As filed with the Securities and Exchange Commission on March 5, 1999
Registration No. 333-72309
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT
NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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VIATEL, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-3787366
(State or Other Jurisdiction of 685 THIRD AVENUE (I.R.S. Employer
Incorporation or Organization) NEW YORK, NEW YORK 10017 Identification
(212) 350-9200 Number)
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal
Executive Offices)
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SHELDON M. GOLDMAN, ESQ.
SENIOR VICE PRESIDENT,
BUSINESS AFFAIRS AND GENERAL COUNSEL
VIATEL, INC.
685 THIRD AVENUE
NEW YORK, NEW YORK 10017
(212) 350-9200
(Name, Address, Including Zip Code, and
Telephone Number, Including Area Code, of
Agent For Service)
COPIES OF ALL COMMUNICATIONS TO:
JAMES P. PRENETTA, ESQ.
KELLEY DRYE & WARREN LLP
101 PARK AVENUE
NEW YORK, NEW YORK 10178
(212) 808-7800
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time following the effectiveness of this registration statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. |_|
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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The information in this Preliminary Prospectus is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This Preliminary
Prospectus is not an offer to sell nor does it seek an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted.
Subject to Completion, dated March 5, 1999
6,824,249 shares
VIATEL, INC.
Common Stock, $.01 par value
This Prospectus may be used by us for the issuance, from time to time,
of up to 6,824,249 shares of our common stock, upon the conversion of our
outstanding Subordinated Debentures or shares of Series A Preferred Stock. We
will not receive any proceeds from the issuance of the shares of common stock
covered by this Prospectus.
Our corporate offices are located at 685 Third Avenue, New York, New
York 10017 and our telephone number is (212) 350-9200.
Our common stock is traded on the Nasdaq National Market under the
symbol "VYTL." On March 4, 1999, our common stock closed at $19.00 per share.
-----------------------
See "Risk Factors" beginning on page 2 to read about certain factors
you should consider before converting your Subordinated Debentures or shares of
Series A Preferred Stock into shares of our common stock.
-----------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. any representation to the contrary is a
criminal offense.
The date of this Prospectus is April , 1999.
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RISK FACTORS
This prospectus includes and incorporates "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. Although we believe that our plans,
intentions and expectations reflected in or suggested by these forward-looking
statements are reasonable, we can give no assurance that such plans, intentions
or expectations will be achieved. Important factors that could cause actual
results to differ materially from these forward-looking statements are discussed
below. All forward-looking statements attributable to the company or persons
acting on our behalf are expressly qualified by the following cautionary
statements.
OUR SUBSTANTIAL LEVERAGE COULD ADVERSELY AFFECT OUR ABILITY TO RUN OUR BUSINESS
We have now and will continue to have a significant amount of
indebtedness. Our substantial indebtedness could have important consequences to
you. For example, it could:
o limit our ability to obtain additional financing in the future
for working capital, capital expenditures, acquisitions and
general corporate purposes;
o require us to dedicate a substantial portion of our cash flow
from operations to payments on our indebtedness, thereby
reducing the funds available to us for other purposes,
including working capital, capital expenditures, acquisitions
and general corporate purposes;
o make us more vulnerable to economic downturns, limiting our
ability to withstand competitive pressures and reduce our
flexibility in responding to changing business and economic
conditions;
o limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate;
o place us at a competitive disadvantage compared to our
competitors that have less debt; and
o limit, along with the financial and other restrictive
covenants, our ability to borrow additional funds. And,
failing to comply with these covenants could result in an
event of default which, if not cured or waived, could have a
material adverse effect on us.
OUR CASH FLOW MAY NOT BE SUFFICIENT TO PERMIT REPAYMENT OF OUR INDEBTEDNESS WHEN
DUE
Our ability to make payments on and to refinance our indebtedness will
depend on our ability to generate cash in the future. This, to a certain extent,
is subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond our control. We cannot assure you that our
business will generate sufficient cash flow from operations to meet our debt
service requirements. We may need to refinance all or a portion of our
indebtedness. Based on our current level of operation, we anticipate that cash
flows from operations may be insufficient to repay our indebtedness at scheduled
maturity and that some or all of such indebtedness may need to be refinanced.
Our ability to refinance will depend on, among other things, our financial
condition at the time, the restrictions in the agreements governing our
indebtedness and other factors, including market conditions. If we are unable to
refinance our debt or if additional financing is not available, we could be
forced to dispose of assets under circumstances that might not be favorable to
realizing the highest price for the assets or to default on our obligations with
respect to our indebtedness.
TERMS OF OUR INDEBTEDNESS RESTRICT OUR CORPORATE ACTIVITIES
The indentures under which our long-term debt was issued restrict, and
in some cases significantly limit or prohibit, among other things, our ability
and the ability of our subsidiaries to:
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o incur additional indebtedness,
o make prepayments of certain indebtedness,
o pay dividends,
o make investments,
o engage in transactions with stockholders and affiliates,
o issue capital stock,
o create liens,
o sell assets, and
o engage in mergers and consolidations.
However, the limitations contained in our indentures are subject to a number of
important qualifications and exceptions. In particular, while the indentures
restrict our ability to incur additional indebtedness, they permit us and our
subsidiaries to, among other things, incur an unlimited amount of secured
indebtedness to finance telecommunications assets and build-out. If new
indebtedness is added to current debt levels, the related risks that we and our
subsidiaries now face could intensify.
WE HAVE A LIMITED OPERATING HISTORY UPON WHICH TO EVALUATE OUR BUSINESS AND, TO
DATE, WE HAVE INCURRED SUBSTANTIAL NET LOSSES AND NEGATIVE CASH FLOW FROM
OPERATIONS
We commenced operations in 1991. Consequently, we have only a limited
operating history upon which you can evaluate our business. You should evaluate
our chances of financial and operational success in light of the risks,
uncertainties, expenses, delays and difficulties frequently encountered by
companies in their early stage of development.
We have experienced net losses and negative earnings before interest,
taxes, depreciation and amortization since we commenced operations. In addition,
we have also experienced significant increases in capital expenditures and
expenses associated with the development and expansion of our network. We expect
to incur operating and net losses, and negative earnings before interest, taxes,
depreciation and amortization and negative cash flow from operating activities
until at least the year 2000. However, our negative earnings before interest,
taxes, depreciation and amortization and negative cash flows are likely to
continue beyond the year 2000 if:
o we extend our expansion plans,
o retail prices decline faster than we anticipated,
o interconnection rates and wholesale prices paid by us do not
decline as quickly as we anticipated, or
o any of the other risks described in this Prospectus materialize.
Accordingly, we cannot assure you that we will achieve or sustain profitability
or positive cash flows from operating activities in the future. If we cannot
achieve profitability or positive cash flows from operating activities, we may
be unable to meet our working capital and future debt service requirements which
would have a material adverse effect on our business, financial condition and
results of operations. See "Our Future Growth Will Require Substantial
Additional Capital Requirements Which May Exceed Budgeted Amounts" and "- Our
Operating Results May be Subject to Substantial Fluctuations."
OUR FUTURE GROWTH WILL REQUIRE SUBSTANTIAL ADDITIONAL CAPITAL REQUIREMENTS WHICH
MAY EXCEED BUDGETED AMOUNTS
We currently have budgeted approximately $530.0 million for the
construction of transmission infrastructure. However, we cannot assure you that
actual costs of these construction projects will not substantially exceed our
budget for these projects. Future sources of financing may include:
o additional public and private debt and equity offerings,
o project financing,
o equipment financings, and
o the sale of indefeasible rights-of-use or capacity in our
network.
We cannot assure you that additional financing arrangements will be available to
us on acceptable terms. Moreover, the amount of our outstanding indebtedness may
adversely affect our ability to raise additional funds.
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We believe that available cash, project financing, equipment financing
and the sale of indefeasible rights-of-use and capacity on our network will
provide sufficient funds for us to expand our business as planned and to fund
our operating losses for at least the next 12 to 18 months. However, the actual
amount of our future capital requirements will depend on a number of factors,
including:
o the success of our business;
o the start-up dates for new transmission infrastructure;
o the rate at which we further expand our network;
o the types of services that we offer;
o staffing levels;
o acquisitions and customer growth; and
o other factors that are not within our control, including
competitive conditions, government regulatory developments and
capital costs.
In the event that our plans or assumptions change or prove to be
inaccurate or available cash, project financing, equipment financing and
proceeds from the sale of indefeasible rights-of-use and capacity on our network
prove to be insufficient to fund our growth in the manner and at the rate we
currently anticipated, we may be required to delay or abandon some or all of our
development and expansion plans or we may be required to seek additional sources
of financing earlier than currently anticipated.
SIGNIFICANT PRICE DECLINES RESULTING FROM COMPETITION AND OTHER FACTORS MAY
ADVERSELY AFFECT OUR FINANCIAL PERFORMANCE
Prices for international long distance calls were historically kept
artificially high in part by above-cost international settlement rates which
allowed carriers to enjoy 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 substantially more expensive than domestic long distance calls. In
addition, the European Union Interconnection Directive, which became effective
in January 1998, requires European Union operators with significant market power
to charge cost-based and non-discriminatory prices for transmission of
cross-border traffic. This has had an effect on settlement rates with countries
and territories outside the European Union and may also contribute to the
collapse of the international settlement rate system. For the foregoing reasons,
during the past year substantial price reductions were reflected in
international rates, particularly the rates charged for calls between countries
where competition exists. This represents a steep decline from rates charged for
such calls as recently as several years ago and we expect rates on international
calls, particularly between the United States and Western Europe, to continue to
decline significantly. Furthermore, the Federal Communications Commission has
adopted the international settlement rate order, which is designed to bring
downward pressure on international telephone rates by requiring U.S.
carriers to pay lower settlement rates to their correspondent foreign carriers.
Industry observers predict that telephone charges will be less
affected by the distance a call is carried, particularly with the possible
increased use of voice services over the internet. As a consequence, if we are
unable to effectively implement our strategy of owning, rather than leasing,
facilities, we could experience a substantial reduction in 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 our business, financial condition and results of operations.
In addition, during 1998 a number of incumbent telecommunications operators took
steps to substantially reduce retail prices, in excess of reductions in
wholesale prices, in an effort to protect their market and deter competitors,
such as us. See "- Our Industry Is Highly Competitive With Participants That
Have Greater Resources."
INABILITY TO MANAGE EFFECTIVELY OUR GROWTH STRATEGY COULD ADVERSELY AFFECT
OUR OPERATIONS
Our rapid and continued growth has placed, and is expected to continue
to place, a significant strain on our administrative, operational and financial
resources and has increased demands on our systems and controls. In addition, we
cannot assure you that we will be able to successfully add services or expand
our geographic markets or that existing regulatory barriers to our current or
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future operations will be reduced or eliminated. As we increase our services and
expand our geographic markets, there will be additional demands on our customer
support, sales and marketing and administrative resources and network
infrastructure. We cannot assure you that our systems and infrastructure will be
adequate to maintain and effectively monitor future growth or that we will be
able to successfully attract, train and manage additional employees. The failure
to continue to upgrade our administrative, operating and financial control
systems and infrastructure or the occurrence of unexpected expansion
difficulties could have a material adverse effect on our business, financial
condition and results of operations.
OUR OPERATING RESULTS MAY BE SUBJECT TO SUBSTANTIAL FLUCTUATIONS
Our quarterly operating results have fluctuated in the past, primarily
as a result of the evolution of our business, and may fluctuate significantly in
the future as a result of a variety of factors, including:
o pricing changes in the industry;
o changes in the mix of services sold or channels through which
those services are sold;
o changes in user demand, customer terminations of service, capital
expenditures and other costs relating to the expansion of our
network;
o the start-up of three phases of the Circe Network;
o the timing and costs of any acquisitions of customer bases and
businesses, services or technologies;
o the timing and costs of marketing and advertising efforts;
o the effects of government regulation and regulatory changes; and
o specific economic conditions in the telecommunications industry.
Variability in our operating results could have a material adverse effect on our
business, financial condition and results of operations. Any significant
shortfall in demand for our services in relation to our expectations, or the
occurrence of any other factor which causes revenue to fall significantly short
of our expectations, would also have a material adverse effect on our 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 our transmission methodology from switchless
resale to use of our network may result in substantial quarterly fluctuations in
our operating results.
OUR ABILITY TO USE NET OPERATING LOSS CARRY FORWARDS ARE SUBJECT TO LIMITATIONS
As of December 31, 1997, we had unused United States federal and
foreign income tax net operating loss carryforwards of approximately $94.7
million. Such net operating loss carryforwards begin to expire in the year 2007.
As a result of an "ownership change," as defined in Section 382 of the
Internal Revenue Code, in October 1996, certain of our net operating loss
carryforwards from periods before such time are subject to annual limitations.
Section 382 of the Internal Revenue Code imposes limitations with respect to the
carryforward of net operating losses by a corporation that experiences a
more-than-50 percent ownership change over a three-year period. A shorter period
applies if there has been a prior ownership change within the immediately
preceding three-year period. In general, if such an ownership change occurs,
Section 382 of the Internal Revenue Code limits the amount of the net operating
losses carried over from pre-ownership change years that can be used in any
post-ownership change year to an amount equal to the product obtained by
multiplying (1) the value of the corporation's capital stock (with certain
adjustments) at the time of the ownership change and (2) an interest rate
determined by the Internal Revenue Service for the month of the ownership
change.
It is possible that the issuance of the shares contemplated by this
Prospectus, when combined with subsequent direct and indirect changes in the
ownership of our capital stock within the relevant testing period, could result
in a more-than-50 percent ownership change and substantially restrict our
subsequent use of our then unused net operating loss carryforwards.
We will be required to pay U.S. federal income tax in any year in which
our taxable income exceeds the amount of each of the net operating loss
carryforwards limited by Section 382 of the Internal Revenue Code, plus the
aggregate net operating loss carryforwards from years after an ownership change.
To the extent that we do not use the full amount of our limited net operating
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loss carryforwards in any year, the unused portion can be used to increase the
net operating loss carryforward limitation for subsequent years prior to the
expiration of the net operating loss carryforwards subject to the limitation.
OUR INDUSTRY IS HIGHLY COMPETITIVE WITH PARTICIPANTS THAT HAVE GREATER RESOURCES
Our success depends upon our ability to compete with other
telecommunications providers in each of our markets many of which have
substantially greater financial, marketing and other resources than we do. These
providers include the incumbent telecommunications operator in each country in
which we operate, global alliances among some of the world's largest
telecommunications carriers, such as "Global One" (Sprint, France Telecom and
Deutsche Telekom) and an alliance between MCI Worldcom and Telefonica de Espana,
and new entrants, such as alternative carriers, Internet backbone networks and
other service providers. Other potential competitors include:
o cable communications companies,
o wireless telephone companies,
o electric and other utilities with rights-of-way,
o railways,
o microwave carriers and
o large end-users which have private networks.
If our competitors devote significant additional resources to the provision of
international or national long distance telecommunications services to our
target customer base of small and medium-sized businesses, this action could
have a material adverse effect on our business, financial condition and results
of operations and we cannot assure you that we will be able to compete
successfully. The intensity of competition and price declines have increased
over the past several years and we believe that competition and price declines
will continue to intensify, particularly in Western Europe, as other providers
obtain operative connectivity.
Customers in most of our current and targeted European markets are not
accustomed to obtaining services from competitors to incumbent
telecommunications operators and may be reluctant to use emerging
telecommunications providers, such as Viatel. In particular, our 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 our competitors, including the incumbent telecommunications
operators, provide potential customers with a broader range of services than we
currently offer.
Competition for customers in the telecommunications industry is
primarily based on price and quality of services offered. We price services
primarily by offering discounts to the prices charged by incumbent
telecommunications operators and other major competitors. However, prices for
international long distance calls have decreased substantially over the past few
years in the markets in which we currently maintain operations and in which we
expect to establish operations. Some of our larger competitors may be able to
use their greater financial resources to cause severe price competition in the
countries in which we operate and expect to operate. It appears that incumbent
telecommunications operators in Western Europe are responding to deregulation
more rapidly and aggressively than occurred after deregulation in the United
States and the United Kingdom. We expect that prices for our services will
continue to decrease for the foreseeable future and that incumbent
telecommunications operators and other dominant telecommunications providers
will continue to improve their product offerings. The improvement in product
offerings and service provisions by the incumbent telecommunications operators
could similarly have a material adverse effect on our competitiveness to the
extent that we are unable to provide similar levels of offerings and services.
If the incumbent telecommunications operator in any jurisdiction uses its
competitive advantages to their fullest extent, our 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
are implementing plans to offer telecommunications services over the Internet at
substantially reduced prices. Any price competition could have a material
adverse effect on our business, financial condition and results of operations.
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We believe that incumbent telecommunications operators generally have
certain competitive advantages that we and other competitors do not have due to
their control over local connectivity. We currently rely on the incumbent
telecommunications operators for access to the public switched telephone network
and the provision of leased lines, and the failure of the incumbent
telecommunications operators to provide such access or leased lines at
reasonable pricing or within a reasonable time frame could have a material
adverse effect on our business, financial condition and results of operations.
The reluctance of some national regulators to provide operative interconnection
as a result of their failure to grant regulatory approvals, provide necessary
provisioning and enforce access to such operators' networks and essential
facilities could have a material adverse effect on our competitive position. We
cannot assure you that we will be able to compete effectively in any of our
current or proposed markets.
RAPID CHANGES IN THE TELECOMMUNICATIONS INDUSTRY, TECHNOLOGY AND CUSTOMER
REQUIREMENTS COULD PLACE US AT A COMPETITIVE DISADVANTAGE
The telecommunications industry is changing rapidly. Such changes may
happen at any time and can significantly affect our operations from
period-to-period. Factors which are affecting the telecommunications industry
include, among other factors:
o liberalization,
o privatization of incumbent telecommunications operators,
o technology and customer requirements,
o significant price declines,
o technological improvements,
o expansion of telecommunications infrastructure, and
o the continued globalization of the world's economies and free
trade.
We cannot assure you that one or more of the above factors will not have
unforeseen effects which could have a material adverse effect on our business.
Also, we cannot assure you, even if these factors turn out as anticipated, that
we will be able to implement our strategy or that our 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 and broadband applications, increased
availability of transmission capacity and increased utilization of the Internet
for voice and data transmission. As new technologies develop, we may be placed
at a competitive disadvantage and competitive pressures may force us to
implement such new technologies at substantial cost. In addition, competitors
may implement new technologies before we are able to do so, allowing such
competitors to provide enhanced services and superior quality compared to those
provided by us. We cannot assure you that we 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 us, or
which we may implement in the future, may not be preferred by our customers or
may become obsolete. If we are 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 us do not achieve a significant degree of
market acceptance, any such event could have a material adverse effect on our
business, financial condition and results of operations.
FAILURE TO IDENTIFY SUITABLE ACQUISITION TARGETS, OR THE COSTS AND DIFFICULTIES
OF ACQUIRING AND INTEGRATING BUSINESSES COULD AFFECT OUR FUTURE GROWTH AND
COMPETITIVENESS
We 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 with these types of transactions.
These risks include, among others:
o the difficulty of identifying appropriate acquisition candidates;
o the difficulty of assimilating the operations and personnel of the
acquired entities;
o the potential disruption of our ongoing business;
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o the inability of our management to capitalize on the opportunities
presented by acquisitions, investments or strategic alliances;
o the failure to successfully incorporate licensed or acquired
technology and rights into our services;
o the failure to maintain uniform standards, controls, procedures and
policies; and
o the impairment of relationships with employees as a result of
changes in management and ownership.
Additionally, in connection with an acquisition, we may experience rates of
customer attrition that are significantly higher than the rate of customer
attrition which we generally experience. Further, to the extent that any
transaction involves customer bases or businesses located outside the United
States, the transaction would involve the risks associated with international
operations. We cannot assure you that we would be successful in overcoming these
risks or any other problems encountered with acquisitions, investments or
strategic alliances. See "- Inability to Expand Our Network, Construction Delays
and System Failures Could Adversely Affect Our Business" and "-Operating In
Foreign Countries Present Risks That May Affect Our Performance."
INABILITY TO EXPAND OUR NETWORK, CONSTRUCTION DELAYS AND SYSTEM FAILURES COULD
ADVERSELY AFFECT OUR BUSINESS
Our success is dependent, in part, on our ability to continue to expand
our network and on our ability to provide seamless technical operation of the
network. Furthermore, as we continue to expand our network to increase its
capacity and reach, we will face increasing demands and challenges including:
o effectively managing the construction of new fiber routes, obtaining
any necessary rights-of-way and required licenses for such
construction, and completing any such construction on budget and on
time,
o increasing traffic volume on our network, and
o selling indefeasible right-of-use and other capacity on the network.
If the costs of construction projects significantly exceed our
budget for those projects, we may be required to obtain additional
financing or to abandon or curtail portions of those projects.
If we encounter construction delays, we will not be able to route our traffic
over our owned facilities as soon as we hope, which will, for some period of
time, have a detrimental effect on our ability to increase traffic volumes and
gross margins. In addition, construction delays could negatively affect our
ability to sell indefeasible rights-of-use or capacity to other carriers. Our
network is subject to several risks which are outside of our 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 our network or other systems or hardware that
causes significant interruptions to our operations could have a material adverse
effect on our business, financial condition and results of operations. Our
operations are also dependent on our ability to successfully integrate new and
emerging technologies and equipment into the network, which could increase the
risk of system failure and result in further strains upon our network. We
attempt 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 our network, could
seriously damage our reputation and result in customer attrition, reduced
margins and financial losses. Additionally, any damage to our switching centers
in New York, New York, Somerset, New Jersey or London, England (of which there
are two) could have a material adverse effect on our ability to monitor and
manage the network operations and generate accurate call detail reports.
The expansion and development of our 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
network, for example, through variable or fixed lease arrangements, the purchase
of indefeasible rights-of-use or minimum investment units 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 our network would
result in less than optimal utilization of our network and could have a material
adverse effect on our business, financial condition and results of operations.
We are aware that certain long distance carriers and consortia are
expanding capacity in Europe and believe that other long distance carriers, as
well as potential new entrants, such as alternative carriers, global consortia
of telecommunications operators, international carriers, Internet backbone
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networks, resellers, value-added networks and other service providers, are
considering the construction of new fiber optic and other long distance
transmission networks. For example, the Ulysses cable system owned by MCI
WorldCom and the Hermes Europe Railtel B.V cable system connect cities that will
be linked by our network. In addition, Level 3 Communications, British Telecom,
Global Crossing, KPN/Qwest and Colt Telecom Group plc have announced their plans
to construct fiber optic networks in Europe. As a result, there has been pricing
pressure with respect to sales of indefeasible rights-of-use and capacity on our
network and transmission of calls between connected cities. Such price
competition is expected to continue and further price competition could have a
material adverse effect on our business, financial condition and results of
operations. 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. 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 due to higher costs. If European businesses do
not substantially increase their demand for data services, our ability to
utilize our network will be adversely affected. In addition, we intend to sell
indefeasible rights-of-use and capacity on our network to other carriers, which
will result in competitors having capacity on various routes along our 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 our routes, severe additional
pricing pressure could develop.
INTRODUCTION OF THE EURO AND FOREIGN CURRENCY EXCHANGE RATES COULD HAVE ADVERSE
EFFECTS ON OUR BUSINESS
In January 1999, a new currency called the "euro" was introduced in
eleven of the fifteen European Union member states. There is a three-year
phase-in period for the euro, and by January 2002 the participating European
Union member states are expected to operate with the euro as their single
currency. Some of the rules and regulations with regard to the euro have yet to
be promulgated and completed by the European Commission. Although our management
does not believe that the conversion to the euro will have a material or adverse
impact on our business, they have not completed their assessment of the effect
that the introduction of the euro will have on our business, financial condition
and results of operations.
Since our inception in 1991, we have invested heavily in developing our
ability to provide international telecommunications services within Western
Europe and other deregulating markets and in developing and expanding our market
presence, including entering into the national long distance telecommunications
markets in Belgium, France, Germany, Italy, The Netherlands, and Spain. Our
payment obligations with respect to our outstanding indebtedness are denominated
in U.S. Dollars and the euro, but certain of our revenues are denominated in
Sterling. Any appreciation in the value of the U.S. Dollar or the euro relative
to the Sterling could have a material adverse effect on our ability to make
payments on such obligations. We do not currently use financial hedging
transactions, although in the future we may elect to manage the exchange rate
exposure presented by our euro denominated obligations. We cannot provide any
assurance that exchange rate fluctuations will not have a material adverse
effect on our ability to make payments on our outstanding indebtedness. In
addition, we cannot assure you that the laws or administrative practices
relating to taxation, foreign exchange or other matters in countries within
which we operate will not change. Any such change could have a material adverse
effect on our business, financial condition and results of operations.
OPERATING IN FOREIGN COUNTRIES PRESENTS RISKS THAT MAY AFFECT OUR PERFORMANCE
There are certain risks inherent in conducting an international
business. These risks include, among others:
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o regulatory limitations restricting or prohibiting the provision of
our services;
o unexpected changes in regulatory requirements, tariffs, customs,
duties and other trade barriers;
o difficulties in staffing and managing foreign operations;
o longer payment cycles;
o problems in collecting accounts receivable;
o political risks;
o fluctuations in currency exchange rates and the conversion to the
"euro" by several members of the European Union;
o foreign exchange controls which restrict or prohibit repatriation of
funds;
o technology export and import restrictions or prohibitions;
o delays from custom's brokers or government agencies;
o seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world; and
o potentially adverse tax consequences resulting from operating in
multiple jurisdictions with different tax laws.
If any of these risks materialize, our business, financial condition and results
of operations could be materially and adversely affected.
WE MAY BE UNABLE TO IMPLEMENT REQUIRED ENHANCEMENTS TO OUR INFORMATION SYSTEMS
To efficiently produce customer bills in a timely manner, we must
record and process millions of call detail records quickly and accurately. While
we believe that our billing and information systems are currently sufficient for
our operations, our systems will require enhancements and ongoing investments,
particularly as volume increases. We cannot assure you that we will not
encounter difficulties in enhancing our systems or integrating new technology
into our systems. Our failure 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 our business, financial
condition and results of operations.
WE COULD EXPERIENCE SYSTEM FAILURES AND SERVICE DISRUPTIONS AS A RESULT OF THE
YEAR 2000 ISSUE
The year 2000 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 our year 2000 state of readiness, during 1997 we began performing a
complete inventory assessment of all of our information technology and
non-information technology systems, the vast majority of which have either been
developed or purchased by us within the past four years. Based on our review to
date, we believe that the vast majority of our existing systems are year 2000
compliant. However, we cannot provide any assurance until the year 2000 occurs
that such is the case. With regard to systems which are not currently year 2000
compliant, we are actively replacing such systems to ensure our ability to
continue to meet our internal needs and the requirements of our customers. We
currently anticipate that the upgrade or modification of such non-compliant
systems will be completed during the first half of 1999. We have also initiated
formal communications with the key carriers and other vendors on which our
operations and infrastructure are dependent to determine the extent to which we
are susceptible to a failure resulting from such third parties' inability to
remediate their own year 2000 issues. We cannot assure you that the carriers and
other vendors on which our operations and infrastructure rely are or will be
year 2000 compliant in a timely manner. Interruptions in the services provided
to us by these third parties could result in disruptions in our services.
Depending upon the extent and duration of any disruptions and the specific
services affected, these disruptions could have a material adverse affect on our
business, financial condition and results of operations. In addition,
disruptions in the economy generally resulting from year 2000 issues could also
have a material adverse affect on us. We could be subject to litigation
resulting from any disruption in our services. The amount and potential
liability or lost revenue cannot be reasonably estimated at this time.
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WE ARE CURRENTLY DEPENDENT UPON THIRD PARTIES FOR LEASED CAPACITY AND
INTERCONNECTION ARRANGEMENTS
Other than our fiber ring which connects London, Paris, Brussels,
Antwerp and Rotterdam and indefeasible rights-of-use and minimum investment
units which we own in certain digital fiber optic cables, we do not currently
own any other telecommunications transmission lines. As a result, we are
generally not able to terminate calls over our own network and are currently
dependent upon other facilities-based carriers, virtually all of which are our
competitors. We currently lease transmission lines from the respective incumbent
telecommunications operator in each country in which we operate. In addition,
our ability to access customers and to effectively utilize our network is
dependent upon our ability to secure operative interconnection agreements,
providing access and egress into and from the public switched telephone network,
with the respective incumbent telecommunications operator in each market in
which we operate. We currently have interconnection agreements with Cable &
Wireless and British Telecom in the United Kingdom, France Telecom in France,
KPN in The Netherlands, Infostrada in Italy and Deutsche Telekom in Germany, and
expect to secure additional interconnection agreements in certain other European
Union member states in which we operate. Difficulties or delays in obtaining
necessary operative interconnections in a satisfactory or timely manner may
significantly delay or prevent the maximum utilization of our network which
could have a material adverse effect on us.
Notwithstanding our fiber ring connecting London, Paris, Brussels,
Antwerp and Rotterdam, we currently lease capacity for point-to-point circuits
with fixed monthly payments and buy minutes of use under agreements with maximum
twelve-month terms and are vulnerable to changes in our lease arrangements,
capacity limitations and service cancellations. These lease arrangements present
us with high fixed costs, while revenues generated by the utilization of these
leases will vary based on traffic volume and pricing. Accordingly, if we are
unable to generate sufficient traffic volume over particular routes or are
unable to charge appropriate rates, we could fail to generate revenue sufficient
to meet the fixed costs associated with the lease and may incur negative gross
margins with respect to those routes. Although we believe that our arrangements
and relationships with other carriers generally are satisfactory, the
deterioration or termination of our arrangements and relationships with one or
more carriers could have a material adverse effect on our cost structure,
service quality, network coverage, financial condition and results of
operations.
A SIGNIFICANT PORTION OF OUR REVENUES ARE DERIVED FROM CARRIER CUSTOMERS
Viatel derives a significant portion of its revenues from a relatively
small number of carrier customers. Accordingly, the loss of revenue from one or
more carrier customers could have a material adverse effect upon our business,
financial condition and results of operations.
Carrier customers are extremely price sensitive, generate relatively
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 types of customers. While we
believe that our credit criteria enables us to reduce our exposure to the higher
payment risks generally associated with carrier customers, we cannot assure you
that such criteria will afford adequate protection against such risks.
THE FUTURE SUCCESS OF OUR BUSINESS DEPENDS UPON CERTAIN KEY PERSONNEL
The success of our business is dependent, to a significant extent, upon
the abilities and continued efforts of our senior management, and particularly
upon the abilities and efforts of Michael J. Mahoney, our Chairman, Chief
Executive Officer and President. We do not currently have employment agreements
with any executive officer other than Mr. Mahoney, Allan L. Shaw, our Senior
Vice President of Finance and Chief Financial Officer, and Sheldon M. Goldman,
our Senior Vice President, Business Development and General Counsel. Except for
a $3.0 million "key-man" life insurance policy which we obtained on the life of
Mr. Mahoney, we do not maintain and do not contemplate obtaining such life
insurance policies on any of our employees. Our success also will depend on our
ability to attract, retain and motivate qualified management, marketing,
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technical and sales executives and other personnel who are in high demand and
are often subject to competing employment opportunities. In addition, the labor
market for software engineers and central office technicians has been extremely
competitive recently and we may lose key employees or be forced to increase
their compensation. The loss of the services of key personnel, or the inability
to attract additional qualified personnel, could have a material adverse effect
on our business, financial condition and results of operations. We cannot assure
you that we will be successful in attracting, retaining and motivating
personnel.
PROVISIONS OF OUR CERTIFICATE OF INCORPORATION, BYLAWS AND INDENTURES MAY MAKE
IT MORE DIFFICULT TO EFFECT A CHANGE IN CONTROL OF THE COMPANY
Our Certificate of Incorporation and By-laws include certain provisions
which are intended to enhance the likelihood of continuity and stability in the
composition of our Board of Directors and which may have the effect of delaying,
deterring or preventing a future takeover or change in control of the Company,
unless such takeover or change in control is approved by our Board of Directors,
even though such a transaction may offer the holders of our common stock the
opportunity to sell their shares at a price above the prevailing market price.
These provisions may also render the removal of directors and management more
difficult. Specifically, our Certificate of Incorporation and By-laws provide
for a classified Board of Directors serving staggered, three-year terms and
certain advance notice requirements for stockholder nominations of candidates
for election to our Board of Directors and certain other stockholder proposals.
These provisions could limit the price that certain persons might be willing to
pay in the future for shares of our common stock. In addition, our Board of
Directors could authorize the issuance of additional shares of our preferred
stock, which shares, depending upon the rights, designations, preferences,
qualifications, limitations, and restrictions of those shares, may have the
effect of delaying, deterring or preventing a change in control or may otherwise
adversely affect the interests of holders of our common stock. In addition,
certain provisions of the Delaware General Corporation Law prevent certain
stockholders from engaging in business combinations with us, subject to certain
exceptions.
The indentures under which the vast majority of our outstanding
indebtedness was issued provide that, upon the occurrence of certain specified
events, we will be required to make an offer to purchase all of the indebtedness
outstanding under the indentures at the purchase price stated therein. However,
our ability to repurchase our indebtedness upon the occurrence of specified
events may be limited by the terms of other existing contractual obligations. In
addition, we cannot assure you that, in the event of a triggering event, we will
have, or will have access to, sufficient funds to repurchase our indebtedness.
If we fail to repurchase all of indebtedness tendered for purchase upon the
occurrence of a triggering event, such failure will constitute an Event of
Default under the indentures. Further, under the terms of our Salary and
Benefits Continuation Program salaried employees with at least one year of
consecutive service with us may be entitled to receive a payment of a salary
continuation benefit if their employment is involuntarily terminated under
conditions specified in the program within one year after certain specified
events. Maximum benefits currently payable under the Program in the event of a
triggering event are limited to three months' base salary, plus two additional
weeks of salary for each completed year of service. In addition, the employment
agreements between the company and each of Messrs. Mahoney, Shaw and Goldman
contain provisions which require us to make certain payments to those officers
in certain instances if employment is terminated following certain specified
events. Finally, our Amended Stock Incentive Plan provides that outstanding
options, restricted stock or stock appreciation rights held by certain members
of management vest in their entirety and become exercisable, and as with respect
to restricted stock, are released from restrictions on transfer and repurchase
rights in event of certain corporate transactions.
WE ARE SUBJECT TO SUBSTANTIAL GOVERNMENT REGULATION WHICH MAY AFFECT OUR ABILITY
TO OFFER CERTAIN SERVICES AND WHICH MAY CHANGE IN AN ADVERSE MANNER
OVERVIEW. National and local laws and regulations governing the
provision of telecommunications services differ significantly among the
countries in which we currently operate and intend to operate. The
interpretation and enforcement of such laws and regulations varies and could
limit our ability to provide certain telecommunications services in certain
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markets. We cannot assure you that future regulatory, judicial and legislative
changes will not have a material adverse effect on us, that domestic or
international regulators or third parties will not raise material issues with
regard to our compliance with applicable laws and regulations, or that other
regulatory activities will not have a material adverse effect on our business,
financial condition and results of operations.
INTERNATIONAL TRAFFIC. Under the World Trade Organization 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 has been implemented, to
varying degrees, by the signatory countries. We believe that the WTO Agreement
will increase opportunities for us and our competitors. However, we cannot
assure you that the WTO Agreement will result in beneficial regulatory
liberalization in all signatory countries.
On November 26, 1997, the Federal Communications Commission adopted the
Foreign Participation Order to implement the U.S. obligations under the WTO
Agreement. In this order, the Federal Communications Commission adopted an open
entry standard for carriers from World Trade Organization member countries,
generally facilitating market entry for such applicants by eliminating certain
existing tests. These tests remain in effect, however, for carriers from
non-World Trade Organization member countries. Requests for reconsideration of
the Foreign Participation Order are pending at the Federal Communications
Commission.
International carriers serving the United States, including us, remain
subject to the Federal Communications Commission's international settlement
policies, including rules adopted by the Federal Communications Commission
regarding international settlement rates 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
International Settlement Rates Order generally requires U.S. facilities-based
carriers to negotiate settlement rates with their foreign correspondent at no
greater than Federal Communications Commission-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
us. First, the Federal Communications Commission 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. Our foreign affiliates satisfy this condition.
Second, the Federal Communications Commission 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, we have
been permitted to resell private lines for the provision of switched services to
any country that either has been found by the Federal Communications Commission
to comply with the benchmarks or has been determined to be equivalent. We,
however, remain subject to prior Federal Communications Commission approval in
order to provide resold private lines to any country in which we have an
affiliated carrier that has not been found by the Federal Communications
Commission to lack market power. Many parties appealed the International
Settlement Rates Order to the U.S. Court of Appeals for the D.C. Circuit or have
filed requests for reconsideration with the Federal Communications Commission.
On January 12, 1999, the U.S. Court of Appeals for the D.C. Circuit issued an
order resolving this appeal, upholding the International Settlement Rates Order
in all respects. The appealing parties now have the option of requesting that
the case be heard by the U.S. Supreme Court. The petition for reconsideration is
still pending at the Federal Communications Commission. We cannot predict the
outcome of these proceedings and their possible impact on us.
Increasing regulatory liberalization in many countries'
telecommunications markets now permits more flexibility in the way we can route
calls. Although certain Federal Communications Commission rules limit the way in
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which some international calls can be routed, we do not believe that our network
configuration, specifically the way in which traffic is routed through our
facilities in the UK, is specifically prohibited by, or undermines in any way
the intent of, these rules. It is possible, however, that the Federal
Communications Commission could find that our network configuration violates
these rules. If we were found to be in violation of these routing restrictions,
and if the violation was sufficiently severe, it is possible that the Federal
Communications Commission could impose sanctions and penalties upon us.
CALL REORIGINATION. In addition, outside the European Union we provide
a small number of customers with access to services through the use of call
reorigination. A substantial number of countries have prohibited certain forms
of call reorigination. We cannot assure you that certain of our 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 our business,
financial condition and results of operations.
UNSETTLED NATURE OF REGULATORY ENVIRONMENT. We have pursued and expect
to continue to pursue a strategy of providing our services to the maximum extent
we believe permissible under applicable laws and regulations. Our provision of
services in Western Europe may also be affected if any European Union member
state imposes greater restrictions on non-European Union international service
than on such service within the European Union. We cannot assure you that the
United States or foreign jurisdictions will not adopt laws or regulatory
requirements that will adversely affect us. Additionally, we cannot assure you
that future United States or foreign regulatory, judicial or legislative changes
will not have a material adverse effect on us or that regulators or third
parties will not raise material issues with regard to our compliance with
applicable laws or regulations. If we are unable to provide the services we are
presently providing or intend to provide or to use our existing or contemplated
transmission methods, due to our 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 of such compliance, such
events could have a material adverse effect on our business, financial condition
and results of operations.
Since January 1, 1998, we, as well as our U.S. competitors, have been
required by the Federal Communications Commission to make 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 our gross revenues. There can be no assurance that
we will be able fully to pass the cost of these contributions on to our
customers or that doing so will not result in a loss of customers.
EUROPEAN IMPLEMENTATION. The national governments of the European Union
member states were required to pass legislation to liberalize the
telecommunications markets within their countries to implement European
Commission directives. Although most of the member states have now implemented
the required legislation, they have done so on an inconsistent, and sometimes
unclear, basis. In addition, the legislation and/or its implementation has, in
certain circumstances, imposed significant obstacles on the ability of carriers
to proceed with the necessary licensing process. Such barriers include
requirements that carriers post significant bonds, make significant capital
commitments to build infrastructure, complete extensive application
documentation and pay significant license fees. Implementation has also been
slow in certain member states as a result of such member state's failure to
dedicate the resources necessary to have a functioning regulatory body in place.
The above factors and other potential obstacles associated with the effective
implementation of liberalization could have a material adverse effect on our
operations by preventing us from expanding our operations either as quickly or
as currently intended, as well as a material adverse effect on our business,
financial condition and results of operations.
THE PRICE OF OUR COMMON STOCK HAS BEEN SUBJECT TO SUBSTANTIAL FLUCTUATIONS IN
PRICE
Since our common stock has been publicly traded, its market price has
fluctuated over a wide range and may continue to do so in the future. The market
price of our common stock could be subject to significant fluctuations in
response to various factors and events, including, among other things, the depth
and liquidity of the trading market of our common stock, variations in our
operating results and the difference between actual results and the results
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expected by investors and securities analysts. In addition, the stock market in
recent years has experienced broad price and volume fluctuations that have often
been unrelated to the operating performance of companies. These broad market
fluctuations also may adversely affect the market price of our common stock.
THE COMPANY
GENERAL. We are a rapidly growing, facilities-based, global provider of
telecommunications services, primarily to small and medium-sized businesses,
carriers and resellers. We currently operate one of the largest alternative
Pan-European networks, with international gateway switching centers in New York,
New York, Somerset, New Jersey and London, England, network points of presence
in 34 cities, direct sales forces in nine Western European cities and indirect
sales offices in more than 100 additional locations in Western Europe. We offer
a broad array of competitively priced, value-added services and voice telephony
to more than 230 countries and territories worldwide.
SERIES A PREFERRED STOCK AND SUBORDINATED CONVERTIBLE DEBENTURES. On
April 8, 1998, we issued and sold in a transaction exempt from the registration
requirements of the Securities Act of 1933, (i) 500,000 units, each of which
consisted of one 12.50% Senior Discount Note Due 2008 and .490 of a share of 10%
Redeemable Convertible Series A Preferred Stock ("Series A Preferred Stock");
(ii) 400,000 units, each of which consisted of one 11.25% Senior Note Due 2008
and .483 of a share of Series A Preferred Stock; (iii) 226,000 units, each of
which consisted of one DM denominated 12.40% Senior Discount Note Due 2008 and
2.77 10% Subordinated Convertible Debentures due 2011 (the "Subordinated
Debentures"); and (iv) 178,000 units, each of which consisted of one DM
denominated 11.15% Senior Note Due 2008 and 2.69 Subordinated Debentures.
As required by the terms of our April 8, 1998 offering, in August 1998
we commenced a registered exchange offer under which we offered to exchange each
series of unregistered notes issued in the offering for an issue of notes with
terms identical to each such series of notes. Upon effectiveness of such
registration statement, the units automatically separated into their constituent
parts.
The Registration Statement of which this Prospectus is a part was filed
under the terms of the Conversion Shares Registration Rights Agreement, dated
April 3, 1998, among us and the initial purchasers of the units, which requires
that on or prior to April 8, 1999 we file and have declared effective a shelf
registration statement with respect to issuances of our common stock upon
conversion of the Series A Preferred Stock and Subordinated Debentures. Subject
to certain "blackout periods," we are required to keep the Registration
Statement effective for two years or, if earlier, when all the Series A
Preferred Stock and Convertible Debentures have been convertible into shares of
our common stock.
The Series A Preferred Stock and the Subordinated Debentures are
mandatorily convertible into shares of our common stock if the per share closing
price of the common stock for any 20 consecutive trading days during the twelve
months ended April 15, 1999, April 15, 2000, April 15, 2001, April 15, 2002 or
April 15, 2003, exceeds $26.40, $32.30, $38.20, $44.10 or $50.00, respectively;
provided that no such conversion may occur (i) until April 8, 1999 and until the
Registration Statement becomes effective and (ii) unless the price of our common
stock on the conversion date exceeds the relevant price listed above.
In addition, the Series A Preferred Stock and the Subordinated
Debentures may be converted at the option of the holder, at any time after April
8, 1999 at a conversion price of $13.20 per share of common stock, in the case
of the Series A Preferred Stock, and DM 24.473 per share of common stock, in the
case of the Subordinated Debentures, in each case subject to certain
adjustments.
USE OF PROCEEDS
We will not receive any proceeds from the conversion of the
Subordinated Debentures or the Series A Preferred Stock by the holders of such
securities. The expenses incurred in registering the shares of common stock
covered by this Prospectus will be paid by us.
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PLAN OF DISTRIBUTION
This Prospectus registers 6,824,249 shares of our common stock to be
issued upon the conversion of the Subordinated Debentures and the Series A
Preferred Stock by the holders of such securities.
Upon conversion of the Subordinated Debentures and the Series A
Preferred Stock, the holders will receive registered shares, which may be sold
in any one or more transactions on the Nasdaq Stock Market, or any exchange on
which our common stock may then be listed, in the over-the-counter market or
otherwise in negotiated transactions or a combination of such methods of sale,
at market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices.
LEGAL MATTERS
Certain legal matters relating to the validity of the shares of our
common stock covered by this Prospectus will be passed upon for us by Kelley
Drye & Warren LLP, New York, New York.
EXPERTS
The consolidated financial statements and schedule of Viatel, Inc. and
subsidiaries as of December 31, 1996 and 1997, and for each of the years in the
three-year period ended December 31, 1997, have been incorporated by reference
in the Registration Statement in reliance upon the report of KPMG LLP,
independent certified public accountants, incorporated by reference in this
Prospectus, and upon the authority of said firm as experts in accounting and
auditing.
AVAILABLE INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act of 1934, and, in accordance therewith, files reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). Such reports, proxy and information statements and other
information may be read and copied at the Public Reference Room maintained by
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following Regional Offices of the Commission: 7 World Trade Center, Suite 1300,
New York, New York 10048, and 500 West Madison Street, Suite 1300, Chicago,
Illinois 60661-2511. Copies of such material also may be obtained from the
Public Reference Section of the Commission, at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. Information regarding the operation
of the Commission's Public Reference Room may be obtained by calling the
Commission at 1-800-SEC-0330. The Commission also maintains a Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of the Commission's Web site is HTTP://WWW.SEC.GOV. Our common stock is traded
on Nasdaq, and our periodic reports, proxy and information statements and other
information can be inspected at the offices of Nasdaq Operations, 1735 K Street,
N.W., Washington, D.C. 20006. Information regarding us may also be obtained from
its Web site at HTTP://WWW.VIATEL.COM.
This Prospectus constitutes a part of a Registration Statement on Form
S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") filed by us with the Commission under the Securities
Act of 1933. This Prospectus does not contain all of the information contained
in the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission. Reference is made to the
Registration Statement and exhibits thereto for further information. Exhibits to
the Registration Statement that are omitted from this Prospectus may also be
obtained at the Commission's Web site described above. Statements contained or
incorporated by reference in this Prospectus concerning the provisions of any
agreement or other document filed as an exhibit to the Registration Statement or
otherwise filed with the Commission are not necessarily complete, and you are
referred to the copy so filed for more detailed information, each such statement
being qualified in its entirety by such reference.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by us with the Commission
under the Securities Exchange Act of 1934 are incorporated by reference in this
Prospectus:
(i) Our Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, as filed with the Commission on March 31,
1998 and amended by Form 10-K/A-1 filed with the Commission
on April 29, 1998;
(ii) Our Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998, as filed with the Commission on May 15,
1998;
(iii) Our Quarterly Report on Form 10-Q for the quarter ended June
30, 1998, as filed with the Commission on August 14, 1998;
(iv) Our Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998, as filed with the Commission on November
16, 1998;
(v) Our Current Report on Form 8-K, as filed with the Commission
on March 3, 1998;
(vi) Our Current Report on Form 8-K, as filed with the Commission
on June 8, 1998; and
(vii) The description of our common stock, $0.01 par value,
contained in our Registration Statement on Form 8-A
(Registration No. 000-21261) filed with the Commission on
August 27, 1996 under Section 12 of the Securities Exchange
Act of 1934.
All reports and other documents filed by us under Section 13(a), 13(c),
14 or 15(d) of the Securities Exchange Act of 1934 after the date of this
Prospectus and prior to the termination of this offering will be deemed to be
incorporated by reference in this Prospectus and to be a part of this Prospectus
from the date of filing of such reports and documents. Any statement contained
in a document incorporated or deemed to be incorporated by reference in this
Prospectus will be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained therein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference in this Prospectus modifies or supersedes such statement. Any such
statement so modified or superseded will not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
We will provide without charge to each person, including any beneficial
owner, to whom a copy of this Prospectus is delivered, upon written or oral
request of such person, a copy of any or all of the documents incorporated by
reference in this Prospectus, excluding exhibits to such documents, unless such
exhibits are specifically incorporated by reference into such documents. Written
requests for such documents should be directed to our Director of Investor
Relations at our principal executive offices located at 685 Third Avenue, New
York, New York 10017 or by telephone at (212) 350-9200.
17
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 16. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- ------------------------
4.1* Indenture, dated as of April 8, 1998, between Viatel, Inc. and
The Bank of New York, as Trustee, relating to Viatel, Inc.'s
12.50% Senior Discount Notes Due 2008 (including form of 12.50%
Senior Discount Note) (incorporated herein by reference to
Exhibit 4.1 to Viatel, Inc.'s Registration Statement on Form S-4,
filed on July 10, 1998, Registration No. 333-58921 ("Viatel's
1998 Form S-4")).
4.2* Indenture, dated as of April 8, 1998, between Viatel, Inc. and
The Bank of New York, as Trustee, relating to Viatel, Inc.'s
11.25% Senior Notes Due 2008 (including form of 11.25% Senior
Note) (incorporated herein by reference to Exhibit 4.2 to
Viatel's 1998 Form S-4).
4.3* Indenture, dated as of April 8, 1998, among Viatel, Inc., The
Bank of New York, as Trustee, and Deutsche Bank,
Aktiengesellschaft, as German Paying Agent and Co-Registrar,
relating to Viatel, Inc.'s 12.40% Senior Discount Notes Due 2008
(including form of 12.40% Senior Discount Note) (incorporated
herein by reference to Exhibit 4.3 to Viatel's 1998 Form S-4).
4.4* Indenture, dated as of April 8, 1998, among Viatel, Inc., The
Bank of New York, as Trustee, and Deutsche Bank,
Aktiengesellschaft, as German Paying Agent and Co-Registrar,
relating to Viatel, Inc.'s 11.15% Senior Notes Due 2008
(including form of 11.15% Senior Note) (incorporated herein by
reference to Exhibit 4.4 to Viatel's 1998 Form S-4).
4.5* Indenture, dated as of April 8, 1998, among Viatel, Inc., The
Bank of New York, as Trustee, and Deutsche Bank,
Aktiengesellschaft, as German Paying Agent and Co-Registrar,
relating to Viatel, Inc.'s 10% Subordinated Convertible
Debentures Due 2011 (including form of 10% Subordinated
Convertible Debenture) (incorporated herein by reference to
Exhibit 4.5 to Viatel's 1998 Form S-4).
4.6* Conversion Shares Registration Rights Agreement, dated April 3,
1998, among Viatel, Inc., Morgan Stanley & Co. Incorporated,
Morgan Stanley Bank AG, Salomon Brothers Inc, ING Baring (U.S.)
Securities, Inc. and NationsBanc Montgomery Securities LLC
(incorporated herein by reference to Exhibit 4.7 to Viatel's 1998
Form S-4).
4.7* Amended and Restated Certificate of Incorporation of Viatel, Inc.
(incorporated herein by reference to Exhibit 3.1(i)(a) to Viatel,
Inc.'s Registration Statement on Form S-1, Registration No.
333-09699, filed on August 7, 1996; Certificate of Designations,
Preferences and Rights of 10% Series A Redeemable Convertible
Preferred Stock, $.01 par value (incorporated herein by reference
to Exhibit 3(i)(b) to Viatel's 1998 Form S-4); Certificate of
Amendment to Viatel, Inc.'s Amended and Restated Certificate of
Incorporation (incorporated herein by reference to Exhibit 4.9 to
Viatel, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998, File No. 000-21261).
<PAGE>
4.8* Second Amended and Restated Bylaws of Viatel, Inc. (incorporated
herein by reference to Exhibit 3(ii) of Viatel, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997,
File No.
000-21261).
5.1** Opinion of Kelley Drye & Warren LLP as to the validity of the
securities being registered.
23.1** Consent of Kelley Drye & Warren LLP (included in their opinion
filed as Exhibit 5.1).
23.2 Consent of KPMG LLP.
24* Powers of Attorney (included on original S-3 signature page).
- ---------------------------------------
* Incorporated herein by reference.
** Previously filed.
<PAGE>
SIGNATURES
Under the requirements of the Securities Act, the Registrant, Viatel,
Inc. certifies that it has reasonable grounds to believe that it meets all of
the requirements for filing on Form S-3 and has duly caused this Amendment to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York on this 5th day of March, 1999.
VIATEL, INC.
By: MICHAEL J. MAHONEY*
------------------------------
Chairman of the Board,
President and Chief Executive
Officer
Under the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated on March 5, 1999.
Signature Title
- ---------------------------------------------- --------------------------------
MICHAEL J. MAHONEY * Chairman of the Board, President
- --------------------------------- and Chief Executive Officer
Michael J. Mahoney (Principal Executive Officer)
ALLAN L. SHAW * Senior Vice President, Finance,
- --------------------------------- Chief Financial Officer and
Allan L. Shaw Director (Principal Financial
and Accounting Officer)
PAUL G. PIZZANI * Director
- ---------------------------------
Paul G. Pizzani
FRANCIS J. MOUNT * Director
- ---------------------------------
Francis J. Mount
JOHN G. GRAHAM * Director
- ---------------------------------
John G. Graham
* By: /s/ SHELDON M. GOLDMAN
---------------------------------
Sheldon M. Goldman
by Power of Attorney
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- ------------------------
4.1* Indenture, dated as of April 8, 1998, between Viatel, Inc. and
The Bank of New York, as Trustee, relating to Viatel, Inc.'s
12.50% Senior Discount Notes Due 2008 (including form of 12.50%
Senior Discount Note) (incorporated herein by reference to
Exhibit 4.1 to Viatel, Inc.'s Registration Statement on Form S-4,
filed on July 10, 1998, Registration No. 333-58921 ("Viatel's
1998 Form S-4")).
4.2* Indenture, dated as of April 8, 1998, between Viatel, Inc. and
The Bank of New York, as Trustee, relating to Viatel, Inc.'s
11.25% Senior Notes Due 2008 (including form of 11.25% Senior
Note) (incorporated herein by reference to Exhibit 4.2 to
Viatel's 1998 Form S-4).
4.3* Indenture, dated as of April 8, 1998, among Viatel, Inc., The
Bank of New York, as Trustee, and Deutsche Bank,
Aktiengesellschaft, as German Paying Agent and Co-Registrar,
relating to Viatel, Inc.'s 12.40% Senior Discount Notes Due 2008
(including form of 12.40% Senior Discount Note) (incorporated
herein by reference to Exhibit 4.3 to Viatel's 1998 Form S-4).
4.4* Indenture, dated as of April 8, 1998, among Viatel, Inc., The
Bank of New York, as Trustee, and Deutsche Bank,
Aktiengesellschaft, as German Paying Agent and Co-Registrar,
relating to Viatel, Inc.'s 11.15% Senior Notes Due 2008
(including form of 11.15% Senior Note) (incorporated herein by
reference to Exhibit 4.4 to Viatel's 1998 Form S-4).
4.5* Indenture, dated as of April 8, 1998, among Viatel, The Bank of
New York, as Trustee, and Deutsche Bank, Aktiengesellschaft, as
German Paying Agent and Co-Registrar, relating to Viatel, Inc.'s
10% Subordinated Convertible Debentures Due 2011 (including form
of 10% Subordinated Convertible Debenture) (incorporated herein
by reference to Exhibit 4.5 to Viatel's 1998 Form S-4).
4.6* Conversion Shares Registration Rights Agreement, dated April 3,
1998, among Viatel, Inc., Morgan Stanley & Co. Incorporated,
Morgan Stanley Bank AG, Salomon Brothers Inc, ING Baring (U.S.)
Securities, Inc. and NationsBanc Montgomery Securities LLC
(incorporated herein by reference to Exhibit 4.7 to Viatel's 1998
Form S-4).
4.7* Amended and Restated Certificate of Incorporation of Viatel, Inc.
(incorporated herein by reference to Exhibit 3.1(i)(a) to Viatel,
Inc.'s Registration Statement on Form S-1, Registration No.
333-09699, filed on August 7, 1996; Certificate of Designations,
Preferences and Rights of 10% Series A Redeemable Convertible
Preferred Stock, $.01 par value (incorporated herein by reference
to Exhibit 3(i)(b) to Viatel's 1998 Form S-4); Certificate of
Amendment to Viatel, Inc.'s Amended and Restated Certificate of
Incorporation (incorporated herein by reference to Exhibit 4.9 to
Viatel, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998, File No. 000-21261).
<PAGE>
4.8* Second Amended and Restated Bylaws of Viatel, Inc. (incorporated
herein by reference to Exhibit 3(ii) of Viatel, Inc.'s Form 10-Q
for the quarter ended September 30, 1997, File No. 000-21261).
5.1** Opinion of Kelley Drye & Warren LLP as to the validity of the
securities being registered.
23.1** Consent of Kelley Drye & Warren LLP (included in their opinion
filed as Exhibit 5.1).
23.2 Consent of KPMG LLP.
24** Powers of Attorney (included on original S-3 signature page).
- ---------------------------------------
* Incorporated herein by reference
** Previously filed.
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Stockholders
Viatel, Inc.:
We consent to the use of our reports incorporated herein by reference and to the
reference to our firm under the heading "Experts" in the registration statement.
/s/KPMG LLP
New York, New York
March 5, 1999
