<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of
earliest event reported): March 17, 1999
VIATEL, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 000-21261 13-3787366
(State or Other (Commission (I.R.S. Employer
Jurisdiction File Number) Identification No.)
of Incorporation)
Viatel, Inc.
685 Third Avenue
New York, New York 10017
(Address of Principal Executive Offices, Including Zip Code)
Registrant's telephone number, including area code: 212-350-9200
Exhibit List Appears on Page 4
<PAGE>
Item 5. Other Events.
Viatel, Inc. desires to release its most current financial
information by filing it with the Securities and Exchange Commission. Attached
hereto, together with the independent auditors' report thereon, are the
consolidated balance sheets of Viatel, Inc. as of December 31, 1997 and 1998,
and the related consolidated statements of operations, comprehensive loss,
stockholders' equity (deficiency) and cash flows for each of the years in the
three year period ended December 31, 1998.
Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits.
(a) Financial Statements of Businesses Acquired.
Not Applicable
(b) Pro Forma Financial Information.
Not Applicable
(c) Exhibits.
The following exhibits are filed with this Report.
<TABLE>
<CAPTION>
Exhibit No. Description.
<S> <C>
23.1 Consent of KPMG, LLP
27.1 Financial Data Schedule
99.1 1998 Audited Financial Statements
</TABLE>
2
<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 hereunto duly authorized.
VIATEL, INC.
Date: March 17, 1999 By: /s/ SHELDON M. GOLDMAN
--------------------------------------
Name: Sheldon M. Goldman
Title: Senior Vice President,
Business Affairs and General
Counsel
<PAGE>
EXHIBIT LIST
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
23.1 Consent of KPMG, LLP
27.1 Financial Data Schedule
99.1 1998 Audited Financial Statements
</TABLE>
<PAGE>
Exhibit 23.1
The Board of Directors and Stockholders
Viatel, Inc.:
We consent to incorporation by reference in the registration
statement No. 333-15155 on Form S-8 and in the registration statement No.
333-16671 on Form S-8 of Viatel, Inc. of our report dated February 26, 1999,
relating to the consolidated balance sheets of Viatel, Inc. and subsidiaries as
of December 31, 1997 and 1998 and the related consolidated statements of
operations, comprehensive loss, stockholders' equity (deficiency) and cash flows
for each of the years in the three-year period ended December 31, 1998, which
appears in the March 17, 1999 report on Form 8-K of Viatel, Inc.
/s/ KPMG LLP
New York, New York
March 17, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 339,821,000
<SECURITIES> 222,641,000
<RECEIVABLES> 31,610,000
<ALLOWANCES> 3,093,000
<INVENTORY> 0
<CURRENT-ASSETS> 606,800,000
<PP&E> 291,924,000
<DEPRECIATION> 25,668,000
<TOTAL-ASSETS> 1,009,111,000
<CURRENT-LIABILITIES> 178,143,000
<BONDS> 896,503,000
47,121,000
0
<COMMON> 232,000
<OTHER-SE> 128,357,000
<TOTAL-LIABILITY-AND-EQUITY> 1,009,111,000
<SALES> 0
<TOTAL-REVENUES> 135,188,000
<CGS> 0
<TOTAL-COSTS> 122,109,000
<OTHER-EXPENSES> 61,161,000
<LOSS-PROVISION> 4,225,000
<INTEREST-EXPENSE> 79,177,000
<INCOME-PRETAX> (99,000,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (99,000,000)
<DISCONTINUED> 0
<EXTRAORDINARY> (28,304,000)
<CHANGES> 0
<NET-INCOME> (130,605,000)
<EPS-PRIMARY> (5.67)
<EPS-DILUTED> (5.67)
</TABLE>
<PAGE>
Exhibit 99.1
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
VIATEL, INC. AND SUBSIDIARIES
Independent Auditors' Report.............................................................................. F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998.............................................. F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997 and 1998........................................................................ F-4
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 1996, 1997 and 1998........ F-5
Consolidated Statements of Stockholders' Equity (Deficiency) for the
Years ended December 31, 1996, 1997 and 1998............................................................ F-6
Consolidated Statements of Cash Flows for the Years ended
December 31, 1996, 1997 and 1998........................................................................ F-7
Notes to Consolidated Financial Statements for the Years
Ended December 31, 1996, 1997 and 1998.................................................................. F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Viatel, Inc.:
We have audited the accompanying consolidated balance sheets of Viatel, Inc.
and subsidiaries as of December 31, 1997 and 1998, and the related consolidated
statements of operations, comprehensive loss, stockholders' equity (deficiency),
and cash flows for each of the years in the three-year period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Viatel, Inc. and subsidiaries as of December 31, 1997 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
New York, New York
February 26, 1999
F-2
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1997 1998
---------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.............................................................. $ 21,096 $ 329,511
Restricted cash equivalents............................................................ -- 10,310
Restricted marketable securities, current.............................................. -- 50,870
Marketable securities, current......................................................... 3,500 171,771
Trade accounts receivable, net of allowance for doubtful accounts of $1,041 and $3,093,
respectively......................................................................... 10,981 28,517
Other receivables...................................................................... 6,505 13,404
Prepaid expenses....................................................................... 1,348 2,417
---------- -----------
Total current assets................................................................. 43,430 606,800
---------- -----------
Restricted marketable securities, non-current............................................ -- 83,343
Marketable securities, non-current....................................................... 22,547 --
Property and equipment, net.............................................................. 54,094 266,256
Intangible assets, net................................................................... 4,338 46,968
Other assets............................................................................. 2,400 5,744
---------- -----------
$ 126,809 $ 1,009,111
---------- -----------
---------- -----------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accrued telecommunications costs....................................................... $ 16,898 $ 26,518
Accounts payable and other accrued expenses............................................ 10,753 23,656
Property and equipment purchases payable............................................... 4,739 97,288
Accrued interest....................................................................... -- 12,240
Liability under joint construction agreement........................................... -- 9,523
Current installments of notes payable and obligations under capital leases............. 3,373 8,918
---------- -----------
Total current liabilities............................................................ 35,763 178,143
---------- -----------
Long term liabilities:
Long term debt......................................................................... 89,855 896,503
Notes payable and obligations under capital leases, excluding current installments..... 8,255 24,636
Equipment purchase obligation.......................................................... 1,500 --
---------- -----------
Total long term liabilities.......................................................... 99,610 921,139
---------- -----------
Series A Redeemable Convertible Preferred Stock, $.01 par value; Authorized 718,042
Shares; issued and outstanding no shares and 461,258, respectively..................... -- 47,121
---------- -----------
Commitments and contingencies
Stockholders' deficiency:
Preferred Stock, $.01 par value. Authorized 1,281,958 shares, no shares issued and
outstanding.......................................................................... -- --
Common Stock, $.01 par value. Authorized 50,000,000 shares, issued and outstanding
22,635,267 and 23,184,465 shares, respectively....................................... 226 232
Additional paid-in capital............................................................. 125,661 128,357
Unearned compensation.................................................................. (65) --
Accumulated other comprehensive loss................................................... (5,356) (6,246)
Accumulated deficit.................................................................... (129,030) (259,635)
---------- -----------
Total stockholders' deficiency....................................................... (8,564) (137,292)
---------- -----------
$ 126,809 $ 1,009,111
---------- -----------
---------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Communication services revenue............................................... $ 50,419 $ 73,018 $ 135,188
---------- ---------- -----------
Operating expenses:
Cost of communication services............................................. 42,130 63,504 122,109
Selling, general and administrative expenses............................... 32,866 36,077 44,893
Depreciation and amortization.............................................. 4,802 7,717 16,268
---------- ---------- -----------
Total operating expenses................................................. 79,798 107,298 183,270
---------- ---------- -----------
Other income (expenses):
Interest income............................................................ 1,852 3,686 28,259
Interest expense........................................................... (10,848) (12,450) (79,177)
---------- ---------- -----------
Loss before extraordinary loss............................................... (38,375) (43,044) (99,000)
Extraordinary loss on debt prepayment ..................................... -- -- (28,304)
---------- ---------- -----------
Net loss..................................................................... (38,375) (43,044) (127,304)
Dividends on redeemable convertible preferred stock........................ -- -- (3,301)
---------- ---------- -----------
Net loss attributable to common stockholders ................................ $ (38,375) $ (43,044) $ (130,605)
---------- ---------- -----------
---------- ---------- -----------
Loss per common share, basic and diluted:
Before extraordinary item................................................ $ (2.47) $ (1.90) $ (4.44)
From extraordinary item ................................................. $ -- $ -- $ (1.23)
---------- ---------- -----------
Net loss attributable to common stockholders ............................ $ (2.47) $ (1.90) $ (5.67)
---------- ---------- -----------
---------- ---------- -----------
Weighted average common shares outstanding................................. 15,514 22,620 23,054
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Net loss..................................................................... $ (38,375) $ (43,044) $ (127,304)
Foreign currency translation adjustments................................... (698) (4,494) (890)
---------- ---------- -----------
Comprehensive loss........................................................... $ (39,073) $ (47,538) $ (128,194)
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF CLASS A ACCUMULATED
COMMON COMMON CLASS A ADDITIONAL OTHER
STOCK STOCK COMMON COMMON PAID-IN UNEARNED COMPREHENSIVE
SHARES SHARES STOCK STOCK CAPITAL COMPENSATION LOSS
------------ ----------- ----------- ----------- ----------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1996................... 10,736,135 2,904,846 $ 107 $ 29 $ 30,099 $ (78) $ (164)
Issuance of restricted
common stock........... 66,666 -- 1 -- 389 (52) --
Issuance of common stock,
net of $9,541,954 issue
costs.................. 8,667,000 -- 87 -- 94,375 -- --
Conversion of Class A
common stock to common
stock.................. 2,904,846 (2,904,846) 29 (29) -- -- --
Stock options exercised.. 138,579 -- 1 -- 373 -- --
Foreign currency
translation
adjustment............. -- -- -- -- -- -- (698)
Net loss................. -- -- -- -- -- -- --
------------ ----------- ----- --- ----------- ----- --------------
Balance at December 31,
1996................... 22,513,226 -- 225 -- 125,236 (130) (862)
Stock options exercised.. 122,041 -- 1 -- 425 -- --
Earned compensation...... -- -- -- -- -- 65 --
Foreign currency
translation
adjustment............. -- -- -- -- -- -- (4,494)
Net loss................. -- -- -- -- -- -- --
------------ ----------- ----- --- ----------- ----- --------------
Balance at December 31,
1997................... 22,635,267 -- 226 -- 125,661 (65) (5,356)
Stock options exercised.. 174,198 -- 2 -- 945 -- --
Issuance costs of Series
A Redeemable
Convertible Preferred
Stock.................. -- -- -- -- (1,620) -- --
Issuance of common stock
related to business
purchase............... 375,000 -- 4 -- 3,371 -- --
Earned compensation...... -- -- -- -- -- 65 --
Foreign currency
translation
adjustment............. -- -- -- -- -- -- (890)
Dividends on redeemable
convertible preferred
stock.................. -- -- -- -- -- -- --
Net loss................. -- -- -- -- -- -- --
------------ ----------- ----- --- ----------- ----- --------------
Balance at December 31,
1998................... 23,184,465 -- $ 232 $ -- $ 128,357 $ -- $ (6,246)
------------ ----------- ----- --- ----------- ----- --------------
------------ ----------- ----- --- ----------- ----- --------------
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
------------- -------------
<S> <C> <C>
Balance at January 1,
1996................... $ (47,611) $ (17,618)
Issuance of restricted
common stock........... -- 338
Issuance of common stock,
net of $9,541,954 issue
costs.................. -- 94,462
Conversion of Class A
common stock to common
stock.................. -- --
Stock options exercised.. -- 374
Foreign currency
translation
adjustment............. -- (698)
Net loss................. (38,375) (38,375)
------------- -------------
Balance at December 31,
1996................... (85,986) 38,483
Stock options exercised.. -- 426
Earned compensation...... -- 65
Foreign currency
translation
adjustment............. -- (4,494)
Net loss................. (43,044) (43,044)
------------- -------------
Balance at December 31,
1997................... (129,030) (8,564)
Stock options exercised.. -- 947
Issuance costs of Series
A Redeemable
Convertible Preferred
Stock.................. -- (1,620)
Issuance of common stock
related to business
purchase............... -- 3,375
Earned compensation...... -- 65
Foreign currency
translation
adjustment............. -- (890)
Dividends on redeemable
convertible preferred
stock.................. (3,301) (3,301)
Net loss................. (127,304) (127,304)
------------- -------------
Balance at December 31,
1998................... $ (259,635) $ (137,292)
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................................................... $ (38,375) $ (43,044) $ (127,304)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.............................................. 4,802 7,717 16,268
Accreted interest expense on long term debt................................ 10,783 12,479 35,417
Provision for losses on accounts receivable................................ 2,225 2,733 4,225
Extraordinary loss on debt repayment....................................... -- -- 28,304
Earned compensation........................................................ 338 65 65
Changes in assets and liabilities:
Increase in accounts receivable............................................ (6,058) (6,221) (20,302)
Increase in accrued interest expense on Senior Notes....................... -- -- 11,969
Increase in prepaid expenses and other receivables......................... (1,384) (3,482) (8,291)
Increase in other assets and intangible assets............................. (315) (1,022) (12,625)
Increase in accrued telecommunications costs, accounts payable, and other
accrued expenses......................................................... 1,653 8,250 11,956
----------- ----------- -----------
Net cash used in operating activities.................................... (26,331) (22,525) (60,318)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property, equipment and software............................... (9,423) (34,190) (94,674)
Payment for business acquired excluding cash acquired of $364.............. -- -- (5,000)
Purchase of marketable securities.......................................... (30,571) (49,098) (310,625)
Proceeds from maturity of marketable securities............................ 38,807 40,124 60,307
Investment in affiliate.................................................... (102) -- --
Issuance of notes receivable............................................... (303) -- --
----------- ----------- -----------
Net cash used in investing activities...................................... (1,592) (43,164) (349,992)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long term debt................................... -- -- 845,752
Proceeds from issuance of redeemable convertible preferred stock........... -- -- 42,198
Prepayment of senior discount notes........................................ -- -- (119,282)
Deferred financing costs................................................... -- -- (31,547)
Proceeds from issuance of Common Stock..................................... 94,836 426 947
Borrowings on notes payable................................................ -- 11,121 --
Payments under capital leases.............................................. (64) (525) (5,480)
Repayment of notes payable and bank credit line............................ -- (336) (3,553)
Borrowings under bank credit line.......................................... -- 600 --
----------- ----------- -----------
Net cash provided by financing activities.................................. 94,772 11,286 729,035
----------- ----------- -----------
Effects of exchange rate changes on cash....................................... 12 (297) --
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents........................... 66,861 (54,700) 318,725
Cash and cash equivalents at beginning of year................................. 8,935 75,796 21,096
----------- ----------- -----------
Cash and cash equivalents at end of year....................................... $ 75,796 $ 21,096 $ 339,821
----------- ----------- -----------
----------- ----------- -----------
Supplemental disclosures of cash flow information:
Interest paid................................................................ $ 65 $ 134 $ 31,560
----------- ----------- -----------
----------- ----------- -----------
Assets acquired under capital lease obligations.............................. $ 310 $ 1,122 $ 30,359
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
Viatel, Inc. (the "Company") is an international facilities-based global
provider of communications services offering international and domestic long
distance telecommunications services, primarily to small and medium-sized
businesses, carriers and resellers. The Company operates a pan-European
communication network with international gateway switching centers in New York
and London and network points of presence throughout Western Europe. The Company
is constructing a fiber optic ring which will connect five European countries
(the "Circe Network").
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant inter-company balances and
transactions have been eliminated in consolidation. Investments in affiliates in
which the Company has significant influence but does not exercise control are
accounted for under the equity method.
(C) CASH AND CASH EQUIVALENTS
The Company's policy is to maintain its uninvested cash at minimum levels.
Unrestricted cash equivalents, which include highly liquid debt instruments
purchased with a maturity of three months or less, were $8.2 million and $278.9
million at December 31, 1997 and 1998, respectively.
(D) REVENUE
The Company records communication services revenue as earned, at the time
services are provided. Network capacity sales are recorded at the time the
capacity is provided to the customer.
(E) PROPERTY AND EQUIPMENT
Property and equipment consist principally of telecommunications related
equipment such as switches, fiber optic cable systems, remote nodes and related
computer software and is stated at cost. Assets acquired under capital leases
are stated at the present value of the future minimum lease payments.
Maintenance and repairs are expensed as incurred.
Depreciation is provided using the straight-line method over the estimated
useful lives of the related assets. Leasehold improvements are amortized over
the life of the lease or useful life of the improvement, whichever is shorter.
The estimated useful lives are as follows:
<TABLE>
<S> <C>
Communications systems....................................... 5 to 7 years
Fiber optic cable systems.................................... 15 years
Leasehold improvements....................................... 2 to 5 years
Furniture, equipment and other............................... 5 years
</TABLE>
(F) INTANGIBLE ASSETS
Deferred financing and registration fees represent costs incurred to issue
and register debt and are being amortized over the term of the related debt.
F-8
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Licenses issued by governing bodies are being amortized over the lesser of
25 years or the term of the license.
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefitted, five to seven years.
Acquired employee base and sales force in place represents the intangible
assets associated with the acquisition of independent sales organizations and is
being amortized over three years.
The costs of all other intangible assets are being amortized over their
useful lives, ranging from three to seven years.
(G) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income or expense in the period it occurs.
(H) FOREIGN CURRENCY TRANSLATION
Foreign currency assets and liabilities are translated using the exchange
rates in effect at the balance sheet date. Results of operations are translated
using the average exchange rates prevailing throughout the year. The effects of
exchange rate fluctuations on translating foreign currency assets and
liabilities into U.S. dollars are accumulated as part of the foreign currency
translation adjustment in stockholders' equity. Gains and losses from foreign
currency transactions are included in selling, general and administrative
expenses in the period in which they occur. For the years ending December 31,
1996, 1997 and 1998, the Company experienced no material exchange transaction
gains or losses.
(I) NET LOSS PER SHARE
Basic earnings per share ("EPS") is computed by dividing income or loss
attributable to common stockholders 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.
Net loss and weighted average shares outstanding used for computing diluted
loss per common share were the same as that used for computing basic loss per
common share for each of the years ended December 31, 1996, 1997 and 1998.
The Company had potentially dilutive common stock equivalents of 1.0
million, 1.1 million and 7.2 million for the years ended December 31, 1996, 1997
and 1998, respectively. These common stock equivalents were not included in the
computation of diluted net loss per common share because they were antidilutive
for the periods presented.
(J) CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of temporary cash investments and trade
receivables. The Company restricts investment of
F-9
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
temporary cash investments to financial institutions with high credit standing.
The Company does not believe there is any concentration of credit risk on trade
receivables as a result of the large and diverse nature of the Company's
worldwide customer base.
During 1998, one customer, LD Exchange.com, accounted for 10.6% of the
Company's revenues.
(K) RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year's presentation.
(L) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
(M) ADDITIONAL ACCOUNTING POLICIES
Additional accounting policies are incorporated into the notes herein.
(N) STOCK OPTION PLAN
The Company accounts for its stock option plan in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 123 which allows entities to
continue to apply the provisions of Accounting Principles Board ("APB") Opinion
No. 25 and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future years as if
the fair-value-based method, as defined in SFAS No. 123, had been applied. The
Company has elected to apply the provisions of APB Opinion No. 25 and provide
the pro forma disclosure required by SFAS No. 123. See Note 12.
(O) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
(2) INVESTMENTS IN DEBT SECURITIES
Management determines the appropriate classification of its investments in
debt securities at the time of purchase and classifies them as held to maturity
or available for sale. These investments are diversified among high credit
quality securities in accordance with the Company's investment policy. Debt
securities that the Company has both the intent and ability to hold to maturity
are carried at amortized cost. Debt
F-10
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(2) INVESTMENTS IN DEBT SECURITIES (CONTINUED)
securities for which the Company does not have the intent or ability to hold to
maturity are classified as available for sale. Securities available for sale are
carried at fair value, with the unrealized gains and losses, net of tax,
reported in a separate component of stockholders' equity. The Company does not
invest in securities for the purpose of trading and as such does not classify
any securities as trading.
The 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 accretion are included in
interest income. There were no securities classified as held to maturity as of
December 31, 1997 and no securities classified as available for sale as of
December 31, 1998.
The following is a summary of the amortized cost, which approximates fair
value of restricted securities held to maturity at December 31, 1998 (in
thousands):
<TABLE>
<S> <C>
U.S. Treasury obligations......................................... $ 105,508
German government obligations..................................... 28,705
---------
Total......................................................... $ 134,213
---------
---------
</TABLE>
The following is a summary of the amortized cost, which approximates fair
value of securities held to maturity at December 31, 1998 (in thousands):
<TABLE>
<S> <C>
European corporate debt securities................................ $ 122,299
U.S. corporate debt securities.................................... 49,472
---------
Total......................................................... $ 171,771
---------
---------
</TABLE>
The following is a summary of the fair value of securities available for
sale at December 31, 1997 (in thousands):
<TABLE>
<S> <C>
U.S. Treasury obligations.......................................... $ 2,028
Corporate debt securities.......................................... 13,482
Federal agencies obligations....................................... 10,537
---------
Total.......................................................... $ 26,047
---------
---------
</TABLE>
Unrealized gains or losses on securities classified as available for sale
are not material at December 31, 1997.
The amortized cost, which approximates fair value, of restricted securities
held to maturity at December 31, 1998 are shown below (in thousands):
<TABLE>
<S> <C>
Due within one year............................................... $ 50,870
Due after one year through two years.............................. 54,328
Due after two years............................................... 29,015
---------
Total......................................................... $ 134,213
---------
---------
</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.
F-11
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Communications system..................................................................... $ 43,322 $ 70,971
Construction in progress.................................................................. 10,094 172,630
Fiber optic cable systems................................................................. 1,432 25,222
Furniture, equipment and other............................................................ 8,924 16,450
Leasehold improvements.................................................................... 3,254 6,651
---------- ----------
67,026 291,924
Less accumulated depreciation and amortization............................................ 12,932 25,668
---------- ----------
$ 54,094 $ 266,256
---------- ----------
---------- ----------
</TABLE>
At December 31, 1997, construction in progress represents a portion of the
expansion of the Company's European network. At December 31, 1998, construction
in progress represents construction of the Circe Network. For the years ended
December 31, 1996, 1997 and 1998, $0.1 million, $0.2 million and $3.3 million of
interest was capitalized.
The Company trades indefeasible rights-of-use or capacity on the Circe
Network for indefeasible rights-of-use or capacity on other cable systems. These
trades of indefeasible rights-of-use or capacity are accounted for as
non-monetary exchanges and did not have a material effect on the Company's
statement of operations.
At December 31, 1998, the Company has entered into a letter of intent with
Metromedia Fiber Networks, Inc. and Carrier 1, Inc. to jointly construct the
civil works associated with a national communications networks being constructed
by each party in Germany. As part of the letter of intent, Metromedia Fiber
Networks, Inc. and Carrier 1, Inc. were required to place in escrow with the
Company an amount of $9.3 million which is included in restricted cash
equivalents in the accompanying consolidated balance sheets. In February 1999,
the parties entered into a definitive agreement which required each party to
supply a standby letter of credit to cover the construction costs related to
their portion of the network.
(4) INTANGIBLE ASSETS
Intangible assets consist of the following as of December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Deferred financing and registration costs................................................... $ 3,789 $ 31,547
Licenses, trademarks and servicemarks....................................................... 464 10,031
Goodwill.................................................................................... 474 8,744
Purchased software.......................................................................... 1,494 1,859
Acquired employee base and sales force in place............................................. 1,607 --
Other....................................................................................... 385 206
--------- ---------
8,213 52,387
Less accumulated amortization............................................................... 3,875 5,419
--------- ---------
$ 4,338 $ 46,968
--------- ---------
--------- ---------
</TABLE>
F-12
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(5) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following as of
December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Accounts payable............................................................................ $ 6,231 $ 5,566
Accrued expenses............................................................................ 3,253 16,224
Accrued compensation and benefits........................................................... 1,269 1,866
--------- ---------
$ 10,753 $ 23,656
--------- ---------
--------- ---------
</TABLE>
(6) LINE OF CREDIT AND LETTERS OF CREDIT
The Company has a revolving line of credit agreement which provides for
secured borrowings of up to $11.2 million. Borrowings under this line of credit
agreement can be made under either of the following interest rate formulas: (i)
the lending institution's prime rate or (ii) the LIBOR rate plus two hundred
basis points. The Company had $0.6 million in borrowings under the line of
credit agreement at December 31, 1997 and no borrowings under the line of credit
agreement at December 31, 1998. The terms of the line of credit agreement
include, among other provisions, requirements for maintaining defined levels of
securities and other liquid collateral. At December 31, 1998, standby letters of
credit of approximately $3.3 million have been issued under this line of credit
agreement.
In connection with the Company's joint construction of the civil works
associated with national communications networks being constructed by each party
in Germany, in February 1999 the Company was required to obtain a letter of
credit of approximately $123 million (DM219.1 million) in support of its
obligations.
The weighted-average interest rate on short-term borrowings under the line
of credit agreement at December 31, 1997 was 8.0%.
F-13
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(7) LONG TERM LIABILITIES AND REDEEMABLE CONVERTIBLE PREFERRED STOCK
(A) LONG TERM DEBT AND REDEEMABLE CONVERTIBLE PREFERRED STOCK
On April 8, 1998, the Company completed an offering of units (the "Units
Offering") consisting of senior notes or senior discount notes due 2008 and
shares of 10% Series A Redeemable Convertible Preferred Stock due 2010 ("Series
A Preferred"), $.01 par value per share, of the Company and units consisting of
senior notes or senior discount notes due 2008 and subordinated convertible
debentures due 2011 (the "Subordinated Debentures") through which it raised
approximately $889.6 million of gross proceeds ($856.6 million of net proceeds).
The Company utilized $118.9 million of the proceeds from the Units Offering to
retire its 15% Senior Discount Notes due 2005 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 Deutsche Mark denominated senior notes issued in the
Units Offering. The senior discount notes accrete through April 15, 2003 and
interest becomes payable in cash in semi-annual installments thereafter. The
interest on the senior notes is payable in semi-annual installments. The Series
A Preferred and the subordinated convertible debentures require quarterly
payments which are paid in additional securities, cash or any combination
thereof through April 15, 2003 and payable in cash thereafter. The Series A
Preferred and the subordinated convertible debentures are mandatorily
convertible in the event the closing price of the Company's common stock exceeds
certain predetermined annual price targets. The Series A Preferred and the
Subordinated Debentures conversion rates are $13.20 and DM24.473 ($14.58),
respectively. In addition, the terms of the Series A Preferred and Subordinated
Debentures provide for special dividends and special interest payments,
respectively, under certain conditions.
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 stockholders 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.
On September 30, 1998, the Company consummated an offer to exchange senior
notes and senior discount notes due 2008 which have been registered under the
Securities Act of 1933, as amended, for outstanding notes of each such series
which were not registered under the Securities Act of 1933, as amended.
F-14
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(7) LONG TERM LIABILITIES AND REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
Long term debt consists of the following as of December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1998
--------- ----------
<S> <C> <C>
11.25% Senior Notes........................................................................ $ -- $ 400,000
11.15% Senior Notes (DM178,000)............................................................ -- 106,015
12.50% Senior Discount Notes, less discount of $202,716.................................... -- 297,284
12.40% Senior Discount Notes (DM134,916), less discount of $54,249
(DM91,084)............................................................................... -- 80,355
10% Subordinated Convertible Debentures (DM21,573)......................................... -- 12,849
15% Senior Discount Notes, less discount of $30,845........................................ 89,855 --
--------- ----------
$ 89,855 $ 896,503
--------- ----------
--------- ----------
</TABLE>
(B) EQUIPMENT FINANCING
In November and December 1997, the Company entered into Loan and Security
Agreements, as amended, with Charter Financial, Inc. ("Charter") pursuant to
which the Company borrowed an aggregate of $11.1 million, of which $7.8 million
was outstanding as of December 31, 1998. Repayment of these loans commenced in
December 1997 and January 1998 and are repayable in thirty-two or thirty-six
successive monthly installments respectively. Under the terms of these
arrangements, the Company is required to satisfy certain EBITDA and unrestricted
cash requirements. As of December 31, 1998, the Company was either in compliance
with, or had received waivers to, these covenants. Obligations under these Loan
and Security Agreements are secured by the grant to Charter of a security
interest in certain designated telecommunications equipment. A portion of the
payment obligations under these borrowing arrangements are also secured by
letters of credit.
(8) STOCKHOLDERS' EQUITY
On October 23, 1996, the Company completed an initial public offering
("IPO") of its Common Stock, through which it sold 8,667,000 shares of Common
Stock at $12 a share and raised approximately $104 million of gross proceeds
($94.5 million of net proceeds).
In connection with the IPO, all shares of then Class A Common Stock were
converted into shares of Common Stock at a ratio of one-to-one and all then
outstanding shares of Common Stock were subject to a reverse stock split at a
ratio of 3-to-2. In addition, the Company's stockholders approved an amendment
to the Company's Certificate of Incorporation which (i) authorized the Board of
Directors to issue up to two million shares of Preferred Stock, $.01 par value
per share, of which no shares were issued and outstanding at December 31, 1996,
in one or more series and to fix the powers, voting rights, designations and
preferences of each series and (ii) eliminated the Class A Common Stock.
All earnings per share and share data presented herein reflect the
conversion of the Class A Common Stock into Common Stock and the reverse stock
split of all then outstanding shares of Common Stock.
F-15
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(9) ACQUISITION
On February 27, 1998, the Company acquired Flat Rate Communications, Inc.
("Flat Rate"), a long distance telecommunications reseller, for $5.0 million of
cash, 375,000 shares of Common Stock and a contingent payment based upon key
operating performance targets for the twelve month period ending February 28,
1999 which will range from zero to $21.0 million in cash and zero to 1.0 million
shares of Common Stock. The Company recorded the acquisition under the purchase
method of accounting. The purchase price has been allocated to the assets
acquired and liabilities assumed, based upon the estimated fair values at the
date of acquisition. The excess purchase price was $8.3 million and will be
amortized on a straight line basis over a five-year period. If the acquisition
had occurred on January 1, 1996 (i) communication services revenue for the years
1996, 1997 and 1998 would have been $53.4 million, $101.8 million and $138.5
million, respectively, (ii) loss before extraordinary loss for 1998 would have
been $(98.9) million, (iii) net loss attributable to common stockholders for the
years 1996, 1997 and 1998 would have been $(38.5) million, $(42.8) million and
$(130.5) million, respectively and (iv) net loss per common share for the years
1996, 1997 and 1998 would have been $(2.43), $(1.86) and $(5.65), respectively.
(10) INCOME TAXES
The statutory Federal tax rates for the years ended December 31, 1996, 1997
and 1998 were 35%. The effective tax rates were zero for the years ended
December 31, 1996, 1997 and 1998 due to the Company incurring net operating
losses for which no tax benefit was recorded.
For Federal and foreign income tax purposes, the Company has unused net
operating loss carryforwards of approximately $218.8 million expiring in 2007
through 2018. The availability of the net operating loss carryforwards to offset
income in future years is restricted as a result of the Company's issuance of
its Common Stock and may be further restricted as a result of future sales of
Company stock and other events.
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1997 1998
---------- ----------
Accounts receivable principally due to
allowance for doubtful accounts..................................... $ 587 $ 1,506
OID Interest not deductible in current period......................... 11,149 11,125
Federal net operating loss carryforwards.............................. 29,093 68,579
Foreign net operating loss carryforwards.............................. 3,777 7,989
---------- ----------
Total gross deferred tax assets................................. 44,606 89,199
Less valuation allowance.............................................. (44,606) (89,199)
---------- ----------
Net deferred tax assets......................................... $ -- $ --
---------- ----------
---------- ----------
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred
F-16
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(10) INCOME TAXES (CONTINUED)
tax liabilities, projected future taxable income, and tax planning in making
these assessments. During 1997 and 1998, the valuation allowance increased by
$14.7 million and $44.6 million, respectively.
(11) SEGMENT AND GEOGRAPHIC DATA
All of the Company's operations are in a single industry segment,
communications services. While the Company's chief decision maker monitors the
revenue streams of the various products and geographic locations, operations are
managed and financial performance is evaluated based on the delivery of
multiple, integrated services to customers over a single network. As a result,
there are many shared expenses generated by the various revenue streams and
management believes that any allocation of the expenses incurred to multiple
revenue streams or geographic locations would be impractical and arbitrary.
Management does not currently make such allocations internally.
The Company groups its products and services by two customers types,
wholesale and retail. The information below summarizes communication services
revenue by customer type (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ----------
<S> <C> <C> <C>
Wholesale....................................................................... $ 9,516 $ 20,397 $ 78,777
Retail.......................................................................... 40,903 52,621 56,411
--------- --------- ----------
Consolidated.................................................................... $ 50,419 $ 73,018 $ 135,188
--------- --------- ----------
--------- --------- ----------
</TABLE>
The information below summarizes communication services revenue by
geographic area (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
---------- --------- ----------
<S> <C> <C> <C>
Western Europe................................................................. $ 19,917 $ 32,647 $ 62,946
North America.................................................................. 9,516 15,936 56,172
Latin America.................................................................. 14,402 16,240 14,653
Asia/Pacific Rim and other..................................................... 6,584 8,195 1,417
---------- --------- ----------
Consolidated................................................................. $ 50,419 $ 73,018 $ 135,188
---------- --------- ----------
---------- --------- ----------
</TABLE>
The information below summarizes long lived assets by geographic area (in
thousands):
<TABLE>
<CAPTION>
1997 1998
--------- ----------
<S> <C> <C>
Western Europe............................................................................. $ 32,640 $ 237,443
North America.............................................................................. 25,626 75,492
Latin America.............................................................................. 166 289
--------- ----------
Consolidated............................................................................... $ 58,432 $ 313,224
--------- ----------
--------- ----------
</TABLE>
(12) STOCK OPTION PLAN
During 1993, the Board of Directors approved the 1993 Flexible Stock
Incentive Plan, as amended (the "Stock Incentive Plan") under which
"non-qualified" stock options ("NQSOs") to acquire shares of Common Stock may be
granted to employees, directors and consultants of the Company and "incentive"
stock options ("ISOs") to acquire shares of Common Stock may be granted to
employees, including non-
F-17
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(12) STOCK OPTION PLAN (CONTINUED)
employee directors. The Stock Incentive Plan also provides for the grant of
stock appreciation rights ("SARs") and shares of restricted stock to the
Company's employees, directors and consultants.
The Stock Incentive Plan provides for the issuance of up to a maximum of
4,166,666 shares of Common Stock and is currently administered by the
Compensation Committee of the Board of Directors. Under the Stock Incentive
Plan, the option price of any ISO may not be less than the fair market value of
a share of Common Stock on the date on which the option is granted. The option
price of an NQSO may be less than the fair market value on the date the NQSO is
granted if the Board of Directors so determines. An ISO may not be granted to a
"ten percent stockholder" (as such term is defined in Section 422A of the
Internal Revenue Code) unless the exercise price is at least 110% of the fair
market value of the Common Stock and the term of the option may not exceed five
years from the date of grant. Common Stock subject to a restricted stock
purchase or bonus agreement is transferable only as provided in such agreement.
The maximum term of each stock option granted to persons other than ten percent
stockholders is ten years from the date of grant.
The per share weighted average fair value of stock options granted during
1996, 1997 and 1998 was $2.29, $5.99 and $6.40, respectively, on the date of
grant using the Black-Scholes option pricing model with the following
assumptions: (1) a risk free interest rate of 5.5% in 1996 and 1997 and 5.0% in
1998, (2) an expected life of 10 years for all years, (3) volatility of
approximately 35.9% for 1996, 52.2% for 1997 and 92.7% for 1998 and (4) an
annual dividend yield of 0% for all years.
The Company applies the provisions of APB Opinion No. 25 in accounting for
its Stock Incentive Plan and, accordingly, no compensation cost has been
recognized for its stock options in the financial statements since the exercise
price was equal to or greater than the fair market value at the date of grant.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Company's net loss
would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Net loss, as reported (in thousands)..................... $ (38,375) $ (43,044) $ (130,605)
Net loss, pro forma (in thousands)....................... (38,986) (44,171) (135,458)
Net loss per common share, as reported................... (2.47) (1.90) (5.67)
Net loss per common share, pro forma..................... (2.51) (1.95) (5.88)
</TABLE>
Pro forma net loss reflects only options granted since January 1, 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net loss amounts because
compensation cost is reflected over the options' vesting period of three years
and compensation cost for options granted prior to January 1, 1995 is not
considered.
F-18
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(12) STOCK OPTION PLAN (CONTINUED)
Stock option activity under the Stock Incentive Plan is shown below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE NUMBER OF
EXERCISE SHARES
PRICES (IN THOUSANDS)
----------- ---------------
<S> <C> <C>
Outstanding at January 1, 1996.......................................................... 4.01 474
Granted................................................................................. 6.75 823
Forfeited............................................................................... 5.77 (188)
Exercised............................................................................... 2.70 (139)
----- ------
Outstanding at December 31, 1996........................................................ 6.18 970
Granted................................................................................. 8.61 428
Forfeited............................................................................... 6.68 (197)
Expired................................................................................. 5.46 (27)
Exercised............................................................................... 3.49 (122)
----- ------
Outstanding at December 31, 1997........................................................ 7.40 1,052
Granted................................................................................. 7.19 1,794
Forfeited............................................................................... 7.14 (64)
Expired................................................................................. 5.05 (14)
Exercised............................................................................... 5.44 (174)
----- ------
Outstanding at December 31, 1998........................................................ 7.41 2,594
----- ------
----- ------
</TABLE>
The following table summarizes weighted-average option exercise price
information:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
NUMBER
OUTSTANDING AT WEIGHTED WEIGHTED NUMBER WEIGHTED
RANGE OF DECEMBER 31, AVERAGE AVERAGE EXERCISABLE AT AVERAGE
EXERCISE 1998 REMAINING EXERCISE DECEMBER 31, 1998 EXERCISE
PRICES (IN THOUSANDS) LIFE PRICE (IN THOUSANDS) PRICE
- -------------------------------- --------------- ---------- ----------- --------------------- -----------
$0.75 - $3.50 2 5 Years 0.75 2 0.75
3.51 - 5.75 999 9 Years 5.22 19 3.74
5.76 - 8.75 552 8 Years 6.17 291 5.90
8.76 - 12.00 1,041 9 Years 10.13 148 10.22
----- ----- --- -----
2,594 7.41 460 7.18
----- ----- --- -----
----- ----- --- -----
</TABLE>
Prior to the adoption of the Stock Incentive Plan, 5,913 options were
granted. These options were exercised at $0.75 per share during the year ended
December 31, 1996.
The exercise price of all options approximates the fair market value of the
Common Stock on the date of grant.
In addition, prior to the adoption of the Stock Incentive Plan, the Board of
Directors authorized the issuance of up to 233,333 shares of Common Stock as
compensation to employees and consultants of the Company of which 219,639 are
available for issuance at December 31, 1998.
F-19
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(13) COMMITMENTS AND CONTINGENCIES
(A) LEASES
At December 31, 1998, the Company was committed under non-cancelable
operating and capital leases for the rental of office space, network locations
and for fiber optic cable systems.
The Company's future minimum capital and operating lease payments are as
follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
--------- -----------
<S> <C> <C>
1999.................................................................... $ 6,890 $ 3,917
2000.................................................................... 6,952 4,277
2001.................................................................... 4,372 4,206
2002.................................................................... 1,635 4,263
2003.................................................................... 1,635 4,231
Thereafter.............................................................. 32,692 28,853
--------- -----------
54,176 $ 49,747
-----------
-----------
Less interest costs..................................................... 28,453
---------
$ 25,723
---------
---------
</TABLE>
Total rent expense amounted to $1.5 million, $1.3 million and $1.8 million
for the years ended December 31, 1996, 1997 and 1998, respectively.
(B) CARRIER CONTRACTS
The Company has entered into contracts to purchase transmission capacity
from various domestic and foreign carriers. By committing to purchase minimum
volumes of transmission capacity from carriers, the Company is able to obtain
guaranteed rates which are more favorable than those generally offered in the
marketplace. The minimum volume commitments are approximately $13.2 million for
the year ending December 31, 1999. The Company is involved in disputes with
carriers arising in the ordinary course of business. The Company believes the
outcome of all current disputes will not have a material effect on the Company's
financial position or results of operations.
(C) PURCHASE COMMITMENTS
The Company is continually upgrading and expanding its network and its
switching facilities. In connection therewith, the Company has entered into
purchase commitments to expend approximately $38.2 million.
The Company is developing a fiber-optic ring which will connect over 30
cities in Western Europe (the "Circe Network"). In connection with the Circe
Network, the Company has entered into purchase commitments to expend
approximately $130.6 million.
(D) EMPLOYMENT CONTRACTS
The Company has employment contracts with certain officers at amounts
generally equal to such officers' current levels of compensation. The Company's
remaining commitments at December 31, 1998 for the next three years under such
contracts aggregates approximately $1.4 million.
F-20
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(13) COMMITMENTS AND CONTINGENCIES (CONTINUED)
(E) LITIGATION
From time to time, the Company is subject to litigation in the normal course
of business. The Company believes that any adverse outcome from litigation would
not have a material adverse effect on its financial position or results of
operations.
(14) REGULATORY MATTERS
The Company is subject to regulation in countries in which it does business.
The Company believes that an adverse determination as to the permissibility of
the Company's services under the laws and regulations of any such country would
not have a material adverse long-term effect on its business.
(15) RELATED PARTY TRANSACTIONS
During 1998, the Company entered into an agreement with Cignal Global
Communications, Inc. ("Cignal"), pursuant to which the Company sold
transatlantic capacity. Consideration received was in the form of 650,000 shares
of Cignal's common stock. The Company recognized $3.25 million of revenue, the
fair value of the transatlantic capacity. In addition, the Company agreed to
sell capacity on the Circe Network in exchange for an additional 350,000 shares
of Cignal's common stock. Pending delivery of the capacity to Cignal, these
350,000 shares are being held in escrow. The Company's Chairman and Chief
Executive Officer is a director of Cignal.
On June 3, 1998, the Company entered into a Mutual Cooperation Agreement
with Martin Varsavsky, a greater than ten percent stockholder of the Company,
and Jazz Telecom S.A. pursuant to which the parties made certain agreements
including the following: (1) subject to Jazz Telecom S.A. completing a high
yield offering with net proceeds to Jazz Telecom S.A. of at least $100 million
(the "Offering Condition"), the Company and Jazz Telecom S.A. agreed to use
commercially reasonable efforts to execute and deliver a construction agreement
no later than January 1, 1999 to construct a fiber optic submarine cable system
between Spain and the United Kingdom, (2) subject to the Offering Condition the
Company agreed to purchase $6.0 million of Jazz Telecom S.A. common stock, (3)
the Company and Jazz Telecom S.A. agreed to the purchase from the other
international switched minutes and to transmit at least one-third of our Spanish
domestic switched minute traffic over Jazz Telecom S.A.'s network, assuming the
prices charged by Jazz Telecom S. A. are competitive, (4) the Company and Jazz
Telecom S.A. agreed to sell capacity to each other for fixed prices, (5) Mr.
Varsavsky agreed to lock-up his Viatel shares for a specified period, (6) the
Company agreed to release any past claims which the Company had against either
Jazz Telecom S.A. and Mr. Varsavsky in exchange for their respective release of
any claims against the Company and (7) Mr. Varsavsky agreed to pay the Company
liquidated damages in the event that he violates certain provisions of the
agreement. The Company and Jazz Telecom S.A. are currently in discussions to
certain modifications to the terms of the Mutual Corporation Agreement.
On November 13, 1998, Mr. Varsavsky entered into an additional lock-up
agreement with us pursuant to which Mr. Varsavsky agreed that he would not sell,
contract to sell, announce an intention to sell, pledge or otherwise dispose of
his shares of our common stock, either directly or indirectly, without the prior
written consent of the Company until after August 12, 1999.
F-21
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(16) SUBSEQUENT EVENT--UNAUDITED
On March 12, 1999, the Company priced a $365.5 million offering of debt
securities consisting of $200 million of U.S. denominated 11.50% Senior Notes
Due 2009 and $165 million Euro denominated 11.50% Senior Notes Due 2009, which
offering is scheduled to be completed on March 19, 1999. The net proceeds from
the sale of these notes will be used primarily to fund the further expansion of
the Circe Network into southern France and Switzerland.
F-22
