SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to __________________
Commission File Number: 000-21261
VIATEL, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3787366
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
800 Third Avenue
New York, New York
(Address of principal executive offices)
10022
(Zip Code)
(212) 350-9200
(Registrant's telephone number, including area code)
--------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
As of November 12, 1998, 23,171,305 shares of the registrant's Common Stock,
$.01 par value, were outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
VIATEL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30,
1998 December 31,
(Unaudited) 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 588,351,898 $ 21,095,635
Restricted cash equivalents 1,842,010 --
Restricted marketable securities, current 49,221,516 --
Marketable securities, current -- 3,499,691
Trade accounts receivable, less allowance for doubtful accounts of
$2,308,000 and $1,041,000, respectively 25,115,743 10,980,737
Other receivables 7,065,595 6,505,875
Prepaid expenses 1,055,356 1,347,814
------------- -------------
Total current assets 672,652,118 43,429,752
------------- -------------
Restricted marketable securities, non-current 111,030,004 --
Marketable securities, non-current -- 22,546,591
Property and equipment, net 151,298,189 54,093,748
Intangible assets, net 39,834,627 4,338,792
Other assets 1,720,565 2,400,315
------------- -------------
$ 976,535,503 $ 126,809,198
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accrued telecommunications costs $ 22,994,155 $ 16,899,194
Accounts payable and other accrued expenses 20,544,465 14,991,472
Property and equipment purchases payable 53,919,318 500,000
Accrued interest 27,574,454 --
Current installments of notes payable and obligations
under capital leases 6,985,035 3,372,923
------------- -------------
Total current liabilities 132,017,427 35,763,589
------------- -------------
Long-term liabilities:
Long term debt 885,923,696 89,854,612
Notes payable and obligations under capital leases, excluding
current installments 13,850,884 8,254,682
Equipment purchase obligation -- 1,500,000
------------- -------------
Total long-term liabilities 899,774,580 99,609,294
Series A Redeemable Convertible Preferred Stock, $.01 par value; Authorized
718,042 Shares; issued and outstanding 449,965 and no shares, respectively 45,950,646 --
------------- -------------
Commitments and contingencies
Stockholders' deficiency:
Preferred Stock, $.01 par value. Authorized 281,958 shares, no shares
issued and outstanding -- --
Common Stock, $.01 par value. Authorized 50,000,000 shares, issued and
outstanding 23,171,305 and 22,635,267 shares, respectively 231,713 226,353
Additional paid-in capital 128,306,554 125,661,323
Unearned compensation (16,260) (65,040)
Accumulated other comprehensive loss (4,200,906) (5,356,474)
Accumulated deficit (225,528,251) (129,029,847)
------------- -------------
Total stockholders' deficiency (101,207,150) (8,563,685)
------------- -------------
$ 976,535,503 $ 126,809,198
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
---------------------------------- ----------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Telecommunications revenue $ 37,143,687 $ 19,148,941 $ 86,133,477 $ 52,149,570
------------- ------------- ------------- -------------
Operating Expenses:
Cost of telecommunications services 33,423,542 17,176,851 77,624,419 44,946,680
Selling, general and administrative expenses 11,669,299 8,702,015 31,056,860 27,069,575
Depreciation and amortization 3,669,471 2,062,311 10,706,424 4,782,913
------------- ------------- ------------- -------------
Total operating expenses 48,762,312 27,941,177 119,387,703 76,799,168
------------- ------------- ------------- -------------
Other income (expense):
Interest income 10,092,614 884,449 19,905,643 3,055,896
Interest expense (26,384,091) (3,242,260) (52,715,324) (9,229,738)
------------- ------------- ------------- -------------
Loss before extraordinary loss (27,910,102) (11,150,047) (66,063,907) (30,823,440)
Extraordinary loss on debt prepayment -- -- (28,303,850) --
------------- ------------- ------------- -------------
Net loss (27,910,102) (11,150,047) (94,367,757) (30,823,440)
Dividend on redeemable convertible
preferred stock (1,120,351) -- (2,130,646) --
------------- ------------- ------------- -------------
Net loss applicable to common shareholders $ (29,030,453) $ (11,150,047) $ (96,498,403) $ (30,823,440)
============= ============= ============= =============
Loss per common share before extraordinary
item, basic and diluted $ (1.25) $ (0.49) $ (2.96) $ (1.36)
Loss per common share from extraordinary item -- -- (1.23) --
------------- ------------- ------------- -------------
Net loss per common share applicable to
common shareholders $ (1.25) $ (0.49) $ (4.19) $ (1.36)
============= ============= ============= =============
Weighted average common shares outstanding 23,156,881 22,634,081 23,012,777 22,615,028
============= ============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
----------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (94,367,757) $ (30,823,440)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 10,706,424 4,782,913
Accreted interest expense on long term debt 24,015,696 9,231,068
Provision for losses on accounts receivable 3,149,109 1,685,547
Extraordinary loss on debt prepayment 28,303,850 --
Earned compensation 48,780 48,780
Changes in assets and liabilities:
Increase in accounts receivable (17,505,109) (4,928,760)
Increase in accrued interest expense on Senior Notes 27,311,899 --
Increase in prepaid expenses and other receivables (4,952,163) (2,753,130)
Increase in other assets and intangible assets (363,533) (731,682)
Increase in accrued telecommunication costs, accounts payable
and other accrued expenses 10,152,393 2,794,235
------------- -------------
Net cash used in operating activities (13,500,411) (20,694,469)
------------- -------------
Cash flows from investing activities:
Purchase of property, equipment and software (33,994,378) (24,080,901)
Payment for business acquired excluding cash of $364,000 (5,000,000) --
Purchase of marketable securities (144,457,733) (47,096,017)
Proceeds from maturity of marketable securities 34,775,794 19,881,351
------------- -------------
Net cash used in investing activities (148,676,317) (51,295,567)
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of long term debt 845,751,555 --
Proceeds from issuance of convertible preferred stock 42,197,978 --
Repayment of senior discount notes (119,281,715) --
Deferred financing costs (31,547,345) --
Proceeds from issuance of Common Stock 897,613 426,040
Repayment of notes payable and bank credit line (2,781,414) --
Payments under capital leases (4,610,275) (456,553)
------------- -------------
Net cash provided by (used in) financing activities 730,626,397 (30,513)
------------- -------------
Effects of exchange rate changes on cash 648,604 (39,161)
------------- -------------
Net increase (decrease) in cash equivalents 569,098,273 (72,059,710)
Cash and cash equivalents at beginning of period 21,095,635 75,796,102
------------- -------------
Cash and cash equivalents at end of period $ 590,193,908 $ 3,736,392
============= =============
Supplemental disclosures of cash flow information:
Interest paid $ 1,705,133 $ 86,670
============= =============
Equipment acquired under capital lease obligations $ 16,000,000 $ 1,122,000
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Information as of September 30, 1998 and for the periods
ended September 30, 1998 and 1997 is unaudited)
(1) INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements as of September 30, 1998 and for the
three and nine month periods ended September 30, 1998 and 1997 have been
prepared by Viatel, Inc. and subsidiaries (collectively, the "Company"),
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, all adjustments
(consisting of only normal recurring adjustments) necessary for a fair
presentation of the consolidated financial position, results of operations
and cash flows for each period presented have been made on a consistent
basis. Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations although management believes that the
disclosures herein are adequate to make the information presented not
misleading. It is suggested that these financial statements be read in
conjunction with the Company's annual consolidated financial statements.
Operating results for the three and nine months ended September 30, 1998
may not be indicative of the results that may be expected for the full
year. Certain reclassifications have been made to the previous year's
financial statements to conform to the current year's presentation.
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS 128"), for year-end 1997.
SFAS 128, which supersedes APB Opinion No. 15, "Earnings Per Share" was
issued in February 1997. SFAS 128 requires dual presentation of basic and
diluted earnings per share ("EPS") for complex capital structures on the
face of the statement of operations. Basic EPS is computed by dividing
income or loss by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution from the
exercise or conversion of securities into common stock. Giving effect to
SFAS 128,per share amounts for the three and nine months ended September
30, 1998 and 1997 were not different from EPS measured under APB No. 15.
The Company had potentially dilutive common stock equivalents of 2,606,897
and 1,081,027 at September 30, 1998 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.
Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income," and Statement of Financial Accounting
Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an
Enterprise and Related Information," were issued in June 1997. SFAS 130
establishes standards for reporting and display of comprehensive income
and its components in a full set of general purpose financial statements.
This statement requires that all items that are required to be recognized
under accounting standards as components of comprehensive income, such as
foreign currency fluctuations currently reported in stockholder's equity,
be reported in an annual financial statement that is displayed with the
same prominence as other financial statements. SFAS 131 establishes
standards for the way public companies report information about operating
segments in annual financial statements and requires that those companies
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. The Company adopted SFAS 130 in the first quarter of 1998 and
will adopt SFAS 131 for its annual reporting in 1998.
Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities," was issued
in June 1998. SFAS 133 standardizes the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, by requiring recognition of those instruments as assets and
liabilities and to measure them at fair value. SFAS 133 will be effective
for the Company in the year 2000. The Company has not yet determined the
effects of the pronouncement.
5
<PAGE>
(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 available for sale as of September 30, 1998.
The following is a summary of the fair value of restricted securities held
to maturity at September 30, 1998:
<TABLE>
<S> <C>
U.S. Treasury obligations $125,562,466
German government obligations 34,689,054
------------
Total $160,251,520
============
</TABLE>
The fair value of restricted securities held to maturity at September 30,
1998 are shown below:
<TABLE>
<S> <C>
Due within one year $49,221,516
Due after one through two years 81,589,770
Due after two years 29,440,234
------------
Total $160,251,520
============
</TABLE>
There were no changes in the classification of any securities held to
maturity or securities available for sale from the time of purchase to the
time of maturity or sale.
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Communication system $ 58,031,344 $ 43,321,912
Construction in progress 73,381,702 10,093,614
Fiber optic cable systems 23,107,464 1,431,933
Leasehold improvements 4,419,694 3,254,515
Furniture, equipment and other 14,329,128 8,923,806
------------ ------------
173,269,332 67,025,780
Less accumulated depreciation and amortization 21,971,143 12,932,032
------------ ------------
$151,298,189 $ 54,093,748
============ ============
</TABLE>
At September 30, 1998, construction in progress primarily represents
construction of the Circe pan-European network. At December 31, 1997,
construction in progress represents a portion of the expansion of its
European network.
6
<PAGE>
(4) INTANGIBLE ASSETS
Intangible assets consist of the following as of:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Deferred financing and registration fees $31,547,345 $ 3,789,347
Goodwill 8,744,364 474,065
Acquired employee base and sales force in place -- 1,607,225
Purchased software 1,962,053 1,493,546
Other 1,997,261 849,276
----------- -----------
44,251,023 8,213,459
Less accumulated amortization 4,416,396 3,874,667
----------- -----------
$39,834,627 $ 4,338,792
=========== ===========
</TABLE>
(5) LONG TERM DEBT
On April 8, 1998, the Company completed an offering of units consisting of
senior notes or senior discount notes and shares of 10% Series A Redeemable
Convertible Preferred Stock ("Series A Preferred"), $.01 par value per
share, of the Company and units consisting of senior notes or senior
discount notes and subordinated convertible debentures (the "Units
Offering") through which it raised approximately $889.6 million of gross
proceeds ($856.6 million of net proceeds). The Series A Preferred and the
subordinated convertible debentures are mandatorily convertible in the
event that the Company's common stock, $.01 par value (the "Common Stock")
maintains certain specified prices during specified periods. A portion of
the proceeds from the Units Offering were utilized by the Company to retire
its 15% Senior Discount Notes due 2005 pursuant to a tender offer resulting
in an extraordinary loss of $28.3 million. Additionally, a portion of the
proceeds from the Units Offering were used to purchase approximately $122.8
million of U.S. government securities which were pledged as security for
the first six interest payments on the U.S. dollar denominated senior notes
and approximately $30.6 million of German government obligations which were
pledged as security for the first six interest payments on the Deutschmark
denominated senior notes issued in the Units Offering.
The indentures pursuant to which the senior notes and the senior discount
notes were issued contain certain covenants that, among other things, limit
the ability of the Company to incur additional indebtedness, pay dividends
or make certain other distributions, enter into transactions with
shareholders and affiliates and create liens on its assets. In addition,
upon a change of control, the Company is required to make an offer to
purchase the senior notes and the senior discount notes at a purchase price
equal to 101% of the principal amount, in the case of the senior notes, and
101% of the accreted value of the notes, in the case of the senior discount
notes. The indenture pursuant to which the subordinated convertible
debentures were issued also requires that the Company offer to repurchase
the debentures at 101% of the principal amount in the event of a change of
control.
Long term debt consists of the following as of:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
11.25% Senior Notes $400,000,000 $ --
11.15% Senior Notes 106,612,362
12.50% Senior Discount Notes, less discount of $211,680,418 288,319,582 --
12.40% Senior Discount Notes, less discount of $56,972,637 78,389,125
15% Senior discount notes, less discount of $30,845,388 -- 89,854,612
10% Subordinated convertible debentures 12,602,627 --
------------ ------------
$885,923,696 $ 89,854,612
============ ============
</TABLE>
7
<PAGE>
(6) STOCK INCENTIVE PLAN
The Amended Stock Incentive Plan (the "Stock Incentive Plan") provides for
the issuance of up to a maximum of 4,166,666 shares of the Common Stock.
Stock option activity for the nine months ended September 30, 1998 under
the Stock Incentive Plan is shown below:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE NUMBER OF
EXERCISE PRICES SHARES
--------------- ----------
<S> <C> <C>
Outstanding at January 1, 1998 $7.40 1,052,200
Granted 7.19 1,793,736
Expired 5.05 (14,493)
Forfeited 7.14 (63,508)
Exercised 5.58 (161,038)
----- ----------
Outstanding at September 30, 1998 $7.39 2,606,897
===== ==========
</TABLE>
As of September 30, 1998, 472,150 options were exercisable under the Stock
Incentive Plan.
(7) COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net loss applicable to common shareholders $(29,030,453) $(11,150,047) $(96,498,403) $(30,823,440)
Foreign currency translation adjustment 1,020,517 (436,796) 1,155,568 (4,307,872)
------------ ------------ ------------ ------------
Comprehensive loss $(28,009,936) $(11,586,843) $(95,342,835) $(35,131,312)
============ ============ ============ ============
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
Since its inception in 1991, 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. 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. The Company has developed an integrated digital,
switch-based telecommunications network with thirty locations in Western Europe
including ten switches and twenty points of presence ("POPs") 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 located within
the United States is referred to as the "Viatel Network." The Company has
invested heavily in developing the ability to provide long distance
telecommunications services and in developing and expanding its market presence
within Western Europe and in certain other countries in Latin America and Asia.
The Company has also made substantial investments in software and back office
operations and an administrative infrastructure.
The Company believes that network ownership is critical to becoming a
high quality, low-cost provider and creates the necessary platform to provide a
full array of telecommunications products and services to customers. The Company
has recently initiated a program to own or control 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 additional broadband service offerings such as data products,
including frame relay, Internet services, e-commerce and asynchronous transfer
mode services.
As part of the Company's strategy to own or control key elements of its
network, the Company completed an offering of units consisting of senior notes
or senior discount notes and shares of Series A Preferred Stock and units
consisting of senior notes or senior discount notes and subordinated convertible
debentures in April 1998 (the "Units Offering") through which it raised
approximately $889.6 million of gross proceeds, a substantial portion of which
are being used to construct three interconnected state-of-the-art fiber optic
rings which will connect over thirty cities within the United Kingdom, France,
Belgium, The Netherlands and Germany (the "Circe Network"). Each ring of the
Circe Network, when completed, will be a high quality, high capacity,
self-healing ring, utilizing advanced synchronous digital hierarchy and dense
wave division multiplexing technologies. Each ring of the Circe Network is
projected to significantly expand the Company's revenue opportunities by
enabling it to (i) provide a broader range of products and services to retail
customers, (ii) provide wholesale services to the large base of resellers that
the Company expects will develop as deregulation continues in Western Europe and
(iii) capitalize on the growing demand for bandwidth intensive services in
Europe.
THE CIRCE NETWORK
When constructed, the Circe Network is expected to have significant
effects on the Company's results of operations. The sale of indefeasible rights
of use or capacity on the Circe Network will vary substantially from
period-to-period and result in fluctuations in the Company's operating results.
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.
The Company will also incur selling, general and administrative
expenses with respect to each ring of the Circe Network that will not be
capitalized and will affect the Company's results of operations, particularly
while each ring of the Circe Network are being designed and built and placed
into service in 1999 and 2000 and will incur additional operating and
maintenance expenses once each ring of the Circe Network is operational. As a
result of financing each ring of the Circe Network with debt, the Company will
capitalize the portion of the interest incurred that relates to each ring of the
Circe Network until it is placed in service and will incur increases in interest
expense thereafter.
9
<PAGE>
RESULTS OF OPERATIONS
The following table summarizes the breakdown of the Company's results
of operations as a percentage of telecommunications revenue:
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
---------------- ----------------
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Telecommunications revenue 100.0% 100.0% 100.0% 100.0%
Cost of telecommunications services 90.0% 89.7% 90.1% 86.2%
Selling, general and administrative expenses 31.4% 45.4% 36.1% 51.9%
Depreciation and amortization 9.9% 10.8% 12.4% 9.2%
EBITDA loss (1) 21.4% 35.1% 26.2% 38.1%
</TABLE>
- - -------------------
(1) As used herein "EBITDA" consists of earnings before interest, income taxes,
extraordinary loss, dividends on convertible preferred stock 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.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
TELECOMMUNICATIONS REVENUE. Telecommunications revenue increased by
94.0% to $37.1 million on 113.2 million billable minutes for the three months
ended September 30, 1998 from $19.1 million on 40.4 million billable minutes for
the three months ended September 30, 1997. Telecommunications revenue growth for
the third quarter of 1998 was generated primarily from increased European
traffic and growth in the Company's carrier business which was partially offset
by decreased revenue from the Company's Pacific Rim and Latin American
operations.
The overall increase of 180.0% in billable minutes from the third
quarter of 1997 to the third quarter of 1998 was partially offset by declining
revenue per billable minute, as revenue per billable minute declined by 29.8% to
$.33 in the third quarter of 1998 from $.47 in the third quarter of 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 and (iii) reductions in certain rates
charged to retail customers in response to pricing reductions enacted by certain
Incumbent Telecommunications Operators ("ITOs") and other carriers in many of
the Company's markets. See "- Cost of Telecommunications Services."
10
<PAGE>
Telecommunications revenue per billable minute from the sale of
services to retail customers, which represented 39.8% of total
telecommunications revenue for the three months ended September 30, 1998,
compared to 69.1% for the three months ended September 30, 1997, decreased 45.3%
to $.35 in the third quarter of 1998 from $.64 in the third quarter of 1997.
Telecommunications revenue per billable minute from the sale of services to
carriers and other resellers increased to $.31 in the third quarter of 1998 from
$.29 in the third quarter of 1997 due primarily to changes in traffic mix. The
number of contracted customers billed declined 32.7% to 15,444 (excluding
dial-around customers) at September 30, 1998 from 22,940 at September 30, 1997.
This decline in contracted customers billed is primarily attributable to the
Company's Pacific Rim operations where the number of customers billed declined
91.9% to 559 at September 30, 1998 from 6,873 at September 30, 1997,
representing a net loss of 6,314 customers, as a result of the Asian economic
crisis.
During the third quarter of 1998, approximately 43.7% of the Company's
telecommunications revenue was generated in Western Europe as compared to
approximately 43.2% of the Company's telecommunications revenue during the third
quarter of 1997. Telecommunications revenue from Latin America represented
approximately 10.0% of the Company's telecommunications revenue during the three
months ended September 30, 1998 compared to approximately 21.1% of the Company's
telecommunications revenue during the three months ended September 30, 1997.
Telecommunications revenue from the Pacific Rim represented approximately 0.9%
of the Company's telecommunications revenue during the three months ended
September 30, 1998 as compared to approximately 11.9% of the Company's
telecommunications revenue during the three months ended September 30, 1997.
During the third quarter of 1998 as compared to the third quarter of
1997, the Company has significantly increased its carrier business (through
which it sells switched minutes, private lines and ports to carriers, Internet
Service Providers ("ISPs") 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 60.2% of total telecommunications revenue and approximately 63.1%
of billable minutes for the three months ended September 30, 1998 as compared to
approximately 30.9% of total telecommunications revenue and approximately 49.8%
of billable minutes for the three months ended September 30, 1997. The increase
in telecommunications revenue derived from carriers and other resellers
represents an increase of approximately 277.7% over the corresponding period in
1997 and is partially attributable to the acquisition of Flat Rate
Communications, Inc., a long distance telecommunications reseller, on February
27, 1998 (the "Flat Rate acquisition").
COST OF TELECOMMUNICATIONS SERVICES. Cost of telecommunications
services increased to $33.4 million in the third quarter of 1998 from $17.2
million in the third quarter of 1997 and, as a percentage of telecommunications
revenue, increased to approximately 90.0% from approximately 89.7% for the three
months ended September 30, 1998 and 1997, respectively. The Company's gross
margin remained relatively constant, as a percentage of telecommunications
revenue, at 10.0% for the three months ended September 30, 1998 as compared to
10.3% for the three months ended September 30, 1997. This slight decrease was
primarily due to (i) decreased revenue per minute (resulting from price
competition and foreign currency fluctuations) which was not offset by
corresponding decreases in infrastructure costs, (ii) increased sales to carrier
customers (which generate substantially lower margins), and (iii) an increase in
intra-European and national long distance traffic compared to higher margin
international traffic. This decrease in gross margin, as a percentage of
revenue, 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
to $.30 during the three months ended September 30, 1998 from $.42 during the
three months ended September 30, 1997, a 28.6% decrease. This decrease, which
partially offset the effect of the decline in average revenue per billable
minute, was attributable primarily to increased traffic being routed through the
European Network and increased switched minutes generated by the Company's
carrier business, both of which increased the utilization of fixed cost leased
lines. Increased European Network utilization helped reduce costs on a per
minute basis with respect to European long distance telecommunications services.
11
<PAGE>
Cost of telecommunications services increased in the three months ended
September 30, 1998 in part because of the relatively high cost of leased
infrastructure related to increasing the Viatel Network's transmission capacity.
These costs are expected to decrease as a percentage of telecommunications
revenue as the Company continues its efforts to convert from leased to owned
capacity. From September 30, 1997 to September 30, 1998, the Company increased
its private line circuits capacity and, as a result, costs for private line
circuits increased to approximately $4.5 million for the three months ended
September 30, 1998 (approximately 12.0% of telecommunications revenue) from
approximately $2.6 million for the three months ended September 30, 1997
(approximately 13.7% of telecommunications revenue).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $11.7 million in the three months ended
September 30, 1998 from $8.7 million in the three months ended September 30,
1997 and, as a percentage of telecommunications revenue, decreased to
approximately 31.4% in the three months ended September 30, 1998 from
approximately 45.4% in the corresponding period 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. The Company expects to incur additional
expenses as it continues to invest in operating infrastructure and actively
markets its products and services. Salaries and commissions, as a percentage of
total selling, general and administrative expenses, were approximately 48.4% and
54.4% for the three months ended September 30, 1998 and 1997, respectively.
Advertising and promotion expenses, as a percentage of total selling, general
and administrative expenses, were approximately 3.3% and 0.5% for the three
months ended September 30, 1998 and 1997, respectively.
EBITDA LOSS. EBITDA loss increased to $7.9 million for the three
months ended September 30, 1998 from $6.7 million for the three months ended
September 30, 1997. As a percentage of telecommunications revenue, EBITDA loss
decreased to approximately 21.4% in the third quarter of 1998 from
approximately 35.1% in the third quarter of 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
price reductions implemented by certain ITOs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense,
which includes depreciation of the Viatel Network, increased to approximately
$3.7 million in the three months ended September 30, 1998 from approximately
$2.1 million in the three months ended September 30, 1997. The increase was due
primarily to (i) the depreciation of equipment related to network expansion and
fiber optic cable systems placed in service during 1997 and the first nine
months of 1998 and (ii) the amortization of goodwill associated with the Flat
Rate acquisition. Depreciation expense will increase substantially as each of
the rings of the Circe Network become operational.
INTEREST. Interest expense increased to approximately $26.4 million in
the three months ended September 30, 1998 from approximately $3.2 million in the
three months ended September 30, 1997 primarily as a result of the Units
Offering. Interest income increased to approximately $10.1 million for the three
months ended September 30, 1998 from approximately $.9 million in the three
months ended September 30, 1997 primarily as a result of the interim investment
of the net proceeds from the Units Offering.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
TELECOMMUNICATIONS REVENUE. Telecommunications revenue increased by
65.2% to $86.1 million on 248.9 million billable minutes for the nine months
ended September 30, 1998 from $52.1 million on 99.4 million billable minutes for
the nine months ended September 30, 1997. Telecommunications revenue growth for
the first nine months of 1998 was generated primarily from increased European
traffic and growth in the Company's carrier business which was partially offset
by decreased traffic from the Company's Pacific Rim and Latin American
operations.
12
<PAGE>
The overall increase of 150.5% in billable minutes from the first nine
months of 1997 to the first nine months of 1998 was partially offset by
declining revenue per billable minute, as revenue per billable minute declined
by 34.6% to $.34 in the first nine months of 1998 from $.52 in the first nine
months of 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 and (iv) foreign
currency fluctuations.
Telecommunications revenue per billable minute from the sale of
services to retail customers, which represented 45.0% of total
telecommunications revenue for the nine months ended September 30, 1998,
compared to 74.0% for the nine months ended September 30, 1997, decreased 41.7%
to $0.42 in the first nine months of 1998 from $.72 in the first nine months of
1997. Telecommunications revenue per billable minute from the sale of services
to carriers and other resellers increased to $.30 in the first nine months of
1998 as compared to $.28 in the first nine months of 1997 due primarily to
changes in traffic mix.
During the first nine months of 1998, approximately 47.4% of the
Company's telecommunications revenue was generated in Western Europe as compared
to approximately 40.4% of the Company's telecommunications revenue during the
first nine months of 1997. Telecommunications revenue from Latin America
represented approximately 13.0% of the Company's telecommunications revenue
during the nine months ended September 30, 1998 as compared to approximately
23.4% of the Company's telecommunications revenue during the nine months ended
September 30, 1997. Telecommunications revenue from the Pacific Rim represented
approximately 1.6% of the Company's telecommunications revenue during the nine
months ended September 30, 1998 as compared to approximately 12.8% of the
Company's telecommunications revenue during the nine months ended September 30,
1997.
The carrier business represented approximately 55.0% of total
telecommunications revenue and approximately 63.2% of billable minutes for the
nine months ended September 30, 1998 as compared to approximately 26.0% of total
telecommunications revenue and approximately 46.4% of billable minutes for the
nine months ended September 30, 1997. The increase in telecommunications revenue
derived from carriers and other resellers represents an increase of
approximately 249.0% over the corresponding period in 1997 and is partially
attributable to the Flat Rate acquisition.
COST OF TELECOMMUNICATIONS SERVICES. Cost of telecommunications
services increased to $77.6 million in the first nine months of 1998 from $44.9
million in the first nine months of 1997 and, as a percentage of
telecommunications revenue, increased to approximately 90.1% from approximately
86.2% for the nine months ended September 30, 1998 and 1997, respectively. The
Company's gross margin, as a percentage of revenue, decreased to 9.9% for the
nine months ended September 30, 1998 from 13.8% for the nine months ended
September 30, 1997. This decrease was primarily due to (i) decreased revenue per
minute (resulting from price competition and foreign currency fluctuations)
which was not offset by corresponding decreases in infrastructure costs, (ii)
increased sales to carrier customers (which generate substantially lower
margins), and (iii) an increase in intra-European and national long distance
traffic compared to higher margin international traffic. Although it did not
decrease as fast as revenues per minute, the Company's average cost per billable
minute decreased to $.31 during the nine months ended September 30, 1998 from
$.45 during the nine months ended September 30, 1997, a 31.1% decrease. This
decrease, which partially offset the effect of the decline in average revenue
per billable minute, was attributable primarily to increased traffic being
routed through the European Network and increased switched minutes generated by
the Company's carrier business, both of which increased the utilization of fixed
cost leased lines. Increased European Network utilization helped reduce costs on
a per minute basis with respect to European long distance telecommunications
services.
Cost of telecommunications services increased in the nine months ended
September 30, 1998 in part because of the relatively high cost of leased
infrastructure related to increasing the Viatel Network's transmission capacity.
Costs for private line circuits increased to approximately $11.9 million for the
nine months ended September 30, 1998 (approximately 13.8% of telecommunications
revenue) from approximately $6.8 million for the nine months ended September 30,
1997 (approximately 13.1% of telecommunications revenue).
13
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $31.1 million in the nine months ended
September 30, 1998 from $27.1 million in the nine months ended September 30,
1997 and, as a percentage of telecommunications revenue, decreased to
approximately 36.1% in the nine months ended September 30, 1998 from
approximately 51.9% in the corresponding period in 1997. Salaries and
commissions, as a percentage of total selling, general and administrative
expenses, were approximately 49.3% and 52.7% for the nine months ended September
30, 1998 and 1997, respectively. Advertising and promotion expenses, as a
percentage of total selling, general and administrative expenses, were
approximately 2.7% and 1.5% for the nine months ended September 30, 1998 and
1997, respectively.
EBITDA LOSS. EBITDA loss increased to $22.5 million for the nine months
ended September 30, 1998 from $19.9 million for the nine months ended September
30, 1997. As a percentage of telecommunications revenue, EBITDA loss decreased
to approximately 26.2% in the first nine months of 1998 from approximately 38.1%
in the first nine months of 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 price reductions implemented
by certain ITOs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased to approximately $10.7 million in the nine months ended September 30,
1998 from approximately $4.8 million in the nine months ended September 30,
1997. The increase was due primarily to (i) the depreciation of equipment
related to network expansion and fiber optic cable systems placed in service
during 1997 and the first nine months of 1998 and (ii) the amortization of
goodwill associated with the Flat Rate acquisition. Depreciation expense will
increase substantially as each of the rings of the Circe Network become
operational.
INTEREST. Interest expense increased to approximately $52.7 million in
the nine months ended September 30, 1998 from approximately $9.2 million in the
nine months ended September 30, 1997 primarily as a result of the Units
Offering. Interest income increased to approximately $19.9 million for the nine
months ended September 30, 1998 from approximately $3.1 million in the nine
months ended September 30, 1997 primarily as a result of the interim investment
of the net proceeds from the Units Offering.
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 through private and
public equity and debt financings and, to a lesser extent, equipment-based
financing. As of September 30, 1998, the Company had $588.4 million of cash,
cash equivalents and other liquid investments and $162.1 million of restricted
cash equivalents and other restricted investments.
On April 8, 1998, the Company completed the Units Offering through
which it raised approximately $889.6 million of gross proceeds ($856.6 million
of net proceeds). The Company believes that the net proceeds from the Units
Offering, together with project financing, equipment financing and the sale of
capacity on the Circe Network will provide sufficient funds for the Company to
expand its business as planned and to fund operating losses for at least the
next 15 to 21 months. To date, the Company has used certain of the net proceeds
from the Units Offering to (i) finance a tender offer for its senior discount
notes issued in 1994 and (ii) to purchase approximately $122.8 million of U.S.
government securities which were pledged as security for the interest on the
U.S. dollar denominated senior notes and approximately $30.6 million of German
government obligations which were pledged as security for the interest on the
Deutschmark denominated senior notes issued in the Units Offering. The Company
intends to use the remaining net proceeds to fund a portion of the construction
and operational start-up of the Circe Network, to fund other capital
expenditures and for general corporate and working capital purposes.
14
<PAGE>
CAPITAL EXPENDITURES; COMMITMENTS. The development of the Company's
business has required substantial capital expenditures. During the nine months
ended September 30, 1998, the Company had capital expenditures of approximately
$103.9 million. The Company has or intends to enter into certain agreements
associated with the Circe Network, purchase commitments for network expansion
and other items aggregating $200 to $500 million during 1998 and 1999. In
addition, the Company has minimum volume commitments to purchase transmission
capacity from various domestic and foreign carriers aggregating approximately
$13.8 million for 1998.
FOREIGN CURRENCY. The Company has exposure to fluctuations in foreign
currencies relative to the U.S. Dollar as a result of billing portions of its
telecommunications revenue in the local European 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 the nine months ended September 30, 1998, approximately 40.9%
of the Company's telecommunications revenue was billed in various European
currencies. Debt service on certain of the notes issued in the Units Offering
are payable in German Deutschmarks (in Euros after January 1, 1999).
Substantially all of the costs of acquisition and upgrade of the Company's
switches have been, and are expected to continue to be, U.S. Dollar denominated
transactions, however, a substantial portion of the costs to construct the Circe
Network will be denominated in various European currencies, including the Euro.
All of the European currencies in which the Company does business are expected
to converge as part of the European Monetary Union, with the exception of the
British Pound Sterling.
With the continued expansion of the European Network, a substantial
portion of the costs associated with the European Network, such as local access
and termination charges and a portion of the leased line costs, as well as a
majority of local selling expenses and debt service related to the Deutschmark
(Euro after January 1, 1999) denominated notes, will be charged to the Company
in the same currencies as revenue is billed. These developments create a natural
hedge against a portion of the Company's foreign exchange exposure. To date,
much of the funding necessary to establish the local direct sales organizations
has been derived from telecommunications revenue that was billed in local
currencies. Consequently, the Company's financial position as of September 30,
1998 and its results of operations for the three and nine months ended September
30, 1998 were not significantly impacted by fluctuations in the U.S. Dollar in
relationship to foreign currencies.
YEAR 2000
The Year 2000 ("Y2K") issue is the result of computer programs,
microprocessors and embedded date reliant systems using two digits rather than
four to define the applicable year. If such programs are not corrected, such
date sensitive computer programs, microprocessors and embedded systems may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculation causing disruptions in
operations.
In an effort to assess its Y2K state of readiness, during 1997 the
Company began performing a complete inventory assessment of all of its
information technology and non-information technology systems, the vast majority
of which have either been developed or purchased by the Company within the past
four years. Based on its review to date, the Company believes that the vast
majority of its existing systems are Y2K compliant. However, there can be no
assurance until the year 2000 occurs that such is the case. With regard to
systems which are not currently Y2K compliant, the Company is actively replacing
such systems to ensure the Company's ability to continue to meet its internal
needs and the requirements of its customers. The Company currently anticipates
that the upgrade or modification of such non-compliant systems will be completed
during the first half of 1999. In addition, with respect to all new software and
hardware purchases, the Company requires that the proposed vendor certify that
its product is Y2K compliant.
The Company has initiated formal communications with the key carriers
and other vendors on which the Company's operations and infrastructure are
dependent to determine the extent to which the Company is susceptible to a
failure resulting from such third parties' inability to remediate their own Y2K
issues. There can be no assurance that the carriers and other vendors on which
the Company's operations and infrastructure rely are or will be Y2K compliant in
a timely manner. Interruptions in the services provided to the Company by these
third parties could result in disruptions in the Company's services. Depending
upon the extent and duration of any such disruptions and the specific services
affected, such disruptions could have a material adverse affect on the Company's
business, financial condition and results of operations.
In addition, disruptions in the economy generally resulting from the
Y2K issue could also have a material adverse affect on the Company. The Company
could be subject to litigation resulting from any disruption in its services.
The amount and potential liability or lost revenue cannot be reasonably
estimated at this time.
EURO
On January 1, 1999, eleven of the fifteen member countries of the
European Union ("EU") are scheduled to establish fixed irrevocable conversion
rates between their existing sovereign currencies and a single currency called
the Euro. The sovereign currencies are scheduled to remain legal tender as
denominations of the Euro during a transition period from January 1, 1999 to
January 1, 2002.
The Company has completed an internal analysis regarding business and
systems issues related to the Euro conversion and, as a result, is in the
process of making necessary modifications to its business processes and software
applications. Once the modifications are completed, the Company will be able to
conduct business in both Euro and sovereign currencies on a parallel basis, as
required by the EU.
15
<PAGE>
The Company believes that the Euro conversion will not have a
significant impact on its business strategy in Europe. The costs to convert all
systems to be Euro compliant will not have a significant impact on the Company's
results of operations.
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 the
Company's network and related services, the development and expansion of the
Company's business, the markets in which the Company'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," of the Company's Annual Report on Form 10-K for fiscal 1997.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not currently applicable to the Company.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its Annual Meeting of Stockholders on
September 10, 1998. Proposals presented for a stockholder
vote were (i) the election of two Class B Directors, (ii) the
approval of an amendment to the Company's Amended Stock
Incentive Plan, (iii) the approval of an amendment to the
Company's Amended and Restated Certificate of Incorporation
and (iv) the ratification of the appointment of KPMG Peat
Marwick LLP as independent auditors for the Company for the
fiscal year 1998.
Each of the incumbent Class B directors nominated by the
Company were elected with the following voting results:
VOTES VOTES
FOR WITHHELD
--- --------
Francis J. Mount 17,862,241 495,458
Paul G. Pizzani 17,867,640 490,059
An Amendment to the Company's Amended Stock Incentive Plan was
approved with the following voting results:
VOTES VOTES
CAST CAST
FOR AGAINST ABSTENTIONS
--- ------- -----------
10,181,371 5,160,984 104,022
An Amendment to the Company's Amended and Restated Certificate
of Incorporation was approved with the following voting
results:
VOTES VOTES
CAST CAST
FOR AGAINST ABSTENTIONS
--- ------- -----------
12,102,861 3,240,980 102,536
The appointment of KPMG Peat Marwick LLP as the Company's
independent auditors for the fiscal year 1998 was approved
with the following voting results:
VOTES VOTES
CAST CAST
FOR AGAINST ABSTENTIONS
--- ------- -----------
18,308,172 32,350 17,150
17
<PAGE>
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS.
4.9 Certificate of Amendment to the Company's Amended and
Restated Certificate of Incorporation.
4.10 Amended Stock Incentive Plan
27 Financial Data Schedule.
(B) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed by the Company during the
quarter ended September 30, 1998.
18
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
VIATEL, INC.
By: /s/ Michael J. Mahoney
----------------------------------
Michael J. Mahoney
President and Chief Executive Officer
By: /s/ Allan L. Shaw
----------------------------------
Allan L. Shaw
Senior Vice President, Finance and
Chief Financial Officer
Date: November 13, 1998
19
<PAGE>
EXHIBIT INDEX
SEQUENTIALLY
NO. DESCRIPTION NUMBERED PAGE
- - --- ----------- -------------
4.9 Certificate of Amendment to the Company's
Amended and Restated Certificate of
Incorporation.
4.10 Amended Stock Incentive Plan.
27 Financial Data Schedule.
EXHIBIT 4.9
CERTIFICATE OF AMENDMENT
OF
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
VIATEL, INC.
VIATEL, INC., a Delaware corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Corporation"), does
hereby certify that:
FIRST: By unanimous written consent, the Board of Directors of the
Corporation duly adopted a resolution recommending that the Corporation's
Amended and Restated Certificate of Incorporation be further amended to increase
the total number of shares of the Corporation's Preferred Stock, par value $.01
per share, from One Million (1,000,000) to Two Million (2,000,000) and that the
total authorized capital stock of the Corporation be increased from Fifty-One
Million (51,000,000) to Fifty-Two Million (52,000,000) (the "Amendment").
SECOND: At the 1998 Annual Meeting of the Stockholders of the
Corporation held on September 10, 1998, which meeting was duly called and held
upon notice in accordance with Section 222 of the General Corporation law of the
State of Delaware (the "DGCL"), the necessary number of shares of the
Corporation's common stock, par value $.01 per share, were voted in favor of the
Amendment.
THIRD: The Amendment was duly adopted in accordance with the
provisions of Section 242 of the DGCL.
FOURTH: The first paragraph of Article IV of the Corporation's
Amended and Restated Certificate of Incorporation is hereby amended and restated
to read as follows:
"The total authorized capital stock of the Corporation shall be
Fifty-Two Million (52,000,000) shares consisting of Fifty Million (50,000,000)
shares of Common Stock, par value $.01 per share (the "Common Stock"), and Two
Million (2,000,000) shares of Preferred Stock, par value $.01 per share."
IN WITNESS WHEREOF, VIATEL, INC. has caused this Certificate to be
signed by its duly authorized officer this 28th day of October, 1998.
/S/ MICHAEL J. MAHONEY
---------------------------------------
Michael J. Mahoney
Chairman, President and Chief Executive Officer
EXHIBIT 4.10
AMENDED STOCK INCENTIVE PLAN
1. ESTABLISHMENT, PURPOSE, AND DEFINITIONS.
(a) There is hereby adopted the Amended Stock Incentive Plan (the
"Plan") of VIATEL, INC. (the "Company").
(b) The purpose of the Plan is to provide a means whereby Eligible
Individuals (as defined in paragraph 4, below) can acquire Common Stock, $.01
par value, of the Company (the "Stock"). The Plan provides employees (including
officers and directors who are employees) of the Company and of its Affiliates
(as defined in subparagraph (c) below) an opportunity to purchase shares of
Stock pursuant to options which may qualify as incentive stock options (referred
to as "Incentive Stock Options") under Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code"), and employees, officers, directors,
independent contractors, and consultants of the Company and of its Affiliates an
opportunity to purchase shares of Stock pursuant to options which are not
described in Sections 422 or 423 of the Code (referred to as "Nonqualified Stock
Options"). The Plan also provides for the sale or bonus of Stock to Eligible
Individuals in connection with the performance of services for the Company or
its Affiliates. Finally, the Plan authorizes the grant of stock appreciation
rights ("SARs"), either separately or in tandem with options, entitling holders
to cash compensation measured by appreciation in the value of the Stock.
(c) The term "Affiliates" as used in the Plan means parent or
subsidiary corporations, as defined in Sections 424(e) and (f) of the Code (but
substituting "the Company" for "employer corporation"), including parents or
subsidiaries which become such after adoption of the Plan.
2. ADMINISTRATION OF THE PLAN.
(a) The Plan shall, unless otherwise determined by the Board of
Directors, be administered by the Compensation Committee of the Board (the
"Committee"). The Committee shall consist of not less than two non-employee
director members within the meaning of the rules promulgated under Section 16(b)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Members
of the Committee shall serve at the pleasure of the Board. The Committee shall
select one of its members as chairman, and shall hold meetings at such times and
places as it may determine. A majority of the Committee shall constitute a
quorum and acts of the Committee at which a quorum is present, or acts reduced
to or approved in writing by all the members of the Committee, shall be the
valid acts of the Committee. If the Board does not delegate administration of
the Plan to the Committee, then each reference in this Plan to "the Committee"
shall be construed to refer to the Board.
(b) The Committee shall determine which Eligible Individuals shall
be granted options under the Plan, the timing of such grants, the terms thereof
(including any restrictions on the Stock), and the number of shares subject to
such options.
<PAGE>
(c) The Committee may amend the terms of any outstanding option
granted under this Plan, but any amendment which would adversely affect the
optionee's rights under an outstanding option shall not be made without the
optionee's written consent. The Committee may, with the optionee's written
consent, cancel any outstanding option or accept any outstanding option in
exchange for a new option.
(d) The Committee shall also determine which Eligible Individuals
shall be issued Stock or SARs under the Plan, the timing of such grants, the
terms thereof (including any restrictions), and the number of shares of Stock or
SARs to be granted. The Stock shall be issued for such consideration (if any) as
the Committee deems appropriate. Stock issued subject to restrictions shall be
evidenced by a written agreement (the "Restricted Stock Purchase Agreement" or
the "Restricted Stock Bonus Agreement"). The Committee may amend any Restricted
Stock Purchase Agreement or Restricted Stock Bonus Agreement, but any amendment
which would adversely affect the stockholder's rights to the Stock shall not be
made without his or her written consent.
(e) The Committee shall have the sole authority, in its absolute
discretion to adopt, amend, and rescind such rules and regulations as, in its
opinion, may be advisable for the administration of the Plan, to construe and
interpret the Plan, the rules and the regulations, and the instruments
evidencing options, SARs or Stock granted under the Plan and to make all other
determinations deemed necessary or advisable for the administration of the Plan.
All decisions, determinations, and interpretations of the Committee shall be
binding on all participants.
3. STOCK SUBJECT TO THE PLAN.
(a) An aggregate of not more than 4,166,666 shares of Stock shall be
available for the grant of options or the issuance of Stock under the Plan. If
an option is surrendered (except surrender for shares of Stock) or for any other
reason ceases to be exercisable in whole or in part, the shares which were
subject to such option but as to which the option had not been exercised shall
continue to be available under the Plan. Any Stock which is retained by the
Company upon exercise of an option in order to satisfy the exercise price for
such option or any withholding taxes due with respect to such option exercise
shall be treated as issued to the optionee and will thereafter not be available
under the Plan.
(b) If there is any change in the Stock subject to either the Plan,
an Option Agreement (as defined below), a Restricted Stock Purchase Agreement, a
Restricted Stock Bonus Agreement or a SAR Agreement (as defined in paragraph 8)
through merger, consolidation, reorganization, recapitalization,
reincorporation, stock split, stock dividend, or other change in the capital
structure of the Company, appropriate adjustments shall be made by the Committee
in order to preserve but not to increase the benefits to the individual,
including adjustments to the aggregate number, kind of shares, and price per
share subject to either the Plan, an Option Agreement, a Restricted Stock
Purchase Agreement, a Restricted Stock Bonus Agreement, or a SAR Agreement.
4. ELIGIBLE INDIVIDUALS. Individuals who shall be eligible to have
granted to them the options, Stock or SARs provided for by the Plan shall be
such employees, officers, directors, independent contractors, and consultants of
the Company or an Affiliate as the Committee in its discretion, shall designate
from time to time ("Eligible Individuals"). Notwithstanding the foregoing,
<PAGE>
only employees of the Company or an Affiliate (including officers and directors
who are bona fide employees) shall be eligible to receive Incentive Stock
Options.
5. THE OPTION PRICE. The exercise price of the Stock covered by each
Incentive Stock Option shall be not less than the per share fair market value of
such Stock on the date the option is granted. The exercise price of the Stock
covered by each Nonqualified Stock Option shall be as determined by the
Committee. Notwithstanding the foregoing, in the case of an Incentive Stock
Option granted to a person possessing more than ten percent of the combined
voting power of the Company or an Affiliate, the exercise price shall be not
less than 110 percent of the fair market value of the Stock on the date the
option is granted. The exercise price of an option shall be subject to
adjustment to the extent provided in paragraph 3(b), above.
6. TERMS AND CONDITIONS OF OPTIONS.
(a) Each option granted pursuant to the Plan will be evidenced by a
written agreement (the "Option Agreement") executed by the Company and the
person to whom such option is granted.
(b) The Committee shall determine the term of each option granted
under the Plan; PROVIDED, HOWEVER, that the term of an Incentive Stock Option
shall not be for more than 10 years and that, in the case of an Incentive Stock
Option granted to a person possessing more than ten percent of the combined
voting power of the Company or an Affiliate, the term shall be for no more than
five years.
(c) In the case of Incentive Stock Options, the aggregate fair
market value (determined as of the time such option is granted) of the Stock
with respect to which Incentive Stock Options are exercisable for the first time
by an Eligible Individual in any calendar year (under this Plan and any other
plans of the Company or its Affiliates) shall not exceed $100,000.
(d) The Stock Option Agreement may contain such other terms,
provisions and conditions consistent with this Plan as may be determined by the
Committee. If an option, or any part thereof, is intended to qualify as an
Incentive Stock Option, the Option Agreement shall contain those terms and
conditions which are necessary to so qualify it.
7. TERMS AND CONDITIONS OF STOCK PURCHASES AND BONUSES.
(a) Each sale or grant of Stock pursuant to the Plan will be
evidenced by a written Restricted Stock Purchase Agreement or Restricted Stock
Bonus Agreement executed by the Company and the person to whom such Stock is
sold or granted.
(b) The Restricted Stock Purchase Agreement or Restricted Stock
Bonus Agreement may contain such other terms, provisions and conditions
consistent with this Plan as may be determined by the Committee, including not
by way of limitation, restrictions on transfer, forfeiture provisions,
repurchase provisions and vesting provisions.
8. TERMS AND CONDITIONS OF SARS. The Committee may, under such terms and
conditions as it deems appropriate, authorize the issuance of SARs evidenced by
a written SAR agreement (which, in the case of tandem options, may be part of
the Option Agreement to which the SAR relates) executed by the Company and the
person to whom such SAR is granted (the "SAR Agreement"). The SAR Agreement may
contain such terms, provisions and conditions consistent with this Plan as may
be determined by the Committee.
<PAGE>
9. USE OF PROCEEDS. Cash proceeds realized from the issuance of Stock
under the Plan shall constitute general funds of the Company.
10. AMENDMENT, SUSPENSION, OR TERMINATION OF THE PLAN.
(a) The Board may at any time amend, suspend or terminate the Plan
as it deems advisable; provided that such amendment, suspension or termination
complies with all applicable requirements of state and federal law, including
any applicable requirement that the Plan or an amendment to the Plan be approved
by the Company's stockholders, and provided further that, except as provided in
paragraph 3(b), above, the Board shall in no event amend the Plan in the
following respects without the consent of stockholders then sufficient to
approve the Plan in the first instance:
(i) To increase the maximum number of shares subject to
Incentive Stock Options issued under the Plan; or
(ii) To change the designation or class of persons eligible to
receive Incentive Stock Options under the Plan.
(b) No option may be granted nor any Stock issued under the Plan
during any suspension or after the termination of the Plan, and no amendment,
suspension, or termination of the Plan shall, without the affected individual's
consent, alter or impair any rights or obligations under any option previously
granted under the Plan. The Plan shall terminate with respect to the grant of
Incentive Stock Options on September 29, 2003, unless previously terminated by
the Board pursuant to this paragraph 10.
11. ASSIGNABILITY. Each option granted pursuant to this Plan shall,
during the optionee's lifetime, be exercisable only by him, and neither the
option nor any right hereunder shall be transferable by the optionee by
operation of law or otherwise other than by will or the laws of descent and
distribution. Stock subject to a Restricted Stock Purchase Agreement or a
Restricted Stock Bonus Agreement shall be transferable only as provided in such
Agreement.
12. PAYMENT UPON EXERCISE OF OPTIONS.
(a) Payment of the purchase price upon exercise of any option
granted under this Plan shall be made in cash (including for purposes of this
Plan the following cash equivalents: certified check, bank draft, postal or
express money order payable to the order of the Company in lawful money of the
United States); PROVIDED, HOWEVER, that the Committee, in its sole discretion,
may permit an optionee to pay the option price in whole or in part (i) with
shares of Stock owned by the optionee; (ii) by delivery on a form prescribed by
the Committee of an irrevocable direction to a securities broker approved by the
Committee to sell shares and deliver all or a portion of the proceeds to the
Company in payment for the Stock; (iii) by delivery of the optionee's promissory
note with such recourse, interest, security, and redemption provisions as the
Committee in its discretion determines appropriate; or (iv) in any combination
of the foregoing. Any Stock used to exercise options shall be valued at its fair
market value on the date of the exercise of the option.
<PAGE>
In addition, the Committee, in its sole discretion, may authorize the surrender
by an optionee of all or part of an unexercised option and authorize a payment
in consideration thereof of an amount equal to the difference between the
aggregate fair market value of the Stock subject to such option and the
aggregate option price of such Stock. In the Committee's discretion, such
payment may be made in cash, shares of Stock with a fair market value on the
date of surrender equal to the payment amount, or some combination thereof.
(b) In the event that the exercise price is satisfied by the
Committee retaining from the shares of Stock otherwise to be issued to the
optionee shares of Stock having a value equal to the exercise price, the
Committee may issue the optionee an additional option, with terms identical to
this Option Agreement under which the option was received, entitling the
optionee to purchase additional Stock in an amount equal to the number of shares
so retained.
13. WITHHOLDING TAXES.
(a) No Stock shall be granted or sold under the Plan to any
participant, and no SAR may be exercised, until the participant has made
arrangements acceptable to the Committee for the satisfaction of federal, state,
and local income and employment tax withholding obligations, including without
limitation obligations incident to the receipt of Stock under the Plan, the
lapsing of restrictions applicable to such Stock, the failure to satisfy the
conditions for treatment as Incentive Stock Options under applicable tax law, or
the receipt of cash payments. Upon exercise of a stock option or lapsing of
restrictions on Stock issued under the Plan, the Company may satisfy its
withholding obligations by withholding from the optionee or requiring the
stockholder to surrender shares of Stock sufficient to satisfy federal, state
and local income and employment tax withholding obligations.
(b) In the event that such withholding is satisfied by the Company
or the optionee's employer retaining from the shares of Stock otherwise to be
issued to the optionee shares of Stock having a value equal to such withholding
tax, the Committee may issue the optionee an additional option, with terms
identical to the Option Agreement under which the option was received, entitling
the optionee to purchase additional Stock in an amount equal to the number of
shares so retained.
14. RESTRICTIONS ON TRANSFER OF SHARES. The Stock acquired pursuant to
the Plan shall be subject to such restrictions and agreements regarding sale,
assignment, encumbrances or other transfer as are in effect among the
stockholders of the Company at the time such Stock is acquired, as well as to
such other restrictions as the Committee shall deem advisable.
15. CORPORATE TRANSACTION.
(a) For purposes of this paragraph 15, a "Corporate Transaction"
shall include any of the following stockholder-approved transactions to which
the Company is a party:
(i) a merger or consolidation in which the Company is not the
surviving entity, except (1) for a transaction the principal purpose of which is
to change the state of the Company's incorporation, or (2) a transaction in
which the Company's stockholders immediately prior to such merger or
consolidation hold (by virtue of securities received in exchange for their
<PAGE>
shares in the Company) securities of the surviving entity representing more than
fifty percent (50%) of the total voting power of such entity immediately after
such transaction;
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Company unless the Company's stockholders
immediately prior to such sale, transfer or other disposition hold (by virtue of
securities received in exchange for their shares in the Company) securities of
the purchaser or other transferee representing more than fifty (50%) of the
total voting power of such entity immediately after such transaction; or
(iii) any reverse merger in which the Company is the surviving
entity but in which the Company's stockholders immediately prior to such merger
do not hold (by virtue of their shares in the Company held immediately prior to
such transaction) securities of the Company representing more than fifty percent
(50%) of the total voting power of the Company immediately after such
transaction.
(b) In the event of any Corporate Transaction, any option,
restricted Stock or SAR shall vest in its entirety and become exercisable, or
with respect to restricted Stock, be released from restrictions on transfer and
repurchase rights, immediately prior to the specified effective date of the
Corporate Transaction unless assumed by the successor corporation or its parent
company, pursuant to options, restricted stock agreements or stock appreciation
rights providing substantially equal value and having substantially equivalent
provisions as the options, restricted Stock or SARs granted pursuant to this
Plan.
16. STOCKHOLDER APPROVAL. This Plan shall only become effective with
regard to the issuance of additional Incentive Stock Options upon its approval
by a majority of the stockholders voting (in person or by proxy) at a
stockholders' meeting held within 12 months of the Board's adoption of the Plan.
The Committee may grant Incentive Stock Options under the Plan prior to the
stockholders' meeting, but until stockholder approval of the Plan is obtained,
no such additional Incentive Stock Option shall be exercisable.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS OF THE COMPANY FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 590,193,908
<SECURITIES> 49,221,516
<RECEIVABLES> 27,423,743
<ALLOWANCES> 2,308,000
<INVENTORY> 0
<CURRENT-ASSETS> 672,652,118
<PP&E> 173,269,332
<DEPRECIATION> 21,971,143
<TOTAL-ASSETS> 976,535,503
<CURRENT-LIABILITIES> 132,017,427
<BONDS> 885,923,696
45,950,646
0
<COMMON> 231,713
<OTHER-SE> 128,306,554
<TOTAL-LIABILITY-AND-EQUITY> 976,535,503
<SALES> 0
<TOTAL-REVENUES> 86,133,477
<CGS> 0
<TOTAL-COSTS> 77,624,419
<OTHER-EXPENSES> 41,763,284
<LOSS-PROVISION> 3,149,109
<INTEREST-EXPENSE> 52,715,324
<INCOME-PRETAX> (66,063,907)
<INCOME-TAX> 0
<INCOME-CONTINUING> (66,063,907)
<DISCONTINUED> 0
<EXTRAORDINARY> (28,303,850)
<CHANGES> 0
<NET-INCOME> (96,498,403)
<EPS-PRIMARY> (4.19)
<EPS-DILUTED> (4.19)
</TABLE>
