the Building and fixtures and property therein; and
shall not do, or permit anything to be done in or upon the Premises or bring or
keep anything therein, except as now or hereafter permitted by the New York City
Fire Department, New York Board of Fire Underwriters, New York Fire Insurance
Rating Organization or other authority having jurisdiction and then only in such
quantity and manner of storage as not to increase the rate for fire insurance
applicable to the Building, or use the Premises in a manner which shall increase
the rate of fire insurance on the Building or on property located therein, over
that in similar type buildings or in effect prior to
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this Lease. Any work or installations made or performed by or on behalf of
Tenant or any person claiming through or under Tenant pursuant to this Article
shall be made in conformity with, and subject to the provisions of, Article 3
hereof. If by reason of Tenant's failure to comply with the provisions of this
Article, the fire insurance rate shall at the beginning of this Lease or at any
time thereafter be higher than it otherwise would be, then Tenant shall
reimburse Landlord, as additional rent hereunder, for that part of all fire
insurance premiums thereafter paid by Landlord which shall have been charged
because of such failure of use by Tenant, and shall make such reimbursement upon
the first day of the month following such outlay by Landlord. In any action or
proceeding wherein Landlord and Tenant are parties, a schedule or "make up" of
rates for the Building or the Premises issued by the New York Fire Insurance
Rating Organization, or other body fixing such fire insurance rates, shall be
conclusive evidence of the facts therein stated and of the several items and
charges in the fire insurance rates then applicable to the Premises.
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7. SUBORDINATION.
A. SUBORDINATION. This Lease is subject and subordinate to each and
every ground or underlying lease of the Real Property or the Building heretofore
or hereafter made by Landlord (collectively the "SUPERIOR LEASES") and to each
and every trust indenture and mortgage (collectively the "MORTGAGES") which may
now or hereafter affect the Real Property, the Building or any such Superior
Lease and the leasehold interest created thereby, and to all renewals,
extensions, supplements, amendments, modifications, consolidations, and
replacements thereof or thereto, substitutions therefor and advances made
thereunder. Landlord represents that, to the best of Landlord's knowledge,
there are no Superior Leases encumbering the Building or the Real Property.
This clause shall be self-operative and no further instrument of subordination
shall be required to make the interest of any lessor under a Superior Lease, or
trustee or mortgagee of a Mortgage superior to the interest of Tenant hereunder.
In confirmation of such subordination, however, Tenant shall execute promptly
any reasonable certificate evidencing such subordination that Landlord may
request. If the date of expiration of any Superior Lease shall be the same day
as the Expiration Date, the Term shall end and expire twelve (12) hours prior to
the expiration of the Superior Lease. Tenant covenants and agrees that, except
as expressly provided herein, Tenant shall not do anything that would constitute
a default under this Lease, or omit to do anything that Tenant is obligated to
do under the terms of this Lease. If, in connection with the financing of the
Real Property, the Building or the interest of the lessee under any Superior
Lease, any lending institution shall request reasonable modifications of this
Lease that do not increase the obligations in any material respect or adversely
affect the rights of Tenant under this Lease in any material respect, Tenant
covenants to make such modifications.
B. ATTORNMENT. If at any time prior to the expiration of the Term,
any Mortgage shall be foreclosed or any Superior Lease shall terminate or be
terminated for any reason, Tenant agrees, at the election and upon demand of any
owner of the Real Property or the Building, or the lessor under any such
Superior Lease, or of any mortgagee in possession of the Real Property or the
Building, to attorn, from time to time, to any such owner, lessor or mortgagee,
upon the then executory terms and conditions of this Lease, for the remainder of
the term originally demised in this Lease, provided that such owner, lessor or
mortgagee, as the case may be, or receiver caused to be appointed by any of the
foregoing, (a) shall also be bound by the terms of the lease as lessor
thereunder, or (b) shall not then be entitled to possession of the Premises.
The provisions of this subsection B shall inure to the benefit of any such
owner, lessor or mortgagee, shall apply notwithstanding that, as a matter of
law, this Lease may terminate upon the termination of any such Superior Lease,
and shall be self-operative upon any such demand, and no further instrument
shall be required to give effect to said provisions. Tenant, however, upon
demand of any such owner, lessor or mortgagee, agrees to execute, from time to
time, instruments in confirmation of the foregoing provisions of this subsection
B, satisfactory to any such owner, lessor or mortgagee, acknowledging such
attornment and setting forth the terms and conditions of its tenancy. Nothing
contained in this
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subsection B shall be construed to impair any right otherwise exercisable by any
such owner, lessor or mortgagee.
C. NON-DISTURBANCE AGREEMENT.
(i) Landlord represents that, to the best of its knowledge, the
holder of the only Mortgage on the date hereof is Lehman Brothers Holdings Inc.
Landlord shall use its reasonable efforts (which shall include prudent steps
taken by similar landlords with similar lenders) to obtain from each holder of a
Mortgage which may now affect the Real Property or the Building an agreement to
the effect that, if there shall be a foreclosure of its Mortgage, the holder of
such Mortgage will not make Tenant a party defendant to such foreclosure, evict
Tenant, disturb Tenant's possession under this Lease, or terminate or disturb
Tenant's leasehold estate or rights hereunder, and will recognize Tenant as the
direct tenant of the holder of such Mortgage on the same terms and conditions as
are contained in this Lease, subject to the provisions hereinafter set forth,
provided no default shall have occurred and be continuing hereunder (any such
agreement, or any agreement of similar import, from the holder of a Mortgage
being hereinafter referred to as a "NONDISTURBANCE AGREEMENT").
(ii) Landlord shall have no liability to Tenant for its failure to
obtain any Nondisturbance Agreement referred to in subparagraph (i) above.
Landlord's agreement to use reasonable efforts under this subparagraph C shall
not impose any obligation upon Landlord (y) to incur any cost or expense or (z)
to institute any legal or other proceeding in connection with obtaining such
Nondisturbance Agreement.
(iii) Any Nondisturbance Agreement may be made on the condition that
the holder of the Mortgage, or anyone claiming by, through or under such holder,
including a purchaser at a foreclosure sale, shall not be:
(a) liable for any act or omission of any prior landlord
(including, without limitation, the then defaulting landlord), or
(b) subject to any defense or offsets which Tenant may have
against any prior landlord (including, without limitation, the then defaulting
Landlord), or
(c) bound by any payment of Rent or additional rent which
tenant may have made to any prior landlord (including, without limitation, the
then defaulting Landlord) more than thirty (30) days in advance of the date upon
which such payment was due, or
(d) bound by any obligation to make any payment to or on
behalf of Tenant, or
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(e) bound by any obligation to perform any work or to make
improvements to the Premises, except for (i) repairs and maintenance pursuant to
the provisions of Article 4 hereof, the need for which repairs and maintenance
first arises after the date upon which such owner, or holder shall be entitled
to possession of the Premises, (ii) repairs to the Premises or any part thereof
as a result of damage by fire or other casualty pursuant to Article 10 hereof,
but only to the extent that such repairs can be reasonably made from the net
proceeds of any insurance actually made available to such holder, and (iii)
repairs to the Premises as a result of a partial condemnation pursuant to
Article 11 hereof, but only to the extent that such repairs can be reasonably
made from the net proceeds of any award made available to such holder, or
(f) bound by any amendment or modification of this Lease made
without its consent, or
(g) bound to return Tenant's security deposit, if any, until
such deposit has come into its actual possession and Tenant would be entitled to
such security deposit pursuant to the terms of this Lease.
(iv) If required by the holder of a Mortgage, within ten (10)
business days after notice thereof, Tenant shall join in any Nondisturbance
Agreement to indicate its concurrence with the provisions thereof and its
agreement in the event of a foreclosure of such Mortgage or the granting of a
deed in lieu to attorn to such mortgagee or to any person acquiring the interest
of Landlord in the Real Property and Building as Tenant's landlord hereunder.
Any such Nondisturbance Agreement may also contain other terms and conditions as
may otherwise be required by such holder which do not increase Tenant's
obligations under this lease in any material respect, or adversely affect or
diminish the rights in any material respect, or increase the other obligations
of Tenant under this Lease in any material respect.
8. RULES AND REGULATIONS. Tenant and Tenant's servants, employees,
agents, visitors, and licensees shall observe faithfully, and comply strictly
with, the Rules and Regulations annexed hereto and made a part hereof as
SCHEDULE A and such other and further reasonable Rules and Regulations as
Landlord or Landlord's agents may from time to time adopt (collectively, the
"RULES AND REGULATIONS") on such notice to be given as Landlord may elect. In
case Tenant disputes the reasonableness of any additional Rule or Regulation
hereafter made or adopted by Landlord or Landlord's agents, the parties hereto
agree to submit the question of the reasonableness of such Rule or Regulation
for decision to the Real Estate Board of New York, Inc., or to such impartial
person or persons as he may designate, whose determination shall be final and
conclusive upon the parties hereto. The right to dispute the reasonableness of
any additional Rule or Regulation upon Tenant's part shall be deemed waived
unless the same shall be asserted by service of a notice in writing upon
Landlord within thirty (30) days after receipt by Tenant of written notice of
the adoption of any such additional Rule or Regulation. Nothing in this Lease
contained shall be construed to impose upon Landlord any duty or obligation to
enforce the Rules and Regulations or terms, covenants
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or conditions in any other lease, against any other tenant and Landlord shall
not be liable to Tenant for violation of the same by any other tenant, its
servants, employees, agents, visitors or licensees. Landlord shall enforce the
Rules and Regulations on a non-discriminatory basis.
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9. INSURANCE.
A. TENANT'S INSURANCE. Tenant shall obtain at its own expense and
keep in full force and effect during the Term, a policy of commercial general
liability insurance (including, without limitation, insurance covering tenant's
contractual liability under this Lease), under which Tenant is named as the
insured, and Landlord, Landlord's asset manager, Landlord's managing agent, the
present and any future mortgagee of the Real Property or the Building and/or
such other designees specified by Landlord from time to time, are named as
additional insureds. Such policy shall contain (i) a provision that no act or
omission of Tenant shall affect or limit the obligation of the insurance company
to pay the amount of any loss sustained, (ii) a waiver of subrogation against
Landlord or a consent to a waiver of right of recovery against Landlord and
(iii) an agreement by the insurer that it will not make any claim against or
seek to recover from Landlord for any loss, damage or claim whether or not
covered under such policy. Such policy shall also contain a provision which
provides the insurance company will not cancel or refuse to renew the policy, or
change in any material way the nature or extent of the coverage provided by such
policy, without first giving Landlord at least thirty (30) days written notice
by certified mail, return receipt requested, which notice shall contain the
policy number and the names of the insureds and policy holder. The minimum
limits of liability shall be a combined single limit with respect to each
occurrence in an amount of not less than $5,000,000 for injury (or death) and
damage to property or such greater amount as Landlord may, from time to time,
reasonably require. Tenant shall also maintain at its own expense during the
Term a policy of workers' compensation insurance providing statutory benefits
for Tenant's employees and employer's liability. Tenant shall provide to
Landlord upon execution of this Lease and at least thirty (30) days prior to the
termination of any existing policy, a certificate evidencing the effectiveness
of the insurance policies required to be maintained hereunder which shall
include the named insured, additional insured, carrier, policy number, limits of
liability, effective date, the name of the insurance agent and its telephone
number. Tenant shall provide Landlord with a complete copy of any such policy
upon written request of Landlord. Tenant shall have no right to obtain any of
the insurance required hereunder pursuant to a blanket policy covering other
properties unless the blanket policy contains an endorsement that names
Landlord, Landlord's managing agent and/or designees specified by Landlord from
time to time, as additional insureds, references the Premises, and guarantees a
minimum limit available for the Premises equal to the amount of insurance
required to be maintained hereunder. Each policy required hereunder shall
contain a clause that the policy and the coverage evidenced thereby shall be
primary with respect to any policies carried by Landlord, and that any coverage
carried by Landlord shall be excess insurance. The limits of the insurance
required under this subsection shall not limit the liability of Tenant under
this Lease. All insurance required to be carried by Tenant pursuant to the
terms of this Lease shall be effected under valid and enforceable policies
issued by reputable and independent insurers permitted to do business in the
State of New York, and rated in Best's Insurance Guide, or any successor thereto
(or if there be none, an organization having a national reputation) as having a
general policyholder rating of "A-" and a financial
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rating of at least "10". In the event that Tenant fails to continuously
maintain insurance as required by this subsection, Landlord may, after five (5)
business days notice to Tenant, at its option and without relieving Tenant of
any obligation hereunder, order such insurance and pay for the same at the
expense of Tenant. In such event, Tenant shall repay the amount expended by
Landlord, with interest thereon, immediately upon Landlord's written demand
therefor.
B. TENANT'S IMPROVEMENT INSURANCE. Tenant shall also maintain at
its own expense during the Term a policy against fire and other casualty on an
"all risk" form covering all Alterations, construction and other improvements
installed within the Premises, whether existing in the Premises on the date
hereof or hereinafter installed by or on behalf of Landlord or Tenant, and on
all furniture, fixtures, equipment, personal property and inventory of Tenant
located in the Premises and any property in the care, custody and control of
Tenant (fixed or otherwise) sufficient to provide 100% full replacement value of
such items, which policy shall otherwise comply with the provisions of
subsections A and C of this Article 9. On any such policy, Tenant shall name
Landlord as a loss payee, as its interest may appear.
C. WAIVER OF SUBROGATION. The parties hereto shall procure an
appropriate clause in, or endorsement on, any "all-risk" property insurance
covering the Premises and the Building, including its respective Alterations,
construction and other improvements as well as personal property, fixtures,
furniture, inventory and equipment located thereon or therein, pursuant to which
the insurance companies waive subrogation or consent to a waiver of right of
recovery, and each party hereby agrees that it will not make any claim against
or seek to recover from the other for any loss or damage to its property or the
property of others resulting from fire or other hazards covered by such
"all-risk" property insurance policies to the extent that such loss or damage is
actually recoverable under such policies exclusive of any deductibles. Such
waiver will not apply should any loss or damage result from one of the parties'
gross negligence or willful misconduct. If the payment of an additional premium
is required for the inclusion of such waiver of subrogation provision, each
party shall advise the other of the amount of any such additional premiums and
the other party shall pay the same. It is expressly understood and agreed that
Landlord will not carry insurance on the Alterations, construction and other
improvements presently existing or hereafter installed within the Premises or on
Tenant's fixtures, furnishings, equipment, personal property or inventory
located in the Premises or insurance against interruption of Tenant's business.
10. DESTRUCTION OF THE PREMISES; PROPERTY LOSS OR DAMAGE
A. REPAIR OF DAMAGE. If the Premises shall be damaged by fire or
other casualty, then Landlord shall proceed to repair and restore (subject to
receipt of insurance proceeds) the Premises to its condition preceding the
damage, subject to the provisions of this Article 10. Landlord shall have no
liability to Tenant, and Tenant shall not be entitled to terminate this Lease,
if such repairs and restoration are not in fact completed within Landlord's
estimated time period, so long as Landlord shall have proceeded with reasonable
due diligence. The Rent and additional rent until such repairs shall be made
shall be reduced in the proportion
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which the area of the part of the Premises which is not usable (it being
understood that percentage of damage shall not necessarily equate to percentage
of usability) by Tenant bears to the total area of the Premises; provided,
however, should Tenant reoccupy a portion of the Premises for the conduct of its
business prior to the date such repairs are made, the Rent shall be reinstated
with respect to such reoccupied portion of the Premises and shall be payable by
Tenant from the date of such occupancy. Further, should Landlord, at its sole
option, make available to Tenant, during the period of such repair, other space
in the Building which is reasonably suitable for the temporary carrying on of
Tenant's business (and reasonably acceptable to Tenant), the Rent shall be
reinstated with respect to such temporarily occupied space and shall be payable
by Tenant from the date such space is occupied by Tenant. Whenever in this
Article 10 reference is made to restoration of the Premises (i) Tenant's
obligation shall be as to all property within the Premises including Tenant's
furniture, fixtures, equipment and other personal property, any and all
Alterations, construction or other improvements made to the Premises by or on
behalf of Tenant and any other leasehold improvements existing in the Premises
on the date hereof, all of which shall be restored and replaced at Tenant's sole
cost and expense and (ii) Landlord's obligation shall be as to the shell, which
constitutes the structure of the Building and the mechanical, electrical,
plumbing, air-conditioning and other building systems up to the point of
connection into the Premises. During any period of Tenant's repair and
restoration following substantial completion of Landlord's repair and
restoration work (it being agreed that Landlord shall give Tenant thirty (30)
days written notice that Landlord's work is substantially complete), Rent and
additional rent shall be payable as if said fire or other casualty had not
occurred.
B. TERMINATION OPTION. Anything in subsection A of this Article 10
to the contrary notwithstanding, if the Premises are totally damaged or are
rendered wholly untenantable, and if Landlord's architect determines the
Premises cannot be restored within one (1) year of such casualty, or if the
Building shall be so damaged by fire or other casualty that, in Landlord's
opinion, either substantial alteration, demolition or reconstruction of the
Building shall be required (whether or not the Premises shall have been damaged
or rendered untenantable) or the Building, after its proposed repair, alteration
or restoration shall not be economically viable as an office building, then in
any of such events, Landlord or Tenant may, not later than ninety (90) days
following the damage, give the other party a notice in writing terminating this
Lease. In addition (i) if any material damage shall occur to the Premises or
the Building during the last two (2) years of the Term, either party shall have
the option to terminate this Lease by written notice to the other and in such
event this Lease shall terminate on the later of the date of the notice of
termination or the date Tenant vacates the Premises and removes all of its
property therefrom and (ii) Landlord shall not be obligated to repair or restore
the Premises or the Building if a holder of a mortgage or underlying leasehold
applies proceeds of insurance to the loan or lease payment balance, and the
remaining proceeds, if any, available to Landlord are insufficient to pay for
such repair or restoration. If either elects to terminate this Lease as
permitted herein, the Term shall expire upon the tenth (10th) business day after
such notice is given, and Tenant shall vacate the Premises and surrender the
same to Landlord. If Tenant shall not be in default under this Lease, then upon
the termination of this
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Lease under the conditions provided for in the next preceding sentence, Tenant's
liability for Rent thereafter accruing shall cease as of the day following such
damage.
C. REPAIR DELAYS. Landlord shall not be liable for reasonable
delays which may arise by reason of the claim adjustment with any insurance
company on the part of Landlord and/or Tenant, and for reasonable delays on
account of "labor troubles" or any other cause beyond Landlord's control.
D. PROVISION CONTROLLING. The parties agree that this Article 10
constitutes an express agreement governing any case of damage or destruction of
the Premises or the Building by fire or other casualty, and that Section 227 of
the Real Property Law of the State of New York, which provides for such
contingency in the absence of an express agreement, and any other law of like
import now or hereafter in force shall have no application in any such case.
E. PROPERTY LOSS OR DAMAGE. Anything in this Article 10 to the
contrary notwithstanding, nothing in this Lease shall be construed to relieve
Landlord or Landlord's agent from responsibility to Tenant for any loss or
damage caused directly to Tenant wholly or in part by the gross negligence or
willful misconduct of Landlord or Landlord's agents. Any Building employee to
whom any property shall be entrusted by or on behalf of Tenant shall be deemed
to be acting as Tenant's agent with respect to such property and neither
Landlord nor its agents shall be liable for any damage to property of Tenant or
of others entrusted to employees of the Building, nor for the loss of or damage
to any property of Tenant by theft or otherwise, except to the extent such
property is required to be delivered to a Building employee pursuant to the
terms of this Lease. Neither Landlord nor its agents shall be liable for any
injury or damage to persons or property or interruption of Tenant's business
resulting from fire, explosion, falling plaster, steam, gas, electricity, water,
rain or snow or leaks from any part of the Building or from the pipes,
appliances or plumbing works or from the roof, street or subsurface or from any
other place or by dampness or by any other cause of whatsoever nature, except
for Landlord's gross negligence or willful misconduct; nor shall Landlord or its
agents be liable to Tenant for any such damage caused by other tenants or
persons in the Building or caused by construction of any private, public or
quasi-public work. Nothing in the foregoing sentence shall affect any right of
Landlord to the indemnity from Tenant to which Landlord may be entitled under
Article 37 hereof in order to recoup for payments made to compensate for losses
of third parties. If at any time any windows of the Premises are temporarily
closed, darkened or bricked-up for any reason whatsoever except Landlord's or
Landlord's agents, employees and contractors, own acts, or any of such windows
are permanently closed, darkened or bricked-up if required by law or related to
any construction upon property adjacent to the Real Property by Landlord or
others, Landlord shall not be liable for any damage Tenant may sustain thereby
and Tenant shall not be entitled to any compensation therefor nor abatement of
Rent nor shall the same release Tenant from its obligations hereunder nor
constitute an eviction (Landlord shall, however, use commercially reasonable
efforts to cause any temporarily darkened or bricked up windows to be reopened.)
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Tenant shall reimburse and compensate Landlord as additional rent within five
(5) days after rendition of a statement for all expenditures made by, or damages
or fines sustained or incurred by, Landlord due to nonperformance or
noncompliance with or breach or failure to observe any term, covenant or
condition of this Lease upon Tenant's part to be kept, observed, performed or
complied with. Tenant shall give immediate notice to Landlord in case of fire
or accident in the Premises or in the Building. Tenant shall not move any safe,
heavy machinery, heavy equipment, freight, bulky matter or fixtures into or out
of the Building without Landlord's prior consent and payment to Landlord of
Landlord's costs in connection therewith. If such safe, machinery, equipment,
freight, bulky matter or fixtures requires special handling, Tenant agrees to
employ only persons holding a Master Rigger's License to do said work, and that
all work in connection therewith shall comply with the Administrative Code of
the City of New York and all other laws and regulations applicable thereto, and
shall be done during such hours as Landlord may reasonably designate and,
notwithstanding said consent of Landlord, Tenant shall indemnify Landlord for,
and hold Landlord harmless and free from, damages sustained by persons or
property and for any damages or monies paid out by Landlord in settlement of any
claims or judgments, as well as for all expenses and attorneys' fees incurred in
connection therewith and all costs incurred in repairing any damage to the
Building or appurtenances.
11. CONDEMNATION.
A. CONDEMNATION. If the whole of the Real Property, the Building or
the Premises shall be acquired or condemned for any public or quasi-public use
or purpose, this Lease and the Term shall end as of the date of the vesting of
title with the same effect as if said date were the Expiration Date. If only a
part of the Real Property shall be so acquired or condemned then (i) except as
hereinafter provided in this subsection A, this Lease and the Term shall
continue in force and effect but, if a part of the Premises is included in the
part of the Real Property so acquired or condemned, from and after the date of
the vesting of title, the Rent shall be reduced in the proportion which the area
of the part of the Premises so acquired or condemned bears to the total area of
the Premises immediately prior to such acquisition or condemnation; (ii) whether
or not the Premises shall be affected thereby, Landlord, at Landlord's option,
may give to Tenant, within sixty (60) days next following the date upon which
Landlord shall have received notice of vesting of title, a five (5) days notice
of termination of this Lease; and (iii) if the part of the Real Property so
acquired or condemned shall contain more than twenty percent (20%) of the total
area of the Premises immediately prior to such acquisition or condemnation, or
if, by reason of such acquisition or condemnation, Tenant no longer has
reasonable means of access to the Premises, Tenant, at Tenant's option, may give
to Landlord, within sixty (60) days next following the date upon which Tenant
shall have received notice of vesting of title, a five (5) days notice of
termination of this Lease. If any such five (5) days notice of termination is
given by Landlord or Tenant this Lease and the Term shall come to an end and
expire upon the expiration of said five (5) days with the same effect as if the
date of expiration of said five (5) days were the Expiration Date. If a part of
the Premises shall be so acquired or condemned and this Lease and the Term
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shall not be terminated pursuant to the foregoing provisions of this subsection
A, Landlord, at Landlord's expense, shall restore that part of the Premises not
so acquired or condemned to a self-contained rental unit. In the event of any
termination of this Lease and the Term pursuant to the provisions of this
subsection A, the Rent and additional rent shall be apportioned as of the date
of sooner termination and any prepaid portion of Rent for any period after such
date shall be refunded by Landlord to Tenant.
B. AWARD. In the event of any such acquisition or condemnation of
all or any part of the Real Property, Landlord shall be entitled to receive the
entire award for any such acquisition or condemnation, Tenant shall have no
claim against Landlord or the condemning authority for the value of any
unexpired portion of the Term and Tenant hereby expressly assigns to Landlord
all of its right in and to any such award. Nothing contained in this subsection
B shall be deemed to prevent Tenant from making a claim in any condemnation
proceedings for Tenant's moving expenses and the then value of any furniture,
furnishings and fixtures installed by and at the sole expense of Tenant and
included in such taking.
12. ASSIGNMENT AND SUBLETTING.
A. PROHIBITION WITHOUT CONSENT. Tenant, for itself, its heirs,
distributees, executors, administrators, legal representatives, successors and
assigns, expressly covenants that it shall not assign, mortgage, pledge,
encumber or otherwise transfer this Lease, nor underlet, nor suffer, nor permit
the Premises or, except as expressly permitted herein, any part thereof to be
occupied by others, without the prior written consent of Landlord in each
instance. If this Lease be assigned, or if the Premises or any part thereof be
underlet or occupied by anybody other than Tenant, Landlord may, after default
by Tenant, collect rent from the assignee, under tenant or occupant, and apply
the net amount collected to the Rent herein reserved, but no assignment,
underletting, occupancy or collection shall be deemed a waiver of the provisions
hereof, the acceptance of the assignee, undertenant or occupant as tenant, or a
release of Tenant from the further performance by Tenant of covenants on the
part of Tenant herein contained. The consent by Landlord to an assignment or
underletting shall not in any way be construed to relieve Tenant from obtaining
the express consent in writing of Landlord to any further assignment or
underletting. In no event shall any permitted subtenant assign or encumber its
sublease or further sublet all or any portion of its sublet space, or otherwise
suffer or permit the sublet space or any part thereof to be used or occupied by
others, without Landlord's prior written consent in each instance. Any
assignment, sublease, mortgage, pledge, encumbrance or transfer in contravention
of the provisions of this Article 12 shall be void.
B. NOTICE OF PROPOSED TRANSFER. If Tenant shall at any time or
times during the Term desire to assign this Lease or sublet all or part of the
Premises, Tenant shall give notice thereof to Landlord, which notice shall be
accompanied by (i) a conformed or photostatic copy of the proposed assignment or
sublease, if available (but in any event at least a signed bona fide term sheet
from such assignee or subtenants containing the material terms
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of such assignment or sublease and instructions directing Tenant to prepare a
sublease or assignment, as the case may be, pursuant to the terms of such term
sheet), the effective or commencement date of which shall be not less than
thirty (30) nor more than one hundred and eighty (180) days after the giving of
such notice, (ii) a statement setting forth in reasonable detail the identity of
the proposed assignee or subtenant, the nature of its business and its proposed
use of the Premises, (iii) current financial information with respect to the
proposed assignee or subtenant, including, without limitation, its most recent
financial report, (iv) an agreement by Tenant to indemnify Landlord against
liability resulting from any claims that may be made against Landlord by the
proposed assignee or subtenant or by any brokers or other persons in each event
claiming a commission or similar compensation in connection with the proposed
assignment or sublease and (v) in the case of a sublease, such additional
information related to the proposed subtenant as Landlord shall reasonably
request, if any.
C. LANDLORD'S OPTIONS. The notice containing all of the information
set forth in Subsection B of this Article 12 above shall be deemed an offer from
Tenant to Landlord whereby Landlord (or Landlord's designee) may, at its option
(a) sublease such space (hereinafter called the "LEASEBACK SPACE") from Tenant
upon the terms and conditions hereinafter set forth, or (b) terminate this Lease
(if the proposed transaction is an assignment or a sublease of all or
substantially all of the Premises). Said options may be exercised by Landlord
by notice to Tenant at any time within thirty (30) days after the aforesaid
notice has been given by Tenant to Landlord; and during such thirty (30) day
period Tenant shall not assign this Lease nor sublet such space to any person or
entity. Notwithstanding the foregoing, and without in any way affecting the
applicability of all other provisions of this Article 12, the provisions of this
Section C and the provisions of Sections 12D, 12E, 12F, 12G(x)(b) and 12P shall
not apply to any proposed subletting by Tenant of that portion of the Premises
more particularly described on EXHIBIT 1(A) annexed hereto (the "DESIRED SUBLET
PREMISES"); provided that there shall not be permitted more than one (1)
subtenant (at any one time) per each floor in respect of the Desired Sublet
Premises.
D. TERMINATION BY LANDLORD. If Landlord exercises its option to
terminate this Lease in the case where Tenant desires either to assign this
Lease or sublet all or substantially all of the Premises, then this Lease shall
end and expire on the date that such assignment or sublet was to be effective or
commence, as the case may be, and the Rent and additional rent due hereunder
shall be paid and apportioned to such date. Furthermore, if Landlord exercises
its option to terminate this Lease pursuant to subsection C of this Article 12,
Landlord shall be free to and shall have no liability to Tenant if Landlord
should lease the Premises (or any part thereof) to Tenant's prospective assignee
or subtenant.
E. TAKEBACK BY LANDLORD. If Landlord exercises its option to sublet
the Leaseback Space, such sublease to Landlord or its designee (as subtenant)
shall be at the lower of (i) the rental rate per rentable square foot of Rent
and additional rent then payable pursuant to this Lease, or (ii) the rentals set
forth in the proposed sublease, and shall be for the same term as that of the
proposed subletting, and such sublease:
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(i) shall be expressly subject to all of the covenants,
agreements, terms, provisions and conditions of this Lease except such as are
irrelevant or inapplicable, and except as otherwise expressly set forth to the
contrary in this Article 12;
(ii) shall be upon the same terms and conditions as those
contained in the proposed sublease, except such as are irrelevant or
inapplicable and except as otherwise expressly set forth to the contrary in this
Article 12;
(iii) shall give the subtenant the unqualified and unrestricted
right, without Tenant's permission, to assign such sublease or any interest
therein and/or to sublet the space covered by such sublease or any part or parts
of such space and, if such sublease is for the remainder of the initial term of
this Lease, to make any and all changes, alterations and improvements in the
space covered by such sublease;
(iv) shall provide that any assignee or further subtenant of
Landlord or its designee, may, at the election of Landlord, be permitted to make
alterations, decorations and installations in such space or any part thereof and
shall also provide in substance that any such alterations, decorations and
installations in such space therein made by any assignee or subtenant of
Landlord or its designee shall be removed, in whole or in part, by such assignee
or subtenant, prior to or upon the expiration or other termination of such
sublease provided that such assignee or subtenant, at its expense, shall repair
any damage and injury to such space so sublet caused by such removal; and
(v) shall also provide that (a) the parties to such sublease
expressly negate any intention that any estate created under such sublease be
merged with any other estate held by either of said parties, (b) any assignment
or subletting by Landlord or its designee (as the subtenant) may be for any
purpose or purposes that Landlord, in Landlord's uncontrolled discretion, shall
deem suitable or appropriate, (c) Tenant, at Tenant's expense, shall and will at
all times provide and permit reasonably appropriate means of ingress to and
egress from such space so sublet by Tenant to Landlord or its designee, (d)
Landlord, at Tenant's expense, if such expense would have been incurred by
Tenant in connection with a similar transaction (or otherwise, at Landlord's
expense), may make such alterations as may be required or deemed necessary by
Landlord to physically separate the subleased space from the balance of the
Premises and to comply with any legal or insurance requirements relating to such
separation, and (e) that at the expiration of the term of such sublease, Tenant
will accept the space covered by such sublease in the condition in which Tenant
would have accepted the Premises had Tenant sublet or assigned the Premises,
subject to the obligations of the subtenant to make such repairs thereto as may
be necessary to preserve the premises demised by such sublease in good order and
condition.
F. EFFECT OF TAKEBACK OR TERMINATION. If Landlord exercises its
option to sublet the Leaseback Space (i) Landlord shall indemnify and save
Tenant harmless from all
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obligations under this Lease as to the Leaseback Space during the period of time
it is so sublet to Landlord or its designee; (ii) performance by Landlord, or
its designee, under a sublease of the Leaseback Space shall be deemed
performance by Tenant of any similar obligation under this Lease and any default
under any such sublease shall not give rise to a default under a similar
obligation contained in this Lease nor shall Tenant be liable for any default
under this Lease or deemed to be in default hereunder if such default is
occasioned by or arises from any act or omission of the tenant under such
sublease or is occasioned by or arises from any act or omission of any occupant
holding under or pursuant to any such sublease; and (iii) Tenant shall have no
obligation, at the expiration or earlier termination of the Term, to remove any
alteration, installation or improvement made in the Leaseback Space by Landlord
(or its designee). In addition, if required by applicable law in connection
with any termination of this Lease, or subletting of all or any portion of the
Leaseback Space to Landlord or its designee, Tenant shall complete, swear to and
file any questionnaires, tax returns, affidavits or other documentation which
may be required to be filed (a) with the New York State Department of Taxation
and Finance in connection with Article 31 -B of the Tax Law of the State of New
York, (b) with the Commissioner of Finance of the City of New York or the New
York State Department of Taxation and Finance in connection with Article 31 of
the Tax Law of the State of New York, (c) with the Commissioner of Finance of
the City of New York in connection with the New York City Real Property Transfer
Tax and (d) with the appropriate governmental agency in connection with any
other tax which may now or hereafter be in effect.
G. CONDITIONS FOR LANDLORD'S APPROVAL. In the event Landlord does
not exercise either of the recapture options provided to it pursuant to
subsection C of this Article 12 and providing that Tenant is not in default of
any of Tenant's obligations under this Lease (after notice and the expiration of
any applicable grace period) as of the time of Landlord's consent, and as of the
effective date of the proposed assignment or commencement date of the proposed
sublease, Landlord's consent (such consent shall be in writing and form
reasonably satisfactory to Landlord) to the proposed assignment or sublease
shall not be unreasonably withheld or delayed, provided and upon condition that:
(i) Tenant shall have complied with the provisions of
subsection B of this Article 12 and Landlord shall not have exercised any of its
options under subsection C of this Article 12 within the time permitted
therefor;
(ii) In Landlord's reasonable judgment the proposed assignee
or subtenant is engaged in a business or activity, and the Premises, or the
relevant part thereof, will be used in a manner, which (a) is in keeping with
the then standards of the Building, (b) is limited to the use of the Premises as
general and executive offices and (c) if not general and executive offices of a
particular purpose, will not violate any negative covenant as to use contained
in any other lease of office space in the Building;
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(iii) The proposed assignee or subtenant has a financial worth
equal to the lesser of (a) Tenant's net worth or (b) a net worth sufficient
considering the responsibility involved, and Landlord has been furnished with
reasonable proof thereof;
(iv) Neither (a) the proposed assignee or subtenant nor (b)
any person which, directly or indirectly, controls, is controlled by or is under
common control with, the proposed assignee or subtenant, is then an occupant of
any part of the Building;
(v) The proposed assignee or subtenant is not a person with
whom Landlord is or has been, within the preceding three (3) month period,
negotiating to lease space in the Building;
(vi) The form of the proposed sublease or instrument of
assignment (a) shall be in form reasonably satisfactory to Landlord, and,
without limitation, (1) shall not provide for a rental or other payment for the
use, occupancy or utilization of the space demised thereby based in whole or in
part on the income or profits derived by any person from the property so leased,
used, occupied or utilized other than an amount based on a fixed percentage or
percentages of gross receipts or sales and (2) shall provide that no person
having an interest in the possession, use, occupancy or utilization of the space
demised thereby shall enter into any lease, sublease, license, concession or
other agreement for use, occupancy or utilization of such space which provides
for a rental or other payment for such use, occupancy or utilization based in
whole or in part on the income or profits derived by any person from the
property so leased, used, occupied or utilized other than an amount based on a
fixed percentage or percentages of gross receipts or sales, and that any such
purported lease, sublease, concession or other agreement shall be absolutely
void and ineffective AB INITIO and (b) shall comply with the applicable
provisions of this Article 12;
(vii) There shall not, at any one time, be more than two (2)
subtenants (that is, Tenant plus 2 subtenants) per floor (including Landlord or
its designee) of the Premises;
(viii) The aggregate per rentable square foot rent at which
Tenant advertises the proposed space shall be not less than the then current
market rent per rentable square foot for the Premises as though the Premises
were vacant, and the rental and other terms and conditions of the sublease are
the same as those contained in the proposed sublease furnished to Landlord
pursuant to subsection B of this Article 12;
(ix) Within five (5) days after receipt of a bill therefor,
Tenant shall reimburse Landlord for the reasonable costs that may be incurred by
Landlord in connection with said assignment or sublease, including without
limitation, the costs of making investigations as to the acceptability of the
proposed assignee or subtenant, and reasonable legal costs incurred by Landlord
in connection with the granting of any requested consent;
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(x) Tenant shall not have (a) advertised or publicized in
writing in any way the availability of the Premises without prior notice to and
approval by Landlord (such approval to not be unreasonably withheld or delayed),
nor shall any advertisement state the name (as distinguished from the address)
of the Building or the proposed rental, (b) for the first two (2) years of the
terms of this Lease, listed the Premises for subletting or assignment, with a
broker, agent or representative other than the then exclusive leasing agent of
the Building; provided that (y) such leasing agent shall charge commercially
reasonable fees and (z) Tenant shall not be required to use such leasing agent
for more than three (3) months;
(xi) The proposed occupancy shall not, in Landlord's
reasonable opinion, increase the office cleaning requirements beyond those set
forth on SCHEDULE E annexed hereto or materially increase the Building's
operating or other expenses or impose an extra burden upon services to be
supplied by Landlord to Tenant;
(xii) The proposed assignee or subtenant or its business shall
not be subject to compliance with additional requirements of law (including
related regulations) beyond those requirements which are applicable to the named
Tenant herein and which will have an adverse affect on Landlord's ownership of
the Building; and
(xiii) The proposed subtenant or assignee shall not be entitled,
directly or indirectly, to diplomatic or sovereign immunity and shall be subject
to the service of process in, and the jurisdiction of the courts of New York
State.
Except for any subletting by Tenant to Landlord or its designee pursuant to
the provisions of this Article 12, each subletting pursuant to this subsection G
of this Article 12 shall be subject to all of the covenants, agreements, terms,
provisions and conditions contained in this Lease. Notwithstanding any such
subletting to Landlord or any such subletting to any other subtenant and/or
acceptance of Rent or additional rent by Landlord from any subtenant, Tenant
shall and will remain fully liable for the payment of the Rent and additional
rent due and to become due hereunder (except to the extent of rent not paid by
Landlord to Tenant if Landlord has subleased the Leaseback Space from Tenant)
and for the performance of all the covenants, agreements, terms, provisions and
conditions contained in this Lease on the part of Tenant to be performed and all
acts and omissions of any licensee or subtenant or anyone claiming under or
through any subtenant which shall be in violation of any of the obligations of
this Lease shall be deemed to be a violation by Tenant. Tenant further agrees
that notwithstanding any such subletting, no other and further subletting of the
Premises by Tenant or any person claiming through or under Tenant shall or will
be made except upon compliance with and subject to the provisions of this
Article 12. Without limiting any rights which Tenant may have against Landlord
under this Lease, if Landlord shall decline to give its consent to any proposed
assignment or sublease, or if Landlord shall exercise either of its options
under subsection C of this Article 12, Tenant shall indemnify, defend and hold
harmless Landlord against and from any and all loss, liability, damages, costs,
and expenses (including reasonable counsel fees) resulting from any claims that
may be made against Landlord by the proposed
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assignee or subtenant or by any brokers or other persons claiming a commission
or similar compensation in connection with the proposed assignment or sublease.
H. FUTURE REQUESTS. In the event that (i) Landlord fails to
exercise either of its options under subsection C of this Article 12 and
consents to a proposed assignment or sublease, and (ii) Tenant fails to execute
and deliver the assignment or sublease to which Landlord consented within one
hundred twenty (120) days after the giving of such consent, then, Tenant shall
again comply with all of the provisions and conditions of subsection B of this
Article 12 before assigning this Lease or subletting all or part of the
Premises.
I. SUBLEASE PROVISIONS. With respect to each and every sublease or
subletting authorized by Landlord under the provisions of this Lease, it is
further agreed that:
(i) No subletting shall be for a term ending later
than one (1)
day prior to the Expiration Date of this Lease;
(ii) No sublease shall be delivered, and no subtenant
shall take possession of the Premises or any part thereof, until an executed
counterpart of such sublease has been delivered to Landlord;
(iii) Each sublease shall provide that it is subject and
subordinate to this Lease and to the matters to which this Lease is or shall be
subordinate, and that in the event of termination, re-entry or dispossession by
Landlord under this Lease Landlord may, at its option, take over all of the
right, title and interest of Tenant, as sublessor, under such sublease, and such
subtenant shall, at Landlord's option, attorn to Landlord pursuant to the then
executory provisions of such sublease, except that Landlord shall not (a) be
liable for any previous act or omission of Tenant under such sublease, (b) be
subject to any counterclaim, offset or defense, not expressly provided in such
sublease, which theretofore accrued to such subtenant against Tenant, or (c) be
bound by any previous modification of such sublease or by any previous
prepayment of more than one (1) month's Rent. The provisions of this Article 12
shall be self-operative and no further instrument shall be required to give
effect to this provision.
(iv) Subject to Article 6, if in connection with any
alteration to the Sublet Space (as hereinafter defined) by Tenant or any
subtenant (which for purposes hereof, shall not include Tenant's initial
alteration to the Desired Sublet Premises), unless Landlord or its designee is
the subtenant pursuant to Section C herein, any laws, orders, rules or
regulations of any applicable governmental authority require that any Hazardous
Substances, including, without limitation, asbestos, contained in or about the
Premises to be sublet (the "SUBLET SPACE") be dealt with in any particular
manner in connection with any alteration of the Sublet Space, then it shall be
the subtenant's obligation, at the subtenant's expense, to deal with such
Hazardous Substances in accordance with all such laws, orders, rules and
regulations. In the event the subtenant is required to deal with Hazardous
Substances
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in accordance with the foregoing provisions of this paragraph (iv) of subsection
I of Article 12, then, notwithstanding anything herein to the contrary,
Landlord, at Landlord's election, shall have the option to deal with such
Hazardous Substances itself and, in such event, the subtenant shall reimburse
Landlord for all of Landlord's actual out-of-pocket costs and expenses in
connection therewith within ten (10) days next following the rendition of a
statement by Landlord to the subtenant requesting such reimbursement. If the
subtenant shall fail to so reimburse Landlord for the aforesaid costs and
expenses within the ten (10) day period referred to above, then notwithstanding
anything contained in the Lease to the contrary, such costs and expenses shall,
at Landlord's option, be paid by Tenant to Landlord, within ten (10) days next
following of Landlord's demand therefor.
J. PROFITS FROM ASSIGNMENT OR SUBLETTING. If Landlord shall give
its consent to any assignment of this Lease or to any sublease or if Tenant
shall enter into any other assignment or sublease permitted hereunder (other
than an assignment or sublease pursuant to subsection K or L herein), Tenant
shall in consideration therefor, pay to Landlord, as additional rent:
(i) in the case of an assignment, an amount equal to fifty
(50%) percent of all sums and other considerations paid to Tenant by the
assignee for or by reason of such assignment (excluding, but not limited to,
fair market sums paid for the sale of Tenant's fixtures, leasehold improvements,
equipment, furniture, furnishings or other personal property, less, in the case
of a sale thereof, the then net unamortized or undepreciated cost thereof
determined on the basis of Tenant's federal income tax returns) less all
expenses reasonably and actually incurred by Tenant on account of brokerage
commissions, reasonable legal fees, reasonable market-rate build-out costs for
similar assignments and sublettings and advertising costs in connection with
such assignment, provided that Tenant shall submit to Landlord a receipt
evidencing the payment of such expenses (or other proof of payment as Landlord
shall require); and
(ii) in the case of a sublease, fifty (50%) percent of any rents,
additional charges or other consideration payable under the sublease on a per
square foot basis to Tenant by the subtenant which is in excess of the Rent and
additional rent accruing during the term of the sublease in respect of the
subleased space (at the rate per square foot payable by Tenant hereunder)
pursuant to the terms hereof (excluding, but not limited to, fair market sums
paid for the sale or rental of Tenant's fixtures, leasehold improvements,
equipment, furniture or other personal property, less, in the case of the sale
thereof, the then net unamortized or undepreciated cost thereof determined on
the basis of Tenant's federal income tax returns), less all expenses reasonably
and actually incurred by Tenant on account of brokerage commissions, reasonable
legal fees, advertising costs, reasonable market-rate build-out costs for
similar assignments and sublettings and the cost of demising the premises so
sublet in connection with such sublease, provided that Tenant shall submit to
Landlord a receipt evidencing the payment of such expenses (or other proof of
payment as Landlord shall require). The sums payable
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under this subsection J(ii) of this Article 12 shall be paid to Landlord as and
when payable by the subtenant to Tenant.
K. OTHER TRANSFERS. (i) If Tenant is a corporation other than a
corporation whose stock is listed and traded on a nationally recognized stock
exchange (hereinafter referred to as a "public corporation"), the provisions of
subsection A of this Article 12 shall apply to a transfer (by one or more
transfers) of a majority of the stock of Tenant as if such transfer of a
majority of the stock of Tenant were an assignment of this Lease; but said
provisions shall not apply to transactions with a corporation into or with which
Tenant is merged or consolidated or to which substantially all of Tenant's
assets are transferred, provided that in any of such events (a) the successor to
Tenant has a net worth computed in accordance with generally accepted accounting
principles at least equal to the lesser of (1) the net worth of Tenant
immediately prior to such merger, consolidation or transfer, or (2) the net
worth of Tenant herein named on the date of this Lease and (b) proof
satisfactory to Landlord of such net worth shall have been delivered to Landlord
at least ten (10) days prior to the effective date of any such transaction.
(ii) If Tenant is a partnership, the provisions of subsection
A of this Article 12 shall apply to a transfer (by one or more transfers) of a
majority interest in the partnership, as if such transfer were an assignment of
this Lease.
(iii) If Tenant is a subdivision, authority, body, agency,
instrumentality or other entity created and/or controlled pursuant to the laws
of the State of New York or any city, town or village of such state or of
federal government ("GOVERNMENTAL ENTITY"), the provisions of subsection A of
this Article 12 shall apply to a transfer (or one or more transfers) of any of
Tenant's rights to use and occupy the Premises, to any other Governmental
Entity, as if such transfer of the right of use and occupancy were an assignment
of this Lease; but said provisions shall not apply to a transfer of any of
Tenant's rights in and to the Premises to any Governmental Entity which shall
replace or succeed to substantially similar public functions, responsibilities
and areas of authority as Tenant, provided that in any of such events the
successor Governmental Entity (a) shall utilize the Premises in a manner
substantially similar to Tenant, and (b) shall not utilize the Premises in any
manner which, in Landlord's judgment, would impair the reputation of the
Building as a first-class office building.
L. RELATED CORPORATION. Tenant may, upon prior written notice to
Landlord, permit any corporations or other business entities (but not including
Governmental Entities) which control, are controlled by, or are under common
control with Tenant (herein referred to as "related corporation") to sublet all
or part of the Premises for any of the purposes permitted to Tenant, subject
however to compliance with Tenant's obligations under this Lease. Such
subletting shall not be deemed to vest in any such related corporation any right
or interest in this Lease or the Premises nor shall it relieve, release, impair
or discharge any of Tenant's obligations hereunder. For the purposes hereof,
"control" shall be deemed to mean ownership
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of not less than fifty percent (50%) of all of the voting stock of such
corporation or not less than fifty percent (50%) of all of the legal and
equitable interest in any other business entities.
M. ASSUMPTION BY ASSIGNEE. Any assignment or transfer, whether made
with Landlord's consent pursuant to subsection A of this Article 12 or without
Landlord's consent pursuant to subsection K of this Article 12, shall be made
only if, and shall not be effective until, the assignee shall execute,
acknowledge and deliver to Landlord an agreement in form and substance in
compliance with the terms of this Lease whereby the assignee shall assume the
obligations of this Lease on the part of Tenant to be performed or observed and
whereby the assignee shall agree that the provisions in subsection A of this
Article 12 shall, notwithstanding such assignment or transfer, continue to be
binding upon it in respect of all future assignments and transfers. The
original named Tenant covenants that, notwithstanding any assignment or
transfer, whether or not in violation of the provisions of this Lease, and
notwithstanding the acceptance of Rent and/or additional rent by Landlord from
an assignee, transferee or any other party, the original named Tenant shall
remain fully liable for the payment of the Rent and additional rent (except to
the extent of Rent and/or additional rent not paid by Landlord to Tenant as
subtenant if Landlord has subleased the Leaseback Space from Tenant) and for the
other obligations of this Lease on the part of Tenant to be performed or
observed.
N. LIABILITY OF TENANT. The joint and several liability of Tenant
and any immediate or remote successor in interest of Tenant and the due
performance of the obligations of this Lease on Tenant's part to be performed or
observed shall not be discharged, released or impaired in any respect by any
agreement or stipulation made by Landlord extending the time, or modifying any
of the obligations, of this Lease, or by any waiver or failure of Landlord to
enforce any of the obligations of this Lease.
O. LISTINGS. The listing of any name other than that of Tenant,
whether on the doors of the Premises or the Building directory, or otherwise,
shall not operate to vest any right or interest in this Lease or in the
Premises, nor shall it be deemed to be the consent of Landlord to any assignment
or transfer of this Lease or to any sublease of the Premises or to the use or
occupancy thereof by others.
P. EXCLUSIVE BROKER. For the first two (2) years of the term of
this Lease, in the event Tenant desires to sublet the Premises or assign this
Lease, at Landlord's option, Tenant shall, for a period of at least three (3)
months, designate the then exclusive leasing agent of the Building, as Tenant's
exclusive agent to effect such sublease or assignment and shall pay such
exclusive leasing agent a reasonable brokerage commission computed in accordance
with the usual rates charged by such exclusive leasing agent. This Section P
shall not apply to the Desired Sublet Premises.
Q. RE-ENTRY BY LANDLORD. If Landlord shall recover or come into
possession of the Premises before the date herein fixed for the termination of
this Lease, Landlord shall
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have the right, at its option, to take over any and all subleases or sublettings
of the Premises or any part thereof made by Tenant and to succeed to all the
rights of said subleases and sublettings or such of them as it may elect to take
over. Tenant hereby expressly assigns and transfers to Landlord such of the
subleases and sublettings as Landlord may elect to take over at the time of such
recovery of possession, such assignment and transfer not to be effective until
the termination of this Lease or re-entry by Landlord hereunder or if Landlord
shall otherwise succeed to Tenant's estate in the Premises, at which time Tenant
shall upon request of Landlord, execute, acknowledge and deliver to Landlord
such further instruments of assignment and transfer as may be necessary to vest
in Landlord the then existing subleases and sublettings. Every subletting
hereunder is subject to the condition and by its acceptance of and entry into a
sublease, each subtenant thereunder shall be deemed conclusively to have thereby
agreed from and after the termination of this Lease or re-entry by Landlord
hereunder of or if Landlord shall otherwise succeed to Tenant's estate in the
Premises, that such subtenant shall waive any right to surrender possession or
to terminate the sublease and, at Landlord's election, such subtenant shall be
bound to Landlord for the balance of the term of such sublease and shall attorn
to and recognize Landlord, as its landlord, under all of the then executory
terms of such sublease, except that Landlord shall not (i) be liable for any
previous act, omission or negligence of Tenant under such sublease, (ii) be
subject to any counterclaim, defense or offset not expressly provided for in
such sublease, which theretofore accrued to such subtenant against Tenant, (iii)
be bound by any previous modification or amendment of such sublease or by any
previous prepayment of more than one (1) month's Rent and additional rent which
shall be payable as provided in the sublease, (iv) be obligated to repair the
subleased space or the Building or any part thereof, in the event of total or
substantial total damage beyond such repair as can reasonably be accomplished
from the net proceeds of insurance actually made available to Landlord, (v) be
obligated to repair the subleased space or the Building or any part thereof, in
the event of partial condemnation beyond such repair as can reasonably be
accomplished from the net proceeds of any award actually made available to
Landlord as consequential damages allocable to the part of the subleased space
or the Building not taken or (vi) be obligated to perform any work in the
subleased space of the Building or to prepare them for occupancy beyond
Landlord's obligations under this Lease, and the subtenant shall execute and
deliver to Landlord any instruments Landlord may reasonably request to evidence
and confirm such attornment. Each subtenant or licensee of Tenant shall be
deemed automatically upon and as a condition of occupying or using the Premises
or any part thereof, to have given a waiver of the type described in and to the
extent and upon the conditions set forth in this Article 12.
13. CONDITION OF THE PREMISES.
A. ACCEPTANCE BY TENANT. Tenant agrees to accept possession of the
Premises in the condition which shall exist on the Commencement Date "as is",
except for Landlord's Core Work and further agrees that Landlord shall have no
other obligation to perform any work or make any installations in order to
prepare the Premises for Tenant's occupancy. The taking of possession of the
Premises by Tenant shall be conclusive evidence
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as against Tenant that, at the time such possession was so taken, the Premises
and the Building were, except for latent defects and the condition of Building
systems, in good and satisfactory condition and that such Landlord's Core Work
as is completed by such date is in good and satisfactory condition. Landlord
shall, promptly upon receipt thereof by Landlord, deliver to Tenant three (3)
originals of an ACP-5 certificate with respect to the Premises.
B. TENANT'S INITIAL ALTERATION. Tenant agrees to perform, or to
cause contractors approved by Landlord to perform, Tenant's Initial Alteration
described in SCHEDULE B annexed hereto in accordance with the terms, conditions
and provisions thereof, and in accordance with all other terms, conditions and
provisions contained in this Lease, including, without limitation, SCHEDULES C
and D annexed hereto. All of the terms, covenants and conditions of SCHEDULES C
and D are incorporated in this Lease as if fully set forth at length herein.
14. ACCESS TO PREMISES. Tenant shall permit Landlord, Landlord's agents
and public utilities servicing the Building to, to the extent necessary, erect,
use and maintain, concealed ducts, pipes and conduits in and through the
Premises. Landlord or Landlord's agents shall have the right to enter the
Premises at all reasonable times, and upon reasonable notice (except in case of
emergency) to (i) examine the same, (ii) to show them to prospective purchasers,
mortgagees or lessees (in the case of lessees, during the last six (6) months of
the Term) of the Building or space therein, (iii) to make such repairs,
alterations, improvements or additions as Landlord may deem necessary to the
Premises or to any other portion of the Building or which Landlord may elect to
perform following Tenant's failure to make repairs or perform any work which
Tenant is obligated to perform under this Lease, or (iv) for the purpose of
complying with laws, regulations or other requirements of government
authorities. Landlord shall be allowed to take all necessary material and
equipment into and upon the Premises and, if in connection with Landlord's Core
Work only and while Landlord's Core Work is being performed, to store them
within the Premises without the same constituting an eviction or constructive
eviction of Tenant in whole or in part and the Rent shall in nowise abate while
any decorations, repairs, alterations, improvements or additions are being made,
by reason of loss or interruption of business of Tenant, or otherwise. During
the nine (9) months prior to the Expiration Date or the expiration of any
renewal or extended term, Landlord may exhibit the Premises to prospective
tenants thereof. If, during the last six (6) months of the Term, Tenant shall
have removed all or substantially all of Tenant's property therefrom, Landlord
may terminate this Lease and such acts shall not be deemed an actual or
constructive eviction. If Tenant shall not be personally present to open and
permit an entry into the Premises, at any time, when for any reason an entry
therein shall be necessary, Landlord or Landlord's agents may enter the same by
a master key, or may forcibly enter the same, without rendering Landlord or such
agents liable therefor, except for any damages caused thereby (if during such
entry Landlord or Landlord's agents shall accord reasonable care to Tenant's
property), and without in any manner affecting the obligations and covenants of
this Lease. Nothing herein contained, however, shall be deemed or construed to
impose upon Landlord any obligation, responsibility or liability whatsoever, for
the care, supervision or repair of the
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Building or any part thereof, other than as in this Lease provided. Landlord
also shall, if required by Laws or if same does not materially adversely affect
Tenant's use of the Premises, have the right at any time, without the same
constituting an actual or constructive eviction and without incurring any
liability to Tenant therefor, to change the arrangement and/or location of
entrances or passageways, doors and doorways, and corridors, elevators, stairs,
toilets or other public parts of the Building and to change the name, number or
designation by which the Building is commonly known. In addition, Tenant
understands and agrees that Landlord may perform substantial renovation work in
and to the public parts of the Building and the mechanical and other systems
serving the Building (which work may include the replacement of the Building
exterior facade and window glass, requiring access to the same from within the
Premises), and that Landlord shall incur no liability to Tenant, nor shall
Tenant be entitled to any abatement of Rent on account of any noise, vibration
or other disturbance to Tenant's business at the Premises (provided that Tenant
is not denied access to said Premises) which shall arise out of the performance
by Landlord of the aforesaid renovations of the Building. Tenant understands
and agrees that all parts (except surfaces facing the interior of the Premises)
of all walls, windows and doors bounding the Premises (including exterior
Building walls, core corridor walls, doors and entrances), all balconies,
terraces and roofs adjacent to the Premises, all space in or adjacent to the
Premises used for shafts, stacks, stairways, chutes, pipes, conduits, ducts, fan
rooms, heating, air cooling, plumbing and other mechanical facilities, service
closets and other Building facilities are not part of the Premises, and Landlord
shall have the use thereof, as well as access thereto through the Premises for
the purposes of operation, maintenance, alteration and repair. Landlord shall,
in connection with the exercise of Landlord's rights under this Article 14 or
Article 4, but not in any way limiting Landlord's rights in this Lease, use
reasonable efforts to minimize disturbance to Tenant.
15. CERTIFICATE OF OCCUPANCY. Tenant shall not at any time use or occupy
the Premises in violation of the certificate of occupancy issued for the
Premises or for the Building and in the event that any department of the City or
State of New York shall hereafter at any time contend and/or declare by notice,
violation, order or in any other manner whatsoever that the Premises are used
for a purpose which is a violation of such certificate of occupancy whether or
not such use shall be a Permitted Use, Tenant shall, upon five (5) days written
notice from Landlord, immediately discontinue such use of the Premises. Failure
by Tenant to discontinue such use after such notice shall be considered a
default in the fulfillment of a covenant of this Lease and Landlord shall have
the right to terminate this Lease immediately, and in addition thereto shall
have the right to exercise any and all rights and privileges and remedies given
to Landlord by and pursuant to the provisions of Articles 17 and 18 hereof.
16. LANDLORD'S LIABILITY. The obligations of Landlord under this Lease
shall not be binding upon Landlord named herein after the sale, conveyance,
assignment or transfer by such Landlord (or upon any subsequent landlord after
the sale, conveyance, assignment or transfer by such subsequent landlord) of its
interest in the Building or the Real Property, as the case may be, and in the
event of any such sale, conveyance, assignment or
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transfer, Landlord, provided such assignee assumes Landlord's obligations under
the Lease, shall be and hereby is entirely freed and relieved of all covenants
and obligations of Landlord hereunder, and it shall be deemed and construed
without further agreement between the parties or their successors in interest,
or between the parties and the purchaser, grantee, assignee or other transferee
that such purchaser, grantee, assignee or other transferee has assumed and
agreed to carry out any and all covenants and obligations of Landlord hereunder.
Neither the shareholders, directors or officers of Landlord, if Landlord is a
corporation, nor the partners comprising Landlord (nor any of the shareholders,
directors or officers of such partners), if Landlord is a partnership
(collectively, the "PARTIES"), shall be liable for the performance of Landlord's
obligations under this Lease. Tenant shall look solely to Landlord to enforce
Landlord's obligations hereunder and shall not seek any damages against any of
the Parties. The liability of Landlord for Landlord's obligations under this
Lease shall not exceed and shall be limited to Landlord's interest in the
Building and the Real Property and Tenant shall not look to or attach any other
property or assets of Landlord or the property or assets of any of the Parties
in seeking either to enforce Landlord's obligations under this Lease or to
satisfy a judgment for Landlord's failure to perform such obligations.
17. DEFAULT.
A. EVENTS OF DEFAULT; CONDITIONS OF LIMITATION. This Lease and the
term and estate hereby granted are subject to the limitations that upon the
occurrence, at any time prior to or during the Term, of any one or more of the
following events (referred to as "EVENTS OF DEFAULT"):
(i) if Tenant shall default in the payment when due of any
installment of Rent or in the payment when due of any additional rent, and such
default shall continue for a period of five (5) business days after notice by
Landlord to Tenant of such default; or
(ii) if Tenant shall default in the observance or performance
of any term, covenant or condition of this Lease on Tenant's part to be observed
or performed (other than the covenants for the payment of Rent and additional
rent) and Tenant shall fail to remedy such default within twenty (20) days after
notice by Landlord to Tenant of such default, or if such default is of such a
nature that it cannot be completely remedied within said period of twenty (20)
days and Tenant shall not commence within said period of twenty (20) days, or
shall not thereafter diligently prosecute to completion all steps necessary to
remedy such default; or
(iii) Intentionally Omitted; or
(iv) Intentionally Omitted; or
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(v) if Tenant's interest in this Lease shall devolve upon or
pass to any person, whether by operation of law or otherwise, except as may be
expressly permitted under Article 12 hereof; or
(vi) if Tenant shall file a voluntary petition in bankruptcy
or insolvency, or shall be adjudicated a bankrupt or insolvent, or shall file
any petition or answer seeking any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under the present or
any future federal bankruptcy act or any other present or future applicable
federal, state or other statute or law, or shall make an assignment for the
benefit of creditors or shall seek or consent to or acquiesce in the appointment
of any trustee, receiver or liquidator of Tenant or of all or any part of
Tenant's property; or
(vii) if, within thirty (30) days after the commencement of any
proceeding against Tenant, whether by the filing of a petition or otherwise,
seeking any reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under the present or any future federal bankruptcy
act or any other present or future applicable federal, state or other statute or
law, such proceeding shall not have been dismissed, or if, within thirty (30)
days after the appointment of any trustee, receiver or liquidator of Tenant, or
of all or any part of Tenant's property, without the consent or acquiescence of
Tenant, such appointment shall not have been vacated or otherwise discharged, or
if any execution or attachment shall be issued against Tenant or any of Tenant's
property pursuant to which the Premises shall be taken or occupied or attempted
to be taken or occupied;
then, in any of said cases, at any time prior to or during the Term, of any one
or more of such Events of Default, Landlord, at any time thereafter, at
Landlord's option, may give to Tenant a five (5) days notice of termination of
this Lease and, in the event such notice is given, this Lease and the Term shall
come to an end and expire (whether or not the Term shall have commenced) upon
the expiration of said five (5) days with the same effect as if the date of
expiration of said five (5) days were the Expiration Date, but Tenant shall
remain liable for damages as provided in Article 18 hereof.
B. EFFECT OF BANKRUPTCY. If, at any time (i) Tenant shall be
comprised of two (2) or more persons, or (ii) Tenant's obligations under this
Lease shall have been guaranteed by any person other than Tenant, or (iii)
Tenant's interest in this Lease shall have been assigned, the word "Tenant", as
used in clauses (vi) and (vii) of subsection A of this Article 17, shall be
deemed to mean any one or more of the persons primarily or secondarily liable
for Tenant's obligations under this Lease. Any monies received by Landlord from
or on behalf of Tenant during the pendency of any proceeding of the types
referred to in said clauses (vi) and (vii) shall be deemed paid as compensation
for the use and occupation of the Premises and the acceptance of any such
compensation by Landlord shall not be deemed an acceptance of rent or a waiver
on the part of Landlord of any rights under said subsection A.
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C. CONDITIONAL LIMITATION. Nothing contained in this Article 17
shall be deemed to require Landlord to give the notices herein provided for
(except for the notice provided for in Article 17A(i)) prior to the commencement
of a summary proceeding for non-payment of rent or a plenary action for recovery
of rent on account of any default in the payment of the same, it being intended
that such notices are for the sole purpose of creating a conditional limitation
hereunder pursuant to which this Lease shall terminate and if Tenant thereafter
remains in possession after such termination, Tenant shall do so as a holdover
tenant.
18. REMEDIES AND DAMAGES.
A. LANDLORD'S REMEDIES. (i) If Tenant shall default in the payment
when due of any installment of Rent or in the payment when due of any additional
rent (after the expiration of applicable notice and grace periods), or if any
execution or attachment shall be issued against Tenant or any of Tenant's
property whereupon the Premises shall be taken or occupied or attempted to be
taken or occupied by someone other than Tenant, or if Tenant shall fail to move
into or take possession of the Premises within thirty (30) days after the Rent
Commencement Date, or if this Lease and the Term shall expire and come to an end
as provided in Article 17:
(a) Landlord and its agents and servants may
immediately, or at any time after such default or after the date upon which this
Lease and the Term shall expire and come to an end, re-enter the Premises or any
part thereof, either by summary proceedings, or by any other applicable action
or proceeding (without being liable to indictment, prosecution or damages
therefor), and may repossess the Premises and dispossess Tenant and any other
persons from the Premises and remove any and all of their property and effects
from the Premises; and
(b) Landlord, at Landlord's option, may relet the
whole or any part or parts of the Premises from time to time, either in the name
of Landlord or otherwise, to such tenant or tenants, for such term or terms
ending before, on or after the Expiration Date, at such rental or rentals and
upon such other conditions, which may include concessions and free rent periods,
as Landlord, in its sole discretion, may determine. Landlord shall have no
obligation to relet the Premises or any part thereof and shall in no event be
liable for refusal or failure to relet the Premises or any part thereof, or, in
the event of any such reletting, for refusal or failure to collect any rent due
upon any such reletting, and no such refusal or failure shall operate to relieve
Tenant of any liability under this Lease or otherwise to affect any such
liability; Landlord, at Landlord's option, may make such repairs, replacements,
alterations, additions, improvements, decorations and other physical changes in
and to the Premises as Landlord, in its sole but reasonable discretion,
considers advisable or necessary in connection with any such reletting or
proposed reletting, without relieving Tenant of any liability under this Lease
or otherwise affecting any such liability.
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(ii) Tenant hereby waives the service of any notice of
intention to re-enter or to institute legal proceedings to that end which may
otherwise be required to be given under any present or future law. Tenant, on
its own behalf and on behalf of all persons claiming through or under Tenant,
including all creditors, does further hereby waive any and all rights which
Tenant and all such persons might otherwise have under any present or future law
to redeem the Premises, or to re-enter or repossess the Premises, or to restore
the operation of this Lease, after (a) Tenant shall have been dispossessed by a
judgment or by warrant of any court or judge, or (b) any re-entry by Landlord,
or (c) any expiration or termination of this Lease and the Term, whether such
dispossess, re-entry, expiration or termination shall be by operation of law or
pursuant to the provisions of this Lease. In the event of a breach or
threatened breach by Tenant, or any persons claiming through or under Tenant of
any term, covenant or condition of this Lease on Tenant's part to be observed or
performed, Landlord shall have the right to enjoin such breach and the right to
invoke any other remedy allowed by law or in equity as if re-entry, summary
proceedings and other special remedies were not provided in this Lease for such
breach. The right to invoke the remedies hereinbefore set forth are cumulative
and shall not preclude Landlord from invoking any other remedy allowed at law or
in equity.
B. DAMAGES. (i) If this Lease and the Term shall expire and come to
an end as provided in Article 17, or by or under any summary proceeding or any
other action or proceeding, or if Landlord shall re-enter the Premises as
provided in subsection A of this Article 18, or by or under any summary
proceeding or any other action or proceeding, then, in any of said events:
(a) Tenant shall pay to Landlord all Rent, additional
rent and other charges payable under this Lease by Tenant to Landlord to the
date upon which this Lease and the Term shall have expired and come to an end or
to the date of re-entry upon the Premises by Landlord, as the case may be;
(b) Tenant also shall be liable for and shall pay to
Landlord, as damages, any deficiency (referred to as "DEFICIENCY") between the
Rent reserved in this Lease for the period which otherwise would have
constituted the unexpired portion of the Term and the net amount, if any, of
rents collected under any reletting effected pursuant to the provisions of
subsection A(i) of this Article 18 for any part of such period (first deducting
from the rents collected under any such reletting all of Landlord's actual
out-of-pocket expenses in connection with the termination of this Lease, or
Landlord's reentry upon the Premises and with such reletting including, but not
limited to, all repossession costs, brokerage commissions, legal expenses,
attorneys' fees and disbursements, alteration costs and other expenses of
preparing the Premises for such reletting); any such Deficiency shall be paid in
monthly installments by Tenant on the days specified in this Lease for payment
of installments of Rent, Landlord shall be entitled to recover from Tenant each
monthly Deficiency as the same shall arise, and no suit to collect the amount of
the Deficiency for any month shall
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prejudice Landlord's right to collect the Deficiency for any subsequent month by
a similar proceeding; and
(c) whether or not Landlord shall have collected any
monthly Deficiencies as aforesaid, Landlord shall be entitled to recover from
Tenant, and Tenant shall pay to Landlord, on demand, in lieu of any further
Deficiencies as and for liquidated and agreed final damages, a sum equal to the
amount by which the Rent reserved in this Lease for the period which otherwise
would have constituted the unexpired portion of the Term exceeds the then fair
and reasonable rental value of the Premises for the same period, less the
aggregate amount of Deficiencies theretofore collected by Landlord pursuant to
the provisions of subsection B(l)(b) of this Article 18 for the same period.
(ii) If the Premises, or any part thereof, shall be relet
together with other space in the Building, the rents collected or reserved under
any such reletting and the expenses of any such reletting shall be equitably
apportioned for the purposes of this subsection B. Tenant shall in no event be
entitled to any rents collected or payable under any reletting, whether or not
such rents shall exceed the Rent reserved in this Lease. Solely for the
purposes of this Article, the term "Rent" as used in subsection B(i) of this
Article 18 shall mean the Rent in effect immediately prior to the date upon
which this Lease and the Term shall have expired and come to an end, or the date
of re-entry upon the Premises by Landlord, as the case may be, adjusted to
reflect any increase or decrease pursuant to the provisions of Article 28 hereof
for the Comparison Year (as defined in said Article 28) immediately preceding
such event. Nothing contained in Article 17 or this Article 18 shall be deemed
to limit or preclude the recovery by Landlord from Tenant of the maximum amount
allowed to be obtained as damages by any statute or rule of law, or of any sums
or damages to which Landlord may be entitled in addition to the damages set
forth in subsection B(i) of this Article 18.
C. LEGAL FEES. (i) Tenant hereby agrees to pay, as additional rent,
all attorneys' fees and disbursements (and all other court costs or expenses of
legal proceedings) which Landlord may incur or pay out by reason of, or in
connection with:
(a) any action or proceeding by Landlord to terminate
this Lease, provided Landlord is the prevailing party in such action or
proceeding;
(b) any other action or proceeding by Landlord against
Tenant (including, but not limited to, any arbitration proceeding), provided
Landlord is the prevailing party in such action or proceeding;
(c) any default by Tenant in the observance or
performance of any obligation under this Lease (including, but not limited to,
matters involving payment of rent and additional rent, computation of
escalations, alterations or other Tenant's work and subletting or assignment),
whether or not Landlord commences any action or proceeding against Tenant;
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(d) any action or proceeding brought by Tenant against
Landlord (or any officer, partner or employee of Landlord) in which Tenant fails
to secure a final unappealable judgment against Landlord; and
(e) any other appearance by Landlord (or any officer,
partner or employee of Landlord) as a witness or otherwise in any action or
proceeding whatsoever involving or affecting Landlord, Tenant or this Lease,
provided Landlord is the prevailing party in such action or proceeding;
(ii) Tenant's obligations under this subsection C of Article
18 shall survive the expiration of the Term hereof or any earlier termination of
this Lease. This provision is intended to supplement (and not to limit) other
provisions of this Lease pertaining to indemnities and/or attorneys' fees.
19. FEES AND EXPENSES.
A. CURING TENANT'S DEFAULTS. If Tenant shall default in the
observance or performance of any term or covenant on Tenant's part to be
observed or performed under or by virtue of any of the terms or provisions in
any Article of this Lease, Landlord may immediately or at any time thereafter on
ten (10) days written notice (provided Tenant is still then in default) perform
the same for the account of Tenant, and if Landlord makes any expenditures or
incurs any obligations for the payment of money in connection therewith
including, but not limited to reasonable attorneys' fees and disbursements in
instituting, prosecuting or defending any action or proceeding, such sums paid
or obligations incurred with interest and costs shall be deemed to be additional
rent hereunder and shall be paid by Tenant to Landlord within ten (10) days of
rendition of any bill or statement to Tenant therefor.
B. LATE CHARGES. If Tenant shall fail to make payment of any
installment of Rent or any additional rent within five (5) days after the date
when such payment is due, Tenant shall pay to Landlord, in addition to such
installment of Rent or such additional rent, as the case may be, as a late
charge and as additional rent, a sum based on a rate equal to the lesser of (i)
four percent (4%) per annum above the then current prime rate charged by
Citibank, N.A. or its successor and (ii) the maximum rate permitted by
applicable law, of the amount unpaid computed from the date such payment was due
to and including the date of payment. Tenant acknowledges and agrees that,
except as otherwise expressly provided herein, if Tenant fails to dispute any
item of additional rent within ninety (90) days of receipt of a bill or notice
therefor, Tenant shall be deemed to have waived its right to dispute the same.
20. NO REPRESENTATIONS BY LANDLORD. Landlord or Landlord's agents have
made no representations or promises with respect to the Building, the Real
Property, the Premises or Taxes (as defined in Article 28 hereof) except as
herein expressly set forth and no rights, easements or licenses are acquired by
Tenant by implication or otherwise except as
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expressly set forth herein. All references in this Lease to the consent or
approval of Landlord shall be deemed to mean the written consent of Landlord or
the written approval of Landlord and no consent or approval of Landlord shall be
effective for any purpose unless such consent or approval is set forth in a
written instrument executed by Landlord.
21. END OF TERM.
A. SURRENDER OF PREMISES. Upon the expiration or other termination
of the Term, Tenant shall quit and surrender to Landlord the Premises, broom
clean, in good order and condition, ordinary wear and tear and damage for which
Tenant is not responsible under the terms of this Lease excepted, and Tenant
shall remove all of its property pursuant to Article 3 hereof. Tenant's
obligation to observe or perform this covenant shall survive the expiration or
sooner termination of the Term. If the last day of the Term or any renewal
thereof falls on Saturday or Sunday this Lease shall expire on the business day
immediately preceding. In addition, the parties recognize and agree that the
damage to Landlord resulting from any failure by Tenant to timely surrender
possession of the Premises as aforesaid will be substantial, will exceed the
amount of the monthly installments of the Rent theretofore payable hereunder,
and will be impossible to accurately measure. Tenant therefore agrees that if
possession of the Premises is not surrendered to Landlord within fourteen (14)
days after the Expiration Date or sooner termination of the Term, in addition to
any other rights or remedies Landlord may have hereunder or at law, Tenant shall
pay to Landlord for each month and for each portion of any month during which
Tenant holds over in the Premises after the Expiration Date or sooner
termination of this Lease, a sum equal to two (2) times the aggregate of that
portion of the Rent and the additional rent which was payable under this Lease
during the last month of the Term. Nothing herein contained shall be deemed to
permit Tenant to retain possession of the Premises after the Expiration Date or
sooner termination of this Lease and no acceptance by Landlord of payments from
Tenant after the Expiration Date or sooner termination of the Term shall be
deemed to be other than on account of the amount to be paid by Tenant in
accordance with the provisions of this Article 21, which provisions shall
survive the Expiration Date or sooner termination of this Lease.
B. HOLDOVER BY TENANT. If Tenant shall hold-over or remain in
possession of any portion of the Premises of more than fourteen (14) days beyond
the Expiration Date of this Lease, notwithstanding the acceptance of any Rent
and additional rent paid by Tenant pursuant to subsection A above, Tenant shall
be subject not only to summary proceeding and all damages related thereto, but
also to any damages arising out of lost tenancies (and/or new leases) by
Landlord to re-let the Premises (or any part thereof). All damages to Landlord
by reason of such holding over by Tenant may be the subject of a separate action
and need not be asserted by Landlord in any summary proceedings against Tenant.
22. QUIET ENJOYMENT. Landlord covenants and agrees with Tenant that upon
Tenant paying the Rent and additional rent and observing and performing all the
terms, covenants and conditions, on Tenant's part to be observed and performed,
Tenant may
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peaceably and quietly enjoy the Premises subject, nevertheless, to the terms and
conditions of this Lease including, but not limited to, Article 16 hereof and to
all Superior Leases and Mortgages.
23. FAILURE TO GIVE POSSESSION. Landlord hereby delivers possession of
the Premises to Tenant and Tenant hereby accepts possession of the Premises from
Landlord, in each case subject to the terms of this Lease.
24. NO WAIVER. If there be any agreement between Landlord and Tenant
providing for the cancellation of this Lease upon certain provisions or
contingencies and/or an agreement for the renewal hereof at the expiration of
the Term, the right to such renewal or the execution of a renewal agreement
between Landlord and Tenant prior to the expiration of the Term shall not be
considered an extension thereof or a vested right in Tenant to such further
term, so as to prevent Landlord from canceling this Lease and any such extension
thereof during the remainder of the original Term; such privilege, if and when
so exercised by Landlord, shall cancel and terminate this Lease and any such
renewal or extension previously entered into between Landlord and Tenant or the
right of Tenant to any such renewal or extension; any right herein contained on
the part of Landlord to cancel this Lease shall continue during any extension or
renewal hereof; any option on the part of Tenant herein contained for an
extension or renewal hereof shall not be deemed to give Tenant any option for a
further extension beyond the first renewal or extended term. No act or thing
done by Landlord or Landlord's agents during the Term shall be deemed an
acceptance of a surrender of the Premises, and no agreement to accept such
surrender shall be valid unless in writing signed by Landlord. No employee of
Landlord or of Landlord's agents shall have any power to accept the keys of the
Premises prior to the termination of this Lease. The delivery of keys to any
employee of Landlord or of Landlord's agents shall not operate as a termination
of this Lease or a surrender of the Premises. In the event Tenant at any time
desires to have Landlord sublet the Premises for Tenant's account, Landlord or
Landlord's agents are authorized to receive said keys for such purpose without
releasing Tenant from any of the obligations under this Lease, and Tenant hereby
relieves Landlord of any liability for loss of or damage to any of Tenant's
effects in connection with such subletting, except if arising from Landlord's
gross negligence or willful misconduct. The failure of Landlord to seek redress
for violation of, or to insist upon the strict performance of, any covenant or
condition of this Lease, or any of the Rules and Regulations set forth or
hereafter adopted by Landlord, shall not prevent a subsequent act, which would
have originally constituted a violation, from having all force and effect of an
original violation. The receipt by Landlord of Rent with knowledge of the
breach of any covenant of this Lease shall not be deemed a waiver of such
breach. The failure of Landlord to enforce any of the Rules and Regulations set
forth, or hereafter adopted, against Tenant and/or any other tenant in the
Building shall not be deemed a waiver of any such Rules and Regulations. No
provision of this Lease shall be deemed to have been waived by Landlord unless
such waiver be in writing signed by Landlord. No payment by Tenant or receipt
by Landlord of a lesser amount than the monthly Rent herein stipulated shall be
deemed to be other than on account of the earliest stipulated Rent, or as
Landlord may elect to apply same,
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nor shall any endorsement or statement on any check or any letter accompanying
any check or payment as Rent be deemed an accord and satisfaction, and Landlord
may accept such check or payment without prejudice to Landlord's right to
recover the balance of such Rent or pursue any other remedy in this Lease
provided. This Lease contains the entire agreement between the parties and all
prior negotiations and agreements are merged in this Lease. Any executory
agreement hereafter made shall be ineffective to change, modify, discharge or
effect an abandonment of it in whole or in part unless such executory agreement
is in writing and signed by the party against whom enforcement of the change,
modification, discharge or abandonment is sought.
25. WAIVER OF TRIAL BY JURY. It is mutually agreed by and between
Landlord and Tenant that the respective parties hereto shall and they hereby do
waive trial by jury in any action, proceeding or counterclaim brought by either
of the parties hereto against the other on any matters whatsoever arising out of
or in any way connected with this Lease, the relationship of Landlord and
Tenant, Tenant's use or occupancy of the Premises, and/or any claim of injury or
damage, or for the enforcement of any remedy under any statute, emergency or
otherwise. It is further mutually agreed that in the event Landlord commences
any summary proceeding (whether for nonpayment of rent or because Tenant
continues in possession of the Premises after the expiration or termination of
the Term), Tenant will not interpose any counterclaim (except for mandatory or
compulsory counterclaims) of whatever nature or description in any such
proceeding.
26. INABILITY TO PERFORM. Except as expressly provided in the definition
of "Rent Commencement Date", this Lease and the obligation of Tenant to pay Rent
and additional rent hereunder and perform all of the other covenants and
agreements hereunder on the part of Tenant to be performed shall in nowise be
affected, impaired or excused because Landlord is unable to fulfill any of its
obligations under this Lease expressly or impliedly to be performed by Landlord
or because Landlord is unable to make, or is delayed in making any repairs,
additions, alterations, improvements or decorations or is unable to supply or is
delayed in supplying any equipment or fixtures if Landlord is prevented or
delayed from so doing by reason of strikes or labor troubles or by accident or
by any cause whatsoever reasonably beyond Landlord's control, including but not
limited to, laws, governmental preemption in connection with a National
Emergency or by reason of any rule, order or regulation of any federal, state,
county or municipal authority or any department or subdivision thereof or any
government agency or by reason of the conditions of supply and demand which have
been or are affected by war or other emergency.
27. BILLS AND NOTICES. Except as otherwise expressly provided in this
Lease, any bills, statements, notices, demands, requests or other communications
given or required to be given under this Lease shall be deemed sufficiently
given or rendered if in writing, sent by registered or certified mail (return
receipt requested), and (y) facsimile or (z) reputable overnight courier, in
each case addressed (i) to Tenant (a) at Tenant's address set forth in this
Lease if mailed prior to Tenant's taking possession of the Premises (Facsimile #
(212) 350-
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9250), or (b) at the Building if mailed subsequent to Tenant's taking possession
of the Premises, or (c) at any place where Tenant or any agent or employee of
Tenant may be found if mailed subsequent to Tenant's vacating, deserting,
abandoning or surrendering the Premises, or (ii) to Landlord (1) at Landlord's
address set forth in this Lease (Facsimile # (212) 758-5305), and (2) c/o Emmes
Asset Management Corp., 420 Lexington Avenue, Suite 2702, New York, New York
10170, Attention: Mr. Andrew Davidoff (Facsimile (212) 293-8802), with a
courtesy copy to Landlord's attorneys, Solomon and Weinberg LLP, 70 East 55th
Street, New York, New York 10022, Attention: Craig H. Solomon, Esq. (Facsimile
#212-605-0999), or (iii) to such other address as either Landlord or Tenant may
designate as its new address for such purpose by notice given to the others in
accordance with the provisions of this Article 27. Tenant hereby acknowledges
and agrees that any such bill, statement, demand, notice, request or other
communication may be given by Landlord's agent on behalf of Landlord. Any such
bill, statement, demand, notice, request or other communication shall be deemed
to have been rendered or given on four (4) days after the date when it shall
have been mailed as provided in this Article 27. Notwithstanding anything
contained in this Article 27 to the contrary, bills and statements issued by
Landlord may be sent by the method(s) set forth hereinabove, without copies to
any other party. This notice provision has been specifically negotiated between
the parties hereto.
28. ESCALATION
A. DEFINED TERMS. In a determination of any increase in the Rent under
the Provisions of this Article 28, Landlord and Tenant agree as follows:
(i) "TAXES" shall mean the aggregate amount of real estate taxes
and any special assessments (exclusive of penalties and interest thereon)
imposed upon Real Property (including, without limitation, (a) assessments made
upon or with respect to any "air rights", (b) assessments made in connection
with the Grand Central Partnership and (c) any assessments levied after the date
of this Lease for public benefits to the Real Property or the Building
(excluding an amount equal to the assessments payable in whole or in part during
or for the Base Tax Year (as defined in Article 1 of this Lease)), which
assessments, if payable in installments, shall be deemed payable in the maximum
number of permissible installments (in the manner in which such taxes and
assessments are imposed as of the date hereof), but not including franchise,
income, transfer or inheritance taxes; provided, that if because of any change
in the taxation of real estate, any other tax or assessment (including, without
limitation, any occupancy, gross receipts, or rental income, franchise, transit
or other tax) is imposed upon Landlord or the owner of the Real Property or the
Building or the occupancy, rents or income therefrom, in substitution or in
addition to, any of the foregoing Taxes, such other tax or assessment shall be
deemed part of the Taxes. With respect to any Comparison Year (hereinafter
defined) all expenses, including attorneys' fees and disbursements, experts' and
other witnesses' fees, incurred in contesting the validity or amount of any
Taxes or in obtaining a refund of Taxes shall be considered as part of the Taxes
for such year. Taxes shall not
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include costs in connection with obtaining ICIP benefits, nor shall Tenant have
the right to any benefits obtained by Landlord in respect of ICIP.
(ii) "ASSESSED VALUATION" shall mean the amount for which the Real
Property is assessed pursuant to applicable provisions of the New York City
Charter and of the Administrative Code of the City of New York for the purpose
of imposition of Taxes.
(iii) "TAX YEAR" shall mean the period July 1 through June 30 (or
such other period as hereinafter may be a duly adopted by the City of New York
as it fiscal year for real estate tax programs).
(iv) "BASE TAXES" shall mean the Taxes payable for the Base Tax
Year.
(v) "COMPARISON YEAR" shall mean (a) with respect to Taxes, any Tax
Year subsequent to the Base Tax Year, and (b) with respect to Operating Expenses
(as hereinafter defined) any calendar year subsequent to the Base Expense Year
(as hereinafter defined) commencing with the calendar year which begins on
January 1, 2000, for any part or all of which there is an increase in the Rent
pursuant to subsection B of this Article 28.
(vi) (a) "OPERATING EXPENSES" shall mean the aggregate of those
costs and expenses (and taxes, if any, thereof) paid or incurred by or on behalf
of Landlord (whether directly or through independent contractors) in respect of
the operation, maintenance and management of the land and/or the Building and
the sidewalks and areas adjacent thereto (hereinafter called "OPERATION OF THE
PROPERTY") which, in accordance with the accounting practices used by Landlord
(and which is in accordance with sound management principles respecting the
operation of non-institutional first class office buildings in New York City)
are properly chargeable to the Operation of the Property together with and
including (without limitation) the financial expenses incurred in connection
with the Operation of the Property such as insurance costs, attorneys' fees and
disbursements (exclusive of any such fees and disbursements incurred in applying
for any abatement of Taxes) and auditing the other professional fees and
expenses, but specifically excluding (1) Taxes, (2) franchise or income taxes
imposed upon Landlord, (3) mortgage interest, (4) leasing and mortgage broker
commissions, (5) the cost of tenant installations and decorations incurred in
connection with preparing space for a tenant, (6) ground rent, if any, (7) costs
incident to any financing and refinancing or sale or net lease of the Building;
(8) the cost of electric energy furnished to any space leased or available for
lease to tenants; (9) salaries, fringe benefits and other compensation of
Landlord's personnel above the grade of building manager; (10) expenses for
which landlord receives compensation through the proceeds of insurance; (11)
ground rent, if any, or any other payments under any Superior Lease; (12)
expenses incurred in connection with services or other benefits of a type that
are not provided to Tenant (or are provided at separate or additional charge)
that are provided to another tenant or occupant of the Building; (13)
depreciation, except as otherwise provided for herein; (14) advertising,
entertainment and promotional expenditures; (15) legal fees and expenses and
disbursements incurred in
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connection with leasing, sales, financings or refinancings or disputes with
current or prospective tenants; (16) amounts otherwise includable in Operating
Expenses but reimbursed to Landlord directly by Tenant or others; (17) to the
extent any costs includable in Operating Expenses are incurred with respect to
both the Building and other properties (including without limitation, salaries,
fringe benefits and other compensation of Landlord's personnel who provide
services to both the Building and other properties), there shall be excluded
from Operating Expenses a fair and reasonable percentage thereof which is
properly allocable to such other properties; (18) any profits that Landlord
earns or receives on so called sundry charges to individual tenants; (19) the
cost of acquiring or replacing or installing any separate electrical meter
Landlord may provide to any of the tenants in the Building; (20) costs relating
to withdrawal liability or unfunded pension liability; (21) any interest, fine
penalty or other late charges payable by Landlord not caused by Tenant; (22)
expenditures for repairing and/or replacing any defect in any work required to
be performed by Landlord pursuant to the provisions of the Lease; (23) costs of
remedying violations of local building code requirements or other legal
requirements that arise by reason by Landlord's failure to construct, maintain
or operate the building or any part thereof in compliance with such building
code requirements or other legal requirements and regulations; (24) costs
incurred in connection with acquisition or sale of air rights; (25) any
increased insurance costs reimbursed directly to Landlord by a tenant,
including, without limitation, Tenant, pursuant to their respective leases; (26)
costs incurred by Landlord which result from Landlord's or other Building
tenants' breach of a lease or Landlord's tortious or negligent conduct; (27) the
cost paid or incurred in connection with the removal, replacement, enclosure,
encapsulation or other treatment of any hazardous materials in the Building,
other than periodic monitoring of asbestos levels; (28) costs incurred in
connection with the payment of any insurance premium required to be paid by
Landlord under the Mortgage; (29) payments by Landlord to any tenant in
connection with the takeover by Landlord of such tenant's lease; (30) payments
to any affiliates of Landlord in excess of payments which would be incurred in
an arms-length transaction; (31) charitable contributions; (32) costs of fine
arts installed after the date hereof; and (33) capital improvements, except,
however, that if any capital improvement results in reducing Operating Expenses
(as, for example, a labor-saving improvement), then with respect to the
Comparison Year in which the improvement is made and each subsequent Comparison
Year during the Term the amount by which the Operating Expenses have been
reduced shall be deemed deducted from the Base Operating Expenses (hereinafter
defined). If Landlord is not furnishing any particular work or service (the
cost of which if performed by Landlord would constitute an Operating Expense) to
a tenant who has undertaken to perform such work or service in lieu of the
performance thereof by Landlord, Operating Expenses shall be determined to be
increased by an amount equal to the additional Operating Expenses which
reasonably would have been incurred during such period by Landlord if it had at
its own expense furnished such work or services to such tenant.
(b) In determining the amount of Operating Expenses for the
Base Expense Year or any Comparison Year, if less than ninety percent (90%) of
the Building rentable area shall have been occupied by tenant(s) at any time
during any such Base Expense Year or Comparison Year, Operating Expenses shall
be determined for such Base Expense
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Year or Comparison Year to be an amount equal to the like expenses which would
normally be expected to be incurred had such occupancy been ninety percent (90%)
throughout such Base Expense Year or Comparison Year.
(c) If any capital improvement is made during any Comparison
Year, then the reasonable annual amortization, with interest, of the cost of
such improvements shall be deemed an Operating Expense in each of the Comparison
Years during which such amortization occurs provided, however, that such
improvement is made (i) to reduce Operating Expenses (to the extent of such
savings) or (ii) pursuant to (x) changes in Laws on or after the date hereof,
(y) any new Laws enacted after the date hereof or (z) the compliance by Landlord
with any Laws solely due to Tenant's specific occupancy of, or Alterations to,
the Premises.
(vii) "BASE OPERATING EXPENSES" shall mean the Operating Expenses for
the Base Expense Year.
(viii) "LANDLORD'S STATEMENT" shall mean an instrument or instruments
containing a comparison of any increase or decrease in the Rent for the
preceding Comparison Year pursuant to the provisions of this Article 28.
(ix) "BASE EXPENSE YEAR" shall mean the calendar year 1999.
B. ESCALATION. (i) If the Taxes payable for any Comparison Year (any
part or all of which falls within the Term) shall represent an increase above
the Base Taxes, then the Rent for such Comparison Year and continuing thereafter
until a new Landlord's Statement is rendered to Tenant, shall be increased by
Tenant's Proportionate Share of such increase. The Taxes shall be initially
computed on the basis of the Assessed Valuation in effect at the time Landlord's
Statement is rendered (as the Taxes may have been settled or finally adjudicated
prior to such time) regardless of any then pending application, proceeding or
appeal respecting the reduction of any such Assessed Valuation but shall be
subject to subsequent adjustment as provided in subsection D(i) of this Article
28.
(ii) If the Operating Expenses for any Comparison Year (any part or
all of which falls within the Term) shall be greater than the Base Operating
Expenses, then the Rent for such Comparison Year and continuing thereafter until
a new Landlord's Statement is rendered to Tenant, shall be increased by Tenant's
Proportionate Share of such increase.
C. PAYMENT OF ESCALATIONS. (i) At any time during or after any
Comparison Year Landlord shall render to Tenant, either in accordance with the
provisions of Article 27 hereof or by personal delivery at the Premises, a
Landlord's Statement or Statements showing separately or together (a) a
comparison of the Taxes payable for the Comparison Year with the Base Taxes, (b)
a comparison of the Operating Expenses for the Comparison year with the Base
Operating Expenses, and (c) the amount of the increase in the Rent resulting
from each of such comparisons. Landlord's failure to render a Landlord's
Statement during or with respect
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to any Comparison Year shall not prejudice Landlord's right to render a
Landlord's Statement during or with respect to any subsequent Comparison Year,
and shall not eliminate or reduce Tenant's obligation to pay increases in the
Rent pursuant to this Article 28 for such Comparison Year.
(ii) (a) Tenant's obligations with respect to increases in
Operating Expenses and Taxes, shall be payable by Tenant on the first day of the
month following the furnishing to Tenant of a Landlord's Statement with respect
to Operating Expenses and/or Taxes, as applicable, in an amount equal to
one-twelfth (1/12th) of such increase in the Rent multiplied by the number of
months (and any fraction thereof) of the Term then elapsed since the
commencement of the Comparison Year for which the increase in Operating Expenses
and/or Taxes, as the case may be, is applicable, together with a sum equal to
one-twelfth (1/12th) of such increase with respect to the month, following the
furnishing to Tenant of a Landlord's Statement; and thereafter, commencing with
the next succeeding monthly installment of Rent and continuing monthly
thereafter until rendition of the next succeeding Landlord's Statement, the
monthly installments of Rent shall be increased by an amount equal to
one-twelfth (1/12th) of such increase in Operating Expenses and/or Taxes, as the
case may be. Any increase in the Rent shall be collectible by Landlord in the
same manner as Rent.
(b) If during the Term of this Lease, Taxes are required to
be paid (either to the appropriate taxing authorities or as to tax escrow
payments to a mortgagee or ground lessor) in full or in monthly, quarterly, or
other installments, on any other date or dates than as presently required, then,
at Landlord's option, Tenant's Proportionate Share with respect to Taxes shall
be correspondingly accelerated or revised so that Tenant's Proportionate Share
is due at least thirty (30) days prior to the date payments are due to the
taxing authorities or the superior mortgagee or ground lessor, as the case may
be.
(c) Following each Landlord's Statement, a reconciliation
shall be made as follows: Tenant shall be debited with any increase in the Rent
shown on such Landlord's Statement and credited with the aggregate, if any, paid
by Tenant on account in accordance with the provisions of subsection C(ii)(a)
for the Comparison Year in question; Tenant shall pay any net debit balance to
Landlord within fifteen (15) days next following rendition by Landlord, either
in accordance with the provisions of Article 27 hereof or by personal delivery
to the Premises, of an invoice for such net debit balance; any net credit
balance shall be applied against the next accruing monthly installment of Rent
or if at the end of the term, refunded to Tenant.
(iii) (a) As used in this subsection C(iii), the words "TENTATIVE
MONTHLY EXPENSE CHARGE" shall mean a sum equal to one-twelfth (1/12th) of
Tenant's Proportionate Share multiplied by the difference between (i) the Base
Operating Expenses and (ii) one hundred and six percent (106%) of the Operating
Expenses for (1) the Base Expense Year with respect to the first Comparison Year
during the Term or (2) the immediately preceding
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Comparison Year with respect to the second Comparison Year and each Comparison
Year thereafter during the Term.
(b) At any time in any Comparison Year (any part or all of
which falls within the term), Landlord, at its option, in lieu of the payments
required under subsection C(ii)(a) of this Article 28 with respect to Operating
Expenses only, may demand and collect from Tenant, as additional rent, a sum
equal to the Tentative Monthly Expense Charge multiplied by the number of months
in said Comparison Year preceding the demand, and thereafter; commencing with
the month in which the demand is made and continuing thereafter for each month
remaining in said Year, the monthly installments of Rent shall be deemed
increased by the Tentative Monthly Expense Charge. Any amount due to Landlord
under this subsection C(iii)(b) may be included by Landlord in any Landlord's
Statement rendered to Tenant as provided in subsection C(i) of this Article 28.
(c) After the end of the Comparison Year in which a demand is
made pursuant to the provisions of subsection C(iii)(b) of this Article 28 and
at any time that Landlord renders a Landlord's Statement or Statements to Tenant
as provided in subsection C(i) of this Article 28 in respect of Operating
Expenses, the amounts, if any, collected by Landlord from Tenant under
subsection C(iii)(b) hereof on account of Tentative Monthly Expense Charge shall
be adjusted, and, if the amount so collected is less than or exceeds the amount
actually due under said Landlord's Statement for the Comparison Year, a
reconciliation shall be made in the same manner as provided in subsection
C(ii)(c) of this Article 28.
D. ADJUSTMENTS.(i) (a) In the event that, after a Landlord's Statement
has been sent to Tenant, an Assessed Valuation which had been utilized in
computing the Taxes for a Comparison Year is reduced (as a result of settlement,
final determination of legal proceedings or otherwise), and as a result thereof
a refund of Taxes is actually received by or on behalf of Landlord, then,
promptly after receipt of such refund, Landlord shall send Tenant a statement
adjusting the Taxes for such Comparison Year (taking into account the expenses
mentioned in the last sentence of subsection A(i) of this Article 28) and
setting forth Tenant's Proportionate Share of such refund and Tenant shall be
entitled to receive such Tenant's Proportionate Share by way of a credit against
the Rent next becoming due after the sending of such Statement; provided,
however, that Tenant's Proportionate Share of such refund shall be limited to
the amount, if any, which Tenant had theretofore paid to Landlord as increased
Rent for such Comparison Year on the basis of the Assessed Valuation before it
had been reduced.
(b) In the event that, after a Landlord's Statement has been
sent to Tenant, the Assessed Valuation which had been utilized in computing the
Base Taxes is reduced (as a result of settlement, final determination of legal
proceedings or otherwise), then, and in such event: (1) the Base Taxes shall be
retroactively adjusted to reflect such reduction, (2) the monthly installment of
Rent shall be increased accordingly, and (3) all retroactive additional rent
resulting from such retroactive adjustment shall be forthwith payable when
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billed by Landlord. Landlord promptly shall send to Tenant a statement setting
forth the basis for such retroactive adjustment and additional rent payments.
(ii) Any Landlord's Statement sent to Tenant shall be conclusively
binding upon Tenant unless, within ninety (90) days after such statement is
sent, Tenant shall (a) pay to Landlord the amount set forth in such statement,
without prejudice to Tenant's right to dispute same, and (b) send a written
notice to Landlord objecting to such statement and specifying the respects in
which such statement is claimed to be incorrect. If such notice is sent, the
parties recognize the unavailability of Landlord's books and records because of
the confidential nature thereof and hence agree that either party may refer the
decision of the issues raised to a reputable independent firm of certified
public accountants selected by Tenant and reasonably acceptable to Landlord, and
the decision of such accountants shall be conclusively binding upon the parties.
If such accountants determine that such Landlord's Statement was incorrect with
respect to a particular item, Tenant may, in accordance with this Section
28D(ii), object to any prior Landlord's Statement in respect of such item only.
The fees and expenses involved in such decision shall be borne by the
unsuccessful party (and if both parties are partially unsuccessful, the
accountants shall apportion the fee and expenses between the parties based on
the degree of success of each party).
(iii) Anything in this Article 28 to the contrary notwithstanding,
under no circumstances shall the rent payable under this Lease be less than the
Rent set forth in Article 1 hereof.
(iv) The expiration of termination of this Lease during any
Comparison Year for any part or all of which there is an increase in the Rent
under this Article shall not affect the rights or obligations of the parties
hereto respecting such increase and any Landlord's Statement relating to such
increase may, on a pro rata basis, be sent to Tenant subsequent to, and all such
rights and obligations shall survive, any such expiration or termination. Any
payments due under such Landlord's Statement shall be payable within twenty (20)
days after such statement is sent to Tenant.
29. SERVICES.
A. ELEVATOR. Landlord shall provide passenger elevator facilities
on business days, twenty-four (24) hours per day, and shall have one passenger
elevator in the bank of elevators servicing the Premises available at all other
times. Landlord shall provide freight elevator services on an "as available"
basis for incidental use by Tenant from 8:00 A.M. through 12:00 Noon and from
1:00 P.M. through 5:00 P.M. on business days only. Any extended use may be
arranged with Landlord's prior consent and Tenant shall pay as additional rent
therefor $110.00 per hour for each hour of extended use. Notwithstanding the
foregoing, Landlord shall provide 100 hours of freight elevator service during
Overtime Periods (as hereinafter defined) at no additional cost or expense to
Tenant.
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B. HEATING. Landlord shall furnish heat to the Premises when and as
required by law, on business days from 8:00 A.M. to 6:00 P.M. Landlord shall not
be responsible for the adequacy, design or capacity of the heating distribution
system if the normal operation of the heat distribution system serving the
Building shall fail to provide heat at reasonable temperatures or any reasonable
volumes or velocities in any parts of the Premises by reason of any
rearrangement of partitioning or other Alterations made or performed by or on
behalf of Tenant (other than Landlord's Core Work) or any person claiming
through or under Tenant.
C. COOLING. Landlord, at Landlord's expense, shall furnish
air-cooling on business days from 8:00 A.M. to 6:00 P.M. from May 15 through
October 15 of each year during the Term, when, in the judgment of Landlord,
reasonably exercised, it may be required for the comfortable occupancy of the
Premises, and shall ventilate the Premises on business days and for similar
hours during other months of the year. Anything in this subsection C to the
contrary notwithstanding, Landlord shall not be responsible if the normal
operation of the Building air-cooling system shall fail to provide cooled air at
reasonable temperatures, pressures or degrees of humidity or any reasonable
volumes or velocities in any parts of the Premises by reason of (i) human
occupancy factors and any machinery or equipment installed by or on behalf of
Tenant or any person claiming through or under Tenant that have an electrical
load in excess of the average electrical load for the Building air-cooling
system as designed or (ii) any rearrangement of partitioning or other
Alterations made or performed by or on behalf of Tenant or any person claiming
through or under Tenant. Tenant agrees to keep and cause to be kept closed all
of the windows in the Premises whenever the air-cooling system is in operation
and agrees to lower and close the blinds when necessary because of the sun's
position whenever the air-cooling system is in operation. Tenant at all times
agrees to cooperate fully with Landlord and to abide by the regulations and
requirements which Landlord may prescribe for the proper functioning and
protection of the air-cooling system. Landlord, throughout the Term, shall have
free access to any and all mechanical installations of Landlord, including but
not limited to air-cooling, fan, ventilating, machine rooms and electrical
closets. The HVAC specifications currently in effect for the Building are more
particularly described on EXHIBIT F annexed hereto, but Landlord reserves the
right to amend such specifications at any time, provided same is done on a
non-discriminatory basis. Landlord shall provide Tenant with two (2)
connections, per floor, to the main duct of the HVAC System.
D. AFTER HOURS AND ADDITIONAL SERVICES. The Rent does not include
any charge to Tenant for the furnishing of any freight elevator facilities
(other than as contemplated in Article 29 subsection A) or for the service of
heat, cooled air or mechanical ventilation to the Premises during periods other
than the hours and days set forth in sections A, B and C of this Article 29 for
the furnishing and distributing of such facilities or services (referred to as
"OVERTIME PERIODS"). Accordingly, if Landlord shall furnish any (i) passenger
elevator facilities to Tenant during Overtime Periods or freight elevator
facilities, except as provided in subsection A of this Article 29, or (ii) heat,
cooled air or ventilation to the
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Premises during Overtime Periods, then Tenant shall pay Landlord additional rent
for such facilities or services at the standard rates then fixed by the Landlord
for the Building or, if no such rates are then fixed, at reasonable rates (which
for freight elevator facilities shall be at the rate set forth in Subsection A
of this Article 29 and which for heat and cooled air shall be deemed to be (y)
One Hundred Fifty ($150.00) Dollars per hour (which shall be increased yearly by
the Consumer Price Index), provided Tenant shall require no fewer than two
hundred twenty-five (225) hours of cooled air per year during Overtime Periods
and (z) Two Hundred Fifteen ($215.00) Dollars per hour (subject to increase
yearly by the Consumer Price Index) if less than two hundred twenty-five (225)
hours of cooled air per year are used). Neither the facilities nor the services
referred to in this Article 29D shall be furnished to Tenant or the Premises if
Landlord has not received advance notice from Tenant specifying the particular
facilities or services requested by Tenant at least seven (7) hours prior to the
time on which the facilities or services are to be furnished; or if Tenant is in
default under or in breach of any of the terms, covenants or conditions of this
Lease beyond applicable notice and grace periods; or if such facilities or
services are requested in connection with, or the use thereof shall create or
aid in a default under or a breach of any term, covenant or condition of this
Lease. All of the facilities and services referred to in this Article 29D are
conveniences and are not and shall not be deemed to be appurtenances to the
Premises, and the failure of Landlord to furnish any or all of such facilities
or services shall not constitute or give rise to any claim of an actual or
constructive eviction, in whole or in part, or entitle Tenant to any abatement
or diminution of Rent, or relieve Tenant from any of its obligations under this
Lease, or impose any liability upon Landlord or its agents by reason of
inconvenience or annoyance to Tenant, or injury to or interruption of Tenant's
business or otherwise (provided that, without modifying this sentence in any
way, Landlord shall use commercially reasonable efforts to provide such services
or restore same if they have been discontinued). In the event Tenant installs a
supplemental air cooling system in the Premises, and if condenser water for such
system shall be supplied by Landlord Tenant shall pay to Landlord, annually upon
demand, a sum equal to $1,000 per ton of condenser water air conditioning
capacity, adjusted annually, to compensate Landlord for the cost of supplying
condenser water for such supplemental system. In no event shall Landlord be
obligated to supply more than ten (10) tons of condenser water, per floor, in
any calendar year. In addition, any such supplemental air-cooling system shall
be installed with balancing valves and circuit setters manufactured by Bell &
Gossett or other comparable company for balancing by Landlord, at Tenant's sole
cost and expense.
E. CLEANING. Landlord, at Landlord's expense, shall cause the
Premises to be kept clean in building standard manner. The cleaning
specifications currently in effect for the Building are more particularly
described on EXHIBIT E annexed hereto, but Landlord reserves the right to amend
such specifications at any time provided same is done on a non-discriminatory
basis and does not materially adversely affect Tenant. Tenant shall, however,
have the option in its sole discretion to clean or independently contract for
the cleaning of the Premises at Tenant's sole expense, without any adjustment in
the Rent, provided that such cleaning is done in a manner satisfactory to
Landlord and no one other than persons approved by Landlord shall be permitted
to enter the Premises or the Building for such purpose. Tenant
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shall pay to Landlord the cost of removal of any of Tenant's refuse and rubbish
from the Premises and the Building to the extent that the same exceeds the
refuse and rubbish usually attendant upon the use of such Premises as offices.
Bills for the same shall be rendered by Landlord to Tenant at such time as
Landlord may elect and shall be due and payable when rendered and the amount of
such bills shall be deemed to be, and be paid as additional rent. Tenant shall,
however, have the option of independently contracting for the removal of such
refuse and rubbish in the event that Tenant does not wish to have same done by
employees of Landlord. Under such circumstances, however, the removal of such
refuse and rubbish by others shall be subject to such rules and regulations, as
in the reasonable judgment of Landlord, are necessary for the proper operation
of the Building.
F. SPRINKLER SYSTEM. If there now is or shall be installed in the
Building a "sprinkler system", and such system or any of its appliances shall be
damaged or injured or not in proper working order by reason of any act or
omission of Tenant, Tenant's agents, servants, employees, licensees or visitors,
Tenant shall forthwith restore the same to good working condition at its own
expense; and if the New York Board of Fire Underwriters or the New York Fire
Insurance Rating Organization or any bureau, department or official of the state
or city government, shall require or recommend that any changes, modifications,
alterations or additional sprinkler heads or other equipment be made or supplied
by reason of Tenant's specific business, or the location of the partitions,
trade fixtures, or other contents of the Premises, Tenant shall, at Tenant's
expense, promptly make and supply such changes, modifications, alterations,
additional sprinkler heads or other equipment.
G. WATER. If Tenant requires, uses or consumes water for any
purpose in addition to ordinary drinking, cleaning or lavatory purposes (other
than condenser water for supplemental air conditioning), Landlord may install a
water meter and thereby measure Tenant's water consumption for all purposes. In
such event (i) Tenant shall pay Landlord for the cost of the meter and the cost
of the installation thereof and through the duration of Tenant's occupancy
Tenant shall keep said meter and installation equipment in good working order
and repair at Tenant's own cost and expense in default of which Landlord may
cause such meter and equipment to be replaced or repaired and collect the cost
thereof from Tenant; (ii) Tenant agrees to pay for water consumed, as shown on
said meter as and when bills are rendered, and on default in making such payment
Landlord may pay such charges and collect the same from Tenant; and (iii) Tenant
covenants and agrees to pay the sewer rent, charge or any other tax, rent, levy
or charge which now or hereafter is assessed, imposed or shall become a lien
upon the Premises or the realty of which they are part pursuant to law, order or
regulation made or issued in connection with any such metered use, consumption,
maintenance or supply of water, water system, or sewage or sewage connection or
system. The bill rendered by Landlord for the above shall be based upon
Tenant's consumption and shall be payable by Tenant as additional rent within
five (5) days of rendition. Any such costs or expenses incurred or payments
made by Landlord for any of the reasons or purposes hereinabove stated shall be
deemed to be additional rent payable by Tenant and collectible by Landlord as
such. Independently of and in addition to any of the remedies reserved to
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Landlord hereinabove or elsewhere in this Lease, Landlord may sue for and
collect any monies to be paid by Tenant or paid by Landlord for any of the
reasons or purposes hereinabove set forth.
H. ELECTRICITY SERVICE. (i) Landlord shall redistribute six (6) watts
of connected electrical load per rentable square foot of space deemed to be in
the Premises to the electric panel boxes located in the Premises for the
servicing of all of Tenant's electrical needs within the Premises, including,
without limitation, any air-cooling equipment located in, or exclusively
servicing the Premises, but excluding the Building HVAC. Landlord's designated
agent shall, at Landlord's cost, install a submeter to measure Tenant's
consumption of electrical energy in the Premises. The cost of electricity
utilized by Tenant shall be paid for by Tenant to Landlord as additional rent
and shall be calculated at the then applicable rate prescribed by the public
utility company serving the Premises for submetered electrical energy (utilizing
demand factors incurred within the Premises and time of day rates which are
applicable), plus (a) Landlord's charge for overhead and supervision in the
amount of seven percent (7%) of the total electric bill and (b) any taxes or
other charges in connection therewith. If any tax shall be imposed upon
Landlord's receipts from the sale or resale of electrical energy to Tenant, the
pro rata share applicable to the electrical energy service received by Tenant
shall be passed on to, included in the bill of, and paid by Tenant if and to the
extent permitted by law. Landlord shall bill Tenant, monthly, for the cost if
its consumption of electricity in the Premises and Tenant shall pay the amount
thereof at the time of payment of each installment of Rent. If either the
quantity or character of electrical services is changed by the public utility or
other company supplying electrical service to the Building or is no longer
available or suitable for Tenant's requirements, no such change, unavailability
or unsuitability shall constitute an actual or constructive eviction, in whole
or in part, or entitle Tenant to any abatement or diminution of rent, or relieve
Tenant from any of its obligations under this Lease, or impose any liability
upon Landlord, or its agents, by reason of inconvenience or annoyance to Tenant,
or injury to or interruption or Tenant's business, or otherwise.
(ii) If Tenant requires additional electrical energy beyond the
wattage specified above for any reason whatsoever, including without limitation,
the use of additional business machines, office equipment or other appliances in
the Premises which utilize electrical energy, Tenant shall request such
additional electrical energy from Landlord in each instance. If Landlord agrees
to provide the same, any additional feeders or risers which are required to
supply Tenant's additional electrical requirements, and all other equipment
proper and necessary in connection with such feeders or risers, shall be
installed by Landlord upon Tenant's request, at the sole cost and expense of
Tenant (including without limitation, a connection fee of Three Hundred Fifty
and 00/100 ($350.00) Dollars per kilovolt ampere), provided that, in Landlord's
reasonable judgment, such additional feeders or riders are necessary and are
permissible under applicable laws and insurance regulations and the installation
of such feeders or risers will not cause permanent damage or injury to the
Building or the Premises or cause or create a dangerous or hazardous condition
or entail excessive or unreasonable alterations or interfere with or disturb
other tenants or occupants of the Building.
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Tenant covenants that at no time shall the use of electrical energy in the
Premises exceed the capacity of the existing feeders or wiring installations
then serving the Premises or provide Tenant with greater than six (6) watts of
connected electrical load per rentable square foot deemed to be in the Premises
(excluding HVAC). Tenant shall not make or perform, or permit the making or
performance of, any alterations to wiring installations or other electrical
facilities in or serving the Premises without the prior consent of Landlord in
each instance and without paying Landlord's customary charges therefor. Any
such Alterations, additions or consent by Landlord shall be subject to the
provisions of this Lease including, but not limited to, the provisions of
Article 3 hereof.
(iii) Landlord reserves the right to discontinue furnishing
electricity to Tenant in the Premises on not less than sixty (60) days notice to
Tenant if Landlord does so either (y) on a non-discriminatory basis or
(z) because Tenant has failed, beyond the expiration of applicable notice and
grace periods, to pay Landlord any amounts payable by Tenant to Landlord
pursuant to this paragraph 29(H). If Landlord exercises such right to
discontinue, or is compelled to discontinue furnishing electricity to Tenant,
this Lease shall continue in full force and effect and shall be unaffected
thereby, except only that from and after the effective date of such
discontinuance, Landlord shall not be obligated to furnish electricity to
Tenant. If Landlord so discontinues furnishing electricity to Tenant, Tenant
shall arrange to obtain electricity directly from the public utility or other
company servicing the Building. Such electricity may be furnished to Tenant by
means of the then existing electrical facilities serving the Premises to the
extent that the same are available, suitable and safe for such purposes. All
meters and all additional panel boards, feeders, risers, wiring and other
conductors and equipment which may be required to obtain electricity, of
substantially the same quantity, quality and character, shall be installed by
Landlord at Tenant's sole cost and expense. Landlord shall not voluntarily
discontinue furnishing electricity to Tenant until Tenant is able to receive
electricity directly from the public utility or other company servicing the
Building.
(iv) Landlord shall not be liable to Tenant in any way for any
interruption, curtailment or failure or defect in the supply or character of
electricity furnished to the Premises by reason of any requirement, act or
omission of Landlord (except Landlord's gross negligence or willful misconduct)
or of any public utility or other company servicing the Building with
electricity or for any other reason except Landlord's negligence or willful
misconduct.
(v) In the event that the submeter to be installed in the Premises
in accordance with the provisions of Subsection H(i) of this Article 29 is not
installed, activated and fully operational on or before the Commencement Date
(and irrespective of whether or not Rent shall be payable for such period),
Tenant will pay, monthly, as additional rent the sum of (a) ($2.00 times
rentable square feet) divided by (b) 12 (the "INTERIM ELECTRICAL CHARGE") on the
Commencement Date and on the first day of each calendar month thereafter until
such time as the submeter is installed, activated and fully operational. If the
Commencement Date occurs on a date other than the first day of a calendar month,
the Interim Electrical Charge for such
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month shall be an amount equal to such proportion of the Interim Electrical
Charge as the number of days from and including the Commencement Date to the
last day of the calendar month in which the Commencement Date occurs bears to
the total number of days in such calendar month. If the first day that the
electrical submeter becomes activated and fully operational occurs on a date
other than the first day of a calendar month, the Tenant shall pay for such
month an amount equal to such proportion of the Interim Electrical Charge as the
number of days from the beginning of such calendar month through and including
the date that such electrical submeter becomes operational bears to the total
number of days in such calendar month plus the cost of electricity as determined
by the submeter, for the remainder of such month.
I. INTERRUPTION OF SERVICES. Landlord reserves the right, to the
extent necessary, to stop service of the HVAC system and all other Building
systems including the elevator, electrical, plumbing or other mechanical systems
or facilities in the Building when necessary, by reason of accident or
emergency, or for repairs, additions, alterations, replacements, or improvements
in the judgment of Landlord necessary to be made, until said repairs,
alterations, replacements or improvements shall have been completed. Landlord
shall have no responsibility or liability for interruption, curtailment or
failure to supply cooled or outside air, heat, elevator, plumbing or electricity
when prevented by exercising its right to stop service or by strikes, labor
troubles or accidents or by any cause whatsoever reasonably beyond Landlord's
control, or by failure of independent contractors to perform or by laws, orders,
rules or regulations of any federal, state, county or municipal authority, or
failure of suitable fuel supply, or inability by exercise of reasonable
diligence to obtain suitable fuel or by reason of governmental preemption in
connection with a National Emergency or by reason of the conditions of supply
and demand which have been or are affected by war or other emergency. Tenant
acknowledges that the Building HVAC system may contain freon or other
chlorofluorocarbons (CFC's) and that future federal, state or city regulations
may require the removal of CFC's as well as the alteration or replacement of
equipment utilizing CFC'S. In connection therewith (i) Landlord reserves the
right to stop service of the HVAC system or any other mechanical systems
containing CFC's for such duration as may be necessary to convert any such
systems to eliminate the use of CFC's and (ii) to enter upon the Premises, as
necessary to install replacement equipment within the Premises required by any
such change. The exercise of such right or such failure by Landlord shall not
constitute an actual or constructive eviction, in whole or in part, or entitle
Tenant to any compensation or to any abatement or diminution of Rent, or relieve
Tenant from any of its obligations under this Lease, or impose any liability
upon Landlord or its agents by reason of inconvenience or annoyance to Tenant,
or injury to or interruption of Tenant's business, or otherwise.
30. PARTNERSHIP TENANT.
A. PARTNERSHIP TENANTS. If Tenant is a partnership (or is comprised
of two (2) or more persons, individually and as co-partners of a partnership) or
if Tenant's interest in this Lease shall be assigned to a partnership (or to two
(2) or more persons, individually and as
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co-partners of a partnership) pursuant to Article 12 (any such partnership and
such persons are referred to in this Article 30 as a "PARTNERSHIP TENANT"), the
following provisions of this Article 30 shall apply to such Partnership Tenant:
(i) the liability of each of the parties comprising a Partnership Tenant shall
be joint and several, and (ii) each of the parties comprising a Partnership
Tenant hereby consents in advance to, and agrees to be bound by, any written
instrument which may hereafter be executed, changing, modifying or discharging
this Lease, in whole or in part, or surrendering all or any part of the Premises
to Landlord, and by any notices, demands, requests or other communications which
may hereafter be given by a Partnership Tenant or by any of the parties
comprising a Partnership Tenant, and (iii) any bills, statements, notices,
demands, requests or other communications given or rendered to a Partnership
Tenant and to all such parties shall be binding upon a Partnership Tenant and
all such parties, and (iv) if a Partnership Tenant shall admit new partners, all
of such new partners shall, by their admission to a Partnership Tenant, be
deemed to have assumed performance of all of the terms, covenants and conditions
of this Lease on Tenant's part to be observed and performed, and (v) a
Partnership Tenant shall give prompt notice to Landlord of the admission of any
such new partners, and upon demand of Landlord, shall cause each such new
partner to execute and deliver to Landlord an agreement in form satisfactory to
Landlord, wherein each such new partner shall assume performance of all the
terms, covenants and conditions of this Lease on Tenant's part to be observed
and performed (but neither Landlord's failure to request any such agreement nor
the failure of any such new partner to execute or deliver any such agreement to
Landlord shall vitiate the provisions of subdivision (iv) of subsection A of
this Article 30). Notwithstanding the foregoing, Landlord shall forbear from
seeking to enforce or obtaining a judgment against the partners of Tenant if,
within thirty (30) days of Landlord's notice of termination of this Lease upon
the occurrence of an Event of Default, Tenant shall fully and truly surrender
the Premises to Landlord in accordance with the other provisions of this Lease
(and execute such documents evidencing such surrender as Landlord may reasonably
require), provided, that, from the date hereof through the 13 month anniversary
of such surrender, no proceedings shall theretofore have been instituted by
Tenant (by any partner, shareholder, officer, director or affiliate) to
reinstate, modify or disaffirm Tenant's rights under this Lease pursuant to
Section 365 of the United States Bankruptcy Reform Act of 1978, as amended, or
under other bankruptcy laws, or otherwise, or to attack Landlord's rights to the
possession, use and enjoyment of the Premises by way of a "Yellowstone
injunction" and associated declaratory relief or pursuant to other remedies at
law or in equity, in which event this sentence shall be deemed null and void.
B. LIMITED LIABILITY ENTITY. Notwithstanding anything to the
contrary contained herein, if Tenant is a limited or general partnership (or is
comprised of two (2) or more persons, individually or as co-partners), the
change or conversion of Tenant to (i) a limited liability company, (ii) a
limited liability partnership, or (iii) any other entity which possesses the
characteristics of limited liability (any such limited liability company,
limited liability partnership or entity is collectively referred to as a
"LIMITED LIABILITY SUCCESSOR ENTITY"), shall be prohibited unless the prior
written consent of Landlord is obtained, which
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consent may be withheld in Landlord's sole discretion. Notwithstanding the
foregoing, Landlord agrees not to unreasonably withhold or delay such consent
provided that:
(a) The Limited Liability Successor Entity succeeds to all or
substantially all of Tenant's business and assets;
(b) The Limited Liability Successor Entity shall have a net
worth, determined in accordance with generally accepted accounting principles,
consistently applied, of not less than the greater of the net worth of Tenant on
(1) the date of execution of this Lease, or (2) the day immediately preceding
the proposed effective date of such conversion;
(c) Tenant is not in default of any of the terms, covenants
or conditions of this Lease on the proposed effective date of such conversion;
(d) Tenant shall cause each partner of Tenant to execute and
deliver to Landlord an agreement, in form and substance satisfactory to
Landlord, wherein each such partner agrees to remain personally liable for all
of the terms, covenants and conditions of this Lease that are to be observed and
performed by the Limited Liability Successor Entity; and
(e) Tenant shall reimburse Landlord within ten (10) business
days following demand by Landlord for any and all reasonable costs and expenses
that may be incurred by Landlord in connection with said conversion of Tenant to
a Limited Liability Successor Entity, including, without limitation, any
attorney's fees and disbursements.
31. VAULT SPACE. Any vaults, vault space or other space outside the
boundaries of the Real Property, notwithstanding anything contained in this
Lease or indicated on any sketch, blueprint or plan are not included in the
Premises. Landlord makes no representation as to the location of the boundaries
of the Real Property. All vaults and vault space and all other space outside
the boundaries of the Real Property which Tenant may be permitted to use or
occupy is to be used or occupied under a revocable license, and if any such
license shall be revoked, or if the amount of such space shall be diminished or
required by any Federal, State or municipal authority or by any public utility
company, such revocation, diminution or requisition shall not constitute an
actual or constructive eviction, in whole or in part, or entitle Tenant to any
abatement or diminution of rent, or relieve Tenant from any of its obligations
under this Lease, or impose any liability upon Landlord.
32. SECURITY DEPOSIT. In order to secure Tenant's obligations under this
Lease, simultaneously with the execution of this Lease, Tenant shall deliver to
Landlord an irrevocable letter of credit in the amount of $1,178,420.00 in form
and substance acceptable to Landlord in its sole discretion and issued by a New
York City bank acceptable to Landlord (the "L/C"). Landlord may draw on the L/C
from time to time to reimburse itself in the event Tenant defaults (beyond the
expiration of applicable notice and cure periods) in respect of any of the
terms, provisions and conditions of this Lease including, but not limited to,
the payment
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of Rent and additional rent. Drawings may be made by sight draft and partial
drawings shall be permitted. The L/C shall be substantially in the form of
EXHIBIT 2 annexed hereto and provide for a twelve (12) month-expiry, and shall
contain a so-called "evergreen" clause so that, unless the issuing bank notifies
Landlord, in writing, of its intention not to renew the L/C at least thirty (30)
days prior to the stated expiry thereof, the L/C shall be renewed automatically
for a period of twelve (12) months. If the issuing bank so notifies Landlord or
if, with Landlord's consent, the L/C does not contain an "evergreen" clause and
Tenant fails to provide a renewal letter of credit in the form and amount of the
original L/C at least thirty (30) days prior to the stated expiry thereof,
Landlord may draw down on the L/C and hold the cash proceeds of same as security
for Tenant's obligations under this Lease. Tenant may, (a) on the third (3rd)
anniversary of the Rent Commencement Date, cause the L/C to be reduced to an
amount equal to $884,380.00, (b) on the fourth (4th) anniversary of the Rent
Commencement, cause the L/C to be reduced to an amount equal to $758,040.00 and
(c) on the fifth (5th) anniversary of the Rent Commencement Date, cause the L/C
to be reduced to an amount equal to $631,700.00, IN EACH CASE PROVIDED (a) that
in no event shall Tenant ever have the right to reduce the L/C to an amount less
than $631,700.00 and (b) Tenant's right to reduce the amount of the L/C as
provided for herein shall terminate upon an Event of Default.
33. CAPTIONS. The Captions are inserted only as a matter of convenience
and for reference and in no way define, limit or describe the scope of this
Lease nor the intent of any provision thereof.
34. ADDITIONAL DEFINITIONS.
A. The term "office" or "offices", wherever used in this Lease,
shall not be construed to mean premises used as a store or stores, for the sale
or display, at any time, of goods, wares or merchandise, of any kind, or as a
restaurant, shop, booth, bootblack or other stand, barber shop, or for other
similar purposes or for manufacturing.
B. The term "rent" as used in this Lease shall mean and be deemed to
include Rent, any increases in Rent, all additional rent and any other sums
payable hereunder.
C. The term "business days" as used in this Lease shall exclude
Saturdays, Sundays and all days observed by the State or Federal Government as
legal holidays and union holidays for those unions that materially affect the
delivery of services in the Building.
35. PARTIES BOUND. The covenants, conditions and agreements contained in
this Lease shall bind and inure to the benefit of Landlord and Tenant and their
respective heirs, distributees, executors, administrators, successors, and,
except as otherwise provided in this Lease, their assigns.
36. BROKER. Each party represents and warrants to the other that it has
dealt directly with (and only with), the Broker (as defined in Article 1 herein)
as broker in
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connection with this Lease, and that insofar as such party knows no other broker
negotiated this Lease or is entitled to any commission in connection therewith,
and the execution and delivery of this Lease by Landlord and Tenant,
respectively, shall be conclusive evidence that Landlord and Tenant,
respectively, have relied upon the foregoing representation and warranty.
Landlord shall pay Broker a commission pursuant to separate agreement.
37. INDEMNITY. Tenant shall not do or permit any act or thing to be done
upon the Premises which will subject Landlord to any liability or responsibility
for injury, damages to persons or property or to any liability by reason of any
violation of law or of any legal requirement of public authority, but shall
exercise such control over the Premises as to fully protect Landlord against any
such liability. Tenant agrees to indemnify and save harmless Landlord from and
against (i) all claims of whatever nature against Landlord arising from any act,
omission or negligence of Tenant, its contractors, licensees, agents, servants,
employees, invitees or visitors, excluding any claims arising from any act,
omission or negligence of Landlord, (ii) all claims against Landlord arising
from any accident, injury or damage whatsoever caused to any person or to the
property of any person and occurring during the Term in the Premises, other than
claims arising from the gross negligence of Landlord, its agents, servants, and
employees, (iii) all claims against Landlord arising from any accident, injury
or damage to any person, entity or property, occurring outside of the Premises
but anywhere within or about the Real Property, where such accident, injury or
damage results or is claimed to have resulted from an act or omission of Tenant
or Tenant's agents, Tenant's employees, Tenant's invitees or Tenant's visitors,
and (iv) any breach, violation or nonperformance of any covenant, condition or
agreement in this Lease set forth and contained on the part of Tenant to be
fulfilled, kept, observed and performed and (v) any claim, loss or liability
arising or claimed to arise from Tenant, or any of Tenant's contractors,
licensees, agents, servants, employees, invitees or visitors causing or
permitting any Hazardous Substance to be brought upon, kept or used in or about
the Premises or the Real Property or any seepage, escape or release of such
Hazardous Substances. As used herein and in all other provisions in this Lease
containing indemnities made for the benefit of Landlord, the term "Landlord"
shall mean Emmes Asset Management Corp. and 685 Acquisition LLC and their
respective parent companies and/or corporations, their respective controlled,
associated, affiliated and subsidiary companies and/or corporations and their
respective members, officers, partners, agents, consultants, servants,
employees, successors and assigns. This indemnity and hold harmless agreement
shall include indemnity from and against any and all liability, fines, suits,
demands, costs and expenses (including reasonable attorneys' fees) of any kind
or nature incurred in or in connection with any such claim or proceeding brought
thereon, and the defense thereof. Landlord agrees to indemnify and save
harmless Tenant from and against claims arising from the gross negligence or
willful misconduct of Landlord, its agents, contractors and employees.
38. ADJACENT EXCAVATION SHORING. If an excavation shall be made upon land
adjacent to the Premises, or shall be authorized to be made, Tenant shall afford
to the person causing or authorized to cause such excavation, license to enter
upon the Premises for
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the purpose of doing such work as said person shall deem necessary to preserve
the wall or the Building from injury or damage and to support the same by proper
foundations without any claim for damages or indemnity against Landlord, or
diminution or abatement of Rent; provided that such person shall use its best
efforts to minimize disturbance to Tenant's use of the Premises
39. MISCELLANEOUS.
A. NO OFFER. This Lease is offered for signature by Tenant and it
is understood that this Lease shall not be binding unless and until Landlord
shall have executed and delivered a fully executed copy of this Lease to Tenant.
B. SIGNATORIES. If more than one person executes this Lease as
Tenant, each of them understands and hereby agrees that the obligations of each
of them under this Lease are and shall be joint and several, that the term
"Tenant" as used in this Lease shall mean and include each of them jointly and
severally and that the act of or notice from, or notice or refund to, or the
signature of, any one or more of them, with respect to the tenancy and/or this
Lease, including, but not limited to, any renewal, extension, expiration,
termination or modification of this Lease, shall be binding upon each and all of
the persons executing this Lease as Tenant with the same force and effect as if
each and all of them had so acted or so given or received such notice or refund
or so signed.
C. CERTIFICATES. From time to time, within seven (7) days next
following request by Landlord or the mortgagee of a Mortgage, Tenant shall
deliver to Landlord or such mortgagee, as the case may be, a written statement
executed and acknowledged by Tenant, in form satisfactory to Landlord or such
mortgagee (i) stating that this Lease is then in full force and effect and has
not been modified (or if modified, setting forth all modifications), (ii)
setting forth the date to which the Rent, additional rent and other charges
hereunder have been paid, together with the amount of fixed base monthly Rent
then payable, (iii) stating whether or not, to the reasonable knowledge of
Tenant, Landlord is in default under this Lease, and, if Landlord is in default,
setting forth the specific nature of all such defaults, (iv) stating the amount
of the security deposit under this Lease, (v) stating whether there are any
subleases affecting the Premises, (vi) stating the address of Tenant to which
all notices and communications under the Lease shall be sent, the Commencement
Date and the Expiration Date, and (vii) as to any other matters reasonably
requested by Landlord or such mortgagee. Tenant acknowledges that any statement
delivered pursuant to this subsection C may be relied upon by any purchaser or
owner of the Real Property or the Building, or Landlord's interest in the Real
Property or the Building or any Superior Lease, or by any mortgagee of a
Mortgage, or by any assignee of any mortgagee of a Mortgage, or by any lessor
under any Superior Lease.
D. DIRECTORY LISTINGS. Landlord agrees to provide Tenant, at
Landlord's sole cost and expense, with up to five (5) listings of Tenant's name
on the directory in the lobby of
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the Building. Upon written request by Tenant, Landlord agrees to provide Tenant
with additional listings on such directory, at Tenant's sole cost and expense,
provided Tenant shall be limited to a number of listings determined by
multiplying Tenant's Proportionate Share by the total number of spaces for
listings on such directory. In the event Landlord installs an electronic
directory in the lobby of the Building, Landlord shall provide Tenant with a
reasonable number of additional listings at no cost to Tenant.
E. AUTHORITY. If Tenant is a corporation or partnership, each
individual executing this Lease on behalf of Tenant hereby represents and
warrants that Tenant is a duly formed and validly existing entity qualified to
do business in the State of New York and that Tenant has full right and
authority to execute and deliver this Lease and that each person signing on
behalf of Tenant is authorized to do so.
F. SIGNAGE. Tenant shall not exhibit, inscribe, paint or affix any
sign, advertisement, notice or other lettering on any portion of the Building or
the outside of the Premises without the prior written consent of Landlord in
each instance, which consent shall not be unreasonably withheld. A plan of all
signage or other lettering proposed to be exhibited, inscribed, painted or
affixed outside the Premises shall be prepared by Tenant in conformity with
building standard signage requirements and submitted to Landlord for Landlord's
consent, which consent shall not be unreasonably withheld. If the proposed
signage is acceptable to Landlord, Landlord shall approve such signage or other
lettering by written notice to Tenant. All signage or other lettering which has
been approved by Landlord shall thereafter be installed by Tenant at Tenant's
sole cost and expense.
Upon installation of any such signage or other lettering, such signage or
lettering shall not be removed, changed or otherwise modified in any way without
Landlord's prior written approval. The removal, change or modification of any
signage or other lettering theretofore installed shall be performed solely by
Tenant at Tenant's sole cost and expense. Tenant shall not exhibit, inscribe,
paint or affix on any part of the Premises or the Building visible to the
general public any signage or lettering including the words "temporary" or
"personnel".
Any signage, advertisement, notice or other lettering which shall be
exhibited, inscribed, painted or affixed by or on behalf of Tenant in violation
of the provisions of this section may be removed by Landlord and the reasonable
cost of any such removal shall be paid by Tenant as additional rent.
G. CONSENTS AND APPROVALS. Wherever in this Lease Landlord's
consent or approval is required, the first time Landlord shall delay or refuse
such consent or approval, Tenant shall not be entitled to make, nor shall Tenant
make, any claim, and Tenant hereby waives any claim for money damages (nor shall
Tenant claim any money damages by way of set-off, counterclaim or defense) based
upon any claim or assertion by Tenant that Landlord unreasonably withheld or
unreasonably delayed its consent or approval; Tenant's sole remedy such first
time shall be an action or proceeding to enforce any such provision, for
specific
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performance, injunction or declaratory judgment. After such first time, Tenant
may, subject to the terms of this Lease, seek any remedy to which it is
entitled.
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H. ICIP.
(a) Tenant acknowledges that Landlord is seeking or has
obtained benefits under the ICIP program;
(b) Tenant shall not be required to pay taxes or charges
which become due because of the willful neglect or fraud by Landlord in
connection with the ICIP program, or otherwise relieve or indemnify Landlord
from any personal liability arising under Administrative Code section 11-265,
except where such impositions have been caused by the actions of Tenant;
(c) Tenant agrees to report to Landlord the number of workers
permanently engaged in employment in the Premises, the nature of each worker's
employment and the New York City residency of each worker; and
(d) Tenant agrees to provide access to the Premises to the
Department of Finance at all reasonable times upon request by the Landlord.
I. STORAGE SPACE. At any time, from time to time, during the term of
this Lease, and provided there shall not have occurred an Event of Default,
Tenant may, in addition to the storage space leased to Tenant pursuant to the
last sentence of this Section I, upon thirty (30) days prior written notice to
Landlord, elect to use up to 2,000 additional square feet of space in the
basement of the Building, which may be used by Tenant for storage only and for
no other purpose, provided, however, such space is available, which availability
shall be determined by Landlord in Landlord's sole discretion. Tenant's notice
shall also state the term for which Tenant elects to lease such storage space.
In consideration therefor, commencing on the date which is thirty (30) days
after Tenant has delivered the aforesaid notice (provided Landlord has consented
to the availability of such space), Tenant shall pay to Landlord, in addition to
Rent and all other sums payable by Tenant to Landlord under the Lease, a per
annum amount, payable in equal monthly installments, equal to the product of (x)
the number of square feet leased, multiplied by (y) the then applicable rate per
square foot of fixed base Rent, multiplied by (z) 50%. Such storage space shall
be held by Tenant subject to all of the terms, covenants and conditions of this
Lease except (i) no escalations under Article 28 shall be payable by Tenant in
respect thereof, (ii) Tenant shall have no right to make any Alterations to such
storage space and (iii) Landlord shall have no obligations to provide any
services or make any repairs in respect of such storage space. Notwithstanding
the foregoing, Landlord hereby leases to Tenant, and Tenant hereby hires from
Landlord, 500 square feet of space in the basement of the Building upon all of
the terms of this Section I except that (a) Landlord hereby waives the thirty
(30) day notice requirement with respect to such space and (b) no Rent shall be
payable in respect of such space until the Rent Commencement Date.
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40. RENEWAL OPTION.
A. Provided that (i) both at the time of the exercise of the option
hereinafter set forth and at the time of commencement of the Renewal Term (as
hereinafter defined) this Lease is in full force and effect, and provided
further that Tenant is not then in default beyond applicable notice and grace
periods, hereunder and (ii) Tenant has neither assigned its interest under this
Lease or subleased more than 15% of the Premises nor offered to so assign this
Lease or sublease more than 15% of the Premises, and (iii) Tenant is in
occupancy of the entire Premises for the purpose of conducting its own business,
Tenant is hereby granted the option to renew the Term of this Lease for one (1)
period of sixty (60) months (the "RENEWAL TERM"). The Renewal Term is to
commence immediately upon the expiration of the initial Term. Once Tenant has
served a Renewal Notice (as hereinafter defined) upon Landlord, Tenant shall be
bound for the entire applicable Renewal Term by the terms and conditions of this
Lease, as the same is modified pursuant to this Article 40. Tenant shall
exercise the option to renew only by delivering irrevocable written notice of
such election (a "RENEWAL NOTICE") to Landlord not less than three hundred
sixty-five (365) days nor more than six hundred (600) days prior to the
expiration of the initial Term. In the event that Landlord does not receive the
Renewal Notice within such 245-day notice period (time being of the essence with
respect thereto), then such option to renew the Term shall, upon the expiration
of such time period, become null and void and be of no further force or effect
and Tenant shall, at the request of Landlord, execute an instrument in form and
substance reasonably acceptable to Landlord confirming such facts.
B. The Renewal Term shall be upon the same terms and conditions of
this Lease, except that (a) the Rent during the Renewal Term shall be payable
at an annual rate per rentable square foot equal to the greater of (1)
ninety-five (95%) percent of the annual fair market rental rate for the Premises
for the Renewal Term ("FMR"), as such FMR is determined (x) by agreement between
Landlord and Tenant on or before the date (the "FMR AGREEMENT DATE") which is
sixty (60) days prior to the end of the initial Term or (y) in the absence of
such agreement, by the Three Appraiser Method set forth in Section C of this
Article 40, or (2) the Rent in effect during the last year of the initial Term;
(b) Tenant shall have no option to renew this Lease beyond the expiration of the
Renewal Term; and (c) the Premises shall be delivered in their existing
condition (on an "as is" basis) at the time the Renewal Term commences.
Landlord and Tenant shall attempt to negotiate in good faith a mutually
acceptable determination of the FMR prior to the FMR Determination Date.
C. The "Three Appraiser Method" shall operate as follows: FMR shall
be based upon the then current fair market rental rate for comparable space in
comparable buildings in the midtown, New York, New York area (I.E., the rental
rate payable by a willing tenant to a willing landlord for like and comparable
space) which shall be determined by each of two (2) real estate appraisers, one
of whom shall be named by Landlord and the other of whom shall be named by
Tenant. Each of the appraisers shall be licensed or certified, as appropriate,
in New York as a real estate appraiser, specializing in first-class office
buildings
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in the New York, New York area, having no less than ten (10) years' experience
in such field, and generally recognized as ethical and reputable within the
field (each, a "QUALIFIED APPRAISER"). Landlord and Tenant agree to make their
appointments within five (5) business days after the FMR Agreement Date, if the
parties have not theretofore agreed upon the FMR. Each Qualified Appraiser
shall submit his determination of the FMR within fifteen (15) days after the
date of his selection. If the positive difference between the two
determinations of the FMR is less than or equal to ten (10%) percent of the
higher of the two determinations, then, for the purposes of Section B(a)(1)
above, the FMR shall be the higher of such two determinations of the FMR. If
the positive difference between the two determinations of the FMR is greater
than ten (10%) percent of the higher of the two determinations, then the two (2)
Qualified Appraisers selected by Landlord and Tenant shall select a third
Qualified Appraiser within five (5) days after they both have rendered their FMR
determinations, and within fifteen (15) days after the date of his selection,
the third Qualified Appraiser shall submit his determination of the FMR and, for
the purposes of Section B(a)(1) above, the FMR shall be the average of the three
(3) determinations made by the three (3) Qualified Appraisers. Landlord and
Tenant shall each pay the fee of the Qualified Appraiser selected by it, and
they shall equally share the payment of the fee of the third Qualified
Appraiser, if the selection of same is required hereunder.
D. Except for the renewal option set forth in this Article 40, this
Lease may only be extended beyond the Expiration Date by the parties executing
an extension agreement signed by both parties making specific reference to this
Lease.
41. ROOFTOP ANTENNA. Tenant shall have the non-exclusive right to install,
inspect, adjust and maintain a transmission antenna (the "Antenna") (or such
other type of Antenna as may be reasonably approved by Landlord) on the Building
rooftop at Tenant's sole risk, cost and expense (said right is hereinafter
referred to as "Tenant's Antenna Right") provided said Antenna does not involve
any penetration of the roof surface and such installation is otherwise, in all
respects, satisfactory to Landlord and its roofing contractor (it being agreed
that Tenant may, subject to Landlord's reasonable approval to not be withheld or
delayed, run a conduit from the roof to the Premises). The dimensions and
performance characteristics of said Antenna shall be subject to Landlord's
reasonable approval: In consideration of Landlord's granting to Tenant Tenant's
Antenna Right, Tenant shall pay to Landlord, in addition to all Rent and
additional rent payable by Tenant under this Lease, $225.00 per month on the
first day of each month for each month that the Antenna is on the roof of the
Building.
(a) ROOF ACCESS. Landlord and Tenant agree that Tenant's Antenna
Right will necessitate that Tenant have access to the rooftop of the Building.
To the extent that Tenant's Antenna Right expands the area of the Building to
which Tenant has access (the "new access areas"), then Landlord and Tenant agree
that any and all provisions of the Lease that apply to the Premises, including,
but not limited to Building Rules and Regulations, shall also apply to new
access areas, except as modified herein and except to the extent that said Lease
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provisions place any additional responsibilities on the Landlord with respect to
the new access areas. The precise location of the Antenna shall be subject to
the sole discretion of Landlord. Landlord shall also have the express right to
reject the proposed size and design of the Antenna.
(b) TENANT'S OBLIGATIONS.
(i) INCREASE IN LANDLORD'S INSURANCE COST. If the rate of any
insurance carried by Landlord is increased as a result of the exercise of
Tenant's Antenna Right, then Tenant will pay to Landlord, as additional rent,
not later than thirty (30) days before the date Landlord is obligated to pay a
premium on the insurance or within ten (10) days after Landlord delivers to
Tenant a certified statement from Landlord's insurance carrier stating that the
rate increase was caused by Tenant's Antenna Right, whichever date is later, a
sum equal to the difference between the original premium and the increased
premium resulting solely from the installation of the Antenna.
(ii) ROOFTOP ACCESS. Landlord has not made any representations or
promises pertaining to physical condition of the Building's rooftop or its
suitability for the installation and maintenance of the Antenna. Tenant, for
the purpose of this Article 41 and its right to rooftop access hereunder,
accepts the rooftop in its "as is" condition.
(iii) COMPLIANCE LAWS. Tenant represents that it has obtained, or
will have obtained prior to installation, any and all necessary licenses,
approvals, permits, etc., necessary for the installation, maintenance and
operation of Tenant's Antenna. Tenant's Antenna Right shall not in any way
conflict with any applicable law, statute, ordinance or governmental rule or
regulation now in force or which may hereafter be enacted. Tenant will, at its
sole cost and expense, promptly comply or take all action necessary to enable
the Building to comply with all laws, statutes, ordinances, governmental rules
or regulations, or requirements of any board of fire insurance underwriters or
other similar bodies now or hereafter constituted relating to or affecting
Tenant's Antenna Right. Tenant shall and hereby does indemnify and hold
Landlord harmless from and against any loss, cost (including reasonable
attorneys' fees incurred in defending Landlord), damage or liability arising out
of any violations of said laws, statutes, ordinances, rule or regulations.
Tenant shall, at its sole cost and expense, make any repairs to the rooftop
which are necessitated by the installation, maintenance or operation of the
Antenna. Such repairs shall be governed by the provisions of Section 4 hereof.
Landlord may, at its option, after notice to Tenant, cause such repairs to be
made at the sole cost and expense of Tenant.
(iv) OPERATION. Tenant's Antenna Right shall, in all material
respects, be exercised: (1) in such manner as will not create any hazardous
condition or interfere with or impair the operation of the heating, ventilation,
air conditioning, plumbing, electrical, fire protection, life, safety, public
utilities or other systems or facilities in the Building or the premises or any
other tenant in the Building; (2) in compliance with all applicable laws, codes
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and regulations; (3) in such a manner as will not directly or indirectly
interfere with, delay, restrict or impose any expenses, work or obligations upon
Landlord in the use or operation of the Building; (4) at Tenant's cost,
including the cost of repairing all damage attributable to the installation,
inspection, adjustment, maintenance, removal or replacement of the Antenna. In
connection with the installation of the Antenna, Tenant shall provide to the
Landlord: (aa) a letter from a structural engineer reasonably acceptable to
Landlord certifying that the installation of the Antenna was properly performed
and that the integrity of the Building structure has not been adversely affected
in any material way by reason of such installation; and (bb) written approval of
Landlord's roofing contractor of the manner of installation.
(v) INSURANCE. Tenant will, at all times during the term of this
Lease, and at its cost and expense, ensure that the insurance policies to be
maintained by Tenant under Section 9 hereof are properly endorsed to reflect the
Antenna and Tenant's Antenna Right. Tenant agrees to pay the premiums therefor
and to deliver copies of said policies and/or endorsements thereto to Landlord
on the first day of the term of this Lease, and the failure of Tenant to either
obtain said insurance or deliver copies of said policies or certificates thereof
to Landlord shall be a default under this Lease.
(vi) INDEMNITY. Tenant shall and hereby does indemnify and hold
harmless the Landlord against and from any and all claims arising from the
Tenant's use of the new access areas and Tenant's installation, inspection,
adjustment and maintenance of the Antenna. Tenant assumes all risk of damage to
property or injury to persons, in, upon or about the new access areas as a
result of Tenant's installation, inspection, adjustment and maintenance of the
Antenna.
(vii) LANDLORD'S RECAPTURE. In conjunction with the Lease, Landlord
may, by giving ten (10) days notice to Tenant, elect to retain or dispose of in
any manner the Antenna (the " Antenna Recapture Right") if Tenant does not
remove said Antenna from the rooftop on the Lease Expiration Date or earlier
termination of this Lease. If Landlord notifies Tenant of its intent to
exercise the Antenna Recapture Right and Tenant does not remove the Antenna by
the Expiration Date, title to the Antenna shall, on expiration of the ten days
period, vest in Landlord. Additionally, Tenant shall be liable to Landlord for
any of Landlord's costs for storing, removing and disposing of said Antenna.
This provision shall survive the expiration or termination of this Lease.
(viii) NON-EXCLUSIVITY. By granting the Tenant's Antenna Right,
Landlord does not covenant or agree that it has not conveyed or will not convey
in the future similar rights to other parties desiring to install communications
devices on the roof of the Building. In addition, Landlord makes no
representation whatsoever as to the suitability of the rooftop for installation
of the Antenna in terms of the quality of reception of the Antenna, and does not
warrant that the Antenna will be free from interference from other devices
placed upon the Building or other buildings in the area.
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(ix) DEFAULT. Tenant's Antenna Right shall terminate in the Event
of a Default by Tenant under the Lease.
42. RIGHT OF FIRST OFFER.
(i) Provided (1) this Lease shall then be in full force and
effect, (2) Tenant shall not be in default hereunder beyond any applicable
notice and/or cure period, and (3) Tenant shall be in actual occupancy of at
least eighty-five (85%) percent of the Premises (items (1), (2), and (3)
hereinafter shall be collectively referred to as the "OFFER SPACE CONDITIONS"),
in the event that Landlord shall desire to lease any portion of the
twenty-seventh (27th) or twenty-sixth (26th) floor in the Building not leased on
the date hereof (the "OFFER SPACE"), Tenant shall have the single, non-recurring
right ("RIGHT OF FIRST OFFER") to have Landlord submit written notice (the
"LEASE NOTICE") to Tenant of Landlord's desire to lease the Offer Space as to
the space offered, which Lease Notice shall be deemed an offer to Tenant to
lease the Offer Space.
(ii) The Lease Notice shall set forth (1) a description of the
locations on the twenty-seventh (27th) or twenty-sixth (26th) floor of the Offer
Space, the number of rentable square feet attributable to the Offer Space as
determined by Landlord (the "DEEMED RENTABLE SQUARE FOOTAGE") and Tenant's
Proportionate Share attributable to the Offer Space (the "DEEMED TENANT'S
PROPORTIONATE SHARE"), (2) the fixed annual rent and all additional rent
(including the base amount or base years, if any, for taxes, operating expenses
and other escalations) at which Landlord proposes to lease the Offer Space
(collectively, the "OFFER RENTAL"), (3) the term for which Landlord proposes to
lease the Offer Space (including renewal options, if any, it being understood
that, unless expressly set forth in the Lease Notice, the renewal options
provided in Article 40 hereof shall not be applicable to the Offer Space), (4)
the condition in which Landlord proposes to deliver the Offer Space, (5) the
tenant inducements (such as, by way of example only, work letters, work
allowances and free rent periods ) that Landlord proposes to offer in connection
with the leasing of the Offer Space, (6) the date upon which Landlord
anticipates the Offer Space could be delivered to Tenant (the "OFFER SPACE
SCHEDULED DATE"), and (7) such other terms as Landlord may propose upon which
Landlord would be willing to lease the Offer Space to a third party tenant. The
Lease Notice shall constitute an offer by Landlord to Tenant to lease all and
not less than all of the Offer Space identified in the Lease Notice. The
parties hereto agree that in no event, unless Landlord was grossly negligent or
intentionally lied to Tenant, shall the Deemed Rentable Square Footage
constitute or imply any representation by Landlord whatsoever as to the actual
size of the Offer Space.
(iii) Tenant shall have twenty (20) days following Landlord's
giving of the Lease Notice to deliver to Landlord written notice (the "ELECTION
TO LEASE NOTICE") of Tenant's desire to lease from Landlord the Offer Space for
the Offer Rental and on such other terms as may be set forth in the Lease
Notice. Time shall be of the essence with respect to said
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20-day period and the failure or refusal of Tenant for any reason whatsoever to
deliver to Landlord the Election to Lease Notice in the time and manner herein
prescribed shall be deemed an irrevocable waiver of Tenant's Right of First
Offer as to the particular transaction and any future lease of the Offer Space,
whereupon Tenant's Right of First Offer shall lapse, and be of no further force
or effect.
(iv) If Tenant shall timely and in the manner herein
prescribed deliver its Election to Lease Notice and provided the Offer Space
Conditions are satisfied, then, on the date on which Landlord delivers vacant
possession of the Offer Space to Tenant (the "OFFER SPACE EFFECTIVE DATE"), the
Offer Space shall become, and be deemed to comprise, part of the Premises as if
originally included in the demise hereunder, upon the same terms, covenants and
provisions of this lease, except (1) the Rent shall be increased by the Offer
Rental, (2) Tenant's Proportionate Share shall be increased by the Deemed
Tenant's Proportionate Share and (3) as may be otherwise set forth in the Offer.
Landlord shall use reasonable efforts to deliver vacant possession of the Offer
Space to Tenant on or prior to the Offer Space Scheduled Date; provided,
however, it is expressly understood that the Offer Space Scheduled Date shall
not be binding upon Landlord and if Landlord is unable to deliver possession of
the Offer Space to Tenant for any reason on or prior to such date, the Offer
Space Effective Date shall be the date on which Landlord is able to so deliver
possession and Landlord shall not be subject to any liability and this Lease
shall not be impaired under such circumstances. Tenant hereby waives any right
to rescind this Lease under the provisions of Section 223(a) of the Real
Property Law of the State of New York, and agrees that the provisions of this
Article are intended to constitute "an express provision to the contrary" within
the meaning of said Section 223(a). Notwithstanding the foregoing, if Landlord
is unable to deliver vacant possession of the Offer Space to Tenant on or prior
to the first anniversary of the Offer Space Scheduled Date, Tenant shall have
the right, as and for its sole remedy, by written notice to Landlord given
within ten (10) days after the five (5) month anniversary of the Offer Space
Scheduled Date, to rescind its Election to Lease Notice. Upon Landlord's
receipt of Tenant's notice to rescind (provided that Landlord shall not
theretofore have delivered to Tenant vacant possession of the Offer Space), the
provisions of this Section 42 shall automatically cease to apply to the Offer
Space and Landlord shall cease to have any further obligations to Tenant with
respect to the Offer Space, but the foregoing shall not affect Tenant's rights
or obligations under the Lease with respect to any other portion of the
Premises.
(v) If Tenant shall notify Landlord of Tenant's waiving of
its Right of First Offer, or if Tenant is deemed to have waived its Right of
First Offer, then the following shall apply:
(1) Tenant shall, immediately upon demand therefor by
Landlord, execute, in form for recording and as otherwise reasonably required by
Landlord, an instrument ("WAIVER") confirming the waiver of and extinguishing
the Right of First Offer and expressly reciting that the Waiver is given
pursuant to Article 42 of this Lease. If Tenant shall fail or refuse for any
reason to execute the Waiver within two (2) Business Days after demand
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therefor by Landlord, then Landlord may, without waiving any of Landlord's
rights and remedies to recover damages. Nothing herein shall be in derogation
of Landlord's right to damages (and/or to seek equitable relief, E.G., an action
to compel specific performance) which may be incurred by Landlord in such event
if another transaction is discontinued or terminated, with or without an
agreement having been entered into, as a result of or attributable to Tenant's
failure or refusal to have executed and delivered the Waiver; and
(2) Landlord shall have a period of three hundred
sixty-five (365) days from the date of Landlord's receipt of the Waiver executed
by Tenant, to execute a lease for the Offer Space for not less than seventy-five
(75%) percent of the Net Effective Offer Rental (as hereinafter defined) and on
such other terms and conditions as are substantially the same as, but not
substantially more favorable to the proposed lessee then, those contained in the
Lease Notice. The term "NET EFFECTIVE OFFER RENTAL" shall mean the net present
value, determined as of the commencement date of the proposed lease using a
discount rate of 10%, of the aggregate of all rent and additional rent for
taxes, operating expenses and electricity charges payable under the proposed
lease discounted from the date that any such payment would have been made under
the proposed lease to the commencement date of such proposed lease, after
deducting therefrom the amount of all tenant inducements (such as, by way of
example only, work allowances, work letters and rent abatements) that are (or
will be) granted to the tenant thereunder, discounted, using a discount rate of
10%, from the date that such tenant inducements were to have been given under
the proposed lease to the commencement date of such proposed lease. If a lease
for the Offer Space is not executed within the said 365-day period, then the
Right of First Offer accorded to Tenant in this Section 42 shall be deemed
revived and reinstated with respect to any subsequent desire of Landlord to
lease the Offer Space subsequent to said 365-day period (except that the time
period within which Tenant shall have the right to deliver its Election to Lease
Notice, pursuant to Section 42(iii), shall be shortened to ten (10) days (time
being of the essence)), but in no event be deemed to revive the particular Right
of First Offer theretofore waived or deemed waived by Tenant. Notwithstanding
the foregoing, in the event that Landlord shall submit a new Lease Notice to
Tenant within the 365-day period applicable to a previous Waiver by Tenant and
Tenant shall also waive or be deemed to have waived its Right of First Offer as
to the new Lease Notice, then the provisions of the first two (2) full sentences
of this Section 42(v)(2) above shall be deemed to apply to the terms and
conditions of the new Lease Notice, and the terms of this sentence shall always
be applicable to the most recent Lease Notice with respect to which Tenant shall
have waived or been deemed to have waived its Right of First Offer.
(vi) Any breach by Tenant of its obligations under this
Section 42 shall entitle Landlord to any and all remedies available to Landlord
at law and in equity.
(vii) The Right of First Offer herein set forth is available
only to the Tenant first named in the heading of this Lease (I.E., Viatel, Inc.
or a related corporation to which this Lease is assigned pursuant to Paragraph
12L), and reference in this Section 42 to "Tenant" shall mean, and the rights
accorded in this Section 42 shall be available only to,
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Viatel, Inc. or a related corporation to which this Lease is assigned pursuant
to Paragraph 12L; and to no other person, party or entity whatsoever including,
without limitation, any assignee, licensee or subtenant of Viatel, Inc.
(viii) Notwithstanding the foregoing, Tenant's Right to First
Offer shall not apply to, and the term Offer Space shall not include, any space
(1) which is subject to (w) a lease which grants the tenant thereunder any
rights of renewal or extension as to such space, (x) a right, option or
obligation to lease such space hereafter acquired by any other tenant or person,
if such right, option or obligation arises pursuant to an option or right to
renew or extend the term of such lease contained in any lease or a so-called
"must-take" provision contained in any lease (i.e., a provision whereby such
tenant or person is obligated to take the space in question upon the occurrence
of certain events enumerated in such lease), (y) an expansion option contained
in any lease, or (z) with respect to any tenant leasing an aggregate of three
(3) floors or more in the Building, an offer space or available space option
contained in any such lease, (2) which Landlord intends to offer to the existing
tenant of such space notwithstanding the absence of any renewal or extension
rights in such tenant's existing lease, or (3) which Landlord intends to offer
for leasing for a term that extends beyond the then Expiration Date of this
Lease.
(ix) Tenant and Landlord, respectively, shall indemnify,
defend and hold harmless the other from any claims for any brokerage commissions
or real estate consultant fees and all costs, expenses and liabilities in
connection therewith, including, without limitation, reasonable attorneys' fees
and expenses, arising out of any conversations or negotiations had by Tenant or
Landlord, respectively, with any broker or real estate consultant other than
Broker and any one claiming by, through or under Broker in connection with the
granting of the Right of First Offer, the exercise thereof and consummation of
the transaction(s) contemplated thereby.
(x) Landlord and Tenant shall, upon the request of the other
party, execute, acknowledge and deliver to the other party an instrument or
instruments in form reasonably satisfactory to both parties confirming the
addition of the Offer Space to the Premises, the Offer Space Effective Date, the
increase in the Rent, the increase in Tenant's Proportionate Share and any other
terms or conditions in respect of the Offer Space, but any
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failure of the parties to execute, acknowledge and deliver such instrument(s)
shall not affect the validity of the leasing of the Offer Space or any of the
provisions of this Section 42.
IN WITNESS WHEREOF, Landlord and Tenant have respectively executed this
Lease as of the day and year first above written.
LANDLORD:
685 ACQUISITION LLC,
a Delaware limited liability company
By: Blackacre 685 LLC,
a Delaware limited liability company,
Manager
By: /s/ Jeffrey B. Citrin
-----------------------
Name: Jeffrey B. Citrin
Title:
TENANT:
VIATEL, INC.,
a Delaware corporation
By: /s/ Ellen Rudin
------------------------------
Name: Ellen Rudin
Title:
13-3787366
-----------------------------------
Tenant's Tax I.D. Number
70
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EXHIBIT 1
Floor Plan of Premises
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EXHIBIT 1(a)
Desired Sublet Premises
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EXHIBIT 2
Form of Letter of Credit
[BANK LETTERHEAD]
685 Acquisition LLC
c/o__________________
_____________________
_____________________
Re: Irrevocable Clean Letter of Credit
By order of our client, ______________, we hereby open our clean irrevocable
Letter of Credit No. ___ in your favor for an amount not to exceed in the
aggregate $______________ Dollars effective immediately.
Funds under this credit are available to you against your sight draft on us
mentioning thereon our Credit No. ________________.
This Letter of Credit shall expire twelve (12) months from the date hereof;
provided, however, that it is a condition of this Letter of Credit that it shall
be deemed automatically extended, from time to time, without amendment, for one
year from the expiry date hereof and from each and every future expiry date,
unless at least sixty (60) days prior to any expiry date we shall notify you by
registered or certified mail (return receipt requested) that we elect not to
consider this Letter of Credit renewed for any such additional period.
Upon receipt of such notice, but on or before the then expiration date, you may
draw the full amount hereunder by means of your sight draft drawn on us,
accompanied by your written statement purportedly signed by one of your
authorized representatives reading as follows: "We are in receipt of written
notice from you of your election not to renew your Letter of Credit No.
__________, and we have not received an acceptable replacement Letter of Credit
as of the date of our drawings."
This Letter of Credit is transferable without any fees or charges and may be
transferred one or more times upon receipt of your written instructions.
[Insert standard provision for the right to transfer the letter of credit in
accordance with the Uniform Customs and Practice for Documentary Credits
referred to below.]
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We hereby agree with you that all drafts drawn with the terms of this Letter of
Credit will be duly honored upon presentment and delivery to our office at on or
prior to the expiry date, or as the same may from time to time be extended.
Except as otherwise specified herein, this Letter of Credit is subject to the
Uniform Customs and Practice for Documentary Credits (1993 Revision),
International Chamber of Commerce Publication No. 500.
Very truly yours,
[Name of Bank]
By:
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SCHEDULE A
RULES AND REGULATIONS
I. The rights of each tenant in the Building to the entrances, corridors and
elevators of the Building are limited to ingress to and egress from such
tenant's premises and no tenant shall use, or permit the use of the
entrances, corridors, or elevators for any other purpose. No tenant
shall invite to its premises, or permit the visit of persons in such
numbers or under such conditions as to interfere with the use and
enjoyment of any of the plazas, entrances, corridors, elevators and other
facilities of the Building by other tenants. No tenant shall encumber or
obstruct, or permit the encumbrances or obstruction of any of the
sidewalks, plazas, entrances, corridors, elevators, fire exits or
stairways of the Building. Landlord reserves the right to control and
operate the public portions of the Building, the public facilities, as
well as facilities furnished for the common use of the tenants, in such
manner as Landlord reasonably deems best for the benefit of the tenants
generally.
II. Landlord may refuse admission to the Building outside of ordinary
business hours to any person not known to the watchman in charge or not
having a pass issued by Landlord or not properly identified, and may
require all persons admitted to or leaving the Building outside of
ordinary business hours to register. Tenants' employees, agents and
visitors shall be permitted to enter and leave the Building whenever
appropriate arrangements have been previously made between Landlord and
the tenant with respect thereto. Each tenant shall be responsible for
all persons for whom it requests such permission and shall be liable to
Landlord for all acts of such persons. Any person whose presence in the
Building at any time shall, in the judgment of Landlord, be prejudicial
to the safety, character, reputation or interests of the Building or its
tenants may be denied access to the Building or may be ejected therefrom.
In case of invasion, riot, public excitement or other commotion Landlord
may prevent all access to the Building during the continuance of the
same, by closing the doors or otherwise, for the safety of the tenants
and protection of property in the Building. Landlord may require any
person leaving the Building with any package or other object to exhibit a
pass from the tenant from whose premises the package or object is being
removed, but the establishment and enforcement of such requirement shall
not impose any responsibility on Landlord for the protection of any
tenant against the removal of property from the premises of tenant.
Landlord shall, in no way, be liable to any tenant for damages or loss
arising from the admission, exclusion or ejection of any person to or
from a tenant's premises or the Building under the provisions of this
rule.
III. No tenant shall obtain or accept for use in its premises ice, towels,
barbering, boot blacking, floor polishing, lighting maintenance, cleaning
or other similar services from any persons not authorized by Landlord in
writing to furnish such services. Such
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services shall be furnished only at such hours, in such places within the
tenant's premises and under such regulation as may be fixed by Landlord.
IV. No window or other air-conditioning units shall be installed by any
tenant, and only such window coverings as are supplied or reasonably
permitted by Landlord shall be used in a tenant's premises.
V. There shall not be used in any space, nor in the public halls of the
Building, either by any tenant or by jobbers, or other in the delivery or
receipt of merchandise, any hand trucks, except those equipped with
rubber tires and side guards.
VI. All entrance doors in each tenant's premises shall be left locked when
the tenant's premises are not in use. Entrance doors shall not be left
open at any time. All windows in each tenant's premises shall be kept
closed at all times and all blinds therein above the ground floor shall
be lowered when and as reasonably required because of the position of the
sun, during the operation of the Building air-conditioning system to cool
or ventilate the tenant's premises.
VII. No noise, including the playing of any musical instruments, radio or
television, which, in the judgment of Landlord, might disturb other
tenants in the Building, shall be made or permitted by any tenant. No
dangerous, inflammable, combustible or explosive object, material or
fluid shall be brought into the Building by any tenant or with the
permission of any tenant other than day to day office and cleaning
supplies used in compliance with Laws.
VIII. All damages resulting from any misuse of the plumbing fixtures shall be
borne by the tenant who, or whose servants, employees, agents, visitors
or licensees, shall have caused the same.
IX. Each tenant shall be required to install such locks and other security
devices as Landlord reasonably approves. Each tenant shall furnish
Landlord with keys to its respective premises so that Landlord may have
access thereto for the purposes set forth in the Lease. No additional
locks or bolts of any kind shall be placed upon any of the doors or
windows in any tenant's premises and no lock on any door therein shall be
changed or altered in any respect. Duplicate keys for a tenant's
premises and toilet rooms shall be procured only from Landlord, which may
make a reasonable charge therefore. Upon the termination of a tenant's
lease, all keys of the tenant's premises and toilet rooms shall be
delivered to Landlord.
X. Each tenant, shall, at its expense, provide artificial light in the
premises for Landlord's agents, contractors and employees while
performing janitorial or other cleaning services and making repairs or
alterations in said premises.
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XI. No tenant shall install or permit to be installed any vending machines,
except as set forth in the Lease.
XII. No animals or birds, bicycles, mopeds or vehicles of any kind shall be
kept in or about the Building or permitted therein.
XIII. No furniture, office equipment, bulk packages or merchandise will be
received in the Building or carried up or down in the elevator, except
between such hours as shall be reasonably designated by Landlord.
Landlord shall prescribe the charge for freight elevator use and the
method and manner in which any merchandise, heavy furniture, equipment or
safes shall be brought in or taken out of the Building, and also the
hours at which such moving shall be done. No furniture, office
equipment, merchandise, large packages or parcels shall be moved or
transported in the passenger elevators at any time.
XIV. All electrical fixtures hung in offices or spaces along the perimeter of
any tenant's Premises must be fluorescent, of a quality, type, design and
bulb color approved by Landlord unless the prior reasonable consent of
Landlord has been obtained for other lamping.
XV. The exterior windows and doors that reflect or admit light and air into
any premises or the halls, passageways or other public places in the
Building, shall not be covered or obstructed by any tenant, nor shall any
articles be placed on the windowsills.
XVI. Canvassing, soliciting and peddling in the Building is prohibited and
each tenant shall cooperate to prevent same.
XVII. Other than use of a microwave, no tenant shall do any cooking, conduct
any restaurant, luncheonette or cafeteria for the sale or service of food
or beverages to its employees or to others, except as expressly approved
in writing by Landlord. In addition, no tenant shall cause or permit any
odors of cooking or other processes or any unusual or objectionable odors
to emanate from the premises. The foregoing shall not preclude tenant
from having food or beverages delivered to the premises, provided that no
cooking or food preparation shall be carried out at the premises.
XVIII. No tenant shall generate, store, handle, discharge or otherwise deal with
any hazardous or toxic waste, substance or material or oil or pesticide
on or about the Real Property except day to day cleaning and office
supplies used in compliance with Laws.
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SCHEDULE B
TENANT'S INITIAL ALTERATION
I. Tenant shall perform or cause the performance of Alterations in and
to the Premises to prepare same for Tenant's initial occupancy thereof
("TENANT'S INITIAL ALTERATION"). All Alterations to be performed by Tenant
shall be, at a minimum, of a quality and standard equivalent to the standards
for construction set by Landlord, from time to time, for the Building, and shall
be subject to the prior approval of Landlord as set forth in Article 3 hereof.
Tenant shall submit to Landlord or, at Landlord's direction, Landlord's
Consultant, complete and detailed architectural, mechanical and engineering
plans and specifications prepared by an architect or engineer licensed in the
State of New York and reasonably approved by Landlord, which plans and
specifications shall be stamped and certified by such architect or engineer,
showing Tenant's Initial Alteration, which plans and specifications shall be
prepared by Tenant, at Tenant's own cost and expense. Tenant's plans and
specifications shall include all information necessary to reflect Tenant's
requirements for the design and installation of any supplemental air-cooling
equipment, ductwork, heating, electrical, plumbing and other mechanical systems
and all work necessary to connect any non-standard facilities to the Building's
base mechanical, electrical and structural systems. Tenant's submission shall
include not less than three (3) sets of sepias and five (5) sets of black and
white prints.
II. Tenant shall not perform work which would (a) require changes to
structural components of the Building or the exterior design of the Building,
(b) require any material modification to the Building's mechanical installations
or other Building installations outside the Premises, (c) not be in compliance
with all applicable laws, rules, regulations and requirements of any
governmental department having jurisdiction over the Building and/or the
construction of the Premises, including but not limited to, the Americans with
Disabilities Act of 1990, or (d) be incompatible with the Certificate of
Occupancy for the Building. Any changes required by any governmental department
affecting the construction of the Premises shall be performed at Tenant's sole
cost. Subject to the terms of this Lease and all Schedules thereto, Tenant may
run one (1) 2-inch riser to the Premises from the basement of the Building
through the shaft designated by Landlord therefor.
III. At the time that Tenant submits its plans and specifications to
Landlord for Landlord's approval, which approval shall not be unreasonably
withheld, such plans and specifications must be transmitted to Landlord with a
cover letter specifically stating that "the enclosed plans and specifications
are being transmitted to Landlord for its review and approval pursuant to the
terms of the Lease." Landlord or Landlord's Consultant shall respond to Tenant's
request for approval of any plans and specifications described in subsection A
above within ten (10) business days following the submission of such plans and
specifications prepared in accordance with the terms hereof. In the event
Landlord or Landlord's Consultant shall disapprove of all or a portion of any of
Tenant's plans and specifications, such
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disapproval shall be set forth in writing and shall include the reasons therefor
in reasonable detail, in which event Tenant shall revise such plans and
specifications and resubmit same to Landlord within ten (10) business days
thereafter, time being of the essence. Landlord or Landlord's Consultant shall
respond to Tenant's request for consent of any such revised plans within five
(5) business days following resubmission. The approval of plans and
specifications by Landlord or Landlord's Consultant (hereinafter referred to as
the "FINAL PLANS") together with Tenant's satisfactory compliance with the
requirements set forth in items (1) through (4) of SCHEDULE D annexed hereto,
shall be deemed an authorization for Tenant to proceed with Tenant's Initial
Alteration, which shall be performed in accordance with the provisions of
Article 3 and SCHEDULE D of this Lease. Tenant shall reimburse Landlord for any
reasonable fees of Landlord's Consultant incurred in connection with Tenant's
Initial Alteration. Neither the recommendation or designation of an architect
or engineer nor the approval of the final plans and specifications by Landlord
or Landlord's Consultant shall be deemed to create any liability on the part of
Landlord with respect to the design or specifications set forth in the Final
Plans.
IV. Landlord agrees to reimburse Tenant for the cost of Tenant's
Initial Alteration, as approved by Landlord or Landlord's Consultant and made by
Tenant within twelve (12) months of the Commencement Date to the extent of the
lesser of (i) $1,359,720.00 or (ii) the actual cost to Tenant for Tenant's
Initial Alteration ("LANDLORD'S CONTRIBUTION"). Provided this Lease is in full
force and effect and Tenant is not in default hereunder, Landlord's Contribution
shall be paid by progress payments as follows: on or before the first (1st) day
of each calendar month, Tenant may submit to each of Landlord and Landlord's
Consultant an application and certificate for payment (standard AIA Form G702)
for that portion of Tenant's Initial Alteration previously completed, which
application and certificate for payment must be accompanied by (a) all
information and documents required thereunder and (b) a partial lien waiver
executed by the general contractor (the "GENERAL CONTRACTOR") and its
subcontractors employed in connection with Tenant's Initial Alteration covering
work previously paid for out of prior progress payments. Provided Landlord's
architect verifies in writing that the work described in any such application
and certificate for payment has been completed in accordance with the Final
Plans, Landlord, on or about the thirtieth (30th) day of such calendar month
shall remit to Tenant, or to Tenant's designee as Tenant shall direct, ninety
percent (90%) of the amount so requisitioned by Tenant or such other amount as
is approved by Landlord, based on the portion of Tenant's Initial Alteration
which has been completed, with ten (10%) percent to be retained until final
payment of Landlord's Contribution is due pursuant to the terms of this
Subsection IV. Provided this Lease is in full force and effect and Tenant is
not in default, beyond applicable notice and grace, hereunder, Landlord shall
pay the balance of Landlord's Contribution to Tenant within thirty (30) days of
submission by Tenant of (a) paid receipts (or such other proof of payment as
Landlord shall reasonably require) for work done in connection with Tenant's
Initial Alteration, (b) a written statement from Tenant's architect or engineer
that the work described on any such invoices has been completed in accordance
with the Final Plans, (c) a lien waiver executed by the General Contractor, (d)
proof reasonably satisfactory to Landlord that Tenant has complied with all of
the conditions
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set forth in this SCHEDULE B (as applicable), which shall include, without
limitation, submission of all of the items described on SCHEDULE D annexed
hereto and made a part hereof and (e) two (2) complete sets of "as-built" Final
Plans. In no event shall more than ten (10%) percent of Landlord's contribution
be used for "soft" costs of Tenant's Initial Alteration.
LANDLORD'S CORE WORK
V. Landlord agrees, at its sole cost and expense and without charge to
Tenant, to do the following work in the Premises, all of which shall be of
design, capacity, finish and color of the building standard adopted by Landlord
for the Building hereinafter called "Building Standard":
DEMOLITION: Demolish and remove existing tenant improvements,
except for existing staircase, the Supplemental Units and the plumbing for the
pantry on the 24th floor, with floors left broom clean; Remove VAT.
SERVICE CORE:
- Deliver the premises with electrical (including electrical
panel box), telephone and janitorial closets on each floor
(including the removal of all abandoned cabling).
- Deliver perimeter core walls and columns in "as is" condition.
- Deliver the premises with access to plumbing for the purposes
permitted in the Lease.
- Deliver the premises with access to main sprinkler loop on the
floor; tenant to provide all branch sprinkling.
- Deliver the premises with doors to the stairwells, to the
electrical, telephone and janitorial closets and the restrooms
installed, complete with hardware.
- Deliver the premises with the elevators servicing the same
operational.
TOILET ROOMS: Provide four renovated toilet rooms (two each women
and men). One of each type will be handicapped-accessible per authorities
having jurisdiction.
EXTERIOR AND COLUMN WALLS:
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- Deliver the premises with the exterior walls sealed.
- Deliver the premises with drywall where appropriate on the
facade and covering columns installed and sealed.
- Deliver the premises convector units in good working order and
convector covers in good condition; deliver the premises air
conditioning in good working order.
WINDOWS: Provide all windows with glazing sealed without
scratches, cracks or breakage.
FLOORS: Provide floors in "as is" condition.
ASBESTOS: Provide tenant with a duly completed ACP-5 Form which
will be sufficient for the tenant to perform alterations in accordance with
"final plans." VAT and asbestos containing pipewrap have been removed from the
premises.
Class E system capability will be brought to floor. Existing
blinds will remain in Premises.
VI. Landlord may perform Landlord's Core Work simultaneously with
Tenant's Initial Alteration and Tenant shall not be entitled to any extension of
the Rent Commencement Date on account thereof except as specifically provided in
the definition of "Rent Commencement Date" set forth in Section 1.
Notwithstanding the foregoing, Landlord shall endeavor to substantially complete
Landlord's Core Work on or prior to July 31, 1998 (the "LANDLORD'S CORE WORK
ANTICIPATED COMPLETION DATE"), except with respect to (a) the Toilet Rooms,
which Landlord shall endeavor to substantially complete on or prior to September
7, 1998 and (b) the demolition and VAT removal, which Landlord shall endeavor to
substantially complete on or before July 15, 1998 . Tenant shall not materially
interfere with the performance of Landlord's Core Work and shall coordinate
Tenant's Initial Alteration so that it does not materially interfere with the
performance of Landlord's Core Work.
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SCHEDULE C
REQUIREMENTS FOR
"CERTIFICATES OF FINAL APPROVAL"
1. All required Building Department Forms must be properly filled out and
completed by the approved architect/engineer of record or Building Department
expediter, as required.
2. All forms are to be submitted to the Landlord for the owner's review and
signature prior to submission of final plans and forms to the New York City
Building Department, as required.
3. All pertinent forms and filed plans are to be stamped and sealed by a
licensed architect and/or professional engineer, as required. All controlled
inspections are to be performed by the architect/engineer of record unless
approved otherwise by the Landlord.
4. A copy of all approved forms, permits and approved Building Department
plans (stamped and signed by the New York City Building Department) are to be
submitted to the building office prior to start of work.
5. Copies of all completed inspection reports and Building Department
Sign-offs are to be submitted to the building office immediately following
completion of construction, as required.
6. All claims, violations or discrepancies with improperly filed plans,
applications, or improperly completed work shall become the sole responsibility
of the applicant to resolve, as required.
7. All changes to previously approved plans and applications must be filed
under an amended application, as required. The Landlord reserves the right to
withhold approvals to proceed with changes until associated plans are properly
filed with the New York City Buildings Department, as required.
8. The architect/engineer of record accepts full responsibility for any and
all discrepancies or violations which arise out of non-compliance with all local
laws and building codes having jurisdiction over the work.
9. The Landlord reserves the right to reject any and all work requests and
new work applications that are not properly filed or accompanied by approved
plans and building permits.
Checklist of "Certificates of Final Approval" required to be furnished by
Tenant pursuant to Article 3 (Alterations) of Lease.
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These forms must be furnished by the Architect/ Engineer of record
or Building Department expediter (filing agency) and approved by the Landlord
prior to submitting all plans and forms to the New York City Building Department
for final approval.
These forms, to the extent applicable, must be furnished in order
for Tenant to receive "Landlord's Contribution."
FORM DESCRIPTION
_____ * PW- 1 Building Notice Application (Plan work approval
application)
_____ * PW-1 B Plumbing/Mechanical Equipment
Application and Inspection Report
_____ * PW- 1 Statement Form B
_____ * TR- 1 Amendment Controlled Inspection Report
_____ PW-2 Building Permit Form (All Disciplines)
_____ B Form 708 Building Permit "Card"
_____ * TR- 1 Certification of Completed Inspection and
Certified Completion Letter by Architect/Engineer
of record or Building Department expediter
_____ PW-3 Cost Affidavit Form
_____ PW-4 Equipment Use Application Form
_____ * PW-6 Revised Certificate of Occupancy for change in use
(if applicable)
_____ Form ACP7 New York City Department of
or Environmental Protection Asbestos
Form ACP5 Inspection Report as prepared by a licensed and
approved asbestos inspection agency
Building Department Equipment Use Permits for all
new HVAC equipment installed under this
application
Revised Certificate of Occupancy for change in use
(if applicable)
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*These items must be PERFORATED (with the date and New York City Building
Department Stamp) to signify New York City Building Department Approval. All
forms must bear proper approvals and sign-offs prior to authorization given by
the Landlord to proceed with the work.
SCHEDULE D
TENANT ALTERATION WORK AND NEW CONSTRUCTION
CONDITIONS AND REQUIREMENTS
1 No Alterations are permitted to commence until ORIGINAL CERTIFICATES OF
INSURANCE, REQUIRED from Tenant's general contractor (the "GENERAL
CONTRACTOR") and all subcontractors complying with the attached
requirements are on file with the Building office.
2. All New York City Building Department applications with assigned BN# and
PERMITS must be on file with the Building office to starting work. A
copy of the building permit must also be posted on the job site by the
General Contractor. [THE GENERAL CONTRACTOR SHALL MAKE ALL ARRANGEMENTS
WITH LANDLORD'S EXPEDITER FOR FINAL INSPECTIONS AND SIGN-OFFS PRIOR TO
SUBSTANTIAL COMPLETION.]
3. The General Contractor shall comply with all Federal, State and local
laws, building codes, OSHA requirements, and all laws having jurisdiction
over the performance and handling of the Alterations.
4. The existing "Class E" fire alarm system (including all wiring and
controls), if any, must be maintained at all times. Any additions or
alterations to the existing system shall be coordinated with the Building
office as required. All final tie-in work is to be performed by
Landlord's fire alarm vendor and coordinated by the General Contractor.
All costs for the tie-ins are reimbursable to Landlord by Tenant.
5. All wood used, whether temporary or not, such as blocking, form work,
doors, frames, etc. shall be fire rated in accordance with the New York
City Building and Fire Code requirements governing this work.
6. Building standby personnel (i.e. Building operating engineer and/or
elevator operator), required for all construction will be at Landlord's
discretion. Freight elevators used for overtime deliveries must be
scheduled in writing with Landlord at least 24 hours in advance, as
required. All costs associated are reimbursable to Landlord by Tenant.
7. The General Contractor shall comply with the Rules and Regulations of the
Building elevators and the manner of handling materials, equipment and
debris to avoid conflict and interference with Building operations. All
bulk deliveries or removals will be made
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prior to 8:00 a.m. and after 5:00 p.m. or on weekends, as required, or at
such other times as Landlord shall reasonably approve.
8. No exterior hoisting will be permitted. All products or materials
specified are to be assembled on-site, and delivered to the site in such
a manner so as to allow unobstructed passage through the Building's
freight elevator, lobbies, corridors, etc. The General Contractor will
be responsible for protection of all finished spaces, as required.
9. All construction personnel must use the freight elevator at all times.
Any and all tradesman found riding the passenger elevators without prior
approval from Landlord will be escorted out of the Building and not be
allowed re-entry without written approval from the Building office.
10. During the performance of Alterations, Tenant's construction supervisor
or job superintendent must be present on the job site at all times.
11. During the performance of Alterations, all demolition work shall be
performed after 6:00 p.m. during the week or at any time on weekends.
This would include carting or rubbish removal as well as performing any
operations that would disturb other Building tenants or other occupants
(drilling, chopping, grinding, recircuiting, etc.).
12. No conduits or cutouts are permitted to be installed in the floor slab
without prior written approval from Landlord. Landlord reserves the
right to restrict locations of such items to areas that will not
interfere with the Building's framing system or components. No conduits
or cutouts are permitted outside of Tenant's Premises.
13. Plumbing connections to Building supply, waste and vent lines are to be
performed after normal working hours, and coordinated with the Building
manager, and are to include the following minimum requirements:
A. Separate shutoff valves for all new hot and/or cold water supply
lines (including associated access doors).
B. Patch and repair of existing construction on floor below,
immediately following completion of plumbing work (to be performed
after normal working hours, as required).
14. The General Contractor must coordinate all work to occur in public
spaces, core areas and other tenant occupied spaces with Landlord, and
perform all such work after normal working hours (to include associated
patch and repair work). The General Contractor shall provide all
required protection of existing finishes within the affected area(s).
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15. The General Contractor must perform all floor coring, drilling or
trenching after normal business hours, and obtain Landlord's permission
and approval of same prior to performing such work.
16. Convector mounted outlets and associated conduits, wiring, boxes, etc.,
shall be located and installed in areas where they will not hinder the
operation or maintenance of existing fan coil units or prevent removal or
replacement of access panels or removable covers.
17. The General Contractor shall be responsible for all final tests,
inspections and approvals associated with all modifications, deletions or
additions to Building Class "E" systems and equipment.
18. Recircuiting of existing power/lighting panels and circuits affecting
Building and/or tenant operations are to be performed after normal
business hours and coordinated with the Building office in advance, as
required.
19. All burning and welding to be performed in occupied or finished areas
shall be performed after normal business hours and coordinated with the
Building office in advance, as required. Proper ventilation of the work
area will be required in order to perform this work.
20. The General Contractor shall provide _________________________ and the
Building office with all approved submittal and closeout documents as
well as all required final inspections and Building Department sign-offs
just prior to or immediately following completion of construction.
21. Any and all alterations to the Building sprinkler system (including
draining of system) are to be performed after normal business hours and
coordinated with the Building office, as required. All costs associated
with the shut down, drain and refill of the sprinkler system are
reimbursable to Landlord.
22. The General Contractor shall be responsible for any and all daily cleanup
required to keep the job site clean throughout the entire course of the
Alterations. No debris shall be allowed to accumulate in any public
spaces.
23. The General Contractor shall be responsible for proper protection of all
existing finishes and construction for Alterations to be performed in
common Building areas. All Alterations to be performed in occupied areas
outside of the Premises shall be performed after normal business hours
and coordinated with the Building office, as required.
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24. The General Contractor shall perform any and all hoisting associated with
the Alterations after normal business hours. The General Contractor will
obtain all required permits and insurance to perform work of this nature.
The General Contractor shall specify hoisting methods and provide all
required permits and insurance to ____________________ and the Building
office prior to commencement of Alterations.
25. Union labor shall be used by all contractors and subcontractors
performing any and all Alterations within the Building. All contractors
and subcontractors shall perform all work in a professional manner, and
shall work in close harmony with one another as well as with the Building
management and maintenance personnel.
26. The General Contractor shall forward complete copies of all approved
contractor submittal, and Building and Fire Department sign-offs and
Statement of Responsibility forms, to the Building office immediately
following completion of construction.
INSURANCE REQUIREMENTS
Prior to commencement of the Work and until completion and final acceptance of
the same, the Contractor and each and every Subcontractor of the Contractor
shall, at its sole expense, maintain the following insurance on its own behalf,
and furnish to the Owner certificates of insurance evidencing same and
reflecting the effective date of such coverage as follows:
The term "Contractor & Subcontractor" as used in this Insurance Rider, shall
mean and include Contractors and Subcontractors of every tier.
A. Worker's Compensation and Occupational Disease Insurance in accordance
with applicable law or laws.
B. Employer's Liability Insurance with Limits of Liability of at least Five
Hundred Thousand ($500,000.00) Dollars.
C. Commercial General Liability Insurance written on an occurrence basis
with a combined Personal Injury, Bodily Injury and Property Damage limit
of at least One Million ($1,000,000.00) Dollars per occurrence and Five
Million ($5,000,000.00) Dollars combined single limit umbrella policy,
including the following perils:
1. Broad Form Blanket Contractual Liability for liability assumed
under this Agreement and all other contracts relative to the Work.
2. Premises/Operations.
6
<PAGE>
3. Completed Operations/Products Liability with a two (2) year
extension beyond completion and acceptance of the Work.
4. Broad Form Property Damage.
5. "XC&U" Perils, where applicable.
6. Personal Injury Liability (A, B & C).
7. Independent Contractors.
8. Elevator Collision Insurance, where applicable.
9. Endorsements (GL2010) and Certificates of Insurance must be
furnished reflecting the inclusion of the interests of the
following parties as additional insureds:
685 Acquisition LLC
c/o Blackacre Capital Group, L.P.
450 Park Avenue
New York, New York 10022
Williamson, Picket, Gross, Inc.
85 John Street
New York, New York 10080
Lehman Brothers Holding Inc.
200 Vesey Street, 12th Floor
World Financial Center
New York, New York 10285
Emmes Asset Management Corp.
420 Lexington Avenue, Suite 2702
New York, New York 10170
Levien & Company Inc.
570 Lexington Avenue
New York, New York 10022
Horowitz/Immerman, Architects, P.C.
38 W. 70th Street
New York, New York 10023
7
<PAGE>
LZA Technology
641 Avenue of the Americas
New York, New York 10011-2014
Cosenza & Associates, Inc.
66 York Street
Jersey Street, New Jersey 07302
10. Endorsements must be furnished that "The General Aggregate limit
applies separately to each project" unless a "comprehensive"
general liability policy is being provided.
11. Coverage is to be endorsed to reflect that insurance is to be
primary for the Contractor, the Owner and all other additional
insureds.
12. Coverage is to be provided on an "occurrence" basis, if available.
If not available, coverage on a "claims made" basis will be
acceptable provided that both the retroactive date and available
limits remaining are properly indicated and if the policy form is
acceptable to the Owner.
13. A copy of policy endorsement(s) and any other documents required to
verify such insurance are to be submitted with the appropriate
certificate(s).
D. Intentionally Omitted.
E. Where an off site property exposure exists, the Contractor, at its sole
expense, shall furnish to the Owner a certificate of insurance and other
required documentation evidencing that the Contractor is maintaining "All
Risk" Property Insurance on all materials, equipment and supplies stored
off site which are intended to become a permanent part of the Project
Site, while off site and while in transit, until actually delivered to
the Project Site. Coverage is to be provided on a replacement cost
basis. In addition, such coverage shall provide for the interest of 685
Acquisition LLC and Emmes Asset Management Corp. to be named as loss
payees and shall contain a provision requiring the insurance carriers to
waive their rights of subrogation against all additional insureds named
in this Rider.
F. All of the above insurance shall each contain the following working
verbatim:
"This insurance will not be canceled, materially changed or not renewed
without at least a thirty (30) day advance written notice to 685
Acquisition LLC, c/o Blackacre Capital Group, L.P., 450 Park Avenue, New
York, New York 10022, by certified mail-return receipt requested, with a
copy to the Owner's counsel, Solomon and Weinberg LLP, 70 East 55th
Street, New York, New York 10022, Attention: Craig H. Solomon, Esq.
8
<PAGE>
G. The amount of insurance contained in aforementioned insurance coverages,
shall not be construed to be a limitation of the liability on the party
of the Contractor or any of its Subcontractors.
H. The Contractor shall file certificates of insurance prior to the
commencement of the Work with the Owner which shall be subject to the
Owner's approval of adequacy of protection and the satisfactory character
of the insurer. In the event of failure of the Contractor to furnish and
maintain said insurance and to furnish satisfactory evidence thereof, the
Owner shall have the right (but not the obligation) to take out and
maintain the same for all parties on behalf of the Contractor who agrees
to furnish all necessary information thereof and to pay the cost thereof
to the Owner immediately upon presentation of a bill.
I. Owner and its agents are not responsible for any temporary structures on
or around the Project Site or any of contractor's tools and equipment or
any material, equipment or supplies located away from or in transit to
the Project Site.
NOTE: In addition to the standard policy exclusions:
1. No coverage is provided for temporary structures and the
Contractors' or Subcontractors tools and equipment.
2. No coverage is provided for losses resulting from flood and
earthquake.
3. No coverage is provided for any material, equipment, or supplies
located away from or in transit to the Project Site.
J. Any type of insurance or any increase of limits of liability not
described above which the Contractor requires for its own protection or
on account of statute shall be its own responsibility and at its own
expense.
K. The carrying of the insurance described shall in no way be interpreted as
relieving the Contractor of any responsibility of liability under this
Agreement.
L. Any policies effected by the Contractor or any of its Subcontractors on
their owned and/or rented equipment and materials shall contain a
provision requiring the insurance carriers to waive their rights of
subrogation against the Owner and all other indemnities named in this
Agreement.
M. Should the Contractor engage a Subcontractor, the same conditions apply
under this Agreement to each Subcontractor.
9
<PAGE>
SCHEDULE E
Cleaning Specifications
A. Entrance and Main Lobby
1. Daily
a. Sweep and spray buff floor.
b. Wipe down all metal surfaces in the lobby interior using
appropriate metal cleaner.
c. Dust lobby decorative motif and clean protective glass.
d. Damp wipe and clean all cigarette urns, screen and supply sand
as necessary for said urns.
e. Wash all rubber mats and vacuum carpet runners when down.
f. Wipe clean all monitoring devices.
g. Clean entrance doors, lobby glass and directory glass.
2. Weekly
a. Dust all lobby walls.
3. Monthly
a. High dust.
b. Scrub lobby floor.
B. Elevators (to include freight elevators)
1. Daily
a. Clean and polish elevator doors, call buttons, and bright
work. Clean thresholds.
b. Damp mop elevator cab floors and spray buff.
c. Clean and polish doors inside and outside.
d. Clean and polish push buttons in cab and in corridor and all
metal.
e. Clean and polish elevator cab walls.
f. Remove all gum, foreign matter, unauthorized marks and writing
from the sides of elevator cabs.
1
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2. Monthly
a. Clean lights in elevator cabs.
C. Office Areas
1. Daily
a. Sweep all flooring surfaces.
b. Empty all ashtrays and damp-wipe clean.
c. Empty all waste containers and transport trash to collection
areas.
d. Wash, clean and sanitize all water fountains and coolers.
e. Clean with chemically-treated dust mop, tiles and floor
surfaces.
f. Remove fingerprints and smudges from walls, woodwork, light
switch plates and glass doors and partitions.
g. Wipe clean telephone mouthpiece and receiver.
h. Remove all gum and foreign matter from floor, walls,
partitions, etc.
i. Hand dust and wipe clean with a treated cloth, mitt or duster,
all furniture and window unit covers.
j. Wash locker and slop sink rooms.
2. Weekly
a. Vacuum clean all carpet and rugs using a rotary type vacuum
cleaner.
b. Remove all finger marks from all painted surfaces near light
switches, entrance doors and the like.
c. Dust door louvers and other ventilating louvers, convertors,
chair legs and bases of all furniture, door frames, etc.
3. Monthly
a. Hand-dust ventilating grills and convertor covers.
b. Dust all picture frames, charts, glass covers or pictures, and
similar hangings.
4. Quarterly
a. Perform high dusting, e.g., door sash, tops of partitions,
shelving, ledges, etc.
2
<PAGE>
D. Lobbies and Common Area Corridors
1. Daily
a. Clean and sanitize drinking fountains.
b. Keep janitor sinks clean and orderly.
2. Weekly
a. Vacuum and spot-clean corridor carpets. Shampoo upon request
at an additional cost.
b. Dust baseboards.
c. Wash and disinfect trash collecting brutes.
3. Quarterly
a. Clean air-supply grills in lobbies.
b. Dust fire extinguisher cabinets (interior and exterior).
c. Shampoo corridor carpets.
E. Stairways
1. Daily
a. Police stairways to remove debris, gum and foreign matter
(sweep and spot-mop, if necessary).
2. Weekly
a. Sweep and otherwise keep clean all public stairwells.
3. Monthly
a. Wipe all ledges, standpipes and hand rails of dust in
stairways.
b. Polish and clean light fixtures.
4. Quarterly
Wipe clean exit lights.
3
<PAGE>
F. Restrooms
1. Daily
a. Clean, sanitize and polish all toilet fixtures with care to
clean under edges of fixtures and to wipe clean all
chrome-plated plumbing on fixtures, including flush rings,
drains and overflow outlets.
b. Restock toilet paper and hand towels and wipe clean all such
containers when necessary.
c. Clean and polish all mirrors, glass, powder shelves, bright
work and enameled surfaces, etc.
d. Sweep and wet-mop floors using proper chemicals for
disinfectant and detergent use.
e. Clean and sanitize both sides of toilet seats and leave up;
clean underside of fixtures.
f. Hand-dust, spot-clean or wash doors, partitions and walls,
with special attention to walls and partitions adjacent to
urinals and lavatories.
g. Empty, clean and replace liners of all paper towel and
sanitary disposal receptacles.
h. Wipe clean all doors, switch plates, kick plates, handles,
etc.
i. Remove all graffiti from any surface.
j. Clean all thresholds.
2. Monthly
a. Machine scrub all floors
b. Hand dust, clean and wash all tile walls.
c. Clean air supply and exhaust grills.
d. Chemically descale fixture.
4
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SCHEDULE F
HVAC SPECIFICATIONS
The Landlord will provide interior summer conditions of no more than
seventy-five (75) degrees Fahrenheit dry bulb and fifty (50%) percent (plus or
minus 10%) relative humidity when outside conditions are ninety-one (91) degrees
Fahrenheit dry bulb and seventy-five (75) degrees Fahrenheit wet bulb,
population load per floor of not more than 1 person per 100 sq. ft. of rentable
area (excluding dining and other special use areas), total electrical load of
not more than 5 watts per sq. ft. of rentable area for all purposes, including
lighting and power, and interior winter conditions of not less than seventy-two
(72) degrees Fahrenheit when outside conditions are five (5) degrees Fahrenheit.
The Building's HVAC system will provide .20 CFM per person of outside
ventilation air during business hours, based on one (1) person per hundred and
fifty square feet of rentable area.
5
<PAGE>
[LETTERHEAD OF VIATEL GLOBAL COMMUNICATIONS]
July 27, 1998
685 Acquisition LLC
c/o Balckacre Capital Group, L.P.
450 Park Avenue
New York, NY 10022
To Whom It May Concern:
This letter confirms our understanding with respect to that certain
lease between 685 Acquisition LLC, as landlord, and Viatel, Inc., as tenant,
dated June 24, 1998, for space on the 24th and 25th floors of 685 Third
Avenue, New York, New York (the "Lease"). In addition to the Desired Sublet
Premises (as defined in the Lease), the space shown on the attached Exhibit A
(the "Additional Space") shall also be deemed to be included in the Desired
Sublet Premises, except that such Additional Space may be sublet for a period
no longer than three years, without being subject to the additional
provisions of paragraph 12 of the Lease. In addition, if Viatel is unable to
sublet the Additional Space within six (6) months from the date that Viatel
occupies the Premises, then the Additional Space shall be subject to the
additional provisions of paragraph 12 of the Lease and shall no longer be
part of the Desired Sublet Premises. Any space that is not included in the
Desired Sublet Premises that Viatel may wish to sublet throughout the term of
the Lease shall be subject to paragraph 12 of the Lease. Except as
specifically set forth herein, the Lease shall remain in full force and
effect, and unchanged.
Please acknowledge your agreement with the foregoing by signing the
enclosed copy of this letter, and returning it to me.
Very truly yours,
/s/ Ellen S. Rudin
Ellen S. Rudin
Assistant General Counsel
Acknowledged and Agreed:
685 Acquisition LLC
By: Blackacre 685 LLC
By: Blackacre Capital Group, L.P.
By: Blackacre Capital Management Corp.
By: /s/ Jeffrey B. Citrin
-----------------------------
Name: Jeffrey B. Citrin
Title:
Cc: Lehman Bothers Holdings Inc.
Diagram entitled Exhibit "A" attached, providing an overview of the 25th
floor of 685 Third Avenue, New York, New York and highlighting the additional
space to be added to the previously agreed Desired Sublet Premises.
<PAGE>
Exhibit 10.18
LEASE
BETWEEN
VC ASSOCIATES, LLC, Lessor
- and -
VIATEL NEW JERSEY, INC., Lessee
Dated: June 23, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
BASIC LEASE PROVISIONS AND DEFINITIONS.............................................................. 1
1. DESCRIPTION................................................................................... 4
2. TERM.......................................................................................... 4
3. BASIC RENT.................................................................................... 4
4. USE AND OCCUPANCY............................................................................. 5
5. CARE AND REPAIR OF PREMISES/ENVIRONMENTAL..................................................... 5
6. ALTERATIONS, ADDITIONS OR IMPROVEMENTS........................................................ 8
7. ACTIVITIES INCREASING FIRE INSURANCE RATES.................................................... 8
8. ASSIGNMENT AND SUBLEASE....................................................................... 8
9. COMPLIANCE WITH RULES AND REGULATIONS......................................................... 14
10. DAMAGES TO BUILDING/WAIVER OF SUBROGATION..................................................... 14
11. EMINENT DOMAIN................................................................................ 15
12. INSOLVENCY OF LESSEE.......................................................................... 16
13. LESSOR'S REMEDIES ON DEFAULT.................................................................. 16
14. DEFICIENCY.................................................................................... 16
15. SUBORDINATION OF LEASE........................................................................ 18
16. SECURITY DEPOSIT.............................................................................. 19
17. RIGHT TO CURE LESSEE'S BREACH................................................................. 19
18. LIENS......................................................................................... 19
19. RIGHT TO INSPECT AND REPAIR................................................................... 20
20. SERVICES TO BE PROVIDED BY LESSOR............................................................. 21
21. INTERRUPTION OF SERVICES OR USE............................................................... 21
22. BUILDING STANDARD OFFICE ELECTRICAL SERVICE................................................... 22
23. ADDITIONAL RENT............................................................................... 24
(A) Operating Cost Escalation................................................................ 24
(B) Fuel, Utilities and Electric Cost Escalation............................................. 25
(C) Tax Escalation........................................................................... 25
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
(D)........................................................................................... 26
(E) Lease Year............................................................................... 27
(F) Payment.................................................................................. 27
(G) Books and Records........................................................................ 28
(H) Occupancy Adjustment..................................................................... 29
24. LESSEE'S ESTOPPEL............................................................................. 30
25. HOLDOVER TENANCY.............................................................................. 30
26. RIGHT TO SHOW PREMISES......................................................................... 30
27. LESSEE IMPROVEMENT WORK........................................................................ 31
28. WAIVER OF TRIAL BY JURY........................................................................ 33
29. LATE CHARGE.................................................................................... 33
30. INSURANCE...................................................................................... 34
(A) Lessee's Insurance....................................................................... 34
(B) Lessor's Insurance....................................................................... 37
(C) Waiver of Subrogation.................................................................... 38
31. NO OTHER REPRESENTATIONS....................................................................... 38
32. QUIET ENJOYMENT................................................................................ 38
33. INDEMNITY...................................................................................... 38
34. APPLICABILITY TO HEIRS AND ASSIGNS............................................................. 39
35. PARKING SPACES................................................................................. 39
36. LESSOR'S EXCULPATION........................................................................... 39
37. RULES OF CONSTRUCTION/APPLICABLE LAW........................................................... 40
38. BROKERS........................................................................................ 40
39. PERSONAL LIABILITY............................................................................. 41
40. NO OPTION...................................................................................... 41
41. DEFINITIONS.................................................................................... 41
(A) Affiliate............................................................................. 41
(B) Building Hours........................................................................ 42
(C) Common Facilities..................................................................... 42
(D) Force Majeure......................................................................... 42
(E) Lessee's Percentage................................................................... 43
(F) Additional Rent....................................................................... 43
42. LEASE COMMENCEMENT............................................................................. 43
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
43. NOTICES........................................................................................ 44
44. ACCORD AND SATISFACTION........................................................................ 44
45. EFFECT OF WAIVERS.............................................................................. 45
46. FIBER INTERCONNECT............................................................................. 45
47. MORTGAGEE'S NOTICE AND OPPORTUNITY TO CURE..................................................... 45
48. LESSOR'S RESERVED RIGHT........................................................................ 46
49. CORPORATE AUTHORITY............................................................................ 46
50. GOVERNMENT REQUIREMENTS........................................................................ 46
51. LITIGATION FEES AND EXPENSES................................................................... 46
52. 24-HOUR ACCESS................................................................................. 47
53. AFTER-HOURS USE................................................................................ 47
54. SIGNAGE/FLAGPOLE............................................................................... 47
55. ROOF DISH ANTENNA.............................................................................. 47
56. SUPPLEMENTAL AIR CONDITIONING.................................................................. 48
57. SPRINKLER SYSTEM............................................................................... 48
58. BACK-UP GENERATOR.............................................................................. 49
59. EARLY OCCUPANCY................................................................................ 49
60. RIGHT OF SUBORDINATED FIRST OFFER.............................................................. 50
61. RENEWAL OPTIONS................................................................................ 50
62. GUARANTY....................................................................................... 51
</TABLE>
iii
<PAGE>
LEASE, made the _____ day of June 1998, between VC ASSOCIATES, LLC, a New
Jersey limited liability company, whose address is c/o Portman Group, Inc., One
Parker Plaza, Fort Lee, New Jersey 07024 (hereinafter referred to as "Lessor");
and VIATEL NEW JERSEY, INC., a Delaware corporation, whose address is 800 Third
Avenue, New York, New York 10022 (hereinafter referred to as "Lessee").
PREAMBLE
BASIC LEASE PROVISIONS AND DEFINITIONS
In addition to other terms elsewhere defined in this Lease, the following terms
whenever used in this Lease should have only the meanings set forth in this
Section, unless such meanings are expressly modified, limited or expanded
elsewhere herein.
(1) Additional Rent: All sums in addition to Basic Rent payable by Lessee
to Lessor pursuant to the provisions of this Lease.
(2) Base Period Costs: As to the following:
(A) Base Operating Costs: The average of those costs incurred for the
Building and Office Building Area during calendar years 1998 and 1999, as
estimated by Lessor, subject to final adjustment.
(B) Base Real Estate Taxes: The average of those Real Estate Taxes
incurred for the Building, Complex and Office Building Area during calendar
years 1998 and 1999, as estimated by Lessor, subject to final
adjustment.
(C) Base Utility and Energy Costs: Those costs determined by
multiplying the average usage incurred for the Building and Office Building
Area during calendar years 1998 and 1999, as estimated by Lessor, by the
average rate in effect (including surcharges and/or adjustments) during
calendar year 1998 (herein "Base Utility Rate").
(3) Brokers: Cushman & Wakefield of New Jersey, Inc. and CB Richard Ellis.
(4) Building: Building B, Vantage Court, 200 Cottontail Lane, Franklin
Township, New Jersey.
(5) Building Holidays: Those shown on Exhibit E.
1
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(6) Commencement Date: Upon substantial completion of the work to be
performed to the Premises, subject however to Sections 27 and 42 hereof.
(7) Demised Premises or Premises: Approximately 26,380 gross rentable
square feet on the first (1st) floor of the east wing as shown on Exhibit A
hereto, which includes an allocable share of the Common Facilities as defined in
Subsection 41(C).
(8) Exhibits: The following Exhibits attached to this Lease are
incorporated herein and made a part hereof:
<TABLE>
<S> <C>
Exhibit A Premises
Exhibit A-1 Office Building Area
Exhibit B Rules and Regulations
Exhibit C Lessee Improvements
Exhibit D Cleaning Services
Exhibit E Building Holidays
Exhibit F Guaranty
</TABLE>
(9) Term Basic Rent: Five Million Three Hundred Forty-one Thousand Nine
Hundred Fifty and 00/100 ($5,341,950.00) Dollars for the Term payable as
follows:
<TABLE>
<CAPTION>
==========================================================================================================================
Period Annual Basic Monthly Basic
Rent Rent
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
Commencement Date through $507,815.00 $42,317.92
60th month following
Commencement Date
- --------------------------------------------------------------------------------------------------------------------------
61st through 120th months $560,575.00 $46,714.58
following Commencement Date
==========================================================================================================================
</TABLE>
(10) Lessee's Percentage:
(A) For Base Operating Costs and Base Utility and Energy Costs:
twenty-six and 66/100 (26.66%) percent.
(B) For Base Real Estate Taxes: thirteen and 33/100 (13.33%) percent.
subject to adjustment as provided for in Subsection 41(E).
(11) Office Building Area: Lot 15.10, Block 517.02, on the tax map of the
Township of Franklin.
(12) Parking Spaces: A total of one hundred five (105) spaces assigned and
unassigned as indicated at no charge to Lessee.
(A) Assigned: Twenty-one (21)
2
<PAGE>
(B) Unassigned: Eighty-four (84)
(13) Permitted Use: General office for executive and administrative
purposes and/or for telecommunications facilities to include switches and
related equipment.
(14) Security Deposit: Shall, subject to the first Subsection of Section 16
of the Lease, be NONE.
(15) Term: Ten (10) years from the Commencement Date unless extended
pursuant to any option contained herein.
(16) Termination Date: 11:59 p.m. of the day immediately preceding the
tenth (10th) anniversary of the Commencement Date unless Lessee exercises its
renewal option(s) as in Section 61 contained.
3
<PAGE>
W I T N E S S E T H:
For and in consideration of the covenants herein contained, and upon the
terms and conditions herein set forth, Lessor and Lessee agree as follows:
1. DESCRIPTION. Lessor hereby leases to Lessee, and Lessee hereby hires
from Lessor, the Demised Premises as defined in the Preamble (hereinafter called
"Demised Premises" or "Premises", as shown on the plan or plans, initialed by
the parties hereto, marked Exhibit A attached hereto and made part of this Lease
in the Building as defined in the Preamble (hereinafter called "Building") which
is part of a complex (hereinafter called the "Complex") of buildings known as
Building A and Building B, also known as Vantage Court, which is situated on the
Office Building Area as defined in the Preamble (hereinafter called "Office
Building Area"), as described on Exhibit A-1, together with the right to use in
common with other lessees of the Building, their invitees, customers and
employees, those public areas of the Common Facilities as hereinafter defined.
2. TERM. The Premises are leased for the Term to commence on the
Commencement Date, and to end at 11:59 p.m. on the Termination Date, all as
defined in the Preamble.
3. BASIC RENT. The Lessee shall pay to the Lessor during the Term the Term
Basic Rent as defined in the Preamble (hereinafter called "Term Basic Rent"),
payable in such coin or currency of the United States of America as at the time
of payment shall be legal tender for the payment of public and private debts.
The Term Basic Rent shall accrue at an annual rate as defined in the Preamble
(hereinafter called "Annual Basic Rent") and shall be payable in advance on the
first day of each calendar month during the Term in monthly installments of Term
Basic Rent as defined in the Preamble (hereinafter called "Monthly Basic Rent"),
except that a proportionately lesser sum may be paid for the first and last
months of the Term of this Lease if the Term commences on a day other than the
first day of the month, in accordance with the provisions of this Lease herein
set forth. Lessor acknowledges receipt from Lessee of the Monthly Basic Rent for
the first month of the Lease Term by check, subject to collection. Lessee shall
pay Basic Rent, and any Additional Rent as hereinafter provided, to Lessor at
Lessor's above stated address, or at such other place as Lessor may designate in
writing, without demand and without counterclaim, deduction or setoff. As used
in this Lease, Basic Rent shall mean either Term Basic Rent, Annual Basic Rent
or Monthly Basic Rent, as appropriate.
4
<PAGE>
4. USE AND OCCUPANCY. Lessee shall use and occupy the Premises for the
Permitted Use as defined in the Preamble and for no other purpose.
5. CARE AND REPAIR OF PREMISES/ENVIRONMENTAL. Lessee covenants to commit
no act of waste and to take good care of the Premises and those portions of
Building Systems exclusively servicing Tenant's Premises and the fixtures and
appurtenances therein, and shall, in the use and occupancy of the Premises
comply with all present and future laws, orders and regulations of the
federal, state and municipal governments or any of their departments
affecting the Premises and with any and all environmental requirements
resulting from the Lessee's specific manner of use as distinguished from
laws, orders and regulations of the federal, state and municipal governments
or any of their department affecting the Premises applicable to all manner of
uses; this covenant to survive the expiration or sooner termination of the
Lease. Any laws, orders and regulations of the federal, state and municipal
governments or any of their department affecting the Premises applicable to
all manner of uses shall be complied with by Lessor, with the cost for same
to the extent permitted by the terms hereof, to be included as an Operating
Cost as provided for in Subsection 23(A). Lessor shall, at Lessee's
reasonable expense, promptly make all necessary repairs to the Premises.
Lessor shall make all necessary repairs to the Common Facilities and to the
structural portions of the Building, the non-exclusive portions of the
Building Systems, and to the parking areas, if any, the same to be included
as an Operating Cost to the extent permitted pursuant to Section 23, except
where the repair has been made necessary by misuse or neglect by Lessee or
Lessee's agents, servants, visitors or licensees, in which event Lessor shall
nevertheless make the repair but Lessee shall pay to Lessor, as Additional
Rent, immediately upon demand, the reasonable costs therefor. As used herein,
the structural portions of the Building shall mean the foundations, load
bearing exterior walls and steel support columns of the Building, and the
non-exclusive portions of the Building Systems (i.e. HVAC, plumbing and
electrical) which shall mean Building Systems up to the points of
distribution to a tenant's premises, and the Building roof. All improvements
made by Lessee to the Premises, which are so attached to the Premises that
they cannot be removed without material injury to the Premises, shall become
the property of Lessor upon installation. Not later than the last day of the
Term, Lessee shall, at Lessee's expense, remove all Lessee's personal
property and those improvements made by Lessee which have not become the
property of Lessor, including trade fixtures, cabinetwork, movable paneling
partitions and the like; repair all injury done by or in connection with the
installation or removal of said property and improvements; and surrender the
Premises in as good condition as they were at the beginning of the Term,
reasonable wear and damage by fire, the elements, casualty, or other cause
not due to
5
<PAGE>
the misuse or neglect by Lessee, Lessee's agents, servants, visitors or
licensees excepted. All other property of Lessee remaining on the Premises after
the last day of the Term of this Lease shall be conclusively deemed abandoned
and may be removed by Lessor, and Lessee shall reimburse Lessor for the
reasonable cost of such removal. Lessor may have any such property stored at
Lessee's risk and expense.
Lessee acknowledges the existence of the environmental laws, rules and
regulations, including but not limited to the provisions of ISRA, as hereinafter
defined. Lessee shall comply with any and all such laws, rules and regulations.
Lessee represents to Lessor that Lessee's Standard Industrial Classification
(SIC) Number as designated in the Standard Industrial Classifications Manual
prepared by the Office of Management and Budget in the Executive Office of the
President of the United States is 4825; however, Lessee represents that the
nature of the business to be conducted in the Premises will not constitute an
industrial establishment for purposes of ISRA. Any change by Lessee to an
operation which will subject the Premises to ISRA applicability shall require
Lessor's written consent. Any such proposed change shall be sent in writing to
Lessor sixty (60) days prior to the proposed change. Lessor, at its sole option,
may deny consent.
Lessee hereby agrees to execute such documents as Lessor reasonably deems
necessary and to make such applications as Lessor reasonably requires to assure
compliance with ISRA. Lessee shall bear all costs and expenses incurred by
Lessor associated with any required ISRA compliance resulting from Lessee's
specific manner of use of the Demised Premises including but not limited to
state agency fees, engineering fees, clean-up costs, filing fees and suretyship
expenses. As used in this Lease, ISRA compliance shall include applications for
determinations of nonapplicability by the appropriate governmental authority.
The foregoing undertaking shall survive the termination or sooner expiration of
the Lease and surrender of the Demised Premises and shall also survive sale, or
lease or assignment of the Demised Premises by Lessor. Lessee agrees to
indemnify and hold Lessor harmless from any violation of ISRA occasioned by
Lessee's specific use of the Demised Premises as opposed to mere occupancy by
Lessee. The Lessee shall immediately provide the Lessor with copies of all
correspondence, reports, notices, orders, findings, declarations and other
materials pertinent to the Lessee's compliance and the requirements of the New
Jersey Department of Environmental Protection ("NJDEP") under ISRA as they are
issued or received by the Lessee. The Lessor shall promptly provide Lessee with
notice of any communications received from NJDEP which affect the Lessee's use
of the Premises.
Lessee agrees not to generate, store, manufacture, refine, transport,
treat, dispose of, or otherwise permit to be present on or about the Premises,
any Hazardous Substances.
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Notwithstanding anything contained herein to the contrary, Lessee shall be
permitted to keep small quantities of normal office supplies which may be
included as Hazardous Substances such as cleaning supplies and copier supplies,
provided the same are properly stored, handled and disposed of in full
compliance with all environmental laws. As used herein, Hazardous Substances
shall be defined as any "hazardous chemical," "hazardous substance" or similar
term as defined in the Comprehensive Environmental Responsibility Compensation
and Liability Act, as amended (42 U.S.C. 9601, et seq.), the New Jersey
Environmental Cleanup Responsibility Act, as amended, N.J.S.A. 13:1K-6 et seq.
and/or the Industrial Site Recovery Act ("ISRA"), the New Jersey Spill
Compensation and Control Act, as amended, N.J.S.A. 58:10-23.11b, et seq., any
rules or regulations promulgated thereunder, or in any other applicable federal,
state or local law, rule or regulation dealing with environmental protection. It
is understood and agreed that the provisions contained in this Section shall be
applicable notwithstanding the fact that any substance shall not be deemed to be
a Hazardous Substance at the time of its use by the Lessee but shall thereafter
be deemed to be a Hazardous Substance. Lessor represents, without undertaking
any investigation or inquiry, that it has no actual knowledge of any Hazardous
Substances contained in the Premises or Building. Lessor further represents to
Lessee that as of the date hereof, Lessor has received no notice of any
violation of any law, order or regulation of the federal, state or municipal
governments with respect to the Building and Office Building Area.
In the event Lessee fails to comply with ISRA as stated in this Section or
any other governmental law as of the termination or sooner expiration of the
Lease and as a consequence thereof Lessor is unable to rent the Demised
Premises, then the Lessor shall treat the Lessee as one who has not removed at
the end of its Term, and thereupon be entitled to all remedies against the
Lessee provided by law in that situation including a monthly rental of one
hundred fifty (150%) percent of the Monthly Basic Rent paid for the last month
of the Term of this Lease or any renewal term, for the first thirty (30) days,
which shall be increased to two hundred (200%) percent of the Monthly Basic Rent
for the last month of the Term of this Lease or any renewal term, for any period
thereafter, payable in advance on the first day of each month, until such time
as Lessee provides Lessor with a negative declaration or confirmation that any
required clean-up plan has been successfully completed.
Lessee agrees to indemnify and hold harmless the Lessor and each mortgagee
of the Premises from and against any and all liabilities, damages, claims,
losses, judgments, causes of action, costs and expenses (including the
reasonable fees and expenses of counsel) which may be incurred by the Lessor or
any such mortgagee or threatened against the Lessor or such mortgagee, resulting
from any breach by Lessee of the
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undertakings set forth in this Section, said indemnity to survive the Lease
expiration or sooner termination.
6. ALTERATIONS, ADDITIONS OR IMPROVEMENTS. Lessee shall not, without first
obtaining the written consent of Lessor, make any alterations, additions or
improvements in, to or about the Premises. Provided Lessee first provides Lessor
with written plans or information detailing any proposed alterations, additions
or improvements, Lessor shall not unreasonably withhold its consent. For
purposes hereof, Lessor shall not be deemed to have unreasonably withheld its
consent if the proposed alteration, addition or improvement impacts any
structural portion of the Building or any non-exclusive Building System as
defined in Section 5, including by way of example but not limitation, the HVAC,
plumbing or electrical systems. Nothing herein contained shall be construed to
prevent Lessee from making cosmetic or decorative changes (e.g., painting,
wallcovering) to the Premises without Lessor's prior written approval. This
Section shall apply to any alterations, additions or improvements to the
Premises made subsequent to Lessee's improvements, approval for which is
provided for in Section 27.
7. ACTIVITIES INCREASING FIRE INSURANCE RATES. Lessee shall not do or
suffer anything to be done on the Premises which will increase the rate of fire
insurance on the Building. The existence of a mere elevated occupancy level
resulting from Lessee's tenancy shall not increase the rate of fire insurance on
the Building.
8. ASSIGNMENT AND SUBLEASE. Lessee may not mortgage, pledge,
hypothecate, assign, transfer, sublet or otherwise deal with this Lease or the
Premises in any manner except as specifically provided for in this Section 8:
(A) (1) In the event that Lessee desires to sublease or assign the
Premises or any part thereof to any other party, the terms and conditions
of such sublease or assignment shall be communicated to the Lessor in
writing not less than thirty (30) days prior to the effective date of any
such sublease or assignment, and, prior to such effective date, the Lessor
shall have the option exercisable in writing to the Lessee, to recapture
the space proposed to be sublet for the duration of the proposed sublease
or to recapture the within Lease in the case of an assignment, and the
within Lessee shall be fully released from any and all obligations
thereafter accruing for the duration of the proposed sublease or for the
balance of the Term in the case of an assignment.
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(2) Notwithstanding the foregoing, in the event that Lessee desires
to sublease the Premises to a business entity whose occupancy is in
furtherance of a project between Lessee and said subtenant, Lessee shall
have the right to do so upon notice to Lessor without the provisions of
Subsection 8(A)(1) being applicable thereto. All the terms and provisions
of Subsection 8(B) shall apply to such subletting with the exception of
Subsection 8(B)(6) and with the further qualification that Subsection
8(B)(4) shall be amended for purposes of such subletting to entitle Lessor
to all of the net rent (Basic and Additional), as and when received, in
excess of the Term Basic Rent and Additional Rent required to be paid by
Lessee for the period affected by said sublease for the area sublet,
computed on the basis of an average square foot rent for the gross square
footage Lessee has leased.
(B) In the event that the Lessor elects not to recapture the Lease or
part thereof as the case may be in accordance with Subsection 8(A) above,
the Lessee may nevertheless assign this Lease or sublet the whole or any
portion of the Premises so offered to Lessor, subject to the Lessor's prior
written consent, which consent shall not be unreasonably withheld or
delayed, and subject to the consent, which consent shall not be
unreasonably withheld or delayed, of any mortgagee, trust deed holder or
ground lessor, on the basis of the terms and conditions enumerated herein
in this Subsection 8(B). However, Lessor shall not be deemed unreasonable
if it refuses to consent to any proposed sublease or an assignment of the
Lease to a tenant, subtenant or other occupant of the Building (or to a
subsidiary or affiliate thereof) provided Lessor has other comparable space
available in the Building to show to such proposed sublessee of, or if, in
the reasonable judgment of Lessor, the business of such proposed subtenant
or assignee is not compatible with the type of occupancy of the Building,
violates any exclusive granted in writing to any other tenant in the
Building or Complex, or such business will create material increased use of
the Common Facilities of the Office Building Area and/or Building or is to
any State, Federal or municipal agency or bureau.
(1) The Lessee shall provide to Lessor the name and address of
the assignee or sublessee.
(2) The assignee or sublessee shall assume, by written
instrument, all of the obligations of this Lease, and a copy of such
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assumption agreement shall be furnished to Lessor within ten (10)
business days of its execution. Any sublease shall expressly
acknowledge that said sublessee's rights against the Lessor shall be
no greater than those of the Lessee.
(3) The Lessee and each assignee shall be and remain liable for
the observance of all the covenants and provisions of this Lease,
including, but not limited to, the payment of Term Basic Rent and
Additional Rent reserved herein as and when required to be paid,
through the entire Term of this Lease, as the same may be renewed,
extended or otherwise modified.
(4) The Lessee and any assignee shall promptly pay to Lessor
one-half (1/2) of any net consideration received for any assignment or
one-half (1/2) of the net rent (Basic and Additional), as and when
received in excess of the Term Basic Rent and Additional Rent required
to be paid by Lessee for the period affected by said assignment or
sublease for the area sublet, computed on the basis of an average
square foot rent for the gross square footage Lessee has leased. As
used herein, net consideration and/or net rent shall mean gross rent
(Basic and Additional) or gross consideration received less any
brokerage or other reasonable costs or tenant work paid by Lessee in
connection with the assignment or sublet, said brokerage or tenant
work to be amortized over the term of the assignment or sublet.
(5) In any event, the acceptance by Lessor of any rent (Basic and
Additional) from the assignee or from any of the subtenants or the
failure of Lessor to insist upon a strict performance of any of the
terms, conditions and covenants herein shall not release Lessee
herein, nor any assignee assuming this Lease, from any and all of the
obligations herein during and for the entire Term of this Lease.
(6) Lessor shall require a Five Hundred and 00/100 ($500.00)
Dollar payment to cover its handling charges for each request for
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consent to any sublet or assignment prior to its consideration of the
same.
(7) Lessee shall have no claim, and hereby waives the right to
any claim, against Lessor for money damages by reason of any refusal,
withholding or delaying by Lessor of any consent, approval or
statement of satisfaction, and in such event, Lessee's only remedies
therefor shall be an action for specific performance, injunction or
declaratory judgment to enforce any such requirement. Lessor
acknowledges that Lessee may commence such action by way of an
expedited proceeding (e.g. Order to Show Cause) before the Superior
Court of New Jersey, Somerset County and Lessor shall take all
reasonable actions (including acceptance of a Verified Complaint and
an Order to Show Cause) requested by Lessee to ensure that such
dispute is heard before the Superior Court in such an expedited
proceeding. Lessor and Lessee further agree that the determination of
such Court shall be final and non-appealable.
(C) Any sublet or assignment to an "Affiliate" as hereinafter defined
shall not be subject to the provisions of Subsections 8(A), 8(B)(4) or
8(B)(6) hereof and shall not require Lessor's prior written consent, but
all other provisions of this Section shall apply.
(D) In the event that any or all of Lessee's interest in the Premises
and/or this Lease is transferred by operation of law to any trustee,
receiver, or other representative or agent of Lessee, or to Lessee as a
debtor in possession, and subsequently any or all of Lessee's interest in
the Premises and/or this Lease is offered or to be offered by Lessee or any
trustee, receiver, or other representative or agent of Lessee as to its
estate or property (such person, firm or entity being hereinafter referred
to as the "Grantor"), for assignment, conveyance, lease, or other
disposition to a person, firm or entity other than Lessor (each such
transaction being hereinafter referred to as a "Disposition"), it is agreed
that Lessor has and shall have a right of first refusal to purchase, take,
or otherwise acquire, the same upon the same terms and conditions as the
Grantor thereof shall accept upon such Disposition to such other person,
fire, or entity; and as to each such
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Disposition the Grantor shall give written notice to Lessor in reasonable
detail of all of the terms and conditions of such Disposition within twenty
(20) days next following its determination to accept the same but prior to
accepting the same, and Grantor shall not make the Disposition until and
unless Lessor has failed or refused to accept such right of first refusal
as to the Disposition, as set forth herein.
Lessor shall have sixty (60) days next following its receipt of
the written notice as to such Disposition in which to exercise the option
to acquire Lessee's interest by such Disposition, and the exercise of the
option by Lessor shall be effected by notice to that effect sent to the
Grantor; but nothing herein shall require Lessor to accept a particular
Disposition or any Disposition, nor does the rejection of any one such
offer of first refusal constitute a waiver or release of the obligation of
the Grantor to submit other offers hereunder to Lessor. In the event Lessor
accepts such offer of first refusal, the transaction shall be consummated
pursuant to the terms and conditions of the Disposition described in the
notice to Lessor. In the event Lessor rejects such offer of first refusal,
Grantor may consummate the Disposition with such other person, firm, or
entity; but any decrease in price of more than two (2%) percent of the
price sought from Lessor or any change in the terms of payment for such
Disposition shall constitute a new transaction requiring a further option
of first refusal to be given to Lessor hereunder.
(E) Without limiting any of the provisions of Sections 12 and 13, if
pursuant to the Federal Bankruptcy Code (herein the "Code"), or any similar
law hereafter enacted having the same general purpose, Lessee is permitted
to assign this Lease notwithstanding the restrictions contained in this
Lease, adequate assurance of future performance by an assignee expressly
permitted under such Code shall be deemed to mean the deposit of cash
security in an amount equal to one (1) year's Annual Basic Rent and
Additional Rent for the next succeeding twelve (12) months (which
Additional Rent shall be reasonably estimated by Lessor), which deposit
shall be held by Lessor for the balance of the Term, without interest, as
Additional Security Deposit as hereinafter defined for the full performance
of all of Lessee's obligations under this Lease, to be held and applied in
the manner specified for security in Section 16.
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(F) Except as specifically set forth above, no portion of the Demised
Premises or of Lessee's interest in this Lease may be acquired by any other
person or entity, whether by assignment, mortgage, sublease, transfer,
operation of law or act of the Lessee, nor shall Lessee pledge its interest
in this Lease or in any security deposit required hereunder.
(G) If Lessee is a corporation other than a corporation whose stock is
listed and traded on a nationally recognized stock exchange, the provisions
of this Subsection 8(G) shall apply to a transfer (however accomplished,
whether in a single transaction or in a series of related or unrelated
transactions) of stock [or any other mechanism such as, by way of example,
the issuance of additional stock, a stock voting agreement or change in
class(es) of stock] which results in a change of control of Lessee as if
such transfer of stock (or other mechanism) which results in a change of
control of Lessee were an assignment of this Lease, and if Lessee is a
partnership or joint venture, said provisions shall apply with respect to a
transfer (by one or more transfers) of an interest in the distributions of
profits and losses of such partnership or joint venture (or other
mechanism, such as, by way of example, the creation of additional general
partnership or limited partnership interests) which results in a change of
control of such a partnership or joint venture as if such transfer of an
interest in the distributions of profits and losses of such partnership or
joint venture which results in a change of control of such partnership or
joint venture were an assignment of this Lease; but said provisions shall
not apply to transactions with a corporation into or with which Lessee is
merged or consolidated or to which all or substantially all of Lessee's
assets are transferred or to any corporation which controls or is
controlled by Lessee or is under common control with Lessee, provided that
in the event of such merger, consolidation or transfer of all or
substantially all of Lessee's assets, (i) the successor to Lessee has a net
worth computed in accordance with generally accepted accounting principles
at least equal to the net worth of Lessee immediately prior to such merger,
consolidation or transfer, and (ii) proof satisfactory to Lessor of such
net worth shall have been delivered to Lessor at least ten (10) days prior
to the effective date of any such transaction.
(H) If Lessee is a corporation whose stock is listed and traded on a
nationally recognized stock exchange and Lessee acquires or is acquired by
another
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entity whereby the successor entity shall continue the business operations
of Lessee at the Premises in a manner which is substantially similar to
those business operations which were conducted immediately prior to such
transfer, then such transaction shall not constitute an assignment of this
Lease in violation of Subsection 8(G).
9. COMPLIANCE WITH RULES AND REGULATIONS. Lessee shall observe and comply
with the rules and regulations hereinafter set forth in Exhibit B attached
hereto and made a part hereof and with such further reasonable rules and
regulations as Lessor may prescribe, on written notice to Lessee, for the
safety, care and cleanliness of the Building and the Complex and the comfort,
quiet and convenience of other occupants of the Building or Complex. Lessee
shall not place a load upon any floor of the Demised Premises exceeding the
floor load of two hundred fifty (250) pounds per square foot which it was
designed to carry. Such installations shall be placed and maintained by Lessee,
at Lessee's expense, in settings sufficient, in Lessor's reasonable judgment, to
absorb and prevent vibration, noise and annoyance. In the event that the
existing floor load capacity is insufficient to support Lessee's installations,
Lessee shall have the right to perform such improvements to the floor slab as
are required to increase the floor load capacity of the Premises. Any such work
shall be performed in accordance with the requirements set forth Subsection
27(C).
10. DAMAGES TO BUILDING/WAIVER OF SUBROGATION. If the Building is damaged
by fire or any other cause to such extent that the cost of restoration, as
reasonably estimated by Lessor, will equal or exceed twenty-five (25%) percent
of the replacement value of the Building (exclusive of foundations) just prior
to the occurrence of the damage, then Lessor may, no later than the sixtieth
(60th) day following the damage, give Lessee a notice of election to terminate
this Lease, or, if the cost of restoration will equal or exceed fifty (50%)
percent of such replacement value and if the Premises shall not be reasonably
usable for the purpose for which they are leased hereunder, then Lessee may, no
later than the sixtieth (60th) day following the damage, give Lessor a notice of
election to terminate this Lease. In either said event of election, this Lease
shall be deemed to terminate on the thirtieth (30th) day after the giving of
said notice, and Lessee shall surrender possession of the Premises within a
reasonable time thereafter; and the Term Basic Rent, and any Additional Rent,
shall be apportioned as of the date of said surrender, and any Term Basic Rent
or Additional Rent paid for any period beyond the latter of the thirtieth (30th)
day after said notice or the date Lessee surrenders possession shall be repaid
to Lessee. If the cost of restoration shall not entitle Lessor to terminate this
Lease, or if, despite the cost, Lessor does not elect to terminate this Lease,
Lessor shall restore the
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Building and the Premises with reasonable promptness, subject to Force Majeure,
as hereinafter defined, and except as stated above, Lessee shall have no right
to terminate this Lease. Lessor need not restore fixtures and improvements owned
by Lessee.
In any case in which use of the Premises is affected by any damage to the
Building, there shall be either an abatement or an equitable reduction in Term
Basic Rent and an equitable reduction in the Base Period Costs as established in
Section 23 depending on the period for which and the extent to which the
Premises are not reasonably usable for the purpose for which they are leased
hereunder. The words "restoration" and "restore" as used in this Section shall
include repairs. If the damage results from the negligence or willful misconduct
of Lessee, or Lessee's agents, servants, visitors or licensees, Lessee shall not
be entitled to any abatement or reduction in Term Basic Rent or Additional Rent,
except to the extent of any rent insurance received by Lessor.
Except as provided in Section 5 hereof, notwithstanding the provisions of
this Section of the Lease of any other provision of this Lease, in the event of
any loss or damage to the Building, the Premises and/or any contents (herein
"property damage"), each party waives all claims against the other and its or
their agents, servants, employees and partners for any such loss or damage and
each party shall look only to any insurance which it has obtained to protect
against such loss (or in the case of Lessee, against any tenant of the Building
that has not waived subrogation against such Lessee) and each party shall
obtain, for each policy of such insurance, provisions waiving any claims against
the other party (and against any other tenant[s] in the Building that has waived
subrogation against the Lessee) for loss or damage within the scope of such
insurance.
11. EMINENT DOMAIN. If Lessee's use of the Premises is materially affected
due to the taking by eminent domain of (a) the Premises or any part thereof or
any estate therein; or (b) any other part of the Building; then, in either
event, this Lease shall terminate on the latter of (i) the date when title vests
pursuant to such taking or (ii) the date when Lessee's use of the Premises is
materially affected (herein the "Termination Date"). The Term Basic Rent, and
any Additional Rent, shall be apportioned as of said Termination Date and any
Term Basic Rent or Additional Rent paid for any period beyond said date shall be
repaid to Lessee. In the event of a partial taking which does not effect a
termination of this Lease but does deprive Lessee of the use of a portion of the
Demised Premises, there shall either be an abatement or an equitable reduction
of the Term Basic Rent, and an equitable adjustment reducing the Base Period
Costs depending on the period for which and the extent to which the Premises so
taken are not reasonably usable for the purpose for
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which they are leased hereunder. Lessee shall not be entitled to any part of the
award for such taking or any payment in lieu thereof, but Lessee may file a
separate claim for any taking of fixtures and improvements owned by Lessee which
have not become Lessor's property, and for moving expenses, provided the same
shall in no way affect or diminish Lessor's award.
12. INSOLVENCY OF LESSEE. Either (a) the appointment of a receiver to take
possession of all or substantially all of the assets of Lessee, or (b) a general
assignment by Lessee for the benefit of creditors, or (c) any action taken or
suffered by Lessee under any insolvency or bankruptcy act, shall constitute a
default of this Lease by Lessee, and Lessor may terminate this Lease forthwith
and upon notice of such termination Lessee's right to possession of the Demised
Premises shall cease, and Lessee shall then quit and surrender the Premises to
Lessor but Lessee shall remain liable as hereinafter provided in Section 14
hereof.
13. LESSOR'S REMEDIES ON DEFAULT. If Lessee defaults in the payment of Term
Basic Rent, or any Additional Rent, or defaults in the performance of any of the
other covenants and conditions hereof, Lessor may give Lessee notice of such
default, and if Lessee does not cure any Term Basic Rent or Additional Rent
default within five (5) days of the giving of such notice or other default
within fifteen (15) days after giving of such notice (or if such other default
is of such nature that it cannot be completely cured within such period, if
Lessee does not commence such curing within such fifteen [15] days and
thereafter proceed with reasonable diligence and in good faith to cure such
default), then Lessor may terminate this Lease on not less than ten (10) days'
notice to Lessee, and on the date specified in said notice, Lessee's right to
possession of the Demised Premises shall cease, and Lessee shall then quit and
surrender the Premises to Lessor, but Lessee shall remain liable as hereinafter
provided. If this Lease shall have been so terminated by Lessor pursuant to
Sections 12 or 13 hereof, Lessor may at any time thereafter resume possession of
the Premises by any lawful means and remove Lessee or other occupants and their
effects.
14. DEFICIENCY. In any case where Lessor has recovered possession of the
Premises by reason of Lessee's default, Lessor may, at Lessor's option, occupy
the Premises or, consistent with prevailing market conditions, cause the
Premises to be redecorated, altered, divided, consolidated with other adjoining
premises, or otherwise changed or prepared for reletting, and may relet the
Premises or any part thereof as agent of Lessee or otherwise, for a term or
terms to expire prior to, at the same time as, or subsequent to, the original
expiration date of this Lease, at Lessor's option, and receive the Term Basic
Rent or Additional Rent therefor. Term Basic Rent or Additional Rent so received
shall be applied first to the payment of such reasonable
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expenses as Lessor may have incurred in connection with the recovery of
possession, redecorating, altering, dividing, consolidating with other adjoining
premises, or otherwise changing or preparing for reletting, and the reletting,
including brokerage and reasonable attorney's fees, and then to the payment of
damages in amounts equal to the Term Basic Rent and Additional Rent hereunder
and to the costs and expenses of performance of the other covenants of Lessee as
herein provided. Lessee agrees, in any such case, whether or not Lessor has
relet, to pay to Lessor damages equal to the Term Basic Rent and Additional Rent
and other sums herein agreed to be paid by Lessee, as and when due, less the net
proceeds of the reletting, if any, as ascertained from time to time, as of the
due date, and the same shall be payable by Lessee on the several rent days above
specified. Lessee shall not be entitled to any surplus accruing as a result of
any such reletting, nor shall any surplus be applied to offset the damages
referred to in the preceding sentence. In reletting the Premises as aforesaid,
Lessor may grant rent concessions, and Lessee shall not be credited therewith.
No such reletting shall constitute a surrender and acceptance or be deemed
evidence thereof. If Lessor elects, pursuant hereto, actually to occupy and use
the Premises or any part thereof during any part of the balance of the Term as
originally fixed or since extended, there shall be allowed against Lessee's
obligation for Term Basic Rent and Additional Rent or damages as herein defined,
during the period of Lessor's occupancy, the reasonable value of such occupancy,
not to exceed in any event the Term Basic Rent and Additional Rent herein
reserved and such occupancy shall not be construed as a release of Lessee's
liability hereunder.
Alternatively, in any case where Lessor has recovered possession of the
Premises by reason of Lessee's default, Lessor may at Lessor's option, and at
any time thereafter, and without notice or other action by Lessor, and without
prejudice to any other rights or remedies it might have hereunder or at law or
equity, become entitled to recover from Lessee, as damages for such breach, in
addition to such other sums herein agreed to be paid by Lessee, to the date of
reentry, expiration and/or dispossess, an amount equal to the difference between
the Term Basic Rent and Additional Rent reserved in this Lease from the date of
such default to the date of expiration of the Term demised, as the same may have
been extended or renewed, and the then fair and reasonable rental value
(inclusive of Additional Rent and Term Basic Rent) of the Premises for the same
period. Said damages shall become due and payable to Lessor immediately upon
such breach of this Lease and without regard to whether this Lease be terminated
or not, and if this Lease be terminated, without regard to the manner in which
it is terminated. In the computation of such damages, the difference between any
installments of rent (Basic and Additional) thereafter becoming due and the fair
and reasonable rental value of the Premises for
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the period for which such installment was payable shall be discounted to the
date of such default at the rate of not more than four (4%) percent per annum.
Lessee hereby waives all right of redemption to which Lessee or any person
under Lessee might be entitled by any law now or hereafter in force. In
addition, in the event of an event of default which results in the Lessor
recovering possession of the Demised Premises, Lessor will use commercially
reasonable efforts to mitigate Lessee's damages as provided for in this Section
14, provided that Lessor shall retain the right, in the exercise of its
reasonable business judgment, to approve any tenant and determine the reasonable
terms and conditions of any lease, including, but not limited to, rent and
length of term. Notwithstanding the foregoing, Lessor shall not be obligated to
display the Premises to prospective tenants if Lessor has other premises
available in the Complex. However, if prospective tenants do not find such other
premises suitable, Lessor agrees that it will then display the Premises to the
prospective tenants.
Lessor's remedies hereunder are in addition to any remedy allowed by law.
15. SUBORDINATION OF LEASE. Lessor represents that the Building is not
currently encumbered by a mortgage or deed of trust. This Lease shall be subject
and subordinated to all future first mortgages or deeds of trust affecting the
Demised Premises, provided that either any such mortgage or deed of trust shall
include therein a covenant on the part of the holder thereof substantially to
the effect that it will not at any time join the Lessee as a party defendant in
any action which may be brought to foreclose said mortgage or deed of trust, or
disturb Lessee's possession of the Demised Premises, so long as the Lessee is
not in default under any provision of this Lease beyond any applicable notice
and grace period, or provided Lessor obtains a nondisturbance agreement in favor
of Lessee from said first mortgagee or holder of any deed of trust providing the
above, and provided further that in either event, Lessee agrees at the first
mortgagee's option or at the option of the holder of any deed of trust to attorn
to said mortgagee or holder of said trust deed. The Lessee shall execute, at no
expense to the Lessee, any instrument which may be deemed necessary or desirable
by the Lessor to further effect or to evidence the subordination of this Lease
to any such mortgage or deed of trust. The Lessor may assign this Lease to any
such mortgagee or trust deed holder in connection with any mortgage or deed of
trust, and the Lessee shall execute any instrument which may be necessary or
desirable by the Lessor or the mortgagee or trust deed holder in connection with
said assignment.
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16. SECURITY DEPOSIT. In the event of the insolvency of Lessee, or in the
event of the entry of a judgment in bankruptcy in any court against Lessee which
is not discharged within thirty (30) days after entry, or in the event a
petition is filed by or against Lessee under any chapter of the bankruptcy laws
of the State of New Jersey or the United States of America, then in such event,
Lessor may require the Lessee to deposit security in the amount specified in
Subsection 8(E) to adequately assure Lessee's performance of all of its
obligations under this Lease including all payments subsequently accruing.
Failure of Lessee to deposit the Security Deposit required by this Section
within ten (10) days after Lessor's written demand shall constitute a material
breach of this Lease by Lessee.
In the event any security is required to be deposited pursuant to the terms
of this Lease and in the event Lessor uses any of said Security Deposit to cure
Lessee's default(s) or meet any of Lessee's obligations, Lessee covenants to
upon demand replace the amount so utilized. In the event of a bona fide sale,
subject to this Lease, Lessor shall have the right to transfer the Security
Deposit to the vendee for the benefit of Lessee, and Lessor shall be considered
released by Lessee from all liability for the return of such Security Deposit;
and Lessee agrees to look solely to the new lessor for the return of the said
Security Deposit, and it is agreed that this shall apply to every transfer or
assignment made of the Security Deposit to a new lessor. The security deposited
as provided for herein shall not be mortgaged, assigned or encumbered by Lessee
without the written consent of Lessor.
17. RIGHT TO CURE LESSEE'S BREACH. If Lessee breaches any covenant or
condition of this Lease, Lessor may, on reasonable notice to Lessee and after
giving Lessee an opportunity to cure same (except that no notice need be given
in case of emergency), cure such breach at the expense of Lessee and the
reasonable amount of all expenses, including reasonable attorneys' fees,
incurred by Lessor in so doing (whether paid by Lessor to outside counsel or
attributable to in-house counsel at prevailing market rates) shall be deemed
Additional Rent payable on demand.
18. LIENS. Lessee shall not do any act, or make any contract, which may
create or be the foundation for any lien or other encumbrance upon any interest
of Lessor or any ground or underlying lessor in any portion of the Premises. If,
because of any act or omission (or alleged act or omission) of Lessee, any
Construction Lien Claim or other lien (collectively "Lien"), charge, or order
for the payment of money or other encumbrance shall be filed against Lessor
and/or any ground or underlying lessor and/or any portion of the Premises
(whether or not such Lien, charge, order, or encumbrance is valid or enforceable
as such), Lessee shall, at its own cost and expense, cause same to be discharged
of record or bonded within fifteen (15) days after
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the filing thereof; and Lessee shall indemnify and save harmless Lessor and all
ground and underlying lessor(s) against and from all reasonable costs,
liabilities, suits, penalties, claims, and demands, including reasonable counsel
fees, resulting therefrom. If Lessee fails to comply with the foregoing
provisions, Lessor shall have the option of discharging or bonding any such
Lien, charge, order, or encumbrance, and Lessee agrees to reimburse Lessor for
all costs, expenses and other sums of money in connection therewith (as
additional rental) with interest at the so-called annual prime rate of interest
established and quoted by The Chase Manhattan Bank or a successor thereto, from
time to time, as its interest rate charged for unsecured loans to its most
creditworthy corporate customers plus two (2%) percent but in no event greater
than the highest lawful rate from time to time in effect. All materialmen,
contractors, artisans, mechanics, laborers, and any other persons now or
hereafter contracting with Lessee or any contractor or subcontractor of Lessee
for the furnishing of any labor services, materials, supplies, or equipment with
respect to any portion of the Premises, at any time from the date hereof until
the end of the Lease Term, are hereby charged with notice that they look
exclusively to Lessee to obtain payment for same.
19. RIGHT TO INSPECT AND REPAIR. Lessor may enter the Premises but shall
not be obligated to do so (except as required by any specific provision of this
Lease) at any reasonable time on reasonable notice to Lessee (except that no
notice need be given in case of emergency) for the purpose of inspection or the
making of such repairs, replacement or additions, in, to, on and about the
Premises or the Building, as reasonably deemed necessary by Lessor. Lessor
agrees to use its diligent efforts to minimize any disruption to Lessee's
business operations in the Premises; however, in no event shall Lessor be
required to perform such repairs, replacements or additions outside of normal
Building Hours or to incur overtime charges in connection therewith. During the
last three (3) months of the Term, Lessor may immediately enter, alter, renovate
or redecorate the Premises if Lessee shall have removed all of Lessee's property
from the Premises. Such actions by Lessor shall have the same effect upon
Lessee's obligations under this Lease as if the date of Lessor's entry was the
scheduled Termination Date of this Lease with the exception however that Lessee
shall nevertheless continue to be obligated to pay all Term Basic Rent and
Additional Rent required to be paid under this Lease through the originally
scheduled Termination Date. In no event shall Lessee have any claim against
Lessor for interruption to Lessee's business, however occurring, including but
not limited to that arising from the negligence of Lessor, its agents, servants
or invitees, or from defects, errors or omissions in the construction or design
of the Demised Premises and/or the Building and/or Complex, including the
structural and non-structural portions thereof.
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20. SERVICES TO BE PROVIDED BY LESSOR. Subject to intervening laws,
ordinances, regulations and executive orders, while Lessee is not in default
under any of the provisions of this Lease beyond any applicable notice and grace
periods, Lessor agrees to furnish, except on holidays as set forth on Exhibit E
attached hereto and made a part hereof (other than as provided in Subsections
20(B), 20(C) and 20(D)):
(A) The cleaning services, as set forth on Exhibit D attached hereto
and made a part hereof, and subject to the conditions therein stated.
Except as set forth on Exhibit D, Lessee shall pay the cost of all other
cleaning services required by Lessee.
(B) Heating, ventilating and air conditioning (herein "HVAC"), as
appropriate for the season and as set forth on Exhibit C attached hereto
and made a part hereof, together with Complex and Building Common
Facilities lighting and electric energy all during Building Hours, as
hereinafter defined. Lessor shall provide Lessee with the services
described in this Subsection 20(B) beyond Building Hours as provided for in
Section 53 upon request by Lessee.
(C) Cold and hot water for drinking and lavatory purposes, twenty-four
(24) hours per day, seven (7) days per week, subject to Force Majeure.
(D) Elevator service during Building Hours (if the Building contains
an elevator or elevators for the use of the occupants thereof). There shall
be one (1) elevator available for Lessee's use twenty-four (24) hours per
day, seven (7) days per week, subject to applicable governmental laws and
Force Majeure.
(E) Restroom supplies and exterior window cleaning when reasonably
required.
21. INTERRUPTION OF SERVICES OR USE. Interruption or curtailment of any
service maintained in the Building, Complex, or at the Office Building Area if
caused by Force Majeure, as hereinafter defined, shall not entitle Lessee to any
claim against Lessor or to any abatement in Term Basic Rent or Additional Rent,
and shall not constitute a constructive or partial eviction, unless Lessor fails
to take measures as may be reasonable under the circumstances to restore the
service. If Lessor fails to take such measures as may be reasonable under the
circumstances to restore the curtailed service, Lessee's remedies shall be
limited to an equitable abatement of Term Basic Rent and Additional Rent for the
duration of the curtailment beyond said reasonable period to the extent such
Premises are not reasonably usable by Lessee or to a claim of constructive
eviction. If the
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Premises are rendered untenantable in whole or in part, for a period of ten (10)
consecutive business days, by the making of repairs, replacements or additions,
other than those made with Lessee's consent or caused by misuse or neglect by
Lessee, or Lessee's agents, servants, visitors or licensees, there shall be a
proportionate abatement of rent from and after said tenth (10th) consecutive
business day and continuing for the period of such untenantability. In no event
shall Lessee be entitled to claim a constructive eviction from the Premises
unless Lessee shall first have notified Lessor in writing of the condition or
conditions giving rise thereto, and, if the complaints be justified, unless
Lessor shall have failed, within a reasonable time after receipt of such notice,
to remedy, or commence and proceed with due diligence to remedy, such condition
or conditions, all subject to Force Majeure, as hereinafter defined. The
remedies provided for in this Section 21 shall be Lessee's sole remedies for any
interruption of service or use as described above.
22. BUILDING STANDARD OFFICE ELECTRICAL SERVICE.
(A) For so long as Lessee is not in default beyond any applicable notice
and grace periods with respect to this Lease, Lessor agrees to redistribute
Building Standard Office Electrical Service (as hereinafter defined), to the
Premises, consistent with the requirements as set forth on Exhibit C, upon the
following terms and conditions:
(1) Lessor shall, at its sole cost and expense, install a meter to
measure Building Standard Office Electrical Service, in which event from
and after the installation of said meter (hereinafter "Standard Electric
Meter") the following shall apply with respect to Lessee's charges for
Building Standard Office Electrical Service.
(2) Lessee shall, within ten (10) days of receipt of Lessor's bill,
pay the cost of the gross electrical energy consumed in providing Building
Standard Office Electrical Service to the entire Demised Premises as
measured by Standard Electric Meter measuring said service. Charges for
electricity shall be determined by multiplying the usage by the rate
(including surcharges and/or adjustments) for the comparable usage charged
by the public utility furnishing electrical energy to the Building.
(3) Lessor shall not be liable in any way to Lessee for any loss,
damage or expense which Lessee may sustain or incur as a result of any
failure, defect or change in the quantity or character of electrical energy
available for redistribution to the Premises
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pursuant to this Section nor for any interruption in the supply, and Lessee
agrees that such supply may be interrupted for inspection, repairs,
replacement and in emergencies. Lessor agrees to use its diligent efforts
to minimize any disruption to Lessee's business operations in connection
such with such repairs, replacements and inspections to the electricity
supply and to provide reasonable advance prior telephonic notice (except in
the case of emergencies); however, in no event shall Lessor be required to
perform such repair or replacement or inspections outside of normal
Building Hours or to incur overtime charges in connection therewith.
(B) In the event the public utility company that furnishes electric energy
to Lessor for redistribution to Lessee, declines to continue furnishing electric
energy for that purpose, Lessor reserves the right to discontinue distributing
Building Standard Office Electric Service to Lessee at any time upon reasonable
notice to Lessee. If Lessor exercises such right to termination, this Lease
shall continue in full force and effect and shall be unaffected thereby, except
only that, from and after the effective date of such termination, Lessee shall
not be obligated to pay Lessor for said Building Standard Office Electrical
Service. If Lessor so discontinues distributing the aforesaid electrical
service, Lessee shall arrange to obtain electric energy directly from the public
utility furnishing electric energy to the Building. Lessee may obtain such
electric energy by means of the then-existing Building system feeders, risers
and wiring to the extent the same are available, suitable and safe for such
purposes. All meters and additional panel boards, feeders, risers, wiring and
other conductors and equipment which may be required to obtain electric energy
from the public utility company shall be installed and maintained by Lessee at
its sole expense. If Lessee is unable to obtain such electric service after
diligent efforts, Lessee may cancel this Lease.
(C) For purposes of this Section 22, Building Standard Office Electrical
Service shall mean the electrical energy required to provide the lighting and
operate general office equipment such as typewriters, computers, calculators,
copiers, and other office equipment consistent with the existing capacity
provided at the Premises, which energy shall be provided twenty-four (24) hours
per day, seven (7) days per week.
(D) Subject to the requirements set forth in Subsection 27(C) Lessee shall
have the right, at its sole cost and expense, to upgrade the electrical energy
capacity of the Building, in which event Lessee shall have the right to be
entitled to any increased capacity so obtained.
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23. ADDITIONAL RENT. It is expressly agreed that Lessee will pay in
addition to the Term Basic Rent, provided in Section 3 above, an Additional Rent
to cover Lessee's Percentage, as defined in the Preamble, of the increased cost
to Lessor, for each of the categories enumerated herein, over the Base Period
Costs, as defined in the Preamble, for each of said categories.
(A) Operating Cost Escalation. If during the Lease Term the Operating
Costs incurred for the Building in which the Demised Premises are located
and Office Building Area and the allocable Complex Operating Costs as
defined in Subsection 23(D) hereof, for any Lease Year or proportionate
part thereof if the Lease Term expires prior to the expiration of a Lease
Year (herein the "Comparison Period") shall be greater than the Base
Operating Costs (adjusted proportionately if the Comparison Period is less
than a Lease Year), then Lessee shall pay to Lessor, as Additional Rent,
Lessee's Percentage as defined in the Preamble of all such excess Operating
Costs. Operating Costs shall include, by way of illustration and not of
limitation: personal property taxes levied on equipment used in the
operation and maintenance of the Building; management fees; labor,
including all wages and salaries above the level of Building manager;
social security taxes, and other taxes which may be levied against Lessor
upon such wages and salaries; supplies; repairs and maintenance;
maintenance and service contracts; painting; wall and window washing;
laundry and towel service consistent with the character of the Building;
tools and equipment (which are not required to be capitalized for federal
income tax purposes); fire and other insurance; the cost of any loss which
is the responsibility of Lessor because of the existence of commercially
reasonable deductibles; trash removal; lawn care; snow removal and all
other items properly constituting direct operating costs according to
standard accounting practices (hereinafter collectively referred to as the
"Operating Costs"), but shall not include: depreciation of Building or
equipment; interest; income or excess profits taxes; costs of maintaining
Lessor's corporate existence; franchise taxes; any expenditures required to
be capitalized for federal income tax purposes, unless said expenditures
are for the purpose of reducing Operating Costs within the Building,
Complex and/or Office Building Area or are required under any governmental
law, ordinance or regulation, in which event the costs thereof shall be
included to the extent of such savings; and any tenant work performed or
alteration of space leased to other tenants or occupants of the Building,
whether such work or alteration is performed for the initial occupancy by
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such tenant or occupant or thereafter, except to the extent required to
maintain and repair Common Facilities, costs of electricity for all leased
or leasable space in the Building, the Utility and Energy Costs provided
for in Subsection 23(B) and Real Estate Taxes provided for in Subsection
23(C). The Base Period Costs for Operating Costs shall be as defined in the
Preamble.
(B) Fuel, Utilities and Electric Cost Escalation (hereinafter "Utility
and Energy Costs"). If during the Lease Term the Utility and Energy Costs,
including any fuel surcharges or adjustments with respect thereto but
excluding costs of electricity for leased or leasable areas, incurred for
water, sewer, gas, electric, other utilities and heating, ventilating and
air conditioning for the Building as a whole to include all leased and
leasable areas and all Common Facilities electric, lighting, water, sewer
and other utilities for the Building and the allocable share of the Complex
Utility and Energy Costs as defined in Subsection 23(D) hereof, for any
Comparison Period shall be greater than the Base Utility and Energy Costs
(adjusted proportionately if the Comparison Period is less than a Lease
Year), then Lessee shall pay to Lessor as Additional Rent, Lessee's
Percentage, as defined in the Preamble, of all such excess Utility and
Energy Costs. To reflect the exclusion of costs of electricity for leased
or leasable space in the Building, the portion of Lessor's total costs for
Building electricity allocable to Common Facilities shall be determined, to
the extent not separately metered, by survey or other reasonable method
selected by Lessor, and only such portion of total Building electricity
costs inclusive of the reasonable cost to establish said sum paid for the
survey or other reasonable method shall be included in Utility and Energy
Costs for the Base Period and each subsequent Comparison Period. As used in
this Subsection 23(B), the Base Period Costs for Utility and Energy Costs
shall be as defined in the Preamble.
(C) Tax Escalation. If during the Lease Term the Real Estate Taxes for
the Complex at which the Demised Premises are located for any Comparison
Period shall be greater than the Base Real Estate Taxes (adjusted
proportionately if the Comparison Period is less than a Lease Year), then
Lessee shall pay to Lessor as Additional Rent, Lessee's Percentage, as
defined in the Preamble, of all such excess Real Estate Taxes.
As used in this Subsection 23(C), the words and terms which follow
mean and include the following:
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(1) The Base Period Costs for "Real Estate Taxes" shall be as
defined in the Preamble.
(2) "Real Estate Taxes" shall mean the property taxes and
assessments imposed upon the Building, Complex (including all
buildings located thereon including the Building) and Office Building
Area, or upon the term Basic Rent and Additional Rent, as such,
payable by Lessor, including, but not limited to, real estate, city,
county, village, school and transit taxes, or taxes, assessments or
charges levied, imposed, or assessed against the Building, Complex and
Office Building Area by any other taxing authority, whether general or
specific, ordinary or extraordinary, foreseen or unforeseen. If due to
a future change in the method of taxation, any franchise, income or
profit tax shall be levied against Lessor in substitution for, or in
lieu of, or in addition to, any tax which would otherwise constitute a
Real Estate Tax, such franchise, income or profit tax shall be deemed
to be a Real Estate Tax for the purposes hereof; conversely, any
additional real estate tax hereafter imposed in substitution for, or
in lieu of, any franchise, income or profit tax (which is not in
substitution for, or in lieu of, or in addition to, a Real Estate Tax
as hereinbefore provided) shall not be deemed a Real Estate Tax for
the purposes hereof. Notwithstanding anything contained herein to the
contrary, Lessee shall assume and pay to Lessor in full at the time of
paying the Term Basic Rent any excise, sales, use, gross receipts or
other taxes (other than a net income or excess profits tax) which may
be imposed on or measured by such Term Basic Rent or Additional Rent
or may be imposed on or on account of the letting or which Lessor may
be required to pay or collect under any law now in effect or hereafter
enacted.
(D) In calculating the Operating Costs and Utility and Energy Costs
for the Building, the total cost incurred for the Complex Operating Costs
and Complex Utility and Energy Costs shall be divided by two (2) and deemed
allocable one-half (1/2) to Building A and one-half (1/2) to Building B.
For the purposes of this Subsection 23(D), Complex Operating
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Costs shall include by way of illustration and not of limitation: repairs
and maintenance of (i) the parking areas and access roadways and driveways,
and (ii) exterior parking lot lighting [excluding the installation of new
fixtures, as distinguished from the replacement of existing fixtures the
cost of which shall be includable]; landscaping and lawn care; snow
removal; trash removal; liability and extended coverage insurance; and
maintenance personnel serving both Building A and Building B. Complex
Utility and Energy Costs shall include by way of illustration and not of
limitation: parking area lighting.
(E) Lease Year. As used in this Lease, Lease Year shall mean the
twelve (12) month period commencing on the Commencement Date and each
twelve (12) month period thereafter. Once the base costs are established,
in the event any lease period is less than twelve (12) months, then the
Base Period Costs for the categories listed above shall be adjusted to
equal the proportion that said period bears to twelve (12) months, and
Lessee shall pay to Lessor as Additional Rent for such period, an amount
equal to Lessee's Percentage, as defined in the Preamble, of the excess for
said period over the adjusted base with respect to each of the aforesaid
categories. Notwithstanding anything contained herein to the contrary, once
the base costs are established, Lessor reserves the right to calendarize
billing and payment in order to establish operating consistency.
(F) Payment. Lessee shall commence the payment of Additional Rent for
each of the categories referred to above on January 1, 1999 based upon
Lessor's estimate of the Base Operating Costs, Base Real Estate Taxes, and
Base Utility and Energy Costs (all as defined in the Preamble), all subject
to adjustment upon final establishment of the Base Period Costs once the
actual Base Operating Costs, Base Real Estate Taxes, and Base Utility and
Energy Costs are finally established after the expiration of calendar year
1999. Thereafter, and at any time, and from time to time, after the
establishment of the Base Period Costs for each of the categories referred
to above, Lessor shall advise Lessee in writing of Lessee's Percentage with
respect to each of the categories as reasonably estimated for the current
Lease Year [and for each succeeding Lease Year or proportionate part
thereof if the last period prior to the Lease's termination is less than
twelve (12) months] as then known to Lessor, and thereafter, Lessee shall
pay as Additional Rent, Lessee's Percentage of the excess of these costs
over
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the Base Period Costs for the then current period affected by such advice
(as the same may be periodically revised by Lessor as additional costs are
incurred) in equal Monthly Installments on the first day of each month,
such new rates being applied to any months for which the installment of
Monthly Basic Rent shall have already been paid which are affected by the
Operating Cost Escalation and/or Utility and Energy Cost Escalation and/or
Tax Escalation Costs above referred to, as well as the unexpired months of
the current period, the adjustment for the then expired months to be made
at the payment of the next succeeding installment of Monthly Basic Rent,
all subject to final adjustment at the expiration of each Lease Year as
defined in Subsection 23(E) hereof [or proportionate part thereof, if the
last period prior to the Lease's termination is less than twelve (12)
months].
In the event the last period prior to the Lease's termination is less
than twelve (12) months, the Base Period Costs during said period shall be
proportionately reduced to correspond to the duration of said final period.
(G) Books and Records. For the protection of Lessee, Lessor shall
maintain books of account which shall be open to Lessee and its
representatives so that Lessee, at its sole cost and expense, can audit
said books of account to determine that such Operating, Utility and Energy,
and Tax Costs have, in fact, been paid or incurred, such audit to be
subject to the following conditions:
(i) Lessee's Percentage of Operating, Utility and Energy, and Tax
Costs has increased by more than three (3%) percent in any Lease Year;
(ii) The fiscal year Lessee intends to audit must be within the
Term of Lessee's Lease;
(iii) Such audit shall be conducted only during regular business
hours at the office where Lessor maintains said books of account;
(iv) Lessee shall provide Lessor with fourteen (14) days' prior
notice;
(v) Lessee is not default of any of the terms and provisions of
the Lease from the time Lessee provides Lessor with notice through the time
such audit is conducted; and
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(vi) Lessee shall deliver to Lessor a copy of the results of such
audit within fifteen (15) days of its receipt by Lessee.
If, as a result of the audit, any disagreement with respect to any one
or more of said charges exists and is not satisfactorily settled between
Lessor and Lessee, said disagreement may be referred by either party to an
independent certified public accountant to be mutually agreed upon, and if
such an accountant cannot be agreed upon, the American Arbitration
Association may be asked by either party to select an arbitrator, whose
decision on the dispute will be final and binding upon both parties, who
shall jointly share any cost of such arbitration. Pending resolution of
said dispute, Lessee shall pay to Lessor the sum so billed by Lessor
subject to its ultimate resolution as aforesaid. If it shall be finally
determined as a result of an audit that Lessee was overcharged by more than
five (5%) percent for any of its obligations with respect to Operating
Costs, Utility and Energy Costs or Tax Costs, then Lessor shall reimburse
Lessee for the reasonable costs and expenses incurred by Lessee in
connection with such audit. Notwithstanding anything herein to the
contrary, once Lessor shall have finally determined said Operating, Utility
and Energy or Tax Costs at the expiration of a Lease Year, then as to the
item so established, Lessee shall only be entitled to audit and dispute
said charge as finally established for a period of twelve (12) months after
such charge is finally established, and Lessee specifically waives any
right to dispute or audit any such charge at the expiration of said twelve
(12) month period. Furthermore, no subtenant shall have any right to
conduct an audit.
(H) Occupancy Adjustment. If, during any Lease Year including the
initial Lease Year or proportionate part thereof the Building is less than
one hundred (100%) percent occupied then the actual costs incurred for
Operating Cost and Utility and Energy Cost shall be increased during any
such period to reflect one hundred (100%) percent occupancy so that at all
times the Utility and Energy Cost or Operating Cost shall be actual costs,
but in the event less than one hundred (100%) percent of the Building is
occupied during all or part of the Lease Year involved, the Utility and
Energy Cost and operating Cost shall not be less than that which would have
been incurred had one hundred (100%) percent of the Building been occupied.
The aforesaid adjustment shall only be made with respect to those items
that are in fact affected by variations in
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occupancy levels. To the extent any Operating Cost or Utility and Energy
Cost is separately billed or metered or paid for directly by any Building
tenant, to include but not be limited to Lessee, or for which Lessor
receives reimbursements, said space shall be considered vacant space for
purposes of the aforesaid adjustment.
24. LESSEE'S ESTOPPEL. Lessee shall, from time to time, within seven (7)
business days of Lessor's written request, execute, acknowledge and deliver to
Lessor a written statement certifying that the Lease is unmodified and in full
force and effect, or that the Lease is in full force and effect as modified and
listing the instruments of modification; the dates to which the Monthly Basic
Rent and Additional Rent and charges have been paid; and, to the best of
Lessee's knowledge, whether or not Lessor is in default hereunder, and if so,
specifying the nature of the default and any such other reasonable information
as Lessor may request. It is intended that any such statement delivered pursuant
to this Section may be relied on by a prospective purchaser of Lessor's interest
or mortgagee of Lessor's interest or assignee of any mortgage of Lessor's
interest.
25. HOLDOVER TENANCY. If Lessee holds possession of the Premises after the
Term of this Lease, Lessee, at Lessor's option, shall become a tenant from month
to month under the provisions herein provided, but at a Monthly Basic Rent of
one hundred fifty (150%) percent of the Monthly Basic Rent for the last month of
the Term (as the same may have been extended pursuant to any option) and without
the requirement for demand or notice by Lessor to Lessee demanding delivery of
possession of said Premises (but Additional Rent shall continue as provided in
this Lease), which sum shall be payable in advance on the first day of each
month, and such tenancy shall continue until terminated by Lessor by notice to
Lessee given at least thirty (30) days prior to the intended date of
termination, or until Lessee shall have given to Lessor, at least sixty (60)
days prior to the intended date of termination, a written notice of intent to
terminate such tenancy, which termination date must be as of the end of a
calendar month. The time limitations described in this Section 25 shall not be
subject to extension for Force Majeure.
26. RIGHT TO SHOW PREMISES. Lessor may show the Premises to prospective
purchasers and mortgagees; and, during the nine (9) months prior to termination
of this Lease, to prospective tenants, during Building Hours on reasonable
notice to Lessee. Lessor agrees to use its diligent efforts to minimize any
disruption to Lessee's business operations in connection with such showing of
the Premises; however, in no event shall Lessor be required to perform same
outside of normal Building Hours.
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27. LESSEE IMPROVEMENT WORK. (A) Lessor agrees that it will perform certain
tenant improvement work in the Demised Premises (the "Lessee Improvements") in
accordance with construction drawings to be prepared by Lessee and delivered to
Lessor no later than July 1, 1998 (hereinafter the "Construction Plans"). The
Construction Plans shall be sufficient in form and content to enable Lessor to
obtain a building permit to perform the Lessee Improvements. Upon receipt of the
Construction Plans Lessor agrees to apply for a building permit for the
performance of the Lessee Improvements. Upon receipt of the building permit
Lessor shall promptly commence and diligently pursue to completion the Lessee
Improvements in an effort to have the aforesaid substantially completed on or
before the ninetieth (90th) day after complete execution of this Lease by Lessor
and Lessee. Provided Lessor complies with the foregoing, Lessee's obligation to
commence paying Term Basic Rent shall commence on the one hundred twentieth
(120th) day after complete execution of this Lease by Lessor and Lessee
notwithstanding the fact that substantial completion of the Lessee Improvements
and issuance of a Certificate of Occupancy (temporary or permanent) therefor may
not have occurred, and Lessor shall thereafter continue to diligently complete
the Lessee Improvements in the Demised Premises and obtain a Certificate of
Occupancy (temporary or permanent) therefor as soon thereafter as is reasonably
possible.
Lessor hereby agrees to provide Lessee with a cash allowance in the amount
of Five Hundred Twenty-seven Thousand Six Hundred and 00/100 ($527,600.00)
Dollars, calculated at the rate of Twenty and 00/100 ($20.00) Dollars per gross
rentable square foot (hereinafter referred to as the "Work Allowance"), which
Work Allowance shall be applied towards the cost of the work to be performed to
the Premises pursuant to the provisions of this Section 27 and, at Lessee's
option, to the cost of the preparation of the drawings and specifications in
connection therewith.
(B) Lessor shall obtain bids from at least three (3) subcontractors
and Lessee shall have the right to specify the inclusion of particular
contractor(s). Unless otherwise directed by Lessee, Lessor shall select the
lowest competent bidder. Lessor agrees to periodically advise Lessee of the
costs and expenses it has incurred in connection with the performance of the
Lessee Improvements. Any cost of the Lessee Improvements which shall be in
excess of the Work Allowance shall be paid by Lessee to Lessor promptly upon
receipt of invoices therefor. To the extent the cost of the Lessee Improvements
shall be less than the Work Allowance, Lessee may credit said overage against
Basic Rent thereafter becoming due and owing. The cost of the Lessee
Improvements shall be Lessor's actual costs (direct and indirect) of providing
labor and materials together with a construction manager's fee of four and
one-half (4 1/2%) percent of said costs.
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The following provisions shall apply to the performance of the Lessee
Improvements:
(i) Lessor agrees that it will do substantially all of the work to
complete the Demised Premises in accordance with the Construction Plans.
All of said Lessee Improvements, whether paid for in whole or in part by
Lessee, is and shall remain the property of Lessor.
(ii) Lessee, at Lessee's expense, will supply to Lessor the
Construction Plans on or before July 1, 1998. Any delay occasioned by
Lessee's failure to supply such Construction Plans on or before such date
or any delay resulting from additional requirements imposed on Lessor
resulting inter alia, from changes or modifications to the Construction
Plans or any delay resulting from Lessee's acts or omissions shall not
delay the Commencement Date of the Term, as hereinafter defined, and
Lessee's obligations hereunder and the Commencement Date shall be the date
the Premises would have been delivered to Lessee, but for the aforesaid.
(iii) Lease Commencement shall occur and the Commencement Date is
defined as that date which is the sooner to occur of (i) the date when
Lessor has done substantially all of the Lessee Improvements to be
performed by Lessor unless the provisions of Subsection 27(B)(ii) are
applicable, or the date which is one hundred twenty (120) days after
execution of this Lease by Lessor and Lessee. Occupancy by Lessee or the
delivery of a Certificate of Occupancy (temporary without any conditions
which could result in revocation or permanent) by Lessor (if required
pursuant to local law), together with a certification from Lessor's
construction manager, or architect, or general contractor and Lessor that
all of the Lessee Improvements have been completed, shall be prima facie
evidence that Lessor has done substantially all of the Lessee Improvements,
subject only to normal punchlist items which shall be completed with
reasonable dispatch.
(iv) Lessor shall be responsible for causing all of the Lessee
Improvements to be performed in compliance with all applicable codes, rules
and regulations. Lessor also agrees to cause so-called "builder's risk"
insurance to be maintained on the Lessee Improvements during the course of
construction, the cost of which shall be paid from the Work Allowance.
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(C) Any work performed by the Lessee to the Switch Area, as
hereinafter defined shall be performed in compliance with all applicable codes,
rules and regulations and with the quality of workmanship and materials
consistent with the character and integrity of the Building and in conformance
with Lessor's rules and regulations with respect to the performance of work
within the Building. Prior to the performance of the Lessee Improvements, Lessor
hereby reserves the right to review and reasonably approve, promptly (but in no
event less than five (5) days following receipt of Lessee's request), all of
Lessee's contractors, plans and specifications, which shall be completed and
submitted to Lessor at least thirty (30) days prior to the anticipated
commencement of any work. Lessee shall, prior to commencement of the Lessee
Improvements, at its sole cost and expense, obtain all permits, approvals and
certificates required by any governmental or quasi-governmental bodies and (upon
completion) certificates of final approval thereof and shall deliver promptly
duplicates of all such permits, approvals and certificates to Lessor. Lessee
agrees to carry and will cause Lessee's contractors and subcontractors to carry
such workmen's compensation, general liability, personal and property damage
insurance as Lessor may reasonably require. The risk of loss for the Lessee
Improvements shall be borne by Lessee. If any mechanic's lien is filed against
the Premises or the Building of which the same form a part, for work claimed to
have been done for, or materials furnished to, Lessee, the same shall be
discharged by Lessee within thirty (30) days thereafter, at Lessee's expense, by
filing a bond and, in addition, Lessee shall take all necessary steps required
by law to permanently discharge said lien.
28. WAIVER OF TRIAL BY JURY. To the extent such waiver is permitted by law,
the parties waive trial by jury in any action or proceeding brought in
connection with this Lease or the Premises.
29. LATE CHARGE. Anything in this Lease to the contrary notwithstanding, at
Lessor's option, Lessee shall pay a "Late Charge" of eight (8%) percent of any
installment of Monthly Basic Rent or Additional Rent paid more than five (5)
days after the due date thereof, to cover the extra expense involved in handling
delinquent payments, said "Late Charge" to be considered Additional Rent. The
amount of the Late Charge to be paid by Lessee shall be reassessed and added to
Lessee's obligations for each successive monthly period until paid. Lessee shall
not be charged a Late Charge the first time Lessee is late during each Lease
Year of the Term until Lessee, as to such time each Lease Year, is given five
(5) days' notice and an opportunity to cure said nonpayment within said notice
period and fails to cure said nonpayment within said time.
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30. INSURANCE.
(A) Lessee's Insurance.
(1) Lessee covenants and represents, said representation being
specifically designed to induce Lessor to execute this Lease, that during the
entire Term hereof, at its sole cost and expense, Lessee shall obtain, maintain
and keep in full force and effect the following insurance:
(a) "All Risk" property insurance against fire, theft, vandalism,
malicious mischief, sprinkler, leakage and such additional perils as
are now, or hereafter may be, included in a standard extended coverage
endorsement from time to time in general use in the State of New
Jersey upon property of every description and kind owned by Lessee and
or under Lessee's care, custody or control located in the Building or
within the Office Building Area or Complex or for which Lessee is
legally liable or installed by or on behalf of Lessee, including by
way of example and not by way of limitation, furniture, fixtures,
fittings, installations and any other personal property (but excluding
the work done by Lessor in connection with Exhibit C which is owned by
Lessor) in an amount equal to the full replacement cost thereof.
(b) Commercial General Liability Insurance coverage to include
personal injury, bodily injury, broad form property damage, operations
hazard, owner's protective coverage, blanket contractual liability,
products and completed operations liability naming Lessor and Lessor's
mortgagee or trust deed holder and ground lessor (if any) as
additional named insureds in an amount per occurrence of not less than
Three Million and 00/100 ($3,000,000.00) Dollars combined single limit
bodily injury and property damage.
(c) Business interruption insurance in such amounts as will
reimburse Lessee for direct or indirect loss of earnings attributable
to all perils commonly insured against by prudent tenants or assumed
by Lessee pursuant to this Lease or
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attributable to prevention or denial of access to the Premises,
Building, Office Building Area or Complex as a result of such
perils.
(d) Workers' Compensation insurance in form and amount as
required by law.
(e) Any other form or forms of insurance or any increase in the
limits of any of the aforesaid enumerated coverages or other forms of
insurance as Lessor or the mortgagees or ground lessors (if any) of
Lessor may reasonably require from time to time if in the reasonable
opinion of Lessor or said mortgagees or ground lessors said coverage
and/or limits become inadequate or less than that commonly maintained
by prudent tenants in similar buildings in the area by tenants making
similar uses.
(2) All insurance policies required pursuant to this Subsection 30(A)
shall be taken out with insurers rated A XIII by A.M. Best Company,
Oldwick, New Jersey who are licensed to do business in the State of New
Jersey and shall be in form satisfactory from time to time to Lessor. A
policy or certificate evidencing such insurance together with a paid bill
shall be delivered to Lessor not less than fifteen (15) days prior to the
commencement of the Term hereof. Such insurance policy or certificate will
unequivocally provide an undertaking by the insurers to notify Lessor and
the mortgagees or ground lessors (if any), provided Lessor delivers prior
written notice of such mortgagees and ground lessors to Lessee, of Lessor
in writing not less than thirty (30) days prior to any material change,
reduction in coverage, cancellation, or other termination thereof. Should a
certificate of insurance initially be provided, a policy shall be furnished
by Lessee within thirty (30) days of the Term's commencement. The aforesaid
insurance shall be written with no deductible, except as specifically
provided for herein. However, Lessor hereby agrees the insurance required
to be maintained pursuant to Subsection 30(A)(1)(a) may be written with a
deductible not to exceed Two Thousand and 00/100 ($2,000.00) Dollars per
occurrence and the insurance required to be maintained under Subsection
30(A)(1)(b) may be written with a deductible not to exceed One Hundred
Thousand and 00/100 ($100,000.00) Dollars per occurrence, and Lessee shall
be deemed a self-insurer with respect to
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the amount of such deductibles provided said deductibles would not and do
not in fact impose liability on Lessor for any reason to include their
negligence, and provided further that Lessee indemnifies and holds Lessor
harmless with respect to any claims against Lessor or any Building or
Complex tenant as a result of said deductible to the extent the same would
not have existed if the policies required by Subsections 30(A)(1)(a) and
(b) were obtained without a deductible.
(3) In the event of damage to or destruction of the Building and/or
Premises entitling Lessor or Lessee to terminate this Lease pursuant to
Section 9 hereof, and if this Lease be so terminated, Lessee will
immediately pay to Lessor all of its insurance proceeds, if any, relating
to the leasehold improvements and alterations (but not Lessee's trade
fixtures, equipment, furniture or other personal property of Lessee in the
Premises) which have become Lessor's property on installation or would have
become Lessor's property at the Term's expiration or sooner termination. If
the termination of the Lease, at Lessor's election, is due to damage to the
Building, and if the Premises have not been so damaged, Lessee will deliver
to Lessor, in accordance with the provisions of this Lease, the
improvements and alterations to the Premises which have become on
installation or would have become at the Term's expiration, Lessor's
property.
(4) Lessee agrees that it will not keep or use or offer for sale (if
sales of goods is a permitted use pursuant to Section 4 hereof) in or upon
the Premises or within the Building, Office Building Area or Complex any
article which may be prohibited by any insurance policy in force from time
to time covering the Building, Office Building Area or Complex. In the
event Lessee's occupancy or conduct of business in or on the Premises or
Building or Office Building Area or Complex, whether or not Lessor has
consented to the same, results in any increase in premiums for insurance
carried from time to time by Lessor with respect to the Building or Office
Building Area or Complex, Lessee shall pay such increase in premiums as
Additional Rent within ten (10) days after being billed therefor by Lessor.
In determining whether increased premiums are a result of Lessee's use and
occupancy a schedule issued by the organization computing the insurance
rate on the Building or Office Building Area or Complex showing the
components of such rate shall be conclusive evidence of the items and
charges making up such rate.
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Lessor represents that use of the Demised Premises for general office
purposes will not result in an increase in the premiums for insurance
currently maintained by Lessor. Lessee shall promptly comply with all
reasonable requirements of the insurance authority or of any insurer now or
hereafter in effect relating to the Building, Office Building Area or
Premises or Complex.
(5) If any insurance policy carried by either party as required by
this Section 30 shall be cancelled or cancellation shall be threatened or
the coverage thereunder reduced or threatened to be reduced in any way by
reason of the use or occupation of the Premises, Office Building Area,
Building or Complex or any part thereof by Lessee or any assignee or
sublessee of Lessee or anyone permitted by Lessee to be upon the Premises,
and if Lessee fails to remedy the conditions giving rise to said
cancellation or threatened cancellation or reduction in coverage on or
before the earlier of (i) forty-eight (48) hours after notice thereof from
Lessor, or (ii) prior to said cancellation or reduction becoming effective,
Lessee shall be in default hereunder and Lessor shall have all of the
remedies available to Lessor pursuant to this Lease.
(B) Lessor's Insurance. Lessor covenants and agrees that throughout the
Term it will insure the Building (excluding any property with respect to which
Lessee is obligated to insure pursuant to Subsection 30(A)(1)(a) above) against
damage by fire and standard extended coverage perils and public liability
insurance in such reasonable amounts with such reasonable deductibles as
required by any mortgagee or ground lessor (if any), or if none, as would be
carried by a prudent owner of a similar building in the area. In addition,
Lessor shall maintain and keep in force and effect during the Term, rental
income insurance insuring Lessor against abatement or loss of Term Basic Rent,
including items of Additional Rent, in case of fire or other casualty similarly
insured against, in an amount at least equal to the Term Basic Rent and
Additional Rent during, at the minimum, one Calendar Year hereunder. Lessor may,
but shall not be obligated to, take out and carry any other forms of insurance
as it or the mortgagee or ground lessor (if any) of Lessor may require or
reasonably determine available. All insurance carried by Lessor on the Building,
Office Building Area or Complex shall be included as an Operating Cost pursuant
to Subsection 23(A). Notwithstanding its inclusion as an Operating Cost or any
contribution by Lessee to the cost of insurance premiums by Lessee as provided
herein, Lessee acknowledges that it has no right to receive any proceeds from
any such insurance policies carried by Lessor. Lessee further acknowledges that
the exculpatory provisions of this Lease as set forth in Section 37
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and the provisions of Subsection 30(A) as to Lessee's insurance are designed to
insure adequate coverage as to Lessee's property and business without regard to
fault and to avoid Lessor obtaining similar coverage for said loss for its
negligence or that of its agents, servants or employees which could result in
additional costs includable as part of Operating Costs which are payable by
Lessee. Lessor will not carry insurance of any kind on Lessee's furniture or
furnishings, or on any fixtures, equipment, appurtenances or improvements (other
than those enumerated in Exhibit C which belong to Lessor) of Lessee under this
Lease and Lessor shall not, except as to the aforesaid Exhibit C items owned by
Lessor, be obligated to repair any damage thereto or replace the same.
(C) Waiver of Subrogation. Any all risk policy or similar casualty
insurance, which either party obtains in connection with the Premises, Building,
Office Building Area or Complex shall include a clause or endorsement denying
the insurer any rights of subrogation against the other party (i.e. Lessor or
Lessee) for all perils covered by said policy. Should such waiver not be
available then the policy for which the waiver is not available must name the
other party as an additional named insured affording it the same coverage as
that provided the party obtaining said coverage.
31. NO OTHER REPRESENTATIONS. No representations or promises shall be
binding on the parties hereto except those representations and promises
contained herein or in some future writing signed by the party making such
representation(s) or promise(s).
32. QUIET ENJOYMENT. Lessor covenants that if, and so long as, Lessee pays
the Term Basic Rent, and any Additional Rent as herein provided, and performs
the covenants hereof, Lessor shall do nothing to affect Lessee's right to
peaceably and quietly have, hold and enjoy the Premises for the Term herein
mentioned, subject to the provisions of this Lease and to any mortgage or deed
of trust to which this Lease shall be subordinate as provided for in Section 15.
33. INDEMNITY. Lessee shall indemnify and save harmless Lessor and its
agents against and from (a) any and all claims (i) arising from (x) the conduct
or management by Lessee, its subtenants, licensees, its or their employees,
agents, contractors or invitees on the Demised Premises or of any business
therein, or (y) any work or thing whatsoever done, or any condition created
(other than by Lessor for Lessor's or Lessee's account) in or about the Demised
Premises during the Term of this Lease or during the period of time, if any,
prior to the Commencement Date that Lessee may have been given access to the
Demised Premises, or (ii) arising from any negligent or otherwise wrongful act
or omission of Lessee or any of its
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subtenants or licensees or its or their employees, agents, contractors or
invitees, and (b) all costs, expenses and liabilities incurred in or in
connection with each such claim or action or proceeding brought thereon. In case
any action or proceeding be brought against Lessor by reason of any such claim,
Lessee, upon notice from Lessor, shall resist and defend such action or
proceeding. The provisions of this Section 33 shall survive the expiration or
earlier termination of this Lease.
34. APPLICABILITY TO HEIRS AND ASSIGNS. The provisions of this Lease shall
apply to, bind and inure to the benefit of Lessor and Lessee and their
respective heirs, successors, legal representatives and assigns. It is
understood that the term "Lessor" as used in this Lease means only the owner, a
mortgagee in possession or a term lessee of the Building, so that in the event
of any sale of the Building or of any lease thereof or if a mortgagee shall take
possession of the Premises, Lessor named herein shall be and hereby is entirely
freed and relieved of all covenants and obligations of Lessor hereunder accruing
thereafter, and it shall be deemed without further agreement that the purchaser,
the term lessee of the Building, or the mortgagee in possession has assumed and
agreed to carry out any and all covenants and obligations of Lessor hereunder.
35. PARKING SPACES. Lessee's occupancy of the Demised Premises shall
include the use of those assigned and unassigned parking spaces as enumerated in
the Preamble. Lessee shall, upon request, promptly furnish to Lessor the license
numbers of the cars operated by Lessee and its subtenants, licensees, invitees,
concessionaires, officers and employees. If any vehicle of Lessee, or of any
subtenant, licensee, concessionaire, or of their respective officers, agents or
employees, is parked in any part of the Common Facilities other than the
employee parking area(s) designated therefor by Lessor, Lessee shall pay to
Lessor such reasonable penalty as may be fixed by Lessor from time to time. All
amounts due under the provisions of this Section shall be deemed to be
Additional Rent. Lessor reserves the right to reassign assigned parking to
comparable facilities in a comparable location to the Building in connection
with any modification to the Building or Office Building Area permitted pursuant
to this Lease. Nothing contained herein shall be deemed to impose any obligation
on Lessor to police the parking area.
36. LESSOR'S EXCULPATION. Lessor shall not be liable to Lessee for any loss
suffered by Lessee under any circumstances, including, but not limited to (i)
that arising from the negligence of Lessor, its agents, servants, invitees,
contractors or subcontractors, or from defects, errors or omissions in the
construction or design of the Premises and/or the Building and Office Building
Area including the structural and nonstructural portions thereof; or (ii) for
loss of or injury to Lessee or to Lessee's property or that for which Lessee is
legally liable from
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any cause whatsoever, including but not limited to theft or burglary; or (iii)
or that which results from or is incidental to the furnishing of or failure to
furnish or the interruption in connection with the furnishing of any service
which Lessor is obligated to furnish pursuant to this Lease; or (iv) for that
which results from any inspection, repair, alteration or addition or the failure
thereof undertaken or failed to be undertaken by Lessor; or (v) for any
interruption to Lessee's business, however occurring. The foregoing shall not
limit any other right Lessee may have against Lessor in the event Lessor
breaches any of its obligations under this Lease.
The aforesaid exculpatory Section is to induce the Lessor, in its judgment,
to avoid or minimize covering risks which are better quantified and covered by
Lessee either through insurance (or self-insurance or combination thereof if
specifically permitted pursuant to this Lease), thereby permitting potential
cost savings in connection with the Operating Costs borne by Lessee pursuant to
Section 23.
37. RULES OF CONSTRUCTION/APPLICABLE LAW. Any table of contents, captions,
headings and titles in this Lease are solely for convenience of reference and
shall not affect its interpretation. This Lease shall be construed without
regard to any presumption or other rule requiring construction against the party
causing this Lease to be drafted. If any words or phrases in this Lease shall
have been stricken out or otherwise eliminated, whether or not any other words
or phrases have been added, this Lease shall be construed as if the words or
phrases so stricken out or otherwise eliminated were never included in this
Lease and no implication or inference shall be drawn from the fact that said
words or phrases were so stricken out or otherwise eliminated. Each covenant,
agreement, obligation or other provision of this Lease on Lessee's part to be
performed, shall be deemed and construed as a separate and independent covenant
of Lessee, not dependent on any other provision of this Lease. All terms and
words used in this Lease, regardless of the number or gender in which they are
used, shall be deemed to include any other number and any other gender as the
context may require. This Lease shall be governed and construed in accordance
with the laws of the State of New Jersey (excluding New Jersey conflict of laws)
and by the State courts of New Jersey. If any of the provisions of this Lease,
or the application thereof to any person or circumstances, shall to any extent
be invalid or unenforceable, the remainder of this Lease, or the application of
such provision or provisions to persons or circumstances other than those as to
whom or which it is held invalid or unenforceable, shall not be affected
thereby, and every provision of this Lease shall be valid and enforceable to the
fullest extent permitted by law.
38. BROKERS. Lessee and Lessor represent and warrant one to the other that
the Brokers, as defined in the Preamble, are
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the sole brokers with whom either party has negotiated in bringing about this
Lease, and Lessee and Lessor agree to indemnify and hold each other and Lessor's
mortgagee(s) harmless from any and all claims of other brokers and expenses in
connection therewith arising out of or in connection with any conduct
inconsistent with the representations tendered by one to the other herein. In no
event shall Lessor's mortgagee(s) have any obligation to any broker involved in
this transaction. In the event that no broker was involved as aforesaid, then
Lessee and Lessor represent and warrant one to the other that no broker brought
about this transaction, and Lessee and Lessor agree to indemnify and hold each
other harmless from any and all claims of any broker arising out of or in
connection with any conduct inconsistent with the representations tendered by
one to the other herein. Lessor agrees to pay any commission to the Brokers in
connection with this Lease pursuant to a separate brokerage agreement.
39. PERSONAL LIABILITY. Notwithstanding anything to the contrary provided
in this Lease, it is specifically understood and agreed, such agreement being a
primary consideration for the execution of this Lease by Lessor, that there
shall be absolutely no personal liability on the part of Lessor, its constituent
members (to include but not be limited to officers, directors, partners and
trustees), their respective successors, assigns or any mortgagee in possession
(for the purposes of this Section, collectively referred to as "Lessor"), with
respect to any of the terms, covenants and conditions of this Lease, and that
Lessee shall look solely to the equity of Lessor in the Building for the
satisfaction of each and every remedy of Lessee in the event of any breach by
Lessor of any of the terms, covenants and conditions of this Lease to be
performed by Lessor, such exculpation of liability to be absolute and without
any exceptions whatsoever. A deficit capital account of any portion in Lessor
shall not be deemed an asset or property of Lessor. The foregoing limitation of
liability shall be noted in any judgment secured against Lessor and in the
judgment index.
40. NO OPTION. The submission of this Lease Agreement for examination does
not constitute a reservation of or option for the Premises, and this Lease
Agreement becomes effective as a Lease Agreement only upon execution and
delivery thereof by Lessor and Lessee.
41. DEFINITIONS. (A) Affiliate. Affiliate shall mean any corporation
related to Lessee as a parent, subsidiary or brother-sister corporation so that
such corporation and such party or such corporation and such party and other
corporations constitute a controlled group as determined under Section 1563 of
the Internal Revenue Code of 1986, as amended and as elaborated by the Treasury
Regulations promulgated thereunder or any
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business entity in which Lessee has more than a fifty (50%) percent interest.
(B) Building Hours. As used in this Lease, the Building Hours shall be
Monday through Friday, 8:00 a.m. to 6:00 p.m., and Saturdays from 8:00 a.m. to
1:00 p.m., excluding those holidays as set forth on Exhibit E attached hereto
and made a part hereof, except that Common Facilities lighting in the Building
and Office Building Area shall be maintained for such additional hours as, in
Lessor's sole but reasonable judgment, is necessary or desirable to insure
proper operation of the Building and Office Building Area. In no event is the
foregoing to be construed to require Common Facilities lighting to be supplied
on a twenty-four (24) hour per day, seven (7) day per week basis.
(C) Common Facilities. Common Facilities shall include, by way of
example and not by way of limitation, the non-assigned parking areas within the
Complex; lobby; elevator(s); fire stairs; public hallways; public lavatories;
all other general Building facilities that service all Building tenants; air
conditioning rooms; fan rooms; janitors' closets; electrical closets; telephone
closets; elevator shafts and machine rooms; flues; stacks; pipe shafts; and
vertical ducts with their enclosing walls. Lessee's use of those Common
Facilities not open to all tenants is subject to Lessor's consent which may be
denied for any reason. However, upon reasonable prior notice Lessor shall make
the telephone and electrical closets and air conditioning room accessible to
Lessee during Business Hours in order for Lessee to perform those installations
or repairs which are expressly permitted under this Lease.
Lessor may at any time close temporarily any of the Common Facilities to make
repairs or changes therein or to effect construction, repairs or changes within
the Building or Complex, or to discourage non-tenant parking or to prevent the
dedication of the same, and may do such other acts in and to the Common
Facilities as in its judgment may be desirable to improve the convenience
thereof provided it does not make the Premises unusable for the Permitted Use as
set forth in the Preamble but shall always in connection therewith endeavor to
minimize any inconvenience to Lessee.
(D) Force Majeure. Force Majeure shall mean and include those
situations beyond either party's control, including by way of example and not by
way of limitation, acts of God; accidents; repairs; strikes; shortages of labor,
supplies or materials; inclement weather; or, where applicable, the passage of
time while waiting for an adjustment of insurance proceeds so long as Lessor
employs commercially reasonable efforts to collect from the insurance company.
Any time limits required to be met by either party hereunder, whether
specifically made subject to Force Majeure or not, except those related to the
payment of Term
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Basic Rent or Additional Rent and except as to the time periods set forth in
Section 25, shall, unless specifically stated to the contrary elsewhere in this
Lease, be automatically extended by the number of days by which any performance
called for is delayed due to Force Majeure.
(E) Lessee's Percentage. The parties agree that Lessee's Percentage,
as defined in the Preamble, reflects and will be continually adjusted to reflect
the sum arrived at by dividing the gross rentable square feet (which includes an
allocable share of all Common Facilities) of the area rented to Lessee as set
forth in Section 1 [the numerator], plus any additional gross square footage
leased from time to time pursuant to this Lease, by the total number of gross
square feet of the entire Building [the denominator], measured outside wall to
outside wall but excluding therefrom any storage areas. Lessor shall have the
right to make changes or revisions in the Common Facilities of the Building so
as to provide additional leasing area. Lessor shall also have the right to
construct additional buildings in the Office Building Area for such purposes as
Lessor may deem appropriate and subdivide the lands for that purpose if
necessary, and upon so doing, the Office Building Area shall become the
subdivided lot on which the Building in which the Demised Premises is located.
If any service provided for in Subsection 23(A) or any utility provided for in
Subsection 23(B) is separately billed or separately metered within the Building,
then the square footage so billed or metered shall be deemed vacant and if
applicable subject to the Occupancy Adjustment set forth in Subsection 23(H).
Lessee understands that as a result of changes in the layout of the Common
Facilities from time to time occurring due to, by way of example and not by way
of limitation, the rearrangement of corridors, the aggregate of all Building
tenant proportionate shares may be equal to, less than or greater than one
hundred (100%) percent.
(F) Additional Rent. As used in this Lease, Additional Rent shall mean
all sums in addition to Term Basic Rent payable by Lessee to Lessor pursuant to
the provisions of this Lease.
42. LEASE COMMENCEMENT. Notwithstanding anything contained herein to the
contrary, in the event Lessor is performing the Lessee Improvements and if
Lessor, for any reason whatsoever, including Lessor's negligence, cannot deliver
possession of the Premises as provided for in Subsection 27(B)(i) to Lessee at
the commencement of the agreed Term as set forth in Section 2, this Lease shall
not be void or voidable, nor shall Lessor be liable to Lessee for any loss or
damage resulting therefrom, but in that event, the Lease Term shall be for the
full Term as specified above to commence from and after the date Lessor shall
have delivered possession of the Premises to Lessee or from the date Lessor
would have delivered possession of the Premises to Lessee
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but for Lessee's failure to timely supply to Lessor the Construction Plans
and/or such other information reasonably required by Lessor to complete the
Lessee Improvements or for any other reason attributable to Lessee (herein the
"Commencement Date") and to terminate 11:59 p.m. of the day immediately
preceding the Term anniversary of the Commencement Date, and if requested by
Lessor, Lessor and Lessee shall, by a writing signed by the parties, ratify and
confirm said commencement and termination dates. Nothing contained herein shall
be deemed to modify the commencement of the Lease Term as set forth in the
Preamble and Lessee's obligations hereunder if Lessor is unable to deliver the
Demised Premises on the Commencement Date by reason of Lessee's failure to
comply with the requirements of Subsection 27(B)(ii).
Notwithstanding anything contained herein to the contrary, if Lessor shall
not have delivered possession of the Demised Premises to Lessee on or before the
one hundred twentieth (120th) day after complete execution of this Lease by
Lessor and Lessee, and provided the reason therefor has not been as a result of
Lessee's acts or omissions, then, and in such event, Lessee may, applying the
balance of the Work Allowance, if any, upon thirty (30) days' notice to Lessor,
which notice may be given on or after said one hundred twentieth (120th) day
after complete execution of this Lease by Lessor and Lessee, undertake to
complete the performance of the Lessee Improvements, unless Lessor delivers
possession of the Demised Premises within the aforesaid thirty (30) days with
the Lessee Improvements substantially completed. However, the immediately
preceding sentence is expressly conditioned upon Lessee delivering its
Construction Plans to Lessor on or before July 1, 1998, failing which said one
hundred twenty (120) day period shall be extended by one (1) day for each day
following July 1, 1998 that Lessee fails to deliver the Construction Plans.
43. NOTICES. Any notice by either party to the other shall be in writing
and shall be deemed to have been duly given only if delivered personally or sent
by registered mail or certified mail in a postpaid envelope addressed, if to
Lessee, at the above described Building, with copy to Viatel, Inc., Attn:
General Counsel, 800 Third Avenue, New York, New York 10022; if to Lessor, at
Lessor's address as set forth above, with copy to Dollinger & Dollinger, P.A.,
Attn: Martin E. Dollinger, Esq., 365 West Passaic Street, Rochelle Park, New
Jersey 07662; or, to either at such other address as Lessee or Lessor,
respectively, may designate in writing. Notice shall be deemed to have been duly
given if delivered personally, on delivery thereof, and if mailed, upon the
tenth (10th) day after the mailing thereof.
44. ACCORD AND SATISFACTION. No payment by Lessee or receipt by Lessor of a
lesser amount than the Monthly Basic Rent and additional charges payable
hereunder shall be deemed to be other than a payment on account of the earliest
stipulated Monthly Basic Rent and Additional Rent, nor shall any endorsement
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<PAGE>
or statement on any check or any letter accompanying any check or payment for
Basic Rent or Additional Rent be deemed an accord and satisfaction, and Lessor
may accept such check or payment without prejudice to Lessor's right to recover
the balance of such Basic Rent and Additional Rent or pursue any other remedy
provided herein or by law.
45. EFFECT OF WAIVERS. No failure by Lessor to insist upon the strict
performance of any covenant, agreement, term or condition of this Lease, or to
exercise any right or remedy consequent upon a breach thereof, and no acceptance
of full or partial Monthly Basic Rent or Additional Rent during the continuance
of any such breach, shall constitute a waiver of any such breach or of such
covenant, agreement, term or condition. No consent or waiver, express or
implied, by Lessor to or of any breach of any covenant, condition or duty of
Lessee shall be construed as a consent or waiver to or of any other breach of
the same or any other covenant, condition or duty, unless in writing signed by
Lessor.
46. FIBER INTERCONNECT. Lessee shall have the right to install and
maintain, at a location to be designated by Lessor, in its reasonable
discretion, a fiber internet cable from the street bordering the Office Building
Area to the Demised Premises. Prior to making any such installation Lessee shall
obtain, at its sole cost and expense, all necessary governmental permits and
approvals required for the installation of such fiber interconnect. Any
installation made by Lessee shall be performed in compliance with all of the
requirements set forth in Subsection 27(C). Lessee further agrees that
immediately following installation it shall restore the Office Building Area to
the condition in which it existed immediately prior to such installation. Lessor
acknowledges and agrees that at the expiration of the Term of the Lease Lessee
shall not be required to remove the fiber interconnect.
47. MORTGAGEE'S NOTICE AND OPPORTUNITY TO CURE. Lessee agrees to give any
mortgagees and/or trust deed holders, by registered mail, a copy of any notice
of default served upon Lessor, provided that, prior to such notice, Lessee has
been notified in writing (by way of notice of assignment of rents and leases or
otherwise) of the address of such mortgagees and/or trust deed holders. Lessee
further agrees that, if Lessor shall have failed to cure such default within the
time provided for in this Lease, then the mortgagees and/or trust deed holders
shall have an additional thirty (30) days within which to cure such default, or
if such default cannot be cured within that time, then such additional time as
may be necessary, if within such thirty (30) days, any mortgagee and/or trust
deed holder has commenced and is diligently pursuing the remedies necessary to
cure such default (including but not limited to commencement of foreclosure
proceedings if necessary to effect such cure), in which event this Lease shall
not be terminated while such remedies are being so diligently pursued.
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48. LESSOR'S RESERVED RIGHT. Lessor and Lessee acknowledge that the
Premises are in a Building which is not open to the general public. Access to
the Building is restricted to Lessor, Lessee, their agents, employees and to
their invited visitors. In the event of a labor dispute including a strike,
picketing, informational or associational activities directed at Lessee or any
other tenant, Lessor reserves the right unilaterally to alter Lessee's ingress
and egress to the Building or make any other change in operating conditions to
restrict pedestrian, vehicular or delivery ingress and egress to a particular
location. In the event that as a result of a change in any existing law or by
virtue of the enactment of any new law, Lessee is prohibited from using the
Premises for the Permitted Use set forth in the Preamble, then Lessee, upon
sixty (60) days' prior notice to Lessor, may terminate this Lease unless within
said sixty (60) day period Lessor is able to cause the enforcement of such law
to be stayed or overturned. In the event of such termination, the Termination
Date shall be the date established in Lessee's notice.
49. CORPORATE AUTHORITY. If Lessee is a corporation, Lessee represents and
warrants that this Lease and the undersigned's execution of this Lease has been
duly authorized and approved by the corporation's Board of Directors. The
undersigned officers and representatives of the corporation executing this Lease
on behalf of the corporation represent and warrant that they are officers of the
corporation with authority to execute this Lease on behalf of the corporation,
and upon written request of Lessor made within fifteen (15) days of execution
hereof, Lessee will provide Lessor with a corporate resolution confirming the
aforesaid.
50. GOVERNMENT REQUIREMENTS. In the event of the imposition of federal,
state, or local governmental control, rules, regulations, or restrictions on the
use or consumption of energy or other utilities or with respect to any other
aspect of this Lease during the Term, both Lessor and Lessee shall be bound
thereby. In the event of a difference in interpretation of any governmental
control, rule, regulation or restriction between Lessor and Lessee, the
interpretation of Lessor shall prevail, and Lessor shall have the right to
enforce compliance, including the right of entry into the Premises to effect
compliance.
51. LITIGATION FEES AND EXPENSES. The parties agree that either party who
brings an action to enforce any obligation of the other party under this Lease
shall, if successful, be entitled to an award by the court against the
unsuccessful party for all of its reasonable attorneys' fees and other
reasonable costs and expenses incurred in enforcing said obligation against the
unsuccessful party, this to survive the expiration or sooner termination of this
Lease.
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52. 24-HOUR ACCESS. Lessee shall be entitled to twenty-four (24) hour,
seven (7) day a week access to the Demised Premises and parking area, but this
shall not be construed as authorization to make use of the Building services
described in Section 20 hereof beyond Building Hours without reimbursing the
Lessor for any additional cost thereof attributable to said use, and shall be
subject to any governmental or municipal laws and regulations with respect to
said twenty-four (24) hour, seven (7) day a week access. Lessee shall obtain
said access by means of a key card or other similar means to be provided by
Lessor to afford access to the Building.
53. AFTER-HOURS USE. Lessee shall be entitled to make use of Building
Standard Office Electrical Service and HVAC beyond Building Hours, at Lessee's
sole cost and expense, provided Lessee shall notify Lessor during normal
Business Hours at least four (4) hours prior to such desired overtime use on
weekdays and by 1:00 p.m. of the day preceding a weekend or holiday as set forth
on Exhibit E. It is understood and agreed that Lessee shall pay the sum of
Twenty-five and 00/100 ($25.00) Dollars per hour or part thereof per HVAC zone
so used, and the sum of Ten and 00/100 ($10.00) Dollars per hour or part thereof
for each additional zone, not to exceed, however, the aggregate sum of
Fifty-five and 00/100 ($55.00) Dollars per hour or part thereof, plus such
additional percentage increase of the aforesaid hourly sum computed by measuring
the percentage increase of the rate in effect (including fuel surcharges or
adjustments) during the month for which such overtime use is requested against
the Base Utility Rate.
In no event shall the Lessee pay less than the sums set forth above for
such aforesaid overtime use.
54. SIGNAGE/FLAGPOLE. Lessee, at Lessee's sole cost and expense, shall be
entitled to the use of Lessee's Percentage of the street monument sign located
in the Office Building Area and the Building directory in the lobby, it being
understood and agreed that the position of Lessee's name on both the street
monument sign and the Building directory shall be as reasonably determined by
Lessor. Lessee shall be permitted to utilize, at no cost to Lessee, the flagpole
located nearest the entrance of the Building to display its corporate flag.
55. ROOF DISH ANTENNA. Subject to Lessor's prior written approval which
shall not be unreasonably withheld or delayed, Lessee shall have the right to
install and maintain, at Lessee's sole cost and expense but Lessor shall not
charge a fee therefor, one (1) dish antenna on the roof, said antenna not to
display any name, logo or identity other than the manufacturer, and to be
installed in compliance with any and all necessary governmental approvals.
Lessee shall have the right to remove the dish at any time, at its sole cost and
expense. Lessee shall employ a
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<PAGE>
roofing contractor reasonably designated by Lessor to perform any work involving
penetration to the roof membrane or structure. Lessee shall be responsible for
any damage caused to Lessor's roof and indemnifies and holds Lessor harmless
from all direct and indirect costs, expenses, and claims resulting from such
installation, removal and use. Lessor and Lessee shall designate a mutually
satisfactory roof location. Lessee shall have the right to cause the relocation
by other tenants of radio transmission or reception equipment properly located
at the Building if a frequency audit conducted by Lessee shall indicate that
such other equipment is materially interfering with Lessee's operation. Upon the
expiration or sooner termination of the Term of this Lease, Lessee, at Lessor's
option, shall remove said antenna and repair all injury done by or in connection
with the installation or removal of said antenna.
56. SUPPLEMENTAL AIR CONDITIONING. Subject to Lessor's prior written
approval which shall not be unreasonably withheld or delayed, Lessee shall have
the right, at no additional cost except for payment for the electric energy
consumed, to install and maintain, at Lessee's sole cost and expense, air
conditioning compressors on the roof to supply supplemental air conditioning to
the Premises which shall be installed in compliance with any and all necessary
governmental approvals. Lessee shall employ a roofing contractor designated by
Lessor to perform any work involving penetration to the roof membrane or
structure. Lessee shall be responsible for any damage caused to Lessor's roof
and indemnifies and holds Lessor harmless from all direct and indirect costs,
expenses, and claims resulting therefrom. Lessor and Lessee shall designate a
mutually satisfactory roof location. If the installation of such air
conditioning compressors require reenforcement of the floor, Lessor shall cause
the performance of such reenforcement and Lessee shall reimburse Lessor,
promptly upon receipt of an invoice therefor, for the full cost thereof. Prior
to causing such work to be performed, Lessor shall notify Lessee and obtain
Lessee's authorization. If such authorization is not granted, Lessor shall not
be obligated to perform such work. Upon the expiration or sooner termination of
the Term of this Lease, Lessee, at Lessor's option, shall remove said
compressors and repair all injury done by or in connection with the installation
or removal of said compressors.
57. SPRINKLER SYSTEM. Lessee shall have the right to replace the existing
sprinkler system in the Switch Area (as hereinafter defined) with FM 200 fire
suppression equipment, such equipment to be installed and maintained at Lessee's
sole cost and expense and installed in compliance with any and all necessary
governmental approvals. In addition, Lessee may at its sole cost and expense
reposition the heat pumps in the ceiling of the Switch Area, to a location
acceptable to Lessor in Lessor's reasonable discretion provided such relocation
(i) is performed in compliance with all applicable laws and Lessee obtains all
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<PAGE>
necessary governmental approvals prior to such relocation, and (ii) such
relocation will not, in Lessor's reasonable opinion, have a materially adverse
effect upon the Building heating system or the distribution of the heat therein.
Upon the expiration or sooner termination of the Term of this Lease, Lessee, at
Lessor's option, shall remove said fire suppression equipment and/or relocate
the heat pumps to their original position, repair all injury done by or in
connection with the installation or removal of said equipment and restore the
existing sprinkler system which was replaced.
58. BACK-UP GENERATOR. Lessee shall have the right to install and maintain,
at Lessee's sole cost and expense, a back-up generator on a certain portion of
the Common Facilities adjacent to the Building, as designated by Lessor, in
Lessor's reasonable discretion, which shall be installed in compliance with any
and all necessary governmental approvals. Prior to commencing any work Lessee
shall first obtain, at its sole cost and expense, all necessary governmental
permits and approvals required for the installation and operation of such
generator. Upon the expiration or sooner termination of the Term of this Lease,
Lessee, at Lessor's option, shall remove said back-up generator and repair all
injury done by or in connection with the installation or removal of said
generator.
59. EARLY OCCUPANCY. Lessor acknowledges that, prior to the Commencement
Date, Lessee will need to take possession of a portion of the Demised Premises
measuring approximately 8,500 gross rentable square feet, as shown on Exhibit A
and marked as the EO Area, for the purpose of demolishing the entire 8,500 gross
rentable square feet of space and installing and operating a telecommunications
switch in a portion thereof containing 5,000 gross rentable square feet (the
"Switch Area") provided said work shall not interfere with or delay the Lessor
in completion of the Demised Premises and provided said work shall be performed
for the Lessee so as not to cause or create any labor dispute for Lessor. Lessee
acknowledges and agrees that it has inspected the aforedescribed 8,500 gross
rentable square feet, is familiar with its condition and, is leasing the Switch
Area in its "AS IS" condition. Upon such delivery by Lessor of the Switch Area,
Lessee shall be responsible for the payment of Basic Rent and Additional Rent
for the Switch Area commencing July 1, 1998 and shall comply with all of the
other terms and provisions of this Lease with respect to the Switch Area only,
to include but not be limited to the provisions of Section 30. Lessee
acknowledges and agrees that it has elected to perform its own improvements with
respect to the Switch Area and has elected to have Lessor perform the Lessee
Improvements with respect to the remaining 3,500 gross rentable square feet
described in this Section.
60. RIGHT OF SUBORDINATED FIRST OFFER. Provided Lessee is not in default
pursuant to any of the terms and conditions of
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this Lease, Lessee shall have the right of first offer to lease additional space
in the Building, which hereafter may become vacant and available (the "First
Offer Space"), subject only to whatever prior rights as to the First Offer Space
exist or are created in connection with the leasing of space in the Building to
the tenants to whom said leases are granted. Lessor will advise the Lessee of
the availability of the First Offer Space and the terms and conditions Lessor
would be willing to accept with respect to the First Offer Space, and Lessee
shall have ten (10) days within which to respond to Lessor's offer, TIME HEREBY
BEING MADE OF THE ESSENCE. The term for the First Offer Space shall expire
coterminously with the Term of this Lease as the same may be extended or
renewed. Should Lessee decline Lessor's offer or fail to respond, then, and in
such event, Lessee shall lose any prospective rights of first offer in the
Building, and Lessor shall be free to lease the First Offer Space to any other
tenant upon substantially the same terms and conditions as that offered to
Lessee. Substantially, as used herein, shall mean terms not materially different
or a rent of not more than five (5%) percent below the rent requested by Lessor
of Lessee. Should Lessee accept Lessor's offer, the description of the Demised
Premises, Basic Rent, Lessee's Percentage, and apportionment of parking spaces
[i.e. four (4) spaces per 1,000 gross rentable square feet] shall be adjusted to
reflect the inclusion of the First Offer Space.
61. RENEWAL OPTIONS. Lessee is hereby granted two (2) options to renew this
Lease upon the following terms and conditions:
(A) At the time of the exercise of each option to renew and at the
time of the said renewal, the Lessee shall not be in default beyond any
applicable notice and grace periods in accordance with the terms and
provisions of this Lease, and shall be in possession of the Premises
pursuant to this Lease.
(B) Notice of the exercise of the first option shall be sent to the
Lessor in writing at least nine (9) months before the expiration of the
Term of this Lease, and notice of the exercise of the second option shall
be sent to Lessor in writing at least nine (9) months before the expiration
of the first renewal option, TIME HEREBY BEING MADE OF THE ESSENCE.
(C) The renewal terms shall be for the term of five (5) years each,
the first renewal term to commence at the expiration of the Term of this
Lease, and the second renewal term to commence at the expiration of the
first renewal term, and all of the terms and conditions of this Lease,
other than the Annual Basic Rent, shall apply during any such renewal term.
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(D) The Annual Basic Rent to be paid during the first renewal term
shall not be less than that paid for the Premises during the last year of
the original Term of the Lease (without regard to any temporary abatement
of rent then in effect pursuant to the Lease provisions); and the Annual
Basic Rent to be paid during the second renewal term shall not be less than
that paid for the Premises during the first renewal term (without regard to
any temporary abatement of rent then in effect pursuant to the Lease
provisions). However, if the fair rental value per square foot at the
commencement of either renewal term shall exceed the rent as established in
the preceding sentence, the Lessee shall pay such fair rental value. In
determining the fair rental value, the Lessor shall notify Lessee of the
fair rental value as established by Lessor. Should Lessee dispute Lessor's
determination, then the Lessee shall be free to, at the Lessee's sole cost
and expense, employ the services of an appraiser familiar with buildings
similar to the Building and located within the Somerset County, New Jersey
area comparable to the Building, who shall be a member of The Appraisal
Institute ("MAI") and who shall render an appraisal. If the Lessor and the
Lessee's appraiser cannot agree on the fair rental value, or in such case,
on an independent appraiser acceptable to both, either party may request
the American Arbitration Association of Somerset, New Jersey to appoint
such independent appraiser who shall be a member of MAI familiar with
buildings in the area of the Building and in such event the judgment of a
majority of the two appraisers and Lessor shall be final and binding upon
the parties. The parties shall share equally in the cost of any such
independent appraiser. Pending resolution of the issue of fair rental
value, the Lessee shall pay Lessor as of commencement of either renewal
term, the Annual Basic Rent as established by Lessor, subject to
retroactive adjustment upon final determination of this issue.
62. GUARANTY. This Lease is expressly conditioned on the execution by
Viatel, Inc. of the guaranty of the terms, covenants and conditions in this
Lease to be performed and observed by
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Lessee in the form and substance attached hereto and made a part hereof as
Exhibit F.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and
seals the day and year first above written.
VC ASSOCIATES, LLC, a New Jersey
limited liability company, Lessor
BY: CHELSFIELD VANTAGE COURT,
INC., Member
By: /s/ Peter N. Armstrong
----------------------------------
PETER N. ARMSTRONG,
President
VIATEL NEW JERSEY, INC., Lessee
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
52
<PAGE>
Lessee in the form and substance attached hereto and made a part hereof as
Exhibit F.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and
seals the day and year first above written.
VC ASSOCIATES, LLC, a New Jersey
limited liability company, Lessor
BY: CHELSFIELD VANTAGE COURT,
INC., Member
By:
----------------------------------
VIATEL NEW JERSEY, INC., Lessee
By: /s/ Sheldon M. Goldman
---------------------------------------
Name: Sheldon M. Goldman
-------------------------------------
Title: Vice-President
------------------------------------
52
<PAGE>
EXHIBIT A
Drawing of the first floor of the east wing, which includes an allocable
share of the Common Facilities as defined in Subsection 41(c).
[GRAPHIC]
<PAGE>
EXHIBIT A-1
-----------
BEGINNING at a point in the easterly line-of Cottontail Lane, said point
being a monument set at the northwesterly corner of Lot 15.01, Block 517.02
as shown on the map entitled "Map of Subdivision Williams-Franklin
Industrial Park, Franklin Township, Somerset County" dated March 3, 1982,
filed in Somerset County as Map No. 1959, said point also being the
northwesterly corner of Lot 15.10, Block 517.02 and running thence:
1. South 70 deg. 26' 15" East 789.03 feet to a point; thence,
2. South 18 deg. 26' 34" West 791.82 feet to a point; thence,
3. North 69 deg. 54' 13" West 811.85 feet to a point in easterly
line of Cottontail Lane; and thence,
4. North 20 deg. 05' 47" East 784.14 feet along the easterly line of
Cottontail Lane to the point or place of beginning.
<PAGE>
ACORD CERTIFICATE OF LIABILITY INSURANCE DATE (MM/DD/YY)
6/23/98
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
PRODUCER THIS CERTIFICATE IS ISSUED AS A MATTER OF INFORMATION ONLY AND CONFERS NO RIGHTS
MARK J. JACOBY ASSOCIATES INC. UPON THE CERTIFICATE HOLDER. THIS CERTIFICATE DOES NOT AMEND, EXTEND OR ALTER THE
7 OLD WESTBURY ROAD COVERAGE AFFORDED BY THE POLICIES BELOW.
PO BOX 1000 -------------------------------------------------------------------------------------------
ROSLYN HEIGHTS, NY 11577 INSURERS AFFORDING COVERAGE
516-621-6717
- ----------------------------------------------------------------------------------------------------------------------------------
INSURED INSURER A: CHUBB
VIATEL INC. INSURER B:
800 THIRD AVENUE INSURER C:
NEW YORK, NY 10022 INSURER D:
INSURER E:
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
COVERAGES
THE POLICIES OF INSURANCE LISTED BELOW HAVE BEEN ISSUED TO THE INSURED NAMED
ABOVE FOR THE POLICY PERIOD INDICATED. NOTWITHSTANDING ANY REQUIREMENT, TERM
OR CONDITION OF ANY CONTRACT OR OTHER DOCUMENT WITH RESPECT TO WHICH THIS
CERTIFICATE MAY BE ISSUED OR MAY PERTAIN. THE INSURANCE AFFORDED BY THE
POLICIES DESCRIBED HEREIN IS SUBJECT TO ALL THE TERMS, EXCLUSIONS AND
CONDITIONS OF SUCH POLICIES. AGGREGATE LIMITS SHOWN MAY HAVE BEEN REDUCED BY
PAID CLAIMS.
<TABLE>
<CAPTION>
POLICY
Desc POLICY EFFECTIVE EXPIRATION
LTR TYPE OF INSURANCE POLICY NUMBER DATE MM/DD/YY DATE MM/DD/YY LISTS
- -------------------------------------- ------------- ------------- ------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GENERAL LIABILITY 2534-33-58 11/06/97 11/06/98 EACH OCCURRENCE $ 1,000,000
/X/ COMMERCIAL GENERAL LIABILITY FEE DAMAGE $ INCLUDED
/ / CLAIMS MADE /X/ OCCUR MED EXP (any one person) $ 10,000
/ / ____________________________ PERSONAL & ADV INJURY $ 1,000,000
/ / ____________________________ CLINICAL AGGREGATE $ 2,000,000
GENL AGGREGATE LIMIT PRODUCTS - COMP/OP AGG $ INCLUDED
/X/ POLICY / / PROJECT / / LOC
- -----------------------------------------------------------------------------------------------------------------------------------
AUTOMOBILE LIABILITY CONDENSED SINGLE LAST $
/ / ANY AUTO (Ea accident)
/ / ALL OWNED AUTOS ADULT INJURY $
/ / SCHEDULED AUTOS (per person)
/ / HIRED AUTOS BODILY INJURY $
/ / NON-AUTOS (per accident)
/ / ______________________ PROPERTY DAMAGE $
/ / ______________________ (per accident)
- -----------------------------------------------------------------------------------------------------------------------------------
COVERAGE LIABILITY AUTO ONLY - EA ACCIDENT $
/ / ANY AUTO OTHER THAN EA ACC $
AUTO ONLY: ACC $
- -----------------------------------------------------------------------------------------------------------------------------------
EXCESS LIABILITY 7875-08-08 11/06/97 11/06/98 EACH OCCURRENCE $ 8,000,000
/X/ OCCUR / / CLASS WAGE AGGREGATE $ 8,000,000
$
/ / DEDUCTIBLE $
/X/ RETENTION $ 10,000 $
- -----------------------------------------------------------------------------------------------------------------------------------
WORKERS COMPENSATION AND WC STATUTORY OTHER
EMPLOYERS LIABILITY LIMITS
EL EACH ACCIDENT $
EL DISEASE - EA EMPLOYEE $
EL DISEASE - POLICY LIMIT $
- -----------------------------------------------------------------------------------------------------------------------------------
A OTHER CONTENTS 3534-33-58 11/06/97 11/06/98 $10,000 - $1,000 DED
REPLACEMENT INCLUDING THEFT
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
DESCRIPTION OF OPERATIONS/LOCATIONS/SYSTEMS/EXCLUSIONS ADDED BY
ENDORSEMENT/SPECIAL PROVISIONS
EFF. 6/19/98 ADDITIONAL INSURED-LANDLORD FOR LOCATION AT VANTAGE COURT, 208
COTTONTAIL LANE, FRANKLIN TOWNSHIP, NJ: V.C. ASSOC., LLC
POLICY CONTAINS A WAIVER OF SUBROGATION CLAUSE
<TABLE>
<CAPTION>
CERTIFICATE HOLDER ADDITIONAL INSURED;INSURER LETTER CANCELLATION
<S> <C> <C>
L.C. ASSOCIATES, LLP SHOULD ANY OF THE ABOVE DESCRIBED POLICIES BE CANCELLED BEFORE
C/O PORTMAN GROUP, INC. THE EXPIRATION DATE THEREOF, THE ISSUING INSURER WILL ENDEAVOR
1 PARKER PLAZA TO MAIL 10 DAYS WRITTEN NOTICE TO THE CERTIFICATE HOLDER NAMED
FORT LEE, NJ 07024 TO THE LEFT, BUT FAILURE TO DO SO SHALL IMPOSE NO OBLIGATION OR
LIABILITY OF ANY KIND UPON THE INSURER, ITS AGENTS OR
REPRESENTATIVES.
AUTHORIZED SIGNATURE
/s/ Keith Jantz
</TABLE>
ACCORD 25-S *7/g ACCORD CORPORATION 1998
<PAGE>
EXHIBIT B Page 1 of 4
---------
RULES AND REGULATIONS
1. Lessee shall not obstruct or permit its agents, clerks or servants to
obstruct, in any way, the sidewalks, entry passages, corridors, halls,
stairways or elevators of the building, or use the same in any other way than
as a means of passage to and from the offices of Lessee, bring in, store,
test or use any materials in the Building which could cause a fire or an
explosion or produce any fumes of vapor, make or permit any improper noises
in the Building, smoke in the elevators, throw substances of any kind out of
the window sills, or clean the windows.
2. Waterclosets and urinals shall not be used for any purpose other than
those for which they were constructed, and no sweepings, rubbish, ashes,
newspaper or any other substances of any kind shall be thrown into them.
Waste and excessive or unusual use of electricity or water is prohibited.
3. The windows, doors, partitions and lights that reflect or admit light
into the halls or other places of the Building shall not be obstructed,* NO
SIGNS, ADVERTISEMENTS OR NOTICES SHALL BE INSCRIBED, PAINTED, AFFIXED OR
DISPLAYED, IN, ON, UPON OR BEHIND ANY WINDOWS, except as may be required by
law or agreed upon by the parties; and no sign, advertisement or public
notice shall be inscribed, painted or affixed on any doors, partitions or
other part of the inside of the Building, without the prior written consent
of Lessor.** If such consent be given by Lessor, any such sign, advertisement
or notice shall be inscribed, painted or affixed by Lessor, or a company
approved by Lessor, but the cost of the same shall be charged to and be paid
by Lessee, and Lessee agrees to pay the same promptly, on demand.
4. No contract of any kind with any supplier of towels, ice, toilet
articles, waxing, rug shampooing, venetian blind washing, furniture
polishing, lamp servicing, cleaning of electrical fixtures, removal of waste
paper, rubbish or garbage, or other like service shall be entered into by
Lessee, nor shall any vending machine of any kind be installed in the
Building, or on the property, without the prior written consent of the
Lessor.**
5. Subject to the terms of the Lease, when electric wiring of any kind
is introduced, it must be connected as directed by Lessor, and no stringing
or cutting of wires will be allowed, except with the prior written consent of
Lessor,** and shall be done only by contractors approved by Lessor.** No
lessee shall lay linoleum or other similar floor covering so that the same
shall be in direct contact with the floor of the Premises, and if linoleum or
other similar floor covering is desired to be used, an interlining of
builder's deadening felt shall be first affixed to the floor by a paste or
other material, the use of cement or other similar adhesive material being
expressly prohibited.
* with the exception of obstructions to the windows in the Switch Area which
shall not be obvious from outside the Building, the blinds shall be drawn
at all time for such Switch Area.
** which consent shall not be unreasonably withheld or delayed
<PAGE>
EXHIBIT B Page 2 of 4
---------
6. Lessor shall have the right to prescribe the weight, size and
position of all safes and other bulky or heavy equipment and all freight
brought into the building by any tenant*, and also the times of moving the
same in and out of the Building and all such moving must be done under the
supervision of the Lessor. Lessor will not be responsible for loss of or
damage to any such equipment or freight from any cause; but all damage done
to the Building by moving or maintaining any such equipment or freight shall
be repaired at the expense of Lessee. All safes shall stand on a base of
such size as shall be designated by the Lessor. The Lessor reserves the
right to inspect all freight to be brought into the Building and to exclude
from the Building all freight which violates any of these Rules and
Regulations or the Lease of which these Rules and Regulations are a part.
7. No machinery of any kind or articles of unusual weight or size will
be allowed in the Building*, without the prior written consent of Lessor.**
Business machines and mechanical equipment shall be placed and maintained by
Lessee, at Lessee's expense, in setting sufficient, in Lessee's judgement, to
absorb and prevent vibration, noise and annoyance.
8. No additional lock or locks shall be placed by Lessee on any door
in the Building, without prior written consent of Lessor. Two keys will be
furnished Lessee by Lessor; any additional keys requested by Lessee shall be
paid for by Lessee. Lessee, its agents and employees, shall not have any
duplicate key made and shall not change any locks. All keys to doors and
washroom shall be returned to Lessor at the termination of the tenancy, and,
in the event of loss of any keys furnished, Lessee shall pay Lessor the cost
thereof.
9. Lessee shall not employ any person or persons other than Lessor's
janitors for the purpose of cleaning the premises, without prior written
consent of Lessor. Lessor shall not be responsible to Lessee for any loss of
property from the Premises however occurring, or for any damage done to the
effects of Lessee by such janitors or any of its employees, or by any other
person or any other cause. The janitor's service furnished by Lessor does
not include the heating or cleaning of carpets or rugs.
10. No bicycles, vehicles or animals of any kind shall be brought
into or about the Premises.
11. The requirements of Lessee will be attended to only upon
application at the office of the Building. Employees of Lessor shall not
perform any work for Lessee or do anything outside of their regular duties,
unless under special instructions from the office of the Lessor.
12. The Premises shall not be used for lodging or sleeping
purposes, therein is prohibited.
* with the exception of the switches to be located in the Switch Area
** which consent will not be unreasonably withheld or delayed.
<PAGE>
Page 3 of 4
EXHIBIT B
---------
13. Lessee shall not conduct, or permit any other person to conduct,
any auction upon the Premises; manufacture or store goods, wares or
merchandise upon the Premises, without the prior written approval of Lessor,
except the storage of usual supplies and inventory to be used by Lessee in
the conduct of its business; permit the Premises to be used for gambling;
make any unusual noises in the Building; permit to be played any musical
instrument on the Premises; permit to be played any radio, television,
recorded or wired music in such a loud manner as to disturb or annoy other
tenants; or permit any unusual odors to be produced upon the Premises. Lessee
shall not occupy or permit any portion of the Premises leased to him to be
occupied as an office for a public stenographer or typist, or for the
possession, storage, manufacture, or sale of intoxicating beverages,
narcotics, tobacco in any form, or as a barber or manicure shop.
14. After 6:00 p.m. until 8:00 a.m. on weekdays, after 1:00 p.m. on
Saturdays and at all hours on Sundays and legal holidays, the Building is
closed. Lessor reserves the right to exclude from the Building during such
periods all persons who are not in possession of a key to the Building. Each
tenant shall be responsible for all persons for whom he issues a key and
shall be liable to Lessor for all acts of such persons. Lessee may, at its
own expense, install additional security systems to further protect Premises.
15. No awnings or other projections shall be attached to the outside
walls of the Building. No curtains, blinds, shades or screens shall be
attached to or hung in, or used in connection with, any window or door of
the Premises, without the prior written consent of the Lessor. Such curtains
and shades must be of a quality, type, design, and color, and attached in a
manner approved by Lessor.
16. Canvassing, soliciting and peddling in the Building are prohibited,
and Lessee shall cooperate to prevent the same.
17. There shall not be used in the Premises or in the Building, either
by Lessee or by others in the delivery or receipt of merchandise, any hand
trucks except those equipped with rubber tires and side guards, and no hand
trucks will be allowed in passenger elevators.
18. Each tenant, before closing and leaving the Premises, shall ensure
that all windows are closed and all entrance doors locked.
19. Lessor shall have the right to prohibit any advertising by Lessee
which, in Lessor's opinion, tends to impair the reputation of the Building
or its desirability as a building for offices, and upon written notice from
Lessor, Lessee shall refrain from or discontinue such advertising.
<PAGE>
Page 4 of 4
EXHIBIT B
---------
20. Lessor hereby reserves to itself any and all rights not granted to
Lessee hereunder, including, but not limited to, the following rights which
are reserved to Lessor for its purposes in operating the Building:
(a) the exclusive right to the use of the name of the Building for all
purposes, except that Lessee may use the name as its business address
and for no other purpose;
(b) if required to do so by law the right to change the name or address
of the Building, without incurring any liability to Lessee for so
doing;
(c) the right to install and maintain a sign or signs on the exterior
of the Building;
(d) the exclusive right to use or dispose of the use of the roof of the
Building;
(e) the right to limit the space on the directory of the Building to be
allotted to the Lessee;
(f) the right to grant to anyone the right to conduct any particular
business or undertaking in the Building;
21. Lessee shall list all articles to be taken from the building (other
than those to be taken out in the usual course of business of Lessee) on
Lessee's letterhead, or a blank which will be furnished by Lessor. Such
list shall be presented at the office of the Building for approval before
such articles are taken from the Building.
22. The Lessee, its employees, agents, representatives, invitees and
business visitors shall comply promptly and courteously with the directions
of any building security personnel hired by Lessor.
23. Lessor shall not be responsible to Lessee for the non-observance or
violation of any of these Rules and Regulations by any other tenants.
24. Lessee and its employees shall park their cars only in those
portions of the parking area designated by Lessor.
<PAGE>
EXHIBIT C
LESSEE IMPROVEMENTS
Construction Plans to be supplied by Lessee pursuant to Section 27.
<PAGE>
Page 1 of 4
EXHIBIT D
---------
<TABLE>
<CAPTION>
SERVICES TO BE PERFORMED FREQUENCY OF SERVICES
"GENERAL CLEANING" ---------------------
TIMES TIMES TIMES
WEEKLY MONTHLY YEARLY
<S> <C> <C> <C>
1. EMPTY WASTE BASKETS AND OTHER TRASH
RECEPTACLES, REMOVING CONTENTS TO
PRE-DESIGNATED AREA. 5
2. REPLACE WASTE BASKET LINERS IF REQUIRED
(LINERS SUPPLIED BY CONTRACTOR). 5
3. EMPTY AND DAMP WIPE ALL ASHTRAYS. 5
4. REMOVE REFUSE AND CLEAN ASH AND LITTER
URNS IN COMMON AREAS. 5
5. DUST OFFICE FURNITURE, WINDOW SILLS,
AND ALL OTHER SURFACES UP TO 84" HIGH. 5
6. DAMP WIPE AND POLISH ALL DESK TOPS IF
PAPERS ARE CLEARED. 5
7. DUST OR DAMP WIPE ALL TELEPHONES AND
AFFILIATED EQUIPMENT USING ANTISEPTIC
TREATED CLOTHS. 5
8. REMOVE ALL FINGERMARKS FROM DOORS, DOOR
FRAMES, PARTITIONS AND LIGHT SWITCHES. 5
9. REMOVE ALL FINGERMARKS, SMUDGES AND
DIRT FROM RECEPTION AND INTERIOR DOOR
GLASS, SIDELIGHTS AND FURNITURE PARTITION
GLASS. 5
10. CLEAN ENTRANCE DOOR GLASS AT ALL ENTRANCE
WAYS. 5
11. VACUUM DRAPERIES. 3
12. VACUUM UPHOLSTERED FURNITURE. 1
13. DUST VENETIAN BLINDS AND WALL HANGINGS. 3
</TABLE>
<PAGE>
Page 2 of 4
EXHIBIT D
---------
<TABLE>
<CAPTION>
SERVICES TO BE PERFORMED FREQUENCY OF SERVICES
"GENERAL CLEANING" ---------------------
TIMES TIMES TIMES
WEEKLY MONTHLY YEARLY
<S> <C> <C> <C>
14. DUST WALLS AND DAMP CLEAN AS REQUIRED. 5
15. CLEAN, POLISH AND SANITIZE ALL DRINKING
FOUNTAINS. 5
16. SWEEP STAIRWELLS AND LANDINGS, WIPE CLEAN
ALL RAILINGS AND TRIM. 1
17. CLEAN ELEVATOR CABS, INCLUDING CEILING,
FLOORS, WALLS, DOORS AND TRACKS. 5
18. HIGH DUST ALL VENTS, LOUVERS, AND MOLDINGS. 3
19. MAINTAIN JANITOR'S CLOSETS IN A NEAT,
ORDERLY CONDITION. 5
20. LEAVE ON DESIGNATED NIGHT LIGHTS AND
SECURE BUILDING. CLOSE ALL WINDOWS AND
LOCK ENTRANCE DOORS. 5
21. REPORT TO THE PROPER AUTHORITIES IF ANY
PROBLEMS IN HVAC, PLUMBING, SECURITY, ETC. 5
22. WIPE CLEAN ALL ALUMINUM, CHROME, STAINLESS
STEEL AND OTHER METAL WORK AS REQUIRED. 5
23. WET SPONGE WIPE TABLE TOPS IN EMPLOYEE
LOUNGE. CLEAN SPILLS WHERE APPLICABLE. 5
24. CLEAN INTERIOR AND EXTERIOR OF PERIMETER
WINDOWS. 3
</TABLE>
<PAGE>
Page 3 of 4
EXHIBIT D
---------
<TABLE>
<CAPTION>
SERVICES TO BE PERFORMED FREQUENCY OF SERVICES
"LAVATORY CLEANING" ---------------------
TIMES TIMES TIMES
WEEKLY MONTHLY YEARLY
<S> <C> <C> <C>
1. DAMP WIPE AND CLEAN WASTE RECEPTACLES. 5
2. REMOVE REFUSE TO A DESIGNATED AREA. 5
3. CLEAN, DISINFECT AND DEODORIZE ALL
LAVATORY FIXTURES USING A HIGH PHENOL
COEFFICIENT CLEANER. 5
4. CLEAN AND POLISH LAVATORY MIRRORS,
BRITEWORK AND ENAMEL SURFACES. 5
5. SPOT CLEAN LAVATORY WALLS AND STALL
PARTITIONS. 5
6. FULL WASH LAVATORY WALLS AND STALL
PARTITIONS. 1
7. HAND DUST ALL STALL PARTITIONS AND
OTHER SURFACES. 5
8. PRESSURE VACUUM ALL VENTS. 1
9. WET MOP ALL LAVATORY FLOORS USING A
HIGH PHENOL COEFFICIENT GERMICIDAL
CLEANER. 5
10. CLEAN ALL BASEBOARDS AND FLOOR
DRAIN PLATES. 5
11. DAMP CLEAN AND REFILL ALL DISPENSERS 5
12. MACHINE SCRUB RESTROOM FLOORS. 1
</TABLE>
<PAGE>
Page 4 of 4
EXHIBIT D
---------
<TABLE>
<CAPTION>
SERVICES TO BE PERFORMED FREQUENCY OF SERVICES
"FLOOR CARE" ---------------------
TIMES TIMES TIMES
WEEKLY MONTHLY YEARLY
<S> <C> <C> <C>
1. VACUUM ALL CARPETED AREAS, INCLUDING EDGES
AND CORNERS. VACUUM WALK OFF MATS AT
BUILDING ENTRANCES. 5
2. SWEEP AND/OR DUST MOP ALL NON-CARPETED AREAS. 5
3. SPOT MOP SPILLAGE IN NON-CARPETED AREAS. 5
4. SPOT CLEAN ALL CARPETED AREAS (ONCE CARPETS
HAVE BEEN CLEANED). 5
5. SWEEP AND/OR VACUUM AND DUST STAIRWELLS,
LANDINGS AND HANDRAILS. 1
6. WET MOP STAIRWELLS. 1
7. MAINTAIN HARD-SURFACED FLOOR SURFACES
USING AN APPROVED, NON-INJURIOUS CLEANING
SOLUTION AS WELL AS AN UNDERWRITERS LABORATORY
APPROVED FLOOR FINISH THAT PROVIDES A HIGH
DEGREE OF SLIP RESISTANCE. 1
8. REMOVE AND CLEAN WALK OFF MATS. 1
</TABLE>
<PAGE>
EXHIBIT E
---------
HOLIDAY SCHEDULE
----------------
New Years Day
Washington's Birthday
Good Friday
Memorial Day
Independence Day
Labor Day
Thanksgiving Day
Christmas Day
<PAGE>
EXHIBIT F
GUARANTY OF LEASE
WHEREAS, VIATEL NEW JERSEY, INC., with offices at 800 Third Avenue,
New York, New York 10022 (hereinafter referred to as "Lessee") is desirous of
entering into the lease hereinafter mentioned; and
WHEREAS, VIATEL, INC., with offices at 800 Third Avenue, New York,
New York 10022 (hereinafter referred to as "Guarantor") has requested VC
ASSOCIATES, LLC, whose address is c/o Portman Group, Inc., One Parker Plaza,
Fort Lee, New Jersey 07024 (hereinafter referred to as "Lessor") to enter
into a lease with the Lessee for ten (10) years with two (2) renewal options
of five (5) years each, in the building known as Building B, as part of
Vantage Court, located at 200 Cottontail Lane, Franklin Township, New Jersey
(hereinafter referred to as the "Lease"); and
WHEREAS, the Lessor has refused to enter into the said Lease unless
the Guarantor guarantees said Lease in the manner hereinafter set forth.
NOW, THEREFORE, to induce the Lessor to enter into said Lease, which
Lease is dated this day and is being executed simultaneously herewith, the
Guarantor hereby agrees as follows:
1. (a) The Guarantor unconditionally guarantees to the Lessor
and the successors and assigns of the Lessor, the full and punctual
performance and observance by the Lessee of all of the terms, covenants and
conditions in said Lease contained on Lessee's part to be kept, performed or
observed.
(b) If, at any time, default shall be made by the Lessee in
the performance or observance of any of the terms, covenants or conditions in
said Lease contained on the Lessee's part to be kept, performed or observed,
the Guarantor will keep, perform and observe the same, as the case may be, in
place and stead of the Lessee.
(c) The liability of the Guarantor hereunder shall be
enforceable against the Guarantor without the necessity for any suit or
proceedings on the Lessor's part of any kind or nature whatsoever against the
Lessee.
2. Any act of the Lessor, or the successors or assigns of the
Lessor, consisting of a waiver of any of the terms or conditions of said
Lease, or the giving of any consent to any manner or thing relating to said
Lease, or the granting of any indulgences or extensions of time, to the
Lessee, may be done
1
<PAGE>
without notice to the Guarantor and without releasing the obligations of the
Guarantor hereunder.
3. The obligations of the Guarantor hereunder shall not be
released by Lessor's receipt, application or release of security given for
the performance and observance of covenants and conditions in said Lease
contained on the Lessee's part to be performed or observed; nor by any
modification of such Lease, but in the case of any such modification, the
liability of the Guarantor shall be deemed modified in accordance with the
terms of any such modification of the Lease.
4. The liability of the Guarantor hereunder shall in no way be
affected by (a) the release or discharge of the Lessee in any creditors'
receivership, bankruptcy or other proceedings; (b) the impairment, limitation
or modification of the liability of the Lessee or the estate of the Lessee in
bankruptcy, or of any remedy for the enforcement of the Lessee's said
liability under the Lease, resulting from the operation of any present or
future provision of the Bankruptcy Code or other statute or from the decision
in any court; (c) the rejection or disaffirmance of the Lease in any such
proceedings; (d) the assignment or transfer of the Lease by the Lessee; (e)
any disability or other defense of the Lessee; or (f) the cessation from any
cause whatsoever of the liability of the Lessee. Notwithstanding the
foregoing, in the event that Lessee is released from its obligations under
the Lease due to (1) Lessor exercising its right of recapture as provided for
in Subsection 8(A) of the Lease, or (2) as a result of a final non-appealable
judicial decree not resulting from the operation of any present or future
provision of the Bankruptcy Code that Lessee is released from its obligations
under the Lease (i.e. constructive eviction) then Grantor shall be released
from its obligations hereunder arising from and after the date of such
termination to the same extent and for the same duration that Lessee is
released from its obligations under the Lease.
5. Until all the covenants and conditions in said Lease on the
Lessee's part to be performed and observed are fully performed and observed,
the Guarantor: (a) shall have no right of subrogation against the Lessee by
reasons of any payments or acts of performance by the Guarantor hereunder;
(b) waives any right to enforce any remedy which the Guarantor now or
hereafter shall have against the Lessee by reason of any one or more payment
or acts of performance in compliance with the obligations of the Guarantor
hereunder; and (c) during the period, if any, that Lessee is in default of
any of its obligations under the Lease beyond any applicable notice and cure
periods provided for therein subordinates any liability or indebtedness of
the Lessee now or hereafter held by the Guarantor to the obligations of the
Lessee to the Lessor under said Lease.
2
<PAGE>
6. Notwithstanding any payments of Basic Rent or Additional Rent
made by the undersigned pursuant to the provisions of this Guaranty, the
undersigned shall not seek to enforce or collect upon any rights which the
undersigned now has or may acquire against the Lessee either by way of
subrogation, indemnity, reimbursement or contribution for any amount paid
under this Guaranty during the period, if any, that Lessee is in default of
any of its obligations under the Lease beyond any applicable notice and cure
periods provided for therein. In the event either a petition is filed under
the Bankruptcy Code or under any other applicable Federal or state insolvency
law in regard to the Lessee, or an action or proceeding is commenced for the
benefit of the creditors of the Lessee, and the Lessor is ordered to repay
all or any portion of any payments made to Lessor which were received from or
on behalf of the Lessee and which are held voidable on the grounds of
preference, fraudulent conveyance or otherwise, the undersigned shall pay to
the Lessor an amount equal to such payments held to be voidable, provided,
however, that the aggregate of all payments made by the undersigned under
this Guaranty shall not exceed the amount of the Basic Rent and Additional
Rent arrears then due and payable.
If at any time payment, or portion thereof, made by or for the
account of the undersigned on account of the obligations under this Guaranty,
is set aside by any court or trustee having jurisdiction as a voidable
preference, fraudulent conveyance or otherwise as being subject to avoidance
or recovery under the provisions of the Bankruptcy Code or under any other
applicable Federal or state insolvency law or similar law, the undersigned
hereby agrees that this Guaranty (a) shall continue and remain in full force
and effect, and (b) if previously terminated as a result of the undersigned
having fulfilled the undersigned's obligations hereunder in full or as a
result of the Lessor having released the undersigned from its obligations and
liabilities hereunder, shall without further act or instrument be reinstated
and shall thereafter remain in full force and effect, in either case with the
same force and effect as though such payment or portion thereof had not been
made, and, if applicable, as if such previous termination had not occurred.
7. This Guaranty shall apply to the said Lease and to any renewal or
extension thereof.
3
<PAGE>
8. This instrument may not be changed, modified, discharged or
terminated orally or in any manner other than by an agreement in writing signed
by the Guarantor and the Lessor.
IN WITNESS WHEREOF, the Guarantor has hereunto set his hands and
seals the 23rd day of June 1998.
VIATEL, INC.
By: /s/ Sheldon M. Goldman
-------------------
Name: Sheldon M. Goldman
-------------------
Title: Vice-President
-------------------
4
<PAGE>
GUARANTY OF LEASE
WHEREAS, VIATEL NEW JERSEY, INC., with offices at 800 Third Avenue, New
York, New York 10022 (hereinafter referred to as "Lessee") is desirous of
entering into the lease hereinafter mentioned; and
WHEREAS, VIATEL, INC., with offices at 800 Third Avenue, New York, New York
10022 (hereinafter referred to as "Guarantor") has requested VC ASSOCIATES, LLC,
whose address is c/o Portman Group, Inc., One Parker Plaza, Fort Lee, New Jersey
07024 (hereinafter referred to as "Lessor") to enter into a lease with the
Lessee for ten (10) years with two (2) renewal options of five (5) years each,
in the building known as Building B, as part of Vantage Court, located at 200
Cottontail Lane, Franklin Township, New Jersey (hereinafter referred to as the
"Lease"); and
WHEREAS, the Lessor has refused to enter into the said Lease unless the
Guarantor guarantees said Lease in the manner hereinafter set forth.
NOW, THEREFORE, to induce the Lessor to enter into said Lease, which
Lease is dated this day and is being executed simultaneously herewith, the
Guarantor hereby agrees as follows:
1. (a) The Guarantor unconditionally guarantees to the Lessor and the
successors and assigns of the Lessor, the full and punctual performance and
observance by the Lessee of all of the terms, covenants and conditions in said
Lease contained on Lessee's part to be kept, performed or observed.
(b) If, at any time, default shall be made by the Lessee in the
performance or observance of any of the terms, covenants or conditions in said
Lease contained on the Lessee's part to be kept, performed or observed, the
Guarantor will keep, perform and observe the same, as the case may be, in place
and stead of the Lessee.
(c) The liability of the Guarantor hereunder shall be enforceable
against the Guarantor without the necessity for any suit or proceedings on the
Lessor's part of any kind or nature whatsoever against the Lessee.
2. Any act of the Lessor, or the successors or assigns of the Lessor,
consisting of a waiver of any of the terms or conditions of said Lease, or the
giving of any consent to any manner or thing relating to said Lease, or the
granting of any indulgences or extensions of time, to the Lessee, may be done
without notice to the Guarantor and without releasing the obligations of the
Guarantor hereunder.
1
<PAGE>
3. The obligations of the Guarantor hereunder shall not be released by
Lessor's receipt, application or release of security given for the performance
and observance of covenants and conditions in said Lease contained on the
Lessee's part to be performed or observed; nor by any modification of such
Lease, but in the case of any such modification, the liability of the Guarantor
shall be deemed modified in accordance with the terms of any such modification
of the Lease.
4. The liability of the Guarantor hereunder shall in no way be affected by
(a) the release or discharge of the Lessee in any creditors' receivership,
bankruptcy or other proceedings; (b) the impairment, limitation or modification
of the liability of the Lessee or the estate of the Lessee in bankruptcy, or of
any remedy for the enforcement of the Lessee's said liability under the Lease,
resulting from the operation of any present or future provision of the
Bankruptcy Code or other statute or from the decision in any court; (c) the
rejection or disaffirmance of the Lease in any such proceedings; (d) the
assignment or transfer of the Lease by the Lessee; (e) any disability or other
defense of the Lessee; or (f) the cessation from any cause whatsoever of the
liability of the Lessee. Notwithstanding the foregoing, in the event that Lessee
is released from its obligations under the Lease due to (1) Lessor exercising
its right of recapture as provided for in Subsection 8(A) of the Lease, or (2)
as a result of a final non-appealable judicial decree not resulting from the
operation of any present or future provision of the Bankruptcy Code that Lessee
is released from its obligations under the Lease (i.e. constructive eviction)
then Grantor shall be released from its obligations hereunder arising from and
after the date of such termination to the same extent and for the same duration
that Lessee is released from its obligations under the Lease.
5. Until all the covenants and conditions in said Lease on the Lessee's
part to be performed and observed are fully performed and observed, the
Guarantor: (a) shall have no right of subrogation against the Lessee by reasons
of any payments or acts of performance by the Guarantor hereunder; (b) waives
any right to enforce any remedy which the Guarantor now or hereafter shall have
against the Lessee by reason of any one or more payment or acts of performance
in compliance with the obligations of the Guarantor hereunder; and (c) during
the period, if any, that Lessee is in default of any of its obligations under
the Lease beyond any applicable notice and cure periods provided for therein
subordinates any liability or indebtedness of the Lessee now or hereafter held
by the Guarantor to the obligations of the Lessee to the Lessor under said
Lease.
6. Notwithstanding any payments of Basic Rent or Additional Rent made by
the undersigned pursuant to the provisions of this Guaranty, the undersigned
shall not seek to enforce or collect upon any rights which the undersigned now
has
2
<PAGE>
or may acquire against the Lessee either by way of subrogation, indemnity,
reimbursement or contribution for any amount paid under this Guaranty during the
period, if any, that Lessee is in default of any of its obligations under the
Lease beyond any applicable notice and cure periods provided for therein. In the
event either a petition is filed under the Bankruptcy Code or under any other
applicable Federal or state insolvency law in regard to the Lessee, or an action
or proceeding is commenced for the benefit of the creditors of the Lessee, and
the Lessor is ordered to repay all or any portion of any payments made to Lessor
which were received from or on behalf of the Lessee and which are held voidable
on the grounds of preference, fraudulent conveyance or otherwise, the
undersigned shall pay to the Lessor an amount equal to such payments held to be
voidable, provided, however, that the aggregate of all payments made by the
undersigned under this Guaranty shall not exceed the amount of the Basic Rent
and Additional Rent arrears then due and payable.
If at any time payment, or portion thereof, made by or for the account of
the undersigned on account of the obligations under this Guaranty, is set aside
by any court or trustee having jurisdiction as a voidable preference, fraudulent
conveyance or otherwise as being subject to avoidance or recovery under the
provisions of the Bankruptcy Code or under any other applicable Federal or state
insolvency law or similar law, the undersigned hereby agrees that this Guaranty
(a) shall continue and remain in full force and effect, and (b) if previously
terminated as a result of the undersigned having fulfilled the undersigned's
obligations hereunder in full or as a result of the Lessor having released the
undersigned from its obligations and liabilities hereunder, shall without
further act or instrument be reinstated and shall thereafter remain in full
force and effect, in either case with the same force and effect as though such
payment or portion thereof had not been made, and, if applicable, as if such
previous termination had not occurred.
7. This Guaranty shall apply to the said Lease and to any renewal or
extension thereof.
8. This instrument may not be changed, modified, discharged or terminated
orally or in any manner other than by an agreement in writing signed by the
Guarantor and the Lessor.
IN WITNESS WHEREOF, the Guarantor has hereunto set his hands and seals the
_____ day of June 1998.
VIATEL, INC.
By: /s/ Sharon M. Galson
------------------------------------
Name: Sharon M. Galson
----------------------------------
Title: Vice President
---------------------------------
3
<PAGE>
EXHIBIT 23.2
ACCOUNTANTS' REPORT ON SCHEDULE AND CONSENT
The Board of Directors and Stockholders
Viatel, Inc. and Subsidiaries:
The audits referred to in our report dated March 4, 1998, except as to note
13(c) which is dated as of March 18, 1998, included the related consolidated
financial statement schedule as of December 31, 1997, and for each of the years
in the three-year period ended December 31, 1997, included in the registration
statement. This consolidated financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion on this
consolidated financial statement schedule based on our audits. In our opinion,
such consolidated financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
We consent to the use of our reports included herein and to the references
to our firm under the headings "Summary Consolidated Financial and Other Data,"
"Selected Consolidated Financial Data" and "Experts" in the prospectus.
/s/ KPMG PEAT MARWICK LLP
New York, New York
August 6, 1998
<PAGE>
EXHIBIT 99.1
LETTER OF TRANSMITTAL
OFFER TO EXCHANGE
12.50% SENIOR DISCOUNT NOTES DUE 2008 (DOLLAR DENOMINATED),
11.25% SENIOR NOTES DUE 2008 (DOLLAR DENOMINATED),
12.40% SENIOR DISCOUNT NOTES DUE 2008 (DM DENOMINATED/DTC HELD)
AND 11.15% SENIOR NOTES DUE 2008 (DM DENOMINATED/DTC HELD)
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT,
FOR ANY AND ALL OUTSTANDING
12.50% SENIOR DISCOUNT NOTES DUE 2008 (DOLLAR DENOMINATED),
11.25% SENIOR NOTES DUE 2008 (DOLLAR DENOMINATED),
12.40% SENIOR DISCOUNT NOTES DUE 2008 (DM DENOMINATED/DTC HELD)
AND 11.15% SENIOR NOTES DUE 2008 (DM DENOMINATED/DTC HELD)
WHICH HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT,
OF
VIATEL, INC.
PURSUANT TO THE PROSPECTUS, DATED AUGUST 11, 1998
THE EXCHANGE OFFERS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON SEPTEMBER
16, 1998 (THE "EXPIRATION DATE"), UNLESS EXTENDED. TENDERS MAY BE WITHDRAWN
PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
DELIVERY TO THE BANK OF NEW YORK BY FACSIMILE TRANSMISSION, BY
REGISTERED OR CERTIFIED MAIL, BY OVERNIGHT COURIER OR BY HAND:
THE BANK OF NEW YORK
Reorganization Section
101 Barclay Street, Floor 7 East
New York, New York 10286
Attention: Theresa Gass
BY FACSIMILE TRANSMISSION
(For Eligible Institutions Only)
(212) 815-6339
CONFIRM BY TELEPHONE:
(212) 815-5942
For information with respect to the Exchange Offers, call:
(212) 815-5942
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE, WILL
NOT CONSTITUTE A VALID DELIVERY.
<PAGE>
The undersigned acknowledges receipt of the Prospectus, dated August 11,
1998 (the "Prospectus"), of Viatel, Inc., a Delaware corporation ("Viatel") and
this Letter of Transmittal (this "Letter"). The Prospectus and this Letter
together constitute the offers of Viatel to exchange (i) 12.50% Senior Discount
Notes Due 2008 (Dollar Denominated) (the "12.50% Exchange Notes"), which have
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), (ii) 11.25% Senior Notes Due 2008 (Dollar Denominated) (the "11.25%
Exchange Notes"), which have been registered under the Securities Act, and (iii)
12.40% Senior Discount Notes Due 2008 (DM Denominated) and 11.15% Senior Notes
Due 2008 (DM Denominated), each of which have been registered under the
Securities Act and which will, upon consummation of the Exchange Offers, be
represented by the New DTC-DM Global Certificates, deposited with a custodian
for, and registered in the name of the Depository Trust Company ("DTC") or its
nominee (the "New DM Notes (DTC Held)"), for a like principal amount of (x)
12.50% Senior Discount Notes Due 2008 (Dollar Denominated), which were not
registered under the Securities Act (the "Existing 12.50% Notes"), (y) 11.25%
Senior Notes Due 2008 (Dollar Denominated), which were not registered under the
Securities Act (the "Existing 11.25% Notes"), and (z) 12.40% Senior Discount
Notes Due 2008 (DM Denominated) (the "Existing 12.40% Notes") and 11.15% Senior
Notes Due 2008 (DM Denominated) (the "Existing 11.15% Notes"), each of which
were not registered under the Securities Act and which were originally sold
pursuant to Rule 144A under the Securities Act, and are represented by permanent
global certificates in definitive, fully registered form deposited with a
custodian for, and registered in the name of DTC or its nominee (the "Existing
DM Notes (DTC Held)"). Capitalized terms used herein and not otherwise defined
shall have the meaning given such terms in the Prospectus.
The 12.50% Exchange Notes, the 11.25% Exchange Notes and the New DM Notes
(DTC Held) are collectively hereinafter referred to as the "New Non-DBC Notes."
The Existing 12.50% Notes, the Existing 11.25% Notes and the Existing DM Notes
(DTC Held) are collectively hereinafter referred to as the "Existing Non-DBC
Notes." The above offers form part of the Exchange Offers that are being
conducted concurrently by Viatel for Existing Non-DBC Notes and DBC Notes (as
defined below).
THIS LETTER IS APPLICABLE ONLY TO THE EXISTING NON-DBC NOTES. THIS LETTER
AND THE INSTRUCTIONS CONTAINED HEREIN DO NOT APPLY TO THE EXISTING 12.40% NOTES
OR THE EXISTING 11.15% NOTES ORIGINALLY SOLD OUTSIDE THE UNITED STATES PURSUANT
TO REGULATION S UNDER THE SECURITIES ACT AND REPRESENTED BY PERMANENT GLOBAL
CERTIFICATES IN BEARER FORM, DEPOSITED WITH DEUTSCHE BORSE CLEARING AG (THE "DBC
NOTES"). HOLDERS WHO WISH TO TENDER DBC NOTES, SHOULD USE THE APPLICABLE LETTER
OF TRANSMITTAL OBTAINABLE FROM DEUTSCHE BANK AG, THE GERMAN EXCHANGE AGENT.
2
<PAGE>
For each Existing Non-DBC Note accepted for exchange, the holder of such
Existing Non-DBC Note will receive a New Non-DBC Note having a principal amount
equal to that of the surrendered Existing Non-DBC Note.
Pursuant to the 1998 Registration Rights Agreement, Viatel agreed, with
respect to the Existing Notes and subject to the determination that the Exchange
Offers are permitted under applicable law, to use its best efforts to consummate
the Exchange Offers prior to October 8, 1998.
In the event that applicable interpretations of the staff of the Securities
and Exchange Commission (the "Commission") do not permit Viatel to effect the
Exchange Offers, or under certain other circumstances, Viatel is required, at
its cost, to use its best efforts to cause to become effective the Shelf
Registration Statement with respect to resales of the Existing Notes by holders
who satisfy certain conditions relating to the provision of information, and to
keep such Shelf Registration Statement effective until the expiration of the
time period referred to in Rule 144(k) under the Securities Act after April 8,
1998, or such shorter period that will terminate when all Existing Notes covered
by such registration statement have been sold thereunder. The Exchange Offers
are intended to satisfy Viatel's exchange offer obligations under the 1998
Registration Rights Agreement.
Viatel reserves the right, in its sole discretion (but subject to the terms
of the 1998 Registration Rights Agreement) (i) to delay accepting any Existing
Non-DBC Notes, (ii) to extend the Exchange Offers, in which case the term
"Expiration Date" shall mean the latest time and date to which the Exchange
Offers are extended, and (iii) to amend the terms of the Exchange Offers in any
manner. If the Exchange Offers are amended in a manner determined by Viatel to
constitute a material change, Viatel will promptly disclose such amendments by
means of a prospectus supplement that will be distributed to the registered
holders of the Existing Notes and Viatel will extend the Exchange Offers for a
period of five to ten business days, depending upon the significance of the
amendment and the manner of disclosure to the registered holders, if the
Exchange Offers would otherwise expire during such five to ten business day
period.
This Letter is to be completed by a holder of Existing Non-DBC Notes either
if certificates are to be forwarded herewith or if a tender of Existing Non-DBC
Notes is to be made by book-entry transfer to the account maintained by The Bank
of New York, as U.S. Exchange Agent (the "U.S. Exchange Agent"), at the
Book-Entry Transfer Facility of DTC pursuant to the procedures set forth in "The
Exchange Offers -- Terms of the Exchange Offers -- Book-Entry Transfer" section
of the Prospectus and an Agent's Message (as defined below) is NOT delivered.
Tenders by book-entry transfer may also be made by delivery of an Agent's
Message in lieu of this Letter. The term "Agent's Message" means a computer
generated message transmitted by means of DTC's Automated Tender Offer Program
("ATOP") system and received by the U.S. Exchange Agent, in which the tendering
holder acknowledges and agrees to be bound by the terms of this Letter. Holders
of Existing Non-DBC Notes (i) whose Existing Non-DBC Notes are not immediately
available or (ii) who cannot deliver their Existing Non-DBC Notes or any other
documents required by this Letter to the U.S. Exchange Agent prior to 5:00 p.m.,
New York City time, on the Expiration Date (or who cannot complete the procedure
for book-entry transfer on a timely basis), may tender their Existing Non-DBC
Notes according to the guaranteed delivery procedures set forth in "The Exchange
Offers -- Terms of the Exchange Offers -- Guaranteed Delivery Procedures"
section of the Prospectus. See Instruction 1 below.
If the undersigned is a broker-dealer that will receive New Non-DBC Notes
for its own account pursuant to the Exchange Offers, the undersigned
acknowledges that it will deliver the Prospectus meeting the requirements of the
Securities Act in connection with any resale of such New Non-DBC Notes;
PROVIDED, HOWEVER, that by so acknowledging that it will deliver and by
delivering a Prospectus, the undersigned will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. The Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of New Non-DBC Notes received in exchange for
Existing Non-DBC
3
<PAGE>
Notes where such Existing Non-DBC Notes were acquired by such broker-dealer for
its own account as a result of market-making activities or other trading
activities. For a period of 180 days after the Expiration Date, Viatel will use
its best efforts to maintain the effectiveness of the Registration Statement of
which the Prospectus forms a part and to amend and supplement the Prospectus
contained therein in order to permit the Prospectus to be lawfully delivered by
any broker-dealer for use in connection with any such resale, provided that such
broker-dealer indicates in this Letter that it is a broker-dealer. However, if
any holder is acquiring New Non-DBC Notes in the Exchange Offers for the purpose
of distributing or participating in a distribution of the New Non-DBC Notes,
such holder cannot rely on the position of the staff of the Commission
enunciated in the no-action letters regarding MORGAN STANLEY & CO., INCORPORATED
(available June 5, 1991) and EXXON CAPITAL HOLDINGS CORPORATION (available May
13, 1988), or interpreted in the Commission's interpretative letter to SHEARMAN
& STERLING (available July 2, 1993), or similar no-action or interpretive
letters, will not be entitled to validly tender Existing Non-DBC Notes in the
Exchange Offers and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any sale or transfer of
such Existing Non-DBC Notes, unless such sale or transfer is made pursuant to an
exemption from, or in a transaction not subject to, such requirements.
By acceptance of the Exchange Offers, each broker-dealer that receives New
Non-DBC Notes pursuant to the Exchange Offers agrees that, upon receipt of
notice from Viatel of the happening of any event which makes any statement in
the Prospectus untrue in any material respect or which requires the making of
any changes in the Prospectus in order to make the statements therein not
misleading (which notice Viatel agrees to deliver promptly to such
broker-dealer), such broker-dealer will suspend use of the Prospectus until
Viatel has amended or supplemented the Prospectus to correct such misstatement
or omission and has furnished copies of the amended or supplemented Prospectus
to such broker-dealer or until such broker-dealer is advised in writing by
Viatel that the use of the Prospectus may be resumed, and such broker-dealer has
received copies of any additional or supplemental filings that are incorporated
by reference in the Prospectus. If Viatel gives any such notice to suspend the
use of the Prospectus, it will extend the 180 day period referred to above by
the number of days during the period from and including the date of the
supplemented or amended Prospectus or until such broker-dealers have received a
statement in writing from Viatel that the use of the Prospectus may be resumed
and have received copies of any additional or supplemental filings that are
incorporated by reference in the Prospectus necessary to permit resales of the
New Non-DBC Notes.
Except as described above, the Prospectus may not be used for or in
connection with an offer to resell, a resale or any other transfer or
disposition of New Non-DBC Notes.
The undersigned has completed the appropriate boxes below and signed this
Letter to indicate the action the undersigned desires to take with respect to
the Exchange Offers.
4
<PAGE>
List below the Existing Non-DBC Notes to which this Letter relates. If the
space provided below is inadequate, the Certificate numbers and principal amount
of Existing Non-DBC Notes should be listed on a separate signed schedule affixed
hereto.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
DESCRIPTION OF EXISTING NON-DBC NOTES
----------------------------------------------------------------------------------------
(1) (2) (3)
AGGREGATE
PRINCIPAL
AMOUNT OF
NAME(S) AND ADDRESS(ES) OF REGISTERED EXISTING PRINCIPAL
HOLDER(S) CERTIFICATE NON-DBC AMOUNT
(PLEASE FILL IN, IF BLANK) NUMBER(S)* NOTE(S) TENDERED**
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
----------------------------------------------
----------------------------------------------
----------------------------------------------
TOTAL
- ----------------------------------------------------------------------------------------
* Need not be completed if Existing Non-DBC Notes are being tendered by book-entry
transfer.
** Unless otherwise indicated in this column, a holder will be deemed to have tendered
ALL of the Existing Non-DBC Notes represented by the Existing Non-DBC Notes indicated
in column 2. See Instruction 2 below. Existing 12.50% Notes and Existing 11.25% Notes
tendered hereby must be in denominations of U.S. $1,000 principal amount (principal
amount at maturity in the case of the Existing 12.50% Notes) and any integral
multiples thereof. Existing 12.40% Notes and Existing 11.15% Notes tendered hereby
must be in denominations of DM 100,000 principal amount (principal amount at maturity
in the case of the Existing 12.40% Notes) and any integral multiples of DM 1,000 above
such number. See Instruction 1 below.
</TABLE>
/ / CHECK HERE IF TENDERED EXISTING NON-DBC NOTES ARE BEING DELIVERED BY
BOOK-ENTRY TRANSFER MADE TO AN ACCOUNT MAINTAINED BY THE U.S. EXCHANGE
AGENT WITH THE BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution ___________________________________________
Account Number ____________ Transaction Code Name _______________________
By transferring the Existing Non-DBC Notes to the U.S. Exchange Agent's
account at the Book-Entry Transfer Facility of DTC in accordance with DTC's ATOP
procedures for transfer, including transmitting to the U.S. Exchange Agent an
Agent's Message in which the holder of the Existing Non-DBC Notes acknowledges
and agrees to be bound by the terms of, and makes the representations and
warranties contained in, this Letter, the participant in the Book-Entry Transfer
Facility confirms on behalf of itself and the beneficial owners of such Existing
Non-DBC Notes all provisions of this Letter (including all representations and
warranties) applicable to it and such beneficial owner as fully as if it had
completed the information required herein and executed and transmitted this
Letter to the U.S. Exchange Agent.
5
<PAGE>
/ / CHECK HERE IF THE TENDERED EXISTING NON-DBC NOTES ARE BEING DELIVERED
PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE U.S.
EXCHANGE AGENT AND COMPLETE THE FOLLOWING:
Name(s) of Registered Holder(s) _________________________________________
Window Ticket Number (if any) ___________________________________________
Date of Execution of Notice of Guaranteed Delivery ______________________
Name of Institution which Guaranteed Delivery ___________________________
If Delivered by Book-Entry Transfer, Complete the Following:
Account Number ____________ Transaction Code Name _______________________
/ / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name: _____________________________________________________________________
Address: __________________________________________________________________
__________________________________________________________________
6
<PAGE>
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4 BELOW)
To be completed ONLY if certificates for Existing Non-DBC Notes not
exchanged and/or New Non-DBC Notes are to be issued in the name of and sent to
someone other than the person or persons whose signature(s) appear(s) on this
Letter above, or if Existing Non-DBC Notes delivered by book-entry transfer
which are not accepted for exchange are to be returned by credit to an account
maintained at the Book-Entry Transfer Facility other than the account indicated
above.
Issue: New Non-DBC Notes and/or Existing Non-DBC Notes to:
Name(s) ________________________________________________________________________
(Please Type or Print)
_______________________________________________________________________________
(Please Type or Print)
Address ________________________________________________________________________
_______________________________________________________________________________
(Zip Code)
/ / Credit unexchanged Existing Non-DBC Notes delivered by book-entry transfer
to the Book-Entry Transfer Facility account set forth below:
_______________________________________________________________________________
(Book-Entry Transfer Facility
Account Number, if applicable)
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4 BELOW)
To be completed ONLY if certificates for Existing Non-DBC Notes not
exchanged and/or New Non-DBC Notes are to be sent to someone other than the
person or persons whose signature(s) appear(s) on this Letter above or to such
person or persons at an address other than shown in the box entitled
"Description of Existing Non-DBC Notes" on this Letter above.
Mail: New Non-DBC Notes and/or Existing Non-DBC Notes to:
Name(s) ________________________________________________________________________
(Please Type or Print)
_______________________________________________________________________________
(Please Type or Print)
Address ________________________________________________________________________
_______________________________________________________________________________
(Zip Code)
IMPORTANT: THIS LETTER OR A FACSIMILE HEREOF (TOGETHER WITH THE CERTIFICATES
FOR EXISTING NON-DBC NOTES OR CONFIRMATION OF BOOK-ENTRY DELIVERY AND ALL
OTHER REQUIRED DOCUMENTS OR THE NOTICE OF GUARANTEED DELIVERY) MUST BE
RECEIVED BY THE U.S. EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON
THE EXPIRATION DATE.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETING ANY BOX ABOVE.
7
<PAGE>
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS)
<TABLE>
<S> <C>
Dated: , 1998
X , 1998
X , 1998
Signature(s) of Owner Date
</TABLE>
Area Code and Telephone Number: ________________________________________________
If a holder is tendering any Existing Non-DBC Notes, this Letter must be
signed by the registered holder(s) as the name(s) appear(s) on the
certificate(s) for the Existing Non-DBC Notes or by any person(s) authorized to
become registered holder(s) by endorsements and documents transmitted herewith.
If signature is by a trustee, executor, administrator, guardian, officer or
other person acting in a fiduciary or representative capacity, please set forth
full title. See Instruction 3 below.
<TABLE>
<S> <C>
Name(s):
(Please Type or Print)
Capacity:
Address:
(Including Zip Code)
</TABLE>
SIGNATURE OF GUARANTEE
(IF REQUIRED BY INSTRUCTION 3 BELOW)
<TABLE>
<S> <C>
Signature(s) Guaranteed by
an Eligible Institution:
(Authorized Signature)
(Title)
(Name and Firm)
</TABLE>
Dated:
__________________________________________________________________________, 1998
8
<PAGE>
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offers, the
undersigned hereby tenders to Viatel the aggregate principal amount of Existing
Non-DBC Notes indicated above. Subject to, and effective upon, the acceptance
for exchange of the Existing Non-DBC Notes tendered hereby, the undersigned
hereby sells, assigns and transfers to, or upon the order of, Viatel all right,
title and interest in and to such Existing Non-DBC Notes as are being tendered
hereby.
The undersigned hereby represents and warrants that the undersigned has full
power and authority to tender, sell, assign and transfer the Existing Non-DBC
Notes tendered hereby and that Viatel will acquire good and unencumbered title
thereto, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claim when the same are accepted by Viatel. The
undersigned hereby further represents that any New Non-DBC Notes acquired in
exchange for Existing Non-DBC Notes tendered hereby will have been acquired in
the ordinary course of business of the person receiving such New Non-DBC Notes,
whether or not such person is the undersigned, that neither the holder of such
Existing Non-DBC Notes nor any such other person is participating in, or intends
to participate in, a distribution of such New Non-DBC Notes, or has an
arrangement or understanding with any person to participate in the distribution
of such New Non-DBC Notes, and that neither the holder of such Existing Non-DBC
Notes nor any such other person is an "affiliate," as defined in Rule 405 under
the Securities Act, of Viatel.
The undersigned also acknowledges that the Exchange Offers are being made
based upon Viatel's understanding of an interpretation by the staff of the
Commission set forth in no-action letters and interpretative letters issued to
third parties that the New Non-DBC Notes issued in exchange for the Existing
Non-DBC Notes pursuant to the Exchange Offers may be offered for resale, resold
and otherwise transferred by any holder thereof (other than a broker-dealer who
purchased Existing Non-DBC Notes directly from Viatel for resale pursuant to
Rule 144A under the Securities Act or any other available exemption thereunder),
without compliance with the registration and prospectus delivery requirements of
the Securities Act, provided that such New Non-DBC Notes are acquired in the
ordinary course of such holder's business and that such holder is not
participating, does not intend to participate, and has no arrangement or
understanding with any person to participate, in any distribution of the New
Non-DBC Notes.
Any holder who tenders in the Exchange Offers with the intention to
participate, or the purpose of participating, in a distribution of the New
Non-DBC Notes (i) may not rely upon such interpretations by the staff of the
Commission, (ii) will not be entitled to validly tender Existing Non-DBC Notes
in the Exchange Offers and (iii) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
sale or transfer of the New Non-DBC Notes, unless such sale or transfer is made
pursuant to an exemption from, or in a transaction not subject to, such
requirements. If the undersigned is a broker-dealer that will receive New
Non-DBC Notes for its own account in exchange for Existing Non-DBC Notes, it
represents that the Existing Non-DBC Notes to be exchanged for the New Non-DBC
Notes were acquired by it as a result of market-making activities or other
trading activities and acknowledges that it will deliver a prospectus meeting
the requirements of the Securities Act in connection with any resale of such New
Non-DBC Notes; however, by so acknowledging and by delivering a prospectus, the
undersigned will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
The undersigned will, upon request, execute and deliver any additional
documents deemed by Viatel to be necessary or desirable to complete the sale,
assignment and transfer of the Existing Non-DBC Notes tendered hereby. All
authority conferred or agreed to be conferred in this Letter and every
obligation of the undersigned hereunder shall be binding upon the successors,
assigns, heirs, executors, administrators, trustees in bankruptcy and legal
representatives of the undersigned and shall not be affected by, and shall
survive, the death or incapacity of the undersigned. This tender may be
withdrawn only in accordance with the procedures set forth in "The Exchange
Offers -- Terms of the Exchange Offers -- Withdrawal of Tenders of Existing
Notes" section of the Prospectus.
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF EXISTING
NON-DBC NOTES" ABOVE AND SIGNING THIS LETTER, WILL BE DEEMED TO HAVE TENDERED
THE EXISTING NON-DBC NOTES AS SET FORTH IN SUCH BOX ABOVE.
9
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE
OFFER TO EXCHANGE
12.50% SENIOR DISCOUNT NOTES DUE 2008 (DOLLAR DENOMINATED),
11.25% SENIOR NOTES DUE 2008 (DOLLAR DENOMINATED),
12.40% SENIOR DISCOUNT NOTES DUE 2008 (DM DENOMINATED/DTC HELD)
AND 11.15% SENIOR NOTES DUE 2008 (DM DENOMINATED/DTC HELD)
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT,
FOR ANY AND ALL OUTSTANDING
12.50% SENIOR DISCOUNT NOTES DUE 2008 (DOLLAR DENOMINATED),
11.25% SENIOR NOTES DUE 2008 (DOLLAR DENOMINATED),
12.40% SENIOR DISCOUNT NOTES DUE 2008 (DM DENOMINATED/DTC HELD)
AND 11.15% SENIOR NOTES DUE 2008 (DM DENOMINATED/DTC HELD)
WHICH HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF
VIATEL, INC.
1. DELIVERY OF THIS LETTER AND EXISTING NON-DBC NOTES; GUARANTEED DELIVERY
PROCEDURES. This Letter is to be completed by holders of Existing Non-DBC Notes
either if certificates are to be forwarded herewith or if tenders are to be made
pursuant to the procedures for delivery by book-entry transfer set forth in "The
Exchange Offers -- Terms of the Exchange Offers -- Book-Entry Transfer" section
of the Prospectus and an Agent's Message is NOT delivered. Tenders by book-entry
transfer may also be made by delivery of an Agent's Message in lieu of this
Letter.
Certificates for all physically tendered Existing Non-DBC Notes, or
book-entry confirmation, as the case may be, as well as a properly completed and
duly executed Letter (or fascimile hereof or an Agent's Message in lieu thereof)
and any other documents required by this Letter, must be received by the U.S.
Exchange Agent at the address set forth above prior to 5:00 p.m., New York City
time, on the Expiration Date, or the tendering holder must comply with the
guaranteed delivery procedures set forth below. Existing 12.50% Notes and
Existing 11.25% Notes tendered hereby must be in denominations of U.S. $1,000
principal amount (principal amount at maturity in the case of Existing 12.50%
Notes) and any integral multiples thereof. Existing 12.40% Notes and Existing
11.15% Notes tendered hereby must be in denominations of DM 100,000 principal
amount (principal amount at maturity in the case of Existing 12.40% Notes) and
any integral multiples of DM 1,000 above such number.
Holders of Existing Non-DBC Notes (i) whose Existing Non-DBC Notes are not
immediately available or (ii) who cannot deliver their Existing Non-DBC Notes or
any other documents required by this Letter to the U.S. Exchange Agent prior to
5:00 p.m., New York City time, on the Expiration Date (or who
10
<PAGE>
cannot complete the procedure for book-entry transfer on a timely basis), may
tender their Existing Non-DBC Notes pursuant to the guaranteed delivery
procedures set forth in "The Exchange Offers -- Terms of the Exchange Offers --
Guaranteed Delivery Procedures" section of the Prospectus. Pursuant to such
procedures: (i) such tender must be made by or through an Eligible Institution
(as defined below), (ii) on or prior to the Expiration Date, the U.S. Exchange
Agent must have received from the Eligible Institution a properly completed and
duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail, or
hand delivery) setting forth the name and address of the holder, the certificate
number or numbers of the tendered Existing Non-DBC Notes, and the principal
amount of tendered Existing Non-DBC Notes, stating that the tender is being made
thereby and guaranteeing that, within three business days after the Expiration
Date, an applicable Letter of Transmittal, or a facsimile thereof, together with
the tendered Existing Non-DBC Notes (or confirmation of a book-entry transfer of
such Existing Non-DBC Notes into the U.S. Exchange Agent's account at DTC), and
any other required documents will be deposited by the Eligible Institution with
the U.S. Exchange Agent, and (iii) such properly completed and executed Letter
of Transmittal and all documents required thereby, and the tendered Existing
Non-DBC Notes in proper form for transfer (or confirmation of a book-entry
transfer of such Existing Non-DBC Notes into the U.S. Exchange Agent's account
at DTC), must be received by the U.S. Exchange Agent within three business days
after the Expiration Date. Any holder who wishes to tender Existing Non-DBC
Notes pursuant to the guaranteed delivery procedures described above must ensure
that the U.S. Exchange Agent receives the required Notice of Guaranteed Delivery
prior to 5:00 p.m., New York City time, on the Expiration Date. Copies of a
Notice of Guaranteed Delivery, which may be used by Eligible Institutions for
the purposes described in this paragraph are available from the U.S. Exchange
Agent.
THE METHOD OF DELIVERY OF EXISTING NON-DBC NOTES, LETTERS OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER. IF SUCH
DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED,
WITH RETURN RECEIPT REQUESTED, BE USED. INSTEAD OF DELIVERY BY MAIL, IT IS
RECOMMENDED THAT THE HOLDER USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL
SUCH CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO
EXISTING NON-DBC NOTES OR LETTERS OF TRANSMITTAL SHOULD BE SENT TO VIATEL.
See "The Exchange Offers" section of the Prospectus.
2. PARTIAL TENDERS (NOT APPLICABLE TO HOLDERS OF EXISTING NON-DBC NOTES WHO
TENDER BY BOOK-ENTRY TRANSFER). If less than all of the Existing Non-DBC Notes
evidenced by a submitted certificate are to be tendered, the tendering holder(s)
should fill in the aggregate principal amount of Existing Non-DBC Notes to be
tendered in the box above entitled "Description of Existing Non-DBC Notes --
Principal Amount Tendered." A reissued certificate representing the balance of
non-tendered Existing Non-DBC Notes will be sent to such tendering holder,
unless otherwise provided in the appropriate box on this Letter, promptly after
the Expiration Date. All of the Existing Non-DBC Notes delivered to the U.S.
Exchange Agent will be deemed to have been tendered unless otherwise indicated.
3. SIGNATURES ON THIS LETTER; BOND POWERS AND ENDORSEMENTS; GUARANTEE OF
SIGNATURES. If this Letter is signed by the registered holder of the Existing
Non-DBC Notes tendered hereby, the signature must correspond exactly with the
name of the registered holder as it appears on the Existing Non-DBC Notes or
security position listing maintained by DTC, as the case may be, without any
change whatsoever.
If any tendered Existing Non-DBC Notes are owned of record by two or more
joint owners, all such owners must sign this Letter.
If any tendered Existing Non-DBC Notes are registered in different names on
Existing Non-DBC Notes or security position listings maintained by DTC, as the
case may be, it will be necessary to complete, sign and submit as many separate
copies of this Letter as there are different registrations of Existing Non-DBC
Notes or security position listings, as the case may be.
11
<PAGE>
When this Letter is signed by the registered holder of the Existing Non-DBC
Notes specified herein and tendered hereby, no endorsements of certificates or
separate bond powers are required. If, however, the New Non-DBC Notes are to be
issued, or any untendered Existing Non-DBC Notes are to be reissued, to a person
other than the registered holder, then endorsements of any certificates
transmitted hereby or separate bond powers are required. Signatures on such
certificates must be guaranteed by an Eligible Institution.
If this Letter is signed by a person other than the registered holder of
Existing Non-DBC Notes specified herein, such Existing Non-DBC Notes must be
endorsed or accompanied by appropriate bond powers, in either case signed
exactly as the name of the registered holder appears on the Existing Non-DBC
Notes or security position listing maintained by DTC, as the case may be, and
such signatures must be guaranteed by an Eligible Institution.
If this Letter or any other certificates or bond powers required by this
Letter are signed by any trustee, executor, administrator, guardian,
attorney-in-fact, officer of a corporation or other person acting in a fiduciary
or representative capacity, such person should so indicate when signing, and,
unless waived by Viatel, proper evidence satisfactory to Viatel, in its sole
discretion, of such person's authority to so act must be submitted.
Endorsements on certificates for Existing Non-DBC Notes or signatures on
bond powers required by this Instruction 3 must be guaranteed by a firm that is
a member of a registered national securities exchange or a member of the
National Association of Securities Dealers, Inc., by a commercial bank or trust
company having an office or correspondent in the United States or by an
"eligible guarantor institution" within the meaning of Rule 17Ad-15 under the
Securities Exchange Act of 1934, as amended (an "Eligible Institution").
Signatures on this Letter need not be guaranteed by an Eligible Institution,
provided that the Existing Non-DBC Notes are tendered (i) by a registered holder
of Existing Non-DBC Notes (which term, for purposes of the Exchange Offers,
includes any participant in the Book-Entry Transfer Facility system whose name
appears on a security position listing as the holder of such Existing Non-DBC
Notes) who has not completed the box entitled "Special Issuance Instructions" or
"Special Delivery Instructions" on this Letter, or (ii) for the account of an
Eligible Institution.
4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. Tendering holders of
Existing Non-DBC Notes should indicate in the applicable box the account at the
Book-Entry Transfer Facility to which New Non-DBC Notes issued pursuant to the
Exchange Offers are to be credited, if different from the account number
appearing below the box entitled "Description of Existing Non-DBC Notes." Any
substitute certificates representing Existing Non-DBC Notes not exchanged will
be delivered in the name of the undersigned at the address shown above in the
box entitled "Description of Existing Non-DBC Notes," unless otherwise indicated
herein in the appropriate box.
5. U.S. BACKUP TAX WITHHOLDING AND INTERNAL REVENUE SERVICE FORM
W-9. Under the federal income tax laws, payments made to United States persons
on account of New Non-DBC Notes issued pursuant to the Exchange Offers may be
subject to backup withholding at the rate of 31%. In order to avoid such backup
withholding, a holder that is a United States person may be required to complete
and sign an Internal Revenue Service Form W-9 (an "IRS Form W-9") and provide it
to the payor. Certain holders (including, among others, corporations and certain
foreign individuals) are not subject to these backup withholding and reporting
requirements. In order for a foreign individual to qualify as an exempt
recipient, such holder must submit an IRS Form W-8 to the payor, signed under
penalties of perjury, and must attest to that individual's exempt status.
6. TRANSFER TAXES. Viatel will pay all transfer taxes, if any, applicable
to the exchange of the Existing Non-DBC Notes pursuant to the Exchange Offers.
If however, New Non-DBC Notes, or Existing Non-DBC Notes for principal amounts
not tendered or accepted for exchange, are to be delivered to, or to be
12
<PAGE>
issued in the name of, any person other than the registered holder of the
Existing Non-DBC Notes tendered or if a transfer tax is imposed for any reason
other than the exchange of Existing Non-DBC Notes pursuant to the Exchange
Offers, then the amount of any such transfer taxes (whether imposed on the
registered holder or any other persons) will be payable by the tendering holder.
If satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the applicable Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering holder.
EXCEPT AS PROVIDED IN THIS INSTRUCTION 6, IT IS NOT NECESSARY FOR TRANSFER
TAX STAMPS TO BE AFFIXED TO THE EXISTING NON-DBC NOTES SPECIFIED IN THIS LETTER.
7. WAIVER OF CONDITIONS. Viatel reserves the absolute right to waive
satisfaction of any or all conditions enumerated in the Prospectus.
8. NO CONDITIONAL TENDERS. No alternative, conditional, irregular or
contingent tenders will be accepted. All tendering holders of Existing Non-DBC
Notes, by execution of this Letter, shall waive any right to receive notice of
the acceptance of their Existing Non-DBC Notes for exchange. Neither Viatel nor
the U.S. Exchange Agent nor any other person is obligated to give notice of any
defect or irregularity with respect to any tender of Existing Non-DBC Notes nor
shall any of them incur any liability for failure to give any such notice.
9. MUTILATED, LOST, STOLEN OR DESTROYED EXISTING NON-DBC NOTES. Any holder
whose Existing Non-DBC Notes have been mutilated, lost, stolen or destroyed
should contact the U.S. Exchange Agent at the address indicated above for
further instructions.
10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to
the procedure for tendering Existing Non-DBC Notes, as well as requests for
additional copies of the Prospectus, this Letter and other related documents
should be directed to the U.S. Exchange Agent at the address and telephone
number indicated above.
IMPORTANT: THIS LETTER OR A FACSIMILE HEREOF (TOGETHER WITH CERTIFICATES FOR
EXISTING NON-DBC NOTES, OR CONFIRMATION OF BOOK-ENTRY DELIVERY, AND ALL OTHER
REQUIRED DOCUMENTS OR THE NOTICE OF GUARANTEED DELIVERY) MUST BE RECEIVED BY THE
U.S. EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION
DATE.
13
<PAGE>
EXHIBIT 99.2
LETTER OF TRANSMITTAL
OFFER TO EXCHANGE
12.40% SENIOR DISCOUNT NOTES DUE 2008 (DM DENOMINATED/DBC HELD)
AND 11.15% SENIOR NOTES DUE 2008 (DM DENOMINATED/DBC HELD)
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT,
FOR ANY AND ALL OUTSTANDING
12.40% SENIOR DISCOUNT NOTES DUE 2008 (DM DENOMINATED/DBC HELD)
AND 11.15% SENIOR NOTES DUE 2008 (DM DENOMINATED/DBC HELD)
WHICH HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT,
OF
VIATEL, INC.
PURSUANT TO THE PROSPECTUS, DATED AUGUST 11, 1998
THE EXCHANGE OFFERS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME (11:00
P.M. FRANKFURT/MAIN TIME), ON SEPTEMBER 16, 1998 (THE "EXPIRATION
DATE"), UNLESS EXTENDED. TENDERS MAY BE WITHDRAWN PRIOR TO 5:00 P.M.,
NEW YORK CITY TIME (11:00 P.M. FRANKFURT/MAIN TIME), ON THE EXPIRATION
DATE.
DELIVERY TO DEUTSCHE BANK AG BY FACSIMILE TRANSMISSION, BY
REGISTERED OR CERTIFIED MAIL, BY OVERNIGHT COURIER OR BY HAND:
DEUTSCHE BANK AG
Wertpapierdienste/Kepitaltransaktionen Inland
Alfred-Herrhausen-Allee 16-24
D-60262 Frankfurt am Main
Germany
Attention: Dogmar Riedel
BY FACSIMILE TRANSMISSION:
011-49-69-910-66813
CONFIRM BY TELEPHONE:
011-49-69-910-66809
For information with respect to the Exchange Offer, call:
011-49-69-910-66809
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE, WILL
NOT CONSTITUTE A VALID DELIVERY.
<PAGE>
The undersigned acknowledges receipt of the Prospectus, dated August 11,
1998 (the "Prospectus"), of Viatel, Inc., a Delaware corporation ("Viatel") and
this Letter of Transmittal (this "Letter"). The Prospectus and this Letter
together constitute the offers (the "Exchange Offer") of Viatel to exchange
12.40% Senior Discount Notes Due 2008 (DM Denominated) and 11.15% Senior Notes
Due 2008 (DM Denominated), which have been registered under the Securities Act
of 1933, as amended (the "Securities Act") and which will, upon consummation of
the Exchange Offer, be represented by the New DBC-DM Global Certificates,
deposited with Deutsche Borse Clearing AG ("DBC") (the "New DBC Notes") for a
like principal amount of 12.40% Senior Discount Notes Due 2008 (DM Denominated)
(the "Existing 12.40% Notes") and 11.15% Senior Notes Due 2008 (DM Denominated)
(the "Existing 11.15% Notes"), which have not been registered under the
Securities Act and which were originally sold outside the United States pursuant
to Regulation S under the Securities Act and are represented by permanent global
certificates in definitive, bearer form deposited with DBC (the "Existing DBC
Notes"). Capitalized terms used herein and not otherwise defined shall have the
meaning given such terms in the Prospectus.
The Exchange Offer forms a part of the Exchange Offers that are being
conducted concurrently by Viatel for the Existing DBC Notes and the non-DBC
Notes.
THIS LETTER IS APPLICABLE ONLY TO THE EXISTING DBC NOTES. THIS LETTER AND
THE INSTRUCTIONS CONTAINED HEREIN DO NOT APPLY TO NON-DBC NOTES (INCLUDING THE
EXISTING 12.40% NOTES AND THE EXISTING 11.15% NOTES ORIGINALLY SOLD IN THE
UNITED STATES PURSUANT TO RULE 144A UNDER THE SECURITIES ACT AND REPRESENTED BY
PERMANENT GLOBAL CERTIFICATES IN DEFINITIVE, FULLY REGISTERED FORM, DEPOSITED
WITH A CUSTODIAN FOR, AND REGISTERED IN THE NAME OF, THE DEPOSITORY TRUST
COMPANY). HOLDERS WHO WISH TO TENDER NON-DBC NOTES SHOULD USE THE APPLICABLE
LETTER OF TRANSMITTAL OBTAINABLE FROM THE BANK OF NEW YORK, THE U.S. EXCHANGE
AGENT.
2
<PAGE>
Any Existing DBC Notes accepted for exchange shall be exchanged for a
principal amount equal to that of the surrendered Existing DBC Notes. Upon
consummation of the Exchange Offer, the New DBC Notes will be represented by
permanent global certificates in bearer form, deposited with DBC (the "New
DBC-DM Global Certificates") and will represent the New DBC Notes held by
account holders in DBC. The New DBC Notes represented by the New DBC-DM Global
Certificates will be shown on, and transfers thereof will be effected only
through, records maintained by DBC and its direct and indirect participants.
Certificated notes will not be issued in exchange for interests in the New
DBC-DM Global Certificates.
Pursuant to the 1998 Registration Rights Agreement, Viatel agreed, with
respect to the Existing Notes and subject to the determination that the Exchange
Offers are permitted under applicable law, to use its best efforts to consummate
the Exchange Offers prior to October 8, 1998.
In the event that applicable interpretations of the staff of the Securities
and Exchange Commission (the "Commission") do not permit Viatel to effect the
Exchange Offers, or under certain other circumstances, Viatel is required, at
its cost, to use its best efforts to cause to become effective the Shelf
Registration Statement with respect to resales of the Existing Notes by holders
who satisfy certain conditions relating to the provision of information, and to
keep such registration statement effective until the expiration of the time
period referred to in Rule 144(k) under the Securities Act after April 8, 1998,
or such shorter period that will terminate when all Existing Notes covered by
the Shelf Registration Statement have been sold thereunder. The Exchange Offers
are intended to satisfy Viatel's exchange offer obligations under the 1998
Registration Rights Agreement.
Viatel reserves the right, in its sole discretion (but subject to the terms
of the 1998 Registration Rights Agreement) (i) to delay accepting any Existing
DBC Notes, (ii) to extend the Exchange Offers, in which case the term
"Expiration Date" shall mean the latest time and date to which the Exchange
Offers are extended, and (iii) to amend the terms of the Exchange Offers in any
manner. If the Exchange Offers are amended in a manner determined by Viatel to
constitute a material change, Viatel will promptly disclose such amendments by
means of a prospectus supplement that will be distributed to the registered
holders of the Existing Notes and Viatel will extend the Exchange Offers for a
period of five to ten business days, depending upon the significance of the
amendment and the manner of disclosure to the registered holders, if the
Exchange Offers would otherwise expire during such five to ten business day
period.
This Letter is to be completed by a holder of Existing DBC Notes wishing to
tender such Existing DBC Notes for exchange pursuant to the procedures set forth
in "The Exchange Offers -- Terms of the Exchange Offers -- Procedures for the
Tendering of the DBC Notes" section of the Prospectus.
If the undersigned is a broker-dealer that will receive New DBC Notes for
its own account pursuant to the Exchange Offer, the undersigned acknowledges
that it will deliver the Prospectus meeting the requirements of the Securities
Act in connection with any resale of such New DBC Notes; PROVIDED, HOWEVER, that
by so acknowledging that it will deliver and by delivering a Prospectus, the
undersigned will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. The Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New DBC Notes received in exchange for Existing DBC Notes where
such Existing DBC Notes were acquired by such broker-dealer for its own account
as a result of market-making activities or other trading activities. For a
period of 180 days after the Expiration Date, Viatel will use its best efforts
to maintain the effectiveness of the Registration Statement of which the
Prospectus forms a part and to amend and supplement the Prospectus contained
therein in order to permit the Prospectus to be lawfully delivered by any
broker-dealer for use in connection with any such resale, provided that such
broker-dealer indicates in this Letter that it is a broker-dealer. However, if
any holder is acquiring New DBC Notes in the Exchange Offer for the purpose of
distributing or participating in a distribution of the New DBC Notes, such
holder cannot rely on the position of the staff of the Commission enunciated in
the no-action letters regarding MORGAN STANLEY & CO., INCORPORATED (available
June 5, 1991) and EXXON CAPITAL
3
<PAGE>
HOLDINGS CORPORATION (available May 13, 1988), or interpreted in the
Commission's interpretative letter to SHEARMAN & STERLING (available July 2,
1993), or similar no-action or interpretive letters, will not be entitled to
validly tender Existing DBC Notes in the Exchange Offer, and must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any sale or transfer of such Existing DBC Notes, unless such
sale or transfer is made pursuant to an exemption from, or in a transaction not
subject to, such requirements.
By acceptance of the Exchange Offer, each broker-dealer that receives New
DBC Notes pursuant to the Exchange Offer agrees that, upon receipt of notice
from Viatel of the happening of any event which makes any statement in the
Prospectus untrue in any material respect or which requires the making of any
changes in the Prospectus in order to make the statements therein not misleading
(which notice Viatel agrees to deliver promptly to such broker-dealer), such
broker-dealer will suspend use of the Prospectus until Viatel has amended or
supplemented the Prospectus to correct such misstatement or omission and has
furnished copies of the amended or supplemented Prospectus to such broker-dealer
or until such broker-dealer is advised in writing by Viatel that the use of the
Prospectus may be resumed, and such broker-dealer has received copies of any
additional or supplemental filings that are incorporated by reference in the
Prospectus. If Viatel gives any such notice to suspend the use of the
Prospectus, it will extend the 180 day period referred to above by the number of
days during the period from and including the date of the supplemented or
amended Prospectus or until such broker-dealers have received a statement in
writing from Viatel that the use of the Prospectus may be resumed and have
received copies of any additional or supplemental filings that are incorporated
by reference in the Prospectus necessary to permit resales of the New DBC Notes.
Except as described above, the Prospectus may not be used for or in
connection with an offer to resell, a resale or any other transfer or
disposition of New DBC Notes.
The undersigned has completed the appropriate boxes below and signed this
Letter to indicate the action the undersigned desires to take with respect to
the Exchange Offer.
4
<PAGE>
List below the Existing DBC Notes to which this Letter relates. If the space
provided below is inadequate, the principal amount of Existing DBC Notes should
be listed on a separate signed schedule affixed hereto.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
DESCRIPTION OF EXISTING DBC NOTES
----------------------------------------------------------------------------------------
(1) (2)
AGGREGATE
PRINCIPAL
AMOUNT OF
EXISTING PRINCIPAL
NAME(S) AND ADDRESS(ES) OF HOLDER(S) DBC AMOUNT
(PLEASE FILL IN, IF BLANK) NOTE(S) TENDERED*
<S> <C> <C>
- ------------------------------------------------------------------------------------------
------------------------------
------------------------------
------------------------------
TOTAL
- ----------------------------------------------------------------------------------------
* If less than ALL of the aggregate principal amount of the Existing DBC Notes indicated
in Column (1) are to be tendered, the tendering holder(s) should fill in the aggregate
principal amount of Existing DBC Notes to be tendered in Column (2). Existing DBC
Notes tendered hereby must be in denominations of DM 100,000 principal amount (or
principal amount at maturity in the case of the Existing 12.40% Notes) and any
integral multiples of DM 1,000 above such number. See Instruction 1 below.
</TABLE>
/ / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name: _____________________________________________________________________
Address: __________________________________________________________________
__________________________________________________________________
5
<PAGE>
IMPORTANT: THIS LETTER OR A FACSIMILE HEREOF (TOGETHER WITH ALL OTHER REQUIRED
DOCUMENTS) MUST BE RECEIVED BY THE GERMAN EXCHANGE AGENT AT THE ADDRESS SET
FORTH ABOVE PRIOR TO 5:00 P.M., NEW YORK CITY TIME (11:00 P.M. FRANKFURT/MAIN
TIME), ON THE EXPIRATION DATE.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETING THE BOX BELOW.
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS)
<TABLE>
<S> <C>
Dated: , 1998
X , 1998
X , 1998
Signature(s) of Owner Date
</TABLE>
Area Code and Telephone Number: ________________________________________________
If a holder is tendering any Existing DBC Notes, this Letter must be signed
by the holder(s) or by any person(s) authorized to become holder(s) by
endorsements and documents transmitted herewith. If signature is by a trustee,
executor, administrator, guardian, officer or other person acting in a fiduciary
or representative capacity, please set forth full title.
<TABLE>
<S> <C>
Name(s):
(Please Type or Print)
Capacity:
Address:
(Including Zip Code)
</TABLE>
6
<PAGE>
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to Viatel the aggregate principal amount of Existing
DBC Notes indicated above. Subject to, and effective upon, the acceptance for
exchange of the Existing DBC Notes tendered hereby, the undersigned hereby
sells, assigns and transfers to, or upon the order of, Viatel all right, title
and interest in and to such Existing DBC Notes as are being tendered hereby.
The undersigned hereby represents and warrants that the undersigned has full
power and authority to tender, sell, assign and transfer the Existing DBC Notes
tendered hereby and that Viatel will acquire good and unencumbered title
thereto, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claim when the same are accepted by Viatel. The
undersigned hereby further represents that any New DBC Notes acquired in
exchange for Existing DBC Notes tendered hereby will have been acquired in the
ordinary course of business of the person receiving such New DBC Notes, whether
or not such person is the undersigned, that neither the holder of such Existing
DBC Notes nor any such other person is participating in, or intends to
participate in, a distribution of such New DBC Notes, or has an arrangement or
understanding with any person to participate in the distribution of such New DBC
Notes, and that neither the holder of such Existing DBC Notes nor any such other
person is an "affiliate," as defined in Rule 405 under the Securities Act, of
Viatel.
The undersigned also acknowledges that the Exchange Offer is being made
based upon Viatel's understanding of an interpretation by the staff of the
Commission set forth in no-action letters and interpretative letters issued to
third parties that the New DBC Notes issued in exchange for the Existing DBC
Notes pursuant to the Exchange Offer may be offered for resale, resold and
otherwise transferred by any holder thereof (other than broker-dealers who
purchased Existing DBC Notes directly from Viatel for resale pursuant to Rule
144A under the Securities Act or any other available exemption thereunder),
without compliance with the registration and prospectus delivery requirements of
the Securities Act, provided that such New DBC Notes are acquired in the
ordinary course of such holder's business and that such holder is not
participating, does not intend to participate, and has no arrangement or
understanding with any person to participate, in any distribution of the New DBC
Notes.
Any holder who tenders in the Exchange Offer with the intention to
participate, or the purpose of participating, in a distribution of the New DBC
Notes (i) may not rely upon such interpretations by the staff of the Commission,
(ii) will not be entitled to validly tender Existing DBC Notes in the Exchange
Offer and (iii) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any sale or transfer of
the New DBC Notes, unless such sale or transfer is made pursuant to an exemption
from, or in a transaction not subject to, such requirements. If the undersigned
is a broker-dealer that will receive New DBC Notes for its own account in
exchange for Existing DBC Notes, it represents that the Existing DBC Notes to be
exchanged for the New DBC Notes were acquired by it as a result of market-making
activities or other trading activities and acknowledges that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such New DBC Notes; however, by so acknowledging and by delivering a
prospectus, the undersigned will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
The undersigned will, upon request, execute and deliver any additional
documents deemed by Viatel to be necessary or desirable to complete the sale,
assignment and transfer of the Existing DBC Notes tendered hereby. All authority
conferred or agreed to be conferred in this Letter and every obligation of the
undersigned hereunder shall be binding upon the successors, assigns, heirs,
executors, administrators, trustees in bankruptcy and legal representatives of
the undersigned and shall not be affected by, and shall survive, the death or
incapacity of the undersigned. This tender may be withdrawn only in accordance
with the procedures set forth in "The Exchange Offers -- Terms of the Exchange
Offers -- Withdrawal of Tenders of Existing Notes" section of the Prospectus.
7
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE
OFFER TO EXCHANGE
12.40% SENIOR DISCOUNT NOTES DUE 2008 (DM DENOMINATED/DBC HELD)
AND 11.15% SENIOR NOTES DUE 2008 (DM DENOMINATED/DBC HELD)
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT,
FOR ANY AND ALL OUTSTANDING
12.40% SENIOR DISCOUNT NOTES DUE 2008 (DM DENOMINATED/DBC HELD)
AND 11.15% SENIOR NOTES DUE 2008 (DM DENOMINATED/DBC HELD)
WHICH HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF
VIATEL, INC.
1. DELIVERY OF THIS LETTER AND EXISTING DBC NOTES. This Letter is to be
completed by holders of Existing DBC Notes who wish to tender pursuant to the
procedures for delivery by book-entry transfer set forth in "The Exchange Offers
- -- Terms of the Exchange Offers -- Procedures for the Tendering of the DBC
Notes" section of the Prospectus. A holder wishing to tender Existing DBC Notes
for exchange pursuant to the Exchange Offer must make book-entry delivery of
such Existing DBC Notes by causing the transfer of such Existing DBC Notes to
the DBC account of the German Exchange Agent as set forth in this Letter in
accordance with the applicable German statutory and contractual provisions and
must complete, sign and date this Letter or a facsimile hereof, in accordance
with the instructions contained herein and in the Prospectus, and must mail or
otherwise deliver this Letter to the German Exchange Agent at the address set
forth above prior to 5:00 p.m., New York City time (11:00 p.m. Frankfurt/Main
time), on the Expiration Date.
Any Existing DBC Notes tendered to the German Exchange Agent for exchange
pursuant to the Exchange Offer shall be exchanged for New DBC Notes in the
principal amount equal to that of the Existing DBC Notes tendered, provided that
the Letters of Transmittal were duly executed by the respective holders and that
a valid book-entry transfer of the Existing DBC Notes was made to the German
Exchange Agent's account in accordance with the terms set forth in the
applicable Letter of Transmittal and further provided that the Existing DBC
Notes must be tendered only in denominations of DM 100,000 principal amount (or
principal amount at maturity in the case of Existing 12.40% Notes), and any
integral multiples of DM 1,000 above such number, and that no such partial
tender may reduce the principal amount at maturity of an Existing DBC Note not
tendered to less than DM 100,000.
2. SIGNATURES ON THIS LETTER. If any tendered Existing DBC Notes are owned
of record by two or more joint owners, all such owners must sign this Letter.
8
<PAGE>
If this Letter is signed by any trustee, executor, administrator, guardian,
attorney-in-fact, officer of a corporation or other person acting in a fiduciary
or representative capacity on behalf of the owner of Existing DBC Notes, such
person should so indicate when signing, and, unless waived by Viatel, proper
evidence satisfactory to Viatel, in its sole discretion, of such person's
authority to so act must be submitted.
3. U.S. BACKUP TAX WITHHOLDING AND INTERNAL REVENUE SERVICE FORM
W-9. Under the federal income tax laws, payments made to United States persons
on account of New DBC Notes issued pursuant to the Exchange Offer may be subject
to backup withholding at the rate of 31%. In order to avoid such backup
withholding, a holder that is a United States person may be required to complete
and sign an Internal Revenue Service Form W-9 (an "IRS Form W-9") and provide it
to the payor. Certain holders (including, among others, corporations and certain
foreign individuals) are not subject to these backup withholding and reporting
requirements. In order for a foreign individual to qualify as an exempt
recipient, such holder must submit an IRS Form W-8 to the payor, signed under
penalties of perjury, and must attest to that individual's exempt status.
4. TRANSFER TAXES. Viatel will pay all transfer taxes, if any, applicable
to the exchange of the Existing DBC Notes pursuant to the Exchange Offer. If
however, New DBC Notes, or Existing DBC Notes for principal amounts not tendered
or accepted for exchange, are to be delivered to, or to be issued in the name
of, any person other than the registered holder of the Existing DBC Notes
tendered or if a transfer tax is imposed for any reason other than the exchange
of Existing DBC Notes pursuant to the Exchange Offer, then the amount of any
such transfer taxes (whether imposed on the registered holder or any other
persons) will be payable by the tendering holder. If satisfactory evidence of
payment of such taxes or exemption therefrom is not submitted with the
applicable Letter of Transmittal, the amount of such transfer taxes will be
billed directly to such tendering holder.
5. WAIVER OF CONDITIONS. Viatel reserves the absolute right to waive
satisfaction of any or all conditions enumerated in the Prospectus.
6. NO CONDITIONAL TENDERS. No alternative, conditional, irregular or
contingent tenders will be accepted. All tendering holders of Existing DBC
Notes, by execution of this Letter, shall waive any right to receive notice of
the acceptance of their Existing DBC Notes for exchange. Neither Viatel nor the
German Exchange Agent nor any other person is obligated to give notice of any
defect or irregularity with respect to any tender of Existing DBC Notes nor
shall any of them incur any liability for failure to give any such notice.
7. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to the
procedure for tendering Existing DBC Notes, as well as requests for additional
copies of the Prospectus, this Letter and other related documents should be
directed to the German Exchange Agent at the address and telephone number
indicated above.
IMPORTANT: THIS LETTER OR A FACSIMILE HEREOF (TOGETHER WITH ALL OTHER
REQUIRED DOCUMENTS) MUST BE RECEIVED BY THE GERMAN EXCHANGE AGENT PRIOR TO 5:00
P.M., NEW YORK CITY TIME (11:00 P.M. FRANKFURT/MAIN TIME), ON THE EXPIRATION
DATE.
9
<PAGE>
EXHIBIT 99.3
NOTICE OF GUARANTEED DELIVERY FOR
VIATEL, INC.
This form or one substantially equivalent hereto must be used to accept the
Exchange Offers of Viatel, Inc., a Delaware corporation ("Viatel") made pursuant
to the Prospectus, dated August 11, 1998 (the "Prospectus"), and the enclosed
Letter of Transmittal (the "Letter of Transmittal") if certificates for the
non-DBC Notes are not immediately available or if the procedure for the
book-entry transfer cannot be completed on a timely basis or time will not
permit all required documents to reach The Bank of New York, as the U.S.
Exchange Agent (the "U.S. Exchange Agent"), prior to 5:00 p.m., New York City
time, on the Expiration Date. Such form may be delivered or transmitted by
facsimile transmission, by registered or certified mail, by overnight courier or
by hand delivery to the U.S. Exchange Agent as set forth below. In addition, in
order to utilize the guaranteed delivery procedure to tender non-DBC Notes
pursuant to the Exchange Offers, a completed, signed and dated Letter of
Transmittal (or facsimile thereof) must also be received by the U.S. Exchange
Agent prior to 5:00 p.m., New York City time, on the Expiration Date.
Capitalized terms used herein and not otherwise defined shall have the meaning
given such terms in the Prospectus.
DELIVERY TO THE BANK OF NEW YORK BY FACSIMILE TRANSMISSION, BY REGISTERED
OR CERTIFIED MAIL, BY OVERNIGHT COURIER OR BY HAND:
THE BANK OF NEW YORK
Reorganization Section
101 Barclay Street, Floor 7 East
New York, New York 10286
Attention: Theresa Gass
BY FACSIMILE TRANSMISSION:
(FOR ELIGIBLE INSTITUTIONS ONLY)
(212) 815-6339
CONFIRM BY TELEPHONE:
(212) 815-5942
For information with respect to the Exchange Offers, call:
(212) 815-5942
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE, OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET
FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY.
<PAGE>
Ladies and Gentlemen:
Upon the terms and conditions set forth in the Prospectus and the
accompanying Letter of Transmittal, the undersigned hereby tenders to Viatel the
principal amount of non-DBC Notes set forth below, pursuant to the guaranteed
delivery procedure described in "The Exchange Offers -- Terms of the Exchange
Offers -- Guaranteed Delivery Procedures" section of the Prospectus.
- -------------------------------------------
Principal Amount of non-DBC Notes
Tendered:
$ ____________________________________________________________________________
______________________________________________________________________________
Certificate Nos. (if available):
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
If non-DBC Notes will be delivered by book-entry transfer to The Depository
Trust Company, provide account number.
Account Number _______________________________________________________________
- ------------------------------------------- ------------------------------
---------------------------------------------
Name(s) of Record Holder(s):
______________________________________________________________________________
Address(es):
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
Area Code and Telephone Number(s):
______________________________________________________________________________
Signature(s):
______________________________________________________________________________
______________________________________________________________________________
THE FOLLOWING GUARANTEE MUST BE COMPLETED.
<TABLE>
<S> <C>
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm that is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having a member or an office or correspondent in the
United States or any "eligible guarantor institution" within the meaning of Rule 17Ad-15
of the Securities Exchange Act of 1934, as amended, hereby (a) guarantees to deliver to
the U.S. Exchange Agent, at its address set forth above, the certificate(s) representing
all tendered non-DBC Notes, in proper form for transfer, or a book-entry confirmation,
together with a properly completed and duly executed Letter of Transmittal (or facsimile
thereof), with any required signature guarantees, and any other documents required by
the Letter of Transmittal within three business days after the date of execution of this
Notice of Guaranteed Delivery.
Name of Firm:
(AUTHORIZED SIGNATURE)
Address: Title:
Name:
Area Code and Tel. No.: Date:
</TABLE>
