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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER: 000-21261
VIATEL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-378366
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
800 THIRD AVENUE, NEW YORK, NEW YORK 10022
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 350-9200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. [X] YES [ ] NO
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K [ ].
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF
THE REGISTRANT AS OF MARCH 20, 1998 WAS APPROXIMATELY $135,514,594. AS OF MARCH
20, 1998, 23,061,857 SHARES OF THE REGISTRANT'S COMMON STOCK, $0.01 PAR VALUE,
WERE OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE. THE INFORMATION CALLED FOR BY PART III
IS INCORPORATED BY REFERENCE TO THE DEFINITIVE PROXY STATEMENT FOR THE COMPANY'S
1998 ANNUAL MEETING OF STOCKHOLDERS, WHICH WILL BE FILED ON OR BEFORE APRIL 30,
1998.
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<PAGE>
TABLE OF CONTENTS
PAGE
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PART I.................................................................. 1
ITEM 1. BUSINESS................................................. 1
General.................................................. 1
Business Strategy........................................ 2
Market Opportunities..................................... 4
Services................................................. 5
The Viatel Network....................................... 6
Circe Network............................................ 7
Sales and Marketing; Customers........................... 9
Information Systems...................................... 10
Carrier Contracts........................................ 11
Competition.............................................. 11
Government Regulation.................................... 12
Employees................................................ 22
ITEM 2. PROPERTIES............................................... 22
ITEM 3. LEGAL PROCEEDINGS........................................ 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...... 22
PART II.................................................................. 25
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS..................................... 25
ITEM 6. SELECTED FINANCIAL DATA................................... 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................... 27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISKS........................................... 44
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............... 45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................... 65
PART III................................................................. 65
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........ 65
ITEM 11. EXECUTIVE COMPENSATION.................................... 65
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT. ................................. 65
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............ 65
ITEM IV.................................................................. 65
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K...................................... 65
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED HEREIN WHICH EXPRESS "BELIEF," "ANTICIPATION,"
"EXPECTATION," OR "INTENTION" OR ANY OTHER PROJECTION, INCLUDING STATEMENTS
CONCERNING THE DESIGN, CONFIGURATION, FEATURE AND PERFORMANCE OF VIATEL, INC.'S
NETWORK (INCLUDING THE PROPOSED CIRCE NETWORK (AS DEFINED HEREIN)) AND RELATED
SERVICES, THE DEVELOPMENT AND EXPANSION OF VIATEL, INC.'S BUSINESS, THE MARKETS
IN WHICH VIATEL, INC.'S SERVICES ARE OR WILL BE OFFERED, CAPITAL EXPENDITURES
AND REGULATORY REFORM, INSOFAR AS THEY MAY APPLY PROSPECTIVELY AND ARE NOT
HISTORICAL FACTS, ARE "FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934. BECAUSE SUCH STATEMENTS INCLUDE RISKS AND UNCERTAINTIES, ACTUAL RESULTS
MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE
NOT LIMITED TO, THE FACTORS SET FORTH IN "ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CERTAIN FACTORS
WHICH MAY AFFECT THE COMPANY'S FUTURE RESULTS."
PART I
ITEM 1. BUSINESS.
GENERAL
Viatel, Inc. (together with its subsidiaries and predecessors, the
"Company" or "Viatel") 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 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. 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
(defined for purposes of this Report to include Central and South America and
the United Mexican States) 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 incumbent
telecommunications operator ("ITO") and is likely to be receptive to
competitively priced bundled service offerings by 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"), 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 December 31, 1997, the Company's customer base, primarily
consisting of small and medium-sized businesses, was 21,515, of which 12,407
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 asynchronous transfer mode ("ATM") services.
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As part of the Company's strategy to own or control key elements of its
network, the Company is in the process of raising capital to construct a
state-of-the-art fiber optic ring which will connect London, Paris, Brussels,
Antwerp, Rotterdam and Amsterdam (the "Circe Network"). The Circe Network will
be a high quality, high capacity, self-healing ring, utilizing advanced
synchronous digital hierarchy ("SDH") and dense wave division multiplexing
("DWDM") technologies. If the Company is able to raise the funds necessary to
construct the Circe Network, 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.
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.
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 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
European Union ("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.
2
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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 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
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 ("IRUs") or Minimum Investment Units
("MIUs") in digital fiber optic cable systems, (ii) has purchased POPs and
switches, and (iii) assuming that the Company is able to raise the necessary
funds, will construct 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 its acquisition of
Flat Rate Communications, Inc. ("Flat Rate"), a United States based
international telecommunications company that markets capacity to other
carriers, 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.
3
<PAGE>
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.
<TABLE>
<CAPTION>
INTERNATIONAL TRAFFIC PATTERNS
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
- -----------
* Europe-EU member states and Switzerland.
Source: TeleGeography 1997.
</TABLE>
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 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 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, Inc. ("WorldCom"),
and Europe Railtel B.V. cable system ("Hermes"). When completed, Ulysses will be
4
<PAGE>
an approximately 1,800 route kilometer Pan-European fiber optic network
connecting London, Amsterdam, Brussels and Paris. Hermes is currently 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, Esprit Telecom Group plc is continuing its
Pan-European build out, Fibernet Group plc has built a 35 city network,
primarily in the United Kingdom, and Level 3 Communications is 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" (an alliance among Telia of Sweden, Swiss
Telecom PTT and KPN of The Netherlands) and "Global One" (an alliance among
Sprint, France Telecom and Deutsche Telekom), 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.
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 (defined as the commercial provision
for the public of the direct transport and switching of speech in real-time
between public switched network termination points, enabling any user to use
equipment connected to such a network termination point to communicate with
another termination point) (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."
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 Integrated Services
Digital Network ("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.
5
<PAGE>
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 approximately
$20.0 million of capital expenditures in 1998 and approximately $10.0 million in
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 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'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."
6
<PAGE>
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."
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 public switched telephone
network ("PSTN"). 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, (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 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. The Company will monitor the activity of its network later in 1998 from
dual Network Operations Centers (each a "NOC") located in London and the greater
New York metropolitan area. These NOC's are to 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, if constructed.
CIRCE NETWORK
As part of the Company's strategy to own or control key elements of its
network infrastructure, the Company is currently seeking capital in order to
develop the Circe Network, which will link London, Paris, Brussels, Antwerp,
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Rotterdam and Amsterdam. There can be no assurance, however, that the Company
will be able to raise the funds necessary to develop the Circe Network in a
timely fashion, if at all. 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 1,850 route
kilometers, including 320 route kilometers of undersea fiber optic cable. The
development and operational start-up of the Circe Network is estimated to cost
approximately $330.0 million, based upon an existing route study. Assuming the
necessary funds are raised by mid-April 1998, the Company expects to commence
construction of the Circe Network in the Spring of 1998 and to place the system
in operation during 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 at 20 gigabits per second
("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. If
constructed, 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 the Circe Network in the Fall of 1997 and
retained MK International Limited ("MKI"), a subsidiary of WorldCom, to perform
a feasibility study and to propose a terrestrial route for the Circe Network. On
January 28, 1998, the Company received a preliminary route study from MKI which
identifies (i) the preferred rights-of-way in each country in which the Circe
Network will be constructed, as well as alternative routing options, (ii)
procedures for obtaining all permits, licenses and other regulatory requirements
necessary to allow the system to be installed along the preferred route and
(iii) construction methodology and associated risk analysis. The existing route
study is flexible and may be altered in order to reduce construction costs or
the time required to place the Circe Network in operation.
On March 13, 1998, the Company executed a binding letter of intent and
term sheet with Bechtel International, Inc. ("Bechtel"), pursuant to which
Bechtel was engaged by the Company to manage the construction of the system.
Under the terms of the letter of intent, Bechtel will have overall
responsibility for the procurement for, and the arranging and administering of,
the engineering, construction, commissioning and testing of the Circe Network.
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 the Circe Network 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 the Circe Network is
proposed to be constructed.
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Under the terms of the letter of intent, Bechtel has committed to a
ready-for-service date of December 31, 1998. 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.
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, the
Company has a binding letter of understanding with Nortel Telecom, Inc.
("Nortel"), executed on March 5, 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
agreements 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 (November 30, 1998
in the case of each agreement and December 1998 in the case of each Nortel
agreement).
The Company intends to employ DWDM technology, which is among the
latest commercial advancements in optical physics, on the Circe Network. 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.
If constructed, 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 and Brussels and its POP in
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.
If constructed, the operation of the Circe Network will be monitored by
the Company's NOCs to be located in London and in the New York metropolitan
area. 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.
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 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
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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.
The Company has recently 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
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 "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Certain Factors
Which May Affect the Company's Future Results - Dependence on Effective
Information Systems; 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,
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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 "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Certain Factors Which May Affect the
Company's Future Results - Dependence on Effective Information Systems; 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 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, "Concert" (an alliance
between British Telecom and MCI), Global One and the recently announced alliance
among WorldCom, MCI and Telefonica de Espana. 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 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
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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 and
results of operations.
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 and results of operations.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operatios - Certain Factors Which May Affect the Company's Future
Results - Rapidly Changing Industry, Technology and Customer Requirements;
Significant Price Declines." 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. There can be no assurance that the Company would be able
to compete effectively in any of its markets. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Certain Factors Which May Affect The Company's Future Results - "- 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 and
results of operations.
INTERNATIONAL TRAFFIC. Under the World Trade Organization ("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
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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.
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
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
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 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. In the Foreign Participation Order
described above, however, if the subject route does not comply with the
benchmark requirement, a carrier can demonstrate that the foreign country
provides "equivalent" resale opportunities. 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.
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
facilities in the United Kingdom, 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
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states are required to implement directives issued by the European Commission
("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 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
benefits 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
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<PAGE>
enjoy significant market power within the market for interconnection over the
fixed network.
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 remains to be implemented by a considerable number of implementing
Royal Decrees to be fully effective. For instance, the licensing conditions
applicable to certain carriers, including the Company, require further
implementing Royal Decrees.
In the interim, there is a provisional licensing system, which
effectively represents a barrier for many operators wishing to enter the Belgian
market. The drafts of the Royal Decrees containing definitive licensing
conditions also contain stringent requirements, such as the operator's
commitment to invest 400 million Belgian Francs or to deploy 500 kilometers of
transmission infrastructure within three years of the date the license is
granted in order to be eligible for a public telecommunications network operator
license. Furthermore, the draft Royal Decrees relating to Voice Telephony and to
public telecommunications networks each contain stringent requirements,
including a contribution of 1% of annual turnover in order to fund research and
development and other initiatives.
Notwithstanding these requirements (which may be modified by EC
intervention), the Company intends to file applications in Belgium for the
provision of Voice Telephony and for the establishment and operation of a public
telecommunications network. The portion of the Circe Network proposed to be
built in Belgium is expected to satisfy the infrastructure requirements
described above.
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. If the Circe Network is constructed,
the Company expects to 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.
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
Telecommunications ("ART").
In December 1997, the Company filed an application for a license as a
public telecommunications network operator (under Article L33.1 of the French
Code de Postes et Telecommunications) and provider of Voice Telephony services
to the public (under Article L34.1 of the French Code de Postes et
Telecommunications). The timing for the granting of the actual license remains
uncertain, but should, in principle, not extend beyond the end of April 1998 as
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<PAGE>
required by the EU Licensing Directive (a draft decree implementing the
Licensing Directive in France is currently undergoing formal public comment).
Should the Company be granted authorization to establish and operate a
public telecommunications network, it will be subject to certain obligations,
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.
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.
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.
Since the Company operates a telecommunications network, Deutsche
Telekom, as a dominant carrier, is obligated to give to the Company favorable
interconnection rates. If the Company does not agree with the offered rates, the
Company can take the case to the RegTP who decides whether the rates are based
on objective criteria and are not discriminatory in nature. Since the Company is
not a dominant carrier, it is not subject to the same interconnection
obligations.
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
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.
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<PAGE>
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.
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, Associazione Italiana Sviluppo delle Telecommunicazioni
("AISTEL").
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 numbering, the
framework must be complemented by a number of implementation decrees.
To date, only a small number of the required decrees have been issued.
License applications can be filed with AISTEL, but since January 1, 1998 only
three licenses to supply and install fixed telecommunications networks have been
granted. Major uncertainties remain with regard to the rules applicable in the
context of interconnection and universal service financing. 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 either subject to (i)
licensing requirements which are currently confined to PTT Telecom (the ITO) and
two licensed infrastructure operators, EnerTel and Telfort, or (ii)
authorization by OPTA (Onafhankelijke post-en telecommunicatie autoriteit) under
Article 23 of The Netherlands' Telecommunications Act (the "NTA"). Under the
proposed new Telecommunications Act, presented to The Netherlands' Parliament in
September 1997, infrastructure licensing (or authorization) requirements for
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.
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. 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
network owners.
Under Article 7 of the NTA, all 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
numbers for third party service or the authorization holder's own services. The
Company obtained such a registration in August 1997.
PTT Telecom is under a statutory obligation to provide leased lines to
anyone against payment. In addition, PTT Telecom and the two infrastructure
licensees are under a statutory obligation to provide interconnection to, 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. For
supervisory purposes, anyone wishing to obtain interconnection must register
with OPTA and then negotiate its own interconnection agreement. In August 1997,
the Company registered with OPTA for this purpose and concluded an
interconnection agreement with PTT Telecom in January 1998. Under the proposed
new Telecommunications Act, a statutory obligation to interconnect will be
imposed upon operators having significant market power, such as PTT Telecom.
The proposed new Telecommunications Act will 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.
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<PAGE>
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 placed a draft new Telecommunications Act (Ley General de
Telecomunicaciones) before Parliament in June 1997. There can be no assurance,
however, that such liberalization will occur at a time or in a manner which is
advantageous to the Company.
The Company intends to apply for a Voice Telephony license in Spain as
and when the appropriate procedures have been published (such publication is
required by the EC by August 1, 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.
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 over leased lines where all
calls originate over the PSTN on certain specified routes. 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 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. Although Viatel UK's IFL does not contain Code Powers. Viatel UK recently
submitted a request seeking an appropriate amendment of its IFL to provide for
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.
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The U.K. Statutory Instrument ("U.K.SI"), which implements the EU
Interconnection Directive, specifies which U.K. telecommunications operators
have significant market power and includes provisions for additional operators
to acquire significant market power or "relevant connectable systems status".
This status has the effect of applying the Interconnection Directive provisions
(as enacted by the U.K.SI) to such operators. Organizations that have relevant
connectable systems status, which includes the Company, are entitled to request
and receive interconnection from those operators that have been determined by
the Director General to be "well established operators." British Telecom and
Kingston Communications have been so determined for all services and Cable &
Wireless has been so determined in respect of international services on
virtually all routes.
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 entities already licensed to provide mobile telephone or cable
television services in Argentina. By November 2000, the market is to be fully
open to competition. 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, and the new decree itself may be subject to challenge.
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
19
<PAGE>
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 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.
Advisors have just been appointed to recommend a specific model for the
reorganization and privatization of Telebras and its long distance and
international affiliate Embratel. According to preliminary plans recently
announced, Telebras, which consists of 27 regional companies, most likely will
be divided into three regional holding companies. These companies initially will
probably be prohibited from providing interregional and international services.
Embratel, probably will be sold as a separate entity. The privatized companies
most likely will be subject to competition from at least one new long distance
company to be authorized right away. New concessions also will be issued for
local service.
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.
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% has been retained in Brazil only for
cellular and satellite services. There are presently no foreign ownership limits
for limited services, including specialized limited services, or for value-added
services. The President retains the authority to impose foreign ownership limits
on other services.
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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 principle 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. One competitor to TELECOM has been licensed, and an additional company
is supposed to be licensed.
In Colombia, there are approximately 35 local operating companies, many
municipally owned. TELECOM is the sole long distance and international company.
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. 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 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 international-initiated 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 (the "Section 214 Switched
Authorization") to resell public switched telecommunications services of other
U.S. carriers. The Section 214 Switched Authorization requires that services be
provided in a manner that is consistent with the laws of countries in which the
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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 December 31, 1997, the Company had 280 full-time employees,
approximately 147 of whom were engaged in sales, marketing and customer service.
None of the Company's employees are covered by a collective bargaining
agreement. Management believes that the Company's relationship with its
employees is good.
ITEM 2. PROPERTIES.
The Company currently occupies approximately 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. The Company also
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 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).
ITEM 3. LEGAL PROCEEDINGS.
The Company is also involved from time to time in other litigation
incidental to the conduct of its business. The Company believes that any
potential adverse determination in any pending action will not have a material
adverse effect on the Company's business, financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with respect to the executive
officers of the Company as of March 16, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----- --- --------------------------------------------------------------
<S> <C> <C>
Michael J. Mahoney................... 38 President, Chief Executive Officer and Director
Allan L. Shaw........................ 34 Senior Vice President, Finance; Chief Financial Officer;
Treasurer 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
</TABLE>
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
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<PAGE>
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, has served as Chief Financial Officer of the Company since
January 1996 and as Treasurer of the Company since September 1996. Mr. Shaw has
served as a director of the Company since June 1996. Mr. Shaw was Vice
President, Finance of the Company from January 1996 to December 1997. 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 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. 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.
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.
23
<PAGE>
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.
JAN C. 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.
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.
ELLEN S. RUDIN. Ms. Rudin has served as Assistant General Counsel of the
Company since October 1997 and as 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.
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.
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 MiniCom 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 since December 1991.
CONSULTANT
DEREK FOXWELL. Mr. Foxwell has served as a consultant to the Company since
December, 1997, providing advice to the Company in connection with the
development of the Circe Network. Prior to joining the Company, 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 Network;
International and National Elements. Mr. Foxwell is a chartered engineer with
more than 25 years of experience in international telecommunications networks.
24
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Since completion of the Company's initial public offering in October
1996 (the "IPO"), the Company's common stock, $0.01 par value per share (the
"Common Stock") has been traded on the Nasdaq Stock Market under the symbol
"VYTL." As of March 16, 1998, there were approximately 23,011,913 shares of
Common Stock outstanding. The Company believes that it has in excess of 400
beneficial owners. The following table sets forth, for each of the periods
indicated, the high and low sales prices per share of Common Stock as reported
on the Nasdaq National Market.
HIGH LOW
---- ---
1997
- ----
Fourth Quarter............................ $7-7/8 $4-1/2
Third Quarter ............................ 6-3/4 4-1/8
Second Quarter............................ 7 6
First Quarter ............................ 9-1/2 6-1/2
1996
- ----
Fourth Quarter (from October 18, 1996).... 12-1/4 8-1/2
To date, the Company has never declared or paid any cash dividends on
its Common Stock and does not expect to do so in the foreseeable future. The
Company does not expect to generate any net income in the foreseeable future,
but anticipates that future earnings generated from operations, if any, will be
retained to finance the expansion and continued development of its business. Any
future determination with respect to the payment of dividends on its Common
Stock will be within the sole discretion of the Company's Board of Directors and
will depend upon, among other things, the Company's earnings, capital
requirements, the terms of the existing indebtedness, applicable requirements of
the Delaware General Corporation Law, general economic conditions and such other
factors considered relevant by the Company's Board of Directors. In addition,
the Company's ability to pay cash dividends is currently restricted under the
terms of the Indenture, dated as of December 15, 1994, as amended October 11,
1996 (as amended, the "1994 Indenture"), between the Company and United States
Trust Company of New York, pursuant to which 15% Senior Discount Notes Due 2005
(the "1994 Notes") were issued. The Company is currently seeking to raise
approximately $650.9 million through an offering of notes and shares of
preferred stock (the "Offering") to refinance the 1994 Notes, to fund a portion
of the construction and operational start-up of the Circe Network, to fund
certain other capital expenditures and for general corporate and working capital
purposes. In the event such financing is completed, the Company's ability to pay
dividends will be restricted under the terms of the indentures pursuant to which
such new debt securities are issued.
Since September 30, 1997, the Company has used approximately an
additional $10.1 million of the net proceeds from the IPO for purchase and
installation of machinery and equipment and approximately an additional $2.3
million for working capital. At December 31, 1997, the Company also had
approximately $3.4 million invested in short-term marketable securities.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected Consolidated Statement of Operations, 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 Report. This
information should be read in conjunction with "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations," the Company's
Consolidated Financial Statements, including the notes thereto, and the other
financial data included elsewhere in this Report.
25
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER OPERATING DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Telecommunications revenue............................... $ 21,393 $ 26,268 $ 32,313 $ 50,419 $ 73,018
Operating expenses:
Costs of telecommunications services.................. 18,159 22,953 27,648 42,130 63,504
Selling, general and administrative................... 8,458 14,318 24,328 32,857 36,076
Depreciation and amortization......................... 111 789 2,637 4,802 7,717
Equipment impairment loss............................. - - 560 - -
---------- -------- --------- --------- ----------
Total operating expenses............................. 26,728 38,060 55,173 79,789 107,297
---------- --------- --------- ---------- ----------
Operating loss........................................... (5,335) (11,792) (22,860) (29,370) (34,279)
Interest income.......................................... 21 214 3,282 1,853 3,685
Interest expense......................................... - (772) (8,856) (10,848) (12,450)
Share in loss of affiliate............................... (142) (145) (42) (10) -
---------- -------- ---------- ---------- ----------
Net loss................................................. $ (5,456) $(12,495) $(28,476) $(38,375) $ (43,044)
========== ========= ========== ========== ===========
Net loss per common share, basic(1)...................... $ (0.77) $ (1.22) $ (2.09) $ (2.47) $ (1.90)
=========== ========= =========== ============ ==========
Net loss per common share, diluted(1).................... $ (0.77) $ (1.22) $ (2.09) $ (2.47) $ (1.90)
=========== ========= =========== ============ ===========
OTHER FINANCIAL DATA:
EBITDA(2)................................................ $ (5,366) $(11,148) $(20,265) $(24,578) $(26,562)
Net cash used in operating activities.................... (1,442) (11,571) (18,489) (26,331) (22,525)
Net cash used in investing activities.................... (2,949) (4,996) (37,057) (1,592) (43,164)
Net cash provided by (used in) financing activities...... 6,329 80,984 (2,306) 94,772 11,286
Capital expenditures..................................... 1,090 3,672 11,378 9,423 34,190
OTHER OPERATING DATA:
Billable minutes (000s).................................. 10,899 14,981 25,932 62,249 140,918
Average revenue per billable minute...................... $ 1.87 $ 1.70 $ 1.23 $ .80 $ .51
Average cost per billable minute......................... $ 1.67 $ 1.53 $ 1.04 $ .67 $ .44
Switches(3).............................................. 2 2 10 13 14(4)
Points of presence(3).................................... 3 3 11 13 33
Customers(3)............................................. 5,486 6,469 9,218 18,172 21,515
BALANCE SHEET DATA(3):
Cash, cash equivalents and marketable securities......... $2,327 $66,762 $35,066 $ 92,982 $ 47,142
Property and equipment, net.............................. 3,584 6,933 15,715 21,074 54,094
Total assets............................................. 10,585 83,923 65,613 134,664 126,809
Long-term debt, excluding current installments........... 866 59,955 67,283 77,904 99,609
Stockholders' (deficiency) equity........................ (162) 10,985 (17,618) 38,483 (8,564)
- -----------
</TABLE>
(1) Net loss per share is computed on the basis described in Note 1 of the
Company's Consolidated Financial Statements.
(2) 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, 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.
(3) Information presented as of the end of the periods indicated.
(4) Consists of four Nortel DMS 100e switches, one Nortel DMS 300 switch,
six Wyatt/Reuters MRX-2000 switches and three call reorigination
switches.
26
<PAGE>
ITEM 7. 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 REPORT. 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, SEE " - CERTAIN FACTORS WHICH MAY AFFECT THE
COMPANY'S FUTURE RESULTS."
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, if the Company is successful in
raising the funds necessary to construct the Circe Network, 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. If constructed, 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.
During the past three years, several key trends have affected the
composition of the Company's telecommunications revenue. First, a growing
proportion of the Company's customers, particularly in Western Europe, now
access the Viatel Network using paid local access through the PSTN rather than
access through the Company using call reorigination or ITF access. This change
has reduced the Company's revenue per minute. Second, the Company has continued
to expand its wholesale business, which represented approximately 6.2% and 16.5%
of total telecommunications revenue for 1995 and 1996, respectively, and 27.9%
of total telecommunications revenue for 1997. Third, Western Europe has
continued to become an increasingly important market for the Company. 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 for 1996 and 38.2% for 1995. In contrast, despite an
increase of approximately 14.1% over 1996, telecommunications revenue from Latin
America represented approximately 22.2% of the Company's telecommunications
revenue for 1997, as compared to approximately 28.4% of the Company's
telecommunications revenue for 1996. Historically, significant portions of the
Company's telecommunications revenue have been derived from Latin America,
principally from the provision of callback and ITF related services. During
1997, the Company continued to devote substantial resources to the deregulating
EU market, as demonstrated by the Company's installation of 20 POPs in Western
Europe.
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.
27
<PAGE>
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 recently 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 foregoing forward looking statements, including a decline in
the Company's cost of telecommunications services, can be achieved. See "Item 1.
Business - Competition" and " - Substantial Government Regulation" and " -
Certain Factors Which May Affect the Company's Future Results - Risks Relating
to the Circe Network," "- Rapidly Changing Industry, Technology and Customer
Requirements; Significant Price Declines," and "- Risks Associated with the
Operation of the Viatel Network."
The table set forth below presents the Company's telecommunications
revenue, as a percentage of total revenue, from different regions (based on
where calls originated on the Viatel Network):
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
---- ---- ----
Western Europe............................ 38.2% 41.9% 44.7%
North America............................. 6.6 16.9 21.9
Latin America............................. 37.6 28.4 22.2
Asia/Pacific Rim.......................... 11.8 12.4 11.2
Other..................................... 5.8 0.4 0.0
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 if the Company is able to construct the Circe Network and
secure 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,
28
<PAGE>
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 "Item 1. Business - Competition" and "-
Substantial Government Regulation" and "- Certain Factors Which May Affect the
Company's Future Results - Risks Relating to the Circe Network," "- 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 network 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.
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 intangibles
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 if
the Circe Network is constructed by the Company, at least until significant
portions of such system are sold.
THE CIRCE NETWORK
If constructed, 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 $330.0 million, although there can
be no assurance in this regard. See "Item 1. Business Competition" and
"Substantial Government Regulation" and "- Certain Factors Which May Affect the
Company's Future Results - 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 that link strategic Western
European cities not served by the Circe Network. 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.
29
<PAGE>
RESULTS OF OPERATIONS
The following table summarizes the breakdown of the Company's results
of operations as a percentage of telecommunications revenue:
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
---- ---- ----
Cost of telecommunications services........ 85.6% 83.6% 87.0%
Selling, general and administrative........ 75.3 65.2 49.4
Depreciation and amortization............. 8.2 9.5 10.6
EBITDA (loss)............................. (62.7) (48.7) (36.4)
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 (as defined herein), 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 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 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
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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 $.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 Circe Network, if constructed.
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 if the Company completes the Offering.
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.
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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).
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 network operations.
The transition to a direct sales force was significantly completed in 1995 and
1996 is the first year in which the costs of such sales force was incurred
throughout the year.
During 1996, the Company took a $1.3 million charge associated with a
corporate restructuring undertaken during the year principally for employee
termination and relocation costs and a charge for a portion of the Company's
lease for its administrative headquarters in London and an $.85 million expense
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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
IPO and, to a lesser extent, equipment-based financing. As of December 31, 1997,
the Company had $47.1 million of cash, cash equivalents and other liquid
investments. Whether or not the Circe Network is constructed, the Company
believes that the remaining net proceeds from the IPO, together with equipment
financing, will provide sufficient funds for the Company to fund its operating
losses and to fund non-Circe Network related capital expenditures for the
foreseeable future. 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 construction 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 and equipment financing proves 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 is currently conducting a tender offer for the 1994 Notes
(all $120.7 million principal amount at maturity have been irrevocably tendered
and may not be withdrawn). In connection with the refinancing of the 1994 Notes
and assuming the extinguishment of the 1994 Notes were completed on March 31,
1998, the Company estimates that a one-time charge of approximately $28.3
million will be incurred. 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. The Company's obligation to complete the tender
offer is condition upon its successful completion of the Offering.
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CAPITAL EXPENDITURES; COMMITMENTS. The development of the Company's
business has required substantial capital expenditures. During 1995, 1996 and
1997, the Company had capital expenditures, including acquisitions of
businesses, of approximately $11.4 million, $9.4 million and $34.2 million,
respectively. As of December 31, 1997 the Company had entered into purchase
commitments for network upgrades, minutes of use and other items aggregating
approximately $11.8 million. In addition, at December 31, 1997, the Company had
non-cancelable capital lease commitments of $1.0 million and non-cancelable
operating lease commitments of $5.9 million. In addition, the Company has
minimum volume commitments to purchase transmission capacity from various
domestic and foreign carriers aggregating approximately $13.8 million for fiscal
1998. See Note 13 to the Company's Consolidated Financial Statements, contained
elsewhere in this Report. 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 DM 13.6 million. 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 to mitigate damages if the arrangements
are terminated by the Company. Assuming the Offering is completed, the Company
expects to spend approximately $330.0 million to construct the Circe Network and
place it in service, although there can be no assurance that the Company will
complete the Offering or if the Offering is completed that it will not spend
substantially more to complete the Circe Network.
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 currency in countries 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 1997, approximately 41.3% of the Company's telecommunications
revenue was billed in currencies other than the U.S. Dollar. Furthermore,
substantially all of the costs of acquisition and upgrade of the Company's
switches have been, and will continue to be, U.S. Dollar denominated
transactions.
With the continued expansion of the European Network, a substantial
portion of the costs associated with the European Network, such as local access
charges and a portion of the leased line costs, as well as a majority of local
selling expenses, will be charged to the Company in the same currencies as
revenue is billed. These developments create a natural hedge against a portion
of the Company's foreign exchange exposure. To date, much of the funding
necessary to establish the local direct sales organizations has been derived
from telecommunications revenue that was billed in local currencies.
Consequently, the Company's financial position as of December 31, 1997 and its
results of operations for 1997 were not significantly impacted by fluctuations
in the U.S. Dollar in relationship to foreign currencies. See " - Certain
Factors Which May Affect the Company's Future Results - Risks Associated with
International Operations."
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. See "-
Certain Factors Which May Affect the Company's Future Results - 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 a 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
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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 is required to adopt both new standards in the first
quarter of 1998.
INFLATION
The Company does not believe that inflation has had a significant effect on the
Company's operations to date.
CERTAIN FACTORS WHICH MAY AFFECT THE COMPANY'S FUTURE RESULTS
SUBSTANTIAL INDEBTEDNESS; ABILITY TO SERVICE DEBT; RESTRICTIVE COVENANTS
At December 31, 1997, the Company's total indebtedness (including
capitalized lease obligations) was approximately $103.0 million, which will
increase substantially if the Offering is completed. 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 outstanding indebtedness and
senior equity securities.
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. 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, which would permit the holders of the
Notes to accelerate the maturity thereof.
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. 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. 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 was approximately $(28.5)
million, $(38.4) million and $(43.0) million, respectively. EBITDA for each of
1995, 1996 and 1997 was approximately $(20.3) million, $(24.6) million and
$(26.6) 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. 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
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working capital or future debt service requirements which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
RISKS RELATING TO THE CIRCE NETWORK
The Company's success is dependent, in part, upon its ability to
finance and 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 $330.0 million to
complete the Circe Network and will have substantial existing commitments for
materials and labor, which may cost more than budgeted. However, the Company has
not yet completed the Offering or signed definitive agreements for the
construction of the Circe Network. The successful completion and/or use of the
Circe Network is dependent, among other things, on the Company's ability to
complete the Offering and to: (i) enter into final definitive agreements with
Bechtel, ASN and Nortel with respect to the engineering, construction,
installation and testing of the Circe Network; (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 Nortel includes price terms, ready-for-service
dates and specified equipment that Nortel will provide but is not a definitive
agreement covering all the terms that are customarily addressed in definitive
agreements (such as warranties). 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. In addition, the successful
construction of the Circe Network is substantially dependent on third party
contractors retained by Bechtel. Although the Circe Network, as proposed, will
consist primarily of "new digs," it may also involve acquisition of existing
fiber for certain 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."
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 four separate countries (the United Kingdom,
France, 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. 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 four 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 complete the Offering and must obtain rights-of-way
and wayleaves in order to complete 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
significantly 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
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optic and other long distance transmission networks. For example, the Ulysses
cable system owned by WorldCom and the Hermes connect cities that will be linked
by the Circe Network. In addition, Esprit Telecom Group plc and Fibernet Group
are currently building out their Pan-European networks, and other companies such
as Level 3 Communications, 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 its outstanding indebtedness and any senior equity
securities. Since the cost of the actual 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. recently
announced 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 its outstanding indebtedness and any senior equity securities.
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. 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, if it is constructed. There can be no assurance that additional
financing arrangements will be available on acceptable terms. Moreover, if the
Offering is completed, the amount of the Company's substantial total outstanding
indebtedness 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 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.
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
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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, Concert, Global One and
the recently announced alliance among WorldCom, MCI and Telefonica de Espana.
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 and results of operations.
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, 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 and
results of operations.
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 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 and results of
operations. 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.
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There can be no assurance that the Company will be able to compete effectively
in any of its markets. See "Item 1. 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 and
results of operations. See "Item 1. Business - Government Regulation."
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 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 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. In the Foreign Participation Order described above,
however, if the subject route does not comply with the benchmark requirement, a
carrier can demonstrate that the foreign country provides "equivalent" resale
opportunities. 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.
Increasing regulatory liberalization in many countries'
telecommunications markets now permits more flexibility in the way the Company
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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
facilities in the United Kingdom, 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 and results of operations. See "Item 1. 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 the EU. There can be no assurance that the United
States or foreign jurisdictions will not adopt laws or regulatory requirements
that will adversely affect the Company. Additionally, there can be no assurance
that future United States or foreign regulatory, judicial or legislative changes
will not have a material adverse effect on the Company or that regulators or
third parties will not raise material issues with regard to the Company's
compliance with applicable laws or regulations. If the Company is unable to
provide the services it is presently providing or intends to provide or to use
its existing or contemplated transmission methods, due to its inability to
receive or retain formal or informal approvals for such services or transmission
methods, or for any other reason related to regulatory compliance or the lack
thereof, such events could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Item 1. 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 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 and results of operations.
RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH AND IMPLEMENTATION OF GROWTH STRATEGY
The Company's rapid growth has placed, and is expected to continue to
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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 and results of operations. See "- Dependence on Effective
Information Systems; Year 2000 Technology Risks."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
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, 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 Spain, Italy and Germany. If the
Company's operations in Western Europe expand as expected, an increasing portion
of the Company's revenue and expenses will be denominated in currencies other
than U.S. dollars, and changes in exchange rates will likely affect the
Company's results of operations. Furthermore, international rates charged to
customers are likely to decrease in the future for a variety of reasons,
including increased competition between existing carriers, New Entrants into
geographic markets in which the Company operates or intends to operate and
additional strategic alliances or joint ventures among large international
carriers that facilitate targeted pricing and cost reductions. Depending on the
countries involved, any or all of the foregoing factors could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, there can be no assurance that laws or administrative
practices relating to taxation, foreign exchange or other matters in countries
within which the Company operates will not change. Any such change could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "- Substantial Government Regulation, "- Results of
Operations - Liquidity and Capital Resources - Foreign Currency," and "Item 1.
Business - Government Regulation."
RISKS ASSOCIATED WITH ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES
The Company may 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,
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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," "- Risks Associated with the Operation of the Viatel
Network," and "Item 1. 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 and results of operations.
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 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, the Interconnection Directive, which became effective on January 1,
1998, 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
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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 and results of operations. In addition,
France Telecom and Deutsche Telekom have recently 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
"Item 1. Business - Competition" and "- Competition."
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. 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 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 and results of operations.
See "Item 1. 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 and
results of operations. See "Item 1. 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 and results of operations.
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,
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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 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 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 and results of
operations. See "Item 1. 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. 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 and results of operations.
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.
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 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 and results of operations. Any significant shortfall in
demand for the Company's services in relation to the Company's expectations, or
the occurrence of any other factor which causes revenue to fall significantly
short of the Company's expectations, would also have a material adverse effect
on the Company's business, financial condition and results of operations. In
addition, the uncertainty of revenue growth coupled with substantial planned
increases in operating expenses and the continued evolution in the Company's
transmission methodology from switchless resale to use of the Viatel Network may
result in substantial quarterly fluctuations in the Company's operating results.
See "- Limited Operating History; Substantial Net Losses and Negative Cash Flow
from Operations; Expected Future Net Losses and Negative Cash Flow from
Operations."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not currently applicable to the Company.
44
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following statements are filed as part of this Report:
Form 10-K
Financial Statements: PAGE NO.
---------
Independent Auditors' Report...................................... 46
Consolidated Balance Sheets as of December 31, 1996 and 1997...... 47
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997............................. 48
Consolidated Statements of Stockholders' Equity (Deficiency)for the
Years ended December 31, 1995, 1996 and 1997................. 49
Consolidated Statements of Cash Flows for the Years ended
December 31, 1995, 1996 and 1997............................. 50
Notes to Consolidated Financial Statements for the Years
Ended December 31, 1995, 1996 and 1997....................... 51
II. Valuation and Qualifying Accounts............................. 64
All other schedules have been omitted because the required information either
is not applicable or is shown in the consolidated financial statements or notes
thereto.
45
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Viatel, Inc:
We have audited the consolidated financial statements of Viatel, Inc.
Inc. and subsidiaries as listed in the accompanying index. In connection with
our audits of the consolidated financial statements, we also audited the
financial schedule as listed in the accompanying index. These consolidated
financial statements and the financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements and financial statement schedule based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Viatel, Inc. and subsidiaries as of December 31, 1996 and 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. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG PEAT MARWICK LLP
New York, New York
March 4, 1998, except as to note 13(c),
which is as of March 18, 1998
46
<PAGE>
<TABLE>
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
1996 1997
------------------- ----------------
ASSETS
<S> <C> <C>
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
============== ===============
See accompanying notes to consolidated financial statements.
47
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
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.
48
<PAGE>
<TABLE>
<CAPTION>
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
NUMBER OF
NUMBER OF CLASS A
COMMON COMMON CLASS A ADDITIONAL CUMULATIVE
STOCK STOCK COMMON COMMON PAID-IN UNEARNED TRANSLATION ACCUMULATED
SHARES SHARES STOCK STOCK CAPITAL COMPENSATION ADJUSTMENT DEFICIT TOTAL
-------- --------- ------ ------ ------- ----------- ----------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January
1, 1995.......... 10,716,135 2,904,846 $107,161 $29,048 $29,982,211 $ - $ 1,523 $(19,135,113) $10,984,830
Issuance of
restricted
common stock..... 20,000 - 200 - 116,800 (78,000) - - 39,000
Foreign currency
translation
adjustment.... - - - - - - (166,199) - (166,199)
Net loss........... - - - - - - - (28,475,711) (28,475,711)
----------- ----------- ---------- ------- ------------ --------- --------- ------------ ------------
Balance at December
31, 1995........ 10,736,135 2,904,846 107,361 29,048 30,099,011 (78,000) (164,676) (47,610,824) (17,618,080)
Issuance of
restricted
common stock..... 66,666 - 667 - 389,333 (52,080) - - 337,920
Issuance of common
stock, net of
$9,541,954 issue
costs.......... 8,667,000 - 86,670 - 94,375,376 - - - 94,462,046
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 - - - 374,076
Foreign currency
translation
adjustment....... - - - - - - (697,782) - (697,782)
Net loss ........... - - - - - - - (38,375,350) (38,375,350)
----------- ------------ ---------- ------- ----------- ----------- ----------- ------------ ------------
Balance at December
31, 1996......... 22,513,226 - 225,132 - 125,236,410 (130,080) (862,458) (85,986,174) 38,482,830
Stock options
exercised........ 122,041 - 1,221 - 424,913 - - - 426,134
Earned compensation. - - - - - 65,040 - - 65,040
Foreign currency
translation
adjustment....... - - - - - - (4,494,016) - (4,494,016)
Net loss............ - - - - - - - (43,043,673)(43,043,673)
----------- ----------- ---------- ------ ----------- ----------- ---------- -------------- ----------
Balance at December
31, 1997......... 22,635,267 - $226,353 $ - $125,661,323 $(65,040) $(5,356,474) $(129,029,847)$(8,563,685)
=========== =========== ========== ====== ============ =========== =========== ==========================
See accompanying notes to consolidated financial statements.
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
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.
50
<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:
Communications systems....................................... 5 to 7 years
Fiber optic cable systems................................... 15 years
Leasehold improvements....................................... 2 to 5 years
Furniture, equipment and other............................... 5 years
(F) INTANGIBLE ASSETS
Goodwill, which represents the excess of purchase price over fair value
of net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, seven years.
51
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Acquired employee base and sales force in place represents the
intangible assets associated with the acquisition of independent sales
organizations and is being amortized over three years.
Deferred financing and registration fees represent 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.
52
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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
53
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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:
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
==================
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.
54
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
55
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(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>
(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.
56
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(7) LONG TERM LIABILITIES (CONTINUED)
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 and 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.
57
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(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.
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1996 1997
----------------- -------------------
<S> <C> <C>
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>
58
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
DECEMBER 31,
-----------------------------------------------------------
1995 1996 1997
------------------ ------------------ ------------------
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.
59
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(11) STOCK OPTION PLAN (CONTINUED)
The Company applies APB Opinion No. 25 in accounting for its Stock
Incentive Plan and, accordingly, no compensation cost has been recognized for
its stock options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net loss would have been increased to
the pro forma amounts indicated below:
<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>
60
<PAGE>
(11) STOCK OPTION PLAN (CONTINUED)
The following table summarizes weighted-average option exercise price
information:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------ -------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF NUMBER AVERAGE AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING AT REMAINING EXERCISE EXERCISABLE AT EXERCISE
PRICES DECEMBER 31, 1997 LIFE PRICE DECEMBER 31, 1997 PRICE
- ---------------- ------------------------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C>
$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>
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.
61
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(13) COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company's future minimum capital and operating lease payments are
as follows:
CAPITAL OPERATING
--------------- ----------------
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
================
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.
62
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(13) COMMITMENTS AND CONTINGENCIES (CONTINUED)
(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.
(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 $650.9 million through
an offering of units, consisting of Senior Notes Due 2008 and shares of
convertible redeemable preferred stock of the Company.
63
<PAGE>
<TABLE>
<CAPTION>
VIATEL, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATIONS AND QUALIFYING ACCOUNTS
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>
64
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to executive officers of the Company is
presented in Item 4 of this Report under the caption "Executive Officers of the
Company."
The information appearing under the captions "Proposal 1 -- Election of
Directors," "Certain Transactions" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's Proxy Statement for its 1998 Annual
Meeting of Stockholders (the "1998 Proxy Statement") is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information appearing under the caption "Executive Compensation" in the
1998 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information appearing under the caption "Security Ownership of Beneficial
Owners and Management" in the 1998 Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information appearing under the caption "Certain Transactions" in the 1998
Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) 1. FINANCIAL STATEMENTS.
The financial statements are included in Part II, Item 8 of this
Report.
2. FINANCIAL STATEMENT SCHEDULES AND SUPPLEMENTARY INFORMATION
REQUIRED TO BE SUBMITTED.
Any required financial statement schedules are included in Part
II, Item 8 of this Report.
(B) REPORT ON FORM 8-K.
The Company did not file any Current Reports on Form 8-K during
the fourth quarter of 1997.
65
<PAGE>
(C) Index to Exhibits.
The following is a list of all Exhibits filed as part of this
Report:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENTS
- -------------- -------------------------
<S> <C>
3(i) - Amended and Restated Certificate of Incorporation of the Company (incorporated herein
by reference to Exhibit 3.1(i)(a) to the Company's Registration Statement on Form S-1,
filed on August 7, 1996, Registration No. 333-09699 (the "Company's S-1")).*
3(ii) - Second Amended and Restated By-laws of the Company (incorporated herein by reference
to Exhibit 3.1(ii) of the Company's Form 10-Q for the fiscal quarter ended September
30, 1997, File No. 000-21261).*
4.1 - Indenture, dated as of December 15, 1994, between the Company and United States Trust
Company of New York, as Trustee (incorporated herein by reference to Exhibit 4.2 to
the Company's Registration Statement on Form S-4, filed on May 24, 1995, Registration
No. 33-92696 (the "Company's S-4").*
4.2 - Company Common Stock Certificate (incorporated herein by reference to Exhibit 4.4 to
the Company's S-1).*
4.3 - Amendment No. 1 to the Indenture, dated as of December 15, 1994, between the Company
and United States Trust Company of New York, as Trustee (incorporated herein by
reference to Exhibit 4.5 to the Company's S-1).*
10.1 - Common Stock Registration Rights Agreement, dated as of December 15, 1994, among the
Company, Martin Varsavsky, Juan Manuel Aisemberg and Morgan Stanley & Co. Incorporated
in connection with the Company's shares of non-voting Class A Common Stock
(incorporated herein by reference to Exhibit 10.4 to the Company's S-4).*
10.2 - Mercury Carrier Services Agreement, dated as of March 1, 1994, between the Company and
Mercury Communications Limited (incorporated herein by reference to Exhibit 10.8 to
the Company's S-4).*
10.3 - Provision and Management Facilities Agreement, dated as of October 17, 1994, between
the Company and Mercury Communications Limited (incorporated herein by reference to
Exhibit 10.9 to the Company's S-4).*
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 the Company and S-C
V-Tel Investments, L.P. (incorporated herein by reference to Exhibit 10.13 to the
Company's S-4).*
10.5 - 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 the Company's
S-4).*
10.6 - Shareholders' Agreement, dated as of April 5, 1994, and as amended as of November 22,
1994, by and among the Company, Martin Varsavsky, Juan Manuel Aisemberg and COMSAT
Investments, Inc. (incorporated herein by reference to Exhibit 10.19 to the Company's
S-4).*
10.7 - 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 the Company, Martin Varsavsky and S-C V-Tel Investments, L.P.
(incorporated herein by reference to Exhibit 10.21 to the Company's S-4).*
10.8 - Commercial Lease Agreement, dated as of November 1, 1993, and Addendum, dated as of
December 8, 1994, between the Company and 123rd Street Partnership in connection with
the Company's premises located in Omaha, Nebraska (incorporated herein by reference to
Exhibit 10.24 to the Company's Form S-4).*
67
<PAGE>
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 the Company's S-4).*
10.10 - Agreement of Lease, dated August 7, 1995, between the Company and Joseph P. Day Realty
Corp. (incorporated herein by reference to Exhibit 10.33 to the Company's S-4).*
10.11 - Employment Agreement between the Company and Martin Varsavsky (incorporated herein by
reference to Exhibit 10.31 to the Company's S-1).*+
10.12 - Employment Agreement between the Company and Michael J. Mahoney.+
10.13 - Amended Stock Incentive Plan (incorporated herein by reference to Exhibit 10.31 to the
Company's Form 10-Q for the fiscal quarter ended September 30, 1997, File No.
000-21261).*+
10.14 - Employment Agreement between the Company and Allan L. Shaw.+
10.15 - Employment Agreement between the Company and Sheldon M. Goldman.+
21.1 - Subsidiaries of the Company.
23.1 - Consent of KPMG Peat Marwick LLP.
24.1 - Power of Attorney (Appears on signature page).
27.1 - Financial Data Schedule.
- ----------
* Incorporated herein by reference.
+ Management contract or compensatory plan or arrangement.
</TABLE>
68
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City and State
of New York, on the 27th day of March, 1998.
VIATEL, INC.
By: /S/ MICHAEL J. MAHONEY
-------------------------------------------
Michael J. Mahoney
President and Chief Executive Officer
KNOWN BY ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Allan L. Shaw and Sheldon M. Goldman his
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-K,
and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or their or his substitutes
or substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 27th day of March, 1998.
SIGNATURE TITLE(S)
--------- --------
/S/ MICHAEL J. MAHONEY President, Chief Executive Officer
- ------------------------------------- and Director (Principal Executive
Michael J. Mahoney Officer)
/S/ ALLAN L. SHAW Senior Vice President, Finance;
- ------------------------------------- Chief Financial Officer;
Allan L. Shaw Treasurer (Principal Financial and
Accounting Officer) and Director
/S/ PAUL G. PIZZANI Director
- -------------------------------------
Paul G. Pizzani
/S/ W. JAMES PEET Director
- -------------------------------------
W. James Peet
69
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT
NO. DESCRIPTION OF DOCUMENTS PAGE
------- ------------------------ ----------
<S> <C> <C>
3(i) - Amended and Restated Certificate of Incorporation of the
Company (incorporated herein by reference to Exhibit 3.1(i)(a)
to the Company's Registration Statement on Form S-1, filed on
August 7, 1996, Registration No. 333-09699 (the "Company's
S-1")).*
3(ii) - Second Amended and Restated By-laws of the Company
(incorporated herein by reference to Exhibit 3.1(ii) of the
Company's Form 10-Q for the fiscal quarter ended September 30,
1997, File No. 000-21261).*
4.1 - Indenture, dated as of December 15, 1994, between the Company
and United States Trust Company of New York, as Trustee
(incorporated herein by reference to Exhibit 4.2 to the
Company's Registration Statement on Form S-4, filed on May 24,
1995, Registration No. 33-92696 (the "Company's S-4").*
4.2 - Company Common Stock Certificate (incorporated herein by
reference to Exhibit 4.4 to the Company's S-1).*
4.3 - Amendment No. 1 to the Indenture, dated as of December 15,
1994, between the Company and United States Trust Company of
New York, as Trustee (incorporated herein by reference to
Exhibit 4.5 to the Company's S-1).*
10.1 - Common Stock Registration Rights Agreement, dated as of
December 15, 1994, among the Company, Martin Varsavsky, Juan
Manuel Aisemberg and Morgan Stanley & Co. Incorporated in
connection with the Company's shares of non-voting Class A
Common Stock (incorporated herein by reference to Exhibit 10.4
to the Company's S-4).*
</TABLE>
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<TABLE>
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10.2 - Mercury Carrier Services Agreement, dated as of March 1, 1994,
between the Company and Mercury Communications Limited
(incorporated herein by reference to Exhibit 10.8 to the
Company's S-4).*
10.3 - Provision and Management Facilities Agreement, dated as of
October 17, 1994, between the Company and Mercury
Communications Limited (incorporated herein by reference to
Exhibit 10.9 to the Company's S-4).*
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 the Company and S-C V-Tel
Investments, L.P. (incorporated herein by reference to Exhibit
10.13 to the Company's S-4).*
10.5 - 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 the Company's S-4).*
10.6 - Shareholders' Agreement, dated as of April 5, 1994, and as
amended as of November 22, 1994, by and among the Company,
Martin Varsavsky, Juan Manuel Aisemberg and COMSAT
Investments, Inc. (incorporated herein by reference to Exhibit
10.19 to the Company's S-4).*
</TABLE>
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<TABLE>
<S> <C> <C>
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 the Company, Martin Varsavsky and S-C V-Tel Investments,
L.P. (incorporated herein by reference to Exhibit 10.21 to the
Company's S-4).*
10.8 - Commercial Lease Agreement, dated as of November 1, 1993, and
Addendum, dated as of December 8, 1994, between the Company
and 123rd Street Partnership in connection with the Company's
premises located in Omaha, Nebraska (incorporated herein by
reference to Exhibit 10.24 to the Company's Form S-4).*
10.9 - 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 the Company's S-4).*
10.10 - Agreement of Lease, dated August 7, 1995, between the Company
and Joseph P. Day Realty Corp. (incorporated herein by
reference to Exhibit 10.33 to the Company's S-4).*
10.11 - Employment Agreement between the Company and Martin Varsavsky
(incorporated herein by reference to Exhibit 10.31 to the
Company's S-1).*+
10.12 - Employment Agreement between the Company and Michael J.
Mahoney. +
10.13 - Amended Stock Incentive Plan (incorporated herein by reference
to Exhibit 10.31 to the Company's Form 10-Q for the fiscal
quarter ended September 30, 1997, File No. 000-21261).*+
10.14 - Employment Agreement between the Company and Allan L. Shaw. +
10.15 - Employment Agreement between the Company and Sheldon M. Goldman. +
21.1 - Subsidiaries of the Company.
23.1 - Consent of KPMG Peat Marwick LLP.
24.1 - Power of Attorney (Appears on signature page).
27.1 - Financial Data Schedule.
</TABLE>
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* Incorporated herein by reference.
+ Management contract or compensatory plan or arrangement.
72
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered
into as of April 1, 1998 by and between VIATEL, INC., a Delaware corporation
with an office at 800 Third Avenue, New York, New York 10022 (the "Company"),
and MICHAEL J. MAHONEY, an individual currently residing at 77 Park Avenue, Apt.
15E, New York, New York 10016 (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company and the Executive have previously entered into
an Employment Agreement, dated as of September 23, 1996, and the parties desire
to amend and restate such agreement as set forth below.
NOW THEREFORE, each of the Company and the Executive,
intending to be legally bound, hereby mutually covenant and agree as follows:
ARTICLE I
DEFINITIONS
The following terms used in this Agreement shall have the
meanings set forth below.
1.1 "Accrued Obligations" shall mean, as of the date of
Termination, the sum of Executive's aggregate accrued but unpaid (A) Base
Salary, (B) Bonus Award, (C) other cash compensation and (D) vacation pay,
expense reimbursements and other cash entitlements, all determined through the
date of Termination.
1.2 "Base Salary" shall mean the amount set forth in Section
3.1 hereof, or if the Executive has received different Base Salaries during the
course of a year, the average of such Base Salaries.
1.3 "Bonus Agreement" shall mean that certain Bonus Agreement
dated September 23, 1996, as amended by the First Amendment to Bonus Agreement
attached hereto as Exhibit A.
1.4 "Bonus Award" shall have the meaning specified in the
Bonus Agreement.
1.5 "Cause" shall mean Executive's (i) material violation of
Section 2.3 hereof, which violation has not been cured within 15 days of the
date that written notice thereof is received by Executive from the Board of
Directors of the Company (the "Board"); (ii) material violation of Section 4.1
or 4.2 hereof; (iii) violation of Section 4.3 hereof; (iv) gross negligence or
dishonesty in the performance of his duties hereunder or habitual neglect in
managing the Company; PROVIDED, HOWEVER, that the Board undertakes a
comprehensive review and determines that such conduct is materially injurious or
materially damaging to the Company or its reputation; or (vi) conviction of any
felony or a misdemeanor involving fraud, misrepresentation or dishonesty.
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1.6 "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
under 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.
1.7 "Common Stock" shall mean the common stock, par value
$.01 a share, of the Company.
1.8 "Competitive Activities" shall have the meaning set forth
in Section 4.3 hereof.
1.9 "Confidential Material" shall have the meaning set forth
in Section 4.2 hereof.
1.10 "Control" (including, with correlative meanings, the
terms "controlling," "controlled by," and "under common control with"), as used
with respect to any Person, shall mean the possession, directly or indirectly,
of the power to direct or cause the direction of the management or policies of
such Person, whether through ownership of voting securities, by contract or
otherwise.
1.11 "Disability" shall mean Executive's death or inability to
perform his material duties to the Company by reason of a physical or mental
disability, which has existed for an aggregate of nine months during any
twelve-month period.
1.12 "Disability Payment" shall mean, for purposes of Section
5.3(d) hereof, an amount equal to 60% of the Base Salary in effect for the
calendar year in which such Disability occurred (or the average Base Salary if
such Disability occurred over more than one calendar year).
1.13 "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
1.14 "Good Reason" shall mean any (i) reduction in Executive's
Base Salary, (ii) failure by the Company to continue any material benefit or
compensation plan, life insurance plan, health and accident plan, disability
plan (or plan providing Executive with substantially similar benefits) in which
Executive is participating or the material reduction by the Company of
Executive's benefits under any such plan, (iii) failure by the Company to obtain
an assumption of this Agreement by any successor of the Company (as contemplated
in Section 6.2 hereof), (iv) transaction resulting in a Change of Control, if
Executive has provided written notice to the Company within 60 days of such
Change of Control of his intentions to cease employment hereunder or (v)
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material diminution in Executive's authority, function or position with the
Company which continues after 15 days of the date that written notice thereof is
given to the Board by Executive.
1.15 "Intellectual Property" shall mean any idea, process,
trademark, service mark, trade or business secret, invention, technology,
computer program or hardware, original work of authorship, design, formula,
discovery, patent or copyright, application, record, design, plan or
specification and any improvement, right or claim related to the foregoing.
1.16 "Participation" shall mean the direct or indirect
participation in any Competitive Activity, whether as an operator, manager,
consultant, and whether individually or jointly.
1.17 "Performance Year" shall mean each calendar year
beginning on January 1 and ending on December 31.
1.18 "Person" shall mean any individual or entity, whether a
governmental or other agency or political subdivision thereof or otherwise.
1.19 "Severance Amount" shall mean, for purposes of Section
5.3(b) hereof, an amount equal to (i) the sum of (A) the Base Salary for the
calendar year in the Term in which the date of Termination occurs plus (B) the
prior year's Bonus Award (not to be less than $100,000) MULTIPLIED BY (ii) the
Severance Period Multiple.
1.20 "Severance Period Multiple" shall mean, the quotient
obtained by dividing (i) the Severance Period by (ii) 12; PROVIDED, HOWEVER,
that the Severance Period Multiple shall not be less than one (1), except that
in the case of a Change of Control, the Severance Period Multiple shall not be
less than two and one half (2.5).
1.21 "Severance Period" shall mean the number of full calendar
months remaining in the Term on the date of any Termination.
1.22 "Term" shall have the meaning set forth in Section 2.2
hereof and shall include any renewal or extension as set forth therein.
1.23 "Termination" shall mean termination of Executive's
employment with the Company for any reason, including (i) for Disability, (ii)
with or without Cause, (iii) resignation by Executive with or without Good
Reason or (iv) upon the expiration of the Term.
1.24 "Voting Stock" shall mean with respect to any share,
interest, participation or other equivalent (however designated, whether voting
or non-voting) in equity of the Company, whether now outstanding or issued after
the date hereof, including, without limitation, any Common Stock, any preferred
stock and any class or kind ordinarily having the power to vote for the election
of directors, managers or other voting members of the Board.
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ARTICLE Il
EMPLOYMENT AND TERM
2.1 EMPLOYMENT. The Executive shall be employed as the
President and Chief Executive Officer of the Company, and Executive hereby
accepts such employment. In addition, Executive agrees that he will serve in any
similar capacity on behalf of any existing or future subsidiary of the Company
as reasonably requested by the Board.
2.2 TERM. (a) The Term shall commence on the date hereof and
shall end on the earlier of (i) one week after the third anniversary of such
date and (ii) the date of any Termination.
(b) Subject to Section 5.2 hereof, if six (6)
months' advance written notice terminating this Agreement is not received by
either party from the other party before March 19, 2001 or any subsequent
anniversary of such date, then this Agreement shall be automatically renewed for
successive one year-periods.
2.3 DUTIES. The Executive shall be directly responsible for
the Company's strategy and daily operations and shall have all powers, duties
and responsibilities commensurate with his positions as set forth in Section 2.1
hereof or as may be assigned by the Board from time to time; PROVIDED, HOWEVER,
that any such powers, duties and responsibilities assigned by the Board are
commensurate with such positions. The Executive shall use his best efforts and
devote all of his business time, attention and energy in performing his duties
hereunder. Notwithstanding the foregoing, nothing in this Agreement shall
restrict Executive from managing his personal investments, personal business
affairs and other personal matters, or serving on civic or charitable boards or
committees, if such activities do not interfere with the performance of his
duties hereunder or conflict with the Company's interests.
ARTICLE III
COMPENSATION AND BENEFITS
3.1 BASE SALARY. For services performed by Executive for the
Company and its subsidiaries hereunder, the Company shall pay Executive an
annual Base Salary of $300,000 in accordance with the Company's regular payroll
practices. On each anniversary date of this Agreement, the Executive shall be
subject to an annual review; PROVIDED, HOWEVER, that the Executive's Base Salary
shall be increased (but not decreased) to an amount equal to the product of the
Base Salary multiplied by the sum of (i) one plus (ii) the percentage increase,
if any, in the Consumer Price Index for all Urban Consumers, All Items, for the
most recent twelve-month period for which such figures are then available as
promulgated by the Department of Labor Bureau of Statistics.
3.2 BONUSES. Executive shall be eligible to receive an annual
cash bonus in accordance with the Bonus Agreement. Any compensation which may be
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otherwise authorized from time to time by the Board (or an appropriate committee
thereof) shall be in addition to the Base Salary and any Bonus Award.
3.3 STOCK OPTIONS. Executive shall be entitled to receive
annual grants of stock options or restricted stock in amounts determined by the
Board (or any committee thereof) in its sole and absolute discretion.
3.4 OTHER BENEFITS. In addition to the Base Salary and the
Bonus Award, Executive shall also be entitled to the following:
(a) PARTICIPATION IN BENEFIT PLANS. Executive
shall be entitled to participate in and receive benefits under all present and
future life, accident, disability, medical, pension, and savings plan and all
similar benefits made available to senior executive officers of the Company.
Executive shall also be entitled to participate in all other welfare and benefit
plans maintained by the Company and/or its subsidiaries, as the case may be, for
their respective employees generally.
(b) VACATION. Executive shall be entitled to
vacation and paid holidays consistent with the Company's practices as adopted
from time to time; PROVIDED, HOWEVER, that such vacation shall not be less than
20 days each year.
(c) EXPENSES. The Company shall reimburse
Executive for reasonable travel expenses and out of pocket business expenses
incurred by Executive in the performance of his duties hereunder, provided
appropriate documentation supporting such expenses is submitted in accordance
with the Company's governing policies.
ARTICLE IV
COVENANTS
4.1 NON-INTERFERENCE. During the Term and a period of two
years thereafter, Executive agrees not to solicit or encourage any employee of
the Company who is employed in an executive, managerial, administrative or
professional capacity or who possesses Confidential Material to leave the
employment of the Company.
4.2 NONDISCLOSURE OF CONFIDENTIAL MATERIAL. (a) In the
performance of his duties hereunder, Executive shall have access to confidential
records and information, including, but not limited to, information relating to
(i) any Intellectual Property or (ii) the Company's business practices,
finances, developments, customers, affairs, marketing or purchasing strategy or
other secret information (collectively, clauses (i) and (ii) of this Section
4.2(a) are referred to as the "Confidential Material").
(b) All Confidential Material shall be disclosed
to Executive in confidence. Except in performing his duties hereunder, Executive
shall not, during the Term and at all times thereafter, disclose or use any
Confidential Material.
(c) All records, files, drawings, documents,
equipment and other tangible items containing Confidential Material shall be the
Company's exclusive
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property, and, upon termination of this Agreement, or whenever requested by the
Company, Executive shall promptly deliver to the Company all of the Confidential
Material (and copies thereof) that may be in Executive's possession or control.
The Company hereby represents and warrants that it shall give custody of such
Confidential Material to a escrow agent, with terms acceptable to both the
Company and the Executive, for a three-year period at an annual cost not to
exceed $500.
(d) The foregoing restrictions shall not apply if
(i) such Confidential Material has been publicly disclosed (not due to a breach
by Executive of his obligations hereunder or by breach of any other person of a
fiduciary or confidential obligation to the Company) or (ii) Executive is
required to disclose Confidential Material by or to any court of competent
jurisdiction or any governmental or quasi-governmental agency, authority or
instrumentality of competent jurisdiction; PROVIDED, HOWEVER, that Executive
shall, prior to any such disclosure, immediately notify the Company of such
requirement; PROVIDED, FURTHER, that the Company shall have the right, at its
expense, to object to such disclosures and to seek confidential treatment of any
Confidential Material to be so disclosed on such terms as it shall determine.
4.3 NON-COMPETITION. (a) The Executive shall not, during the
Term, Control any Person which is engaged, directly or indirectly, or
Participate in any business that is competitive with the Company's business of
developing, operating or expanding a facilities-based telecommunications voice
or voice band data network within any country in any European Union member
state, Switzerland or any country (excluding the Americas) in which the Company
currently has a switch or point of presence for either origination or
termination of voice or voice band data transmissions or in which the Company is
so engaged in business or proposes to be so engaged in business in accordance
with its strategic business plan current at the time of the Termination
(including the solicitation of any customer of the Company on behalf of any
competitor or any other business, directly, indirectly on behalf of himself or
any other Person) (collectively, "Competitive Activities"); PROVIDED, HOWEVER,
that nothing in this Agreement shall preclude Executive from owning less than 5%
of any class of publicly traded equity of any Person engaged in any Competitive
Activity. Notwithstanding the immediately preceding sentence, if the Company has
ceased to so provide such services within any such country at the time of
Executive's Termination (or any time thereafter), the covenant set forth in the
immediately preceding sentence shall no longer be applicable to such any such
business in such country.
(b) Upon Termination for Disability or Cause or
without Good Reason the Executive shall not, for himself or any third party,
directly or indirectly, for a period of one year following the date of such
Termination engage in Competitive Activities.
(c) Upon Termination either without Cause or for Good
Reason the Executive shall not, for himself or any third party, directly or
indirectly, engage in Competitive Activities for a period equal to the greater
of (i) the Severance Period and (ii) one year following the date of Termination.
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4.4 EXECUTIVE INVENTIONS AND IDEAS.
(a) Executive hereby agrees to assign to the
Company, without further consideration, his entire right, title and interest
(within the United States and all foreign jurisdictions), to any Intellectual
Property created, conceived, developed or reduced to practice by Executive
(alone or with others), free and clear of any lien or encumbrance. If any
Intellectual Property shall be deemed patentable or otherwise registrable,
Executive shall assist the Company (at its expense) in obtaining letters patent
or other applicable registration therein and shall execute all documents and do
all things (including testifying at the Company's expense) necessary or
appropriate to obtain letters patent or other applicable registration therein
and to vest in the Company, or any affiliate specified by the Board.
(b) Should the Company be unable to secure Executive's
signature on any document necessary to apply for, prosecute, obtain or enforce
any patent, copyright or other right or protection relating to any Intellectual
Property, whether due to Executive's Disability or other reason, Executive
hereby irrevocably designates and appoints the Company and each of its duly
authorized officers and agents as Executive's agent and attorney-in-fact to act
for and on Executive's behalf and stead and to execute and file any such
document and to do all other lawfully permitted acts to further the prosecution,
issuance and other enforcement of patents, copyrights or other rights or
protections with the same effect as if executed and delivered by Executive.
4.5 ENFORCEMENT.
(a) Executive acknowledges that violation of any
covenant or agreement set forth in this Article IV would cause the Company
irreparable damage for which the Company cannot be reasonably compensated in
damages in an action at law, and, therefore, upon any breach by Executive of
this Article IV, the Company shall be entitled to make application to a court of
competent jurisdiction for equitable relief by way of injunction or otherwise
(without being required to post a bond). This provision shall not, however, be
construed as a waiver of any of the rights which the Company may have for
damages, and all of the Company's rights and remedies shall be unrestricted.
(b) If any provision of this Agreement, or application
thereof to any person, place or circumstance, shall be held by a court of
competent jurisdiction or be found in an arbitration proceeding to be invalid,
unenforceable or void, the remainder of this Agreement and such provisions as
applied to any other person, place and circumstance shall remain in full force
and effect. It is the intention of the parties hereto that the covenants
contained herein shall be enforced to the maximum extent (but no greater extent)
in time, area, and degree of participation as is permitted by the law of the
jurisdiction whose law is found to be applicable to the acts allegedly in breach
of this Agreement, and the parties hereby agree that the court making any such
determination shall have the power to so reform the Agreement.
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(c) The Executive understands that the provisions of
this Article IV may limit his ability to earn a livelihood in a business similar
to the business of the Company but nevertheless agrees and hereby acknowledges
that (i) such provisions do not impose a greater restraint than is necessary to
protect the goodwill or other business interests of the Company; (ii) such
provisions contain reasonable limitations as to time and the scope of activity
to be restrained; and (iii) the consideration provided under this Agreement,
including, without limitation, any amounts or benefits provided under Article V
hereof, is sufficient to compensate Executive for the restrictions contained in
this Article IV. In consideration of the foregoing and in light of Executive's
education, skills and abilities, Executive agrees that he will not assert, and
it should not be considered, that any provisions of this Article IV prevented
him from earning a living or otherwise are void, voidable or unenforceable or
should be voided or held unenforceable.
(d) Each of the covenants of this Article IV is given by
Executive as part of the consideration for this Agreement and as an inducement
to the Company to enter into this Agreement and accept the obligations
hereunder.
ARTICLE V
TERMINATION
5.1 TERMINATION OF AGREEMENT. Except for those provisions of
this Agreement that survive Termination, this Agreement shall terminate upon any
Termination.
5.2 PROCEDURES APPLICABLE TO TERMINATION.
(a) TERMINATION FOR CAUSE. The Executive may be
terminated for Cause, upon at least 30 days' prior written notice from the Board
to Executive for termination for Cause provided that Executive, with his
counsel, shall have had the opportunity during such period to be heard at a
meeting of the Board concerning such determination.
(b) RESIGNATION FOR GOOD REASON. The Executive may
terminate his employment for Good Reason, upon at least 30 days' prior written
notice from Executive to the Board of his intent to resign for Good Reason
provided that Executive, with his counsel, shall have met with the Board, if
requested by the Board, during such period with respect to his intent to resign.
(c) TERMINATION WITHOUT CAUSE OR FOR DISABILITY. The
Executive may be terminated without Cause or for Disability, upon at least 30
days' prior written notice from the Board to Executive, by a vote of the Board,
provided that Executive, with his counsel, shall have had the opportunity during
such period to be heard at a meeting of the Board with respect to such
determination.
(d) NO EFFECT ON RIGHTS. The Executive's right or
obligation to be heard in connection with a Termination shall not otherwise
effect the rights and obligations of Executive or the Company hereunder.
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5.3 OBLIGATIONS OF THE COMPANY UPON TERMINATION.
(a) ACCRUED OBLIGATIONS AND OTHER BENEFITS. Upon any
Termination, the Company shall pay to Executive, or, upon Executive's
Disability, to his heirs, estate or legal representatives, as the case may be,
the following:
(i) all Accrued Obligations in a lump sum within
10 days after the date of Termination; and
(ii) all benefits accrued by Executive as of the date
of Termination under all qualified and nonqualified retirement, pension, profit
sharing and similar plans of the Company to such extent, in such manner and at
such time as are provided under the terms of such plans and arrangements.
(b) TERMINATION WITHOUT CAUSE OR RESIGNATION FOR GOOD
REASON. If the Board terminates Executive's employment without Cause (excluding
Termination because of Disability), or if Executive resigns for Good Reason, in
addition to the amounts payable under Section 5.3(a) hereof:
(i) The Company shall pay Executive the Severance
Amount in a lump sum within 10 days after the date of Termination; and
(ii) The Company shall continue all benefits
coverage of Executive and any dependents then provided under its benefit plans
or policies for the unexpired portion of the Term.
(c) TERMINATION FOR CAUSE OR RESIGNATION WITHOUT GOOD
REASON. If the Board terminates Executive's employment for Cause, or if
Executive resigns without Good Reason, Executive shall only be entitled to the
amounts payable under Section 5.3(a) hereof:
(d) TERMINATION FOR DISABILITY. Upon Termination of
Executive because of a Disability, in addition to the amounts payable under
Section 5.3(a) hereof, the Company shall pay the aggregate Disability Payment
for three years in accordance with the Company's regular payroll practices then
in existence.
(e) EXCLUSIVITY. Any amount payable to Executive
pursuant to this Article V shall be Executive's sole remedy upon a Termination,
and Executive waives any and all rights to pursue any other remedy at law or in
equity; PROVIDED, HOWEVER, that Executive does not hereby waive any right
provided under any federal, state or local law or regulation relating to
employment discrimination.
ARTICLE VI
MISCELLANEOUS
6.1 EXECUTIVE ACKNOWLEDGMENT. The Executive acknowledges that
he has consulted with or has had the opportunity to consult with independent
counsel of his own choice concerning this Agreement and has been advised to do
so by the
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Company, and that he has read and understands the Agreement, is fully aware of
its legal effect, and has entered into it freely based on his own judgment.
6.2 BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of Executive's heirs and representatives and the Company's
successors and assigns. The Company shall require any successor (whether direct
or indirect, by purchase, merger, reorganization, consolidation, acquisition of
assets or stock, liquidation, or otherwise), by agreement in form and substance
reasonably satisfactory to Executive, to assume performance of this Agreement in
the same manner that the Company would have been required to perform this
Agreement if no such succession had taken place. Regardless of whether such
agreement is executed, this Agreement shall be binding upon any successor of the
Company in accordance with the operation of law.
6.3 NOTICES. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if delivered by hand or mailed within the continental United States
by first class certified mail, return receipt requested, postage prepaid,
addressed as follows:
(a) if to the Board or the Company, to:
Viatel, Inc.
800 Third Avenue, 18th Floor
New York, New York 10022
Attention: Senior Vice President, Business
Affairs and General Counsel
(b) if to Executive, to:
77 Park Avenue, Apt. 15E
New York, New York 10016
with a copy to:
Lanny A. Oppenheim, Esq.
Christy & Viener
620 Fifth Avenue
New York, New York 10020
Any such address may be changed by written notice sent to the other party at the
last recorded address of that party.
6.4 TAX WITHHOLDING. The Company shall provide for the
withholding of any taxes required to be withheld under federal, state and local
law (other than the employer's portion of such taxes) with respect to any
payment in cash and/or other property made by or on behalf of the Company to or
for the benefit of Executive under this Agreement or otherwise. The Company may,
at its option: (i) withhold such taxes from any cash payments owing from the
Company to Executive, (ii) require Executive to pay to the Company in cash such
amount as may be required to satisfy such
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withholding obligations and/or (iii) make other satisfactory arrangements with
Executive to satisfy such withholding obligations.
6.5 NO ASSIGNMENT; NO THIRD PARTY BENEFICIARIES. Except as
otherwise expressly provided in Section 6.2 hereof, this Agreement is not
assignable by any party, and no payment to be made hereunder shall be subject to
alienation, sale, transfer, assignment, pledge, encumbrance or other charge.
Except for the Company and its existing and future subsidiaries, no Person shall
be, or deemed to be, a third party beneficiary of this Agreement.
6.6 EXECUTION IN COUNTERPARTS. This Agreement may be executed
by the parties hereto in one or more counterparts, each of which shall be deemed
to be an original, but all such counterparts shall constitute one and the same
instrument, and all signatures need not appear on any one counterpart.
6.7 JURISDICTION AND GOVERNING LAW. Jurisdiction over disputes
with regard to this Agreement shall be exclusively in the courts of the State of
New York, and this Agreement shall be construed and interpreted in accordance
with and governed by the laws of the State of New York as applied to contracts
capable of being wholly performed in such State.
6.8 ENTIRE AGREEMENT; AMENDMENT. This Agreement, the Bonus
Agreement, and the Exhibits attached hereto embody the entire understanding of
the parties hereto, and supersede all prior agreements, including the employment
agreement dated September 23, 1996, regarding the subject matter hereof. No
change, alteration or modification hereof may be made except in a writing,
signed by both of the parties hereto.
6.9 HEADINGS. The headings in this Agreement are for
convenience of reference only and shall not be construed as part of this
Agreement or to limit or otherwise affect the meaning hereof.
6.10 SURVIVAL. Notwithstanding anything to the contrary
herein, Article IV, Section 5.3 and Article VI of this Agreement shall survive
termination of this Agreement or Termination for any reason whatsoever.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the day first written above.
VIATEL, INC.
By: /S/ ALLAN L. SHAW
_____________________
EXECUTIVE
/S/ MICHAEL J. MAHONEY
________________________
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and
entered into as of April 1, 1998 by and between VIATEL, INC., a Delaware
corporation with an office at 800 Third Avenue, New York, New York 10022 (the
"Company"), and ALLAN L. SHAW, an individual currently residing at 87 Joyce
Lane, Woodbury, New York 11797 (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company and the Executive have previously entered
into an Employment Agreement, dated November 1, 1997, and the parties desire to
amend and restate such agreement as set forth below.
WHEREAS, the Company desires to provide certain incentives to
Executive to remain in the Company's employ; and
WHEREAS, the Company and the Executive desire that Company
employs the Executive as the Senior Vice President, Finance and and Chief
Financial Officer.
NOW THEREFORE, each of the Company and Executive, intending to
be legally bound, hereby mutually covenant and agree as follows:
ARTICLE I
DEFINITIONS
The following terms used in this Agreement shall have the
meanings set forth below.
1.1 "Accrued Obligations" shall mean, as of the date of
Termination, the sum of Executive's aggregate accrued but unpaid (A) Base
Salary, (B) Bonus Award, (C) other cash compensation and (D) vacation pay,
expense reimbursements and other cash entitlements, all determined through the
date of Termination.
1.2 "Base Salary" shall mean the amount set forth in Section
3.1 hereof, or if the Executive has received different Base Salaries during the
course of a year, the average of such Base Salaries.
1.3 "Bonus Agreement" shall mean the Bonus Agreement entered
into by the parties in the form attached hereto as EXHIBIT A.
1.4 "Bonus Award" shall have the meaning specified in the
Bonus Agreement.
1.5 "Cause" shall mean Executive's (i) material violation of
Section 2.3 hereof, which violation has not been cured within 15 days of the
date that written notice thereof is received by Executive from the Board; (ii)
material violation of Section 4.1 or 4.2 hereof; (iii) violation of Section 4.3
hereof; (iv) gross negligence or dishonesty in the
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performance of his duties hereunder; PROVIDED, HOWEVER, that the Board
undertakes a comprehensive review and determines that such conduct is materially
injurious or materially damaging to the Company or its reputation; or (vi)
conviction of any felony or a misdemeanor involving fraud, misrepresentation or
dishonesty.
1.6 "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
under 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.
1.7 "Common Stock" shall mean the common stock, par value
$.01 a share, of the Company.
1.8 "Competitive Activities" shall have the meaning set forth
in Section 4.3 hereof.
1.9 "Confidential Material" shall have the meaning set forth
in Section 4.2 hereof.
1.10 "Control" (including, with correlative meanings, the
terms "controlling," "controlled by," and "under common control with"), as used
with respect to any Person, shall mean the possession, directly or indirectly,
of the power to direct or cause the direction of the management or policies of
such Person, whether through ownership of voting securities, by contract or
otherwise.
1.11 "Disability" shall mean Executive's death or inability to
perform his material duties to the Company by reason of a physical or mental
disability which has existed for an aggregate of nine months during any
twelve-month period.
1.12 "Disability Payment" shall mean, for purposes of Section
5.3(d) hereof, an amount equal to 60% of the Base Salary in effect for the
calendar year in which such Disability occurred (or the average Base Salary if
such Disability occurred over more than one calendar year).
1.13 "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
1.14 "Good Reason" shall mean any (i) reduction in Executive's
Base Salary or material diminution in Executive's authority, duty,
responsibility, function or position with the Company (which diminution
continues after 15 days of the date that written notice thereof is given by
Executive), (ii) either the failure by the Company to
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continue any material benefit or compensation plan, life insurance plan, health
and accident plan, disability plan (or plan providing Executive with
substantially similar benefits) in which Executive is participating or the
material reduction by the Company of Executive's benefits under any such plan,
(iii) failure by the Company to obtain an assumption of this Agreement by any
successor of the Company (as contemplated in Section 6.2 hereof) or (iv) Change
of Control, if Executive has provided written notice to the Company within 60
days of such Change of Control of his intentions to cease employment hereunder.
1.15 "Intellectual Property" shall mean any idea, process,
trademark, service mark, trade or business secret, invention, technology,
computer program or hardware, original work of authorship, design, formula,
discovery, patent or copyright, application, record, design, plan or
specification and any improvement, right or claim related to the foregoing.
1.16 "Participation" shall mean the direct or indirect
participation in any Competitive Activity, whether as an operator, manager,
consultant, and whether individually or jointly.
1.17 "Performance Year" shall mean each calendar year
beginning on January 1 and ending on December 31.
1.18 "Person" shall mean any individual or entity, whether a
governmental or other agency or political subdivision thereof or otherwise.
1.19 "Severance Amount" shall mean, for purposes of Section
5.3(b) hereof, an amount equal to (i) the sum of (A) the Base Salary for the
calendar year in the Term in which the date of Termination occurs plus (B) the
prior year's Bonus Award (not to be less than $50,000) multiplied by (ii) the
Severance Period Multiple.
1.20 "Severance Period Multiple" shall mean, the quotient
obtained by dividing (i) the Severance Period by (ii) 12; PROVIDED, HOWEVER,
that the Severance Period Multiple shall not be less than one, except that in
the case of a Change of Control, the Severance Period Multiple shall not be less
than two.
1.21 "Severance Period" shall mean the number of full calendar
months remaining in the Term on the date of any Termination.
1.22 "Term" shall have the meaning set forth in Section 2.2
hereof and shall include any renewal or extension as set forth therein.
1.23 "Termination" shall mean termination of Executive's
employment with the Company for any reason, including (i) for Disability, (ii)
with or without Cause, (iii) resignation by Executive with or without Good
Reason (including a Voluntary Resignation) or (iv) upon the expiration of the
Term.
1.24 "Voting Stock" shall mean with respect to any share,
interest, participation or other equivalent (however designated, whether voting
or non-voting) in equity of the Company, whether now outstanding or issued after
the date hereof,
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including, without limitation, any Common Stock, any preferred stock and any
class or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the Board.
ARTICLE II
EMPLOYMENT AND TERM
2.1 EMPLOYMENT. The Executive shall be employed as the Senior
Vice President, Finance and Chief Financial Officer to the Company, and
Executive hereby accepts such employment. In addition, Executive agrees that he
will serve in any similar capacity on behalf of any existing or future
subsidiary of the Company as reasonably requested by the Board.
2.2 TERM. (a) The Term shall commence on the date
hereof and shall end on the earlier of (i) one week after the second anniversary
hereof and (ii) the date of any Termination.
(b) Subject to Section 5.2 hereof, if four months' advance
written notice terminating this Agreement is not received by either party from
the other party before the second anniversary hereof, then this Agreement shall
be automatically renewed for successive one year-periods.
2.3 DUTIES. The Executive shall serve as Chief Financial
Officer to the Company and shall be directly responsible for the Company's
financial affairs and shall have all powers, duties and responsibilities
commensurate with his position as set forth in Section 2.1 hereof or as may be
assigned by the Board from time to time; PROVIDED, HOWEVER, that any such
powers, duties and responsibilities assigned by the Board are commensurate with
such position. The Executive shall use his best efforts and devote all of his
business time, attention and energy in performing his duties hereunder.
Notwithstanding the foregoing, nothing in this Agreement shall restrict
Executive from managing his personal investments, personal business affairs and
other personal matters, or serving on civic or charitable boards or committees,
if such activities do not interfere with the performance of his duties hereunder
or conflict with the Company's interests.
ARTICLE III
COMPENSATION AND BENEFITS
3.1 BASE SALARY. For services performed by Executive for the
Company and its subsidiaries hereunder, the Company shall pay Executive an
annual Base Salary of $175,000 in accordance with the Company's regular payroll
practices. The Base Salary shall be increased in the sole and absolute
discretion of the Board.
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3.2 BONUSES. Executive shall be eligible to receive an annual
cash bonus in accordance with the Bonus Agreement. Any compensation which may be
otherwise authorized from time to time by the Board (or an appropriate committee
thereof) shall be in addition to the Base Salary and any Bonus Award.
3.3 STOCK OPTIONS. Executive shall be entitled to receive
annual grants of stock options or restricted stock in amounts determined by the
Board (or any committee thereof) in its sole and absolute discretion.
3.4 OTHER BENEFITS. In addition to the Base Salary and the
Bonus Award, Executive shall also be entitled to the following:
(a) PARTICIPATION IN BENEFIT PLANS. Executive shall be
entitled to participate in and receive benefits under all present and future
life, accident, disability, medical, pension, and savings plan and all similar
benefits made available to senior executive officers of the Company. Executive
shall also be entitled to participate in all other welfare and benefit plans
maintained by the Company and/or its subsidiaries, as the case may be, for their
respective employees generally.
(b) VACATION. Executive shall be entitled to vacation
and paid holidays consistent with the Company's practices as adopted from time
to time; PROVIDED, HOWEVER, that such vacation shall not be less than 20 days
each year.
(c) EXPENSES. The Company shall reimburse Executive for
reasonable travel, out of pocket business expenses incurred by Executive in the
performance of his duties hereunder, provided appropriate documentation
supporting such expenses is submitted in accordance with the Company's governing
policies.
ARTICLE IV
COVENANTS
4.1 NON-INTERFERENCE. During the Term and a period of two
years thereafter, Executive agrees not to solicit or encourage any employee of
the Company who is employed in an executive, managerial, administrative or
professional capacity or who possesses Confidential Material to leave the
employment of the Company.
4.2 NONDISCLOSURE OF CONFIDENTIAL MATERIAL. (a) In the
performance of his duties hereunder, Executive shall have access to confidential
records and information, including, but not limited to, information relating to
(i) any Intellectual Property or (ii) the Company's business practices,
finances, developments, customers, affairs, marketing or purchasing strategy or
other secret information (collectively, clauses (i) and (ii) of this Section
4.2(a) are referred to as the "Confidential Material").
(b) All Confidential Material shall be disclosed to
Executive in confidence. Except in performing his duties hereunder, Executive
shall not, during the Term and at all times thereafter, disclose or use any
Confidential Material.
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(c) All records, files, drawings, documents, equipment
and other tangible items containing Confidential Material shall be the Company's
exclusive property, and, upon termination of this Agreement, or whenever
requested by the Company, Executive shall promptly deliver to the Company all of
the Confidential Material (and copies thereof) that may be in Executive's
possession or control. The Company hereby represents and warrants that it shall
give custody of such Confidential Material to an escrow agent, with terms
acceptable to both the Company and the Executive, for a three-year period at an
annual cost not to exceed $500.
(d) The foregoing restrictions shall not apply if (i)
such Confidential Material has been publicly disclosed (not due to a breach by
Executive of his obligations hereunder or by breach of any other person of a
fiduciary or confidential obligation to the Company) or (ii) Executive is
required to disclose Confidential Material by or to any court of competent
jurisdiction or any governmental or quasi-governmental agency, authority or
instrumentality of competent jurisdiction; PROVIDED, HOWEVER, that Executive
shall, prior to any such disclosure, immediately notify the Company of such
requirement; PROVIDED, FURTHER, that the Company shall have the right, at its
expense, to object to such disclosures and to seek confidential treatment of any
Confidential Material to be so disclosed on such terms as it shall determine.
4.3 NON-COMPETITION. (a) The Executive shall not, during the
Term, Control any Person which is engaged, directly or indirectly, or
Participate in any business that is competitive with the Company's business of
developing, operating or expanding facilities-based telecommunications
services within any country in any European Union member state or Switzerland or
any other country in Europe in which the Company is physically present at the
time of the Termination (including the solicitation of any customer of the
Company on behalf of any Competitor or any other business, directly, indirectly
on behalf of himself or any other Person) (collectively, "Competitive
Activities"); PROVIDED, HOWEVER, that nothing in this Agreement shall preclude
Executive from owning less than 5% of any class of publicly traded equity of any
Person engaged in any Competitive Activity. Notwithstanding the immediately
preceding sentence, if the Company has ceased to so provide such services within
any such country at the time of Executive's Termination (or any time
thereafter), the covenant set forth in the immediately preceding sentence shall
no longer be applicable to any such business in such country.
(b) Upon Termination for Disability or Cause or without
Good Reason the Executive shall not, for himself or any third party, directly or
indirectly, for a period of one year following the date of such Termination
engage in Competitive Activities.
(c) Upon Termination either without Cause or for Good
Reason the Executive shall not, for himself or any third party, directly or
indirectly, engage in Competitive Activities for a period equal to the greater
of (i) the Severance Period and (ii) one year following the date of Termination.
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4.4 EXECUTIVE INVENTIONS AND IDEAS.
(a) Executive hereby agrees to assign to the Company,
without further consideration, his entire right, title and interest (within the
United States and all foreign jurisdictions), to any Intellectual Property
created, conceived, developed or reduced to practice by Executive (alone or with
others), free and clear of any lien or encumbrance. If any Intellectual Property
shall be deemed patentable or otherwise registrable, Executive shall assist the
Company (at its expense) in obtaining letters patent or other applicable
registration therein and shall execute all documents and do all things
(including testifying at the Company's expense) necessary or appropriate to
obtain letters patent or other applicable registration therein and to vest in
the Company, or any affiliate specified by the Board.
(b) Should Company be unable to secure Executive's
signature on any document necessary to apply for, prosecute, obtain or enforce
any patent, copyright or other right or protection relating to any Intellectual
Property, whether due to Executive's Disability or other cause, Executive hereby
irrevocably designates and appoints the Company and each of its duly authorized
officers and agents as Executive's agent and attorney-in-fact to act for and on
Executive's behalf and stead and to execute and file any such document and to do
all other lawfully permitted acts to further the prosecution, issuance and other
enforcement of patents, copyrights or other rights or protections with the same
effect as if executed and delivered by Executive.
4.5 ENFORCEMENT.
(a) Executive acknowledges that violation of any covenant
or agreement set forth in this Article IV would cause the Company irreparable
damage for which the Company cannot be reasonably compensated in damages in an
action at law, and, therefore, upon any breach by Executive of this Article IV,
the Company shall be entitled to make application to a court of competent
jurisdiction for equitable relief by way of injunction or otherwise (without
being required to post a bond). This provision shall not, however, be construed
as a waiver of any of the rights which the Company may have for damages, and all
of the Company's rights and remedies shall be unrestricted.
(b) If any provision of this Agreement, or application
thereof to any person, place or circumstance, shall be held by a court of
competent jurisdiction or be found in an arbitration proceeding to be invalid,
unenforceable or void, the remainder of this Agreement and such provisions as
applied to any other person, place and circumstance shall remain in full force
and effect. It is the intention of the parties hereto that the covenants
contained herein shall be enforced to the maximum extent (but no greater extent)
in time, area, and degree of participation as is permitted by the law of the
jurisdiction whose law is found to be applicable to the acts allegedly in breach
of this Agreement, and the parties hereby agree that the court making any such
determination shall have the power to so reform the Agreement.
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(c) The Executive understands that the provisions of
this Article IV may limit his ability to earn a livelihood in a business similar
to the business of the Company but nevertheless agrees and hereby acknowledges
that (i) such provisions do not impose a greater restraint than is necessary to
protect the goodwill or other business interests of the Company; (ii) such
provisions contain reasonable limitations as to time and the scope of activity
to be restrained; and (iii) the consideration provided under this Agreement,
including, without limitation, any amounts or benefits provided under Article V
hereof, is sufficient to compensate Executive for the restrictions contained in
this Article IV. In consideration of the foregoing and in light of Executive's
education, skills and abilities, Executive agrees that he will not assert, and
it should not be considered, that any provisions of this Article IV prevented
him from earning a living or otherwise are void, voidable or unenforceable or
should be voided or held unenforceable.
(d) Each of the covenants of this Article IV is given by
Executive as part of the consideration for this Agreement and as an inducement
to the Company to enter into this Agreement and accept the obligations
hereunder.
ARTICLE V
TERMINATION
5.1 TERMINATION OF AGREEMENT. Except for those provisions of
this Agreement that survive Termination, this Agreement shall terminate upon any
Termination.
5.2 PROCEDURES APPLICABLE TO TERMINATION.
(a) TERMINATION FOR CAUSE. The Executive may be
terminated for Cause, upon at least 30 days' prior written notice from the Board
to Executive for termination for Cause provided that Executive, with his
counsel, shall have had the opportunity during such period to be heard at a
meeting of the Board concerning such determination.
(b) RESIGNATION FOR GOOD REASON. The Executive may
terminate his employment for Good Reason upon at least 30 days' prior written
notice from Executive to the Board of his intent to resign for Good Reason
provided that Executive, with his counsel, shall have met with the Board, if
requested by the Board, during such period with respect to his intent to resign.
(c) TERMINATION WITHOUT CAUSE OR FOR DISABILITY. The
Executive may be terminated without Cause or for Disability, upon at least 30
days' prior written notice from the Board to Executive, by a vote of the Board,
provided that Executive, with his counsel, shall have had the opportunity during
such period to be heard at a meeting of the Board with respect to such
determination.
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(d) NO EFFECT ON RIGHTS. The Executive's right or
obligation to be heard in connection with a Termination shall not otherwise
effect the rights and obligations of the Executive and the Company hereunder.
5.3 OBLIGATIONS OF THE COMPANY UPON TERMINATION.
(a) ACCRUED OBLIGATIONS AND OTHER BENEFITS. Upon any
Termination, the Company shall pay to Executive, or, upon Executive's
Disability, to his heirs, estate or legal representatives, as the case may be,
the following:
(i) all Accrued Obligations in a lump sum within 10
days after the date of Termination; and
(ii) all benefits accrued by Executive as of the date
of Termination under all qualified and nonqualified retirement, pension, profit
sharing and similar plans of the Company to such extent, in such manner and at
such time as are provided under the terms of such plans and arrangements.
(b) TERMINATION WITHOUT CAUSE OR RESIGNATION FOR GOOD
REASON. If the Board terminates Executive's employment without Cause (excluding
Termination because of Disability), or if Executive resigns for Good Reason, in
addition to the amounts payable under Section 5.3(a) hereof:
(i) The Company shall pay Executive the Severance
Amount in a lump sum within 10 days after the date of Termination; and
(ii) The Company shall continue all benefits
coverage of Executive and any dependents then provided under its benefit plans
or policies for the unexpired portion of the Term.
(c) TERMINATION FOR CAUSE OR RESIGNATION WITHOUT GOOD
REASON. If the Board terminates Executive's employment for Cause, or if
Executive resigns without Good Reason, Executive shall only be entitled to the
amounts payable under Section 5.3(a) hereof:
(d) TERMINATION FOR DISABILITY. Upon Termination
of Executive because of a Disability, in addition to the amounts payable under
Section 5.3(a) hereof, the Company shall pay the aggregate Disability Payment
for three years in accordance with the Company's regular payroll practices then
in existence.
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(e) EXCLUSIVITY. Any amount payable to Executive
pursuant to this Article V shall be Executive's sole remedy upon a Termination,
and Executive waives any and all rights to pursue any other remedy at law or in
equity; PROVIDED, HOWEVER, that Executive does not hereby waive any right
provided under any federal, state or local law or regulation relating to
employment discrimination.
ARTICLE VI
MISCELLANEOUS
6.1 EXECUTIVE ACKNOWLEDGMENT. The Executive acknowledges that
he has consulted with or has had the opportunity to consult with independent
counsel of his own choice concerning this Agreement and has been advised to do
so by the Company, and that he has read and understands the Agreement, is fully
aware of its legal effect, and has entered into it freely based on his own
judgment.
6.2 BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of Executive's heirs and representatives and the Company's
successors and assigns. The Company shall require any successor (whether direct
or indirect, by purchase, merger, reorganization, consolidation, acquisition of
assets or stock, liquidation, or otherwise), by agreement in form and substance
reasonably satisfactory to Executive, to assume performance of this Agreement in
the same manner that the Company would have been required to perform this
Agreement if no such succession had taken place. Regardless of whether such
agreement is executed, this Agreement shall be binding upon any successor of the
Company in accordance with the operation of law.
6.3 NOTICES. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if delivered by hand or mailed within the continental United States
by first class certified mail, return receipt requested, postage prepaid,
addressed as follows:
(a) if to the Board or the Company, to:
Viatel, Inc.
800 Third Avenue, 18th Floor
New York, NY 10022
Attention: General Counsel
(b) if to Executive, to:
87 Joyce Lane
Woodbury, New York 11797
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Any such address may be changed by written notice sent to the other party at the
last recorded address of that party.
6.4 TAX WITHHOLDING. The Company shall provide for the
withholding of any taxes required to be withheld under federal, state and local
law (other than the employer's portion of such taxes) with respect to any
payment in cash and/or other property made by or on behalf of the Company to or
for the benefit of Executive under this Agreement or otherwise. The Company may,
at its option: (i) withhold such taxes from any cash payments owing from the
Company to Executive, (ii) require Executive to pay to the Company in cash such
amount as may be required to satisfy such withholding obligations and/or (iii)
make other satisfactory arrangements with Executive to satisfy such withholding
obligations.
6.5 NO ASSIGNMENT; NO THIRD PARTY BENEFICIARIES. Except as
otherwise expressly provided in Section 6.2 hereof, this Agreement is not
assignable by any party, and no payment to be made hereunder shall be subject to
alienation, sale, transfer, assignment, pledge, encumbrance or other charge.
Except for the Company and its existing and future subsidiaries, no Person shall
be, or deemed to be, a third party beneficiary of this Agreement.
6.6 EXECUTION IN COUNTERPARTS. This Agreement may be executed
by the parties hereto in one or more counterparts, each of which shall be deemed
to be an original, but all such counterparts shall constitute one and the same
instrument, and all signatures need not appear on any one counterpart.
6.7 JURISDICTION AND GOVERNING LAW. Jurisdiction over disputes
with regard to this Agreement shall be exclusively in the courts of the State of
New York, and this Agreement shall be construed and interpreted in accordance
with and governed by the laws of the State of New York as applied to contracts
capable of being wholly performed in such State.
6.8 ENTIRE AGREEMENT; AMENDMENT. This Agreement, the Bonus
Agreement, and the Exhibits attached hereto embody the entire understanding of
the parties hereto, and supersede all prior agreements, including the employment
agreement dated November 1, 1997, regarding the subject matter hereof. No
change, alteration or modification hereof may be made except in a writing,
signed by both of the parties hereto.
6.9 HEADINGS. The headings in this Agreement are for
convenience of reference only and shall not be construed as part of this
Agreement or to limit or otherwise affect the meaning hereof.
6.10 SURVIVAL. Notwithstanding anything to the contrary
herein, Article IV, Section 5.3 and Article VI of this Agreement shall survive
termination of this Agreement or Termination for any reason whatsoever.
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IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the day first written above.
VIATEL, INC.
By: /s/ Michael J. Mahoney
_______________________
EXECUTIVE
/s/ Allan L. Shaw
________________________
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EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered
into as of April 1, 1998 by and between VIATEL, INC., a Delaware corporation
with an office at 800 Third Avenue, New York, New York 10022 (the "Company"),
and SHELDON M. GOLDMAN, an individual currently residing at 51 Crossway,
Scarsdale, New York 10022 (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company desires to provide certain incentive to
Executive to remain in the Company's employ; and
WHEREAS, the Company and the Executive desire that Company
employs the Executive as the Senior Vice President, Business Affairs and General
Counsel.
NOW THEREFORE, each of the Company and Executive, intending to
be legally bound, hereby mutually covenant and agree as follows:
ARTICLE I
DEFINITIONS
The following terms used in this Agreement shall have the
meanings set forth below.
1.1 "Accrued Obligations" shall mean, as of the date of
Termination, the sum of Executive's aggregate accrued but unpaid (A) Base
Salary, (B) Bonus Award, (C) other cash compensation and (D) vacation pay,
expense reimbursements and other cash entitlements, all determined through the
date of Termination.
1.2 "Base Salary" shall mean the amount set forth in Section
3.1 hereof, or if the Executive has received different Base Salaries during the
course of a year, the average of such Base Salaries.
1.3 "Bonus Agreement" shall mean the Bonus Agreement entered
into by the parties in the form attached hereto as Exhibit A.
1.4 "Bonus Award" shall have the meaning specified in the
Bonus Agreement.
1.5 "Cause" shall mean Executive's (i) material violation of
Section 2.3 hereof, which violation has not been cured within 15 days of the
date that written notice thereof is received by Executive from the Board; (ii)
material violation of Section 4.1 or 4.2 hereof; (iii) violation of Section 4.3
hereof; (iv) gross negligence or dishonesty in the performance of his duties
hereunder; PROVIDED, HOWEVER, that the Board undertakes a comprehensive review
and determines that such conduct is materially injurious or
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materially damaging to the Company or its reputation; or (vi) conviction of any
felony or a misdemeanor involving fraud, misrepresentation or dishonesty.
1.6 "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
under 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.
1.7 "Common Stock" shall mean the common stock, par value
$.01 a share, of the Company.
1.8 "Competitive Activities" shall have the meaning set forth
in Section 4.3 hereof.
1.9 "Confidential Material" shall have the meaning set forth
in Section 4.2 hereof.
1.10 "Control" (including, with correlative meanings, the
terms "controlling," "controlled by," and "under common control with"), as used
with respect to any Person, shall mean the possession, directly or indirectly,
of the power to direct or cause the direction of the management or policies of
such Person, whether through ownership of voting securities, by contract or
otherwise.
1.11 "Disability" shall mean Executive's death or inability to
perform his material duties to the Company by reason of a physical or mental
disability which has existed for an aggregate of nine months during any
twelve-month period.
1.12 "Disability Payment" shall mean, for purposes of Section
5.3(d) hereof, an amount equal to 60% of the Base Salary in effect for the
calendar year in which such Disability occurred (or the average Base Salary if
such Disability occurred over more than one calendar year).
1.13 "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
1.14 "Good Reason" shall mean any (i) reduction in Executive's
Base Salary or material diminution in Executive's authority, duty,
responsibility, function or position with the Company (which diminution
continues after 15 days of the date that written notice thereof is given by
Executive), (ii) either the failure by the Company to continue any material
benefit or compensation plan, life insurance plan, health and accident plan,
disability plan (or plan providing Executive with substantially similar
2
<PAGE>
benefits) in which Executive is participating or the material reduction by the
Company of Executive's benefits under any such plan, (iii) failure by the
Company to obtain an assumption of this Agreement by any successor of the
Company (as contemplated in Section 6.2 hereof) or (iv) Change of Control, if
Executive has provided written notice to the Company within 60 days of such
Change of Control of his intentions to cease employment hereunder.
1.15 "Intellectual Property" shall mean any idea, process,
trademark, service mark, trade or business secret, invention, technology,
computer program or hardware, original work of authorship, design, formula,
discovery, patent or copyright, application, record, design, plan or
specification and any improvement, right or claim related to the foregoing.
1.16 "Participation" shall mean the direct or indirect
participation in any Competitive Activity, whether as an operator, manager,
consultant, and whether individually or jointly.
1.17 "Performance Year" shall mean each calendar year
beginning on January 1 and ending on December 31.
1.18 "Person" shall mean any individual or entity, whether a
governmental or other agency or political subdivision thereof or otherwise.
1.19 "Severance Amount" shall mean, for purposes of Section
5.3(b) hereof, an amount equal to (i) the sum of (A) the Base Salary for the
calendar year in the Term in which the date of Termination occurs plus (B) the
prior year's Bonus Award (not to be less than $50,000) multiplied by (ii) the
Severance Period Multiple.
1.20 "Severance Period Multiple" shall mean, the quotient
obtained by dividing (i) the Severance Period by (ii) 12; PROVIDED, HOWEVER,
that the Severance Period Multiple shall not be less than one, except that in
the case of a Change of Control, the Severance Period Multiple shall not be less
than two.
1.21 "Severance Period" shall mean the number of full calendar
months remaining in the Term on the date of any Termination.
1.22 "Term" shall have the meaning set forth in Section 2.2
hereof and shall include any renewal or extension as set forth therein.
1.23 "Termination" shall mean termination of Executive's
employment with the Company for any reason, including (i) for Disability, (ii)
with or without Cause, (iii) resignation by Executive with or without Good
Reason (including a Voluntary Resignation) or (iv) upon the expiration of the
Term.
1.24 "Voting Stock" shall mean with respect to any share,
interest, participation or other equivalent (however designated, whether voting
or non-voting) in equity of the Company, whether now outstanding or issued after
the date hereof, including, without limitation, any Common Stock, any preferred
stock and any class or kind ordinarily having the power to vote for the election
of directors, managers or other voting members of the Board.
3
<PAGE>
ARTICLE II
EMPLOYMENT AND TERM
2.1 EMPLOYMENT. The Executive shall be employed as the
Senior Vice President, Business Affairs and General Counsel and as Secretary
to the Company, and Executive hereby accepts such employment. In addition,
Executive agrees that he will serve in any similar capacity on behalf of any
existing or future subsidiary of the Company as reasonably requested by the
Board.
2.2 TERM. (a) The Term shall commence on the date
hereof and shall end on the earlier of (i) one week after the second anniversary
hereof and (ii) the date of any Termination.
(b) Subject to Section 5.2 hereof, if four months' advance
written notice terminating this Agreement is not received by either party from
the other party before the second anniversary hereof, then this Agreement shall
be automatically renewed for successive one year-periods.
2.3 DUTIES. The Executive shall serve as General Counsel to
the Company and shall be directly responsible for the Company's legal and
regulatory affairs and shall have all powers, duties and responsibilities
commensurate with his position as set forth in Section 2.1 hereof or as may be
assigned by the Board from time to time; PROVIDED, HOWEVER, that any such
powers, duties and responsibilities assigned by the Board are commensurate with
such position. The Executive shall use his best efforts and devote all of his
business time, attention and energy in performing his duties hereunder.
Notwithstanding the foregoing, nothing in this Agreement shall restrict
Executive from managing his personal investments, personal business affairs and
other personal matters, or serving on civic or charitable boards or committees,
if such activities do not interfere with the performance of his duties hereunder
or conflict with the Company's interests.
ARTICLE III
COMPENSATION AND BENEFITS
3.1 BASE SALARY. For services performed by Executive for the
Company and its subsidiaries hereunder, the Company shall pay Executive an
annual Base Salary of $185,000 in accordance with the Company's regular payroll
practices. The Base Salary shall be increased in the sole and absolute
discretion of the Board.
3.2 BONUSES. Executive shall be eligible to receive an annual
cash bonus in accordance with the Bonus Agreement. Any compensation which may be
otherwise authorized from time to time by the Board (or an appropriate committee
thereof) shall be in addition to the Base Salary and any Bonus Award.
3.3 STOCK OPTIONS. Executive shall be entitled to receive
annual grants of stock options or restricted stock in amounts determined by the
Board (or any committee thereof) in its sole and absolute discretion.
4
<PAGE>
3.4 OTHER BENEFITS. In addition to the Base Salary and the
Bonus Award, Executive shall also be entitled to the following:
(a) PARTICIPATION IN BENEFIT PLANS. Executive shall be
entitled to participate in and receive benefits under all present and future
life, accident, disability, medical, pension, and savings plan and all similar
benefits made available to senior executive officers of the Company. Executive
shall also be entitled to participate in all other welfare and benefit plans
maintained by the Company and/or its subsidiaries, as the case may be, for their
respective employees generally.
(b) VACATION. Executive shall be entitled to vacation
and paid holidays consistent with the Company's practices as adopted from time
to time; PROVIDED, HOWEVER, that such vacation shall not be less than 20 days
each year.
(c) EXPENSES. The Company shall reimburse Executive for
reasonable travel, out of pocket business expenses incurred by Executive in the
performance of his duties hereunder, provided appropriate documentation
supporting such expenses is submitted in accordance with the Company's governing
policies.
ARTICLE IV
COVENANTS
4.1 NON-INTERFERENCE. During the Term and a period of two
years thereafter, Executive agrees not to solicit or encourage any employee of
the Company who is employed in an executive, managerial, administrative or
professional capacity or who possesses Confidential Material to leave the
employment of the Company.
4.2 NONDISCLOSURE OF CONFIDENTIAL MATERIAL. (a) In the
performance of his duties hereunder, Executive shall have access to confidential
records and information, including, but not limited to, information relating to
(i) any Intellectual Property or (ii) the Company's business practices,
finances, developments, customers, affairs, marketing or purchasing strategy or
other secret information (collectively, clauses (i) and (ii) of this Section
4.2(a) are referred to as the "Confidential Material").
(b) All Confidential Material shall be disclosed to
Executive in confidence. Except in performing his duties hereunder, Executive
shall not, during the Term and at all times thereafter, disclose or use any
Confidential Material.
(c) All records, files, drawings, documents, equipment
and other tangible items containing Confidential Material shall be the Company's
exclusive property, and, upon termination of this Agreement, or whenever
requested by the Company, Executive shall promptly deliver to the Company all of
5
<PAGE>
the Confidential Material (and copies thereof) that may be in Executive's
possession or control. The Company hereby represents and warrants that it shall
give custody of such Confidential Material to an escrow agent, with terms
acceptable to both the Company and the Executive, for a three-year period at an
annual cost not to exceed $500.
(d) The foregoing restrictions shall not apply if (i)
such Confidential Material has been publicly disclosed (not due to a breach by
Executive of his obligations hereunder or by breach of any other person of a
fiduciary or confidential obligation to the Company) or (ii) Executive is
required to disclose Confidential Material by or to any court of competent
jurisdiction or any governmental or quasi-governmental agency, authority or
instrumentality of competent jurisdiction; PROVIDED, HOWEVER, that Executive
shall, prior to any such disclosure, immediately notify the Company of such
requirement; PROVIDED, FURTHER, that the Company shall have the right, at its
expense, to object to such disclosures and to seek confidential treatment of any
Confidential Material to be so disclosed on such terms as it shall determine.
4.3 NON-COMPETITION. (a) The Executive shall not, during the
Term, Control any Person which is engaged, directly or indirectly, or
Participate in any business that is competitive with the Company's business of
developing, operating or expanding facilities-based telecommunications
services within any country in any European Union member state or Switzerland or
any other country in Europe in which the Company is physically present at the
time of the Termination (including the solicitation of any customer of the
Company on behalf of any Competitor or any other business, directly, indirectly
on behalf of himself or any other Person) (collectively, "Competitive
Activities"); PROVIDED, HOWEVER, that nothing in this Agreement shall preclude
Executive from owning less than 5% of any class of publicly traded equity of any
Person engaged in any Competitive Activity. Notwithstanding the immediately
preceding sentence, if the Company has ceased to so provide such services within
any such country at the time of Executive's Termination (or any time
thereafter), the covenant set forth in the immediately preceding sentence shall
no longer be applicable to any such business in such country.
(b) Upon Termination for Disability or Cause or without
Good Reason the Executive shall not, for himself or any third party, directly or
indirectly, for a period of one year following the date of such Termination
engage in Competitive Activities.
(c) Upon Termination either without Cause or for Good
Reason the Executive shall not, for himself or any third party, directly or
indirectly, engage in Competitive Activities for a period equal to the greater
of (i) the Severance Period and (ii) one year following the date of Termination.
4.4 EXECUTIVE INVENTIONS AND IDEAS.
(a) Executive hereby agrees to assign to the Company,
without further consideration, his entire right, title and interest (within the
United States and all
6
<PAGE>
foreign jurisdictions), to any Intellectual Property created, conceived,
developed or reduced to practice by Executive (alone or with others), free and
clear of any lien or encumbrance. If any Intellectual Property shall be deemed
patentable or otherwise registrable, Executive shall assist the Company (at its
expense) in obtaining letters patent or other applicable registration therein
and shall execute all documents and do all things (including testifying at the
Company's expense) necessary or appropriate to obtain letters patent or other
applicable registration therein and to vest in the Company, or any affiliate
specified by the Board.
(b) Should Company be unable to secure Executive's
signature on any document necessary to apply for, prosecute, obtain or enforce
any patent, copyright or other right or protection relating to any Intellectual
Property, whether due to Executive's Disability or other cause, Executive hereby
irrevocably designates and appoints the Company and each of its duly authorized
officers and agents as Executive's agent and attorney-in-fact to act for and on
Executive's behalf and stead and to execute and file any such document and to do
all other lawfully permitted acts to further the prosecution, issuance and other
enforcement of patents, copyrights or other rights or protections with the same
effect as if executed and delivered by Executive.
4.5 ENFORCEMENT.
(a) Executive acknowledges that violation of any
covenant or agreement set forth in this Article IV would cause the Company
irreparable damage for which the Company cannot be reasonably compensated in
damages in an action at law, and, therefore, upon any breach by Executive of
this Article IV, the Company shall be entitled to make application to a court of
competent jurisdiction for equitable relief by way of injunction or otherwise
(without being required to post a bond). This provision shall not, however, be
construed as a waiver of any of the rights which the Company may have for
damages, and all of the Company's rights and remedies shall be unrestricted.
(b) If any provision of this Agreement, or application
thereof to any person, place or circumstance, shall be held by a court of
competent jurisdiction or be found in an arbitration proceeding to be invalid,
unenforceable or void, the remainder of this Agreement and such provisions as
applied to any other person, place and circumstance shall remain in full force
and effect. It is the intention of the parties hereto that the covenants
contained herein shall be enforced to the maximum extent (but no greater extent)
in time, area, and degree of participation as is permitted by the law of the
jurisdiction whose law is found to be applicable to the acts allegedly in breach
of this Agreement, and the parties hereby agree that the court making any such
determination shall have the power to so reform the Agreement.
(c) The Executive understands that the provisions of this
Article IV may limit his ability to earn a livelihood in a business similar to
the business of the Company but nevertheless agrees and hereby acknowledges that
(i) such provisions do not impose a greater restraint than is necessary to
protect the goodwill or other
7
<PAGE>
business interests of the Company; (ii) such provisions contain reasonable
limitations as to time and the scope of activity to be restrained; and (iii) the
consideration provided under this Agreement, including, without limitation, any
amounts or benefits provided under Article V hereof, is sufficient to compensate
Executive for the restrictions contained in this Article IV. In consideration of
the foregoing and in light of Executive's education, skills and abilities,
Executive agrees that he will not assert, and it should not be considered, that
any provisions of this Article IV prevented him from earning a living or
otherwise are void, voidable or unenforceable or should be voided or held
unenforceable.
(d) Each of the covenants of this Article IV is given by
Executive as part of the consideration for this Agreement and as an inducement
to the Company to enter into this Agreement and accept the obligations
hereunder.
ARTICLE V
TERMINATION
5.1 TERMINATION OF AGREEMENT. Except for those provisions of
this Agreement that survive Termination, this Agreement shall terminate upon any
Termination.
5.2 PROCEDURES APPLICABLE TO TERMINATION.
(a) TERMINATION FOR CAUSE. The Executive may be
terminated for Cause, upon at least 30 days' prior written notice from the Board
to Executive for termination for Cause provided that Executive, with his
counsel, shall have had the opportunity during such period to be heard at a
meeting of the Board concerning such determination.
(b) RESIGNATION FOR GOOD REASON. The Executive may
terminate his employment for Good Reason upon at least 30 days' prior written
notice from Executive to the Board of his intent to resign for Good Reason
provided that Executive, with his counsel, shall have met with the Board, if
requested by the Board, during such period with respect to his intent to resign.
(c) TERMINATION WITHOUT CAUSE OR FOR DISABILITY. The
Executive may be terminated without Cause or for Disability, upon at least 30
days' prior written notice from the Board to Executive, by a vote of the Board,
provided that Executive, with his counsel, shall have had the opportunity during
such period to be heard at a meeting of the Board with respect to such
determination.
(d) NO EFFECT ON RIGHTs. The Executive's right or
obligation to be heard in connection with a Termination shall not otherwise
effect the rights and obligations of the Executive and the Company hereunder.
8
<PAGE>
5.3 OBLIGATIONS OF THE COMPANY UPON TERMINATION.
(a) ACCRUED OBLIGATIONS AND OTHER BENEFITS. Upon any
Termination, the Company shall pay to Executive, or, upon Executive's
Disability, to his heirs, estate or legal representatives, as the case may be,
the following:
(i) all Accrued Obligations in a lump sum
within 10 days after the date of Termination; and
(ii) all benefits accrued by Executive as of the date
of Termination under all qualified and nonqualified retirement, pension, profit
sharing and similar plans of the Company to such extent, in such manner and at
such time as are provided under the terms of such plans and arrangements.
(b) TERMINATION WITHOUT CAUSE OR RESIGNATION FOR GOOD
REASON. If the Board terminates Executive's employment without Cause (excluding
Termination because of Disability), or if Executive resigns for Good Reason, in
addition to the amounts payable under Section 5.3(a) hereof:
(i) The Company shall pay Executive the Severance
Amount in a lump sum within 10 days after the date of Termination; and
(ii) The Company shall continue all benefits coverage
of Executive and any dependents then provided under its benefit plans or
policies for the unexpired portion of the Term.
(c) TERMINATION FOR CAUSE OR RESIGNATION WITHOUT GOOD
REASON. If the Board terminates Executive's employment for Cause, or if
Executive resigns without Good Reason, Executive shall only be entitled to the
amounts payable under Section 5.3(a) hereof:
(d) TERMINATION FOR DISABILITY. Upon Termination of
Executive because of a Disability, in addition to the amounts payable under
Section 5.3(a) hereof, the Company shall pay the aggregate Disability Payment
for three years in accordance with the Company's regular payroll practices then
in existence.
(e) EXCLUSIVITY. Any amount payable to Executive pursuant
to this Article V shall be Executive's sole remedy upon a Termination, and
Executive waives any and all rights to pursue any other remedy at law or in
equity; PROVIDED, HOWEVER, that Executive does not hereby waive any right
provided under any federal, state or local law or regulation relating to
employment discrimination.
ARTICLE VI
MISCELLANEOUS
6.1 EXECUTIVE ACKNOWLEDGMENT. The Executive acknowledges that
he has consulted with or has had the opportunity to consult with independent
counsel of his own choice concerning this Agreement and has been advised to do
so by the Company, and that he has read and understands the Agreement, is fully
aware of its legal effect, and has entered into it freely based on his own
judgment.
9
<PAGE>
6.2 BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of Executive's heirs and representatives and the Company's
successors and assigns. The Company shall require any successor (whether direct
or indirect, by purchase, merger, reorganization, consolidation, acquisition of
assets or stock, liquidation, or otherwise), by agreement in form and substance
reasonably satisfactory to Executive, to assume performance of this Agreement in
the same manner that the Company would have been required to perform this
Agreement if no such succession had taken place. Regardless of whether such
agreement is executed, this Agreement shall be binding upon any successor of the
Company in accordance with the operation of law.
6.3 NOTICES. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if delivered by hand or mailed within the continental United States
by first class certified mail, return receipt requested, postage prepaid,
addressed as follows:
(a) if to the Board or the Company, to:
Viatel, Inc.
800 Third Avenue, 18th Floor
New York, NY 10022
Attention: President
(b) if to Executive, to:
51 Crossway
Scarsdale, New York, 10583
Any such address may be changed by written notice sent to the other party at the
last recorded address of that party.
6.4 TAX WITHHOLDING. The Company shall provide for the
withholding of any taxes required to be withheld under federal, state and local
law (other than the employer's portion of such taxes) with respect to any
payment in cash and/or other property made by or on behalf of the Company to or
for the benefit of Executive under this Agreement or otherwise. The Company may,
at its option: (i) withhold such taxes from any cash payments owing from the
Company to Executive, (ii) require Executive to pay to the Company in cash such
amount as may be required to satisfy such withholding obligations and/or (iii)
make other satisfactory arrangements with Executive to satisfy such withholding
obligations.
6.5 No ASSIGNMENT; NO THIRD PARTY BENEFICIARIES. Except as
otherwise expressly provided in Section 6.2 hereof, this Agreement is not
assignable by any party, and no payment to be made hereunder shall be subject to
alienation, sale, transfer, assignment, pledge, encumbrance or other charge.
Except for the Company and its existing and future subsidiaries, no Person shall
be, or deemed to be, a third party beneficiary of this Agreement.
10
<PAGE>
6.6 EXECUTION IN COUNTERPARTS. This Agreement may be executed
by the parties hereto in one or more counterparts, each of which shall be deemed
to be an original, but all such counterparts shall constitute one and the same
instrument, and all signatures need not appear on any one counterpart.
6.7 JURISDICTION AND GOVERNING LAW. Jurisdiction over disputes
with regard to this Agreement shall be exclusively in the courts of the State of
New York, and this Agreement shall be construed and interpreted in accordance
with and governed by the laws of the State of New York as applied to contracts
capable of being wholly performed in such State.
6.8 ENTIRE AGREEMENT; AMENDMENT. Except as otherwise provided
in Section 3.3 hereof, this Agreement and the Exhibits attached hereto embody
the entire understanding of the parties hereto, and supersede all prior
agreements regarding the subject matter hereof. No change, alteration or
modification hereof may be made except in a writing, signed by both of the
parties hereto.
6.9 HEADINGS. The headings in this Agreement are for
convenience of reference only and shall not be construed as part of this
Agreement or to limit or otherwise affect the meaning hereof.
6.10 SURVIVAL. Notwithstanding anything to the contrary
herein, Article IV, Section 5.3 and Article VI of this Agreement shall
survive termination of this Agreement or Termination for any reason whatsoever.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the day first written above.
VIATEL, INC.
/s/ Michael J. Mahoney
By:_____________________________
EXECUTIVE
/s/ Sheldon M. Goldman
_____________________________
11
Exhibit 21.1
SUBSIDIARIES OF VIATEL, INC.
JURISDICTION OF INCORPORATION
NAME OF SUBSIDIARY: OR ORGANIZATION:
- ------------------ -------------------------------
Viatel U.K. Limited United Kingdom
Viaphone S.R.L. Italy
Viatel S.R.L. Italy
Viatel Operations, S.A. France
Viatel S.A. France
Viafon Dat Iberica, S.A. Spain
Viatel Global Communications Espana S.A. Spain
Viatel Belgium SA/NV Belgium
Viaphone SA/NV Belgium
Viatel Gmbh Germany
Viaphone Gmbh Germany
Viatel AG Switzerland
Viaphone AG Switzerland
Viatel Global Communications BV Netherlands
Viafoperations BV Netherlands
Viacol Ltda. Colombia
Viatel Colombia Management, Inc. Delaware
Viatel Colombia Holdings, Inc. Delaware
Viatel Sales U.S.A., Inc. Delaware
YYC Communications, Inc. Delaware
Viatel Nebraska, Inc. Delaware
Viatel Sweden, Inc. Delaware
Viatel Finland, Inc. Delaware
Viatel Argentina Holdings, Inc. Delaware
Viatel Argentina Management, Inc. Delaware
Viatel Brazil Management, Inc. Delaware
Viatel Brazil Holdings, Inc. Delaware
Exhibit 23.1
The Board of Directors and Stockholders
Viatel, Inc.:
We consent to incorporation by reference in the registration statement No. 333-
15155 on Form S-8 and in the registration statement No. 333-16671 on Form S-8 of
Viatel, Inc. of our report dated March 4, 1998, except as to note 13(c) which is
as of March 18, 1998, relating to 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, and the related schedule, which appears in the December 31, 1997 annual
report on Form 10-K of Viatel, Inc.
/s/ KPMG PEAT MARWICK LLP
New York, New York
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets of the Corporation at December 31, 1997 and the
consolidated statements of operations for the year ended December 31, 1997 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 21,095,635
<SECURITIES> 3,499,691
<RECEIVABLES> 12,021,737
<ALLOWANCES> 1,041,000
<INVENTORY> 0
<CURRENT-ASSETS> 43,429,752
<PP&E> 67,025,780
<DEPRECIATION> 12,932,032
<TOTAL-ASSETS> 126,809,198
<CURRENT-LIABILITIES> 35,763,589
<BONDS> 89,854,612
0
0
<COMMON> 226,353
<OTHER-SE> 125,661,323
<TOTAL-LIABILITY-AND-EQUITY> 126,809,198
<SALES> 0
<TOTAL-REVENUES> 73,018,004
<CGS> 0
<TOTAL-COSTS> 63,504,031
<OTHER-EXPENSES> 43,793,014
<LOSS-PROVISION> 2,733,220
<INTEREST-EXPENSE> 12,450,343
<INCOME-PRETAX> (43,043,673)
<INCOME-TAX> 0
<INCOME-CONTINUING> (43,043,673)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (43,043,673)
<EPS-PRIMARY> (1.90)<F1>
<EPS-DILUTED> (1.90)<F1>
<FN>
<F1> There was no change in primary and diluted EPS for 1995 and 1996 as
a result of the adoption of SFAS 128.
</FN>
</TABLE>